Summer Training project Report

AURELIUS CORPORATE SOLUTIONS Analysis of BPO Industry & Financial performance of Aurelius corporate solutions
A SUMMER INTERNSHIP PROJECT REPORT 2011-12 Submitted by

NITIN GARG
in partial fulfillment for the award of the degree of
POST GRADUATE DIPLOMA IN MANAGEMENT

At

INSTITUTE OF TECHNOLOGY AND SCIENCE Ghaziabad (Mohan Nagar) Under the guidance of Mr. RAHUL BISHT

DECLARATION
I hereby declare that the project entitled Analysis of BPO Industry & Financial performance of Aurelius corporate solutions submitted for the PGDM Degree is my original work and the project has not formed the basis for the award of any degree, associateship, fellowship or any other similar titles. Signature of the Student: Place: Date:

CERTIFICATE
This is to certify that the project entitled Analysis of BPO Industry & Financial performance of Aurelius corporate solutions is the bonafide work carried out by _________________________student of PGDM, Institute of Technology And Science, Ghaziabad (Mohan Nagar), during the year__________, in partial fulfillment of the requirements for the award of the Degree of Post Graduate Diploma in Management and that the project has not formed the basis for the award previously of any degree, diploma, associateship, fellowship or any other similar title. Signature of the Guide: Place: Date:

TABLE OF CONTENTS

PAGE NO.

Declaration Certificate Preface Executive Summary Industry Profile Company Profile Objective of the Study Research Methodology Data Analysis Recommendation & Suggestion Bibliography

PREFACE 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.

EXECUTIVE SUMMARY The major objective of the study is to understand the working capital of AURELIUS & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of agents 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 firms 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 Aurelius: Aurelius is a small scale BPO or service providing company involved in providing business solutions . Therefore, it has to maintain a rich database for smooth running and functioning of company. Cash management at Aurelius: Aurelius has been accumulating huge cash surpluses since inception, which enables the organization to maintain adequate cash reserves and to generate required amount of cash. Receivables management at Aurelius: Aurelius has set up its office in SINGAPORE, USA, U.K, INDIA i.e New Delhi & Noida .

INDUSTRY PROFILE

1) INTRODUCTION OF INDUSTRY 7

BPO stands for Business Process Outsourcing. There is a common misconception that B.P.O. and call centers, mean one and the same. A call centre is a remote location in India wherein calls made by customers abroad are routed to India by means of telecommunication equipments. This call is answered by call centre agents who are trained to speak in an accent which the customer can understand. This accent is commonly referred to as Neutral Accent Coming to the term Business Process Outsourcing, let us understand the term in a simple way by breaking it up. There is a business. Each business has got a process. A process means a specific way or method of doing a job. Those jobs which are routine in nature, are given to countries outside India, to save money by way of salaries.

1.1)

OVERVIEW OF VARIOUS CAREER OPPORTUNITIES IN THE BPO INDUSTRY Voice Process (Inbound and Outbound) Semi Voice Process or Back Office Support Medical Transcription Medical Billing Data Entry E-Mail Support Knowledge Process Outsourcing Recruitment Process Outsourcing Education Process Outsourcing Legal Process Outsourcing Technical Writing Content Writing Web Designing

1.2)

ABOUT NASSCOM

NASSCOM stands for National Association of Software and Servicing Companies It regulates the functioning of the IT and ITES industry IT means Information Technology which includes software programming and ERP (Enterprise Resource Planning) ITES stands for Information Technology Enabled Services, which includes, BPO, KPO, RPO, EPO and LPO etc .

1.3)

INBOUND (Taking incoming calls) Incoming calls means calls made by the customer to the call centre agent which is customer service. Just to give an example, a person banking with CITI BANK in the U.S. would call to know the balance in his account or a customer may call up the customer service to know whether his bank charges have been reversed.

1.4)

OUTBOUND (Making outgoing calls)

Out going calls focus on selling a product or service. In this type of calling, the dialer will automatically dial numbers of customers at random from the database and the call centre executive will sell a product or service to the customer. If a bank has come out with new products, the call centre agent can call up the existing customers of the bank and try to promote the new service. This process is called as cross selling. 1.5) TYPES OF CALL CENTERS

Call Centers can be classified in two major categories: 1.5.1 1.5.2 DOMESTIC AND INTERNATIONAL DOMESTIC CALL CENTERS

Domestic call centers handle sales and customer service only for Indian companies. 9

DOMESTIC CALL CENTERS IN INDIA ARE:

Reliance Mobile Airtel Idea Vodafone ABN-AMRO Bank ICICI Bank

INTERNATIONAL CALL CENTERS International call centers handle sales and customer service for foreign clients.

1.6)

HIERARCHY IN A CALL CENTER

VERTICAL GROWTH SERVICE DELIVERY MANAGER ( Responsible for all the processes ) OPERATIONS MANAGER ( Fully responsible for one process ) TEAM LEADER ( Responsible for his team performance which normally consists of 15 call centre agents and 2 team coaches ) SENIOR CALL CNTR EXECUTIVE \ TEAM COACH ( Takes calls and also helps new recruits in handling calls ) CALL CENTER EXECUTIVE ( Makes or receives calls )

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HORIZONTAL GROWTH We had a look at the vertical growth pattern. Now let us have a look at the horizontal growth opportunities that a call centre agent can choose from depending on his skills and performance. RECRUITMENT: Short listing resumes by identifying the right profile and conducting the selection rounds TRAINING: Product Training, Process Training, Soft Skills and Voice and Accent HUMAN POTENTIAL MANAGEMENT: Planning career growth of employees. All BPOs have a high attrition rate. This function has to ensure that it provides growth opportunities and various career options. They come out with various policies which are normally referred to as HR interventions to keep the employee happy. SALES: Generating new business for the company HOUSE KEEPING: Maintenance & upkeep of the company premise FINANCE: Managing the funds of the company and also looking at various options to raise money for the company wherein the cost of funds is low ACCOUNTS: Maintaining day to day cash transactions, preparing bank reconciliation statements and preparing the yearly balance sheet and file income tax returns. Preparing monthly salary statements and ensuring that all statutory payments are made and records are in order.

1.7 ADVANTAGES OF THE BPO INDUSTRY 11 Provides employment opportunities to large number of people Good salary levels ensure better standard of living Employees hone their skills to be an excellent oral communicator and a powerful listener Ongoing training programs help employees to add on to their skill set and thereby become better professionals

All the BPO in the top rung, sponsor employees for professional programs. This not only helps employees to acquire a professional qualification, but also opens up new career options within the B.P.O. industry Call center provide employees with a world class working environment, coupled with fantastic perks and incentives which motivate employees to give their best The call center industry gives the employee, a chance to work across multiple functions. For example, an employee who performs well as an agent gets a chance to grow horizontally or vertically Employees also get a chance to gain international work experience Employees have to make internal adjustments since they have to work in teams. Moreover in the B.P.O industry the whole team has to work hand in glove with each other. Any misunderstanding will severely affect the whole team and they also stand the danger of losing their job. Over a period of time, all employees become excellent team players.

1.8 PRESENT SCENARIO OF THE BPO INDUSTRY There is no doubt that the outsourcing business has come to stay in India. The advantage that India provides the foreign clients is the availability of a good English speaking population, who are well educated and ambitious, coupled with the savings that foreign clients make with respect to salaries and infrastructure. Another unmatched advantage is the average age of the work force in India, which is just 30 years, as compared with any other country in the world, where the average age varies between 45 and 50 years. Since the B.P.O industry requires a very young crowd this huge advantage cannot be matched by any country in the world. Earlier only routine jobs were outsourced to India. This scenario has totally changed. Apart from routine jobs, high end jobs are also outsourced, which has paved the way for functions like KPO, RPO, Technical writing and so on. Over the last few years there have been a few stray cases of frauds taking place within the BPO industry. This is not a serious problem as portrayed by the fourth estate. Such frauds are very common in countries like US and UK, where BPO employ lakhs of people. But in India, the kind of hype the media generates, show these happenings to have damaging consequences on the BPO industry. 12

To tackle the problem of frauds, NASSCOM has taken the initiative to come up with a cyber law which punishes any employee who resorts to unethical practices. As part of the ongoing process, NASSCOM is taking it on priority to make the security systems as fool proof as possible. Another initiative is the appointment of verification agencies to ensure that the information given by the candidate in his resume is authentic. An All India Ranking System known as NAC (Nasscom Assessment of Competence) is on the cards for all candidates who want to be a part of this industry, thereby ensuring quality manpower and reducing the recruitment time of HR personnel and thereby help them focus on critical issues. The NAC test is online and tests the candidate on all skills required for a call centre executive, which is an entry level position. The NAC test will be mandatory for all BPO aspirants in the near future. Though countries like China, Vietnam and Philippines are gearing up to get a chunk of the business, there is absolutely no doubt whatsoever, that India will continue to be the most preferred destination. Even though the wages in countries like China and Philippines are low as compared with India, still the availability of a young work force makes India the preferred choice. Initially the B.P.O. industry was looked down upon by people from other industries. But gradually with the passage of time and the emergence of new areas like K.P.O , R.P.O, E.P.O, Content Writing, Technical Writing and so on, which requires highly qualified and experienced personnel with professional qualifications and specialized skill, professionals have started looking at the B.P.O. industry seriously, as a long term career option.

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COMPANY PROFILE

INTRODUCTION TO COMPANY

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AURELIUS CORPORATE SOLUTIONS PVT. LTD. was established in 2009. The Main line of business as Voice, Content, Data & Back office Support, Payroll, Enhanced Business Communication, SEO/SMO, Corporate & Institutional Training. Aurelius Corporate Solutions is a dynamic, self-motivated and one of the fastest growing off-shore BPOs, located in India. A business-driven and customer centric, organization, we deliver an array of BPO and Sales & Marketing Services to organizations, which require end-to-end solution for their business operations. As a multi-faceted outsourcing company having expertise in organizational business functions, we constantly leverage our pool of professional experience with our excellent understanding of markets and customer behavior to deliver complete and customized solutions to meet our clients requirements. We take pride in the way we work and the energy that we bring to any assignment.

Mission To emerge as one of the key organizations in offering strategic insights and customized solutions to facilitate businesses across the globe and improve their profitability.

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 Aurelius. 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.

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OBJECTIVE OF THE STUDY

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

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1. To determine the amount of working capital requirement and to calculate various ratios relating to working capital. 2. To analyze the Indian BPO Industry. 3. To evaluate the financial performance of Aurelius corporate solutions pvt. limited using financial tools. 4. To suggest the steps to be taken to increase the efficiency in management of working capital.

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RESEARCH METHODOLOGY

Study design and methodology:Two types of data are collected, one is primary data and second one is secondary data.

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Primary data The primary data were collected from the Department of finance, Aurelius.

Secondary data The secondary data were collected from: The Aurelius newsletter Website.

SWOT ANALYSIS of BPO industry 19

Strengths: 1. The industry is likely to maintain its growth momentum and continue growing at about 9 10% in the foreseeable future. 2. In the coming few years the demand for the BPO will increase due to increase in service industry.

Weakness: 1. BPO Industry is highly fragmented & regionalized. 2. High capital cost and investment cost for each and every project.

Opportunities: Demandsupply 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 service sector is expected to record healthy growth, which augurs well for BPO industry.

Threats: 1. Entry of KPOs to india which can reduce or convert BPO blue ocean into red . 2. Increase in operation cost as due to inflation & other economical factors can put question mark on there survival.

HIGHLIGHTS OF FINANCIAL PERFORMANCE of ACC LTD Rs. Crore 20

Particulars NET SALES PBT OPERATING PROFIT PAT Capital Employed

2009 3,221 684 616 544 3,502

2010 5,803 1,620 1,717 1,232 4,234

2011 6,991 1,930 1,993 1,439 4,791

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 payment of wages & salaries, 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 21

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 Liability.

Working capital

Current Assets Cash in hand / at bank Bills Receivable Sundry Debtors Short term loans Temporary investment Prepaid expenses Accrued incomes in terms of

Current Liabilities Bills Payable Sundry Creditors Outstanding expenses Accrued expenses Bank Over draft

three

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. 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: 22 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 firms 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 firms 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 versa. 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.

CASH

RAW MATERIAL

DEBTORS & BILLS RECEIVABLES

OPERATING CYCLE

WORK IN PROGRESS

SALES

FINISH GOODS

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Types of Working Capital

TYPES OF WORKING CAPITAL

ON THE BASIS OF B/S CONCEPT

ON THE BASIS OF TIME

GROSS WORKING CAPITAL

NET WORKING CAPITAL

REGULAR WORKING CAPITAL

TEMPORARY WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIFIC WORKING CAPITAL

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SIGNIFICANCE OF WORKING CAPITAL:-

PAYMENT TO SUPPLIERS

EASY LOAN FROM BANKS SIGNIFICAN--CE OF WORKING CAPITAL INCREASE EFFECIENC-Y

DIVIDEND DISTRIBUTI-ON

INCREASE DEBT CAPACITY

INCREASE IN FIX ASSETS

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

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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 utilization.

Interpretation On average, we turn over the value of our entire stock every x days. We may need to Average Stock * break this down into product groups for Stock 365/ effective stock management. Turnover = x days Cost of Goods Obsolete stock, slow moving lines will extend (in days) Sold overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes on average x days to collect monies due to we. If were official credit terms are 45 Receivables Debtors * 365/ day and it takes 65 days... why? Ratio = x days Sales One or more large or slow debts can drag out (in days) 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 get a Payables Creditors * 365/ discount this will decline. If we simply defer Ratio Cost of Sales (or = x days paying our suppliers (without agreement) this (in days) Purchases) will also increase - but our reputation, the quality of service and any flexibility provided by our suppliers may suffer. Current Total Current = x Current Assets are assets that we can readily Ratio Assets/ times turn in to cash or will do so within 12 months Total Current in the course of business. Current Liabilities 26

Ratio

Formulae

Result

Liabilities

are amount we are due to pay within the coming 12 months. For example, 1.5 times means that we should be able to lay our hands on $1.50 for 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. Similar to the Current Ratio but takes account =x of the fact that it may take time to convert times inventory into cash. As % A high percentage means that working capital Sales needs are high relative to our sales.

Quick Ratio

Working Capital Ratio

(Total Current Assets Inventory)/ Total Current Liabilities (Inventory + Receivables Payables)/ 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 27

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

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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 29

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 components.

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 managers. 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.

CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL 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. 30

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.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL o Excess of working capital may result in unnecessary accumulation of inventories. 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. Shortterm funds are also called current liabilities. The following are the major sources of raising short-term funds: I. Suppliers 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 31

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

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 firms manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firms 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.

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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 credit. 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 33

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....... Collect receivables (debtors) faster Collect receivables (debtors) slower Then...... We release cash from the cycle Our receivables soak up cash

Get better credit (in terms of duration or We increase our cash amount) from suppliers resources

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Shift inventory (stocks) faster Move inventory (stocks) slower

We free up cash We consume more cash

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 profit.

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 overstretch 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

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Management pre-occupation with surviving rather than managing Frequent shortterm 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 debts. 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 36

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.

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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 illfeeling 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 Aurelius 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. Commonsize statements are used primarily for comparative purposes so that firms of various sizes can be equated. Also called one hundred percent statement. Advantages: 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. Limitations: It doesnt show variations in the different account items from period to period. Less useful due to lack of established standard proportion of an asset to the total asset & so on.

Common size statement analysis of AURELIUS. from 2009-2011 2009 (%) 2010(%) 2011(%) SOURCES OF FUNDS: Rs.(Crore) Rs.(Crore) Rs.(Crore) Shareholders Funds:46.96 71.76 83.84 38

Loan Funds: Deferred Tax Liabilities (Net) TOTAL FUNDS APP. OF FUNDS:--Fixed Assets: Investments:Net Current Assets( Curr Assests- current liabilities & provision) MISC EXP. (to the extent not written off or adjusted) TOTAL ASSETS (Net)

44.36 8.68 100 84.16 9.60 5.62 0.61 100

20.91 7.32 100 79.48 11.50 9.00 0.02 100

9.47 6.69 100 80.03 17.06 2.92 0.00 100

Interpretation:(a) There is a significant increase in shareholders 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 time. 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 year.

Advantages: 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.

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Limitations: 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 another.

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.

Year SOURCES OF FUNDS: Shareholders Funds:40

2009 Rs. (Crore) 100

2010 Rs.(Crore) 132.06

2011 Rs.(Crore) 156.79

Loan Funds Deferred Tax Liabilities TOTAL FUNDS APP. OF FUNDS:Fixed Assets Investments Curr Assets,Loans & Adv: --(Less):-Current Liabilities &Prov. MISC EXP. (to the extent not written off or adjusted) TOTAL ASSETS (Net)

100 100 100

51.21 103.4 113.1

52.62 104.7 131.2

100 503.5 100

113.9 167.8 114.7

145.7 134.9 143.6

100 100 100

134.8 0.00 113.1

181.1 0.00 131.2

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DATA ANALYSIS

Similarly the calculation of WC for the year 2009 to 2011 as given below:(Rs.in Crore) 2009 2010 2011 42

(A)Current assets (B)Current Liabilities Working capital

1,421 1,335 86

1,921 1,672 249

2,203 2,221 (18)

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

Interpretation:- The above fig. shows that the company was having maximum working Capital in 2010 & in 2011 it has gradually decreased.

SUNDRY DEBTORS ANALYSIS 43

300 250 200 150 100 50 0 2009 2010 2011

Interpretation:- Debtors will arise only when instant payment is not received for the services rendered . 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:-

800 700 600 500 400 300 200 100 0 2009 2010 2011

Cash & Bank Bal Loans & Adv Others

Interpretation:- Significant increase in Cash & bank balance, which shows the 44

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.

CURRENT LIABILITIES & PROVISIONS ANALYSIS:-

1400 1200 1000 800 600 400 200 0 2009 2010 2011

Interpretation:- 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.

RATIO ANALYSIS (A) Overview:45

Financial ratios are measures of the relative health, or sometimes the relative sickness of a business. A physician, when evaluating a persons health, will measure the heart rate, blood-pressure and temperature; whereas, a financial analyst will take readings on a companys 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 companys strengths and weaknesses, it has its limitations and will not necessarily provide the solutions or cures for the problems it identifies.

B. APPLICATION OF RATIO ANALYSIS:Integral tool in trend analysis Compares the companys own ratios to itself over time Identifies the companys strengths and weaknesses Assists in establishing appropriate capitalization rates (helps to identify risk factors particular to the subject company)

WORKING CAPITAL RATIOS AND ITS INTERPRETATION :Dec09 Liquidity Ratio Current Ratio Quick Ratio Solvency Ratio Debt-equity ratio. 0.50 0.25 0.07 0.58 0.42 0.77 0.61 0.86 0.55 Dec10 Dec11

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0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2009 2010 2011

Current ratio Quick Ratio Debt-equity ratio

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 companys 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 Aurelius it was the highest around 0.5:1 in 2009 but after that it shows fluctuation.

Activity/mgmt efficiency Ratio:47

Dec09 Debtor Turnover Ratio 16.34

Dec10 27.75

Dec11 27.40

Investment Turnover Ratio

12.29

22.40

24.85

Work cap turn.

(27.93)

(6.96)

(18.25)

30 25 20 15 10 5 0 2009 2010 2011

Debtor Turnover R Investment Turnov Working capital Tu

Interpretation:- 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 debtors 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.

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Profitability & Investment turnover Ratio:Profitability Ratio Dec09 Dec10

Dec11

Gross Profit Ratio Net Profit Ratio Face value

17.32 16.85 10.00

28.97 21.16 10.00

23.72 20.44 10.00

30 25 20 15 10 5 0 2009 2010 2011 Gross profit ratio Net profit ratio Dividend per share

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 Aurelius it is uneven but it was good in FY10 & FY11. 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 company.

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RECOMMENDATIONS & SUGGESTIONS

Suggestion: 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.

Bibliography

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www.myiris.com www.google.com www.Moneycontrol.com www.cmaindia.org www.aurelius.com www.Investopedia.com

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