WORKING CAPITAL

OF
TAFE TRACTORS
 INTRODUCTION

INTRODUCTION
Working capital is the money and assets that business uses to finance the day to
day operations that produce the goods or services supplied to customers”.

The capital required for running the day to day business activities of a firm is
known as “Working Capital”. It refers to that part of total capital employed
which has been invested for financing of current assets and payment of day to
day expenses.

E.g.- Inventories, Debtors, Bill receivable etc.

“Working Capital is the amount of fund necessary to cover the cost of operating
the enterprises.”

Working Capital Gap = Current Assets - Current Liabilities

Working capital has two concepts:-

a) Gross concept: - Gross working capital usually referred to as working capital

represent investment in current assets. The gross concept of working capital
focuses the attention on two aspects of current management.
These are:
i) Optimum investment in current assets.
ii) Financing of current assets.
This mean the level of investment in current assets should be adequate.

b) Net concept: - Net working capital is difference between current assets and
current liabilities. The net concept of working capital is an accounting
concept that deals with management of net value of current assets in long
run. Net concept of working capital
i) Indicates liquidity position of the firm.
ii) Suggests the extent to which working capital needs may be financed
by permanent source of funds.

OBJECTIVE OF STUDY
Aims and objective act as the limiting boundaries and keep the researcher on
track and help to avoid any mistakes and errors during the project work.

The aims and objective of this project are listed below:

1) To learn more about working capital management and it’s financing from
banks.
2) To know the importance of working capital from the company’s point of
view.
3) To study the impact of working capital on liquidity position of the firm.
4) To study the impact of working capital on the balance sheet of the
company.
 LIMITATION OF STUDY

1) Inter firm comparison is not possible because it is a multi product firm with
varying Competitors having multi product profile.
2) Working Capital Management is a vast subject covering many domains of
current assets and current liabilities management. It is not possible to cover all
the aspects in such a short tenure of the project.

RESEARCH METHODOLOGY
 Research is essentially a logical and an organized enquiry seeking facts
through objective methods in order to discover the relationship among them
and to refer from the broad principles or laws. It is really a method of critical
thinking.

Research may be defined as a systematic and objective analysis and

recording of controlled abservations that may lead to the development of
generalization of principles or theories resulting in prediction and possibly
ultimate control of events.

Methodology is often used in a narrow sense to refer to methods, technology

or tools employed fpr the collection data as well as its processing. This is
also used sometimes to designate data collection to arrive at the conclusion.
In fact it describes that what should have been done. It provides answer to
some of the major question while research like what must be done, how it
will be done, what data will be needed, what data gathering devices will be
employed, how sources of data will be analysed to arrive at the conclusion.
For systematic research scientific approach is necessary. It is therefore
essential to follow systematic methodology to arrive at a proper conclusion.

There several ways of collecting the appropriate data, which defers

considerable in context of money, cost, time and other resources at the
dispersal of the researcher. The data for this project has been collected by
primary as well as secondary sources.

PRIMARY SOURCES:-
The primary data will be collected from various books of financial management
and various other reference materials.

SECONDARY SOURCES:-

The data required for the study will be collected from annual reports of the
company of the respective years. The company provided the annual reports. The
analysis has been completed with the help of various tools and techniques of
ratio analysis to evaluate company performance.
Company’s Website and other Internet sources.
The project mainly depends upon the secondary data.
COMPANY PROFILE
 TAFE is a US$750 million tractor major incorporated in 1960 at Chennai in India, in
collaboration with Massey Ferguson (now owned by AGCO corporation, USA). TAFE
acquired the Eicher tractors business, its engine plant at Alwar and transmissions plant at
Parwanoo through a wholly owned subsidiary “TAFE Motors and Tractors Limited.

A member of the Amalgamations Group of Chennai, this company has four plants
involved in tractor manufacturing at Mandidheep (Bhopal), Kallidaipatti (Madurai),
Doddabalbur (Bangalore) and in Chennai.

Apart from being among the top five tractor manufacturers in the world, TAFE is also
involved in making diesel engines, gears, panel instruments, engineering plastics, hydraulic
pumps, plantations and passenger car distribution through other divisions and wholly owned
subsidiaries.

TAFE Motors and Tractors Limited has, apart from the tractor manufacturing plant at
Mandideep mentioned above, a Diesel Engine plant at Alwar, Rajasthan producing a range of
air cooled and water cooled diesel engines up to 80 HP with plans are on to increase the
product range up to 125 KVA. The Transmissions Division located at Parwanoo in Himachal
Pradesh produces a range of transmission components both for captive use as well as for sale
to OE manufacturers.
 TAFE Access Limited is a wholly owned subsidiary of TAFE involved in the
manufacture and marketing of farm implements, trailers and accessories, distribution of
passenger cars, manufacture of hydraulic pumps and panel instruments to discerning
customers both in India and overseas.

TAFE’s Engineering Plastics Division produces a range of components for the

consumer electronics, IT, white goods and automotive sector and has the distinction of being
awarded Toyota Quality Award.

TAFE’s Power Source Division produces a range of automotive batteries for both 2-
wheeler and 4-wheeler applications for sale through AMCO Batteries Ltd. As well as for sale
directly through a dedicated distribution channel under the brand name of “Speed”.

TAFE, first tractor company to be recognized for strong commitment to excel at CII
-EXIM Bank Award for Excellence.

The commendation to Tractors and Farm Equipment Limited (TAFE), for “Strong
commitment to excel on the journey towards excellence”, was announced at the 15th Quality
Summit conducted by the Confederation of Indian Industry (CII) held at the NIMHANS
auditorium in Bangalore recently. The commendation is based on an independent assessment
of the organization on the basis of specified criteria which include Leadership, Policy &
Strategies, Partnership & resources, Processes, Key results, People Results, Customer results
and Society results.
VISION –

“To achieve the distinction of the First Choice among the farming community of
India and a Growing Presence in International Markets through setting Leadership
standards of Performance and Customer Care in the Agricultural Machinery
Business.”

CORE VALUES -

Customer satisfaction: We may not be able to wipe the sweat from the customer's brow but
we can certainly put a smile on their face.

Quality in products and services: An uncompromising focus on quality not just in products
but in all that we do.

Human resources: We are not just individuals doing our respective jobs. We are partners in
progress. Our people matter.

Proactive response to change: We create value by anticipating, preparing and facing

changes in a world where the only thing that is permanent, is change itself.

Environment and society: While serving our company, we don't forget our commitment to
serve our society for everything that it has given us.

Trust & long term relationships with stake holders: We value relationships and we live it,
with our business associates.

Business ethics: Our strong foundation has been ethical practices and open and transparent
operations.
C H E N N A I

TAFE’s first plant which now houses

TAFE’s R & D and the total machining
operations of key tractor components.

K A L L A D I P A T T I

Most modern Tractor assembly plant at

Kalladipatti near Madurai set among verdant
fields and orchards.

D O D D A B A L P U R

Tractors assembly plant at

Doddaballapur near Bangalore.
 M A N D I D E E P

The Eicher Tractor plant at

Mandidheep also houses Eicher R & D
facilities apart from a new line to manufacture
the Massey Ferguson range.

A L W A R

Alwar is in Rajasthan where the Eicher

diesel engines are made for captive
consumption at TAFE Motors and Tractors as
well as for supply to other original equipment
manufacturers in industrial, marine construction equipment and generator sets applications.
Capacity: 30,000 engines for agricultural, industrial and Diesel Generator set applications.

P A R W A N O O

Parwanoo is in Himachal Pradesh

where transmission components, cam shafts
etc are made for captive consumption by
TMTL.
FACT SHEET

TAFE, Tractors And Farm Equipment, is a Chennai, India based tractor manufacturer, is a
unit of the Amalgamation Group. TAFE was established in 1961 to market and manufacturer
tractors under the license of Massey Ferguson. TAFE manufactures Simpson engines from
designs under license from the Perkins Company.

TAFE is one of the largest tractor manufacturers in India over 500 dealers and outlet in India
alone. TAFE is 24% owned by the AGCO Corporation of Duluth, Georgia, the owner of the
Massey Ferguson brand, and manufacturers’ tractors and components for AGCO for
exportation. TAFE is also active in exporting their own TAFE branded tractors.

TAFE has agreements with other companies to brand and market tractors under the TAFE
name to the USA. TAFE USA imports tractors from TAFE in India, as well as tractors
manufactured by LS Tractors in South Korea, (formerly LG Tractors), which are branded as
TAFE.

In June 2004, TAFE purchased Eicher motors Tractors and Engines business, along with the
Eicher brand name for tractors. This put them in the #2 position for market share of tractors
in India.

BUSINESS AREA

TAFE Limited is also involved in the following areas, apart from its core business of
manufacturing and marketing tractors.

TAFE has developed a range of matching trailers, implements and accessories

These are marketed through TAFE’s dealer network by a totally owned subsidiary, TAFE
access Limited (TAL).
TAFE through TAL is also involved in the marketing and distribution of lubricants and
greases for tractors through its dealer network.

TAFE is also involved in the packaged power industry through its Power Source Division.

TAFE has in-house facilities for the manufacture of Hydraulic pumps and Gears for tractors.
A related facility for the manufacture of panel instruments, not only for captive use but also
for the growing automobile industry in India is an integral part of the company.

TAFE has also diversified into Engineering plastics and Production of tools and dies for this
industry.
MARKETING NETWORK

TAFE has a network of more than 500 dealers, branches, service outlets as well as its own
sales officers and depots covering the entire width and breadth of India, TAFE is committed
to providing complete farming solutions to its customers and empowering them to work
towards increase farm productivity, prosperity and profits.

COMMUNITY SERVICE

TAFE’s factory at HYDEARBAD, stands in perfect harmony with nature. The Simpson
Industrial Estate, where the factory is located, also houses a serene bird sanctuary.

At Paddur Village, where TAFE’s Product Training Centre and “J” Farm are located , TAFE
has an ongoing Village Development Program which provides primary health services,
drinking water, Education and Vocational Training to the villagers from in and around
Paddur.
 RESEARCH
METHODOLOGY
RESEARCH METHODOLOGY:
NEED FOR STUDY

Every company needs working capital to run its day to day business
activities smoothly and uninterruptedly. We hardly find a business firm which does not
require any amount of working capital. TAFE has a dilemma regarding to the liquidity, cash
and accounts receivables management. So in this direction I have undergone a study on
working capital management.

Objectives of the study:

 To study and analyze the working capital management of TAFE.

Research design: Analytical

Sources of data: secondary data

 The data required for the study is mainly based on the secondary data.
 The required information is collected from the annual reports of the TAFE comprising
of balance sheets and profit & loss accounts.
 The related data is obtained from the printed and published financial statements of
TAFE.

Tools of analysis:

 Scheduled changes in working capital

 Ratio analysis.
 Trend analysis.

Period of study:
Data for a period of 6 years has been taken for the study i.e., starting from 2004-05
TO 2009-10
 Working capital management

Working capital management an overview:

Introduction:
Working capital is probably the most often used financial management concept verbally and
misused practically .literally, no organization can exist with out the existence of working
capital. Independent of nature of an organization, its constitutions and activity requires
working capital.

Working capital management is a significant facet of financial

Management .working capital management refers to the current assets as
Well as current liabilities .its importance starts from two reasons:

 investment in current assets represents substantial position of

the total investment.

 investment in current assets and level of current liabilities have

to be geared quickly to changes in sales.
WORKING CAPITAL DEFINITIONS:

“Working capital refers to a firm’s investment in shorter currents, cash, short term
securities, accounts receivables and inventory.”
- Weston and Beigham

“Working capital is the excess of current assets over current liabilities.”

- Guttmann and Doughhall

“Working capital is an amount of funds necessary to cover of operating the

enterprise.”
- Shubbin
Principles of working capital management

Introduction:

“The interaction between current assets and current liabilities is therefore the
main theme of the theory of working capital.”

Managing the current assets is similar to that of fixed assets in the sense that in
both cases a firm analyses their effects on its returns and risks. The management of fixed
assets however differs in three different ways:

 In managing fixed assets, time is very important factor, consequently

discounting and compounding techniques play a significant role in capital
budgeting and a minor one in the management of current assets.
 The large holdings of current assets, especially cash, strengths the firms
liquidity position, but also reduces the overall profitability. Thus a risk –
return trade off is evolved in holding current assets.
 Levels of fixed as current assets depend up on expected sales, but it is only
current assets which can be adjusted with sales fluctuations in the short run.
Thus the firm has a great flexibility in managing current assets.
Types of working capital:

These are of two types:

 Permanent working capital

 Temporary working capital

 Permanent working capital

The magnitude of current assets needed is not always the

Same it increases and decreases over the period of time.
Permanent working capital is the amount of funds required
 For the production of the goods and services to satisfy the
demand .These are different from fixed assets which are in the
business and retained their form of a long period but
this kind of working capital is constantly changing from
one current asset to another.
Secondly the amount of value
represents by the permanent working capital never leaves
the business properly.
Thirdly the size of the permanent Working capital
will increase so long as there is growth in the business.

 Temporary working capital:

Depending upon the changes in the production and sales,

the need for the working capital over the above permanent working capital will influence.
The extra working capital required, to support the changing production and the sales activities
is called temporary working capital.

Need for working capital:

The need for working capital is to run day to day business activities smoothly and
uninterruptedly and cannot be over emphasized earning a
Steady amount of profit requires successful sales activities. We hardly find a business firm
which does not require any amount of working capital. Indeed, firms differ in their
requirements. The firm has to invest enough funds in current assets for generating sales.
Currents assets are needed because sales do not convert into cash instantaneously. There is an
operating cycle involved for conversion of sales to cash.

CONCEPTS OF WORKING CAPITAL:

 The concept of working capital is divided into two concepts:
1. Gross working capital and
2. Net working capital.

Gross working capital:

It refers to firm’s investments in current assets. Current assets are the assets
which can be converted into cash with in the accounting period and that include cash, short
term securities, debtors, bills receivables and stock.

Net working capital:

It refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected mature for the payment
within an accounting period and include creditors, bills payables and outstanding expenses.
Net working capital may be positive or negative. A positive net
working capital arises when current assets exceed current liabilities and vice versa.

Changes in working capital:

The changes in the level of working capital occur because of the following basic
reasons:
1. Policy changes
2. Technological changes
3. Sales growth
4. Price level changes
5. Growth and expansion of business
6. Availability of credit

 Policy changes:

The major causes for changing in working capital are because of

policy changes initiated by management. Policy changes can also be known as current asset
policy. It may be defined as the relationship between the current assets and also the volume
of the sales.
  Technological change

These can cause a significant change in the working capital. If a new

process emerges as a result of technological development this shortens the operating cycle. It
reduces the need of working capital and vice versa.

 Sales growth:

The working capital needs of firm increases its sales growth. It

precisely determines the relationship between the volume of sales and working capital before
growth takes place. It is necessary to make advance planning of working capital for a growth
firm on continuous basis.

 Price level change:

The increasing shifts in price level function of financial manager are

difficult. The effect of price level changes on working capital requirements of the firm.
Raising price levels will require a firm to maintain higher amount of working capital. Firms
will feel the effects of increasing general price level differently as individual prices may
move differently.

 Growth and expansion of business:

As a corporation grows, it is logical that a huge amount of working

capital will be required. It is difficult to determine precisely the relationship between the
growths in the volume of business of a corporation and the increase in the working capital.
The composition of a working capital in a going corporation also shifts with an economic
circumstances and corporate practice. Growing industries require more working capital than
those that of static, other things being equal.

 Availability of credit:

The working capital requirement of a film is affected by credit terms

granted by its creditors. A firm will need a less working capital of a liberal credit from banks
also influences the working capital needs to the firm. A firm which can get bank credit easily
on favorable conditions will operate with a less working capital than a firm without such a
facility.
Determinants of working capital:
 The determinants of working capital are as follows:

Nature of business:

Working capital requirements of the firm are basically influenced by

the nature of its business. The larger scale of operations will need more working capital than
small firms.
Demand conditions:

The firm experiences seasonal and cyclical fluctuations in the

demand for their services. The firm’s investments, inventories and book debts will also
increase. To meet the requirements of funds for fixed assets and current assets under the
boom period.

Manufacturing cycle:

The manufacturing cycle comprises purchase and use of raw

materials and the production of finished goods. Longer the manufacturing,
larger will be the firm’s working capital requirements.

Production policy:

A study policy will cause the inventories to accumulate during the

off season period and the firm will be exposed to greater inventory costs and
risks. This may adopt variable production policy varying its production
schedules in accordance with changing demand. Thus production policy will
differ from one firm to another firm, depending upon circumstances of
individual firms.

Sales growth:

The working capital needs of the firm increase as its sales grow. It
is difficult to precisely determine that the relation between volume of sales and
 working capital needs. Current assets will have to be employed before growth
takes place. It is necessary to make advance planning of working capital for a
growing firm on continuous basis.

Price level changes:

The increasing shifts in price level function of financial manager

are difficult. The effect of price level changes on working capital requirements
of the firm. Raising price levels will require a firm to maintain higher amount of
working capital. Firms will feel the effects of increasing general price level
differently as individual prices may move differently.

Availability of credit:

The working capital requirement of a firm is affected by credit

terms granted by its creditors. A firm will need less working capital of a liberal
credit from banks also influences the working capital needs to the firm. A firm
which can get bank credit easily on favourable conditions will operate with a
less working capital than a firm without such a facility.

Goals of working capital management:

 The two important aims of working capital management are
profitability and solvency. To ensure solvency the firm should be very liquid, which means
large current asset holdings. However there is cost associated with the maintaining of sound
liquid position. Since the funds invested in current assets are higher due to higher
investments, the firm’s profitability will suffer. To have high profitability, the firms may
sacrifice solvency and maintain a relatively low level of current assets, which may expose
into a greater risk of cash shortage and stock outs. The finance managers would have to look
into both these objectives, so that one may not suffer at the expenses of the other. Hence
while managing the working capital, the objective of the firm is to achieve an optimal
combination of risk return trade off.

If the working capital pool is to function efficiently, the following

matters must receive the attention of the management:

1. The level of investment in stock.

2. The level of investment in debtors.
3. The ability of the concern to deal with its creditors.
4. The maturing obligations such as taxes and dividends.

Factors affecting the working capital problems:

The requirements of working capital differ from industry, within the same
industry from company and within the company from time to time. A wide variety of factors
influence the volume of investment in working capital which may be external and internal
and management must be familiar with these.

Nature of business:

The amount of working capital is related to the nature and volume of the
business. In concerns, where the cost of the raw materials is to be used in the manufacture of
product in very large in production to its total cost of its manufacturing the requirements of
the working capital will be very large.

Size of the business:

Size of the business unit is also determining factor in estimating the total amount
of working capital.

Depreciation policy:
 In every manufacturing business, depreciation is the most important element
of the working capital structure. The management should try its best of the maintain the
structure in a health start of earning satisfactory profits.

Profit Level:

The net profit level earned by the business firms the most important element
of the working capital structure. The management should try its best of the structure a healthy
start of earning satisfactory profits

Taxes:

Taxation has an important impact of the earned by an enterprise. Nearly on

half of the profits earned is drained off. Tax liability when assessed will be a drain on
working capital fund. The management should be to calculate this liability and make
provision for the payment when due.

Credit policy:

Credit policy of a firm has a direct bearing in the level working capital
liberal credit policy demands a higher level of working capital. If there is a lack in collection
efforts, the problem would be further intensified necessity higher levels of working capital.

Dividend policy:

Dividend policy is a dominant influence on working capital position of an

organization divined policy connects liquidity the ability of the concern to find necessary
cash to meet the dividend payment. When once the dividend declared and the same has same
has to be paid in cash.

Attitude risk
 The level of working capital is also influenced by the attitude of the
management towards the risk. If the management is more concern with the liquidity then
there is need of higher level of working capital.

Components of working capital

The components working capital are:

CURRENT ASSETS CURRENT LIABILITIES

1.Cash and bank balances 1. Short-term borrowing including bill
purchased and discounted form banks
and others.
2. Sundry debtors 2. Unsecured loans maturing within one
year.
3. Bulls receivables 3. Public deposits maturing within one
year
4.Prepaid expenses 4. Sundry creditors.
5. Investments(marketable securities- 5. Bills payables.
maturing with in one year)
6. Fixed deposits with banks (maturing 6. Interest & other charges due for
within one yea) payments for payment.
7.Instalment of deferred(receivable due 7. Advance/progress payments form
within one year) customers.
8. Raw materials and components used in 8. Deposits form dealers selling agents.
the process. 9. Outstanding expenses.

10. Statutory liabilities:

9. Stocks in process including semi Provident fund dues
finished goods. Provision for taxation
10. Finished goods including semi Sales tax, excise, etc.,
finished goods.
 DATA ANALYSIS

SCHEDULE OF CHANGES IN WORKING CAPITAL:

 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2005
AND 2006:

Components of As on 31st March As on 31st Change in Working

Working Capital 2005 March,2006 Capital(Rs.000’s)
(Rs.000’s) (Rs.000’s)

Current Assets 2,62,83,573 3,79,51,084 1,16,67,511

Inventories

Sundry Debtors 3,83,10,554 3,35,14,656 -47,95,898

Cash and Bank 1,77,73,563 2,36,07,635 58,34,072

Balances

Loans and Advances 5,80,48,119 7,57,60,621 1,77,12,502

Total Current Assets 14,04,15,809 17,08,33,996 3,04,18,187

Current Liabilities 17,74,50,595 18,06,26,351 31,75,756

Liabilities

Provisions 1,24,88,477 2,30,69,166 1,05,80,689

Total Current 18,99,39,072 20,36,95,517 1,37,56,445

Liabilities

Working -4,95,23,263 -3,28,61,521 1,66,61,742

Capital=C.A-C.L

Interpretation:

The working capital for the years 2004-05 and 2005-06 are both negative. The net
working capital has increased in 2005-06 when compared with the previous year 2004-05.
This is due to the increase in current assets (inventories and loans & advances) when
compared with the previous year 2004-05.
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 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2006 AND
2007:

Components of As on 31st As on 31st Change in Working

Working Capital March,2006(Rs.000’s) March,2007(Rs.000’s) Capital(Rs.000’s)

Current Assets 379,51,084 3,17,03,150 -62,47,934

Inventories

Sundry Debtors 571,58,686 5,36,70,786 -34,87,900

Cash and Bank 236,07,635 3,43,96,844 1,07,89,209

Balances

Loans and Advances 5,25,05,223 4,38,67,117 -86,38,106

Total Current 17,12,22,628 16,36,37,897 -75,84,731

Assets(C.A)

Current Liabilities 17,85,27,717 17,31,00,827 -54,26,890

Liabilities

Provisions 2,30,69,166 3,38,98,939 1,08,29,773

Total Current 20,15,96,883 20,69,99,766 54,02,883

Liabilities(C.L)

Net Working -3,03,74,255 -4,33,61,869 -1,29,87,614

capital=C.A-C.L

Interpretation:

The net working capital for the years 2005-06 and 2006-07 are both negative. The net
working capital has decreased in 2006-07 when compared with the previous year 2005-06.
This is due to the decrease in current assets (inventories, debtors and loans & advances) when
compared with the previous year 2005-06.
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 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2007 AND
2008:

Components of As on 31st As on 31st Change in Working

Working Capital March,2007(Rs.000’s) March,2008(Rs.000’s) Capital(Rs.000’s)

Current assets 3,05,32,810 2,34,37,496 -70,95,314

Inventories

Sundry Debtors 2,94,51,975 3,97,94,505 1,03,42,530

Cash and Bank Balances3,43,96,844 11,55,74,751 8,11,77,907

Loans and Advances 6,80,85,928 9,70,40,202 2,89,54,274

Total Current 16,24,67,557 27,58,46,954 11,33,79,397

Assets(C.A)

Current liabilities 17,31,00,827 14,92,80,684 -2,38,20,143

Liabilities

Provisions 3,38,98,939 5,88,66,140 249,67,201

Total Current 20,69,99,766 20,81,46,824 11,47,058

Liabilities(C.L)

Net Working Capital= C -4,45,32,209 6,77,00,130 11,22,32,339

.A-C.L

Interpretation:

The net working capital for the year 2006-07 is negative and for the year 2003-04 is
positive. The net working capital has increased drastically in 2007-08 when compared
with the previous year 2006-07. This is due to the increase in total current assets (Sundry
debtors, cash & bank balances and loans & advances) when compared with the previous
year 2006-07 and also due to the decrease in liabilities.
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 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2008 AND
2009:

Components of As on 31st March,2008 As on 31st Change in Working

Working Capital (Rs.000’s) March,2009 Capital (Rs.000’s)

(Rs.000’s)

Current Assets 5,07,100 15,02,900 9,95,800

Accrued Interest

Inventories 2,22,08,200 2,24,53,500 2,45,300

Sundry Debtors 6,36,08,600 6,63,58,700 27,50,100

Cash and Bank Balances 11,55,13,300 21,93,11,300 10,37,98,000

Loans and Advances 6,16,40,800 7,51,49,800 1,35,09,000

Total current 26,34,78,000 38,47,76,200 12,12,98,200

Assets(C.A)

Current Liabilities 15,09,42,700 1,45,38,6200 -55,56,500

Liabilities

Provisions 4,97,77,200 7,46,17,800 2,48,40,600

Total Current 20,07,19,900 22,00,04,000 1,92,84,100

Liabilities(C.L)

Net working 6,27,58,100 16,47,72,200 10,20,14,100

capital=C.A-C.L

Interpretation:

The net working capital has increased drastically in 2008-09 when compared with
the previous year 2008-09. This is due to the increase in total current assets (Sundry debtors,
cash & bank balances and loans & advances) when compared with the previous year 2008-09
and also due to the decrease in liabilities.

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 SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2009 AND
20010:

Components of Working As on 31st As on 31st Change in Working

Capital March,2009 March,2010 Capital(Rs.000’s)

(Rs.000’s) (Rs.000’s)

Current Assets 2,24,53,500 2,78,92,200 54,38,700

Inventories

Accrued Interest 14,36,800 63,62,700 49,25,900

Sundry Debtors 6,63,70,300 6,30,20,500 -33,49,800

Cash and Bank Balances 21,93,113 30,57,94,800 30,36,01,687

Loans and Advances 7,52,16,000 9,23,20,700 1,71,04,700

Total current Assets(C.A) 38,47,87,900 49,53,90,900 11,06,03,000

Current liabilities 14,61,54,100 16,12,32,400 1,50,78,300

Liabilities

Provisions 7,38,61,600 8,88,22,300 1,49,60,700

Total Current 22,00,15,700 25,00,54,700 3,00,39,000

Liabilities(C.L)

Working capital = C.A-C. L 16,47,72,200 24,53,36,200 8,05,64,000

Interpretation:

The net working capital for the year 2008-09 and for the year 2009-10 are both positive.
The net working capital has slightly increased in 2005-06 when compared with the
previous year 2008-09. This is due to the increase in total current assets (Accrued interest,
cash & bank balances and loans & advances) when compared with the previous year
2008-09.
350000000
300000000
250000000
200000000
150000000
100000000
50000000
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-50000000

TREND ANALYSIS

Year Sales Current Assets Current

Liabilities

2004-05 100 100 100

2005-06 109.51898 21.939708 6.1376582

2006-07 118.10717 15.704605 8.982193

2007-08 170.7619 87.641265 5.6759401

2008-09 188.44544 174.0346 15.834882

2009-010 211.63229 252.8028 31.649954
 16

14

12

10

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

intepretation:

The sales of the company are growing but the current assets are increasing at a higher
proportion. This is due to the piling-up of book debts and large amount of cash balances.
 RATIO ANALYSIS
LIQUIDITY RATIOS:

1) CURRENT RATIO:
Current Ratio= (Current assets- Current liabilities)

Current Assets Current Liabilities Current Ratio

Year (Rs.000’s) (Rs.000’s)

2004-2009 14,04,15,809 18,99,39,072 0.739268

2009-2006 17,12,22,628 20,15,96,883 0.849332

2006-2007 16,24,67,557 20,69,99,766 0.784868

2007-2008 26,34,78,000 20,07,19,900 1.312665

2008-2009 38,47,87,900 22,00,15,700 1.748911

2009-2010 49,53,90,900 25,00,54,700 1.98113

Interpretation:

The current ratio well below the standard ratio 2:1 during the years 2009-2010, indicates
low liquidity position of the TAFE. Liquidity has improved during the later part of study
period with current ratio above 1.5:1
16

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10

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 QUICK RATIO OR LIQUID RATIO:

Quick ratio = Current Assets- Inventory

Current liabilities

Year Current Assets Inventory Current Quick Ratio

Liabilities
(Rs.000’s) (Rs.000’s)
(Rs.000’s)

2004-2005 14,04,15,809 2,62,83,573 18,99,39,072 0.6008887

2006-2006 17,12,22,628 3,79,51,084 20,15,96,883 0.6610794

2006-2007 16,24,67,557 3,05,32,810 20,69,99,766 0.6373666

2007-2008 26,34,78,000 2,22,08,200 20,07,19,900 1.2020223

2008-2009 38,47,87,900 2,24,53,500 22,00,15,700 1.646857

2009-2010 49,53,90,900 2,78,92,200 25,00,54,700 1.8695857

Interpretation:

The Quick ratio of the company should be 1:1 to represent a satisfactory financial
condition. The quick ratio has been unsatisfactory upto the year 2006-2007. From the
year 2007-2008 the quick ratio is too high for TAFE indicating excess liquidity.
16

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10

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
SUPER QUICK (CASH) RATIO:

Cash or Super Quick Ratio= Cash

Current liabilities

Year Cash(Rs.000’s) Current Liabilities Cash Ratio

(Rs.000’s)

2004-2005 1,77,73,563 18,99,39,072 0.093575

2005-2006 2,36,07,635 20,15,96,883 0.117103

2006-2007 3,43,96,844 20,69,99,766 0.166169

2007-2008 11,55,13,300 20,07,19,900 0.575495

2008-2009 21,93,11,300 22,00,15,700 0.996798

2009-2010 30,57,94,800 25,00,54,700 1.222912

Interpretation:

This ratio is still more stringent test of liquidity. Generally cash ratio of 0.5:1 will be
taken as a standard one. The cash ratio from the year 2007-08 to the year 2009-10 is in
increasing order. TAFE is holding enormous cash balances which are a drag on its
profitability.
16

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10

0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 LIQUIDITY RATIOS:

Year Current Ratio Quick Ratio Cash Ratio

2004-05 0.739 0.6 0.093

2005-06 0.849 0.661 0.117

2006-07 0.784 0.637 0.166

2007-08 1.312 1.202 0.575

2008-09 1.748 1.646 0.996

2009-10 1.981 1.869 1.222

16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
INVENYORY MANAGEMENT
1) INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio = (Sales/Inventory)

Sales Inventory Inventory

Turnover Ratio
Year (Rs.000’s) (Rs.000’s)

2004-2005 11,59,66,611 2,62,83,573 4.412133

2005-2006 24,29,72,056 3,79,51,084 6.402243

2006-2007 25,29,31,493 3,05,32,810 8.283925

2007-2008 31,39,93,400 2,22,08,200 14.13862

2008-2009 33,45,00,400 2,24,53,500 14.89747

2009-2010 36,13,89,400 2,78,92,200 12.95665

Interpretation:

For the TAFE this ratio has been increased during the years 2007-08 to 2008-09 and
then it decreases in the year 2008-09. This shows the less effort or laziness on the part of
management to provide connections on demand.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 3) DAYS OF INVENTORY HOLDING:

No. of days of Inventory holding = (No. of days in a year/ Inventory Turnover

Ratio)

Year Days Inventory Turnover Days of Inventory

Ratio Holding

2004-2005 365 4.412133 82.72643

2005-2006 365 6.402243 57.01127

2006-2007 365 8.283925 44.06124

2007-2008 365 14.13862 25.81582

2008-2009 365 14.89747 24.5008

2009-2010 365 12.95665 28.17086

Interpretation:

The inventory holding period in 2008-09 is 82 days, 2009-10 is 57 days, 2006-07 is 44

days, 2007-08 is 25 days, 2008-09 is 24 days and 2009-10 is 28 days. The inventory
holding period was decreasing from the years 2008-09 to 2008-09 and then in 2009-10 it
has increased.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
RECEIVABLES MANAGEMENT

1) DEBTORS TURNOVER RATIO:

Debtors Turnover Ratio = (Sales /Debtors)

Year Sales Debtors Debtors Turnover

Ratio
(Rs.000’s) (Rs.000’s)

2004-2005 11,59,66,611 3,83,10,554 3.027015

2005-2006 24,29,72,056 5,71,58,686 4.250833

2006-2007 25,29,31,493 2,94,51,975 8.58793

2007-2008 31,39,93,400 6,36,08,600 4.936336

2008-2009 33,45,00,400 6,63,70,300 5.039911

2009-2010 36,13,89,400 6,30,20,500 5.734474

Interpretation:

The liquidity position of the firm depends on the quality of debtors. Generally the higher
the value of debtor’s turnover, the more efficient is the management of credit. For TAFE
it has increased from 2008-09 to 2006-07 and decreases in the year 2007-08, later it
increases slightly in the next years 2008-09 and 2009-10.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 AVERAGE COLLECTION PERIOD:

Average Collection Period = No. of days in a year

Debtors Turnover Ratio

Year Days in a year Debtors Turnover Average

Ratio Collection Period

2004-2005 365 3.027015 120.5808

2005-2006 365 4.250833 85.86552

2006-2007 365 8.58793 42.50151

2007-2008 365 4.936336 73.94148

2008-2009 365 5.039911 72.42191

2009-2010 365 5.734474 63.65013

Interpretation:
The target of debtors collection period for TAFE is 40 to 45 days. But only in 2006-07
the target has been achieved. In the other years the collection period is not upto the
expectations.
16

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0
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 TURNOVERRATIOS:

1) CURRENT ASSETS TURNOVER RATIO:

Current Assets Turnover Ratio = Sales

Current Assets

year Sales current assets current assets

turnover ratio
(Rs.000’s) (Rs.000’s)

2004-2005 115966611 140415809 0.82588

2005-2006 242972056 171222628 1.419042

2006-2007 252931493 162467557 1.556812

2007-2008 313993400 263478000 1.191725

2008-2009 334500400 384787900 0.869311

2009-2010 361389400 495390900 0.729504

Interpretation:

Current assets turnover ratio is a measure of the efficiency of the firm in utilizing the
current assets for sales generation. The current assets turnover ratio in the year 2008-09 is
0.825, 2009-10 is 1.419, 2006-07 is 1.556, 2007-08 is 1.191, 2008-09 is 0.869 and 2009-
2010 is 0.729. Decrease in current asset ratio after the year 2006-03 shows the decrease in
sales and under utilization of current assets
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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
WORKING CAPITAL TURNOVER RATIO:

Working Capital Turnover Ratio = Sales

Net current Assets

year Sales Net Current Assets Working Capital

Turnover Ratio
(Rs.000’s) (Rs.000’s)

2008-2009 115966611 -49523263 -2.34166

2009-2006 242972056 -30374255 -7.99928

2006-2007 252931493 -44532209 -5.67974

2007-2008 313993400 62758100 5.003233

2008-2009 334500400 164772200 2.030078

2009-2010 361389400 245336200 1.473037

Interpretation:

 Working capital turnover ratio indicates whether or not working capital has been
efficiently utilized in making sales. This ratio measures the relationship between
working capital and sales. This ratio shows the number of times the working capital
results in sales. Working capital turnover ratio is negative for the company from the
year 2008-04 to 2006-2007 because of negative working capital. Afterwards in the
next year 2007-08 it has drastically increased to 5. It is due to the increase in current
assets of the company. In 2008-09 working capital turnover ratio decreases again due
to decrease in working capital (due to increase in the provisions i.e., current
liabilities). In the next year 2009-10 also the working capital turnover ratio decreases
due to the decrease in sundry debtors (current asset) due to the inefficient
management of accounts receivables.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 PROFITABILITYRATIOS:

1)GrossProfiRatio:
GrossProfitRatio=GrossProfit
Sales

year Gross Profit Sales Gross Profit Gross Profit

Ratio Ratio in %
(Rs.000’s) (Rs.000’s)

2008-01 40952595 115966611 0.353141 35.31%

2009-02 82995036 242972056 0.341583 34.15%

2006-03 60442262 252931493 0.238967 23.89%

2007-04 114358900 313993400 0.364208 36.42%

2008-05 121298000 334500400 0.362624 36.26%

2009-06 158185700 361389400 0.437715 43.77%

Interpretation:

The gross profit ratio of the company in 2008-05 is 35.31%, 2009-06 is 34.15%,
2006-07 is 23.89%, 2007-08 is 36.42%, 2008-09 is 36.26% and 2009-10 is 43.77%. The
gross profit of the company decreases in 2009-06 and 2006-07, increases in 2007-08, then
partially decreases in 2008-09 and again increases in2009-10.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
 NET PROFIT RATIO:

Net profit ratio= profit after tax

Sales

Year Net Profit(PAT) Sales Net Profit Ratio

(Rs.000’s)
(Rs.000’s)

2008-01 7470538 115966611 0.06442(6.44%)

2009-02 63121695 242972056 0.25979(25.97%)

2006-03 14444492 252931493 0.057108(5.71%)

2007-04 59765300 313993400 0.190339(19.03%)

2008-05 101832900 334500400 0.304433(30.44%)

2009-06 89396900 361389400 0.24737(24.73%)

Interpretation:

The net profit ratio in 2008-05 is 6.44%, 2009-02 is 25.97%, 2006-07 is 5.71%,
2007-08 is 19.03%, 2008-09 is 30.44% and 2009-10 is 24.73%. The net working capital
is fluctuating. It increases in 2009-08 and decreases in 2006-07, then increases in 2007-08
and 2008-09. In 2009-10 it again decreases. This ratio indicates the management’s
efficiency in sales. This ratio indicates the firms capacity to withstand adverse economic
conditions.
16

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2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
FINDINGS
FINDINGS:

 The gross profit ratio has been increased over the years, but the net profit
ratio has not increased as fast as gross profit ratio. It implies that operating
expenses are increasing with increase in sales.

 Net increase in working capital of Rs.1, 666.17 crores in 2008-08, net

decrease in working capital of Rs.1298.76 crores in 2009-10, net increase in
working capital of Rs.11,223.23 crores, 10808.41 crores and 8086.4 crores
in the next years 2010-09, 2009-08 and 2008-10 respectively.

 The current ratio in the year 2010-2008 is 0.739, 2008-2009 is 0.849, 2008-
2009 is 0.784, 2010-2008 is 1.312, 2008-2008 is 1.748 and 2009-2010 is
1.981 which is below the standard ratio 2:1, indicates low liquidity position
of the TAFE company.

 Quick ratio of the company in the year 2010-2008 is 0.6, 2008-2008 is 0.66,
2008-2009is 0.63, 2009-2008 is 1.20, 2008-2009 is 1.64 and 2009-2010 is
1.86. The quick ratio of the company should be 1:1 to represent a
satisfactory financial condition. The quick ratio has been unsatisfactory upto
the year 2009-2010. From the year 2010-2009 the quick ratio of the
company is satisfactory. This ratio is a measure of judging the ability of the
company to pay off its current obligations.

 The cash ratio is still more stringent test of liquidity. Generally an absolute
liquid ratio or cash ratio of 0.5:1 will be taken as a standard one. The super
quick ratio from the year 2010-09 to the year 2009-10 is in increasing order.

 For the TAFE Company the inventory turnover ratio has been increased
during the years 2010-09 to 2008-2009and then it decreases in the year
2009-10. This shows the less effort or laziness on the part of management to
dispose the inventory at the earliest (i.e., provide connections on demand).

 The inventory holding period in 2010-08 is 82 days, 2008-08 is 57 days,

2008-10 is 44 days, 2010-09is 25 days, 2008-08 is 24 days and 2008-10 is
28 days. The inventory holding period was decreasing from the years 2010-
08 to 2008-08 and then in 2009-10 it has increased.

 If the number of days of collection period increases, it shows the inability to

collect the bills receivables. In the year 2010-08 the average collection
period is 120 days, 2008-09 is 85 days, 2008-09 is 42 days, 2010-08 is 73
 days, 2008-09 is 72 days and 2009-10 is 63 days. The bills receivables
period has been decreased from 2010-09 to 2008-09but in 2010-08 it has
again increased, later it decreases in the next years 2008-09 and 2009-10.

 The current assets turnover ratio in the year 2010-08 is 0.825, 2008-08 is
1.419, 2008-09 is 1.556, 2010-09 is 1.191, 2008-08 is 0.869 and 2008-2009
is 0.729. Decrease in current asset ratio after the year 2008-09 shows the
decrease in sales and under utilization of current assets.

 Working capital turnover ratio is negative for the company from the year
2010-09to 2008-2009 because of negative working capital. Afterwards in
the next year 2010-09 it has drastically increased to 5. It is due to the
increase in current assets of the company. In 2008-09 working capital
turnover ratio decreases again due to decrease in working capital (due to
increase in the provisions i.e., current liabilities). In the next year 2008-09
also the working capital turnover ratio decreases due to the decrease in
sundry debtors (current asset) due to the inefficient management of accounts
receivables.

 The gross profit ratio of the company in 2010-09 is 35.31%, 2008-08 is

34.15%, 2008-09is 23.89%, 2010-09 is 36.42%, 2008-09 is 36.26% and
2009-10 is 43.77%. The gross profit of the company decreases in 2008-09
and 2009-10, increases in 2010-09, then partially decreases in 2008-09 and
again increases in2008-09.

 The net profit ratio in 2009-08 is 6.44%, 2008-09 is 25.97%, 2008-10 is

5.71%, 2010-09 is 19.10%, 2008-08 is 30.44% and 2008-10 is 24.73%. The
net working capital is fluctuating. It increases in 2008-08 and decreases in
2008-9, then increases in 2010-09 and 2008-09. In 2008-09 it again
decreases. This ratio indicates the management’s efficiency in sales. This
ratio indicates the firm’s capacity to withstand adverse economic
conditions.
SUGGESTIONS
SUGGESTIONS:

 The profits of the company are declining although the current assets are increasing.
This is due to the bad debts for the company. The management is not efficient in
collecting the bills receivables. The company should develop an optimum credit
policy.

 TAFE Company has to forecast the working capital requirements and optimize the
working capital for increasing profitability. They should invest cash in short term
investments. The company is maintaining more cash ratio. This reflects that they are
keeping cash with them. This will affect the profitability of the company. So the
company should invest in short term securities so as to earn more profits.

 Decrease in profits is due to the increase in operating and administrative expenses. So

the company has to decrease unnecessary administrative and operating expenses like
vehicle running expenses, postage, power and fuel and rent for the buildings.

 The working capital of the TAFE Company is fluctuating. This will create a doubt in
the minds of shareholders and creditors. So the company should educate its
employees that working capital management does produce profits.
BIBLIOGRAPHY
 BIBLIOGRAPHY

BOOKS

Financial Management - I.M.Pandey

Financial Management -S.N.Maheshwari

Financial Management Theory and Practice - Prasanna Chandra

Management Accounting-Principles and Practice- Shashi K.Gupta and R.K.Sharma

A Hand Book on TAFE Accounts; Accounting & Financial Statements – C.V.R.Reddy