DECLARATION

I do hereby declare that the project report entitled A Study on Descriptive Analysis of Working Capital Management of J.K.Tyre is an authentic work developed by Kumar Deep Banoriya Student of MBA 2nd year under the guidance of Mr. P.K.Patankar for the partial fulfillment of the requirements for the award of the degree of Post Graduate, Master of Business Administration By the Gautam Budhha Technical University, Uttar Pradesh, from the local centre the City College, College of Science & Engineering(Jhansi), I also declare that any or all contents incorporated in this project have not been submitted in any form for the award of any degree or diploma of any other institution or university.

PLACE: DATE:

SIGNATURE OF THE STUDENT

ACKNOWLEDGEMENT

Foremost, I would like express my gratitude to Mr. P. K. Patankar for taking out time from his hectic schedule for being my mentor. He has been a wonderful guide and a counselor. He has shown immense patience in dealing with all my queries, however petty they may have been. I fall short of words in thanking him. My sincere thanks to all the respondents who spared their valuable time in giving me the required information and my apology for testing their patience. Special thanks to the Head Dr. M. K. Sharma and the entire faculty. I also wish sincere and humble thanks to all my friends and colleagues who encouraged and inspired me from time to time. It is only because of them that I did not lose the sight of my track and completed the research. I thank my parents who supported me and provided me with all the help required during my summer training period and the preparation the project report.

PREFACE

To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-to-day finance and the management of this short-term capital or finance of the business is called Working capital Management. Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader.

Kumar Deep Banoriya MBA 2nd yr

EXECUTIVE SUMMERY
The major objective of the study is to have proper understanding of the working capital of J.K Tyre Ltd., Banmore & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firms short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period. The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management.

ABSTRACT
The management of Working Capital is one of the most important and challenging aspect of the overall financial management. Merely more effective and efficient management of working capital can ensure survival of a business enterprise. Working Capital Management is concerned with the problems that arise in attempting to manage the Current Assets, Current Liabilities and the interrelation that exists between them. This is a two-dimensional study which examines the policy and practices of cash management, evaluate the principles, procedures and techniques of Investment Management, Receivable and Payable Management deals with analyzing the trend of working capital management and also to suggest an audit program to facilitate proper working capital management in Indian Tyre Industry.

The study covers a production of year viz, -2007-June 2011. For the purpose of investigation both primary and secondary data is used. The collected data is analyzed by applying research tool which include accounting tools like Analysis, Cash Flow Analysis, Common Size and Trend Analysis. They reveal that there is a standoff between liquidity and profitability and the selected corporate has been achieving a tradeoff between risk and return. Efficient management of working Capital and its components have a direct effect on the profitability levels of tyre industry

OBJECTIVES OF THE STUDY

The primary aim of our study is to examine and assess management of working capital of JK Tyre industry. In this broader framework an attempt will be made to meet out the following specific objectives of the study 1. To study the components of Working Capital Management in J.K.TYRE Industry. 2. To assess at length, prevalent practices of inventory management, cash management and receivables management on the profitability and liquidity of firms in the Tyre Industry. 3. To analyze the relative proportion of different sources of finance for working capital of J.K.TYRE Industry. 4. To get the practical exposure to deal and find out the working capital requirements.

TABLE OF CONTENTS
1. INTRODUCTION 2. ABOUT THE ORGANIZATION 3. UNDERSTANDING THE WORKING CAPITAL 8. WORKING CAPITAL ANALYSIS 9. ANALYSIS OF SHORT TERM FINANCIAL POSITION 10. CURRENT ASSET MOVEMENT RATIO 11. INVENTORIES 13. INVENTORY MANAGEMENT 14. CASH MANAGEMENT 15. WORKING CAPITAL CYCLE 16. SOURCES OF ADDITIONAL WORKING CAPITAL 17. HANDILING RECEIVABLES MANAGEMENT 19. RESEARCH METHODLOGY 19. DATA INTERPRETATION AND ANALYSIS 12. ANALYSIS OF FINANCIAL STATEMENTS 20. SUGGESTIONS 22. LIMITATIONS OF THE STUDY 23. CONCLUSION 24. REFERENCES 08 09-28 29-47 48-49 50-56 57-64 65-69 70 71 72-74 75 76-81 82-84 85 86-96 97 99 100 101

INTRODUCTION
Working Capital Management refers to all management decisions and actions that ordinarily influence the size and effectiveness of the working capital. It is concerned with the most effective choice of working capital sources and the determination of appropriate levels of the current assets and their use. It focuses attention to the managing of current assets, current liabilities and the relationships that exist between them. In the present day of rising capital cost and scarce funds, the importance of working capital needs special emphasis. It has been widely accepted that the profitability of a business concern likely depends upon the manner in which its working capital is managed. The inefficient management of working capital not only reduces profitability but ultimately may also lead a concern to financial crises. On the other hand, proper management of working capital leads to a material savings and ensures financial returns at the optimum level even on the minimum level of capital employed. Both excessive and inadequate working capital is harmful for a firm. Excessive working capital leads to unremunerative use of scarce funds. On the other hand, inadequate working capital usually interrupts the normal operations of a business and impairs profitability. There are many instances of business failure for inadequate working capital Example. Modi Rubbers. Further, working capital has to play a vital role to keep pace with the scientific and technological developments that are taking place in the area of tyre industry. Also, the current financial parameters of tyre industry are much less than the desired level. In this context, an attempt has, therefore, been made to undertake an in depth study on working capital management of Indian Tyre Industry.
8

ABOUT THE ORGANISATION

The advent of JK Organization on the industrial landscape of India almost synchronizes with the beginning of an era of industrial awareness - an Endeavour for self reliance and the setting up of a dynamic Indian industry. This was way back in the middle of the19th century. And the rest that followed is history Excellence comes not from mere words or procedures. It comes from an urge to strive and deliver the best. A mindset that says, when it is good enough, improve it. It is a way of thinking that comes only from a power within.

10

CORE VALUES

JK Organization has been a forerunner in the economic and social advancement of India. It always aimed at creating job opportunities for a multitude of countrymen and to provide high quality products. It has striven to make India self reliant by pioneering the production of a number of industrial and consumer products, by adopting the latest technology as well as developing its own know-how. It has also under taken industrial ventures in several other countries. JK Organization is an association of industrial and commercial companies and charitable trusts. Its member companies, employing nearly 50,000 persons are engaged in the manufacture of a variety of products and in diverse fields of commerce. Trusts are devoted to promoting industrial, technical and medical research, education, religious values and providing better living and recreational facilities. With the spirit of social consciousness uppermost in mind, J.K. Organization is committed to the cause of human advancement.

11

 VISION
To be amongst the most admired companies in India, committed to excellence

MISSION

Be a Customer Obsessed Company - Customer First 24x7 No.1 Tyre Brand in India Most profitable Tyre Company in India Motivated and Committed team for excellence in performance Be a Green Company Deliver Enhanced Value to all stakeholders Enhance global presence through Acquisition / JV / Strategic Partnerships

12

HISTORY OF JK TYRE & INDUSTRY LTD

Ever since its inception it has been JK Tyre's belief in the value of technological superiority that has made it grown by leaps and bounds. This division produces and sells tyres and tubes under the brand name "JK Tyre" for Truck, Buses, Passenger Cars, Jeeps, Light Commercial Vehicles, Multi Utility Vehicles and Tractors. The company pioneered Steel Radial Technology in India in 1977and continues to be the industry leader in the Radial segment in India. JK Tyre is the only Tyre Manufacturer in the country to produce high performance 'T' & 'H' -rated steel radial tyres. JK Tyre has consciously followed a policy of continuously modernizing and expanding its tyre manufacturing facilities to retain its edge in the market place. Our customer base covers virtually the entire Original Equipment Manufacturers (OEMs) in India together with Replacement Market for four wheeler vehicles, Defense and State Transport Units. Besides India, we have a worldwide customer base in over 45countries across all 6 continents.

To keep pace with the market demand as well as technological leadership in Indian market, J.K.Industries acquired Vikrant Tyres Limited, Mysore in 1997. J.K.Industries and Vikrant Tyres Limited are the only tyre companies in India to have received all three ISO 9001, QS 9000 and ISO14001 certificates. This indeed is a true reflection of our commitment to system oriented approach. The company has technical collaboration with M/s Continental AG, Germany, which is among the top five tyre manufacturers In the world to keep pace with latest technological developments. To stay at the forefront of technological advancements a state of art Research & Development Centre, HASETRI, was set up, which remains the nerve centre for with three plants located in Rajasthan, Madhya Pradesh and Karnataka, JK Tyre is the largest manufacturer of truck and bus tyres in India. The truck and bus tyres produced account for nearly74% of the total tyre business in India, thus giving JK Tyre an undisputed position. Additionally,
13

YEARLY ACHIEVEMENTS 1951- The Company was incorporated as a private limited company in West Bengal in
14thFebruary, 1951 until31stMarch 1970 The company was engaged in the managing agency business thereafter the company decided to undertake manufacturing activities and obtained a letter of intent in February 1972 for the manufacture of automobile tyres and tubes.

1972-

The letter of intent was converted into an industrial license in February for the

manufacture of 4lakh nos. each automobile tyre and tubes per annum. The company was converted into a public limited company on 1stApril 1974. the manufacturing project was promoted by Straw Products Ltd and J.K. Synthetics Ltd. Co., U.S.A.,(a subsidiary of General Tire& Rubber Co., U.S.A.) for technical services for a period of 5years and sales agreement for the supply of technical know-how, engineering and documentation for operational facilities (for a period of 8 years from23.08.1973).- Under the collaboration agreement, the company has the right to use on its products the wording Made in collaboration with General Tire International Co., U.S.A

1982
The companys technical collaboration agreement with General tire International Co.,

was renewed for a further period of 5 years.

1987-

The overall working resulted in substantial profits despite a 51 days

strike as well as go-slow from 14thOctober. The strike had since then been resolved and

14

amicable settlement was reached. Efforts were on to launch a new pattern in steel belted radial tyres.

1988-

New steel radial tyres for Maruti Gypsy and Tata mobile were

introduced. The company proposed to incur an expenditure of Rs.300 lakhs for installation of latest and sophisticated R&D equipment.

1989-

Several new patterns and sizes of tyres were introduced including a

semi-lug Nylon tyre, all of which were well received in the market

1990-

Han deep Investment Ltd., Hid rive Finance Ltd., Panchanan

Investment Ltd., and Radial Finance Ltd., J.K. International Ltd., Shivdham Properties Ltd., and J.K. Asia Pacific, Ltd., are

1991-

The J.K. International division expanded its activities by opening its

office in Moscow besides starting companys subsidiaries in UK &Honkong. The radial tyres for tractors and business launched in the previous years were well received.

1992-

New radial tyres Brute and Ultima were introduced. The company

was in the process of developing steel belted radial tyres the prestigious cars in the Mercedes Benz, Peugeot, Daewoo race and Opel Astra. A new pattern developed for Bus and tucks PET8 was well received in the market.

1994-

The company maintained its pace of growth, despite steep rise in raw

material and input costs and competition. The company effected an all round cost reduction and attained higher capacity utilization at both the Tyre plants at Jaykaygram and Banmore.15

The T-rated Ultima tyres launched for new generation cars found its acceptance in DCM Daewoos Ceilo. Also J.K. steel radial was chosen for Mercedes Benz India. Subsidiaries of the Company

1995-

The company undertook to develop steel radials for GMs Astra. Pals

Peugeot Fiats, UNO and M&Ms Ford.- The company launched a premium truck Tyre

Jet Trek 39 which was introduced to meet the need of the heavy load market.- The new tractor rear tyre SONA was well received in the market.

1996-

During this period, a new car tyre Jet Drive XS, the widest nylon car

tyre of Maruti 800 was launched. Along with new semi-lug and heavy duty lug tyre for trucks, anew lug tyre for super heavy load applications Jet Trak-39 was also introduced. In the radial category, Ultima XR Radial, a terrain tyre was introduced. All these products were well received in the market.- Both the tyre plants operated to full capacity. In line with JK Tyre, the radials unit introduced the dual contact high traction and high performance Aqua sonic steel radial car Tyre. The unit also developed also developed Indias first and only H-rated Ultima Xs especially for Mercedes-Benz Cars.

2000-

The company proposes to reduce its debt by Rs.125crore in the current

fiscal from the current level of Rs.635 crore by way of loan repayment.- The company and Indian Oil Corporation have entered into a marketing alliance for installing digital air pressure gauges and setting up sales and services outlets at IOC petrol stations throughout the country.

16

2001-

Raghupati Singhania managing director of J.K. Industries has been

appointed the 19th Chairman of Automotive Tyre Manufacturers association, the representative body of Tyre industry in India.

2002-

J.K. Industries Ltd. has informed BSE that CRISIL has assigned a

P1+rating to the Commercial Paper programmer of the company.

2003-

J.K. Industries Ltd. has a new Marketing Director in Mr. Ajay Kapila.

Before joining J.K. Industries Ltd., Mr. Kapila was Senior Vice-President (sales and Marketing) at Kinetic Engineering Ltd. He was also Director on board and operational head of Kinetics direct selling arm-Kinetic Marketing Services Ltd.

2004-

J.K. Industries Ltd. has informed that its securities are delisted from

Delhi Stock Exchange Association Ltd (DSE) w.e.f. January 29, 2004.

2007-

J.K.

Industries Ltd. has informed that the name of the company has

been changed from J.K. Industries Ltd. To J.K. Tyre & Industries Ltd. w.e.f. April 02, we the people of J.K. Tyre will have organization committed to quality in everything we do. We will continuously anticipated and understand our customers requirements. Convert these into performance standards for our products and services and meet these standards every time. Full customer satisfaction-both internal and external is our motto.

17

JK ORGANISATION - A CENTURY OF TRUST

Innovation and passion to perform have always been the driving forces at J K Organization. J. K. Organization, is one of the leading Private Sector Groups in India, Was founded over 100 years ago - it's been a century of multi-business, multi-product and multi-location business operation.

JK TYRE- WHEELS TO THE NATION

JK Tyre has five Modern plants in India which are strategically located at

Mysore, Karnataka (3) Banmore, Madhya Pradesh Kankroli, Rajasthan

JK Tyre pioneered radial technology in India way back in 1977, and is the Radial Leader in the country being the only tyre manufacturer offering the entire range of 4 wheeler radials i.e. for Trucks & Buses, LCVs, Cars and Farm. With strong adherence to quality and customer service we are not only a leading brand in India but also a strong global player with a presence in 77 countries across 6 continents offering a wide range of products backed by world class technology. JK Tyre enjoys a premium brand status in various advanced markets, including the USA and Australia.

18

OUR FIRSTS - LEADING THE WAY

Ever since its inception, JK Tyre has been a leader rather than a follower. We have garnered many Firsts to our credit like;

First Indian tyre company to introduce All Steel Truck & Bus Radials in India in 1999

Pioneered Radial technology in India by introducing passenger radials in 1977

First Indian tyre company to be recognized a 'SUPERBRAND' by Global Advertising

Professionals

First in India to launch 'Eco-friendly - Green tyre' First in India to launch 'Dual Contact' - Aqua sonic tyre First to launch 'Asymmetric' tyre First in India to launch high performance tyre H rated - Speed of above 190 kms upto 210 kms V rated - Speed of above 210 kms upto 240 kms Z rated - Speed of above 240 kms. Upto 300 kms. World's first tyre manufacturer to get QS 9000 certification for all its multi-location

operations

World's first tyre manufacturer to get ISO 9001 certification for its entire operations.
19

CUSTOMER SATISFACTION - OUR CREDO

Customer Satisfaction has always been our prime focus. We are indeed proud of our highly experienced and professional team for winning the trust of customers and building strong relationships with them.

Our 115 company owned stocking points serve over 4000 dealers across the country. We have set up 130 JK Tyre Steel Wheels - a unique concept in car tyre retailing which

provides value added services like wheel balancing, alignment and tyre care to customers.

Our Truck Radial Care Centers offer after-sales service for Truck/Bus Radials, which

operate on 365 days / 24 hours basis. A large number of such centers have been set up along all major National Highways.

JK Tyre has been among the top two tyre companies in respect of Customer Satisfaction, as

per JK Power Asia Pacific Study, for many years.

20

R & D, TECHNOLOGY OUR DRIVING FORCE

J.K tyre has always been pushing the limits of possibilities. Our research centers have been our nerve centers for extensive research and development. These are

Mr.Hari Shankar Singhania Elastomer and Tyre Research Institute (HASETRI) -

Jaykaygram, Kankroli (Rajasthan) and Faridabad (Haryana)

Dr.Raghupati Singhania Center of Excellence for Tyre and Vehicle Mechanics - Chennai

(Tamil Nadu)

21

MOTORSPORTS - PUTTING INDIA ON THE FAST TRACK

JK

Tyre is

synonymous

with Motorsports in India. By investing in Infrastructure and to put India on the world Motorsports

instituting championship, JK Tyre has taken upon Itself map.

FUTURE PLANS
India is fast emerging as a global automobile hub particularly for small cars. It offers immense Opportunities for JK Tyre to grow its business both organically and inorganically. We have been constantly exploring ways of increasing our presence in different world markets, through alliances and acquisitions in tyre and related business. In all our endeavors, our core focus is on

22

customer delight. Enlarging the customer base, providing them with better quality of services and more value added products, will continue to be the key areas of our thrust.

SOCIAL RESPONSIBILITY AND COMMUNITY SERVICE

As a responsible corporate organization, JK Tyre is committed to social and community service. Giving back to society and the environment is one of our core principles. We have implemented many programmes in order to enrich people in and around our workplaces. In order to provide an all round development and growth, our social programs are diversified to include

Healthcare Education Environment initiatives Sports programmes

HEALTH CARE
We have been running and supporting a number of health programmes not only for our employees, but also for people living in and around the areas we operate from. Some of our efforts in this area are:

Free

Medical

Camps were

organized at our Tyre Plants in collaboration with various reputed hospitals in rural areas

Where no medical facilities are available. Around 1000 people availed the benefit of general medical treatment.

23

Eye Camps were organized at Banmore. Almost 2500 people for tested and 500 eye operations were conducted.

Programmes on Development of Mentally Retarded Children was supported by donations and contributions made by employees of Vikrant Plant at Mysore. This was organized in collaboration with the District Hospital.

In collaboration with Population

Foundation of India, we adopted 60 villages in the Rajsamand District of Rajasthan for running a Population Control Programmes titled

"Parivartan". Services such as

Ante-Natal and post - natal Check-ups,

Immunization, Growth Monitoring of Children upto 5 years, identification and treatment of various diseases and other common ailments are provided free of cost. This has significantly reduced Maternal and Child Mortality rates. The programmes also regularly counsel the community members on issues of Family Welfare and Population Control, including free distribution of contraceptives.

"Pushpawati Singhania Research Institute" (PSRI) which is a Super Specialty Hospital for Digestive, Liver and Renal Diseases, Delhi is an initiative by JK Tyre. The Institute organizes a number of health care programmes like, Free Medical-checkups, Blood Donation Camps etc.

24

We provide all support to TCI and the Bill & Melinda Gates Foundation in their endeavor to spread awareness for HIV /AIDS. Centers have been set up on the National Highway / Transport Nagar to help and council truck drivers who are considered to be highly vulnerable to the diseases. So far, more than 1, 25,000 people have attended the clinics, of which 25% were treated for sexually transmitted infections. We also support "Infotainment Melas"

EDUCATION
We recognize the great importance of education for building the future of our country, and are committed to its contribution. With this belief, Lakshmipat Singhania School at Jaykaygram was established. It gives us great pride to note that our students have excelled and are recognized for their efforts in Rajasthan. We also help and support various educational institutions who are involved in providing quality education for the children in villages. This includes free distribution of books, computers etc. We are also helping raise the level of education amongst the elders by initiating Adult Literacy Programmes in remote and backward villages. Example: small villages adjoining Mysore (Karnataka), Kankroli (Rajasthan) Banmore (Madhya Pradesh) etc.

Children Career Counseling is provided for almost 500 children in Mysore. 10 Ekal Vidyalayas are active in remote villages of Rajasthan. Mid Day Meal programmes are given to a number of schools. J.K Tyre has so far spread our programs across 33 locations benefiting more than 3,500 people. J K Tyre having contributed 7500 adults moving towards literacy as of June 2011, out of 20,000 plus for the J K Group as a whole.

25

 ENVIRONMENT

Environment Management is taken up as a critical function at all our locations. Massive plantation programmes have been organized at all the manufacturing locations to improve ecology. Some of these initiatives are:

In the last five years, 1, 00,000 Trees have been planted.

In an effort to increase greenery in the surrounding villages, public parks have been adopted.

Assistance is provided to Government authorities for maintenance of civic amenities like parks, bus shelters, etc.

Public conveniences have been constructed by our Company at village schools in Mysore.

Neighboring villages have been adopted and temporary water huts are provided during summer months.

We arrange the spraying of special chemicals on large water bodies so that water evaporation can be reduced and it can be conserved during the long summer months.
26

 SPORTS

Our various sporting activities not only encourage a team spirit amonst our employees, but is also extended to sports enthusiasts of the neighboring areas. Apart from conducting different innovative sports events, we also promoting indoor and outdoor sports facilities for our employees. J.K.TYRE also sponsored Indian Jaycee's Gwalior Alankaran Samaroh 2007 wherein eminent personalities of different fields were honoured. JK Tyre is also known for its efforts in the field of Motor Sports, having started the annual events for "JK Tyre National Racing Championship" in 1997 and "JK Tyre National Karting Championship" in 2000. We are extremely proud of this initiative as it has nurturing talent such as, Narain Karthikeyan, Karun Chandhok, and Aarman Ebrahim, and many others. And putting India on the World Car Racing Map. JK Tyre has five Modern plants in India which are strategically located at

Mysore, Karnataka (3) Banmore, Madhya Pradesh Kankroli, Rajasthan

27

JK Tyre has also enhanced its global reach by taking over Tornel a renowned Mexican company, which has 3 plants in Mexico. All these plants are equipped with Worlds most advanced manufacturing and testing machines

ABOUT BANMORE TYRE PLANT

Started its production in 1991 and the first tyre rolled out 25thmarch 1991.The initial capacity of the plant was 4.5 mt/ day. Radial tyre production in passenger and light commercial vehicle segment was added in 1996. The plant is continuously improving its capacity, particularly in radial segment. Present radial capacity is 9000 tyre/ day. Total investment is in last three years for in capacity in radial tyre is apporx Rs117 crore. The expansion of radial plant is still on. Our customers base virtually covers the entire Original equipment manufacturers [OEM] in India together with replacement market for four wheeler, defense and state transport undertaking. Besides India, we have worldwide customers base exporting to more then60 countries. Plant manages their process through documented procedures based upon ISO/TS16949QMS and ISO 14001 EMS [for plant only].These described only all the activities in structured manner to be performed at all BU & SSU level. These procedures are audited at least twice in six months, once each by internal and external auditors. These audits ensure that systems are effectively functioning and continual improvement is achieved.

28

UNDERSTANDING THE WORKING CAPITAL

Capital required for a business can be classified under two main categories via,

1) 2)

FIXED CAPITAL WORKING CAPITAL

Every business needs funds for two purposes for its establishment and to carry out its day- to-day operations. Long terms funds are required to create production facilities through purchase of fixed assets such as p & m, land, building, furniture, etc. Investments in these assets represent that part of firms capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purposes for the purchase of raw material, payment of wages and other day to- day expenses etc.

CONCEPT OF WORKING CAPITAL

There are two concepts of working capital: 1. GROSS WORKING CAPITAL
29

2.

NET WORKING CAPITAL

Gross working capital is the total of all current assets. Net working capital is the difference between current assets and current liabilities. Though the later concept of working capital is commonly used it is an accounting concept with little sense to say that a firm manages its net working capital. What a firm really does is to take decisions with respect to various current assets and current liabilities.

NATURE OF ENTERPRISE
The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.

MANUFACTURING/PRODUCTION POLICY
Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.

30

WORKING CAPITAL CYCLE

In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.

31

OPERATIONS
The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.

MARKET CONDITION
If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high.

32

Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.

CREDIT POLICY
The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables.

BUSINESS CYCLE
Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at the time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal

33

AVAILABILITY OF RAW MATERIAL

If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same.

GROWTH AND EXPANSION

Growth and expansion in the volume of business results in enhancement of the working capital requirement as business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.

EARNING CAPACITY AND DIVIDEND POLICY

Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital.

PRICE LEVEL CHANGES

Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.

MANUFACTURING CYCLE
The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working
34

capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion.

OTHER FACTORS
Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital.

NET WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES.

COMPONENT OF WORKING CAPITAL BASIS OF VALUATION

35

Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses

Each constituent of the working capital is valued on the basis of valuation Enumerated above for the holding period estimated. The total of all such valuation becomes the total estimated working capital requirement. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large. We know that working capital has a very close relationship with day-to-day operations of a business. Negligence in proper assessment of the working capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to liquidation. An inaccurate assessment of the working capital may cause either under-assessment or overassessment of the working capital and both of them are dangerous

CONSTITUENTS OF CURRENT ASSETS

1) 2) 3) 4) 5) Cash in hand and cash at bank Bills receivables Sundry debtors Short term loans and advances. Inventories of stock as: a. Raw material
36

b. c. d.

Work in process Stores and spares Finished goods

6. Temporary investment of surplus funds. 7. Prepaid expenses 8. Accrued incomes. 9. Marketable securities. In a narrow sense, the term working capital refers to the net working. Net working capital is the excess of current assets over current liability, or, say: Net working capital can be positive or negative. When the current assets exceeds the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assts or the income business.

CONSTITUENTS OF CURRENT LIABILITIES

1. 2. 3. 4. 5. 6. Accrued or outstanding expenses. Short term loans, advances and deposits. Dividends payable. Bank overdraft. Provision for taxation, if it does not amt. to app. of profit. Bills payable.
37

7.

Sundry creditors

The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits. The gross concept is sometimes preferred to the concept of working capital for the following reasons: 1. It enables the enterprise to provide correct amount of working capital at correct time. 2. Every management is more interested in total current assets with which it has to operate source from where it is made available. then the

3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital. 4. This concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for following reasons: It is qualitative concept, which indicates the firms ability to meet to its operating expense and short-term liabilities. o It indicates the margin of protection available to the short term creditors. o It is an indicator of the financial soundness of enterprises. o It suggests the need of financing a part of working capital requirement out of the permanent sources of funds.
o

CLASSIFICATION OF WORKING CAPITAL

Working capital may be classified in two ways: On the basis of concept. On the basis of time.

On the basis of concept working capital can be classified as gross working capital and net working capital. On the basis of time, working capital may be classified as:

Permanent or fixed working capital.

38

Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL

Permanent or fixed working capital is minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of working is permanently blocked in current assets. As the business grow the requirements of working capital also increases due to increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPITAL

Temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing for conducting research, etc. Temporary working capital differs from permanent working capital in the sense that is required for short periods and cannot be permanently employed gainfully in the business.
39

IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL

Solvency of the Business: Adequate working capital helps in maintaining the solvency of the
business by providing uninterrupted of production.

Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and
makes and maintain the goodwill.

40

Easy loans: Adequate working capital leads to high solvency and credit standing can arrange
loans from banks and other on easy and favorable terms.

Cash Discounts: Adequate working capital also enables a concern to avail cash discounts on
the purchases and hence reduces cost.

Regular Supply of Raw Material: Sufficient working capital ensures regular supply of
raw material and continuous production.

Regular Payment Of Salaries, Wages And Other Day TO Day Commitments:

It leads to the satisfaction of the employees and raises the morale of its employees, increases their efficiency, reduces wastage and costs and enhances production and profits.

Exploitation Of Favorable Market Conditions: If a firm is having adequate working

capital then it can exploit the favorable market conditions such as purchasing its requirements in bulk when the prices are lower and holdings its inventories for higher prices.

Ability To Face Crises: A concern can face the situation during the depression.

41

Quick And Regular Return On Investments: Sufficient working capital enables a

concern to pay quick and regular of dividends to its investors and gains confidence of the investors and can raise more funds in future.

High Morale: Adequate working capital brings an environment of securities, confidence, high
morale which results in overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

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

42

DISADVANTAGES OF EXCESSIVE WORKING CAPITAL

1. Excessive working capital means ideal funds which earn no profit for the firm and business cannot earn the required rate of return on its investments. 2. 3. Redundant working capital leads to unnecessary purchasing and accumulation of inventories. Excessive working capital implies excessive debtors and defective credit policy which causes higher incidence of bad debts. 4. 5. It may reduce the overall efficiency of the business. If a firm is having excessive working capital then the relations with banks and other financial institution may not be maintained. 6. 7. Due to lower rate of return n investments, the values of shares may also fall. The redundant working capital gives rise to speculative transactions

DISADVANTAGES OF INADEQUATE WORKING CAPITAL

Every business needs some amounts of working capital. The need for working capital arises due to the time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production; production and sales; and realization of cash.

NEED FOR WORKING CAPITAL

For the purpose of raw material, components and spares. To pay wages and salaries To incur day-to-day expenses and overload costs such as office expenses.
43

To meet the selling costs as packing, advertising, etc. To provide credit facilities to the customer. To maintain the inventories of the raw material, work-in-progress, stores and spares and finished stock.

For studying the need of working capital in a business, one has to study the business under varying circumstances such as a new concern requires a lot of funds to meet its initial requirements such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and ambitions of its promoters. Greater the size of the business unit, generally larger will be the requirements of the working capital. The requirement of the working capital goes on increasing with the growth and expensing of the business till it gains maturity. At maturity the amount of working capital required is called normal working capital.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

1. NATURE OF BUSINESS: The requirements of working is very limited in public utility
undertakings such as electricity, water supply and railways because they offer cash sale only and supply services not products, and no funds are tied up in inventories and receivables. On the other hand the
44

trading and financial firms requires less investment in fixed assets but have to invest large amt. of working capital along with fixed investments.

2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of
working capital.

3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating

inventories it will require higher working capital.

4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and
other supplies have to be carried for a longer in the process with progressive increment of labor and service costs before the final product is obtained. So working capital is directly proportional to the length of the manufacturing process.

5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger
working capital than in slack season. 6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of WC

7.

RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question

of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of turnover.

45

8.

CREDIT POLICY: A concern that purchases its requirements on credit and sales its product /

services on cash requires lesser amt. of working capital and vice-versa.

9.

BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for

larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtor and the firm may have a large amt. of working capital.

10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt.
of working capital.

11. EARNING CAPACITY AND DIVIDEND POLICY:

Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.

OTHERS FACTORS: THESE ARE:

Operating efficiency. Management ability. Irregularities of supply. Import policy.
46

Asset structure. Importance of labor. Banking facilities, etc

MANAGEMENT OF WORKING CAPITAL

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

WORKING CAPITAL ANALYSIS

As we know working capital is the life blood and the centre of a business. Adequate amount of working capital is very much essential for the smooth running of the business. And the most important part is the efficient management of working capital in right time. The liquidity position of the firm is totally effected by the management of working capital. So, a study of changes in the uses and sources of
47

working capital is necessary to evaluate the efficiency with which the working capital is employed in a business. This involves the need of working capital analysis.

The analysis of working capital can be conducted through a number of devices, such as:
1. 2. 3. Ratio analysis. Fund flow analysis. Budgeting.

1.

RATIO ANALYSIS

A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis can be employed for measuring short-term liquidity or working capital position of a firm.

The following ratios can be calculated for these purposes:

1. Current ratio. 2. Quick ratio 3. Absolute liquid ratio 4. Inventory turnover. 5. Receivables turnover. 6. Payable turnover ratio. 7. Working capital turnover ratio. 8. Working capital leverage 9. Ratio of current liabilities to tangible net worth

2.

FUND FLOW ANALYSIS

Fund flow analysis is a technical device designated to the study the source from which additional funds were derived and the use to which these sources were put. The fund flow analysis consists of: a. b. Preparing schedule of changes of working capital Statement of sources and application of funds.
48

It is an effective management tool to study the changes in financial position (working capital) business enterprise between beginning and ending of the financial dates.

3.

WORKING CAPITAL BUDGET

A budget is a financial and / or quantitative expression of business plans and polices to be pursued in the future period time. Working capital budget as a part of the total budge ting process of a business is prepared estimating future long term and short term working capital needs and sources to finance them, and then comparing the budgeted figures with actual performance for calculating the variances, if any, so that corrective actions may be taken in future. He objective working capital budget is to ensure availability of funds as and needed, and to ensure effective utilization of these resources. The successful implementation of working capital budget involves the preparing of separate budget for each element of working capital, such as, cash, inventories and receivables etc.

ANALYSIS OF SHORT TERM FINANCIAL POSITION

The short term creditors of a company such as suppliers of goods of credit and commercial banks short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm being tied up in current assets. Therefore, it is important proper balance in regard to the liquidity of the
49

firm. Two types of ratios can be calculated for measuring short-term financial position or short-term solvency position of the firm.

1. 2.

LIQUIDITY RATIOS. CURRENT ASSETS MOVEMENTS RATIOS.

A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when these become due. The short-term obligations are met by realizing amounts from current, floating or circulating assts. The current assets should either be liquid or near about liquidity. These should be convertible in cash for paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following ratios can be calculated:

1.

CURRENT RATIO

2.

QUICK RATIO

3.

ABSOLUTE LIQUID RATIO

1. CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and its most widely used to make the analysis of short-term financial position or liquidity of a firm. It is defined as the relation between current assets and current liabilities. Thus,

CURRENT RATIO

CURRENT ASSETS
50

CURRENT LIABILITES

The two components of this ratio are:

1) 2) CURRENT ASSETS CURRENT LIABILITES

Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc. A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

CALCULATION OF CURRENT RATIO

Example Year Current Assets Current Liabilities Current Ratio 2008 81.29 27.42 2.96:1 2009 83.12 20.58 4.03:1 (Rupees in crore) 2010 13,6.57 33.48 4.08:1
51

INTERPRETATION As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company for last three years it has increased from 2006 to 2008. The current ratio of company is more than the ideal ratio. This depicts that companys liquidity position is sound. Its current assets are more than its current liabilities.

2. QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it can be converted into cash with a short period without loss of value. It measures the firms capacity to pay off current obligations immediately. QUICK RATIO = QUICK ASSETS CURRENT LIABILITES
52

Where Quick Assets are:

1) 2) 3) Marketable Securities Cash in hand and Cash at bank. Debtors.

A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand a low quick ratio represents that the firms liquidity position is not good. As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm having a low liquidity position if it has fast moving inventories.

CALCULATION OF QUICK RATIO

Example Year Quick Assets Current Liabilities Quick Ratio 2008 44.14 27.42 1.6 : 1 2009 47.43 20.58 2.3 : 1 (Rupees in Crore) 2010 61.55 33.48 1.8 : 1
53

INTERPRETATION A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is more than ideal ratio. This shows company has no liquidity problem.

3. ABSOLUTE LIQUID RATIO

Although receivables, debtors and bills receivable are generally more liquid than inventories, yet there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio should be calculated together with current ratio and acid test ratio so as to exclude even receivables from the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes

ABSOLUTE LIQUID RATIO

ABSOLUTE LIQUID ASSETS

54

CURRENT LIABILITES ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.

CALCULATION OF ABSOLUTE LIQUID RATIO

Example Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio 2008 4.69 27.42 17 : 1 2009 1.79 20.58 .09 : 1 (Rupees in Crore) 2010 5.06 33.48 15 : 1

55

INTERPRETATION These ratio shows that company carries a small amount of cash. But there is nothing to be worried about the lack of cash because company has reserve, borrowing power & long term investment. In India, firms have credit limits sanctioned from banks and can easily draw cash.

B) CURRENT ASSETS MOVEMENT RATIOS

Funds are invested in various assets in business to make sales and earn profits. The efficiency with which assets are managed directly affects the volume of sales. The better the management of assets, large
56

is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a firm manages its resources. These ratios are called turnover ratios because they indicate the speed with which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These are

1. 2. 3. 4.

Inventory Turnover Ratio Debtors Turnover Ratio Creditors Turnover Ratio Working Capital Turnover Ratio

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

1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO

Every firm has to maintain a certain amount of inventory of finished goods so as to meet the requirements of the business. But the level of inventory should neither be too high nor too low. Because it

57

is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon as possible.

INVENTORY TURNOVER RATIO

COST OF GOOD SOLD AVERAGE INVENTORY

Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a high inventory ratio indicates an efficient management of inventory because more frequently the stocks are sold the lesser amount of money is required to finance the inventory. Whereas low inventory turnover ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low profits as compared to total investment.

AVERAGE STOCK

OPENING STOCK + CLOSING STOCK 2

CALCULATION OF INVENTORY TURNOVER

Example Year Cost of Goods sold 2006 110.6 2007 103.2 (Rupees in Crore) 2008 96.8
58

Average Stock Inventory Turnover Ratio

73.59 1.5 times

36.42 2.8 times

55.35 1.75 times

INTERPRETATION This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the companys inventory management technique is less efficient as compare to last year.

2. INVENTORY CONVERSION PERIOD:

INVENTORY CONVERSION PERIOD = Example Year Days 2006 365 365 (NET WORKING DAYS) INVENTORY TURNOVER RATIO (Rupees in Crore) 2007 365 2008 365
59

Inventory Turnover Ratio Inventory Conversion Period

1.5 243 days

2.8 130 days

1.8 202 days

INTERPRETATION Inventory conversion period shows that how many days inventories take to convert from raw material to finished goods. In the company inventory conversion period is decreasing. This shows the efficiency of management to convert the inventory into cash.

3. DEBTORS TURNOVER RATIO

A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are expected to be converted into cash within a short period and are included in current assets. So liquidity
60

position of a concern also depends upon the quality of trade debtors. Two types of ratio can be calculated to evaluate the quality of debtors.

A)

Debtors Turnover Ratio

B)

Average Collection Period

DEBTORS TURNOVER RATIO =

TOTAL SALES (CREDIT) AVERAGE DEBTORS

Debtors velocity indicates the number of times the debtors are turned over during a year. Generally higher the value of debtors turnover ratio the more efficient is the management of debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the same business and a trend may be found to make a better interpretation of the ratio.

AVERAGE DEBTORS

OPENING DEBTOR+CLOSING DEBTOR 2

CALCULATION OF DEBTORS TURNOVER RATIO

Example Year Sales 2006 166.0 2007 151.5 (Rupees in Crore) 2008 169.5
61

Average Debtors Debtor Turnover Ratio

17.33 9.6 times

18.19 8.3 times

22.50 7.5 times

INTERPRETATION
This ratio indicates the speed with which debtors are being converted or turnover into sales. The higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows that company is not utilizing its debtors efficiency. Now their credit policy become liberal as compare to previous year

4. AVERAGE COLLECTION PERIOD:

AVERAGE COLLECTION PERIOD

NO. OF WORKING DAYS DEBTORS TURNOVER RATIO

62

The average collection period ratio represents the average number of days for which a firm has to wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors and vice-versa.

AVERAGE COLLECTION PERIOD =

365 (NET WORKING DAYS) DEBTORS TURNOVER RATIO

Year Days Debtor Turnover Ratio Average Collection Period

2006 365 9.6 38 days

2007 365 8.3 44 days

2008 365 7.5 49 days

INTERPRETATION The average collection period measures the quality of debtors and it helps in analyzing the efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm average collection period increasing year to year. It shows that the firm has Liberal Credit policy. These changes in policy are due to competitors credit policy.

5. WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio indicates the number of times the working capital is turned over in the course of the year. This ratio measures the efficiency with which the working capital is used by the firm. A higher ratio indicates
63

efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover is not a good situation for any firm.

WORKING CAPITAL TURNOVER RATIO WORKING CAPITAL TURNOVER

= =

COST OF SALES NET WORKING CAPITAL SALES NETWORKING CAPITAL (Rs In Crore)

Example Year Sales Networking Capital Working Capital Turnover INTERPRETATION 2006 166.0 53.87 3.08 2007 151.5 62.52 2.4

2008 169.5 103.09 1.64

This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal of this ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working capital. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale.

INVENTORIES
Example Year Inventories 2005-2006 37.15 2006-2007 35.69 (Rs. in Crore) 2007-2008 75.01
64

INTERPRETATION Inventories are a major part of current assets. If any company wants to manage its working capital efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2005-2006 is 45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to reduce the inventory upto 10% or 20% of current assets.

KEY RATIOS

65

CASH BANK BALANCE

Example (Rs. in Crore)
66

Year Cash Bank Balance INTERPRETATION

2005-2006 4.69

2006-2007 1.79

2007-2008 5.05

Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements. The above graph is indicate that in 2006 the cash is 4.69 crore but in 2007 it has decrease to 1.79. The result of that it disturbs the firms manufacturing operations. In 2008, it is increased upto approx. 5.1% cash balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.

DEBTORS
Example Year Debtors 2005-2006 17.33 2006-2007 19.05 (Rs. in Crore) 2007-2008 25.94

INTERPRETATION
Debtors constitute a substantial portion of total current assets. In India it constitute one third of current assets. The above graph is depict that there is increase in debtors. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy.

CURRENT ASSETS:
Example (Rs. in Crore)
67

Year Current Assets

2005-2006 81.29

2006-2007 83.15

2007-2008 136.57

INTERPRETATION
This graph shows that there is 64% increase in current assets in 2008. This increase is arising because there is approx. 50% increase in inventories. Increase in current assets shows the liquidity soundness of company.

CURRENT LIABILITY:
Example Year Current Liability 2005-2006 27.42 2006-2007 20.58 (Rs. in Crore) 2007-2008 33.48

INTERPRETATION
Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities of the company increased. But still increase in current assets is more than its current liabilities.

NET WOKRING CAPITAL:

Example (Rs. in Crore)
68

Year Net Working Capital

2005-2006 53.87

2006-2007 62.53

2007-2008 103.09

INTERPRETATION
Working capital is required to finance day to day operations of a firm. There should be an optimum level of working capital. It should not be too less or not too excess. In the company there is increase in working capital. The increase in working capital arises because the company has expanded its business.

INVENTORY MANAGEMENT (A)

69

Inventory Turnover ratio signifies the amount of sale generated with each unit invested in raw material. The inventory utilization by J.K. is quite effective but and need to take measures to increase to stock turnover. This is possible only by shortening the operating cycle in days taken from the point of purchase of raw material to its conversion to the final sale to the consumers and the money getting back into the organization to be utilized again by the company to purchase raw materials for the next operating cycle.

The raw material holding period identifies the number of days the raw material stays in the company before being put into the production process. The raw material holding period of J.K. Tyres have to reduce the number of holding days.

J.K .tyres has already started taking the initiative to reduce the number of holding days from 61 days to 30 days. This can be done by avoiding stocking up of raw materials.

The finished goods holding period of company is very less of 12 days as compared to others industries, which is around 18-20 days in others industries.

Reducing the number of holding days whether raw materials or finished goods is important as this will shorten the operating cycle which would increase the working capital turnover indicating its efficient use.

J.K. Tyre has the highest inventory to current assets ratio of around 50%. This means that a lot of money is blocked in excess inventory storage which should be reduced.

The Debtors Turnover Ratio of is very high which is quite appreciable. This is due to the fact that the average collection period of is very short of around an average of 24 days as compared to others ranging from 50 to 55 days.

CASH MANAGEMENT
70

Cash management throws light on the judicious and efficient use of cash (which is the most liquid asset of an organization). J.K. seems to have the best cash management system since it is the policy of management to invest excess cash into profitable investment avenues.

J.K.Tyre needs to look into its cash management system and bring some changes as there seems to be unnecessary idle cash lying in the business which could otherwise be used more productively.

J.K.Tyre already has started with remedial measures of utilizing excess cash into suitable ventures.

The percentage of cash out of total current assets of J.K.Tyre is very high ranging from 15% 20% as the company needs to utilize the excess cash and bring down the percentage. This will also help the company to increase its profitability

71

WORKING CAPITAL CYCLE

Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

72

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

If you.......

Then...... You release cash from the cycle Your receivables soak up cash You increase your cash resources You free up cash You consume more cash

Collect receivables (debtors) faster Collect receivables (debtors) slower Get better credit (in terms of duration or amount) from suppliers

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

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight,
73

consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than for want of profit.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following:
74

Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing

o o o o o o o

Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).

HANDLING RECEIVABLES (DEBTORS)

75

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt.

COMPARISON WITH VARIOUS INDUSTRIES

The major observations of the study are as follows:-

76

 The selected sample companies have been following either an aggressive or conservative approach: APOLLO - Aggressive approach J.K CEAT MRF Aggressive approach No definitive approach Conservative approach All the companies have a positive net working capital except in the case of Ceat Ltd. in 20052006 and 2006-2007. On an average, the net working capital is largest in MRF followed by Apollo, J.K. and Ceat. When quick assets are compared with current liabilities, it is revealed that the former are insufficient to cover current liabilities in case of J.K. Tyres. For Ceat Ltd. there has been a sudden decline in quick ratio in the year 2005-2006 and 2006-2007. MRF and Apollo are in good position to pay off current debts from quick assets. If standard current ratio is to be taken as 2:1 then Apollo and MRF have current ratios equal to or more than two. But in case of J.K. and Ceat the current ratio is less than two which reflects a poor liquidity position of these two enterprises. There is a standoff between liquidity and profitability position of the tyre companies. These two dont go hand in hand, as in case of MRF where liquidity levels are very high as compared to the industry standards but profitability levels do not rise up to expectations even though MRF has the largest market share. There is an inverse relationship between the two as analyzed

from financial reports. Higher the liquidity levels, lower would be the profitability and viceversa, therefore, tyre companies have to maintain a delicate balance between the two.
77

The efficient management of Working Capital and its components has a direct effect on the profitability levels of the tyre companies: With increase in working capital turnover of Apollo and MRF, the net profit ratio has also improved

The efficient management of Working Capital and its components has a direct effect on the profitability levels of the tyre companies: With increase in working capital turnover of Apollo and MRF, the net profit ratio has also improved 14 International Research Journal of Finance and Economics Issue 46 (2010) An efficient receivables management by Apollo has led to short operating cycle which has led to high debtor turnover ratio and high profitability levels of the company. High collection period from debtors of J.K., Ceat and MRF is apparent from their low DTR and further low profitability levels.

Although J.K. has the highest working capital turnover ratio, much above the industry level, it shows no effect on the profitability levels. This may be due to over-trading which the company should look into as early as possible. Also, there is a gradual decline in the liquidity level and the company should be aware of a liquidity crises coming up.

The tyre companies have on an average half of their total assets in the form of current assets.
78

The average ratio of current assets to total assets is largest for MRF followed by Ceat, Apollo and J.K. Of the total different components of current assets, the share of inventories in total assets, on an average, is largest followed by receivables and cash. Over a period of time, the share of cash has declined except in case of MRF. Since inventories occupy a major share in current assets and its share has increased over a period of time, the tyre industry should pay more attention to management of inventories. The increasing share of inventories indicates that current assets seem to have become less liquid.

For financing any working capital requirements, the tyre companies generally prefer: Bank overdraft/Bank cash credit for immediate solution. Short term loans from Banks generally secured by hypothecation of Inventories and book debts.

Loans from financial Institutions like IDBI, IFCI, and ICICI by hypothecation of immovable properties. The study of the turnover ratios compiled over a period of 8 years show that there has been an improvement in utilization of current assets

Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects:

weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements
79

errors in invoices or statements Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For Example......... longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors.

o o o o o

Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer.

MANAGING PAYABLES (CREDITORS)

80

Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people?
o o o o

Are purchase quantities geared to demand forecasts? Do you use order quantities which take account of stock-holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?

o o o o

There is an old adage in business that if you can buy well then you can sell well. Management of your creditors and suppliers is just as important as the management of your debtors. It is important to look after your creditors - slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!).

RESEARCH METHODOLOGY
81

The methodology, I have adopted for my study is the various tools, which basically analyze critically financial position of to the organization:

I. II. III.

COMMON-SIZE P/L A/C COMMON-SIZE BALANCE SHEET COMPARTIVE P/L A/C

IV. V. VI.

COMPARTIVE BALANCE SHEET TREND ANALYSIS RATIO ANALYSIS

The above parameters are used for critical analysis of financial position. With the evaluation of each component, the financial position from different angles is tried to be presented in well and systematic manner. By critical analysis with the help of different tools, it becomes clear how the financial manager handles the finance matters in profitable manner in the critical challenging atmosphere, the recommendation are made which would suggest the organization in formulation of a healthy and strong position financially with proper management system.

FORMULATING THE RESERCH DESIGN This is the first step under which the problem is stated in general way and the ambiguities that is understanding and rephrasing the problem thoroughly and rephrasing the same into meaningful terms from a analysis point of view. The research problem under the present project was to study the data of various funds. For this research process was to be formulated and the execution which would result in desired data.

PREPARING THE RESERCH DESIGN

82

The function of research design is to provide for the collection of relevant evidence with minimal expenditures of efforts, time & money.

RESERCH DESIGN
Type of Research Sample Design

TYPE OF RESEARCH
The type of research under present is an analytical research. In analytical research, we use tact and information already available, and analyze these to make critical evaluation of the material. Hence the same would be done. In this project I had collected fact, data and information.

SAMPLE DESIGN
A sample design is a definite plan determines the data is actually collected for obtaining a sample. Researcher must select a sample design which should be reliable and appropriate for this project.

COLLECTION OF DATA
Observational design relates to the condition under which the observations are to make. Observational design in respect to research there are several ways of collecting the data which differ considerably in context of money, time cost and resources at the disposal of the researcher

DATA CAN BE OBTAIN FROM TWO IMPORTANT SOURCES

Primary data
83

Secondary data

PRIMARY DATA
Primary data are the data collected afresh and for the first time thus happen to be in character. Primary data collected by the following ways Observation Interview Schedule Questionnaire

SECONDARY DATA
Secondary data are the data that are already collected and are only analyzed by different sources are as follows Corporate magazines Manuals of various companies Journal, newspapers and books

The secondary data is collected from financial statement, journal of national repute books of national and international authors as well as the annual report of the company. In addition to this internet excess will make more effective and meaningful.

DATA INTERPRETATION AND ANALYSIS

84

INVENTORIES MANAGEMENT AT J.K TYRE

J.K TYRE is a large scale manufacturing company involved in Manufacturing of tyres for different vehicles like cars & trucks. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning.

CASH MANAGEMENT AT J.K TYRE

J.K TYRE has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate required amount of cash.

RECEIVABLES MANAGEMENT AT J.K TYRE

J.K TYRE has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New Delhi, Chennai, Bangalore, and Pondicherry. This marketing office obtains sales order from Tyres dealers in India as well as globally. On the basis of order received for different range of tyres it marks production planning

PERFORMANCE HIGHLIGHTS

85

J.K TYRE & Industries (JK Tyre) reported 23% growth in net sales to Rs1, 051cr (Rs854cr), which was below our expectations. This was largely because of lower-than-expected performance at the operating front due to a substantial increase in raw material cost. The company reported an OPM of 7.8% on account of the qoq increase in raw material cost. Net profit at Rs26.7cr (Rs13.6cr) came in below our expectations. Management is optimistic about generating good volumes in FY2010 on the back of strong demand, capacity expansion across segments and the Tornel acquisition. The stock is currently available at attractive valuations of 4.2x and 3.7x FY2011E and FY2012E EPS, respectively. We maintain Buy on the stock

FY2010 FINANCIAL PERFORMANCE

86

JK Tyre reported net sales of Rs 3,678cr on a standalone basis for FY2010 and Rs 4, 571cr on a consolidated basis. Net profit came in at Rs163cr on a standalone and at Rs224cr on a consolidated basis. The numbers are not comparable with the previous fiscal as previous fiscal numbers are for eighteen months. The tonnage stood at 56,700MT for 4QFY2010 and 2, 40,000MT for FY2010.

OUTLOOK AND VALUATION

87

In FY2010, the tyre industry benefited largely from the increased original equipment manufacturer (OEM) demand and spike in replacement demand. Going ahead, we are positive on the sector as OEM offtake is expected to improve, benefitting the overall auto industrys volume growth. However, the recent run-up in raw-material prices is a concern and expected to exert some pressure on the companys operating margin. On account of the lower-than-expected 4QFY2010 performance, we estimate the company to generate EPS of Rs43.2 (Rs45.5) in FY2011E and Rs48.4 (Rs53.5) in FY2012E. We maintain Buy on JK Tyre with a revised Target Price of Rs242 (Rs267), at which the stock would trade at 5x, 3.3 xs and 0.8x FY2012E EPS, EV/EBITDA and P/BV, respective

88

MARGINAL TOP-LINE GROWTH; STRIKE AFFECTS SALES

JK Tyre reported 23% yoy growth in net sales to Rs1, 051cr (Rs854cr) in 4QFY2010. In tonnage terms, the company registered 11.2% yoy growth in volume to 56,700MT in 4QFY2010 (51,500MT in 3QFY2010 and 51,000MT in 4QFY2009). JK Tyre announced a hike in prices in 3QFY2010 and 4QFY2010 to pass-through the raw-material cost increase. An average of ~5% hike across the segments was applicable from January 2009 to abbreviate the increase in raw-material costs. The average procurement price of rubber in 4QFY2010 stood at Rs145/Kg compared to Rs119/Kg in 3QFY2010.

OPM BELOW EXPECTATION DUE TO INCREASED RAW MATERIAL COST

The companys operating profit increased 14.5% yoy to Rs82.2cr (Rs71.8cr). However, on a qoq basis, OPM dropped by 449bp yoy to 7.8% (11.7% in 3QFY2010), which was below our estimates. This was primarily on account of the 586bp qoq jump in raw-material cost. The company attributed the substantial contraction in OPM to change in product mix and higher rubber prices. OPM growth was also partially arrested by the spike in other expenditure, which comprised discounts and other selling and distribution expenses. The company also hiked prices by 5% in 4QFY2010 and has guided on subsequent price hikes in the event of increasing rubber prices. Management has guided to sustain margins of 10 10.5% in FY2011E.

89

NET PROFIT BELOW EXPECTATIONS AT Rs 26.7Cr

For 4QFY2010, JK Tyre recorded a 96.1% yoy increase in net profit to Rs26.7cr (Rs13.6cr), which was below our estimates, primarily on account of a low base of last year and significant payback in working capital loans leading to a fall in interest costs (debt on books of standalone entity is Rs860cr).

90

PROFIT & LOSS STATEMENT CONSOLIDATED

Rs Cr

CAPACITY EXPANSION PLANS

91

Currently, JK Tyre is running at almost full capacity and is partially unable to meet increasing OEM demand. Therefore, the company has major expansion plans on the anvil across segments, with most of the capacities coming on board from 2011E2012E. The companys total capacity post the expansions is slated at 12.6mn tyres annually. The company incurred a capex of Rs315cr for FY2010 and has lined up a capex of Rs750cr for FY2011E. The company has overall capital expenditure plans of Rs930cr in the next two years, out of which Rs776cr is for a Greenfield facility at Chennai, which could be operational by 2012. This facility will produce 25 lakh passenger car radials, 2 lakh bus radials and 2 lakh truck radials. The remaining capex will be used for expanding the facility at the Mysore plant from 8 lakh to 10 lakh radials at a cost of Rs154 cr. The expansion is expected to be completed by March 2011. Consequently, the companys domestic capacity will reach 1.25cr tyres a year in 2012. JK Tyre is currently expanding its off-road tyre (ultra large-size tyre) capacity by 3,000 tyres a year to 42,000 tyres per year, primarily for Bharat Earth Movers (BEML), at a cost of Rs120cr.

The company has, in fact, delivered the first batch of its ultra large-size tyres to BEML ahead of schedule. JK Tyre has completed its truck and bus radial (T&BR) capacity expansion plan, with an investment of Rs315cr, and will have increased capacity from 307,000 tyres to 800,000 tyres per year by October 2010. This capacity has been running at almost 100% capacity utilization in November and December 2009. Therefore, management plans to increase its radial capacity by another 4 lakh tyres to 12 lakh tyres per year over the next three years.

MANAGEMENT OUTLOOK
92

Management is positive about the auto industrys growth, including the commercial vehicle and the passenger vehicle segments, and has planned capacity expansions to meet the demand arising from the uptrend in the auto industry in general. With new international players entering the compact car segment particularly, management expects the industry to witness ~18% annual growth in the passenger car radial segment over the next couple of years. Management is also optimistic on an upturn in the CV cycle and off-take from its strong clients, Ashok Leyland and Tata Motors. Further, management expects the T&BR segment to register 810% annual growth over the next couple of years. The acquisition of Tornel, which is majorly into truck, LCV, farm and industrial tyres in the bias category and truck, LCV and high-speed passenger car tyres, has given JK Tyre a strong hold in the

South American market, which will help increase contribution from the companys international business Debt levels for the company as in March 2010 have gone down from Rs1,100cr to Rs860cr on a standalone basis, and from Rs1, 382cr to Rs1, 158cr on a consolidated basis. The company continues to maintain cash at a normal level of Rs5060cr.Production volumes for JK Tyre for FY2011E could be up by 2025% as demand from passenger cars, trucks and buses remains robust. Currently, demand for tyres is exceeding the supply. The company should also benefit from full capacity utilization at the Kankroli tyre plant in FY2011E. The disruption in operations last year due to the illegal strike by workmen led to a decline of Rs300cr in sales and a loss of Rs3035cr at the EBITDA level.

BALANCESHEET

CONSOLIDATED

Rs Cr
93

CASH FLOW STATEMENT CONSOLIDATED

Rs Cr
94

FINANCIAL STATEMENT ANALYSIS

95

It is the process of identifying the financial strength and weakness of a firm from the available accounting data and financial statements. The analysis is done

LIMITATIONS OF FINANCIAL STATEMENTS:

Though financial statements are relevant and useful for a concern, still they do not present a final picture a final picture of a concern. The utility of these statements is dependent upon a number of factors. The analysis and interpretation of these statements must be done carefully otherwise misleading conclusion may be drawn. 1. Financial statements do not given a final picture of the concern. The data given in these

statements is only approximate. The actual value can only be determined when the business is sold or liquidated. 2. Financial statements have been prepared for different accounting periods, generally one year,

during the life of a concern. The costs and incomes are apportioned to different periods with a view to determine profits etc. The allocation of expenses and income depends upon the personal judgment of the accountant. The existence of contingent assets and liabilities also make the statements imprecise. so financial statement are at the most interim reports rather than the final picture of the firm. 3. The financial statements are expressed in monetary value, so they appear to give final ad accurate

position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on the presumption of a going concern. The concern is expected to continue in future so fixed assets are shown at cost less accumulated depreciation. Moreover, there are certain assets in the balance sheet which will realize nothing at the time of liquidation but they are shown in the balance sheets.
96

4.

The financial statements are prepared on the basis of historical costs or original costs. The value of

assets decreases with the passage of time current price changes are not taken into account. The statement are not prepared with the keeping in view the economic conditions. The balance sheet loses the significance of being an index of current economic realities. Similarly, the profitability shown by the income statements may be representing the earning capacity of the concern.

5.

There are certain factors which have a bearing on the financial position and operating result of the

business but they do not become a part of these statements because they cannot be measured in monetary terms. The basic limitation of the traditional financial statements comprising the balance sheet, profit & loss A/c is that they do not give all the information regarding the financial operation of the firm. Nevertheless, they provide some extremely useful information to the extent the balance sheet mirrors the financial position on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred during the year Thus, the financial position and operation of the firm.

SUGGESTIONS
97

1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option. 12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.

LIMITATIONS OF THE STUDY

98

A) The limitations inherent in secondary data are bound to exist in the research as well. B) The primary data has been collected from the previous financial statements of J.K.Tyre and as such is biased to certain extent. C) The study of working capital is done in Banmore plant which is not enough to understand the whole working of the industry E) The primary data has been collected during the working hours and as such reveal the result in its limits.

CONCLUSION
99

After studying the components of working capital management system of J.K.Tyre It is found that the company has a sound and effective policy and its performance is very good even in this bad recession Situation Company has managed to post good profit. Company is competing well at the domestic as well as the international level and it is among the low cost producers of Tyres in the world only because of its proper management of finance, specially the short term finance known as the working capital. The company is a matured one and it has contributed well in the countries growth and development and will also continue to perform and contribute to the whole nation. In conclusion, we can say that the companies management is an effective one and knows well the management of finance, its working capital management system is very good

REFERENCES
100

Books [1] Anthony, R.N. et.al.(1998). Management Accounting Taxes and cases Illinois. Richard D. Irwin Inc. [2] Agarwal N.P. and Mangal S.K.(1988). Readings in Financial Management Jaipur: Rupa Publishers. [3] Bhalla, V.K. (1987). Financial Management, Delhi; Khosla Publishing House. [4] Chaddha R.S. (2002). Inventory Management in India, Mumbai Allied Publication. [5] Gupta M.C., Profitability Analysis. (1989). Jaipur, Pointer Publishers. [6] Gupta, S.P. (2002). Statistical Methods, New Delhi: Sultan Chand & sons. [7] Horward, L.R., Working Capital: Its Management and control. (1987). London: McDonald and events Ltd.

REPORTS/OFFICIAL PUBLICATIONS
[1] Annual reports of selected Companies of the selected period. Periodicals/Journals/Bulletins [1] The Journal of Industries and Trade Lok Udyog, New Delhi. [2] The Indian Accounting journal and Finance [3] The Accounting Review

WEBSITES
[1] www.ICAI.org [2] www.mrftyres.com [3] www.ceatyres.com [4] www.apollotyres.com [5] http://www.jktyres.com/

101