project report on working capital … project has been done on a working capital management in...
TRANSCRIPT
i
PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
IN
BHARTI AIRTEL LTD
SUBMITTED BY:
IMT
INSTITUTE OF MANAGEMENT TECHNOLOGY
CENTER FOR DISTANCE LEARNING,
GHAZIABAD-201101
ii
PROFORMA FOR SYNOPSIS OF PROJECT WORK Name :
Mr.
Enrolment No. :
Address :
Course :
PGPM - 3 years
Submitted To :
Institute of Management Technology,
Ghaziabad (UP)
Mobile No. :
Major Area of Specialization : Finance
Phone No. of the project Guide :
Date of Submission :
iii
CERTIFICATE
Place:
Date: (Project Guide)
iv
CERTIFICATE
Place:
Date: Enrollment No.: 0
v
PREFACE The study group found that there was a substantial gap between the sanctioned limit of
cash credit and the extent of their utilization. They recommended that the bank should
strictly ensure that a review of all borrowers accounts, enjoying working capital credit
limits of Rs 10 cores and over from the banking system is made at least once a year. A
working capital limit will include all fund-based limits for working capital purposes. It
will verify the continued viability of the borrowers and also assess the need-based
character of their limit.
This project has been done on a Working Capital Management in Bharti Airtel
Services Ltd. It was complicated but exiting as well to do a project on a company
with such a large strength and whose work operations are actually complicated from
normal companies. The project starts with a background & study of the working
Capital activities of the company and followed by recognizing the major subsystems
of Comparative study with Vodafone of the company. The focus then shifts to the
performance of these subsystems. How these were achieved in the past and how
they are achieved presently and is there any transformation over the years. It then
goes in the study of what activities are being outsourced and what the company does
internally. Also the balance between the two is highlighted.. The focus then shifts to
whether the employees are satisfied with the working Capital activities of the
company or not. The answer we found was, positive. Apart from this the factors that
influence the decision for outsourcing are also highlighted.
Overall the project involves work that will give interest to the reader and provide
information to him/her that will improve their knowledge as well as make them
wonder about the working as well as the vast changes in Working Capital
Management in Bharti Airtel Services Ltd and the way it discharges its functions.
But to know more you have to flip through all the pages in detail…….
vi
ACKNOWLEDGEMENT
vii
TABLE OF CONTENTS
S.No. Topic
1. Chapter – 1 INTRODUCTION
2. Chapter – 2 COMPANY PROFILE
3. Chapter – 3 LITERATURE REVIEW
4. Chapter – 4 OBJECTIVE
5. Chapter – 5 METHODOLOGY
6. Chapter – 6 RESULTS
7. Chapter – 7 RECOMMENDATIONS
8. Chapter – 8 CONCLUSIONS & IMPLICATIONS
9. Chapter -9 BIBLIOGRAPHY
10. Chapter -10 Appendices
FINANCIAL STATEMENTS
1
Chapter – 1
INTRODUCTION
WORKING CAPITAL - OVERALL VIEW
Working Capital management is the management of assets that are current in nature.
Current assets, by accounting definition are the assets normally converted in to cash in
a period of one year. Hence working capital management can be considered as the
management of cash, market securities receivable, inventories and current liabilities.
In fact, the management of current assets is similar to that of fixed assets the sense
that is both in cases the firm analyses their effect on its profitability and risk factors,
H differ on three major aspects.
1. In managing fixed assets, time is an important factor discounting and
compounding aspects of time play an important role in capital budgeting and a
minor part in the management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the firm’s
liquidity position, but is bound to reduce profitability of the firm as ideal car
yield nothing.
3. The level of fixed assets as well as current assets depends upon the expected
sales, but it is only current assets that are ad the fluctuation in the short run u a
business.
To understand working capital better we should have basic knowledge about the
various aspects of working capital. To start with, there are two concepts of working
capital:
Gross Working Capital
Net working Capital
Gross Working Capital: Gross working capital, which is also simply known as
working capital, refers to the firm’s investment in current assets: Another aspect of
gross working capital points out the need of arranging funds to finance the current
assets. The gross working capital concept focuses attention on two aspects of current
assets management, firstly optimum investment in current assets and secondly in
financing the current assets. These two aspects will help in remaining away from the
two danger points of excessive or inadequate investment in current assets. Whenever
a need of working capital funds arises due to increase in level of business activity or
for any other reason the arrangement should be made quickly, and similarly if some
2
surpluses are available, they should not be allowed to lie ideal but should be put to
some effective use.
Net Working Capital: The term net working capital refers to the difference between
the current assets and current liabilities. Net working capital can be positive as well as
negative. Positive working capital refers to the situation where current assets exceed
current liabilities and negative working capital refers to the situation where current
liabilities exceeds current assets. The net working capital helps in comparing the
liquidity of the same firm over time. For purposes of the working capital
management, therefore Working Capital can be said to measure the liquidity of the
firm. In other words, the goal of working capital management is to manage the current
assets and liabilities in such a way that a acceptable level of net working capital is
maintained.
Importance of working capital management:
Management of working capital is very much important for the success of the
business. It has been emphasized that a business should maintain sound working
capital position and also that there should not be an excessive level of investment in
the working capital components. As pointed out by Ralph Kennedy and Stewart MC
muller, “the inadequacy or mis-management of working capital is one of a few
leading causes of business failure.
Determinants of Working Capital
There is no specific method to determine working capital requirement for a business.
There are a number of factors affecting the working capital requirement. These factors
have different importance in different businesses and at different times. So a thorough
analysis of all these factors should be made before trying to estimate the amount of
working capital needed. Some of the different factors are mentioned here below :-
Nature of business: Nature of business is an important factor in determining the
working capital requirements. There are some businesses which require a very
nominal amount to be invested in fixed assets but a large chunk of the total
investment is in the form of working capital. There businesses, for example, are of the
trading and financing type. There are businesses which require large investment in
fixed assets and normal investment in the form of working capital.
Size of business : It is another important factor in determining the working capital
requirements of a business. Size is usually measured in terms of scale of operating
3
cycle. The amount of working capital needed is directly proportional to the scale of
operating cycle i.e. the larger the scale of operating cycle the large will be the amount
working capital and vice versa.
Business Fluctuations: Most business experience cyclical and seasonal fluctuations
in demand for their goods and services. These fluctuations affect the business with
respect to working capital because during the time of boom, due to an increase in
business activity the amount of working capital requirement increases and the reverse
is true in the case of recession. Financial arrangement for seasonal working capital
requirements are to be made in advance.
Production Policy: As stated above, every business has to cope with different types
of fluctuations. Hence it is but obvious that production policy has to be planned well
in advance with respect to fluctuation. No two companies can have similar production
policy in all respects because it depends upon the circumstances of an individual
company.
Firm’s Credit Policy: The credit policy of a firm affects working capital by
influencing the level of book debts. The credit term are fairly constant in an industry
but individuals also have their role in framing their credit policy. A liberal credit
policy will lead to more amount being committed to working capital requirements
whereas a stern credit policy may decrease the amount of working capital requirement
appreciably but the repercussions of the two are not simple. Hence a firm should
always frame a rational credit policy based on the credit worthiness of the customer.
Availability of Credit: The terms on which a company is able to avail credit from its
suppliers of goods and devices credit/also affects the working capital requirement. If a
company in a position to get credit on liberal terms and in a short span of time then it
will be in a position to work with less amount of working capital. Hence the amount
of working capital needed will depend upon the terms a firm is granted credit by its
creditors.
Growth and Expansion activities: The working capital needs of a firm increases as
it grows in term of sale or fixed assets. There is no precise way to determine the
relation between the amount of sales and working capital requirement but one thing is
sure that an increase in sales never precedes, the increase in working capital but it is
always the other way round. So in case of growth or expansion the aspect of working
capital needs to be planned in advance.
4
Price Level Changes: Generally increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also
increases. The companies which are in a position to alter the price of these
commodities in accordance with the price level changes will face less problems as
compared to others. The changes in price level may not affect all the firms in same
way. The reactions of all firms with regards to price level changes will be different
from one other.
CIRCULATION SYSTEM OF WORKING CAPITAL
In the beginning the funds are obtained from the issue of shares, often supplemented
by long term borrowings. Much of these collected funds are used in purchasing fixed
assets and remaining funds are used for day to day operation as pay for raw material,
wages overhead expenses. After this finished goods are ready for sale and by selling
the finished goods either account receivable are created and cash is received. In this
process profit is earned. This account of profit is used for paying taxes, dividend and
the balance is ploughed in the business.
Working capital is considered to efficiently circulate when it turns over quickly. As
circulation increases, the investment in current assets will decrease. Total Assets is the
sum of all assets, current and fixed. The asset turnover ratio measures the ability of a
company to use its assets to efficiently generate sales. The higher the ratio indicates
that the company is utilizing all its assets efficiently to generate sales. Companies
with low profit margins tend to have high asset turnover.
5
Bharit Airtel.
Ratios useful to analyze working capital management
(A) Efficiency Ratios
2011-12 2012-13
1. Working Capital Turnover (times) 4.84 10.23
2. Current Assets Turnover (times) 1.78 2.98
3. Inventory turnover (times) 9.49 9.20
(B) Liquidity Ratio and Solvency Ratio
1. Current Ratio 1.02 0.65
2. Quick Ratio 1.37 0.75
3. Debt Equity Ratio 0.29 0.24
The Company generates healthy operational cash flows and maintains sufficient cash and financing arrangements to meet its strategic objectives. It deploys a robust cash management system to ensure timely servicing of its liquidity obligations. The Company has also been able to arrange for adequate liquidity at an optimized cost to meet its business requirements and has minimized the amount of funds tied-up in the current assets. As of March 31, 2012, the Company has cash and cash equivalents of Rs. 20,300 Mn and short term investments of Rs. 18,132 Mn. During the year ended March 31, 2012, the Company generated operating free cash flow of Rs. 101,319 Mn. The net debt - EBITDA ratio as on March 31, 2012 was at 2.56 and the net debt - equity ratio was at 1.29. The net debt in USD terms decreased from USD 13,427 Mn as on March 31, 2011 to USD 12,714 Mn as on March 31, 2012.
On further analysis, inventory constitutes a major proportion of total current assets.
Among its various components, raw materials, stocks, spared and finished goods in
particular need further analysis as here stand out to the problem areas.
6
Schedule of Changes in Working Capital
Particulars Amount
Assets 31 March 2013 31 March 2012
Gross Block 71911.80 63885.40
(-) Acc. Depreciation 28729.20 23444.60
Net Block 43182.60 40440.80
Capital Work in Progress 1030.80 4466.50
Investments 28199.10 12337.80
Sundry Debtors 2246.80 2134.50
Cash and Bank 362.70 481.20
Loans and Advances 12859.10 20430.80
Total Current Assets 15470.70 23078.60
Current Liabilities 20061.70 16067.20
Provisions 695.50 697.50
Total Current Liabilities 20757.20 16764.70
Working capital (CA-CL)
Working Capital (5286.5) 6313.90
Cash Flow of Bharti Airtel
7
Chapter – 2
COMPANY PROFILE Bharti Airtel Limited
Bharti Airtel to Observe Silent period from June 30, 2012
New Delhi June 25, 2011 : Bharti Airtel, India’s leading private telecom services
provider would observe a 'Silent Period' from the close of business on June 30, 2011
(Wednesday), till the declaration of results for the first quarter ending June 30, 2011,
as a commitment towards highest level of corporate governance.
Details about the quarterly and annual results announcement and the earnings call will
be made available on the website.
The practice of silent period does not refrain the company and its representatives from
any press conference & public dissemination of information. The observation of silent
period is only a practice and hence does not imply any legal obligation for the
company under any circumstances.
About Bharti Airtel Limited: Bharti Airtel Limited, a group company of Bharti
Enterprises, is among Asia’s leading integrated telecom services providers with
operations in India, Sri Lanka and Bangladesh. The company has an aggregate of
around 138 million customers across its operations. Bharti Airtel has been ranked
among the six best performing technology companies in the world by Business Week.
Bharti Airtel is structured as four strategic business units - Mobile, Telemedia,
Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka
and Bangladesh. The Telemedia business provides broadband, IPTV and telephone
services in 89 Indian cities. The Enterprise business provides end-to-end telecom
solutions to corporate customers and national and international long distance services
to carriers. The Digital TV business provides DTH Airtel’s national high-speed optic
fiber network currently spans over 126,357 Rkms across India. Airtel's international
network infrastructure includes ownership of the i2i submarine cable system and
consortium ownership in five global undersea cable systems, SEA-ME-WE 4, EIG, I-
ME-WE, AAG and Unity. For more information, visit www.airtel.in
Bharti Airtel
Airtel comes to you from Bharti Airtel Limited, one of Asia’s leading integrated
telecom services providers with operations in 19 countries across Asia and Africa.
8
Bharti Airtel since its inception, has been at the forefront of technology and has
pioneered several innovations in the telecom sector.
The company is structured into four strategic business units - Mobile, Telemedia,
Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka
and Bangladesh. The Telemedia business provides broadband, IPTV and telephone
services in 89 Indian cities. The Digital TV business provides Direct-to-Home TV
services across India. The Enterprise business provides end-to-end telecom solutions
to corporate customers and national and international long distance services to telcos.
Vision and Values
Our vision
By 2020 we will build India's finest conglomerate by:
• Always empowering and backing our people
• Being loved and admired by our customers and -respected by our partners
• Transforming millions of lives and making a positive impact on society
• Being brave and unbounded in realizing our dreams
Our values
Empowerment
We respect the opinions and decisions of others. We encourage and back people to do
their best
Entrepreneurship
We always strive to change the status quo. We Innovate with new ideas and energise
with a strong passion and entrepreneurial spirit.
Transparency
We believe we must work with honesty, trust and the innate desire to do good.
Impact
Are driven by the desire to create a meaningful difference in society
Flexibility
We are ever willing to learn and adapt to the environment, our partners and the
customer's evolving needs.
Bharti Airtel Limited (BSE: 532454) formerly known as Bharti Tele-Ventures LTD
(BTVL) is an Indian company offering telecommunication services in 19 countries. It
is the largest cellular service provider in India, with more than 141 million
subscriptions as of August 2011[update] Bharti Airtel is the world's third largest,
single-country mobile operator and fifth largest telecom operator in the world with a
9
subscriber base of over 180 million It also offers fixed line services and broadband
services. It offers its telecom services under the Airtel brand and is headed by Sunil
Bharti Mittal. Bharti Airtel is the first Indian telecom service provider to achieve this
Cisco Gold Certification. To earn Gold Certification, Bharti Airtel had to meet
rigorous standards for networking competency, service, support and customer
satisfaction set forth by Cisco. The company also provides land-line telephone
services and broadband Internet access (DSL) in over 96 cities in India. It also acts as
a carrier for national and international long distance communication services. The
company has a submarine cable landing station at Chennai, which connects the
submarine cable connecting Chennai and Singapore.
It is known for being the first mobile phone company in the world to outsource
everything except marketing and sales and finance. Its network (base stations,
microwave links, etc.) is maintained by Ericsson and Nokia Siemens Network,
business support by IBM and transmission towers by another company. Ericsson
agreed for the first time, to be paid by the minute for installation and maintenance of
their equipment rather than being paid up front. This enables the company to provide
pan-India phone call rates of Rs. 1/minute (U$0.02/minute). During the last financial
year [2010-10], Bharti has roped in a strategic partner Alcatel-Lucent to manage the
network infrastructure for the Telemedia Business.
The company is structured into four strategic business units - Mobile, Telemedia,
Enterprise and Digital TV. The mobile business offers services in 18 countries across
the Indian Subcontinent and Africa. The Telemedia business provides broadband,
IPTV and telephone services in 89 Indian cities. The Digital TV business provides
Direct-to-Home TV services across India. The Enterprise business provides end-to-
end telecom solutions to corporate customers and national and international long
distance services to telcos.
Globally, Bharti Airtel is the 3rd largest in-country mobile operator by subscriber
base, behind China Mobile and China Unicom. In India, the company has a 30.7%
share of the wireless services market. In January 2011, company announced that
Manoj Kohli, Joint Managing Director and current Chief Executive Officer of Indian
and South Asian operations, will become the Chief Executive Officer of the
International Business Group from 1 April 2011. He will be overseeing Bharti's
overseas business. Current Dy. CEO, Sanjay Kapoor, will replace Manoj Kohli and
will be the CEO, effective from 1 April 2011.
10
Airtel digital TV launches two attractive offers for new customers this festive
season
- Offer 1: Now get 4 month free subscription to Economy Pack with all new Airtel
digital connections @Rs.1690
- Offer 2: Purchase a new Airtel digital TV connection for just Rs. 999
New Delhi, October 7, 2011 : Airtel digital TV, the DTH arm of Bharti Airtel, today
announced two powerful combos on new subscriptions for customers across India.
The Limited Period Offers come on the eve of the festival season.
Offer 1: Customers purchasing a new Airtel digital TV connection @ Rs.1690 need
not recharge their Airtel digital TV accounts for the next 4 months. They would be
entitled to 4 months free subscription to the Economy Pack (around 150 popular
channels, worth Rs.200+taxes) thereby enabling them to make the move to the next
generation DTH technology on Airtel, for an effective price of just Rs.806!
Offer 2: New customers who purchase a new Airtel digital TV connection for Rs.999
and get started with an initial recharge of just Rs.200.
Announcing the offers, Sugato Banerji, CMO-DTH Services, Bharti Airtel, said "We
believe that these two new entry offers will provide yet another compelling reason for
customers to join the growing Airtel digital TV family. By significantly bring down
the Total Cost of Ownership these offers will make it more easier for more customers,
to move to the next generation home entertainment options like Airtel digital TV."
Airtel digital TV – the DTH service from Bharti Airtel – has 3.8 million customers
and is one of the leading national level DTH service in the country which offers its
customers MPEG 4 with DVBS 2 – currently the most advanced digital broadcasting
technologies available in the world after HD broadcasting. Additionally, Airtel digital
TV was the first to bring many firsts to the DTH segment in India including a
Universal Remote which operates both the Set Top Box and TV set as well as several
unique Interactive Applications. Airtel digital TV recorder was the first to offer the
capability to record live television, anytime, anywhere and recently added HD
services to its portfolio. Users can also update themselves on the latest stock news. All
this is backed by 24x7 customer care. Airtel digital TV launched its services in
October 2009.
About Bharti Airtel Limited : Bharti Airtel Limited is a leading global
telecommunications company with operations in 19 countries across Asia and Africa.
The company offers mobile voice & data services, fixed line, high speed broadband,
11
IPTV, DTH, turnkey telecom solutions for enterprises and national & international
long distance services to carriers. Bharti Airtel has been ranked among the six best
performing technology companies in the world by BusinessWeek. Bharti Airtel had
over 188 million customers across its operations at the end of August 2011. To know
more visit www.airtel.in
Services
Mobile Services
Airtel is the name of the company's mobile services brand. It operates in 19 countries
and the Channel Islands. It is the 5th largest mobile operator in the world in terms of
subscriber base. Airtel's network consists of 3G and 2G services depending on the
country of operation.
Airtel
In India, the company's mobile service is branded as Airtel. It has nationwide
presence and is the market leader with a market share of 30.07% (as of May 2011).
On 19 October 2004, Airtel announced the launch of a Black Berry Wireless Solution
in India. The launch is a result of a tie-up between Bharti Tele-Ventures Limited and
Research In Motion (RIM).
The Apple iPhone 3G was rolled out in India on 22 August 2009 by Airtel &
Vodafone. Both the cellular service providers rolled out their Apple iPhone 3GS in
the first quarter of 2011. However, high prices and contract bonds discouraged
consumers and it was not as successful for both the service providers as much as the
iPhone is successful in other markets of the world.
On May 18, 2011, 3G spectrum auction was completed and Airtel will have to pay the
Indian government Rs. 12,295 crores for spectrum in 13 circles, the most amount
spent by an operator in this auction. Airtel won 3G licences in 13 telecom circles of
India: Delhi, Mumbai, Andhra Pradesh, Karnataka, Tamil Nadu, Uttar Pradesh
(West), Rajasthan, West Bengal, Himachal Pradesh, Bihar, Assam, North East,
Jammu & Kashmir. Bharti is expecting to launch its 3G service by December 2011.
On 20 September 2011, Bharti Airtel said that it has given contracts to Ericsson India,
Nokia Siemens Networks (NSN) and Huawei Technologies to set up infrastructure for
providing 3G services in the country. These vendors will plan, design, deploy and
maintain 3G-HSPA (third generation, high speed packet access) networks in 13
telecom circles where the company has won 3G licences. While Bharti Airtel has
awarded network contracts for seven 3G circles to Ericsson India, NSN would
12
manage networks in three circles. Chinese telecom equipment vendor Huawei
Technologies has been introduced as the third partner for three circles.
Subscriber base in India
The Airtel subscriber base according to Cellular Operators Association of India
(COAI) as of August 2011 was:
Metros
• Chennai - 2,877,029
• Delhi - 6,950,079
• Mumbai - 3,201,916
• Kolkata - 2,947,042
"A" Circle
• Andhra Pradesh - 14,240,429
• Gujarat - 5,980,024
• Karnataka - 13,434,418
• Maharashtra - 7,209,072
• Tamil Nadu - 8,744,937
"B" Circle
• Haryana - 1,580,398
• Kerala - 3,332,095
• Madhya Pradesh - 7,496,236
• Punjab - 5,171,278
• Rajasthan - 11,004,105
• Uttar Pradesh (East) - 8,534,334
• Uttar Pradesh (West) - 4,923,409
• West Bengal - 6,644,688
"C" Circle
• Assam - 2,683,243
• Bihar - 12,600,521
• Himachal Pradesh - 1,452,709
• Jammu and Kashmir - 1,751,239
• North Eastern States - 1,612,005
• Orissa - 4,840,243
Airtel is the market leader in India with about 31.18% market share of 481 million
GSM mobile connections as of August 2011.
13
Criticism
There has been lot of criticism about Airtel for its unauthorised VAS activation. Many
of its services were activated automatically according to a complaint forum. In return
Airtel launched STOP/START 121 services for such issues.
Airtel-Vodafone (Jersey and Guernsey)
On 1 May 2007, Jersey Airtel and Guernsey Airtel, both wholly owned subsidiaries of
the Bharti Group, announced they would launch mobile services in the British Crown
Dependency islands of Jersey and Guernsey under the brand name Airtel-Vodafone
after signing an agreement with Vodafone.
Airtel Lanka
In December 2009, Bharti Airtel rolled out 3.5G services in Sri Lanka in association
with Singapore Telecommunications. Airtel's operation in Sri Lanka, known as Airtel
Lanka, commenced operations on 12 January 2010. Airtel Lanka has 1.4 million
mobile customers in Sri Lanka, across 20 administrative districts.
Airtel in Bangladesh
In January 2011, it was announced that the Bangladesh Telecommunications
Regulatory Commission (BTRC) had given Bharti Airtel the go ahead to acquire a
70% stake in the Bangladesh business of Abu Dhabi based Warid Telcom. The latter
had till date invested a total of $600 million, with plans to bring their Bangladesh
investments to the $1 billion mark. Airtel's 70% stake in the company is said to be at a
cost of an initial $300 million. The service is being operated under the brand name
Warid Telecom.
Warid Telecom covers the entire country and has over 2.5 million customers.
Airtel in Africa
On 14, February 2011 a statement issued by Zain Ghana, said "the Board of Directors
of Kuwait's Zain Group, after its meeting on February 14, 2011, issued a resolution to
accept a proposal received from Bharti Airtel Limited (Bharti) to enter into exclusive
discussions until 25 March 2011, regarding the sale of its African unit, Zain Africa
BV." The offer was for $10.7 billion. The deal would provide Bharti access to 15
more countries in the region, adding around 40.1 million subscribers to its already 125
million-plus user base. The combined revenue of the two entities would be around
$12 billion.
The deal ran into hurdles after the government of the of Gabon had come out against
the deal, but later approved the sale. The government of Congo Republic had also said
14
Bharti-Zain deal broke law. There was also a dispute about minority ownership of
Zain's operations in Nigeria, the biggest market in the deal. Minority shareholder
Econet was seeking to overturn a 2006 deal by Zain - then called Celtel - in which it
bought a majority stake in Nigerian mobile operator Vee Networks Ltd, now Zain
Nigeria. On 8, June 2011, Bharti said the Nigeria ownership dispute had been settled.
On 8, June 2011, Bharti Airtel, in the largest ever telecom takeover by an Indian firm,
completed a deal to buy Kuwait-based Zain Telecom's businesses in 15 African
countries for $10.7 billion. The transaction is the largest ever cross-border deal in an
emerging market and will result in combined revenues of about $13 billion."The
overall integration should be complete by the end of this financial year.
On September 1, 2011, Chairman and Managing Director Sunil Bharti Mittal said that
Bharti Airtel Ltd would change its Africa operations brand from Zain to Airtel by 15
October 2011.
Airtel Seychelles
On August 11, 2011, Bharti Airtel announced that it would acquire 100% stake in
Telecom Seychelles for US$62 million taking its global presence to 19 countries.
Telecom Seychelles began operations in 1998 and operates 3G, Fixed Line, ship to
shore services satellite telephony, among value added services like VSAT and
Gateways for International Traffic across the Seychelles under the Airtel brand. The
company has over 57 percent share of the mobile market of Seychelles.
Airtel announced plans to invest US$10 million in its fixed and mobile telecoms
network in the Seychelles over three years , whilst also participating in the Seychelles
East Africa submarine cable (SEAS) project. The US$34 million SEAS project is
aimed at improving the Seychelles’ global connectivity by building a 2,000 km
undersea high speed link to Dar es Salaam in Tanzania.
Telemedia
The Telemedia business provides services in 89 Indian cities and consists of two
brands.
Airtel Broadband provides broadband and IPTV services. Airtel provides both capped
as well as unlimited download plans. The maximum speed available for home users is
16Mbps.
Airtel Fixed Line which provides fixed line services.
Airtel has about 3.15 million wireline customers, of which 42.6% are
broadband/internet subscribers as of August 2011. Until September 18, 2004, Bharti
15
provided fixed-line telephony and broadband services under the Touchtel brand.
Bharti now provides all telecom services including fixed-line services under a
common brand "Airtel".
Digital Televison
Main article: Airtel Digital TV
The Digital TV business provides Direct-to-Home (DTH) TV services across India
under the brand name Airtel Digital TV. It started services on 9 October 2009 and has
about 32.44 million customers as of August 2011.
Enterprise
The Enterprise business provides end-to-end telecom solutions to corporate customers
and national and international long distance services to telcos through its nationwide
fiber optic backbone, last mile connectivity in fixed-line and mobile circles, VSATs,
ISP and international bandwidth access through the gateways and landing stations.
Merger talks
In May 2009, it emerged that Bharti Airtel was exploring the possibility of buying the
MTN Group, a South Africa-based telecommunications company with coverage in 21
countries in Africa and the Middle East. The Financial Times reported that Bharti was
considering offering US$45 billion for a 100% stake in MTN, which would be the
largest overseas acquisition ever by an Indian firm. However, both sides emphasize
the tentative nature of the talks, while The Economist magazine noted, "If anything,
Bharti would be marrying up," as MTN has more subscribers, higher revenues and
broader geographic coverage. However, the talks fell apart as MTN group tried to
reverse the negotiations by making Bharti almost a subsidiary of the new company.
In May 2011, Bharti Airtel again confirmed that it is in Talks with MTN and
companies have now agreed discuss the potential transaction exclusively by July 31,
2011. Bharti Airtel said in a statement "Bharti Airtel Ltd is pleased to announce that it
has renewed its effort for a significant partnership with MTN Group".
Talks eventually ended without agreement, due to the South African government
opposition
Consecutively for four years 1997,1998,1999 and 2000, AirTel has been voted as the
Best Cellular Service in the country and won the coveted
Techies award.
16
AirTel has consistently strived hard to, not only deliver as per customer expectation,
but also go beyond that. According to its those at AirTel, their vision, mission and
values are as follows….
VISION
To make mobile communications a way of life and be the customers' first choice
MISSION
We will meet the mobile communication needs of our customers through :
Error-free service delivery
Innovative products and services
Cost efficiency
VALUES
We will always put our customers first. We will always trust and respect each other.
We will respect our associates as we respect each other. We will work together
through a process of continuous improvement
Airtel (Bharti Airtel Ltd.) Bharti Airtel Limited was incorporated on July 7, 1995 for promoting investments in
telecommunications services. Its subsidiaries operate telecom services across India.
Bharti Airtel is India's leading private sector provider of telecommunications services
based on a strong customer base consisting of 50 million total customers, which
constitute, 44.6 million mobile and 5.4 million fixed line customers, as of March 31,
2011.
Airtel comes to us from Bharti Airtel Limited - a part of the biggest private integrated
telecom conglomerate, Bharti Enterprises. Bharti provides a range of telecom
services, which include Cellular, Basic, Internet and recently introduced National
Long Distance. Bharti also manufactures and exports telephone terminals and cordless
phones. Apart from being the largest manufacturer of telephone instruments in India,
it is also the first company to export its products to the USA. Bharti has also put its
footsteps into Insurance and Retail segment in collaboration with Multi- National
giants. Bharti is the leading cellular service provider, with a footprint in 23 states
covering all four metros and more than 50 million satisfied customers.
SERVICES
Airtel Prepaid
Strong Network Coverage
17
Other Services
Voice Mail
SMS (Short Messaging Service)
Subscription Alerts
Airtel Live!
Airtel Live! WAP Services: Airtel Live! Voice Services:
Airtel Live! SIM Services.
Airtel Live! SMS Services
Hello Tunes
Airtel Postpaid
Easy Billing
Easy Payment Options. Anytime Anywhere
Long Distance Calling Facility
Widest Roaming - National and International
GPRS - Roaming
Say it. In more than just words, with Services from Airtel
Conference call
Missed call alert
Subscription Alerts
Airtel Live!
GPRS (General Packet Radio Services)
Get the EDGE
Business Divisions
Bharti Airtel offers GSM mobile services in all the 23-telecom circles of India and is
the largest mobile service provider in the country, based on the number of customers.
The group focuses on delivering telecommunications services as an integrated
offering including mobile, broadband & telephone, national and international long
distance and data connectivity services to corporate, small and medium scale
enterprises.
The group offers high speed broadband internet with a best in class network. With
Landline services in 94 cities we help you stay in touch with your friends & family
and the world.
18
The Company compliments its mobile and broadband & telephone services with
national and international long distance services. It has over 35,016 route kilometers
of optic fibre on its national long distance network. For international connectivity to
east, it has a submarine cable landing station at.
Bharti Airtel Limited
(A Bharti Enterprise)
Bharti Airtel is one of India's leading private sector providers of telecommunications
services based on an aggregate of 42,685,530 customers as on May 31, 2009,
consisting of 40,743,725 GSM mobile and 1,941,805 broadband & telephone
customers.
The businesses at Bharti Airtel have been structured into three individual strategic
business units (SBU’s) - mobile services, broadband & telephone services (B&T) &
enterprise services. The mobile services group provides GSM mobile services across
India in 23 telecom circles, while the B&T business group provides broadband &
telephone services in 94 cities. The enterprise services group has two sub-units -
carriers (long distance services) and services to corporates. All these services are
provided under the Airtel brand.
Company shares are listed on The Stock Exchange, Mumbai (BSE) and The National
Stock Exchange of India Limited (NSE).
Partners
The company has a strategic alliance with SingTel. The investment made by SingTel
is one of the largest investments made in the world outside Singapore, in the
company.
The company’s mobile network equipment partners include Ericsson and Nokia. In
the case of the broadband and telephone services and enterprise services (carriers),
equipment suppliers include Siemens, Nortel, Corning, among others. The Company
also has an information technology alliance with IBM for its group-wide information
technology requirements and with Nortel for call center technology requirements. The
call center operations for the mobile services have been outsourced to IBM Daksh,
Hinduja TMT, Teletech & Mphasis.
19
Chapter – 3
LITERATURE REVIEW
CIRCULATION SYSTEM OF WORKING CAPITAL
In the beginning the funds are obtained from the issue of shares, often supplemented
by long term borrowings. Much of these collected funds are used in purchasing fixed
assets and remaining funds are used for day to day operation as pay for raw material,
wages overhead expenses. After this finished goods are ready for sale and by selling
the finished goods either account receivable are created and cash is received. In this
process profit is earned. This account of profit is used for paying taxes, dividend and
the balance is ploughed in the business.
Working capital is considered to efficiently circulate when it turns over quickly. As
circulation increases, the investment in current assets will decrease. Current assets
turnover ratio speaks about the efficiency of Airtel in the utilization of current assets.
Fast turnover current assets results in a better rate on investment.
Table showing Current assets turnover ratio
Year Ratio (in times)
2011-12 1.38
2012-13 0.74
1.38
0.74
0
0.5
1
1.5
2011‐12 2012‐13
Ratio (in times)
Ratio (in times)
20
BHARTI AIRTEL SERVICES LTD.
Ratios useful to analyze Working Capital Management
2011-12 2012-13
(A) Liquidity and Solvency Ratio
1. Long Term Debt Equity Ratio 0.18 0.17
2. Quick Ratio 0.75 1.37
3. Debt Equity Ratio 0.57 0.08
(B) Management Efficiency Ratios
Ratio/Year 2012-13 2011-12
Debtors Turnover Ratio 20.70 23.14
Fixed Assets Turnover Ratio 0.82 0.84
Total Assets Turnover Ratio 0.90 0.84
Asset Turnover Ratio 0.69 0.71
Number of Days In Working Capital -53.47 43.95
Interpretation (Ratio Analysis)
As shown by current assets turnover ratio, the utilisation of current assets in
terms of sales has shown a decreasing trend which shows that current assets
has been effectively used to achieve sales.
Again if we look at the efficiency with which individual elements of working
capital have been utilised, the picture of inventory turnover is not very bright
and moved on a same trend.
Receivables turnover also shows a declining trend.
As we look at the extent of liquidity of working capital, we notice that the
ration shows a increasing trend.
If we analyse the structural health of working capital, the proportion of current
assets to total asests has been appropriate during this period.
Our analysis above indicates the areas of concern to management in making best
possible use of resources. Decreasing efficiency in the use of current assets hints of
the possibility of problems in working capital management.
On further analysis, inventory constitutes a major proportion of total current assets.
Among its various components, raw materials, stocks, spared and finished goods in
particular need further analysis as here stand out to the problem areas.
21
Cash Flow of Bharti Airtel
Sources March 2013 (in cr) March 2012 (in cr) Net Profit Before Tax 6454.80 6956.20
Net Cash From Operating Activities 13884.70 11437.80 Net Cash (used in)/from
Investing Activities (10725.90) (12611.80)
Net Cash (used in)/from Financing
Activities (3185.70) 1400.80
Net (decrease)/increase In Cash and Cash Equivalents
(26.90) 226.80
Opening Cash & Cash Equivalents 354.80 128.00 Closing Cash & Cash Equivalents 327.90 354.80
Interpretation (Cash Flow Statement)
In the year 2012-13 cash from operation is more from previous years. The
company should take appropriate steps in order to continue the trend.
In the 2012-13 company has major spending in terms of spending in form of
Acquisition/subscription/investment in subsidiaries.
Out of total cash flow from operating activites there has been increase in trade and
other payables.
COMPARISON OF OPERATING CYCLE OF BHARTI AIRTEL SERVICES
LTD WITH VODAFONE ESSAR MOBILE SERVICES LTD.
Operating cycle
A direct result of our interest in both liquidity and activity ratios in the concept of a
firm’s operating cycle. A firm’s operating cycle is the length of time from the
commitment of cash for purchases until the collection of receivables resulting from
the sale of goods or services. It is as if we start a stop watch when the purchase raw
material and stop the watch only when we receive cash after the finished goods have
been sold. The time appearing on our watch (usually in days) is the firm’s operating
cycle.
Oper
Total
Oper
Total
rating Cycle
l 47 days
rating Cycle
l 45 days (A
e (Bharti Ai
e (VODAFO
Approx.)
irtel Service
ONE ESSAR
es Ltd.) 2012
R MOBILE
2
E SERVICES LTD.) 201
12
23
Our Analysis clearly indicates that Bharti Airtel has improved its operating cycle from
the year 2011. It needs to improve its operating cycle in coming years to achieve
profitability.
CASH MANAGEMENT
Cash is the important current asset for the operations of the business. Cash is the basic
input needed to keep the business running on a continuous basis It is also the ultimate
output expected to be realized by selling the service or product manufactured by the
firm. The firm should keep sufficient cash, neither more nor less. Cash shortage will
disrupt the firm’s operations while excessive cash will simply remain idle, without
contributing anything towards the firm’s profitability. Thus a major function of the
Financial Manager is to maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any restriction. The
term cash includes currency and cheques held by the firm and balances in its bank
accounts. Sometimes near cash items, such as marketable securities or bank time
deposits are also included in cash. The basic characteristics of near cash assets are that
they can readily be converted into cash. Cash management is concerned with
managing of:
i) Cash flows in and out of the firm
ii) Cash flows within the firm
iii) Cash balances held by the firm at a point of time by financing deficit or
inverting surplus cash.
Sales generate cash which has to be disbursed out. The surplus cash has to be invested
while deficit cash has to be borrowed. Cash management seeks to accomplish this
cycle at a minimum cost. At the same time it also seeks to achieve liquidity and
control. Therefore the aim of Cash Management is to maintain adequate control over
cash position to keep firm sufficiently liquid and to use excess cash in some profitable
way.
The Cash Management is also important because it is difficult to predict cash flows
accurately. Particularly the inflows and that there is no perfect coincidence between
the inflows and outflows of the cash. During some periods cash outflows will exceed
cash inflows because payments for taxes, dividends or seasonal inventory build up
etc. On the other hand cash inflows will be more than cash payment because there
may be large cash sales and more debtors’ realization at any point of time. Cash
Management is also important because cash constitutes the smallest portion of the
24
current assets, yet management’s considerable time is devoted in managing it. An
obvious aim of the firm now-a-days is to manage its cash affairs in such a way as to
keep cash balance at a minimum level and to invest the surplus cash funds in
profitable opportunities. In order to resolve the uncertainty about cash flow prediction
and lack of synchronization between cash receipts and payments, the firm should
develop appropriate strategies regarding the following four facets of cash
management.
1. Cash Planning: - Cash inflows and cash outflows should be planned to project
cash surplus or deficit for each period of the planning period. Cash budget should
prepared for this purpose.
2. Managing the cash flows: - The flow of cash should be properly managed. The
cash inflows should be accelerated while, as far as possible decelerating the cash
outflows.
3. Optimum cash level: - The firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be
matched to determine the optimum level of cash balances.
4. Investing surplus cash: - The surplus cash balance should be properly invested to
earn profits. The firm should decide about the division of such cash balance
between bank deposits, marketable securities and inter corporate lending.
The ideal Cash Management system will depend on the firm’s products, organization
structure, competition, culture and options available. The task is complex and decision
taken can affect important areas of the firm.
Functions of Cash Management:
Cash Management functions are intimately, interrelated and intertwined Linkage
among different Cash Management functions have led to the adoption of the
following methods for efficient Cash Management:
Use of techniques of cash mobilization to reduce operating requirement of
cash.
Major efforts to increase the precision and reliability of cash forecasting.
Maximum effort to define and quantify the liquidity reserve needs of the firm.
Development of explicit alternative sources of liquidity.
Aggressive search for relatively more productive uses for surplus money
assets.
25
The above approaches involve the following actions which a finance manager has to
perform.
1. To forecast cash inflows and outflows
2. To plan cash requirements
3. To determine the safety level for cash.
4. To monitor safety level for cash
5. To locate the needed funds
6. To regulate cash inflows
7. To regulate cash outflows
8. To determine criteria for investment of excess cash
9. To avail banking facilities and maintain good relations with bankers
Motives for holding cash:
There are four primary motives for maintaining cash balances:
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Compensating motive
1. Transaction motive: - The transaction motive refers to the holding of cash to
meet anticipated obligations whose timing is not perfectly synchronized with
cash receipts. If the receipts of cash and its disbursements could exactly
coincide in the normal course of operations, a firm would not need cash for
transaction purposes. Although a major part of transaction balances are held in
cash, a part may also be in such marketable securities whose maturity
conforms to the timing of the anticipated payments.
2. Precautionary motive: - Precautionary motive of holding cash implies the
need to hold cash to meet unpredictable obligations and the cash balance held
in reserve for such random and unforeseen fluctuations in cash flows are
called as precautionary balances. Thus, precautionary cash balance serves to
provide a cushion to meet unexpected contingencies. The unexpected cash
needs at short notice may be the result of various reasons as: unexpected
slowdown in collection of accounts receivable, cancellations of some purchase
orders, sharp increase in cost of raw materials etc. The more unpredictable the
cash flows, the larger the need for such balances. Another factor which has a
bearing on the level of precautionary balances is the availability of short term
26
credit. Precautionary cash balances are usually held in the form of marketable
securities so that they earn a return.
3. Speculative motive: - It refers to the desire of a firm to take advantage of
opportunities which present themselves at unexpected movements and which
are typically outside the normal course of business. The speculative motive
represents a positive and aggressive approach. Firms aim to exploit profitable
opportunities and keep cash in reserve to do so. The speculative motive helps
to take advantage of: In opportunity to purchase raw materials at a reduced
price on payment of immediate cash; a chance to speculate on interest rate
movements by buying securities when interest rates are expected to decline;
delay purchases of raw materials on the anticipation of decline in prices; etc.
4. Compensation motive: - Yet another motive to hold cash balances is to
compensate banks for providing certain services and loans. Banks provide a
variety of services to business firms, such as clearances of cheques, supply of
credit information, transfer of funds, etc. While for some of the services banks
charge a commission of fee for others they seek indirect compensation.
Usually clients are required to maintain a minimum balance of cash at the
bank. Since this balance can not be utilized by the firms for transaction
purposes, the bank themselves can use the amount for services rendered. To be
compensated for their services indirectly in this form, they require the clients
to always keep a bank balance sufficient to earn a return equal to the cost of
services. Such balances are compensating balances. Compensating balances
are also required by some loan agreements between a bank and its customer.
CASH MANAGEMENT: OBJECTIVES
The Basic objective of cash management are two fold: (a) to meet the cash
disbursement needs (payment schedule); and (b) to minimize funds committed to cash
balances. These are conflicting and mutually contradictory and the task of cash
management is to reconcile them.
Meeting the payments schedule: - A basic objective of the cash management is to
meet the payment schedule, i.e. to have sufficient cash to meet the cash disbursement
needs of the firm. The importance of sufficient cash to meet the payment schedule can
hardly be over emphasized. The advantages of adequate cash are : (i) it prevents
insolvency or bankruptcy arising out of the inability of the firm to meet its
27
obligations; (ii) the relationship with the bank is not strained; (iii) it helps in fostering
good relations with trade creditors and suppliers of raw materials, as prompt payment
may also help their cash management; (v) it leads to a strong credit rating which
enables the firm to purchase goods on favorable terms and to maintain its line of
credit with banks and other sources of credit; (vi) to take advantage of favorable
business opportunities that may be available periodically; and (vi) finally the firm can
meet unanticipated cash expenditure with a minimum of strain during emergencies,
such as strikes , fires or a new marketing campaign by competitors.
Minimizing funds committed to cash balances: - The second objective of cash
management is to minimize cash balances. In minimizing cash balances two
conflicting aspects have to be reconciled. A high level of cash balance will, ensure
prompt payment together with all the advantages, but it also implies that large funds
will remain idle ultimately results less to the expected. A low level of cash balances,
on the other hand, may mean failure to meet the payment schedule, that aim of cash
management should be to have an optimal amount of cash balances.
Cash management techniques and process
The following are the basic cash management techniques and process which are
helpful in better cash management:-
Speedy cash collection: In managing cash efficiently the cash in flow process can be
accelerated through systematic planning and refined techniques. These are two broad
approaches to do this which are narrated as under:
Prompt payment by customer: One way to ensure prompt payment by customer is
prompt billing with clearly defined credit policy. Another and more important
technique to encourage prompt payment the by customer is the practice of offering
trade discount/cash discount.
Early conversion of payment into cash: Once the customer has makes the payment
by writing its cheques in favor of the firm, the collection can be expedited by prompt
encashment of the cheque. It will be recalled that there is a lack between the time and
cheque is prepared and mailed by the customer and the time funds are included in the
cash reservoir of the firm.
Concentration Banking: In this system of decentralized collection of accounts
receivable, large firms which have a large no. of branches at different places, select
some of these which are strategically located as collection centers for receiving
payment for customers. Instead of all the payments being collected at the head office
28
of the firm, the cheques for a certain geographical areas are collected at a specified
local collection centers. Under this arrangement the customers are required to send
their payments at local collection center covering the area in which they live and these
are deposited in the local account of concerned collection, after meeting local
expenses, if any. Funds beyond a predetermined minimum are transferred daily to a
central or disbursing or concentration bank or account. A concentration banking is
one with which the firm has a major account usually a disbursement account. Hence
this arrangement is referred to as concentration banking.
Lock-Box System: - The concentration banking arrangement is instrumental in
reducing the time involved in mailing and collection. But with this system of
collection of accounts receivable, processing for purposes of internal accounting is
involved i.e. sometime in elapses before a cheque is deposited by the local collection
center in its account. The lock-box system takes care of this kind of problem, apart
from effecting economy in mailing and clearance times. Under this arrangement,
firms hire a post office box at important collection centers. The customers are
required to remit payments to lock-box. The local banks of the firm, at respective
places, are authorized to open the box and pick up the remittance received from the
customers. Usually the authorized banks pick up the cheques several time a day and
deposit them in the firm’s account. After crediting the account of the firm the banks
send a deposit 4epo slip along with the list of payments and other enclosures, if any,
to the firm by way of proof and record of the collection.
Slowing disbursements: A basic strategy of cash management is to delay payments
as long as possible without impairing the credit rating/standing of the firm. In fact,
slow disbursement represents a source of funds requiring no interest payments. There
are several techniques to delay payment of accounts payable namely (1) avoidance of
early payments; (2) centralized disbursements; (3) floats; (4) accruals.
Avoidance of early payments: One way to delay payments is to avoid early
payments. According to the terms of credit, a firm is required to make a payment
within a stipulated period. It entitles a firm to cash discounts. If however payments are
delayed beyond the due date, the credit standing may be adversely affected so that the
firms would find it difficult to secure trade credit later. But if the firm pays its
accounts payable before the due date it has no special advantage. Thus a firm would
be well advised not to make payments early i.e. before the due date.
29
Centralized disbursements: Another method to slow down disbursements is to have
centralized disbursements. All the payments should be made by the head office from a
centralized disbursement account. Such an arrangement would enable a firm to delay
payments and conserve cash for several reasons. Firstly it involves increase in the
transit time. The remittances from the head office to the customers in distant places
would involve more mailing time than a decentralized payment by a local branch. The
second reason for reduction in operating cash requirement is that since the firm has a
centralized bank account, a relatively smaller total cash balance will be needed. In the
case of a decentralized arrangement, a minimum cash balance will have to be
maintained at each branch which will add to a large operating cash balance. Finally,
schedules can be tightly controlled and disbursements made exactly on the right day.
Float: - A very important technique of slow disbursements is float. The term float
refers to amount of money tied up in the cheques that have been written, but have yet
to be collected and enchased. Alternatively, float represents the difference between
the bank balance and book balance of cash of a firm. The difference between the
balance as shown in the firm’s record and the actual bank balance is due to transit and
processing delays. There is time lag between the issue of a cheque by the firm and its
presentation to its bank by the customer’s bank for payment. The implication is that
although a cheque has been issued cash would be required later when the cheque
resented for encashment. Therefore, a firm can send remittance although it does not
have cash in its bank at the time of issuance of cheque. Meanwhile, funds can be
arranged to make payments when the cheque is presented for collection after a few
days. Float used in this sense is called cheque kitting.
Accruals: - Finally, a potential tool for stretching accounts payable is accruals which
are defined as current liabilities that represent a service or goods received by a firm
but not yet paid for instance, payroll, i.e. remuneration to employees, who render
services in advance and receive payment later. In a way they extend credit to the firm
for a period at the end of which they are paid, say, a week or month. The longer the
period after which payment is made, the greater the amount of free financing and the
smaller the amount of cash balances required. Thus, less frequent payrolls, i.e.
monthly as compared to weekly, are important sources of accruals. They can be
manipulated to slow down disbursements.
30
Determining the optimum level of cash balance:
Cash balance is maintained for the transaction purposes and additional amount may be
maintained as a buffer or safety stock.
The Finance manager should determine the appropriate amount of cash balance. Such
a decision is influenced by trade-off between risk and return. If the firm maintains
small cash balance, its liquidity position becomes week and suffers from a paucity of
cash to make payments. But a higher profitability can be attained by investing
released funds in some profitable opportunities. When the firm runs out of cash it may
have to sell its marketable securities, if available, or borrow. This involves transaction
cost.
On the other hand if the firm maintains a higher level of cash balance, it will have a
sound liquidity position but forego the opportunities to earn interests. The potential
interest lost on holding large cash balance involves opportunities cost to the firm.
Thus the firm should maintain an optimum cash balance, neither a large nor a small
cash balance.
To find out the optimum cash balance the transaction cost and risk of too small
balance should be matched with opportunity costs of too large a balance should be
matched with opportunity cost of too large a balance. Figure shows this trade-off
graphically. If the firm maintains larger cash balances its transaction cost would
decline, but the opportunity cost would increase. At point X the sum of two costs is
minimum. This is the point of optimum cash balance. Receipts and disbursement of
cash are hardly in perfect synchronization. Despite the absence of synchronization it
is not difficult to determine the optimum level of cash balance.
If cash flows are predictable it is simply a problem of minimizing the total costs - the
transaction cost and the opportunity cost.
The determination of optimum working cash balance under certainty can thus be
viewed as an inventory problem in which we balance the cost of too little cash (
transaction cost) against the cost of too much cash( opportunity cash)
Cash flows, in practice, are not completely predictable. At times they may be
completely random . Under such a situation, a different model based on the technique
of control theory is needed to solve the problem of appropriate level of working cash
balance.
With unpredictable variability of cash flows, we need information on transaction
costs, opportunity costs and degree of variability of net cash flows to determine the
31
appropriate cash balance. Given such data the minimum and maximum of cash
balances should be set. Greater the degree of variability, higher the minimum cash
balance. Whenever the cash balance reaches a maximum level, the differences
between maximum and minimum levels should be invested in marketable securities.
When balance is falls to zero, marketable securities should be sold and proceed should
be transferred to the working cash balances.
Evaluation of cash management performances
To assess the cash management performance this phase is divided as follows:
a) Size of Cash
b) Liquidity and Adequacy of cash
3) Control of cash
A) Size of cash : The quantum of cash held by Bharti Airtel during the study period
is presented in the table. The trend percentage also calculated and shown in the table:
Size of cash and bank balance (Rs. in Crores)
Year Cash
31 March 2013 36.27
31 March 2012 48.12
32
(B) Operating Profit & OPM
Operating Profit gives an indication of the current operational profitability of the
business and allows a comparison of profitability between different companies after
removing out expenses that can obscure how the company is really performing.
Interest cost depends on the management's choice of financing, tax can vary widely
depending on acquisitions and losses in prior years, and depreciation and amortization
policies may differ from company to company.
33
(C) EBITDA, PBT & PAT:
EBITDA is an acronym for Earnings before Interest, Taxes, Depreciation, and Amortization. PBT stands for Profit before Tax, and PAT stands for Profit After Tax. The graph visually shows how the net profit of the company stand reduced due to the impact of Interest, Depreciation, and Tax.
(D) Total Assets & Asset Turnover Ratio:
Total Assets is the sum of all assets, current and fixed. The asset turnover ratio
measures the ability of a company to use its assets to efficiently generate sales. The
higher the ratio indicates that the company is utilizing all its assets efficiently to
generate sales. Companies with low profit margins tend to have high asset turnover.
34
(E) Net Sales: Sales is the total amount of products or services sold by the
company.
(F) Return On Capital Employed %:
Capital Employed is defined as total assets less current liabilities. Return On
Capital Employed is a ratio that shows the efficiency and profitability of a
company's capital investments. The ROCE should always be higher than the rate
at which the company borrows money.
35
CONCEPTS OF WORKING CAPITAL
There are two broad concepts of working capital:
a) Gross Concept
b) Net Concept
Gross working capital, simply called as working capital, refers to the firm’s
investment in current assets. Net working capital refers to the difference between
current assets and current liabilities.
The two concepts of working capital i.e., gross and net are not exclusive; rather they
have equal significance from the point of view of the management.
The gross working capital concept focuses attention on two aspects of current asset
management:
a) Optimum investment in current assets
b) Financing of current assets
Net working capital, being the difference between current assets and current
liabilities, is a qualitative concept. It focuses attention on: -
a) Indicates the position if the firm
b) Suggests the extent to which working capital needs may be financed by
permanent sources of funds.
“An expert is someone who knows all the answers if you ask the right questions.”
DETERMINANTS OF WORKING CAPITITAL
36
A firm should plan its operations in such a way that it should neither have too much
nor too little working capital. The total working capital requirement is determined by
a wide variety of factors. It should be however noted that these factors affect different
enterprises differently. They also vary from time to time. In general, these are some of
the factors, which are involved, in the proper assessment of the quantum of working
capital required.
1) GENERAL NATURE OF BUSINESS
The working capital requirements of an enterprise are basically related to the conduct
of the business. Enterprises fall into some broad categories depending on the nature of
their business. For instance, public utilities have certain features, which have a
bearing on their working capital needs. The two relevant features are:
a) Cash nature of business, i.e., cash sale
b) Sale of services rather than commodities.
In view of these features they do not maintain big inventories and have, therefore,
probably the latest requirement of working capital. At the other extreme are the
trading and financial enterprises. The nature of their business is such that they have to
maintain a sufficient amount of cash, inventories and book debts. They have
necessarily to invest proportionately large amounts in 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 the raw materials and the completion of the manufacturing process
leading to the production of finished goods. Funds will have to be necessarily tied-up
during the process of manufacture, necessitating enhanced working capital. In other
words, there is some gap before raw materials become finished goods. To sustain such
activities the need for working capital is obvious. The longer the time span (i.e., the
production cycle), the larger will be the funds tied-up and, therefore, the larger the
working capital needed and vice-versa. There are enterprises, which due to the nature
of business will have a shorter operating cycle. A distillery, which has an aging
process, has relatively to make a heavy investment in inventory. The bakery provides
the other extremes. The bakeries sell their products at short intervals and have a very
high inventory turnover. The investment in inventory and, consequently, working
capital is not large.
37
3) BUSINESS CYCLE
The working capital requirements are also determined by the nature of the business
cycle. Business fluctuations lead to cyclical and seasonal changes, which, in turn,
cause a shift in the working capital position, particularly for temporary working
capital requirements. The variations in business conditions may be in two directions:
1) Upward phase when boom conditions prevail
2) Downswing phase when economic activities are marked by a decline.
During the upswing of business activity the need for working capital is likely to grow
to cover the lag between increased sales and receipt of cash as well as to finance
purchase of additional material to cater to the expansion of the level of the activity.
Additional funds may be required to invest in the plant and machinery to meet the
increased demand. The downswing phase of the business cycle will have exactly and
opposite effect on the level of working capital requirement. The decline in the
economy is associated with a fall in the volume of sales which, in turn, will lead to
fall in the level of inventories and book debts. The need for working capital in the
recessionary conditions is bound to decline. In brief, business fluctuations influence
the size of working capital mainly through the effect on inventories. The response of
inventory to business cycles is mild or violent according to the mild or violent nature
of the business cycle.
4) CREDIT POLICY
The level of working capital is also determined by credit policy, which relates to sales
and purchases. The credit policy influences the requirement of the working capital in
two ways:
a) Through credit terms granted by the firm to its customers/buyers of goods.
b) Credit terms available to the firm from its creditors.
The credit terms granted to the customers have a bearing on the magnitude of the
working capital by determining the level of book debts. The credit sales will result in
higher book debts (receivables). Higher book debts will mean more working capital.
On the other hand, if liberal credit terms are available from the suppliers of the goods
(trade creditors), the need for working capital will be less. The working capital
requirements of a business are, thus, affected by the terms of purchase and sale and
the role given to credit by a company in its dealings with the creditors and the debtors.
3) PROFIT LEVEL
38
The level of profits earned differs from to enterprise to enterprise. In general, the
nature of the products, hold on the market, quality of management and monopoly
power would by and large determine the profit earned by the firm. A priori, it can be
generalised that a firm dealing in a high quality product, having a good marketing
arrangement and enjoying monopoly power in the market is likely to earn high profits
and vice-versa. Higher profit margin would improve the prospects of generating more
internal funds thereby contributing to the working capital pool. The net profit is a
source of working capital to the extent that it has been earned in cash. The cash profit
can be found by adjusting non-cash items such as depreciation, outstanding expenses
and losses written off, in the net profit. But, in practice, the net cash inflows from
operations cannot be considered as cash available for use at the end of the cash cycle.
Even as company’s operations are in progress, cash is used for augmenting stock,
book debts and fixed assets. It must, therefore, be seen that cash generation has been
used for furthering the use of enterprise. It is in this context that elaborate planning
and projections of expected activities and the resulting cash inflows on a day to day,
week to week and month to month basis assume importance because steps can then be
taken to deal with surplus and deficit cash.
The availability of internal funds for working capital requirements is determined not
merely by the profit margin but also on the manner of appropriating profits. The
availability of such funds would depend upon the profit appropriations for taxation,
dividend, reserves and depreciation.
No person was ever honoured for what he received. Honour has been the reward for
what he gave.”
NEED FOR WORKING CAPITAL
The need for working capital (gross) or current assets can not be over emphasized. As
the objective of financial decision making is to maximize the shareholder’s wealth, it
is necessary to generate sufficient profits. The extent to which profits can be earned
will naturally depend upon the magnitude of the sales, among other things. A
successful sales program is, in other words, necessary for earning profits by any
business enterprise. However, sales do not convert into cash instantly; there is
invariably a time lag between the sale of goods and the receipt of cash. There is,
therefore, a need for working capital in the form of current assets to deal with the
problem arising out of the lack of immediate realisation of cash against goods sold.
Therefore, sufficient working capital is necessary to sustain sales activity.
39
Technically, this is referred to as the operating or cash-cycle. The operating cycle can
be said to be at the heart of the need for working capital. The continuing flow from
cash to suppliers, to inventory, to accounts receivable and back into cash. The cycle
refers to the length of time necessary to complete the following cycle of events:
1) Conversion of cash into inventory.
2) Conversion of raw materials into work in progress
3) Conversion of work in progress into finished goods
4) Conversion of finished goods into account receivable
5) Conversion of account receivable into cash
“Make no little plans, they have no magic t stir man’s blood.. Make big plans,
aim high in hope and work”
If it were possible to complete the sequences instantaneously, there would be no need
for current assets (working capital). But since it is not possible, the firm is forced to
have current assets. Since cash inflows and cash inflows do not match, firms have to
necessarily keep cash or invest in short-term liquid securities so that they will be in
position to meet obligations when they become due. Similarly, firm must have
adequate inventory to guard against the possibility of not being able to meet a demand
for their products. Adequate inventory, therefore, provides a cushion against being out
of stock. If firms have to be competitive, they must sell goods to their customers on
credit, which necessitates the holding of accounts receivable. It is in these ways that
an adequate level of working capital is absolutely necessary for smooth sales activity
which, in turn, enhances the owner’s wealth.
“Being ignorant is not so much a shame as being unwilling to learn to do the
things the right way.”
PERMANENT AND TEMPORARY WORKING CAPITAL:
The operating cycle thus, creates the need for current assets (working capital). To
explain this continuing need of current assets, a distinction should be drawn between
permanent and temporary working capital.
The need for current assets arises, as already observed, because of the cash cycle.
Business activity does not come to an end after the realization of cash from the
40
customer. For a company, the process is continuous and, hence, the need for the
regular supply of working capital. However, the magnitude of working capital
required will not be constant, but will fluctuate. To carry on business a certain
minimum level of working capital is necessary on a continuous and uninterrupted
basis. For all practical purposes, this requirement will have to be met permanently as
with other fixed assets. This requirement is referred to as permanent or fixed working
capital.
Any amount over and above the permanent level of working capital is temporary,
fluctuating or variable working capital. This portion of the required working capital is
needed to meet fluctuations in demand consequent upon changes in production and
sales as a result of seasonal changes. ‘Obstacles are those frightful things you see
when you take your eyes off the goal.”
Both kinds of working capital are necessary to facilitate the sales process through the
operating cycle. Temporary working capital is created to meet liquidity requirements
that are of a purely transient nature.
“The quality of a persons life is in direct proportion to their commitment to
excellence, regardless of their chosen field of endeavor.”
SOURCES OF FINANCE FOR WORKING CAPITAL
The sources of finance for working capital may fall into four categories, namely:
1) BANK FINANCE
2) COMMERCIAL PAPER
3) FIXED DEPOSITS
4) INTER CORPORATE DEPOSITS.
The relative importance of these sources from country and from time to time
depending on the environment. In India, the primary sources for financing working
capital are trade credit and short term bank credit. According to an estimate, both
these sources together finance about three fourth of the working capital requirements
of the industry:
The above points are elaborated as below:
1) BANK FINANCE
It is the primary institutional source for working capital finance. To obtain short- term
bank credit, working capital requirements have to be estimated by the borrowers, and
41
the banks are approached with the necessary supporting data. The banks determine the
maximum credit based on the margin requirement of the security. The margin
represents a percentage of the value of the asset offered as security by the borrower.
The margin is based on the nature of goods and is laid down by the Reserve Bank of
India. It is changed from time to time to suit the requirements of the banker; the
borrower draws funds periodically.
FORMS OF BANK FINANCE
Working capital advance is provided by the commercial banks in three primary ways:
i) Cash credits/overdrafts
ii) Loans
iii) Purchase/Discount of bills.
In addition to these forms of direct finance, commercial banks help their customers in
obtaining credit from other sources through the letter of credit agreement.
i) Cash credits/overdrafts
Under a cash credit or overdraft agreement, a predetermined limit for borrowing is
specified by the bank. The borrower can draw as often as required, provided the
outstanding do not exceed the cash credit/overdraft limit. The borrower also enjoys
the facility of repaying the amount fully or partially, as and when he desires. Interest
is charged only on the running balance, and not on the limit sanctioned. A minimum
charge may be payable, irrespective of the level of borrowing, for availing this
facility. This form of advance is highly attractive from the borrower’s point of view
because while the borrower has freedom drawing the amount in installments as and
when required, interest is payable only on the amount actually outstanding.
ii) LOANS
These are advances of fixed amounts, which are credited to the current account of the
borrower or released to him in the form of cash. The borrower is charged with interest
on the entire loan amount, irrespective of how much he withdraws. In this respect this
system differs markedly from the overdraft or the cash credit arrangement wherein
interest is payable only on the amount actually utilized. Loans are supported by a
demand promissory note executed by the borrower. There is often a possibility of
renewing the loan.
iii) PURCHASE/DISCOUNT OF BILS
A bill arises out of a trade transaction. The seller of goods draws the bill on the
purchaser. The bill may be either clean or documentary (a documentary bill is
42
supported by a document of the title of goods like a railway receipt or a bill of lading)
and may be payable on demand or after absence period which does not exceed 90
days. On acceptance of the bill by the purchaser, the seller offers it to the bank for
discount/purchase. When the bank discounts/purchases the bill it releases the funds to
the seller. The bank presents the bill to the purchaser (the acceptor of the bill) on the
due date and gets its payment.
The Reserve Bank of India launched the new market scheme in 1970 to encourage the
use of bills as an instrument of credit The objective was to reduce the reliance and the
cash credit arrangement because of its amenability to abuse. The new bill market
scheme sought to promote an active market for bills as a negotiable instrument so that
the lending activities of a bank could be share by other banks. It was envisaged that a
bank, when short of funds, would sell or rediscount the bill that it has purchased or
discounted. Likewise, a bank, which has surplus funds, would invest in bill.
Obviously, for such a system to work there has to be a lender of last resort which can
come to the succor of the banking system as a whole. This role naturally has been
assumed by the Reserve Bank of India, which rediscounts the bills of commercial
banks up to a certain limit.
SECURITY
For working capital advances, commercial banks seek security either in the form of
hypothecation or in the form of pledge.
HYPOTHECATION
Under this agreement the owner of the goods borrows money against the security of
movable property, usually inventories. The owner does not part with the possession of
property. The rights of the lender (hypothecatee) depend on the agreement of the
lender and the borrower. Should the borrower default in paying his dues, the lender
can file a suit to realise his dues by sale of the goods hypothecated.
PLEDGE
In a pledge agreement, the owner of the goods (pledgor) deposits the goods with the
lender (pledgee) as security for the borrowing. Transfer of possession of goods is a
precondition for pledge. The lender is expected to take reasonable care of goods
pledged with him. The pledge contract gives the lender the right to sell the goods and
recover dues, should the borrower default in paying debt.
2) COMMERCIAL PAPER
43
Commercial paper represents short-term unsecured promissory notes issued by firms,
which enjoy a fairly high credit rating. Generally, large firms with considerable
financial strength are able to issue commercial paper. The important features of
commercial paper are as follows:
# The maturity period of commercial paper mostly ranges from 90 to 150 days.
# Commercial paper is sold at a discount from its face value and redeemed at its
face value. Hence the implicit interest rate is a function of the size of the
discount and the period of maturity.
# Commercial paper is either directly placed with the investors or sold through
the dealers.
3) FIXED DEPOSIT/PUBLIC DEPOSIT
Many firms, large and small, have solicited unsecured deposits from the public in the
recent years, mainly to finance their working capital requirements.
Evaluation
Company’s Point of View — Public deposits offer the following advantages to the
company:
# The procedure for obtaining public deposits is fairly simple.
# No restrictive covenants are involved.
# No security is offered against public deposits. Hence the mortgageable assets
of the firm are conserved.
The post-tax cost is fairly reasonable. The demerits of public deposit are:
The quantum of funds that can be raised by way of public deposits is limited.
The maturity period is relatively short.
Investor’s Point of View — Investors find the following advantages in public deposit:
The rate of interest is higher than several alternative forms of financial
investment.
The maturity period is fairly short i.e., one to three years.
The negative features are as follows:
There is no security offered by the company.
The interest on public deposits is not exempt from taxation.
4) INTER- CORPORATE DEPOSITS
44
A deposit made by one company with another, normally for a period up to six months,
is referred to as an inter-corporate deposit. Such deposits are usually of three types.
They are as follows:
Call deposits
In theory, a call deposit is withdraw able by the lender on giving a day notice. In
practice, however, the lender has to wait for at least three days. The interest rate on
such deposits may be around 14 per cent per annum.
Three-months Deposits
More popular in practice, these deposits are taken by borrowers to tide over a short-
term cash inadequacy that may be caused by one or more of the following factors:
disruption in production, excessive import of raw material, tax payment, delay in
collection, dividend payment and unplanned capital expenditure. The interest rate on
such deposits is around 16 per cent per annum.
Six-months Deposits
Normally, lending companies do not extend deposits beyond this time frame. Such
deposits, usually made with first class borrowers, carry an interest rate of around 18
per cent per annum.
Non-fund based facilities
Credit facilities, which do not involve actual deployment of funds by the banks, but
help the obligates to obtain certain facilities from third parties, are termed as non-fund
based facilities. These facilities include:
Letter of credit (LC)
Guarantees
Guarantees
Co-acceptance of Bills/Deferent payment Guarantees.
1) LETTER OF CREDIT
A letter of credit is an arrangement whereby a bank helps its customers to obtain
credit from its (customers) suppliers. When bank opens a letter of credit in favour of
its customer for some specific purchases, the bank undertakes the responsibility to
honour the obligation of its customer, should the customer fail to do so. To illustrate,
suppose a bank opens a letter of credit in favour of A for some purchases that A plans
to make from B. if A does not make payment to B within the credit period offered by
B, the bank assumes the liability of A for the purchases covered by the letter of credit
arrangement. Naturally, B would hardly have any hesitation to extend credit to A
45
when a bank opens a letter of credit in favour of A. It is clear from the preceding
illustration that under a letter of credit arrangement the credit is provided by the
supplier but the risk is assumed by the bank which opens the letter of credit. Hence,
this is an indirect form of financing as against overdraft, cash credit, loans and bill
purchasing/discounting, which are direct forms of financing. It may be noted here that
in direct financing the bank assumes risk as well as provides finance.
2) GUARANTEES
A contract of guarantee can be defined as a “contract to perform the promise or
discharge the liability of the third party in case of default”. The guarantee facilities
cannot be sanctioned in isolation. Financial guarantees can be issued by banks only if
they are satisfied that the customer will be in a position to reimburse the bank in case
the guarantee is invoked and the bank is required to make the payment in terms of
guarantee.
3) CO-ACCEPTANCE OF BILLS
Facilities of co-acceptance of bills are generally required for acquiring plant and
machinery and may be technically taken as a substitute for term loan which would
require detailed appraisal of the borrower’s needs and financial position in the same
manner as in the case of any other term loan proposal. The banks will sanction limits
of co-acceptance of bills after detailed appraisal of customer’s requirements is
completed and the bank is fully satisfied about the genuineness of the need of the
customer
“Things may come to those who wait, but only the things left by those who
hustle.”
“The critic is one who knows the price of everything and value of nothing.”
ASSESSMENT OF WORKING CAPITAL
In the good old days, when the banks were mainly adopting security oriented
approach in lending, no emphasis whatsoever was placed on assessment of limits as
the credit decision was mainly based on the security available to cover the advance.
The concept of assessment of working capital gained currency in early seventies and
Reserve Bank of India, proposed a scientific method for such purpose.
Assessment of working capital is always done for future period. It is always to be
assessed on the basis of projections made for the next year, keeping in view the
previous year’s figures.
46
The banks may not be willing to finance all the components of the working capital,
which have been taken into consideration for Gross Working Capital requirements.
Banks also stipulate margin requirements on the value of security of raw material,
semi-finished and finished goods etc. while sanctioning the limits.
APPROACH TO LENDING
A group constituted by the Reserve Bank of India with Shri Prakash Tandon
stipulated that the firm should finance part of its currant assets from owned funds and
term liabilities, It prescribed a minimum margin of 25% to be brought in by the firm
and suggested three different methods of lending to arrive at the contribution of the
borrower in the above manner. They are as follows:
Method I : The borrower should bring in 25% of the Net Working Capital (CA-
CL) from its owned funds and long term liabilities and 75% will be
financed by the banks.
Method II: The borrower should finance 25% of all Current Assets and the balance
is financed by the banks.
Method III : The hard core current assets i.e., the borrower must exclusively
finance current assets, which are permanently required by the
firm for its functioning. The borrower should also provide 25%
of the remaining current assets and only the bank will finance
the balance.
1) Application starts with the preparation of
a) Operating statement (Form-Il)
b) Balance sheet (Form-Ill)
c) Comparative Statement of Current Assets and Current
Liabilities (Form-IV)
d) Fund flow statements (Form-VI)
Working capital is assessed on the basis of projection made for next year keeping in
mind the previous figures.
Computation of maximum permissible bank finance is done (Form-V). A statement
which shows total current assets, total current liabilities, working capital gap, firm’s
contribution i.e., 25% of the current assets and actual Net Working Capital. Then the
firm’s contribution (25% of the CA) and the actual calculated net working capital is
subtracted from working capital gap. Banks finance the amount, which comes lower.
47
2) Second step is the documentation. Working capital advance is provided by the
banks in generally three ways :-
a) Cash credit against - Stock
- Book Debt
b) Bill discounting facilities
C) Clean li/U
For instance, a firm needs Rs. 1000 Lacs ,then the bank according to its prescribed
limit will sanction different amounts to each of above as:-
1) CC - Stock 400
- Book Debts 350
2) Bill discounting 200
3) Clean D/D 50
1000
Documentation consists of several agreement made with the bank like
1) Agreement of hypothecation of book debts
2) Agreement of hypothecation of goods to secure a demand cash credit.
3) Agreement for Clean DD limit
4) Agreement for Bill discounting limit.
5) Availment: In this the firm has to submit stock statements of the stocks
hypothecated as security to different banks.
6) Statutory Periodical Documents: Prompt submission of Forms I, II, III under
the Quarterly Information System.
Form-I: Being estimates of the ensuing quarter and to be submitted in the week
preceding the commencement of the quarter to which it relates.
Form-II: Being a statement showing performance for previous quarter to be
furnished within 6 weeks of the close of quarter to which it relates.
Form-III: Being half yearly operating and fund flow statement to be furnished within
2 months from the close of the half year to which it relates.
48
FINANCIAL STATEMENTS
Financial analysis involves the use of various financial statements. A financial
statement is a collection of data organised according to logical and consistent
accounting procedures. Its purpose is to convey an understanding of some financial
aspects of a business firm. It may show a position at a moment in time, as in the case
of Balance Sheet ( A summary of firm’s financial position on a given date that shows
total assets = total liabilities + owner’s equity ), or may reveal a series of activities
over a given period of time; as in the case of an Income Statement ( A summary of the
firm’s revenues and expenses, over a specified period ending with net income or loss
for the period ), or may show the sources and uses of funds, as in the case of Fund
Flow Statement (A summary of a firm’s changes in financial position from one period
to another).
BALANCE SHEET
The balance sheet is the first of the three major financial statements. The balance
sheet shows the assets, liabilities and the equity for the firm as of the last day of the
accounting period. In effect, it matches resources (assets) with sources (liabilities and
equity). It is commonly presented in two columns that illustrate the relationship
between assets and the sources of these assets. The assets or resources of the firm are
displayed in the right hand column and the sources of these assets in the left hand
column.
ASSETS
Current Assets is a subsection that contains all assets either held in form of cash or
those expected to be converted into cash within the current accounting period or
within the next year, through the ordinary operations of the business. It includes the
following:-
# Gash and bank balance
# Marketable securities
# Bills receivable
# Inventory
# Loans and advances
FIXED ASSETS is the subsection that contains the assets used by the firm to generate
revenues. They are acquired for use over relatively long period for carrying on
operation of firm and they are ordinarily not meant for sale in the normal course of
business.
49
It includes:-
# Land
# Building
# Machinery
# Equipment
# Furniture
INTANGIBLE FIXED ASSETS are the ones which do not have physical existence
but which help in earning, like goodwill, patent, trademark etc. The cost of intangible
fixed assets is amortized over their useful lives.
Anything less than a conscious commitment to the important is an unconscious
commitment to the unimportant.”
NON CURRENT ASSETS
It include:
# Investment in non marketable securities
# investment in long term loans to sister or allied or associated firm.
# Other long term investments.
# Non consumable stores and spares.
# Loans and advances of long term nature.
# Prepaid expenses of long term nature.
LIABILITIES
Liabilities are debts of the firm. They represent sources of assets since the firm either
borrows the money listed as liabilities or makes use of certain assets that have not yet
been paid for. Liabilities are divided into current and long term.
CURRENT LIABILITIES are the debts of the firm that must be paid during the
current accounting period, that is normally one year. Examples are the following :-
# Creditors
# Bills Payable
# Bank Overdraft
# Tax Payable
# Outstanding Expenses
# Income Received in Advance
LONG TERM LIABILITIES are the firm’s debts mat need not e paid off during the
next year. Examples are the following :-
50
# Long - Term Secured Financing — This covers mortgages and notes where a
building or other fixed assets are pledged as specific collateral for the debt.
# Long — Term Unsecured Financing — This consists largely of notes and bonds.
Notes payable are promissory notes with maturity periods in excess of one year.
When the note enters into final year, it is transferred to current liabilities account.
EQUITY
Equity represents the ownership rights in the company and arises from several
sources. Owners purchase the preferred or common stock either through an initial
offering or through later sales by the firm, or the firm retains a portion of its profits
and reinvests them in the firm. Equity does not represent the money held by the firm
but does show the sources of assets and approximately what portion of the assets is
financed by the owners and retention of the earnings. Term Net Worth is used for
owners equity. Types of equity include :-
# Paid up Share Capital or Proprietors Capital
# Retained Profit (General Reserve)
# Unappropriated earning (Surplus)
# Reserves of various types namely Capital Reserve, Share Premium, share/debenture
redemption reserve.
INCOME STATEMENT
The income statement, is a report of the firm’s activities during a given accounting
period. Firms often publish income statements showing the results of each quarter,
each half year and the full accounting year. It shows the revenues and expenses of the
firm, the effect of interest and taxes, and the net income for the period. It may be
called by other titles, such as the profit-and-loss statement or the statement of
earnings.
It is an accounting device designed to show stockholders and creditors whether the
firm is making money. It can also be used as a tool to identify the factors that affect
the degree of profitability.
The income statement is prepared according to generally accepted accounting
procedures. The various accounts on the books of the firm are carefully defined and
then placed in a specific format on the statement. Most large firms hire a Chartered
Accountant at the end of the fiscal period to certify the fairness of the firm’s financial
statements. When this is done, we can usually rely on the accuracy of the profit
picture presented by the income statement.
51
“The art of getting rich is found not in saving, but in being at the right spot at the right
time.”
FLOW OF FUNDS STATEMENTS
A third important financial statement is the flow-of-funds or sources-of- funds
statement. This statement shows the movement of funds into the form’s current asset
account from external sources such as stockholders, creditors and customers. It also
shows the movement of funds to meet the firm’s obligations, retire stock or pay
dividends. The movements are shown for a specific period of time, normally the same
time period as the firm’s income statement. The financial manager makes decisions to
ensure that the firm has sufficient funds to meet financial obligations when they are
due and to take advantage of financial opportunities. To help the analyst appraise
these decisions (made over a period of time), we need to study the firm’s “flow of
funds”. By arranging the firm’s flow of funds in the systematic fashion, the analyst
can better determine whether the decisions made for the firm resulted in a reasonable
flow of funds, or in questionable flows, which warrant further inspection.
SOURCES OF PONDS
The sources of funds which are important to the most firms are
# Sale of fixed assets
# Sale of stock
# Long term borrowings
# Fund from operations
USES OF FUNDS
A firm may apply its funds in a number of areas. A portion of the funds is expended
for operations. The uses are the following:-
# Purchase fixed assets
# Pay dividends
# Retire long term debts
# Make up losses
# Buy back stock
FINANCIAL ANALYSIS
Financial analysis is the process of determining the significant operating and financial
characteristics of a firm from accounting data and financial statements. The goal of
such analysis is to determine the efficiency and performance of the firm’s
management, as reflected in the financial records and reports. The analyst is attempted
52
to measure the firm’s liquidity, profitability and other indications that business is
conducted in a rational and orderly way. Financial analysis is used primarily to gain
insights into operating and financial problems confronting the firm. Ratio analysis is
the primary tool for examining the firm’s financial position and performance.
“Obstacles like money, habit, fear and other people can all be overcome. Nothing can
stop you when you are moving in the direction of your dreams.”
NATURE OF RATIO ANALYSIS
Ratio analysis is a powerful tool of financial analysis. A ratio is defined as “the
indicated quotient of two mathematical expressions” and as “the relationship between
two or more things”. In financial analysis, a ratio is used as an index or yardstick for
evaluating the financial position and performance of the firm. The absolute
accounting figures reported in the financial statements do not provide a meaningful
understanding of the performance and financial position of the firm. An accounting
figure conveys meaning when it is related to some other relevant information. For
example, a Rs. 5 crore net profit may look impressive, but the firm’s performance can
be said to be good or bad only when the net profit figure is related to the firm’s
investment. Ratios help to summarise the large quantities of financial data and to
make qualitative judgment about the firm’s performance.
Anyone who takes himself too seriously always runs the risk of looking ridiculous;
anyone who can consistently laugh at himseff does not.
TYPES OF RATIOS
Several ratios, calculated from the accounting data, can be grouped into various
classes according to the financial activity or function to be evaluated. The parties
which generally undertake financial analysis are short and long term creditors owners
and management. Short term creditor’s main interest is in the liquidity position or the
short term solvency of the firm. Long term creditors on the other hand are more
interested in the long term solvency and profitability of the firm. Similarly, owners
concentrate on the firm’s profitability and the analysis of the firm’s financial
conditions. Management is interested in evaluating every aspect of the firm’s
performance. They have to protect the interest of all parties and see that the firm
grows profitably. In view of the requirement of the various user of ratios, we may
classify them into the following four categories:
1. Liquidity Ratios
2. Leverage Ratios
53
3. Activity Ratios
4. Profitability Ratios
Liquidity ratios measures the firm’s ability to meet current obligation; Leverage ratios
show the proportion of debt and equity in financing the firm’s assets; Activity ratios
reflect the firm’s efficiency in utilising its assets, and Profitability ratios measure the
overall performance and effectiveness of the firm.
life is difficult, this is a great truth, one of the greatest truths. it is a great truth because once we truly see this truth, we transcend il once we know that life is difficult — it is no longer difficult,” LIQUIDITY RATIOS
1) CURRENT RATIO
The current ratio is calculated in dividing current assets by current liabilities.
31.03.12 31.03.13 0.38 0.44 Current Ratio is used to assess short term financial position of business concern. It is
indicator of firm’s ability to meet its short term obligations. Current Ratio represents a
margin of safety i.e. a “cushion” of protection for creditors. A Current Ratio of 1.33:1
is considered satisfactory.
2. QUICK RATIO
Quick Ratio is calculated by dividing the total of quick assets to current liabilities. An
asset is liquid if it can be converted into cash immediately or reasonably soon.
31.03.12 31.03.13 0.47 0.44 Quick Ratio is test short term liquidity of the firm. It is a measurement of the firm’s
ability to convert its current assets quickly into cash in order to meet current
liabilities. Generally a Quick Ratio of 1:1 is considered a satisfactory current financial
condition.
sLiabilitieCurrentAssetsCurrentRatioCurrent =
54
LEVERAGE RATIOS
1) DEBT EQUITY RATIO
Debt Equity Ratio is calculated by dividing Total Term Liabilities by Net Worth. (Net
Worth – Intangible Asseets0
31.03.12 31.03.13 1.36 1.45
Debt Equity Ratio is the ratio of amount invested by outsiders to the amount invested
by the others of the business. The ratio reflects the relative contribution of creditors
and owners of business in its financing. It is a measure of long term financial position
of firm. Ideal ratio is 2:1
Management Efficiency Ratios
1) Inventory Turnover Ratio
Inventory Turnover Ratio is calculated by dividing sold by average inventory.
Average inventory =Average of opening and Closing balance of the inventory.
Inventory Turnover Ratio = Cost of Goods Sold/ Average inventory
Inventory Turnover Ratio measures how quickly the inventory or the stock is sold. It
is a test of efficient inventory management
31.03.12 31.03.13 546.68 724.61
2. Debtors Turnover Ratio
Debtors Turnover Ratio is calculated by dividing credit sales by average debtor
(including bills receivables).
WorthNetsLiabilitieTermTotalRatioEquity =
DebtorAverageSalesCreditTotalRatioTunoverDebtors =
55
Debtors Turnover Ratio indicates how quickly receivables or debtors are converted
into cash. Generally the higher the value of Debtors Turnover Ratio, the more
efficient is the management of credit.
31.03.12 31.03.13 12.05 12.35
3. Average Collection Period
Average Collection Period is calculated by dividing the number of days in a year
(generally taken as 360) by the Debtors Turnover Ratio.
31.03.12 31.03.13
360/12.05 360/12.35
30 days 29 days
Average Collection Period measure the quality of debtors since it indicates the rapidly
or slowness of collectability. The ratio should be compared against firm’s credit term
and policy to judged its credit and collection efforts.
4. Total Asset Turnover Ratio
Total Asset Turnover is calculated by dividing the total sales by the total tangible
assets.
Tangible Assets = Total Asset – Intangible Assets
31.03.12 31.03.13
1.27 1.36
RatioTurnoverDebtorsPeriodCollectionAverage 360
=
AssetsTangibleSalesTotalTurnoverAssetsTotal =
56
Total Assets Turnover Ratio shows the firm’s ability in generating sales from all
financial resources committed to total assets. It measure the efficiency of firm in
managing and utilizing its assets.
VALUATION RATION
Valuation Ratio indicates how the equity stock of the company is assessed in the
market. In practice, the company calculates many other ratios.
1. Earning Per Share
Earning Per Share is calculated by dividing the profit after tax by the total number of
common shares outstanding.
31.03.12 31.03.13
Rs. 15.09 Rs. 13.42
Earning Per Share is only for equity shares. It is a measure of profitability of the firm
from the point of view of the ordinary shareholder. It measures the profit available to
equity holder on a per share basis.
2. Dividend Per Share
The Dividend Per Share is the earning distributed to the common share holders
divided by the number of common shares outstanding.
31.03.12 31.03.13
Rs. 1.00 Rs. 1.00
Dividend Per Share is the dividend paid to the shareholder on per share basis.
Dividend Per Share is a better indicator than Earning Per Share as the former shows
what exactly is received by the shareholders.
SharesofNoofitNetSharePerEarning
.Pr
=
sharesdingoutsofNorshareholdetopaidEarningSharePerDividened
tan.=
57
3. Dividend Payout Ratio Net Profit
Dividend Payout Ratio is obtained by dividing dividend per share by earning per
share.
Retained Earnings = 100 – Payout Ratio
31.03.12 31.03.13
7.70 7.43
Dividend Payout Ratio measures the relationship between the earning of the ordinary
share holder and the dividend paid to them or what percentage share of net profits
after taxes and preference dividend is paid out as dividend to the equity holder.
4. Earning Retention Ratio
Earning Retention Ratio is also called as Plowback Ratio. As per definition,
Earning Retention Ratio or Plowback Ratio is the ratio that measures the amount
of earnings retained after dividends have been paid out to the shareholders. The prime
idea behind earnings retention ratio is that the more the company retains the faster it
has chances of growing as a business. This is also known as retention rate or retention
ratio. There is always a conflict when it comes to calculation of Earnings retention
ratio, the managers of the company want a higher earnings retention ratio or plowback
ratio, while the shareholders of the company would think otherwise, as the higher the
plowback ratio the uncertain their control over their shares and finances are.
Earnings retention ratio = (Net income - dividends) / Net income
31.03.12 31.03.13
92.30 92.57
SharePerEarningShareperDividend
RatioPayout =
58
PROFITABILITY RATIO
1. Gross profit Ratio
Gross Profit Ratio is calculated by dividing the gross profit of the firm by the total
sales in that stipulated period.
OR
31.03.12 31.03.13
12872.20/41603.80*100 13281.50/45350.90*100
30.93% 29.20%
Gross Profit Ratio reflects the efficiency with which management produces each unit
of product. The ratio indicates the average speed between the cost of goods sold and
the sales revenue.
2. Cost of Goods Sold
Cost of Goods Sold = 100 – Gross Profit Ratio
31.03.12 31.03.13
69.07 70.8%
Cost of Goods Sold shows the equal cost incurred in the goods sold.
3. Net Profit Ratio
Net Profit Ratio is calculated by dividing the net profit of the firm by the total sales of
the firm.
31.03.12 31.03.13
5,730.00/41,603.80 5,096.30/45,350.90
13.77% 11.23%
SalesofitGrossRatioofitGross PrPr =
SalesSoldGoodsofCostSales −
SalesofitNetofitNet PrPr =
Net P
suffic
merch
marg
expre
4. Re
ROCbusinwhich
It basmuch
31.03
12.07
The r
in the
inclu
This
a sati
Profit Ratio i
cient succes
handise or s
in of reason
esses the cos
eturn On C
E is used to ness which oh owns little
sically can bh it is losing
3.12
7%
real owners
e manageme
ding prefere
is probably
isfactory retu
is indicative
ss not only
ervice, the e
nable compen
st price effec
Capital Emp
prove the vaowns lots of le land but ma
e used to shofor its liabil
31.03.
13.14%
of the comp
ent and are
ence dividend
the single m
urn for equit
e of the mana
to recover
expenses of o
nsation to ow
ctiveness of t
ployed(%)
alue the busiland will havakes the sam
ow how mucities.
.13
%
any are the
entitled to a
d are met in
most importa
ty holders or
agement’s ab
from reven
operating the
wner for pro
the operation
iness gains fve a smaller
me profit.
ch a busines
shareholders
all profits re
full.
ant ratio to ju
r not.
bility to ope
nues of the
e business e
oviding their
n.
from its asseROCE com
s is gaining
s who bear a
emaining af
udge whethe
erate the busi
e period, th
tc., but also
r capital at r
ets and liabilimpared to a bu
for its assets
all the risk, p
fter all outsi
er the firm h
iness with
he cost of
to leave a
risk. Ratio
ities. A usiness
s, or how
participate
ide claims
has earned
60
EXPENSES RATIO
Another profitability ratio related to sales is expenses ratio. It is computed by dividing
expenses by sales. The ratios indicate as to what proportion of the sales is used for
meeting out different expenses. Expenses ratio is used to determine the operating
efficiency of management in controlling the expenses.
1. Manufacture Expenses Ratio
31.03.12 31.03.13
15,138.50/41,603.80*100 17895.20/45350.90*100
36.3% 39.4%
2. Selling & Administration Expenses
31.03.12 31.03.13
10502.80/41,603.80*100 12302.70/45350.90*100
25.2% 27.12%
SalesNetExpensesingManufacturRatioExpensesingManufactur =
SalesNetExpensesAdmnSellingExpensesistrationAdSelling .&min& =
61
Chapter – 4
OBJECTIVES
• The main objective of the study is to have an insight into the current practices
of the company with regards to management of various elements of working
capital.
• Apart from the above more specifically the present study is conducted to find
out the following.
• To what extent the management of working capital in Airtel, which is one of
the leading concern in the fastener industry contribute to the overall objective
of the firm i.e. Wealth examination.
• To study management policies regarding inventory management, whether the
management have applied various inventory control techniques for proper
utilization of resources.
• To analysis the nature, effectiveness and style of functioning of various
process of payments.
• To make aware the different methods of payments that are available for the
foreign transaction, and
• To suggest the best and appropriate method of payment of foreign transaction,
and
• Also to keep in mind the other aspects of the methods this can effect the
organization.
Scope of the Study
As we were seen as a liability towards the organization since there was no
contribution from our side towards, nobody actually paid any attention towards
Working Capital.
It was very difficult to actually take out relevant information from the Comparative
Study with Vodafone were very hesitant to let us meet the company.
62
Chapter – 5
METHODOLOGY MANAGERIAL USEFULNESS OF THE STUDY
This type of analysis helps the management of the company to plan its future polices
according to the external environment. Any sound research must have an proper
design to achieve the required result, this study id constructed on the basis of
descriptive design.
The methodology, I have adopted for my study is the various tools, which basically
analyze critically financial position of to the organization:
I. COMMON-SIZE P/L A/C
II. COMMON-SIZE BALANCE SHEET
III. COMPARTIVE P/L A/C
IV. COMPARTIVE BALANCE SHEET
V. TREND ANALYSIS
VI. RATIO ANALYSIS
The above parameters are used for critical analysis of financial position. With the
evaluation of each component, the financial position from different angles is tried to
be presented in well and systematic manner. By critical analysis with the help of
different tools, it becomes clear how the financial manager handles the finance
matters in profitable manner in the critical challenging atmosphere, the
recommendation are made which would suggest the organization in formulation of a
healthy and strong position financially with proper management system.
I sincerely hope, through the evaluation of various percentage, ratios and
comparative analysis, the organization would be able to conquer its in
efficiencies and makes the desired changes.
ANALYSIS OF FINANCIAL STATEMENTS
63
FINANCIAL STATEMENTS:
Financial statement is a collection of data organized according to logical and
consistent accounting procedure to convey an under-standing of some financial
aspects of a business firm. It may show position at a moment in time, as in the case of
balance sheet or may reveal a series of activities over a given period of time, as in the
case of an income statement. Thus, the term ‘financial statements’ generally refers to
the two statements
(1) The position statement or Balance sheet.
(2) The income statement or the profit and loss Account.
OBJECTIVES OF FINANCIAL STATEMENTS:
According to accounting Principal Board of America (APB) states
The following objectives of financial statements: -
1. To provide reliable financial information about economic resources and obligation
of a business firm.
2. To provide other needed information about charges in such economic resources and
obligation.
3. To provide reliable information about change in net resources (recourses less
obligations) missing out of business activities.
4. To provide financial information that assets in estimating the learning potential of
the business.
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not
present a final picture a final picture of a concern. The utility of these statements is
dependent upon a number of factors. The analysis and interpretation of these
statements must be done carefully otherwise misleading conclusion may be drawn.
Financial statements suffer from the following limitations: -
1. Financial statements do not given a final picture of the concern. The data given in
these statements is only approximate. The actual value can only be determined when
the business is sold or liquidated.
2. Financial statements have been prepared for different accounting periods, generally
one year, during the life of a concern. The costs and incomes are apportioned to
different periods with a view to determine profits etc. The allocation of expenses and
income depends upon the personal judgment of the accountant. The existence of
64
contingent assets and liabilities also make the statements imprecise. So financial
statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give
final and accurate position. The value of fixed assets in the balance sheet neither
represent the value for which fixed assets can be sold nor the amount which will be
required to replace these assets. The balance sheet is prepared on the presumption of a
going concern. The concern is expected to continue in future. So fixed assets are
shown at cost less accumulated deprecation. Moreover, there are certain assets in the
balance sheet which will realize nothing at the time of liquidation but they are shown
in the balance sheets.
4. The financial statements are prepared on the basis of historical costs Or original
costs. The value of assets decreases with the passage of time current price changes are
not taken into account. The statement are not prepared with the keeping in view the
economic conditions. the balance sheet loses the significance of being an index of
current economics realities. Similarly, the profitability shown by the income
statements may be represent the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and
operating result of the business but they do not become a part of these statements
because they cannot be measured in monetary terms. The basic limitation of the
traditional financial statements comprising the balance sheet, profit & loss A/c is that
they do not give all the information regarding the financial operation of the firm.
Nevertheless, they provide some extremely useful information to the extent the
balance sheet mirrors the financial position on a particular data in lines of the
structure of assets, liabilities etc. and the profit & loss A/c shows the result of
operation during a certain period in terms revenue obtained and cost incurred during
the year. Thus, the financial position and operation of the firm.
FINANCIAL STATEMENT ANALYSIS
It is the process of identifying the financial strength and weakness of a firm from the
available accounting data and financial statements. The analysis is done
CALCULATIONS OF RATIOS
Ratios are relationship expressed in mathematical terms between figures, which are
connected with each other in some manner.
CLASSIFICATION OF RATIOS
65
Ratios can be classified in to different categories depending upon the basis of
classification
The traditional classification has been on the basis of the financial statement to which
the determination of ratios belongs.
These are:-
� Profit & Loss account ratios
� Balance Sheet ratios
� Composite ratios
RESEARCH DESIGN
For the proper analysis of data simple statistical techniques such as percentage were
use. It helped in making more accurate generalization from the data available.
TOOLS OF ANALYSIS
It is essential to use a systematic research methodology for the assessment of a project
because without the use of a research methodology analysis of any company or
organization will not be possible.
In the present analysis mostly secondary data have been used. Its is worth a white to
mention that I have used the following types of published data:
Balance sheet
Profit & Loss A/c
Schedules
LIMITATIONS OF THE STUDY
Non monetary aspects are not considered making the results unreliable.
Different accounting procedures may make results misleading.
In spite of precautions taken there are certain procedural and technical limitations.
Accounting concepts and conventions cause serious limitation to financial analysis.
Lack of sufficient time to exhaust the detail study of the above topic became a
hindering factor in my research.
Cha
1. CU
Interp
As we
last th
ratio. T
liabilit
0
0
0
0
0
apter – 6
RESUL
RRENT RAT
pretation:-
e know that ide
hree years it ha
This depicts th
ties.
0
0.1
0.2
0.3
0.4
0.5
3
31.03.12 0.38
Curren
LTS – RE
TIO
eal current rati
as increased fr
hat company’s
31.03.12
0.44
CRationt =
EPORT
io for any firm
rom last year.
liquidity positi
31.0
31.03.13 0.44
LiabiCurrentAssCurrent
OF DAT
m is 2:1. If we
The current r
ion is sound. It
03.13
0.38
silitiesets
TA COLL
see the current
ratio of compa
ts current asset
LECTIO
t ratio of the c
any is more tha
ts are more tha
ON
company for
an the ideal
an its current
2. QU
31.030.47
Interp
A qui
time.
compa
UICK RATIO
QUICK R
3.12
pretation :
ick ratio is an i
The ideal qui
any has no liqu
0
0.1
0.2
0.3
0.4
0.5
RATIO = Liqu
31.03.0.44
indication that
ick ratio is 1
uidity problem.
0
1
2
3
4
5
31.0
uid Assets/ Cur
.13
t the firm is liq
1:1. Company
.
03.12
0.47
rrent liabilities
quid and has th
y’s quick ratio
31.03.13
0.44
he ability to me
o is more than
eet its current
n ideal ratio.
liabilities in
This shows
3. INV
Inven
Aver
Inven
Inter
throu
effici
4. Deb
Debto
(inclu
1
2
3
4
5
6
7
8
VENTORY TU
ntory Turnov
age inventor
ntory Turnov
31.03.125
rpretation: T
ugh sales, sh
ient as comp
btors Turno
ors Turnove
uding bills re
0
100
200
300
400
500
600
700
800
URNOVER O
ver Ratio is c
ry =Average
ver Ratio = C
2 546.68
This ratio sh
hows that th
pare to last y
over Ratio
er Ratio is
eceivables).
31.03.12
546.78
TuDebtors
OR STOCK TU
calculated by
e of opening
Cost of Good
31.03.1372
hows how ra
he company
ear.
calculated
Ratiounover
URNOVER R
y dividing so
and Closing
ds Sold/ Ave
24.61
apidly the in
’s inventory
by dividing
31.03.13
724.6
AverageCreTotalo =
RATIO:
old by avera
g balance of
erage invent
nventory is tu
y manageme
g credit sale
61
DebtoreSalesedit
age inventory
the inventor
tory
urning into r
ent techniqu
es by avera
y.
ry.
receivable
ue is more
ge debtor
Interp
This ra
the va
manag
shows
compa
5. Av
Aver
(gene
31.03
360/1
30 da
31.03.12
pretation :
atio indicates t
alues or turnov
gement of cred
s that company
are to previous
verage Colle
age Collecti
erally taken a
3.12
12.05
ays
0
5
10
15
31
CAverage
2 12.05
the speed with
ver into sales.
dit. But in the
y is not utilizin
year.
ection Perio
ion Period i
as 360) by th
1.03.12
12.05
PCollection
31.03.131
which debtors
The higher the
company the
ng its debtors
od
is calculated
he Debtors T
31.
360/
29
31.03.
12
DebPeriod =
2.35
s are being con
e values of deb
debtor turnove
efficiency. No
d by dividin
Turnover Ra
03.13
/12.35
days
13
2.35
Turnovbtors360
nverted or turno
btors turnover
er ratio is decr
ow their credit
ng the numb
atio.
Ratiover
over into sales.
r, the more eff
reasing year to
t policy becom
ber of days
. The higher
ficient is the
o year. This
me liberal as
in a year
Interp
The
analy
adopt
show
comp
FINA
In lin
(Inter
finan
the op
pretation:
average co
yzing the effi
ted by comp
ws that the f
petitor’s cred
NCIAL RESU
ne with the
rnational Fin
ncial year 20
perations of
0
5
10
15
20
25
30
llection per
ficiency of co
pany. In the
firm has Lib
dit policy.
ULTS AND R
e amended
nancial Repo
010-11 onwa
f the Compan
20
riod measur
ollection eff
firm averag
beral Credit
RESULTS OF
statutory gu
orting Stand
ards. Consol
ny are as foll
12
30
res the qua
forts. It also
ge collection
policy. The
OPERATION
uidelines, th
dards) for co
idated and S
lows:
201
lity of deb
helps to ana
period incre
ese changes
NS
he Company
onsolidation
Standalone f
13
29
tors and it
alysis the cre
easing year
in policy a
y has adop
of accounts
financial hig
helps in
edit policy
to year. It
are due to
pted IFRS
s from the
ghlights of
Days
71
Consolidated Financial Highlights
LIQUIDITY
The Company generates healthy operational cash flows and maintains sufficient cash and financing arrangements to meet its strategic objectives. It deploys a robust cash management system to ensure timely servicing of its liquidity obligations. The Company has also been able to arrange for adequate liquidity at an optimized cost to meet its business requirements and has minimized the amount of funds tied-up in the current assets. As of March 31, 2012, the Company has cash and cash equivalents of Rs. 20,300 Mn and short term investments of Rs. 18,132 Mn. During the year ended March 31, 2012, the Company generated operating free cash flow of Rs. 101,319 Mn. The net debt - EBITDA ratio as on March 31, 2012 was at 2.56 and the net debt - equity ratio was at 1.29. The net debt in USD terms decreased from USD 13,427 Mn as on March 31, 2011 to USD 12,714 Mn as on March 31, 2012. The Company manages the short-term liquidity to generate optimum returns by deploying surpluses albeit only in the debt and money market
72
instruments including in high rated liquid and income debt fundschemes, fixed maturity plans, bank fixed deposits and other similar instruments. The Company is comfortable with its present liquidity position and foreseeable liquidity needs. It has adequate facilities in place and robust cash flows to meet liquidity requirements for executing its business plans and meeting with any evolving requirements. The Company also enjoys strong access to capital markets across debt, equity and hybrids.
73
Chapter – 7
RECOMMENDATIONS The study conducted on working capital management of Bharti Airtel shows the
evaluation of management performance in this regard. Major findings and suggestions
thereon are narrated as under:
• Current assets comprise/a significant portion of total investment in assets of
the company. There is fluctuating and rather increasing trend of this ratio
during the period which shows management in-efficiency in managing
working capital in relation to total investment. Further current assets to fixed
assets ratio also shows on fluctuating trend during the study period which
substantiate above mentioned criterion of in-effectiveness in management of
working capital by the company.
• Assets turnover ratio for the given years of study shows stagnant trend which
is due to significant increase in sales.
• The ratio used for analysis of liquidity position is current ratio and quick ratio.
This ratio reveals that company has sound liquidity position throughout the
period of study. Company should maintain significant balance in terms of
resources to improve these ratios.
• Inventory turnover ratio depict the fluctuating trend which indicates the
accumulation of inventory in turn which cause loss to the company by way of
deterioration of stock, interest loss on blockage of stock etc. Further
composition of inventory reveals that portion of individual element of
inventory has fluctuating trend which indicates that management has no policy
in respect of inventory management.
• Debtors Turnover ratio reveals a decreasing trend during the period of study
and average collection period ranges have not improved. It reveals that
management has no specific policy in respect of debtor’s management.
Keeping in view of detailed analysis of study and our findings mentioned in above
paragraphs, the following suggestions shall be helpful in increasing the efficiency in
working capital management.
• Company should make a policy in respect of investment of excess cash, if any;
in marketable securities and overall cash policy should be introduced.
74
• In case of inventory management ABC analysis, FSN technique, VED
technique should be adopted to increase the efficiency of inventory
management. Further a inventory monitoring system should be introduced to
avoid holding of excess inventory.
• Management should develop a credit policy and proper self realisation system
from customers so that efficient and effective management of accounts
receivable can be ensured. This will significantly improve the profitability and
liquidity of the company.
• Purchase policy regarding raw material, consumables, tools and packing
materials etc. should be introduced which ultimately helps in planning of
inventory, availment of maximum trade! cash discount and availment of
maximum credit period from suppliers.
75
Chapter – 8
CONCLUSIONS & IMPLICATIONS Bifurcation of credit limits
Bifurcation of cash credit limits into a demand loan portion and a fluctuating
cash credit component has not found acceptance either on the part of the banks
or the borrowers. Such bifurcation may not serve the purpose of better credit
planning by narrowing gap between sanctioned limits and the extent of
utilization thereof.
2. Reduction in over dependence on bank finances
The need for reducing the over dependence of the medium and large
borrowers both in private and public sectors on bank finance for their
production / trading purposes is recognized. The net surplus cash generation
on established industrial unit should be utilized partly at least for reducing
borrowing for working capital purposes.
3. Increase in owner’s contribution
In order to ensure that the borrowers do enhance their contributions working
capital and to improve their current ratio, it is necessary to place them under
the second method of sending recommended by hand on committee which
would give a minimum current ration of 1.33:1. As many of the borrowers
may not be immediately in a position to work under the second method of
lending the excess borrowings should be segregated and treated as working
capital term loan which should be made repayable loan, it should be charged at
higher rate of interest.
4. AD-HOC or temporary Limits
Borrowers should be discouraged from approaching banks frequently for ad-
hoc or temporary limits in excess of sanctions and limit to meet unforeseen
contingencies.
Banks should charge additional interest of 1% pa over normal rate on these 1
limits.
76
5. Separation of Normal Non-Peak Level & Peak Level Requirements
While assessing the credit requirement, the bank should appraise and the
separate limits or the normal non-peak level as also or the ‘peak level’ or
requirement indicating also the periods during which the separate limits would
be extended to all borrowers having working capital of Rs. 10 lacs and above.
One of the imp. Criteria for deciding such limit should be the borrowers’
utilization of cr. Limits in the past.
7. Temporary Accommodation through loan
If any ad-hoc or temporary accommodation is req. in excess of the sanctioned
limit to meet unproven contingencies the additional finance should be given,
where necessary, through a separate demand loan A/C
Or a separate non-operable cash Cr. A/C. There should be a stiff penalty for
such demand loan or non-operable cash cr. Portion, ablest 2% above the
normal rate unless the RBI exempts such penalty. The discipline may be made
applicable in cases involving working capital limits of Rs. 10 lacs and above.
7. Penal Information
The borrower should be asked to give his quarterly requirements of funds
before the commencement of the quarter on the basis of his budget, the actual
requirements being within the sanctioned limit for the particular peak
level/non-peak level periods. Drawings of less than or in excess of the
operative limit so fined (with a tolerance o 10% either way) but not exceeding
the sanctioned limit would be subject to a penalty to be fined by the RBI from
time to time. For the time being, the penalty may be fixed at 2% p.a. The
borrower would be required to submit his budgeted requirements in triplicate
& a copy of each would be sent immediately by the branch to the controlling
office and head office for record. The penalty would be applicable only in
respect of parties enjoying cr. Limits of Rs. 10 lacs and above subject to
certain exemptions.
8. Info. Systems
The non-submission of the returns in time is partly due to certain features in
the forms themselves. To get over this difficulty, simplified forms have been
proposed. As the quarterly info. System is part and parcel of the revised style
of lending under the cash cr. System, I the borrower does not submit the return
within the prescribed time, he should be penalized by charging the whole
77
outstanding in the A/C at a penal rate of mt., 1% p.a. more than the contracted
date for the advance from the due date of the return till the date of its actual
submission.
After completing this project it can now be concluded that an after great effect
on Airtel. Working Capital (Airtel) to very important in which have higher
unit value.
After doing my survey I have concluded that most of the consumer prefers to
buy because Airtel give the excellent after sale service than any other brand.
and their after sale service is also very good. But beside these points I have
concluded on my survey that sharp give the better after sale service than any
brand. Airtel give the prompted after sale service than any other company
most of the customer are satisfied with the after sale service of Airtel and
attitude of compliant handler is very sensitive.
Prime lending rate:
The RBI had given the total freedom of changing the rate of interest on the amount of
credit facilities, which are extended by it. The banks has now been advised to stick to
concept of PLR, which is the minimum rate of interest, which every bank can charge
from its clients and constituents. It keeps on a changing as per the direction of RBI.
Factors taken into consideration which fixing actual ROI:
1. The project / product
2. The promoter
3. The prospects
4. The performance of the group co.
5. Promoters contribution in the project.
6. The structural ratios like the debt equity ratio.
7. The earlier operation of the a/c.
8. The submission of QIS
9. The timely submission of the production/sales figure etc.
10. The difference between actuals and projections
78
BIBLIOGRAPHY BOOKS
• Khan M.Y. and Jain P.K., Financial Management
• Dalal Street Journal
• Annual Report – Bharti Airtel
• Financial Express
• Seth, A.K., (2003); International Financial Management
• Vij, Madhu, (2002); Multinational Financial Management
• Apte, P.G., (2003); International Financial Management
• Rajwade, A.V., (2003); Foreign Exchange International Finance and Risk
Management
• Avadhani, V.E., (2003); Global Business Finance
• Majumdar, Bhaskar, (2002); Concept and Practice of Global Finance
• Global Trade And Investment Finance – Lawrence Tuller
• Corporate Finance IMT Gaziabad
WEBSITE:
www.airtelindia.com
http://www.hinduonnet.com/2004/12/22/stories/2004122202441700.htm
http://bhartiairtel.in/index.php?id=14
http://bhartiairtel.in/index.php?id=264
http://bhartiairtel.in/index.php?id=265
http://bhartiairtel.in/index.php?id=company_profile
http://economictimes.indiatimes.com/bharti-airtel-
ltd/balancesheet/companyid-2718.cms
http://www.moneycontrol.com/annual-report/bhartiairtel/directors-
report/BA08#BA08
http://www.moneycontrol.com/financials/bhartiairtel/financial-
graphs/operating-profit-ebitda-percentage/BA08
http://www.indianotes.com/research-analysis/company/company-
financial.php?cc=MTUyMDAwMjIuM
79
APPENDICES
FINANCIAL STATEMENTS
Bharti Airtel Services Ltd.
Consolidated Statement of Financial Position (Amounts in millions of Indian Rupees, except share and per share data and as stated otherwise)