Working Capital Management at TVS Sundaram Motors

A Summer Project Proposal for

Post-Graduate Programme Business Management

By

Balaji S R

Under the guidance of

Mr. V. Rajaraman Assistant Manager - Finance, TVS Sundaram Motors

Prof. Suyash Bhat, Faculty, SIMSR

K J Somaiya Institute of Management Studies & Research

1st July 2010

Working Capital Management at TVS Sundaram Motors

A Summer Project Proposal for

Post-Graduate Programme Business Management

By

Balaji S R

Under the guidance of

Mr. V. Rajaraman Assistant Manager - Finance, TVS Sundaram Motors

Prof. Suyash Bhat, Faculty, SIMSR

K J Somaiya Institute of Management Studies & Research

1st July 2010

Working Capital Management at TVS Sundaram Motors

A Summer Project Proposal for

Post-Graduate Programme Business Management

By

Balaji S R

Under the guidance of

Mr. V. Rajaraman Assistant Manager - Finance, TVS Sundaram Motors

Prof. Suyash Bhat, Faculty, SIMSR

K J Somaiya Institute of Management Studies & Research

1st July 2010

Certificate of Approval

We approve this Summer Project Report titled "Working Capital Management at TVS Sundaram Motors" as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of PostGraduate Diploma in Business Administration/ Post Graduate Program in

International Business for which it has been submitted. It is understood that by this approval we do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it is submitted.

Summer Project Report Examination Committee for evaluation of Summer Project Report

Name

Signature

1. Faculty Examiner

2. PG Summer Project Co-coordinator

Certificate from Summer Project Guides

This is to certify that Mr. Balaji S R, a student of the Post-Graduate Diploma in Business Administration, has worked under our guidance and supervision. This Summer Project Report has the requisite standard and to the best of our knowledge no part of it has been reproduced from any other summer project, monograph, report or book.

Faculty Guide: Prof. Suyash Bhat Designation:

Organizational Guide: Mr. V. Rajaraman Designation: Organization: Assistant Manager Sundaram Motors 23rd June 2010

Address: 180, Anna Salai, Chennai - 6 Date Date

Acknowledgement
I am heartily thankful to my manager, Mr.V.Rajaraman, whose encouragement, guidance and support from the initial to the final level enabled me to develop an understanding of the project and its requirements.

Lastly, I offer my regards to all of those who supported me in any respect during the completion of the project.

Balaji S R

Abstract
The report objective is to understand the working capital management practices followed at TVS Sundaram motors. Working capital management is a crucial aspect of business for any organization. The report carries the details of working capital management processes followed by financial analysis of TVS Sundaram motors. The financial analysis includes various tools such as ratio analysis in order to understand and arrive at conclusions regarding the financial position of TVS Sundaram motors. These conclusions are then used to come up with certain strategic recommendations which might help improving the working capital position at TVS Sundaram motors. The methodology adopted was, first to understand the overall business model of TVS Sundaram motors - the major organizational functions are used as a base upon which we try to fit the existing departments so as to obtain a clear picture at the macro level. Next, we go a level deeper and take a look at the processes used by each of these departments; the finance department in particular is our area of interest. Here we try to see how the accounting function supports the sales and service functions of TVS Sundaram motors. The major activities and their relevance are observed. In the third part of our research we look at the financial numbers of TVS Sundaram motors and do a ratio analysis based on which we arrive at certain conclusions. These conclusions lead to recommendations which would improve upon the working capital management practices followed. The major findings are related to the various procedures followed and working capital position of the company. We go one step further and try to identify the reasons behind such issues noticed and come up with certain recommendations which would address them. Ratio analysis is the core tool used in order to understand the financials of the company.

Table of Contents
Acknowledgement .................................................................................................................................. 6 Abstract ................................................................................................................................................... 7 1. Introduction .................................................................................................................................... 9 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 2. 2.1. 2.2. About the Group ................................................................................................................... 12 About the Company .............................................................................................................. 12 Automobile Dealership ......................................................................................................... 12 Parts distribution .................................................................................................................. 13 Tools and Garage equipments division ................................................................................. 13 Special products division....................................................................................................... 13 Customer centric business - MyTVS ...................................................................................... 13 Problem Statement ............................................................................................................... 14 Literature survey ................................................................................................................... 15 Working Capital ............................................................................................................. 15 The Need ....................................................................................................................... 15 Fixed and Fluctuating working capital .......................................................................... 15 Components of Working Capital ................................................................................... 16

Rationale for Study ....................................................................................................................... 14

2.2.1. 2.2.2. 2.2.3. 2.2.4. 3. 3.1. 3.2. 3.3. 3.4.

The Research Design ..................................................................................................................... 17 Methodology of Study .......................................................................................................... 17 Business model of Sundaram motors ................................................................................... 17 Accounting practices at Sundaram motors ........................................................................... 18 Data Analysis ......................................................................................................................... 19 Activity Ratios................................................................................................................ 19 Liquidity Ratios .............................................................................................................. 25 Solvency Ratios ............................................................................................................. 29

3.4.1. 3.4.2. 3.4.3. 4. 5.

Results and Conclusions ................................................................................................................ 32 Recommendations ........................................................................................................................ 32 5.1. 5.2. General .................................................................................................................................. 32 Aspects of Working Capital Management ............................................................................ 33 Links ...................................................................................................................................... 34 Books ..................................................................................................................................... 34 Current Assets, Liabilities Statement .................................................................................... 35

6.

References .................................................................................................................................... 34 6.1. 6.2.

7.

Appendix ....................................................................................................................................... 35 7.1.

List of Figures

Figure 1 Business Model of Sundaram Motors ..................................................................................... 17 Figure 2 Working Capital Turnover ....................................................................................................... 20 Figure 3 Inventory Turnover Ratio ........................................................................................................ 22 Figure 4 Debtors Turnover Ratio........................................................................................................... 23 Figure 5 Creditors Turnover Ratio......................................................................................................... 24 Figure 6 Current Ratio ........................................................................................................................... 26 Figure 7 Quick Ratio .............................................................................................................................. 27 Figure 8 Absolute Liquidity Ratio .......................................................................................................... 29 Figure 9 Debt Equity Ratio .................................................................................................................... 30 Figure 10 Interest Coverage Ratio ........................................................................................................ 31

List of Tables

Table 1 Working Capital Turnover ........................................................................................................ 20 Table 2 Inventory Turnover Ratio ......................................................................................................... 21 Table 3 Debtor Turnover Ratio ............................................................................................................. 23 Table 4 Creditors Turnover Ratio .......................................................................................................... 24 Table 5 Current Ratio ............................................................................................................................ 25 Table 6 Quick Ratio ............................................................................................................................... 27 Table 7 Absolute Liquidity Ratio ........................................................................................................... 28 Table 8 Debt Equity Ratio ..................................................................................................................... 29 Table 9 Interest Coverage Ratio ............................................................................................................ 31

Abbreviations
OEM Original Equipment Manufacturer TVS TV Sundaram Iyengar and Sons WCT Working Capital Turnover ITR Inventory Turnover Ratio DTR Debtors Turnover Ratio CTR Creditors Turnover Ratio ALR Absolute Liquidity Ratio ICR Interest Coverage Ratio

1. Introduction
1.1. About the Group
The TVS Group - T V Sundaram Iyengar & Sons Ltd. was established in 1911 by Shri. TV Sundaram Iyengar. As one of Indias largest industrial entities it epitomizes Trust, Value and Service. Today, there are around 43 companies in the TVS Group, employing more than 25,000 people worldwide and with a turnover in excess of USD 5 billion. With steady growth, expansion and diversification, TVS commands a strong presence in manufacturing of two-wheelers, auto components and computer peripherals. It also has vibrant business in the distribution of heavy commercial vehicles passenger cars, finance and insurance.

1.2.

About the Company

T V Sundaram Iyengar & Sons Ltd., established a Vehicle Dealership in Chennai for

handling Cars and Commercial Vehicles and thus Sundaram Motors was born on August 13, 1945. Being the trading and distribution arm of the group, the business activities of Sundaram motors include Dealerships for Automobile vehicles, Distribution of spares for after market, Sales & Service support for Garage Equipment, Sales & Service of products for special applications like construction & Material handling and providing customer centric services for car customers under brand My TVS.

1.3.

Automobile Dealership
Sundaram motors distributes commercial vehicles, Utility & Sports Utility vehicles,

Passenger Cars representing various leading automobile vehicle manufacturers such as Ashok Leyland, Daimler Chrysler, General Motors, Honda and Mahindra & Mahindra. The company has more than 100 outlets and sells over 30,000 vehicles and services more than 300000 vehicles per annum being the leading automobile distribution company in India.

1.4.

Parts distribution
The company is the largest distributors of automobile spare parts in the country,

handling more than 80 suppliers and 35, 000 part numbers of franchised parts, agency lines TVS branded parts and so on. It has operations in Tamil Nadu, Kerala, MP & UP and reaches over 3000 retail outlets spread all over these territories. It has modern warehouse supported with state of the art IT infrastructure.

1.5.

Tools and Garage equipments division

The company also undertakes Sales & Service of Garage Equipments and specializes

in installing commissioning and providing complete after sales service support for critical imported state - of - the art automobile service equipment. All these are imported from various countries from suppliers who are reputed brands abroad.

1.6.

Special products division

The company has also diversified into Marketing (Sales & Service) products for

special application such as Construction & Material handling Equipment, Man lifts, Air Compressors, Bus Air Conditioners etc., representing leading names from India & Overseas in this field and has earned a niche for itself in this category of business. The company has also launched a new avenue of service providing Fork Lift Trucks with trained operators on a monthly lease basis under its unique Own & Operate scheme.

1.7.

Customer centric business - MyTVS

My TVS is the newest initiative of TVS & Sons to offer customers a branded

alternative chain of service network for all brands of cars. Thus, TVS has given birth to a true multi brand independent aftermarket integrated solution for car customers.

2. Rationale for Study

The purpose of this study is to get a grip on the actual accounting practices followed in organizations, to observe in practice what has been studied in theory. By going through the processes of working capital management at TVS Sundaram motors it is hoped to gain an insight into the workings of the company from the context of its accounting function. The scope of the project has been limited to the finance department and specifically within it to areas concerning the management of working capital i.e. cash, inventory and receivables and their utilization. Financial statement analysis forms the core part of the study. Analysis and interpretation of financial statement refers to such a treatment of information containing in the balance sheet and income statement so as to afford full diagnosis of the financial position and profitability of the business enterprises. Financial statement analysis largely depends upon the relationship between various financial factors in a business. The objective is not only to understand the concepts alone, but rather to observe the processes involved and look for potential areas of improvement. A comparison with ideal case scenarios would help us identify such areas which can then be improved upon. Recommendations would be made keeping in mind these specific areas. Specifically the objectives for this study are:

2.1.

Problem Statement

1. To analyze working capital management in TVS Sundaram motors limited. 2. To assess the relative significance of various source of working capital. 3. To observe the relationship between working capital and liquidity position of the company. 4. To find out the impact of working capital on profitability and to suggest potential areas of improvement.

2.2.

Literature survey
2.2.1. Working Capital

The accounting principles board of the America Institute of certified public accountants, USA, has defined working capital as follows:

Working capital, sometimes called net working capital, is represented by the excess of current assets over current liabilities and identifies the relatively liquid portion of total enterprises capital which constitutes a margin or buffer for maturing obligation within the ordinary operating cycle of the business.

2.2.2.

The Need

Working capital is required by a company to sustain its operations in the time gap between sales of goods to receipt of cash. This time gap always arises because sales do not translate into cash instantaneously. There are two major considerations which affect the way working capital is managed. Firstly, the fixed assets of the company can be put to optimum use only when there is sufficient level of working capital. Secondly, proper management of working capital ensures that it does not cause blockage of scarce resources of the company. Lack of sufficient working capital can cause hindrances in smooth operation of the company.

2.2.3.

Fixed and Fluctuating working capital

Fixed working capital is the minimum level of working capital required by a company to carry out its operations effectively. The company cannot operate below this level irrespective of its level of production or sales. The production and sales volumes of a company fluctuate with time sometimes increasing and sometimes decreasing, however fixed working capital does not change with these fluctuations. It is the minimum irreducible amount of working capital required to keep the companys current assets in circulation. It is also known as permanent working capital since this working capital is permanently locked up in business.

Fluctuating working capital is the level of working capital that is needed by a company over and above its permanent working capital. The need for fluctuating working capital arises because of changes in the level of production and sales due to seasonal changes, abnormal conditions or unanticipated demand. Excess working capital is required to support such changes in demand. For example, some additional capital might be required in order to finance a special advertising campaign designed to boost sales in a lean season. This extra working capital needed to support changing business activities is called fluctuating working capital.

2.2.4.

Components of Working Capital

The main components working capital are cash, accounts receivable, inventory, marketable securities, trade credits and loans from banks etc.

Cash is the most liquid and important component of working capital. It is necessary for a business to maintain some amount of cash in hand at bank the even if the other current assets are substantial.

Inventory is required for smooth running of the activities of a company. It acts as buffer between various stages of production as well as between production and distribution. Inventory is of different types and includes raw material, work-in-progress and finished goods.

Accounts Receivable constitutes a significant part of the current assets of a company. It represents amounts that a company is eligible to receive due to the sale of its goods or services. The credit period time allowed before a customer can pay for the good/service, and discounts are decided by credit policy of the company.

Marketable securities include commercial papers that companies issue, bankers acceptance letters, treasury bills etc. They can be bought and sold quickly at a reasonable price. Usually marketable securities tend to have maturity periods of less than a year which makes them attractive as an investment option for the company.

3. The Research Design

3.1. Methodology of Study
Data collection was resorted to through secondary sources of data, financial statements of the company, company process documents and general observation.

3.2.

Business model of Sundaram motors

Sundaram motors

Showroom

WorkShop

Purchase

Sales

Purchase

Sales

Figure 1 Business Model of Sundaram Motors

The flow of cash at Sundaram motors primarily comes from two sources, the showroom and the workshop. The show room is responsible for new vehicle sales while the workshop is responsible for spare parts sales and servicing. Both show rooms and workshops have a purchase and sales function.

The purchase function of the showroom is further subdivided into three based on the OEM i.e. Honda, GM and Benz. The purchases from these three manufacturers are financed through the group company Sundaram Finance. There is an open credit line between Sundaram motors and Sundaram finance for a period of 45 days from the date of purchase.

On the sales side vehicle delivery happens once the full settlement is made by the customer to Sundaram motors either from the end customer or from the customer financing company.

The workshop department has a purchase function as mentioned earlier. The suppliers to the workshop are of two types, one the OEM and the second the local supplier who manufactures parts independently. All transactions in this case are settled automatically with being settled upfront. Coming to the sales function we can further classify it into 5 divisions based on the type of customer. The sundry customer, credit based customer, insurance companies, group companies and the Government. Credit based customers are given a time period of 15 days to settle their dues, which the same in case of other buyers except sundry customers who need to close their dealings immediately with cash.

3.3.

Accounting practices at Sundaram motors

The key stakeholders in the accounting process followed at Sundaram motors are: 1. The Bank 2. The Customer 3. The Vendor The vendor can be further subdivided into auto part suppliers and office equipment vendors. We will look at each of these in detail. This gives us a clear picture of the accounting department from a transactional level. Cash management Cash transactions happen in two cases, cash received from customer or cash goes out to the vendor, in case of office equipment vendors it is treated as petty cash expense. Petty cash expenses might be incurred for employees as well. E.g. couriering parcels or travel within the city. The Customer The customer is the entity who purchases cars, parts from Sundaram motors. A separate account is maintained for the customer accounts receivables. The customer account always maintains a debit balance meaning we always receive money from the customer. An anomaly to this rule needs to be investigated further. The Vendor The vendor account consists of accounts payable to the supplier and usually maintains a credit balance. This means that Sundaram motors gets some time period before it needs to pay the vendor or supplier. A debit balance in the vendor account is not preferred and such occurrences need to be investigated immediately.

The Bank The bank simply acts as a repository of cash and transactions. Sundaram motors has accounts with several banks mostly in the public sector. The transactions to and from the bank are available online and reports from the bank are a vital input for reconciliation activities. Reconciliation This is one of the key activities carried out by the finance department at Sundaram motors. Reconciliation takes place at several levels. At the highest level

reconciliation occurs with the bank account i.e. the reports from bank are cross checked with internal accounts maintained by the company. At the lower level it takes place individually with each customer and vendor account. The main purpose of reconciliation is to ensure that the accounts are all in order and all credit and debit balances are maintained as required. The reports taken from the bank must tally with individual accounts of the customer and vendor.

3.4.

Data Analysis
3.4.1. Activity Ratios

Activity ratios are employed to evaluate the efficiency with which the company manages and utilize its assets. These ratios are called turnover ratio because they indicate the speed with which assets are being converted or turnover into sales. Activity ratio is thus a relationship between sales and assets.

Working Capital turnover Working capital turnover indicates how effectively the company is using its working capital in order to generate sales. Working capital (current assets - current liabilities) is used to fund operations and purchase inventory which is then converted into sales.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Sales 1683.654 2129.681 2834.490 2738.751 3392.312

Working Capital 279.799 379.533 955.471 1219.203 1498.042

WCT (times) 6.017 5.611 2.966 2.246 2.264

Table 1 Working Capital Turnover

So we obtain the relationship between the money used to fund operations and the sales generated from these operations. A higher the working capital turnover is better because it means the company is generating more sales as compared to the funds it uses.

WCT
7 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 WCT
Figure 2 Working Capital Turnover

2007-08

2008-09

In case of Sundaram motors we find that the working capital turnover has come down from a peak of 6 times to only 2 times in the year 2009. This means that the firm is using more and more of its funds to generate less of sales. Though sales has increased

in this period, it has not been achieved efficiently. Instead the company has simply pumped in more money to achieve this sales increase. Inventory turnover ratio A certain amount of inventory is required to meet the business requirements. However the level of inventory should be carefully regulated, it should neither be too high nor too low. If inventory levels are more than required, it blocks cash available to run the business. If inventory levels are too low, the company runs the risk of stock out. The inventory turnover ratio indicates how many times the inventory has turned over in business. It is calculated as the ratio of cost of goods sold to average inventory. Here average inventory refers to the average of beginning and ending inventory levels during the financial year.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Cost of goods sold 1889.123 2155.027 2243.467 2657.401 2976.604

Average Inventory 374.437 308.144 422.069 621.006 665.147

ITR (times) 5.045 6.993 5.315 4.279 4.475

Table 2 Inventory Turnover Ratio

Inventory turnover ratio measures the speed with which the stock is converted to sales. Usually a high inventory turnover ratio indicates efficient management of inventory because more frequently the stocks are sold money comes in quickly to finance the inventory. A low inventory turnover implies higher investment in inventory.

ITR
7 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 ITR
Figure 3 Inventory Turnover Ratio

2007-08

2008-09

In this case, the inventory turnover ratio has steadily decreased over time, though by a small amount. Inventory management is an area which needs to be inspected in detail further.

Debtors turnover ratio The liquidity position of a company also depends on its accounts receivables. Accounts receivables occur when a company sells its goods on credit. A liberal credit policy would result in substantial amounts of accounts receivables. The debtors turnover ratio is used to measure how quickly a companys accounts receivables are being converted to cash.

Year 2004-05 2005-06 2006-07

Sales 1683.654 2129.681 2834.490

Sundry Debtors 166.009 154.996 190.845

DTR (times) 10.142 13.74 14.852

2007-08 2008-09

2738.751 3392.312

188.173 231.475

14.793 14.655

Table 3 Debtor Turnover Ratio

It indicates the number of times the sundry debtors (accounts receivables) are turned over during one year. Generally, the higher the value of debtors turnover ratio the more efficient is the management of debtors.

DTR
15

10

0 2004-05 2005-06 2006-07 DTR

Figure 4 Debtors Turnover Ratio

2007-08

2008-09

A low debtors turnover ratio indicates poor management of debtors. The debtors turnover ratio has been constant and relatively high over the past three financial years which is an indicator that the company is doing a good job of managing its accounts receivables.

Creditors turnover ratio

The creditors turnover ratio is used to measure the length of time that is needed for a company to repay its suppliers. The main purpose is to measure short term liquidity. Accounts payable include both sundry creditors and bills payable.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Credit purchase 623.412 690.452 935.875 1239.138 1332.825

Creditors 167.755 178.163 220.856 242.752 254.512

CTR (times) 3.717 3.876 4.238 5.105 5.236

Table 4 Creditors Turnover Ratio

A high creditors turnover ratio signifies that the creditors are being paid promptly. Though this enhances the credit worthiness of the company, a very high ratio also shows that the business is not taking the full advantage of the credit facilities allowed by the creditors. Hence this value needs to be looked at in conjunction with other ratios. The reason being, sometimes companies can keep this ratio low on purpose in order to invest the cash it has in hand in order to get better returns. However with better cash flows the tendency for this ratio is to go up which has been observed in case of Sundaram motors as well. This only indicates that the company is generating cash fast enough.

CTR
6 5 4 3 2 1 0 2004-05 2005-06 2006-07 CTR
Figure 5 Creditors Turnover Ratio

2007-08

2008-09

3.4.2.

Liquidity Ratios

Liquidity refers to the ability of a company 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 assets. 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. Current ratio Current Ratio is a measure of general liquidity and mostly used to make the analysis of short-term financial position of a company. It is defined as the ratio between current assets and current liabilities.

Current assets include cash, accounts receivable, inventory, marketable securities, trade credits etc. Current liabilities include outstanding expenses, accounts payable, dividends payable etc.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Current Assets 729.070 820.133 1433.363 1738.373 2037.862

Current Liabilities 731.411 893.262 1016.607 1242.814 1094.898

Ratio 1.00 0.918 1.490 1.398 1.861

Table 5 Current Ratio

The general thumb rule for current ratio is that it should be 2:1 for currents assets to current liabilities. When the companys current ratio is near about this value it indicates

that the liquidity position of the company is satisfactory. A low current ratio shows that the liquidity position of the company is not good and the company shall not be able to pay its current liabilities as and when they are due. A relatively high current ratio is an indication that the company is liquid and has the ability to pay its current obligations as and when they are due.

Current Ratio
2 1.5 1 0.5 0 2004-05 2005-06 2006-07 Current Ratio
Figure 6 Current Ratio

2007-08

2008-09

In the case of Sundaram Motors, we can clearly see that the current ratio has been on an upward trend since 2004. It has reached 1.8 in the year 2009, which is still less than an ideal current ratio of 2:1.

Quick ratio Quick ratio is a more stringent test of liquidity than the current ratio. Quick ratio may be defined as the ratio between quick assets and current liabilities. It measures the companys ability to pay its current obligations immediately.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Liquid Assets 354.633 511.989 1011.294 1117.367 1372.715

Current Liabilities 731.411 893.262 1016.607 1242.814 1094.898

Ratio 0.485 0.573 0.994 0.899 1.253

Table 6 Quick Ratio

To find out the quick assets of the company we need to remove inventory from the current assets of the company. Now we calculate the value of quick assets to current liabilities of the company to get the quick ratio. The rule of thumb for quick ratio is 1:1 for current assets to current liabilities. If the company is able to maintain a quick ratio of 1:1 it means that the company is able to meet its obligations immediately without dependence on its inventory sales. It has enough of cash and accounts receivables in hand.

Quick Ratio
1.4 1.2 1 0.8 0.6 0.4 0.2 0 2004-05 2005-06 2006-07 Quick Ratio
Figure 7 Quick Ratio

2007-08

2008-09

In case of Sundaram motors we can clearly see that the quick ratio has been healthy throughout the period of analysis. This can attributed to the fact that the company has always maintained a good cash balances in hand. Especially over the 5 year period, cash balances have increased by a substantial amount.

Absolute liquidity ratio The accounts receivable part of current assets though more liquid than inventory, is still subject to realization of cash. It may happen that the customer is not able to pay on time, in which case the company cannot use it to pay off its obligations.

Year

Current Assets Inventory Accounts Receivable

Current Liabilities

Ratio

2004-05 2005-06 2006-07 2007-08 2008-09

51.291 201.716 613.212 617.264 960.983

731.411 893.262 1016.607 1242.814 1094.898

0.0731 0.2257 0.6031 0.496 0.878

Table 7 Absolute Liquidity Ratio

Hence while calculating the absolute liquidity ratio we remove the accounts receivable from current assets. The amount left with us in this case would be the cash and bank balances of the company.

ALR
1 0.8 0.6 0.4 0.2 0 2004-05 2005-06 2006-07 ALR
Figure 8 Absolute Liquidity Ratio

2007-08

2008-09

3.4.3.

Solvency Ratios

Debt equity ratio The debt to equity ratio is a measure of the financial leverage of the company. It tells us how the company is using debt to increase its returns to shareholders. A high debt to equity ratio means that the company has aggressively financed its expansion through debt. This is a risky proposition for any firm. The earnings of the firm would be very volatile in this case as the interest expense will constitute a significant component.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Long term debt 1297.028 868.876 576.979 429.762 418.052

Shareholders Equity 529.017 503.867 1030.665 1260.141 1731.315

Debt Equity 2.4517 1.7246 0.5598 0.3410 0.241

Table 8 Debt Equity Ratio

D/E
2.5 2 1.5 1 0.5 0 2004-05 2005-06 2006-07 D/E
Figure 9 Debt Equity Ratio

2007-08

2008-09

When a company opts for a higher debt load care should be taken so that returns from using debt for expansion far exceed its costs, otherwise it is possible that the company might getting trapped in a vicious cycle which drags it down. It is seen that the debt to equity ratio of Sundaram motors has steadily fallen over the years and currently stands at 0.2. This only indicates that the company is reducing its dependence on long term debt. The company has been prudent in its usage of debt as a tool to fund its expansion.

Interest Coverage Ratio This ratio determines if the company is in a good position to service its debt. It is calculated as the ratio of EBIT to interest expense incurred by the company.

The lower this ratio, the more difficult it is for the company to pay interest on its debt. It is usually expressed in the number of times a companys earnings can cover its interest expense and hence the term.

Year 2004-05 2005-06 2006-07 2007-08 2008-09

EBIT 31.587 262.821 936.535 570.574 942.262

Interest Expense 133.456 89.923 60.522 46.889 39.511

ICR 0.236 2.923 15.479 12.192 23.854

Table 9 Interest Coverage Ratio

If the companys interest coverage ratio goes below 1.5 times, then its ability to service its debt becomes doubtful. An interest coverage ratio of 2 times or more is considered to be safe.

ICR
25 20 15 10 5 0 2004-05 2005-06 2006-07 ICR
Figure 10 Interest Coverage Ratio

2007-08

2008-09

Sundaram motors has improved its ICR over the years, from less than 0.2 to more than 23 times in 2009. This is a healthy indication for the business. This is both due to increase in earnings as well as reduction in debt load by paying off the lenders.

4. Results and Conclusions

1. Overall we can see that the company has managed to increases its sales significantly over the five year period. It has substantially increased its cash and bank balances while at the same time improving its financial ratios. It is seen that the company has lowered its risk and is in a better position to meet its obligations both short term and long term in time. This is clearly indicated by the rising trends in current and quick ratios as well as the falling D/E ratio and increase in interest coverage ratio. Where the firm seems to be lacking is in the area of inventory management, working capital turnover and accounts receivables. Hence we will be focusing our recommendations on these specific areas.

2. It is interesting to note that in the initial two years of the analysis period, the cost of goods sold exceeds the total revenues. This has happened because of subsidizing sales to group companies, mainly in the case of spare part sales. However Sundaram motors has since then moved on to arms length pricing and is now treating group companies as equivalent to external companies. This is a significant shift in terms of management policy.

5. Recommendations
5.1.General
1. On observation of the practices followed in the accounts department it is seen that a lot of activities carried out by the staff can be eliminated by do things right the first time around. For example the Data entry process needs to be stringent and if p roper accounting entries are made at this level, a lot of effort can be reduced in the later stages of the process. Reconciliation needs to be done only for verification purposes and it should not used correct mistakes made earlier in the accounting flow. 2. An integrated solution needs to be looked into for accounting software. There are a lot of issues arising because of different software tools being used at different stages in the accounting process. The point of sales terminals use software supplied by the OEM, while the accounts department uses their custom software. Therefore lot of error creep in at this juncture where the data is being fed from the showroom to the accounts

department. A complete end to end solution would not only eliminate these errors, but also reduce a lot of manual work in feeding data into the accounts software thus leading to significant effort savings.

5.2.Aspects of Working Capital Management

1. A healthy level of current ratio to maintain would be at 2:1 for current assets to current liabilities. It is seen that in case of Sundaram motors, the maximum value of current ratio has been 1.8, reached in the year 2009. Since bankers and lenders take keen interest in the current ratio of a company, it is important that we maintain this ratio at a normal level. To achieve this, we can look at collecting our receivables faster. It is to be noted that the sundry debtors have increased significantly over the period of analysis. We need to reduce the receivables amount under sundry debtors and covert more of this to cash or bank balances. We can request for banker acceptance letters, credit notes or credit lines from banks as an additional tool to ensure prompt payment.

2. As indicated in the current ratio, the level of inventory has been increasing throughout the entire duration of analysis (2004 to 2009). The spending on inventory needs to be reviewed to understand the requirement for maintaining such high levels. Significant cost savings can be achieved by reducing the level of expenditure in this area.

3. It is seen the Inventory turnover ratio has come down gradually over the period of analysis. Inventory turnover ratio indicates the number of times inventory has been depleted and new inventory stocked (turnover). The higher this ratio the better it is for the company, as already noted inventory has surged over the 5 year period. Hence this ratio is another indicator that the spending on inventory needs to be looked at again.

6. References
6.1. Links

1. http://www.aicpa.org 2. http://www.investopedia.com 3. http://www.bized.co.uk 4. http://www.accountingformanagement.com 5. http://www.netmba.com 6. http://hubpages.com/hub/ 7. http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html 8. http://www.siamindia.com 9. http://www.araiindia.com 10. http://www.aasindia.in 11. http://www.tvsgroup.com 12. http://www.tvsiyengar.com 13. http://www.sundarammotors.com

6.2.

Books

7. Appendix
7.1.Current Assets, Liabilities Statement
2004-2005 Particulars Current Assets Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Unpaid dividends Unclaimed matured deposits Interest accrued on matured deposits Other liabilities Total current liabilities 2005-2006 Particulars Current Assets Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Unpaid dividends Unclaimed matured deposits Interest accrued on matured deposits Other liabilities Total current liabilities As at 31st march 2006 308.144 154.996 201.716 8.618 146.659 820.133 361.046 73.894 38.873 170.451 .161 2.404 .22 246.210 893.262 % of Total 37.57 18.9 24.59 1.05 17.88 100 40.42 8.27 4.35 19.1 0.03 0.27 0.05 27.56 100 As at 31st march 2005 374.437 166.009 51.291 9.059 128.274 729.07 273.068 40.795 31.239 162.454 .093 2.470 .688 220.541 731.411 % of Total 51.36 22.77 7.04 1.24 17.59 100 37.34 5.58 4.27 22.21 0.02 0.34 0.09 30.15 100

2006-2007 Particulars Current Assets Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Unpaid dividends Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities 2007-2008 Particulars Current Assets Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Unpaid dividends Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities As at 31st march 2008 621.006 188.173 617.264 8.548 303.382 1738.373 598.492 132.234 57.245 55.421 .970 .820 .402 .639 396.586 1242.814 % of Total 35.72 10.82 35.51 0.49 17.49 100 46.75 10.33 4.47 7.24 0.06 0.1 0.02 0.05 30.98 100 As at 31st march 2007 422.069 190.845 613.512 14.218 193.019 1433.363 469.587 111.545 44.617 112.250 .072 2.342 .190 .921 275.089 1016.617 % of Total 29.45 13.31 42.78 0.99 13.47 100 46.19 10.97 4.39 11.04 0.01 0.23 0.02 0.09 27.06 100

2008-2009 Particulars Current Assets Inventories Sundry Debtors Cash & Bank balances Interest Receivable Loan & Advances Total current Assets Current Liabilities Sundry creditors Advances received Security Deposits Interest accrued Unpaid dividends Unclaimed matured deposits Unclaimed matured bonds Interest accrued on matured deposits Other liabilities Total current liabilities As at 31st march 2009 665.147 231.475 960.983 15.256 165.001 2037.862 516.226 128.112 52.253 40.305 .874 .441 .0755 .185 356.424 1094.898 % of Total 32.44 11.36 47.15 0.75 8.1 100 47.15 11.7 4.77 3.68 0.08 0.04 0.01 0.02 32.55 100