Receivables Finished Goods hort Term sources Raw Material Work In Process mmercial Banks genous Banks Cash

de Creditors

lic Deposits ughing back of Profits ns from Financial institution

RESEARCH PROJECT REPORT

ON

allment Credit ances ount receivable dit rued Expenses ered Income mmercial Paper

WORKING CAPITAL ANALYSIS OF HMT LTD.

SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION of Punjab Technical University By Vipul Choudhary, 100172243525 MBA 3rd SEMESTER UNDER THE SUPERVISION OF Ms. RUBY SHARMA

Chandigarh Business School, Landran, Mohali 2010-12

Certificate of Supervisor

This is to certify that Mr. Vipul choudhary Roll No. 100172243525 has completed the research project titled WORKING CAPITAL ANALYSIS OF SAILunder my supervision in partial fulfillment of the MASTER OF BUSINESS ADMINISTRATION degree of Punjab Technical University.

Supervisors signature: Supervisors name: Ms. Ruby Sharma Supervisors Designation: Date: Place:

Forwarded for evaluation by the Dean: (Deans Signature) Seal of the Dean

Declaration

I,

hereby

declare

that

the

research

project

report

titled

WORKING CAPITAL ANALYSIS OF HMT LTD. is my own original research work and this report has not been submitted to any University/Institute for the award of any professional degree or diploma.

Vipul Choudhary M.B.A 3rd Sem. Chandigarh Business School

Date: Place:

HMT LTD.

LET US LIGHT THE LAMP OF QUALITY AND PRODUCTIVITY

4

INDEX

1.

INTRODUCTION

HMT Limited, with a diverse range of products, over 18 manufacturing units and a countrywide well established marketing network restructured its various businesses into different subsidiaries under the ambit of a holding company. The constituent

subsidiaries of HMT Limited are as below while the holding company retains the Tractors Business Group.

Sr.No. Name of Subsidiary 1 2 3 4 5 6 HMT Machine Tools Limited HMT Watches Limited HMT Chinar Watches Limited HMT International Limited HMT Bearings Limited Praga Tools Limited

% Holding 100 100 100 100 97.25 51.00

The Holding Company with its Corporate Head Quarters at Bangalore forms the hub for the activities of the different subsidiaries. The Holding Company while ensuring good corporate governance also pursues strategies such as Creation of strategic alliances, Development of brand equity, Provision of strategic planning inputs, Interface with regulatory agencies, Creation and maintenance of data warehouse with suitable corporate informational data for the use of all subsidiaries.

CORPORATE PROFILE
HMT is India's premier Public Sector conglomerate. It is a Public Sector Undertaking of the Government of India engaged in the manufacture of engineering goods in diverse areas such as Machine Tools, Watches, Tractors, Printing Machinery, Die Casting & Plastic Processing Machinery, Metal Forming Presses etc. It began in a small way in 1953 to meet a big commitment:

`To

build

mother

machines

to

build

modern

industrial

India'.

From a single Product, single Unit Company in the post independence era it emerged as a conglomerate by the turn of the twentieth century with

Several manufacturing bases spread over different states in India

A wide & diversified product range

Markets stretching across 38 countries around the world.

Its teams of engineers have created a brand equity that symbolizes:

Machine Tools to a manufacturer

Tractors to a farmer

Watches to millions of people in India and abroad.

Over the years HMT received know-how and know-why from 36 collaborators from 12 countries who were leaders in their respective domains of business. HMTs marketing and servicing network criss-cross the length and breadth of India, feeling the pulse of the market and striving to create customer delight. Their exports are channeled through wholly owned subsidiary viz., HMT (International) Ltd., with an agency network across the globe. Their Corporate Head Quarters housed at Bangalore formulates strategic plans, policies and programmes and co-ordinates implementation across our various subsidiaries.

Corporate Vision
7

Corporate Mission

To establish themselves as one of the worlds premier companies in the engineering field having strong international competitiveness

To achieve market leadership in India through ensuring customer satisfaction by supplying internationally competitive products and services

To achieve sustained growth in the earnings of the group on behalf of shareholders

Corporate Objectives & Goals

To encourage the modernization of Indian Industry through the supply of engineering goods and services of world class excellence

To maintain technological leadership through continuous efforts to update product technology and manufacturing methods To globalize our operations by developing a mix of international markets and businesses 8

To ensure a satisfactory return on capital employed, to meet the growth needs and the aspirations of our stakeholders To present an active, pleasant and productive working environment

Corporate Strengths

HMT's Products

Business Domain

HMTS MILESTONES
YEAR UNITS / DIVISION LOCATION STATE 10

1953 Machine Tools I Bangalore Karnataka 1961 Machine Tools II Bangalore Karnataka 1962 Watch Factory I Bangalore Karnataka 1963 Machine Tools III Pinjore Haryana 1965 Machine Tools IV Kalamassery Kerala 1967 Machine Tools V Hyderabad Andhra Pradesh 1971 Tractor Division Pinjore Haryana 1971 Die Casting Division Bangalore Karnataka 1972 Printing Machinery Division Kalamassery Kerala 1972 Watch Factory II Bangalore

11

Karnataka 1973 Precision Machinery Division Bangalore Karnataka 1975 Machine Tools VI Ajmer Rajasthan 1975 HMT (International) Ltd. Bangalore Karnataka 1975 Watch Factory III Srinagar Jammu & Kashmir 1978 Watch Factory IV Tumkur Karnataka 1981 HMT Bearings Limited Hyderabad Andhra Pradesh 1981 Quartz Analog Watches Bangalore Karnataka 1982 Watch Factory V Ranibagh Uttar Pradesh 1982 Specialised Watch Case Division Bangalore Karnataka 1983 Stepper Motor Division

12

Tumkur Karnataka 1985 Ball Screw Division Bangalore Karnataka 1986 CNC Systems Division Bangalore Karnataka 1991 Central Re-conditioning Division Bangalore Karnataka

Accolades - over the years

YEAR AWARD INSTITUTED BY 1960-61 Outstanding Performance President of India 1961-62 Outstanding Performance President of India 1970-71 Excellence Performance in Exports Govt. of Mysore 1971-72 Outstanding Export Performance Govt. of Mysore 1971-72 Outstanding Export Performance EEPC 1975-76 National Award for Outstanding Export Performance 13

Ministry of Commerce 1978-79 Best Product at IMTEX - 79 PMT & FIE 1981-82 Best Export Performance EEPC 1981-82 Best Product at IMTEX - 82 FIE Foundation 1982-83 Export Excellence EEPC 1982-83 Meritorious Performance in the field of Export Ministry of Commerce 1983 Best Corporate Performance Harvard Business School Association of India & Economic Times 1983-84 Most Effective Organisation Foundation for Organisation Research (FORE) 1983-84 Best Productivity Organisation Research (FORE) 1983-84 Export Excellence EEPC 1984-85 Best Productivity National Productivity Council 1984-85 Export Excellence EEPC 14

1984-85 Meritorious Performance in the field of Export Ministry of Commerce 1985-86 Best Product at IMTEX - 86 CMTI - PMT Trust 1985-86 Best Product at IMTEX - 86 FIE Foundation 1985-86 Best Productivity National Productivity Council 1985-86 Export Excellence EEPC 1986-87 Export Excellence EEPC 1986-87 Excellence in Productivity CEI 1986-87 Best Productivity National Productivity Council 1987-88 Export Excellence EEPC 1987-88 Best Productivity National Productivity Council 1988-89 Company Standards Bureau of Indian Standards 1988-89 15

Best Product at IMTEX - 89 CMTI - PMT Trust 1988-89 Best Product at IMTEX - 89 FIE Foundation 1988-89 Outstanding Performance in Industrial Safety National Safety Council 1988-89 Best Productivity National Productivity Council 1988-89 Best Company for HRD Practices CEI 1990 National Award for R&D Efforts in Industry - 1990 in the Mechanical Industrial Sector Dept. of Scientific and Industrial Research 1989-90 Valuable Contribution & Significant Encouragement to the cause of the Industrial Engineering Profession in India H.N.THADANI 1990-91 Best Productivity National Productivity Council 1990-91 Tech. Development for Machine Tools, Bangalore Directorate General of Technical Development 1991-92 Best Productivity National Productivity Council 1992 National Safety National Safety Council 1994 Best Performance in Company Standardisation 16

Sir Jahangir Ghandy Trophy 1995 Best Products at IMTEX - 95 CMTI - PMT Trust Award 1995 Best Product at IMTEX - 95 FIE Foundation 1995-96 Regional 'Top Exporters Shield' Engineering Export Promotion Council, Chennai 1996-97 Regional 'Top Exporters Shield -Project Exporters' Engineering Export Promotion Council, Chennai 1997-98 All India Trophy for Highest Exporters Engineering Export Promotion Council, Kolkata 1998 Best Product at IMTEX - 98 FIE Foundation 1998 Best Products at IMTEX - 98 CMTI - PMT Trust Award 1998-99 Regional Trophy for Highest Exporters in the Group - Services Exporter Engineering Export Promotion Council, Southern Region, Chennai 2001 Best Product at IMTEX - 2001 FIE Foundation 2001 Best Products at IMTEX - 2001 CMTI - PMT Trust Award

HMT Fast Forward

It was in the early post independence era that, HMT began in a small way to meet a big commitment; 17

'To manufacture mother machines to build modern industrial India'. HMT was conceived by the Government of India in 1949, and was incorporated in 1953, with the objective of producing a limited range of machine tools, required for building an industrial edifice for the country.

THE 1960s:
With the success achieved in the initial years in absorbing the technology and in attaining production competence far ahead of the original plans, the Company launched a bold plan of diversification and expansion which resulted in the duplication of the Bangalore Unit and the setting up of new units at Pinjore, Kalamassery and Hyderabad. In 1967, recession struck the Indian Engineering Industry and the consumption of machine tools dipped drastically. The traumatic years of recession did indeed serve to bring to the fore two latent strengths of HMT, namely, the urge to survive and the confidence to innovate. With these strengths at full play, the Company emerged from the recession:

With the world's widest range of machine tools and associated services under a single corporate entity. With action plans firmly launched for diversification into Tractors, Presses and Press Brakes, Printing Machines, Die Casting and Plastic Injection Moulding Machines, Horological Machinery, etc., which were considered to have economic cycles that are different from those of machine tools.

With a Watch Factory already established in 1961-62, additional capacities for watch production were contemplated to provide a greater cushion against cyclical fluctuations in capital goods markets and also to meet the burgeoning demand for watches.

With export markets of enormous potential under active development.

THE 1970s:
The 70s witnessed the fructification of all the diversification plans as envisaged. HMT setup

HMT International Limited as a subsidiary company to channel HMT's products and technical services abroad.

18

Two more units for manufacture of Watches, one at Srinagar and one at Tumkur. HMT took over Machine Tool Corporation at Ajmer as its sixth machine tool unit.

THE 1980s:
In the 80s, HMT as a part of vertical integration efforts, launched units to manufacture Watches at Ranibagh Watch Cases at Bangalore Stepper Motors at Tumkur CNC Systems at Bangalore Ball screws for use on CNC machines at Bangalore etc.,. Also HMT took over Indo-Nippon Precision Bearings Ltd, a state owned unit as a subsidiary, which was renamed HMT-Bearings Ltd. HMT took over Praga Tools Ltd as another subsidiary.

THE 1990s:
The Company restructured itself into five Business Groups viz., Machine Tools, Watches, Tractors, Industrial Machinery and Engineering Components as part of Business Reorganisation.

The New Millennium

HMT is now restructured with addition of three more subsidiaries to those already existing. HMT now comprises of six subsidiaries under the ambit of the Holding Company which also manages the Tractors business directly. HMT Machine Tools Limited, Bangalore HMT Watches Limited, Bangalore HMT Chinar Watches Limited, Jammu HMT Bearings Limited, Hyderabad

19

Praga Tools Limited, Hyderabad HMT (International) Limited, Bangalore The strategic plans of the HMT group are coordinated by the holding company at Bangalore. To navigate through the challenges of the new millennium, HMT seeks strategic alliances from global leaders to synergise its own strengths with symbiotic inputs from the partners. For us, the whole world of opportunities is ahead to emerge as a global engineering conglomerate.

HMTS TRACTOR BUSINESS

HMTs Tractor business commenced its operations in 1971 in technical

collaboration with M/s MOTOKOV, Czechoslovakia Republic. Initially, HMT started the operation with the manufacture of 25 HP Tractor at the manufacturing plant established in Pinjore, Haryana State.

Over the years, it has developed Tractors ranging from 25 HP to 75 HP. The

company achieved market leadership in tractors by enlarging its range to cover most of the applications for the farming community.

Currently the company has three tractor manufacturing units in India located at

Pinjore in Haryana, Mohali in Punjab and Hyderabad in Andhra Pradesh. It has a well equipped R&D Center duly recognized by the Department of Scientific and Industrial Research, the Government of India.

The Tractor Business Group of HMT has been a proud recipient of a number of

National Level - Productivity Awards. It has also been certified for ISO-9001 by KEMA, Netherlands. 20

It has an installed capacity of 20,000 Tractors for manufacturing and assembly

operations. It has an in-house marketing organization comprising 17 Area Offices, 11 Stockyards and over 300 Dealers spread across the country. HMT Tractors Group is ably supported by over 40 Ancillary Units. It has qualified and experienced workforce. HMT has produced and marketed over 3,60,000 Tractors since inception in India and abroad.

HMT TRACTORS- PINJORE

Year of Inception: 1971

PRODUCTS: Tractor Model 2522 3022 H.P. 25 30 Main Feature

AVL fuel efficient engine & New Style Bonnet Fuel efficient engine (HMTs Design) New Style Bonnet 21

3522 4511 5911 7511 2522 OS 3522 CS 3522 DX 4511 CS 4922 EDI

35 45 58 75 25 35 35 45 49

AVL adapted fuel efficient engine & New Style Bonnet HMT Design Heavy Duty Tractor (Czechs Design) HMTs Design, Power Steering & ROPS Low height and width for orchard applications Wetland cultivation Direct Axle Drive Wetland cultivation AVL adapted fuel efficient engine & New Style Bonnet

OS = Orchard Special; CS = Coastal Special; DX = Direct Axle

FEATURES

Integrated plant having captive foundry of capacity 2250 TPA Facilities to manufacture components for 20000 tractors & engines p.a. Facilities to assemble 15000 tractors & 20000 engines p.a. Research & Development Centre Marketing headquarters Spare Parts Management Centre

MARKETING THROUGH:

Area offices: 17 Stockyards : 11 Dealers: 305

Exports through its subsidiary, HMT (International) Limited, a recognized export house.

22

FINANCE DEPARTMENT
Finance Department is one of the most functional areas in HMT, Pinjore. Under the leadership of able and qualified staff, finance department works in hard with other departments with the sole aim of achieving corporate goals. A systematic procedure has been charted out which coordinates with the heads of the various departments. HMT is registered under the Companies Act, 1956, and proper accounts are maintained. Finance Department has done so by delegating such responsibilities to the various functional sections. The complete activity of Finance Department is divided into two sections:

WAGES / SALARIES

&

EXPENSES

(SECTION II)

MAIN ACCOUNTS

WAGES/ SALARIES & EXPENSES:

23

It deals with the determination of the monthly wages and salaries of employees, fringe benefits or retirement, provident fund deduction, income tax, incentives, bonus etc., all the rewards which an employee gets for rendering his services to the company. History sheet for each employee is the basis to compute the payment above because it contains the wage rate which are multiplied with the no. of working days to arrive at monthly wages & salaries. Under expenses II, fringe benefits to employees are dealt with, which include payment of medical reimbursement, conveyance allowance, education expenses, bonus etc.

MAIN ACCOUNTS:
In main accounts section General Manager (Finance) is the head of the department. This section is divided among various sub- sections: 1) Outward Billing Section (OBS) This section mainly deals with accounts relating to sales. The sale of tractors is made through respective dealers. The Sales Department receives the demand of tractors through marketing division; the sales invoices prepared by the sales are then sent to OBS for accounting of these invoices. Accountings relating to freight payment, insurance claims, dealer etc. and assessment of sales tax, excise duty etc. are also some of the functions of this department. 2) Inward Billing Section This section deals with the accounting relating to purchases of raw material and components, tool stores and spares from outside. The Purchase Department receives the requisition from production department through stores department; the inspection 24

department then verifies the material when it comes in, after then the purchase invoice is sent to IBS for accounting purpose. Also, this department opens a letter of credit in the name of the supplier which is a common mode of payment in HMT Ltd. 3) Costing Section This section was set up in 1971. The main purpose of this section is to estimate cost of the product. This is done with the help of the planning department. This section values the inventory on the basis of weighted average cost method. The section is very helpful in planning, decision- making and control of inventory by giving timely information through management information system. 4) Expenses I This section deals with the expenses other than employees, like whitewash, repairs of factory building, its maintenance etc. 5) Time Office As the name suggest. This section keeps the time record of all the employees working in the company. Salaries of the employees are computed after seeing the daily attendance register of the employees. There are 25 punching machines in the factory; these machines keep the time record of all the employees. Then the staff of this section makes the entries into the attendance register of the employees.

OBJECTIVE OF THE STUDY

Working capital management is very important in modern business. The analysis of working capital is also very useful for short-term management of funds. The following are objective of study:

25

To study the size and composition of current assets and current liabilities, increase or decrease in individual current assets and current liabilities and its effect on the working capital position. To make item-wise analysis of the elements or component of working capital to identify the items responsible for change in working capital.

To assess the working capital requirement of the company. To know about the length of operating cycle. To locate the weaknesses and give suggestions to improve them. To know the causes of changes in working capital.

2.

BACKGROUND

CONCEPT OF WORKING CAPITAL

Introduction

26

Financial management can be divided into two broad areas of responsibility as the management of long-term capital and the management of short-term funds or working capital. The management of working capital which constitutes a major area of decisionmaking for financial managers is a continuous function which involves the control at the every ebb and flow of financial resources circulating in the enterprise in one form or another. It also refers to the management of current assets and current liabilities. Efficient management of working capital is an essential prerequisite for the successful operation of a business enterprise and improving its rate of return on the capital invested in short-term assets. Virtually every business enterprise requires working capital to pay-off its short-term obligations. Moreover, every firm needs working capital because its not possible that production, sales, cash receipts and payments are all instantaneous and synchronised. There elapses certain time for converting raw materials into finished goods: finished goods into sales and finally realisation of sale proceeds. Hence, funds are required to support all such activities in the firm. A number of terms like working funds, circulating capital, temporary funds are used synonymously for working capital. However, the expression, Working Capital, is preferred by many due to its popularity and simplicity.

Definition of working capital

Working capital may be defined in two ways, either as the total of current assets or as the difference between the total of current assets and total of current liabilities. Like, most other financial terms the concept of working capital is used in different connotations by different writers. Thus, there emerged the following two concepts of working capital. i) Gross concept of working capital ii) Net concept of working capital 27

Gross concept: No special distinction is made between the terms total current assets and working capital by authors like Mehta, Archer, Bogen, Mead and Baker. According to them working capital is nothing but the total of current assets for the following reasons: i) Profits are earned with the help of the assets which are partly fixed and partly current. To a certain degree, similarity can be observed in fixed and current assets in that both are partly borrowed and yield profit over and above the interest costs. Logic then demands that current assets should be taken to mean the working capital of the corporation. ii) With every increase in funds, the gross working capital will increase while according to the net concept of working capital there will be no change in the funds available for the operating manager. iii) The management is more concerned with the total current assets as they constitute the total funds available for operating purposes than with the sources from which the funds came, and that iv) The net concept of working capital had relevance when the form of organisation was single entrepreneurship or partnership. In other words a close contact was involved between the ownership, management and control of the enterprise and consequently the ownership of current and fixed assets is not given so much importance as in the past.

Net concept: Contrary to the aforesaid point of view, writers like Smith, Guthmann and Dongall. Howard and Gross, consider working capital as the mere difference between current assets and current liabilities. According to Keith. V. Smith, a broader view of working capital would also include current liabilities such as accounts payable, notes payable and other accruals. In his opinion, working capital management involves the managing of individual current liabilities and the managing of all inter-relationships that link current assets with current liabilities and other balance sheet accounts. The net concept is advocated for the following reasons: 28

i) In the long-run what matters is the surplus of current assets over current liabilities. ii) It is this concept which helps creditors and investors to judge the financial soundness of the enterprise. iii) What can always be relied upon to meet the contingencies is the excess of current assets over current liabilities, since it is not to be returned; and iv) This definition helps to find out the correct financial position of companies having the same amount of current assets. In general, the gross concept is referred to as the Economics concept, since assets are employed to derive a rate of return. What rate of return is generated by different assets is more important than the analyzed difference between assets and liabilities. On the contrary, the net concept is said to be the point of view of an accountant. In this sense, working capital is viewed as a liquidation concept. Therefore, the solvency of the firm is seen from the point of view of this difference generally, lenders and creditors view this as the most pertinent approach to the problem of working capital.

TYPES OF WORKING CAPITAL

Sometimes, working capital is divided into two varieties as: i) Permanent working capital ii) Variable working capital Permanent Working Capital: Though working capital has a limited life and usually not exceeding a year, in actual practice some part of the investment in that is always permanent. Since firms have relatively longer life and production does not stop at the end of a particular accounting period some investment is always locked up in the form 29

of raw materials, work-in-progress, finished stocks, book debts and cash. The investment in these components of working capital is simply carried forward to the next year. This minimum level of investment in current assets that is required to continue the business without interruption is referred to as permanent working capital. While suggesting a methodology for financing working capital requirements by commercial banks, the Tandon committee has also recognized the need to maintain a minimum level of investment in current assets. It referred them as, hard core current assets. The Committee wanted the borrowers to meet this portion of investment out of their own sources and not to depend on commercial banks. Variable Working Capital: This is also known as the circulating or transitory working capital. This is the amount of investment required to take care of the fluctuations in the business activity. While permanent working capital is meant to take care of the minimum investment in various current assets, variable working capital is expected to care for the peaks in the business activity. While investment in permanent portion can be predicted with some probability, investment in variable portion of working capital cannot be predicted easily as sudden changes in the business activity causes variations in this portion of working capital

Sources of Working Capital

30

Principles of Working Capital Management:

There are some principles of sound working capital management policy. They are as follows: 1) Principle of Risk Variation: Risk here refers to inability of a firm to meet its obligation when they become due for payment. Large investment in current assets with less dependence on a short term borrowing increases liquidity reduces risk. 31

On the other hand less investment in current assets and greater dependence on debt increases the risk, reduces liquidity and increases profitability. In other word there is a definite inverse relationship between the degree of risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management should be to establish a suitable trade off between profitability and risk. 2) Principle of Cost of Capital: The various sources of raising working capital finance have different cost of capital and the degree of risk involved. Generally higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two. 3) Principle of Equity position: According this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in the current assets should contribute to the net worth of he firm. 4) Principle of Maturity of Payment: This principle is concerned with planning the sources of finance for working capital. According to this principle, a firm should make every effort to relate maturities of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an impotent factor in risk assumptions and risk assessments

Importance of working capital

The largest portion of financial managers time is spent in managing current assets and current liabilities. A study of Fortune 1000 firms found that more than one-third of financial management time is spent managing current assets and about one-fourth of financial management time is spent managing current liabilities, and

32

More than half of the total assets of a business are generally invested in current assets.

CURRENT ASSETS YEAR Current Assets Total Ratio Ratio

TO TOTAL ASSETS RATIO :-

2005-06
19433209 36 21889478 22 0.887:1

2006-07
19846499 16 22260185 62 0.891:1

2007-08
18432868 54 21290050 03 0.865:1

2008-09
13687933 58 16916289 32 0.809:1

2009-10
12036921 67 15243669 26 0.789:1

Determining the size of working capital

A business undertaking must have adequate amount of working capital to ensure its productive and distributive activities smoothly. Since there is no precise standards to measure working capital adequacy, the management has to determine the size of working capital requirement in the light of certain special attributes of the business firm and general economic environment within which the firm has to operate. Therefore, due consideration should be given to the following factors: FACTORS
DETERMINING WORKING CAPITAL:

1) Nature or character of Business: The working capital requirement of a firm basically depends upon the nature of its business. Public utility undertaking like Electricity, Water Supply, and Railways need very limited working capital because they offer cash sales only and supply services, not products and as such no funds are tied up in inventories and receivables.

33

On the other hand trading and financial firms require less investment in fixed assets but they have to invest large amount in current assets like inventories, receivables and cash. So they need large amount of working capital. HMT Ltd. is producing capital natured product, tractor. It is a large scale manufacturing firm and therefore, needs large amount of working capital. 2) Production cycle: Another factor, which has a bearing on the quantum of working capital, is the production cycle. The term production or manufacturing cycle refers to the time involved in the manufacturing of goods. It covers the time span between the procurement of raw material and the completion of the manufacturing process leading to the production of finished goods. In other words, there is sometime gap before raw material becomes finished goods. To sustain such activities that need for working capital is obvious. The longer time span (production cycle) the large will be the tied up funds and therefore, larger is working capital need and vise versa. In HMT Ltd. the completion cycle of a tractor is 120 hours. Therefore, it needs large amount of working capital. 3) Production Policy: In certain industry the demand is subject to wide fluctuations due to seasonal variations. The requirement of working capital in such case, depend upon the production policy. The production can be either kept steady by accumulating inventories during slack period with a view to meet high demand during peak season of the production could be curtailed during the slack season and increased during the peak season. If policy is to keep production steady by accumulating inventories it will require higher working capital In HMT Ltd., they apply annual production budget as well as monthly budgets for better utilisation of resources such as labour, material and machinery. 4) Credit Policy: The credit terms granted to customers have a bearing in the magnitude of working capital by determining the level of book debts. The credit sales result in higher book 34

debs. Higher book debts mean more working capital. On the other hand, if liberal credit terms are available from the supplies of goods trade needs less working capital. The working capital requirement of a business are thus, affected by term of purchase and sale, and the role given to credit by a company in its dealing with creditors and debtors. The credit policy of HMT Ltd. is as follows: The debtors are divided into four categories, A, B, C and D. Credit period for the categories is:A- 90 days B- 60 days C- No period D- No period

Category C and D debtors have to make payment on the date mentioned on the invoice. If the payment gets delayed, then 15% simple interest will be charged on the outstanding amount per annum. Early Payment Incentive: For Category A & B- discount at 12% for the no. of days left before the completion of the credit period. For category C & D- cash discount is given on the invoice amount at 2%. 5) Growth and Expansion: The working capital requirement of concern increases with the growth and expansion of its business activities. Although, it is difficult to determine the relationship between the growth in the volume of business and the growth in the working capital of a business, yet it may be concluded that for normal rate of expansion in the volume of business, we may have retained profits to provide for the working capital but in fast growing concern, we shall require larger amount of working capital.

35

No such activity of growth and expansion has taken place in HMT Ltd. during the past five years. 6) Seasonal Variation: In certain industry raw material is not available throughout the year. They have to buy raw material in bulk during the season to ensure uninterrupted flow and process them during the entire year. So a huge amount is blocked in form of row material during the peak season, which gives more requirements for working capital and less requirement during the slack season. 7) Earning Capacity: Some firm have more earning capacity than others due to quality of the products, monopoly condition etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their working capital. 8) Dividend Policy: The dividend policy of a concern influences the requirement of the working capital. A firm that maintains a steady high rate of cash dividend irrespective of its profits level needs more working capital than the firm that retains large part of its profits and does not pay at high rate of cash dividend. No such policy is maintained in HMT Ltd. 9) Other Factors: Certain other factors such as operating efficiency, management ability, irregularities in supply, import policy, assets structure, importance of labour, banking facilities etc, also influence the requirement of working capital.

Methods of Calculation of Required Working Capital

The methods of calculation of required working capital are as follows:

Working Capital Cycle:

36

The working capital cycle is also known as operating cycle. It refers to the duration between the firms payment of cash for raw material, entering into production and inflow of cash from debtors and realization of receivables. Simply speaking, operating cycle is the duration between the outflow of cash and inflow of cash and this may be evidenced from the following working capital cycle.

The above and network diagram may offer a clear picture of a complete working capital i.e. it is a cash phenomenon. In the diagram, raw material, stock refers to material only. In work in process, components involved are raw material, wages, and overhead, more specifically manufacturing overheads. Finished stock consists of components of material, wages and overheads inclusive of factory, office and administration and selling and distribution. Debtors include material, wages, overheads and profits. Credit involves for the components of raw material, etc. something a contingency margin is also given while estimating the working capital requirement. The operating cycle consists of him following events, which continues throughout the life of a firm remaining engaged in commercial activities.

Avg. Stock of Raw Material 37

1) Raw Material Holding Period = Avg. Cost of Consumption per day Avg. Stock of Work in Process 2) Work in Process Holding Period = Avg. Cost of Production per day Avg. Stock of Finished Goods 3) Finished Goods Holding Period = Avg. Cost of Sales per day Avg. Book Debt 4) Receivables Collection Period = Avg. Credit Sales per day Avg. Trade Creditors 5) Creditors Collection Period = Avg. Credit Purchased per day

In the form of a simple equation working capital cycle or operating cycle can be represented as bellow:

O = R+W+F+D-C

Where, O = Operating Cycle (In Days) R = Raw Materials Holding Period

W = Work in Process Holding Period F = Finished Goods Holding Period 38

D = Receivables Collection Period C = Creditors Collection Period.

Total Operating Cost Working Capital Required = Number of Operating Cycle

Components of Working Capital:

39

Current Assets:
i) Stock of Raw Material (formonth consumption) ii) Work In Process (forMonth) a) Raw Materials b) Direct Labour c) Overheads iii) Stock of Finished Goods (formonth sales) iv) Sundry Debtors or Receivables (formonth sales) v) Payments in Advance (if any) vi) Balance of Cash (required to meet day-to-day Expenses) vii) Any Other (if any)

Amount

-----------

--------------------------

Less: Current Liabilities:

i) Creditors (formonth purchase of raw materials) ii) Outstanding Expenses (for month) iii) Others (if any) Working Capital (CA CL) Add: Provision/ Margin for contingencies Net Working Capital Required --------------------------------------

Management of working capital:

40

Working capital, in general practice, refers to the excess of current assets over current liabilities. Management of working capital therefore, is concerned with problems that arise in attempting to mange the current assets, current liabilities, and interrelationship that exists between them. In other word it refers to all aspects of administration of both current assets and current liabilities. The basic goal of working capital management is to manage the current assets and current liabilities of a firm in such way that a satisfactory level of working capital is maintained, i.e. neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position is bad for the business. Inadequacy of working capital, may lead the firm to insolvency and excessive working capital implies idle funds, which earn no profit for the business. Working capital management policies of the firm have a great effect on its profitability, liquidity and structural health of the organization. In this context, working capital management is three-dimensional nature:

Dimension I is concerned with the formulation of the policy with regard to profitability, risk and liquidity.

Dimension II is concerned with the decision about the composition and level of current assets.

Dimension III is concerned with the decision about the composition and level of current liabilities.

This dimension aspect of the working capital has been more clearly and precisely explained by the following diagram: Profitability, Risk & Liquidity Dimension I

Composition & level Of current Liabilities Dimension III Dimension II

Composition & Level of current assets

41

3.

METHODOLOGY

The data is secondary in nature. It has been collected from the published annual reports and accounts of the company which were received from the company itself. Extensive use has also been made of books, PhD Thesis, website etc. To process the data scientifically and to make it easily understandable, the profit and loss accounts and balance sheets have been re-casted and presented in a condensed form. For the purpose of analyzing working capital, the techniques of: -Trend analysis -Ratio analysis and -Funds Flow analysis have been used.

PRESENTATION OF THE STUDY

THE STUDY HAS FIVE CHAPTERS AND THEN REFERENCES. FIRST CHAPTER DEALS WITH THE INTRODUCTION ABOUT THE COMPANY. THE SECOND CHAPTER EXPLAINS THE CONCEPT OF WORKING CAPITAL. THE THIRD CHAPTER, I.E., THE PRESENT CHAPTER EXPLAINS THE WORKING OF THE ANALYSIS. THE FOURTH CHAPTER DEALS WITH THE ACTUAL ANALYSIS AND FINDS OUT THE RESULT. THE LAST CHAPTER CONCLUDES THE PROJECT AND CONTAINS RECOMMENDATIONS.

SCOPE
IN THIS STUDY HMT LTD. TRACTOR DIVISION AT PINJORE HAS BEEN ANALYZED. The data for the past five years have been considered, i.e., from 2005-06 to 2009-10.

42

The analysis of working capital position of the firm has been done to

determine the size and composition of the components of the working capital find out the liquidity position, and assess the operating cycle (which is a method to determine the requirement of working capital in a firm)

4.

RESULTS

The results are obtained by applying three techniques, i.e., Trend analysis and Common size Statement, Ratio Analysis & Funds Flow Statement.

WORKING CAPITAL TREND ANALYSIS AND COMMON SIZE STATEMENT

This technique has been used to determine the size and composition of working capital. The proportion of each item of current assets and current liabilities taking total of respective head as hundred, working capital statements and indices of working capital have been calculated, to study the size and composition of current assets and current

43

liabilities, increase or decrease in individual current assets and current liabilities and its effect on the working capital position.

Size and Composition of Working Capital

The size of working capital according to net concept will depend upon what items are included in current assets and current liabilities I have included inventories, receivables, short term loans and advance and cash & bank balance in current assets. Other current assets include patterns, jigs and fixtures. In current liabilities, sundry creditors, payables, other short term outstanding liabilities, interest accrued but not due and provision for liabilities are included. Provision for liabilities further includes provision for contingencies, provision for gratuity, provision for FBT and others. (In Rs) Year Current Assets, Loans & Advances:Inventories Sundry Debtors Cash & Bank Balances Other Current Assets Loans & Advances TOTAL Less Current Liabilities Current Liabilities Provisions TOTAL 2005-06 2006-07 2007-08 2008-09 2009-10

363877449 18.72 126900649 7 65.30 35801150 1.84 10669408 0.55 263966432 13.58 194332093 6 100 1109816145 71.88 434183131 28.12 154399927 6 100

317873634 16.02 133419291 6 67.23 34837209 1.76 11094515 0.56 286651642 14.44 198464991 6 100 1116351988 69.11 498936838 30.89 1615288826 100

513679230 27.87 102744022 0 55.74 70991463 3.85 11556974 0.63 219618967 11.91 184328685 4 100 925986527 62.93 545537410 37.07 147152393 7 100

389672667 28.47 736757339 53.83 14143026 1.03 10929249 0.80 217291077 15.87 1368793358 100 813333574 58.75 570985320 41.25 1384318894 100

280210204 23.28 666765422 55.39 23171137 1.93 11008944 0.91 222536460 18.49 120369216 7 100 856486731 59.30 587829839 40.70 144431657 0 100

44

NET WORKING CAPITAL (C.A.-C.L.) Base year = 2005-06

399321660 100

369361090 92.50

371762917 93.10

-15525536 -3.89

240624403 -60.26

Analysis:During the period of study from 2006 to 2010, the current assets have shown a decreasing trend, except in 2007, where it increased by 2%, as compared to previous year. Current liabilities have shown a fluctuating trend. Overall, in 2010, current assets decreased to Rs 12037 lakhs as compared to Rs 19433 lakhs in 2006, which amounted to a decrease of 38%. During the period current 45

liabilities also decreased, but the speed of decrease of current assets was more than that of current liabilities. In 2010, current liabilities decreased to Rs 14443 lakhs from Rs 15440 lakhs during the same period. It amounted to decrease of 6.5% only. The high rate of decrease in current assets resulted into negative net working capital in 2009 and 2010. The indices of working capital are calculated as compared to that of 2006, the table shows that the indices of working capital were less than 2006 for all years. The inference is that short term solvency and liquidity of the company stood reduced during the period under study. Regarding the composition of current assets and current liabilities, the table expresses that debtors constituted the highest proportion of current assets. The proportion of debtors in total current assets varied from 55% in 2010 to 67% in 2007. The credit sales and accumulated arrears of dues were the main causes of high proportion of debtors to current assets. Inventories have occupied the second place and it varied from 16% in 2007 to 29% in 2009. Loans and advances occupying third place varied from 12 % in 2008 to 19% in 2010. The fourth position was occupied by cash & bank balance and varied from 1% in 2009 to 4% in 2008. Other current assets were at the bottom in the ranking. It varied from 0.55% in 2006 to 0.9% in 2010. In current liabilities, sundry liabilities remained a major item. It varied from 58% of total current liabilities in 2009 to 72% in 2010. The proportion of sundry liabilities in current liabilities was towards a decrease till 2009 but later it showed an increase in2010. The proportion of provisions in current liabilities varied from 28% in 2006 to 41% in 2009. It is discernible from the table that:

Debtors occupied a predominant position in the total current assets of the company, followed by inventories, loans and advances, cash & bank balance and other current assets respectively.

The percentage of debtors declined from 65% in 2006 to 55% in 2010 which indicates, that earlier excessively huge amount was blocked in debtors, now some measures have been taken to reduce the block of huge amount.

46

Finally, the sundry liabilities were always ahead in composition of current liabilities as compared to provisions throughout the period of the study.

RATIO ANALYSIS
A few important ratios like current ratio, acid test ratio, and absolute liquid ratio are computed to determine the liquidity position of the company and inventory collection period, debtors conversion period and payables conversion period are worked to determine the operating cycle of the company.

Liquidity Position
The word liquidity means conversion of assets into cash during the normal course of business and to have a regular uninterrupted flow of cash to meet outside current liabilities. It may be defined as the ability to realize value in money- the most liquid of assets. The ratios used to find liquidity position are:
-

Current Ratio Quick Ratio Absolute Liquid Ratio

47

Operating Cycle
The concept of operating cycle has been discussed earlier in the topic Background under the head Methods of calculation of required working capital. It is determined by computing:
-

Raw material conversion period Work- in process conversion period Finished goods conversion period Debtors conversion period Payables conversion period

CURRENT RATIO:The two major pillars on which the liquidity of a business stands are the current assets and current liabilities. The difference between current assets and current liabilities has been measured in the working capital statement but the magnitude of the amount of working capital is not the straight indicator of the companys ability to pay current liabilities. Ability to meet current obligations is measured more accurately by the ratio of current assets and current liabilities than the difference between current assets and current liabilities. Therefore, it is the current ratio that affords a measure of liquidity. The current ratio is the indicator of the relationship between current assets and current liabilities.

Current Ratio = Current Assets Current Liabilities

The relationship is generally expressed in times for the amount of current assets available for every rupee of current liabilities. The ratio of 2:1 of current assets and 48

current liabilities is regarded as a satisfactory state of affairs. However, the western countries rule of 2:1 cannot be taken as permanent yardstick of measuring the shortterm solvency in India because such a rigid insistence on a large current is not feasible for developing economies. There is no unanimous opinion in India about what an acceptable current ratio should be. However, according to Tandon Committee and then by Chore Committee the acceptable minimum current ratio under Indian conditions is 100:75 i.e. 1.33:1. Therefore, for the analysis, the current ratio above 1.33:1 indicates an adequate liquidity, if it is 2:1 or above then it shows more than necessary liquidity while current ratio below 1.33:1 is suggestive of poor liquidity and weak position.

Year Current Assets (In Rs) Current Liabilities (In Rs) Current Ratio

2005-06

2006-07

2007-08

2008-09

2009-10

1943320936 1984649916 1843286854 1368793358 1203692167 1543999276 1615288826 1471523937 1384318894 1444316570 1.26:1 1.23:1 1.25:1 0.99:1 0.83:1

Analysis:49

The table and chart reveals the current ratio position of the company during the years 2006 to 2010. It discloses that the current ratio position, on the whole, was not satisfactory. Moreover, the chart shows a decreasing trend in the ratio, which means, there was further loss of liquidity with the passing of the time. The current ratio decreased from 1.26 times in 2006 to 0.83 times in 2010, while it varied in the same range. The ratio is always below 1.33 which is the indicator of poor liquidity position.

QUICK RATIO:The current ratio is a good measure where inventory is liquid. But quick ratio provides a better measure of overall liquidity when a firms inventory cannot be easily converted into cash. The quick ratio is calculated as follows:

Quick ratio = Current Assets- Inventory Current Liabilities

The relationship is generally expressed in times for the amount of liquid assets available for every rupee of current liabilities. The ratio of 1:1 of liquid assets and current liabilities is regarded as a satisfactory ratio. But, however, this ratio can also be not regarded as a yardstick to measure short term solvency. No committee has determined an acceptable quick ratio in Indian scenario. The acceptable quick ratio 1:1 is half of acceptable current ratio of 2:1. Therefore, the acceptable quick ratio for the analysis will be half of acceptable current ratio of 1.33:1, which is 0.67:1. Thus, the quick ratio 0.67:1 or above will indicate adequate liquidity. If it is 1:1 or above, then it will indicate excessive liquidity, and ratio below 0.67:1 will indicate poor liquidity position.

Year Quick Assets (In Rs) Current Liabilities (In Rs) Quick Ratio

2005-06

2006-07

2007-08

2008-09 978689086

2009-10 922842584

1577576073 1664586394 1328658382

1543999276 1615288826 1471523937 1384318894 1444316570 1.02:1 1.03:1 0.90:1 0.71:1 50 0.64:1

Analysis:The table and chart reveals the quick ratio position of the company during the years 2006 to 2010. It discloses that the quick ratio position has been satisfactory, except for the last year (2010), where it was 0.64:1. Also, the chart shows a decreasing trend over the years, which shows a decrease in liquidity position with the passage of time. The quick ratio decreased from 1.02 times in2006 to 0.64 times in 2010, while it varied from 1.03 in 2007 to 0.64 in 2010.

ABSOLUTE LIQUID RATIO:Although, debtors and bills receivables are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. Hence, some authorities are of the opinion that the absolute liquid ratio should also be calculated together with current ratio and quick ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. The ratio is calculated as follows:

Absolute Liquid Ratio= Cash & Bank + Short-Term Securities Current Liabilities
Absolute liquid assets include cash in hand and at bank and marketable securities or temporary investments. The acceptable norm for this ratio is 50% or 0.5:1. This ratio is also expressed in times. But this norm is also acceptable in western countries and not in a developing country like India.

51

No acceptable norm has been determined for India. The acceptable norm of 0.5:1 is half of quick ratio. Therefore, the acceptable norm for the analysis should be half of quick ratio of 0.67:1, which works out to be 0.34:1.

Year Absolute Liquid Assets (In Rs) Current Liabilities (In Rs) Absolute Liquid Ratio

2005-06 35801150

2006-07 34837209

2007-08 35801150

2008-09 70991463

2009-10 23171137

1543999276 1615288826 1471523937 1384318894 1444316570 0.02 0.02 0.02 0.05 0.02

Analysis:The table and chart reveals the absolute liquid ratio position of the company during the years 2006 to 2010. It discloses that the absolute liquid ratio position, on the whole, was not satisfactory. It remained same for all the five years at 0.02, except for 2008-09 where it was 0.05 times. The ratio always remained below 0.34:1, thus indicating that the company has very less absolute liquid assets.

RAW MATERIAL CONVERSION PERIOD:It measures the velocity of conversion of raw material into work-in-process. It is also known as raw material holding period. This period is calculated as follows:

RMCP = Average stock of raw material * 365 Raw material consumption

52

Average stock of raw material has been computed as follows: Opening stock of raw material + closing stock of raw material 2 A lower number of days mean that the company is taking less time in converting its raw material into work-in-process and vice-versa.

Year Average Stock of Raw Material (In Rs) Raw Material Consumption (In Rs) Raw Material Conversion Period

2005-06 119334018 1568301782 27.77 days

2006-07 111800549.5 1359561659 30.01 days

2007-08 102411952 1258606003 29.69 days

2008-09 84911824 922220784 33.61 days

2009-10 86744097.5 1072028579 29.53 days

Analysis:THE
TABLE AND CHART SHOWS THE RAW MATERIAL CONVERSION PERIOD DURING

2006

TO

2010. IT

UNCOVERS THAT DURING THE PERIOD OF STUDY, THE

RMCP

HAS REMAINED ALMOST SAME, EXCEPT FOR

2008-09, WHERE

IT WAS

34

DAYS.

THE RMCP HAS 28

INCREASED FROM

28

DAYS IN

2006 TO 30

DAYS IN

2010. THE RMCP

PERIOD VARIED FROM

DAYS IN

2006

TO

34

DAYS IN

2009. THE

INCREASE IN

RMCP IS AN INDICATOR OF REDUCED SPEED OF CONVERSION OF RAW MATERIAL. WORKING NOTES:Year Opening R.M Closing R.M Average Stock of Raw Material 2005-06 127855810 110812226 119334018 2006-07 110812226 112788873 111800549.5 2007-08 112788873 92035031 102411952 2008-09 92035032 77788616 84911824 2009-10 77788616 95699579 86744097.5 53

WORK-IN-PROCESS CONVERSION PERIOD:It measures the velocity of conversion of work-in-process into finished goods. It is also known as work-in-process holding period. This period is calculated as follows:

WIPCP = Average stock of WIP * 365 Cost of production

Average stock of WIP has been computed as follows: Opening stock of WIP+ closing stock of WIP 2 A lower number of days mean that the company is taking less time in converting its work-in-process into finished goods and vice-versa.

Year Average WIP (In Rs) Cost of Production (In Rs) WIP Conversion Period

2005-06

2006-07

2007-08 99696767.5 1868328194 19.47 days

2008-09 101730441 1547190501 23.99 days

2009-10 92435706.5 1742184563 19.36 days

148685860 124385817.5 2230748867 24.32 days 2017649391 22.5 days

Analysis:THE TABLE AND CHART ILLUSTRATES THE WORK-IN-PROCESS CONVERSION PERIOD DURING 2006 TO 2010. IT DISCLOSES THAT DURING THE PERIOD OF STUDY, WIPCP HAS SHOWN A DECREASING TREND, EXCEPT
FOR

2009 WHERE IT RAISED TO 24 DAYS AGAIN. OVERALL THE WIPCP DECLINED FROM 24 DAYS IN WIP

2006 TO 19 DAYS IN 2010. THE WIPCP VARIED FROM 19 DAYS IN 2010 TO 24 DAYS IN 2006. THE
DECREASING TREND INDICATES THAT THERE HAS BEEN AN INCREASE IN THE SPEED OF CONVERSION OF INTO FINISHED GOODS.

54

WORKING NOTES:Calculation of Cost of production: (Amount in Rs) Particulars 2005-06 2006-07 Materials 1730435533 1490541242 Add: Salaries & Wages 347747415 375883876 Depreciation 33191729 26723906 Power & Fuel 53786829 50015931 Rent 2617271 2602676 Rates & Taxes 51168661 2151214 Insurance 4348714 3904544 Water & Electricity charges 7811404 8540240 Repairs to Buildings 1117668 2038639 Repairs to Machinery 428758 587001 Printing & Stationery 2151817 2003105 Opening Balance of WIP 146657394 150714326 Less: Closing balance of WIP 150714326 98057309 TOTAL 2230748867 2017649391 Year Opening Balance of WIP (in Rs) Closing balance of WIP (in Rs) TOTAL (in Rs) Average WIP (in Rs) 2005-06
146657394 150714326 2230748867 148685860

2007-08
1387187375 387842875 24838124 49003275 2546046 1934431 3351223 9986050 2319689 820986 1777621 98057017 101336518 1868328194

2008-09
1042790946 414606078 28975196 42202013 1905626 2327954 1982851 9927835 1267328 577385 1415135 101336518 102124364 1547190501

2009-10
1190107850 437300865 34056116 38695591 2146716 2476789 2996051 10535723 2056883 458007 1976657 102124364 82747049 1742184563

2006-07
150714326 98057309 2017649391 124385817.5

2007-08
98057017 101336518 1868328194 99696767.5

2008-09
101336518 102124364 1547190501 101730441

2009-10
102124364 82747049 1742184563 92435706.5

FINISHED GOODS CONVERSION PERIOD:It measures the velocity of conversion of finished goods into debtors. It is also known as finished goods holding period. This period is calculated as follows: 55

FGCP = Average stock of finished goods * 365 Cost of sales

Average stock of finished goods has been computed as follows: Opening stock of finished goods+ closing stock of finished goods 2 A lower number of days mean that the company is taking less time in converting its finished goods into debtors and vice-versa.

Year Average Stock of Finished Goods (In Rs) Cost of Sales (In Rs) Finished Goods Conversion Period

2005-06
98163527.5 2330378195 15.37 days

2006-07
90851626.5 2107565504 15.73 days

2007-08
187177703.5 1932354334 35.35 days

2008-09
227256802 1625773992 51.02 days

2009-10
115586344 1824091652 23.12 days

Analysis:THE TABLE AND CHART ILLUSTRATES THE FINISHED GOODS CONVERSION PERIOD (FGCP) DURING 2006
TO

2010. IT DISCLOSES THAT DURING THE PERIOD OF STUDY, FGCP HAS SHOWN A FLUCTUATING TREND. 240% AT 51 DAYS, WHICH IS VERY HIGH. THE FGCP VARIED FROM 15 DAYS IN 2006 TO

OVERALL THE FGCP INCREASED FROM 15 DAYS IN 2006 TO 23 DAYS IN 2010. IN 2009, THE FGCP
INCREASED BY

35 DAYS IN 2009. THE INCREASE IN THE FGCP INDICATES THAT THERE HAS BEEN DECREASE IN THE
SPEED OF CONVERSION OF FINISHED GOODS INTO DEBTORS.

WORKING NOTES:Calculation of Cost of Sales: (Amount in Rs) 56

Details Cost of production Add:-selling & distribution expenses Rebate on Sales Advertisement & Publicity Bad Debtors written off Carriage outward Warranty claims TOTAL

2005-06
2230748867

2006-07
2017649391

2007-08
1868328194

2008-09
1547190501

2009-10
1742184563

15843551 12013174 0 59453640 12318963 2330378195

16526053 10646320 0 52723161 10020579 2107565504

7208174 10110632 0 38352342 8354992 1932354334

8787522 8589739 15596220 31978701 13631309 1625773992

20738611 5817601 9107 39082040 16259730 1824091652

(Amount in Rs) Details Opening balance of stock-in-trade Opening balance of stock at showrooms Closing balance of stock-in-trade Closing balance of stock at showrooms Average stock of finished goods 2005-06
79113849 21269141 67037853 28906212 98163527.5

2006-07
67037853 28906212 62420049 23339139 90851626.5

2007-08
62420049 23339139 238027426 50568793 187177703.5

2008-09
238027426 50568793 94807837 71109548 227256802

2009-10
94807837 71109548 58278961 6976342 115586344

DEBTORS CONVERSION PERIOD:Debtors Conversion Period (DCP), also known as average collection period, represents the average number of days for which a firm has to wait before its debtors are converted into cash. It is also called as average debtors holding period. This period can be calculated as follows:

57

Debtors conversion period= Average debtors * 365 Net credit sales

Average debtors have been calculated as follows: Opening balance of debtors+ closing balance of debtors 2 The information regarding credit sales was not given, therefore to calculate debtor conversion period, following formula is used:

Debtors conversion period= Average debtors * 365 Net sales

A lower number of days mean that the company is taking less time in converting its finished goods into debtors and vice-versa.

Year Average Debtors (In Rs) Net Sales (In Rs) Debtors Conversion Period

2005-06
1269006497 2442756514 189.61 days

2006-07
1301599707 2196321753 216.30 days

2007-08
1180816568 1632515477 264.00 days

2008-09

2009-10

882098779. 5 701761380.5 1551245631 207.55 days 1847068917 138.67 days

Analysis:THE TABLE AND CHART ILLUSTRATES THE DEBTORS CONVERSION PERIOD (DCP) DURING 2006 TO 2010. IT DISCLOSES THAT DURING THE PERIOD OF STUDY, DCP HAS SHOWN AN INCREASING TREND TILL 2008
AND THEN IT SHOWED A DECREASING TREND. TO

OVERALL THE DCP DECREASED FROM 190 DAYS IN 2006

139 DAYS IN 2010. THE DCP VARIED FROM 139 DAYS IN 2010 TO 264 DAYS IN 2008. THE

58

INCREASE IN THE

FGCP INDICATES THAT THERE HAS BEEN DECREASE IN THE SPEED OF CONVERSION OF

FINISHED GOODS INTO DEBTORS.

IT ALSO INDICATES THAT OVER THE YEARS MEASURES HAVE BEEN TAKEN TO IMPROVE THE SPEED OF
CONVERSION OF DEBTORS INTO CASH.

ACCORDING TO THE CREDIT POLICY, CREDIT PERIOD GIVEN TO DEBTORS SHOULD BE NOT BE MORE THAN 90
DAYS.

HOWEVER, DURING THE PERIOD OF STUDY IT HAS ALWAYS REMAINED HIGHER THAN 90 DAYS. IN

2010, IT WAS LEAST AS COMPARED TO LAST FIVE YEARS, BUT HIGH AS COMPARED TO 90 DAYS.

PAYABLES CONVERSION PERIOD:The average payment period or payables conversion period (PCP) is calculated in the same manner as the average collection period:

Payables conversion period= Average creditors * 365 Annual purchases

Average creditors are calculated as follows: Opening balance of creditors+ closing balance of creditors 2 It represents the average number of days taken by the firm to pay its creditors. Generally, lower the ratio, the better is the liquidity position of the firm and higher the ratio, less liquid is the position of the firm. But a higher payment period also implies greater credit period enjoyed by the firm and consequently larger the benefit reaped from credit suppliers. But, a higher ratio may also imply lesser discount facilities availed or higher prices for the goods purchased on credit.

Year Average Trade creditors Net Credit Purchases

2005-06
484123700 1551258198

2006-07
478146580.5 1361538306

2007-08
424269134 1237852161

2008-09
371094568.5 907974368

2009-10
377639946 1089939542

59

Payables Conversion Period

113.91 days

128.18 days

125.10 days

149.17 days

126.46 days

Analysis:The average number of days taken by the firm to pay its creditors has not varied much in the past five years. It varied between 114 days in 2006 and 149 in 2009. Overall the creditors conversion period has shown an increase from 114 days in 2006 to 127 days in 2010. It indicates that over the years the firm enjoyed greater credit period. It may also indicate that there are less discount facilities availed by the company.

FUNDS FLOW STATEMENT

Statement of Schedule of Changes in Working Capital:(Amount in Rs) Statement of Schedule of Changes In Working Capital Effect on Working Capital 2008-09 2009-10 Increase Decrease
14143026 736757339 389672667 10929249 217291077 1368793358 813333574 570985320 1384318894 -15525536 23171137 666765422 280210204 11008944 222536460 1203692167 856486731 587829839 1444316570 -240624403 9028111 69991917 109462463 79695 5245383

Particulars Current Assets:Cash & Bank Balances Sundry Debtors Inventories Other Current Assets Loans and Advances TOTAL Current Liabilities:Current Liabilities Provisions TOTAL Working Capital (CA-CL)

43153157 16844519

60

Net Decrease in Working Capital

-15525536

225098867 -15525536

225098867 239452056

239452056

Analysis:The statement shows that there has been increase in the following current assets: Cash and bank balance, loans and advances and other current assets, which are patterns, jigs & fixtures. Following two current assets were decreased: - Sundry debtors and inventories. Huge amount were locked in these two current assets. Similarly there was decrease in the current liabilities. But the decrease in the two current assets (debtors and inventories), was so huge that it resulted in net decrease in working capital.

Sources and Applications of Funds:(Amount in Rs) Sources Funds from operations Net decrease in Working Capital Unsecured loan raised Rs Applications 508000560 Head office Account 225098867 Secured loan paid 140523000 Purchase of fixed assets Interest paid on LOAN GOIVRS Interest paid on LOAN GOICAPEX Interest paid on LOAN GOISTATUTORY DUES Interest paid on Loan from CHO-VRS Funds Interest paid on Cash Credit/ Term Loan Interest paid on others 873622427 Rs 733436258 4206705 31257051 313204 1328056 15064236 16368917 52613663 19034337 873622427

Analysis:Funds from operations, Net decrease in Working Capital and Unsecured loan raised are the different Sources of Funds. These funds have been applied majorly in head office account. 61

WORKING NOTES:FUNDS FROM OPERATIONS Closing Balances of P&L Account Add:- Non-fund & non-operating items Depreciation Misc. Expenditure written off Interest on loans: GOI-VRS GOI-CAPEX GOI-Statutory dues Loan from Cho-VRS Funds Cash Credit & Term Loans Others Less:- Non-fund or Non-operating income Profit on sale of assets Opening Balance of P&L Account Funds from Operations Rs -569466684 34056116 2926811 57000872 40002332 84251165 16368917 50755754 19034337 638250 -773709190 508000560

Particulars To Balance b/d To Adjusted P&L a/c To Capital WIP, Machinery & equipment in transit a/c To Cash a/c

Fixed Assets A/c Rs Particulars 108828549 By Accumulated Depreciation 8 a/c

638250 10513236 31257051 By Balance c/d

Rs
4125947

1126568088

62

1130694035

1130694035

Particulars To Fixed Assets a/c (balancing Figure) To balance c/d

Accumulated depreciation a/c Rs Particulars 4125947 By balance b/d By Adjusted P&L a/c 814101855 818227802

Rs 7841716 86 34056116 8182278 02

Particulars To Bank a/c (balancing figure) To Balance c/d

Interest a/c (Loan GOI-VRS) Rs Particulars 313204 By Balance b/d 271401604 By Adjusted P&L a/c 271714808

Rs 2147139 36 5700087 2 2717148 08

Interest a/c (Loan GOI-CAPEX) Particulars Rs Particulars To Bank a/c (balancing figure) 1328056 By Balance b/d To Balance c/d 139297027 By Adjusted P&L a/c 140625083 Interest a/c (Loan GOI-Statutory dues) Particulars Rs Particulars To Bank a/c (balancing figure) 15064236 By Balance b/d To Balance c/d 162312594 By Adjusted P&L a/c 177376830 Interest a/c (Cash Credit/ Term Loan ) Particulars Rs Particulars To Bank a/c (balancing figure) 52613663 By Balance b/d To Balance c/d 1993458 By Adjusted P&L a/c

Rs 100622751 40002332 140625083

Rs 93125665 84251165 177376830

Rs 3851367 50755754 63

54607121

54607121

5.

CONCLUSIONS &

RECOMMENDATIONS
THE RESULTS WHICH WERE FOUND FROM THE ANALYSIS WERE AS FOLLOWS: The working capital of the firm has decreased. The reason for the decline of the working capital is mainly due to the reduction in the two major currents, which are inventory and debtors. The operating cycle of the firm has shortened. The main reason for shortened operating cycle is the reduction in the debtor conversion period and increase in the payables conversion period. The debtor conversion period has been shortened because of the introduction of new credit policy. The application of funds has been majorly in the head office a/c and in paying of interest on loans. Giving a closer look at the annual reports reveals that huge amount of expenditure is incurred on the personnel a/c. The firm is following the technique of credit monitoring. They follow the technique of aging schedule, a credit- monitoring technique that breaks down accounts receivables into groups on the basis of their time of origin. 64

RECOMMENDATIONS

Though, the collection period has reduced compared to previous year, it should
be reduced further so that the chances of bad debts can be minimized. This can be done by following the collection techniques more vigorously. These can be done through letters, telephone calls, personal visits, collection agencies or legal actions.

Worker participation management should be encouraged. No purchases should be made till the stock is disposed off. Techniques like justin-time, computerized systems for resource control (like MRP) should be followed to avoid unnecessary purchases.

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REFERENCES
Gitman,L.J.Principles of managerial finance.(11th ed.).2009.New Delhi: Pearson Education Kumar,A. A study of financial management of sick cotton textile mills in the northern region.1987. University Business School: Unpublished Thesis Guthman,H.C. Analysis of financial Statement. (4thEd.).New Delhi: Prentice Hall of India

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