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Expense budgeting at Bectochem Consultants & Engineers Pvt Ltd

By

Nagesh Kashyap Akshintala

Ghaziabad

May, 2011

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Expense budgeting at Bectochem Consultants & Engineers Pvt Ltd

By

Nagesh Kashyap Akshintala

Under the Guidance of

Mr. N. K. Unnikrishnan Business Head - Pharma Pharmacy Business Head Bectochem Consultants & Engineers Pvt Ltd

Dr. Gunjan Malhotra Assistant Professor Operations Management Institute of Management Technology

Ghaziabad

May, 2011

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Certificate of Approval
The following Summer Project Report titled "Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd" is hereby approved as a certified study in management carried out and presented in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate Diploma in Business Management for which it has been submitted. It is understood that by this approval the undersigned do not necessarily endorse or approve any statement made, opinion expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it is submitted. Summer Project Report Examination Committee for evaluation of Summer Project Report Name Signature

1. Faculty Examiner

_______________________

___________________

2. PG Summer Project Co-coordinator _______________________

___________________

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Certificate from Summer Project Guides


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

Dr. Gunjan Malhotra Assistant Professor Operations Management Institute of Management Technology Raj Nagar, Ghaziabad, Uttar Pradesh 201001 Date:

Mr. N. K. Unnikrishnan Business Head - Pharma Bectochem Consultants & Engineers Pvt Ltd Building 5C/204, Mittal Estate, Andheri-Kurla Road, Andheri(E), Mumbai 400059 Date:

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Abstract Expense budgeting at Bectochem Consultants & Engineers Pvt Ltd By Nagesh Kashyap Akshintala

The Company under study, Bectochem Consultants & Engineers Pvt Ltd is a leading process equipment manufacturer that produces machinery for pharmacy companies. It has a wide range of product portfolio catering needs of Pharmacy, cosmetic and food processing industries. Its
head office is present in Mumbai and it has two manufacturing plants located at Ankleshwar(Gujarat) and Pune. Job order production is carried out by this company. The major production is

carried out at Ankleshwar plant. The objectives of the project are: To find various expenses those occur in producing a job and to compare the expenses in job production with present pricing policy. To analyse if the present investment, cash management scenario is at par with the industry and consistent with the performance.

As part of project following approach is adopted Micro Analysis of the expenses involved in the production of an individual job.

In this study the P&L report for the year 2010-11 is considered and the expenses are classified under Factory Expenses, Labour, Marketing and Material heads. The percentage share of these individual heads on sales is calculated. Further, seven jobs were considered for study and all possible direct costs were calculated and the costs which cannot be calculated are apportioned as a percentage of sale value which is derived from p&L document. Thus expenses involved in production of these jobs are estimated and compared with the traditional costing process of the company. The annual expenses under different heads are restructured as expenses for different activities, using Activity Based Costing process. Later the jobs which were studied earlier are also represented in Activity Based Costing Format. This representation supports in managerial decision making regarding the expenses incurred in various activities. It is observed that the expenses estimated from job costing vary with the price quoted either ways. So, sometimes a greater profit is realised and sometimes expenses may be more than estimated. This way of costing helps in cross checking if the price quoted is adequate. Financial Statement Analysis

The Financial Statement Analysis is carried out in the following manner 1) Trend Analysis : Performance of company over a period of 5 years 2) Cross sectional Analysis: Performance of company with respect to its peer companies

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

3) Working capital Management: The current asset, liability, inventory management over time and with respect to peers Under each study, a horizontal analysis, vertical analysis and a ratio analysis is carried out. The observations are recorded and conclusions and recommendations regarding the performance of the company are assessed. The detailed job analysis brings out the fact that, there is a variation in the traditional price estimation method and the actual expenses incurred. Especially the labour costs appear to be more than estimated, and the share of different cost centres is not in sync with the way they are estimated. Secondly, the company is working on a lower profit margin, compared to its peers. The growth has not been in sync with industry pace. Hence it is strongly recommended to increase capacity to cater the activity needs. Thirdly the working capital management has to be made effective. Efficient management of working capital through effective credit, purchase and inventory policy can fetch greater net profit that adds to the growth. There should be a coordinated growth rather than growth in a single dimension. Focus to grow in one direction may lead to inconsistencies in business processing. Hence it is recommended to initiate a coordinated growth. The study is also constrained by few limitations, especially in detailed production and transport costs. Further study can be focussed on, Capacity Adequacy for the present sales growth Review of Credit Policy for sales and Purchase

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Acknowledgement

I would like to thank Mr. Alok Bector and Mrs. Sangeeta Bector for giving me this opportunity to work on a project which has been challenging and a great learning experience. I am very much thankful to my project guide Mr. N. K. Unnikrishnan (DGM, Pharmacy Business Head) for the support, guidance and the encouragement he has given all through the project. My special thanks to my IMT faculty project guide Dr. Gunjan Malhotra for her
guidance during my project.

I thank the Planning, Accounts, HR, Production and Quality departments of Bectochem Ankleshwar plant, Accounts department Mumbai office and all the staff members for their prompt support in guiding and sharing the information for my project. My special thanks Mr. M. S. Pandey and Mrs. Vidya who have been taking care of all my requirements during the project. Nagesh Kashyap Akshintala

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Table of Contents

Certificate of Approval Certificate from Summer Project Guides Abstract Acknowledgement Table of Contents List of Tables List of Figures List of Appendices Chapter 1 : Company Profile 1.1 About the Company 1.2 Operation Procedure 1.3 Product Portfolio Chapter 2: Project Introduction 2.1 Introduction 2.2Problem definition 2.3 Literature Chapter 3: Job Costing 3.1 Overhead Break Up 3.2 Job Costing 3.3 Activity Based Costing 3.4 Learning 3.5 Recommendations 3.6 Limitations and Further Study Chapter 4: Financial Statement Analysis 4.1 Financial Statement Analysis 4.2 Trend analysis 4.3 Competitor Analysis 4.4 Working Capital Management

3 4 5 7 8 9 10 11 13 14 18 21 21 21 24 24 29 33 33 33 35 36 46 55 58 59 61

4.4 Recommendations from FSA


Summary Appendix

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List of Tables

Table 1.1: Kick off SOP Table 1.2: Design SOP Table 1.3: Planning SOP Table 1.4: Manufacture SOP Table 1.5: Testing SOP Table 1.6: Dispatch SOP Table 2.1: Job Costing Break Up Table 3.1: Cost head Break up Table 3.2: Costing sheet sample Table 3.3: Job Costing Table 3.4: Comparison with Bectochem Costing Table 3.5 : Departmental costing Table 3.6: Activity Cost Table 3.7: Cost Driver Table 3.8: Activity cost appropriation Table 9: Activity Based Job Costing Table 3.10: Cost comparison Table 4.1: Horizontal analysis Observations Table 4.2: Vertical analysis Table 4.3: Vertical Analysis Observations Table 4.4: Ratio Analysis Output Table 4.5: Ratio Analysis Observations Table 4.6: Growth rate of peer companies Table 4.7: Horizontal analysis observations Table 4.8: Vertical Analysis Observations Table 4.9: Ratio Analysis Table 4.10: Ratio Analysis Observations Table 4.11: Over Trading Symptoms

16 17 17 18 18 19 23 25 26 29 29 31 31 32 33 33 34 39 40 42 44 45 49 50 53 54 55 57

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Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

List of Figures

Figure 1.1: SOP Figure 3.1: 2010-11 Annual Overhead Break Up Figure 3.2: Activity Expenses Break Up Figure 4.1: P&L Trend Figure 4.2: Capital Structure Trend Figure 4.3: Application of Funds Figure 4.4: Expenses Break Up Trend Figure 4.5: Capital Structure Mix Figure 4.6: Application of Funds Mix Figure 4.7: Indirect Expense Comparison Figure 4.8: Direct Expenses Figure 4.9: Capital Structure Figure 4.10: Funds Application Figure 4.11: Overtrading Cycle Figure 4.12: CCC trend

14 24 31 36 37 37 39 40 40 50 50 51 51 56 57

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List of Appendices

Appendix 1: P&L Break Up Appendix 2: Job costing Appendix 3: Freight Rates Appendix 4: Average Contract worker man hour calculation Appendix 5: Financial reports of Bectochem from 2005-2010 Appendix 6: Horizontal Analysis of Bectochem financial elements during 2005-10 Appendix 7: Vertical Analysis of Bectochem Financial Elements during 2005-10 Appendix 8: Horizontal Analysis of Financial Reports of Bectochem and its peer companies

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Chapter 1 : Company Profile

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1.1 About the Company Bectochem Consultants & Engineers Pvt Ltd is one of the leading process equipment manufacturers in INDIA since 1978.It deals in pharmaceutical, active pharmaceutical ingredients, food and cosmetics and allied industries. It has a 500 + work force in INDIA. It has manufacturing setups at ANKALESHWAR (Gujarat) and PUNE (Maharashtra).It has Joint ventures with 6 organizations in INDIA. They are :1. 2. 3. 4. 5. 6. FITZPATRICK Hecht Sterivalve Riva RML CSP

Bectochem has 4 major product divisons:1. Pharma 2. Food and cosmetics 3. Isolators 4. API.

The products of Bectochem are found in 5 continents of the world. Introducing barrier isolator technology to India in 2004, Bectochem is the acknowledged expert in the specialised and technically demanding field of design & manufacture of high specification barrier containment systems. The industries that are served are:1. 2. 3. 4. API Manufacturing Solids Formulations Liquid Formulations Ointment Formulations Think Different Engineer Smart To be a INR 1000 million company by 2011 Passion Respect Integrity Diligence Ethical Product People Process ISO 9001:2008 Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

VISION : MISSION : VALUES :

Values are enhanced through:-

Certifications: 13 | P a g e

1.2 Operation Procedure As mentioned earlier, Job order production is followed at Bectochem. Following are the series of activities involved from getting purchase order from the client till finishing the installation of machine at client location.

Kick off meeting Mumbai

Production

Testing

Kick off Meeting Plant

Store

Installation

Design

Planning

Recording

Figure 1.1: SOP

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Kick Off Meeting at Mumbai Kick Off meeting is initiated after getting the URS from the client. Task Ones the URS is received, a Kick Off meeting has to be initiated Besides FAQ, technical details are discussed and timelines for design, planning, production, installation are fixed MoM is prepared and signed by Project director and Client Representative Project plan is prepared A Technical Checklist is prepared consisting of following details Layout Details Mechanical Design data Details of main components Material data PLC automation and control Electrical Instrumentation Utilities Overall Dimensions Level of Documentation List of spares Update of order details job no and job details in Brahma FDS and Component list is forwarded for clients approval A kick off meeting is held at plant level by PMO, production, quality, design teams Person Responsible Project Director Review Time Line Within a week of receiving URS

Project Director

Project Engineer

1 day after meeting

Project Engineer Marketing dept/Project Engineer Project Director

2 days 2 days

Marketing Dept

General Manager

2 days

Documentation Dept

QA Manager

5 days

Table 1.1: Kick off SOP

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Design After Kick off meeting, the GA and PI drawings are prepared by design team Task Indent drawing is sent to production for planning purpose Making of drawing log according to sequence of drawing Sending drawings to client and getting approved, making required correction Commercial Implication of approved Drawing Issue of approved drawings to Works at Mumbai, Pune and Ankleshwar Old drawings returned from Works Update of clients approval of drawings in Bramha Person Responsible Drawing Dept Review Design Manager Timeline 3 days

Drawing Dept

Design Manager

1 day

Project Engineer

Project Director

10 day

Project Director

Drawing Dept

Project Director

1 day

Production Dept Marketing Dept

Design Manager General Manager

1 day 1 day

Table 1.2: Design SOP

Planning After receiving the detailed design, Planning team prepares BOM, checks available material and orders required material Task Preparation of BOM Forwarding the BOM to Store for update of JTR PO for material not available with store Procurement of material, Quality testing of the material and binning, MRN update in Focus Person Responsible Planning dept Planning Dept Review Technical director Technical Director Time Line Approx 45 days

Planning Dept

Technical Director

Store, QA dept

Technical Director

Table 1.3: Planning SOP

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Manufacture Ones the material is procured, production process starts Task Production of Job Monitoring progress of job Weekly reporting of the status of job Person Responsible Production Dept Production Engineer Production Manager
Table 1.4: Manufacture SOP

Review Technical Director Technical Director Technical Director

Timeline

Testing After production the job is tested as follows Task Pre FAT FAT trail by QA department and client Documentation of FAT protocol Person Responsible Production Dept QA Engineer Documentation Dept
Table 1.5: Testing SOP

Review

Timeline

Production Manager QA manager

Despatch and Installation Person Responsible Project Director Review Timeline

Task Issuance of Dispatch Instructions to plant Advance intimation by factory 10 days before Thorough checking of equipment before despatch Arrangements to comply with legal norms Insurance of goods and unloading instructions Submission of documents/manuals to client Generation of Shipment document and Invoice Filing of records in Job file 17 | P a g e

Production Manager QA Engineer

Production Manager Production manager Documentation dept Marketing Dept QA Mnager

By all Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Table 1.6: Dispatch SOP

1.3 Product Portfolio Bectochem manufactures wide variety of machinery to cater the needs of pharma, food and cosmetic and isolator industries. The products produced at Bectochem can be classified under following sections. 1) Dry Syrup Powder a. Sifters i. Mechanical Sifter ii. Vibro Sifter iii. Rota Sifter b. Mixer i. Horizontal Mass Mixer ii. Planetary Mixer iii. Rapid Mixer Granulator iv. Starch Paste Kettle v. Fluid Bed Processor c. Miller i. Multi Mill ii. Co Mill d. Dryer i. Tray Drier ii. Fluid Bed Dryer e. Blender i. Double Cone Blender ii. Y Blender iii. Ribbon Blender iv. Drum Blender v. Rotating Type Drum Blender vi. Vertical Blender vii. Octagonal Blender f. Coating i. Conventional Solid Coating ii. Auto Coater g. CIP/WIP i. Automated/Manual CIP/WIP Skids ii. Bin wash systems

2) Paste/Pulp a. Preparation of Paste i. Jacketed Titling Pan Hemispherical Type ii. Jelly Storage and Processing Kettle iii. Transfer Pumps and piping b. Mixing i. Planetary Mixing ii. Paste Mixer c. Liquid Preparation i. Sugar Syrup Preparation Tanks 18 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

d. Storage/Transfer i. Holding/Storage Tanks ii. Pumps/Transfer Lines iii. Horizontal Filters e. Homogenization i. Continuous Mixer ii. Batch Mixer iii. Mega shear 3) Containment a. Isolation i. Split Butterfly Valves ii. RTP iii. Flexible Isolator iv. Rigid Wall Isolator 4) Material Handling Equipment i. ii. iii. iv. v. Bowl Lifting and tilting Device IPC Lifting and Loading Device IPC and Bins Conveyors and Trolleys Jacking Trolleys and Raising Platforms

5) Process Equipment i. ii. iii. iv. v. vi. vii. Reactors Heat Exchanges Evaporators and Crystallizers Disperses Extractor Hydrogenator Condenser

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Chapter 2: Project Introduction

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2.1 Introduction

Companies need financial professionals who know to communicate not only what a company spent but also how it consumed that spending and where it provided value and alignment to strategy. The financial skills that are needed are those which allow us to focus on the future as well as the past, with a common thread of creating value. Ralph W Canter Bearing Point

The Objective of every business is to create value. Every organisation works for this objective but in its own unique method. Few Organisations focus on product innovation, few others focus on customer satisfaction. Whatever might be the approach organisations should timely review if they are spending right amount to create this value. The present project is one such attempt to review the financial health of the organisation under study. 2.2Problem definition Problem Are the expenses incurred in different activities are relevant and creating value To classify and estimate different expenses and compare their behaviour overtime and with competitors. Ranges from as small as individual job cost study to annual expenses trend. Relates costs incurred in all functional departments, especially material and production. Job Costing, ABC Costing, FSA (Horizontal, Vertical and Ratio), Working capital Management

Research Objective

Scope of study

Tools/Techniques used

2.3 Literature Bectochem Consultants & Engineers Pvt Ltd is one of the leading process equipment manufacturers. As mentioned in chapter 1, a series of activities are followed to produce jobs (capital goods) on order by the customers. In order to assess if the expenses are at par, following methodology is adopted. 1) Job Costing[1]: In this method, different expenses that occur in the production of a job are classified under following heads and the total cost of job is estimated. Thus derived cost is compared with the price quoted by traditional techniques at Bectochem. The difference in the costs will assess if the job is being produced at profit or loss and approximate margin. This method can be used on regular basis on random jobs to timely review if the pricing is appropriate with the actual expenses.

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Cost Head Material Cost Transport

Labour Factory Overheads Marketing Overhead

Details Under this head costs of material that is purchased and in stock is considered The transport, packing, octrai, tax door delivery costs during purchase of material, production of sub components and delivery of final product are considered The production staff expenses, In house contractor cost and vendor costs along with a portion of overheads are considered Expenses of different allied departments associated with production and a portion of indirect costs are considered Expenses of Marketing department and remaining portion of overheads are considered
Table 2.1: Job Costing Break Up

2) Activity Based Costing[1]: The Activity Based Costing Technique assigns the expenses occurred in producing a job to different activities involved in the production of a job. This allows the management to cross check the expenses of each activity and to take necessary action to control individual activity costs. 3) Financial Statement Trend analysis[2][3]: This analysis reviews the performance of sales, expenses, profits, capital structure and its application over a period of time. In the trend analysis financial reports of the company for the years 2010-2005 are studied by computing horizontal, vertical common formats and ratio analysis.

4) Financial Statement Cross Sectional Analysis[2][3]: This analysis reviews the performance of sales, expenses, profits, capital structure and its application with those of its peer companies. In the cross sectional analysis financial reports of the company and two of its peers for the years 2009-10, 2008-09 are studied by computing horizontal, vertical common formats and ratio analysis. 5) Working Capital Management[4]: It is an investigation into the effectiveness of working capital management of the organization with particular reference to its liquidity and solvency and impact on commercial operations of the organization. References: [1] : Management Accounting By Anthony A Atkinson [2] : Financial Accounting [3]: Financial Accounting for Non Specialists 2nd Edition by Catherine Gowthrope [4]: Working capital management in heavy engineering firms by Dr. D. Mukhopadhyay

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Chapter 3: Job Costing

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3.1 Overhead Break Up: The annual expenses for the year 2010-11 are considered and classified under the following heads. The detailed expense classification is mentioned in Appendix 1. All the expenses are mentioned as a percentage of the sales. The aggregate overhead break up is as follows.

cost head material factory labour marketing profit sales

Value (lakh Rs) 3,989 855 994 368 466 6,189

% 64.45 13.81 16.06 5.94 7.53 100.00

Table 3.1: Cost head Break up

3.2 Job Costing: Making use of the percentages above, different costs of individual jobs are estimated. Following is one such case explained in detail. Individual job costing of six other jobs is mentioned in Appendix 2. Product: Fluid Bed Dryer (FBD) Product No: 10651.01.01 Client: Kina Pharma The different costs involved in the production of this job are 1) Material cost : Cost of Stock and Purchase 2) Transport: Freight, Octrai, Tax, Packing, Door delivery charges during material procurement , production and delivery. 3) Labour : The production department, In house Contractor Charges, Vendor Charges, 40% of indirect labour and admin overheads 4) Factory Overhead: Electricity, different department expenses involved with production, factory expenses and 35% of admin and indirect labour overhead. 5) Marketing Expenses: Marketing Dept expenses and 25% of admin and Indirect Labour expenses.

3.2.1 Material Calculation: 24 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Direct Cost of material is available from costing sheet maintained by planning department. The cost sheet of the job will have ddescription of each individual component of job and its quantity, weight, price and supplier details. Components can be classified as steel and non steel and also stock and purchase items. A sample costing will have 50 entries for each component. The important details of the costing are as follows, P p p Q ty 1 1 P p p W t 0. 00 0. 00 Pp p T W t 0. 00 0. 00

Ind Sr No 101 .29 101 .23

Product Name Ball Valve TC End 1 SS 304 Bend ERW 1 OD 14swg 90 SS 304

MRN Date 18-042011 17-032011

MRN No. ANK/1112/438 ANK/1011/9557

Cost of Prod uct Party Name 2,29 Shakti Engineering 0 Equipment Co. SHREE FORGE 90 INDUSTRIES

Table 3.2: Costing sheet sample

The total Cost of the product thus calculated is, Purchase: Rs 3, 03, 979 Stock: Rs 2, 28, 462 3.2.2 Transport Cost: 3.2.2.1 Transport Purchase: Under this the details of all the suppliers (taken from costing sheet) and their locations are considered. A standard transport cost charges manual is considered as mentioned in Appendix 3. Using the charging standard the cost of procuring each component is estimated. The sum of all such costs gives the total cost of purchase transport. In this case, 382 Kgs of Steel items are purchased from Bafna Metal Corporation. So as per Manual, each kg of steel costs 1.3 Rs of freight, Door delivery charges of 700 Rs at Mumbai and 400 Rs at Ankleshwar and a CST of 2% on purchase. So the cost of transport is, Freight = 382*1.3 CST = 0.02* 72618 Door Delivery Charges = 1100 Total Transport: 3048.96 Rs Similarly cost of transport of components from each supplier is calculated and total transport cost of material purchase is determined. The cost of transport for purchase is: Rs 33,714 3.2.2.2 Transport Production: Some of the sub assemblies are outsourced for manufacture to vendors. So there is a transport cost incurred in the procurement of such subassemblies. The same approach adopted for purchase is used in the transport cost estimation. 25 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

The component details are mentioned in the costing sheet under the name work order (Appendix 3). In this case Panel Box 1050Ht X 1100W X 350Deep 16Swg MS is fabricated at Shivam Fabrications and procured on part load transport basis. For this costing is as follows, Door Delivery Charges: 1400 CST: 0.02*6468 = Rs 129 Total Cost: 1529 Rs 3.2.2.3 Transport Outward: The transport cost for delivery depends on the location of delivery and the size of the job. The data of delivery charges is estimated based on previous charging pattern. Besides a percentage component of 1.92% is added to account for packing, octrai and other expenses. Transport Outward: 1.92% sales + actual freight = Rs 33,622 Total Transport Cost: Rs 68,905 3.2.3: Labour Charges: 3.2.3.1 Production charges: This is taken as 1.07% of sales. As we are not aware of final selling price following formula can be used. This apportions for salary of supervisory production department and their expenses. 1.07% of sales = (material cost/0.6645) * (1.07/100) The same approach is followed where ever % apportionment has to be made. 3.2.3.2 In house Contractor Charges: (1) The bills made by each contractor are studied. As the contractor for a particular job is known, the cost he charged previously for a similar job is referred and the contract cost is estimated. (2) From Appendix 4 the total charges of contractors are matched to the man hour labour input. This gives the average per month charges of labour. This can be further calculated for a single man hour. Secondly the standard man hours required for a job are also recorded. Multiplying it by per hour average cost of labour also gives approximate contractor cost. For this case in house contractor is R R Industries and they charge Rs 54500 for this kind of job as per records.

3.2.3.3 Vendor Charges The Material Charge mentioned in costing sheet against components under work order are taken as cost of vendors. Care should be taken that these items are not included in material cost also. For this particular job the vendor is Shivam and the cost of fabrication is Rs 6468. 3.2.3.4 CRM charges CRM charges are calculated as 1.67% of sale value. This includes the salary, travelling accommodation and expenses of CRM employee apportioned appropriately. 26 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

1.67% of sale = material cost/0.6645 * 1.67/100 CRM charges for the Job : Rs 13, 796 3.2.3.5 Overhead 35% of indirect labour and admin expenses are accounted by this overhead charge. This is calculated as 3.35% of sale price. 3.35% of selling price = material cost/0.6645 * 3.35/100 Overhead charge for the Job: Rs 27,675 3.2.4 Factory Overhead The factory overhead accounts for per job expenses of all departments involved in production activity directly viz PMO, Planning, Purchase, design, store, Quality and factory expenses which consist of electricity, consumable, late delivery charges, factory expenses and 40% of admin and indirect labour charges. This is calculated as 8.03% of selling price. Factory Overhead of the Job: Rs66, 338 3.2.5 Marketing overhead The marketing overhead accounts for marketing department salary, travelling and lodging expenses, stationery, late delivery and promotional expense and 25% of admin and indirect labour charges. It is calculated as 5.94% of selling price. Marketing Overhead of the job: Rs 49, 072

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3.2.6 Consolidated cost and comparison with traditional costing Thus adding up all these values the cost of producing is determined. Following Table represents the job costing. Job No 10651.01.01 Cost Head material cost purchase stock Total Material Cost Transport purchase production distribution Total Transport Cost Labour Production In House Contractor Vendor CRM overhead Total Labour Cost Factory Overhead Marketing Overhead Cost of sale before profit
Table 3.3: Job Costing

Kina Pharma FBD Details Predefined % Value % of cost of sale

from cost sheet from cost sheet

3,03,979 2,28,462 5,32,441

36.71 27.59 64.30 4.07 0.18 4.07 8.32 1.07 6.58 0.78 1.67 3.34 13.44 8.01

purchase freight production freight 1.92%+ delivery freight

33,714 1,529 33,662 68,905

1.07% R R Ind Shivam 1.67% 3.35% 8.03%

8,840 54,500 6,468 13,796 27,675 1,11,279 66,338

5.94%

49,072

5.93

8,28,035

100.00

Job No 10651.01.01 Cost Head Material Labour Consumable overhead cost of sale profit selling price

Kina Pharma FBD Bectochem % Bectochem System 55% 532441 10% 96807 8% 77446 17% 164573 871267 10% 96807 968075
Table 3.4: Comparision with Bectochem Costing

Job Costing 532441 111279 184315 828035 92004 920039

% Costing 58 12 20 10

The difference between two costing methods is Rs 43, 232 28 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

3.3 Activity Based Costing Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities. 3.3.1 Approach Step 1: Identification of activities As per SOP, following activities come under processing of job 1) 2) 3) 4) 5) Kickoff: meeting to finalise job FAQs and timelines Planning: Detailed planning for material, technical checklist Design: GA and detailed drawing Purchase: Ordering, procuring of material and follow up with the suppliers Inspection: Inspection of purchased material for quality compliance and rejection of disqualified ones 6) Store: maintenance of procured material and Inventory 7) Production: fabrication, machining, fitting, polishing, electrical operations required for the job 8) Inspection: Testing the performance of job at different levels of production and documenting 9) Pre FAT/ FAT: Final internal and main testing for certification 10) Packing, dispatch, transport: packing of job, bills settlement, transfer of job, user manual etc 11) Maintenance: Installation, testing and maintenance of job at client location 12) Admin: Admin activity refers to the core activity of every department. For example the quality department does QA at stores and various stages of production, FAT and documentation. Besides this its core activity is to train the staff on quality standards, .aintain the measuring devices and develop documents on QA practises. These activities accounted as 20% of their annual effort are mentioned under admin activities. Similarly core activity efforts of each department are defined under admin activity head. 13) Marketing: Presales, VTOP, following up with clients, coordination with production and design teams, etc comes under marketing activity. Step 2: Contribution of each team for a given activity (% of effort) Each team will be responsible for a particular task; however they need not be necessarily limited to a single task. Each team will be allocating its time and resources into different activities. The % amount of effort of a team for different activities is tabulated. Step 3: Distributing departmental expenses among activities, on substituting the expenses in the activity cost table, we get cost of activities also Using the proportions mentioned in the above table, the expenses of each team are distributed over different activities according to the % effort. Thus expanses of each activity is determined and tabulated as follows.

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Dept wise annual expense % of Team Expense sales PMO 2679600 0.42 Planning 2237883 0.35 Design 4904691 0.77 Purchase 1780683 0.28 Store 1485380 0.23 Quality 5002776 0.79 Production 6637934 1.04 Vendor 55122439 8.65 Inhouse 2384012 0.37 Contract CRM 10360814 1.63 Admin 4738738 0.74 Accounts 3068475 0.48 Commercial 642541 0.10 Export 1611996 0.25 IT 252000 0.04 288000 spares 0.05 vendor 1104000 0.17 management Remuneration 18720000 2.94 Marketing 22053119 3.46 Total 145075081 22.77
Table 3.5 : Departmental costing

Activity Wise Annual Expense % of Activity expense sales Kick off Planning Design Purchase Store Procuction Indirect Production Direct FAT Indirect FAT Direct Dispatch Maintenance Marketing Admin Total 56,84,653 40,42,416 65,07,403 44,01,306 42,13,178 1,11,85,762 5,72,68,050 62,98,251 5,06,361 48,44,296 1,24,87,744 1,94,19,034 82,16,629 14,50,75,081
Table 3.6: Activity Cost

0.89 0.63 1.02 0.69 0.66 1.76 8.99 0.99 0.08 0.76 1.96 3.05 1.29 22.77

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Step 4: Determining Activity Cost Drivers Each activity for a given job will be measured in terms of a cost driver and the expense will be determined. Activity Kick off Planning Design Purchase Store Production FAT Dispatch Maintenance Indirect Activity Cost Driver Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales

Table 3.7: Cost Driver

Step 5: Calculating Activity Cost Driver Rate Following table represents the value of cost drivers, ie the expenses of activities per unit cost driver. Step 6: Activity Expense of Kina Pharma FBD
Activity Activity Expense 56,84,653 Kick off 40,42,416 Planning 65,07,403 Design 44,01,306 Purchase 42,13,178 Store 1,11,85,762 Production Indirect 5,72,68,050 Production Direct 62,98,251 FAT Indirect 5,06,361 FAT Direct 48,44,296 Dispatch 1,24,87,744 Maintenance Marketing Admin
Table 3.8: Activity cost appropriation

Cost Driver Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales Net Sales

Cost Driver expense 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08 6.19E+08

rate of activity expense per 100 rs cost driver expense 0.92 0.65 1.05 0.71 0.68 1.81 9.25 1.02 0.08 0.78 2.02 3.14 1.33

1,94,19,034 82,16,629

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Step 6: Calculating the Activity cost of individual job Using the cost driver rates, the activity expenses for the FBD are determined. Job No 10651.01.01 Cost head
Material Kick off Planning Design Purchase Store Production + FAT indirect Production+FAT Direct Dispatch Maintenance Marketing Admin Activity Cost transport overhead cost of sale before profit

Kina Pharma FBD Value 5,32,441

effective % 64.69 0.92 0.66 1.06 0.71 0.68 2.63 7.41 0.79 2.02 3.15 1.33 21.36 8.37 5.58 100.00

0.92 7,587 0.65 5,395 1.05 8,685 0.71 5,874 0.68 5,623 2.62 21,645 60,968 0.78 6,465 2.02 16,666 3.14 25,917 1.33 10,966 1,75,791 68,905 5.56 45,933 8,23,070
Table 9: Activity Based Job Costing

3.4 Learnings:

Average Overheads derived from job costing and annual ratio are
Cost Overhead Material Transport Labour Factory Marketing % from p&l 64.45 5.21 16.06 8.03 5.94
Table 3.10: Cost comparision

Average from 7 job costing 66.52 5.72 13.33 8.29 6.13

Out of activities production activity costs 39% of net sales. Out of seven cases in 5 cases labour cost is estimated more in job costing technique than traditional method.
Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

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The job costing done in this particular year jobs will be in most of the cases less than traditional costing. The reason being that, in job costing the material cost is derived as 64% as per P&L break up(=> selling price = material/0.64), but traditional costing maintains material at 55% (=> selling price = material/0.55) Job costing expenses may be sometimes at par with traditional estimation. Sometimes the will be more than the traditional estimates.

3.5 Recommendations As the behaviour of expenses is variable it is suggested to apply a detailed job costing technique on a regular basis on randomly selected jobs to review if the traditional costing is estimating the price with a considerable margin. As the job costing labour costing is more than traditional weightage in majority cases, the labour having taken by analysing the billing of each contractor implies that the share of labour expense has to be increased in traditional costing to 13 to 15% this includes CRM also. The lower bound of final price is estimated as 1.25% of material+labour cost in traditional method; however the overheads ranged from a minimum of 27% and maximum of 30%. It is suggested to maintain overhead estimate in this range. The activity based costing can be used to observe the expense pattern. Suppose overtime, the cost of individual department increases, then the corresponding activity cost shares also increases. A deeper study easily identifies the variations caused.

3.6 Limitations and Further Study The direct costing heads like labour and transport can change the cost estimate significantly. So a further detailed study to estimate labour cost on man hour basis for jobs of different capacities and a more accurate transport costing technique can be worked on to make the job costing more detailed and accurate.

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Chapter 4: Financial Statement Analysis

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4.1 Financial Statement Analysis


Financial statement analysis is defined as the process of identifying financial health of an organisation by establishing relationship between the items of the balance sheet and the P&L statement. Financial analysis determines a companys health and stability. The data gives an intuitive understanding of how the company conducts business. There are various techniques used in analysing Financial Statements as mentioned in literature. The approach in the analysis is as follows 1) Trend analysis a. Horizontal Analysis b. Vertical Analysis c. Ratio Analysis d. Observations

2) Competitor Analysis a. Horizontal Analysis b. Vertical Analysis c. Ratio Analysis d. Observations

3) Working Capital Management a. Ratio Analysis b. Cash conversion cycle c. Observations

4) Summary and Recommendations

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4.2 Trend analysis


In the trend analysis the P&L and balance sheet statements of past five years of Bectochem are considered as mentioned in Appendix 5. These statements are related by horizontal, vertical and ratio analysis and the trend of different constituent elements are studied and interpreted.

4.2.1 Horizontal Analysis


In the Horizontal Analysis, the statements of one particular year are maintained constant and the change in corresponding elements over time with the basic statements are derived and compared. In this case the values of balance sheet and P&L elements for the year 2005-06 are maintained as 100 each and the values of the elements of the subsequent years are taken as % of 2005-06 values. For example, sales in 2005-06 are Rs 3141.75 lakhs and that in 2006-07 are Rs 4683.41 lakhs. In horizontal analysis sales of 2005-06 are maintained as 100 and that of 2006-07 will be Sales 2006-07 = (actual sales 2006-07/actual sales 2005-06) * 100 Sales 2006-07 = 149.07 sales 2005-06 = 100 Similarly all the elements of P&L and balance sheet are calculated. This kind of calculation relates and presents the behaviour of each individual element over years. The resultant Horizontal Analysis is mentioned in Appendix 6, The observations are as follows,

Figure 4.1: P&L Trend

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Figure 4.2: Capital Structure Trend

Figure 4.3: Application of Funds

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Observations: P&L sheet sales was undry ing till 2007-08 but there was a gradual fall from 2007-08. There is not much difference in change in stock (opening stock-closing stock) however there was a sudden rise in 2009-10, the closing stock has increased to a great value The amount of material consumed remained constant over 4 years, but if the closing stock is considered in the amount of material handled, 2009-10 registered highest value in the stock handling The Fall in net profit is very high compared to the fall in sales or gross profit. This implies that the variation of sales expenses and gross profit are in sync but the variation of net profit is relatively high. The loan procured in the year 2009-10 is high above the trend which resulted in increased interest payment. The trend of interest is increasing year by year. There is a rise in profit till 2007-08 followed by a fall, this follows the sales trend. The fall in 2009-10 is due to increased personnel expense, interest and reduced sales also primarily of material cost

Balance Sheet

The equity contribution was constant over past three years. The reserves and surplus is also decreasing gradually. Since there is a need for capital, it is raised from loans as the reserves are decreasing. This is observed in the high growth of loan contribution. So the trend of capital structure is it is rising with additional loan capital as the equity is constant and surplus is decreasing Among the assets the gross block and investments were constant, where as the inventory has been increasing The increase in inventory can be attributed to increased volume of activity rather than safety stock increase as majority of the work is carried on with job order production, so material is procured only after order is made leaving little chance to safety stock The sundry debtors value has slightly decreased, however when observed in the trend it has fallen from a high value of 218% in 2006-07 to 91%, this is a good phenomenon as most of the sales are realised in cash, this trend has to be continued The cash balance has come down to very low, on the other hand undry creditors value has been increasing. This is not a healthy situation as there can be cash crunch regularly, poor performance or loosing of suppliers. Loans and advances given are maintained at a low % after a growing trend. This is indeed a goo phenomenon; however the amount of loan is relatively small.
Table 4.1: Horizontal analysis Observations

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4.2.2 Vertical Analysis


In the vertical analysis the total capital developed is taken as 100 for each year and the share of each constituent element is calculated for each year. Similarly the application of funds is also calculated as a % of the total amount. In P&L sales is taken as 100 and all the other elements are taken as a % of it for a given year. Similar computation is done for remaining years. The vertical analysis is reported in Appendix 7. In this case for the year 2005-06 capital structure and the common size sheet for vertical analysis are as follows Capital Structure element Share Capital Reserves & Surplus Total Share Holder Fund Total Loan Total Amount Actual 200 111.34 311.34 224.09 535.65
Table 4.2: Vertical analysis

Vertical 37.34 20.79 58.12 41.84 100

This gives the mix of capital, application of funds and performance year by year. The observations are as follows,

Figure 4.4: Expenses break up Trend

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Figure 4.5: Capital Structure Mix

Figure 4.6: Application of Funds Mix

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Observations: Element Observation The material purchased has been gradually increasing, the purchase was highest in 2009-10, this implies increased activity, and however the closing stock is also increasing, which shows proportional sales are not realised in the same year. Direct and personnel overheads were gradually increasing. This is obvious with increased activity. The admin costs were reduced in the year 2009-10 slightly. However this fall is relative to the sales, so value wise they are increasing Though the gross margin has been increasing, the net margin has decreased in 2009-10 because of increased loan and interest payment The interest component in the expenses is increasing at the expense of profit while the expenses are more or less constant. The trend which has been impressive from 2006-09 is disturbed in 2009-10 with loan share increasing and reserves share decreasing. This implies and increase in cost of capital The equity remaining constant, the share capital was increasing with added surplus each year and the loan capital was increasing as the share capital is not sufficient to handle the expenses. The year 2009-10 has an increased share of loan The gross block is more or less constant. But its share in assets is variable due to changes in other asset/liabilities. In the current assets, inventory and sundry debtors have major share As inventory control is not predictable due to job order production, the sundry debtors share is gradually decreasing indicating decrease in actual value of debtors which implies faster payments The proportion of cash maintained is very low. This might be risky as this leads to situations of cash crunch The proportion of sundry creditors has been decreasing; however it still forms the major chunk of current liabilities. This is not a good phenomena as this results in poor supplier performance On an aggregate the proportion of current liabilities has been decreasing where as current assets is increasing. However most of the current asset items are non cash item, which take time to be converted into cash.
Table 4.3: Vertical Analysis Observations

P&L

Balance Sheet

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4.2.3 Ratio Analysis Different ratios are applied among the elements of balance sheet and P&L statement of a particular year. These ratios give the performance, efficiency and risk coverage capability of that year. The variation of these ratios provides insights into the trend of efficiency performance and risk coverage capacity of firm. The ratios considered are, Overall Performance ROIC ROE Operating Management Net Margin Gross Profit Ratio Operating Ratio Efficiency in use of resources Asset Turnover Fixed Asset Turnover Current Asset Turnover Working Capital Turnover Sundry Debtors Turnover Inventory turnover Average Collection Period Average Payment Period Solvency & liquidity Interest Coverage Net Financial Leverage Current Ratio

NOPLAT/Invested Capital PAT/Net Worth

PBIT/Net Sales Net Sales-Cost of Goods Sold/Net Sales Operating Expenses/Net Sales

Net Sales/Invested Capital Net Sales/Net Fixed Asset Net Slaes/Current Asset Net Sales/Working Capital Net Sales/Sundry Debtors Net Sales/Inventory sundry debtors/avg net sales per day trade creditors/avg purchases per day

PBIT/Interest Debt/Net Worth Current Asset/Current Liability

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Ratio Analysis Output Ratio Overall Performance ROIC ROE Operating Management Net Margin Gross Profit Ratio Operating Ratio Efficiency in use of resources Asset Turnover Fixed Asset Turnover Current Asset Turnover Working Capital Turnover Sundry Debtors Turnover Inventory turnover Average Collection Period Average Payment Period Solvency & liquidity Interest Coverage Net Financial Leverage Current Ratio 2009-10 0.14 0.12 2008-09 0.21 0.2 2007-08 0.23 0.26 2006-07 0.15 0.25 2005-06 0.14 0.13

0.069 0.061 0.939

0.071 0.056 0.944

0.072 0.059 0.941

0.055 0.036 0.964

0.032 0.033 0.967

2.7 11.42 1.51 4.06 3.41 3.47 87.85 143.19

4.25 12.36 1.95 8.12 3.65 10.64 82.3 118.74

4.42 12.63 2.12 8.55 3.98 11.45 75.44 105.3

3.94 12.35 1.67 7.02 3.24 5.14 92.58 130.11

5.87 9.1 1.79 18.22 4.75 5.68 63.22 117.68

3.03 0.51 1.59

5.9 0.26 1.32

5.43 0.57 1.33

7 1.18 1.31

3.59 0.72 1.11

Table 4.4: Ratio Analysis Output

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Observations There was a rise till 2007-08 but a fall after that. The fall in 2008-09 is due to reduced sales and the fall in 2009-10 is due to reduced sales as well as increased investment This also follows a similar trend s ROIC, however the fall in 200910 is greater than that of ROIC this is due to reduction in numerator over a relatively small value Net margin has been almost same implying an almost equal expense head over years This is also a similar ration except for not considering few indirect costs, it has been increasing constantly implying the sales and expenses are following a similar trend of growth There is a slight fall in operating expenses which can be proportional to reduced sales in 2009-10 This also follows the pattern of ROIC and the reasoning is also the same The fixed asset turnover also follows same trend as asset turnover but the fall in ratio value is small, this implies investment in fixed assets is low. The extra investment procured is to address expenses rather than increasing capacity of fixed assets The current asset turnover follows the ROIC trend and the variation is also great, this implies the major investment is into current asset (inventory). So the fall in ratio is of a bigger magnitude.

ROIC

ROE Net Margin

Gross Profit Ratio Operating Ratio Asset Turnover

Fixed Asset Turnover

Current Asset Turnover

The working capital ratio has fallen in 2009-10 greatly because of Working Capital Turnover fall in sales and an increase in working capital I e inventory A reverse of this ratio gives the % of credit sales. It has been growing since past three years. In 2009 it is about 30%, This % has to be reduced as this delay in collection may also have Sundry Debtors Turnover driven for loan procurement to address expenses. There is a great fall in inventory turnover in 2009-10 from 10 to 3, this is due to reduced sales and increase in inventory. So measures have to be taken either to increase capacity or streamline sales with Inventory turnover capacity The average collection period has decreased from a high of 92 days in 2007-08 to 87 days in 2009-10. Though this fall is small, it has to Average Collection Period be further reduced to realise the cost at the earliest The average supplier payment period has reached at an all time high of 143 days. This is the result of increased activity debtors and inventory, money is not being allocated to suppliers in time A reverse of this ratio shows the % of interest paid from PBIT. This has increased to 33% which is pretty high. The debt portion is gradually increasing, and this also indirectly reduces the profit (interest payment) thus reducing the share capital and on the other hand debt is increased
Table 4.5: Ratio Analysis Observations

Average Payment Period Interest Coverage

Net Financial Leverage

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4.2.4

Trend Analysis Summary

Sales, expenses and gross profit follow same trend and same level of variation, but net profit variation will be high for a given change in sales. A small increase in sales can increase the net profit by a greater value and same is the case with fall in sales. A reverse trend is observed in interest payment trend. It is increasing with fall in sales. In the capital structure, reserves are gradually falling where as loan is increasing. The cost of reserves will be lesser than cost of loan. The increase in loan is not a favourable symptom. In the application of funds, the net current assets have increased while the change in fixed assets is negative and small. From this it is understood that the loan procured is to address the working capital management. From Vertical analysis it is understood that there is an increase in profit and interest component while the expense component is slightly reduced. In the recent year (2009-10) there is a fall in profit and rise in interest. This is good symptom and also not following the trend. The trend observed in the capital structure from 2006-09 is disturbed in 2009-10. In the former the reserves were increasing while equity and loan were decreasing, in 2009-10 the loan has increased at the expense of reserves. This is bringing back to the structure that is observed in 2005-06. In the application part the net current assets are increasing while the investments and fixed assets are decreasing. Two critical observations from the ratio analysis are 1) The debtors value is 30% of sales and creditors are 47% of material purchased 2) The interest paid is 33% of PBIT in 2009-10
These two symptoms indicate the risk resulted due to credit sale policy and the capital structure policy.

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4.3 Competitor Analysis


This analysis follows the same approach as in trend analysis. The only difference being the data considered. The financial reports of two peer companies LT and praj for the year 2008-09 and 200910 are considered and following set of analysis tools are applied.

1) Horizontal Analysis 2) Vertical Analysis 3) Ratio Analysis


4.3.1 Horizontal Analysis In the horizontal Analysis the financial reports of Bectochem and two of its peers for the year 2008-09 and 2009-10 are considered and the relative change in each element of the financial statements is recorded. These trend values are compared. For example the sales of the three companies for two years are as follows, LT 2009-10 36,870.19 LT 2008-09 33,856.54 Praj 2009-10 602.28 Praj 2008-09 771.88 Bectochem 2009-10 4239.84 Bectochem 2008-09 4957.82

In horizontal analysis the sales change in 2 years is considered and compared, LT 8.9 Praj -21.97 Bectochem -14.48

Thus the trend of all the elements is calculated and tabulated in Appendix 8. The observations are,

Asset Liability Head Share Holders Funds

Details

LT 2009-10 & 2008-09

Praj 2009-10 & 2008-09

becto 2009-10 & 2008-09

Owners fund Equity share capital Share application money Reserves & surplus Total Share Holders Funds Debt Capital Secured 46 | P a g e

2.82

0.71

0.00

47.29 47.07 -13.30

21.79 20.04 -100.00

23.26 13.16 171.21

Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

loans Unsecured loans Total Debt Total Capital Application of Funds Fixed Assets Gross block Less : revaluation reserve Less : ccumulat e depreciatio n Net block Capital work-inprogress Total Fixed Asset Investments Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Appliction Income/Expense Head

7.18 3.73 32.11

-100.00 16.69

69.74 116.88 34.87

29.79

8.85

5.89

-5.29

21.55 32.84

38.67 3.00

23.19 -7.44

-17.61 22.68 65.85 11.91

248.62 25.93 29.39 -24.59

-7.44

10.52

18.35 -9.28 -100.00 32.11 LT 2009-10 & 2008-09

-24.22 -26.32

-8.59 70.90 -32.62 34.52 becto 2009-10 & 2008-09

Details

16.69 Praj 2009-10 & 2008-09

sales Income Expenses Material consumed Manufactur ing expenses Personnel expenses Selling expenses Adminstrat ive 47 | P a g e

8.90

-21.97

-14.48

8.74

-10.47

-21.41

7.02 19.07 -1.88 -10.87

-26.45 -3.76 -41.21 -37.80

9.98 1.92

-21.48

Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

expenses Expenses capitalised Cost of sales Gross Profit Indirect Income Adjusted PBDIT Other Expenses Financial expenses Depreciatio n Other write offs Adjusted PBT Tax Expenses Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Observations

48.08 6.97 22.73 30.15 23.87

-16.06 -41.49 134.53 -25.37

-15.03 -5.14 -25.46 -12.22

29.27 34.69 46.27 21.85 34.08 16.39 55.95 113.99 -1.49

-15.38 28.64

60.67 13.48

-27.73 -70.44 -19.33 -73.00

-33.12 -40.15 -28.73

-24.28

-28.73

Table 4.6: Growth rate of peer companies

Note

P&L sheet

The companies being compared are of different sizes, LT being the largest Bectochem being second largest and Praj being smallest. LT sales are 60 times greater than Praj and Bectochem is 7 times greater. So the % changes doesnt exactly imply there is a equivalent value change in all three companies There is a growth of 9% in LT sales and a fall of 21% sales in Praj, Bectochem experienced 14% decrease in sales. So the overall industry was experiencing a slowdown in this year The material consumption is also proportional to sales, Praj & Bectochem experienced a decrease in consumption where as LT has increased its consumption Though there is a small increase in Bectochem manufacturing expenses, the overall cost of sales was decreased. The same is the case with Praj and LT has an increase in expenses. However the % fall in expenses of Praj is not as big as in Bectochem. That is why it experienced more fall in profit unlike Bectochem There is a positive growth in indirect income of two competitors where as there is a decrease in Bectochem indirect income. Overall, LT has realised greater growth in profit compared to its sales growth and Praj experienced greater fall is profit than sales. Bectochem had a lesser fall in gross profit than sales which implies sales had a direct impact on direct expenses. In case of praj the fall in expenses is not at pace with fall in sales which implies there is operational inefficiency in the company The interest payment of LT and Bectochem has increased but that of Praj has decreased

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On an overall, LT has experienced growth in sales supported by operational efficiency, by drawing extra investment from loan. It has experienced a good profit. Praj had a great fall in sales, but the fall in expenses is not at par, these further reduced profits however the fall in interest payment helped reduce the difference in gross margin and net margin. In Bectochem, the fall in sales and fall in expenses considerable controlled the fall in gross margin however increase in interest reduced net margin further Balance Sheet The increase in surplus is great in LT compared to Praj and Bectochem which are at par. This implies that a greater portion of profit is transferred to reinvestment at LT There is a small increase in the debt capital of LT. The total debt of Praj is cleared off but Bectochem has borrowed a lot off amount Major investment of LT is into fixed assets and other investments. Infact Praj also invested a major portion in fixed assets. Praj will be expanding its capacity to address the demand. Bectochem did not have significant investment in fixed assets There is a 10 % current asset increase in Bectochem and LT indicating increase in activity. But there is a fall in current assets of Praj as it is in expansion and has reduced its activity greatly. There is a fall in current liabilities of Bectochem and Praj but that of LT has increased by 18% and its current assets are not sufficient to cover liabilities. This leads to mismanagement of working capital The capital developed and applied has grown by 34% in Bectochem and 16% at Praj. As praj is in expansion, the growth might be traded at the cost of expansion
Table 4.7: Horizontal analysis observations

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4.3.2 Vertical Analysis In the vertical Analysis, the same approach adopted in trend analysis is formed. The data considered is the financial reports of the three companies for the year 2008-09 and 2009-10.

Figure 4.7: Indirect Expense Comparison

Figure 4.8: direct Expenses

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Figure 4.9: Capital Structure

Figure 4.10: Funds Application

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Observations

P&L

The expense break up is quite different in LT and Bectochem. In Bectochem Majority of the expense is in material but in LT it is in manufacturing. In Praj the material cost is almost at par with Bectochem. So this implies in long run the focus should be in reducing material cost and to own manufacturing setup rather than outsourcing The personnel cost and admin expenses are also high in Bectochem compared to the peers. Especially LT managed to maintain admin and personnel cost at a low margin. This can be due to heavy investment into manufacturing and material that has reduced the share of personnel and admin. The total cost of sales is maintained below 85% in both the companies but it is as high as 94% in Bectochem The interest payment is found high in LT and Bectochem, but very low in Praj. As mentioned earlier LT borrowed for asset expansion, Bectochem for expenses and Praj has cleared its loan The gross profit is 16% in LT 21% in Praj. This implies the margin should not be less than 15% however in Bectochem it is 8%. The gap in gross and net profit is around 4 to 8 % majorly consumed by interest payment. However in Bectochems case , the operational expenses share reduce the profit share to a very low %. Among the capital structure of three companies, LT and Praj has similar structure, maintaining minimum equity share and majority of reserves to invest. In Bectochem, reserves contribute only 44% of the capital structure and equity and debt form a considerable portion. The cot of debt and equity is more than reserve. The Fixed Asset Level is at par with industry level but the investment share is less and also constant unlike other companies. Secondly the current asset and liability value is having unlikely high share. This implies majority of investment is used in managing working capital than other factors
Table 4.8: Vertical Analysis Observations

Balance Sheet

4.3.3 Ratio Analysis

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Following Performance, efficiency and risk coverage ratios are computed and compared. Ratio Overall Performance ROIC ROE Operating Management Net Margin Gross Profit Ratio Operating Ratio Efficiency in use of resources Asset Turnover Fixed Asset Turnover Current Asset Turnover Working Capital Turnover Solvency & liquidity Interest Coverage Net Financial Leverage Current Ratio Observation The ROIC value of LT is 22%, that of Praj is 34% and Bectochem is 24%. This implies the PBIT is at par with industry margins RoE is very less compared to ROIC as PAT is considered the ROE is very low in LT as its main source of investment is reserves, it is not the same in Bectochem hence there was relatively high margin the net margin is less compared to industry standards, Major expenses are going into operational expenses As discussed in vertical analysis the gross margin is less compared to industry standards, it should maintain either good margin or go for a greater production This is a complementary ratio of gross profit ratio. So this also suggests the operational expenses are greater compared to industry level The Asset Turnover is high compared to its peers. This is a good phenomenon as the investment is resulting in good turnover LT Avg Praj Avg Becto Avg 0.224 0.121 0.326 0.343 0.240 0.159

0.144 0.260 0.740

0.236 0.204 0.796

0.070 0.058 0.942

1.626 6.181 1.401 6.703

1.412 4.248 1.482 8.376

3.476 11.891 1.731 6.092

5.812 0.450 1.269

450.512 0.014 1.215

4.460 0.386 1.454

Table 4.9: Ratio Analysis

ROIC

ROE Net Margin

Gross Profit Ratio Operating Ratio Asset Turnover Fixed Asset Turnover

The Fixed asset turnover is way above its peers. This is due to absence of expansion in fixed assets and an increase in sales Current asset turnover is almost at par with its peers. But is declining over 2 years time. Additional info to be taken from trend Current Asset Turnover analysis Working Capital Turnover Working Capital Turnover is at par with LT. Interest Coverage 53 | P a g e Interest coverage is lowest among the three, this implies the increasing interest payments that are reducing profit margin Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Net Financial Leverage

Current Ratio

Debt is almost 40% of equity. LT is also maintaining the same range. However the investment of debt is different in both the cases The current assets seem to be slightly above its peers. Though it is suggestible to have current assets more than liabilities, fairly high value is also not desired
Table 4.10: Ratio Analysis Observations

4.3.4 Competitor Analysis Summary

There is an overall fall in income in the companies during 2008-10, the growth in expenses has been doubled in the peer companies this was not the case in Bectochem. The sales and expenses of peers have doubled within five years, but Bectochems growth is not at par. The equity capital remained constant whereas those of peers were increasing. Both the competitors are investing in fixed assets and the share allotted for investments is also increasing. This is constant in Bectochem. The current assets and liabilities have increased significantly in the peer companies compared to Bectochem. This is due to increased activity. From vertical Analysis, it is understood that the major share in expenses is material for Bectochem and Praj whereas it is manufacturing in LT. So as company grows material cost has to be reduced. Also personnel cost is relatively high at Bectochem. The financial expenses are also growing as compared to peer companies. The capital structure of peer companies consists of mainly reserves as major investment, this is not the case with Bectochem, debt and equity also have equal contribution compared to reserves. From ratio analysis it can be inferred that o Net margin is very low compared to peers o Peers were investing in assets o The activity growth in peers is high

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4.4 Working Capital Management


It is an investigation into the effectiveness of working capital management of an organization with particular reference to its short term liquidity and solvency and impact on commercial operations of the organization. The primary reason for this investigation is the observations and interpretations derived from FSA

There is a sudden rise in activity in 2009-10 indicated by high level of inventory, material handled Though Current assets are capable of covering current liabilities, loan is procured to address operational expenses The average collection period, average payment period and inventory turnover period are very high
This kind of situation leads to a phenomenon called Overtrading. Overtrading It is a situation of under capitalisation. It is a term that is used to refer to a situation where an organisation aggressively increases its sales or business activities, especially where trading is made on credit sales without sufficient funds (capital) to support such increasing trading activities. This is where an organisation has increasing sales volume, usually with lots of customers credit sales. But the prolonged credit sales period (credit limit) implies that company may not have immediate or sufficient funds from its credit sales and may run the risk of not having sufficient funds to meet its operational expenses and possibly be faced with liquidation. This is often a big problem for small medium enterprise (SME) who focus on increasing sales and business at the inception of business, such that if they are caught up with poor (and inadequate) current account management policies, they run the risk of overtrading. The overtrading scenario can be identified by observing the behaviour of few ratios. Element sales inventory cost of sales gross profit net profit receivables payables debt 2010-11 43.82618 2009-10 -14.4818 162.6079 -15.0146 -12.3884 -29.0517 -8.714 8.967789 240.9465 28.85203 109.8146 178.9866 86.5561 26.48 2008-09 -3.46228 3.894192 -3.07547 -2.00933 -7.4392 5.310797 1.478856 -12.6166 9.395662 102.8761 148.4195 28.18699 39.38 2007-08 9.655785 -50.8253 6.951335 35.29744 45.70089 -10.6431 -20.6797 151.6391 8.73038 94.30586 131.6289 26.19114 122.17 2006-07 49.0701 64.92177 48.6939 103.9373 237.0891 118.3209 30.45688 292.6179 19.46808 115.729 162.639 58.40424 79.51

43.19389

debtors Vol avg collection period avg payment period inventory conversion period cash&bank balance 55 | P a g e

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current ratio quick ratio cash ratio

1.591755 0.719134 0.015017

1.316518 0.725504 0.020415

1.329083 0.774659 0.066945

1.312371 0.714137 0.037237

Table 4.11: Over Trading Symptoms

From the above data it is evident that

1) 2) 3) 4) 5) 6) 7) 8)

9)

The change in net profit is high for a given change in sales or gross profit. The sales have risen in 2010-11 Debt is increased indicating that funds are procured to meet expenses Inventory percentage has also increased considerably Receivables and payables experienced less change, ie the average accounts payable/receivable has been maintained at a constant level Debtors volume is 30% of sales Cash in hand/bank has been decreased The average collection period is 109 days and average payment period is 178 days and inventory conversion period is 86 days in 2009. These values are very high compared to the previous values Though current ratio is decent, quick ratio and cash ratio are not impressive

Effect of Overtrading
more orders require more investment and late payment to suppliers

Mission to aggressive sales

high inventory and high amount of debtors result in late payments

high level of orders high initial investment

procurement of loan to address as cash in hand is less

Figure 4.11: Overtrading Cycle

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Cash Conversion Cycle Cash Conversion Cycle (CCC) measures how long a firm will be deprived of cash if it increases its investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk entailed by growth. CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete unit of operations. = Inventory conversion period + Receivables conversion period Payables conversion period CCC trend The trend of CCC and its constituent elements is as follows
200.00 178.99 150.00 162.64 147.10 131.63 115.73 100.00 79.02 50.00 54.60 60.56 13.65 0.00 2009-10 -13.48 -50.00 inventory cycle accounts payable period accounts receivable cycle cash conversion cycle 2008--09 27.84 29.85 23.05 94.31 102.88 109.81 92.23 148.42

-9.48 2007-08

2006-07 -15.70

2005-06

Figure 4.12: CCC trend

From the trend it is evident that there is a sudden rise in CCC time to 23 days. This implies that the organisation may realise accounts receivables 23 days after it clears all the payments. This was negative earlier, which means, on an average the company was receiving money from debtors before making payments. But the present scenario has changed. Though the current assets are capable of addressing the operational expenses, it is the unavailability of funds at the right time that had costed in procuring loan. This doesnt imply that firms should not apply for loans, but an efficient working capital management would have substituted the burden of loan and thus the expense of interest resulting in a greater profit and a consistent capital structure.

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4.5 Recommendations from FSA

The high share of debtors and creditors has to be reduced (debtors 30% of sales, creditors 47% of purchases). The presence of high amount of debtors and creditors may create liquidity issues. Hence it is suggested to control the values of each. The high value of inventory observed, is majorly work in progress the company carries job order production. The rise in inventory conversion period from 29 to 92 is a matter of concern. Because to procure this inventory money has to be invested, and the return on this inventory will be realised after a period which is equal to inventory conversion period + average collection period. Thus leads to liquidity problems. The profit margin (Gross Profit = 8% and net profit 5%) is significantly below the margin maintained by the peers. The ideal profit margin to be maintained is 15%. Besides these Personnel expenses are high compared to peers, the relative share of this expense has to be controlled. The loan component affects directly the profit; this has to be controlled by proper working capital management. The capital structure of peers has reserves as a major investing component. Also cost of reserves will be compared to cost of loan or equity. The activity pace should be enhanced which hints at capacity expansion as done by peers

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