WORKING CAPITAL MANAGEMENT at

Kotak Mahindra Life Insurance Ltd.

Working Capital Management

y Working capital management is broadly the

management of cash, market securities receivable, inventories and current liabilities. y Working capital management is crucial for the success of the business. y A business should maintain sound working capital position in order to meet current requirements. y Still excessive investment in the working capital components should be avoided ,as it might lead to mismanagement and failure of business

Current assets as percentage of Total assets.

Year 2004 2005 2006

Percentage 31% 26% 35%

It can be visualized from the table that in the first year of our study i.e. 2004 it was 31% which was reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend.

Determinants of Working Capital

y Nature of business y Size of business: The amount of working capital needed is directly
proportional to the scale of operating

y Business Fluctuations:

Financial arrangement for seasonal working capital requirements are to be made in advance.

y Production Policy: Production policy has to be planned well in

advance with respect to fluctuations that businesses face.

y Firm s Credit Policy: A rational credit policy based on the credit

worthiness of the customer.

y Availability of Credit: If a company in a position to get credit on

liberal terms and in a short span of time then it will be in a position to work with less amount of working capital.

y Growth and Expansion activities y Price Level Changes: Increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also increases.

CIRCULATION SYSTEM OF WORKING CAPITAL

Working capital is considered to efficiently circulate when it turns over quickly. As circulation increases, the investment in current assets will decrease. Current assets turnover ratio speaks about the efficiency of Kotak Mahindra in the utilization of current assets. Fast turnover current assets results in a better rate on investment.

Current Assets Turnover Ratio

Year 2004 2005 2006

Ratio (in times) 1.78 2.98 1.98

The ratio average is 2.24 times in the study period of 3 years. In 2005 current assets turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this year company has achieved sales growth 44.36% over the previous year and additional activity needs more funds.

Ratio analysis
Working capital has not been effectively used over the period of years except in the year 2005 as shown by Working Capital Turnover ratio. As shown by current assets turnover ratio, the utilization of current assets in terms of sales has shown a decreasing trend which shows that current assets has been effectively used to achieve sales. Looking at the efficiency with which individual elements of working capital have been utilized, the picture of inventory turnover is not very bright. Receivables turnover also shows a declining trend. Generally such a situation does not suit the company.
(A) Efficiency Ratios 1. Working Capital Turnover (times) 2. Current Assets Turnover (times) 3. Inventory turnover (times) 2004 4.84 1.78 9.49 2005 10.23 2.98 9.20 2006 5.71 1.97 7.88

Ratio analysis
As we look at the extent of liquidity of working capital, we notice that the ratio shows an increasing trend. This indicates improvement on the liquidity front.
(B) Liquidity Ratio 1. Current Ratio 2.AcidTestRatio 3. Cash Ratio 2004 2.12 1.15 0.57 2005 1.80 0.98 0.08 2006 2.41 1.03 0.05 Ideal ratio 2.0 1.0 0.5

Ratio analysis
If we analyze the structural health of working capital, the proportion of current assets to total assets has been appropriate during this period. Such a higher proportion of current asset in the assets portfolio of Kotak Mahindra Life Insurance Ltd. is quite acceptable.
(C) Structural Health of Working Capital Ratio/Year 2004 1. CA 0.31 2. CL 0.15 3. Cash to CA 0.27 4. Receivables to CA 0.27 5. Loans and Advances to CA 0.15 6. Inventory to CA 0.42 7. RM to Inventory 0.44 8. Stock spares to inventory 0.12 9. WIP to inventory 0.06 10. Finished Goods to Inventory 0.38

2005 0.26 0.14 .04 0.50 0.19 0.38 0.46 0.14 0.08 0.32

2006 0.35 0.14 0.02 0.40 0.15 0.50 0.30 0.11 0.03 0.56

SWOT ANALYSIS
STRENGTHS y Market position is strong y Aggressive foreign bank y Shareholders return has grown more than 7 times y Maintains a position as a leading Asian Cash Management provider y Brand Kotak Bank modern and dynamic look appeals to the growing middle income earners y Improved product proposition y Better geographic balances WEAKNESS y HDFC, IDBI, ABN-AMBRO, Citibank and ICICI Bank are dominant players y Has disadvantage due to last entry y Fewer locations as compared to other MNC banks y Service delivery perception is weak

SWOT ANALYSIS
OPPORTUNITIES y Branch expansion for rapid growth y Increase focus on value creation in whole banking y Improve shareholders return y Build market share in consumer banking as consumer banking continues to offer highest potential for growth y Broadening of the demographic base y Tie ups with master card networks y Integrated sales and service approach y Can offer a complete corporate package under proposed corporate relationship THREATS

y ICICI is pitching in quite aggressively y Citibank is expanding in new markets y Competitive products and offers from IDBI and HDFC y Proposed networking of all branches in next 6 months

EVALUATION OF CASH MANAGEMENT PERFORMANCES

EVALUATION OF CASH MANAGEMENT PERFORMANCES

To assess the cash management performance this phase is divided as follows: a) Size of Cash b) Liquidity and Adequacy of cash c) Control of cash

(A) Size of Cash Balance

Year 2004 2005 2006

Cash (In Lacs) 82.20 10.64 5.63

Trend 100 -87.83 -93.15

Size of sales

Year 2004 2005 2006

Sales (Rs. In lacs) 785.65 1134.23 903.92

Trend 100 44.36 15.05

(B) Liquidity and Adequacy of Cash:

Year Curre nt ratio 2.12 Quick ratio 1.51

2004

2005

1.80

0.97

2006

2.41

1.03

(C) Control of Cash:

Year Cash to CA Ratio 26.89 4.29 1.95

2004

Cash to Current assets ratio

2005 2006

Average : 9.43

(C) Control of Cash:

Cash to Current Liability Ratio (%)

Year

Cash to CL ratio 57.21 7.76 4.85

2004 2005 2006

Average: 23.27

Overall Conclusion:
The analysis of financial data reveals that the company has very sound position regarding liquidity and solvency as shown by the current and quick ratios. The cash to current liabilities ratio is nearly on decreasing trend shows the efficiency of operations.

EVALUATION OF INVENTORY MANAGEMENT

Composition of Inventory:
In order to assure effective control on the total investment in inventories it is desirable to maintain a proper balance in all the components.
Year Raw Material Semi Material Finished Goods Stores Spares & Scarp 12 14 11 12 Total

2004 2005 2006 Average

44 46 30 40

6 8 3 5

38 32 56 42

100.00 100.00 100.00 100.00

Inventory Turnover Ratio

Inventory turnover ratio is generally regarded as indicator of inventory efficiencies. It establishes a relationship between the total sales during a period and average inventory
Year Ratio In days

2004

4.06

90

2005

6.61

55

2006

4.76

77

Average :74 days

Overall Conclusion:
This can be concluded that overall composition includes the highest factor of finished goods and that is too on increasing trend. Moreover, the inventory level is maintained for 77 days for the year 2006 that is the highest during the study period. The to overall position of inventory is that adequate on following basis: y The factor of finished goods in the composition of inventory in total is at higher level and also having an increasing trend. y The stock is also very slow moving and the stock retention period is on fluctuating trend. The above two factors increases the cost of production and decreases the profitability, therefore, these should be taken in to consideration for better productivity and efficiency of operation.

EVALUATION OF RECEIVABLES MANAGEMENT

EVALUATION OF RECEIVABLES MANAGEMENT

y

1. 2. 3. 4. 5.

A successful receivable management must ensure a comparatively slow growth of receivable as against sales, as factory collection period and receivable task over minimum bad debts losses and effective use of capital invested in receivable. The criteria for evaluation is: Composition of Receivable : It helps in showing the point where receivable are concentrated most. Ageing of accounts receivable : To have a detail idea of a quality of accounts receivable through agency schedule. Average collection period : To measure the effectiveness of collection efforts. Relationship between debtors and sales : To know growth rate and also co-efficient of correlation and determination. Receivable as percentage of sales ratio: To examine the level of investment is receivable

AVERAGE COLLECTION PERIOD

Average collection period explains how many days of credit, a company is allowing to the customer, a higher collection period indicates towards a liberal and inefficient credit and collection performances shorter the collection period the better the credit management and liquidity of accounts receivable.

Year 2004 2005 2006

Days 38 40 46

Average : 41 days

DEBTORS TURNOVER RATIO

This ratio is calculated the effective utilization of funds involved in receivable. An effective credit management result in a higher turnover of accounts receivable.
Year Debtors Average Turnover collection Ratio period (in days)

2004 2005 2006

9.49 9.20 7.88

38 40 46

Evaluation of Payables Management

Evaluation of Payables Management

Creditors turnover ratio & Average Payment Period
Year Creditors Turnover Ratio 3.95 Average Payment Period 92

2004

2005

5.33

68

Average : 80 days