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Financial Planning and Forecasting PDF
Financial Planning and Forecasting PDF
Submitted in the partial fulfillment of the requirements for the award of the degree of
Vignesh S
(BL.BU.P2MBA09059)
V. Karthikeyan
Manager - Finance
Royal Classic Group
Tirupur
Faculty Guide
DECLARATION
I, Vignesh S, a second year MBA student of Amrita School of Business, Amrita Vishwa
Vidyapeetham hereby declare that project titled Financial Planning and Forecasting was
done by me under guidance of Dr. Usha Nandhini, (PGP Chair-MBA Program), Amrita
School of Business and Mr. V. Karthikeyan, Manager Finance, Royal Classic Group
Tirupur during April June 2010.
I also declare that this project is not submitted by me for award of any degree, diploma,
literature or recognition earlier.
Vignesh S
18th June, 2009
Bangalore
ACKNOWLEDGEMENT
I am grateful to thank Royal Classic Group for giving me this great opportunity to do
my Summer Internship Project with them. I take the privilege to sincerely thank
Mr.R.Sivaraman, Executive Director, Royal Classic Group, in creating the opportunity for a
summer project in the finance department. I would like to thank D. Joshua Chithambaram
Vice President-Finance, my Industry Guide Mr. V. Karthikeyan Manager -Finance, Royal
Classic Group for his guidance and support during the entire course of the project.
I am also thankful to Mr. Kirthivasan, (Industry coordinator for summer internship)
Brand Executive, Royal Classic Group, for making everything possible for me during the
entire course of the project. I am thankful to the Core Finance Team, of the company for their
guidance, support and encouragement to give my best during the Internship Program. I
specially thank all the Managers, Officers and the Staff members with whom I interacted
during the course of my project for their support and cooperation.
I also take great pleasure in thanking my faculty guide, Dr. Usha Nandhini
Chairperson MBA program, Amrita School of Business, Bangalore, for giving me the moral
support and inspiration to perform well and make the Summer Internship Project successful.
I then take the opportunity to thank Ms. Chitra Harshan, Placement Coordinator,
without whose help, I wouldnt have got such a wonderful corporate exposure at Royal
Classic Group, Tirupur.
I would like to heart fully extend my thanks and gratitude to my family for supporting
and instilling confidence in me in all ways. Above all, I thank the Almighty for His presence
within me and without whose grace the endeavor of mine would not have been successful.
Executive Summary
The internship project on Financial Planning and Forecasting has been a very good
experience. Every manufacturing company has to forecast its financial position for better
decision making. An organization risks can be reduced and the efficiency can be increased
through efficient planning. At the same time company needs to plan about its future
investment to increase the productivity and profitability.
In a manufacturing company, the inventories and debtors occupy large amount which are
major components of current assets. The efficient management of these components would
increase the profitability and flexibility of the firm.
This project is a sincere effort to plan, forecast and analyze the financial position of Royal
Classic Group for the future period. The project is executed in an efficient manner. The
preparation of forecasted financial statements has undergone a various hard-hitting processes
to arrive at the amount of each item of financial statements.
The study on effectiveness of management of debtors was made to suggest some areas of
improvements to the company. For the study of the debtors, I reviewed the credit policy
document of the company, credit assessment methodology that the company follows to find
out the credit worthiness of its customers, the financing method adopted by the company to
finance its debtors, the collection method and then finally classification of debtors according
to the segment to which they belong to.
The financial statements analysis like Ratio analysis, Breakeven Analysis, Operating cycle &
cash cycle and Growth rate has been carried out to know the financial position of the
company in the future period.
The internship is a viaduct between the organization and the institute. This made me to
engage in a project that helped me to learn management of finance practically. And in the
process I could contribute substantially to the organizations growth.
The experience that I gathered over the period of my internship has certainly provided the
management knowledge which I trust will help me in future.
Contents
Sl. No.
Contents
1.
Industry Profile
2.
Company Profile
Financial Planning and Forecasting
3.
Introduction
4.
Objective
5.
6.
Assumptions
7.
8.
9.
Debtors Management
10.
11.
Breakeven Analysis
12.
13.
Growth Rate
14.
Recommendations
15.
Conclusion
16.
Bibliography
Page No.
Industry Profile
Textile Industry Holistic Approach
A Textile company the purpose of restructuring scheme is defined as
whose
Tamil Nadu
Tirupur known by various names such as knits city, Cotton city is famously called
the Textile city of India. Tirupur has the largest and fastest growing urban
agglomerations in Tamil Nadu. The knitwear industry which is the soul of Tirupur has
created millions of jobs for all class of people. There are nearly about 3000 sewing
units, 450 knitting units, hundreds of dyeing units and other ancillary units which are
un-countable. The annual for-ex business for the past year 2008 stands at Rs.
8,000cr. Due to the climate and availability of raw material and work force Tirupur
has had made a large contribution to the export of knitwear garments. It is called the
Knits Capital of India as it caters to famous brands retailers from all over the world.
Nearly every international knitwear brand in the world has a strong production share
from Tirupur. It has a wide range of factories which export all types of Knits fabrics
and supply garments for Kids, Ladies, Men's garments - both underwear and tops.
The city is known for its hosiery exports and provides employment for about 300,000
people. Tirupur Exporters Association popularly known as TEA - was established
in the year 1990. This is an Association exclusively for exporters of cotton knitwear
who has production facilities in Tirupur. From the modest beginning TEA has grown
into a strong body of knitwear exporters. Today, TEA has a membership of 672 Life
members and 155 Associate Members. The members of the Association, from the
beginning, have resolved to develop their organization focusing on:
1. Multilateral growth of knitwear industry and exports
2. Development of infrastructural needs for Tirupur.
3. Implementation of schemes for the benefit of the society and public.
4. Promotion of constructive co-operation with workers with fair division of
rewards.
5. General up-liftment of quality of life in Tirupur.
For foreign buyer TEA:
1. Offers conferencing and secretarial services.
2. Helps in locating suitable suppliers.
3. Helps in resolving disputes.
Company Profile
Vision:
Most Preferred global mens wear fashion brand in the mid-premium segment.
Classic Polo aims to be and remain the leading retailer of world-class mens wear in
India and become a compulsory part of mens wardrobe solution by 2011.
Mission:
To grow horizontally and vertically in all formats (MBO, EBO, Chain Stores) through
continuous innovation by offering unparallel value to create customer delight.
The Royal Classic Group (RCG) began in 1991 as an exporter and gradually grew
into an Rs.425cr textile giant with brands under it wings through its 100% vertical
integration state-of-the-art in-house production.
launches its maiden T-Shirt brand Classic Polo, making its foray into the domestic
market. Within a short time, this brand figured among the top casual T-Shirt brands
in India. RCG acquired Smash, another T-Shirt brand, in September 2004 and
launched its exclusive premium mens intimate wear under the brand name smash in
April 2005.
Classic Polo was awarded as the brand for the year 2005-06 for mens casual.
Although, Classic Polo is primarily a T-Shirt brand, the range also offers a complete
lifestyle/wardrobe like exclusive T-Shirts, Shirts, Trousers, Denims, Sweaters,
Jackets, Loungewear etc.,
Royal Classic Group has production capacity of 15000 T-Shirts, 4000 Shirts and
4000 Trousers per day with consistent quality 0.01% defective percentage. Hand
picked cotton is used for production. RCG jointly has covered about 5000 acres of
wet land on contract farming. By providing the best seeds and timely manure, RCG
is getting an average productivity of 10Quintals/hectare, which is much higher from
conventional Cotton Farming.
Infrastructure
Innovations in manufacturing programs of garment occur in our production facilities
very often. Our specialization reflects in the quality of the goods delivered, as the
workers, executives and machinery are trained and tuned for that purpose.
Cotton farming
Ginning and Pressing
Spinning
Yarn
Knitting
Dyeing and finishing
Garmenting
Captive Power Plant
Cotton Farming:RCG has jointly covered about 5000 acres of wet land on contract farming. By
providing the best seeds and timely manure, RCG is getting an average productivity
of 10 Quintals/Hectare which is much higher from conventional cotton farming
RCG is ensuring about minimum guaranteed price for the farmers and hence apart
from its finest quality produce harvested, RCG enjoys a corporate social
responsibility by enlightening about 2000 families involved in cotton /farming.
Constant workshops and seminars are conducted at fields to educate and safe
transportation methods. The present area is planned to go up to 70000 acres in next
3 years.
Modern Ginning and pressing:From kappas cotton, this unit segregates the cotton seeds and good quality cotton
(lint) and this operation is done with least number of workers and totally under a
pneumatic drive system ensuring least human contacts. Ginning has capacity of 200
bales per day with an average weight of 170 Kgs/bale and as the cultivation
improves can reach up to 400 bales per day.
Spinning:The ginned cotton is covered into spun yarn in this unit with the following state-ofthe-art machineries.
Yarn:The company deals in 100% cotton yarn, 100% polyester yarn, all types blended
yarns, 100% gassed mercerized yarn, twisted yarn, various mlange yarn, etc Our
spacious stock yard stores every type of yarn for supply to the regional factories,
apart from our own knitwear factories.
Advanced yarn testing facility is an added advantage. Yarn can be tested both at the
source point of the spinning mill and locally, which ensures best quality of yarn.
Knitting:Knitting dept has an array of latest computer controlled knitting machines from
reputed international brands. The in-house facility, which includes a knitting design
studio, is one of the best in the knitting industry. There are 46 circular knitting
machines that can knit jacquards, interlocks, ribs, and jerseys, in any pattern or
structure as needed. The capacity is 10 tons per day. There are 9 flat knitting
machines and that knit jacquards, plain, strips, and self designs with a capacity of
8500 pieces per day. Our circular machinery includes: (All Brand new MAYER and
CIE machines)
Dyeing and finishing:Our modern soft flow dyeing plant with Effluent Treatment Plant (ETP) has a
processing capacity of 10 tons per day. The soft flow dyeing plant has 7 vessels
imported from Taiwan. Supported by computerized color prediction, measurement
and matching systems from Data Color International, USA (Spectra Flash SF 600)
the plant can deliver evenly color fabrics, streaks free.
Dyed Fabrics are processed through balloon paddler from stretch plus, Switzerland
to remove the moisture neat and to give the fabric a better feeling and finish. Fabrics
are further processed through relax imported from Calator Ruckh, Germany.
Garmenting:The completely integrated facilities is topped by our garmenting division with skilled
pattern masters, cutting masters, tailors, and supporting workmen who are well
trained. The product specialization gives an excellent finish to the garment s they
make.
The entire production wing is housed under one roof with scientific work systems and
quality control systems,
Captive Power Plant:Presently they have installed 4 windmills of total 3.0 MW capacities which are
currently taking care of the entire requirements of the group. The company is
planning to add couple of more machines to take care of the future needs.
Solar Panel
The new solar heating Plant has been deployed at our dyeing division as the
replacement of exiting Fire Wood with the capacity of 10000 Liters per Day at 90D
and 20000 liters at 80. It has replaced the usage of 10 tons of Firewood/Day. In turn
we are saving almost 1000 trees a day.
Objective:
The main objective of the study is to understand the financial position of the
company, refers to the development of long-term strategic financial plans that
guide the preparation of short-term operating plans and budgets, which focus
on analyzing the pro forma statements and preparing the cash budget.
While a financial plan refers to estimating future income, expenses and assets, a
financing plan or finance plan usually refers to the means by which cash will be
acquired to cover future expenses, for instance through earning, borrowing or using
saved cash.
Corporations use forecasting to do financial planning, which includes an assessment
of their future financial needs. Forecasting is also used by outsiders to value
companies and their securities. This is the aggregative perspective of the whole firm,
rather than looking at individual projects. Growth is a key theme behind financial
forecasting, so growth should not be the underlying goal of corporation creating
shareholder value is enabled through corporate growth.
The benefits of financial planning for the organization are
Identifies advance actions to be taken in various areas.
Seeks to develop number of options in various areas that can be
exercised under different conditions.
Facilitates a systematic exploration of interaction between investment
and financing decisions.
Clarifies the links between present and future decisions.
Forecasts what is likely to happen in future and hence helps in avoiding
surprises.
Ensures that the strategic plan of the firm is financially viable.
Provides benchmarks against which future performance may be
measured.
There are three commonly used methods for preparing the pro forma financial
statements. They are:
1. Percent of Sales Method
2. Budgeted Expense Method.
3. Variation Method.
4. Combination Method.
Assumptions
The method used for this study is combination method which eminently works best
for an organization.
The assumptions made for forecasting are as follows:
1. The sales are expected to increase by 20% every year.
2. All expenses are estimated under percentage of sales method.
3. Tax is estimated on the basis of profit.
4. Proposed Dividend to be increased by Rs. 5,000,000 every year.
5. Dividend tax is payable on the basis of proposed dividend.
6. Secured and unsecured loans to be decreased by 5% every year.
7. Tax liability on percentage of sales method.
8. Fixed assets are expected to increase by 2% every year.
9. Work-in-progress of capital is expected to decrease by 10% every year.
10. Investments are expected to increase by 5%.
11. Current assets like inventories and sundry debtors are expected to increase
by 2% every year.
12. Cash and it equivalents on the basis of percentage of sales method.
13. Loans and advances are estimated to increase by 5% every year.
14. Current liabilities are expected to increase by 5% every year.
15. Provisions are expected to increase by 10% every year.
Income
Sales
The firm has sales as Exports as well as Domestic. The total sales include 59.8% of Export
sales, 39.7% of Domestic sales and 0.4% of second sales. The sales are forecasted to
increase by 20%p.a in the coming three years taking 2008-09 as base year.
This shows that company is more Export oriented than the Domestic Sales.
Expenditure
Raw Materials Consumed
Raw materials on which company spend most of its working capital consists of 39.3% of
Total Sales Value. This shows that there is a heavy expenditure on raw materials. It is
forecasted to increase by 20% in the coming three years.
The company should try to optimize the expense on raw material, as in the inflationary
economy capital blocked with raw material will lose its value in the subsequent year which
can be utilized in other profitable investments.
Cost of Human Resources
The cost of Human Resources for the firm is 11.1% of the Total Sales Value which is quite
satisfactory. This is expected to increase by 20% which means that company is expected to
give an increment in wages as well as recruit more employees.
Other Manufacturing Expenses
Other
Manufacturing
Expenses
include
Electricity
Charges,
Processing
Charges,
Consumables and Repair & Maintenance which constitutes 20.1% of Total Sales Value. It is
expected to increase by 20% in coming three years. The other manufacturing expenses of
the company are quite high which is needed to be controlled.
Administrative Overheads
This includes Rent, Repairs and Maintenance, Insurance Charges, Legal and Consultancy
Fees and Audit Fees.
Application of Funds
Fixed Assets
As the company is expanding its business, the fixed assets like Land and Buildings, plant
and machinery of the company is expected to increase by 2%. The company has their own
power plant which includes four windmills. The company has separate production plants for
yarn, knitting, compacting, stitching and packaging. They have their own logistics for
domestic distribution.
Investment
The company is investing its surplus amount from retained earnings in shares of Corporation
Bank and South Indian Bank Ltd. The company has 200 Equity shares of Corporation Bank
and 360 Equity shares of South Indian Bank Ltd. The company has also invested in Tirupur
Infrastructure Bonds and Win Win Enterprises Pvt Ltd.
The company is expected to increase its investment by 5% p.a. for the coming three years.
Current Assets
Inventories
Inventories constitute more than 50% of the total current assets. As the Textile Industries
has longer production cycles the firm needs to maintain inventories but the management of
inventories should be efficiently carried out so that this investment does not become too
large as it result in blocked capital which could be put to productive use elsewhere. This is of
greatest significance in the inflationary economy because of the depreciation in the value of
money. The inventories of the company are expected to increase by 2% p.a. which is
satisfactory with respect to sales.
Sundry Debtors
Investment in receivables involves both benefits and costs. The extension of trade credit has
a major impact on sales, cost and profitability. Liberal policy leads to larger debtors at the
same time increase in sales. So the company needs to have a standard credit policy to
maintain a balance between receivables and sales. The sundry debtors are expected to
increase by 2% which is quite satisfactory with respect to sales which are increasing by
20%.
Cash and Bank Balances
According to the data, the cash and bank balances has increased by 20%, which is a good
indication in aspect of liquidity of the company. This is a good sign for the creditors as it
means company is able to meet its current obligations.
Loans and Advances
According to the data, the cash and bank has increased by 20%, which means companys
liquidity position is good enough and it is able to give loans and advances to its subsidiary
company for carrying its operations.
DEBTORS MANAGEMENT
Royal Classic Group has a large proportion of the sales in cash and a small amount
of sales on credit. Although there is credit sales the credit policies are very
aggressive in nature and the company follows restrictive measures. The sales of the
firm are both domestic sales and international sales. The total debtors are classified
into 4 main segments:
Exporters
MBO-Distributors
Urban Retail Division
Others
There are 132 debtors for the financial year ending 31 st march 2010, which includes
both MBO & EBO. There are 26 debtors with an outstanding amount of Rs 4.047cr
for classic fashion division (MBO Distributors). The total debtors are classified into 4
main regions:
East
North
South
West
Analysis:
East: East region has second highest sales which amount to Rs 6.777 cr but at the
same time debtors turnover is low i.e. 2.91 times in a year with a collection period of
125.4 days which is just twice of the credit period given by the firm. There is a need
of some aggressive policy at the same time maintaining high sales.
North: Here the firm has started the business recently, so it is too early to know the
exact debtors turnover and the firm will have flexible policy. The firm should aim at a
trade-off between profit (benefit) and risk (cost).
South: This is the region with highest sales, debtors turnover is also very good i.e.10
times in a year with the collection period of 36.4 days which is less than the credit
period given by the company.
West: This region also has high debtors turnover of 7.57 times in year, with
collection period of 48 days which is less than the credit period given by the firm. The
company should go for flexible credit policy aiming at higher sale.
Credit Policy
Discounting (or) Receivable purchase: The customers to whom the goods are
sold on credit, many of those receivables are discounted with the banks. In other
words the banks agree to purchase the company receivables and later on the due
date the company collects the amounts from the debtors and pay them to the bank.
This facilitates the company with the earlier realization of funds and no default risk.
Partly Credit policies: Under some circumstances the company also sells goods on
credit to its cash customers. It is purely a business call and this happens rarely .It
happens in the case of second sale. Under the following circumstances the goods
are offered on credit:
To clear period ending stocks which require the customer some period to sell
To sell old goods which are 180 days or more older
Sometimes in case an old customer is in some temporary financial trouble, then the
relation with customer forces to sell goods on credit.
Ratio Analysis
Ratio analysis is a widely-used tool of financial analysis. It is the process of the determining
of the items and group of items in the statements. It can be used to compare the risk and
return relationships of firm of different sizes. Ratio can assists management in its basics
function of forecasting, planning, coordination, control and communication.
Benefits of ratio analysis: Helpful in analysis of financial statements.
Helpful in comparative study.
Helpful in locating the weak spots.
Helpful in forecasting.
Estimate about the trend of the business.
Fixation of ideal standards.
Effective control.
Study of financial soundness.
Types of ratios
Ratios can be classified into four broad groups.
Liquidity Ratios
Leverage ratios
Profitability Ratios
Activity Ratios
Liquidity Ratios
They indicate the firms ability to meet its current obligation out of current resources and
reflect the short - term financial strengths/solvency of a firm. Liquidity implies from the
viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. The
proper balance between the two contradictory requirements that is liquidity and profitability is
required for efficient financial management. The ratios which indicate the liquidity of the
firms are
Current Ratio
Quick Ratio/ Acid test Ratio
Current Ratio
The current ratio of the firm measures its short term solvency that is its availability to meet
short term obligations. As a measure of short term or current term financial liquidity, it
indicates the rupees of current assets available for each rupee of current liabilities obligation
payable. The higher the current ratio the larger is the amount of rupees available per rupee
of current liability, the more is the firms ability to meet current obligations and greater is the
safety of funds of short term creditors. Thus, current ratio is a measure of margin of safety
to the creditors.
Year
Total Current
Total Current
Current
Assets
Liabilities
Ratio
2010-11
1616102521
1254990145
1.29
2011-12
1669271632
1217053762
1.37
2012-13
1726349950
1181591804
1.46
1.46
1.50
1.45
1.37
1.40
1.35
1.29
1.30
1.25
1.20
2010-11
2011-12
2012-13
Current Ratio
The industrial standard norms for current ratio are 1.33:1. The expected current ratio for
the year 2010-11 is 1.29, for 2011-12 is 1.37, for 2012-13 is 1.46. The company is
expected to meet the standard norms from the financial year 2011-12 onwards. It shows
that the liquidity position of the company is expected to improve in the coming years. In
the year 2010-11 it is expected to have Rs.1.29 for each rupee of current liabilities. It is
expected to increase 1.37 and 1.46 for every rupee of current liabilities in the year 201011 and 2011-12 respectively.
Quick Ratio
The quick ratio is a measure of firms ability to convert its current assets quickly into cash in
order to meet its current liabilities. It refers to the amount which is readily available with the
company to meet its current liabilities. The quick ratio is the ratio between quick current
assets and current liabilities. The quick current assets do not include stock and prepaid
expenses. But, now a days majority of the companies assume that prepaid expenses are
also quick assets by considering it is recoverable.
Year
Total Quick
Total Current
Assets
Liabilities
Quick Ratio
2010-11
762888147
1254990145
0.61
2011-12
798826193
1217053762
0.66
2012-13
838320485
1181591804
0.71
0.71
0.72
0.70
0.68
0.66
0.64
0.62
0.60
0.58
0.56
0.54
0.66
0.61
2010-11
2011-12
2012-13
Quick Ratio
The industrial standard norms for quick ratio are 1:1. The expected quick ratio for the year
2010-10, 2011-12 and 2012-13 is 0.61, 0.66 and 0.71 respectively. Of these, the quick ratio
is expected to increase by 0.05 every year. It is expected that in the financial year 2012-13
(0.71) is satisfactory. It means most of the current assets are blocked with unsalable
inventories. This needs to be managed aggressively.
Leverage Ratios
Leverage Ratios measures the financial strength of the company. The long term solvency
of a firm can be examined by using leverage ratios. The leverage ratio may be defined as
financial ratios which throw light on the long term solvency of a firm as reflected in its
ability to assure the long term lenders with regard to periodic payment of interest during
the period of the loan and repayment of principal on maturity
or in predetermined
installments at due dates. These ratios are based on relationship between borrowed funds
and owners capital. These ratios computed from balance sheet. The ratios which indicate
the leverage position of the firm are
Debt Equity Ratio
Debt Assets Ratio
Year
Total Debt
Equity
Debt - Equity
Ratio
2010-11
1183019942
860746887
1.37
2011-12
1171920382
943142093
1.24
2012-13
1141029961
1040846391
1.10
1.37
1.24
1.40
1.10
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2010-11
2011-12
2012-13
Debt-Equity Ratio
The industry standard norms for debt equity ratio are less than 1.65. The firm is expected
to have 1.37, 1.24 and 1.10 for the year 2010-11, 2011-12 and 2012-13 respectively. It
shows that the firm is expected to utilize its own funds more for investments. This also
shows that the firm is quite confident about the returns on its investment and it is also going
to attract creditors as they have less risk.
Year
Total Debt
Total Assets
2010-11
2082161858
3151042611
0.66
2011-12
1978053765
3203129538
0.62
2012-13
1879151077
3258926145
0.58
0.66
0.68
0.66
0.64
0.62
0.60
0.58
0.56
0.54
0.52
0.62
0.58
2010-11
2011-12
2012-13
Debt-Assets Ratio
The industry standard norms for debt assets ratio are 0.50-1.00. It is expected to have
debt assets ratio of 0.66, 0.62 and 0.58 for the 2010-11, 2011-12 and 2012-13
respectively. This shows that the company is expected to utilize its own funds for future
investments. The firm is taking its own risk by being confident about the returns on its
investment. This also shows that the company is trying to reduce its borrowings to finance
the assets.
Turnover Ratios
Turnover ratios determine how quickly certain current assets are converted into cash. It
measured in times. The three relevant turnover ratios are
Debtors Turnover
Creditors Turnover
Inventory Turnover
Fixed Assets Turnover
Net Sales
Avg Debtors
Turnover
2010-11
3514686561
403526275
8.71
2011-12
4217623874
411596800
10.25
2012-13
5061148649
419828736
12.06
12.06
14.00
12.00
10.25
8.71
10.00
8.00
6.00
4.00
2.00
0.00
2010-11
2011-12
2012-13
The industry standard norms for debtors turnover ratio is 6times. The expected debtor
turnover ratio for the year 2010-11, 2011-12 and 2012-13 is 8.71, 10.25 and 12.06
respectively. It is expected to increase every year rapidly. It shows that the company is quite
prompt over its collection and the credit policy of the firm quite aggressive.
Creditors Turnover Ratio
The creditors turnover ratio is an important tool of analysis as a firm can reduce its
requirement of current assets by relying on suppliers credit. The extent to which trade
creditors are willing to wait for payment can be approximated by creditors turnover ratio. A
low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows
that accounts are settled rapidly.
Net Credit
Year
Purchase
Creditors
Avg Creditors
Turnover
2010-11
2392973673
371676164.7
6.44
2011-12
2868576684
390259972.9
7.35
2012-13
3439240462
409772971.6
8.39
8.39
10.00
7.35
8.00
6.44
6.00
4.00
2.00
0.00
2010-11
2011-12
2012-13
Net Sales
Closing Stock
Ratio
2010-11
3514686561
847655111
4.15
2011-12
4217623874
864608214
4.88
2012-13
5061148649
881900378
5.74
7.00
5.74
6.00
5.00
4.88
4.15
4.00
3.00
2.00
1.00
0.00
2010-11
2011-12
2012-13
The industry standard norms for inventory turnover ratio are 6 times. The expected inventory
turnover ratios for 2010-11, 2011-12 and 2012-13 are 4.15, 4.88, and 5.74 respectively. This
shows that the inventories will stored in shelf and sales will not happen fast. As it increasing
rapidly it may be able to turnover the inventories more in the upcoming years.
Net Sales
Ratio
2010-11
3514686561
1956741440
1.80
2011-12
4217623874
1995876269
2.11
2012-13
5061148649
2035793794
2.49
2.49
2.11
2.50
1.80
2.00
1.50
1.00
0.50
0.00
2010-11
2011-12
2012-13
The fixed assets turnover ratios are expected to increase rapidly in the upcoming years. It
shows that the firm is trying to utilize maximum of available resources as the value of fixed
assets are also increasing.
Return on Assets
The return on assets measures the profitability of the total funds or investments of a
firm. It is relationship between Profit after Tax before Interest and Average Total
Assets.
Return on
Year
PBIT
Total Assets
Assets
2010-11
535977572
3151042611
0.17
2011-12
643173086
3203129538
0.20
2012-13
771807703
3258926145
0.24
0.24
0.25
0.20
0.20
0.17
0.15
0.10
0.05
0.00
2010-11
2011-12
2012-13
Return on Assets
The industry standard norms for return on assets are 14%. It is expected return on
assets for the year 2010-11, 2011-12 and 2012-13 are 17%, 20% and 24%
respectively. It shows that the company is expected to get good returns on assets. It
also shows that the operating efficiency is good.
Year
PBIT
Total Capital
Return on Capital
Employed
Employed
2010-11
535977572
2718308097
0.20
2011-12
643173086
2748758299
0.23
2012-13
771807703
2781836344
0.28
0.28
0.23
0.30
0.25
0.20
0.20
0.15
0.10
0.05
0.00
2010-11
2011-12
2012-13
The industry standard norms for Return on capital employed are 14%. The expected
return on capital employed for the year 2010-11, 2011-12 and 2012-13 are 20%, 23%
and 28% respectively. It shows that the firm will able to use its capital fund efficiently
on its operations.
Return on Investment
The purpose of this ratio is to ascertain how much percentage of income is generated by the
use of capital. It measures the overall effectiveness of management in generating profits with
its available assets.
Year
PBIT
Return on
Capital
investment
2010-11
535977572
3046143391
0.18
2011-12
643173086
3107691963
0.21
2012-13
771807703
3171952635
0.24
0.24
0.25
0.21
0.18
0.20
0.15
0.10
0.05
0.00
2010-11
2011-12
2012-13
Return on Investment
The industry standard norms for return in investment are 14%. The expected return
on investment for the year 2010-11, 2011-12 and 2012-13 are 0.18, 0.21 and 0.24
respectively. It shows that the firm earns good returns on their investment and it is
expected to increase rapidly.
Year
Total Current
Assets
Total Current
Liabilities
Current
Ratio
2010-11
1616102521
1254990145
1.29
2011-12
1669271632
1217053762
1.37
2012-13
1726349950
1181591804
1.46
Std
Norms
1.33
BE Current
Assets
BE Current
Liabilities
1669136892
1215114677
1618681503
1255091452
1571517099
1298007481
The industry standard norms for current ratio are 1.33:1. The expected value of
break even current assets is high and break even current liabilities are low in the
year 2010-11. This shows that the current ratio for the year 2010-11 is not up to the
mark, it is back by 0.04. So, the company has to adopt some necessary policies to
increase the current assets or to reduce the current liabilities.
The firm can take decisions to reduce the current liabilities rather than increasing the
current assets because for increasing the current assets either the company has to
reduce their investments on fixed assets or to convert inventories into debtors or
cash. The conversion of inventories to debtors or cash depends on sales, which
depends on market position. So, the firm can have a control on current assets like
Sundry Creditors.
As the firm is expected to have the current ratio better in comparison with industry
standard norms for the year 2011-12 and 2012-13 it shows that the routine is
expected to increase by 0.04 and 0.13 for the year 2011-12 and 2012-13
respectively.
Quick Ratio
Year
Total Quick
Assets
Total Current
Liabilities
Quick
Ratio
2010-11
762888147
1254990145
0.61
2011-12
798826193
1217053762
0.66
2012-13
838320485
1181591804
0.71
Std
Norms
0.8 - 1
BE Quick
Assets
BE Current
Liabilities
1003992116
953610184
973643009
998532741
945273443
1047900606
The industry standard norms for quick ratio is 0.8 1. The expected break even
quick assets are high and break current liabilities are low. The data shows that the
firm is not expected to meet its industry standard norms till the year 2012-13. It is
back by 0.19, 0.14 and 0.09 for the year 2010-11, 2011-12 and 2012-13 respectively.
The firm has to adopt necessary policies to make the quick ratio as a standard one
as it represents the ready cash available to its liabilities.
The current ratio is expected to meet its standards by the year 2011-12 whereas in
case of quick assets it is not so. It shows that the majority of its current assets are
held by inventories. So the firm has to convert its inventories to either cash or sundry
debtors. At the same time the firm has to reduce its current liabilities like sundry
creditors to meet its standard norms.
As per the above breakeven analysis, there are two different breakeven current
liabilities figure which has very high difference. This is because of value of current
assets and quick assets in which inventories hold larger amount.
Equity
Debt - Equity
Ratio
Year
Total Debt
2010-11
1183019942
860746887
1.37
2011-12
1171920382
943142093
1.24
2012-13
1141029961
1040846391
1.10
Std
Norms
< 1.65
BE Debt
BE Equity
1420232364
716981783
1556184454
710254777
1717396545
691533310
The industry standard for debt equity ratio is less than 1.65. The expected
breakeven debt is high and break even equity is low. The data shows that the firm is
expected to have good ratio between debt and equity which is back by 0.28, 0.41
and 0.55 for the year 2010-11, 2011-12 and 2012-13 respectively.
From the data two observations can be made, (i) Firm is expected to utilize its own
funds for its investments or (ii) Firm is expected to reduce its investments.
If the firm is expected to utilize its funds for investments, it is quite confident about its
returns on its investment and it also attracts the creditors as they have less risk.
If the firm is expected to reduce its investments either the firm has got enough
investments or the firm may not be confident about their returns on investments.
Debt Assets Ratio
Year
Total Debt
Total Assets
Debt - Assets
Ratio
2010-11
2082161858
3151042611
0.66
2011-12
1978053765
3203129538
0.62
2012-13
1879151077
3258926145
0.58
Std
Norms
0.5 - 1
BE Debt
BE Assets
1575521305
4164323716
1601564769
3956107530
1629463073
3758302153
The industry standard norms for debt to assets ratio is 0.5 1. The expected
breakeven debt is low and breakeven asset is high which shows that the firm
satisfies the standard norms in upcoming years. The firm is expected to have good
ratio between debt assets which is back by 0.34, 0.38 and 0.42 for the year 201010, 2011-12 and 2012-2013 respectively when compared with maximum value.
It also shows that the firm is expected to utilize its own funds for financing its own
assets as the debt decreases correspondingly assets increases.
As per the above breakeven analysis, there are two different breakeven debt values
with slight difference. From this analysis it is better to consider the breakeven debt of
debt to assets figure because the firm goes for borrowings to finance its assets and
not maintain the standard for debt to equity ratio. Anyway it also satisfies the
standards of debt equity too.
Closing Stock
Inventory
Turnover Ratio
3514686561
847655111
4.15
2011-12
4217623874
864608214
4.88
2012-13
5061148649
881900378
5.74
Year
Net Sales
2010-11
Std
Norms
BE Sales
BE Closing
Stock
5085930669
585781094
5187649282
702937312
5291402268
843524775
The industry standard norms for inventory turnover ratio are 6 times. The expected
breakeven sales are high and breakeven closing stock is low. The data shows that
the firm does not meet its standards till the year 2012-13. It is back by 1.85, 1.12 and
0.26 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt
necessary policies to increase the sales or to decrease its inventories. There is also
possibility that the firm may adopt conservative policy on its raw materials like cotton
as the price of cotton fiber is increasing.
At the same time, the firm has to increase its sales by adopting better marketing
policies and promotion strategies or to reduce the inventories by having a control its
production and raw materials.
Year
Net Sales
Avg Debtors
Std Norms
2010-11
3514686561
403526275
8.71
2011-12
4217623874
411596800
10.25
2012-13
5061148649
419828736
12.06
BE Sales
BE Debtors
2421157648
585781094
2469580801
702937312
2518972417
843524775
The industry standard norms for debtors turnover ratio is 6 times. The expected
breakeven sales are low and breakeven debtors are high. The data shows that the
company has very good debtors turnover which shows that the firm is able to collect
its receivables from its debtors, which is up by 2.71, 4.25 and 6.06 for the year 201011, 2011-12 and 2012-13 respectively.
As per the above breakeven analysis, there are two different breakeven sales figure
with very high differences. From this analysis it is better to consider the debtors
turnover ratio because it is impossible to increase the sales by 200% approximately
as per the inventory turnover data. This shows that the firm holds very huge amount
of inventory which can also be derived from quick ratio. So the firm has to take
necessary steps to control its inventory.
Creditors Turnover Ratio
Net Credit
Purchase
Avg
Creditors
2010-11
2392973673
371676165
6.44
2011-12
2868576684
390259973
7.35
2012-13
3439240462
409772972
8.39
Year
Creditors
Turnover
Std
Norms
BE Purchase
BE Creditors
2230056988
398828945
2341559838
478096114
2458637829
573206744
The industry standard norms for creditors turnover ratio is 6 times. The expected
breakeven purchase is low and breakeven creditors are high. The data shows that
the company is expected to have good creditors turnover ratio which means that
they are payables are compensated on fine time interval. It is up by 0.44, 1.35 and
2.39 for the year 2010-11, 2011-12 and 2012-13 respectively. This policy attracts the
creditors to have business with this company.
Return on Assets
Year
PBIT
Total Assets
Return on
Assets
2010-11
535977572
3151042611
0.17
2011-12
643173086
3203129538
0.20
2012-13
771807703
3258926145
0.24
Std
Norms
0.14
BE PBIT
BE Assets
441145966
3828411226
448438135
4594093471
456249660
5512912165
The industry standard norms for return on assets are 0.14 (14%). The expected
breakeven PBIT is low and breakeven Assets are high. The data shows that the
company meets its standard norms in upcoming years and it is also expected to
have better returns when compared standard norms. It is up by 0.03, 0.06 and 0.10
for the year 2010-11, 2011-12 and 2012-13 respectively. This shows that the assets
are used efficiently and the operating efficiency is also good.
Return on Capital Employed
Total Capital
Employed
Return on Capital
Employed
Year
PBIT
2010-11
535977572
2718308097
0.20
2011-12
643173086
2748758299
0.23
2012-13
771807703
2781836344
0.28
Std
Norms
0.14
BE PBIT
BE Capital
Employed
380563134
3828411226
384826162
4594093471
389457088
5512912165
The industry standard norms for Return on Capital Employed (ROCE) are 14%. The
expected breakeven PBIT is low and breakeven Capital Employed is high. The data
indicates that the firm meets its standards in upcoming years. It is up by 0.06, 0.09
and 0.14 for the year 2010-11, 2011-12, 2012-13 respectively. It indicates that the
firm has enhanced returns when compared with standard norms.
As per the above breakeven analysis, there are two different breakeven PBIT
figures. From these it is better to consider the breakeven PBIT from Return on
Assets (ROA) because Capital employed does not include Current Liabilities. So the
firm expects return on the basis of total assets employed for the business as it is the
efficient one.
Operating cycle and cash cycle are two important components of working capital
management. Together they determine the efficiency of a firm regarding working
capital management.
Operating cycle refers to the delay between the buying of raw materials and the
receipt of cash from sales proceeds. In other words, operating cycle refers to the
number of days taken for the conversion of cash to inventory through the conversion
of accounts receivable to cash. It indicates towards the time period for which cash is
engaged in inventory and accounts receivable. If an operating cycle is long, then
there is lower accessibility to cash for satisfying liabilities for the short term.
Operating cycle takes into consideration the following elements: accounts payable,
cash, accounts receivable, and inventory replacement.
Cash cycle is also termed as net operating cycle, asset conversion cycle, working
capital cycle or cash conversion cycle. Cash cycle is implemented in the financial
assessment of a commercial enterprise. The more the figure is increased, the higher
is the period for which the cash of a commercial entity is engaged in commercial
activities and is inaccessible for other functions, for instance investments. The cash
cycle is interpreted as the number of days between the payment for inputs and
getting
cash
by
sales
of
commodities
manufactured
from
that
input.
The fundamental formula that is applied for the calculation of cash conversion cycle
is as follows:
Year
Inventory
Period
Receivable
Period
Payable
Period
Operating
Cycle
Cash
Cycle
2010-11
88.03
41.91
56.69
129.94
73.24
2011-12
74.82
35.62
49.66
110.44
60.79
2012-13
63.60
30.28
43.49
93.88
50.39
140.00
129.94
110.44
120.00
93.88
100.00
80.00
73.24
Operating Cycle
60.79
50.39
60.00
Cash Cycle
40.00
20.00
0.00
2010-11
2011-12
2012-13
Analysis: A short cash cycle reflects sound management of working capital. On the
other hand, a long cash cycle denotes that capital is occupied when the commercial
entity is expecting its clients to make payments. As per the standard norm it should
be less than 120 days for a textile industry. The forecasted data shows that the
efficiency of accessibility of cash for other instances is good as it is low when
compared with standard norms.
Growth Rates
Firms generally state corporate goals in terms of growth rates. Growth is often the
central theme of corporate planning. It is year over year change expressed in
percentage. The emphasis on maximizing shareholder value as the principal goal of
the firm, the exertion of planners with growth seems like riddling.
While firms are interested in growth, they may be reluctant to raise external equity.
There are two growth rates to overcome this reluctance in the context of long term
financial planning. They are,
1. Internal Growth Rate.
2. Sustainable Growth Rate.
Internal Growth Rate
The internal growth rate is the maximum growth rate that can be achieved with no
external financing. This is the growth rate that can be sustained with retained
earnings, which represent internal financing.
The formula used to calculate internal growth rate is
Year
Return on
Assets
Plough back
Ratio
2010-11
0.17
0.83
16%
2011-12
0.20
0.81
19%
2012-13
0.24
0.80
23%
19%
16%
15%
10%
5%
0%
2010-11
2011-12
2012-13
The data shows the internal growth rate for the forecasted year. It seems that the
firm will have fine internal growth rate in the upcoming years. The firm is expected to
have 16%, 19% and 23% for the year 2010-11, 2011-12 and 2012-13 respectively
with no external financing requirements.
Year
Return on
Equity
Plough back
Ratio
Sustainable growth
rate
2010-11
0.11
0.83
9.7%
2011-12
0.12
0.81
10.5%
2012-13
0.13
0.80
11.5%
11.0%
10.5%
9.7%
10.0%
9.5%
9.0%
8.5%
2010-11
2011-12
2012-13
The data shows the sustainable growth rate of the firm for forecasted year. It seems
that the firm will have fine sustainable growth rate in the upcoming years. The firm is
expected to have 9.7%, 10.5% and 11.5% for the year 2010-11, 2011-12 and 201213 respectively without resorting to external equity requirements.
Recommendations
Conversion of open credit customers to bank financed customers: The
Company has a policy of discounting or receivable purchase with the bank,
which can be converted to discounting without recourse or receivable
purchase backed by Insurance scheme. In case of non- payment of such
bills, the sufferer will be the factor (bank) or insurance company, firm will bear
almost no risk.
Credit sales to retailers: The Company should use other parameters also to
determine the credit scoring of a debtor. The parameters often used for credit
rating are customers profile, its market share, technology standards, capital
investment, credit history and ability to pay debts on time.
Securitization from open credit customers:
finance all its customers through bank, it becomes necessary under some
circumstances for the company to sell its goods to customers who are not
under the bank finance scheme. Thus converting such customers under the
financing scheme may not also be possible. So, the company can make
provisions for circumstances for the securitization of such customers.
Collection of post dated cheque may also be a good instrument.
The indirect expenses for the company are high which as a result leads to low
net profit margin (4.06%) for the company. It may be due to inefficiency of the
marketing department and production department leading uncontrolled
promotional and other expenses on processing the fabrics and materials,
inefficient utilization of resources which should be controlled.
As per the data, majority of the current assets are blocked with slow moving
inventories because of which company is facing liquidity problem which is
expected to have 4.15, 4.88, and 5.74 for the upcoming years where the
standard norm is 6. The quick ratio is not up to the mark because of the value
of inventory. The firm has to control its capacity on over production or the firm
has to adopt proper promotional strategies to move the goods. So, the firm
should work towards the efficient management of inventories.
The debt equity ratio is good from the creditors point of view but not from
the companys point of view. The firm is expected to have 1.37, 1.24 and 1.10
for the upcoming years because it is expected to use the available reserves
and surplus for further investments. The company should go for long term
loans to broaden their investment as well as tax shield on its profit.
As fixed assets turnover ratio is less than the standard it shows that the
companys operating efficiency is not up to the mark. As, the textile industry is
facing the economic problem like exchange rate against US dollar for export
trade and the cost major raw material i.e. cotton has been increasing rapidly,
they have restricted their usage of fixed assets like plant and machinery. The
company should try to improve its operating performance by efficient use of
fixed assets for the future.
Though the company tries to finance all its customers through bank, it
becomes necessary under circumstances for the company to sell its goods to
customers who are not under the bank finance scheme. Thus converting such
customers under the bank financing scheme may not also be possible. So,
the company can make provisions for circumstances under which such sale
will take place and review it regularly.
Conclusion
The project is executed by considering the financial 2009 10 as a base year
because the whole economy was experiencing recession in the previous years. The
company is expected to have good financial position in future as it is expected to
have good turnovers of sales, debtors, creditors and its assets. The firm is also
expected to have ratios between debt, equity and its assets which show the firm
uses its own funds for further investments which are a raising flag for its investors.
As, the firm is facing the difficulty on indirect expenses and its inventories however,
the above mentioned are some of the recommendations that could improve the
financial position of the company if implemented.
Note: The recommendations are brought to the notice of the company after the
effective study on economic conditions and proper analysis of financial statements
during the period of my study. I would like to thank the company, Royal Classic
Group for giving me this great opportunity of doing this project. I would then like to
give a great thanks to my mentor Mr. D.Joshua Chithambaram (Vice President
Finance) & Mr. V. Karthikeyan (Manager-Finance) for their continuous and
unending support during my project study. Finally, I would also like to thank all other
senior managers and officials who were able to spend their valuable time with me in
discussion of the subject area of my project and others for providing me the financial
data any other requirements for my study and successful completion of my project,
and thus contributed a great value to my project.
Bibliography
Financial Management Prasanna Chandra
Management Accounting M.Y. Khan and P.K. Jain
Advanced Accountancy S.M. Shukla
Financial Statements Royal Classic Group
www.wikipedia.org
www.rcg.in
www.mapsofindia.com