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Summer Training project Report




“Analysis of Indian cement Industry & Financial performance of



Submitted to: - Submitted by:-

Semester -III
Course: MBA+PGPM
Batch: SPR-09/11


Sr. No. Contents Page No.

1) Preface
2) Acknowledgement
3) Declaration
4) Executive Summary

5) Introduction To The Study

(A) Objective Of The Study

(B) Place of the study
Research Methodology and Scope Of Study
(C )
Limitation Of The Study
(D )
6) Overview of Indian CEMENT Industry
(A) Industry analysis using Porter’s model
(B) SWOT Analysis
7) Introduction- ACC
(A) Brief History
(B) Plants & Capacity
(C) Vision & Mission
(D) Achievements & Awards
(E) Map of ACC
(F) 5 years performance – physical and highlights
8) Introduction-Working Capital
9) Working Capital Management
Consequences of under and over assessment of
(A) W.C
(B) Types of W.C
( C) Influencing factors

(D) Financing W.C

(E) Inventory Management

(F) Cash Management

(G) Receivables Management

10) Analysis
11) Important Terms and Ratios (graphical
12) Findings & Observed
13) Suggestions
14) Bibliography & Annexure


To start any business, First of all we need finance and the success of that
business entirely depends on the proper management of day-to-day finance and
the management of this short-term capital or finance of the business is called
Working capital Management.

Working Capital is the money used to pay for the
everyday trading activities carried out by the business - stationery needs, staff
salaries and wages, rent, energy bills, payments for supplies and so on.

I have tried to put my best effort to complete this task on the basis of skill that I
have achieved during the last one year study in the institute. I have tried to put
my maximum effort to get the accurate statistical data. However I would
appreciate if any mistakes are brought to me by the reader.


It is difficult to acknowledge precious a debt as that of learning as it is the

only debt that is difficult to repay except through gratitude.
It is my profound privilege to express my sincere thanks to Mr B D Daler,Head
HR of ACC Ltd, Wadi ,for giving me an opportunity to work on the project. who
gave me an opportunity to carry out this project and had been a constant

I would like to thank to Mr. Rajiv joshi, Manager HR for

their constant support and guidance through out the tenure of this project without
their cooperation it would have been a difficult task to accomplish this project.

I am also thankful to my faculty guide Mr.V.Ramana , Rai
Business School, Hyderabad, who has provided their valuable time and effort for
guiding me for the completion of this report.

Shivali Kamal,

Place :-Hyderabad
Date :


I do hereby declare that this piece of project report entitled “Analysis of Indian
cement Industry & Financial performance of ACC LTD” for partial fulfillment of the
requirements for the award of the degree of “MBA+PGPM” is a record of original
work done by me under the supervision and guidance of Mr. Rajiv Joshi, HR and

Mr. B D Daler Head HR of ACC LTD,Wadi plant .This Project work is my own
and has neither been submitted nor published elsewhere.

Place: Hyderabad
Date: Shivali Kamal


The major objective of the study is to understand the working capital of ACC & to
suggest measures to overcome the shortfalls if any.

Funds needed for short term needs for the purpose like raw materials, payment
of wages and other day to day expenses are known as working capital. Decisions
relating to working capital (Current assets-Current liabilities) and short term
financing are known as working capital management. It involves the relationship
between a firm’s short-term assets and its short term liabilities. By definition,
working capital management entails short-term definitions, generally relating to
the next one year period.

The goal of working capital management is to ensure that the firm is able to
continue its operation and that it has sufficient cash flow to satisfy both maturing
short term debt and upcoming operational expenses.

Working capital is primarily concerned with inventories management, Receivable

management, cash management & Payable management.

Inventories management at ACC:

ACC is a large scale manufacturing company involved in production of Cement.

Therefore, it has to maintain large quantity of inventories at production units for
its smooth running and functioning.

Cash management at ACC:

ACC has been accumulating huge cash surpluses over last several years, which
enables the organization to maintain adequate cash reserves and to generate
required amount of cash.

Receivables management at ACC:

ACC has set up its marketing office at all major cities in India i.e Bangaluru ,
Bhopal, Chandigarh , Coimbatore , Kanpur, Kolkata, Mumbai, Pune ,
Secunderabad New Delhi & patna
This marketing office obtains sales order from Cement users in India as well as
globally. The cement production and dispatch figures for the month of May 2010
are 1.81 & 1.75 million tones respectively. The Sales recorded for the FY 2009
was Rs. 83,861,000,000


Working Capital:-
The life blood of business, as is evident, signified funds required for day-to-day
operations of the firm. The management of working capital assumes great
importance because shortage of working capital funds is perhaps the biggest
possible cause of failure of many business units in recent times. There it is of
great importance on the part of management to pay particular attention to the
planning and control for working capital. An attempt has been made to make
critical study of the various dimensions of the working capital management of

Decisions relating to working capital and short term financing are referred to as
working capital management. These involve managing the relationship

between a firm's short-term assets and its short-term liabilities. The goal of
Working capital management is to ensure that the firm is able to continue its
operations and that it has sufficient money flow to satisfy both maturing short-
term debt and upcoming operational expenses.

Objective of the study:-

The following are the main objective which has been undertaken in the present

1. To determine the amount of working capital requirement and to calculate

various ratios relating to working capital.

2. To analyze the Indian Cement Industry.

3. To evaluate the financial performance of ACC limited using financial tools.

4. To suggest the steps to be taken to increase the efficiency in management

of working capital.

Place of study:-
The project study is carried out at the Finance Department of ACC cements ltd
corporate office Situated at Wadi, Karnataka. The study is undertaken as a part
of the PGPM curriculum from 03 JUNE 2010 to 03 JULY 2009 in the form of
summer internship.

Study design and methodology:-

Two types of data are collected, one is primary data and second one is
secondary data. The primary data were collected from the Department of finance,
ACC Ltd, Wadi. The secondary data were collected from the Annual Report of
ACC & ACC website, etc.

Scope: - The study has got a wide & fast scope. It tries to find out the players in
the industry & focuses on the upcoming trends. It also tries to show the financial
performance of the major player of the industry i.e.; ACC Ltd.

There may be limitations to this study because the study duration (summer
placement) is very short and it’s not possible to observe every aspect of working
capital management practices. The data collected were mostly secondary in

Industry Overview:-
The cement industry is one of the vital industries for economic development in a
country. The total utilization of cement in a year is used as an indicator of
economic growth.

Cement is a necessary constituent of infrastructure development and a key raw

material for the construction industry, especially in the government’s
infrastructure development plans in the context of the nation’s socio-
Economic development.
India is the world's second largest producer of cement with total capacity of 219
million tones (MT) at the end of FY 2009, according to the Cement Manufacture’s

According to the Cement Manufacturer’s Association, cement dispatches during

2009-10 were 159.43 million tones (MT) increasing by 12 per cent over 142.23 in
2008-09. Cement production during 2009-10 was 160.31 MT an increase of
12.37 per cent over 142.65 MT in 2008-09.

Moreover, the government’s continued thrust on infrastructure will help the key
building material to maintain an annual growth of 9-10 per cent in 2010,
according to India’s largest cement company, ACC.

In January 2010, rating agency Fitch predicted that the country will add about 50
million tone cement capacity in 2010, taking the total to around 300 million tones.

Government Initiatives

 Government initiatives in the infrastructure sector, coupled with the

housing sector boom and urban development, continue being the main
drivers of growth for the Indian cement industry.

 Increased infrastructure spending has been a key focus area. In the Union
Budget 2010-11, US$ 37.4 billion has been provided for infrastructure
 The government has also increased budgetary allocation for roads by 13
per cent to US$ 4.3 billion.

Future Trends:-
 The cement industry is expected to grow steadily in 2009-2010 and
increase capacity by another 50 million tons in spite of the recession and
decrease in demand from the housing sector.

 The industry experts project the sector to grow by 9 to 10% for the current
financial year provided India's GDP grows at 7%.
 India ranks second in cement production after China.
 The major Indian cement companies are Associated Cement Company
Ltd (ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd
and Madras Cement Ltd.
 The major players have all made investments to increase the production
capacity in the past few months, heralding a positive outlook for the
 The housing sector accounts for 50% of the demand for cement and this
trend is expected to continue in the near future.

PORTER’S FIVE FORCE MODEL:- It is useful for analyzing the industry overall
and determining the level of competition among different existing players .It can
be understood under different topics .Along with the industry we will try to point
out the conditions for ACC too.
ACC has threat from new entrants like TATA; Reliance etc can enter into this
But there are certain barriers to their entry. These are:-

 Availability of raw material

 Restrictions on entry by government into cement industry

 Cement industry requires a huge investment

 Switching costs are high in cement industry


Suppliers have very much impact on cement industry because of the following
 Raw materials used in cement are gypsum, fly ash and slag. There are
few suppliers of these materials.

 Quality of finished goods i.e. cement is very important for ACC ltd.

 As already said, there are high switching costs in cement industry.

 There is no substitute to the raw material used in cement.

iii) BARGAINING POWER OF BUYER:- ACC ltd plays the role of buyer. It has
following bargaining powers:

 There are only few buyers of raw material of cement.

 ACC has major stake in cement industry i.e. 11% of the world.

iv) THREAT OF SUBSTITUTES:- It has threat from its competitors like Ambuja
cements, Birla cements, Binani cements ,Grasim etc.


In spite of huge stake in cement industry, it is difficult to be on the top because of
the other competing companies i.e. Ambuja, Birla, and Binani etc. The
competitors are using different promotional strategies to attract buyers. So, all
the leading players in the industry have to analyze the situation frequently & they
have to keep changing them too.

Strengths: -
1. The industry is likely to maintain its growth momentum and continue
growing at about 9 – 10% in the foreseeable future.
2. Government initiative in the infrastructure sector such as the
commencement of the second phase of the National Highway Development
project, freight carriers, rural roads and development of the housing sector
(Bharat Nirman Yojana) are likely to be the main drivers of growth.
3. In the coming few years the demand for the cement will increase which
will be booming news for cement manufactures. As capacity utilization is
over 90% now.
4. Huge potential for export.

Weakness: -
1. Cement Industry is highly fragmented & regionalized.
2. Low – value commodity makes transportation over long distances un-
3. High capital cost and investment cost for each and every project.
4. The complex Excise Duty structure based on the category of buyer and
end use of the cement has caused at lot of confusion in the industry.
5. The recent ban on export of cement clinker would increase the
availability of cement in the domestic market, which in turn would put
pressure on cement prices.
Opportunities: Demand–supply gap

1. Substantially low per capita cement consumption as compared to
developing countries (1/3 rd of world average) Per capita cement
consumption in India is 82 kgs against a global average of 255 kgs and
Asian average of 200 kgs.
2. Despite slightly lower economic growth, the construction and
infrastructure sector is expected to record healthy growth, which augurs
well for cement industry.
3. Additional capacity of 20 million tons per annum will be required to
match the demand.

Threats: -

1. The recent moves by the Central Government in making the import of

the cement total duty free, is a cause of worry for the Indian cement

2. Further recent changes in the Central Excise Duty structure by way of

introduction of multiple slabs of Excise Duty is also a cause of worry for
the industry.

3. Almost all the major players in the industry have announced substantial
increase in the capacity and the possibility of over supply situation
cannot be ruled out.

4. Increased railway freight, coal prices and dispatch bottlenecks on

account of truck Loading restrictions imposed by various State

5. Scarcity of good quality Coal is some other factors which are cause of
concern for the industry.

Competitor analysis (Overall industry):-

ACC, with an installed capacity of 22.63 MTPA, enjoys an 11% market share in
India, which with its total installed capacity of 207 MTPA, India is the second
largest cement producing country in the world. ACC’s nation-wide presence and
brand image ensures a competitive edge and helps it to withstand regional
fluctuations in prices and also to adapt its distribution to market place needs. Its
key competitors are as follows:-

ACC Ltd is the market leader with the capacity of 22.63 MTPA .The top ten
companies are given below with the details:-
Name ACC Limited
Production 17,902
Installed Capacity 18,640
Net Profit (Quarter ended Sep 30, 2009) 41,550.89 lakhs
Name Gujarat Ambuja Cements Limited
Production 15,094
Installed Capacity 14,860
Net Profit (Quarter ended on Sep 30, 2009) 31,848 lakhs
Name Ultratech
Production 13,707
Installed Capacity 17,000
Net Profit (in 2008-09) 97,700 lakhs
Name Grasim

Production 14,649
Installed Capacity 14,115
Net Profit (in 2008-09) 1,64,800 lakhs
Name India Cements
Production 8,434
Installed Capacity 8,810
Net Profit (in 2008-09) 43,218 lakhs
Name JK Cement Ltd
Production 6,174
Installed Capacity 6,680
Net Profit (in 2008-09) 14,234.40 lakhs
Name Jaypee Group
Production 6,316
Installed Capacity 6,531
Name Century Cement
Production 6,636
Installed Capacity 6,300
Name Madras Cement
Production 4,550
Installed Capacity 5,457
Net Profit (in 2008-09) 49,081 lakhs
Name Birla Corp.
Production 5,150
Installed Capacity 5,113
Net Profit (in 2008-09) 9,061 lakhs

Introduction of the Company

ACC (ACC Limited) is India's foremost manufacturer of cement and concrete.

ACC's operations are spread throughout the country with 14 modern cement
factories, 19 Ready mix concrete plants, 19 sales offices, and several zonal
offices. It has a workforce of about 9000 persons and a countrywide distribution
network of over 9,000 dealers. ACC's research and development facility has a
unique track record of innovative research, product development and specialized
consultancy services. Since its inception in 1936, the company has been a
trendsetter and important benchmark for the cement industry in respect of its
production, marketing and personnel management processes. Its commitment to
environment-friendliness, its high ethical standards in business dealings and its
on-going efforts in community welfare programs have won it acclaim as a
responsible corporate citizen. In the 70 years of its existence, ACC has been a
pioneer in the manufacture of cement and concrete and a trendsetter in many
areas of cement and concrete technology including improvements in raw material
utilization, process improvement, energy conservation and development of high
performance concretes.

ACC’s brand name is synonymous with cement and enjoys a high level of equity
in the Indian market. It is the only cement company that figures in the list of
Consumer Super Brands of India.

The company's various businesses are supported by a powerful, in-house

research and technology backup facility - the only one of its kind in the Indian
cement industry. This ensures not just consistency in product quality but also
continuous improvements in products, processes, and application areas.

ACC has rich experience in mining, being the largest user of limestone, and it is
also one of the principal users of coal. As the largest cement producer in India, it
is one of the biggest customers of the Indian Railways, and the foremost user of

the road transport network services for inward and outward movement of
materials and products.

ACC has also extended its services overseas to the Middle East, Africa, and
South America, where it has provided technical and managerial consultancy to a
variety of consumers, and also helps in the operation and maintenance of
cement plants abroad.

ACC is among the first companies in India to include commitment to

environmental protection as one of its corporate objectives, long before pollution
control laws came into existence. The company installed pollution control
equipment and high efficiency sophisticated electrostatic precipitators for cement
kilns, raw mills, coal mills, power plants and coolers as far back as 1966. Every
factory has state-of-the art pollution control equipment and devices.

History & Profile of ACC Cement Works

ACC was formed in 1936 when ten existing cement companies came together
under one umbrella in a historic merger – the country’s first notable merger at a
time when the term mergers and acquisitions was not even coined. The history of
ACC spans a wide canvas beginning with the lonely struggle of its pioneer F E
Din Shaw and other Indian entrepreneurs like him who founded the Indian
cement industry. Their efforts to face competition for survival in a small but
aggressive market mingled with the stirring of a country’s nationalist pride that
touched all walks of life – including trade, commerce and business.

The first success came in a move towards cooperation in the country’s young
cement industry and culminated in the historic merger of ten companies to form a
cement giant. These companies belonged to four prominent business groups –
Tatas, Khataus, Killick Nixon and F E Din Shaw groups. ACC was formally
established on August 1, 1936. Sadly, F E Din Shaw, the man recognized as the
founder of ACC, died in January 1936. Just months before his dream could be

The ACC Board comprises of 13 persons. These include executive, non-

executive, and nominee directors. This group is responsible for determining the
objectives and broad policies of the Company - consistent with the primary
objective of enhancing long-term shareholder value.

The Board meets once a month. Two other small groups of directors - comprising
Shareholders'/Investors' Grievance Committee and Audit Committee of the Board
of Directors - also meet once a month on matters pertaining to the finance and
share disciplines. During the last decade, there has been a streamlining of the
senior management structure that is more responsive to the needs of the
Company's prime business. A Managing Committee - comprising, in addition to
the Managing Director and the two executive directors, the presidents

representing multifarious disciplines: finance, production, marketing, research
and consultancy, engineering and human resources – meets once a week.

A Strategic Alliance:
The house of Tata was intimately associated with the heritage and history of
ACC, right from its formation in 1936 up to 2000. The Tata group sold all 14.45%
of its shareholdings in ACC in three stages to subsidiary companies of Gujarat
Ambuja Cements Ltd. (GACL), who are now the largest single shareholder in
This enabled ACC to enter into a strategic alliance with GACL; a company
reputed for its brand image and cost leadership in the cement industry.
Holcim – A New Partnership:
A new association was formed between ACC and The Holcim group of
Switzerland in 2005. In January 2005, Holcim announced its plans to enter into
long – term alliances with Ambuja Group by acquiring a majority stake in Ambuja
Cements India Ltd. (ACIL), which at the time held 13.8% of total equity shares in
ACC. Holcim simultaneously announced its bid to make an open offer to ACC
shareholders, through Holdcem Cement Pvt. Ltd. and ACIL, to acquire a majority
shareholding in ACC. An open offer was made by Holdcem Cement Pvt. Ltd.
along with ACIL, following which the shareholding of ACIL increased to 34.69%
of Equity share capital of ACC. Consequently, ACIL has filed declarations
indicating their shareholding and declaring itself as a promoter of ACC.
Holcim is the world leader in cement as
well as being large supplier of concrete, aggregates and certain construction
related services. Holcim is also a respected name in information technology and
research and development. The group has its headquarters in Switzerland with
worldwide operations spread across more than 70 countries.

Plants & Their Capacity:

Units State Capacity (MTPA)
Bargarh Cement Works
1 Bargarh 0.96
Chaibasa Cement Works
2 Chaibasa 0.87
Chanda Cement Works
3 Chanda 1.00
Damodar Cement Works
4 Damodhar 0.53
Gagal Cement Works 4.40
5 Gagal
(Gagal I and II)
Jamul Cement Works
6 Jamul 1.58
Kymore Cement Works
7 Kymore 2.20

Lakheri Cement Works
8 Lakheri 1.50
Madukkarai Cement Works
9 Madukkarai 0.96
Sindri Cement Works
10 Sindri 0.91
Wadi Cement Works
11 Wadi 2.59
Wadi Cement Works
12 New Wadi Plant 2.60
Tikaria Cement Grinding and
13 Tikaria Packing Plant 2.31

“To be one of the most respected companies in India; recognized for challenging
conventions and delivering on our promises”

Mission of ACC

Maintain our leadership of the Indian cement industry through the
Leadership continuous modernization and expansion of our manufacturing
facilities and activities, and through the establishment of a wide and
efficient marketing network.
Achieve a fair and reasonable return on capital by promoting
Profitability productivity throughout the company.
Ensure a steady growth of business by strengthening our position
Growth in the cement sector.
Maintain the high quality of our products and services and ensure
their supply at fair prices.
Promote and maintain fair industrial relations and an environment
Equity for the effective involvement, welfare and development of staff at all
Promote research and development efforts in the areas of product
Pioneering development and energy, and fuel conservation, and to innovate
and optimize productivity.
Fulfill our obligations to society, specifically in the areas of
Responsibility integrated rural development and in safeguarding the environment
and natural ecological balance.

Few Achievement of ACC Limited:

YEAR Achievements

1936 The Associated Cement Companies Limited incorporated on August 1

1947 India's first entirely indigenous cement plant installed at Chaibasa.

ACC Sindri uses waste material - calcium carbonate sludge -from fertilizer factory at
Sindri to make cement
1956 Bulk Cement Depot established at Okhla, Delhi
Blast furnace slag, (a waste by-product from steel) from TISCO used at ACC
Chaibasa to manufacture Portland Slag Cement.

1961 Manufacture of Hydrophobic (waterproof) cement at ACC Khalari.

Manufacture of Portland Pozzolana Cement using naturally available materials. An

Eco-friendly cements using an eco-friendly process.

ACC inducts use of pollution control equipment and high efficiency sophisticated
1966 electrostatic precipitators for its cement plants and captive power plants decades
before it becomes mandatory to do so.

Introduction of the energy efficient pre-calcinations technology for the first time in

1982 Commissioning of the first 1 MTPA plant in the country at Wadi, Karnataka.

ACC develops a new binder, working at sub-zero temperature, which is successfully

used in the Indian expedition to Antarctica.
Incorporation of Bulk Cement Corporation of India, a JV with the Government of

1993 Commercial manufacture of ready-mixed concrete at Mumbai.

Commissioning of the new Wadi plant of 2.6 MTPA capacity in Karnataka, the
2001 largest in India, and among the largest sized kilns in the World.

Awards & Accolades

• IMC Ramkrishna Bajaj National Quality Award - – Gagal wins Commendation

Certificate and New Wadi Plant wins Special Award for Performance Excellence in the
Manufacturing Sector, 2007.

• National Award for outstanding performance in promoting rural and agricultural

development – by ASSOCHAM

• Sword of Honour - by British Safety Council, United Kingdom for excellence in safety

• Indira Priyadarshini Vrikshamitra Award --- by The Ministry of Environment and

Forests for "extraordinary work" carried out in the area of afforestation.

• FICCI Award --- for innovative measures for control of pollution, waste management &
conservation of mineral resources in mines and plant.

• Subh Karan Sarawagi Environment Award - by The Federation of Indian Mineral

Industries for environment protection measures.

• Drona Trophy - By Indian Bureau Of Mines for extra ordinary efforts in protection of
Environment and mineral conservation in the large mechanized mines sector.

• Indo German Greentech Environment Excellence Award

• Golden Peacock Environment Management Special Award - for outstanding efforts in

Environment Management in the large manufacturing sector.

• Indira Gandhi Memorial National Award - for excellent performance in prevention of

pollution and ecological development

• Excellence in Management of Health, Safety and Environment : Certificate of Merit

by Indian Chemical Manufacturers Association

• Vishwakarma Rashtriya Puraskar trophy for outstanding performance in safety and

mine working

• Good Corporate Citizen Award - by PHD Chamber of Commerce and Industry

• Jamnalal Bajaj Uchit Vyavahar Puraskar - Certificate of Merit by Council for Fair
Business Practices

• Greentech Safety Gold and Silver Awards - for outstanding performance in Safety
management systems by Greentech Foundation

• FIMI National Award - for valuable contribution in Mining activities from the Federation
of Indian Mineral Industry under the Ministry of Coal.

ACC was the first recipient of ASSOCHAM’s first ever National Award for
outstanding performance in promoting rural and agricultural development
activities in 1976.

Decades later, PHD Chamber of Commerce and Industry selected ACC as

winner of its Good Corporate Citizen Award for the year 2002.

Over the years, there have been many awards and felicitations for achievements
in Rural and community development, Safety, Health, Tree plantation, A
forestation, Clean Mining, Environment Awareness and Protection.

Map of ACC Network

Corporate office:

Overseeing the company’s rang of business; the Corporate Office is the central
head quarters of all business and human resource function located in Mumbai.

ACC Subsidiaries:

1. Bulk Cement Corporation India Ltd (BCCI)

2. ACC Machinery Company Ltd (AMCL)
3. ACC Nihon Casting Ltd (ANCL)

Regional marketing offices :-

Offices at all major cities in India i.e Bangaluru , Bhopal, Chandigarh ,
Coimbatore , Kanpur, Kolkata, Mumbai, Pune , Secunderabad ,New Delhi &



Rs. Crore
Particulars *2005 2006 2007 2008 2009

NET SALES 3,221 5,803 6,991 7,283 8,027

PBT 684 1,620 1,930 1,737 2,294
OPERATING 616 1,717 1,993 1,899 2,643
PAT 544 1,232 1,439 1,213 1,607
Capital 3,502 4,234 4,791 5,746 6,932
Basic Earnings 30.02 66.02 76.75 64.63 85.60
per Share (Rs.)

An Introduction To Working Capital Management

“Working capital means the part of the total assets of the business that change
from one form to another form in the ordinary course of business operations.”

Concept of working capital:-

The word working capital is made of two words 1.Working and 2. Capital
The word working means day to day operation of the business, whereas the word
capital means monetary value of all assets of the business.

Working capital : -
Working capital may be regarded as the life blood of business. Working capital is
of major importance to internal and external analysis because of its close
relationship with the current day-to-day operations of a business. Every business
needs funds for two purposes.

* Long term funds are required to create production facilities through purchase
of fixed assets such as plants, machineries, lands, buildings & etc

* Short term funds are required for the purchase of raw materials, payment of
wages, and other day-to-day expenses.
. It is other wise known as revolving or circulating capital

It is nothing but the difference between current assets and current liabilities. i.e.

Working Capital = Current Asset – Current Liability.

Businesses use capital for construction, renovation, furniture, software,

equipment, or machinery. It is also commonly used to purchase inventory, or to
make payroll. Capital is also used often by businesses to put a down payment
down on a piece of commercial real estate. Working capital is essential for any
business to succeed. It is becoming increasingly important to have access to
more working capital when we need it.

Concept of working capital

• Gross Working Capital = Total of Current Asset

• Net Working Capital = Excess of Current Asset over Current

Current Assets Current Liabilities

• Cash in hand / at bank • Bills Payable

• Bills Receivable • Sundry Creditors
• Sundry Debtors • Outstanding expenses
• Short term loans • Accrued expenses
• Investors/ stock
• Temporary investment • Bank Over draft
• Prepaid expenses

• Accrued incomes

Working capital in terms of five components:

1. Cash and equivalents: - This most liquid form of working capital requires
constant supervision. A good cash budgeting and forecasting system provides
answers to key questions such as: Is the cash level adequate to meet current
expenses as they come due? What is the timing relationship between cash inflow
and outflow? When will peak cash needs occur? When and how much bank
borrowing will be needed to meet any cash shortfalls? When will repayment be
expected and will the cash flow cover it?

2. Accounts receivable: - Many businesses extend credit to their customers. If

we do, is the amount of accounts receivable reasonable relative to sales? How
rapidly are receivables being collected? Which customers are slow to pay and
what should be done about them?

3. Inventory: - Inventory is often as much as 50 percent of a firm's current

assets, so naturally it requires continual scrutiny. Is the inventory level
reasonable compared with sales and the nature of
our business? What's the rate of inventory turnover compared with other
companies in our type of business?

4. Accounts payable: - Financing by suppliers is common in small

business; it is one of the major sources of funds for entrepreneurs. Is the
amount of money owed suppliers reasonable relative to what we
purchase? What is our firm's payment policy doing to enhance or detract
from our credit rating?

5. Accrued expenses and taxes payable: - These are obligations of our

company at any given time and represent a future outflow of cash.

Two different concepts of working capital are:-

• Balance sheet or Traditional concept
• Operating cycle concept.

Balance sheet or Traditional concept:- It shows the position of the firm at certain
point of time. It is calculated in the basis of balance sheet prepared at a specific
date. In this method there are two type of working capital:-
• Gross working capital
• Net working capital

Gross working capital:- It refers to the firm’s investment in current assets. The sum
of the current assets is the working capital of the business. The sum of the current
assets is a quantitative aspect of working capital. Which emphasizes more on
quantity than its quality, but it fails to reveal the true financial position of the firm
because every increase in current liabilities will decrease the gross working capital.

Net working capital:- It is the difference between current assets and current
liabilities or the excess of total current assets over total current liabilities.

Working capital= current assets - current liabilities.

Net working capital: - It is also can defined as that part of a firm’s current assets
which is financed with long term funds. It may be either positive or negative. When
the current assets exceed the current liability, the working capital is positive and vice

Operating cycle concept: - The duration or time required to complete the

sequence of events right from purchase of raw material for cash to the realization
of sales in cash is called the operating cycle or working capital cycle.




Types of Working Capital:-















Factors requiring consideration while estimating working capital.

• The average credit period expected to be allowed by suppliers.

• Total costs incurred on material, wages.
• The length of time for which raw material are to remain in stores before
they are issued for production.
• The length of the production cycle (or) work in process.
• The length of sales cycle during which finished goods are to be kept
waiting for sales.
• The average period of credit allowed to customers
• The amount of cash required to make advance payment

Importance of Working Capital Ratios

Ratio analysis can be used by financial executives to check upon the efficiency
with which working capital is being used in the enterprise. The following are the
important ratios to measure the efficiency of working capital. The following, easily
calculated, ratios are important measures of working capital utilization.

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital

Ratio Formulae Result Interpretation

On average, we turn over the value of our
entire stock every x days. We may need
to break this down into product groups for
Average Stock
Stock effective stock management.
* 365/ =x
Turnover Obsolete stock, slow moving lines will
Cost of Goods days
(in days) extend overall stock turnover days.
Faster production, fewer product lines,
just in time ordering will reduce average
It takes on average x days to collect
monies due to we. If we’re official credit
Receivables terms are 45 day and it takes 65 days...
Debtors * 365/ = x
Ratio why?
Sales days
(in days) One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.
On average, we pay our suppliers every x
days. If we negotiate better credit terms
this will increase. If we pay earlier, say, to
Creditors *
Payables get a discount this will decline. If we
365/ =x
Ratio simply defer paying our suppliers (without
Cost of Sales days
(in days) agreement) this will also increase - but
(or Purchases)
our reputation, the quality of service and
any flexibility provided by our suppliers
may suffer.
Current Assets are assets that we can
readily turn in to cash or will do so within
12 months in the course of business.
Current Liabilities are amount we are due
Total Current to pay within the coming 12 months. For
Current Assets/ =x example, 1.5 times means that we should
Ratio Total Current times be able to lay our hands on $1.50 for
Liabilities every $1.00 we owe. Less than 1 time
e.g. 0.75 means that we could have
liquidity problems and be under pressure
to generate sufficient cash to meet
oncoming demands.
Quick Ratio (Total Current = x Similar to the Current Ratio but takes
Assets - times account of the fact that it may take time to
Inventory)/ convert inventory into cash.

Total Current
(Inventory +
Working A high percentage means that working
Receivables - As %
Capital capital needs are high relative to our
Payables)/ Sales
Ratio sales.

Note:- Once ratios have been established for our business, it is important to track
them over time and to compare them with ratios for other comparable businesses
or industry sectors.

The working capital needs of a business are influenced by numerous

factors. The important ones are discussed in brief as given below:

 Nature of Enterprise:-The nature and the working capital requirements of

an enterprise are interlinked. While a manufacturing industry has a long
cycle of operation of the working capital, the same would be short in an
enterprise involved in providing services. The amount required also varies
as per the nature; an enterprise involved in production would require more
working capital than a service sector enterprise.

 Manufacturing/Production Policy:-Each enterprise in the manufacturing

sector has its own production policy, some follow the policy of uniform
production even if the demand varies from time to time, and others may
follow the principle of 'demand-based production' in which production is
based on the demand during that particular phase of time. Accordingly,
the working capital requirements vary for both of them.

 Working Capital Cycle :-In manufacturing concern, working capital cycle

starts with the purchase of raw materials and ends with realization of cash
from the sale of finished goods. The cycle involves the purchase of raw
materials and ends with the realization of cash from the sale of finished
products. The cycle involves purchase of raw materials and stores, its
conversion in to stock of finished goods through work in progress with
progressive increment of labor and service cost, conversion of finished
stick in to sales and receivables and ultimately realization of cash and this
cycle continuous again from cash to purchase of raw materials and so on.

 Operations:-The requirement of working capital fluctuates for seasonal

business. The working capital needs of such businesses may increase
considerably during the busy season and decrease during the slack
season. Ice creams and cold drinks have a great demand during
summers, while in winters the sales are negligible.

 Market Condition:-If there is high competition in the chosen product
category, then one shall need to offer sops like credit, immediate delivery
of goods etc. for which the working capital requirement will be high.
Otherwise, if there is no competition or less competition in the market then
the working capital requirements will be low.

 Credit Policy:-The credit policy is concerned in its dealings with debtors

and creditors influence considerably the requirements of the working
capital. A concern that purchases its requirements on credit and sells its
products/services on cash requires lesser amount of working capital. On
the other hand a concern buying its requirements for cash and allowing
credit to its customers, shall need larger amount of funds are bound to be
tied up in debtors or bills receivables.

 Business Cycle:-Business Cycle refers to alternate expansion and

contraction in general business activities. In a period of born i.e. when the
business is prosperous there is a need for larger amount of working
capital due to increase in sales, rise in prices, optimistic expansion of
business etc. On the country at he time of depression i.e. when there is a
down swing of the cycle, business contracts, sales decline, difficulties are
faced in collections from debtors and firms may have a large amount of
working capital lying ideal

 Availability of Raw Material:-If raw material is readily available then one

need not maintain a large stock of the same, thereby reducing the working
capital investment in raw material stock. On the other hand, if raw material
is not readily available then a large inventory/stock needs to be
maintained, thereby calling for substantial investment in the same.

 Growth and Expansion:-Growth and expansion in the volume of

business results in enhancement of the working capital requirement. As
business grows and expands, it needs a larger amount of working capital.
Normally, the need for increased working capital funds precedes growth in
business activities.

 Earning Capacity and Dividend policy:-Some firms have more earning

capacity than others due to the quality of their products, monopoly
conditions etc. Such firms with high earning capacity may generate cash
profits from operations and contribute to their capital. The dividend policy
of a concern also influences the requirements of the working capital. A
firm that maintains steady high rate of cash dividend irrespective of its
generation of profits needs more capital than the firm retains larger part of
its profits and does not pay high rate of cash dividend.

 Price Level Changes:-Generally, rising price level requires a higher
investment in the working capital. With increasing prices, the same level of
current assets needs enhanced investment.

 Manufacturing Cycle:-The manufacturing cycle starts with the purchase

of raw material and is completed with the production of finished goods. If
the manufacturing cycle involves a longer period, the need for working
capital would be more. At times, business needs to estimate the
requirement of working capital in advance for proper control and
management. The factors discussed above influence the quantum of
working capital in the business. The assessment of working capital
requirement is made keeping these factors in view. Each constituent of
working capital retains its form for a certain period and that holding period
is determined by the factors discussed above. So for correct assessment
of the working capital requirement, the duration at various stages of the
working capital cycle is estimated. Thereafter, proper value is assigned to
the respective current assets, depending on its level of completion.

 Other Factors:-Certain other factors such as operating efficiency,

management ability, irregularities a supply, import policy, asset structure,
importance of labor, banking facilities etc. also influences the requirement
of working capital.

Component of Working Capital Basis of Valuation:-

 Stock of raw material Purchase cost of raw materials
 Stock of work in process At cost or market value, whichever is lower
 Stock of finished goods Cost of production
 Debtors Cost of sales or sales value
 Cash Working expenses:-


Working Capital Management refers to management of current assets and

current liabilities. The major thrust of course is on the management of current
assets .This is understandable because current liabilities arise in the context of
current assets. Working Capital Management is a significant fact of financial
management. Its importance stems from two reasons:-

• Investment in current assets represents a substantial portion of

total investment.
• Investment in current assets and the level of current liabilities have to be
geared quickly to change in sales. To be sure, fixed asset investment and
long term financing are responsive to variation in sales. However, this
relationship is not as close and direct as it is in the case of working capital

The importance of working capital management is effected in the fact that
financial manages spend a great deal of time in managing current assets and
current liabilities. Arranging short term financing, negotiating favorable credit
terms, controlling the movement of cash, administering the accounts receivable,
and monitoring the inventories consume a great deal of time of financial

The problem of working capital management is one of the “best” utilization of a

scarce resource.

Thus the job of efficient working capital management is a formidable one, since it
depends upon several variables such as character of the business, the lengths of
the merchandising cycle, rapidity of turnover, scale of operations, volume and
terms of purchase & sales and seasonal and other variations.


o Growth may be stunted. It may become difficult for the enterprise to

undertake profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult and consequently

the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieved due to

non availability of the working capital.

o The business may fail to honor its commitment in time, thereby adversely
affecting its credibility. This situation may lead to business closure.

o The business may be compelled to buy raw materials on credit and sell
finished goods on cash. In the process it may end up with increasing cost
of purchases and reducing selling prices by offering discounts. Both these
situations would affect profitability adversely.

o Non-availability of stocks due to non-availability of funds may result in

production stoppage.


o Excess of working capital may result in unnecessary accumulation of


o It may lead to offer too liberal credit terms to buyers and very poor
recovery system and cash management.

o It may make management complacent leading to its inefficiency.

o Over-investment in working capital makes capital less productive and may

reduce return on investment. Working capital is very essential for success
of a business and, therefore, needs efficient management and control.
Each of the components of the working capital needs proper management
to optimize profit.

Financing Working Capital

Working capital or current assets are those assets, which unlike fixed assets
change their forms rapidly. Due to this nature, they need to be financed through
short-term funds. Short-term funds are also called current liabilities. The following
are the major sources of raising short-term funds:

I. Supplier’s Credit
At times, business gets raw material on credit from the suppliers. The cost of raw
material is paid after some time, i.e. upon completion of the credit period. Thus,
without having an outflow of cash the business is in a position to use raw material
and continue the activities. The credit given by the suppliers of raw materials is
for a short period and is considered current liabilities. These funds should be
used for creating current assets like stock of raw material, work in process,
finished goods, etc.

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extend loans to
businesses to help them create necessary current assets so as to achieve the
Required business level. The loans are available for creating the following
current Assets:
• Stock of Raw Materials
• Stock of Work in Process
• Stock of Finished Goods
• Debtors
Banks give short-term loans against these assets, keeping some security margin.
The advances given by banks against current assets are short-term in nature and
banks have the right to ask for immediate repayment if they consider doing so.
Thus bank loans for creation of current assets are also current liabilities.

iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the promoter’s funds.
They are long-term funds and, therefore do not require immediate repayment.
These funds increase the liquidity of the business.

Management of Inventory

Inventories constitute the most significant part of current assets of a large

majority of companies in India. On an average, inventories are approximately 60
% of current assets in public limited companies in India.

Because of the large size of inventories maintained by firms maintained by firms,

a considerable amount of funds is required to be committed to them. It is,
therefore very necessary to manage inventories efficiently and effectively in order
to avoid unnecessary investments. A firm neglecting a firm the management of
inventories will be jeopardizing its long run profitability and may fail ultimately.

The purpose of inventory management is to ensure availability of materials in

sufficient quantity as and when required and also to minimize investment in
inventories at considerable degrees, without any adverse effect on production
and sales, by using simple inventory planning and control techniques.

Need to hold inventories:-

 Transaction motive emphasizes the need to maintain inventories

to facilitate smooth production and sales operation.
 Precautionary motive necessities holding of inventories to guard against
the risk of unpredictable changes in demand and supply forces and other
 Speculative motive influences the decision to increases or reduce
inventory levels to take advantage of price fluctuations and also for saving
in re-ordering costs and quantity discounts etc.

Objective of Inventory Management:-

The main objectives of inventory management are operational and financial. The
operational mean that means that the materials and spares should be available
in sufficient quantity so that work is not disrupted for want of inventory. The
financial objective means that investments in inventories should not remain ideal
and minimum working capital should be locked in it. The following are the
objectives of inventory management:-

 To ensure continuous supply of materials, spares and finished goods.

 To avoid both over-stocking of inventory.
 To maintain investments in inventories at the optimum level as required by
the operational and sale activities.
 To keep material cost under control so that they contribute in reducing
cost of production and overall purchases.

 To eliminate duplication in ordering or replenishing stocks. This is possible
with the help of centralizing purchases.
 To minimize losses through deterioration, pilferage, wastages and
 To design proper organization for inventory control so that management.
Clear cut account ability should be fixed at various levels of the
 To ensure perpetual inventory control so that materials shown in stock
ledgers should be actually lying in the stores.
 To ensure right quality of goods at reasonable prices.
 To facilitate furnishing of data for short-term and long term planning and
control of inventory

Management of cash

Cash is the important current asset for the operation of the business. Cash is the
basic input needed to keep the business running in the continuous basis, it is
also the ultimate output expected to be realized by selling or product
manufactured by the firm.

The firm should keep sufficient cash neither more nor less. Cash shortage will
disrupt the firm’s manufacturing operations while excessive cash will simply
remain ideal 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 coins, currency and cheques held by the firm and
balances in its bank account. Sometimes near cash items such as marketing
securities or bank term deposits are also included in cash. Generally when a firm
has excess cash, it invests it is marketable securities. This kind of investment
contributes some profit to the firm.

Management of Receivables

A sound managerial control requires proper management of liquid assets and

inventory. These assets are a part of working capital of the business. An efficient
use of financial resources is necessary to avoid financial distress. Receivables
result from credit sales.

A concern is required to allow credit sales in order to expand its sales volume. It
is not always possible to sell goods on cash basis only. Sometimes other
concern in that line might have established a practice of selling goods on credit
basis. Under these circumstances, it is not possible to avoid credit sales without
adversely affecting sales.

The increase in sales is also essential to increases profitability. After a certain
level of sales the increase in sales will not proportionately increase production
costs. The increase in sales will bring in more profits. Thus, receivables
constitute a significant portion of current assets of a firm. But for investment in
receivables, a firm has to insure certain costs. Further, there is a risk of bad
debts also. It is therefore, very necessary to have a proper control and
management of receivables.

Needs to hold cash:

Receivables management is the process of making decisions relating to

investment in trade debtors. Certain investments in receivables are necessary to
increase the sales and the profits of a firm. But at the same time investment in
this asset involves cost consideration also. Further, there is always a risk of bad
debts too.

Thus, the objective of receivable management is to take

a sound decision as regards investments in debtors. In the words of Bolton, S.E.,
the need of receivables management is “to promote sales and profits until
that point is reached where the return of investment in further funding of
receivables is less than the cost of funds raised to finance that additional
Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's life
blood and every manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating profitably, then it should,
in theory, generate cash surpluses. If it doesn't generate surpluses, the business
will eventually run out of cash and expire. The faster a business expands the
more cash it will need for working capital and investment. The cheapest and best
sources of cash exist as working capital right within business. Good management
of working capital will generate cash will help improve profits and reduce risks.
Bear in mind that the cost of providing credit to customers and holding stocks can
represent a substantial proportion of a firm's total profits.

There are two elements in the business cycle

that absorb cash - Inventory (stocks and work-in-progress) and Receivables
(debtors owing our money). The main sources of cash are Payables (our
creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables)
has two dimensions ........TIME ......... and MONEY. When it comes to managing
working capital - TIME IS MONEY. If we can get money to move faster around
the cycle (e.g. collect monies due from debtors more quickly) or reduce the
amount of money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less money to fund
working capital. As a consequence, we could reduce the cost of bank interest or
we'll have additional free money available to support additional sales growth or
investment. Similarly, if we can negotiate improved terms with suppliers e.g. get
longer credit or an increased credit limit; we effectively create free finance to help
fund future sales.

If we....... Then......
• Collect receivables (debtors) We release cash
faster from the cycle

• Collect receivables (debtors) Our receivables soak

slower up cash

• Get better credit (in terms of We increase our

duration or amount) from cash resources

• Shift inventory (stocks) faster We free up cash

• Move inventory (stocks) slower We consume more


It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant,
vehicles etc. If we do pay cash, remember that this is now longer available for
working capital. Therefore, if cash is tight, we should consider other ways of
financing capital investment - loans, equity, leasing etc. Similarly, if we pay

dividends or increase drawings, these are cash outflows and, like water flowing
downs a plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than for want of


Sources of Additional Working Capital:-

• Existing cash reserves

• Profits (when we secure it as cash!)
• Payables (credit from suppliers)
• New equity or loans from shareholders
• Bank overdrafts or lines of credit
• Long-term loans

If we have insufficient working capital and we try to increase sales, we can easily
over-stretch the financial resources of the business. This is called overtrading.
Early warning signs include:

 Pressure on existing cash

 Exceptional cash generating activities e.g. offering high discounts for early
cash payment
 Bank overdraft exceeds authorized limit
 Seeking greater overdrafts or lines of credit
 Part-paying suppliers or other creditors
 Paying bills in cash to secure additional supplies
 Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages,
pending receipt of a cheque).

Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business are
collected faster. Every business needs to know.... who owes them money.... how
much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad


If we don't manage debtors, they will begin to manage our business as we

will gradually lose control due to reduced cash flow and, of course, we could
experience an increased incidence of bad debt.

The following measures will help manage our debtors:

1. Have the right mental attitude to the control of credit and make sure that it
gets the priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers
and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before we offer credit. Use credit
agencies, bank references, industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when we suspect tough times are coming
or if operating in a volatile sector.
8. Keep very close to our larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor our debtor balances and ageing schedules, and don't let any
debts get too large or too old.

Recognize that the longer someone owes we, the greater the chance we will
never get paid. If the average age of our debtors is getting longer, or is already
very long, we may need to look for the following possible defects:

 weak credit judgment

 poor collection procedures
 lax enforcement of credit terms
 slow issue of invoices or statements
 errors in invoices or statements
 Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention.

Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons
and therefore put on the long finger because they convince themselves there is
something more urgent or important that demands their attention now. There is

nothing more important than getting paid for our product or service. A
customer who does not pay is not a customer.

Managing Payables (Creditors)

Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function can

create liquidity problems. Consider the following:

 Who authorizes purchasing in our company - is it tightly managed or

spread among a number of (junior) people?
 Are purchase quantities geared to demand forecasts?
 Do we use order quantities which take account of stock-holding and
purchasing costs?
 Do we know the cost to the company of carrying stock?
 Do we have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms, and reduce
dependence on a single supplier.

 How many of our suppliers have a returns policy?

 Are we in a position to pass on cost increases quickly through price
increases to our customers?
 If a supplier of goods or services lets we down can we charge back the
cost of the delay?
 Can we arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?

There is an old adage in business that if we can buy well then we can sell
well. Management of our creditors and suppliers is just as important as the
management of our debtors. It is important to look after our creditors - slow
payment by we may create ill-feeling and can signal that our company is
inefficient (or in trouble!).

Remember, a good supplier is someone who will work with us to enhance

the future viability and profitability of our company.

ANALYSIS of financial statement of ACC Limited:-

Common size statement Analysis (vertical Analysis):-

A financial statement that has variables expressed in percentages rather than in
dollar amounts. For example, items on an income statement are shown as a
percentage of revenue or sales, and balance sheet entries are displayed as a
percentage of total assets. Common-size statements are used primarily for
comparative purposes so that firms of various sizes can be equated. Also called
one hundred percent statement.
 The statement reveals the sources of funds & the distribution or
application of the total funds in the asset of a business enterprise.
 Comparison of the common size statement over a number of years will
clearly indicate the changing proportion of the various components of
assets, liabilities, cost, net sales & profits.
 It will assist corporate evaluation & ranking.
 It doesn’t show variations in the different account items from period to
 Less useful due to lack of established standard proportion of an asset to
the total asset & so on.

Common size statement analysis of ACC cements Ltd. from 2005-2009

2005 (%) 2006(%) 2007(%) 2008(%) 2009(%)

SOURCES OF Rs. Rs. Rs. Rs. Rs.(Crore)

FUNDS: (Crore) (Crore) (Crore) (Crore)
Shareholders’ 46.96 71.76 83.84 85.77 86.78
Loan Funds: 44.36 20.91 9.47 8.39 8.18

Deferred Tax 8.68 7.32 6.69 5.84 5.04

Liabilities (Net)
TOTAL FUNDS 100 100 100 100 100
Fixed Assets: - 84.16 79.48 80.03 88.29 91.08
Investments:- 9.60 11.50 17.06 11.82 21.28
Net Current Assets( 5.62 9.00 2.92 (0.11) (12.37)
Curr Assests-
current liabilities &
MISC EXP. 0.61 0.02 0.00 0.00 0.00
(to the extent not
written off or
TOTAL ASSETS 100 100 100 100 100


(a) There is a significant increase in shareholder’s fund & decrease in

loan funds continuously over a period of time.
(b) There is also a significant increase in the amount invested by the
company for the purpose of future growth.
(c) There is a significant decrease in current asset over a period of

Trend Analysis (Horizontal):- Trend percentage analysis moves in one

direction either progression or regression ( upward or downward).This method
involves the calculation of percentage relationship that each statements bear to
the same item in the base year .Mostly the earliest period is taken as the base

 It indicates the increase in an accounted item along with the magnitude of
changes in percentages which is more effective then absolute data.
 It facilitates an efficient comparative study of the financial performance of
a firm over a period of time.

 Any one trend by itself is not very analytical & informative.
 During the inflationary periods the data becomes incomparable ,unless the
absolute rupee data is adjusted.
 There is always the danger of selecting the base year which may not be
representative, normal & typical.
 The calculated percentages having no logical relationship with one

Precautions to be taken:-
 Consistency in the principles & practices followed by the organization
throughout the calculated period.
 The base year should be normal.
 Trend percentages should be calculated only for the items which are
having logical relationship with each other.
 Figures of the current year should be adjusted according to the changes in
price levels.

2006* 2007 2008 2009

SOURCES OF FUNDS: Rs. Rs. Rs. Rs.(Crore)

(Crore (Crore) (Crore)

Shareholders’ Funds:- 100 132.06 156.79 191.42

Loan Funds 100 51.21 52.62 61.9

Deferred Tax Liabilities 100 103.4 104.7 108.9

TOTAL FUNDS 100 113.1 131.2 158.3


Fixed Assets 100 113.9 145.7 181.4

Investments 503.5 167.8 134.9 293.1

Curr Assets,Loans & Adv: 100 114.7 143.6 119.4


(Less):-Current Liabilities 100 134.8 181.1 206.4

(to the extent not written 100 0.00 0.00 0.00
off or adjusted)

TOTAL ASSETS (Net) 100 113.1 131.2 158.3

*Base year:-2006 Value (100)

Working Capital calculation:-

Statement showing change in working capital for ACC Ltd:-
( Crore)
Particulars Dec’09 Dec’08 Increase ( + ) Decrease (- )
Current Assets
Inventories 778.98 793.27 (14.29)
Sund. Debtors 203.70 310.17 (106.47)
Cash & Bank Bal 746.38 984.24 (237.86)
Loan & Advances 554.42 651.28 (96.86)
Other CA 10.99 20.67 (9.68)
Total ( A ) 2294.47 2759.63

Current Liabilities
C.L. 2060.34 1801.79 258.55
Provisions 1091.88 963.93 127.95
Total ( B ) 3152.22 2765.72
( A-B ) (857.75) (6.09) (465.16) (465.16)
Changes in (851.66)
working capital
Total (857.75) (857.75) (465.16) (465.16)

Similarly the calculation of WC for the year 2005 to 2009 as given below:-
( Crore)
2005 2006 2007 2008 2009
(A)Current assets 1,421 1,921 2,203 2,760 2,294
(B)Current 1,335 1,672 2,221 2,766 3,152
Working capital 86 249 (18) (6) (858)

Interpretation:-While looking into the changes, we will look into the various
components of working capital & analyze the changes in that.

Working capital
2005 2006 2007 2008 2009



2005 2006 2007 2008 2009

By analyzing the 5 years data we can see that the value of inventories is
increasing over a no of year. It indicates that the company is growing rapidly in
cement sector. A company uses inventory when they have demand in market.
From other point of view we can say that the liquidity of firm is blocked in
inventories but it is important to keep stocks due to uncertainty of availability of
raw material in time.

2005 2006 2007 2008 2009

Debtors will arise only when credit sales are made. The above graph depicts that
there is continuous rise in the debtors of ACC Ltd in the successive years other
than 2009.. It represents an extension of credit to customers. The reason for
increasing credit is competition and company liberal credit policy.

Cash & Bank Bal, Loans & adv ANALYSIS:-



600 Cash & Bank Bal

400 Loans & Adv


2005 2006 2007 2008 2009

 Significant increase in Cash & bank balance, which shows the financial
strengths of the company. Though there is a slight fall in the FY 2009 .
Cash is basic input or component of working capital. Cash is needed to
keep the business running on a continuous basis. So the organization
should have sufficient cash to meet various requirements.
 After analyzing the table, we can say that the pattern of loans & advance
is not static in nature. It shows upwards & downwards movement as the
requirements influence it.







2005 2006 2007 2008 2009

 After analyzing the bar-chart, we can say that the amount of current
liabilities is increasing significantly over years .An increase current
liabilities indicates that company is using its credit facilities to the
maximum extent for operating purpose.

 From the above table we can see that provision shows an increasing trend
and the huge amount is being kept in these provisions. This is kept to pay
the taxes, interest & other facilities or benefits to the employee. It is just
kept for meeting future short-term liabilities.

(A) Overview:-
Financial ratios are measures of the relative health, or sometimes the relative
sickness of a business. A physician, when evaluating a person’s health, will
measure the heart rate, blood-pressure and temperature; whereas, a financial
analyst will take readings on a company’s growth, cost control, turnover,
profitability and risk. Like the physician, the financial analyst will then compare
these readings with generally accepted guidelines. Ratio analysis is an effective
tool to assist the analyst in answering some basic questions, such as:-
1. How well is the company doing?
2. What are its strengths and weaknesses?
3. What are the relative risks to the company?
Although an analysis of financial ratios will help identify a company’s strengths
and weaknesses, it has its limitations and will not necessarily provide the
solutions or cures for the problems it identifies.


Integral tool in trend analysis
 Compares the company’s own ratios to itself over time
 Identifies the company’s strengths and weaknesses
 Assists in establishing appropriate capitalization rates (helps to identify
risk factors particular to the subject company)
Dec’05 Dec’06 Dec’07 Dec’08 Dec’09
Liquidity Ratio

Current Ratio 0.58 0.77 0.86 0.89 0.67

Quick Ratio 0.42 0.61 0.55 0.61 0.42

Solvency Ratio
Debt-equity ratio. 0.50 0.25 0.07 0.10 0.09

0.5 Current ratio
0.4 Quick Ratio
0.3 Debt-equity ratio
2005 2006 2007 2008 2009

 Interpretation: - As we know that ideal current ratio for any firm is 2:1.The
current ratio of company is less than the ideal ratio. This depicts that
company’s liquidity position is not sound. Its current assets are less than
its current liabilities.
 Generally a QR of 1:1 is considered to represent satisfactory current
financial position. The trend of quick ratio is uneven & the ratio is around
0.5:1 over a period of time. A quick ratio is an indication that the firm is
liquid and has the less confidence to meet its current liabilities in time.
This shows company has liquidity problem.
 Debt-equity ratio shows relationship between borrowed funds and owners’
capital is a popular measure of the long term financial solvency of the firm.
For ACC it was the highest around 0.5:1 in 2005.After that it shows

Activity/mgmt efficiency Ratio:-

Dec,05 Dec’06 Dec’07 Dec’08 Dec’09
Inventory Turnover 5.37 9.33 24.85 27.51 25.22
Debtor Turnover 16.34 27.75 27.40 24.12 31.22

Investment 12.29 22.40 24.85 27.51 25.22

Turnover Ratio

Work cap turn. (27.93) (6.96) (18.25) (17.02) (54.17)


50 Inventory turnover ratio

Debtor Turnover Ratio

20 Investment Turnover Ratio

Working capital Turnover
0 ratio
2005 2006 2007 2008 2009

 It shows increasing trend which is favorable for the company. As it

indicates how rapidly the inventory is turning into receivable through
sales. A high ratio is good from the view point of liquidity. A low ratio would
signify that inventory does not sell fast.
 A high ratio is indicative of shorter time lag between credit sales and cash
collection. The higher the value of debtors’ turnover the more efficient is
the management of debtors or more liquid the debtors are. A low ratio
shows that debts are not being collected rapidly. As the graph reveals that
the debts are collected in time & the process is improving consistently.
This shows that company is utilizing its debtor’s efficiently as compare to
previous year.
 This ratio indicates high net working capital requires for sales. This
company having negative working capital because, they have more
current liabilities over current assets. It shows that the short term loans are
not sufficient and more money are invested in the purchase of fixed
assets. Thus this ratio is helpful to forecast the working capital
requirement on the basis of sale.

Profitability & Investment turnover Ratio:-

Profitability Dec,05 Dec’06 Dec’07 Dec’08 Dec’09

Gross Profit 17.32 28.97 23.72 20.59 27.68


Net Profit Ratio 16.85 21.16 20.44 16.29 19.69

Valuation Ratio
Face value 10.00 10.00 10.00 10.00 10.00
Dividend per 8.00 15.00 20.00 20.00 23.00



Gross profit ratio
Net profit ratio
10 Dividend per share

2005 2006 2007 2008 2009

 As it shows the dividend per share ratio is increasing over years. It

means that the investors have faith in the company.
 G/P margin ratio shows the profit relative to sales. A high ratio of gross
profits to sales is a sign of good management as it implies that the cost
of production of the firm is relatively low. For ACC it is uneven but it was
good in FY’06 & FY’09.
 The net profit margin is indicative of management ability to operate the
business with sufficient success not only to recover from revenues, but
also to leave a reasonable margin to the owners. A high net profit margin
would ensure adequate return to the owners as well as enable a firm to
face adverse economic conditions. It is significant & satisfactory for the

 It is suggested that the company has to increase its current assets to
meet its short-term obligations.

 Company has to improve debtors’ collection period continuously so

that effective receivable management will possible.

 Reserves should be utilized for the growth of the company.

 While forecasting cash flow, the management should take into account
the impact of unforeseen events, market cycles and actions by
competitors. The effect of unforeseen demands of working capital
should be factored in.

 Collaborating with the customers & suppliers instead of being focused
only on own operations will also yield good results. If feasible, helping
them to plan their inventory requirements efficiently to match their
production with their consumption will help reduce inventory levels.