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Analysis of Working Capital For Dharampal Satyapal Ltd.
Analysis of Working Capital For Dharampal Satyapal Ltd.
SUBMITTED TO
Col. Mohan
SUBMITTED BY
Ankit Goel
MBA-IB
ROLL NO. C-07
COMPANY CERTIFICATE
TO WHOM IT MAY CONCERN
This is to certify that Ankit Goel , a student of Amity International Business School,
Noida, undertook a project on Working Capital Analysis at Dharampal Satyapal Ltd.
from 1st May09 to 30th June09.
Mr. Ankit Goel has successfully completed the project under the guidance of Mr. Neeraj
Goel. He is a sincere and hard-working student with pleasant manners.
CERTIFICATE OF ORIGIN
This is to certify that Mr. Ankit Goel, a student of Post Graduate Degree in MBA-IB
(2008-2010), Amity International Business School, Noida has worked in the Dharampal
Satyapal Ltd. under the able guidance and supervision of Mr.Neeraj Goel, (Manager
finance), Company Birla Power Ltd.
The period for which he was on training was for 8 weeks, starting from 1 st May09 to 30th
June09. This Summer Internship report has the requisite standard for the partial
fulfillment the Post Graduate Degree in International Business. To the best of our,
knowledge no part of this report has been reproduced from any other report and the
contents are based on original research.
Signature
( FACULTY GUIDE )
Signature
( Student )
ACKNOWLEDGEMENT
I would also like to thank the entire team of Dharamal Satyapal Ltd, for the constant
support and help in the successful completion of my project.
Signature
(Student)
TABLE OF CONTENTS
CHAPTER NO.
SUBJECT
CH.-1.0
Executive Summary
Ch.-2.0
Research Methodology
2.1
Primary Objectives
2.2
Methodology
2.3
Schedule
2.4
Scope of study
2.5
Limitations
Ch.-3.0
3.1
Ch.-4.0
4.1
Company Profile
Industry Profile
Evaluation of financial position
comparative studies
Ch.-5.0
Ch.-6.0
Ch.7.0
Recommendations
Ch.-8.0
Bibliography
Ch.-9.0
Annexture
9.1
Ch.-10.0
Ch.-11.0
Tables
Case Study
Sypnosis of project
EXECUTIVE SUMMARY
Ratio analysis
Birla power ltd. has both long term as well as short term sources
for current asset financing. It implies that company follows
matching principle for raising funds.
Birla power solutions ltd has high collection peri0od which shows
that money has been unnecessarily blocked with the debtors.
Company should reduce the holiday period else the company will
have to pay high carrying cost.
RESEARCH METHODOLOGY
PROJECT OBJECTIVE
METHODOLOGY
The methodology to be adopted for the project is explained as
under:
1. The initial step of the project was studying about the company
and then evaluating the financial position of the company on
the basis of ratio analysis.
2. Comparing the firms financial position with respect to its
competitors i.e. Hindustan Unilever Ltd., ITC and Kothari
Products with the help of following ratios
Liquidity ratios
Solvency/Leveraging ratios
Coverage ratios
Activity/turnover ratios
Profitability ratios
Investors ratios
,
3. The project will focus on the study of overall working capital
management at the organizations, for which the following
study and analysis will be undertaken:
i ) This project is aimed to estimate the operating
plan for the year 2007-2008
ii ) This will also include the calculations and
analysis of the operating cycle for the company.
Iii ) Study of C M A form and to prepare for the
current year.
Iv) It will also include the ratio analysis of the
financial statement so that the profitability and liquidity trade off can
be analyzed.
SCHEDULE
The complete project will be for duration of 8 weeks. The project has
been divided into 2 stages with approximate time period allotted to
each stage. Both the stages along with their approximate timelines are
as follows:
COMPANY PROFILE
Dharampal Satyapal Group (DS Group) is more than Rs.
1400 crores diversified conglomerate, which is committed towards
high quality products & credited with several innovations over last
seven decades. The sagacity to weave its business around consumer
needs has conferred DS Group with a distinct value. Efficient capital
structure, cutting edge technology, operational discipline and a
widespread distribution network, have together attributed to enhance
Brand DS, and enabled the organization to deliver continued growth
in all areas of operation.
Its undeterred pursuit for Quality & Innovation has led the Company
to progress on a path of growth. The Group has consolidated its
position into diversified sectors like FMCG, Packaging,
Hospitality, Rubber thread, Cement and other businesses.
Beginning its journey with Tobacco, DS Group successfully ventured
into the arena of Foods & Beverages, alluring the consumers with a
wide range of beverages, spices, and ready-to-eat snacks under the
brand Catch. While Catch Natural Spring Water and its variants
continue getting great response from consumers, Catch Salt &
Pepper tabletop dispensers hold their supremacy as Indias first
rotatory table top dispensers. Catch Spices excessively continues to be
Corporate
Office
DS Group
A-85, Sector 2,
Noida 201301
Ph : 0120 4032200 , 3083333
Fax : 0120 2522592
email :
ds@dsgroupindia.com
Management Team
Exhibit I
THE TOP 10 COMPANIES IN FMCG SECTOR
S.
NO.
Companies
1.
2.
3.
Nestl India
4.
GCMMF (AMUL)
5.
Dabur India
6.
7.
Cadbury India
8.
Britannia Industries
9.
10.
Marico Industries
Source: Naukrihub.com
The companies mentioned in Exhibit I, are the leaders in their
respective sectors. The personal care category has the largest number
of brands, i.e., 21, inclusive of Lux, Lifebuoy, Fair and Lovely, Vicks,
and Ponds. There are 11 HLL brands in the 21, aggregating Rs. 3,799
crore or 54% of the personal care category. Cigarettes account for 17%
of the top 100 FMCG sales, and just below the personal care category.
ITC alone accounts for 60% volume market share and 70% by value of
all filter cigarettes in India.
The foods category in FMCG is gaining popularity with a swing of
launches by HLL, ITC, Godrej, and others. This category has 18 major
brands, aggregating Rs. 4,637 crore. Nestle and Amul slug it out in the
powders segment. The food category has also seen innovations like
softies in ice creams, chapattis by HLL, ready to eat rice by HLL and
pizzas by both GCMMF and Godrej Pillsbury. This category seems to
have faster development than the stagnating personal care category.
Amul, India's largest foods company, has a good presence in the food
category with its ice-creams, curd, milk, butter, cheese, and so on.
Britannia also ranks in the top 100 FMCG brands, dominates the
biscuits category and has launched a series of products at various
prices.
In the household care category (like mosquito repellents), Godrej and
Reckitt are two players. Goodknight from Godrej, is worth above Rs 217
crore, followed by Reckitt's Mortein at Rs 149 crore. In the shampoo
category, HLL's Clinic and Sunsilk make it to the top 100, although
P&G's Head and Shoulders and Pantene are also trying hard to be
positioned on top. Clinic is nearly double the size of Sunsilk.
Dabur is among the top five FMCG companies in India and is a herbal
specialist. With a turnover of Rs. 19 billion (approx. US$ 420 million) in
2005-2006, Dabur has brands like Dabur Amla, Dabur Chyawanprash,
Vatika, Hajmola and Real. Asian Paints is enjoying a formidable
presence in the Indian sub-continent, Southeast Asia, Far East, Middle
East, South Pacific, Caribbean, Africa and Europe. Asian Paints is India's
largest paint company, with a turnover of Rs.22.6 billion (around USD
513 million). Forbes Global magazine, USA, ranked Asian Paints among
the 200 Best Small Companies in the World
Cadbury India is the market leader in the chocolate confectionery
market with a 70% market share and is ranked number two in the total
food drinks market. Its popular brands include Cadbury's Dairy Milk, 5
Star, Eclairs, and Gems. The Rs.15.6 billion (USD 380 Million) Marico is
a leading Indian group in consumer products and services in the Global
Beauty and Wellness space.
Outlook
There is a huge growth potential for all the FMCG companies as the per
capita consumption of almost all products in the country is amongst
the lowest in the world. Again the demand or prospect could be
increased further if these companies can change the consumer's
mindset and offer new generation products. Earlier, Indian consumers
were using non-branded apparel, but today, clothes of different brands
are available and the same consumers are willing to pay more for
branded quality clothes. It's the quality, promotion and innovation of
products, which can drive many sectors.
FINANCIAL ANALYSIS
LIQUIDITY RATIOS (SHORT- TERM LIQUIDITY)
Liquidity ratios measure the short term solvency, i.e., the firms ability
to pay its current dues and also indicate the efficiency with which
working capital is being used.
Commercial banks and short-term creditors may be basically interested
in the ratios under this group. They comprise of following ratios:
CURRENT RATIO OR WORKING CAPITAL RATIO
Current ratio is a relationship of current assets to current liabilities.
current assets means the assets that are either in the form of cash
or cash equivalents or can be converted into cash or cash equivalents
in short time(say within a year) like cash, bank balances, marketable
securities, sundry debtors, stock, bills receivables, prepaid expenses.
Current liabilities means liabilities repayable in as short time like
sundry creditors, bills payable, outstanding expenses, bank overdraft.
Computation. The ratio is calculated as follows:
Current ratio = Current assets
Current liabilities
Objective.
Current ratio
2008
DS
Group
2.35
ITC
1.60
HUL
0.66
Kothari
products
3.48
Inference
DS Group is in a better position to meet its short term obligations as can be seen by a
current ratio. This is mainly due to high proportion of Loans & Advances and a
significantly low proportion of Debtors.
The CR in case of HUL is less than 1 implying that it would not be able to meet its
obligations if they fall due at that time since current liabilities exceed current assets
which is not a healthy proposition.
The ratio is acceptable in case of ITC.
For Kothari product the ratio is high mainly due to significantly high debtors and Loans
Advances.
Quick Ratio
2008
DS
Group
1.91
ITC
0.67
HUL
0.27
Kothari
products
3.35
Inference
DS Group is better off than ITC and HUL in meeting the short -term debts by selling all
liquid assets of the company at a very short notice.
May be that ITC and HUL are indulged in over-trading. The company should try to keep
ratio greater than 1. Kothari product is also in an excellent position with a high Quick R
Debt-equity Ratio
Objective.
DS
Group
ITC
HUL
2008
0.21
0.02
0.20
Inference
In ITC there is greater use of capital being supplied by the proprietor.
Borrowing capacity is being underutilised.
For DS Group and HUL the proportion of debt to shareholders fund is almost same.
However, there is greater use of long term debt in DS as compared to HUL.
Total Assets
to Debt Ratio
DS
Group
ITC
HUL
2008
79.48
64.58
Inference
In case of DS Group there is greater dependence on outside loans for financing the ass
which is not a healthy sign.
In case of ITC there is greater safety margin available to the providers of long term de
In case of HUL it is satisfactory.
Proprietary Ratio
The proprietary ratio establishes a relationship between proprietors
fund and total assets.
Proprietors fund means share capital plus reserves and surplus both of
capital and revenue nature. Loss, if any, should be deducted. Funds
payable to others should not be added.
Computation. This ratio is worked out as follows:
Proprietors Ratio = Proprietors Fund or Shareholders Fund
Total Assets
Objective.
Proprietary
Ratio
DS
Group
ITC
HUL
Kothari
Products
2008
0.35
0.69
0.23
0.89
Inference
Highest ratio is for Kothari products indicating shareholders have provided majority of
to purchase the assets instead of relying on others sources of funds.
DS Group and HUL are majorly dependent on outsiders for funding the assets / working
For ITC it is on a better side with major funding done by proprietors.
DS Group should increase the shareholders fund and try to bring the
ratio above 0.50.
Total Debt
Ratio
DS
Group
ITC
HUL
2008
0.23
0.02
0.07
Inference
DS Group uses a greater proportion of debt as
compared to ITC and HUL.
ITC has a very low ratio debt ratio indicating there is more reliance on
capital provided
by the proprietors.
This ratio indicates the extent to which the long term funds are
sunk into fixed assets.
A very high trend of this ratio may indicate that a major portion
of long term funds is utilized for the purpose of fixed assets
leaving a small proportion for the investment in the current
assets or working capital.
Fixed Assets
to Capital
Employed
Ratio
DS
Group
ITC
HUL
Kothari
Products
2008
0.13
Inference
This ratio indicates that a major portion of long-term funds is utilized
for the purpose of fixed assets leaving a small portion for the
investment in current assets or working capital. In DS group a small
proportion of capital employed is used for the purpose of fixed assets.
Objective.
Inventory to
Net Working
Capital Ratio
DS
Group
ITC
HUL
Kothari
Products
2008
0.33
1.56
0.05
Inference
In DS Group Inventory form nearly one-third of the working capital
unlike in ITC where Inventories form majority of the Working capital
which is not a healthy proposition.
PROFITABILITY RATIOS
Profit as compared to the capital employed indicated profitability of the
concern. A measure of profitability is the overall measure of efficiency.
The different profitability ratios are as follows:
The Net profit ratio establishes the relationship between net profit and
net sales, expressed in percentage form.
Net Profit is derived by deducting administratitive and marketing
expenses, finance charges and making adjustments for non-operating
expenses and incomes.
Computation. This ratio is calculated as follows:
Net Profit ratio = Net Profit after taxes x 100
Net Sales
Objective.
Net Profit
Ratio
DS
Group
ITC
HUL
Kothari
Products
2008
0.11
0.22
0.14
0.38
Inference
Kothari product has been able to generate a high Net profit
ratio among the four.
For DS Group the ratio is on a lower side so it should aim
to achieve a higher ratio.
COVERAGE RATIOS
Interest Coverage
Ratio
DS Group
ITC
HUL
Kothari
Products
2008
41.37
74.48
361.63
Inference
Capital Turnover ratio establishes between the Net Sales and the
Capital Employed of a firm.
Computation. This ratio is computed with the help of the following
formula:
Capital turnover ratio =
Net sales
Capital Employed
Objective.
Capital Turnover
Ratio
2008
DS Group
0.57
ITC
Kothari
Products
HUL
1.17
9.11
0.30
Inference
In DS Group and kothari products capital employed is not being utilised effectively to g
maximum sales. In case of ITC it is satisfactory.
Capital employed is utilised most effectively in case of HUL as it has been successfully
generate good amount of sales with the capital employed.
Capital turnover ratio indicates that the firms capital employed is
being efficiently used. This ratio indicates that the organization is able
to achieve maximum sales with minimum amount of capital employed.
It indicates that the capital employed is turned over in the form of
sales more number of times.
The working capital turnover ratio indicates the number of times a unit
invested in working capital produces sale. In other words, this ratio
shows the efficiency in the use of short-term funds for achieving sales.
Working capital is computed by deducting current liabilities from
current assets. A careful handling of the short-term assets and funds
will mean a reduction in the amount of capital employed thereby
improving turnover.
Computation. The ratio is calculated as follows:
Working capital turnover ratio =
Net sales
Working capital
Objective.
Working Capital
Turnover Ratio
DS Group
ITC
HUL
Kothari
Products
2008
1.44
5.35
-7.84
0.93
Inference
For HUL it is coming out to be negative. In ITC there is better use of
working capital for
generating sales.
In DS Group the management needs to utilize the working capital in a better
manner so
that it can increase the sales.
Raw Material
Average Raw Material
Inventory
Raw Material
Inventory
Turnover
DS
Group
ITC
HUL
Kothari
Products
2008
3.24
1.45
2.34
10.72
Inference
Raw material inventory turnover ratio is increasing for the DS
Group. Which indicates the increasing efficiency in the management
of the inventory This shows that the company is having sufficient of
sales.
DS Group
ITC
HUL
2008
26.42
13.36
18.70
Objective.
On the other hand, a low inventory turnover ratio may indicate over
investment in inventory, existence of excessive or obsolete/nonmoving inventory, improper inventory management, accumulation
of inventories at the year end in anticipation of increased prices or
sales volume in near future and so on.
There can be no standard inventory turnover ratio which may be
considered ideal. It may depend on nature of industry and
marketing strategies followed by the organization.
Inference
DS Group has the highest ratio among the category which is a good
sign as it indicates the increasing efficiency in the management of
the inventory. This shows that the company is having sufficient
amount of sales. This ratio indicates that maximum sales turnover is
achieved with the minimum investment in inventory.
Net Sales
Total Assets
Total Assets
Turnover
DS
Group
ITC
HUL
Kothari
Products
2008
0.44
0.83
2.11
0.27
Net Sales
Fixed Assets
Fixed assets include net fixed assets, i.e., fixed assets after
providing for depreciation
.
Fixed Assets
Turnover
DS
Group
ITC
HUL
Kothari
Products
2008
4.40
1.87
7.96
7.17
Net Sales
Current Assets
Objective.
Current
Assets
Turnover
DS
Group
ITC
HUL
Kothari
Product
s
2008
0.82
2.00
4.07
0.67
Objective.
This ratio indicates the speed at which the sundry debtors are
converted in the form of cash. However this intention is not
correctly achieved by making the calculations in this way.
Debtors turnover
Ratio
DS Group
ITC
HUL
Kothari
Products
2008
43
18
29
Daily Sales
DS Group
ITC
HUL
Kothari
Products
2008
151
4016
3812
47
Inference
It is highest in case of ITC followed by HUL and DS Group
respectively.
b) Calculation of Average Collection Period:
Average Sundry Debtors
Daily Sales
The average collection period as computed above should be compared
with the normal credit period extended to the customers. If the
average collection period is more than normal credit period allowed to
the customers, it may indicate over investment in debtors which may
be the result of over-extension of credit period, liberalization of credit
terms and ineffective collection procedures.
Average
Collection Period
DS Group
ITC
HUL
Kothari
Products
2008
20
12
74
Inference
The firm should try to reduce its debtors holding period . By this, the
funds which are blocked with the customers, and hence are becoming
idle, can be reduced and that money can be utilized for other profitable
purposes.
DS
Group
ITC
HUL
2008
6.30
1.97
1.64
DS Group
ITC
HUL
57
182
219
Creditor Days
2008
Inference
The firm is having low credit holding period it can try to increase
is so that, those funds can remain with it for a longer period and
can be utilized for fulfilling the working capital requirement. For
this purpose firm can use little strict credit standards it can also
adopt discount policy.
RETURN ON INVESTMENT
The ratios computed in this group indicate the relationship between
the profits of a firm and investment in the firm. There can be three
ways in which the term investment may be interpreted, i.e., Assets,
Capital Employed and Shareholders Funds. As such, there can be three
broad classifications of ROI:
EBIT
Average Total Assets
Objective.
Return on Assets
(ROA)
DS Group
ITC
HUL
Kothari
Products
2008
0.07
0.29
0.29
0.13
Inference
For ITC and HUL it is on same side indicating that assets have been
utilised well to generate earnings.
In case of DS Group and kothari products it is on a lower side so the management nee
make sure it utilises the assets well enough to generate good earnings.
Objective.
Return on Capital
Employed
DS Group
ITC
HUL
Kothari
Products
2008
0.09
0.38
1.01
0.14
Inference
A high ratio in case of HUL indicates a better and profitable use of long term funds
of owners
and creditors.
In case of ITC it is satisfactory. However, for DS Group and kothari products it is
low.
It is calculated as:
This is the most popular ratio to measure whether the firm has
earned sufficient returns for its shareholders or not. As such, this
ratio is the most crucial one from the owners/shareholders point
of view. Higher the ratio better will be the situation.
Return On Equity
DS
Group
ITC
HUL
Kothari
Products
2008
0.13
0.26
1.28
0.11
Inference
HUL has been able to generate exceptionally high ROSF. Higher the return more
satisfied
will be the shareholders.
For DS Group and ITC it is good but slightly on a lower side. Kothari product has the low
return among the category.
INVESTOR RATIOS
Earnings per Share (EPS)
Computation. The ratio is calculated as:
Net Profit after Taxes preference Dividend
Earnings per
share (Rs.)
DS
Group
ITC
HUL
Kothari
Products
2008
26.99
8.39
8.69
97.19
These phases affect cash flows, which most of the time, are neither
synchronized nor certain. They are not synchronized because cash
flows usually occur before cash inflows.
Cash inflows are uncertain because sales and collections which give
rise to cash inflows are difficult to forecast accurately, on the other
hand, are relatively certain. The firm is, therefore, required to invest in
current assets for a smooth, uninterrupted functioning. It needs to
maintain liquidity to purchase raw materials and pay expenses such as
wages and salaries, other manufacturing, administrative and selling
expenses and taxes as there is hardly a matching between cash inflows
and outflows. Cash is also held to meet any future exigencies. Stocks
of raw materials and work-in-progress are kept to ensure smooth
production and to guard against non-availability of raw material and
other components. The firm holds stock of finished goods to meet the
demand of customers on continuous basis and sudden demand from
some customers. Debtors are created because goods are sold on credit
for marketing and competitive reasons. Thus, a firm makes adequate
investment in inventories, and debtors, for smooth, uninterrupted
production and sale.
The raw material conversion period is the average time period taken to
convert material into work-in-progress. Raw material conversion period
depends on: (a) Raw material consumption per day, and (b) Raw
material inventory. Raw material consumption par day is given by the
total raw material consumption divided by the number of days in the
year (say 360). The raw material conversion period is obtained when
raw material inventory is divided by raw material consumption per day.
Raw material conversion period = Raw material inventory
[Raw material consumption]/360
work-in-progress inventory
[Cost of production]/360
Finished goods conversion period is the average time taken to sell the
finished goods. It can be calculated as followsFinished goods inventory
[Cost of goods sold]/360
Creditors
[Credit purchases]/360
In practice, a firm may acquire resources (such as raw materials) on
credit and temporarily postpone payment of certain expenses.
Payables, which a firm can defer, are spontaneous sources of capital
to finance investment in current assets. The creditors deferral period
is the length of time the firm is able to defer payments on various
resource purchases.
Net operating cycle is also referred to as cash conversion cycle. It is
the net time interval between cash collections from sale of the product
and cash payments for resources acquired by the firm. It also
represents the time interval over which additional funds, called
working capital, should be obtained in order to carry out the firms
operations. The firm has to negotiate working capital from sources
such as commercial banks. The negotiated sources of working capital
financing are called non-spontaneous sources. If net operating cycle
of a firm increases, it means further need for negotiated working
capital.
There are two ways of calculations of cash conversion cycle. One is
that depreciation and profit should be excluded in the computation of
cash conversion cycle since the firms concern is with cash flows
associated with conversion at cost; depreciation is a non-cash item and
profits re not costs.
A contrary view air that a firm has to ultimately recover total costs and
make profits; therefore the calculation of operating cycle should
include depreciation, and even the profits.
The above operating cycle concept relates to a manufacturing firm.
Non-manufacturing firms such as wholesalers and retailers will not
have the manufacturing phase. They will acquire stock of finished
goods and convert them into debtors and debtors into cash. Further,
service and financial enterprises will not have inventory of goods
(cash will be their inventory). Their operating cycles will be the
shortest. They need to acquire cash, then lend (create debtors) and
again convert lending into cash.
Fixed assets are not efficiently utilized for the lack of working
capital funds
Seasonality of operations:
Firms, which have marked seasonality in their operations usually, have
highly fluctuating working capital requirements. If the operations are
smooth and even through out the year the working capital requirement
will be constant and will not be affected by the seasonal factors.
Production policy:
capital requirement of this firm will be lower than that of a firm, which
is purchasing cash but has to sell on credit basis.
Operating Cycle:
Time taken from the stage when cash is put into the business up to the
stage when cash is realized.
Thus, the working capital requirement of a firm is determined by a host
of factors. Every consideration is to be weighted relatively to
determine the working capital requirement.
Further, the determination of working capital requirement is not once a
whole exercise; rather a continuous review must be made in order to
assess the working capital requirement in the changing situation.
There are various reasons, which may require the review of the
working capital requirement e.g., change in credit policy, change in
sales volume, etc.
ISSUES IN WORKING CAPITAL MANAGEMENT
Working capital management refers to the administration of all
components of working capital cash, marketable securities, debtors
(receivables), and stock (inventories) and creditors (payables). The
financial manager must determine levels and composition of current
assets. He must see that right sources are tapped to finance current
assets, and that current liabilities are paid in time.
There are many aspects of working capital management which make it
an important function of the financial manager.
Matching approach
Conservative approach
Aggressive approach
Matching Approach
The firm following matching approach (also known as hedging
approach) adopts a financial plan which matches the expected life of
the sources of funds raised to finance assets. For e.g., a ten-year loan
may be raised to finance a plant with an expected life of ten years. The
justification for the exact matching is that, since the purpose of
financing is to pay for the assets, the source of financing for short-term
assets is expensive, as funds will not be utilized for the full period.
Similarly, financing the long-term assets with short-term financing is
costly as well as inconvenient as arrangement for the new short-term
financing will have to be made on a continuing basis.
Long-term financing
The above figure illustrated the matching approach over time. The
firms fixed assets and permanent current assets are financed with
long-term funds and as the level of these assets increases, the longterm financing level also increases. The temporary or variable current
assets are financed with short-term funds and as their level increases,
the level of short-term financing also increases.
Conservative approach
Under a conservative plan, the firm finances its permanent assets and
also a part of temporary currents assets with long-term financing. In
the periods when the firm has no need for temporary current assets,
the idle long-term funds can be invested in the tradable securities to
conserve liquidity. The conservative plan relies heavily on long-term
financing and, therefore, the firm has less risk of facing the problem of
shortage of funds.
Short-term
Financing
Current Assets
(b)
(a)
Long-term
Financing
Time
Aggressive approach
An aggressive approach policy is said to be followed by the firm when
it uses more short-term financing than warranted by the matching
plan. The firm finances a part of its permanent current assets with
short term financing. The relatively more use of short-term financing
makes the firm more risky.
(b)
(a)
Long-term
Fixed Assets
Time
INVENTORY MANAGEMENT
INTRODUCTION: Inventories constitute the most significant part
of current assets of a; large number majority of companies in
India. On an average, inventories are approximately 60 % of
current assets in public limited companies in India. Because of
the large size of the inventories maintained by the firm, a
considerable amount of funds is required to be committed to
them. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid
unnecessary investment.
Inventories are stock of the product a company is manufacturing for
sale and components that make up the product. The various forms in
which inventories exist in a manufacturing company are:
Raw materials are those basis inputs that re converted into
finished product through the manufacturing process. Raw
materials inventories are those units, which have been
purchased and stored for future productions.
Operating cycle period: the firm begins with the purchase of raw
material, which are paid for after a delay, which represents the
accounts payable period. The firm converts raw material into finished
goods and then sell the same. The time that, elapses between the
purchase of raw material and the collection of cash for the sales is
referred to as the operating cycle. The length or time duration of the
operating cycle of any firm can be defined as the sum of its inventory
conversion period and the receivables conversion period.
A) Inventory Conversion period (ICP): The time lag
between the purchase of raw material and the sale of
finished goods is the inventory conversion period. In the
manufacturing firm ICP consists of raw materials
conversion period (RPCP), work-in-progress conversion
period (WPCP), and the finished goods conversion period
(FGCP).
RMCP refers to the period for which the raw material is
generally kept in stores before it is used by the production
department. The WPCP refers to the period for which the raw
material remains in the production process before it is taken
out s a finished product. The FGCP refers to the period for
which finished goods remain in stores before being sold to a
customer.
B) Receivables conversion period (RCP): It is the time required to
convert the credit sales into cash realization. It refers to the period between
the occurrence of credit sales and collection from debtors.
The total of ICP and RCP is also known as Total Operating Cycle period
(TOCP). The firm might be getting some credit facilities from the supplier o a
material, wage earners, etc. this period for which the payment of these
parties are deferred or delayed is known as Deferral Period (DP). The Net
Operating Cycle (NOC) of the firm is arrived at by deducting the DP fro the
TOCP. NOC is also known as cash cycle.
RMCP = (AVG. raw material stock/ Total raw materials stock)*365
WPCP = (avg. work-in process/ Total work-in-process)*365
FGCP = (Avg. finished goods/ Total cost of goods sold)*365
RCP = (Avg. receivables / Total credit purchase)*365
DP = (Avg. creditors / Total credit purchase)*365
In respect of these formulations, the following points are note worthy:
Working Capital
NON-FUND BASED
1. LETTER OF CREDIT
(iii)
2. BANK GURANTEE
OBSERVATIONS
Audited
2005
Audited 2004
TOP
(months)
NOP
(months)
Estim.
2006
Projn.
2007
2.89
2.84
2.89
2.93
2.22
2.07
2.22
2.27
Birla power solutions ltd. is having low holding period for the
inventories which shows that it is following aggressive policy, which
might result in loss of sales.
Therefore, in my opinion the firm should try to shift towards more
conservative policy. The selection of right kind of policy is very
necessary for the full utilization of fixed assets. Because of low inventory
level, the firm may not be able to fulfill its customers instantaneous
needs.
2005
2006
2007
99.54
97.31
50.56
The firm should try to reduce its debtor holding period especially
domestic debtor holing period which is slightly high (i.e. approx. 50
days for the year 2005). By this, the funds, which are blocked with
the customers, and hence are becoming idle, can be reduced and
tat money can be utilized for other profitable purposes.
creditor days/ credit holding
period
2005
2006
2007
27.91
48.5
33.53
The firm is having low credit holding period it can try to increase is
so that, those funds can remain with it for a longer period n can be
utilized for fulfilling the working capital requirements. For this
purpose firm can be little strict credit standards it can also adopt
discount policy.
RECOMMENDATIONS
Current assets to fixed assets ratio
Birla Power Solutions Ltd. should determine the optimal level of
current assets so that the wealth of the shareholders is maximized.
It needs current assets and fixed assets to support a particular level
of current assets. As the firms output and sales are increasing and
will also increase in projected year 2007, it shows that company
needs to increase the current assets.
The level of current assets can be measured by relating current
assets to fixed assets. Dividing current assets by fixed assets vs.
CA/FA ratio. Assuming a constant level of fixed assets, a higher
CA/FA ratio indicates a conservative assets policy and a lower CA/FA
ratio means an aggressive current policy other factors remaining
constant.
year
audited
2005
audited
2006
audited
2007
estimated
2008
projn.
2009
Current assets
27802.88
24986.64
32012.72
37672
42004
Fixed assets
61493.38
74792.63
75426.93
73579
71524
0.45
0.33
0.42
0.51
0.59
CA/FA
force Birla Power ltd to borrow at high rate of interest. This will
adversely affect the credit worthiness of Birla Power ltd.
Thus company should maintain its current asse6s at the level where
the sum of both-cost of liquidity and cost of illiquidity is minimized.
Flexibility
It is relatively easy to refund short-term funds when for funds
diminishes. Long-term funds such as debenture loan or preference
capital cannot be refunded before time. Hence, Birla power ltd.
Should try to anticipate more in short-term funds than long-term
funds as it will reduce the interest rate and will increase the
liquidity.
Reduce the Operating cycle
Birla Power ltd. Should try to reduce its operating cycle. In year
ended 2005 company debtor collection period is 50 days. It shows
that company collecting period is very high. Thats why
unnecessarily company blocked its money with debtors. Hence
company should try to adopt new policies like cash credit policy and
discount credit policy.
BIBLIOGRAPHY
I.M PANDEY
Financial mgt using Financial modeling by Ruzbeh J.
Bodhanwala
M.Y KHAN
R.P Rustogi
The project deals with the working capital management in Birla Power
solutions ltd. For the study of working capital in the first of all I have
looked on the company profile,
Because working capital requirements may differ vastly according to
the profile of industry. Then I will analyze the working capital
management and fulfillment policies of the company.
Raw Materials
Work-in-progress
Finished goods
Receivables etc.
An industry had s to hold raw materials and work-in-progress (semifinished goods) to maintain production flow and finished goods to meet
the timely needs of its customers. The working capital requirement is,
therefore, directly linked with the inventory and the time taken by the
purchasers of the goods to pay the account.
Inventory management involves a trade-of between the costs
associated with the keeping inventory versus the benefit of holding
inventory. Higher inventory results in increased cost from storage,
insurance, spoilage and interest on borrowed funds needed to finance
inventory acquisition. However, an increase in inventory lowers the
possibility of the loss of sales due to stock outs and the incidence of
production slowdowns from inadequate inventory.
Accounts receivables arise due to credit sales affected y the firm.
While it may appear advisable to sale against cash only, conditions in
the market like a highly competitive one, might compel a company to
give credit in order to affect sales. Moreover, extending the credit often
results in higher sales and hence higher profits. These receivables are
influenced by a number of factors like credit policy, market strategy,
pricing policy, type of buyers, credit allowed by the competitors, etc.
Financing of working capital: The funds that are deployed on short term
are mainly used for the working capital or operating purposes. For the
day-to-day operations, a firm will have to provide money towards the
purchase of raw material, payment of salaries of employees, to extent
the credit to buyers of goods as well as to meet other day-to-day
obligations. However the firm can secure part of these funds from its
own suppliers of raw material and other needed suppliers. Therefore,
from the total requirement of funds for the operational purposes, the
credit the firm can obtain from others is deducted; the difference would
be the amount of money the firm has to find against the working
capital requirements.
Ratio Analysis of various factors will be done. With the help of ratio
analysis liquidity and profitability of the firm is analyzed.