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A Study on Brand Image of Two Wheeler Company in

India
RESEARCH PR!ECT REPRT
Submitted to
"eer Bahadur Singh Pur#an$hal %ni#er&ity' !aunpur
In partial fulfillment of the requirements for the degree of
BACHE(R ) B%SI*ESS A+,I*ISTRATI*
\
Submitted by: Under the supervision of:
Priya Singh Mrs. Nitu Singh
BBA VI Semester Senior Lecturer
Roll No.8!8 "e#artment o$ Business Administration
-./0
Te$hni$al Edu$ation 1 Re&ear$h In&titute'
Post%&raduate 'ollege( Ra)indra#uri
&ha*i#ur + ,--.
.
Certifi$ate
/his is to certi$y that Priya Singh #ursuing BBA 0
th
Semester $rom
this Institute has #re#ared the research #ro1ect re#ort entitled A
Study on Brand Image of Two Wheeler Company in India in
#artial $ul$illment o$ the re2uirements o$ the degree o$ Bachelor o$
Business Administration $rom Veer Bahadur Singh Pur)anchal
3ni)ersity( 4aun#ur( during the session o$ ,.-%.!.
/his re#ort is based on research #ro1ect underta5en by Priya &ingh
under my su#er)ision during the course o$ si6th semester and
$ul$ills the re2uirements o$ regulations relating to the nature and
standard o$ BBA course o$ V.B.S. Pur)anchal 3ni)ersity.
I recommend that this research #ro1ect re#ort may be sent $or
e)aluation.
Rahul Anand Singh *itu Singh
Asst. Pro$essor 7 8ead( Senior Lecturer(
"e#t. o$ Business Administration "e#t. o$ Business Administration
,
+e$laration
I( Priya Singh hereby declare that this research #ro1ect re#ort
entitled 9Promotional Strategie& of 2id& Wear ,anufa$ture& In
India has been #re#ared by me on the basis o$ research done
during the course o$ my $ourth semester o$ BBA #rogramme under
the su#er)ision o$ Mrs. Nitu Singh( Assistant Pro$essor(
"e#artment o$ Business Administration( /:RI( &ha*i#ur
/his research #ro1ect re#ort is my bona $ide ;or5 and has not
been submitted in any $orm to any 3ni)ersity or Institute $or the
a;ard o$ any degree or di#loma #rior to the under mentioned date.
I bear the entire res#onsibility o$ submission o$ this #ro1ect re#ort.
-
th
May ,.!
Priya Singh
BBA 0
th
Semester
"e#artment o$ Business Administration
/echnical :ducation 7 Research Institute
P. &. 'ollege( &ha*i#ur
-
Prefa$e
Learning Categories you, and practicing on that learning specialize you
/he im#ortance o$ any academic courses ;ould gain ad)antage and the acce#tance o$ the
true $orm( only through #ractical e6#eriences. 8ence it is 2uite necessary to #ut theories
as into tas5.
Someone has greatly said that #ractical 5no;ledge is $ar better than classroom teaching.
"uring this #ro1ect I $ully reali*ed this and come to 5no; about the #resent real ;orld
./he #resent re#ort entitled as A Study on Brand Image of Two Wheeler Company in
India33 a $ruit$ul outcome o$ my research done during the course o$ my $ourth semester o$
,BA programmed. /his research re#ort $orms an integral #art o$ my MBA degree
course at Te$hni$al Edu$ation Re&ear$h In&titute' P454 College' 5ha6ipur.
Automobile is one o$ the largest industries in global mar5et. Being the leader in #roduct
and #rocess technologies in the manu$acturing sector( it has been recogni*ed as one o$ the
dri)ers o$ economic gro;th. "uring the last decade( ;ell directed e$$orts ha)e been made
to #ro)ide a ne; loo5 to the automobile #olicy $or reali*ing the sector<s $ull #otential $or
the economy. Aggressi)e mar5eting by the auto $inance com#anies ha)e also #layed a
signi$icant role in boosting automobile demand( es#ecially $rom the #o#ulation in the
middle income grou#. /he Aims and =b1ecti)es o$ this research are to ha)e an in%de#th
5no;ledge o$ the Brand Image o$ /;o >heeler 'om#any in India. I ha)e tried my le)el
best to ma5e it sim#le and understandable. /he $indings ;ere in $a)or o$ Brand Image o$
/;o >heeler being )ital $or the Indian organi*ation and they are not diminishing in
today?s ;orld( but they are at the booming stage@ and e)ery organi*ation ;ould ;ant to
use Brand Image o$ /;o >heeler. /he research deals ;ith basics o$ /;o >heeler and its
Brand Image a$$ect in organi*ation. /he $irst cha#ter is dedicated to the introduction o$
!
the Brand Image( history o$ /;o >heeler and its climate( com#anies o$ /;o >heeler. It
also deals the $actors a$$ecting Brand Image o$ /;o >heeler. /his cha#ter gi)es detail
about the Brand Image o$ /;o >heeler ;ith re$erence to Indian industries. It also deals
the challenges and #roblems come at the time o$ Brand Image o$ /;o >heeler. /he
second cha#ter deals ;ith the =b1ecti)e o$ the study and Im#ortance o$ the study7 also
included the Sco#e o$ the study. /he third cha#ter is a summary o$ the )arious research
methodologies used $or the de)elo#ment o$ the #ro1ect. /he methodology used $or the
im#lementation o$ the assigned #ro1ect is based on secondary data. /he ;hole study is
based on secondary data. /he $ourth cha#ter deals the data analysis and inter#retation
'ha#ter $i)e deals ;ith the $indings and recommendations related to the research re#ort.
/he conclusion7 Limitation o$ the #ro1ect is #ro)ided in cha#ter si6 and this cha#ter also
deals ;ith the Bibliogra#hy 7 Re$erence o$ this #ro1ect.
Priya Singh
A
A$7nowledgement
Be$ore I than5 anybody $or the com#ilation o$ this ;or5 I ;ould li5e to than5 Almighty
$or #ro)iding guidance and me all the necessary hel#. It is grace only that I ha)e
com#leted this ;or5.
An understanding o$ the study li5e this is ne)er the outcome o$ the e$$orts o$ an
indi)idual@ rather it bears the im#rint o$ a number o$ indi)iduals ;ho directly hel#ed me
in com#leting the #resent study.
Birst 7 $oremost( I ;ould li5e to e6#ress my regard to ,r4 Rahul Anand Singh 8H44+4
of ,4B4A49 and ,r&4 *itu Singh' A&&i&tant profe&&or and the honorable Readers o$
M.B.A. "e#artment $or this constant encouragement and su##ort. I ;ould also li5e to
e6#ress immense gratitude to;ards su#er)isor mr&4 *itu Singh( $or #ro)iding the
5no;ledge( guidance and coo#eration in research re#ort
I am also sincerely than5$ul to all my $riends $or gi)ing me o##ortunity and resource to
;or5 on the research re#ort and gi)ing me su##ort ;hene)er necessary.
Priya Singh

WR2I*5 CAPITA( ,A*A5E,E*T I* STEE( I*+%STR:
0
I*TR+%CTI*
Indian steel industry #lays a signi$icant role in the country?s economic gro;th. /he ma1or
contribution directs the attention that steel is ha)ing a stronghold in the traditional sectors(
such as in$rastructure 7 constructions( automobile( trans#ortation( industrial a##lications
etc. /he liberali*ation o$ industrial #olicy and other initiati)es ta5en by the &o)ernment
ha)e gi)en a de$inite im#etus $or entry( #artici#ation and gro;th o$ the #ri)ate sector in
the steel industry. >hile the e6isting units are being moderni*edC e6#anded( a large
number o$ ne; steel #lants ha)e also come u# in di$$erent #arts o$ the country based on
modern( cost e$$ecti)e( state o$%the%art technologies. In the last $e; years( the ra#id and
stable gro;th o$ the demand side has also #rom#ted domestic entre#reneurs to set. At
#resent( crude steel ma5ing ca#acity is 8! mt and India( the !th largest #roducer. o$ crude
steel in the ;orld( has to its credit( the ca#ability to #roduce a )ariety o$ grades and that
D
too( o$ international 2uality standards u# $resh green $ield #ro1ects in di$$erent states o$
the country. Management o$ ;or5ing ca#ital is an im#ortant com#onent o$ cor#orate
$inancial management because it directly a$$ects the #ro$itability o$ the $irms. Net
;or5ing ca#ital trend is one o$ the de)ices $or measuring li2uidity. Net ;or5ing ca#ital
trend analysis is highly rele)ant as it #resents the com#osite re$lection o$ the trend
analysis o$ current assets and current liabilities. /he direction o$ change in ;or5ing
ca#ital #osition o)er the #eriod o$ time is an indication o$ the e$$ecti)eness or
ine$$ecti)eness o$ the ;or5ing ca#ital management. /he study has been done on the basis
o$ #ublished annual re#orts o$ o#erating $i)e steel com#anies in India $or a #eriod o$ si6
years starting $rom ,0 and ending on ,... 'om#any may ha)e an o#timal le)el o$
;or5ing ca#ital that ma6imi*es their )alue. Large in)entory and generous trade credit
#olicy may lead to high sales. /he larger in)entory also reduces the ris5 o$ a stoc5%out.
/rade credit may stimulate sales because it allo;s a $irm to access #roduct 2uality be$ore
#aying. Another com#onent o$ ;or5ing ca#ital is accounts #ayables delaying #ayment o$
accounts #ayable to su##liers allo;s $irms to access the li2uidity. A #o#ular measure o$
;or5ing ca#ital management is the net o#erating cycle( that is( the time s#an bet;een the
e6#enditure $or the #urchases o$ ra; materials and the collection o$ sales o$ $inished
goods. Longer the time lag( the larger the in)estment in ;or5ing ca#ital. A long net
o#erating cycle might increase #ro$itability because it leads to higher sales. 8o;e)er(
cor#orate #ro$itability might decrease ;ith the net o#erating cycle( i$ the costs o$ higher
in)estment in ;or5ing ca#ital rise $aster than the bene$its o$ holding more in)entories
andCor granting more trade credit to customers. /he #resent ;or5 aims to e6amine the
;or5ing ca#ital management o$ steel com#anies in India
8
'urrent assets minus current liabilities. >or5ing ca#ital measures ho; much in li2uid
assets a com#any has a)ailable to build its business. /he number can
be #ositi)e or negati)e( de#ending on ho; much debt the com#any is carrying. In
general( com#anies that ha)e a lot o$ ;or5ing ca#ital ;ill be more success$ul since they
can e6#and and im#ro)e their o#erations. 'om#anies ;ith negati)e ;or5ing
ca#ital may lac5 the $unds necessary $or gro;th. also called net current assets or current
ca#ital.
Corporate finan$e is the area o$ $inance dealing ;ith monetary decisions that business
enter#rises ma5e and the tools and analysis used to ma5e these decisions. /he #rimary
goal o$ cor#orate $inance is to ma6imi*e shareholder )alue. Although it is in #rinci#le
di$$erent $rom managerial $inance ;hich studies the $inancial decisions o$ all $irms( rather
than cor#orations alone( the main conce#ts in the study o$ cor#orate $inance are
a##licable to the $inancial #roblems o$ all 5inds o$ $irms.
/he disci#line can be di)ided into long%term and short%term decisions and techni2ues.
'a#ital in)estment decisions are long%term choices about ;hich #ro1ects recei)e
in)estment( ;hether to $inance that in)estment ;ith e2uity or debt( and ;hen or ;hether
to #ay di)idends to shareholders. =n the other hand( short term decisions deal ;ith the
short%term balance o$ current assets and current liabilities@ the $ocus here is on managing
cash( in)entories( and short%term borro;ing and lending Esuch as the terms on credit
e6tended to customersF.
/he terms cor#orate $inance and $orporate finan$ier are also associated ;ith in)estment
ban5ing. /he ty#ical role o$ an in)estment ban5 is to e)aluate the com#any<s $inancial
needs and raise the a##ro#riate ty#e o$ ca#ital that best $its those needs. /hus( the terms
G
9cor#orate $inanceH and 9cor#orate $inancierH may be associated ;ith transactions in
;hich ca#ital is raised in order to create( de)elo#( gro; or ac2uire businesses
'a#ital in)estment decisions are long%term cor#orate $inance decisions relating to $i6ed
assets and ca#ital structure. "ecisions are based on se)eral inter%related criteria. E.F
'or#orate management see5s to ma6imi*e the )alue o$ the $irm by in)esting in #ro1ects
;hich yield a #ositi)e net #resent )alue ;hen )alued using an a##ro#riate discount rate in
consideration o$ ris5. E,F /hese #ro1ects must also be $inanced a##ro#riately. E-F I$ no
such o##ortunities e6ist( ma6imi*ing shareholder )alue dictates that management must
return e6cess cash to shareholders Ei.e.( distribution )ia di)idendsF. 'a#ital in)estment
decisions thus com#rise an in)estment decision( a $inancing decision( and a di)idend
decision
Management must allocate limited resources bet;een com#eting o##ortunities E#ro1ectsF
in a #rocess 5no;n as ca#ital budgeting. Ma5ing this in)estment( or ca#ital allocation(
decision re2uires estimating the )alue o$ each o##ortunity or #ro1ect( ;hich is a $unction
o$ the si*e( timing and #redictability o$ $uture cash $lo;s.
n general(
I!J
each #ro1ect<s )alue ;ill be estimated using a discounted cash $lo; E"'BF
)aluation( and the o##ortunity ;ith the highest )alue( as measured by the resultant net
#resent )alue ENPVF ;ill be selected Ea##lied to 'or#orate Binance by 4oel "ean in .GA.@
see also Bisher se#aration theorem( 4ohn Burr >illiamsK/heoryF. /his re2uires estimating
the si*e and timing o$ all o$ the incremental cash $lo;s resulting $rom the #ro1ect. Such
$uture cash $lo;s are then discounted to determine their present value Esee /ime )alue o$
.
moneyF. /hese #resent )alues are then summed( and this sum net o$ the initial in)estment
outlay is the NPV. See Binancial modeling.
/he NPV is greatly a$$ected by the discount rate. /hus( identi$ying the #ro#er discount
rate + o$ten termed( the #ro1ect Lhurdle rateL + is critical to ma5ing an a##ro#riate
decision. /he hurdle rate is the minimum acce#table return on an in)estmentMi.e. the
#ro1ect a##ro#riate discount rate. /he hurdle rate should re$lect the ris5iness o$ the
in)estment( ty#ically measured by )olatility o$ cash $lo;s( and must ta5e into account the
#ro1ect%rele)ant $inancing mi6.
I0J
Managers use models such as the 'APM or the AP/ to
estimate a discount rate a##ro#riate $or a #articular #ro1ect( and use the ;eighted a)erage
cost o$ ca#ital EWACCF to re$lect the $inancing mi6 selected. EA common error in
choosing a discount rate $or a #ro1ect is to a##ly a >A'' that a##lies to the entire $irm.
Such an a##roach may not be a##ro#riate ;here the ris5 o$ a #articular #ro1ect di$$ers
mar5edly $rom that o$ the $irm<s e6isting #ort$olio o$ assets.F
In con1unction ;ith NPV( there are se)eral other measures used as EsecondaryF selection
criteria in cor#orate $inance. /hese are )isible $rom the "'B and include discounted
#aybac5 #eriod( IRR( Modi$ied IRR( e2ui)alent annuity( ca#ital e$$iciency( and R=I.
Alternati)es Ecom#lementsF to NPV include Residual Income Valuation( MVA C :VA
E4oel Stern( Stern Ste;art 7 'oF and APV ESte;art MyersF. See list of valuation topics.
n many cases( $or e6am#le R7" #ro1ects( a #ro1ect may o#en Eor closeF )arious #aths o$
action to the com#any( but this reality ;ill not Ety#icallyF be ca#tured in a strict NPV
a##roach.
IDJ
Some analysts account $or this uncertainty by ad1usting the discount rate Ee.g.
by increasing the cost o$ ca#italF or the cash $lo;s Eusing certainty e2ui)alents( or
a##lying Esub1ecti)eF LhaircutsL to the $orecast numbersF. :)en ;hen em#loyed( ho;e)er(
these latter methods do not normally #ro#erly account $or changes in ris5 o)er the
..
#ro1ect<s li$ecycle and hence $ail to a##ro#riately ada#t the ris5 ad1ustment. Management
;ill there$ore EsometimesF em#loy tools ;hich #lace an e6#licit )alue on these o#tions.
So( ;hereas in a "'B )aluation the most li5ely or a)erage or scenario s#eci$ic cash $lo;s
are discounted( here the 9$le6ible and staged natureH o$ the in)estment is modelled( and
hence LallL #otential #ayo$$s are considered. See $urther under Real o#tions )aluation.
/he di$$erence bet;een the t;o )aluations is the L)alue o$ $le6ibilityL inherent in the
#ro1ect.
/he t;o most common tools are "ecision /ree Analysis E"/AF and Real o#tions
)aluation ER=VF@ they may o$ten be used interchangeablyN
"/A )alues $le6ibility by incor#orating possible events Eor statesF and conse2uent
management decisions. EBor e6am#le( a com#any ;ould build a $actory gi)en that
demand $or its #roduct e6ceeded a certain le)el during the #ilot%#hase( and
outsource #roduction other;ise. In turn( gi)en $urther demand( it ;ould similarly
e6#and the $actory( and maintain it other;ise. In a "'B model( by contrast( there
is no LbranchingL + each scenario must be modelled se#arately.F In the decision
tree( each management decision in res#onse to an Le)entL generates a LbranchL or
L#athL ;hich the com#any could $ollo;@ the #robabilities o$ each e)ent are
determined or s#eci$ied by management. =nce the tree is constructedN E.F LallL
#ossible e)ents and their resultant #aths are )isible to management@ E,F gi)en this
95no;ledgeH o$ the e)ents that could $ollo;( and assuming rational decision
ma5ing( management chooses the branches Ei.e. actionsF corres#onding to the
highest )alue #ath #robability ;eighted@ E-F this #ath is then ta5en as
re#resentati)e o$ #ro1ect )alue. See "ecision theoryK'hoice under uncertainty.
.,
R=V is usually used ;hen the )alue o$ a #ro1ect is contingent on the value o$
some other asset or underlying )ariable. EBor e6am#le( the )iability o$ a mining
#ro1ect is contingent on the #rice o$ gold@ i$ the #rice is too lo;( management ;ill
abandon the mining rights( i$ su$$iciently high( management ;ill de)elo# the ore
body. Again( a "'B )aluation ;ould ca#ture only one o$ these outcomes.F 8ereN
E.F using $inancial o#tion theory as a $rame;or5( the decision to be ta5en is
identi$ied as corres#onding to either a call o#tion or a #ut o#tion@ E,F an
a##ro#riate )aluation techni2ue is then em#loyed + usually a )ariant on the
Binomial o#tions model or a bes#o5e simulation model( ;hile Blac5 Scholes ty#e
$ormulae are used less o$ten@ see 'ontingent claim )aluation. E-F /he LtrueL )alue
o$ the #ro1ect is then the NPV o$ the Lmost li5elyL scenario #lus the o#tion )alue.
EReal o#tions in cor#orate $inance ;ere $irst discussed by Ste;art Myers in .GDD@
)ie;ing cor#orate strategy as a series o$ o#tions ;as originally #er /imothy
Luehrman( in the late .GGs.F See also =#tion #ricing a##roaches under Business
)aluation.
&i)en the uncertainty inherent in #ro1ect $orecasting and )aluation(
I.,JI.!J
analysts
;ill ;ish to assess the sensitivity o$ #ro1ect NPV to the )arious in#uts Ei.e.
assum#tionsF to the "'B model. In a ty#ical sensiti)ity analysis the analyst ;ill
)ary one 5ey $actor ;hile holding all other in#uts constant( ceteris paribus. /he
sensiti)ity o$ NPV to a change in that $actor is then obser)ed( and is calculated as
a Lslo#eLN ONPV C O$actor. Bor e6am#le( the analyst ;ill determine NPV at
)arious gro;th rates in annual re)enue as s#eci$ied Eusually at set increments( e.g.
%.P( %AP( P( AP....F( and then determine the sensiti)ity using this $ormula.
=$ten( se)eral )ariables may be o$ interest( and their )arious combinations
.-
#roduce a L)alue%sur$aceL(
I.AJ
Eor e)en a L)alue%s#aceL(F ;here NPV is then a
$unction o$ se)eral )ariables. See also Stress testing.
3sing a related techni2ue( analysts also run scenario based $orecasts o$ NPV.
8ere( a scenario com#rises a #articular outcome $or economy%;ide( LglobalL
$actors Edemand $or the #roduct( e6change rates( commodity #rices( etc...F as well
as $or com#any%s#eci$ic $actors Eunit costs( etc...F. As an e6am#le( the analyst may
s#eci$y )arious re)enue gro;th scenarios Ee.g. P $or L>orst 'aseL( .P $or
LLi5ely 'aseL and ,P $or LBest 'aseLF( ;here all 5ey in#uts are ad1usted so as to
be consistent ;ith the gro;th assum#tions( and calculate the NPV $or each. Note
that $or scenario based analysis( the )arious combinations o$ in#uts must be
internally consistent Esee discussion at Binancial modelingF( ;hereas $or the
sensiti)ity a##roach these need not be so. An a##lication o$ this methodology is to
determine an LunbiasedL NPV( ;here management determines a Esub1ecti)eF
#robability $or each scenario + the NPV $or the #ro1ect is then the #robability%
;eighted a)erage o$ the )arious scenarios. See Birst 'hicago Method.
A $urther ad)ancement ;hich Lo)ercomes the limitations o$ sensiti)ity and
scenario analyses by e6amining the e$$ects o$ all #ossible combinations o$
)ariables and their reali*ations.L
I.0J
is to construct stochastic
I.DJ
or #robabilistic
$inancial models + as o##osed to the traditional static and deterministic models as
abo)e.
I.!J
Bor this #ur#ose( the most common method is to use Monte 'arlo
simulation to analy*e the #ro1ect?s NPV. /his method ;as introduced to $inance
by "a)id B. 8ert* in .G0!( although has only recently become ;ides#read. ERis5%
analysis add%ins( such as @Risk or Crystal Ball( allo; analysts to run simulations
in s#readsheet based "'B models( ;hereas be$ore these( some 5no;ledge o$
.!
#rogramming ;as re2uired.F. 8ere( the cash $lo; com#onents that are Ehea)ilyF
im#acted by uncertainty are simulated( mathematically re$lecting their Lrandom
characteristicsL. In contrast to the scenario a##roach abo)e( the simulation
#roduces se)eral thousand random but #ossible outcomes( or trials( Lco)ering all
concei)able real ;orld contingencies in #ro#ortion to their li5elihood@L
I.8J
see
Monte 'arlo Simulation )ersus 9>hat I$H Scenarios. /he out#ut is then a
histogram o$ #ro1ect NPV( and the a)erage NPV o$ the #otential in)estment + as
;ell as its )olatility and other sensiti)ities + is then obser)ed. /his histogram
#ro)ides in$ormation not )isible $rom the static "'BN $or e6am#le( it allo;s $or an
estimate o$ the #robability that a #ro1ect has a net #resent )alue greater than *ero
Eor any other )alueF.
'ontinuing the abo)e e6am#le@ instead o$ assigning three discrete )alues to
re)enue gro;th( and to the other rele)ant )ariables( the analyst ;ould assign an
a##ro#riate #robability distribution to each )ariable Ecommonly triangular or
betaF( and( ;here #ossible( s#eci$y the obser)ed or su##osed correlation bet;een
the )ariables. /hese distributions ;ould then be Lsam#ledL re#eatedly +
incor#orating this correlation + so as to generate se)eral thousand random but
#ossible scenarios( ;ith corres#onding )aluations( ;hich are then used to generate
the NPV histogram. /he resultant statistics Ea)erage NPV and standard de)iation
o$ NPVF ;ill be a more accurate mirror o$ the #ro1ect<s LrandomnessL than the
)ariance obser)ed under the scenario based a##roach. /hese are o$ten used as
estimates o$ the underlying Ls#ot #riceL and )olatility $or the real o#tion )aluation
as abo)e@ see Real o#tions )aluationN Valuation in#uts. A more robust Monte 'arlo
model ;ould include the #ossible occurrence o$ ris5 e)ents Ee.g.( a credit crunchF
that dri)e )ariations in one or more o$ the "'B model in#uts.
.A
Wor7ing $apital Eabbre)iated WCF is a $inancial metric ;hich re#resents o#erating
li2uiditya)ailable to a business( organi*ation or other entity( including go)ernmental
entity. Along ;ith $i6ed assets such as #lant and e2ui#ment( ;or5ing ca#ital is considered
a #art o$ o#erating ca#ital. Net ;or5ing ca#ital is calculated as current
assets minus current liabilities. It is a deri)ation o$ ;or5ing ca#ital( that is commonly
used in )aluation techni2ues such as "'Bs E"iscounted cash $lo;sF. I$ current assets are
less than current liabilities( an entity has awor7ing $apital defi$ien$y( also called
a wor7ing $apital defi$it.
A com#any can be endo;ed ;ith assets and #ro$itability but short o$ li2uidity i$ its assets
cannot readily be con)erted into cash. Positi)e ;or5ing ca#ital is re2uired to ensure that a
$irm is able to continue its o#erations and that it has su$$icient $unds to satis$y both
maturing short%term debtand u#coming o#erational e6#enses. /he management o$
;or5ing ca#ital in)ol)es managing in)entories( accounts recei)able and #ayable( and
cash.
Bactors that determine ;or5ing ca#italN
/he ;or5ing ca#ital re2uirement o$ a concern de#end u#on a large number o$ $actors such
as
Q Si*e o$ business
Q Nature o$ character o$ business.
Q Seasonal )ariations ;or5ing ca#ital cycle
Q =#erating e$$iciency
.0
Q Pro$it le)el.
Q =ther $actors.
Achie)ing the goals o$ cor#orate $inance re2uires that any cor#orate in)estment be
$inanced a##ro#riately. /he sources o$ $inancing are( generically( ca#ital sel$%generated by
the $irm and ca#ital $rom e6ternal $unders( obtained by issuing ne; debt and e2uity Eand
hybrid% or con)ertible securitiesF. As abo)e( since both hurdle rate and cash $lo;s Eand
hence the ris5iness o$ the $irmF ;ill be a$$ected( the $inancing mi6 ;ill im#act the
)aluation o$ the $irm Eas ;ell as the other long%term $inancial management decisionsF.
/here are t;o interrelated considerations hereN
Management must identi$y the Lo#timal mi6L o$ $inancingMthe ca#ital structure
that results in ma6imum $irm )alue. ESee Balance sheet( >A''( Bisher se#aration
theorem@ but( see also the Modigliani%Miller theorem.F Binancing a #ro1ect
through debt results in a liability or obligation that must be ser)iced( thus entailing
cash $lo; im#lications inde#endent o$ the #ro1ect<s degree o$ success. :2uity
$inancing is less ris5y ;ith res#ect to cash $lo; commitments( but results in a
dilution o$ share o;nershi#( control and earnings. /he cost of equity Esee 'APM
and AP/F is also ty#ically higher than the cost of debt % ;hich is( additionally( a
deductible e6#ense % and so e2uity $inancing may result in an increased hurdle rate
;hich may o$$set any reduction in cash $lo; ris5.
Management must attem#t to match the long%term $inancing mi6 to the assets
being $inanced as closely as #ossible( in terms o$ both timing and cash $lo;s.
Managing any #otential asset liability mismatch or duration ga# entails matching
the assets and liabilities res#ecti)ely according to maturity #attern EL'ash$lo;
.D
matchingLF or duration ELimmuni*ationLF@ managing this relationshi# in the short
term is a ma1or $unction o$ ;or5ing ca#ital management( as discussed belo;.
=ther techni2ues( such as securiti*ation( or hedging using interest rate% or credit
deri)ati)es( are also common. See Asset liability management@ /reasury
management@ 'redit ris5@ Interest rate ris5.
Much o$ the theory here( $alls under the umbrella o$ the /rade%=$$ /heory in ;hich $irms
are assumed to trade%o$$ the ta6 bene$its o$ debt ;ith the ban5ru#tcy costs o$ debt ;hen
ma5ing their decisions. 8o;e)er economists ha)e de)elo#ed a set o$ alternati)e theories
about $inancing decisions. =ne o$ the main alternati)e theories o$ ho; $irms ma5e their
$inancing decisions is the Pec5ing =rder /heory ESte;art MyersF( ;hich suggests that
$irms a)oid e6ternal $inancing ;hile they ha)e internal $inancing a)ailable and a)oid ne;
e2uity $inancing ;hile they can engage in ne; debt $inancing at reasonably lo; interest
rates. Also( 'a#ital structure substitution theory hy#othesi*es that management
mani#ulates the ca#ital structure such that earnings #er share E:PSF are ma6imi*ed. An
emerging area in $inance theory is right%$inancing ;hereby in)estment ban5s and
cor#orations can enhance in)estment return and com#any )alue o)er time by determining
the right in)estment ob1ecti)es( #olicy $rame;or5( institutional structure( source o$
$inancing Edebt or e2uityF and e6#enditure $rame;or5 ;ithin a gi)en economy and under
gi)en mar5et conditions. =ne o$ the more recent inno)ations in this are $rom a theoretical
#oint o$ )ie; is the Mar5et timing hy#othesis. /his hy#othesis( ins#ired in the beha)ioral
$inance literature( states that $irms loo5 $or the chea#er ty#e o$ $inancing regardless o$
their current le)els o$ internal resources( debt and e2uity.
>hether to issue di)idends( and ;hat amount( is calculated mainly on the basis o$ the
com#any<s una##ro#riated #ro$it and its earning #ros#ects $or the coming year. /he
.8
amount is also o$ten calculated based on e6#ected free cash flows i.e. cash remaining a$ter
all business e6#enses( and ca#ital in)estment needs ha)e been met.
I$ there are no NPV #ositi)e o##ortunities( i.e. #ro1ects ;here returns e6ceed the hurdle
rate( then + $inance theory suggests + management must return e6cess cash to
shareholders as di)idends. /his is the general case( ho;e)er there are e6ce#tions. Bor
e6am#le( shareholders o$ a Lgro;th stoc5L( e6#ect that the com#any ;ill( almost by
de$inition( retain earnings so as to $und gro;th internally. In other cases( e)en though an
o##ortunity is currently NPV negati)e( management may consider 9in)estment
$le6ibilityH C #otential #ayo$$s and decide to retain cash $lo;s@ see abo)e and Real
o#tions.
Management must also decide on the form o$ the di)idend distribution( generally as cash
di)idends or )ia a share buybac5. Various $actors may be ta5en into considerationN ;here
shareholders must #ay ta6 on di)idends( $irms may elect to retain earnings or to #er$orm a
stoc5 buybac5( in both cases increasing the )alue o$ shares outstanding. Alternati)ely(
some com#anies ;ill #ay Ldi)idendsL $rom stoc5 rather than in cash@ see 'or#orate
action. /oday( it is generally acce#ted that di)idend #olicy is )alue neutral + i.e. the )alue
o$ the $irm ;ould be the same( ;hether it issued cash di)idends or re#urchased its stoc5
Esee Modigliani%Miller theoremF.
"ecisions relating to ;or5ing ca#ital and short term $inancing are re$erred to as working
capital management. /hese in)ol)e managing the relationshi# bet;een a $irm<s short%
term assets and its short%term liabilities. In general this is as $ollo;sN As abo)e( the goal
o$ 'or#orate Binance is the ma6imi*ation o$ $irm )alue. In the conte6t o$ long term(
ca#ital in)estment decisions( $irm )alue is enhanced through a##ro#riately selecting and
$unding NPV #ositi)e in)estments. /hese in)estments( in turn( ha)e im#lications in terms
.G
o$ cash $lo; and cost o$ ca#ital. /he goal o$ >or5ing 'a#ital Ei.e. short termF
management is there$ore to ensure that the $irm is able to o#erate( and that it has su$$icient
cash $lo; to ser)ice long term debt( and to satis$y both maturing short%term debt and
u#coming o#erational e6#enses. In so doing( $irm )alue is enhanced ;hen( and i$( the
return on ca#ital e6ceeds the cost o$ ca#ital@ See :conomic )alue added E:VAF. Managing
short term $inance and long term $inance is one tas5 o$ a modern 'B=.
+e$i&ion $riteria
>or5ing ca#ital is the amount o$ ca#ital ;hich is readily a)ailable to an organi*ation.
/hat is( ;or5ing ca#ital is the di$$erence bet;een resources in cash or readily con)ertible
into cash E'urrent AssetsF( and cash re2uirements E'urrent LiabilitiesF. As a result( the
decisions relating to ;or5ing ca#ital are al;ays current( i.e. short term( decisions. In
addition to time hori*on( ;or5ing ca#ital decisions di$$er $rom ca#ital in)estment
decisions in terms o$ discounting and #ro$itability considerations@ they are also
Lre)ersibleL to some e6tent. E'onsiderations as to Ris5 a##etite and return targets remain
identical( although some constraints + such as those im#osed by loan co)enants + may be
more rele)ant hereF.
>or5ing ca#ital management decisions are there$ore not ta5en on the same basis as long
term decisions( and ;or5ing ca#ital management a##lies di$$erent criteria in decision
ma5ingN the main considerations are E.F cash $lo; C li2uidity and E,F #ro$itability C return
on ca#ital Eo$ ;hich cash $lo; is #robably the most im#ortantF.
/he most ;idely used measure o$ cash $lo; is the net o#erating cycle( or cash
con)ersion cycle. /his re#resents the time di$$erence bet;een cash #ayment $or
ra; materials and cash collection $or sales. /he cash con)ersion cycle indicates
,
the $irm<s ability to con)ert its resources into cash. Because this number
e$$ecti)ely corres#onds to the time that the $irm<s cash is tied u# in o#erations and
una)ailable $or other acti)ities( management generally aims at a lo; net count.
EAnother measure is gross o#erating cycle ;hich is the same as net o#erating
cycle e6ce#t that it does not ta5e into account the creditors de$erral #eriod.F
In this conte6t( the most use$ul measure o$ #ro$itability is Return on ca#ital
ER='F. /he result is sho;n as a #ercentage( determined by di)iding rele)ant
income $or the ., months by ca#ital em#loyed@ Return on e2uity ER=:F sho;s
this result $or the $irm<s shareholders. As abo)e( $irm )alue is enhanced ;hen( and
i$( the return on ca#ital( e6ceeds the cost o$ ca#ital. R=' measures are there$ore
use$ul as a management tool( in that they lin5 short%term #olicy ;ith long%term
decision ma5ing.
,anagement of wor7ing $apital
&uided by the abo)e criteria( management ;ill use a combination o$ #olicies and
techni2ues $or the management o$ ;or5ing ca#ital.
I,!J
/hese #olicies aim at managing the
current assets Egenerally cash and cash e2ui)alents( in)entories and debtorsF and the short
term $inancing( such that cash $lo;s and returns are acce#table.
Ca&h management. Identi$y the cash balance ;hich allo;s $or the business to
meet day to day e6#enses( but reduces cash holding costs.
In#entory management. Identi$y the le)el o$ in)entory ;hich allo;s $or
uninterru#ted #roduction but reduces the in)estment in ra; materials + and
minimi*es reordering costs + and hence increases cash $lo;. Note that Lin)entoryL
is usually the realm o$ o#erations managementN gi)en the #otential im#act on cash
$lo;( and on the balance sheet in general( $inance ty#ically Lgets in)ol)ed in an
,.
o)ersight or #olicing ;ayL.
I,AJND.!
See Su##ly chain management@ 4ust In /ime
E4I/F@ :conomic order 2uantity E:=RF@ "ynamic lot si*e model@ :conomic
#roduction 2uantity E:PRF@ :conomic Lot Scheduling Problem@ In)entory control
#roblem@ Sa$ety stoc5.
+e;tor& management. /here are t;o inter%related roles hereN Identi$y the
a##ro#riate credit #olicy( i.e. credit terms ;hich ;ill attract customers( such that
any im#act on cash $lo;s and the cash con)ersion cycle ;ill be o$$set by
increased re)enue and hence Return on 'a#ital Eor vice versaF@ see "iscounts and
allo;ances. Im#lement a##ro#riate 'redit scoring #olicies and techni2ues such
that the ris5 o$ de$ault on any ne; business is acce#table gi)en these criteria.
Short term finan$ing. Identi$y the a##ro#riate source o$ $inancing( gi)en the cash
con)ersion cycleN the in)entory is ideally $inanced by credit granted by the
su##lier@ ho;e)er( it may be necessary to utili*e a ban5 loan Eor o)erdra$tF( or to
Lcon)ert debtors to cashL through L$actoringL.
Relation&hip with other area& in finan$e
In#e&tment ;an7ing
3se o$ the term 9cor#orate $inanceH )aries considerably across the ;orld. In the 3nited
States it is used( as abo)e( to describe acti)ities( decisions and techni2ues that deal ;ith
many as#ects o$ a com#any?s $inances and ca#ital. In the 3nited Singdom and
'ommon;ealth countries( the terms 9cor#orate $inanceH and 9cor#orate $inancierH tend to
be associated ;ith in)estment ban5ing + i.e. ;ith transactions in ;hich ca#ital is raised
$or the cor#oration.
I,0J
/hese may include
Raising seed( start%u#( de)elo#ment or e6#ansion ca#ital
,,
Mergers( demergers( ac2uisitions or the sale o$ #ri)ate com#anies
Mergers( demergers and ta5eo)ers o$ #ublic com#anies( including #ublic%to%
#ri)ate deals
Management buy%out( buy%in or similar o$ com#anies( di)isions or subsidiaries +
ty#ically bac5ed by #ri)ate e2uity
:2uity issues by com#anies( including the $lotation o$ com#anies on a recognised
stoc5 e6change in order to raise ca#ital $or de)elo#ment andCor to restructure
o;nershi#
Raising ca#ital )ia the issue o$ other $orms o$ e2uity( debt and related securities
$or the re$inancing and restructuring o$ businesses
Binancing 1oint )entures( #ro1ect $inance( in$rastructure $inance( #ublic%#ri)ate
#artnershi#s and #ri)atisations
Secondary e2uity issues( ;hether by means o$ #ri)ate #lacing or $urther issues on
a stoc5 mar5et( es#ecially ;here lin5ed to one o$ the transactions listed abo)e.
Raising debt and restructuring debt( es#ecially ;hen lin5ed to the ty#es o$
transactions listed abo)e
)inan$ial ri&7 management
Main articleN Binancial ris5 management
!ee also" Credit risk# $efault %finance&# 'inancial risk# Interest rate risk#
(iquidity risk# )perational risk# !ettlement risk# *alue at Risk# *olatility risk+
Ris5 management is the #rocess o$ measuring ris5 and then de)elo#ing and im#lementing
strategies to manage ELhedgeLF that ris5. Binancial ris5 management( ty#ically( is $ocused
on the im#act on cor#orate )alue due to ad)erse changes in commodity #rices( interest
,-
rates( $oreign e6change rates and stoc5 #rices Emar5et ris5F. It ;ill also #lay an im#ortant
role in short term cash% and treasury management@ see abo)e. It is common $or large
cor#orations to ha)e ris5 management teams@ o$ten these o)erla# ;ith the internal audit
$unction. >hile it is im#ractical $or small $irms to ha)e a $ormal ris5 management
$unction( many still a##ly ris5 management in$ormally. See also :nter#rise ris5
management.
/he disci#line ty#ically $ocuses on ris5s that can be hedged using traded $inancial
instruments( ty#ically deri)ati)es@ see 'ash $lo; hedge( Boreign e6change hedge(
Binancial engineering. Because com#any s#eci$ic( Lo)er the counterL E=/'F contracts
tend to be costly to create and monitor( deri)ati)es that trade on ;ell%established $inancial
mar5ets or e6changes are o$ten #re$erred. /hese standard deri)ati)e instruments include
o#tions( $utures contracts( $or;ard contracts( and s;a#s@ the Lsecond generationL e6otic
deri)ati)es usually trade =/'. Note that hedging%related transactions ;ill attract their
o;n accounting treatmentN see 8edge accounting( Mar5%to%mar5et accounting( BASB
.--( IAS -G.
/his area is related to cor#orate $inance in t;o ;ays. Birstly( $irm e6#osure to business
and mar5et ris5 is a direct result o$ #re)ious In)estment and Binancing decisions.
Secondly( both disci#lines share the goal o$ enhancing( or #reser)ing( $irm )alue. /here is
a $undamental debate
I,8J
relating to LRis5 ManagementL and shareholder )alue. Per the
Modigliani and Miller $rame;or5( hedging is irrele)ant since di)ersi$ied shareholders are
assumed to not care about $irm%s#eci$ic ris5s( ;hereas( on the other hand hedging is seen
to create )alue in that it reduces the #robability o$ $inancial distress. A $urther 2uestion( is
the shareholder<s desire to o#timi*e ris5 )ersus ta5ing e6#osure to #ure ris5 Ea ris5 e)ent
that only has a negati)e side( such as loss o$ li$e or limbF. /he debate lin5s the )alue o$
,!
ris5 management in a mar5et to the cost o$ ban5ru#tcy in that mar5et. See Bisher
se#aration theorem.
Per&onal and pu;li$ finan$e
'or#orate $inance utili*es tools $rom almost all areas o$ $inance. Some o$ the tools
de)elo#ed by and $or cor#orations ha)e broad a##lication to entities other than
cor#orations( $or e6am#le( to #artnershi#s( sole #ro#rietorshi#s( not%$or%#ro$it
organi*ations( go)ernments( mutual $unds( and #ersonal ;ealth management. But in other
cases their a##lication is )ery limited outside o$ the cor#orate $inance arena. Because
cor#orations deal in 2uantities o$ money much greater than indi)iduals( the analysis has
de)elo#ed into a disci#line o$ its o;n. It can be di$$erentiated $rom #ersonal $inance and
#ublic $inance.
Alternate Approa$he&
A standard assum#tion in 'or#orate $inance is that shareholders are the residual claimants
and that the #rimary goal o$ e6ecuti)es should be to ma6imi*e shareholder )alue.
Recently( ho;e)er( legal scholars Ee.g. Lynn Stout
I,GJ
F ha)e 2uestioned this assum#tion(
im#lying that the assumed goal o$ ma6imi*ing shareholder )alue is ina##ro#riate $or a
#ublic cor#oration. /his criticism in turn brings into 2uestion the ad)ice o$ cor#orate
$inance( #articularly related to stoc5 buybac5s made #ur#ortedly to Lreturn )alue to
shareholders(L ;hich is #redicated on a legally erroneous assum#tion.
Cal$ulation
,A
Current a&&et& and $urrent lia;ilitie& include three a$$ount& ;hich are o$ s#ecial
im#ortance. /hese accounts re#resent the areas o$ the business ;here managers ha)e the
most direct im#actN
accounts recei)able Ecurrent assetF
in)entory Ecurrent assetsF( and
accounts #ayable Ecurrent liabilityF
/he current #ortion o$ debt E#ayable ;ithin ., monthsF is critical( because it re#resents a
short%term claim to current assets and is o$ten secured by long term assets. 'ommon ty#es
o$ short%term debt are ban5 loans and lines o$ credit.
An increase in ;or5ing ca#ital indicates that the business has either increased current
assetsEthat is has increased its recei)ables( or other current assetsF or has
decreased current liabilities(for e<ample has #aid o$$ some short%term creditors.
Impli$ation& on ,1A= /he common commercial de$inition o$ ;or5ing ca#ital $or the
#ur#ose o$ a ;or5ing ca#ital ad1ustment in an M7A transaction Ei.e. $or a ;or5ing ca#ital
ad1ustment mechanism in a sale and #urchase agreementF is e2ual toN
Current Assets , Current (iabilities e-cluding deferred ta- assets.liabilities/ e-cess cash/
surplus assets and.or deposit balances+
'ash balance items o$ten attract a one%$or%one #urchase #rice ad1ustment.
Wor7ing $apital management
"ecisions relating to ;or5ing ca#ital and short term $inancing are re$erred to as working
capital management. /hese in)ol)e managing the relationshi# bet;een a $irm<s short%
term assets and its short%term liabilities. /he goal o$ ;or5ing ca#ital management is to
ensure that the $irm is able to continue itso#erations and that it has su$$icient cash $lo; to
satis$y both maturing short%term debt and u#coming o#erational e6#enses.
,0
+e$i&ion $riteria
By de$inition( ;or5ing ca#ital management entails short term decisions % generally(
relating to the ne6t one year #eriod % ;hich are Lre)ersibleL. /hese decisions are there$ore
not ta5en on the same basis as 'a#ital In)estment "ecisions ENPV or related( as abo)eF
rather they ;ill be based on cash $lo;s and C or #ro$itability.
=ne measure o$ cash $lo; is #ro)ided by the cash con)ersion cycle % the net
number o$ days $rom the outlay o$ cash $or ra; material to recei)ing #ayment $rom
the customer. As a management tool( this metric ma5es e6#licit the inter%relatedness
o$ decisions relating to in)entories( accounts recei)able and #ayable( and cash.
Because this number e$$ecti)ely corres#onds to the time that the $irm<s cash is tied u#
in o#erations and una)ailable $or other acti)ities( management generally aims at a lo;
net count.
In this conte6t( the most use$ul measure o$ #ro$itability is Return on
ca#ital ER='F. /he result is sho;n as a #ercentage( determined by di)iding rele)ant
income $or the ., months by ca#ital em#loyed@ Return on e2uity ER=:F sho;s this
result $or the $irm<s shareholders. Birm )alue is enhanced ;hen( and i$( the return on
ca#ital( ;hich results $rom ;or5ing ca#ital management( e6ceeds the cost o$ ca#ital(
;hich results $rom ca#ital in)estment decisions as abo)e. R=' measures are
there$ore use$ul as a management tool( in that they lin5 short%term #olicy ;ith long%
term decision ma5ing. See :conomic )alue added E:VAF.
'redit #olicy o$ the $irmN Another $actor a$$ecting ;or5ing ca#ital management is
credit #olicy o$ the $irm. It includes buying o$ ra; material and selling o$ $inished
goods either in cash or on credit. /his a$$ects the cash con)ersion cycle.
,D
,anagement of wor7ing $apital
&uided by the abo)e criteria( management ;ill use a combination o$ #olicies and
techni2ues $or the management o$ ;or5ing ca#ital. /hese #olicies aim at managing
the current assets Egenerally cash andcash e2ui)alents( in)entories and debtorsF and the
short term $inancing( such that cash $lo;s and returns are acce#table.
Ca&h management. Identi$y the cash balance ;hich allo;s $or the business to
meet day to day e6#enses( but reduces cash holding costs.
In#entory management. Identi$y the le)el o$ in)entory ;hich allo;s $or
uninterru#ted #roduction but reduces the in)estment in ra; materials % and minimi*es
reordering costs % and hence increases cash $lo;. Besides this( the lead times in
#roduction should be lo;ered to reduce >or5 in Progress E>IPF and similarly(
the Binished &oodsshould be 5e#t on as lo; le)el as #ossible to a)oid o)er
#roduction % see Su##ly chain management@ 4ust In /ime E4I/F@ :conomic order
2uantity E:=RF@ :conomic 2uantity
+e;tor& management. Identi$y the a##ro#riate credit #olicy( i.e. credit terms
;hich ;ill attract customers( such that any im#act on cash $lo;s and the cash
con)ersion cycle ;ill be o$$set by increased re)enue and hence Return on 'a#ital
Eor vice versaF@ see "iscounts and allo;ances.
Short term finan$ing. Identi$y the a##ro#riate source o$ $inancing( gi)en the cash
con)ersion cycleN the in)entory is ideally $inanced by credit granted by the su##lier@
ho;e)er( it may be necessary to utili*e a ban5 loan Eor o)erdra$tF( or to Lcon)ert
debtors to cashL through L$actoringL.
,8
A$$ount& re$ei#a;le
A$$ount& re$ei#a;le also 5no;n as "ebtors( is money o;ed to a business by its clients
EcustomersF and sho;n on its Balance Sheet as an asset It is one o$ a series o$ accounting
transactions dealing ;ith the billing o$ a customer $or goods and ser)ices that the
customer has ordered.
#er#iew
Accounts recei)able re#resents money o;ed by entities to the $irm on the sale o$ #roducts
or ser)ices on credit. In most business entities( accounts recei)able is ty#ically e6ecuted
by generating an in)oice and either mailing or electronically deli)ering it to the customer(
;ho( in turn( must #ay it ;ithin an established time$rame( called credit terms or payment
terms.
/he accounts recei)able de#artments use the sales ledger( this is because a sales ledger
normally records
I,J
N
% /he sales a business has made.
% /he amount o$ money recei)ed $or goods or ser)ices.
% /he amount o$ money o;ed at the end o$ each month )aries EdebtorsF.
/he accounts recei)able team is in charge o$ recei)ing $unds on behal$ o$ a com#any and
a##lying it to;ards their current #ending balances.
'ollections and cashiering teams are #art o$ the accounts recei)able de#artment. >hile
the collection<s de#artment see5s the debtor( the cashiering team a##lies the monies
recei)ed.
,G
Payment term&
An e6am#le o$ a common #ayment term is Net -( ;hich means that #ayment is due at
the end o$ - days $rom the date o$ in)oice. /hedebtor is $ree to #ay be$ore the due date@
businesses entities can o$$er a discount $or early #ayment. =ther common #ayment terms
include0et 12( 0et 34 and - days end o$ month.
Boo5ing a recei)able is accom#lished by a sim#le accounting transaction@ ho;e)er( the
#rocess o$ maintaining and collecting #ayments on the accounts recei)able subsidiary
account balances can be a $ull%time #ro#osition. "e#ending on the industry in #ractice(
accounts recei)able #ayments can be recei)ed u# to . + .A days a$ter the due date has
been reached. /hese ty#es o$ #ayment #ractices are sometimes de)elo#ed by industry
standards( cor#orate #olicy( or because o$ the $inancial condition o$ the client.
Since not all customer debts ;ill be collected( businesses ty#ically estimate the amount o$
and then record an allo;ance $or doubt$ul accounts
I-J
;hich a##ears on the balance sheet
as a contra account that o$$sets total accounts recei)able. >hen accounts recei)able are
not #aid( some com#anies turn them o)er to third #arty collection agencies or collection
attorneys ;ho ;ill attem#t to reco)er the debt )ia negotiating #ayment #lans( settlement
o$$ers or #ursuing other legal action.
=utstanding ad)ances are #art o$ accounts recei)able i$ a com#any gets an order $rom its
customers ;ith #ayment terms agreed u#on in ad)ance. Since billing is done to claim the
ad)ances se)eral times( this area o$ collectible is not re$lected in accounts recei)ables.
Ideally( since ad)ance #ayment occurs ;ithin a mutually agreed%u#on term( it is the
res#onsibility o$ the accounts de#artment to #eriodically ta5e out the statement sho;ing
ad)ance collectible and should be #ro)ided to sales 7 mar5eting $or collection o$
-
ad)ances. /he #ayment o$ accounts recei)able can be #rotected either by a letter o$
credit or by /rade 'redit Insurance
A$$ount& Re$ei#a;le Age Analy&i&
/he Accounts Recei)able Age Analysis Printout( also 5no;n as the "ebtors Boo5 is
di)ided in categories $or current( - days( 0 days( G days( ., days( .A days and .8
days and o)er due that are #roduced in Modern Accounting Systems. /he #rintout is done
in the order o$ the 'hart o$ Accounts $or the Accounts Recei)able andCor "ebtors Boo5.
/he o#tion to include Tero Balances outstanding or to s#eci$ically lea)e it out is also
#ossible in the #rintout $eatures.
Boo77eeping
=n a com#any<s balance sheet( accounts recei)able is the money o;ed to that com#any by
entities outside o$ the com#any. /he recei)ables o;ed by the com#any<s customers are
called trade recei)ables. Account recei)ables are classi$ied as current assets assuming that
they are due ;ithin one year. /o record a 1ournal entry $or a sale on account( one
must debit a recei)able and credit a re)enue account. >hen the customer #ays o$$ their
accounts( one debits cash and credits the recei)able in the 1ournal entry. /he ending
balance on the trial balancesheet $or accounts recei)able is usually a debit.
Business organi*ations ;hich ha)e become too large to #er$orm such tas5s by hand Eor
small ones that could but #re$er not to do them by handF ;ill generally use accounting
so$t;are on a com#uter to #er$orm this tas5.
-.
'om#anies ha)e t;o methods a)ailable to them $or measuring the net )alue o$ accounts
recei)able( ;hich is generally com#uted by subtracting the balance o$ an allo;ance
account $rom the accounts recei)able account.
/he $irst method is the allowan$e method( ;hich establishes a contra%asset
account( allowance for doubtful accounts( or bad debt provision( that has the e$$ect o$
reducing the balance $or accounts recei)able. /he amount o$ the bad debt #ro)ision can
be com#uted in t;o ;ays( either E.F by re)ie;ing each indi)idual debt and deciding
;hether it is doubt$ul Ea s#eci$ic #ro)isionF@ or E,F by #ro)iding $or a $i6ed #ercentage
Ee.g. ,PF o$ total debtors Ea general #ro)isionF. /he change in the bad debt #ro)ision $rom
year to year is #osted to the bad debt e6#ense account in the income statement.
/he second method is the direct writeoff method. It is sim#ler than the allo;ance method
in that it allo;s $or one sim#le entry to reduce accounts recei)able to its net reali*able
)alue. /he entry ;ould consist o$ debiting a bad debt e6#ense account and crediting the
res#ecti)e accounts recei)able in the sales ledger.
/he t;o methods are not mutually e6clusi)e( and some businesses ;ill ha)e a #ro)ision
$or doubt$ul debts( ;riting o$$ s#eci$ic debts that they 5no; to be bad E$or e6am#le( i$ the
debtor has gone into li2uidation.F
Spe$ial u&e&
'om#anies can use their accounts recei)able as collateral ;hen obtaining a loan Easset%
based lendingF. /hey may also sell them through$actoring or on an e6change. Pools or
#ort$olios o$ accounts recei)able can be sold in ca#ital mar5ets through securiti*ation.
Bor ta6 re#orting #ur#oses( a general #ro)ision $or bad debts is not an allo;able
deduction $rom #ro$it
I!J
% a business can only get relie$ $or s#eci$ic debtors that ha)e gone
-,
bad. 8o;e)er( $or $inancial re#orting #ur#oses( com#anies may choose to ha)e a general
#ro)ision against bad debts consistent ;ith their #ast e6#erience o$ customer #ayments( in
order to a)oid o)er%stating debtors in the balance sheet.
In#entory
In#entory means a list com#iled $or some $ormal #ur#ose( such as the details o$ an estate
going to #robate( or the contents o$ a house let $urnished. /his remains the #rime meaning
in British :nglish.
I.J
In the 3SA and 'anada the term has de)elo#ed $rom a list
o$ goods andmaterials to the goods and material a)ailable in stoc5 by a business@ and this
has become the #rimary meaning o$ the term in North American :nglish( e2ui)alent to
the term Lstoc5L in British :nglish. In accounting( in)entory or stoc5 is considered
an asset.
In#entory management
In)entory management is #rimarily about s#eci$ying the sha#e and #ercentage o$ stoc5ed
goods. It is re2uired at di$$erent locations ;ithin a $acility or ;ithin many locations o$ a
su##ly net;or5 to #recede the regular and #lanned course o$ #roduction and stoc5 o$
materials.
/he sco#e o$ in)entory management concerns the $ine lines bet;een re#lenishment lead
time( carrying costs o$ in)entory( asset management( in)entory $orecasting( in)entory
)aluation( in)entory )isibility( $uture in)entory #rice $orecasting( #hysical in)entory(
a)ailable #hysical s#ace $or in)entory( 2uality management( re#lenishment( returns and
de$ecti)e goods( and demand $orecasting. Balancing these com#eting re2uirements leads
--
to o#timal in)entory le)els( ;hich is an on%going #rocess as the business needs shi$t and
react to the ;ider en)ironment.
In)entory management in)ol)es a retailer see5ing to ac2uire and maintain a #ro#er
merchandise assortment ;hile ordering( shi##ing( handling( and related costs are 5e#t in
chec5. It also in)ol)es systems and #rocesses that identi$y in)entory re2uirements( set
targets( #ro)ide re#lenishment techni2ues( re#ort actual and #ro1ected in)entory status
and handles all $unctions related to the trac5ing and management o$ material. /his ;ould
include the monitoring o$ material mo)ed into and out o$ stoc5room locations and the
reconciling o$ the in)entory balances. It also may include AB' analysis( lot trac5ing(
cycle counting su##ort( etc. Management o$ the in)entories( ;ith the #rimary ob1ecti)e o$
determiningCcontrolling stoc5 le)els ;ithin the #hysical distribution system( $unctions to
balance the need $or #roduct a)ailability against the need $or minimi*ing stoc5 holding
and handling costs.
Prin$iple of in#entory proportionality
Purpo&e
In)entory #ro#ortionality is the goal o$ demand%dri)en in)entory management. /he
#rimary o#timal outcome is to ha)e the same number o$ days< Eor hours<( etc.F ;orth o$
in)entory on hand across all #roducts so that the time o$ runout o$ all #roducts ;ould be
simultaneous. In such a case( there is no Le6cess in)entory(L that is( in)entory that ;ould
be le$t o)er o$ another #roduct ;hen the $irst #roduct runs out. :6cess in)entory is sub%
o#timal because the money s#ent to obtain it could ha)e been utili*ed better else;here(
i.e. to the #roduct that 1ust ran out.
-!
/he secondary goal o$ in)entory #ro#ortionality is in)entory minimi*ation. By integrating
accurate demand $orecasting ;ith in)entory management( re#lenishment in)entories can
be scheduled to arri)e 1ust in time to re#lenish the #roduct destined to run out $irst( ;hile
at the same time balancing out the in)entory su##ly o$ all #roducts to ma5e their
in)entories more #ro#ortional( and thereby closer to achie)ing the #rimary goal. Accurate
demand $orecasting also allo;s the desired in)entory #ro#ortions to be dynamic by
determining e6#ected sales out into the $uture@ this allo;s $or in)entory to be in
#ro#ortion to e6#ected short%term sales or consum#tion rather than to #ast a)erages( a
much more accurate and o#timal outcome.
Integrating demand $orecasting into in)entory management in this ;ay also allo;s $or the
#rediction o$ the Lcan $itL #oint ;hen in)entory storage is limited on a #er%#roduct basis.
Appli$ation&
/he techni2ue o$ in)entory #ro#ortionality is most a##ro#riate $or in)entories that remain
unseen by the consumer( as o##osed to L5ee# $ullL systems ;here a retail consumer
;ould li5e to see $ull shel)es o$ the #roduct they are buying so as not to thin5 they are
buying something old( un;anted or stale@ and di$$erentiated $rom the Ltrigger #ointL
systems ;here #roduct is reordered ;hen it hits a certain le)el@ in)entory #ro#ortionality
is used e$$ecti)ely by 1ust%in%time manu$acturing #rocesses and retail a##lications ;here
the #roduct is hidden $rom )ie;.
=ne early e6am#le o$ in)entory #ro#ortionality used in a retail a##lication in the 3nited
States ;as $or motor $uel. Motor $uel Ee.g. gasolineF is generally stored in underground
storage tan5s. /he motorists do not 5no; ;hether they are buying gasoline o$$ the to# or
bottom o$ the tan5( nor need they care. Additionally( these storage tan5s ha)e a ma6imum
ca#acity and cannot be o)er$illed. Binally( the #roduct is e6#ensi)e. In)entory
#ro#ortionality is used to balance the in)entories o$ the di$$erent grades o$ motor $uel(
-A
each stored in dedicated tan5s( in #ro#ortion to the sales o$ each grade. :6cess in)entory
is not seen or )alued by the consumer( so it is sim#ly cash sun5 EliterallyF into the ground.
In)entory #ro#ortionality minimi*es the amount o$ e6cess in)entory carried in
underground storage tan5s. /his a##lication $or motor $uel ;as $irst de)elo#ed and
im#lemented by Petrolso$t 'or#oration in .GG $or 'he)ron Products 'om#any. Most
ma1or oil com#anies use such systems today.
High>le#el in#entory management
It seems that around .88
I!J
there ;as a change in manu$acturing #ractice $rom com#anies
;ith relati)ely homogeneous lines o$ #roducts to hori*ontally integrated com#anies ;ith
un#recedented di)ersity in #rocesses and #roducts. /hose com#anies Ees#ecially in
metal;or5ingF attem#ted to achie)e success through economies o$ sco#e % the gains o$
1ointly #roducing t;o or more #roducts in one $acility. /he managers no; needed
in$ormation on the e$$ect o$ #roduct%mi6 decisions on o)erall #ro$its and there$ore needed
accurate #roduct%cost in$ormation. A )ariety o$ attem#ts to achie)e this ;ere unsuccess$ul
due to the huge o)erhead o$ the in$ormation #rocessing o$ the time. 8o;e)er( the
burgeoning need $or $inancial re#orting a$ter .G created una)oidable #ressure
$or $inancial accounting o$ stoc5 and the management need to cost manage #roducts
became o)ershado;ed. In #articular( it ;as the need $or audited accounts that sealed the
$ate o$ managerial cost accounting. /he dominance o$ $inancial re#orting accounting
o)er management accounting remains to this day ;ith $e; e6ce#tions( and the $inancial
re#orting de$initions o$ <cost< ha)e distorted e$$ecti)e management <cost< accounting since
that time. /his is #articularly true o$ in)entory.
8ence( high%le)el $inancial in)entory has these t;o basic $ormulas( ;hich relate to the
accounting #eriodN
-0
.. 'ost o$ Beginning In)entory at the start o$ the #eriod U
in)entory #urchases ;ithin the #eriod U cost o$ #roduction ;ithin the #eriod V
cost o$ goods a)ailable
,. 'ost o$ goods a)ailable W cost o$ ending in)entory at the end o$ the #eriod V cost
o$ goods sold
/he bene$it o$ these $ormulae is that the $irst absorbs all o)erheads o$ #roduction and ra;
material costs into a )alue o$ in)entory $or re#orting. /he second $ormula then creates the
ne; start #oint $or the ne6t #eriod and gi)es a $igure to be subtracted $rom the sales #rice
to determine some $orm o$ sales%margin $igure.
Manu$acturing management is more interested in inventory turnover ratio or average
days to sell inventory since it tells them something about relati)e in)entory le)els.
In)entory turno)er ratio Ealso 5no;n as in)entory turnsF V cost o$ goods sold C
A)erage In)entory V 'ost o$ &oods Sold C EEBeginning In)entory U :nding
In)entoryF C ,F
and its in)erse
A)erage "ays to Sell In)entory V Number o$ "ays a Xear C In)entory /urno)er
Ratio V -0A days a year C In)entory /urno)er Ratio
/his ratio estimates ho; many times the in)entory turns o)er a year. /his number
tells ho; much cashCgoods are tied u# ;aiting $or the #rocess and is a critical
measure o$ #rocess reliability and e$$ecti)eness. So a $actory ;ith t;o in)entory
turns has si6 months stoc5 on hand( ;hich is generally not a good $igure
Ede#ending u#on the industryF( ;hereas a $actory that mo)es $rom si6 turns to
t;el)e turns has #robably im#ro)ed e$$ecti)eness by .P. /his im#ro)ement
;ill ha)e some negati)e results in the $inancial re#orting( since the <)alue< no;
stored in the $actory as in)entory is reduced.
-D
>hile these accounting measures o$ in)entory are )ery use$ul because o$ their
sim#licity( they are also $raught ;ith the danger o$ their o;n assum#tions. /here
are( in $act( so many things that can )ary hidden under this a##earance o$
sim#licity that a )ariety o$ <ad1usting< assum#tions may be used. /hese includeN
S#eci$ic Identi$ication
>eighted A)erage 'ost
Mo)ing%A)erage 'ost
BIB= and LIB=.
In)entory /urn is a $inancial accounting tool $or e)aluating in)entory and it is not
necessarily a management tool. In)entory management should be $or;ard
loo5ing. /he methodology a##lied is based on historical cost o$ goods sold. /he
ratio may not be able to re$lect the usability o$ $uture #roduction demand( as ;ell
as customer demand.
Business models( including 4ust in /ime E4I/F In)entory( Vendor Managed
In)entory EVMIF and 'ustomer Managed In)entory E'MIF( attem#t to minimi*e
on%hand in)entory and increase in)entory turns. VMI and 'MI ha)e gained
considerable attention due to the success o$ third%#arty )endors ;ho o$$er added
e6#ertise and 5no;ledge that organi*ations may not #ossess.
)inan$ial a$$ounting
An organi*ation<s in)entory can a##ear a mi6ed blessing( since it counts as an asset on
thebalance sheet( but it also ties u# money that could ser)e $or other #ur#oses and
re2uires additional e6#ense $or its #rotection. In)entory may also cause signi$icant ta6
e6#enses( de#ending on #articular countries< la;s regarding de#reciation o$ in)entory( as
in /hor Po;er /ool 'om#any ). 'ommissioner.
-8
In)entory a##ears as a current asset on an organi*ation<s balance sheet because the
organi*ation can( in #rinci#le( turn it into cash by selling it. Some organi*ations hold
larger in)entories than their o#erations re2uire in order to in$late their a##arent asset
)alue and their #ercei)ed #ro$itability.
In addition to the money tied u# by ac2uiring in)entory( in)entory also brings associated
costs $or ;arehouse s#ace( $or utilities( and $orinsurance to co)er sta$$ to handle and
#rotect it $rom $ire and other disasters( obsolescence( shrin5age Ethe$t and errorsF( and
others. Suchholding costs can mount u#N bet;een a third and a hal$ o$ its ac2uisition
)alue #er year.
Businesses that stoc5 too little in)entory cannot ta5e ad)antage o$ large orders $rom
customers i$ they cannot deli)er. /he con$licting ob1ecti)es o$ cost control and customer
ser)ice o$ten #it an organi*ation<s $inancial and o#erating managers against
its sales and mar5etingde#artments. Sales#eo#le( in #articular( o$ten recei)e sales%
commission #ayments( so una)ailable goods may reduce their #otential #ersonal income.
/his con$lict can be minimised by reducing #roduction time to being near or less than
customers< e6#ected deli)ery time. /his e$$ort( 5no;n as LLean #roductionL ;ill
signi$icantly reduce ;or5ing ca#ital tied u# in in)entory and reduce manu$acturing costs
ESee the /oyota Production SystemF.
Role of in#entory a$$ounting
By hel#ing the organi*ation to ma5e better decisions( the accountants can hel# the #ublic
sector to change in a )ery #ositi)e ;ay that deli)ers increased )alue $or the ta6#ayer?s
in)estment. It can also hel# to incenti)ise #rogress and to ensure that re$orms are
sustainable and e$$ecti)e in the long term( by ensuring that success is a##ro#riately
recogni*ed in both the $ormal and in$ormal re;ard systems o$ the organi*ation.
-G
/o say that they ha)e a 5ey role to #lay is an understatement. Binance is connected to
most( i$ not all( o$ the 5ey business #rocesses ;ithin the organi*ation. It should be
steering the ste;ardshi# and accountability systems that ensure that the organi*ation is
conducting its business in an a##ro#riate( ethical manner. It is critical that these
$oundations are $irmly laid. So o$ten they are the litmus test by ;hich #ublic con$idence
in the institution is either ;on or lost.
Binance should also be #ro)iding the in$ormation( analysis and ad)ice to enable the
organi*ations? ser)ice managers to o#erate e$$ecti)ely. /his goes beyond the traditional
#reoccu#ation ;ith budgets + ho; much ha)e ;e s#ent so $ar( ho; much do ;e ha)e le$t
to s#endQ It is about hel#ing the organi*ation to better understand its o;n #er$ormance.
/hat means ma5ing the connections and understanding the relationshi#s bet;een gi)en
in#uts + the resources brought to bear + and the out#uts and outcomes that they achie)e. It
is also about understanding and acti)ely managing ris5s ;ithin the organi*ation and its
acti)ities.
)I) #&4 (I) a$$ounting
>hen a merchant buys goods $rom in)entory( the )alue o$ the in)entory account is
reduced by the cost o$ goods sold E'=&SF. /his is sim#le ;here the 'o& has not )aried
across those held in stoc5@ but ;here it has( then an agreed method must be deri)ed to
e)aluate it. Borcommodity items that one cannot trac5 indi)idually( accountants must
choose a method that $its the nature o$ the sale. /;o #o#ular methods that normally e6ist
areN BIB= and LIB= accounting E$irst in % $irst out( last in % $irst outF. BIB= regards the
$irst unit that arri)ed in in)entory as the $irst one sold. LIB= considers the last unit
arri)ing in in)entory as the $irst one sold. >hich method an accountant selects can ha)e a
signi$icant e$$ect on net income and boo5 )alue and( in turn( on ta6ation. 3sing LIB=
!
accounting $or in)entory( a com#any generally re#orts lo;er net income and lo;er boo5
)alue( due to the e$$ects o$ in$lation. /his generally results in lo;er ta6ation. "ue to
LIB=<s #otential to s5e; in)entory )alue( 3S &AAP and IAS ha)e e$$ecti)ely banned
LIB= in)entory accounting.
Standard $o&t a$$ounting
Standard cost accounting uses ratios called e$$iciencies that com#are the labour and
materials actually used to #roduce a good ;ith those that the same goods ;ould ha)e
re2uired under LstandardL conditions. As long as similar actual and standard conditions
obtain( $e; #roblems arise. 3n$ortunately( standard cost accounting methods de)elo#ed
about . years ago( ;hen labor com#rised the most im#ortant cost in manu$actured
goods. Standard methods continue to em#hasi*e labor e$$iciency e)en though that
resource no; constitutes a E)eryF small #art o$ cost in most cases.
Standard cost accounting can hurt managers( ;or5ers( and $irms in se)eral ;ays. Bor
e6am#le( a #olicy decision to increase in)entory can harm a manu$acturing
manager<s #er$ormance e)aluation. Increasing in)entory re2uires increased #roduction(
;hich means that #rocesses must o#erate at higher rates. >hen Enot i$F something goes
;rong( the #rocess ta5es longer and uses more than the standard labor time. /he manager
a##ears res#onsible $or the e6cess( e)en though sChe has no control o)er the #roduction
re2uirement or the #roblem.
In ad)erse economic times( $irms use the same e$$iciencies to do;nsi*e( rightsi*e( or
other;ise reduce their labor $orce. >or5ers laid o$$ under those circumstances ha)e e)en
less control o)er e6cess in)entory and cost e$$iciencies than their managers.
Many $inancial and cost accountants ha)e agreed $or many years on the desirability o$
re#lacing standard cost accounting. /hey ha)e not( ho;e)er( $ound a successor.
!.
Cal$ulating Wor7ing Capital
/he number one reason most #eo#le loo5 at a balance sheet is to $ind out a com#any<s
;or5ing ca#ital Eor LcurrentLF #osition. It re)eals more about the $inancial condition o$ a
business than almost any other calculation. It tells you ;hat ;ould be le$t i$ a com#any
raised all o$ its short term resources( and used them to #ay o$$ its short term liabilities.
/he more ;or5ing ca#ital( the less $inancial strain a com#any e6#eriences. By studying a
com#any<s #osition( you can clearly see i$ it has the resources necessary to e6#and
internally or i$ it ;ill ha)e to turn to a ban5 and ta5e on debt.
>or5ing 'a#ital is the easiest o$ all the balance sheet calculations. 8ere<s the $ormula.
'urrent Assets % 'urrent Liabilities V >or5ing 'a#ital
=ne o$ the main ad)antages o$ loo5ing at the ;or5ing ca#ital #osition is being able to
$oresee any $inancial di$$iculties that may arise. :)en a business that has billions o$
dollars in $i6ed assets ;ill 2uic5ly $ind itsel$ in ban5ru#tcy court i$ it can<t #ay its
monthly bills. 3nder the best circumstances( #oor ;or5ing ca#ital leads to $inancial
#ressure on a com#any( increased borro;ing( and late #ayments to creditor % all o$ ;hich
result in a lo;er credit rating. A lo;er credit rating means ban5s charge a higher interest
rate( ;hich can cost a cor#oration a lot o$ money o)er time.
*egati#e Wor7ing Capital Can Be a 5ood Thing for High Turn Bu&ine&&e&
'om#anies that ha)e high in)entory turns and do business on a cash basis Esuch as a
grocery storeF need )ery little ;or5ing ca#ital. /hese ty#es o$ businesses raise money
e)ery time they o#en their doors( then turn around and #lo; that money bac5 into
!,
in)entory to increase sales. Since cash is generated so 2uic5ly( managements can sim#ly
stoc5#ile the #roceeds $rom their daily sales $or a short #eriod o$ time i$ a $inancial crisis
arises. Since cash can be raised so 2uic5ly( there is no need to ha)e a large amount o$
;or5ing ca#ital a)ailable.
A com#any that ma5es hea)y machinery is a com#letely di$$erent story. Because these
ty#es o$ businesses are selling e6#ensi)e items on a long%term #ayment basis( they can<t
raise cash as 2uic5ly. Since the in)entory on their balance sheet is normally ordered
months in ad)ance( it can rarely be sold $ast enough to raise money $or short%term
$inancial crises Eby the time it is sold( it may be too lateF. It<s easy to see ;hy com#anies
such as this must 5ee# enough ;or5ing ca#ital on hand to get through any un$oreseen
di$$iculties.
Wor7ing Capital and Ca&h )low Analy&i&
'ash is the most li2uid o$ all assets( so many managers are #articularly interested in ho;
much cash is a)ailable to a business at any gi)en time. Because the $lo; o$ cash into and
out o$ a business is mainly a matter o$ in)esting E#urchasing assetsF and disin)esting
Edis#osing o$ assetsF( an analysis o$ cash $lo;s can hel# measure management?s
#er$ormance. /his cha#ter describes the #rocess o$ accounting $or and analy*ing cash
$lo;s. Although it doesn?t re#lace them( the cash $lo; statement is a use$ul ad1unct to
income statements and balance sheets. 3sing tools that are a)ailable to you in the $orm o$
di$$erent $unctions and lin5s( you?ll see ho; to use :6cel to con)ert the in$ormation in a
balance sheet and income statement to a cash $lo; statement. /o set the stage( the ne6t
section discusses ho; costs are timed.
!-
Ca&h #&4Wor7ing Capital
So $ar( ;e ha)e discussed $unds in terms o$ cash only. A broader and more use$ul ;ay o$
loo5ing at the a)ailability o$ $unds in)ol)es the conce#t o$ working capital. 8o; does
your com#any create incomeQ I$ you manu$acture a #roduct( you use $unds to #urchase
in)entory( #roduce goods ;ith that in)entory( con)ert those goods into accounts
recei)able by selling them( and con)ert accounts recei)able into cash ;hen you ta5e
#ayment. I$ you are a merchandising $irm( the #rocess is basically the same( although you
#robably #urchase $inished goods instead o$ #roducing them. :ach o$ the com#onents in
this #rocess is a current asset( such as an asset that you can con)ert into cash in a
relati)ely short #eriod Eusually( but not al;ays( one yearF as a result o$ your normal
business o#erations. In)entory and accounts recei)able( $or e6am#le( are not as
li2uid as cash( but your business e6#ects to con)ert both to cash be$ore too long. 'urrent
liabilities( on the other hand( are obligations that you must meet during the same
relati)ely short time #eriod that de$ines your current assets. Notes #ayable( accounts
#ayable( and salaries are e6am#les o$ current liabilities.
A
,at$hing Co&t& and Re#enue&
Se)eral other cha#ters o$ this boo5 mention the matching principleMthe notion that
re)enue should
be matched ;ith ;hate)er e6#enses or assets #roduce that re)enue. /his notion leads
ine)itably to the accrual method o$ accounting. I$ you obtain the annual registration $or a
truc5 in 4anuary and use that truc5 to deli)er
#roducts to your customers $or ., months( you ha)e #aid $or an item in 4anuary that hel#s
you #roduce
!!
re)enue all year long. I$ you record the entire amount o$ the e6#ense in 4anuary( you
o)erstate your costs and understate your #ro$itability $or that month. Xou also understate
your costs and o)erstate your #ro$itability $or the remaining .. months.
Largely $or this reason( the accrual method e)ol)ed. 3sing the accrual method( you ;ould
accrue .C.,th o$ the e6#ense o$ the truc5 registration during each month o$ the year.
"oing so enables you to measure your e6#enses against your re)enues more accurately
throughout the year.
Similarly( su##ose that you sell a #roduct to a customer on a credit basis. Xou might
recei)e #eriodic #ayments $or the #roduct o)er se)eral months( or you might recei)e
#ayment in a lum# sum sometime a$ter the sale. Again( i$ you ;ait to record that income
until you ha)e recei)ed $ull #ayment( you ;ill misestimate your #ro$it until the customer
$inishes #aying you. Some )ery small businessesM#rimarily sole #ro#rietorshi#sMuse an
alternati)e to accrual( called the cash method o$ accounting. /hey $ind it more con)enient
to record e6#enses and re)enues ;hen the transaction too5 #lace. In )ery small
businesses( the additional accuracy o$ the accrual method might not be ;orth the e$$ort.
An accrual basis is more com#licated than a cash basis and re2uires more e$$ort to
maintain( but it is o$ten a more accurate method $or re#orting #ur#oses.
/he main distinction bet;een the t;o methods is that i$ you distribute the recording o$
re)enues and e6#enses o)er the $ull time #eriod ;hen you earned and made use o$ them(
you are using the accrual method. I$ you record their totals during the time #eriod that
you recei)ed or made #ayment( you are using the cash method.
!A
Su##ose that 4ean Marble starts a ne; $irm( Marble "esigns( in 4anuary. At the end o$ the
$irst month o$ o#erations( she has made Y.( in sales and #aid )arious o#erating
e6#ensesN her salary( the o$$ice lease( #hone costs( o$$ice su##lies( and a com#uter. She
;as able to sa)e ,P o$ the cost o$ o$$ice su##lies by ma5ing a bul5 #urchase that she
estimates ;ill last the entire year. Recording all o$ these as e6#enses during the current
#eriod results in net income $or the month o$ Y.(AA!.
3sing the accrual method( Marble "esigns records .C.,th o$ the cost o$ the o$$ice
su##lies during 4anuary. /his is a reasonable decision because they are e6#ected to last a
$ull year. It also records .C-0th o$ the cost o$ the com#uter as de#reciation. /he
assum#tion is that the com#uter?s use$ul li$e is three years and that its e)entual sal)age or
residual )alue ;ill be *ero. /he net income $or 4anuary is no; YA(,8-( ;hich is -.! times
the net income recorded under the cash basis.
/he net income o$ YA(,8- is a much more realistic estimate $or 4anuary than Y.(AA!. Both
the o$$ice su##lies and the com#uter ;ill contribute to the creation o$ re)enue $or much
longer than one month. In contrast( the bene$its o$ the salary( lease( and #hone e6#enses
#ertain to that month only( so it is a##ro#riate to record the entire e6#ense $or 4anuary.
But this analysis says nothing about ho; much cash Marble "esigns has in the ban5.
Su##ose that the com#any must #ay o$$ a ma1or loan in the near $uture. /he income
statement does not necessarily sho; ;hether Marble "esigns ;ill li5ely be able to ma5e
that #ayment.
Stru$turing the Balan$e Sheet
!0
Binally( the "ebit and 'redit columns o$ the balance sheet are obtained by $ormulas
similar to those used $or the income statement. /his $ormula returns the debit amountsN
VIBE=REAccount/y#eVHAssetsH(Account/y#eVHLiabilitiesHF(Ad1usted"ebits(F
/his $ormula returns the credit amountsN
VIBE=REAccount/y#eVHAssetsH(Account/y#eVHLiabilitiesHF(Ad1usted'redits(F
No; Marble is in a #osition to calculate her ;or5ing ca#ital. Recall that this is de$ined as
the di$$erence bet;een current assets and current liabilities. As o$ 4anuary -.(
,D(Marble?s current assets are as $ollo;sN
Y,(AA!. EcashF
Y8(. Eaccounts recei)ableF
Y.(8--.-- Eo$$ice su##lies( a #re#aid e6#enseF
Y.(A. Eending in)entoryF
/his adds u# to Y.-(88D.--. Marble?s current liabilities include only the Y,( note
#ayable. 8er ;or5ing ca#ital( there$ore( is Y..(88D.--( or Y.-(88D.--%Y,(.
%&ing Tran&a$tion& to Cal$ulate Change& to Wor7ing Capital
"uring 4anuary( the sale o$ #roducts $or more than they cost increased ;or5ing ca#italN
/he gross #ro$it ;as YG(A. Placing Y,( ;orth o$ materials in in)entory also
increased ;or5ing ca#ital. /hese are both current assets( totaling Y..(A. Ac2uiring a
loan o$ Y,(( the note #ayable that ;as used to #urchase the in)entory( decreased
;or5ing ca#ital. >or5ing ca#ital ;as also decreased by the #ayment o$ cash $or the
com#uter( )arious o#erating e6#enses( and the use o$ o$$ice su##lies. /hese are all
current liabilities( totaling Y8(0.,.0D. /he net e$$ect o$ the increase o$ Y..(A in ;or5ing
ca#ital and the decrease o$ Y8(0.,.0D in ;or5ing ca#ital is Y,(88D.--. "uring the month
!D
o$ 4anuary( Marble "esigns increased its ;or5ing ca#ital by this amount. Note that this is
the same $igure as ;as determined by the analysis in Bigure A.0 EY..(88D.--%YG(F.
Normally( you ;ould not determine changes in ;or5ing ca#ital by e6amining each
transaction that occurred in a gi)en #eriodN /here are 2uic5er ;ays. Also( many
transactions occur that a$$ect current assets and current liabilities to the same degree and(
there$ore( ha)e no net e$$ect on ;or5ing ca#ital.
Bor e6am#le( ;hen you collect #ayment $or a #roduct or ser)ice( this transaction has no
e$$ect on ;or5ing ca#ital. "oing so merely increases one current asset EcashF and
decreases another current asset Eaccounts recei)ableF by identical amounts. >hen you
;rite a chec5 $or an account #ayable( you decrease both a current asset account EcashF and
a current liability account Eaccounts #ayableF by e2ual amounts. /here is no net e$$ect on
the amount o$ ;or5ing ca#ital.
In general( transactions that in)ol)e only current asset or current liability accounts do
ha)e an e$$ect on indi)idual ;or5ing ca#ital accounts( but they do not ha)e a net e$$ect on
the amount o$ ;or5ing ca#ital.
Che$7ing the Sour$e& and %&e& of Wor7ing Capital
Another means o$ determining changes in ;or5ing ca#ital is to com#are its sources ;ith
its uses. Recall that transactions in)ol)ing only current asset and current liability accounts
ha)e no net e$$ect on ;or5ing ca#ital. /he same is true o$ transactions that in)ol)e only
noncurrent accounts. Bor e6am#le( ;hen Marble records YA!..D as the month?s
!8
de#reciation on the com#uter( she adds YA!..D to a noncurrent account( ;ith no net e$$ect
on ;or5ing ca#ital.
8o;e)er( a transaction that in)ol)es a current account and a noncurrent account does
a$$ect the amount o$ ;or5ing ca#ital. Su##ose that Marble in)ested an additional Y.(
in her business( recording it in both the ca#ital account EnoncurrentF and the cash account
Ea current assetF. /his transaction ;ould increase ;or5ing ca#ital by Y.(. /here$ore(
;hen determining changes to ;or5ing ca#ital( it can be con)enient to limit the analysis to
transactions that a$$ect only current accounts and noncurrent accounts.
/he sources o$ ;or5ing ca#ital( in this case( consist solely o$ net income. >hat is
de#reciation doing thereQ Recall that de#reciation is a noncash e6#ense that( $or the
#ur#oses o$ the income statement( acts as an o$$set to gross #ro$it in the calculation o$ net
income. But no $unds change hands as a result o$ recording de#reciation. /here$ore( ;hen
you use net income to calculate your sources o$ ;or5ing ca#ital( it is necessary to add
de#reciation bac5Min other ;ords( to re)erse the e$$ect o$ subtracting it in the calculation
o$ net income.
/he cash #ortion o$ net income( a noncurrent account( is de#osited in the cash account( a
current asset. /here$ore( in combination ;ith the act o$ adding de#reciation bac5( it can
be used to calculate the change in ;or5ing ca#ital.
Analy6ing Ca&h )low
Bor )arious reasons( you might ;ant to determine ho; a com#any uses its cash assets.
/he choice to use cash to ac2uire an asset( to meet a liability( or to retire a debt is a
!G
#rocess o$ Analy*ing 'ash Blo; in)estment and disin)estment( and a manager al;ays has
choices to ma5e( some smart and some maladroit. It?s im#ortant to 5ee# trac5 o$ ho; ;ell
a com#any?s management is ma5ing these choices.
Burthermore( as use$ul as the accrual method o$ accounting is in matching re)enues ;ith
e6#enses( it tends to obscure ho; cash $lo;s through a $irm. =ne o$ the #ur#oses o$ cash
$lo; analysis is to highlight di$$erences bet;een( say( net income and the actual
ac2uisition o$ cash. Bor e6am#le( accounts recei)able is one com#onent o$ net income(
but it ;ill not sho; u# as cash until the chec5 clears. A com#any might ha)e a healthy net
income( but i$ its customers do not #ay it on a timely basis( it might ha)e di$$iculty
meeting its obligations. 'ash $lo; analysis can illuminate #roblems( e)en im#ending
#roblems such as that one.
Identifying Ca&h )low& +ue to perating A$ti#itie&
/he ne6t ste# in analy*ing cash $lo;s is to $ocus on cash generated by and used in
o#erations. Ca&h re$eipt& from $u&tomer&MXou can easily determine this amount by
combining the )alue $or sales Enet o$ any discounts that might ha)e been #ro)ided to
customersF ;ith changes in accounts recei)able. /hat is( add accounts recei)able at the
end o$ the #eriod to the sales $igure and then subtract accounts recei)able at the beginning
o$ the #eriod. /he logic is that i$ accounts recei)able has declined during the #eriod( you
ha)e collected more in cash than you ha)e accrued in accounts recei)able@ i$ it has
increased( you ha)e accrued more in recei)ables than you ha)e collected in cash.
Z Ca&h outlay& for pur$ha&e&MBrom the stand#oint o$ o#erating acti)ities( there is one
use o$ cash $or #urchasesN in)entory. /here$ore( to summari*e cash $lo; $or o#erating
A
#urchases( add to the cost o$ goods sold during the #eriod o$ the ending in)entory le)el(
and subtract the beginning in)entory le)el.
Additionally( you might ha)e #urchased in)entory ;ith a note or account #ayable to the
su##liers o$ your in)entory materials. In this case( you add any decrease in these #ayables
Ebecause you used cash to decrease themF or subtract any increase in these #ayables
Ebecause you used credit( not cash( to ac2uire the materialsF.
Z Ca&h outlay& for e<pen&e&M/hese are a)ailable $rom the o#erating e6#enses #ortion
o$ the income statement. 'ombine the total o#erating e6#enses ;ith any changes in
#re#ayments and accrued liabilities( such as em#loyee salaries earned but as yet un#aid(
at the end o$ the #eriod.
In the case o$ Marble "esigns( a##lying these calculations indicates that sales( increased
by a reduction o$ Y,(A in accounts recei)able( results in cash recei#ts o$ YG,(A. 'ost
o$ goods sold( increased by the YA change in in)entory le)el( results in Y,A( in cash
#urchases. /otal o#erating e6#enses also ;ere EaF reduced by Y.(-0.0D in de#reciation( a
noncash( long%term #re#ayment( and EbF increased by a change in the amount o$ notes
#ayable( con)erted to cash and used to ac2uire o$$ice su##lies. Subtracting cash #ayments
$or #urchases and $or e6#enses $rom total recei#ts results in Y.,(A!G.( the amount o$
cash #ro)ided by o#erations.
/his com#letes the #rocess o$ con)erting in$ormation contained in the income statement(
recei#ts( and outlays re#resented as accruals into a cash basis( re#resented as actual cash
recei#ts and outlays occurring during the #eriod in 2uestion.
A.
Com;ining Ca&h from peration& with Ca&h from *onoperating Tran&a$tion&
/he $inal ste# in de)elo#ing the cash $lo; analysis is to combine the cash amounts used
$or normal o#erations ;ith the cash transactions that a##ly to nono#erating acti)ities.
'ash recei#ts( in this case( consist o$ cash $rom o#erations and cash recei)ed $rom selling
the o$$ice s#ace. 'ash outlays consist o$ the #urchase o$ the ne; com#uter and the o$$ice
s#ace. /he di$$erence bet;een the t;o( Y.A(,,G( re#resents the amount o$ cash Marble
"esigns generated during the .,%month #eriod( and this $igure should agree ;ith the
di$$erence in the cash account bet;een 4anuary -.( ,D( and 4anuary -.( ,8. /he
di$$erence bet;een the ending balance o$ Y.D(D8- and the beginning balance o$ Y,(AA! is
Y.A(,,G( ;hich agrees ;ith the results o$ the cash $lo; analysis. In reality( cash $lo;
analysis is a much more com#licated tas5 than the relati)ely sim#le e6am#le #ro)ided
here. It includes many more transactions than ;ere included in this
e6am#leN /he e$$ect o$ ta6es must be ta5en into account( accrued liabilities com#licate the
#rocess( and such transactions as the issuance o$ stoc5( di)idends( and long%term bonds
a$$ect the identi$ication and calculation o$ cash $lo;s. 8o;e)er( the e6am#le illustrates
the basic #rinci#les and o)erall #rocess o$ con)erting balance sheets and income
statements into in$ormation about ho; a com#any creates and uses its cash resources.
A,
Wor7ing Capital Cy$le
As an introduction to the ;or5ing ca#ital cycle( here is a 2uic5 reminder o$ the main
ty#es o$ cash in$lo; and out$lo; in a ty#ical businessN
Inflow& utflow&
'ash sales to customers Purchasing $inished goods $or re%sale
Recei#ts $rom customers ;ho ;ere allo;ed to
buy on credit Etrade debtorsF
Purchasing ra; materials and other com#onents
needed $or the manu$acturing o$ the $inal #roduct
Interest on ban5 and other balances Paying salaries and ;ages and other o#erating
e6#enses
Proceeds $rom sale o$ $i6ed assets Purchasing $i6ed assets
In)estment by shareholders Paying the interest on( or re#ayment o$ loans
Paying ta6es
'ash $lo; can be described as a cycleN
/he business uses cash to ac2uire resources Eassets such as stoc5sF
/he resources are #ut to ;or5 and goods and ser)ices #roduced. /hese are then
sold to customers
Some customers #ay in cash EgreatF( but others as5 $or time to #ay. :)entually
they #ay and these $unds are used to settle any liabilities o$ the business Ee.g. #ay
su##liersF
And so the cycle re#eats
8o#e$ully( each time through the cash $lo; cycle( a little more money is #ut bac5 into the
business than $lo;s out. But not necessarily( and i$ management don?t care$ully monitor
cash $lo; and ta5e correcti)e action ;hen necessary( a business may $ind itsel$ sin5ing
into trouble.
/he cash needed to ma5e the cycle abo)e ;or5 e$$ecti)ely is 5no;n as wor7ing $apital4
Wor7ing $apital i& the $a&h needed to pay for the day to day operation& of the
;u&ine&&4
A-
In other ;ords( ;or5ing ca#ital is needed by the business toN
Pay su##liers and other creditors
Pay em#loyees
Pay $or stoc5s
Allo; $or customers ;ho are allo;ed to buy no;( but #ay later Eso%called 9trade
debtorsHF
>hat is crucially im#ortant( there$ore( is that a business a$ti#ely manage& wor7ing
$apital. It is the timing o$ cash $lo;s ;hich can be )ital to the success( or other;ise( o$
the business. 4ust because a business is ma5ing a #ro$it does not necessarily mean that
there is cash coming into and out o$ the business.
/here are many ad)antages to a business that acti)ely manages its cash $lo;N
It 5no;s ;here its cash is tied u#( s#otting #otential bottlenec5s and acting to
reduce their im#act
It can #lan ahead ;ith more con$idence. Management are in better control o$ the
business and can ma5e in$ormed decisions $or $uture de)elo#ment and e6#ansion
It can reduce its de#endence on the ban5 and sa)e interest charges
It can identi$y sur#luses ;hich can be in)ested to earn interest
Ca&e &tudy>Intel = Wor7ing Capital
Ca&e +etail&= Pri$e=
'ase 'ode N BINA. Bor deli)ery in electronic $ormatN Rs. -@
Bor deli)ery through courier E;ithin IndiaFN
'ase Length N 8 Pages
Period N .G08 % ,-
A!
Rs. - U Rs. ,A $or Shi##ing 7 8andling
'harges
Theme&
Pub. "ate N ,A
/eaching Note N Not A)ailable
=rgani*ation N Intel
Industry N Semi 'onductors
'ountries N 3SA
Intel is the undis#uted leader in the micro#rocessor industry ;ith about a GP mar5et
share. Since .G08 ;hen it ;as $ounded( Intel has launched many ground%brea5ing
#roducts. Many analysts attribute Intel<<s success to its technology( inno)ation and
management. It has also attem#ted to become a disci#lined com#any that ma6imises
o#erational e$$iciency( one im#ortant dimension o$ ;hich is ;or5ing ca#ital management.
/he case outlines )arious as#ects o$ ;or5ing ca#ital management at Intel.
In early ,!( Intel ;as the undis#uted leader in the micro#rocessor industry ;ith about
GP mar5et share. Since .G08 ;hen it ;as $ounded( Intel had launched many
groundbrea5ing #roducts.
By ,!( it had !A #roducts and ser)ices ranging $rom the ubi2uitous P'
micro#rocessors li5e Pentium( the 0!%bit high%end Itanium , to mobile com#uting
chi#sets such as 'entrino. Intel ended ,, ;ith re)enues o$ Y ,0.D billion. Many
analysts belie)ed Intel<s success ;as as much about technology as about management.
/hey attributed the success o$ Intel to its unbro5en leadershi# chain. As one great leader
retired( another too5 o)er. >hile Intel ;as ;ell 5no;n $or inno)ation( it had also
attem#ted to be a disci#lined com#any that ma6imi*ed o#erational e$$iciency. Intel
reali*ed that as com#etition intensi$ied( ;or5ing ca#ital management ;ould become
increasingly im#ortant...
AA
Corporate Ba$7ground
A #o#ular story ;hich ;ent around in Intel ;as that one ;ee5end a$ternoon in the s#ring
o$ .G08( &ordon Moore EMooreF dro##ed by Robert Noyce<s ENoyceF home. /he t;o
decided to launch a ne; com#any to #ursue large%scale integrated ELSIF memory. /hat
;as the moment ;hen Intel Eabbre)iation o$ Integrated :lectronicsF ;as born though the
com#any ;as o$$icially launched in the month o$ 4uly that year. Little did they 5no; that
their ne; )enture ;ould de$ine contem#orary electronics and change the ;ay the ;orld
;or5ed( li)ed and #layed...
Bu&ine&& Segment&
Intel<s ma1or #roducts included micro#rocessors@ chi#sets@ boards@ $lash memory@
a##lication #rocessors used in cellular handsets and hand%held com#uting de)ices@
cellular chi#sets@ net;or5ing and communications #roducts( such as :thernet connecti)ity
#roducts( o#tical com#onents and net;or5 #rocessing com#onents( and embedded control
chi#s Emicro controllersF...
;?e$ti#e& of the &tudy
/o study the structure o$ the ;or5ing ca#ital o$ selected steel com#anies.
/o study the management o$ ;or5ing ca#ital com#onents by steel com#anies
/o 5no; the com#arati)e #osition o$ steel com#anies in ;or5ing ca#ital
management.
A0
:)ery business needs some amount o$ ;or5ing ca#ital. It is needed $or $ollo;ing
#ur#oses%
Bor the #urchase o$ ra; materials( com#onents and s#ares.
/o #ay ;ages and salaries.
/o incur day to day e6#enses and o)erhead costs such as $uel( #o;er( and o$$ice
e6#enses etc.
/o #ro)ide credit $acilities to customers etc.
Importan$e of the &tudy
/he im#ortance o$ a #ro1ect re#ort is $ollo;ing.
/he study ;ill hel# to 5no; that ;hat additional $eatures 7 ;hat $acilities should
be increase.
AD
/he im#ortance o$ #ro1ect study is that it is hel#$ul to ma5e $uture #olicy o$ the
com#any.

S$ope of the &tudy


Pro1ect aims to understand and enunciate the ;or5ing #rocess o$ di$$erent automobile and
e)aluating its outcome in the t;o ;heeler automobile sector. =)er the #ast $e; years(
there has been tremendous #rogress made around the ;orld in o#ening u# tra)el and
A8
tourism mar5ets to the bene$its o$ increased com#etition. =ne o$ the main as#ects o$ the
#ro1ect is to analy*e the di$$erent #roducts and ser)ices o$$ered and initiati)es ada#ted $or
t;o ;heeler automobile sector their #roduct. Selling 9intangible assetsH is one o$ the
toughest 1obs in the ;orld. /he #ro1ect is more o$ a team e$$ort and ;ill incur team
returns

Re&ear$h ,ethodology
Research is a common language re$ers to a search o$ 5no;ledge. Research is scienti$ic 7
systematic search $or #ertinent in$ormation on a s#eci$ic to#ic( in$ect research is an art o$
scienti$ic in)estigation. Research Methodology is a scienti$ic ;ay to sol)e research
AG
#roblem. It may be understood as a science o$ studying ho; research is don?t
scienti$ically. In it ;e study )arious ste#s that are generally ado#ted by researchers in
studying their research #roblem. It is necessary $or researchers to 5no; not only 5no;
research method techni2ues but also technology. /he sco#e o$ Research Methodology is
;ider than that o$ research methods.
/he research #roblem consists o$ series o$ closely related acti)ities. At times( the $irst ste#
determines the nati)e o$ the last ste# to be underta5en. >hy a research has been de$ined(
;hat data has been collected and ;hat a #articular methods ha)e been ado#ted and a host
o$ similar other 2uestions are usually ans;ered ;hen ;e tal5 o$ research methodology
concerning a research #roblem or study. /he #ro1ect is a study ;here $ocus is on the
$ollo;ing #ointsN
Re&ear$h +e&ign=>
A research design is de$ined( as the s#eci$ication o$ methods and #rocedures $or ac2uiring
the In$ormation needed. It is a #lant or organi*ing $rame;or5 $or doing the study and
collecting the data. "esigning a research #lan re2uires decisions all the data sources(
research a##roaches( Research instruments( sam#ling #lan and contact methods. The
&tudy wa& de&$ripti#e 7ind of re&ear$h4
Research design is mainly o$ $ollo;ing ty#esN
.. :6#loratory research.
,. "escri#ti)e studies
-. 'ausal studiesC:6#erimental studies
/4 E<ploratory re&ear$h=>
0
/he ma1or #ur#oses o$ e6#loratory studies are the identi$ication o$ #roblems( the more
#recise Bormulation o$ #roblems and the $ormulations o$ ne; alternati)e courses o$
action. /he design o$ e6#loratory studies is characteri*ed by a great amount o$ $le6ibility
and ad%hoc )eracity.
-4 +e&$ripti#e re&ear$h=>
"escri#ti)e research in contrast to e6#loratory research is mar5ed by the #rior
$ormulation o$ s#eci$ic research Ruestions. /he in)estigator already 5no;s a substantial
amount about the research #roblem. Perha#s as a Result o$ an e6#loratory study( be$ore
the #ro1ect is initiated. "escri#ti)e research is also characteri*ed by a Pre#lanned and
structured design.
@4 Cau&al &tudie&AE<perimental &tudie&
A casual design in)estigates the cause and e$$ect relationshi#s bet;een t;o or more
)ariables. /he hy#othesis is tested and the e6#eriment is done. /here are $ollo;ing ty#es
o$ casual designs
a. A$ter only ;ith control design
b. Be$ore a$ter ;ith control design
c. Be$ore a$ter ;ithout control design
d. 'onsumer #anel design
e. :6%#ost $acto design
Research "esign has been classi$ied into $our subsections they areN
.. Sam#le selection and si*e@
,. Sam#ling #rocedure@
-. "ata collection@ and
0.
!. Analytical tools
Sample Sele$tion and &i6e
/he $irst ste# o$ research is sam#le selection( $or ;hich the res#ondents ;ere consumers
in Varanasi city. /he total consumers co)ered ;ere .,. /he same 2uestionnaires ;ere
distributed( but only . $ully%com#leted 2uestionnaires ;ere recei)ed. Results are based
on the res#onse o$ these . res#ondents( and in this 8 res#ondent chosen :)eready
batteries.
Sampling Pro$edure
/here are basically t;o methods o$ sam#lingN%
Pro;a;ility &ampling
It is also 5no;n as random sam#ling. 3nder this sam#ling design e)ery item o$ the
uni)erse has an e2ual chance o$ inclusion in the sam#le. It is( so to say( a lottery method
in ;hich indi)idual units are #ic5ed $rom the ;hole grou# not deliberately but by some
mechanical #rocess. 8ere it blind chance alone that determines ;hether one item or the
other is selected. /he results obtained $rom #robability sam#ling can be assured in terms
o$ #robability.
*on Pro;a;ility &ampling
Non Probability sam#ling is that sam#ling #rocedure ;hich does not a$$ord any basis $or
estimating the #robability that each item in the #o#ulation has been included in the
sam#le. In this ty#e o$ sam#ling( items $or the sam#le selected deliberately by the
researcher@ his choice concerning the items remains su#reme.
0,
)or the &tudy the $on&umer& are &ele$ted ;y the $on#enien$e &ampling
method4 /he selection o$ units $rom the #o#ulation based on their easy a)ailability and
accessibility to the researcher is 5no;n as con)enience sam#ling
+ata Colle$tion method
+ata Colle$tion ,ethod
Primary Se$ondary
"irect #ersonal Inter)ie;
Indirect #ersonal Inter)ie; &o)t. #ublication
In$ormation $rom corres#ondents Re#ort 'ommittees
Mailed 2uestionnaire 7 'ommissions Pri)ate Publication
Ruestion $illed by enumerators Research Institute
/he tas5 data collection begins a$ter research #roblem has been de$ined. /here are t;o
methods $or data collection.
Primary data
Primary data may be described as those data that ha)e been obser)ed and recorded by the
researcher $or the $irst time to their 5no;ledge.
Se$ondary data
Secondary data are those data ;hich ha)e been already collected and analy*ed by some
earlier agency $or its o;n use@ and later the same data are used by a di$$erent agency.
0-
Published Sources 3n#ublished Sources
Bor the #resent study( the sur)ey method ;as used $or collecting #rimary data. A
structured 2uestionnaire ;as used $or the #ur#ose. /he 2uestionnaire included multi#le
choice 2uestions. /he main source o$ secondary data has been the lea$y 1ournal o$
'onsumer Beha)ior( and Indian 1ournal o$ Mar5eting. /he study em#loys #rimary data
collected by communicating ;ith the res#ondents ;ith the hel# o$ structured
2uestionnaire. /he study mainly deals ;ith the beha)ior o$ indi)idual to;ards 'onsumer
Pre$erence $or :)eready Batteries in Luc5no;.
Analyti$al +ata
/he data thus collected( ;as tabulated( inter#reted and analy*ed ;ith a )ie; to ma5e the
study meaning$ul. In the #resent study( hy#othesis testing( #ercentage( $re2uency and
cross tabulation methods ha)e been used $or analysis.
0!
0A
Analy&i&
It is $ound that Two wheelerB/C 80- million9 fleet $ompo&ition in India' Three
wheeler 0C 8-4@B million9 fleet $ompo&ition in India' Car&' !eep& 1 Ta<ie& 0C 8B4DE
million9 fleet $ompo&ition in India' Bu&e& /C 8.4FE million9 fleet $ompo&ition in
India' 5ood& #ehi$le FC 8-4ED million9 fleet $ompo&ition in India' and ther
GTra$tor&' Trailer& and mi&$ellaneou&H DC 8@4FF million9 fleet $ompo&ition in India4
Interpretation
Brom the abo)e analysis the researcher came to 5no; that Two wheeler fleet
$ompo&ition in India #ery mu$h4
00
Analy&i&
It is $ound that mar7et &hare of Hero Honda @F4D.C' mar7et &hare of Ba?a? ,otor&
-B4F.C' mar7et &hare of T"S ,otor& /DC' mar7et &hare of :amaha ,otor& BC'
mar7et &hare of Honda ,otor& 0C' and mar7et &hare of other& E4F.C in India4
Interpretation
Brom the abo)e analysis the researcher came to 5no; that 8ero 8onda has the more
mar5et share than other Automobile sector in India.
0D
Market share of two wheeler automobile
sector
35.60%
27.50%
16%
7%
4%
9.50%
Hero Hona
!a"a" Motors
#$% Motors
&amaha
Motors
Hona Motors
'thers
Two Wheeler &ale& in >-./@ 1 5rowth
08
Analy&i&
It is $ound that Ba?a? Auto &ale& in -./->/@ wa& -/.@B@E 8in num;er&9' in -./@>/0 i&
/BB@/BB' Hero ,otor &ale& in -./->/@ wa& 0F-FFFD 8in num;er&9' in -./@>/0 i&
0F0./--' :amaha ,otor &ale& in -./->/@ wa& -F@-/I8in num;er&9' in -./@>/0 i&
-D/-E@' ,ahindra &ale& in -./->/@ wa& . 8in num;er&9' in -./@>/0 i& /-@DBB' and
Ba?a? Auto &ale& in -./->/@ wa& 0B./ED 8in num;er&9' in -./@>/0 i& 0I@0@I4
Interpretation
Brom the abo)e analysis the researcher came to 5no; that growth of Hero ,otor Corp
Two Wheeler $ompany i& #ery mu$h in the mar7et and it3& ha#e the good ;rand
image'4
0G
Analy&i&
It is $ound that Hero ,oto Corp i& the fir&t ran7 with 0/40EC &hare&4 And other i&
lea&t &hare& in thi& year4
D
Interpretation
Brom the abo)e analysis the researcher came to 5no; that growth of Hero ,oto Corp
$ompany i& #ery mu$h in the mar7et and it3& ha#e the good ;rand image' and other
i& lo&& in thi& year4;rand image4
D.
Analy&i&
D,
It is $ound that gro;th rate o$ 8ero Motor 'or# is ,.!.P( 8onda is 0G.0GP( Ba1a1 is
G.0!P( /VS is %-.!8P(Xamaha is .-.G,P(Su*u5i is ,8.AP and Mahindra is %..0P in
,..%.,.
Interpretation
Brom the abo)e analysis the researcher came to 5no; that 8onda ha)e tremendous
gro;th in t;o ;heeler industry.
)inding&
D-
8ero 8onda has managed to #ut in s#ectacular #er$ormance going $rom strength
des#ite increase in com#etition@ the com#any<s sales ha)e ;itnessed an u#trend(
registering an a)erage gro;th o$ !,P in the three years under re)ie;.
8ero Moto 'or# is the $irst ran5 ;ith !..!GP shares. And other is least shares in
this year.
Mahindra /;o >heeler com#any gro;th in the Indian mar5et is )ery tremendous
;ith .,DP in ,.,to ,.- and /VS is the get least sales in this year.
!. P shares are 8ero Moto 'or# ha)e in the Indian mar5et.
/;o ;heeler automobile sectors is the bac5bone o$ the automobile sector in India.
A$ter dee# research( analysis and getting in$ormation about com#anies as
$ormulated that the t;o ;heeler automobile com#anies achie)ed success in the
mar5et.
/hroughout the study ;e $ound the /;o ;heeler manu$acturer ha)ing )ery ne;
and modern technology in their bi5es( they ha)e a good mar5et share in India(
many o$ MN'<s li5e 8onda( Xamaha (Su*u5i are also gi)ing large com#etition.
'oncluding the #er$ormance o$ the com#any related to t;o ;heeler sector in
India( getting their mar5et share and gro;th and ;hat are ser)ices they are
#ro)iding a$ter sales.
/he real ;ar is bet;een 8ero 8onda and Ba1a1 auto. But one cannot discount the
$act that there are other #layers( ;ho are gaining strength day by day.
Re$ommendation&
D!
A$ter com#letion o$ the research ;or5 the researcher came to some conclusions ;hich
could hel# the com#any in de)elo#ment 7 im#ro)ement o$ ser)ice #rocess. /his is
hel#$ul in $uture de)elo#ment o$ the com#any. /he $ollo;ing #oints come in the
suggestion #arts ;hich came a$ter the analysis and conclusion o$ the researchN%
/he com#any should im#ro)e the 2uality o$ the #roduct.
/he com#any should im#ro)e its #romotional acti)ities through ad)ertisement(
$ree gi$ts cou#ons etc. Since the #rice o$ the #roduct is also an im#ortant $actor
;hich in$luence the #urchasing decision so the com#any should design the
#roducts #rice according to the customer a$$ordance le)el.
'om#any should instruct the sales re#resentati)es not to ma5e e6tra ordinary
commitments on behal$ o$ the com#any $or sale.
/he distribution channel should be arranged according to the con)enient o$ the
customer.
No matter ho; much on organi*ation #rogresses it al;ays lac5 something. /hese
are shortcoming o$ e)ery com#any. A$ter com#leting my re#ort on ne; 8ero
8onda motors Ltd. I ha)e some suggestions to o$$er. /he suggestions can be
#ro)ed use$ul $or the com#any as they ha)e $easibility and )iability.
8ero 8onda Motors only manu$acture a ;ide rand o$ !%stro5e bi5e. But in my
o#inion ,%stro5e bi5es ha)e a better #ic5 u#. So in order to letter to the need o$ a
DA
large segment o$ customers( ;ho ;ant a better #ic5 u# bi5e( 8ero 8onda go into
the manu$acture o$ ,%stro5e bi5es.
/he com#any has al;ays targeted urban sector o$ Indian #o#ulation. But in the
rural sector escorts@ Ra1doot en1oys a great mar5et share. So( there$ore 8ero
8onda should target this u#coming mar5et.
8ero 8onda should 5ee# a strict ;atch on to com#etitions. Bor instance Xamaha
has introduced a !%stro5e bi5e 9XBSH ;hose $eatures are almost same as
S#lendors.
/he com#any should ;or5 more on #ublic relation.
D0
Con$lu&ion&
/he study ;hich ;e conducted on the t;o ;heeler automobile sector is a )ery
im#ortant to#ic o$ automobile sector.
/;o ;heeler automobile sectors is the bac5bone o$ the automobile sector in India.
A$ter dee# research( analysis and getting in$ormation about com#anies as
$ormulated that the t;o ;heeler automobile com#anies achie)ed success in the
mar5et.
/hroughout the study ;e $ound the /;o ;heeler manu$acturer ha)ing )ery ne;
and modern technology in their bi5es( they ha)e a good mar5et share in India(
many o$ MN'<s li5e 8onda( Xamaha (Su*u5i are also gi)ing large com#etition.
'oncluding the #er$ormance o$ the com#any related to t;o ;heeler sector in
India( getting their mar5et share and gro;th and ;hat are ser)ices they are
#ro)iding a$ter sales.
8ero 8onda has managed to #ut in s#ectacular #er$ormance going $rom strength
des#ite increase in com#etition@ the com#any<s sales ha)e ;itnessed an u#trend(
registering an a)erage gro;th o$ !,P in the three years under re)ie;.
8ero 8onda has managed to achie)e this because its strong brand image and
#ro)en #roduct 2uality under#inned the #er$ormance gro;th in recent years. A#art
$rom the strong brand Ls#lendorL the com#any<s #er$ormance across the s#ectrum
o$ the motorcycle mar5et hel#ed it e6#loit the gro;ing demand $or !%stro5e
motorcycle.
At the lo;er end the com#any has '" . SS at middle le)el s#lendor( #assion
and "a;n the 'BT :6tremeC Sari*ma range is targeted at #remium segment.
DD
Some years bac5 8ero 8onda are getting sti$$ com#etition because o$ Ba1a1( /VS and
Xamaha ha)e a #resence in .,Acc bi5es segments ;here 8ero 8onda has not any
#resence in this segment. No; this ga# is $illing u# by 8ero 8onda<s ne; S#lendor N[&(
&lamour. But still there is a ga# bet;een .Acc to ,,Acc segment ;hich is most
#re$erable segment by youth today.
>ith ne;er and better models are coming u# customer has better and bigger
choices to choose $rom.
It is the com#etition on )arious as#ects such as #rice( design technology( a$ter
sales ser)ices and e)en #urchases o$$ers( ;hich #ro)ides to both buyer and seller.
:)en many dealers are in )ie; that today 8ero 8onda and Ba1a1( thri)es on
com#etition.
Right no; it seems that the real ;ar is bet;een 8ero 8onda and Ba1a1 auto. But
one cannot discount the $act that there are other #layers( ;ho are gaining strength
day by day.
D8
(imitation& of the Re&ear$h
"es#ite all #ossible e$$orts in conducting the research there ;as some una)oidable
situation( ;hich limited the sco#e o$ this dissertation. /he limitations o$ the dissertation
$all under the $ollo;ingN%
/. /his dissertation is con$ined on the basis o$ secondary data collected only hence it
reliable data $or the study.
-4 As the research is based on the data that already a)ailable and collected through )arious
means not includes the sur)ey( hence it im#oses limitations( as it is 1ust #ossible that the
secondary data may be unsuitable or may be inade2uate in the conte6t o$ the to#ic under
study.
@4 =ne o$ the ma1or limitations o$ the study is that( as the data is collected though the
secondary means( hence it creates uncertainties regarding the methods o$ the data
collection( time o$ data collected( and any bias o$ the com#iler during the #re)ious
research and at the time o$ data collection.
0. Limitation o$ time 7 resources ;ere a ma1or $actor in$luencing the research study.
F4 /he research guide has hel#ed us though at the #ro1ect study( yet his busy time
schedule restricted as to cut short our discussions though detailed discussions ;ere
re2uired $or the #ro1ect.
DG
Bi;liography
Boo7&A,aga6ine& Referred=>
2otler' Philip 1 Arm&trong' 5raw> Prin$iple of ,ar7eting'
Pearson :ducation( Ne; "elhi ,D. Publisher% "orling
Sindersley EIndiaF P)t. Ltd.
2otler' Philip> 9,ar7eting ,anagement= Analy&i&' planning'
Implementation& 1 $ontrol' Pearson :ducation( Ne; "elhi
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t h
:dition4
2othari C4 R4 J Re&ear$h ,ethodology ,
nd
re)ised edition
,! #ublished by Ne; Age International Ltd.
Beri> 9,ar7eting Re&ear$h 8Tata ,$ 5raw>Hill9' .GG- ,
nd
:dition.
,ar7eting Strategy and ,anagement> ,r4 ,i$hael !4
Ba7er4
5upta CB>An Introdu$tion to Stati&ti$al ,ethod EVi5asF'
.GGA( G
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:dition4
E#eready In>hou&e *ew&letter&4
8
B%SI*ESS ,A5AKI*E 1 *EWS PAPER=
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Business
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