ON

“Working Capital Management

And
Ratio analysis”
Conducted at
"JBM Auto Ltd.(SPV)"
Faridabad

In partial fulfillment for the degree of

Master of Business Administration (M.B.A)
(Session 2005-2007)

Submitted to: Submitted by:

Controller of Examination, Antima Goyal
Maharishi Dayanand MBA IIIrd Sem.
University Rohtak

DAV INSTITUTE OF MANAGEMENT

FARIDABAD- HARYANA
 ACKNOWLEDGEMENT

A project report is never the sole product of a person whose name appears on
the cover. This is always the help, guidance and suggestions of many in preparations of
such a report. So, I have indebted to several people who have helped me in completing my
project “Working Capital Management And Ratio Analysis”.
I wish to express my sincere thanks to Mr. Rajesh Goyal, Finance Manager,
who gave me the opportunity to complete my summer project at JBM Auto ltd., Ballabgarh
(Haryana), a unit of JBM INDUSTRY. His keen interest, timely and constant
encouragement and generous cooperation gave me confidence and strength to progress
this report.
I am also thankful to all the employees working in finance department for their
continuous help and advice at different times.
I also want to express my special thanks to Mr. Mukesh yadav, HRD Deptt.
JBM for giving me their valuable opinions time to time. I would be failing my duty if I do not
mention my friends and classmates who helped me at various moments, during my project.
Specially, I am thankful to my parents and God for their blessings and showing
me the right way at all moments.
 DECLARATION

I Antima Goyal, the student of M.B.A. III Semester of DAV Institute of

Manegement, Faridabad(Affiliated to M.D. University,ROHTAK) hereby declare that the
Summer Training Report on “WORKING CAPITAL MANAGEMENT” of JBM Auto ltd.
(JBM INDUSTRY) Is my original work and has not been submitted by any other
person.

I also declare that I have done my work sincerely and accurately even then if
any mistake or error had kept in it, I request the readers to point out these errors and guide
me to remove these errors in future.

Presentation Incharge Signature of the Candidate

 PREFACE

Practical work experience is the integral part of individual learning. An

individual who is learning managerial concepts has to undergo this practical experience for
being a future executive.
Master of Business Administration is a two-year programme that inserts
management knowledge in an individual to make that individual completely professional for
which practical experience is must.
JBM AUTO LTD. (JBM INDUSTRY) offered me a project on Working Capital
Management to understand the current position through data provided by them.
I have also gained confidence to interact with different persons working at
reputed position, during the summer training, in preparing the project report. I have tried my
level best effort to make it reliable, compact and accurate organization.
 CONTENTS OF THE PROJECT

1. COMPANY PROFILE

2. RESEARCH METHODOLOGY

3. WORKING CAPITAL AT A GLANCE

4. THEORTICAL ASPECTS OF WORKING CAPITAL MANAGEMENT

a. WORKING CAPITAL MANAGEMENT

b. RECEIVABLES MANAGEMENT

c. INVENTROY MANAGEMENT

d. CASH MANAGEMENT
5. ANALYSIS OF WORKING CAPITAL MANAGEMENT
1. COMPARATIVE P&L ACCOUNT
2. TREND ANALYSIS
3. CASH FLOW ANALYSIS
4. RATIO ANALYSIS
6. FINDINGS AND CONCLUSIONS
7. LIMITATIONS
8. BIBLIOGRAPHY
 JBM GROUP AT GLANCE:-

The journey to excellence began in 1983, when the JBM Group entered the realm of
engineering activities with the establishment of Gurera Gas Cylinder Ltd for the manufacture
of LPG cylinder and entered into auto component industry in 1985 with the inception of Isuki
Auto India. Jay Bharat Maruti Limited a joint venture between JBM and Maruti Udhyog
Limited was formed in 1987 and is the flag ship company of the group today. With the
passing time group kept on setting new standards of excellence in the field of sheet metal
components, welded assemblies and tools manufacturing.
Last one decade has been one of consolidation and diversification. During this period Group
has embraced international system and processes, implementing them at all levels, in every
unit and across all parameters. The equipments and machines in all plants are state-of-art,
manned by highly skilled, professional workforce, ensuring the best quality and timely
delivery. Bolstered by robust bottom line and infrastructure, the range of JBM products is
vast and comprehensive – shaped blanks, sheet metals stampings, welded assemblies,
exhaust system, chassis and suspension parts, rear axles, wheel rims, press tooling, jigs
and fixtures, white goods components, high tensile fasteners, ERW tubes, LPG cylinder….
With support of its partners both local and international, the company stands poised atop a
launch pad to the future. Drive by a commitment to customer satisfaction and an
international standard of quality, JBM has not only won customer confidence but also
industry recognition through several awards and accolades.Fully geared to meet new
challenges, destined to touch newer heights in excellence JBM has ventured into Special
Purpose Vehicle.
JBM AUTO LIMITED (SPECIAL PURPOSE VEHICLE)

Today, India is fifth largest manufacturer of Commercial Vehicle and is further expected to
make impressive growth. With rapid improvement in the infrastructure e.g. road network and
OEM’s focus on improving the trucks and prime movers, market is looking for reliable, fast
moving and cost effective support vehicle like Tippers, Tipping trailers, liquid bulk carriers…

Ceasing the opportunity and unlocking the huge potential JBM decided to venture in to
Special purpose vehicle of which above is a small part. JBM is geared up to compete with
not only local players, unorganized competitions but with the world’s best.

JBM has focused design team, dedicated vendor base, adaptation of latest manufacturing
technologies, experienced and professional team of workmen and engineering to cater
demanding customers providing them global standards, good quality at most competitive
price.

To begin with we have started manufacturing these at Faridabad and are constructing
another plant in Haryana to produce trailer, tipper and other vehicles in the range.
Group Turnover
Group Companies
Gurgaon
Jay Bharat Maruti Limited, Plant-I
Jay Bharat Maruti Limited, Plant-II
Neel Metal Products Limited
Thai Summit Neel Auto Pvt. Ltd.
Tamil Nadu
Neel Industries Private Limited
ThyssenKrupp JBM Private Limited
Greater Noida
JBM Auto Components Limited, Plant-
II
Haridwar
Neel Metal Products Limited
Indore
JBM Auto Components Limited
Faridabad
JBM AUTO Limited,SPV
JBM Auto Components Limited, Plant-I
Jay Bharat Exhaust system Limited
JBM industries Limited
Jaico Steel Fasteners Private Limited
Delhi
Neel Key Safety System Limited
Pune
TSNA Private Limited at Chakan
Nasik
JBM Auto components Limited
Pondichery
Neel Industries Pvt Limited
Customers
Products of JBM auto Ltd(SPV)
 RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also
the comparison of the logic behind the methods, we used in this context of our research
study and explain why we are using a particular method or technique and why using the
others. 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. In this, we
study the various steps that are generally adopted by researcher in studying his research
problem along with the logic behind them.
“The present study is based upon the case study method of research to investigate
procedures at micro level”.
As the study is analyzing probing in nature, thus, entirely based on the secondary data
gathered through the annual reports of the industry. Therefore it provides a historical
perspective of decisions.
 RESEARCH

Research refers to search for knowledge. Research is an original contribution to the existing
stock of knowledge making for its advancement. It is the pursuit of truth with the help of
study, observation, comparison and experiment. In short, the search for knowledge through
objective and systematic method of finding solution of the problem is research. The advance
learner’s dictionary of current English gives the meaning of research “a careful investigation
or inquiry especially through search for new facts in any branch of knowledge”.

RESEARCH METHODS
Research methods may be understood as those methods/techniques that are used for
conduction of research. All those methods which are used by the researcher during the
course of studying his research problem, are termed as research methods . Keeping in
view, the research methods can be put into following three groups:
 In the first group we include those methods which are concerned with the
collection of data. These methods will be used where the data already
available are sufficient to arrive at the required solution.
 The second group consists of those statistical techniques which are used to
establish relationships between the data and the unknown.
 The third group consists of those methods which are used to evaluate the
accuracy of the obtained results.
COLLECTION OF DATA
There are several ways of collecting the appropriate data which differ considerably in
context of money, cost, time and other sources at the disposable of the researcher.
There are two types of data:
• Primary data
• Secondary data

Primary data
Primary data are those which are collected afresh and for the first time, and thus happen to
be original in character. In case of descriptive research, researcher performs survey
whether sample survey or census survey, thus we obtain primary data either through
• Observation
• Direct communication with respondent

• Personal interview

Secondary data
Secondary data are those which have already been collected by someone else and have
already been passed through statistical process.

In this project report, both types of data have been used. Mainly, secondary data is used
such as annual reports of last two years of Grasim industries.
 LIMITATIONS OF THE STUDY

 This report is prepared with the help of secondary data.

 Short time period.
 Casual attitude of management towards trainees.
 No appropriate working seat for trainees.
 No stipend given to trainees by companies hence no responsibility is given to the
trainees.
WORKING CAPITAL AT A GLANCE

 INTRODUCTION
 IMPORTANCE
 APPROACHES
 DECISION CRITERIA
 TYPES
 FEATURES
 DETERMINANTS
 COMPONENTS
 WORKING CAPITAL CYCLE
 INTRODUCTION

A successful sales program is necessary for earning profits by any business

enterprise. Sales do not convert in cash instantly. There is a time lag between the sale of
goods and receipt of cash.
Therefore, there is a need for working capital in the form of current assets to
deal with the problem arising out of the lack of immediate realization of cash against goods
sold. Therefore sufficient working capital is necessary to sustain sales activity.
Working capital is a financial metric which represents the amount of day-by-day operating
liquidity available to a business. Along with fixed assets such as plant and equipment,
working capital is considered a part of operating capital. It is calculated as current assets
minus current liabilities. A company can be endowed with assets and profitability, but
short of liquidity, if these assets cannot readily be converted into cash

Definition of Working Capital:-

 According to C.W. Gestenbergh-

“Working capital is ordinarily defined as the excess of the current

assets over current liabilities”.

 According to Lawrence. J. Gitmen

“The most common definition of working capital is the difference of the

firm’s current assets and current liabilities.”
CURRENT ASSETS:-

In accounting, a current asset is an asset on the balance sheet which is expected to be

sold or otherwise used up in the near future, usually within one year, or one business cycle -
whichever is longer. Typical current assets include cash, cash equivalents, accounts
receivable, inventory, the portion of prepaid accounts which will be used within a year, and
short-term investments.

Major items in Current assets

• Cash
• Bank balances (Saving and short-term time deposits)
• Accounts receivable
• Inventories
• Prepayments
• Accrued income

CURRENT LIABILITIES:-

In accounting, current liabilities are considered liabilities of the business that are to be
settled in cash within the fiscal year.

For example accounts payable for goods, services or supplies that were purchased for use
in the operation of the business and payable within a normal period of time would be current
liabilities.

Bonds, mortgages and loans that are payable over a term exceeding one year would be
fixed liabilities. However the payments due on the long-term loans in the current fiscal year
could be considered current liabilities if the amount were material.
 Working capital management

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term
assets and its short-term liabilities. The goal of Working capital management is to ensure
that the firm is able to continue its operations and that it has sufficient cash flow to satisfy
both maturing short-term debt and upcoming operational expenses

 Definition of working capital management:-

“Working capital management involves the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has sufficient ability to
satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable
and payable, and cash.” -From WWW.STUDYFINANCE.COM

The Importance of Good Working Capital Management

Working capital constitutes part of the Crown's investment in a department. Associated with
this is an opportunity cost to the Crown. (Money invested in one area may "cost"
opportunities for investment in other areas.) If a department is operating with more working
capital than is necessary, this over-investment represents an unnecessary cost to the
Crown.

From a department's point of view, excess working capital means operating inefficiencies. In
addition, unnecessary working capital increases the amount of the capital charge which
departments are required to meet from 1 July 1991.
 Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of
the working capital components. This includes making sure that funds are held as cash in
bank deposits for as long as and in the largest amounts possible, thereby maximising the
interest earned. However, such cash may more appropriately be "invested" in other assets
or in reducing other liabilities.

Working capital management takes place on two levels:

• Ratio analysis can be used to monitor overall trends in working capital and to identify
areas requiring closer management (see Chapter Three).
• The individual components of working capital can be effectively managed by using
various techniques and strategies (see Chapter Four).

When considering these techniques and strategies, departments need to recognise that
each department has a unique mix of working capital components. The emphasis that
needs to be placed on each component varies according to department. For example, some
departments have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the
department's overall management. The needs of efficient working capital management must
be considered in relation to other aspects of the department's financial and non-financial
performance.
 Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques
for the management of working capital. These require managing the current assets -
generally cash and cash equivalents, inventories and debtors. There is also a variety of
short terms financing options which are to be considered.
.

• Cash management – identify the cash balance which allows for the business to
meet day to day expenses, but it reduces cash holding costs.
• Inventory management - identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials and hence
increases cash flow; see Just In Time (JIT) and Economic order quantity (EOQ).
• Debtors management - identify the appropriate credit policy, i.e. credit terms which
will attract customers, such that any impact on cash flows and the cash conversion
cycle will be offset by increased revenue and hence Return on Capital (or vice
versa); see Discounts and allowances.
• Short term financing - inventory is ideally financed by credit granted by the supplier;
dependent on the cash conversion cycle, it may be necessary to utilize a bank loan (or
overdraft), or to "convert debtors to cash" through "factoring".

Decision criteria

By definition, Working capital management entails short term decisions - generally, relating
to the next one year period - which are "reversible". These decisions are therefore not taken
on the same basis as Capital Investment Decisions (NPV or related, as above) rather they
will be based on cash flows and / or profitability.

• One measure of cash flow is provided by the cash conversion cycle - the net number
of days from the outlay of cash for raw material to receiving payment from the
customer. As a management tool, this metric makes explicit the inter-relatedness of
 decisions relating to inventories, accounts receivable and payable, and
cash. Because this number effectively corresponds to the time that the firm's cash is
tied up in operations and unavailable for other activities, management generally aims
at a low net count.

• In this context, the most useful measure of profitability is Return on capital (ROC).
The result is shown as a percentage, determined by dividing relevant income for the
12 months by capital employed; Return on equity (ROE) shows this result for the
firm's shareholders. Firm value is enhanced when, and if, the return on capital, which
results from working capital management, exceeds the cost of capital, which results
from capital investment decisions as above. ROC measures are therefore useful as a
management tool, in that they link short-term policy with long-term decision making.
See Economic value added (EVA).
 TYPES

Working capital can be classified either on the basis of concept or on the

basis of periodicity of its requirement.

1) ON THE BASIS OF CONCEPT

On the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the total Current
assets.

Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current assets over current
liabilities.

Net working capital = Current assets – Current liabilities

2) ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of two types:
A) Permanent working capital - It is that amount of investment which should always be
there in the fixes or minimum current assets like inventory, accounts receivables or
cash balance etc. to carry out business smoothly. Such an amount cant be reduced if
the firms wants to carry on business operations without interruption.

B) Variable working capital - The excess the amount of working capital over permanent
working capital is known as variable working capital. It may also be subdivided into two
parts.
a) Seasonal working capital - Such capital is required to
meet out the seasonal demands of busy periods occurring at stated
intervals.

b) Special working capital - Such capital is required to meet out the extra-
ordinary needs for contingencies. Events like strike, fire, unexpected
competition, rising price tendencies, or initiating a big advertisement
campaign require such capital.
FEATURES:-

1) Working capital is regarded as the excess of current assets over current liabilities.

2) Working capital indicates circular flow of funds in the day-to-day activities of business.
That’s why it is also called circulating capital.

3) Working capital represents the minimum amount of investment in raw materials, work-in
progress, finished goods, stores and spares, accounts receivables and cash balance.
DETERMINANTS

1) Nature of business – The effect of the general nature of the business on working
capital requirements can’t be exaggerated. Rail, roads and other public utility services
have large fixes investment so they have the lower requirements of current assets.
Industrial and manufacturing enterprises, on the other hand, generally require a large
amount of working capital.

2) Production policies – if the production is evenly spread over the entire year, working
capital requirements are greater, because the inventories will be unnecessarily
accumulated during of season period. But if the production schedule favours a varying
production plan as per the seasonal requirements, working capital is required to a
greater extent during a specified season only. The production policies are affected by
so many factors availability of raw materials, labour, stocking facility etc & therefore,
whatever the productions policies are, the firm has to arrange its working capital
requirements accordingly.

3) Proportion of the cost of raw materials to total cost - In those industries where
cost of proportion is a large proportion of total cost of the goods produced,
requirements of working capital will be comparatively large.

4) Length of period of manufacturing – The time which elapses between the

commencement and end of the manufacturing process has an important bearing upon
the requirements of working capital. The manufacturing cycle may be shorter for
certain concerns & longer for others- it depends on the type of the product to be
manufactured, work to be done through machine labour & hand

5) Terms of purchase - If suppliers allow continuous credit, payment can be postponed

for some time and can be made out of the sale proceeds of the goods produced. In
such a case, the requirements of working capital will be reduced.
 6) Dynamic Attitudes – As a company grows, it is logical to expect the large amount of
working capital will be required.

7) Business cycles – Requirement of working capital also varies with the business.
When the price level is up due to boom conditions, the inflationary conditions create
demand for more working capital. During depression also a heavy amount of working
capital is needed due to the inventories being locked unsold and book debts
uncollected.

8) Requirement of cash - The working capital requirements of a company are also

influenced by the amount of cash required by it for various purposes. The greater the
requirement of cash, the higher will be the working capital needs of the company.

9) Dividend policy of concern – If the management follows a conservative dividend

policy the needs of working capital can be met with the retained earnings. The
relationship between dividend policy and working capital is well established and mostly
companies declare dividend after a careful study of their cash requirements.

10) Other Factors - Other factors, which affect the requirement of working capital, are lack
of co-operation in production and distribution policies, transport and communication
facilities, the fiscal and tariff policies of the government etc.
 COMPONENTS OF WORKING CAPITAL:-

Main components of working capital are as follows:

1) Cash – Cash is the most liquid and important component of working capital. Holding
cash involves cash in the sense that the present worth of cash held for a year is less
than the value of cash on today. During inflationary situations as exist today the cost of
holding includes the deterioration in the value of the cash due to inflation. Cash,
therefore, results in enhanced liquidity, but lower profitability. Despite in the cost
involved it is pertinent to hold cash because it facilitates the attainment of some
important motives.

2) Marketable Securities – Though marketable securities provides a such lower yield

that the firm’s operation assets. They serve two useful functions. Firstly, they act as a
substitute for cash, and secondly, are used as temporary investment. Where these
securities are held in lieu of the cash balance, they act as a substitute for transactional
or precautionary balances. Normally, these aren’t used as speculative balances, but
only as a guard against the possible shortage of bank credit.
Marketable securities (as temporary investment) may be held for one of the following
reasons:

• Seasonal or cyclical operations

• To meet known financial requirements. Construction of an additional plant.
• Immediately after the sale of long-term securities.

3) Account Receivable - Though accounts receivable are a vital investment of any

business organization, little analytical work as been done to determine credit policies.
Maintaining account receivable has its cost implications in that the firm’s monetary
resources are tied up. This is of greater significance in the inflationary economy,
because of the depreciation in the value of money. Basically, this is a two-step
account. When goods are shipped, inventories are reduced and accounts receivable is
 created. When payment is made, this account is reduced and the
cash level increases. Accounts receivables are, therefore a function of the volume of
credit sales and the average length of time between sales and collections.

4) Inventory – Inventories represent a substantial amount of a firm’s current assets.

Management of inventories should be efficiently carried out so that this investment
doesn’t become too large, as it would result in blocked capital which could put to
productive use elsewhere. On the other hand, having too small an inventory could
result in loss of sale or loss of customer goodwill. An optimum level of inventory should
therefore be maintained.

WORKING CAPITAL CYCLE

 Working capital cycle indicates the length of time between a firm’s paying for
materials entering into stock and receiving the cash from sale of finished goods. In a
manufacturing firm, the duration of time required to complete the sequence of events is
called operating cycle.

In case of a manufacturing company, the operating cycle is the length of time

necessary to complete the following cycle of events: -

1) Conversion of cash into raw materials

2) Conversion of raw materials into work-in-progress
3) Conversion of work-in-progress into finished goods
4) Conversion of finished goods into accounts receivable
5) Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period depending upon the
nature of the business & type of product etc. the duration of the operating cycle for the
purpose of estimating working capital is equal to the sum of duration allowed by the
suppliers.

Working capital cycle can be expressed as:

R+W+F+D-C

Where,
R=Raw Material Storage Period = Average Stock of Raw Material / Average Cost of
production per day

W=Work in Progress Holding Period = Average Work in Progress Inventory/Average Cost of

Production per day

F=Finished Goods Storage Period = Average Stock of Finished Goods / Average. Cost of
Goods Sold per day

D=Debtors Collection Period = Average Book Debts/

Average Credit Sales per day

C=Credit Period Availed = Average Trade Creditors/Average Credit Purchases per day

OPERATING CYCLE OF MANUFACTURING BUSINESS

 REALIZATION Accounts SALES
Receivables

Cash Finished Goods

PURCHASES PRODUCTION
PRODUCTION PROCESS
Raw Materials Work-in-Process
PROCESS
 THEORTICAL ASPECTS OF WORKING CAPITAL
MANAGEMANT

NATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets.

3) It is concerned with the decisions about the composition and level of current liabilities.

Policies regarding to Profitability

Liquidity and Risk

Composition of Level Composition of

Level of Current
of Current Assets
Liabilities
 GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and the interrelationship that
exists between them.

Current assets refer to those assets, which in the ordinary course of business
can be converted into cash within one year. Major current assets are:

 Cash
 Marketable securities
 Accounts receivable
 Inventory.

Current liabilities are those liabilities, which are intended, at their inception, to
be paid in the ordinary course of business within a year, out of the current assets or
earnings of the concern. Current liabilities are:

 Accounts payable
 Bills payable
 Bank overdraft
 Outstanding expenses.
Working capital is that portion of firm’s assets which is financed by long-
term funds. Interaction between current assets and current liabilities is the main theme
of the theory of working capital management.
Goal of working capital management is to manage the firm’s current assets and
liabilities in such a way so that a satisfactory level of working capital is maintained.
The second important segment of working capital management is deciding the optimum
level of investment in various current assets. There are three important current assets
cash, accounts receivables and inventory

RECEIVABLES MANAGEMENT

INTRODUCTION

The term receivable is defined as “debt owed to the firm by customers arising from
sale of goods or services in the ordinary course of business”. When a firm makes an
ordinary sale of goods or services and doesn’t receive payment, the firm grants trade credit
accounts receivable, which could be collected in the future.
Receivables Management is also called trade credit management.

OBJECTIVE

The objective of receivables management is “to promote sales and profits

until that point is reached where the return on investment in further funding receivables is
less than the cost of funds raised to finance that additional credit”.
 BENEFITS

Investments in receivables involve both benefits and costs. The extension of

trade credit has a major impact on sales, costs and profitability. Other things being equal, a
relatively liberal policy and, therefore, higher investments in receivables, will produce larger
sales. However, costs will be higher with liberal policies than with more stringent measures.
Therefore, accounts receivables management should aim at a trade-off
between profit (benefit) and risk (cost).

CREDIT POLICIY

The credit policy of a firm provides the framework to determine:

1) Credit standards
2) Credit terms
3) Credit Analysis

Credit Standard
The term credit standards represent the basic criteria for the extension of credit to
those customers to whom goods could be sold on credit. If a firm has more slow-paying
customers, its investment in accounts receivables will increase. The firm will also be
exposed to higher risk of default.

Credit Terms
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.
Credit Analysis
Credit analysis and investigation is an aspect of credit policies of a firm. Two basic
steps are involved in the credit investigation process:
Obtaining credit information
B. Analysis of credit information

It is on the basis of credit analysis that the decisions to grant credit to a customers as
well as the quantum of credit would be taken.

INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the principal item in the working capital of the

majority of trading and industrial companies. In inventory we include raw materials,
finished goods, work-in-progress, supplies and other accessories. To maintain the
continuity in the operations of business enterprises, a minimum stock of inventory is
required.

Management of inventory is designed to regulate the volume of investment in

goods on hand and the types of goods carried in stock to meet the needs of production
and sales while at the same time, the investment in them is to be kept at a reasonable
level.
CONCEPT

The inventory management” is used in two ways- Unit Control and Value
Control. Production and purchase officials use this word in term of unit control whereas in
accounting this word is used in term of value control .Investment in inventory is one the
largest asset item of business enterprises particularly those engaged in manufacturing.

The proper management and control of the capital invested in the inventory
should be the prime responsibility of accounting department because resources invested in
inventory aren’t earning a return for the company. Rather, on the other hand, they are
costing the firm money both in terms of capital costs being incurred and loss of opportunity
income that is being foregone.

OBJECTIVES

The basic managerial objectives of inventory control are two-

1) The avoidance of over-investment or under-investment in inventories.

2) To provide the right quantity of standard raw material to the production department at the
right time.
TECHNIQUES OF INVENTORY CONTROL

1) The Selective Inventory Control or ABC System of Control

2) Maximum Stock Limit
3) Minimum Stock Limit
4) Re-ordering Level
5) Economic Order Quantity
6) Just In Time
7) Supply Chain Management
 ABC System of Control:-

The various inventory items are, according to this system, categorized into three classes-
I. A
II. B
III. C

The item included in-group involve the largest investment. Therefore,

inventory control should be the most rigorous and intensive and the most sophisticated
inventory control techniques should be applied to these items. The C group consists of
items of inventory which involve relatively small investments although the numbers of
items is fairly large. These items deserve minimum attention. The B group stands
midway. It deserves less attention than A but more than C. It can be controlled by
employing less sophisticated techniques.

Maximum Stock Limit:-

This represents the quantity if inventory above which it should not be allowed to be kept.
The following formula may be applied to calculate the maximum stock-

Maximum Stock = Reorder Level – Minimum Consumption during Minimum

Lead Time + Lot Size.

Minimum Stock Limit:-

This represents the quantity below which stock should not be allowed to fall. The
main purpose of this level is to ensure that production isn’t held up due to storage of any
material.

Minimum Stock Limit = Re-order Level – Normal storage during Lead Time
Re- Ordering Level:-

It is the point at which if stock of the material in store reaches, the storekeeper
should initiate the purchase requisition for fresh supplies of the material. This level is fixed
somewhere between the maximum and minimum levels in such a way that the difference of
quantity of the material between the reordering level and the minimum level will be sufficient
to meet requirements of production upto the time of fresh supply of the material.

The reorder point = Lead time in days * Average daily usage of inventory

Economic Order Quantity:-

It is the quantity of inventory, which can be reasonably ordered at a time and

purchased economically. It is also known as Standard Order Quantity or Economic Lot Size.
By definition “Economic Order Quantity is that size or order at which the total cost of
ordering and holding are the minimum.

In determining the economic order quantity the problem is one to set a

balance between two opposing costs, namely, namely ordering costs and carrying costs.
The ordering costs are basically the costs of getting an item into the firm’s inventory.

Carrying costs, sometimes also known as holding costs are the costs of
possessing the materials. These costs are combined known as “Associated Costs”.

Hence, the management tries to reconcile them and this reconciliation point is
economic order quantity.

Just In Time:-

Just-in-time inventory system is designed to ensure that materials or supplies arrive at a

facility just when they are needed so that storage and holding costs are minimized. The just-
in-time system requires considerable cooperation between the supplier and the customer.
The customer must specify what will be needed, when, and in what amounts. The supplier
must be sure that the right supplies arrive at the agreed-on time and location.

• Just In Time (business), an inventory strategy that reduces in-process inventory

 • Just-in-time compilation, a technique for improving the
performance of bytecode-compiled programming systems
• Just in Time (Code Lyoko episode), an episode of the French animated television
series Code Lyoko
• Jit (Corvette), An abbreviation for "Jawvette", also known as a Corvette.

Supply chain management:-

Supply chain management (SCM) is the process of planning, implementing, and

controlling the operations of the supply chain with the purpose to satisfy customer
requirements as efficiently as possible. Supply chain management spans all movement and
storage of raw materials, work-in-process inventory, and finished goods from point-of-origin
to point-of-consumption. The term supply chain management was coined by consultant
Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.
JBM AUTO Ltd. (SPV)
BALANCE SHEET AS ON 31 MARCH, 2007

Schedul
e As at
31st march
2007
(Amt in Rs.)

1. SOURCES OF FUNDS
1 Shareholder's funds 1

Capital -
93860
Reserve & Surplus 0
93860
0

1374855
Secured Loans 2 5
Unsecured Loans
Inter-Unit Account 74421425
8910858
0
2. APPLICATION OF FUNDS
1 Fixed Assets 3
827573
A. Gross Block 1
68965
Less: Depreciation 9
758607
Net Block 2
268104
Capital work in Progress 7
2 Current assets, loans & advances 4
4192254
a. Inventories 0
5762805
b. Sundry Debtors 3
22204
c. Cash & Bank Balances 6
1455755
d. Inter Unit Account 1
2071774
e. Loans & Advances 7
13504793
7
Less: Current Liabilities & Provisions
 5

Current Liabilities 56206476

7884146
Net Current assets 1

Deferred Tax Assets (Net) -

3 MISCELLANEOUS EXPENDITURE
(to the extent not written
off or adjusted) 6
8910858
Total 0

-
JBM AUTO LIMITED (SPV)
Profit & Loss Account For The Period 31st MARCH, 2007

Schedul
e As at
31st march
2007
(Amt in Rs.)
INCOME
34022321
Sales 7 8
3449694
Less : Excise Duty 2
30572627
6
22284
INCREASE (DECREASE) IN WIP 9
139814
Other Income 3
30734726
8
EXPENDITURE
28327374
Material & Manufacturing expenses 8 3
1220299
Employees' remuneration and benefits 9 1
936391
Adminsitrative expenses 10 3
193983
Financial Charges 11 1
30678047
8

56679
Profit before depreciation & 0
Amortisation
 Less:
Depreciation
56679
Profit before tax 0

As at
31st march
2007
(Amt in Rs.)

b. Reserve & Surplus

37181
OPENING BALANCE 0
General Reserve
Add : Transferred from Profit & Loss Account
Securities Premium Account
56679
Profit & Loss account 0

93860
0

a) Vehicle Loans
1 ICICI Bank Limited
2 Citicorp
3 Stanchart Bank
4 Citi Bank
b)Other loans
1. Cash Credit from Bank from banks
1374855
-HDFC 5
2 Forign Currency Loan
- External Commercial Borrowing
c) Deferred Payment Credit

1. Sale Tax Intrest free loan -

1374855
5

a. Inter Corporate Deposit(JBES)

Interest accrued on ICD

As at
31st march
2007
(Amt in Rs.)
 Sheet
Metal
a. Inventories
(as taken, valued and certified by the
Management)
2644996
Raw Material 5
1446863
Stock in process 9
100393
Stores &spares 6
Scrap
4192254
0

b.Sundry Debtors(Unsecured)
Debts outstanding or more than six months

- Considered Good -

Less: Provision for Doubtful Debts -

-
Other Debts, Considered Good

-
c. Cash & Bank Balances
12204
Cash in hand 6
With scheduled banks in :
Current Account
Fixed Deposits Account including
10000
interest accrued (under banks' lien) 0
22204
6

Less
: Unclaimed Dividends
22204
Net Cash & Bank Balances 6

d. Loans & Advances (Unsecured,Considered

good)
Advances recoverable in cash or
196840
in kind or for value to be received 0
159895
Advances to suppliers 2
105500
Security deposits 0
1604801
Balance Of Modvat/ Cenvat 3
Balances With Excise Authority 47382
Advance Income Tax (Net of Provision)
2071774
7

31st march
2007
(Amt in Rs.)

5070188
Sundry Creditors 5
550459
Other liabilities 1
Interest accrued but not due
5620647
6

Proposed Dividend
Corporate Dividend Tax
5620647
6

(to the extent not written off or adjusted)

Exibition expenses

Sales
33963296
Finished Goods 1
59025
Other Sales 7
Job Work/ Other Receipts

Profit on sale of Fixed Assets -

Interest received
34022321
8
Other Income
4196
Miscellaneous Income 2
2370
Notice Pay 9
133247
Fright Outward Received 2
139814
3

As at
31st march
 2007
(Amt in Rs.)

27192500
Raw material Consumed 5
295977
Stores Consumed 4
514432
Manufacturing Expenses 0
251901
Power & Fuel 5
6946
Packing Material 1
65616
Machinery repair & maintenance 8
28327374
3

Opening Stock :-
1424579
Work in process 0

Finished goods -

Scrap -
1424579
0

Closing Stock : -
1446863
Work in process 9
Scrap
1446863
9
(2228
Increase in Stocks 49)
28305089
4

As at
31st march
2007
(Amt in Rs.)

1076940
Salary & wages 6
85865
Contribution to ESI, PF & other Funds 2
57493
Staff & Workers Welfare 3

Directors' Remuneration -
 12202991

167304
Travelling & Conveyance 3
38639
Communication in Expenses 1
25650
Printing & Stationary 8
420000
Rent (including Land Lease Rent) 0
21116
Rates & Taxes 5
9127
Insurance 7
Repair & Maintenance
513
Building 5
36417
Others 4
Auditors' Remuneration

Audit fee -

Tax Audit Fees -

902
Others 7
1180
Legal & Professional 0
30055
Vehicle Running & Maint. 6
16121
Advertisement & Business Promotion 7
Bad Debts Written off
Bad & Doubtful Debts
Loss On Sale Of Vehicle
Loss On Sale Of Assets Other Than Vehicles
Exchange Fluctuation
Demerger Expenses
131381
Freight Outward 8
19758
Bank Charges 2
18222
Miscellaneous Expenses 0
936391
3

Interest - Term Loans -

193907
Interest – Banks 4
Interest – Others 757
193983
1

JBM AUTO LIMITED (SPV)

GROUPING FORMING PART OF PROFIT & LOSS A/C.
For the year
31st march
2007
(Amt in Rs.)

SALES - JOB WORK / OTHER RECEIPTS

Sales- Job Work
Other Receipts
Tool Modification/ Other Charges
SERVICE TAX RECOVERED
SERVICE TAX RECOVERED-CESS
Sales - Job Work - Stock Transfer

SALES - FINISHED GOODS

30409542
Sales – Components 7
Sales Return Finished Goods
3463504
Excise Duty Recovered 0
9643
Excise Duty Recovered-Sec&Higher Edu 5
80605
Excise Duty Recovered-cess 9
33963296
1

SALES OTHERS
50744
Sales – Scrap 0
8119
Excise Duty Recovered - Scrap 1
162
Excise Duty Recovered - Cess Scrap 6
Sales Others
59025
7
 MISCELLANEOUS INCOME
Cash Discount Received
Insurance Claim Received
Liabilities W/Back W/Off
Sundry Balance W/Back / W/Off
Shortage & Excess
4196
Miscellaneous Income 2
Profit On Sale Of Fixed Assets

Rent - Tube investment -

Rent on vehicle
Exchange Fluctuation - Income
4196
2
RAW MATERIAL CONSUMED
1090025
Opening stock 7
28747471
Add: Purchases 3

Less 2644996
: Closing stock 5
Stock in Transit
27192500
5
RAW MATERIAL PURCHASES
Raw Material Expenses
1054213
Raw Material – Sheet 4
191038
Raw Material – Pipe 2
Raw material- Stock Transfer Sheet
478056
Raw material- Paint 6
10669
Raw Material – Others 4
408023
Raw Material-Hyd 6
863607
Less: Sales - Raw Material 0
27309820
Raw Material - Components Tools & Dies 5
Stock Transfer-in transit
Sales - Raw Material- Stock Transfer
Material Procurement Expenses
108936
Freight & Cartage Inward 2
Others
47584
Custom Duty - Raw Material 0
Samples 27364
28747471
3

MANUFACTURING EXPENSES
80342
Job Charges – Outside 5
433789
Job Charges – contractor 5
Job Charges -Sales JBM FBD
300
Design & Drawing Charges 0
Machinery Hire Charges
514432
0

CONSUMABLE EXPENSES
8040
Opening Stock 6
378904
Add: Purchases 3
386944
9
90967
Less: Closing Stock 5
295977
4

CONSUMABLES PURCHASED
6137
Consumables - Oil & Lubricant 6
3099
Consumables - Paint, Chemical, Thinner & AdhESIves 9
182586
Consumables - Welding & Gases 7
19830
Consumables - Hand Tools & Abrasives 8
Consumables – Hardware
10164
Consumables - Safety Items 6
52
Consumables - MEASURING INSTRUMENTS 2
157032
Consumables – Others 5
Custom Duty - Consumables
Clearing Charges- Consumables
378904
3

REPAIR & MAINTENANCE - PLANT & MACHINERY

Opening stock 973
 4
74069
Add : Purchases 5
75042
9
9426
Less : Closing Stock 1
65616
8

REPAIR & MAINTENANCE - P&M PURCHASE

72723
Repair & Maintenance - Plant & Machinery 0
1346
Repair & Maintenance - Electric Installation 5
Repair & Maintenance - Tools & dies
Repair & Maintenance - Stock Transfer
Clearing Charges- Spares
74069
5

REPAIR & MAINTENANCE OTHERS

9294
Repair & Maintenance - General Electrical 4
6183
Repair & Maintenance - Office & Furniture 3
7855
Repair & Maintenance - Computers 3
13084
Repair & Maintenance - Others 4
36417
4

AUDIT FEES
Audit Fees – Statutory
Audit Fees - Tax Audit
Audit Fees - Company Law Matter
Audit Fees – Certification
902
Audit Fees - Out Of Pocket Expenses 7
902
7

EMPLOYEE COSTS & BENEFITS

Salaries & Allowances
90
Wages 0
498247
Salary 7
13798
Production Incentive - Worker 5
Production Incentive - Staff
Special Allowance 1250976
196869
House Rent Allowance 9
51530
Conveyance Allowance 2
Deputation Allowance

Stipend -
Amenities
Bonus
Ex – Gratia
1287
Leave Encashment 5
Compensation / Notice Pay
9594
Leave Travel Assistance 1
Leased House Expenses
26950
Gratuity 1
26928
Medical Reimbursement 6
Gift
Group Insuarnce
6660
Group Mediclaim Insurance 7
4321
Group Insurance Policy 1
Contractual Wages
73117
Contractor Wages 4
18449
Security Charges 8
23997
House Keeping & Sanitation Expenses 4
1076940
6

CONTRIBUTION TO ESI, PF ETC.

31965
Employers Contribution To FPF 6
35873
Employers Contribution To PF 0
11343
Employers Contribution To ESI 7
Employers Contribution To Welfare Fund
Link Insurance PF(LIC)
15
Link Insurance PF 5
5671
Administrative Charges PF 5
ESI Deducted From Contractors 5532
 3
PF Deducted From Contractors
4536
Employees Contribution To PF 4
Employees Contribution To ESI
85865
2

STAFF & WORKERS WELFARE

4163
Staff & Workers Welfare 1
1146
Uniform Expenses 2
1629
Medical Expenses 8
20686
Food & Beverage 9
Staff Recuitment/ Training Expenses
19246
Staff Recruitment Expenses 7
10620
Staff Training Expenses 6

57493
3

DIERCTORS' REMUNERATION
Directors Remuneration
Directors Sitting Fees

TRAVELLING & CONVEYANCE

68300
Travelling - Domestic Employees 3
3009
Travelling - Domestic Others 7
Travelling - Domestic Directors
69983
Travelling – Foreign 6
Travelling - Foreign Directors
25953
Conveyance 2
57
Taxi Charges 5
167304
3

RATES & TAXES

21116
Rates, Fees & Taxes 5
Filing Fees
Listing Fees
LAD Paid
Sales Tax Paid
Testing Fees
Calibration Charges
Service tax Paid on Good Tranport
Service tax -Cess Paid on Good Tranport
Sales Tax Paid
LAD Paid
21116
5

LEGAL & PROFESSIONAL CHARGES

750
Legal & Professional Charges - Retainership 0
430
Legal & Professional Charges 0
Stamp Paper Expenses
1180
0

VEHICLE RUNNING & REPAIR

20403
Vehicle Running & Repair 1
Drivers Salary
9652
Vehicle Hire Charegs 5
30055
6

ADVERTISEMENT & BUSINESS PROMOTION

800
Advertisement & Publicity 0
5332
Business Promotion 4
8989
Entertainment 3
1000
Exhibition Expenses 0
16121
7

PACKING MATERIAL CONSUMED

Opening Balance -
6946
Add : Purchase 1

Closing Stock -
6946
1
PACKING EXPENSES
Packing Expenses - Corrugated
Packing Expenses - Polythene
6946
Packing Expenses – Others 1
Packing Charges Recovered
6946
1

FREIGHT & CARTAGE OUTWARD

412
Freight & Cartage Outward - NCR 0
127559
Freight & Cartage Outward - Export 4
3410
Export Expenses 4
131381
8

POWER & FUEL

80236
Electricity _State Electricity 6
163993
Fuel DG Set 2
6663
Fuel - Logistics & Others 4
1008
Water Charges 3
251901
5

INTEREST ON TERM LOAN

Interest - Term Loans
Interest - Vehicle Finance

OTHER FINANCIAL CHARGES

Bank Charges – BG
6088
Bank Charges 9
Limit Processing Charges
46
Exchange Fluctuation - Expense 7
13622
Bank Charges – LC 6
19758
2
BANK INTEREST
180000
Interest - Cash Credit 0
Interest - FCNR (B)
13907
Interest - LC Usance 4
193907
4

OTHER INTEREST
Interest - ICD'S
75
Interest – Others 7
75
7

COMMUNICATION EXPENSES
20199
Telephone Expenses 5
15536
Cellular Expenses 1
318
Internet / E-Mail Expenses 0
59
Postage Expenses 6
88
TELEPHONE/CELL SET EXPENSES 1
2437
Courier Charges 8
38639
1

PRINTING & STATIONERY

27
Computer Stationery 0
4041
Computer Consumables 2
4115
Photocopy Charges 7
Legal Forms
17466
General Stationery 9
25650
8

RENT
420000
Lease Rent 0
Lease Rent – Others
420000
0

MISCELLANEOUS EXPENDITURE
Meeting Expenses
137
Shortage & Excess 1
907
Newspapers, Books & Periodicals 0
Prior Period Expenses
Charity & Donation
ISO & QS Expenses
Agm Expenses
Meeting Expenses
Shareholders Service Expenses
7987
Diwali Expenses 7
Liabilities W/Back W/Off
Auditor's expenses m
4040
Commission & Brokerage 9
422
Membership & Subscription 8
4726
Miscellaneous Expenditure 5
18222
0

EXCISE DUTY PAID

3484722
Excise Duty Paid 0
134941
Excise Duty Recovered - Raw Material Sales 9
2699
Excise Duty Recovered cess 2
Service Tax Paid
Service Tax Cess Paid
102613
Cess Paid 3
3449694
2

INSURANCE PREMIUM
1963
Insurance Premium – Fixed Assets 4
4444
Insurance Premium – Stock 5
Insurance Premium - Vehicle
243
Insurance Premium - Transit 2
2476
Insurance Premium - Others 6
9127
7
 METHODS OF WORKING CAPITAL ANALYSIS

There are so many methods for analysis of financial statements but BHIWANI TEXTILE
MILL used the following techniques:-

 Comparative size statements

 Trend analysis
 Cash flow statement
 Ratio analysis
A detail description of these methods is as follows:-

COMPARATIVE SIZE STATEMENTS:-

When two or more than two years figures are compared to each other than we called
comparative size statements in order to estimate the future progress of the business,it is
necessary to look the past performance of the company.These statements show the
absolute figures and also show the change from one year to another .

Benefits of this method to the JBM:-

 To indicate the trends,these statements show the change in production, sales, and
expenses.
 To make the data simple and more understandable.

TREND ANALYSIS:-

To analyse many years financial statements BTM uses this method.This indicates the
direction on movement over the long time and help in the financial statements.
Procedure for calculating trends:-
1. Previous year is taken as a base year.
 2. Figures of the base year are taken 100.
3. Trend % are calculated in relation to base year.
Benefits :-

 It is beneficial to find out the long run changes .

 It is helpful in future forecasting.

CASH FLOW STATEMENT:-

Cash flow statements are the statements of changes in the financial position prepared on
the basis of funds defined in cash or cash equivalents. In short cash flow statement
summaries the cash inflows and outflows of the firm during a particular period of time.

Benefits for the JBM:-

 To prepare the cash budget.

 To compare the cash budgets .
 To show the position of the cash and cash equivalents.

RATIO ANALYSIS:-

Ratios provide very useful tools for the manager to assess the organization by making two
basic types of comparisons. First, the analyst can compare a present ratio with past (or
expected ) ratios for the organization to determine if there has been an improvement or
deterioration or no change over time. Second, the ratios of one organization may be
compared with similar organizations or with industry averages at the same point in time
making sure that "apples are compared with apples and oranges with oranges." This is a
type of "benchmarking" so that one may determine whether the organization is "average" in
performance or doing better or worse than others.
 Ratios are simple measures or comparisons of one thing to another.
These tools allow vital comparisons that are not possible when dealing with a single
number. The insights gained by ratio analysis will assist in gaining vital understanding but
ratios will never give answers, only clues. Ratios are found in all types of organizations
from sports to education to business to the military to . . . . You are probably well aware of
some and have been using them without really thinking that you were actually using ratio
analysis. For example, when you were looking at different colleges, did you consider the
student - faculty ratio? Have you talked about the average yards per carry that a particular
back in football has? How about miles per gallon that you are getting with your car?

FINANCIAL RATIOS

Perhaps the most commonly used ratios in business are financial ratios. These are
developed by use of the income statement and the balance sheet. No one ratio will give
sufficient information to judge the financial condition and performance of the firm. Other
factors such as any seasonal businesses, accounting differences and the like must also be
considered. Again, ratio analysis will give clues but not answers. Financial ratios cover
four areas of concern as follows:

Liquidity --the ability to have Debt (Leverage)-- reveal the

 cash ready when needed and relationship of your
sources of
these include capital such as
Current Ratio
Quick (Acid-test) Ratio Debt to Equity
Liquidity of Receivables Debt to Assets
Average collection period Debt to Net Worth
Receivables turnover
Aging of Accounts Payable
Inventory Turnover

The liquidity and leverage (debt) ratios represent as assessment of the risk of the company.
Activity (profitability) ratios are measures of the return generated by the assets of the
company.

• Only a few ratios will be covered in this note. This note was first prepared in 1986 by
Dr. W. Blaker Bolling, Professor of Management, Marshall University, for classroom
use only. Comments and suggestions are welcomed. Revised in January, 1992.
Revised with assistance from graduate assistants Amy McHenry and Sunil Anand in
June, 1996.

Profitability (Activity) – measure profit Coverage -- indicate ability to pay

in relation to sales, assets, or some other your debts given the amount of
base as indicators of efficiency such as money coming in such as

Profitability to Sales Times Interest Earned

Gross Profit Margin Cash Flow to Debt Maturities
Net Profit Margin Doomsday Ratio
Profitability to Investment
Rate of Return on Equity
Return on Assets
Turnover Ratio

Two terms often used in conjunction with financial ratios are

 Working Capital = Current Assets - Current Liabilities

This simply gives a measure of how much capital (money) will be

left after the bills are paid.

Cash Flow = Net Income + Depreciation

This simplified look at cash flow gives a measure of the actual cash
on hand since depreciation is an accounting method to estimate the
use of resources over time but does not involve actual cash. More
detailed cash flow analysis is possible.

Liquidity Ratios:

Current Ratio

This ratio is a measure of the ability of a firm to meet its short-term obligations. It is perhaps
the best known measure of financial strength at a given point in time. In general, a ratio of 2
to 3 is usually considered good. Too small a ratio indicates that some potential difficulty in
covering obligations may exist. A high ratio may indicate that the firm has too may assets
tied up in current assets and is not making efficient use to them.

Current Ratio = Current Assets

Current Liabilities

Current Ratio= 135048/56206

 =2.4

Quick (Acid-Test) Ratio

The Quick (or Acid-Test) Ratio is the same as the current ratio except that it excludes
inventories from the current assets. Inventories are usually the least liquid portion of the
current assets and may be difficult to dispose of -- especially if they are slow-moving and/or
become obsolete. A typical quick or acid-test ratio would be about 1.0 for American
industries. However, this ratio must be used with caution as certain industries may carry a
great deal of inventory and others very little so this should be compared to others in the
same business.

Quick Ratio = Current Assets - Inventories

Current Liabilities

Quick Ratio=93125/56206

=1.7

Average Collection Period

This ratio simply indicates how long the average account is outstanding in days. It measures
how efficiently you collect money due you from your customers. If this indicates that
payments are taking a long time to collect, then collection/billing procedures should be
reviewed. On the other hand, too short a period could cause customers to move to another
supplier that has more reasonable collection policies.

Average Collection Period = Receivables x Days in Year

Annual Credit Sales

=57628 x 12/ 340223

=2 months
The "days in year" would be 365 if your company is open all the time.
More frequently, it is less.

Average Receivables Turnover

This ratio simply indicates how may times a year the accounts turn over. Please note this
ratio is the inverse of the average collection period. Some organizations will prefer this ratio,
others will prefer using the previous one.

Average Receivables Turnover = Annual Credit Sales

Receivables

=340223/57628

=5.9 times

Average Age of Payables

This ratio will indicate how long it is taking the average account to be paid by the firm. This
may then compared to industry averages and management goals. An 86 would, for
example, indicate that the organization is taking almost three months to pay the bills and
probably not taking advantage of various discounts offered to prompt payers. Note that this
ratio is very useful in credit checks of firms applying for credit. Note also that others may be
checking your firm's average age of payables and this could affect your credit ratings and
your reputation with suppliers!

Average Age of Payables = Accounts Payable x 365

Annual Purchases

=50702 x 12/287475
 =2 months

Inventory Turnover

This widely used ratio tells you how fast your inventory is moving. It is an indicator of the
liquidity of inventory, since it tells the rapidity with which the inventory is turned over into
receivables through sales. The norm for American industries is about 9 but this will vary
from industry to industry. The higher the ratio, the more efficient the inventory management
of the firm, but too high a ratio could indicate a level of inventory that is too low with
resulting frequent stockouts and the potential of losing customers. It could also indicate
inadequate production levels to meet customer demand. Caution must be used with this
ratio (as with all of the others) since ratios reveal hidden meaning and must be interpreted
correctly. A ratio by itself will never give an answer! The preferred way to calculate this ratio
is

Inventory Turnover = Cost of Good Sold

Average Inventory

=56949/26450

=2 times

Note: Average Inventory = (beginning inventory + ending inventory) / 2

Since it is often impossible or difficult to obtain beginning and ending inventories and/or
abbreviated financial statements may not show cost of goods sold, a more frequent
(common) way to estimate inventory turnover is

Inventory Turnover = Sales

Inventory

=340223/41923

=8 times
Debt (Leverage) Ratios:

Debt to Assets

This ratio is often called the debt ratio since it compares what is owed to the value of the
assets used by the organization. This monitors use of debt used to build your business. It
tells what percentage of your firm's assets are financed by borrowing. A firm reporting a
debt ratio greater that 100% is functionally bankrupt. As long as some equity exists, this
ratio has to be less that 100%. What may be considered an "acceptable" debt ratio changes
from time to time as well as from industry to industry so be very careful in using this ratio.

Debt to Assets = Total Liabilities x 100

Total Assets

=69955 x 100/145315

=48.14%

Profitability (Activity) Ratios:

Gross Profit Margin

This shows the average amount of profit considering only sales and the cost of the items
sold. This tells how much profit the product or service is making without overhead
considerations. As such, it indicates the efficiency of operations as well as how products are
priced. Wide variations occur from industry to industry. For example, movie theater
concessions may exceed 90% while retail grocery margins may only be a few percentage
points.

Gross Profit Margin = Sales - Cost of Goods Sold x 100

Net Sales
 =283274 x 100/340223

=83.26%

EFFICIENCY RATIOS

Efficiency ratios assist in telling if your operations are providing the most benefit for the
lowest cost. Any deviation from past performance, budget, or industry averages in efficiency
should be addressed. Efficiency is merely a relationship of output to input and can be
measured in any area of the business! Efficiency in not the same as effectiveness,
which is a measure of whether or not the right outcome was achieved given the
inputs. Something might be very efficient but not very effective and vice versa. Ideally, one
should strive for the optimal relationships where operations are appropriately effective and
very efficient, a very difficult task given that these measures often pull in opposite directions.
For example, finding a cheaper raw material may save money on one end of the operations
but could result in higher costs in production with rejects and rework plus the later costs
associated with dissatisfied customers, warranty work and the like. Cutting staff has been
popular with recent downsizing moves by many organizations but will they retain ability to
provide the level of service that customers require? Will the remaining workforce become
demoralized and less effective and less efficient? Ratio analysis will assist the manager in
making these vital decisions to perform a balancing act that is an art rather than a science.

Benefits of ratio analysis to JBM:-

1. Helpful in analysis of financial statements.
2. Helpful in comparitive study.
3. Helpful in locating the weak spots of the JBM.
4. Helpful in forecasting.
5. Estimate about the trend of the business.
6. Fixation of ideal standards.
7. Effective control.
8. Study of financial soundness.
 FINDINGS:-
• In JBM Auto Ltd. They have overdraft facility of 50lacs.
• Debtors are allowed 2 months credit.
• For working capital management they have conservative approach that is the all
liabilities are financed through long term funds.
• They have sufficient current assets to pay for the current liabilities.
• They don’t have share capital they transfer the fund through inter unit.

CONCLUSION
• The ideal current ratio is 2:1. The greater the ratio better will be the short term
solvency of the firm and safer will be the interest of the short term creditors. so from
this we can say the current ratio of the JBM is ideal.
• The quick ratio of JBM is 1.7:1. The ideal quick ratio of 1:1 is considered a standard
ratio the higher the ratio more will be the short term solvency of the business. So
quick ratio of JBM is ideal
• Average collection period of debtors is two months. This indicates that debts are
realized in less time.
• Inventory turnover ratio is two times this indicated that goods have not been retained
in the godown for a longer period.
• Gross profit ratio is 83.26%. this is a sign of efficient management.
• Average payable period of JBM is two months. This indicates that creditors have
followed liberal credit policy.
• Average receivable turnover ratio is 5.9 times. This means that after the credit sales
the debts are realized in less time.
LIMITATIONS:-
Based on financial statements, these statements suffer from certain limitations.
• Affected by window dressing.
• Company provides only secondary data, so certain type of bias is in study.
• Unsuitable for forecasting.
 BIBLIOGRAPHY

 Financial Management
By M.Y.Khan & P.K.Jain
 Financial Management
By D. K. Goyal
 Research Methodology
By C. R. Kothari
 Annual Reports of JBM AUTO Ltd.
2006-07