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ABSTRACT ............................................................................... 2 INTRODUCTION ...................................................................... 3 WORKING CAPITAL REQUIREMENT OF THE COMPANY ............. 4 CASH FLOW STATEMENT ...........................................................
CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 2005-200 ..19ERROR! BOOKMARK NOT DEFINED. CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 2006-2007 .................................................. 20 CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 2007-2008 .................................................. 21 CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 20082009.22ERROR! BOOKMARK NOT DEFINED. CASH FLOW STATEMENT FOR THE FINANCIAL YEAR 2009-2010 .................................................. 23

AN OVERVIEW OF VARIOUS RATIOS ...................................... 27 BANK FINANCE FOR WORKING CAPITAL ................................ 45

VALUATION OF THE COMPANY .............................................. 46 ANALYSIS OF THE VALUATION ............................................. 54 OBSERVATIONS .................................................................... 56 CONCLUSION ........................................................................ 58 LIMITATIONS ......................................................................... 59 RECOMMENDATIONS ............................................................ 60 REFERENCES ...........................................................................

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The project is on Working capital and its impact on the organizations financial position. The idea is to find out how the working capital management has an impact on the financial position of the company. Working Capital keeps the wheels of business running or continue its operations. Working capital has various concepts one is gross concept and another is the net concept which implies current assets minus current liabilities. Net concept is more useful while judging the liquidity of the firm. At first, the working capital requirement of the company is found out. Secondly, the cash flow statement has been considered for the past 5 years in order to find out the changes in operating, investing and financing activities of the company. A thorough analysis has helped us to comment upon the financial position of the company. Various ratios have been calculated in order to comment on the financial position of the company. The ratio analysis has formed the major part of our findings in order to find out how various components of the working capital affect the financial position of the company. The liquidity ratio is calculated at first to find out the liquidity position of the business. After which the solvency position of the business is tested in order to have a look at the financial solvency of the business is tested along with the gearing ratio to find out whether the firm is a levered firm or not. The use of efficiency ratio has been used in order to find out the efficiency with which sales are converted into cash studying previous years financial statements on an ongoing basis will be very essential for understanding the various nitty gritties of working capital management. Then a study on the bank statements of the company and actual utilization of bank overdraft balances would help us to formulate the actual working capital of the company. The Maximum Permissible Bank Finance would help us to understand the actual validity and the actual worthiness of the project. Reports generated from companies Oracle database would also come useful while data collection and data analysis. Lastly, an overall view of thebalance sheet for the past few years would ultimately help us to formulate the final analysis.
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What is Working Capital management ? Gross working capital and net working capital Preference of working capital concepts Classification of working capital Determinants Relation between liquidity and profitability Background of the company

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What is Working Capital Management ?

Working Capital Management in simple terms can be as the daily cash requirement that the Company requires to run its day to day activities of the Company. Any business entity cannot survive without having an adequate working capital as the daily operations of the business are financed by the working capital. It deals with making daily purchases and making payments in time in order to have a proper synchronization between the time lag of making and receiving payments. In other words it can be defined as the excess of current assets over current liabilities. Assets are defined as probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities are defined as: probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. Current in accounting terms does not mean imminent. It refers to the next accounting cycle, or next business year. That is usually assumed to be one year for most companies. In other words, current assets are those that can reasonably be expected to be realized in cash, or either sold, or consumed, in the accounting cycle. Current liabilities are those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. Current Assets:- 1) CASH IN HAND AND CASH AT BANK






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Gross Working Capital and Net Working Capital

Gross working capital refers to the firms investment In current assets. Net working capital refers to the difference between current assets and current liabilities.Net working capital may be positive or negative.

Preference of Working Capital concepts

The gross working capital concept is financial or going concern concept whereas net working capital concept is an accounting concept.Both concepts have their own merits.The gross concept is sometimes preferred for the following reasons: It enables the enterprise to provide the correct amount of working capital at correct time. Every management is more interested in total current assets with which it has to operate then the source from where it is made available. It take into consideration of the fact every increase in the funds would increase its working capital. This concept is useful in determining the rate of return on investments in working capital. The net wc concept is also important for the following concept: It is qualitative concept,which indicates the firms ability to meet to its operating expenses and short term liabilities.
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It indicates the margin of protection available to the short term creditors. It is the indicator of financial soundness of enterprise. It suggests the need of financing a part of working capital requirement out of permanent sources of funds. While the permanent current assets are, individually, short-lived assets, as a category they are always there (hence, permanent) and will always need to be financed. Thus, the permanent current assets should also be financed long-term, just like the fixed assets. While it is possible to finance some of our permanent needs using short-term debt, it is risky to do so. (Such financing is described as an aggressive working capital financing policy being associated with risky.) The risk of financing permanent needs with short-term financing is twofold: first, short-term interest rates fluctuate much more than long-term interest rates. Rolling over short-term debt year after year will subject to greater fluctuation in financing costs as a result. Probably a bigger risk is the inability to roll over the short-term debt every year. Banks generally do not want companies to utilize them as a source of permanent financing. For this reason, many banks will require that a companys line of credit be completely paid off for at least one month each year. This is to prevent the company from using the bank for permanent financing. Of course, banks are essentially matching their assets and liabilities as well. The difference is that a banks assets are its loans which it matches to its sources of financing while firms match their financing to their assets. Since a banks financing source is predominantly short-term deposits, it wants its loan portfolio to be predominantly short-term as well. Life insurance companies and pension funds, on the other hand, have liabilities that are many years in the future. They would prefer to make longer term loans so that there isnt the need to reinvest the money every year.

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The working capital in a firm generally arises out of four basic factors like sales volume, technological changes, seasonal, cyclical changes and policies of the firm. The strength of the firm is dependent on the working capital but this working capital is itself dependent on the level of sales volume of the firm. The firm requires current assets to support and maintain operational or functional activities. By current assets we mean the assets which can be converted readily into cash say within a year such as receivables, inventories and liquid cash. If the level of sales is stable and towards growth the level of cash, receivables and stock will also be on the high.However, with the increase in the working capital as a result of high sales volume this pattern is referred to as working capital management because in order to produce or manufacture additionally or increase the overall sales target, more amount of working capital is required by the firm which is possible only when the management of working capital is prudent and effective whereas in case of declining sales reduction in the allocation of working capital will be prudent way to manage every business operation. Technological changes too have an impact on the management of working capital because as the production process changes or the line of business changes, all this an effect on the working capital requirements which in turn gets affected. Apart from this the policies of the firm too affects the pattern of working capital management. Seasonal and cyclical fluctuations, recession too adversely affects the sales pattern or function ability of the firm.

Relation between Liquidity and profitability

Working capital management requires examination of maturity composition or liquidity of firms assets as it involves fundamental decisions on the firms liquidity and maturity composition of its debts therefore a tradeoff between profitability and risk influences these decisions. In a nut shell the management of working capital proceeds with the aim of achieving three goals: 1. Adequate liquidity

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2. Minimization of risks 3. Contributing to maximizing firm's value Therefore, from the above we have dealt how important working capital is for any business enterprise. Now coming to its impact on the financial position of the company would be our field of study. It has been seen that in most of the construction industry the level of working capital required is generally high. This is due to the fact that receivables, stocks and other materials need to be converted in order to make payments and to have a sound liquidity position. As we all know if the liquidity position of the company is not satisfactory then it would be suffering from acute liquidity crunch. Thereby, our research work would be finding out the liquidity position of Mackintosh Burn. In more specific form it would be finding out the type of working capital the firm uses directly or indirectly effects the financial position of the company. The firm can use an aggressive or a conservative working capital policy. Aggressive asset management results in capital being minimized in current assets versus long-term investments. This has the expectation of higher profitability but greater liquidity risk. As an alternative, a more conservative policy places a greater proportion of capital in liquid assets, but at the sacrifice of some profitability. To measure the degree of aggressiveness the current asset to total asset ratio is used, with a lower ratio meaning a relatively more aggressive policy. Aggressive financing policies utilize higher levels of normally lower cost short-term debt and less long-term capital. Although lowering capital costs, this increases the risk of a short-term liquidity problem. A more Conservative policy uses higher cost capital but postpones the principal repayment of debt, or avoids it entirely by using equity. The total current liability to total asset ratio is used to measure the degree of aggressive financing policy, with a high ratio being relatively more aggressive. If a company has excess working capital it has a high liquidity exposure and less profitability. On the other hand if a company has too less working capital it has less liquidity and high profitability. Thereby, we have to strike a balance and maintain an optimum level of working capital to have a better liquidity and profitability position of the company. There is a general perception that higher PAT (profit after tax) indicates a better financial position or a company having a strong
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fundamental background with a sound financial position. However, it has been seen observed that in majority of the companies having a higher amount of PAT/ Cash Profit does not have enough cash flow from operation. As a result the working capital management inefficient, due to which the company generates an excess working capital. Companies which are listed the adverse impact can be directly identified by the movement in the stock price of the company. The companies which are not listed have an impact on the profitability of the promoters. Sound working capital management requires an efficient and effective inventory management.Working capital management is a significant part in the Financial Management due to the fact that it plays a pivotal role in keeping the wheels of business enterprise running. Working Capital management is concerned with short term financial decisions of the business.

Background of the company

Mackintosh Burn Limited, is a specialized company of Civil Constructors, Structural Fabricators & Erectors was floated way back in 1834 by Mr. James Mackintosh then patronized by the government and other big business houses ,to take up the task of developing Calcutta as city of India. Originally set up as partnership firm, it was incorporated private limited company in1913 and subsequently became a deemed public limited company in 1961. When the company was on the verge of closure due to passing of an winding up order by the honble high court at Calcutta, the govt. of West Bengal took control over the management of the company in 1971 by acquiring 25% of its paid up share capital which was increased to 49% in 1995.with the abolition of provisions for deemed public company, the company was converted into a full fledged public company in2002. It built a number of architectural wonders and civil engineering masterpieces. They are the landmarks. In the domain of building construction, the company has to its credit numerous prestigious buildings and monumental structures. It has the
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unique distinction of constructing Dakineshwar Temple, Nakhoda Mosque, St. Pauls Cathedral, Jain Temple in Kolkata, Loreto School (Kolkata), Bishops College (Kolkata), Kolkata Govt. Engineering College Complex at Salt Lake City, and College of Leather Technology Complex at Salt Lake City. Mackintosh Burn Limited has led the foundation in the construction of various clubs around Kolkata like theRoyal Calcutta Turf Club, Royal Calcutta Golf Club, Calcutta Swimming Club and Bengal Club. The company has spread its activities beyond the boundary of the country and has constructed a bridge near Thimpu in Bhutan under a joint venture project. The company has taken up under a joint venture a prestigious ADB project of broadening and strengthening SH-1 from Bongoan to Chakdah and Kapa to Barajaguli.In the current economic scenario the company is now constructing prestigious underground Car Parking project at BBD Bag (Kolkata). The workshop of the company supports its constructions activities with various structural fabrication work and joinery carpentry work of very high standard. A team of dedicated and competent Engineers, Technicians and workers of the Company are always working hard to keep themselves abreast of the latest developments and trends in design and construction technique to meet the emerging challenges in the construction field. In order to ensure fullest satisfaction of the clients never compromising with quality is the company motto. They take pride in Companys past and are determined the to keep its flag fly high.

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Working Capital requirement of the company

Raw material consumption,Sundry creditors,Cash & bank balance,Fixed deposit,Mobilisation advance,sundry debtors,insurance of stocks Cash flow statement and analysis of cash flow statement Analysis of various ratios Bank finance for working capital

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Over the last 5 years, the turnover of the company has almost doubled from Rs.158 crores to Rs.282 crores. In order to finance the increased level of operation, additional working capital is required. It is, therefore proposed to enhance the existing cash credit limit from Rs.500 lakhs to Rs.1000 lakh. In assessing working capital requirement the following special features of the operation of a construction company like ours need consideration. 1. consumption Unlike manufacturing units, a construction may have wide fluctuation in opening and closing work-in-progress since a civil construction work construction work takes 4/5 years to complete. Further in construction business, some jobs are very often off loaded to outside agencies who are engaged who are engaged to execute the work including supply of materials. Therefore the extent of material consumption depends on the volume of work executed by the company itself. The analysis of raw materials consumption in relation to work executed for last 2 years and estimates for 2010-2011 and 2011-2012 is tabulated as below: 2008-09 Actual Net Sales Add: Closing W-I-P 2009-10 Actual 2010-11 2011-12 Raw material

Estimated Projected 31925 37780 69705 35665

25663.45 20572.16 29805 26873.48 34468.6 35665

52536.93 55040.76 65470 Less: Opening W-I-P 26656.74 26873.48 34468.6

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Value of work executed

25880.19 28167.28 31001.4

34040 18790.08

Less: Value of work 16080.31 12077.66 17112.77 executed by outside agencies

Value of work executed 9799.88 by the company Raw materials consumed 3495.23 by the company % of Raw Materials to 35.67% Value of work executed by the company

16089.62 13888.63








It may be mentioned here that during past one year the prices of steel and cement has increased by 50% to 80% as a result material cost component has increased significantly. 2. Sundry creditors Outside agencies are engaged to execute some jobs including supply of materials. A considerable amount remains due to such agencies as well as other suppliers of materials. Raw Materials Work executed by other agencies Creditors Supply Creditors - Sub-contractor Average credit period supply Average credit period sub-contractor 3495.23 16080.31 1102.59 8394.64 8118.91 8594.37 9398.56

12077.66 17112.77 18790.08 2883.69 1768.62 1431 7662.9 7180 7450

3.79months 4.26mnth 2.47mnth 1.83mnth 6.26mnths 7.61mnth 5.03mnth 4.76mnth

In case of steel and cement, payment is to be made either in advance or immediately against delivery. Bulk of the creditors (Supply)
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represents suppliers of materials like sand, stone chips and bricks. As material cost component for steel and cement has increased considerably. Creditors in relation to the total cost of materials have decreased to great extent. 3. Cash & Bank balance vis--vis Work-in-Progress As construction of a work continues for 4 to 5 years, the client releases payment in installment on progressive work basis. Measurement and certification of such progressive work is done usually at an interval of 3 to 4 months. If annual value of work executed is Rs.300 crores, outstanding work-in-progress will be about Rs.80 crores. Since, the Government clients make usually in the month of September and March every year, there is large amount of cheques in- hand and bank balances at the yearend reducing the net work-in-progress value on the balance sheet date. Thus, immediately before the balance sheet date, work-in-progress stands at a higher value as under:

20062007 Work-in-Progress Cash & Bank Balances


20082009 3617.9 4558.4

20092010 4122.05 4445.45

1140.58 4491.54 4409.45 3616.4

Effective Work-in-Progress 5550.03 8107.94 8176.3 8567.5 Effective Work-in- 2.6 3.4 3.2 3.0 Progress Months Months Months Months

It may be mentioned that current accounts are mentioned that Current Accounts are maintained at different places near project sites for smooth operation of work at sites. At present there are 19 such Accounts at places like Bolpur, Siliguri, Agartala, Jalpaiguri, Midnapur, Malda, Durgapur, Berhampur etc. Some balances are maintained at their branches to meet the requirement at sites.
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4.FIXED DEPOSITS In respect of non-funded limit certain sum is required to be kept as Margin Money such margin money is placed with the bank in the form of Fixed Deposits aggregating to Rs. 770 lakhs was kept as margin money.Besides, now-a-days in cases of tenders for projects financed by financial institutions like World Bank, Asian Development Bank etc., liquidity certificates up to 20% value of the project are required to be furnished at the time of submission of bid. Therefore fixed deposits of Rs.10 crores to Rs.15 crores free from any encumbrances are to be always maintained to earn eligibility for participation in such tenders. Presently there are short term deposits aggregating to Rs.563 lakhs are over and above the margin money. 5.MOBILISATION ADVANCE After awarding the work order, in some cases the clients provide mobilization advance to enable the contractor to build the site establishment, labour hutment and mobilize equipments and labour force to the work force. Such mobilizations advance is recovered gradually from the Running Account Bill over the entire period of Contract. Accordingly, the amount of such advance which is not due to be recovered within a period of 12 months should be considered as deferred liabilities. The positions of mobilization of advance during last three years are furnished below:

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Opening Balance

Amt recd. Amt. During recovered year during year

Closing balance

2007-08 2008-09 2009-10

1027.76 536.54 1201.96

296.36 1133.14 1389.01

787.58 467.72 652.23

536.54 1201.96 1938.74

6.SUNDRY DEBTORS During the period of execution of work the clients make payment progressively against the work done. After the work is completed and handed over to the clients the net amount due against the work after adjusting all advances received is shown as book debt. As in practice in construction work of the Govt. the final bill is prepared by the clients in their prescribed format after thorough checking of measurement and reconciliation of materials consumption. Normally preparation of such final bill takes more than a year. Sometimes it takes even four/five years to complete the bill. After completion of final bill only the client releases further payment against the outstanding dues for the completed work. As such, book debt up to three years old from the Govt. Department is considered normal and good and should be taken into account as security for working capital limit. Age wise outstanding of book debts for last three years are furnished as below:

7.INSURANCE OF STOCKS The project sites are scattered. Construction materials viz. steel, sand, stones chips, bricks are stacked in open yards, while cement is stored in covered godowns. These materials are absolutely free from any fire hazards. As the project sites are located at scheduled places, armed
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guards are engaged to look after the safety and security of materials and men. So chances of theft of materials are also remote. Hence, construction materials are not insured to cover fire and theft risk. Moreover, as there are over hundred on-going work sites at any time, stock of materials of the company. However, stock of materials lying at the companys workshop is fully insured.

Cash Flow Statement

Cash flow statement provides information about the cash receipts and payments of an enterprise for a given period of time. It provides important information that supplements the profit and loss account and balance sheet. The statement of cash flows is required to be reported by the Accounting Standards-3(Revised) issued by the Institute of Chartered Accountants of India in March 1997 which replaces the Changes in Financial Position as per AS-3 The information about the cash flows of a firm is useful in providing users or financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize these cash flows. The economic decisions that are taken by users are require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation. The statement deals with provision of information about the historical changes in cash equivalents of an enterprise by means of a cashflow statement which classifies cash flows during the period as: Cash Flows from Operating Activities: which are the principal revenue generating activities of the enterprise such as purchase and sale of goods which ultimately determine the net profit or loss of the organization.

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Cash Flows from Investing Activities: an investment activity basically includes acquisition and disposal of long term assets and other investments not included in cash equivalents. Cash Flows from Financing Activities: financing activities are the activities that result in changes in the size and composition of the owners capital (including preference share capital in case of a Company) and borrowings of the company. In order to have a proper view and for analysis purpose I have drawn the Cash Flow Statements for the past five years i.e. I have considered the financial years 2005-06, 2006-07, 2007-08, 2008-09 and 2009-10. The cash flow would give us a proper idea and would help us to figure out the actual operating, investing and financing activities of the company.Before going deep into the analysis part of the cash flow statement an introduction to a few terms would help us in better understanding of the subject. Cash comprises of cash on hand and demand deposit with bank Cash equivalents are short term highly liquid investments that are readily convertible. Cashflows are the inflows and outflows of cash and cash equivalents which basically comprises of movement of cash into and outside the organization.

The following are the Cashflow Statements of the company prepared under the norms laid down under Accounting Standards-3(Revised) issued by the Institute of Chartered Accountants of India.

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Cash Flow Statement For the year ended 31-03-2006

2005-06 2004-05

A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit before tax 773.46 608.37 Adjustment for: Depreciation (after adjusting set off against Revaluation Reserve)68.28 53.13 Interest 53.46 43.85 Prior period adjustment 4.12 1.66 Interest Income -74.37 -80.46 Provision for doubtful advances 53.93 Profit on sale of Fixed Assets -2.28 Operating Profit before working capital changes 878.88 624.27 Changes in : Sundry Debtors -137.66 -2167 Inventories -1053.69 1707.99 Other loans and advances -352.31 494.69 Trade and other payables 1320.69 2298.1 Cash generated from operations 655.91 1968.67 Income Tax paid -285.13 -227.5 Net Cash Flow from operating activities 370.78 1741.17 B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets -342.31 -33.46 Sale of Fixed Assets 8.84 Interst Received 74.37 80.46 Net Cash Flow from investing activities -267.94 55.84 C. CASH FLOW FROM FINANCING ACTIVITIES Proceeds from long term borrowings 146.7 Repayment of long term borrowing -41.78 -43.01 Increase / (Decrease) in short term borrowing -21.97 32.98 Interset paid -41.27 -31.69 Dividend paid -3.12 -3.12 Tax on distributed profits -0.4 Net Cash flow financing activities 38.16 -44.84 Net changes in cash and cash equivalents( A + B + C ) 141 1752.17 Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 4894.14 3141.97 5035.14 4894.14

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Cash Flow Statement For the year ended 31-03-2007

2006-07 2005-06

A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit before tax 1157.3 Adjustment for: Depriciation (after adjusting set off againest Revaluation Reserve) 86.64 Interest 39.69 Prior period adjustment 0.67 Interest Income -63.79 Provision for doubtful advances Profit on sale of Fixed Assets Operating Profit before working capital changes 1220.5 Changes in : Sundry Debtors 1225.4 Inventories -204.7 Other loans and advances -378.63 Trade and other payables 590.96 Cash generated from operations 2453.6 Income Tax paid -419.14 Net Cash Flow from operating activities 2034.5 B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets -33.08 Interest accrued on Investment Interst Received 63.87 Net Cash Flow from investing activities 30.79 C. CASH FLOW FROM FINANCING ACTIVITIES Proceeds from long term borrowings Repayment of long term borrowing -78.48 Increase / (Decrease) in short term borrowing -5.8 Interset paid -27.43 Dividend paid -3.12 Tax on distributed profits -0.4 Redemption of Investments 0.06 Net Cash flow financing activities -115.2 Net changes in cash and cash equivalents( A + B + C ) 1950.1 Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 5035.1 6985.2

773.46 68.28 53.46 4.12 -74.37 53.93 878.88 -137.66 -1053.7 -352.31 1320.7 655.91 -285.13 370.78 -342.31 74.37 -267.9 146.7 41.78 21.97 -21.97 -3.12 -0.4 38.16 141 4894.1 5035.1

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Cash Flow Statement For the year ended 31-03-2008

2007-08 2006-07

A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit before tax 1482.76 1157.32 Adjustment for: Depreciation (after adjusting set off against Revaluation Reserve) 85.56 86.64 Interest 54.99 39.69 Prior period adjustment -0.67 0.67 Interest Income -61.14 -63.79 Operating Profit before working capital changes 1561.5 1220.53 Changes in : Sundry Debtors -685.2 1225.43 Inventories 165.93 -204.7 Other loans and advances -1691.7 -378.63 Trade and other payables 826.23 590.96 Cash generated from operations 176.73 2453.59 Income Tax paid -492.89 -419.14 Fringe Benefit Tax Paid -0.79 Net Cash Flow from operating activities -316.86 2034.45 B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets -228 -33.08 Interst Received 61.14 63.87 Net Cash Flow from investing activities -166.86 30.79 C. CASH FLOW FROM FINANCING ACTIVITIES Repayment of long term borrowing -40.13 -78.48 Increase / (Decrease) in short term borrowing 27.07 -5.8 Interset paid -40.17 -27.43 Dividend paid -3.12 -3.12 Tax on distributed profits -0.44 -0.4 Redemption of Investments 0.06 Net Cash flow financing activities -56.79 -115.18 Net changes in cash and cash equivalents( A + B + C ) -540.51 1950.06 Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 6985.2 6444.69 5035.14 6985.2

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Cash Flow Statement For the year ended 31-03-2009 A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit before tax Adjustment for: Depreciation (after adjusting set off against Revaluation Interest Prior period adjustment Interest Income Operating Profit before working capital changes Changes in : Sundry Debtors Inventories Excess provision for income tax Other loans and advances Trade and other payables Cash generated from operations Income Tax paid Fringe Benefit Tax Paid Net Cash Flow from operating activities B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets Interst Received Net Cash Flow from investing activities C. CASH FLOW FROM FINANCING ACTIVITIES Repayment of long term borrowing Increase / (Decrease) in short term borrowing Interset paid Dividend paid Tax on distributed profits Net cash flow from financing activities Net changes in cash and cash equivalents( A + B + C ) Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year

2008-09 2007-08

1374.9 1482.76 139.95 39.68 59.58 -104.72 1509.4 85.56 54.99 -0.67 -61.14 1561.5

1217 -685.2 -3673.7 165.93 -378.63 -1691.7 -1607.6 826.23 2396.9 176.73 -157.95 -492.89 -485.46 -0.79 -4.21 647.62 -316.9 -1016.7 104.72 -912 -228 61.14 -166.9 -40.13 27.07 -40.17 -3.12 -0.44

-29.38 267.54 -28.01 -3.12 -0.4 206.59 -56.79 -1353.1 -540.51 6444.7 6985.2 5091.6 6444.69

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Cash Flow Statement For the year ended 31-03-2010

2009-10 2008-09

A. CASH FLOW FROM OPERATING ACTIVITIES Net Profit before tax 1722.65 Adjustment for: Depreciation (after adjusting set off against Revaluation Reserve) 10.97 2 Interest 47.74 Prior period adjustment 5.9 Interest Income -112.82 Operating Profit before working capital changes 1874.44 Changes in : Sundry Debtors -1063.14 Inventories -945.95 Excess provision for income tax 317.71 Other loans and advances -2059.62 Trade and other payables 3191.27 Cash generated from operations 1314.71 Income Tax paid -605.17 Fringe Benefit Tax Paid -4.91 Net Cash Flow from operating activities 704.63 B. CASH FLOW FROM INVESTING ACTIVITIES Purchase of Fixed Assets -259.43 Interst Received 112.81 Net Cash Flow from investing activities -146.62 C. CASH FLOW FROM FINANCING ACTIVITIES Repayment of long term borrowing -2.21 Increase / (Decrease) in short term borrowing 500.79 Interset paid -34.39 Dividend paid -3.12 Tax on distributed profits -0.53 Net cash flow from financing activities 460.54 Net changes in cash and cash equivalents( A + B + C ) 1018.55 Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year 5091.64 6110.19

1374.91 139.95 39.68 59.58 -104.72 1509.4 1217 -3673.65 -378.63 -1607.57 2396.87 -157.95 -485.46 -4.21 647.62 -1016.74 104.72 -912.02 -29.38 267.54 -28.01 -3.12 -0.4 206.59 -1353.05 6444.69 5091.64

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Analysis of the cash flow statement

Fig(1) From the illustration, note that the net cash flow from operating activities in the year 2004-05 has been excessively high compared to the other years. If we go through the cash Flow satement for the relevant year it can be seen that a chunk of debtors has been added which means a decrease in debtors which in turn means that the collection is more than sales. So to reconcile profit with actual cash collection, the profit is being enhanced by the decrease in debtors as profit is based on sales. In the years 2006-07, and 2007-08 the cash dispositions remain more or less at parity with not much difference. Important to note in the Cash Flow Statement that in the year 200607 Debtors of amount 1217 has been added and adjusted which means there has been a decrease in debtors. On the other hand in the year 2007-08 Debtors of amount 1063.14 has been deducted which shows that there has been an increase in Debtors which has led to the changes in the requirement of working capital. Increase in Debtors implies that cash collection from parties is less than sales as shown in the profit and loss account. So profit has to be matched by the amount of cash actually collected. Increase in inventory is likewise deducted in the year 2007-08 which implies that purchase of materilas is more than cost of goods sold and hence the outflow of cash is more than the cost charged to profit and loss account and the working capital requirement deepens. Deduction in Other Loans and advances for adjustment of working capital change has been more from the year 2006-07 to 2007-08 which indicates that cash payment for the amount of loans and advances is more than the amount of expenses charged. By making payment for the loans and advances the working capital
Working capital Management 24 of 62

gap widens.The other factors which has led to some small changes in the operating margin of the company is mainly due to the increase in depriciation and interst payment obligation of the company. Both depriciation and interst payment has taken a steep rise in tune with the increase in sale as because the company had to purchase various machineries to increase sales and also avail funds for expansion of business. Over all the operating position of the business has been quite healthy. The company can improve itself by keeping aa check on the operating expenses of the company and discarding old machineries to continue operations in a better performance of the company. Changes in investing activities Fig(2) In analyzing changes in the investment activities of the company the negative figure implies purchase of assets by the company which is a capital outflow for the company. The changes in the investment of the company mainly arise due to the sale & purchase of fixed assets of the company, changes in the interest income of the company due to the changes in the investment pattern of the company and other changes in the investment activities.In the year 2006-07 the company had discarded few of its assets and purchased new equipments for business purpose which has led to a negative figure in the graph. In the following year though the company had purchased a few equipments the figure remained positive due to greater inflow from the investment made by the company. Due to massive increase in sales over the years the company had to invest every year a significant amount in the fixed assets of the company. The figure increased by leaps and bounds in the financial year 2006-07 which was nearly a five folded increase from the previous year. Purchase of fixed assets had cooled down in the succeeding year 2007-08.There has been a slow decrease in the interest earning from investments due to the reduction of balances kept with the bank. Thereby, the interest from the bank has reduced a lot from the financial year 2006-07 to 2007-08. In the
Working capital Management 25 of 62

year 2008-09 and 2009-10 again the company has maintained a greater balance than the previous year leading to greater income from investments. Changes in financial activities

Changes in the financing position of the business mainly happen due to the changes in capital structure of the company. It mainly changes due to the firmsborrowing or repayment of capital. It may be from issuing of new shares for raising capital or from borrowing money both short & long term. Dividend paid and all other intersest payment obligation from the financial forefront of the business would appear in this section of the cash flow statement. If we go carefully by the cash flow statement we can figure out that the company had raised some money through Long Term borrowings in the year 2006-07 which has led to a positive balance even after paying heavy interest charges for its earlier borrowings. The following year the company has paid a substantial part of its loan and thereby the interest burden has also slashed down by nearly 50%. Thereby, leading to a negative figure in the graph. If we observe carefully the companys short term borrowings has climbed up significantly during the financial year 2006-07 and 2007-08 which has led to the increase in the interest burden of the company. Over the years the company has paid dividend at a fixed rate of interest.

Working capital Management 26 of 62



2006-2007 Rs. In Lac CURRENT RATIO (Current Assets/Curr ent Liabilities) ACID TEST RATIO (Quick Assets/Quic k Liabilities ) SUPER QUICK RATIO(Cash +Bank+Mar ketable Securities)/ Quick Liabilities) 13262.65/ 11035.37 1.201831

2007-2008 2008-2009 Rs. In Lac Rs. In Lac 14933.14/ 11861.6 1.258948 17644.32/1 4258.36 1.237

2009-2010 Rs. In Lac 22731.58/ 17451.63 1.302

10948.87/ 11035.7

12646.3/1 1861.6

15410.51/1 4258.36

11575.18/ 17451.63

0.992 6985.2/11 035.37 .632

1.06 6444.69/ 11861.6 .54

.883 5091.64/14 258.5 .357

.8118 6110.19/1 7451.6 .350

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Fig(4) Liquidity refers to the ability of the firm to meet its obligations in the short run, usually one year. Liquidity ratios are based on the relationship between current assets (sources for meeting short term obligations) and current liabilities. The important liquidity ratios are current ratio, acid test ratio and cash ratio. The current Ratio measures the ability of the firm to meet its current liabilities-current assets get converted into cash during the operating cycle of the firm and provide the funds needed to pay current liabilities. Apparently greater the current ratio greater is the short term solvency. However in interpreting the current ratio the composition of current assets must not be overlooked. A firm with a high proportion of current assets in the form of cash and debtors is more liquid than one with a high proportion of current assets in the form of inventories even though both the firms have the same current ratio. In 2007-08 inventories occupied 27.46 % of the total current assets whereas in the year 2004-05 it was 13.5 %. Hence it should take care of this situation. But the business of Mackintosh Burn Ltd has been

Working capital Management 28 of 62

growing over the years. To serve on a larger scale and to a greater extent its stock pile has increased over the years. Acid test ratio is a fairly stringent measure of liquidity. It is based on those current assets which are highly liquid-inventories are excluded from the numerator of this ratio because these are deemed to be the least liquid component of current assets. Generally an acid test ratio of 1:1 is considered satisfactory. From the above chart it is visible that the acid test ratio is hovering around 1. The situation was very satisfactory in the financial years 2004-05 and 2005-06. After that we see that the ratio has increased. This is attributable to the fact that inventories have increased quite a lot in the years 2006-07 and 200708. Cash ratio is the most stringent measure of liquidity. Indeed one can argue its overtly stringent. Cash ratio is seen to be steadily falling over the years. Mackintosh Burn has got quite a lot of prominence in Eastern India and hence it can exercise considerable influence on its suppliers and delay its payment. Mackintosh Burn can also borrow credits at a short notice.

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Fig(5) SOLVENCY RATIO: 2006-2007 Rs. In Lac DEBT608.87/20 EQUITY 39.70 RATIO (Long term Debt/Shar .30 eholders Fund) TOTAL 13910.7/6 ASSETS TO 08.87 DEBT RATIO (Total 22.85 Assets/Lo ng Term Debt) PROPRIET 2039.7/15 ARY RATIO 714.9 (Sharehold ers 0.14662 Fund/Total Assets) INTEREST 1197.01/3 COVERAGE 9.69 RATIO(Pro fit before 30.16 int.& tax/Int Charges)

2007-2008 Rs. In Lac 583.56/30 32.18

2008-2009 Rs. In Lac 565.86/39 23.11

2009-2010 Rs. In Lac 577/5360. 76




15714.9/5 83.56

19279.91/ 565.81

24433.77/ 577




3032.18/1 5714.9 0.19295

3923.11/1 9279.91 .203

5360.76/2 4433.77 .219

1537.75/5 4.99 27.96

1474.17/3 9.68 37.15

1776.29/4 7.74 37.15

The Long term financial stability of the firm may be considered as dependent upon the ability to meet all the liabilities, including those
Working capital Management 30 of 62

not currently payable. The ratios which are important in measuring the financial leverage of the company have been calculated above. Solvency ratio which is also known as the leverage ratio helps us in knowing whether the firm is a levered or an unlevered firm. A firm is known as a levered firm when it has got some debt component exposure in its capital structure. A firm, is considered an unlevered firm if it does not have a debt component in its capital structure. The debt-equity ratio indicates the relationship between loan funds and net worth of the company, which is known as gearing. Higher debt-equity ratio are permitted in highly capital intensive industry like petrochemicals, power, fertilizers etc. the higher the gearing, the more volatile the return on shareholders. If this ratio is high it results in disproportionate profit sharing with the equity shareholders. The capital structure should have an optimum level of gearing neither too high nor too low is desired by the company as because the interest burden of debt can be a threat to the company if the sales does not improve where as a low level would increase the cost of capital of the firm. Out here the debt-equity ratio is showing a declining trend over the years from 0.30 in 2003-04 to 0.11 in 2007-08 which is considered to be a positive sign implying an increase in cash accrual and debt repayment which has already been seen in the cash flow statement.

Fig(6) Total Assets to long term debt mainly signifies the proportion of long term funds deployed in fixed assets. A fixed asset represents the gross fixed assets depreciation. The higher the ratio the safer are the funds available in case of liquidation. It also represents the proportion

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of long term funds that is invested in working capital. Over the years starting from the financial year 2003-04 the proportion which was 22.85 has shown an increase of around 17% in the following year. From the year 2005-06 to the current year207-08 it has increased nearly 20% on year on year basis.

Fig(7) Proprietary ratio basically hallmarks the relationship between share holders net worth and total assets. A high level of proprietary ratio indicates a strong and healthy financial position of the company. The higher the ratio the better it is. The proprietary ratio had increased by nearly 35% from the year 2004-05. However, the increase in the year 2006-07 has been moderate at a rate of 5% only. The trend seems to continue in the year 2007-08 also at a steady rate of 5% only.

Fig(8) Interest coverage ratio shows how many times the interest charges are covered by funds that are available for payment of interest. A very high ratio indicates that the firm is conservative in using debt and a very low ratio indicates excessive use of debt by the company. The construction industry gives a safe rating to the company if it maintains
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an interest coverage ratio of 7 times, a ratio of 3 times is desirable and if the ratio is only 2 times then it is rated as reasonable by the financial institutions. After, calculating the interest coverage ratio it is evident that the company has got a very good and sound financial strength. Though there has a decline of 10% from the year 2004-05 to 2005-06 the financial viability of the company cannot be questioned because during that phase the company had borrowed money increasing its debt obligations. In the following repaying few of its

debt the figure has stabilized indicating the financial soundness of the company and presenting the solvency of business in front of the public as well as other institutions who have lend money to the company.

Fig(9) Debt service coverage ratio is the key indicator to the lender to assess the extent of ability of the borrower to service the loan in regard to timely payment of interest and repayment of loan installment. It indicates whether the company is earning sufficient profit in order to service not only the interest but also the installments due on the principal. The industry average of 2 is considered to be the benchmark to represent this ratio. It implies the more higher the ratio the better it is for the company.

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ACTIVITY/EFFICIENCY/TURNOVER RATIO: 2006-2007 2007-2008 2008-2009 Rs. In Lac Rs. In Lac Rs. In Lac STOCK 22851/16 25880.2/1 28167.28/3 TURN 87.7 707.1 460.95 OVER RATIO (Cost of 13.539856 15.1604 8.138 Goods sold/Avg. Stock) Debtors 22851/29 25880.2/2 28167.28/2 turnover 62.2 692.07 426.17 ratio(Annu al Credit Sales/Aver 7.7143561 9.61349 11.09 age Receivable s) Creditors 22851/20 23141.6/9 24848.72/9 Turnover 649 022.95 775.23 Ratio(Ann ual Credit Purchases 2.4467441 2.56475 2.542 /Av Creditors) Fixed 22851/64 25880.2/7 28167.28/3 Assets 8.05 81.76 385.76 Turnover Ratio(Cost 35.261708 33.105 8.3 of goods sold/Fixed Assets) Capital 22851/25 25880.2/3 28167.28/4 turnover 46.75 366.32 488.97 ratio(Sales /Avg. 8.97 7.69 6.27 Capital Empld.)
Working capital Management 34 of 62

2009-2010 Rs. In Lac 31327.41/5 770.75


31327.41/2 349.24


27645.87/1 1158.79


31327.41/5 279.95 5.93

31327.41/6 015 5.21

Activity or Efficiency Ratios are generally required to be calculated in order to figure out the effectiveness of the funds employed by the company. The main purpose of this ratio is to find out the comparison between the levels of sales and investment in various accounts inventories, debtors, fixed assets and other management ratios which are used to measure the speed with which sales are converted into cash. A considerable amount of companys capital may be tied up in the financing of raw materials, work-in-progress and finished goods. It is important to ensure that the level of stock is kept as low as possible, consistent with the need to fulfill customers orders in time. The higher the stock turnover ratio the better it is for the company. It simply measures how many times the companys inventory can be sold over the years. In case of our company the stock-turnover ratio had increased marginally by 15% in the year 2005-06 from the previous year. However, it has dropped down nearly 50% in the succeeding year i.e. 2006-07 and continues to have a downward trend in the current financial year of 2007-08. The main reason for this downturn theoretically could be low levels of sales or piling up of stock. In case of Mackintosh Burn the ratio has become low due to inventory Fig(10) growing at a massive rate. The inventory holding has grown up by more than 17% resulting in lower stock-turnover

The debtors-turnover ratio measures whether the amount tied up in the debtors is reasonable and whether the company has been efficient in converting debtors into cash. The higher the ratio the better it is for the firm as cash is recovered from the debtors which ultimately improve the liquidity position of the business. The companys debtors turnover ratio is increasing constantly at an average of 20% yearly.
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This means that initially a debtor who used to pay in a time lag of 47 days is now paying it in 28 days. Thereby, we can say that the management has outlined out an excellent credit policy which has encouraged the debtors to pay off their debts.

Fig(11) Creditors turnover ratio is basically an indicator of the average time taken to pay the creditors for the goods and services supplied by them to the firm. A companys policy should always be to minimize the creditors turnover ratio as much as possible. However, the interest of creditors should always be kept in mind otherwise it could hamper the goodwill of the business. Mackintosh Burn being a fully government owned enterprise and being into business for the past 175 years maintains a more or less stable payment period of 130 days towards its creditors. The gestation period seems to be quite high as the Government releases payments twice a year in March and September. Fixed Assets turnover ratio is analyzed with the main category of assets. This is a difficult set of ratios to interpret as asset values are based on historic cost. An increase in the fixed asset figure may result from the replacement of an asset at an increased price or the purchase
Working capital Management 36 of 62

of an additional asset. The fixed assets turnover ratio has shown a decreasing trend due to the fact that in the year 2006-07 and 2007-08 the company has made a huge capital investment in the fixed assets for greater production purpose. Capital turnover ratio is ascertained by dividing sales by average capital employed. The ratio indicates the efficiency in utilization of capital employed in generating revenues. Though the sales has increased a lot from the year 2004-05 to 2005-06 as well as from 2006-07 to 2007-08 the amount of borrowing has through secured and unsecured loan has also increased resulting in a lower capital turnover Fig(12) PROFITABILITY RATIO: 2006-2007 Rs. In Lac Gross (1284/22 Profit 851)*100 Ratio(G ross 5.62% Profit/ Sales)* 100 Net (1995.1/2 Profit 2851)*10 Ratio(N et 8.73% Profit/ Sales)* 100 Return (731.5/20 on 39.7)*100 Shareh olders 35.87% Equity( Profit after
Working capital Management 37 of 62

2007-2008 Rs. In Lac (1622.6/25 880.2)*100 6.27%

2008-2009 Rs. In Lac (1614.12/28 167.28)*100 5.73%

2009-2010 Rs. In Lac (1987.27/31 327.41)*100 6.34%

(2992.7/25 (3886.61/28 (5269.96/31 880.2)*100 167.28)*100 327.41)*100 11.56% 13.8% 16.82%

(1001.1/30 (897.61/392 (1127.60/53 32.18)*100 3.11)*100 60.76)*100 33.01% 22.8% 21.03%

tax/Ne tWorth) Fig(13) The purpose of study and analysis of the profitability ratios are to help assessing the adequacy of profits earned by the company and also to discover whether the profitability is increasing or decreasing. The profitability of the firm is the net result of a large number of policies and decisions. The profitability ratios show the combine effects of liquidity, solvency and debt management on operating results of the company. Profitability ratio are measured with reference to sales, capital employed, total assets employed, shareholders funds etc. Gross Profit ratio is the ratio which measures the magnitude of gross profit to total net sales. In accounting terms gross profit is generally arrived at by deducting all direct expenses in selling the product. Therefore, this ratio gives us the idea about the actual operations of the business. On an average the company is earning a return of around 6% from its operations. Since, the company is just hovering around the 6% mark steps should be taken to increase sales and cut down costs.


Working capital Management 38 of 62

Net Profit ratio has been designed to focus attention on the net profit margin arising from business operations before interest and tax is deducted. The ratio reflects the net profit margin on the total sales after deducting all the expenses but before deducting interest, taxes and other non-operating expenses of the business. From the above calculation it is quite evident the net profit margin of the firm has increased from 8.73% to 11.56% which is continued in the succeeding years also from 11.56% to 13.8% climbing up to 16.82% proving the sound financial position of the company. Return on shareholders fund ratio expresses the net profit in terms of the equity holders funds. This ratio is an important yardstick of performance for equity shareholders since it indicates the return on funds employed by them. However, the measure is based on the historical net-worth and will be high for old plants and low for new plants. The factor which motivates shareholders to invest in the company is the expectation for adequate rate of return on their funds and periodically, they want to assess the rate of return earned in order to decide whether to continue with their investment. Over the past few years the net worth of the company has gone up significantly thereby resulting in negative trend in the business. Though, profit after tax has increased by 33% from the year 2004-05 to 2005-06 the return on shareholders fund has gone down due to the massive increase in the net worth of the company. In the year 2006-07 profit has fallen significantly and net worth has also gone up resulting in a figure of 22% return only compared to 33% in the preceding year. In the year 2007-08 though profit has scored a high point the net worth has out beaten the score by the massive increase of nearly 50%.

Working capital Management 39 of 62


Earnings Per share(Profi t after tax/No. of Equity Shares) Dividend Per share(Total Dividend/N o. of Equity Shares) Dividend Payout Ratio (Div. per Share/Earn ings Per Share)

2006-2007 Rs. In Lac 731.55/890 0.8219663

2007-2008 Rs. In Lac 1001.1/890 1.12483

2008-2009 2009-2010 Rs. In Lac Rs. In Lac 838.03/890 1121.7/890 .94160 1.260

3.12/890 .023

3.12/890 .023

3.12/890 .023

3.12/890 .023

.023/.82196 .023/1.126 0.0042649 0.00312

.023/94160 .023/1.260 .02442 .01825

These Investors Ratios are related to the firms stock price to its earnings and book values per share. These ratios give management an indication of what investors think of the companys past performance and future prospects. If firms profitability, solvency and turnover ratios are good, then the market based ratios will be high and its share price is also expected to be high. The objective of finding out the Earnings Per Share of the company is to find maximize wealth. In practice, the performance is better judged
Working capital Management 40 of 62

by the in terms of its earnings per share. EPS is one of the most important measures of economic performance of a corporate entity. Since, our company is an unlisted company market price of the shares is not known. However, from the above figure it has been observed that the company is maintaining an EPS close to 1 which is a sign of better capital productivity of the firm.

Fig(15) Dividend per share reflects the percentage yield that an investor receives on his investment at the current market prices of its shares. This measure is useful for investors who are interested in yield per share rather than capital appreciation. Since, our company is an unlisted entity and the dividend rate has also remained same at 10%p.a. and neither there has been any issue of fresh equity shares due to which has led to a stagnant figure of 0.023. Dividend payout ratio is the dividend per share divided by the earnings per share. Dividend payout indicates the extent of the net profits distributed to the shareholders as dividend. A high payout indicates a liberal distribution policy and low payout reflects conservative distribution policy.


Working capital Management 41 of 62

2006-2007 Rs. In Lac ROI (1197/254 (Operati 6.75)*100 ng Income 47% /Capital Employ ed)* 100

2007-2008 Rs. In Lac 1537.75/33 66.3)*100 45.68%

2008-2009 Rs. In Lac (1474.17/50 21.35)*100 29.3%

2009-2010 Rs. In Lac (1776.29/69 82.14)*100 25.4%

The Return on Investment is a tool that has been devised in order to calculate the return that the company is fetching from its operations. It is basically found out to understand the rate of return from the market by employing its funds. It is a very useful tool in case of listed companies.


BANK FINANCE FOR WORKING CAP ITAL TANDON NORMS The tandon study group, to frame guidelines for follow-up of Bank Credit submitted an interim report in November, 1975. The RBI accepted the recommendations and directed commercial banks to implement them with immediate effect. The important sections of the final report of the tendon Committee are: Norms for current assets relating to 15 industries Lending norms and style of credit with suggestions for a multitiered interest structure
Working capital Management 42 of 62

Norms for follow-up and control, and Other related recommendations The alternative methods of lending have been suggested by the study group. The RBI, however, accepted the first and second methods of lending only. Each method progressively raises the requirement of net working capital of the borrower. CHORE NORMS The Reserve Bank constituted a working Group, called the Chore committee, to review the system of cash credit by banks in all its aspects. The major decisions taken by the Reserve Bank on the recommendations made by the Working Group were communicated to banks for implementation on December, 1980. Decisions were on the following terms: Lending System (cash credit/loans/bills) Enhancement of borrowers contribution Separate limits for credit requirements Ad-hoc (temporary limits) Quarterly Statements Encouragement of bill finance Drawee bill system Public sector undertaking dues

MARATHE COMMITTEEE In 1982, the Reserve Bank of India appointed a committee under the Chairmanship of Marathe to review the working of the Credit Authorization Scheme (CAS). The principal recommendation of the Marathe Committee was to provide incentives to the borrowers to comply with all the requirements of the CAS and to improve the quality of credit appraisal in the banks.

CHAKRAVARTY COMMITTEE A high powered committee under the chairmanship of Sukhamoy Chakravarty was appointed by the Reserve Bank of India to review the
Working capital Management 43 of 62

working of the monetary system of India. In its report, submitted in April 1985, the committee examined the monetary system in India and offered wide ranging suggestions for its improvement. In respect of finance for working capital, the committee made two major recommendations: Penal Interest for Delayed Payments Segregation of Credit Limit The total credit limit to be sanctioned to a borrower should be considered under three heads-(a) Cash Credit to cover supplies to government; (b) Cash Credit to cover special circumstances or contingencies; (c) Normal working capital limit to cover the balance of the credit facilities. JILANI COMMITTEE The Jilani Committee was set up by RBI in May 1992 to explore the possibility or suggest an alternative method of lending in place of the present cash credit system, and improve the quality of credit management by banks. The committee recommended that the banks should phase out the present system of Working Capital financing through the cash credit system. Ultimately, the cash credit limits would take care of only the genuine fluctuating needs of the borrower. The committee laid down that the current ratio norm should be 1.5 to begin with, and the ensuing shortfall in net working capital (NWC) should be carved out as a loan repayable in 3 to 5 years, based on the cash generating potential and the capacity to service long term debt. The maximum permissible bank finance (MPBF) to which a borrower is entitled in consequence, is constituted by the cash credit and, or bill limits or commercial paper. The government departments, public sector undertakings and large industrial establishments should be persuaded to accept the bills drawn on them.

CURRENT SCENARIO I. Working capital up to 2 crores to be assessed on the basis of 20% of projected annual turnover in case of tiny villages and other SSI units. II. Loan system of delivery system of bank credit:
Working capital Management 44 of 62


RBI will not prescribe detailed norms for each item of inventory and also for receivables. It would only advise the overall levels of inventory and receivables for different industries-as broad indications. b) Method of lending is subject to second method of lending, to ensure minimum current ratio of 1.33:1.


Beta is the systematic risk of a variance. It is the ratio between returns on markets and security to variance of the market returns. The risk of the portfolio of securities is measured by its variance or standard deviation. The variance of a portfolio is the sum of: the variances of individual securities times (the square of) their respective weights and

the covariance (that is, the correlation coefficient between securities times their standard deviations) of securities times twice the product of their respective weights.

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Unlevered beta of IVRCL

BL = BU [1+ (D/E) (1-t)]

where ,

BL = Beta of levered firm Bu = Beta of unlevered firm D/E = debt-Equity Ratio T = Tax Rate Or 0.97 = BU [1 + 0.67(1-0.30)] Or BU = 0.66

Calculation of Levered Beta of Mackintosh Burn Ltd BL = 0.66 [1 + 0.11(1-0.30)] Or BL = 0.71

Using the capital asset pricing model(CAPM) we now find out the cost of equity of Mackintosh Burn Ltd.

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Capital Asset Pricing Model CAPM is a model that provides a framework to determine the required rate of return on an asset and indicates the relationship between return and risk of the asset. The required rate of return specified by CAPM helps in valuing an asset. One can also compare the expected (estimated) rate of return on an asset with its required rate of return and determine whether the asset is fairly valued. Under CAPM security market line exemplifies the relationship between an assets risk and its required rate of return.

ASSUMPTIONS OF CAPM The CAPM MODEL envisages the relationship between risk and expected rate of return on a risk security. It provides a framework to price individual securities and determines the required rate of return for individual securities. It is based on number of simplified assumptions the most important assumptions are:

Market Efficiency: The capital market efficiency implies that share prices reflects all available information also, individual investors are not able to affect the prices of securities. This means there is large number of investors holding small amounts of wealth.

Risk Aversion and mean-variance optimization: Investors are risk-averse. They evaluate a securities return and return in terms of expected return and variance or standard deviation. They prefer the highest expected return for a given level of risk. This implies investors are mean variance optimizers and they form an efficient portfolio.

Homogeneous Expectations: All investors have the same expectation about the expected return and risks of securities.
Working capital Management 47 of 62

Single time period: All investors decisions are based on a single time period.

Risk-free rate: All investors can lend and borrow at a risk free rate of interest. They form portfolios from publically traded securities like shares and bonds.

KE = RF + Beta [RM - RF] Where, KE = Cost of Equity RF = Risk free return RM = Market Portfolio Risk or KE = 0.045 + 0.71[0.027-0.045] or KE = 0.0322

WACC = KE. Equity Debt + Equity

KD (1-t) .Debt Debt + Equity

= 0.0322 * 5360.76 . 577+5360.76 = 0.0291 + 0.002 = 0.0311 = 3.11%

(13.6+2.9+0.68)(1-0.30) *577 577 + 5360.76

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Firm Valuation = FCFE1/ (1+WACC)^1 + FCFE2/(1+WACC)^2 + FCFE3/(1+WACC)^3 + FCFE4/ (1+WACC)^4 + FCFE5/ (1+WACC)^5 + [Net Income*(1+g)*(1-retention rate)]/ (Ke-g)*(1+WACC) ^5




Year Net income

2005-06 2006-07 2007-08 578.84

2008-09 2009-10

1197.01 1076.425 990.213 1239.273


G= ROE * RETENTION RATIO Projections= Net Income of previous year * CAGR
Working capital Management 49 of 62

0.21 0.85 0.1785 1.1785

Projections Years 2010-11 2011-12 2012-13 2013-14 2014-15

Rs.(Lacs) 1460.483 1721.179 2028.41 2390.481 2817.182


Year Additional capital expenditures each year Rs(in Lacs) 352.39 34.07


2006- 200707 08



224.34 996.81 281.62

G= current year expenditure/ previous year expenditure

Growth Rate

0.10 6.58 4.44 0.28

Geometric Mean (G.M) = (.10*6.58*4.44*.28)^1/4 = .9455

Working capital Management 50 of 62

Projections= Capex * GM

Projections Years 2010-11 2011-12 2012-13 2013-14 2014-15


Amount(Rs.Lacs) 266.27171 251.759902 238.038987 225.065862 212.799773



2006-07 92.39 1.247502

2007-08 90.62 0.9808421

2008-09 142.98 1.5777974

2009-10 213.18 1.4909778

Depreciation 74.06 Growth Rate CAGR 0.3025389

G = 1 CAGR = 1-30 = .70

Projections= Depreciation * GM
Working capital Management 51 of 62

Projections Years 2008-09 2009-10 2010-11 2011-12 2012-13

Amt(Rs. Lacs.) 277.675264 361.6828607 471.1060317 613.6339795 799.2822167


2008-2009 Non cash working capital -3524.74 growth Multiplier





-4757.92 -3373.15 -1705.88 -830.24 1.3498641 0.7089548 0.5057231 0.4866931 0.6966572

Projections=Non-cash working capital * Multiplier

2008-09 -578.3926892





-402.94144 -280.71206 -195.56009 -136.23835

Working capital Management 52 of 62

Capital Net expenditures income(1) (2)

Change in non Depreciation cash FCFE [1- Valuation (3) working 2+3-4] FCFE capital (4)

YEAR 200809 200910 201011 201112 201213

1460.48 1721.18 2028.41 2390.48 2817.18

266.27 251.76 238.04 225.07 212.80

277.67 361.68 471.11 613.63 799.28

251.85 175.45 122.23 85.15 59.32

1220.04 1655.65 2139.25 2693.89 3344.34

1183.24 1557.28 1951.46 2383.29 2869.50 9944.77

Terminal Value



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There are limitations to the established operating cycle theory to working capital management. In business operations, a firm generates quite a few other assets besides what is taken in calculating the operating cycle. Some of these assets are, advances made to suppliers, security deposits with suppliers or with various statutory authorities, advance income tax, etc. Operating cycle theory does not capture these items. If they are not considered as current may fall outside the operating cycle days then how do we term and manage them. Ratio analysis, CFS and FFS analysis have dealt with identifying the position and utilization of working capital in the company but they have not paved way towards solution of a problem identified. The firm being in construction business and in the prevalent economic scenario is keener on maintaining high level of inventory for its operations. Another component in the current assets, Debtors, are taken to be good for up to three years and book debts are maintained even after 3 years. There has been no write offs after the financial year 2003. The debtors aging percentage on delinquent accounts increase the risk of bad debts. Current assets and current liabilities are necessarily meant for those which would turn cash within a year and cleared off within a year respectively. Free cash flow to Equity (FCFE) is the distributable cash (not necessarily actually distributed as dividend) that can be arrived by subtracting the funds required for the firms growth from the available earnings for the shareholders. The funds required for the growth of the firm are in the form of capital expenditure and increase in the working capital.Formulae to FCFE already provided during calculation. It is to be noted that the negative figures of the non cash working capital has been declining over the years due to additional sources of non cash working capital. The cash position for the company has improved over
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the years as also the current assets and the net working capital of thecompany. There are more number of projects to the company in recent years and more number of government projects results in inflating the receivables in the books of accounts and the resultant aging. And apart from cycle inventories there is a concept of Buffer inventories, that is, a firm is required to hold additional inventories for random fluctuations in demand or price or scarcity of materials in the market. Several models based on probabilistic distribution is available to estimate the buffer stock necessary to cushion the effects of greater than expected demand and the average demand during the supply lead time.Additional receivables and inventories have its impact on the increase in the non cash working capital position. Important to note that the more the increase in the non cash working capital for the firm the lesser would be FCFE and thus lower value of the firm, though it can be seen that the FCFE increases over the years from 2009 to 2013, also note that the increase in the working capital has been gradually lower in the years. If the process of turning inventory and WIP to finished goods and realization of cash is faster the the cash would increase in the current assets with corresponding decrease in inventories. More efficient collection of receivables ensures better liquidity. So the finance manager should make efforts to eliminate any obsolete inventory and make collection efforts for aging accounts and look at minimizing the increase in non cash current assets each year and record only those which has a direct impact on increasing the sales for the company. The valuation of MBL as on 31-03-2008 stands at Rs.60 crore (approx.) based on the assumptions all other things remaining same.

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Working for the company for the past 14 months has left me with some observations and the daily working process of the company. Mackintosh Burns glorious 175 years in business would have not been possible without the well formulated and dedicated team of working professionals serving the company for more than 5 years on an average. The company has separated its wide operations by segmenting its construction office, registered office and works outlet at three prime locations in the city. At the construction office in salt lake where all the construction related works are executed. A team of dedicated and competent Engineers, Technicians and workers of the Company are always working hard to keep themselves abreast of the latest developments and trends in design and construction technique to meet the emerging challenges in the construction field. In order to ensure fullest satisfaction of the clients never compromising with quality is the company motto. They take pride in Companys past and are determined to keep its flag fly high. At the registered office of the company where we were designated to work comprised of the accounts and finance departments of the company. All the projects executed by the engineers where due for payment in the registered office only. In fact, except the technical authentication and advice all other transactions take place at this office. The engineer gives their assent for the payment to suppliers/sub-contractors/laborers and all other terms and conditions are pre-fixed & governed from this office only. The Accounts Department in the organization runs through different sections, the categories of each identified with alphabets according to
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order; (A) Supplier, (B) Labor contractor, (C) Sub contractor, (D) Service contractor, service providers, transport providers. There are some expenses related to Establishment Expenses-salaries, wages, perquisites, Leave travel allowance, Medical bills, electricity and telephone bill payment. Accounts are identified by two alphabets and three numerical. Each type of accounts is classified in ranges for better accounting as ERP modules are used from Oracle which has automated the entire system of keeping accounts records. There are 3 modules of Financial accounting, Inventory accounting, Payrolls. Every project is identified by a Job. No. At present, there are more than 150 work sites. There are 60-70 own worksites of Mackintosh Burn and around 100 sub contractors. During our tenure with the company we had visited each and every department. Our learning was on how these departments function and the broad parameters for accepting/rejecting bills. The process of recording, validating and cross-checking the transactions was our area of work initially. After working with different departments we were assigned to handle the bank statements of the company. Our study shifted to preparing bank reconciliation statements of the company. Presently there are more than 35 Bank accounts are maintained. Bank Reconciliation Statements were prepared up to 31-03-2009 for audit purposes of the company. A practical application of the theoretical part which we had learnt long time back helped us to align theory and practice. A few important and bulky transactions were handled by us single handedly which was highly useful for the company for audit purposes of the company. The works department of the company i.e. the workshop present at Ballygunge Place supports its constructions activities with various structural fabrication work and joinery carpentry work of very high standard.
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a) Time: the subject requires a thorough insight and study about the subject which cannot be completed in only 14 weeks. b) Reliability of Data: as our field of work incorporates secondary data reliability on it may not be always full proof. Moreover, all the accounting data are available on paper which may not always be reliable. c) Availability: the lack of availability of data and statistical information is also a limitation. Also specific data pertaining to our field of study was not always available with the company. d) Accuracy of data: the accuracy and the authenticity of the data could not verified from time to time thereby, all the statistical data may not always be accurate and correct.

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Just-in-time Inventory Management System: In this era of globalization where the companies all over the world is moving to smart and cost savings concept of maintaining just-in-time inventory management system. According to this method the company does not hold stock in any form. It produces according to its demands and requirements in the market. Mackintosh Burns inventory turnover ratio has fallen down significantly implying that there has been an increase in the stock lying with the company. Therefore, company should take steps to reduce its inventory portion as funds are being blocked out there and steps must be taken to sale the inventory in order to free its blocked up funds in inventory. Special Arrangement with banks for financing: In this recessionary phase where the economies all over the world are facing credit crunches this can be a good method of quick recovery of money. As the company is in construction business where 4 to 5 years are the average project life special arrangements with banks for financing can pave a new way of finance. The company which is in business for the past 175 years and having a government badge can easily transform this suggestion into implementation. The company just needs to have a tie up with its banker to finance its projects with nominal interest rates and offering some other good business to the banks to steal the best deals.

Improve the inventory turnover ratio: This point should be urgently dealt with in order to improve the working capital of the company. In order to have a better liquidity position and increase the profitability of the business the inventory turnover ratio should go up. An immediate solution would be to sale the
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underlying stocks at par in order to just recover the money in the blocked up stocks. Writing off bad-debts more than one year: The Company has got a substantial portion of debts in its books of accounts ageing over more than 3 years. The recovery of these debts seems doubtful for which it is advisable to the company to write off these debts. It would also help the company to have a prudent accounting policies and would forecast a true and fair view of the books of accounts.

Improving Receivables Management for better liquidity: Improving management so that AR is permanently reduced, is critical for success in todays environment. Mackintosh should take a broader view by measuring the entire order-to-cash process, to uncover the root causes of poor receivables. By taking a holistic approach focusing on the root causes of payment problems and managing each bucket properly the company can make AR reduction more sustainable. Instead of using a typical point in time to measure receivables, companies should calculate an average AR, which gives a truer understanding of AR status. Instead of using a typical point in time to measure receivables, companies should calculate an average AR, which gives a truer understanding of AR status.

Private participation: Mackintosh Burn can increase its private participation with strategic alliances with major market players which would support the company with a dynamic business model to cover up all the fallacies that exists in government owned enterprises. It would help the company to also expand its business beyond the eastern frontier to major cities in the country to capture the market. Hence, the long term sustainability and increase the valuation of the company.

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Minimizing paper works: In this cost cutting era where all the
companies are taking stringent steps to cut costs Mackintosh Burn should also follow trend and minimize paper works. The project managers from different sites issues various documents such as challans, material receipts notes, stock statement etc., issuing these documents require lot of paper works and filling. If the company like its fully computerized accounts department can shift to the electronic form it would help in cost cutting, help in saving stationary as well as minimize clerical or any other form of errors. Thereby, moving to better electronic means of communication without any barriers or errors, minimizing the paper works and its cons.

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