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Submitted To Submitted By
Miss. Sundas Shaheen
Muhammad Ijaz M.B.A (Marketing) 41
My overall experience of preparing this report was a knowledgeable journey. I learn a lot about the functions of Ruby Textile Mills Ltd. Apart from this, by actually conducting this report; I also learnt practical application of what I have been studying in overall M.B.A. For completing this project I required the annual reports (5 years) of not only Ruby Textile Mills Ltd. but also of some other Textile Mills which are benchmark at this time in the industry in order to estimate the industrial profile, business processes and SWOT analysis. I got my required data from websites of insurance companies and from newspapers. While conducting this report I faced some problems in getting the data as at websites data is not managed very well. The knowledge of what I have studied in MBA also came in handy. Once every thing was found out it got very interesting.
“I dedicate this work of mine to my Teachers, My Parents and to all My Friends, who truly help and guide me in completing this project. “
I am grateful to Allah almighty, for enabling me to fulfill this tiring, but interesting job for the completion of my report.
The long and arduous task of developing this report was made easier by the help and guidance of my teachers Dr.Khwaja Amjad Saeed, Mr. Irshad and as well as Mr. Fida Hussain Bukhari.The whole practice of collecting material for the report compiling and composing was enjoyable.
I would not be going justice in presenting this report without mentioning the people around us who have been inextricably related with the completion of this report I extend my deep gratitude and heartiest thanks to my teachers and Coordinator for preparing this report.
TABLE OF CONTENTS
Introduction of Company-------------------------------------------06 Main Offices---------------------------------------------------------11 Organizational Hierarchy------------------------------------------12 Board of Advisory Committee------------------------------------13 Management of RTML---------------------------------------------17 Departments & functions-------------------------------------------20 Cash Flow Statements----------------------------------------------35 Financial analysis &Interpretation--------------------------------38 Competitors Analysis-----------------------------------------------51 Conclusion,Obligation,&Recomendation------------------------55
This report is written on the textile sector of Pakistan. This sector is playing a vital role in the economy of Pakistan not only by providing large number of employment opportunities but also major share of export of Pakistan. Pakistan is an agricultural country and textile sector has major contribution towards its GDP. Cotton is cash crop of Pakistan and the farmers of Punjab and Sindh mostly depend upon this crop. Due to international affairs and political reason, the curve of progress of this sector has a declining trend due to which the economy of Pakistan is suffering badly. After virus attack in 1992, the farmers of South Punjab and Rural Sindh were unable to meet the seeds, fertilizers and other expenditures. It is also one of the reasons that textile sector of Pakistan is in grasp of problems and stepping slowly towards recovery. Large number of textile units is declared sick industrial units. Faisalabad the centre of textile products in Pakistan has negative growth rate of textile in these years. Hundred of textile units are closed during this time and rate of unemployment is enhancing considerably.
OBJECTIVES OF STUDYING THE ORGANIZATION
The objectives of studying this organization are being elaborated below: 1. To study the performance of textile sector of Pakistan. 2. To find the reasons of downfall of this sector. 3. To know the view point of textile sector and stuffy their suggestions for uplifting of this sector. 4. To know the demand of textile sector for the improvement in the textile policy made by the Government. 5. To make the financial analysis of Ruby Textile Mills Ltd. 6. To give the recommendations for improvement of the Finance & Accounting System of Ruby Textile Mills Ltd.
OVERVIEW OF THE ORGANIZATION
BRIEF HISTORY Ruby Textile Mills Limited (RTML) is a company which was established in October 18,1980 as a private limited company and was subsequently converted into public limited company. the registered office of the company is located at 3-A,SMC Housing Scoietyu,Shara-e-Faisal,Karachi. RTML’s authorized and paid up Capital is Rs.400 million and Rs. 392 million respectively. The Company is listed at Karachi and Lahore stock Exchanges.
NATURE OF THE ORGANIZATION
Ruby textile Mills Ltd. is a ‘public limited company’ incorporated under Companies Ordinance 1984, and listed at Karachi and Lahore Stock Exchanges.
To be company recognized for its art of textile and best business practices.
The mission of the company is to operate state of the art textile plants capable of producing yarn and fabrics. The company will conduct its operations prudently assuring customer satisfaction and will provide profits and growth to its shareholders through: • • • • • Manufacturing of yarn and fabrics as per the customer’s requirements and market demand. Exploring the global market with special emphasis on Europe and USA. Keeping pace with the rapidly changing technology by continuously Balancing, Modernization and Replacement (BMR) of plant and machinery. Enhancing the profitability by improved efficiency and cost controls. Recruiting, developing, motivating and retaining the personnel having exceptional ability and dedication by providing them good working conditions, performance based compensation, attractive benefit program and opportunity for growth. • Protecting the environment and contributing towards the economic strength of the country and function as a good corporate citizen.
COMPANY’S QUALITY POLICY
COMMITMENT TO EXCELLENCE • All of our priorities action and products must be recognized as an expression of unique quality.
We are dedicated to produce fabrics and yarn of the best export quality to meet the requirement and expectations of our customers. We strive for continuous improvement in day-to-day quality work; organize the training and necessary feedback on our performance.
BUSINESS VOLUME The principal business of the Company is manufacturing and sale of cotton yarn and woven fabric. RTML’s production capacity consists of one main segments, manufacturing. Today Ruby Textile Mills Limited is the 5th largest manufacturing mills in Pakistan, with most modern and technologically advanced facilities. IN HOUSE POWER GENERATION The company has its own natural gas fired, captive power plants. The power generating capacity of these plants is 4.5 MW. The company has purchased three more generating sets of 3.0 MW capacities which are under installation and by addition of these generators the company will be in position to meet its power requirements EXPORT SALES Reliance Weaving Mills Limited enjoys excellent reputation in the international as well as domestic market due to its quality products of extended range. Many of the company’s customers have a long association with the company and attach a strong brand loyalty to the company’s products. The company has maintained its export performance during last several years and is one of the leading exporters of the country. NUMBER OF EMPLOYEES The company believes that its dedicated workforce is its biggest asset. At present the company employs 1400 people. Employee breakup is provided as per their position in the management hierarchy hereunder.
Chairman (01) Managers (35) Assistant Managers (85) Officers (153) Officials (300) Workers (825) Company Secretary (01)
PRODUCT LINES M/S Ruby Textile Mills Ltd has the following product lines. FABRIC Grey Woven Fabrics of all construction – with width range 45" to 124",Twill Fabric, Bedford cord, Satin, Stripe Satin, chessboard, Percales, Honey Comb, Sheeting, Poplin, Canvas, Bird eye, Stretch Twill, Double Pick Fabrics, Ottomans, Velveteen, Upholstery, Waffle, Huckaback etc. YARN In order to broaden the product range, along with the traditional usage of local Cotton, cotton of Australian & USA origin are also used to manufacture yarns for high strength, low-contamination and improved evenness yarns. Core-Spun stretch and low hairiness yarns are amongst their specialties
CERTIFICATES & ACCREDITATIONS: • • • The Cotton USA and Supima licenses have been obtained to supply Supima RWML is also Lycra Accredited by M/s Du-Pont. Weaving and Spinning Facilities are ISO – 9001: 2000 Certified by M/S SGS.
AWARDS The company has recently won (in November 2004) the “Special Merit Trophy” from the country’s Premier due to its excellent export performance.
CREDIT RATING The Company has been assigned a ‘Medium to Long Term’ Entity Rating at BBB+, whereas ‘Short Term Credit Rating’ Entity Rating at A-3 by M/s JCR-VIS Credit Rating Company (Pvt.) Ltd.
Organizational structure of the Reliance Weaving Mills Ltd. is discussed detailed below:
COMMENTS ON THE ORGANIZATIONAL STRUCTURE That is sign of good management. There are separate department controlled by the head of the each department a manager. By the division of the managerial activities the everyone is entrusted to his respective assignment but however a little bit exchange is normal , exchange of posts or in case of any employee turnover the colleagues have preferred to create such environment to get the activity done in case of absence of any person. While one thing is that all the decisions are being taken at the top level i.e. at the stage of the C.E.O. and another point which I have noted is that beyond the environment
of departmentalization no preference is given to retain the professional employees in their respective professional department. It has created a little bit phonation in the employees. As for as my visit to the site is concerned and w.r.t. my discussion to mill workers of the site decision of all kinds are being taken by the G.M. and no any other can just put his suggestions or convey his point of view to overcome any barrier or to solve any problem.. The span of control is short therefore the grip of administrative authorities is strong on the management. The chart of account of Reliance Weaving Mills Ltd. is such organized that the discipline in ideal in the head office employees.
Basically Ruby Textile Mills Ltd. has one operative unit which is manufacturing unit. This is a big listed public limited company exporting its major part of production. Main offices of Weaving Ruby Textile Mills Ltd. Lahore are provided as follows:
Room # 203-Faiyaz Center, 2nd floor,3-A, S.M.C.H.S., Shahrah- e- Faisal, Karachi-74400. Phone (+92-21)35396610, 34387710 Fax: (+92-21)34398810 Email:email@example.com
35-Industrial area, Gulburge-IIILahore. Phone: (+92-21)3576-1245,3576-1245 Fax: (+92-21)3576-1128,3571-1410 Email:firstname.lastname@example.org
Raiwand –Manga Road, Raiwand, District Kasur. Phone: (+92-42)3539-1035,3539-2658,3539-2659 Fax: (+92-42)3539-1037 Email:email@example.com
ORGANIZATION’S (RTML) HIERARCHY
CHIEF FINANCIAL OFFICER
CHIEF INTERNAL AUDITOR
ASSISTANT FINANCE MANAGER
DY. MANAGER TAX. MANAGER
ASSISTANT MARKETING MANAGER
ASSISTANT AUDIT OFFICER
DEPUTY CHIEF ACCOUNTANT REBATE ASSISTANT
Chairman and Chief Executive:
Board of Directors:
Mrs.Parveen Elahi Mrs.Naheed Javed Mr.Nabeel Javed Mr.Javed Usman Mr.Faizan Javed Mr.Mansoob A.Akhtar
Mr. Nabeel Javed Chairman Mr.Nabeel Javed Member Mr. Faizan Javed Member
M/S . Mushtaq & Co. Chartered Accountants, Hasrat Mohani Road ,Karachi.
M/S Ali Sibtain Fazli &ASSOCIATES
Askari Commercial Bank Limited Arif Habib Bank Ltd. Habib Bank Ltd. Standard Chartered Bank Ltd. Soneri Bank Ltd.
Registrar and Share Transfer Office
THK Associates (Private) Limited, Ground Floor, State Life Building-3 Dr.Ziauddin Ahmed Road, Karachi Tel: 111-000-322 Fax: 021 - 5655595
Registered Office/Head Office
Room # 203-Faiyaz Center, 2nd floor,3-A, S.M.C.H.S., Shahrah- e- Faisal, Karachi-74400. Phone (+92-21)35396610, 34387710 Fax: (+92-21)34398810 Email:firstname.lastname@example.org
& Chief Executive
Mr. Mohammad Hussain Hirji
Executive Vice Presidents (Marketing)
Syed Hassan Nadeem Rana Shahbaz Ahmed
Senior Vice Presidents
Mr. Muhammad Afzal (H.O) Engr. Ehtesham Malik (Engineering) Sheikh Abdul Qayyum (Claims) Mr. Muhammad Iqbal (Reinsurance) Mr. Waseemullah (Company Secretary/CFO) Mr.Najam Irshad
Senior Vice Presidents (Marketing)
Ch. Shams-ul-Haq Mr. Shah Saud Mirza Mr. Sarfraz Ahmed Tarrar
Maj. (Retd) Muhammad Ajmal Khan Mr. Ali Munem Shamsi Mr. Sohail Khalid Mr.Jamil Ahmed (C.A)
Vice Presidents (Marketing)
Mr. Mubashir-ul-Hassan Mr. Tahir-ul-Haq Sh.Muhammad Hanif Sh.Abdul Wahab
Assistant Vice Presidents
Mr. Ghulam Ashgar Mr. Waqas Ahmed Mr. Sohail Younas
Assistant Vice Presidents (Marketing)
Mr.Ikram Zai Mr.Moeenuddin
Mr. Tazeem Hussain Mr. Gulzar Hussain Shah Syed.Imran Abid (I.A) Mr.Noor Afsar Mr.Gulfraz Anis Mr. Muhammad Ali Soomro
Mr.Qamar Ikram Sheikh Mr.Shahid Hussain Mrs.Tallat Raza Mrs.Samina Khan Mr.Shahid Hussain Mr.Tahir Mahmood Mr.Faisal Ejaz Mr.Taqiuddin
STRUCTURE OF THE FINANCE DEPARTMENT
NUMBER OF EMPLOYEES WORKING IN THE FINANCE DEPARTMENT Finance department performs critical activity of total operation of the company. Operations of this department are so sensitive as company may flourish or collapse just because of the decisions of this department. As this critical job is being done in this department therefore its employees must be qualified, energetic and having sufficient capabilities of managerial operations. There are ten employees in this department. The employee chart of company’s finance department is given in figure provided hereunder.
CHIEF FINANCIAL OFFICER
ASSISTANT FINANCE MANAGER
TREASURY OFFICE BOY
Figure: Employee chart of finance department
FINANCE AND ACCOUNTING OPERATIONS
FUNCTIONS OF ACCOUNTS DEPARTMENT Accounts Department has the following main functions: • • • • • decisions. • • • • • • • • • • Book Keeping in computerized environment Maintaining records. Arrangement and best utilization of funds Cash management Provides reports for assistance in analysis to top management Analysis of reports Preparation of final accounts Arrangement of funds from the banks. Preparation of fund flow statement. Stock taking normally on monthly basis. Stock procurement Filling sales tax and income tax returns. Discounting of export bills from the bank Payment of utility bills and other expenses Preparation of annual Financial Statements of the company.
• Provide necessary assistance to the internal and external auditors on demand We can say that this department acts as a nervous system. Every matter firstly is brought in the knowledge of the head of this dept. The Head of this dept. is equipped with a very experienced Financial Controller who is a C.A (Finalist) and has a ten-year experience in related fields. All the vouchers, reports and any other document prepared by this dept. are vouched and signed by him.
FUNCTION OF BANKING SECTION
This section is also very important part of the account dept. all the functions that are related to the banks are handled in this section. Major functions of this section are as under; 1. 2. 3. 4. 5. 6. Preparation of Bank reconciliation statement daily basis. Vouching of the bank’s debit and credit advice. Preparation of the loan documents. Creation and application of funds adequately. All the works related to the letter of credit. Preparation of documents for Export Re-Finance.
BANK RECONCILIATION STATEMENT
Bank going-clerk collects the statements of the accounts and advice from the bank on daily basis so that true and fair position could remain in the books. All these transactions have been incorporated in the co.’s accounts when the treatment comes, the banking section reconcile it with their accounts. But due to some reasons, these transactions do not equally matched with the co.’ records. These reasons are: 1. 2. 3. Check issued by the co. to any party but not still presented to the bank. Check deposited but not cashed or cancelled due to some reasons. Any amount debited or credited by the bank but not treated in the co.’s
accounts due to disagree with the bank.
DEBIT AND CREDIT ADVICE
Banks going clerk collect debit and credit advices from the co. These advices are the reflection of the transactions between the company and the bank. When any amount is deducted from the company accounts due to any reason like; • • • Deduction of bank charges Payment of any amount to the party on behalf of the company The adjustment of loan as well as markup.
For these amounts the bank made the Debit Advice, means that certain amount has been deducted from the co.’s account and handover it to the employees of the co. ultimately the co. considered these as the expenses and deducts this amount from the banks ledger. Bank section credits these amounts from the accounts and makes and BDN (Bank Debit Note) through passing entry, signed it and send to F.M. who checks it and signed it and than it is send to Director for final approval so that its may be posted in to the computer in its particulars account. More over when the bank credit any amount in the company’s account due to some reasons like; • • • accounts • Refund of excess Mark-up if recovered by the bank Re-imbursement of loan Depositing of any amount in the bank by co. Depositing of any amount in the bank from any party in the company’s
For these the bank sends the Credit Advice to the RTML, means that the certain amount has been credited to the company’s accounts. There is the co. the section treat these pieces of advices in the company’s accounts of that certain bank and Debit the amount in the account.
EXPORT REFINANCE LOAN
Reliance Weaving Mills Limited is an export-oriented company. Its export sales are more than 90% of its sales. Under the facility provided by the State Bank of Pakistan, it avails the export finance/ refinance from different banks for exporting its commodities. EXPORT RE-FINANCE PART-I The following documents are required to present before the bank to avail that loan. • Sales contract for which export refinance is to be applied • Letter of credit opened by the buyer • Purchase order by the buyer The above documents are forwarded for the sanctioning of the refinance loan are checked by the bank for integrity and loan is sanctioned when the loan is sanctioned, the bank pass an entry in its books by crediting the co. with the export refinance loan amount which is called reimbursement. EXPORT RE-FINANCE PART-II This type of loan is provided against the previous export performance of the co. by dividing the total sale on 2.4 The following documents are required to present before the bank to avail that loan: • • • Statement of EE certified from the SBP Promissory note Request letter
These loans are much cheaper to other commercial loans because its markup is in ranging from 10% to 12%. OPENING OF LETTER OF CREDIT One of the most important functions of the commercial banks in the world is to finance the imports and exports trade. There are several ways of financing international trade, of all the methods available at present, the documentary letters of credit are most important because they undertake the beneficiaries to obtain money either immediately or within a mutual agreed period, provided the beneficiary fulfills the conditions lay down in the letter of credit.
Article-2 of the uniform custom and practice for documentary credit of the international chamber of commerce (ICC) defines the documentary credit as under; “Any arrangement, however, named or described, whereby a bank (the issuing bank), acting at the request and on the instructions of a customer (the applicant) or its own behalf is to make payment to or to the order of a third party (the beneficiary) , or is to accept and pay bills of exchange (draft/drafts) drawn by the beneficiaries, or authorizes an other bank to negotiate, against stipulated documents, provided that terms and conditions of credit are compiled with.” Form the above definition it means that a documentary letter is a bank’s written undertaking given to the exporter of the payment of a certain amount of money on behalf of the importer provided the exporter tenders to the bank or its overseas agent, the specified document within a specified period in accordance with the terms of understanding. LETTER OF CREDIT TREATMENT The company has to import following items for the continuation of its operation. 1. 2. Machinery Spare parts and Chemicals
The company has to request to open L/C for these imports. All the work related to the L/C is prescribed in the purchase order and send it to bank duly signed by import department. For opening of L/C amount of margin 10% of the total invoice cost and L/C opening charges are deducted by L/C opening bank. This amount is debited to the L/C account created for that particular L/C # , by debiting the margin and charges recovered by the bank. An entry is made. L/C # XYZ Margin Bank Dr. Dr. Cr.
When the imported items come into the counter, bank inform to get release the documents. By depositing the amount of the L/C is of sight nature. If the L/C is of deferred (30, 60, 90, 120 days) nature then the rate of the currency or the mark up 24
required to deposit by the company in addition to L/C value is decided between the bank and the company provide some guarantee to the bank or the bank decides on the credit worthiness of the company. Amount deposited to the bank is then debited to the L/C account by debiting the bank is then debited to the L/C account by debiting the bank or payable. An entry is made: L/C # XYZ Dr. Cr.
Bank/Import bill payable
After releasing the documents these are sent to the agent sitting in Karachi who then release the shipment from the port by paying all the expenses to cargo, carriers, customs, sales tax, income tax authorities. The company sends time to time the amounts to the agent for the particular L/C #. If there is no payment is made to the bank then bank create the PAD is favor of the company and recovered form the RWML otherwise make the loan duly a mutual consideration. L/C # XYZ Dr. Cr.
Import bill payable
Clearing agent after releasing the consignment dispatched it to the company and along with all documents (bill of entry and receipts of the expenses stated above). The company after checking all the documents sends the remaining amount if any to the agent. When all the amounts are paid to the agent for that certain L/C then the entry is made to close the account of the agent for that particular L/C. the entry is: L/C # XYZ Agent EXPORT BILLS NEGOTIATION This term is specified to the exports. When the company makes export sales, the buyer opens an L/C in favor of the company. As described earlier the L/C may be of different kinds from sight to 90& 120 days. Dr. Cr.
FUNCTIONS OF THE FINANCE DEPARTMENT
ACCOUNTING SYSTEM OF THE ORGANIZATION The Finance department deals with these accounting operations like, Cash & bank, inward invoicing, outward invoicing, Income and sales tax, Inventory accounts and payroll.
CASH & BANK It deals with all the payments and receipts of the funds. Payments are both cash and through cheque. Similarly receipts are both cash and through cheque. The above function is being performed at factory and Head office. Cash payments are made to temporary workers (wages), purchasers against expense summaries, for traveling & entertainments bills, for machinery maintenance & other minor services and petty cash payments. Certain payments are being made through cheque as supplier’s bill and utilities bill after verification by Plant Manager & checking by the Accounts Officer. Sash receipts from waste material sale and Fair Price Shop sale is received by the Accounts Officer. Cash receipts from local distributors are also received by him and deposited in Company’s Bank Account accordingly. The same procedure is in vogue at Head office. INWARD INVOICING Like Cash &Bank Inward invoicing also takes place at factory. cash purchases and credit purchases. OUTWARD INVOICING Outward invoicing deals mainly with the Marketing & Sales function. It also maintains the customer’s records. This section plays a vital role in preparing of acco9unts. The following documents are involved with Sales (i) Order Confirmation (ii) Marketing Order (iii) Invoice. This section does accounting of all the materials stores, spares & supplies. Purchases are classified into
EXCISE AND SALES TAX Reliance Weaving Mills Ltd. Maintains all of the necessary records to submit Monthly Sales Tax return to the Sales Tax department. The sales tax record of Daily Production report, Sales tax invoices, Supply register, Gate pass and Monthly sales tax return are maintained at factory.
INVENTORY ACCOUNTS This department is concerned with the control of inventory/stock carried by the entire company. The company have not separate purchase department hence all the purchases are conducted by storekeeper. Following are the item in the recording entries in the books. Raw material Packing material Miscellaneous items store All these materials are kept in the central stores and two storekeeper looks after the store. All purchases whether on credit or cash purchases arrived at the factory gate. Storekeeper records the received material in books and also bin ledger cards are used to record the material. PAYROLL Payroll section basically deals with payment of salaries and wages to the employees and workers. Like other sections, payroll is also computerized. In Reliance Weaving Mills Ltd following categories of employees and worker: Monthly paid workers Permanent worker Workers on daily wages
FINANCE SYSTEM OF THE ORGANIZATION
FINANCE SYSTEM OF THE ORGANIZATION Finance is the life blood of an organization. To meet the financial requirement of the company a separate finance deptt. is established under the supervision of general manager finance (Manager) Finance. Mr. Hamid Mehmood is manager Finance and finance deptt. falls under the control of Chief Financial Officer (CFO) Sheikh Abrar Manzoor, who is a qualified Chartered Accountant from institute of chartered Accountants of Pakistan (ICAP). The duties & functions of typical finance department can be classified into two categories. 1. 2. Planning Controlling
The first category is PLANNING and the second function is CONTROLLING. These activities are inter-related and inseparable because if there is no planning there will not be any control. Therefore, planning and control move together. Planning refers to the activities that bridge the gap from the starting point to the terminal point. Planning in the finance department under review refers to the activities of Cash Flow and Budget preparation. These are the major activities (planning) in any such department. Further Financial requirements are met through following ways. Banking Receipts and Payments Pledging of Stocks Hedging Brief detail of the above mentioned aspects is given hereunder. BANKING To meet it s financial requirements RWML has obtained financial assistance from various banks like; Habib Bank Limited Allied Bank Limited National Bank of Pakistan Union Bank Muslim Commercial Bank United Bank Limited Saudi Pak Commercial Bank Limited Loans and Advances Capital Market Mortgage of property
LOANS AND ADVANCES Loans and advances is another source of meeting the financial requirements of the RWML. Company meets its requirements through Muslim Commercial Bank United Bank Limited Allied Bank Limited Union Bank Limited National Bank of Pakistan Habib Bank Limited United Bank Limited
Bonds RWML being the 1st Co. in Southern Punjab Issued 7.5% bonds. And it was a very successful offering. RECEIPTS AND PAYMENTS Narrowing the collection from debtors period and widening the payment to supplier period is another source of funds which is also used artistically well by the management of Reliance Weaving Mills Ltd. This is done in such a way that it provides funds to the company for some vital days without agitating the supplies. It is the aim of every effective financial management setup to boost up its collection system and to delay its payments effectively. The company is also adapting effective modes for its receipt collection. The delay in payables is not slow enough to affect the company’s goodwill. Company is using the banking facilities for its receipts and payments. Only the daily laborers or the officials getting less than 10000 salaries are taking their pay and allowances through cash. Moreover, except petty expenses all the expenses are being met through cheques or bank drafts. In case of minimizing the import clearing charges co. is now using the facility of Telephonic Transfer (TT) and delay in the clearing of L/C bills and detention charges are being urgently cleared. Reliance Weaving Mills Ltd. is also using running finance accounts and cash finance accounts with its bankers to meet its money market and capital market requirements. CAPITAL MARKETS Financial Assets exists in the market/economy because an economic units investment in real assets frequently differs from its savings. The purpose of capital market is efficient 29
allocation of savings to ultimate users of funds.
Reliance Weaving Mills Ltd. is
benefiting from lease financing and issue of securities/bonds to capital markets. The allocation of funds in a sector of economy primarily occurs on the basis of risk & returns. This factor is influential in the financial management decision of RWML, also. PLEDGING OF STOCK Financing against the pledging of stock is one of the major sources of financing in RWML mostly working capital requirements are met through pledging of stock; Pledging of Reliance Weaving Mills Ltd. stock with Muslim Commercial Bank Pledging of Reliance Weaving Mills Ltd. stock with Habib Bank Limited Pledging of Reliance Weaving Mills Ltd. stock with Allied Bank Pledging of Reliance Weaving Mills Ltd. stock with Union Bank Financial requirements are also being met through; Pledging of finished goods inventory with Muslim Commercial Bank Pledging of finished goods inventory with Habib Bank Limited Pledging of finished goods inventory with Allied Bank Limited Pledging of finished goods inventory with National Bank Limited Pledging of finished goods inventory with Union Bank
MORTGAGE OF PROPERTY Demand finance requirements are met with mortgage of property of RWML (Ruby Textile Mils Ltd.). Money market loans are also obtained to meet the financial requirements of the company. As company enjoys very healthy relationships with its corporate associates and believes in longer term business relationship and believes in mutual cooperative efforts to boost the economy & contribute to uplift the corporate sector. BUDGETING Cash flow budget, Marketing operation budget, Production department budget are prepared in Reliance Weaving Mill Ltd. Finance System of the organization also covers the decision relation to the investment, financing and dividend.
USE OF ELECTRONIC DATA IN DECISION-MAKING
Reliance Weaving Mills Ltd. also uses the computer in order to record the information. Data related to economic activities of the company is recorded in computers and as well as manually. The company maintains a suitable Management Information System (MIS) by using electronic data processing for every department. Head of all departments send reports to the office of General Manager and then it is presented to the Board of Director. RWML’s Software Specification These are of two types; 1. System Software 2. Application Software SYSTEM SOFTWARE It is the operating system of computers. In RTML, they are using window base operating system. Window based software installed by the company. It is an operating system. The basis of system is a supervisor’s level that creates a number of Virtual machines (VMs). In each of these machines users can run their own program, using the terminal to control, the VM and also to provide the route by which they input to receive out put from their VM. Their operating System provides them every good level of security. APPLICATION SOFTWARE RTML got their system development in Visual tools. (Like Visual Basic + SQL Server). It is a very powerful language. They have following systems computerized. • • • • • • • Accounts system Sales System Both local and export. Share System Yarn Management Purchase System Inventory System Sales Dept. has the following sub-dept. 31
Local Sales Export Sales
Cloth Rags Cloth
Whenever they need some modification, in their system, their programs do so. They are using their system under the environment of Online System. PRESENTATION OF REPORTS No one system can access computer until using their personal password. So the system of RWML is also generating a broad no. of reports in confidential condition. Following are some important reports produced. By this system; • • • • • • • • • • • • Listing of all master files Listing of all ledgers files Sub ledgers Edit lists Due balances Day Book Purchase day book Sale day book Trail Balance Monthly Balances Outstanding Cheque Trail Balance Monthly Profit & Loss Account.
DATA FLOW In RTML, they are using Online System. In account dept. they are using four vouchers. These vouchers are as follows; • • Journal Voucher (bill payable) Bank Voucher Debit/Credit
Adjustment Voucher • • • • • • Chart of Account Employees Buyers Suppliers Banks Letter of Credits ( for Sale & Purchase)
Following are the files that are being maintained there;
The data about any voucher flow in a way that first of all, it comes to Keypunch Operator. He recognizes the type of voucher i.e. JV/BV/BDN/BCN. After recognizing the type, he assigns a specific code to the voucher depending upon that with which entity this voucher is related. After the keypunch Operator has assigned the code to the voucher then the accountant check that whether the voucher is assigned the code of a/c right or not. In no, then it is sent check to the F.M. to correctly assign their code to the voucher. If yes, them it is again sent to the internal auditor to check voucher, then edit list is displayed on the accountant’s screen and he checks the voucher entry. If the finds any error in the entry he asks back the K.P. to make the entry correct. If there is no error in inputting the voucher then it is sent to be C.E. for final approval. Data Security We use the term “data security” to mean protection of the data in the data base against the unauthorized or accidental disclosures, alteration or destruction. Realizing that perfect security is unattainable, the objective of data security is to minimize the risk and probability of loss and disclosure to the lowest affordable level. There, In RTML, they are securing there data in following ways; • • • • • Backup on daily basis. Protecting from unauthorized access Watchman UPS ( Non-interruptible Power Supply) Stabilizer
We have already described that TWML is running their computer network under the environment of W.S. Operating Systems. Their Operating systems provides them the facility to set different level passwords. Each level may be allocated different rights that are pre-specified. They are using five levels of data securing and only the authorized person can access the system up to the extent they have authority. These levels are as follows;
SYSTEM LEVEL SECURITY This is highest level of security. It has all the possible rights. It has access to change the different operating system protocols. It can change the different passwords. It can modify the levels of rights given to different users. In RTML it is carried by Muhammad Tousef the head of MIS Department. MANAGER LEVEL SECURITY This is the top most level in operational work. This level is also held by manager MIS Dept. under this level, the manager can perform any kind of activity regarding the management of the data also hold this level. USER’S LEVEL SECURITY This is also called the K.P. level. At this level user of the system have the minimum rights. Their main work is to input the data and to generate different reports. MOBILIZATION OF FUNDS For fulfilling the cash requirement, an efficient cash management system is maintained by the Reliance Weaving Mills Ltd. In this organization highly qualified financial experts manage its mobilization of funds by slowing disbursements. This means when cash has to flow outside the organization, it tries to delay such payments for some days so that the receiving party doesn’t feel it. Now the Banks has made it more convenient for the businessman. Banks provide the short-term loan facility in order to meet the short34
term needs. Reliance Weaving Mills Ltd. is also enjoying this facility. Assistant Finance Manager of the organization tries to purchase maximum raw material on credit with promise to pay in future. This situation allows company to utilize the fund in other profit earning activities. The opportunity is availed and suitable amount of money is earned in shape of profit by delaying the disbursements.
GENERATION AND SOURCES OF FUNDS
Funds are generated by the sale activities of the company during the year. After the preparation of Profit & Loss Account the amount of generated fund is known. The source of funds of last five years is presented below for ready reference.
Capital Reserves Long Term Finances/Loans: From Saudi Pak Investment Co. - Term Finance From United Bank Limited demand finance I From United Bank Limited demand finance II From NBP Ltd. demand finance From HBL - demand finance From HBL - Fixed Asset Financing Short Term Finances/Loans: Creditors, accrued and other liabilities Finance of mark up arrangements & cr. Facilities
40,933,330 139,375,000 7,873,290 105,135,669 15,199,196 175,911,990
11,615,776 161,675,000 11,813,290 119,829,287 45,533,194 175,911,990
Reliance Weaving Mills Ltd. Cash Flow Statement For the Year Ended September 30, 2010. 2010 Rupees Cash flow from operating activities Cash generated from operations Finance cost paid Taxes paid Gratuity paid Net cash from operating activities Cash flow from investing activities Fixed capital expenditure Sale proceeds of fixed assets Long term security deposits Net cash used in investing activities Cash flow from financing activities Redemption of TFCs Proceeds from long term loans Repayment of long term finances Liabilities against assets subject to finance lease Dividend paid Net cash used in financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of the year Cash and cash equivalents at the end of the year (42,857,142) (78,790,062) (13,576,776) (15,326,357) (150,550,337) (178,279,465) (464,758,832) (643,038,297) 295,741,277 (203,031,667) (11,789,326) (15,288,339) 65,631,945 (249,626,561) (215,132,271) (464,758,832) (93,036,233) 8,070,330 (215,618) (85,181,521) (274,879,907) 4,029,633 (270,850,274) 132,354,184 (85,309,483) (26,853,605) (2,738,703) 57,452,393 71,326,144 (87,527,678) (26,902,424) (1,304,274) (44,408,232) 2009 Rupees
ALLOCATION OF FUNDS
Analysis of Balance sheet is elaborated below which shows the funds allocated to different assets and liabilities for the year 2010. The analysis of Balance Sheet shows that 2010. the funds allocation to different assets and liabilities is as under for the year
LIABILITIES Issued subscribed and paid up capital reserve for bonus shares capital reserve share premium general reserve Un-appropriated Profit Redeemable Capital Long term loans Liabilities against Finance Lease Employee retirement benefits Current Liabilities short term bank borrowings current portion of long term liabilities Creditors, accrued and other liabilities Provision for taxation Dividends Total
ASSETS 205,406,250 Operating fixed assets capital work in progress 136,162,500 long term deposits 300,000,000 Current Asset 21,185,584 stores, spares and loose tools stock in trade 421,845,190 Trade debts loans, advances, deposits, 2,413,983 cash and bank balances 694,602,080 171,480,455 67,020,033 22,031,767 3,195,765 2,045,343,607 1,074,047,252 54,948,865 2,421,340 72,580,056 556,956,873 141,435,098 91,390,340 51,563,783
CRITICAL ANALYSIS OF THE THEORETICAL CONCEPTS RELATING TO PRACTICAL EXPERIENCES
There are many theoretical concepts, which are not used practically in this organization but the basic accounting and finance operations are applicable practically. As far as accounting policies and business ethics in the Reliance Weaving Mills Ltd. is concerned, is according to rules and regulations of the government policies. Legal preceding are made in accordance with the company ordinance 1984. All matter relates to accounts i.e. sales tax, excise tax, audit of the company etc. is done practically in this organization. I analyze that: Accounting system is designed in such way that there is minimum expectation about fraud and omission of entries. a. Accounting system of this organization has made the internal check very strict. b. The internal audit department of this organization is much effective and provides useful information for the decision making. c. There is quick retrieval of posting of entries that works automatically.
Financial analysis is designed to determine the relative strengths and weaknesses of a Company. Financial analysis concentrates on financial statements analysis, which highlights the key aspects of a firm’s operation. Financial statements analysis involves a study of the relationships between income statement and Balance Sheet accounts, how these relationships change overtime (trend analysis) and how a particular firm compares with other firms in its industry (comparative analysis). Although financial analysis has limitation, when used with care and judgment, it can provide some very useful in sight into the operations of a company. The income statement summarizes the firm’s revenues and expenses over the past year. Earning per share (EPS) is called “the bottom line”’ denoting that all of the items on the income statement, EPS is the most important. The Balance Sheet shows the firm’s assets an the claims against those assets. It portrays the financial condition at a point in time. Assets, found on the left-hand side of the balance sheet, are typically shown in the order of their liquidity. Claims, found on the right-hand side are generally listed in the order in which they must be paid. Trend analysis looks at the trend of single ratio overtime. Trend analysis can provide clues as to whether the firm’s financial situation is improving, holding constant, or deterioration Comparative analysis compares the firm’s ratios with industry average ratios and/or the ratios of leading competitors. Such analysis is another technique for analyzing a firm’s financial statements. To create common size statements, all income statement items are divided by sales, and total assets divide all balance sheet items. Thus, a common size income statement shows each item as a percentage of sales, and a common size balance sheet shows each item as a percentage of total assets. Different operation policies, such as the decision to lease rather than to buy equipment may have an impact on financial ratios. Information on the firm’s non-capitalized lease agreements, on its pension plan, on its recent acquisitions and divestitures, or its accounting policies, and so forth can be found in the notes to the financial statements and should be
considered by the analyst. In the financial analysis, following three techniques have been used; these are Ratio analysis, Horizontal and vertical analysis.
TABLE OF DIFFERENT RATIOS
2005 Leverage Ratios: Debt Equity Ratio Interest Cover Ratio(times) Liquidity Ratios: Current Ratio Acid Test(Quick) Ratio Efficiency Ratios: Total Assets Turnover Ratio (Times) Fixed Asset turnover(times) Profitability Ratios: Gross Profit Ratio Net Profit Ratio Inventory Turnover(times) Return on Capital Employed Market Value Ratios: Per Share (Rs.) Break-up Value Cash Dividend Earning Per Share 60:40 1.76 47:53 0.50 0.82 1.67 16.14% 4.28% 4.90 10.12% 20.80 1.25 3.13 2006 46:54 2.46 51:49 0.71 1.06 2.03 24.61% 10.95% 5.69 33.09% 28.61 5.25 10.5 2007 60:40 1.36 54:46 0.53 0.85 1.50 15.58% 1.58% 6.44 14.33% 23.69 0.75 2.67 2008 57:43 1.52 51:49 0.37 1.29 2.01 15.30% 2.66% 7.91 16.66% 22.84 0.75 2.82 2009 57:43 2.00 52:48 0.31 1.32 2.07 12.90% 4.15% 5.76 16.48% 26.63 0.75 4.54 2010 47:53 2.52 49:51 0.20 1.40 2.40 10.46% 4.21% 5.00 16.85% 32.27 5.64
Each above have been applied for the years 2005, 2006, 2007,2008,2009,2010.
COMMENTS Leverage shall be considered from two view points i.e. operating leverage and financial leverage. Since if we analyze the income statement ratio of fixed production cost to that of variable cost in not so high or reasonable. Therefore, as the company is not under heavy debt and loans are not quite old therefore rate of interest is also reasonable. This is the vital aspect of the better financial management. Liquidity ratio shows whether the organization is able to its creditors in the hour of need or not. Current ratio shows that this organization has current assets of Rs. 0.96 for every
Rs. 1 of current liabilities. Quick ratio tells us that in the hour of need this organization can pay Rs. 20 for every Rs. 1 of current liabilities. Total assets turnover ratio shows how hard the firm assets are being put to use. It measures the revenue generated per rupee of assets. For 2004 total assets turnover ratio is 1.40 times. Net profit / (loss) indicates that the profit ranges from 1.58% to 10.95% in the last six years. It indicates that the co. never suffers loss for any of the year; and now continuously the company’s profit is increasing but the more important is that the company’s business volume is expending rapidly. This is a sign of rapid growth. If we overview all the financial ratios of Reliance Weaving Mills Ltd. then it comes to know that this organization is rapidly expanding its business volume. Most of earning is paid towards administrative expenses and raw material because of this liquidity of this company is ultimately affected. And the ratio is less than 1:1. Graphic depiction of important ratios is given in figures I to VI.
HORIZONTAL & VERTICAL ANALYSIS OF RWML BALANCE SHEET ANALYSIS
2010 ASSETS Operating fixed assets capital work in progress long term deposits Current Assets: stores, spares and loose tools stock in trade Trade debts loans, advances, deposits, cash and bank balances Total LIABILITIES Issued subscribed and paid up capital reserve for bonus shares capital reserve share premium general reserve Un-appropriated Profit Redeemable Capital Long term loans Liabilities against Finance Lease Employee retirement benefits Current Liabilities: short term bank borrowings current portion of long term liabilities Creditors, accrued and other liabilities Provision for taxation Dividends Total
1,074,047,252 54,948,865 2,421,340 72,580,056 556,956,873 141,435,098 91,390,340 51,563,783 2,045,343,607 205,406,250 136,162,500 300,000,000 21,185,584 421,845,190 2,413,983 694,602,080 171,480,455 67,020,033 22,031,767 3,195,765 2,045,343,607
1,151,456,788 11,143,923 4,027,780 72,746,915 429,009,085 132,478,254 91,192,017 7,273,398 1,899,328,160 205,406,250 41,081,250 300,000,000 476,817 107,142,858 438,306,846 12,834,692 472,032,230 144,505,609 135,028,920 13,990,566 18,522,122 1,889,328,160
963,961,057 40,260,082 4,027,780 38,527,545 249,798,561 73,023,993 96,656,807 36,897,243 1,503,153,068 205,406,250 41,081,250 200,000,000 22,660,143 150,000,000 352,395,341 25,026,591 252,029,514 91,085,082 124,046,467 21,017,438 18,404,992 1,503,153,068
537,836,670 475,214,695 3,996,550 36,333,854 185,452,931 304,471,808 87,695,275 10,514,208 1,641,515,991 164,325,000 41,081,250 100,000,000 83,894,927 472,654,396 34,838,087 504,643,382 86,055,167 114,959,651 20,797,245 18,266,886 1,641,515,991
585,592,036 67,435,944 650,550 19,641,030 142,680,978 320,084,928 58,545,904 111,196,417 1,305,827,787 109,550,000 27,387,500 100,000,000 76,496,986 314,103,910
397,588,859 62,438,535 147,648,360 11,111,902 59,501,735 1,305,827,787
INTERPERTATION This analysis is describing the five year balance sheet. So, it enables us to observe the comparative progress of the company in these five years in each face item of the balance sheet. It is clear from this table that the operating fixed assets have an increasing trend in the company that these are Rs. 585.60 million in 2006 whereas after 2008 these remains more then 964 million. As for as the current asset are concerned these are also increasing as the business is expanding annually so the requirements of funds to met day to day needs are also increasing which resulted into increase in the current assets. Share capital of the company was Rs. 109.56 million in the year which was raised up to 163.33 million in the year 2007. Furthermore business expansion necessitated the further issuance of share capital of 41.8 million and share capital figure reached to Rs. 205.41 million in 2008. Capital Reserves of the firm were also raised up to Rs. 136.16 million in the year 2010 from 41.08 million in the previous years General reserves of the co. were also increased from 100 million to 200 million in the year 2008 and this amount was further raised to Rs. 300 million in the year 2009. Long term loans are relatively less raised though the firm has expanded its business volume. As for as, the current liabilities are concerned, the need to meet the business requirements was raised therefore firm has to depend more on the current liabilities. These are not bearing high interest rates therefore these are economical then that of the long term liabilities. In nutshell the comparative figures of the last five years revealed that the company’s progress is increasing rapidly in terms of its business worth and also its business volume. As the company’s total assets were Rs. 130.50 million which are now increased up to Rs.2045 million which is a good sign.
VERTICAL ANALYSIS OF BALANCE SHEET
2010 ASSETS Operating fixed assets capital work in progress long term deposits Current Assets: stores, spares and loose tools stock in trade Trade debts loans, advances, deposits, prepayments and other receivables cash and bank balances TOTAL ASSETS EQUITIES SHARE CAPITAL & RESERVES Issued subscribed and paid up capital reserve for bonus shares capital reserve share premium general reserve Un-appropriated Profit Redeemable Capital LIABILITIES: Long term loans Liabilities against assets subject to Finance Lease Employee retirement benefits Current Liabilities: short term bank borrowings current portion of long term liabilities Creditors, accrued and other liabilities provision for taxation Dividends TOTAL LIABILITIES 33.96 8.38 3.28 1.08 0.16 100.00 24.98 7.65 7.15 0.74 0.98 100.00 16.77 6.06 8.25 1.40 1.22 100.00 30.74 5.24 7.00 1.27 1.11 100.00 30.45 4.78 11.31 0.85 4.56 100.00 20.62 0.00 0.12 23.20 0.68 0.00 23.44 1.66 0.00 28.79 2.12 0.00 24.05 0.00 0.00 6.66 14.67 1.04 0.00 2.17 15.88 0.03 5.67 2.73 13.31 1.51 9.98 2.50 6.09 5.11 0.00 10.04 10.87 13.67 10.01 8.39 2.10 0.00 7.66 5.86 0.00 3.55 27.23 6.91 4.47 2.52 100.00 2004 3.83 22.59 6.98 4.80 0.38 100.00 2003 2.56 16.62 4.86 6.43 2.45 100.00 2002 2.21 11.30 18.55 5.34 0.64 100.00 2001 1.50 10.93 24.51 4.48 8.52 100.00 2000 52.51 2.69 0.12 60.62 0.59 0.21 64.13 2.68 0.27 32.76 28.95 0.24 44.84 5.16 0.05 2009 2008 2007 2006
INTERPERTATION This analysis is showing the relationship of each item of the balance sheet in ratio to the total assets. It is clear from this analysis that how much of the assets are being kept in which form at this company. The same depiction of the equities side is also provided. Moreover comparative information of the five years enables us to judge the company’s progress in this time period. Operating fixed assets were 45% of the total assets in the year 2006 whereas these are forming a 65% part of the total assets in the year 2007 which shows that company has increased its fixed assets surely is due to the increase in the share capital. Company has raised its share capital to fulfill the requirement of funds for expansion. Long term deposits are also very short which tells us that company has expanding its business activities therefore it doesn’t have extra funds to put in long term deposits. As for as the stores of the company are concerned these are also increasing as compare to the figure of 2008. The reason of such increase is that by the expansion in business volume it requires more store and stock for ensuring the continuity of operations which is of intense importance in such industries. The ratio of stock in trade and trade debts is increasing annually, which is showing that now company needs more working capital. On the other side the company has issued its further shares to raise funds in 2007 and 2009 Rs. 54.28 million and 41.09 million respectively to meet the business needs. With this share capital induction the owner’s equity portion was raised in these years as compare to 2007. The share capital was 13.67% of the total assets in year 2007 whereas this ratio was declined in the year 20010 because respective portion of general reserve is increased from Rs. 200 million to a Rs. 300 million. And further more, the current liabilities are also increased to meet the working capital needs.
Long term loans are 28.79% in the year 2008 where as this ratio was decreased to 20.62% in the year 2010. In nutshell it is clearly understood that the short term liabilities of the co. are increasing and long term liabilities are decreasing which is a good sign but the negative point of RWML’s is that its current assets are less then the current liabilities i-e Co. is not in a position to meet its current liabilities. Rest of the position of the company is sound and having good repute as well as rapid business growth also.
HORIZENTAL ANALYSIS OF BALANCE SHEET
2010 LIABILITIES Issued subscribed and paid up capital reserve for bonus shares capital reserve share premium general reserve Un-appropriated Profit Redeemable Capital Long term loans Liabilities against assets subject to Finance Lease Employee retirement benefits Current Liabilities: short term bank borrowings current portion of long term liabilities creditors, accrued and other liabilities provision for taxation Dividends TOTAL LIABILITIES 174.70 274.64 45.39 198.27 5.37 156.63 118.72 231.44 91.45 125.91 31.13 144.68 63.39 145.88 84.01 189.14 30.93 115.11 126.93 137.82 77.86 187.16 30.70 125.71 100.00 100.00 100.00 100.00 100.00 100.00 134.30 139.54 112.19 150.48 100.00 300.00 27.69 300.00 0.62 200.00 29.62 100.00 109.67 100.00 100.00 187.50 187.50 187.50 150.00 100.00 100.00 2009 2008 2007 2006
INTERPERTATION Here I have attempted to show the company’s progress considering the year 2006 as a base year i-e how much company has expanded its business. It is basically the depiction of company’s growth form the year 2006 and up to the current year 2010. Share capital was increased 150% in 2007 as compare to the paid up capital of 2006. Whereas, the share’s value was increased up 187.50% of the figure in 2006 then it was in the year 2008 and onward. General Reserve figure is increased by 300% in last four years. But the un-appropriated profit is decreased by 73% in the 2010 as compare to the 2006. Long term loans were also increased in the 2002 but the same were reduced after 2009. More critical is that the short term borrowings are increased 175% and the major reason of this increase is that most of the long term loans are achieving their maturity in these years therefore the current portion of long term liabilities is increased by 274% which is much higher. This is the major reason of having week current ratio. Provision for taxation is also increased by 200% (approx) that is due to the expansion of business growth.
PROFIT AND LOSS ANALYSIS
2010 2,750,397,914 2,462,611,361 287,786,553 (30,273,916) (39,805,128) (9,861,175) 337,342 208,183,676 (82,496,217) 125,687,459 (9,897,442) 115,790,017 2009 2,236,762,562 1,962,481,594 274,280,968 (28,341,359) (31,940,503) (8,023,011) 13,955,016 219,931,111 (111,302,656) 108,628,455 (15,406,312) 93,222,143 220,572,955 (145,384,832) 75,188,123 (21,017,438) 54,170,685 134,032,329 (98,743,210) 35,289,119 (15,566,803) 19,722,316 259,935,520 (105,759,182) 154,176,338 (11,111,902) 143,064,436 2008 2,032,159,094 1,721,195,792 310,963,302 (25,469,915) (64,920,432) 2007 2006 1,252,560,023 1,306,887,918 1,057,331,258 985,287,197 195,228,765 321,600,721 (27,366,056) (33,830,380) (19,089,432) (42,575,769)
Sales Cost of Goods Sold Gross Profit Operating Expenses: Administrative Expenses Distribution and Marketing Exp. other operating Expenses Other Operating Income Profit from Operation Finance cost Profit Before Taxation Taxation Profit After Taxation
INTERPRETATION Profit and loss of the five years are provided here comparatively. From the above figure we can see that company’s sales are increasing rapidly which is a sound signal of rapid business growth. In contravention to the above growth signal the cost of goods sold of company was also increasing, The company’s sales were increased in 2008 by 800 million (approx) whereas increase in the cost of goods sold was high than that of the increase in the sales in 2009. Therefore, the gross profit of the company was decreased. In the year 2010 the sales of the company were reached at peak of Rs. 2750.40 million where as cost of goods sold of the company was also increasing as the business volume is expanding continuously. The gross profit of the company decreased in the year 2009 as compare to the gross profit of 2008. The reason of this is the comparatively more increase in cost of goods sold than that of the sales.
As we now that long term loans were raised in 2007 by 150% that’s why the finance cost of the company was raised in the preceding year 2008 that was reached to its maximum of Rs.145 million which reduces the profit before taxation than that of in the year 2006. Whereas now in 2004 most of the long term loans were paid in 2008 & 2009 the finance cost is much reduced. Marketing and distribution expenses are controlled in the 2009 & 2010. That is a factor to good profitability of company in these years.
VERTICAL ANALYSIS OF PROFIT & LOSS ACCOUNT
2010 Sales Cost of Goods Sold Gross Profit Operating Expenses: Administrative Expenses Distribution and Marketing Exp. other operating Expenses Other Operating Income Profit from Operation Finance cost Profit Before Taxation Taxation Profit After Taxation 100.00 89.54 10.46 (1.10) (1.45) (0.36) 0.01 7.57 (3.00) 4.57 (0.36) 4.21 2009 122.96 110.10 12.26 (1.27) (1.43) (0.36) 0.62 9.83 (4.98) 4.86 (0.69) 4.17 2008 135.34 121.18 15.30 (1.25) (3.19) 0.00 0.00 10.85 (7.15) 3.70 (1.03) 2.67 2007 219.58 196.61 15.59 (2.18) (2.70) 0.00 0.00 10.70 (7.88) 2.82 (1.24) 1.57 2006 210.45 188.43 24.61 (1.46) (3.26) 0.00 0.00 19.89 (8.09) 11.80 (0.85) 10.95
INTERPERTATION Above figures are showing gradually decreasing percentage of gross profit, provided that the sales of the company are increasing annually. So, it is clear that the cost of goods sold is relatively more increasing than of its sales. In 2010 the operating expenses are just 7.57% of the sales than these were 20% in the year 2006. i-e the increasing of trend in the operating expenses is relatively slow than the sales. Profit before taxation ratio is more in the year 2010 than that of just 2.82% and 3.70% in the years 2008 & 2009 respectively; it is due to reduction of finance cost in current year. Though the gross profit of the company has a decreasing trend, the profit after taxation ratio is relatively raising which shows that beyond the annual increase in the cost of goods sold, other operations of the company are being driven on the right track. It is the vertical analysis of profit and loss accounts of the company.
HORIZONTAL ANALYSIS OF PROFIT & LOSS ACCOUNT
2010 210.45 249.94 89.49 158.59 93.49 2009 171.15 199.18 85.29 148.47 75.02 2008 155.50 174.69 96.69 133.42 152.48 2007 95.84 107.31 60.71 143.36 79.46 2006 100.00 100.00 100.00 100.00 100.00
Sales Cost of Goods Sold Gross Profit Operating Expenses: Administrative Expenses Distribution and Marketing Exp. other operating Expenses Other Operating Income Profit from Operation Finance cost Profit Before Taxation Taxation Profit After Taxation
80.09 78.00 81.52 89.07 80.94
84.61 105.24 70.46 138.65 65.16
84.86 137.47 48.77 189.14 37.86
51.56 93.37 22.89 140.09 13.79
100.00 100.00 100.00 100.00 100.00
INTERPERTATION This horizontal analysis of the profit and loss account describes the comparative information of above five year. Sales are 210% more than these were in 2006. It shows annual increase in the sales volume. It is obvious that the marketing department is efficient as for as the sales volume is concerned. RWML’S cost of goods sold is also 249% increased. It is an alarming increase in today’s competitive era. As the Company’s cost of goods sold is 30% extra increased than that of the increase in sales. Due to the higher cost the selling price of the product is also increased however, the sales increasing ratio is low than that of cost. This alarming increase in the cost of goods sold is due to the rise in the prices of raw material consumed and packing material used. This increasing trend of cost of goods sold has reduced the company’s gross profit ratio also.
Company has controlled its marketing and respective administrative expenses in 2010 than that of in the last two years. Therefore, the Co. has better net profit ratio than that of the last two years. Over all if we see the company is loosing its profitability as it has more than 80% of the profits in the year 2008. So we can say that the business is growing in its volume but not in the profitability. If we see from the investors point of view whose aim is to maximize their worth. This business is effectively going on but the Co. is not increasing its profitability annually. In the year 2004 the operation profits of the company were declined therefore the taxation cost is also decreased in the year 2010. By reduction in the taxation cost, profit after taxation rose in the 2010. Which were 37% & 65% in the years 2008& 2009 respectively raised up to 81% in the year 2010.
SIX YEARS GROWTH AT A GLANCE
PARTICULARS OPERATIONAL PERFORMANCE: Weaving Number of Looms Installed Number of Looms Worked Std. Cloth Production(50ppi) into meters(000) Actual Cloth Production(50ppi) into meters(000) Spinning Number of Spindles Installed Number of Spindles worked Installed Capacity(after conversion20/s count)KGS(000) Actual Yarn Production(after con. 20/s count)KGS(000) PROFIT AND LOSS: Net Sales(000) Gross Profit(000) Operating Profit(000) Profit before Tax(000) Profit after Tax(000) Dividends Including Bonus Shares(000) Dividend Declared Percentage BALANCE SHEET: Share Capital and Reserves(000) Shareholders Funds Capital Reserves Property Plant and Machinery(000) Current Assets(000) Current Liabilities(000) Long Term Loans (000) INVESTOR INFORMATION : Per Share (Rs.) Break-up Value Cash Dividend Earning Per Share Market Value per Share Ratios Gross Profit Ratio Net Profit Ratio Inventory turnover(times) Fixed Asset turnover(times) 2005 2006 2007
2008 2009 2010
116 116 16,085 14,340 14,400 14,400 Trial run Trial run 800,382 129,202 94,610 40,834 33,936 13,694 12.50%
116 116 16,085 15,539 14,400 14,400 4,850 4,234
212 212 16,085 14,678 14,400 14,400 4,850 4,294
224 224 37,355 38,838 14,400 14,400 4,850 4,203
272 272 42,092 41,333 14,400 14,400 4,850 4,124 2,243,856 289,381 217,636 108,628 93,222 15,405 7.50%
272 272 42,092 46,688 14,400 14,400 4,850 4,056 2,750,398 287,787 208,184 125,687 115,790
1,360,888 1,252,560 2,032,159 321,601 195,229 310,963 259,935 134,032 220,572 154,176 35,289 75,188 143,064 19,722 54,171 84,902 12,324 15,405 52.50% 7.50% 7.50%
227,884 227,884 334,756 526,659 598,707 341,891 20.80 1.25 3.13 16.14% 4.28% 4.90 1.67
313,435 313,435 653,028 652,149 678,254 314,104 28.61 5.25 10.5 24.61% 10.95% 5.69 2.03
348,220 428,066 41,081 41,081 389,301 469,147 1,013,051 1,004,221 624,468 494,904 744,722 506,583 507,492 527,422 23.69 0.75 2.67 15.58% 1.58% 6.44 1.50 22.84 0.75 2.82 15.30% 2.66% 7.91 2.01
505,883 41,081 546,964 1,162,601 722,700 784,079 558,284 26.63 0.75 4.54 12.90% 4.15% 5.76 2.07
621,673 41,081 662,754 1,128,996 913,926 958,330 424,259 32.27 5.64 10.46% 4.21% 5.00 2.40
Total Asset turnover(times) Price Earning Ratio Return on Capital Employed Debt Equity Ratio Current Ratio Acid Test(Quick) Ratio Interest Cover Ratio(times)
0.82 10.12% 60:40 47:53 0.50 1.76
1.06 33.09% 46:54 51:49 0.71 2.46
0.85 14.33% 60:40 54:46 0.53 1.36
1.29 16.66% 57:43 51:49 0.37 1.52
1.32 16.48% 57:43 52:48 0.31 2.00
1.40 16.85% 47:53 49:51 0.20 2.52
To compare this organization with other similar organization; I have selected Allah Wasaya Textile Mills Limited (AWTML) Multan. The company was incorporated in Pakistan as a public limited company on January 31, 1985. Its shares are quoted on the Karachi and Lahore stock exchanges. organizations can be analyzed as under. The company is principally engaged in The comparison between manufacturing and sale of yarn and woven fabrics.
COMPARISON OF DIFFERENT RATIOS
NET PROFIT/ (LOSS) RS. In (000) Year 2006 2007 2008 2009 2010 AWTML -61961 -63472 -46387 -74229 -51414 RTML 143064 19722 54171 93222 115790
Financial Charges (%) of Sales Year 2006 2007 2008 2009 2010 AWTML 33.49 36.03 18.42 19.66 20.43 RTML 8.09 7.88 7.15 4.98 3.00
Current Ratio Year 2006 AWTML 0.216 52 RTML 1.04
2007 2008 2009 2010
0.202 0.052 0.038 0.037
1.74 1.04 1.08 0.96
Quick Ratio Year 2006 2007 2008 2009 2010 AWTML 0.160 0.190 0.033 0.028 0.023 RTML 0.71 0.53 0.37 0.31 0.20
Earning Per Share Year 2006 2007 2008 2009 2010 AWTML -11.97 -12.27 -8.96 -14.34 -9.94 RTML 10.50 02.67 02.82 04.54 05.64
COMMENTS This is the comparison of the two units involving in same business and it shows that Reliance Weaving Mills Ltd has batter Financial Position then Allah Wasaya Textile Mills Ltd. RTML is earning profit while AWTML is suffering loss. The ratios stated above clearly indicate that RTML is performing well as compared to AWTML in the Textile sector.
FUTURE PROSPECTS OF THE ORGANIZATION
The economic indicators of our economy have shown a healthy trend and the GDP growth rate has been in excess of 6%pa and this growth rate I expected to be at 8%
annually in medium term future. The recent upgrading of Pakistan’ long term Sovereign Credit Ratings by one notch, to ‘B+’ for foreign currency and ‘BB’ for local currency reflects the sustained economic progress. The shifting of the country’s borrowings from the IMF to international capital markets also indicates the country’s economics sovereignty & stability. However rising inflation and simultaneously increasing interest rates if remained unchecked will be affecting profitability of businesses. With overall positive indications for the economy’s future and huge infrastructural investments made by the textile sector in recent years, the future seems to be promising for the industry. Your management also anticipates a promising future for the company and is hopeful that the declining trend of the company’s profit margins will be checked and improved in coming years (Insha-a-Allah) as: 1. with commissioning of the 2nd spinning unit of the company, almost 70% of the yarn demands will be met in house thus enabling the company to take advantage of price efficiency and other synergy effects of its increased backwards integration; 2. to further strengthen its weaving capacity the management decided to add 48 more looms in its weaving unit # 2, This investment will enable the company to capture more orders without comprising on its quality; 3. the company has also made its presence in the local fabric market where the company as it ill enable to claim tax depreciation for on-going capital expansion in proportion to its local sales: 4. the management recognizes the importance of marketing pricing and customer relationship shills to maximize its shareholders value. A substantial increase in current year’s marketing expense also evidences management’s effort in this area.
SHORTFALLS/WEAKNESSES OF FINANCE DEPARTMENT
During the internship period, Following are my findings regarding the weaknesses of the finance department:
Increase in prices of raw material has increased the cost o production and the company has been suffering from gross loaded for many years. Heavy interest on loans is also one of the reasons of the increasing cost of production. Short term running finances and current liabilities cost in very much to the company and a comprehensive amount of funds is consumed on interest. Long term loans are not arranged for the company in suitable amount as compare to short-term loans which is required to be arranged. That’s why the company’s current ratio is lower than the standard. The drawbacks of short term financing are: • • Interest rates fluctuates more often Refinancing frequently needed
RTML having liquidity problem may stretch its accounts payable however among the disadvantages of doing so is the giving up of any cash discount offered which may increase the probability of lowering its credit rating.
CONCLUSIONS & RECOMMENDATIONS FOR IMPROVEMENT
Following are the suggestions for improvements in the financial position of the company. 1. Company should maintain a reserve to meet short-term needs. Moreover short-term loans and finances should be taken very carefully because large amount of funds are being consumed in this regard by paying interest on them. Long-term loans should also be arranged from financial institutions on low interest rates. 2. A training programme is also required to be started for employee to enhance their working skills and grow the same up to International standards. 3. The cost of production is very high, the company needs more concentration on reducing the cost of production.
4. The company is required to finalize the working of the 2nd spinning unit so that, the raw material needs can be fulfilled up to 70%. It will contribute much in reducing the cost. 5. The company has to hedge the foreign currency liabilities which are due within the next four months. This can be effectively managed by entering into forward exchange contracts for the management of currency risk. 6. Company should manage its interest rate risk by contracting minimum and maximum interest rates, it will enable the company to manage the significant interest rates and cash flow risks exposures.
REFERENCES AND SOURCES USED
Following are the sources and references I have consulted during my internship period. 1. Annual Reports of Reliance Weaving Mills Ltd. Multan, for the last five years provided by the finance department. 2. Books consulted for the theoretical knowledge i. Fundamental of Financial Management ii. Managerial Finance 3. Face to Face meeting with the following: Mr. Mukhtar Blouch (C.A.-Finalist) Manager Accounts Mr. Hamid Mehmood (MBA-Finance) Manager Finance (James C. Van Horne) (Shim & Seagle)
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