SUMMER INTERNSHIP PROGRAM 2012 A REPORT ON WORKING CAPITAL MANAGEMENT OF ASHOK LEYLAND LTD.

SUBMITTED TO
PROF. RANGALAL MOHAPATRA IBS, HYDERABAD

SUBMITTED BY
SAGAR ARORA 11BSPHH011190 IBS, HYDERABAD

ASHOK LEYLAND LTD.,PANTNAGAR

ACKNOWLEDGEMENT
It gives me immense pleasure to present this project report on Working Capital Management carried out at Ashok Leyland Ltd. in partial fulfillment of post graduate course MBA. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report. At the outset I would like to thank Mr. V.K.Joshi, Finance Manager and Company guide for giving me an opportunity and timely help concerning various aspects of project. I also thank all my staff members of accounts department for helping me to complete the summer internship program. I also want to show my utmost gratitude to Prof. Rangalal Mohapatra, Faculty guide whose enthusiasm was a source of inspiration for me. I am indebted to entire Ashok Leyland whose encouragement and suggestion were always available to me during the course of completion of the project.

Sagar Arora

AUTHORIZATION
The project report titled as Working Capital Management has been authorized by Prof. Rangalal Mohapatra, faculty guide, IBS Hyderabad as a part of the evaluation for summer internship program and is submitted as a partial fulfilment of the requirement of Masters of Business Administration (MBA) Program of Hyderabad.

Prof. Rangalal Mohapatra Faculty Guide IBS Hyderabad

Mr. Dheeraj G. Hinduja Director

TABLE OF CONTENTS
S.NO. 1 2 CONTENTS AUTHORIZATION ACKNOWLEDGEMENT LIST OF GRAPHS 3 4 5 6 7 8 9 10 INTRODUCTION ECONOMY INDUSTRY ANALYSIS COMPANY ANALYSIS PROJECT SPECIFIC ANALYSIS Working Capital Management Working Capital Analysis 29 53 62 77 81 82 PAGE NO. 2 3 5 6 8 10

DATA ANALYSIS AND INTERPRETATION ACCOUNT PAYABLE PROCESS OUTCOME AND LEARNING RECOMMENDATIONS AND CONCLUSIONS REFERENCE APPENDIX

11 12

85 86

LIST OF GRAPHS

S.NO. 1 2 3

CONTENTS CURRENT RATIO LIQUID RATIO INVENTORY PROPORTION AND TURNOVER RATIO DEBTORS TURNOVER RATIO CREDITORS AND RAW MATERIAL TURNOVER RATIO WIP TURNOVER RATIO FINISHED GOODS TURNOVER RATIO AND NET WORKING CAPITAL WORKING CAPITAL RATIO CURRENT ASSETS AND LIABILITIES TO TOTAL ASSETS AND LIABILITIES GROSS PROFIT RATIO NET PROFIT RATIO AND OPERATING RATIO

PAGE NO. 65 66 67

4 5

68 69

6 7

70 71

8 9

72 73

10 11

74 75

CHAPTER 1 INTRODUCTION
A project entitled A study on working capital management in Ashok Leyland was carried out with an intention to analyze the utilization of working capital. The study helps to know the level of current asset and current liability. Various analytical tools is been used to analyze and to make inference. Findings are based on the analysis; the major finding was that the company has a good liquidity position and profit percentage. Based on the findings various suggestions have been given for the further improvement of the effective utilization of the working capital.

1.1 PURPOSE OF STUDY

The main aim of any firm is to maximize the wealth of shareholders. This can be achieved only by a steady flow of profits which in turn depends on successful sales activity? To generate sales, investment of sufficient funds in current assets is required. The need of current assets should be emphasized, as the sales dont convert into cash immediately but it involved a cycle of operations, namely operating cycle. The capital requirement for each department in an organization is large which (depends on the product target for that particular year) calls for an effective working capital management. Monitoring the operation on cycle duration is an important aspect of working capital. Managing working capital in a manufacturing firm is very difficult and risky position. It is required to maintain the liquidity position of any firm to be good. This is the main problem for all firms. So, components of working capital like inventory management, cash management and receivables management should be managed well. Thus a detailed study regarding the working capital management in Ashok Leyland is to be done to consider the effectiveness of working capital management, identify the shortcoming in management and to suggest for improvement in working capital management.

1.2 OBJECTIVE OF THE STUDY

Study of the working capital management is important because unless the Working capital is managed effectively, monitored efficiently, planned properly and reviewed periodically at regular intervals to remove bottlenecks if any the Company cannot earn profits and increase its turnover. With this primary Objective of the study, the following further objectives are framed for a depth Analysis. To familiarize with business organization. To study in general the working capital management procedure in Ashok Leyland. To study the optimum level of current assets and current liabilities of the Company. To study the liquidity position through various working capital related Ratios. To study the working capital components such as debtor management, creditors management, Inventory position. To study the operating cycle of the company. To give suggestions, if any, for better working capital management in Ashok Leyland, Pantnagar.

1.3 RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying how research is done systematically. It is important for research to know not only the research method but also know methodology. The procedures by which researchers go about their work of describing, explaining and predicting phenomenon is called methodology. Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is an important step in any project and success of any project will largely depend upon how much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.

TYPES OF DATA COLLECTION

There are two types of data collection methods available, primary data collection and secondary data collection. Primary Data: The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can be collected through personal interview, questionnaire etc. to support the secondary data. Secondary Data Collection Method: The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc.

This project is based on primary data collected through personal interview of managers of finance department and other concerned employees of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through five years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company. Project t is based on

Annual report of Ashok Leyland ltd 2006-07 Annual report of Ashok Leyland ltd 2007-08 Annual report of Ashok Leyland ltd 2008-09 Annual report of Ashok Leyland ltd 2009-10 Annual report of Ashok Leyland ltd 2010-11

The statement of changes in working capital for the past 5 years is done using the data taken from these financial reports. Similarly the analysis of operating cycle and calculations of ratios is done. Apart from this, the website of Ashok Leyland is referred to know the products, product facilities, network etc. Industry analysis is done based on the information gathered from newspapers and websites of Indian automotive & other sector related websites.

1.4 SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The Study of working capital is based on tools like Ratio Analysis, statement of flow of working capital, operating cycle etc. Further the study is based on last 5 years Annual Reports of Ashok Leyland.

1.5 LIMITATIONS OF THE STUDY

Following limitations were encountered while preparing this project: Limited data: - This project has completed with annual reports; it just constitutes one part of Data collection i.e. Secondary. There were limitations for primary data Collection because of confidentiality. Limited period: - This project is based on five year annual reports. Conclusions and Recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company. Limited area: - Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

CHAPTER 2 AUTOMOTIVE INDUSTRY

The automotive industry designs, develops, manufactures, markets, and sells motor vehicles, and is one of the world's most important economic sectors by revenue. The term automotive industry usually does not include industries dedicated to automobiles after delivery to the customer, such as repair shops and motor fuel filling stations. This class consists of units mainly engaged in manufacturing motor vehicles or motor vehicle engines. The primary activities of this industry are: Motor cars manufacturing & Motor vehicle engine manufacturing. The major products and services in this industry are: Passenger motor vehicle manufacturing segment (Passenger Cars, Utility Vehicles & Multi Purpose Vehicles) Commercial Vehicles (Medium & Heavy and Light Commercial Vehicles) Two Wheelers Three Wheelers.

2.1 INDIAN AUTOMOTIVE SECTOR

The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4 wheeled) and exports about 2.33 million every year. It is the world's second largest manufacturer of motorcycles. India's passenger car and commercial vehicle manufacturing industry is the seventh largest in the world. In 2009, India emerged as Asia's fourth largest exporter of passenger cars, behind Japan, South Korea, and Thailand. As of 2010, India is home to 40 million passenger vehicles and more than 3.7 million automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the country the second fastest growing automobile market in the world. According to the Society of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million vehicles by 2015 and more than 9 million by 2020. A chunk of India's car manufacturing industry is based in and around Chennai, also known as the "Detroit of India" with the India operations of Ford, Hyundai, Renault and Nissan headquartered in the city and BMW having an assembly plant on the outskirts. Chennai accounts for 60 per cent of the country's automotive exports. The Indian Automobile Industry is manufacturing over 11 million vehicles and exporting about 1.5 million every year. The automotive industry of India is categorised into passenger cars, two wheelers, commercial vehicles and three wheelers, with two wheelers dominating
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the market. More than 75% of the vehicles sold are two wheelers. Nearly 59% of these two wheelers sold were motorcycles and about 12% were scooters. Commercial vehicles are categorised into heavy, medium and light. They account for about 5% of the market. Three wheelers are categorised into passenger carriers and goods carriers. Three wheelers account for about 4% of the market in India. About 91% of the vehicles sold are used by households and only about 9% for commercial purposes. The industry has attained a turnover of more than USD 35 billion and provides direct and indirect employment to over 13 million people. Automobile industry is currently contributing about 5% of the total GDP of India. Indias current GDP is about $ 1.4 trillion and is expected to grow to $ 3.75 trillion by 2020.

5%

4%

16% TWO WHELLERS PASSANGER CARS COMMERICAL VEHICLES THREE WHELLERS

75%

Figure 2.1 Manufacturing segment of automotive industry

2.2 COMPETITORS
Competition in this industry is high. Competition in this industry is increasing. Automotive industry is a volume-driven industry, and certain critical mass is a pre-requisite for attracting the much-needed investment in research and development and new product design and development. Research and development investment is needed for innovations which is the lifeline for achieving and retaining competitiveness in the industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. The most important indices of competitiveness are productivity of both labour and capital. The concept of attaining competitiveness on the basis of low cost and abundant labour, favourable
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exchange rates, low interest rates and concessional duty structure is becoming inadequate and therefore, not sustainable. A greater emphasis is required on the development of the factors like innovation which can ensure competitiveness on a long-term basis. As per Automotive Mission Plan 20062016 (2008), the Indian Government recognises its role as a catalyst and facilitator to encourage the companies to move to higher level of competitive performance. The Indian Government wants to create a policy environment to help companies gain competitive advantage. The government aims that with its policies its encourage growth, promote domestic competition and stimulate innovation.

Tata Motors:- Market Share: Commercial Vehicles 63.94%, Passenger Vehicles 16.45% Maruti Suzuki India:- Market Share: Passenger Vehicles 45.28% Hyundai Motor India:- Market Share: Passenger Vehicles 14-15% Mahindra & Mahindra:- Market Share: Commercial Vehicles 10.01%, Passenger Vehicles 6.50%, Three Wheelers 1.31% Ashok Leyland:- Market Share: Commercial Vehicles 27% Hero Honda Motors:- Market Share: Two Wheelers 41.35% Bajaj Auto:- Market Share: Two Wheelers 26.70%, Three Wheelers 58.60%

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CHAPTER 3 COMPANY PROFILE

Hinduja Group was established in 1914 in Mumbai, India. Hinduja Group was Entered Middle East in 1919 to grow trading initiatives. Hinduja Group Privately owned by the Hinduja Family. Hinduja Group a transnational conglomerate with presence in 25 countries. Hinduja Group Entered India for major activities in 1986. Parmanand Deepchand Hinduja (1901-1971) Parmanand Deepchand Hinduja was the Founder of the Hinduja Group and the Hinduja Foundation. He believed from his early childhood that health and education were the fundamental rights of every person. This belief led him to establish the National Health and Education Society in 1954. Shri Parmanand Hinduja would visit the hospital devotedly every day to meet the patients, enquire after their needs and ensure that they were comfortable and received adequate treatment. He would pay particular attention to the poor and the needy. His method of screening patients to qualify for free treatment was quite simple. He would make the patients declare before the Deities of His Guru and the Almighty that they did not have the means to pay the bills, and provide them with free medical care. The Hinduja Hospital continues to fulfil his dream of providing world class medical care to all sections of the society. Lalita Girdhar Hinduja (1932-1992) Smt. Lalita Girdhar Hinduja was the wife of Late Girdhar Hinduja, the eldest son of, Shri Paramand Hinduja. Widowed at an early age, she was encouraged by her father-in law to step out of the house and offer her services to the Hospital. Following in his footsteps, Lalita served the Hospital for thirty years. During her time, the institution grew from strength to strength.She would spend her entire day from morning to evening in the hospital, personally visiting and looking after the patients, inspecting the quality of medical care, administering various aspects of hospital management and constantly devising ways to match the standards of the hospital with those available in the West.Her affectionate disposition, attention to detail, humane feelings for the staff and simplicity ensured that the Hinduja Hospital operated like a family with a strong sense of belonging, among all medical and non medical personnel. Even today, the staffs remember her with affection and respect.
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3.1 INTRODUCTION
Ashok Leyland is a commercial vehicle manufacturing company based in Chennai, India. Founded in 1948, the company is one of India's leading manufacturers of commercial vehicles, such as trucks and buses, as well as emergency and military vehicles. Operating eight plants, Ashok Leyland also makes spare parts and engines for industrial and marine applications. It sells about 60,000 vehicles and about 7,000 engines annually. It is the second largest commercial vehicle company in India in the medium and heavy commercial vehicle (M&HCV) segment with a market share of 27%. With passenger transportation options ranging from 19 seaters to 80 seaters, Ashok Leyland is a market leader in the bus segment. The company claims to carry over 60 million passengers a day, more people than the entire Indian rail network. In the trucks segment Ashok Leyland primarily concentrates on the 16 ton to 25 ton range of trucks. However Ashok Leyland has presence in the entire truck range starting from 7.5 tons to 49 tons. The joint venture announced with Nissan Motors of Japan would improve its presence in the Light Commercial Vehicle (LCV) segment (<7.5 tons).

3.2 ORGANISATION PROFILE

Type: Public Industry: Automotive Founded: 1948 Headquarters: Chennai, Tamil Nadu, India Key people: R. Seshasayee, R. J. Shahaney, S. P. Hinduja, D. G. Hinduja , Vinod Dasari. Products: Buses, Trucks, Engines, Defense & Special Net Profit: Rs. 565.98 Crores Turnover: Rs. 11,117.7 Crores Employees: 1,15,812(2011) Parent: Hinduja Group No. of Plants: 8 in Chennai (Ennore & Ambattur) and Hosur(Unit I, Unit II, Unit IIA), Tamil Nadu; Bhandara, Maharashtra; Alwar, Rajasthan; Pant Nagar, Uttarakhand Subsidiaries: Ennore foundries Limited Automotive Coaches and Components Limited Gulf-Ashley Motors Limited
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Ashley Holdings Limited Ashley Investments Limited Ashley Design and Engineering Services (ADES) Avia Ashok Leyland Ashok Leyland Defence Systems (ALDS) Ashok Leyland Project Services Limited Lanka Ashok Leyland

3.3 HISTORY
The origin of Ashok Leyland can be traced to the urge for self-reliance, felt by independent India. Pandit Jawaharlal Nehru, Indias first Prime Minister, persuaded Mr. Raghunandan Saran, an industrialist, to enter automotive manufacture. The company began in 1948 as Ashok Motors, to assemble Austin cars at the first plant, at Ennore near Chennai. In 1950 started assembly of Leyland commercial vehicles and soon local manufacturing under license from British Leyland. With British Leyland participation in the equity capital, in 1954, the Company was rechristened Ashok Leyland. Early products included the Leyland Comet bus which was a passenger body built on a truck chassis, sold in large numbers to many operators, including Hyderabad Road Transport, Ahmedabad Municipality, Travancore State Transport, Bombay State Transport and Delhi Road Transport Authority. By 1963, the Comet was operated by every State Transport Undertaking in India, and over 8,000 were in service. The Comet was soon joined in production by a version of the Leyland Tiger. In 1968, production of the Leyland Titan ceased in Britain, but was restarted by Ashok Leyland in India. The Ashok Leyland Titan was very successful, and continued in production for many years. In the journey towards global standards of quality, Ashok Leyland reached a major milestone in 1993 when it became the first in India's automobile history to win the ISO 9002 certification. The more comprehensive ISO 9001 certification came in 1994, QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing units in 2002. In 2006, Ashok Leyland became the first automobile company in India to receive the TS16949Corporate Certification. Editors note: This is part of a series of articles peeking into clean car industries and car manufacturers of China, India, South Korea and Germany.
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In fact, even before laws were placed on car emissions, Ashok Leyland was already producing low-emission vehicles. Back in 1997, they have already released buses with quiet engines and low pollutant emission based on the CNG technology. In 2002 it developed the first hybrid electric vehicle. Ashok Leyland has also launched a mobile emission clinic that operates on highways and at entry points to New Delhi. The clinic checks vehicles for emission levels, recommends remedies and offers tips on maintenance and care. This work will help generate valuable data and garner insight that will guide further development. When it comes to the development of environmentally friendly technologies, Ashok Leyland has developed Hythane engines. An Ashok Leyland-Nissan joint venture produced light commercial vehicles (LCVs) from the former's Hosur facility near Bangalore as well as from Renault-Nissan's car plant near Chennai

3.4 CURRENT STATUS

Ashok Leyland is the second technology leader in the commercial vehicles sector of India. The history of the company has been punctuated by a number of technological innovations, which have since become industry norms. It was the first to introduce multi-axled trucks, full air brakes and a host of innovations like the rear engine and articulated buses in India. In 1997, the company launched the countrys first CNG bus and in 2002, developed the first Hybrid Electric Vehicle. The company has also maintained its profitable track record for 60 years. The annual turnover of the company was Rs. 11117.7 Crore in 2010-11. Selling 54,431 medium and heavy vehicles in 2008-09, Ashok Leyland is India's largest exporter of medium and heavy duty trucks. It is also one of the largest private sector employers in India - with about 15,812 employees working in 8 factories and offices spread over the length and breadth of India. The company has increased its rated capacity to 95,337 vehicles per annum. Also further investment plans including putting up two new plants - one in Uttarakhand in North India and a bus body building unit in middle-east Asia are fast afoot. It already has a sizable presence in African countries like Nigeria, Ghana, Egypt and South Africa. Ashok Leyland has also entered into some significant partnerships, seizing growth opportunities offered by diversification and globalization with Continental Corporation for automotive infotronics; with Alteams in Finland for high pressure die casting and recently, with John Deere for construction equipment.

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Ashok Leyland is looking to expand its production operations overseas to make it a more global company. As part of this global strategy, the company acquired Czech Republic-based Avia's truck business. The newly acquired company has been named Avia Ashok Leyland Motors s.r.o. This gives Ashok Leyland a foothold in the highly competitive European truck market. The Hinduja Group also bought out IVECO's indirect stake in Ashok Leyland in 2007. The promoter shareholding now stands at 51%. The company has a joint venture with Japanese auto giant hiss an (Renault Nissan group) which will share a common manufacturing facility in chennai, India.

3.5 ACHIEVEMENTS OF ASHOK LEYLAND

1966:-Introduce full air brakes. 1967:- Launched double-decker bus. 1968:- Offered power steering in commercial vehicles. 1979:- Introduced multi-axle trucks. 1980:- Introduced the international concept of integral bus with air suspension. 1982:- Introduced vestibule bus. 1992:- Won self-certification status for defence supplies. 1993:- Received ISO 9002 Certification. 1997:- India's first CNG powered bus joined the BEST fleet. 2000:- Euro-I, Engines/vehicles introduced. 2001:- Received ISO 14001 certification for all manufacturing units. 2002:- Launched hybrid electric vehicle. 2003:- E-Comet launched. 2004:- 50,000 mark vehicle produced. 2006:- TS16949Corporate Certification

3.6 VISION
Be among the top Indian corporations acknowledged nationally and internationally, For, Excellence in quality of its products Excellence in customer focus and service.

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3.7 MISSION
Be a leader in the business of commercial vehicles, excelling in technology, quality and value to customer fully supported by customer service of the highest order and meeting national and international environmental and safety standards.

3.8 VALUES
CUSTOMERS: We value our customers and will constantly endeavour to fulfil their needs by proactivity offering them products and service appropriate to their diverse applications. EMPLOYEE: We consider our employee as our most valuable asset and are committed to provide full encouragement and support to them to enhance their potential and contribution to the companys business. VENDORS: Our vendors are our valued partners in our business development and we will work with them in a spirit of mutual co-operation to meet our business objectives. DISTRIBUTERS: Our distributers are the vital between the company and the customers and we are committed to advice and support our distributers to continuously upgrade their infrastructure, skills and capability to serve our customers better. SHAREHOLDERS: We value the trust reposed in us by our shareholders and strive unstintingly to ensure a fair and reasonable return on their investments. SOCIETY: We are committed to add to the wealth and well-being of our society by enhancing the quality of life and contributing to this economic development while maintaining the highest level of environmental and safety standards.

The five Ashok Leyland CORPORATE values are: International Speedy Value creator Innovative Ethical

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3.9 POLICIES AND OBJECTIVES OF ASHOK LEYLAND QUALITY POLICY

Ashok Leyland is committed to achieve customer satisfaction, by anticipating and delivering superior value to the customers in relation to their own business, through the products and services offered by the company and comply with statutory requirements. Towards this, the quality policy of Ashok Leyland is to make continual improvements in the process that constitute the quality management system, to make them more robust and to enhance their effectiveness and efficiency in achieving stated objectives leading to: Superior products manufactured as also services offered by the company. Max use of employee potential to contribute to quality and environment by progressive up gradation of their knowledge and skills as appropriate to their functions. Seamless involvement from vendors and dealers in the mission of the company to address customers changing needs and protection of the environment.

ENVIRONMENTAL POLICY
Ashok Leyland is committed to preserve the environment through a comprehensive environmental policy and a proactive approach in planning and executing the manufacturing and service activities. The objective of Ashok Leylands environmental policy is to adhere to all applicable environmental legislations and regulations, adopt pollution preventive techniques in design and manufacture, conserve all resources such as power, water etc, and optimize its usage, through scientific means, minimize waste generation by all possible ways and Reduce, Reuse and Recycle the same through time bound action plan as well as provide a clean working environment to employees, contractors and neighbours. Ashok Leyland has proactively developed its engines to meet the progressive emission norms, including the Bharat Shage II norms. The Ennore unit was recently identified as one of the model energy efficient units by a CII-TNEB organized energy conservation (ENCON) mission. From August 1999 green energy has been powering the Hosur Plants. Even cooking is eco-friendly here. The canteen runs on Solar Heaters and food waste becomes fodder to cattle at a cattle farm at Mathagiri near Hosur.

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To the best out of Ashok Leylands eco-friendly engine technology, round the year awareness and action programmes are held at Operators meets and service campaigns. Ashok Leyland has also launched a dedicated mobile emission clinic operating on highways and at entry points to New Delhi. On an average 250,000 litters of recycled water is pumped into the garden saving Rs. 1.5 million per annum. We at Ashok Leyland committed personal environmental measures. We follow all legal reasons. Adopt pollution prevent technology in design and manufacturing projects. Conserve all resources such as power, water, oil, gas, compressed air etc and optimise their usage through scientific methods. Provide clean working environment to employees. Set and review objectives and targets for continually improving environment.

3.10 ORGANIZATION STRUCTURE

1) MANAGING DIRECTOR 2) EXECUTIVE DIRECTOR 3) SENIOR DIRECTOR 4) GENERAL MANAGER 5) DEPUTY GENERAL MANAGER 6) ASSISTANT GENERAL MANAGER 7) DIVISIONAL MANAGER 8) SENIOR MANAGER 9) MANAGER 10) DEPUTY MANAGER 11) ASSISTANT MANAGER 12) SENIOR OFFICER 13) OFFICER

3.11 DEPARTMENT FUNCTIONS

The major functional areas of the unit and the major departments which oversee those areas are catalogued as follows: 1. Personnel and Administration Department 2. Purchase & Material Planning Department 3. Production Department
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4. Finance Department 5. Systems Department 6. Research & Development.

3.12 PRODUCT OF ASHOK LEYLAND

Ashok Leyland offers a comprehensive product range with trucks from 7.5 tons to 125 tons. From 19 to 80 seaters a host of special application vehicles and diesel engines from industrial gensets and marine application. Main Products are: Buses Trucks Engines Defence & Special

BUSES: - Leaders in the Indian bus market, offering unique models such as CNG, Double Decker and Vestibule bus.

TRUCKS: - Pioneers in multi axle trucks and tractor-trailers.

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DEFENSE & SPECIAL: - Largest provider of logistic vehicles to the Indian army.

ENGINES: - Diesel engines for Industrial, Genset and Marine applications, in collaboration with technology leaders.

3.13 SWOT ANALYSIS

The SWOT Analysis of the company is done.

STRENGH OF THE COMPANY

1. Good Training System. 2. Good Organizational Climate. 3. High Market Share 4. Skilled Employees 5. Strong Functional Structure 6. Standard Quality Product

WEAKNESS OF THE COMPANY

1. Low margin 2. High price 3. Sales representatives are less 4. There is no proper mechanism to handle the grievance of the customers

OPPORTUNITIES FOR THE COMPANY

1. Due to liberalization, demand for heavy vehicle has stepped up all over the globe. 2. National market through good advertisement. 3. Company provides better credit facility to dealers.
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4. Company introduces promotional programmes

THREATS FACED BY THE COMPANY

1. High completion 2. Liberal credit policy of other brand 3. Promotional programmes of other brand 4. Complicated national market 5. Good replacement facility if other brands.

3.14 ASHOK LEYLAND, PANTNAGAR

Uttarakhand has a geographical area of about 53,483 sq. km. and forest area of about 34,650 sq. km. and in Uttarakhand the employment is not good. So for employment an industrial area is developed in 3 locations, first in Pantnagar & Haridwar and then in Sitarganj. Apart from tax benefits being given by the Uttarakhand Government and increase in procurement and utilisation of local resources that would translate into excise duty exemptions and VAT rebates.

3.14.1 EXEMPTION BENEFITS AT A GLANCE IN UTTARAKHAND

1) 100% Central Excise exemption for 10 years on items other than those mentioned in the negative list in the Concessional Industrial Package announced by the Central Government. 2) 100% Income Tax exemption for first 5 years and 30% for next 5 years for the Manufacturing Companies and 25% for others. 3) Capital Investment Subsidy @15% with a maximum of Rs. 30 Lakhs. (Rs. 3 million). 4) Central Transport Subsidy extended till 2007. 5) Exemption from entry tax on Plant & Machinery for setting up Industry or undertaking substantial expansion and modernization. 6) 75% of the Total Expenditure subject to a maximum of Rs.2 Lakhs incurred in obtaining national/internationally approved quality marks such as ISO series certificate etc., shall be reimbursed to the entrepreneurs provided that the reimbursement / grant availed for this from all sources should not exceed the total expenditure on this head.
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7) 50% of the expenses subject to a maximum of Rs.1 lakh incurred in installing pollution control equipments shall be reimbursed to the entrepreneurs, provided that the total reimbursement /grant availed for this from all sources should not exceed the total expenditure on this head.

Figure 3.1 Ashok leyland , Pantnagar Plant Uttarakhand chief minister Dr. Ramesh Pokhriyal inaugurated Hindujas flagship company, Ashok Leylands technologically world-class automobile manufacturing facility at Pantnagar in. The new facility will increase Ashok Leylands current installed capacity of 100,000 vehicles by another 75,000. With the concessions available in Uttarakhand for new industries, the company will have a cost advantage of about Rs 40,000 Rs 50,000 per vehicle, said a company release. Set over 190 scenic acres, the Pantnagar plant of Ashok Leyland is also its largest manufacturing facility. 200,000 sq.ms of built up area houses one of the most Best in class

integrated manufacturing facilities in Indian commercial vehicle industry.

industrial architecture combined with the latest manufacturing technologies has created a truly modern facility that is also ecology sensitive as reflected in the selection of machinery and processes. Highly energy efficient, the plant is designed to be remarkably operator friendly. The shop floors receive the maximum natural light and ventilation while the insulated high roof reduces the inside temperature by up to 8oC in the summer months. Designed on lean manufacture principles, process control for high quality of output and flexibility to manage variety with quick changeovers are built into the machine and process selection. The factory boasts of

latest generation equipment sourced from global leaders in Japan, USA, Europe and India. The plant is a study in layout optimization and flow, contributing to the high benchmarks in high productivity and operating cost efficiency.
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The facilities have been so designed as to accommodate further expansion in terms of capacity and future models. At full capacity utilization, 75,000 vehicles will roll out of the Pantnagar plant. A large capacity water body has been created for water harvesting, with water treatment and recycling ensuring zero discharge. Over 75 acres, representing around

40% of the total area, is designed green cover area and over 10,000 trees have already been planted. The plant will be supplemented by neighbourhood facilities put up by key vendors, further boosting employment opportunities.

3.14.2 SHOPS
SHOP I (Chassis Shop) : - The chassis assembly is designed to be extremely dexterous to produce the smallest to the largest of vehicles in Ashok Leylands product range, including the U-Truck range and other cab bed vehicles. SHOP II (Frame Side Manufacturing Shop) : - For the first time in India, CNC flexible roll forming technology has been introduced for frame manufacture, offering manufacturing flexibility to form the entire variety of frames and accommodating future model requirements and design changes with no fresh tooling. The flexibility comes with minimum model changeover time, allowing low batch quantities in the manufacturing plan. Frame painting- Powder coating instead of conventional liquid painting eliminates hazardous pollutants while bestowing high corrosion resistance to withstand well over 500 hours of salt spray bath. The change of technology also ensures zero wastage of paint. SHOP III A (Crown Wheel and Pinion Shop) : - Even as it significantly speeds up operations, migration to dry cutting with carbide blades has eliminated, use of cutting oil pollution. Closed loop software connected to inspection and cutting machines dramatically quickens the fine-tuned machine setting, in managing the complicated three dimensional geometry of the aggregate. Clean propane instead of LPG makes for environmental protection and low operating cost. SHOP III B (Axle Shop) : - The integrated axle machining and assembly shop has highly automated front axle machining lines and conveyorised front / rear assemblies, all in one shop. Hazardous operations are performed by robots. SHOP IV (Vehicle Testing Shop) : - The single chassis testing line can test all the models and variants covering various tests, to generate instant test reports.
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 SHOP VI (Cab Weld Shop) : - High on automation, the shop employs robotics in framing and rear body lines, for better quality and improved ergonomics. Manufacture of door assemblies is performed by robotic roller hemming. SHOP V (Cylinder and Block Head Machine Shop) :- It is a part of engine shop , as the head of engine is rough so it is being furnished and then it is to be fit in engine. SHOP VII (Cab Paint Shop) : - The CED coating system is led / tin free, employing robotics and reducing paint wastage. While propane gas cuts atmospheric pollution, the camel back type baking ovens reduces fuel consumption and heat dissipation. material movement is automated to enhance operational safety and output quality. SHOP VIII (Engine Shop) : - Integrated Horizontal Machining Centres (HMC) complex fed by Automated Guided Vehicles (AGV) bestow great flexibility to manufacture a range of engine variants, using components rough machined in an adjoining shop. Auto docking and in-process verification systems directly reduce testing cycle time and optimize test cell requirements. All

All the shops have real-time manufacturing monitoring systems installed which will get hooked and integrated to a centralized computer controlled automated manufacturing management system. This will facilitate order tracking, maximization of machine utilization, quality trend monitoring, prediction of tool life and prompts for preventive maintenance, among others.

3.14.3 SUPPORT SERVICES

The plant has a state-of-the-art Fire Hydrant System, backup power generators (75%), 24 kms of rain water drains and wide concrete roads for taking care inbound / outbound logistics. The latest generation electrical lighting reduces energy consumption significantly. The

manufacturing, canteen, office buildings have been designed on the principles of green building. Ashok Leyland seeks to utilize its presence in this new location to spread the benefits of industrialization to reach the youth of the region, by creating a stepping stone for them to start a career. Ashok Leyland will sponsor them for 3-4 year courses offered in association with a reputed technical training institute. During the training, they will learn and earn. The curriculum will cover contemporary management and manufacturing concepts, side by side with an opportunity for practical hands on learning at the modern plant.
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This training will

give them the skills and knowledge to be effective shop floor associates and will qualify them for managerial positions eventually, cueing a breakthrough practice aptly called the integrated workforce as it seeks to break the conventional hierarchical divisions on the shop floor. The primary considerations for Ashok Leyland in putting up the new Pantnagar plant have been to maximize local value utilization and create employment both directly and indirectly for the local population of Pantnagar and its immediate vicinity. The Company aims at reaching over 50% of local procurement by the end of the year. The increase in procurement and utilization of local resources from areas like Uttarakhand and Himachal Pradesh translate into excise duty exemptions and VAT rebates which can be passed on to the end customer. Several key vendor partners of the Company, accorded Preferred Supplier Status, have accepted the invitation to set up their own facilities in Uttarakhand. For Ashok Leyland, this translates into better supply chain management, obviates the need for stores and enables produce to deliver. The suppliers, on the other hand, enjoy the accruing tax benefits apart from the guarantee of assured business from a captive client. Another positive is the creation of direct and indirect employment opportunities for local talent.

3.14.4 DEPARTMENTS IN ASHOK LEYLAND, PANTNAGAR

The different departments are there in Pantnagar plant of Ashok Leyland so as to do work smoothly. The departments are as follow: Material Department Strategic Sourcing Department Human Resource Department Administration Department Finance Department Production Department Maintenance Department Marketing Department Information Technology Department

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3.14.5 WORKING OF FINANCE DEPARTMENT IN PANTNAGAR

DIVISIONAL MANAGER (1)

FINANCE MANAGER (ACCOUNTS PAYABLE, SALE TAX, EXCISE DUTY) (1)
ASSISTANT MANAGER (1)

FINANCE MANAGER (COSTING) (1)

FINANCE MANAGER (CAPAX, GENERAL LEDGER, INCOME TAX) (1)

DEPUTY MANAGER (2)

DEPUTY MANAGER (1)

SENIOR OFFICER (2)

SENIOR OFFICER (2)

EXECUTIVE OFFICER (3)

OFFICER (1)

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CHAPTER 4 WORKING CAPITAL MANAGEMENT

Cash is the lifeline of a company. Firms need money to pay for their day to day activities. They have to pay salaries, bills, suppliers & so on. The funds available to do this, is known as the firms working capital. 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 Ashok Leyland.

4.1 INTRODUCTION
Every running business needs working capital. Even a business which is fully equipped with all types of fixed assets required is bound to collapse without adequate supply of raw materials for processing; cash to pay for wages, power and other costs; creating a stock of finished goods to feed the market demand regularly; and, The ability to grant credit to its customers. All these require working capital. Working capital cycle involves conversions and rotation of various constituents Components of the working capital. Initially cash is converted into raw materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw materials get converted into work in process and then into finished goods. When sold on credit, the finished goods assume the form of debtors who give the business cash on due date. Thus cash assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. This is how various components of current assets keep on changing their forms due to value addition. As a result, they rotate and business operations continue. Thus, the working capital cycle involves rotation of various constituents of the working capital.

Capital required for a business can be classified under two main categories via, 1) 2) Fixed Capital Working Capital
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Every business needs funds for two purposes for its establishment and to carry out its day- today operations. Long terms funds are required to create production facilities through purchase of fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day to- day expenses etc. These funds are known as working capital. In simple words, working capital refers to that part of the firms capital which is required for financing short- term or current assets such as cash, marketable securities, debtors & inventories. Funds, thus, invested in current assts keep revolving fast and are being constantly converted in to cash and this cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short term capital.

DEFINITION WORKING CAPITAL MANAGEMENT

According to Guttmann & DougallExcess of current assets over current liabilities According to Park & GladsonThe excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to Government) Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment. Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company's efficiency and financial strength. The term working capital refers to the amount of capital which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities).Thus,

WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES In a department's Statement of Financial Position, these components of working capital are reported under the following headings:
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Current Assets: Current assets are those which can be converted into cash within an accounting year and.

Liquid Assets (cash and bank deposits) Bills receivables Sundry debtors Short term loans and advances Inventories of stock as: 1. Raw material, 2. Work in process 3. Stores and spares 4. Finished goods

Temporary investment of surplus funds Prepaid expenses Accrued incomes Marketable securities.

Current Liabilities: Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year.

Accrued or outstanding expenses Short term loans, advances and deposits. Dividends payable Bank overdraft. Provision for taxation. Bills payable. Sundry creditors.

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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 you 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 your business? What's the rate of inventory turnover compared with other companies in your 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 you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? 5. Accrued expenses and taxes payable: - These are obligations of your company at any given time and represent a future outflow of cash.

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4.2 CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways:

WORKING CAPITAL

ON THE BASIS OF CONCEPT

ON THE BASIS OF TIME

GROSS WORKING CAPITAL

NET WORKING CAPITAL

PERMANENT WORKING CAPITAL

TEMPORARY WORKING CAPITAL

SEASONAL WORKING CAPITAL

SPECIFIC WORKING CAPITAL

4.2.1. ON THE BASIS OF CONCEPT:- On the basis of concept working capital can
be classified as gross working capital and net working capital. GROSS WORKING CAPITAL: - It refers to the firms investment in current assets. NET WORKING CAPITAL: - It refers to the difference between current assets and current liabilities. Net working capital is positive Net working capital is negative When current assets >current liabilities When current asset<current liabilities

A firm needs to invest in Current assets to ensure Smooth and Uninterrupted Operations. How much the firm invests will depend on its operating cycle. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits. The gross concept is sometimes preferred to the concept of working capital for the following reasons: It enables the enterprise to provide correct amount of working capital at correct time.

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 Every management is more interested in total current assets with which it has to operate then the source from where it is made available. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. This concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for following reasons: o It is qualitative concept, which indicates the firms ability to meet to its operating expenses and short-term liabilities. o It indicates the margin of protection available to the short term creditors. o It is an indicator of the financial soundness of enterprises. o It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.

4.2.2. ON THE BASIS OF TIME: On the basis of time, working capital may be
classified as: Permanent or fixed working capital and Temporary or variable working capital as the amount of working capital required is not constant throughout the year, but keeps fluctuating.

PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets. The amount involved as permanent working capital has to be met from long term sources of finance, e.g. Capital, debentures, long term loans etc.

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Figure 4.1Permanent Working Capital

TEMPORARY OR VARIABLE WORKING CAPITAL: Any amount over and above the permanent level of working capital is called is called temporary, fluctuating or variable working capital. Due to seasonal changes level of business activity is higher than normal during some months of the year and therefore, additional working capital will be required along with the permanent working capital it is so because during peak season demand rises and more stock is to be maintained to meet the demand. Similarly, the amount of debtors increases due to excessive sales. Additional working capital thus needed is known as temporary working capital because once the season is over; the additional demand will be no more. Need for temporary working capital should be met from short term of finance, e.g. Short term loans etc. so that it can be refunded when it is not required. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.

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Figure 4.2Temporary Working Capital

4.3 NATURE OF WORKING CAPITAL

Every business concern should have adequate amount of working capital to run its business operations. It should have neither redundant or excess working capital nor inadequate nor shortages of working capital. Both excess as well as short working capital positions are bad for any business. However, it is the inadequate working capital which is more dangerous from the point of view of the firm.

4.3.1. DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

1. EXCESSIVE INVENTORY: Excessive working capital results in unnecessary purchasing and accumulation of large inventories. It increases the chances of misuse, waste, theft etc. 2. EXCESSIVE DEBTORS: Excessive working capital will result in liberal credit policy which, in turn, will result in higher amount tied up in debtors and higher incidence of bad debts. 3. ADVERSE EFFECT ON PROFITABILITY: Excessive working capital means idle funds in the business which adds to the cost of capital but earns no profits for the firm and business cannot earn the required rate of return on its investments. Hence it has a bad effect on profitability of the firm.

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4. INEFFECIENCY OF MANAGEMENT: Management becomes careless due to excessive resources at their command. It results in laxity of control on expenses and cash resources. It may reduce the overall efficiency of the business. 5. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. Due to lower rate of return n investments, the values of shares may also fall. 7. The redundant working capital gives rise to speculative transactions.

4.3.2. DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production; production and sales; and realization of cash. Thus working capital is needed for the following purposes: For the purpose of raw material, components and spares. To pay wages and salaries To incur day-to-day expenses and overload costs such as office expenses. To meet the selling costs as packing, advertising, etc. To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock. For studying the need of working capital in a business, one has to study the business under varying circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and ambitions of its promoters. Greater the size of the business unit, generally larger will be the requirements of the working capital. The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. At maturity the amount of working capital required is called normal working capital. There are others factors also influence the need of working capital in a business.

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1. DIFFICULTY IN AVALIABILITY OF RAW-MATERIAL:

Inadequacy of the

working capital results in non-payment of creditors on time. As a result the credit purchase of goods on favourable terms becomes increasingly difficult. Also, the firm cannot avail the cash. 2. FULL UTILISATION OF FIXED ASSETS NOT POSSIBLE: Due to the frequent interruption in supply of raw materials and paucity of stock, the firm cant make full utilization of its machines etc. 3. DIFFICULTY IN THE MAINTAINENCE OF MACHINERY: Due to the shortage of working capital, machines are not cared and maintained properly which results in the closure of production of on many occasions. 4. DECRAESE IN CREDIT RATING: Because of inadequacy of working capital, firm is unable to pay its short term obligations on time. It decays the firms relation with its bankers and it becomes difficult for the firm to borrow in case of need.

4.3.3. ADVANTAGE OF ADEQUATE WORKING CAPITAL

1. Solvency of the business: Adequate working capital helps in maintaining the solvency of the business by providing uninterrupted of production. 2. Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and makes and maintain the goodwill. 3. Easy loans: Adequate working capital leads to high solvency and credit standing can arrange loans from banks and other on easy and favourable terms. 4. Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on the purchases and hence reduces cost. 5. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of raw material and continuous production. 6. Regular payment of salaries, wages and other day to day commitments: It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits. 7. Exploitation of Favourable Market Conditions: If a firm is having adequate working capital then it can exploit the favourable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices. 8. Ability to Face Crises: A concern can face the situation during the depression.
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9. Quick And Regular Return On Investments: Sufficient working capital enables a concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future. 10. High Morale: Adequate working capital brings an environment of securities, confidence, high morale which results in overall efficiency in a business.

4.4 FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS

A firm should have neither too much nor too little working capital. The working capital requirements are determined by a large number of factors but, in general, the following factors influence the need of working capital needs of an enterprise: 1. NATURE OF BUSINESS: The requirements of working is very limited in public utility undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. Their working capital need is minimal because they get immediate payment for their services and do not have to maintain big inventories. On the other hand the trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments. This is so because the nature of the business is such that they have to maintain a sufficient amount of cash, inventories and debtors. Working capital needs of most of the manufacturing enterprise fall between these two extremes that is between public utilities and trading concerns. 2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of working capital. The size of a business may be measured in terms of scale of its business operation. 3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating inventories it will require higher working capital. 4. LENGTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and other supplies have to be carried for a longer in the process with progressive increment of labour and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process. 5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger working capital than in slack season. 6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital.
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7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover. 8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product / services on cash requires lesser amt. of working capital and vice-versa. 9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital. 10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt. of working capital. 11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend. 12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital requirements. Generally rise in prices leads to increase in working capital. 13. EFFECIENCY OF MANAGEMENT: Efficiency of management is also a significant factor to determine the level of working capital. Management can reduce the need for working capital by the efficient utilization of resources. It can accelerate the pace of cash cycle and thereby use the same amount working capital again and again very quickly. 14. DEPRICIATION POLICY: Although depreciation does not result in outflow of cash, it affects the working capital indirectly. In the first place, since the depreciation is allowable expenditure in calculating net profits, it affects the tax-liability. In the second place, higher depreciation also means lower disposable profits and, in turn, a lower dividend payment. Thus, outgo of cash is restricted to that extent.

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4.5 MANAGEMENT OF WORKING CAPITAL

Management of working capital is concerned with the problem that arises in attempting to manage the current assets, current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There should be no shortage of funds and also no working capital should be ideal. Working capital management polices of a firm has a great on its probability, liquidity and structural health of the organization. So working capital management is three dimensional in nature as 1. It is concerned with the formulation of policies with regard to profitability, liquidity and risk. 2. It is concerned with the decision about the composition and level of current assets. 3. It is concerned with the decision about the composition and level of current liabilities. This dimension aspect of his working capital has been more clearly and precisely explains by the following diagram.

DIMENSION I

Profitability, Risk & Liquidity

DIMENSION II

Composition & Level of Current Liabilities Composition & Level of Current Assets

DIMENSION III

Figure 4.3 Dimension 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 favourable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of
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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.

4.6 SIGNIFICANCE OF WORKING CAPITAL

Working Capital is very important in day to day life. So, 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.

PAYMENT TO SUPPLIERS

EASY LOAN FROM BANKS

DIVIDEND DISTRIBUTION

SIGNIFICANCE OF WORKING CAPITAL

INCREASE EFFECIENCY

INCREASE DEBT CAPACITY

INCREASE IN FIX ASSETS

Figure 4.4 Significance of Working Capital

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4.7 FINANCING WORKING CAPITAL

Now let us understand the means to finance the 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: 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 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. 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. 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.

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4.8 ISSUES IN WORKING CAPITAL MANAGEMENT Working capital management refers to the administration of all components of working capital. Debtors (Receivables) Management Creditors (Payables) Management Inventories (Stock) Management

4.8.1 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 owes and for what it is owed? Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. It is very difficult for the organization to sell always on cash basis in todays competitive market. In almost every business, we have to sell on credit basis. The basic objective of management of sundry debtors is to optimize the return on investment on this asset. It is obvious that if there are large amounts tied up in sundry debtors, working capital requirement would be high and consequently interest charges will be high. In such cases, the bad debts and cost of collection of debts would be high. On the other hand if the credit policy is very tight, investment in sundry debtors is low but the sale may be

restricted, since the competitors may offer more liberal credit term. We have limited resources and therefore every resource has its own opportunity cost. Therefore the management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies. Debtors and cost of debtors have direct relation; cost will increase due to increase in debtors and vice-versa. It depends on the credit sale of concern and credit period (collection period) allowed to customer. It is interest of customer to pay as late as possible and company, who made sales, would like to collect their debtor as early as possible. There is a conflict between the two aspects. Debtor management is the process of finding the balance at which company agree to receive its payment without hampering or having any adverse effect on its sales and

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customer agree to pay at their economical buying concept. Sundry debtor level depends on two measure issues: Volume of Credit sales Credit period allowed to customers.

Following factors may be considered before allowing credit period to the customer:1. Nature of product 2. Credit worthiness of the customer, which varies from customer to customer 3. Quantum of advance received from customers 4. Credit policy of company, say number of days allowed to customer for payment to the customers 5. Cost of debtors 6. Manufacturing cycle time of the product etc.

Credit policy: The term credit policy is used to refer to the combination of three decision variables: Credit standard are criteria to decide the types of customers to whom goods could be sold on credit. If a firm has more slow paying customers, its investment in accounts receivable will increase. The firm will also be exposed to higher risk of default. Credit terms specify duration of credit and terms of payment by customers. Investment in accounts receivables will be high if customers are allowed extended time period for making payments. Collection efforts determine the actual collection period. The lower the collection period, the lower the investment in accounts receivable and vice-versa. The financial manager or the credit manager may administer the credit policy of a firm. Credit policy has important implications for the firms production, marketing and finance functions. The following measures will help manage your 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.

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5. Check out each customer thoroughly before you 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 you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your 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 your debtor balances and ageing schedules, and don't let any debts get too large or too old. Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects: 1. Weak Credit Judgement 2. Poor Collection Procedures 3. Lax Enforcement of Credit Terms 4. Slow Issue of Invoices or Statements 5. Errors in Invoices or Statements 6. Customer Dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example, longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to

additional suppliers for the same goods new customers who are reluctant to give credit references receiving part payments from debtors. 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 your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors: 1. 2. Develop appropriate procedures for handling late payments. Track and pursue late payers.
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3. 4. 5. 6.

Get external help if your own efforts fail. Don't feel guilty asking for money, its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem.

7.

When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying.

8.

Make it your objective is to get the money - not to score points or get even.

ASHOK LEYLAND, PANTNAGAR The unit is engaged in the manufacturing business of chassis of truck and busses, where cycle time of the product is 50-59 hours depending on different models and most of the contracts take approximately 1-2 years to complete. Ashok Leyland has a large database for public transport busses, commercial vehicles, defence and special purpose. It caters to different class of society which includes individual buyers, industrial buyers, government buyers and defence also. State electricity boards Individual buyers: - Individual user includes individual or passenger transporter. Industrial buyers: - Industrial user includes transporter, logistics companies, coal and mining industry and other industries etc. Government buyers: - Government user includes state and central transporter like DTC, UPSRTC and others. Defence: - Defence user includes Indian army trucks, tanks and transporter busses.

In most of the contracts, payments of Ashok Leyland, Pantnagar are made in following stages: Advance from customers and at the time of dispatch of goods Finance from Bankers

4.8.2 MANAGING PAYABLES (CREDITORS)

Creditors are the businesses or people who provide goods and services in credit terms. That is, they allow us time to pay rather than paying in cash. There are good reasons why we allow people to pay on credit even though literally it doesn't make sense! If we allow people time to pay their bills, they are more likely to buy from your business than from another business that doesn't give credit. The length of credit period allowed is also a factor that can help a potential customer deciding whether to buy from your business or not: the longer the better, of course. In spite of what we have just said, creditors will need to optimise their credit control policies
47

in exactly the same way that we did when we were assessing our debtors' turnover ratio - after all, if you are my debtor I am your creditor! We give credit but we need to control how much we give, how often and for how long. 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: 1. Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people? 2. Are purchase quantities geared to demand forecasts? 3. Do you use order quantities which take account of stock-holding and purchasing costs? 4. Do you know the cost to the company of carrying stock? 5. Do you 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. 6. How many of your suppliers have a returns policy? 7. Are you in a position to pass on cost increases quickly through price increases to your customers? 8. If a supplier of goods or services lets you down can you charge back the cost of the delay? 9. Can you arrange (with confidence!) to have delivery of supplies staggered or on a justin-time basis? There is an old adage in business that if you can buy well then you can sell well. Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with you to enhance the future viability and profitability of your company.

ASHOK LEYLAND, PANTNAGAR The unit purchases raw material from all over India with around 40% of vendors are in Tamil Nadu and around 20% in Uttarakhand and rest in other states. There are around total 485 vendors of Ashok Leyland. The major vendors of Ashok Leyland, Pantnagar are as follow :48

Surin Automotive Private Limited, Sitarganj, Uttarakhand Birla Tyres Prop. Kesoram Industries Ltd, Haridwar, Uttarakhand Tata Steel Ltd, Jamshepur Sri Balaji Fabrication Works, Hosur Caparo Fasteners, Alwar Wheels India Limited, Pantnagar

In most of the contracts, payments by Ashok Leyland, Pantnagar are made in following stages: General AP booking with the help of ERP software RTGS-(Real Time Gross Settlement) Supplementary Bill Processing is done Hundi Payment Vendor Financing For the Production and Non Production both the payment is made through Standard Chartered Bank and HDFC Bank on the due date only.

4.8.3 INVENTORY MANAGEMENT

Inventories constitute the most significant part of current assets of a majority of companies in India. Because of the large size of inventories maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long run profitability and may fail ultimately. It is possible for a company to reduce its level of inventories to a considerable degree, e.g., 10 to 20 per cent, without any adverse effect on production and sales, by using simple inventory planning and control techniques. The reduction in excessive inventories carries a favourable impact on companys profitability.

Nature of Inventories Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventories exist in a manufacturing company are:

49

Raw Materials: These are those basic inputs that are converted into finished product through the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions.

Work in Process: These inventories are semi-manufactured products. They represent products that need more work before they become finished for sale. Finished Goods: These inventories are those completely manufactured products which are ready for sale. Stocks of raw materials and work-in-process facilitate production, while stock of finished goods is required for smooth marketing operations. Thus, inventories serve as a link between the production and consumption of goods.

The levels of three kinds of inventories for a firm depend on the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories. Within manufacturing firms, there will be differences. Large heavy engineering companies produce long production cycle products; therefore they carry large inventories. Firms also maintain a fourth kind of inventory, supplies or stores and spares. Supplies include office and plant cleaning materials like soap, brooms, oil, fuel, light bulbs etc. these materials do not directly enter production, but are necessary for production process. Usually, these supplies are small part of the total inventory and do not involve significant investment. Therefore, a sophisticated system of inventory control may not be maintained for them. Need To Hold Inventories The question of managing inventories arises only when the company holds inventories. Maintaining inventories involves tying up of the companys funds and incurrence of storage and handling costs. If it is expensive to maintain inventories, why do companies hold inventories? There are three general motives for holding inventories: Transactions motive: It emphasizes the need to maintain inventories to facilitate smooth production and sales operations. Precautionary motive: It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative motive: It influences the decision to increase or reduce inventory levels to take the advantage of price level fluctuations. A company should maintain adequate stock of materials for a continuous supply to the factory for an uninterrupted production. It is not possible for a company to procure raw materials whenever it is needed. A time lag exists between demand for materials and its supply. Also, there exists uncertainty in procuring raw materials in time on many occasions. The
50

procurement of materials may be delayed because of such factors as strike, transport disruption or short supply. Therefore, the firm should maintain sufficient stock of raw materials at a given time to stream line production. Other factors which may necessitate purchasing and holding of raw materials inventories are quantity discounts and anticipated price increase. The firm may purchase large quantities of raw materials than needed for the desired production and sales levels to obtain quantity discounts of bulk purchasing. At times, the firm would like to accumulate raw materials in anticipation of price rise. Work in process inventory builds up because of the production cycle. Production cycle is the time pan between introduction of raw materials into production and emergence of finished product at the completion of production cycle. Till production cycle completes, stock of WIP has to be maintained. Stock of finished goods has to be held because production and sales are not instantaneous. A firm cannot produce immediately when customers demand goods. Therefore, to supply finished goods on a regular basis, their stock has to be maintained. Objective of Inventory Management In the context of inventory management, the firm is faced with the problem of meeting two conflicting needs: 1. To maintain a large size of inventories of raw materials and WIP for efficient and smooth production and of finished goods for uninterrupted sales operations. 2. To maintain a minimum investment in inventories to maximize profitability. Both excessive and inadequate inventories are not desirable. These are two danger points which the firm should avoid. The objective of inventory management should be determine and maintain optimum level of inventory investment. The optimum level of inventory will lie between the two danger points of excessive and inadequate inventories. The firm should always avoid a situation of over investment or under investment in inventories. The major dangers of over investment are: Unnecessary tie up of the firms funds loss of profit Excessive carrying costs Risk of liquidity

The excessive level of inventories consumes funds of the firm, which cannot be used for any other purpose, and thus, it involves an opportunity cost. The carrying costs such as the costs of storage, handling, insurance, recording and inspection, also increases in proportion to the volume of inventory. These costs will impair the firms profitability further. Excessive
51

inventories carried for long period increases chances of loss of liquidity. It may not be possible to sell inventories in time and at full value. Raw materials are generally difficult to sell as the holding period increases. Another danger of carrying excessive inventory is the physical deterioration of inventories while in storage. Maintaining an inadequate level of inventories is also dangerous. The consequences of under investment in inventories are Production hold-ups and failure to meet delivery commitments Inadequate raw materials and WIP inventories will result in frequent production interruptions. The aim of inventory management is to avoid excessive and inadequate levels of inventories and to maintain sufficient inventory for the smooth production and sales operations. An effective inventory management should: Ensure a continuous supply of raw materials to facilitate uninterrupted production Maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. Maintain sufficient finished goods inventory for smooth sales operation and efficient customer service and minimize the carrying cost and time Control investment in inventories and keep it at an optimum level.

Following steps have been taken to control inventory: An inventory monitoring cell is constituted at the corporate office. The purchases were controlled by the materials management group reporting to the Director of Finance. The company provided for weekly meetings between material planning, production control and purchase departments for better matched material availability. Monthly review of total inventory at the level of chief executives of plants and corporate management is introduced. Inventory control is dovetailed with the budgeting system. Top 100 inventory items are identified for closer scrutiny and control ASHOK LEYLAND, PANTNAGAR This unit produces long production cycle items against the firm orders from customers. Because of this as well as sizeable imported raw materials and compulsory bulk purchases of items like steel and tyres in line with availability from Tata Steels and Birla Tyres, the company has to carry high level of inventories
52

CHAPTER 5 WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.

5.1 STATEMENT SHOWING SCHEDULE OF CHANGES IN WORKING CAPITAL

Statement of changes in the working capital is prepared to show the changes in the working capital between the two balance sheet dates. This statement is prepared with the help of the current asset and current liabilities derived from the 2 balance sheets so, 1. An increase in current asset increases working capital. 2. A decrease in current assets decreases in working capital 3. An increase in current liabilities decreases working capital. 4. A decrease in current liabilities increases working capital. It is worth noting that schedule of changes in working capital is prepared only from current assets and current liabilities and the other information is not of any use for preparing this statement. The company should look in to the proper current liabilities.

5.2 RATIO ANALYSIS

Ratios should be taken as guides that are useful in evaluating a companys financial position and operations and making comparisons with results in previous years or with other companies. The primary purpose of ratios is to point out areas needing further investigations. Ratios will not carry meaningful business reasoning if there is no supporting quantitative and financial information. A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm. The following ratios can be calculated for these purposes: Ratios are relationship expressed in mathematical terms between 2 individual groups of figures connected with each other. Different ratios are calculated to analyze and study different

53

aspects of a firm. Ratios have been classified into the following groups: Liquidity Ratios, Current Asset Movement Ratios, and Profitability Ratios

5.2.1 LIQUIDITY RATIO Liquidity refers to the ability of a firm to meet its short-term financial obligations when and
as they fall due. The main concern of liquidity ratio is to measure the ability of the firms to meet their short-term maturing obligations. Failure to do this will result in the total failure of the business, as it would be forced into liquidation. Common liquidity ratios include the current ratio, and the quick ratio. CURRENT RATIO

The current ratio is a popular financial ratio used to test a company's liquidity (also referred to as its current or working capital position) by deriving the proportion of current assets available to cover current liabilities. The concept behind this ratio is to ascertain whether a company's short-term assets (cash, cash equivalents, marketable securities, receivables and inventory) are readily available to pay off its short-term liabilities (notes payable, current portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current ratio, the better. Interpretation of current ratio as: 1. Relatively high ratio values mean that the business is liquid, but cash is not working. 2. If the current ratio is greater than 1.0, the business is liquid. 3. If the current ratio is less than 1.0, the business is illiquid. TOTAL CURRENT ASSETS TOTAL CURRENT LIA ILITIES

CURRENT RATIO

QUICK RATIO

The quick ratio -the quick assets ratio or the acid-test ratio -is a liquidity indicator that further refines the current ratio by measuring the amount of the most liquid current assets there are to cover current liabilities. The quick ratio is more conservative than the current ratio because it excludes inventory and other current assets, which are more difficult to turn into cash. Therefore, a higher ratio means a more liquid current position. A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good.

54

As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories. TOTAL CURRENT ASSETS INVENTORY TOTAL CURRENT LIA ILITIES

QUICK RATIO

5.2.2 CURRENT ASSETS MOVEMENT RATIOS Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are: Inventory Turnover or Stock Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Working Capital Turnover Ratio

The current ratio and quick ratio give misleading results if current assets include high amount of debtors due to slow credit collections and moreover if the assets include high amount of slow moving inventories. As both the ratios ignore the movement of current assets, it is important to calculate the turnover ratio. INVENTORY TURNOVER RATIO

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible. INVENTORY TURNOVER RATIO
55

SALES INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold; the lesser amount of money is required to finance the inventory whereas low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment. The number of days inventory is also known as average inventory period and inventory holding period. A high number of days inventory indicates that there is a lack of demand for the product being sold. A low days inventory ratio (inventory holding period) may indicate that the company is not keeping enough stock on hand to meet demands. AYS INVENTORY TURNOVER RATIO

NO. OF AYS INVENTORY

DEBTORS TURNOVER RATIO

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. So liquidity position of a concern also depends upon the quality of trade debtors. SALES E TORS

E TORS TURNOVER RATIO

Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio. The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors.
56

Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa. AYS E TORS TURNOVER RATIO

AVERAGE COLLECTION PERIO CREDITORS TURNOVER RATIO

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Creditors turnover ratio indicates the pattern of payment of accounts payable. As accounts payable arise on account of credit purchases, it expresses relationship between credit purchases and accounts payable. It is calculated as follows: CRE ITORS TURNOVER RATIO PURCHASES CRE ITORS

It reveals average payment period. Lower ratio means credit allowed by the supplier is for a long period or it may reflect delayed payment to suppliers which is not a very good policy as it may affect the reputation of the business. The average period of payment can be worked out by days/months in a year by the turnover rate. AYS CRE ITORS TURNOVER RATIO

CRE ITORS COLLECTION PERIO

WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm. WORKING CAPITAL TURNOVER RATIO SALES NET WORKING CAPITAL

57

5.2.3 PROFITABILITY RATIO

Profit margin analysis uses the percentage calculation to provide a comprehensive measure of a company's profitability on a historical basis (3-5 years) and in comparison to peer companies and industry benchmarks.

NET PROFIT MARGIN

Often referred to simply as a company's profit margin, the so-called bottom line is the most often mentioned when discussing a company's profitability? While undeniably an important number, investors can easily see from a complete profit margin analysis that there are several income and expense operating elements in an income statement that determine a net profit margin. It behoves investors to take a comprehensive look at a company's profit margins on a systematic basis. PROFIT AFTER TAX NET SALES

NET PROFIT MARGIN

GROSS PROFIT MARGIN

The gross profit margin reflects the efficiency with which management produces each unit of product. This ratio indicates the average spread between the cost of goods sold and the sales revenue. The high gross profit margin relative to the industry average implies that the firm is able to produce at relatively lower cost. GROSS PROFIT MARGIN GROSS PROFIT NET SALES

GROSS PROFIT

SALES COST OF GOO S SOL

5.3 OPERATING CYCLE Operating cycle refers to the time duration required to convert sales, after the conversion of recourses into inventories, into cash .the operating cycle of a manufacturing company like Ashok Leyland includes: 1. Accusation of resources such as raw materials, labour, power and fuel etc. 2. Manufacture of the product which includes conversion of materials into work-inprogress into finished goods.
58

3. Sale of the product either for cash or on credit. Credit sales create account receivables for collection. 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 labour and service cost, conversion of finished stock 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.

CASH

RAW MATERIAL

DEBTORS & BILLS RECEIVAB LES SALES

OPERATING CYCLE

WORK IN PROGRESS

FINISH GOODS
Figure5.1 Operating Cycle

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. The need for working capital can also be explained with the help of operating cycle. Operating cycle of a manufacturing concern involves five phases: 1. Conversion of cash into raw material. 2. Conversion of raw material into work-in-progress. 3. Conversion of work-in-progress into finished goods. 4. Conversion of finished goods into debtors by credit sales. 5. Conversion of debtors into cash by realizing cash from them.
59

Thus, the operating cycle starts from cash and then again restarts from cash. Need for working capital depends upon period of operating cycle. Greater the period more will be the need of working capital. Period of operating cycle in a manufacturing concern is greater than a period of operating cycle in a trading concern because in trading units cash is directly converted into finished goods. Each component of working capital (namely inventory, receivables and payables) has two dimensions, TIME and MONEY. When it comes to manage working capital - TIME IS MONEY. If you 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, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales IF you.. Collect receivables (Debtors) faster Collect receivables (Debtors) slower Get better credit (in terms of duration or amount)from your supply Shift inventory (stocks) faster Move inventory (stocks) slower Then You release cash from the cycle Your receivables soak up cash You increase your cash resources You free up cash You consume more cash

Because of the time involved in a operating cycle, there is a need of working capital in the form of current assets. Firms have to keep adequate stock of raw-material to avoid risk of non-availability of raw materials. Similarly, concerns must have adequate stock of finished goods to meet the demand in market on continuous basis and to avoid competition which necessitates the money tied up in debtors and bills receivables. In addition to all these, concerns have to necessarily keep cash to pay the manufacturing expenses etc. and to meet the contingencies.

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5.3.1

COMPONENTS

OF

WORKING

CAPITAL

CYCLE

ARE

CALCULATED AS FOLLOWS:
1. Raw Materials Storage Period=Average stock of raw materials/Average cost of raw material consumption per day. 2. W-I-P Holding period=Average w-i-p in inventory/Average cost of production per day. 3. Finished goods conversion period= Average stock of finished goods/Average cost of goods sold per day. 4. Debtors collection period=Average book debts/Average credit sales per day. 5. Credit period availed=Average trade creditors/Average credit purchase per day.

Operating Cycle= Raw Material Holding Period +WIP Holding Period +FG Holding Period +Debtors Collection Period -Creditors Collection Period

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CHAPTER 6 DATA ANALYSIS AND INTERPRETATION

Data analysis is an important part in any study as it fulfils the purpose for which it is made. In this part of study the analysis of data is done on the basis of information collected through the annual reports of Ashok Leyland and the data collected through the managers of Ashok Leyland in Pantnagar Plant with the help of table and graphs.

6.1 EVALUATION OF WORKING CAPITAL

Working capital is the life blood and centre of business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need for working capital analysis.

6.1.1

STATEMENT

SHOWING

SCHEDULE

OF

CHANGES

IN

WORKING CAPITAL
TABLE 6.1:- FOR THE YEAR 2006-2007(Rs. IN MILLIONS) PARTICULARS CURRENT ASSETS Inventories Sundry debtors Cash and bank balances Loan & advances (A) CURRENT LIABILITIES Liabilities Provisions (B) (A-B) WORKING CAPITAL Increasing in WC TOTAL 2006 2007 INCREASE DECREASE

9025.61 4243.37 6028.76 3026.39 22324.13

10703.21 5228.75 4349.39 6695.79 26977.14

1677.6 985.38 1679.37 3669.4

11468.95 2616.21 14085.16 8238.97 1179.62 9418.59

16516.25 1042.3 17558.55 9418.59 9418.59

5047.3 1573.91

7906.29

1179.62 7906.29

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INTERPRETATION: The above table shows that there has been increase in need for working capital to the extent of 1179.62 from the year 2006 to 2007. TABLE 6.2:- FOR THE YEAR 2007-2008(Rs. IN MILLIONS) PARTICULARS CURRENT ASSETS Inventories Sundry debtors Cash and bank balances Loan & advances (A) CURRENT LIABILITIES Liabilities Provisions (B) (A-B) WORKING CAPITAL Decreasing in WC TOTAL INTERPRETATION: The above table shows that there has been decrease in need for working capital to the extent of 3385.40 from the year 2007 to 2008. TABLE 6.3:- FOR THE YEAR 2008-2009(Rs. IN MILLIONS) PARTICULARS CURRENT ASSETS Inventories Sundry debtors Cash and bank balances Loan & advances (A) CURRENT LIABILITIES Liabilities Provisions (B) (A-B) WORKING CAPITAL 2008 2009 INCREASE DECREASE 2007 2008 INCREASE DECREASE

10703.21 5228.75 4349.39 6695.79 26977.14

12239.14 3758.35 4513.7 8241.385 28752.581

1535.93 1470.4 164.31 1545.595

16516.25 1042.3 17558.55 9418.59 9418.59

19267.084 3452.31 22719.394 6033.19 3385.4 9418.59 3385.4 6631.235

2750.834 2410.01

6631.235

12239.14 3758.35 4513.7 8241.385 28752.581

13300.144 9579.742 880.836 7895.44 31656.14

1061 5821.391 3632.865 346.25

19267.084 3452.31 22719.394 6033.19

18688.641 2680.82 21369.461 10286.679

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5784.43 771.49

Increasing in WC TOTAL INTERPRETATION:

4253.5 10286.68

10286.68

8232.32

4253.5 8232.32

The above table shows that there has been increase in need for working capital to the extent of 4253.50 from the year 2008 to 2009. TABLE 6.4:- FOR THE YEAR 2009-2010 (Rs. IN MILLIONS) PARTICULARS CURRENT ASSETS Inventories Sundry debtors Cash and bank balances Loan & advances (A) CURRENT LIABILITIES Liabilities Provisions (B) (A-B) WORKING CAPITAL Increasing in WC TOTAL INTERPRETATION: The above table shows that there has been increase in need for working capital to the extent of 1508.92 from the year 2009 to 2010. TABLE 6.5:- FOR THE YEAR 2010-2011 (Rs. IN MILLIONS) PARTICULARS CURRENT ASSETS Inventories Sundry debtors Cash and bank balances Loan & advances (A) CURRENT LIABILITIES Liabilities Provisions 2010 2011 INCREASE DECREASE 2009 2010 INCREASE DECREASE

13300.144 9579.742 880.836 7895.44 31656.14

16382.40 10226.90 5189.20 9604.60 41403.10

3082.26 647.16 4308.36 1709.16

18688.641 2680.82 21369.461 10286.679 1508.92 11795.60

25920.60 3686.90 29607.50 11795.60 11795.60 9746.94

7231.96 1006.08

1508.92 9746.96

16382.40 10226.90 5189.20 9604.60 41403.10

22089.034 11852.133 1795.272 7936.014 43672.453

5706.634 1625.233 3393.928 1668.586

25920.60 3686.90

30379.477 4903.263
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4458.877 1216.363

(B) (A-B) WORKING CAPITAL Decreasing in WC TOTAL INTERPRETATION:

29607.50 11795.60 11795.60

35282.74 8389.713 3405.887 11795.60 3405.887 10737.754 10737.754

The above table shows that there has been decrease in need for working capital to the extent of 3405.887 from the year 2010 to 2011.

6.1.2 RATIO ANALYSIS

LIQUIDITY RATIOS: 1) CURENT RATIO: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 CURRENT ASSESTS 26977.14 28752.58 31656.14 41396.83 43672.45 CURRENT LIABILITIES 17558.55 22719.39 21369.46 29607.56 35282.74 CURRENT RATIO 1.54 1.27 1.48 1.40 1.23 INDUSTRY AVERAGE 1.55 1.55 1.55 1.55 1.55

2 1.54 1.5 1 0.5 0 2006-07

1.55 1.27

1.55 1.48

1.55 1.4

1.55

1.55 1.23

2007-08

2008-09

2009-10 INDUSTRY AVERAGE

2010-11

CURRENT RATIO

INTERPRETATION: Here industry ratio is 1.55. Except in 2007-08 and 2010-11 remaining all years companys current ratio is almost near to industry average ratio. In the year 2006-07 company had power to affect the industry.

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2) LIQUID RATIO (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 QUICK ASSESTS 16273.93 16513.44 18356.00 25014.43 21583.42 CURRENT LIABILITIES 17558.55 22719.39 21369.46 29607.56 35282.74 CURRENT RATIO 0.93 0.73 0.86 0.84 0.61 INDUSTRY AVERAGE 1.07 1.07 1.07 1.07 1.07

1.5 1 0.5 0 2006-07 0.93

1.07

1.07 0.86

1.07

1.07 0.84

1.07

0.73

0.61

2007-08

2008-09

2009-10 INDUSTRY AVERAGE

2010-11

CURRENT RATIO

INTERPRETATION: Here industry ratio is 1.07. In 2006-07 it is higher and then started to decline slowly up to 2007-08. In 2008-09 it started increasing and came near to the industry average and again decline in 2010-11.

CURRENT ASSET MOVEMENT RATIOS: 3) INVENTORY PROPORTION: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 RAW MATERIAL 3853.39 4229.28 5325.74 5860.65 9484.14 WORK-INPROGRESS 1095.07 1140.46 940.82 3465.62 2628.20 FINISHED OTHERS INVENTORY GOODS 5325.70 429.05 10703.21 6255.05 614.33 12239.14 6465.16 568.41 13300.14 6458.81 597.30 16382.40 9051.59 925.09 22089.03

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25000

20000 RAW MATERIAL 15000 WORK-IN-PROGRESS FINISHED GOODS 10000 OTHERS INVENTORY 5000

0 2006-07 2007-08 2008-09 2009-10 2010-11

INTERPRETATION: Raw materials consumed are increasing from year by year. WIP is almost constant for years and in 2009-10 the WIP increased drastically. FG is in increasing condition as it is the major part of inventory. This was a good sign to firm. Total inventory is increasing from year to year. 4) INVENTORY TURN OVER RATIO & INVENTORY HOLDING PERIOD (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11
90 80 70 60 50 40 30 20 10 0

SALES 71681.76 77425.80 59810.73 72447.10 111177.09

INVENTORY 10703.21 12239.14 13300.14 16382.40 22089.03

80 57

DAYS 360 360 360 360 360

81

ITOR 6.69 6.32 4.49 4.42 5.03

IHP 54 57 80 81 72

72 54

6.69

6.32

4.49 2008-09 ITOR IHP

4.42 2009-10

5.03 2010-11

2006-07

2007-08

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INTERPRETATION: During the 2006-07 the company has very high inventory ratio of 6.69, which means more capital is being locked up in the inventory. From the year 2006-07 the ratio was decreased from 6.69 to 4.42 but in 2010-11 there was a slight increase in inventory. The Inventory holding period was good but from 2008-09 to 2009-10 it was increased. But in 2010-11 it decrease. 5) DEBTORS TURN OVER RATIO: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11
70 60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2010-11 13.7 26 20.6 17 6.24 7.08 9.38 38 RTR DCP 58 51

SALES 71681.76 77425.80 59810.73 72447.10 111177.09

DEBTORS 5228.75 3758.35 9579.74 10220.61 11852.13

DAYS 360 360 360 360 360

RTR 13.70 20.60 6.24 7.08 9.38

DCP 26 17 58 51 38

INTERPRETATION: Receivables turnover ratio is highest in 2007-08. Receivables turnover ratio is lowest in 200809 but now it shows an increasing trend, which implies that recovery position is good. From 2006-07 to 2007-08 debtors collection period was decreasing. But in the year 2008-09 the collection period increased to more than 100% and now it declines shows that management is effective in collecting the payments from debtors.

6) CREDITORS TURN OVER RATIO: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 PURCHASES 55212.0 58553.9 45533.1 AVERAGE CREDITORS 8528.47 11531.35 12013.00
68

DAYS 360 360 360

CTR 6.47 5.07 3.79

CCP 56 71 95

2009-10 2010-11
100 90 80 70 60 50 40 30 20 10 0 6.47

52823.9 82306.4

13362.75 18454.71
95

360 360

3.95 4.45

91 81

91 81

71 56 CTR CCP

5.07 2007-08

3.79 2008-09

3.95 2009-10

4.45 2010-11

2006-07

INTERPRETATION: 2006-07 year has highest creditor turnover ratio. 2008-09 year has lowest creditor turnover ratio. It is seen that it follows a decreasing trend which is good sign for the company. So, we can say it enjoys a very good credit facility from the suppliers. In the year 2006-07 creditors collection period are low 56. In the year 2008-09 the creditors collection period is very high 95. 7) RAW MATERIALS TURN OVER RATIO :( Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11
40 20 0 2006-07 2007-08 2008-09 16.43

RAW MATERIALS 54018.14 57480.59 43218.57 52552.32 80667.79

AVERAGE RAW MATERIAL 3290.86 4041.34 4777.52 5593.15 7672.39

40 38 25

DAYS 360 360 360 360 360

34

RW TR 16.43 14.22 9.04 9.39 10.51

RM HP 22 25 40 38 34

22 14.22

9.04

RW TR 9.39 10.51 RM HP RW TR 2009-10 2010-11 RM HP

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INTERPRETATION: In 2006-07 RM TR is highest. From 2006-07 to 2008-09 it was decreased and from 2008-09 to 2010-11 it was increasing. Raw material holding period is constant in all years. But it was slightly increased in 2008-09.

8) WORK IN PROGRESS TURN OVER RATIO: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11
60 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 2010-11 8 7 8 24.38 15 27.51 WIP TR WIP HP 13 44.29

COST OF PRODUCTION 56083.3 59581.5 46420.3 53723.7 83818.6

53.35

AVERAGE WIP 1266.19 1117.77 1040.65 2203.20 3046.91

DAYS 360 360 360 360 360

WIP TR 44.29 53.35 44.60 24.38 27.51

WIP HP 8 7 8 15 13

44.6

INTERPRETATION: In 2007-08 WIP TR is highest. Remaining all years it was similar. In 2009-10 it is lowest. WIP holding period is highest in 2009-10. WIP holding period is lowest in 2007-08.

9) FINISHED GOODS TURNOVER RATIO: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 COST OF GOODS SOLD 64000.16 69143.30 55807.23 64925.50 100484.79 AVERAGE FG 4909.69 5790.38 6360.11 6461.98 7755.20 DAYS 360 360 360 360 360 FG TR 13.03 11.94 8.77 10.04 12.95 FGHP 28 30 41 36 28

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41 50 40 30 20 10 0 2006-07 2007-08 2008-09 2009-10 13.03 11.94 8.77 10.04 28 30

36 28 FG TR 12.95 FG TR 2010-11 FGHP

INTERPRETATION: Finished goods turnover ratio is decreasing from 2006-07 to 2008-09. 2008-09 is the lowest and 2006-07 is the highest. Finished goods holding period is highest in 2008-09. Finished goods holding period is lowest in 2006-07 and in 2010-11.

TO STUDY OVERALL EFFECIENCY OF WORKING CAPITAL: 10) NET WORKING CAPITAL (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 CURRENT ASSESTS 26977.14 28752.58 31656.14 41396.83 43672.45 CURRENT LIABILITIES 17558.55 22719.39 21369.46 29607.56 35282.74 NET WORKING CAPITAL 9418.59 6033.19 10286.68 11789.27 8389.71

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 2006-07 2007-08 2008-09 2009-10 2010-11 CURRENT ASSEST CURRENT LIABILITIES NET WORKING CAPITAL

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INTERPRETATION: Net working capital of Ashok Leyland Ltd is maintained balanced in all years except in 200708 and 2010-11. In 2007-08 year the net working capital is very low and in 2009-2010 the net working capital is high and again in 2010-11 the net working capital is low.

11) WORKING CAPITAL TURN OVER RATIO (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 SALES 71681.76 77425.80 59810.73 72447.10 111177.09 NET.WORKING CAPITAL 9418.59 6033.19 10286.68 11789.27 8389.71 TURN OVER RATIO 7.61 12.83 5.81 6.14 13.25

WORKING CAPITAL TURN OVER RATIO 12.83 7.61 5.81 6.14

13.25

2006-07

2007-08

2008-09

2009-10

2010-11

INTERPRETATION: The working capital turnover ratio of Ashok Leyland Ltd is increasing from 2006-07 to 200708. But suddenly there is a dip in 2008-09. In the year 2008-09 Indian automobile industry was slowed down due to market slowdown. In the year 2010-11, the performance of Ashok Leyland Ltd is in peak position.

TO STUDY THE STRUCTURE OF WORKING CAPITAL 12) CURRENT ASSETS TO TOTAL ASSETS: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 CURRENT ASSESTS 26977.14 28752.58 31656.14 41396.83 TOTAL ASSESTS 44633.32 55399.52 78265.77 92768.65
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CA/TA RATIO 0.60 0.52 0.40 0.45

2010-11

43672.45

105889.98

0.41

2010-11 2009-10 2008-09 2007-08 2006-07 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 CA/TA RATIO

INTERPRETATION: This CA to TA ratio is of reducing tendency. In 2006-07 it is highest and in 2008-09 it is lowest. The portion of current assets is reducing year by year.

13) CURRENT LIABILITIES TO TOTAL LIABILITIES (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 CURRENT LIABILITIES 17558.55 22719.39 21369.46 29607.56 35282.74 TOTAL LIABILITIES 44877.50 55622.42 78362.67 92820.45 105933.14 CL/TL RATIO 0.39 0.41 0.27 0.32 0.33

2010-11 2009-10 2008-09 2007-08 2006-07 0 0.1 0.2 0.3 0.4 0.5

CL/TL RATIO

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INTERPRETATION: CL to TL ratio is increasing from 2006-07 to 2007-08. There is a decrease in 2008-09. But company is capable of recover in 2009-2010 and 2007-08 has highest ratio.

PROFITABILITY RATIOS: 14) GROSS PROFIT RATIO (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11
12 10 8 6 4 2 0 2006-07 2007-08 2008-09 2009-10 2010-11 6.69 GROSS PROFIT RATIO 10.71 10.69 10.38 9.61

GROSS PROFIT 7681.6 8282.5 4003.5 7521.6 10692.3

SALES 71681.76 77425.80 59810.73 72447.10 111177.09

GROSS PROFIT RATIO 10.71 10.69 6.69 10.38 9.61

INTERPRETATION: From the table shown above gross profit of the firm is satisfactory in all the years except in 2008-09. But it was recovered very soon by next year and it is still doing well.

15) NET PROFIT RATIOS: (Rs. IN MILLIONS) YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 NET PROFIT 4412.86 4693.10 1899.96 4236.74 6312.99 SALES 71681.76 77425.80 59810.73 72447.10 111177.09 NET PROFIT RATIO 6.16 6.06 3.18 5.85 5.67

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7 6 5 4 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 3.18 NET PROFIT RATIO 6.16 6.06 5.85 5.67

INTERPRETATION: From the data given in the above table it is clear that the net profit of the company is almost maintained constant except in the year 2008-09. Due to market slow down the net profit of the company effected. But in 2009-10 it shot up as the company recovered very fast.

6.1.3 OPERATING CYCLE YEAR 2006-07 2007-08 2008-09 2009-10 2010-11 RM HP 22 25 40 38 34 WIP HP 8 7 8 15 13 FG HP 28 30 41 36 28 DCP 26 17 58 51 38 CCP 56 71 95 91 81 OPERATING CYCLE 28 8 52 49 32

60 50 40 30 20 10 0 2006-07 2007-08 8 28

52

49

32 OPERATING CYCLE

2008-09

2009-10

2010-11

75

INTERPRETATION: From the table given above it is clear that, in 2007-08 it is very low that is 8. It is best one. In 2008-09 it is increased from 8 to 52. There is a rapid change in operating cycle.

76

CHAPTER 7 ACCOUNT PAYABLE PROCESS

Enterprise Resource Planning systems integrate internal and external management information across an entire organization and embrace finance, manufacturing, sales and service, customer relationship management etc. ERP system automate this activity with an integrated software application. Thr purpose is to spread the flow of information between all business functions across the boundaries of the organization and manage the connections to outside stakeholders. ERP systems can run on a variety of computer hardware and network configurations, typically employing a database as a repository for information. This software consists of many enterprise software modules that an enterprise would purchase, based on what best meets its specific needs and technical capabilities. Each ERP module is focused on one area of business processes, such as product development or marketing. Some of the more common ERP modules include those for product planning, material purchasing, inventory control, distribution. As the ERP methodology is the need of the hour, software applications have emerged to help business managers implement ERP in other business activities and may also incorporate modules such as CRM and business intelligence and present them as a single unified package. The basic goal is to provide one central repository for all information to smooth the flow of data across the organization. Hinduja has developed a customised ERP system for Ashok Leyland, the commercial vehicle manufacturer and is implementing the system in ALL's six manufacturing units and 60 locations across India."The system seamlessly integrates all the manufacturing units which provides a 360 degree view of the entire organisation," an HTMT press release said. The ERP system, a major part of ALL's Rs 52-crore IT initiative, involves HTMT developing customised software for various transactions (e-commerce with suppliers and dealers and CRM systems, among others), with Compaq as the hardware vendor and Oracle 8i as the basic software, it was stated. Ashok Leyland the flagship company of The Hinduja Group of companies, is the second largest commercial vehicle manufacturer in India. Ashok Leyland Ltd. has chosen HP as its partner to provide Infrastructure, System, Integration and Management Services. Ashok Leyland is using state of the art HP Alpha Servers and Proliant Series of systems for running their in house built ERP applications.

ASHOK LEYLAND Welcome to the HP Managed Services at Ashok Leyland. You are the 17801547 user browsing this page.

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The following screen appears while clicking on the ERP: Login Screen ASHOK LEYLAND ENTERPRISE SOLUTION User Id

Password

User Name

Database Clear Connect Change Password Exit

Working in ERP during the training session was a wonderful experience and recently the system of the company has shifted to SAP. So I got little exposure to work in SAP also. Ashok Leyland, the unit of Pantnagar manufacturers only Trucks. As soon as the need for material is needed, the request is sent to the vendors and the material is received. Thu supplier itself generates ASN i.e, Advanced Shipping Note and on basis of this, the material is allowed to enter in the plant by checking quantity, price, freight charges etc. mentioned on the invoice. Then this procedure is followed by sending the material to the different concerned shops like chasis shop, Axle shop etc. In the shops the inspection of the material is done and if it does not match the requirement, the material is rejected and hence called Rejected Material Note. After inspection the GRN i.e. Goods Receipt Number is created and submitted to the Finance department. At this stage the invoices are passed in ERP(Code:002,Bill Entry At Finance) by checking quantity, price, rate etc. The total amount in the system should match the amount mentioned on the invoice. Then the invoice is passed after checking all the required things. If the bill is passed properly, the payment is made to the vendor directly or through cheque. Sometimes it happens so that the amount in decimal is left and not paid to the vendor. That is said to be supplementary and are cleared separately in different programme. The invoice is not passed if the requirements are not met. Ashok Leyland deals with different parties and they have different terms of payment. Some suppliers ask for advance payment and hence called HUNDIS. Hundis are always the first priority and due care is taken for their payment. Many suppliers are made payment within 45 days and these are MS Meda parties. The rest of the suppliers are Non-Ms meda and are paid on their due date.
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7.1 HOW THE BILL IS PASSED

1. Bill processing is of two types 2. Production and non production 3. GRN creation through ALMAP for production and non production module for non production modules. 4. With reference to GRN, end user has to enter GRN number in GRN tab, all relevant data will get appear. End user has to ensure below mentioned points: To check supplier name To check supplier address in invoice. With referncce to above point, end user can ensure whether supplier is within state or outside state. With reference to point 3, end user will ensure status of tax i.e, VAT or CST. Supplier code, invoice number and data is also to be ensured. Value of invoice to be matched with system computer value.

LIST OF HUNDI PARTIES

Auto Clutch Ferrolinks Steel Strips Madras Engineering Dighvijay Plastics Paracoat Products Ltd. Fern Equipments Bhaghya Induction Mod Forge Pvt. Ltd. RSB Transmission Ltd. Jai Suspension Kross Manufacturers Pvt. Ltd. Techno Rings Sound Casting Pvt. Ltd. Nelcast Precitech SAS Autocom Engineering India Paul Components Pvt. Ltd. Metal Forms Proxon Tools Lamina Flexible Vindhya Vasini Taurus Flexibles Pvt. Ltd. Mahle IPL Ltd.
79

MRP Autorub Pvt Ltd. Clutch Auto

80

OUTCOME/CONTRIBUTION
Statement Showing Schedule Of Changes In Working Capital 1. There is increase in need for working capital to the extent of 1179.62 from the year 2006 to 2007. 2. There has been decrease in need for working capital to the extent of 3385.40 from the year 2007 to 2008. 3. There has been increase in need for working capital to the extent of 4253.50 from the year 2008 to 2009. 4. There has been increase in need for working capital to the extent of 1508.92 from the year 2009 to 2010. 5. There has been decrease in need for working capital to the extent of 3405.887 from the year 2010 to 2011. 6. Current Ratio: Industry ratio is 1.55. Except in 2007-08 and 2010-11 remaining all years companys current ratio is almost near to industry average ratio. In the year 2006-07 company had power to affect the industry. 7. Liquidty Ratio: Industry ratio is 1.07. In 2006-07 it is higher and then started to decline slowly up to 2007-08. In 2008-09 it started increasing and came near to the industry average and again decline in 2010-11. 8. Net Working Capital of Ashok Leyland is maintained balanced in all years. 9. The portion of current assets in total assets is reducing year by year.

LEARNING FROM SIP

It was a wonderful experience to do training in Ashok Leyland Ltd. in Pantnagar plant. I came to know exactly the meaning of working capital and how it is managed. Liquidity position is maintained through working capital related ratios. Working capital is financed through different short and long term sources. Beside this, I was also taught how to work in ERP of Ashok Leyland. It was a good learning to do work in SAP also and especially at the time of audits. Even I was also given targets to complete and completing them was a great achievement for me. In this way, I learnt how to survive in corporate and deal with pressure.

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CHAPTER 7 RECOMMENDATIONS AND CONCLUSION 7.1 RECOMMENDATIONS

Recommendations can be used by the firm for the betterment of firm after study and analysis of project report on the study and analysis of working capital. I would like to recommend. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds. Company should utilize the fixed assets effectively to generate more revenues and to maximize the profit in the forthcoming years. The level of working capital should be reduced to maximize the earnings of the company and the company has to take measures to control the level of working capital. Company should take control on debtors collection period which is major part of current assets. Company should reduce the inventory holding period with use of minimum inventory concepts. Company has a good liquidity position but it has to take necessary steps to meet the liquidity of current liabilities as by using more efficient software than ERP like SAP. Company should make a policy in respect of investment of excess cash, if any; in marketable securities and overall cash policy should be introduced. Management should develop a credit policy and proper self realization system from customers so that efficient and effective management of accounts receivable can be ensured. This will significantly improve the profitability and liquidity of the company. Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company is increasing sales volume per year which supported to company to increase the market share year by year.

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7.2 CONCLUSION
Working capital management is important aspect of financial management. The study of working capital management in Ashok Leyland Ltd has revealed that the current ratio was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital components which helped the company to manage its working capital efficiency and affectively. Working capital of the company was increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities. Working capital increased because of increment in the current assets is more than increase in the current liabilities. Companys current assets were always more than requirement it affect on profitability of the company. Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. Current assets components shows sundry debtors were the major part in Current assets it shows that the inefficient receivables collection management.

The company has a good operating cycle, liquidity position, and has sufficient funds to repay its liabilities. It is being found that components of working capital like inventory management, receivables management and cash management was managing effectively. It is being found that the production target of the company has been achieved in time; thereby the profit percentage of company is good. Ashok Leyland sales position is also very good. Its excellent performance is attributed to reduced cost of product The objective of the company now is to increase the scale of its business by increasing its profits and the turnover and also by venturing into new line of business. The company is matured one and it has contributed towards the countries growth and development and will also continue to perform and contribute to the whole nation by

83

continuum of existing management policies, checking exchange rate risk, competing with domestic and global players in terms of quality & quantity. To conclude company has sound and effective management of working capital, which helps them to control the cost and increase the profit.

84

REFERENCES
[1] Khan, M.Y. and Jain, P.K. Management Accounting, fifth edition, Noida Tata Mcgraw Hill Publication, 2008. [2] Pandey, I. M. 2008. Finacial Management, Vikas Publishing House Pvt Ltd., New Delhi, 2008. [3] http://www.business-standard.com/india/news/ashok-leyland-pantnagar-rudrapurplant-launch/387497/ [4] http://www.indiaprwire.com/pressrelease/auto/2010030444861.htm [5] http://www.ashokleyland.com/aboutus.jsp [6] http://en.wikipedia.org/wiki/Ashok_Leyland [7] Annual report of Ashok Leyland ltd 2006-07 [8] Annual report of Ashok Leyland ltd 2007-08 [9] Annual report of Ashok Leyland ltd 2008-09 [10] Annual report of Ashok Leyland ltd 2009-10 [11] Annual report of Ashok Leyland ltd 2010-11

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APPENDIX I BALANCE SHEET

PARTICULARS SOURCE OF FUNDS Shareholders Fund Capital Reserves And Surplus Loan Funds Secured Loans Unsecured Loans Deferred Liability Deferred Tax Liability-Net Foreign Currency Monetary Item Translation Difference-Net Total APPLICATION OF FUNDS Fixed Assets Gross Block Less Depreciation Net Block Capital work in progress Investments Current Assets, Loans And Advances Inventories Sundry Debtors Cash And Bank Balances Loans And Advances Less Current Liabilities And Provisions Liabilities Provisions Net Current Assets Miscellaneous Expenditure Total 2006-07 2007-08 2008-09 2009-10 2010-11

1,323.87 1,330.34 1,330.34 1,330.34 1,330.34 17,621.81 20,159.48 33,408.65 35,357.23 38,299.27 18,945.68 21,489.83 34,738.99 36,687.57 39,629.62 3,602.16 2,801.82 6,403.98 1,969.29 1,902.40 6,972.61 8,875.01 2,538.20 3,044.13 16,537.31 19,581.44 2,634.37 38.41 7,115.66 14,923.32 22,038.98 765.48 3,845.36 (124.50) 11,822.97 13,859.67 25,682.64 899.26 4,438.86 -

27,318.95 32,903.03 56,993.21 63,212.89 70,650.40

26,201.97 13,131.64 1,3070.33 2,374.91 15,445.24 2,210.94

29,424.38 14,168.88 15,255.50 5,292.45 20,547.95 6,098.99

49,532.72 15,541.56 33,991.16 9,982.89 43,974.06 2,635.57

60,186.33 17,690.74 42,495.59 5,614.67 48,110.28 3,261.54

66,918.88 20,580.96 46,337.9 3,579.66 49,917.57 12,299.96

10,703.21 5,228.75 4,349.39 6,695.79 26,977.14

12,239.14 3,758.35 4,513.7 8,241.39 28,752.58

13,300.14 9,579.74 880.836 7,895.44 31,656.14

16,382.4 10,220.61 5,189.2 9,604.62 41,396.83

22,089.03 11,852.13 1,795.27 7,936.01 43,672.45

16,516.25 1,042.3 17,558.55 9,418.59 244.18 27,318.95

19,267.08 3,452.31 22,719.39 6,033.187 222.91 32,903.03

18,688.64 2,680.82 21,369.46 10,286.68 96.88 56,993.21

25,920.65 3,686.91 29,607.56 11,789.27 51.74 63,212.83

30,379.47 4,903.26 35,282.74 8,389.71 43.14 70,650.40

86