Summer Training project Report


Submitted to: -

Submitted by:SHIVALI KAMAL Semester -III RBS/PGPM/SPR09/006 Course: MBA+PGPM Batch: SPR-09/11


TABLE OF CONTENTS Sr. No. 1) 2) 3) 4) Contents Preface Acknowledgement Declaration Executive Summary Page No.

5) (A) (B) (C )

Introduction To The Study Objective Of The Study Place of the study Research Methodology and Scope Of Study Limitation Of The Study

(D ) 6) (A) (B) 7) (A) (B) (C) (D) (E) (F) 8) 9) (A) (B) ( C) (D)

Overview of Indian CEMENT Industry Industry analysis using Porter’s model SWOT Analysis Introduction- ACC Brief History Plants & Capacity Vision & Mission Achievements & Awards Map of ACC 5 years performance – physical and highlights Introduction-Working Capital Working Capital Management Consequences of under and over assessment of W.C Types of W.C Influencing factors Financing W.C


(E) (F) (G) 10) 11) 12) 13) 14)

Inventory Management Cash Management Receivables Management Analysis Important Terms and Ratios (graphical presentation) Findings & Observed Suggestions Bibliography & Annexure

PREFACE To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-to-day finance and the management of this short-term capital or finance of the business is called Working capital Management.


Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to me by the reader.


It is difficult to acknowledge precious a debt as that of learning as it is the only debt that is difficult to repay except through gratitude. It is my profound privilege to express my sincere thanks to Mr B D Daler,Head HR of ACC Ltd, Wadi ,for giving me an opportunity to work on the project. who gave me an opportunity to carry out this project and had been a constant inspiration. I would like to thank to Mr. Rajiv joshi, Manager HR for their constant support and guidance through out the tenure of this project without their cooperation it would have been a difficult task to accomplish this project. 4

I am also thankful to my faculty guide Mr.V.Ramana , Rai Business School, Hyderabad, who has provided their valuable time and effort for guiding me for the completion of this report.

Shivali Kamal, Place :-Hyderabad Date :


I do hereby declare that this piece of project report entitled “Analysis of Indian cement Industry & Financial performance of ACC LTD” for partial fulfillment of the requirements for the award of the degree of “MBA+PGPM” is a record of original work done by me under the supervision and guidance of Mr. Rajiv Joshi, HR and


Mr. B D Daler Head HR of ACC LTD,Wadi plant .This Project work is my own and has neither been submitted nor published elsewhere.

Place: Date:

Hyderabad Shivali Kamal

EXECUTIVE SUMMERY The major objective of the study is to understand the working capital of ACC & to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firm’s short-term assets and its short term liabilities. By definition, working capital management entails short-term definitions, generally relating to the next one year period.


The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management. Inventories management at ACC: ACC is a large scale manufacturing company involved in production of Cement. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning. Cash management at ACC: ACC has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate required amount of cash. Receivables management at ACC: ACC has set up its marketing office at all major cities in India i.e Bangaluru , Bhopal, Chandigarh , Coimbatore , Kanpur, Kolkata, Mumbai, Pune , Secunderabad New Delhi & patna This marketing office obtains sales order from Cement users in India as well as globally. The cement production and dispatch figures for the month of May 2010 are 1.81 & 1.75 million tones respectively. The Sales recorded for the FY 2009 was Rs. 83,861,000,000

INTRODUCTION Working Capital:The life blood of business, as is evident, signified funds required for day-to-day operations of the firm. The management of working capital assumes great importance because shortage of working capital funds is perhaps the biggest possible cause of failure of many business units in recent times. There it is of great importance on the part of management to pay particular attention to the planning and control for working capital. An attempt has been made to make critical study of the various dimensions of the working capital management of ACC. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship


between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing shortterm debt and upcoming operational expenses. Objective of the study:The following are the main objective which has been undertaken in the present study: 1. To determine the amount of working capital requirement and to calculate various ratios relating to working capital. 2. To analyze the Indian Cement Industry. 3. To evaluate the financial performance of ACC limited using financial tools. 4. To suggest the steps to be taken to increase the efficiency in management of working capital. Place of study:The project study is carried out at the Finance Department of ACC cements ltd corporate office Situated at Wadi, Karnataka. The study is undertaken as a part of the PGPM curriculum from 03 JUNE 2010 to 03 JULY 2009 in the form of summer internship.

Study design and methodology:Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, ACC Ltd, Wadi. The secondary data were collected from the Annual Report of ACC & ACC website, etc. Scope: - The study has got a wide & fast scope. It tries to find out the players in the industry & focuses on the upcoming trends. It also tries to show the financial performance of the major player of the industry i.e.; ACC Ltd. Limitations:There may be limitations to this study because the study duration (summer placement) is very short and it’s not possible to observe every aspect of working capital management practices. The data collected were mostly secondary in nature.


Industry Overview:The cement industry is one of the vital industries for economic development in a country. The total utilization of cement in a year is used as an indicator of economic growth. Cement is a necessary constituent of infrastructure development and a key raw material for the construction industry, especially in the government’s infrastructure development plans in the context of the nation’s socioEconomic development. India is the world's second largest producer of cement with total capacity of 219 million tones (MT) at the end of FY 2009, according to the Cement Manufacture’s Association. According to the Cement Manufacturer’s Association, cement dispatches during 2009-10 were 159.43 million tones (MT) increasing by 12 per cent over 142.23 in 2008-09. Cement production during 2009-10 was 160.31 MT an increase of 12.37 per cent over 142.65 MT in 2008-09. Moreover, the government’s continued thrust on infrastructure will help the key building material to maintain an annual growth of 9-10 per cent in 2010, according to India’s largest cement company, ACC. In January 2010, rating agency Fitch predicted that the country will add about 50 million tone cement capacity in 2010, taking the total to around 300 million tones.

Government Initiatives  Government initiatives in the infrastructure sector, coupled with the housing sector boom and urban development, continue being the main drivers of growth for the Indian cement industry.  Increased infrastructure spending has been a key focus area. In the Union Budget 2010-11, US$ 37.4 billion has been provided for infrastructure development.  The government has also increased budgetary allocation for roads by 13 per cent to US$ 4.3 billion. Future Trends: The cement industry is expected to grow steadily in 2009-2010 and increase capacity by another 50 million tons in spite of the recession and decrease in demand from the housing sector.


 The industry experts project the sector to grow by 9 to 10% for the current financial year provided India's GDP grows at 7%.  India ranks second in cement production after China.  The major Indian cement companies are Associated Cement Company Ltd (ACC), Grasim Industries Ltd, Ambuja Cements Ltd, J.K Cement Ltd and Madras Cement Ltd.  The major players have all made investments to increase the production capacity in the past few months, heralding a positive outlook for the industry.  The housing sector accounts for 50% of the demand for cement and this trend is expected to continue in the near future. PORTER’S FIVE FORCE MODEL:- It is useful for analyzing the industry overall and determining the level of competition among different existing players .It can be understood under different topics .Along with the industry we will try to point out the conditions for ACC too. i) THREAT OF NEW ENTRANTS:ACC has threat from new entrants like TATA; Reliance etc can enter into this industry. But there are certain barriers to their entry. These are: Availability of raw material  Restrictions on entry by government into cement industry  Cement industry requires a huge investment  Switching costs are high in cement industry ii) BARGAINING POWER OF SUPPLIERS:Suppliers have very much impact on cement industry because of the following reasons: Raw materials used in cement are gypsum, fly ash and slag. There are few suppliers of these materials.  Quality of finished goods i.e. cement is very important for ACC ltd.  As already said, there are high switching costs in cement industry.  There is no substitute to the raw material used in cement. iii) BARGAINING POWER OF BUYER:- ACC ltd plays the role of buyer. It has following bargaining powers:


 There are only few buyers of raw material of cement.  ACC has major stake in cement industry i.e. 11% of the world. iv) THREAT OF SUBSTITUTES:- It has threat from its competitors like Ambuja cements, Birla cements, Binani cements ,Grasim etc. V) RIVALRY AMONG THE COMPETING FIRMS IN INDUSTRY: In spite of huge stake in cement industry, it is difficult to be on the top because of the other competing companies i.e. Ambuja, Birla, and Binani etc. The competitors are using different promotional strategies to attract buyers. So, all the leading players in the industry have to analyze the situation frequently & they have to keep changing them too. SWOT ANALYSIS Strengths: 1. The industry is likely to maintain its growth momentum and continue growing at about 9 – 10% in the foreseeable future. 2. Government initiative in the infrastructure sector such as the commencement of the second phase of the National Highway Development project, freight carriers, rural roads and development of the housing sector (Bharat Nirman Yojana) are likely to be the main drivers of growth. 3. In the coming few years the demand for the cement will increase which will be booming news for cement manufactures. As capacity utilization is over 90% now. 4. Huge potential for export.

Weakness: 1. Cement Industry is highly fragmented & regionalized. 2. Low – value commodity makes transportation over long distances uneconomical. 3. High capital cost and investment cost for each and every project. 4. The complex Excise Duty structure based on the category of buyer and end use of the cement has caused at lot of confusion in the industry. 5. The recent ban on export of cement clinker would increase the availability of cement in the domestic market, which in turn would put pressure on cement prices. Opportunities: Demand–supply gap


1. Substantially low per capita cement consumption as compared to developing countries (1/3 rd of world average) Per capita cement consumption in India is 82 kgs against a global average of 255 kgs and Asian average of 200 kgs. 2. Despite slightly lower economic growth, the construction and infrastructure sector is expected to record healthy growth, which augurs well for cement industry. 3. Additional capacity of 20 million tons per annum will be required to match the demand.

Threats: 1. The recent moves by the Central Government in making the import of the cement total duty free, is a cause of worry for the Indian cement industry. 2. Further recent changes in the Central Excise Duty structure by way of introduction of multiple slabs of Excise Duty is also a cause of worry for the industry.


3. Almost all the major players in the industry have announced substantial increase in the capacity and the possibility of over supply situation cannot be ruled out. 4. Increased railway freight, coal prices and dispatch bottlenecks on account of truck Loading restrictions imposed by various State Governments 5. Scarcity of good quality Coal is some other factors which are cause of concern for the industry.

Competitor analysis (Overall industry):ACC, with an installed capacity of 22.63 MTPA, enjoys an 11% market share in India, which with its total installed capacity of 207 MTPA, India is the second largest cement producing country in the world. ACC’s nation-wide presence and brand image ensures a competitive edge and helps it to withstand regional fluctuations in prices and also to adapt its distribution to market place needs. Its key competitors are as follows:ACC Ltd is the market leader with the capacity of 22.63 MTPA .The top ten companies are given below with the details:Name Production Installed Capacity Net Profit (Quarter ended Sep 30, 2009) Name Production Installed Capacity ACC Limited 17,902 18,640 41,550.89 lakhs Gujarat Ambuja Cements Limited 15,094 14,860

Net Profit (Quarter ended on Sep 30, 2009) 31,848 lakhs Name Production Installed Capacity Net Profit (in 2008-09) Name Ultratech 13,707 17,000 97,700 lakhs Grasim


Production Installed Capacity Net Profit (in 2008-09) Name Production Installed Capacity Net Profit (in 2008-09) Name Production Installed Capacity Net Profit (in 2008-09) Name Production Installed Capacity Name Production Installed Capacity Name Production Installed Capacity Net Profit (in 2008-09) Name Production Installed Capacity Net Profit (in 2008-09)

14,649 14,115 1,64,800 lakhs India Cements 8,434 8,810 43,218 lakhs JK Cement Ltd 6,174 6,680 14,234.40 lakhs Jaypee Group 6,316 6,531 Century Cement 6,636 6,300 Madras Cement 4,550 5,457 49,081 lakhs Birla Corp. 5,150 5,113 9,061 lakhs


Introduction of the Company ACC (ACC Limited) is India's foremost manufacturer of cement and concrete. ACC's operations are spread throughout the country with 14 modern cement factories, 19 Ready mix concrete plants, 19 sales offices, and several zonal offices. It has a workforce of about 9000 persons and a countrywide distribution network of over 9,000 dealers. ACC's research and development facility has a unique track record of innovative research, product development and specialized consultancy services. Since its inception in 1936, the company has been a trendsetter and important benchmark for the cement industry in respect of its production, marketing and personnel management processes. Its commitment to environment-friendliness, its high ethical standards in business dealings and its on-going efforts in community welfare programs have won it acclaim as a responsible corporate citizen. In the 70 years of its existence, ACC has been a pioneer in the manufacture of cement and concrete and a trendsetter in many areas of cement and concrete technology including improvements in raw material utilization, process improvement, energy conservation and development of high performance concretes. ACC’s brand name is synonymous with cement and enjoys a high level of equity in the Indian market. It is the only cement company that figures in the list of Consumer Super Brands of India. The company's various businesses are supported by a powerful, in-house research and technology backup facility - the only one of its kind in the Indian cement industry. This ensures not just consistency in product quality but also continuous improvements in products, processes, and application areas. ACC has rich experience in mining, being the largest user of limestone, and it is also one of the principal users of coal. As the largest cement producer in India, it is one of the biggest customers of the Indian Railways, and the foremost user of


the road transport network services for inward and outward movement of materials and products. ACC has also extended its services overseas to the Middle East, Africa, and South America, where it has provided technical and managerial consultancy to a variety of consumers, and also helps in the operation and maintenance of cement plants abroad. ACC is among the first companies in India to include commitment to environmental protection as one of its corporate objectives, long before pollution control laws came into existence. The company installed pollution control equipment and high efficiency sophisticated electrostatic precipitators for cement kilns, raw mills, coal mills, power plants and coolers as far back as 1966. Every factory has state-of-the art pollution control equipment and devices. History & Profile of ACC Cement Works ACC was formed in 1936 when ten existing cement companies came together under one umbrella in a historic merger – the country’s first notable merger at a time when the term mergers and acquisitions was not even coined. The history of ACC spans a wide canvas beginning with the lonely struggle of its pioneer F E Din Shaw and other Indian entrepreneurs like him who founded the Indian cement industry. Their efforts to face competition for survival in a small but aggressive market mingled with the stirring of a country’s nationalist pride that touched all walks of life – including trade, commerce and business. The first success came in a move towards cooperation in the country’s young cement industry and culminated in the historic merger of ten companies to form a cement giant. These companies belonged to four prominent business groups – Tatas, Khataus, Killick Nixon and F E Din Shaw groups. ACC was formally established on August 1, 1936. Sadly, F E Din Shaw, the man recognized as the founder of ACC, died in January 1936. Just months before his dream could be realized. The ACC Board comprises of 13 persons. These include executive, nonexecutive, and nominee directors. This group is responsible for determining the objectives and broad policies of the Company - consistent with the primary objective of enhancing long-term shareholder value. The Board meets once a month. Two other small groups of directors - comprising Shareholders'/Investors' Grievance Committee and Audit Committee of the Board of Directors - also meet once a month on matters pertaining to the finance and share disciplines. During the last decade, there has been a streamlining of the senior management structure that is more responsive to the needs of the Company's prime business. A Managing Committee - comprising, in addition to the Managing Director and the two executive directors, the presidents


representing multifarious disciplines: finance, production, marketing, research and consultancy, engineering and human resources – meets once a week. A Strategic Alliance: The house of Tata was intimately associated with the heritage and history of ACC, right from its formation in 1936 up to 2000. The Tata group sold all 14.45% of its shareholdings in ACC in three stages to subsidiary companies of Gujarat Ambuja Cements Ltd. (GACL), who are now the largest single shareholder in ACC. This enabled ACC to enter into a strategic alliance with GACL; a company reputed for its brand image and cost leadership in the cement industry. Holcim – A New Partnership: A new association was formed between ACC and The Holcim group of Switzerland in 2005. In January 2005, Holcim announced its plans to enter into long – term alliances with Ambuja Group by acquiring a majority stake in Ambuja Cements India Ltd. (ACIL), which at the time held 13.8% of total equity shares in ACC. Holcim simultaneously announced its bid to make an open offer to ACC shareholders, through Holdcem Cement Pvt. Ltd. and ACIL, to acquire a majority shareholding in ACC. An open offer was made by Holdcem Cement Pvt. Ltd. along with ACIL, following which the shareholding of ACIL increased to 34.69% of Equity share capital of ACC. Consequently, ACIL has filed declarations indicating their shareholding and declaring itself as a promoter of ACC. Holcim is the world leader in cement as well as being large supplier of concrete, aggregates and certain construction related services. Holcim is also a respected name in information technology and research and development. The group has its headquarters in Switzerland with worldwide operations spread across more than 70 countries. Plants & Their Capacity: S. No. 1 2 3 4 5 6 7 Units Bargarh Chaibasa Chanda Damodhar Gagal Jamul Kymore State Bargarh Cement Works Chaibasa Cement Works Chanda Cement Works Damodar Cement Works Gagal Cement Works Jamul Cement Works Kymore Cement Works Capacity (MTPA) 0.96 0.87 1.00 0.53 4.40 (Gagal I and II) 1.58 2.20


8 9 10 11 12 13

Lakheri Madukkarai Sindri Wadi New Wadi Plant Tikaria

Lakheri Cement Works Madukkarai Cement Works Sindri Cement Works Wadi Cement Works Wadi Cement Works Tikaria Cement Grinding and Packing Plant

1.50 0.96 0.91 2.59 2.60 2.31

Vision: “To be one of the most respected companies in India; recognized for challenging conventions and delivering on our promises”

Mission of ACC



Maintain our leadership of the Indian cement industry through the continuous modernization and expansion of our manufacturing facilities and activities, and through the establishment of a wide and efficient marketing network. Achieve a fair and reasonable return on capital by promoting productivity throughout the company. Ensure a steady growth of business by strengthening our position in the cement sector. Maintain the high quality of our products and services and ensure their supply at fair prices. Promote and maintain fair industrial relations and an environment for the effective involvement, welfare and development of staff at all levels. Promote research and development efforts in the areas of product development and energy, and fuel conservation, and to innovate and optimize productivity. Fulfill our obligations to society, specifically in the areas of integrated rural development and in safeguarding the environment and natural ecological balance.

Profitability Growth Quality Equity Pioneering


Few Achievement of ACC Limited: YEAR 1936 1947 1955 1956 1961 1961 1965 Achievements The Associated Cement Companies Limited incorporated on August 1 India's first entirely indigenous cement plant installed at Chaibasa. ACC Sindri uses waste material - calcium carbonate sludge -from fertilizer factory at Sindri to make cement Bulk Cement Depot established at Okhla, Delhi Blast furnace slag, (a waste by-product from steel) from TISCO used at ACC Chaibasa to manufacture Portland Slag Cement. Manufacture of Hydrophobic (waterproof) cement at ACC Khalari. Manufacture of Portland Pozzolana Cement using naturally available materials. An Eco-friendly cements using an eco-friendly process.



ACC inducts use of pollution control equipment and high efficiency sophisticated electrostatic precipitators for its cement plants and captive power plants decades before it becomes mandatory to do so. Introduction of the energy efficient pre-calcinations technology for the first time in India. Commissioning of the first 1 MTPA plant in the country at Wadi, Karnataka. ACC develops a new binder, working at sub-zero temperature, which is successfully used in the Indian expedition to Antarctica. Incorporation of Bulk Cement Corporation of India, a JV with the Government of India. Commercial manufacture of ready-mixed concrete at Mumbai. Commissioning of the new Wadi plant of 2.6 MTPA capacity in Karnataka, the largest in India, and among the largest sized kilns in the World.

1978 1982 1987 1992 1993 2001


Awards & Accolades

IMC Ramkrishna Bajaj National Quality Award - – Gagal wins Commendation Certificate and New Wadi Plant wins Special Award for Performance Excellence in the Manufacturing Sector, 2007. National Award for outstanding performance in promoting rural and agricultural development – by ASSOCHAM Sword of Honour - by British Safety Council, United Kingdom for excellence in safety performance. Indira Priyadarshini Vrikshamitra Award --- by The Ministry of Environment and Forests for "extraordinary work" carried out in the area of afforestation. FICCI Award --- for innovative measures for control of pollution, waste management & conservation of mineral resources in mines and plant. Subh Karan Sarawagi Environment Award - by The Federation of Indian Mineral Industries for environment protection measures. Drona Trophy - By Indian Bureau Of Mines for extra ordinary efforts in protection of Environment and mineral conservation in the large mechanized mines sector. Indo German Greentech Environment Excellence Award Golden Peacock Environment Management Special Award - for outstanding efforts in Environment Management in the large manufacturing sector. Indira Gandhi Memorial National Award - for excellent performance in prevention of pollution and ecological development Excellence in Management of Health, Safety and Environment : Certificate of Merit by Indian Chemical Manufacturers Association Vishwakarma Rashtriya Puraskar trophy for outstanding performance in safety and mine working Good Corporate Citizen Award - by PHD Chamber of Commerce and Industry Jamnalal Bajaj Uchit Vyavahar Puraskar - Certificate of Merit by Council for Fair Business Practices Greentech Safety Gold and Silver Awards - for outstanding performance in Safety management systems by Greentech Foundation FIMI National Award - for valuable contribution in Mining activities from the Federation of Indian Mineral Industry under the Ministry of Coal. 21

• •

• •

ACC was the first recipient of ASSOCHAM’s first ever National Award for outstanding performance in promoting rural and agricultural development activities in 1976. Decades later, PHD Chamber of Commerce and Industry selected ACC as winner of its Good Corporate Citizen Award for the year 2002. Over the years, there have been many awards and felicitations for achievements in Rural and community development, Safety, Health, Tree plantation, A forestation, Clean Mining, Environment Awareness and Protection.

Map of ACC Network Corporate office: Overseeing the company’s rang of business; the Corporate Office is the central head quarters of all business and human resource function located in Mumbai. ACC Subsidiaries: 1. Bulk Cement Corporation India Ltd (BCCI) 2. ACC Machinery Company Ltd (AMCL) 3. ACC Nihon Casting Ltd (ANCL) Regional marketing offices :Offices at all major cities in India i.e Bangaluru , Bhopal, Chandigarh , Coimbatore , Kanpur, Kolkata, Mumbai, Pune , Secunderabad ,New Delhi & Patna. MAP OF ACC PLANTS:-


HIGHILIGHTS OF FINANCIAL PERFORMANCE of ACC LTD Particulars NET SALES PBT OPERATING PROFIT PAT Capital Employed Basic Earnings per Share (Rs.) *2005 3,221 684 616 544 3,502 30.02 2006 5,803 1,620 1,717 1,232 4,234 66.02 2007 6,991 1,930 1,993 1,439 4,791 76.75 2008 7,283 1,737 1,899 1,213 5,746 64.63 Rs. Crore 2009 8,027 2,294 2,643 1,607 6,932 85.60

An Introduction To Working Capital Management “Working capital means the part of the total assets of the business that change from one form to another form in the ordinary course of business operations.”


Concept of working capital:The word working capital is made of two words 1.Working and 2. Capital The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business. Working capital : Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes. * Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc * Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is other wise known as revolving or circulating capital It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset – Current Liability. Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it. Concept of working capital • • Gross Working Capital = Total of Current Asset Net Working Capital = Excess of Current Asset over Current Liability.

Current Assets Cash in hand / at bank •

Current Liabilities Bills Payable


• • • • • • • Working capital in

Bills Receivable Sundry Debtors Short term loans Investors/ stock Temporary investment Prepaid expenses Accrued incomes

• • • •

Sundry Creditors Outstanding expenses Accrued expenses Bank Over draft





1. Cash and equivalents: - This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it? 2. Accounts receivable: - Many businesses extend credit to their customers. If we do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being collected? Which customers are slow to pay and what should be done about them? 3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of our business? What's the rate of inventory turnover compared with other companies in our type of business? 4. Accounts payable: - Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what we purchase? What is our firm's payment policy doing to enhance or detract from our credit rating? 5. Accrued expenses and taxes payable: - These are obligations of our company at any given time and represent a future outflow of cash.

Two different concepts of working capital are:-


• •

Balance sheet or Traditional concept Operating cycle concept.

Balance sheet or Traditional concept:- It shows the position of the firm at certain point of time. It is calculated in the basis of balance sheet prepared at a specific date. In this method there are two type of working capital:• Gross working capital • Net working capital Gross working capital:- It refers to the firm’s investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current assets is a quantitative aspect of working capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position of the firm because every increase in current liabilities will decrease the gross working capital. Net working capital:- It is the difference between current assets and current liabilities or the excess of total current assets over total current liabilities. Working capital= current assets - current liabilities. Net working capital: - It is also can defined as that part of a firm’s current assets which is financed with long term funds. It may be either positive or negative. When the current assets exceed the current liability, the working capital is positive and vice versa. Operating cycle concept: - The duration or time required to complete the sequence of events right from purchase of raw material for cash to the realization of sales in cash is called the operating cycle or working capital cycle.









Types of Working Capital:-

















Factors requiring consideration while estimating working capital.
• • • • • • •

The average credit period expected to be allowed by suppliers. Total costs incurred on material, wages. The length of time for which raw material are to remain in stores before they are issued for production. The length of the production cycle (or) work in process. The length of sales cycle during which finished goods are to be kept waiting for sales. The average period of credit allowed to customers The amount of cash required to make advance payment

Importance of Working Capital Ratios Ratio analysis can be used by financial executives to check upon the efficiency with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of working capital. The following, easily calculated, ratios are important measures of working capital utilization.

Key Working Capital Ratios


The following, easily calculated, ratios are important measures of working capital utilization.




Stock Turnover (in days)

Average Stock * 365/ =x Cost of Goods days Sold

Receivables Debtors * 365/ = x Ratio Sales days (in days)

Payables Ratio (in days)

Creditors * 365/ =x Cost of Sales days (or Purchases)

Current Ratio

Total Current Assets/ =x Total Current times Liabilities

Quick Ratio (Total Current = x Assets times Inventory)/ 29

Interpretation On average, we turn over the value of our entire stock every x days. We may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes on average x days to collect monies due to we. If we’re official credit terms are 45 day and it takes 65 days... why? One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, we pay our suppliers every x days. If we negotiate better credit terms this will increase. If we pay earlier, say, to get a discount this will decline. If we simply defer paying our suppliers (without agreement) this will also increase - but our reputation, the quality of service and any flexibility provided by our suppliers may suffer. Current Assets are assets that we can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount we are due to pay within the coming 12 months. For example, 1.5 times means that we should be able to lay our hands on $1.50 for every $1.00 we owe. Less than 1 time e.g. 0.75 means that we could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Working Capital Ratio

Total Current Liabilities (Inventory + A high percentage means that working Receivables - As % capital needs are high relative to our Payables)/ Sales sales. Sales

Note:- Once ratios have been established for our business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.

The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below:  Nature of Enterprise:-The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise.  Manufacturing/Production Policy:-Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them.  Working Capital Cycle :-In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials and ends with the realization of cash from the sale of finished products. The cycle involves purchase of raw materials and stores, its conversion in to stock of finished goods through work in progress with progressive increment of labor and service cost, conversion of finished stick in to sales and receivables and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials and so on.  Operations:-The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. 30

 Market Condition:-If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low.  Credit Policy:-The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables.  Business Cycle:-Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at he time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal  Availability of Raw Material:-If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same.  Growth and Expansion:-Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities.  Earning Capacity and Dividend policy:-Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend.


 Price Level Changes:-Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment.  Manufacturing Cycle:-The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above. So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion.  Other Factors:-Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital. Component of Working Capital Basis of Valuation: Stock of raw material Purchase cost of raw materials  Stock of work in process At cost or market value, whichever is lower  Stock of finished goods Cost of production  Debtors Cost of sales or sales value  Cash Working expenses:WORKING CAPITAL MANAGEMENT Working Capital Management refers to management of current assets and current liabilities. The major thrust of course is on the management of current assets .This is understandable because current liabilities arise in the context of current assets. Working Capital Management is a significant fact of financial management. Its importance stems from two reasons:• • Investment in current assets represents a substantial portion of total investment. Investment in current assets and the level of current liabilities have to be geared quickly to change in sales. To be sure, fixed asset investment and long term financing are responsive to variation in sales. However, this relationship is not as close and direct as it is in the case of working capital components.


The importance of working capital management is effected in the fact that financial manages spend a great deal of time in managing current assets and current liabilities. Arranging short term financing, negotiating favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of time of financial managers. The problem of working capital management is one of the “best” utilization of a scarce resource. Thus the job of efficient working capital management is a formidable one, since it depends upon several variables such as character of the business, the lengths of the merchandising cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and seasonal and other variations. CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL o Growth may be stunted. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working capital. o Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. o Cash crisis may emerge due to paucity of working funds. o Optimum capacity utilization of fixed assets may not be achieved due to non availability of the working capital. o The business may fail to honor its commitment in time, thereby adversely affecting its credibility. This situation may lead to business closure. o The business may be compelled to buy raw materials on credit and sell finished goods on cash. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts. Both these situations would affect profitability adversely. o Non-availability of stocks due to non-availability of funds may result in production stoppage. CONSEQUENCES OF OVER ASSESSMENT OF WORKING CAPITAL o Excess of working capital may result in unnecessary accumulation of inventories.


o It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. o It may make management complacent leading to its inefficiency. o Over-investment in working capital makes capital less productive and may reduce return on investment. Working capital is very essential for success of a business and, therefore, needs efficient management and control. Each of the components of the working capital needs proper management to optimize profit. Financing Working Capital Working capital or current assets are those assets, which unlike fixed assets change their forms rapidly. Due to this nature, they need to be financed through short-term funds. Short-term funds are also called current liabilities. The following are the major sources of raising short-term funds: I. Supplier’s Credit At times, business gets raw material on credit from the suppliers. The cost of raw material is paid after some time, i.e. upon completion of the credit period. Thus, without having an outflow of cash the business is in a position to use raw material and continue the activities. The credit given by the suppliers of raw materials is for a short period and is considered current liabilities. These funds should be used for creating current assets like stock of raw material, work in process, finished goods, etc. ii. Bank Loan for Working Capital This is a major source for raising short-term funds. Banks extend loans to businesses to help them create necessary current assets so as to achieve the Required business level. The loans are available for creating the following current Assets: • Stock of Raw Materials • Stock of Work in Process • Stock of Finished Goods • Debtors Banks give short-term loans against these assets, keeping some security margin. The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediate repayment if they consider doing so. Thus bank loans for creation of current assets are also current liabilities. iii. Promoter’s Fund It is advisable to finance a portion of current assets from the promoter’s funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business. 34

Management of Inventory Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques. Need to hold inventories: Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation.  Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors.  Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts etc. Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The following are the objectives of inventory management: To ensure continuous supply of materials, spares and finished goods.  To avoid both over-stocking of inventory.  To maintain investments in inventories at the optimum level as required by the operational and sale activities.  To keep material cost under control so that they contribute in reducing cost of production and overall purchases.


 To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.  To minimize losses through deterioration, pilferage, wastages and damages.  To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization.  To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores.  To ensure right quality of goods at reasonable prices.  To facilitate furnishing of data for short-term and long term planning and control of inventory Management of cash Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firm’s manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firm’s profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm. Management of Receivables A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales.


The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables. Needs to hold cash: Receivables management is the process of making decisions relating to investment in trade debtors. Certain investments in receivables are necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost consideration also. Further, there is always a risk of bad debts too. Thus, the objective of receivable management is to take a sound decision as regards investments in debtors. In the words of Bolton, S.E., the need of receivables management is “to promote sales and profits until that point is reached where the return of investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.” Working Capital Cycle Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress) and Receivables (debtors owing our money). The main sources of cash are Payables (our creditors) and Equity and Loans.


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

• •

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If we do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, we should consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if we pay 38

dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business. More businesses fail for lack of cash than for want of profit.

Sources of Additional Working Capital:• • • • • •

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

If we have insufficient working capital and we try to increase sales, we can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include:
      

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque). Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. Late payments erode profits and can lead to bad debts. If we don't manage debtors, they will begin to manage our business as we will gradually lose control due to reduced cash flow and, of course, we could experience an increased incidence of bad debt.


The following measures will help manage our debtors: 1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before we offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when we suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to our larger customers. 9. Invoice promptly and clearly. 10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option. 12. Monitor our debtor balances and ageing schedules, and don't let any debts get too large or too old. Recognize that the longer someone owes we, the greater the chance we will never get paid. If the average age of our debtors is getting longer, or is already very long, we may need to look for the following possible defects:       weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Profits only come from paid sales.

The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is 40

nothing more important than getting paid for our product or service. A customer who does not pay is not a customer. Managing Payables (Creditors) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following:
    

Who authorizes purchasing in our company - is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do we use order quantities which take account of stock-holding and purchasing costs? Do we know the cost to the company of carrying stock? Do we have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier.

How many of our suppliers have a returns policy? Are we in a position to pass on cost increases quickly through price increases to our customers?  If a supplier of goods or services lets we down can we charge back the cost of the delay?  Can we arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?
 

There is an old adage in business that if we can buy well then we can sell well. Management of our creditors and suppliers is just as important as the management of our debtors. It is important to look after our creditors - slow payment by we may create ill-feeling and can signal that our company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with us to enhance the future viability and profitability of our company.

ANALYSIS of financial statement of ACC Limited:Common size statement Analysis (vertical Analysis):-


A financial statement that has variables expressed in percentages rather than in dollar amounts. For example, items on an income statement are shown as a percentage of revenue or sales, and balance sheet entries are displayed as a percentage of total assets. Common-size statements are used primarily for comparative purposes so that firms of various sizes can be equated. Also called one hundred percent statement. Advantages: The statement reveals the sources of funds & the distribution or application of the total funds in the asset of a business enterprise.  Comparison of the common size statement over a number of years will clearly indicate the changing proportion of the various components of assets, liabilities, cost, net sales & profits.  It will assist corporate evaluation & ranking. Limitations: It doesn’t show variations in the different account items from period to period.  Less useful due to lack of established standard proportion of an asset to the total asset & so on. Common size statement analysis of ACC cements Ltd. from 2005-2009 2005 (%) 2006(%) 2007(%) 2008(%) 2009(%) SOURCES FUNDS: Shareholders’ Funds:Loan Funds: OF Rs. (Crore) 46.96 44.36 8.68 100 84.16 9.60 5.62 Rs. (Crore) 71.76 20.91 7.32 100 79.48 11.50 9.00 Rs. (Crore) 83.84 9.47 6.69 100 80.03 17.06 2.92 Rs. (Crore) 85.77 8.39 5.84 100 88.29 11.82 (0.11) Rs.(Crore) 86.78 8.18 5.04 100 91.08 21.28 (12.37)

Deferred Tax Liabilities (Net) TOTAL FUNDS APP. OF FUNDS:--Fixed Assets: Investments:Net Current Assets( Curr Assestscurrent liabilities & provision) MISC EXP. (to the extent not written off or adjusted) TOTAL ASSETS (Net)












Interpretation:(a) There is a significant increase in shareholder’s fund & decrease in loan funds continuously over a period of time. (b) There is also a significant increase in the amount invested by the company for the purpose of future growth. (c) There is a significant decrease in current asset over a period of time. Trend Analysis (Horizontal):- Trend percentage analysis moves in one direction either progression or regression ( upward or downward).This method involves the calculation of percentage relationship that each statements bear to the same item in the base year .Mostly the earliest period is taken as the base year. Advantages: It indicates the increase in an accounted item along with the magnitude of changes in percentages which is more effective then absolute data.  It facilitates an efficient comparative study of the financial performance of a firm over a period of time. Limitations: Any one trend by itself is not very analytical & informative.  During the inflationary periods the data becomes incomparable ,unless the absolute rupee data is adjusted.  There is always the danger of selecting the base year which may not be representative, normal & typical.  The calculated percentages having no logical relationship with one another. Precautions to be taken: Consistency in the principles & practices followed by the organization throughout the calculated period.  The base year should be normal.  Trend percentages should be calculated only for the items which are having logical relationship with each other.  Figures of the current year should be adjusted according to the changes in price levels.


2006* SOURCES OF FUNDS: Rs. (Crore ) 100 100 100 100

2007 Rs. (Crore) 132.06 51.21 103.4 113.1

2008 Rs. (Crore) 156.79 52.62 104.7 131.2

2009 Rs.(Crore)

Shareholders’ Funds:Loan Funds Deferred Tax Liabilities TOTAL FUNDS APP. OF FUNDS:Fixed Assets Investments Curr Assets,Loans & Adv: --(Less):-Current Liabilities &Prov. MISC EXP. (to the extent not written off or adjusted) TOTAL ASSETS (Net)

191.42 61.9 108.9 158.3

100 503.5 100

113.9 167.8 114.7

145.7 134.9 143.6

181.4 293.1 119.4

100 100 100

134.8 0.00 113.1

181.1 0.00 131.2

206.4 0.00 158.3

*Base year:-2006 Value (100)

Working Capital calculation:-


Statement showing change in working capital for ACC Ltd:Particulars Current Assets Inventories Sund. Debtors Cash & Bank Bal Loan & Advances Other CA Total ( A ) Current Liabilities C.L. Provisions Total ( B ) ( A-B ) Changes in working capital Total 2060.34 1091.88 3152.22 (857.75) (857.75) 1801.79 963.93 2765.72 (6.09) (851.66) (857.75) 258.55 127.95 (851.66) (465.16) (465.16) (465.16) (465.16) Dec’09 778.98 203.70 746.38 554.42 10.99 2294.47 Dec’08 793.27 310.17 984.24 651.28 20.67 2759.63 Increase ( + ) ( Crore) Decrease (- ) (14.29) (106.47) (237.86) (96.86) (9.68)

Similarly the calculation of WC for the year 2005 to 2009 as given below:( Crore) 2005 2006 2007 2008 2009 (A)Current assets 1,421 1,921 2,203 2,760 2,294 (B)Current 1,335 1,672 2,221 2,766 3,152 Liabilities Working capital 86 249 (18) (6) (858)

Interpretation:-While looking into the changes, we will look into the various components of working capital & analyze the changes in that.


400 200 0 -200 -400 -600 -800 -1000 2005 2006 2007 2008 2009 Working capital Changes

800 700 600 500 400 300 200 100 0 2005 2006 2007 2008 2009

By analyzing the 5 years data we can see that the value of inventories is increasing over a no of year. It indicates that the company is growing rapidly in cement sector. A company uses inventory when they have demand in market. From other point of view we can say that the liquidity of firm is blocked in inventories but it is important to keep stocks due to uncertainty of availability of raw material in time. SUNDRY DEBTORS ANALYSIS

350 300 250 200 150 100 50 0 2005 2006 2007 2008 2009


Debtors will arise only when credit sales are made. The above graph depicts that there is continuous rise in the debtors of ACC Ltd in the successive years other than 2009.. It represents an extension of credit to customers. The reason for increasing credit is competition and company liberal credit policy. Cash & Bank Bal, Loans & adv ANALYSIS:1000 800 600 400 200 0 2005 2006 2007 2008 2009 Cash & Bank Bal Loans & Adv Others

 Significant increase in Cash & bank balance, which shows the financial strengths of the company. Though there is a slight fall in the FY 2009 . Cash is basic input or component of working capital. Cash is needed to keep the business running on a continuous basis. So the organization should have sufficient cash to meet various requirements.  After analyzing the table, we can say that the pattern of loans & advance is not static in nature. It shows upwards & downwards movement as the requirements influence it. CURRENT LIABILITIES & PROVISIONS ANALYSIS:-

2500 2000 1500 1000 500 0 2005 2006 2007 2008 2009

After analyzing the bar-chart, we can say that the amount of current liabilities is increasing significantly over years .An increase current liabilities indicates that company is using its credit facilities to the maximum extent for operating purpose.


 From the above table we can see that provision shows an increasing trend and the huge amount is being kept in these provisions. This is kept to pay the taxes, interest & other facilities or benefits to the employee. It is just kept for meeting future short-term liabilities. RATIO ANALYSIS (A) Overview:Financial ratios are measures of the relative health, or sometimes the relative sickness of a business. A physician, when evaluating a person’s health, will measure the heart rate, blood-pressure and temperature; whereas, a financial analyst will take readings on a company’s growth, cost control, turnover, profitability and risk. Like the physician, the financial analyst will then compare these readings with generally accepted guidelines. Ratio analysis is an effective tool to assist the analyst in answering some basic questions, such as:1. How well is the company doing? 2. What are its strengths and weaknesses? 3. What are the relative risks to the company? Although an analysis of financial ratios will help identify a company’s strengths and weaknesses, it has its limitations and will not necessarily provide the solutions or cures for the problems it identifies. B. APPLICATION OF RATIO ANALYSIS:Integral tool in trend analysis  Compares the company’s own ratios to itself over time  Identifies the company’s strengths and weaknesses  Assists in establishing appropriate capitalization rates (helps to identify risk factors particular to the subject company) WORKING CAPITAL RATIOS AND ITS INTERPRETATION :Dec’05 Dec’06 Dec’07 Dec’08 Dec’09 Liquidity Ratio Current Ratio Quick Ratio Solvency Ratio Debt-equity ratio. 0.58 0.42 0.50 0.77 0.61 0.25 0.86 0.55 0.07 0.89 0.61 0.10 0.67 0.42 0.09


0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2005 2006 2007 2008 2009

Current ratio Quick Ratio Debt-equity ratio

 Interpretation: - As we know that ideal current ratio for any firm is 2:1.The current ratio of company is less than the ideal ratio. This depicts that company’s liquidity position is not sound. Its current assets are less than its current liabilities.  Generally a QR of 1:1 is considered to represent satisfactory current financial position. The trend of quick ratio is uneven & the ratio is around 0.5:1 over a period of time. A quick ratio is an indication that the firm is liquid and has the less confidence to meet its current liabilities in time. This shows company has liquidity problem.  Debt-equity ratio shows relationship between borrowed funds and owners’ capital is a popular measure of the long term financial solvency of the firm. For ACC it was the highest around 0.5:1 in 2005.After that it shows fluctuation. Activity/mgmt efficiency Ratio:Dec,05 Dec’06 Inventory Turnover 5.37 9.33 Ratio Debtor Turnover 16.34 27.75 Ratio Investment Turnover Ratio Work cap turn. 12.29 (27.93) 22.40 (6.96) Dec’07 24.85 27.40 24.85 (18.25) Dec’08 27.51 24.12 27.51 (17.02) Dec’09 25.22 31.22 25.22 (54.17)


60 50 40 30 20 10 0 2005 2006 2007 2008 2009 Investment Turnover Ratio Working capital Turnover ratio Inventory turnover ratio Debtor Turnover Ratio

 It shows increasing trend which is favorable for the company. As it indicates how rapidly the inventory is turning into receivable through sales. A high ratio is good from the view point of liquidity. A low ratio would signify that inventory does not sell fast.  A high ratio is indicative of shorter time lag between credit sales and cash collection. The higher the value of debtors’ turnover the more efficient is the management of debtors or more liquid the debtors are. A low ratio shows that debts are not being collected rapidly. As the graph reveals that the debts are collected in time & the process is improving consistently. This shows that company is utilizing its debtor’s efficiently as compare to previous year.  This ratio indicates high net working capital requires for sales. This company having negative working capital because, they have more current liabilities over current assets. It shows that the short term loans are not sufficient and more money are invested in the purchase of fixed assets. Thus this ratio is helpful to forecast the working capital requirement on the basis of sale. Profitability & Investment turnover Ratio:Profitability Dec,05 Dec’06 Dec’07 Ratio Gross Ratio Profit 17.32 16.85 28.97 21.16 23.72 20.44

Dec’08 20.59 16.29

Dec’09 27.68 19.69

Net Profit Ratio Investment Valuation Ratio Face value Dividend per Share

10.00 8.00

10.00 15.00

10.00 20.00

10.00 20.00

10.00 23.00


30 25 20 15 10 5 0 2005 2006 2007 2008 2009 Gross profit ratio Net profit ratio Dividend per share

 As it shows the dividend per share ratio is increasing over years. It means that the investors have faith in the company.  G/P margin ratio shows the profit relative to sales. A high ratio of gross profits to sales is a sign of good management as it implies that the cost of production of the firm is relatively low. For ACC it is uneven but it was good in FY’06 & FY’09.  The net profit margin is indicative of management ability to operate the business with sufficient success not only to recover from revenues, but also to leave a reasonable margin to the owners. A high net profit margin would ensure adequate return to the owners as well as enable a firm to face adverse economic conditions. It is significant & satisfactory for the company. Suggestion: It is suggested that the company has to increase its current assets to meet its short-term obligations.  Company has to improve debtors’ collection period continuously so that effective receivable management will possible.  Reserves should be utilized for the growth of the company.  While forecasting cash flow, the management should take into account the impact of unforeseen events, market cycles and actions by competitors. The effect of unforeseen demands of working capital should be factored in.


 Collaborating with the customers & suppliers instead of being focused only on own operations will also yield good results. If feasible, helping them to plan their inventory requirements efficiently to match their production with their consumption will help reduce inventory levels.




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