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Term Paper On: Working Capital Management Practices
Term Paper On: Working Capital Management Practices
On
Working Capital Management
Practices
(With reference to course, Financial
Management, MGT 517)
Submitted to:
Submitted by:
Ms. Swati Goyal RAJIV GUPTA
Lecturer LSB ROLL NO:
B34
SEC: RR1902
REG NO:
10901946
INDEX
Introduction to Working Capital
Introduction to Ambuja Cement
Balance Sheet of Ambuja Cement
Working Capital Analysis
Interpretation
Ratio Analysis
Interpretation
Introduction to IBM
Balance Sheet of IBM
Working Capital Analysis
Interpretation
Ratio Analysis
Interpretation
Introduction to Birla Sun Life
Balance Sheet of Birla Sun Life
Working Capital Analysis
Interpretation
Ratio Analysis
Interpretation
Comparative Analysis
ACKNOWLEGEMENT
Last but not the least I would like to thank the Almighty
for always helping me
RAJIV GUPTA
Working Capital Management
Working capital, also known as "WC", is a financial metric which
represents operating liquidity available to a business. Along with fixed assets
such as plant and equipment, working capital is considered a part of operating
capital. It is calculated as current assets minus current liabilities. If current
assets are less than current liabilities, an entity has a working capital
deficiency, also called a working capital deficit. Net working capital is
working capital minus cash (which is a current asset). It is a derivation of
working capital that is commonly used in valuation techniques such as DCFs
(Discounted cash flows).
Working Capital = Current Assets − Current Liabilities
A company can be endowed with assets and profitability but short of liquidity if
its assets cannot readily be converted into cash. Positive working capital is
required to ensure that a firm is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term debt and upcoming
operational expenses. The management of working capital involves managing
inventories, accounts receivable and payable and cash.
Ambuja Cements Limited
Ambuja Cements Limited was set up in the late 80s. The cement industry presented an
opportunity of steady growth and ethical competition to the promoters.
However, a decade later, it became one of world’s most efficient cement companies
producing the finest cement in the world at the lowest cost. While adhering to the most
stringent international pollution-control norms.
Today, Ambuja is the 3 rd largest cement company in India, with an annual plant capacity of
16 million tonnes including Ambuja Cement Eastern Ltd. and revenue in excess of Rs.3298
crores.
More importantly, its plants are some of the most efficient in the world. With environment
protection measures that are on par with the finest in the developed world.
But the company’s most distinctive attribute is its approach to the business.
This unique vision is encapsulated in the company’s homegrown philosophy of giving people
the authority to set their own targets, and the freedom to achieve their goals.
This simple vision has created an environment where there are no limits to excellence, no
limits to efficiency. And has proved to be a powerful engine of growth for the company.
As a result, Ambuja has consistently raised the bar in all aspects of the cement industry.
Be it transportation, plant efficiency, brand building or human resource development.
Take a look:
When Ambuja set up its first plant in 1986, the accepted time period for installing a plant was
3 years.
Ambuja, did it in less than 2 years. And with a significantly lower capital expenditure.
In 1993 the company went a step further and bettered its own record. Ambuja's second plant
was installed in a mere 13 months - the quickest time for setting up a one million tonne
cement plant.
In 1993, Ambuja Cement set up a complete system of transporting bulk cement via the sea
route.
Making it the first company in India to introduce bulk cement movement by sea. Others
followed and today, about 10% cement travels by this new route.
The facility comprises: A dedicated port at the Gujarat plants, capable of berthing 40,000
DWT vessels, three bagging terminals at Mumbai, Surat and Sri Lanka, and seven special
bulk cement vessels.
This capability has enabled us to supply fresh cement to many coastal markets – domestic
and international.
Branding a commodity
Cement is a commodity, sold largely on price. Ambuja Cement was the first company to
create a brand out of cement and command a premium.
It was also the first to introduce a special cell, providing technical services to consumers and
masons. Today, this has become the norm in cement marketing.
The trick of course was to provide a consistently high quality of cement, backed by
excellent service. This was reinforced by a strong dealer network.
The result is that customers are ready to pay 2-3% premium for Ambuja Cement for the value
they receive. Ambuja Cement is the top brand in Western, Northern, Central and Eastern
India.
Exports
Ambuja Cement exports almost 17% of its production in a very competitive international
environment. For the last ten years, Ambuja Cement remains India’s highest exporter of
cement.
Two, the dedicated bulk cement transportation capability at our Gujarat plant.
Ambuja Cement Eastern Ltd. - Research
Center
532201 AMBCEMES Group (N.A.) BSE dataView Tips Add
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Balance sheet
(Rs crore)
Jun ' 09 Jun ' 08 Jun ' 07 Jun ' 06 Jun ' 05
Sources of funds
Owner's fund
Equity share capital 193.30 193.30 193.30 193.30 193.30
Share application money - - - - -
Preference share capital - - - - -
Reserves & surplus 88.06 14.92 -30.16 -147.86 -159.69
Loan funds
Secured loans 30.13 107.27 151.16 207.82 221.27
Unsecured loans 55.93 40.80 51.37 34.02 27.99
Total 367.43 356.30 365.67 287.28 282.88
Uses of funds
Fixed assets
Gross block 552.74 471.06 464.50 456.51 427.99
Less : revaluation reserve - - - - -
Less : accumulated depreciation 292.07 255.07 226.75 203.56 176.90
Net block 260.67 215.99 237.75 252.95 251.09
Capital work-in-progress 32.02 27.77 1.87 1.56 19.00
Investments 50.99 41.25 15.03 0.01 0.02
Net current assets
Current assets, loans & advances 139.66 182.48 206.09 111.06 87.93
Less : current liabilities & provisions 116.51 113.84 99.18 83.84 76.20
Jun ' 09 Jun ' 08 Jun ' 07 Jun ' 06 Jun ' 05
Total net current assets 23.14 68.64 106.91 27.22 11.73
Miscellaneous expenses not written 0.61 2.64 4.10 5.54 1.04
Total 367.43 356.30 365.67 287.28 282.88
Notes:
Book value of unquoted investments 50.99 41.25 15.03 - -
Market value of quoted investments - - - 0.01 -
Contingent liabilities 61.86 46.70 18.80 23.96 22.10
Number of equity shares outstanding (Lacs) 1924.52 1924.52 1924.52 1924.50 1924.50
Here,
(Rs crore)
Hence,
Interpretation
When we analyse the working capital of the company, we can see that the company’s
working capital was 11.73 crore in the year 2005 which increased to 27.22 crore in the year
2006 and it further increased to 106.91 crore in the year 2007 but it reduced to 68.64 crore
and it further reduced to 23.14 crore in the year 2009.
What we can analyse from this is that the company’s working capital was very good in the
initial year that is between 2005 to 2007 and it started declining in the successive years.
Though the company is still in the good condition of the working capital, the company should
pay attention towards it and find out the cause of reduction in the working capital.
Ratio analysis
Ratios 2009 2008 2007 2006 2005
Current 1.19 1.60 2.07 1.32 1.15
Ratio
Working notes:
Interpretation
As far as ratio analysis is concerned, the company has sufficient current assets and their
current ratios are somewhat up to the standard. Because the standard for the current ratio is
2:1, the company is able to maintain them. Hence the company is in the good condition when
we analyse the current ratio.
Thus, analysing the overall working capital and current ratio of the company we can say that
the company is in the good position. However there is always room for further improvement,
hence, the company should made extra efforts in order to move to the situation even better
than this.
Balance Shee
Financial data in U.S. Dollars
Annual Interim
Values in Millions (Except for per share
items)
2009 2008 2007 2006 2005
Period End Date 12/31/2009 12/31/2008 12/31/2007 12/31/2006 12/31/2005
Assets
Cash and Short Term Investments 13,974.0 12,907.0 16,146.0 10,656.0 13,686.0
Other Long Term Assets, Total 7,196.0 8,871.0 18,930.0 14,509.0 22,457.0
Other Assets, Total 0.0 0.0 0.0 0.0 0.0
Preferred Stock - Non Redeemable, Net 0.0 0.0 0.0 0.0 0.0
Here,
Current Assets = Cash and Short term Investment + Total Receivables + Total Inventory +
Now,
Interpretation
Here what we can analyse from the company’s Net Working Capital Management is that the
company is paying sufficient attention towards the managing its working capital. The
company’s working capital in the year 2005 was $10509 million which however fell to $4569
during the year. The working capital raise to $8867 million in 2007 and fell to $6567 in the
year 2008 and it went to $12933 in the year 2009.
This shows the company’s working capital is fluctuating over time. However it is never
below the standard or it has never reached the point where it would reflect the company’s
poor management. Therefore we can say that the company’s management is better in case of
working capital management.
Ratio Analysis
Ratios 2009 2008 2007 2006 2005
Current 1.40 1.15 1.20 1.11 1.29
Ratio
Quick Ratio 1.18 0.98 1.05 0.98 1.13
Absolute 0.46 0.34 0.40 0.31 0.44
Ratio
Working notes:
Current Ratio = Current Assets/Current Liabilities
Interpretation
When we analyse the ratios of the company we can say that the company is in good position.
This means the company has sufficient working capital for its use. When we analyse the
current ratio of the company, we can see that it was 1.29 in the year 2005 which fell to 1.11
in the year 2006. There was a slight improvement in the year 2007 that is the ratio went to
1.20. Again the ratio fell to 1.15 in the year 2008 however it was 1.40 in the year 2009.
When we compare it with the actual standard which is 2:1 we can analyse that the company’s
current ratio is not up to the mark. It is below the standard. However the company might have
focused to some other areas of improvement. But the company must pay attention towards
this also and try to maintain the standard of its current ratio.
As far as Quick ratio and Absolute ratio is concerned, they are up to the standard. The slight
deviation can be seen in the 2006 and 2008; however they are above standard in rest of the
years. This means the company is holding sufficient amount of current assets with it.
Finally when we analyse both the Working Capital and the Ration Analysis, we can say that
the company is in good financial condition. It has sufficient amount of liquidity to meet its
current and future need of liquid expenses.
Birla Sun Life Insurance Company
Birla Sun Life Insurance Company also known as BSLI is one of the renowned names in the
field of insurance in India. This insurance company is a result of a joint venture between
Aditya Birla Group, a multinational company in India and Sun Life Financial Inc, a leading
global name in the field of insurance. Birla Sun Life Insurance has to its credit of being the
first company in the field of financial solution to start the Business Continuity Plan. The
vision of the group is to create long term value together with market leadership.
The primary aim of the company is to help customers ease risks of life, accident, health and
money at every stage and under any circumstance. The company works towards making the
financial future and enterprises of the customers better than what they currently are. All the
works undertaken at Birla is done with integrity, full commitment, passion and ample speed.
BSLI Solutions
Birla Sun Life Insurance Company provides individual and other solutions to customers
based on their varied needs. So whether the customer wants long term protection or short
term protection plans, the company has it all for their clients. The insurance solutions offered
by the company are:
• Protection Solution
• Retirement Solutions
• Children's Future Solutions
• Health & Wellness Solutions
• Wealth with Protection Solutions
The protection solutions are ideal for someone who wishes to separate their insurance and
investment needs. The terms of the insurance are made in a way so that it deals with the most
basic need of life insurance, which is the provision of life cover. The children's future
solutions aim to take care of all the financial needs of the child in the best way possible. The
health and wellness solutions have provisions to take care of any financial emergency that
may come up in the family.
Birla Sun Life Insurance Term Plan is ideal for those who are seeking to get insurance
benefits at a lower price. The plan covers all liabilities and provides complete security to the
clients. The minimum age of a customer seeking this insurance must be 18 years and the
maximum age must be 55 years. Premium payment options range from monthly to annual to
quarterly to semi annually depending on the policies. Listed below is some of Birla Sun Life
Insurance saving policies:
Sources Of Funds
Total Share Capital 124.40 124.40 124.49 124.49 124.49
Equity Share Capital 124.40 124.40 124.49 124.49 124.49
Share Application Money 0.00 0.09 0.00 0.77 1.68
Preference Share Capital 0.00 0.00 0.00 0.00 0.00
Reserves 942.73 913.78 1,639.29 2,571.73 3,475.93
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
Net worth 1,067.13 1,038.27 1,763.78 2,696.99 3,602.10
Secured Loans 1,253.35 1,221.93 1,151.25 982.66 1,175.80
Unsecured Loans 278.03 229.90 427.38 757.84 965.83
Total Debt 1,531.38 1,451.83 1,578.63 1,740.50 2,141.63
Total Liabilities 2,598.51 2,490.10 3,342.41 4,437.49 5,743.73
Mar '05 Mar '06 Mar '07 Mar '08 Mar '09
Here,
Current Assets = Inventories + Sundry Debtors + Cash at Bank + Loans & Advance
This is a good sign for the company’s management as they are able to check this fault and the
situation seems to be improving throughout the upcoming period.
Ratio Analysis
Ratios 2005 2006 2007 2008 2009
Current 0.82 0.68 0.732 0.718 0.695
Ratio
Quick Ratio 0.54 0.35 0.40 0.38 0.34
Absolute 0.38 0.20 0.54 0.50 0.44
Ratio
Working notes:
Interpretation
When we analyse the ratios of the company then we can find that the company is not in the
good position. The company’s overall current ratio is not up to the standard. The company’s
current ratio in the year 2005 was 0.82 which is far below the standard that is 2:1. Again in
the year 2006 its current ratio is 0.68, which too is below the standard and it has also reduced
from that which it was in the year 2005. Further analysing the ratio we can say that the
current ratio of the company is not improving and is reduced to 0.695 in the year 2009.
When we analyse the Quick ratio of the company which should be 1:1, the company is again
not up to the standard. The Quick ratio of the company is 0.54 in the year 2005, 0.35 in the
year 2006, 0.40 in the year 2007 and the same was 0.38 in the year 2008 and finally it was
0.34 in the year 2009. What we can analyse from this that in non of the five years the
company’s quick ratio is up to the standard. In all those five years the company has its quick
ratio less than the required. This implies that the company is not up to the standard.
However when we analyse the absolute ratio of the company’s absolute ratio is near the
standard. Since it should be in the ratio of 0.5:1, the company is able to maintain the standard
of its absolute ratio. In all the five years the company’s absolute ratio is near to the standard.
Hence we can say that company is able to maintain its standard in the absolute ratio
Finally when we analyse the overall Net Working Capital Management and Ratio Analysis of
the company then we can say that the company is not in the good position. The company
should pay attention towards the management of its working capital and besides its liquidity
management is also not good.
The financial team should pay attention towards this problem if the company is to improve its
situation in the coming period of time.
Comparative Analysis
Now after analysing the Net Working Capital Management as well as the Ratios of the given
company we can find that both the companies Ambuja Cement and IBM are in good position
however Birla Sun Life is not in better position.
IBM is the most preferred company in all these three companies because at IBM the working
capital management is very good and the company is also able to maintain good level of
working capital with it. Besides it is also able to maintain its ratios up to the standard. The
company is also able to earn sufficient amount of profit which can be observed from its
balance sheet.
Ambuja Cement is also in good position. It is also able to maintain its working capital in
good state and its ratios are also in good condition. The company is also able to earn
sufficient amount of profit which can be observed from its balance sheet. However there is
always a room for further development hence, the company should focus on such areas where
improvements can be done.
The third company is the Birla Sun Life. This company is not able to perform well. The
company is not able to manage its working capital and besides the ratios of the company is
also not up to the standard. Hence the company should pay more attention towards managing
its working capital and they should also manage their liquidity in proper manner so as to meet
the current and future demand of the liquidity.