PREFACE

MBA is a stepping stone to management career. In order to achieve practical, positive

and concrete results, the classroom learning needs to be effectively fed to the realities of
situation existing outside classroom. This is practical true for management.

To develop healthy managerial and administrative skills in the potential managers it is

necessary that theoretical knowledge must be supplemented with exposure of real
environment. Actually it is very vital for the management and it is practical training that
the measuring of management is itself realized.

I took summer training in a well managed organization and was too fortunate to get a
good exposure. In this project report, an attempt has been made to cover different aspects
of my training.

1
 ACKNOWLEDGEMENT

Any accomplishment requires the effort of many people and this work is not different.
Behind this successful undertaking is the blessing and guidance of many. This formal
piece of acknowledgement may not be sufficient to express my feeling of gratitude and
deep respect that have been experienced during my learning process at hero cycles. This
endeavor would not have been successful without the help and encouragement of lot of
people with whom I had good fortunate of interacting during course of journey. I am
indebted to Mr. Bharat Goyal (Sr. V.P. Finance cum company secretary), for the
knowledge and experience that I have gained from him during course of training.

Without his immaculate and intellectual guidance, sustained efforts and friendly
approach, it would have been difficult to achieve the result in short span of period.

Not leaving behind the contribution of all other staff members at finance department for
sharing with us the wealth of their experience and knowledge.

EXECUTIVE SUMMERY

2
The major objective of the study is to properly understanding the working capital of
HERO CYCLES & to suggest measures to overcome the shortfalls if any.

Funds needed for short term needs for the purpose like raw materials, payment of wages
and other day to day expenses are known as working capital. Decisions relating to
working capital (Current assets-Current liabilities) and short term financing are known as
working capital management. It involves the relationship between a firm’s short-term
assets and its short term liabilities. By definition, working capital management entails
short-term definitions, generally relating to the next one year period.

The goal of working capital management is to ensure that the firm is able to continue its
operation and that it has sufficient cash flow to satisfy both maturing short term debt and
upcoming operational expenses.

Working capital is primarily concerned with inventories management, Receivable

management, cash management & Payable management.

3
 OBJECTIVES OF WORKING CAPITAL

Working capital management is conducted for some sole objectives. These objectives are:

• To study how working capital is managed by the company.

• To study which factors effect the working capital of the company.
• To study the working capital policies.
• To properly and effectively operate the working capital cycle of the management.

IMPORTANCE OF STUDY

There is no denying the fact that working capital is one of the most important
tools in the hand of the company for the successful operation of the business. It is
imperative for the finance manager because of the following reasons :

• It helps in properly assessing the working capital requirement in the company.

• It is that part of the firms capital which is required for financing short term or
current assets.
• It acts as a fund for short term purposes.
• It tells about the liquidity position of the company.

RESEARCH METHODOLOGY(R & D)

4
 1. Specific areas in which R & D carried out by the company:

Increasing competition in market place have brought into sharp focus importance of
differentiation. Research and development centre which is recognized by the Government
of India as an in house R & D center is instrumental in providing Company a
competitive edge by bringing out new products/models and improved components to
meet consumer’s aspirations and thus helping the company to achieve its targeted growth.
The state of art R & D software like pro-engineer wilt fire 4.0 is extensively used during
the year Company has launched 13 new models and new set of products for export
market.

2. Benefits derived as a result of the above R & D activities:

This brought the concept of high quality low cost by-cycles through internal R & D.

3. Future plan of action:

The market for fancy cycle has shown a significant growth since last few years. This has
mainly happened due to intensive in house research and introduction of new innovative
models to the delight of all categories of customers and giving value for their money.

4. Expenditure on R & D: (Rs. In lacs)

Year ended Year ended

March 31, 2008 March 312007

i) Capital 2.84 1.21

ii) Recurring 51.07 45.76

Total 53.91 46.97

iii) Total R & D expenditure

5
as a percentage of sales 0.04% 0.04

TECHNOLOGY ABSORBTION, ADAPTATION AND

INNOVATION

i) The Company is upgrading technology absorption and innovation on continuance basis

to enhance its market share both in domestic and exports.

ii) The Company has not imported any technology in the last five years

FINDINGS

1. HERO CYCLES LIMITED they follow the moderate policies of working capital.
They enjoy the benefits of both conservative and aggressive policy.
2. There liquidity is greater risks are minimized and cost of financing is relatively
less.
3. They are financing fixed working capital from long term sources. And temporary
working capital from short term sources.
4. The optimum current ratio would be 2:1 but heroes are achieving 1.627.
5. The acid test ratio would be 1:1 but they are achieving 1.2.
6. The working capital they have achieved consider as an optimal level.
7. According to their operating cycle their inventory turnover ratio is very good and
it helps in solvency of the business.

CHAPTER-1

6
INTRODUCTION

THEORETICAL FOUNDATION

7
Working Capital:-

The life blood of business, as is evident,

signified funds required for day-to-day
operations of the firm. The management of
working capital assumes great importance
because shortage of working capital funds
is perhaps the biggest possible cause of
failure of many business units in recent
times. There it is of great importance on the
part of management to pay particular
attention to the planning and control for
working capital. An attempt has been made
to make critical study of the various dimensions of the working capital management of
HERO CYCLE manufacturing ltd.

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-
term assets and its short-term liabilities. The goal of Working capital management is to
ensure that the firm is able to continue its operations and that it has sufficient money flow
to satisfy both maturing short-term debt and upcoming operational expenses.

8
 REVIEW OF LITERATURE

1. Pradeep Singh (2008) empirically analysed that a firm’s working capital consists of
its investments in current assets, which includes short-term assets—cash and bank
balance, inventories, receivable and marketable securities. Therefore, the working capital
management refers to the management of the levels of all these individual current assets.
On the other hand, inventory, which is one of the important elements of current assets,
reflects the investment of a firm’s fund. Hence, it is necessary to efficiently manage
inventories in order to avoid unnecessary investments. A firm, which neglects the
management of inventories, will have to face serious problems relating to long-term
profitability and may fail to survive. With the help of better inventory management, a
firm can reduce the levels of inventories to a considerable degree.This paper tries to
evaluate the effect of the size of inventory and the impact on working capital through
inventory ratios, working capital ratios, trends, computation of inventory and working
capital, and liquidity ranking. Finally, it was found that the size of inventory directly
affects working capital and it's management. Size of the inventory and working capital of
Indian Farmers Fertilizer Cooperative Limited (IFFCO) is properly managed and
controlled compared to National Fertilizer Ltd. (NFL).

2.Pedro Juan Garcı´a-Teruel and Pedro Martı´nez-Solano (2007) conducted research

for the object of the research presented in this paper is to provide empirical evidence on
the effects of working capital management on the profitability of a sample of small and
medium-sized Spanish firms. The results, which are robust to the presence of
endogeneity, demonstrate that managers can create value by reducing their inventories
and the number of days for which their accounts are outstanding. Moreover, shortening
the cash conversion cycle also improves the firm’s profitability. The aim is to ensure that
the relationships found in the analysis carried out are due to the effects of the cash
conversion cycle on corporate profitability and not vice versa.

3. Naila Iqbal (2001) examined that for increasing shareholder's wealth a firm has to
analyze the effect of fixed assets and current assets on its return and risk. Working
Capital Management is related with the Management of current assets. The Management
of current assets is different from fixed assets on the basis of the following points i.e

9
Current assets are for short period while fixed assets are for more than one Year.The
large holdings of current assets, especially cash, strengthens Liquidity position but also
reduces overall profitability, and to maintain an optimum level of liquidity and
profitability, risk return trade off is involved holding Current assets.Only Current Assets
can be adjusted with sales fluctuating in the short run. Thus, the firm has greater degree
of flexibility in managing current Assets. The management of Current Assets helps affirm
in building a good market reputation regarding its business and economic condition.

4. Vellanki S. Kumar, Awad S.Hanna, Teresa Adams (2000) conducted research and
examined that the systematic assessment of working capital requirement in construction
projects deals with the analysis of various quantitative and qualitative factors in which
information is subjective and based on uncertainty. There exists an inherent difficulty in
the classical approach to evaluate the impact of qualitative factors for the assessment of
working capital requirement. This paper presents a methodology to incorporate linguistic
variables into workable mathematical propositions for the assessment of working capital
using fuzzy set theory. This article takes into consideration the uncertainty associated
with many of the project resource variables and these are reflected satisfactorily in the
working capital computations. A case study illustrates the application of the fuzzy set
approach. The results of the case study demonstrate the superiority of the fuzzy set
approach to classical methods in the assessment of realistic working capital requirements
for construction projects.

5. Maynard E. Rafuse (1996) Argues that attempts toimprove working capital by

delaying payment to creditors is counter-productive to individuals and to the economy as
a whole. Claims that altering debtor and creditor levels for individual tiers within a value
system will rarely produce any net benefit. Proposes that stock reduction generates
systemwide financial improvements and other important benefits.Urges those
organizations seeking concentrated working capital reduction strategies to focus on stock
management strategies based on “lean supply-chain” techniques.

10
CHAPTER – 2

INTRODUCTION

TO

THE

11
 ORGANIZATIO
N

OVERVIEW OF CYCLE INDUSTRY:

12
James Starley (1830 - 1881) is considered to be the "Father of the Bicycle
Industry." The bicycle, cycle, or bike is a pedal-driven, human-powered vehicle with
two wheels attached to a frame, one behind the other.

Bicycles were introduced in the 19th century and now number about one billion
worldwide. With an annual turnover of more than 12 million bicycles, the bicycle
industry is one of the most established industries in India. It has raised the country's
position to that of the second largest bicycle manufacturer in the world, next only to
China. Today, the Indian bicycle manufacturing and bicycle spares industry is well
accepted and is also widely recognized for its quality standards in international markets.
Today the Indian roads can be seen packed with all kinds of luxury vehicles, but during
the early years of Independence the scenario was not same. The bicycle, though not
invented in India, became the most popular vehicle among Indians.

Bicycle was seen in India in the year 1880. Import of cycle, however started in 1905 and
continued for more than 50 years. The Govt. in July 1953 announced complete ban on
imports, but cycle kept on simmering in country till 1961. In 1980, selling price of an
imported bicycle was around Rs. 45. In 1917, during the First World War the price

13
jumped to Rs.500/- but dropped considerably, month by month and came down to Rs.
35/- or so (U.K. makes) and Rs. 15/- or so (Japanese models).

It would be interesting to mention that in 1919, five persons in Punjab imported cycles
and used them on the mall, Shimla. These include one Bishop, Two military men and two
tractors including S.Pala Singh Bhogal. Under special permission of the Governor, they
were allowed to use cycles on ‘The Mall’ only for a one hour in a day. They imported
B.S, A cross bar cycles from U.K. and it is used to be a kind of Mela at that particular
hour on that mall in Shimla, the scene watched by hundred of people everyday. Later, a
firm was formed under the name of Singh & Co. with shops on railway road, Jalandhar
and bazaar Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.

In 1960’s, 70’s, 80’s and 90’s, bicycle was used by large number of Indians. In fact,
bicycle was available in almost every Indian family. The number of bicycles has now
crossed one billion all over the world. From the far-flung areas, big and small towns to
metros, bicycles are still having its importance and used commonly in India.

Though the most progressive phase started in 1950, when Mr. Janki Dass Kapur had
established Atlas Cycles Industries Ltd. Then came Hero Cycles by Munjal Brothers,
Avon by Shri Hans Raj Pahwa, RMI by Aggarwals and Goyals.

In India the cycle industry is mainly classified into two segments i.e. Standard and Fancy.
The standard segment, which constitutes about two-thirds of the market, has a
growth rate of 2% to 3%. The opportunity before cycle makers, thus, will be in
fancy bikes, which according to Mr. Munjal, has grown by "a fabulous 15%-18%"
across the various brands.

MAJOR PLAYERS

There are four major players in Indian Bicycle Industry i.e.:-

• Hero

14
 • Atlas
• Avon
• TI

All these companies are mainly concentrating in domestic market but now days they are
also exporting to other countries.

Atlas

A man had a dream. To provide quality bicycles to his countrymen at reasonable prices.
The man was Late Janki Das Kapur. The dream: Atlas Cycle Industries Ltd. A modest
beginning in an improvised shed at Sonepat. In the very first year of operation 12,000
Atlas Cycles rolled out of the plant. Soon, the first consignment of Atlas Cycles was sent
overseas. Atlas has since then exported to over 35 countries.

TI Bicycle Industries Ltd

One of the leading bicycle manufacturers in India, started in 1949, has been at the
forefront of innovations. TI cycles are the makers of country’s most famous brands like
Hercules, BSA and Philips cycles. The company’s vision is to be a worldwide leader in
cycling and cycling solutions by “instilling the pride of ownership in the customers”.

Avon

Avon cycle industries Ltd. was established in 1952 by Pahwa Brothers. In Bicycles and
Bicycle Parts, the company distinguishes itself as the Largest Manufacturer Exporter
from India. That it has enjoyed this status now for several years in a row, speaks of the
popularity of its brands overseas. Currently the company is engaged in development of a
range of e-bikes and e-scooters. Entry level model AVON e-bike is already in the market.

15
PROFILE OF HERO GROUP:

16
The Hero Group has done business differently right from the inception and that is what
has helped us to achieve break-through in whatever product category we have ventured
in. The Group's low key, but focussed, style of management has earned the plaudits
amidst investors, employees, vendors and dealers, as also worldwide recognition.

The growth of the Group through the years has been influenced by the number of factors:

The Hero Group through the Hero Cycles Division was the first to introduce the concept
of just-in-time inventory. The Group boasts of superb operational efficiencies. Every
assembly line worker operates two machines simultaneously to save time and improve
productivity. The fact that most of the machines are either developed or fabricated in-
house, has resulted in low inventory levels.

The Hero Group philosophy is: "To provide excellent transportation to the common
man at easily affordable prices and to provide total satisfaction in all its spheres of
activity." Thus apart from being customer-centric, the Hero Group also provides its
employees with a fine quality of life and its business associates with a total sense of
belonging.

"Engineering Satisfaction" is the prime motive of the Hero Group and it has become a
way of life and a part of the work culture of the Group. This is what drives the Group to
seek newer vistas, adopt faster technology and create quality driven products to the
utmost satisfaction of customers, partners, dealers and vendors.

17
Today the Hero Group has a number of accolades and achievements to its credit … yet
consumer requirements and newer technologies provide fresh challenges every day, and
at Hero the wheels of progress continue to turn ...

The Driving Force

18
Dr.Brijmohan Lall Munjal
Chairman
Dr.Brijmohan Lall Munjal, patriarch of the US$ 3.19
billion Hero Group was born in 1923, in what is
now Pakistan. After partition, the Munjal
brothers started a small business of manufacturing
bicycle components in Ludhiana in North India in the face of the bottlenecks of industrial
infrastructure and investments. Dr Lall led a small time manufacturer of 60 cycles a day
to become a manufacturing giant, which churns out not only over 17,000 cycles per day
but is also diversified into various domains. Undoubtedly, Dr.Lall is a first generation
business entrepreneur of the 1950s'.

HISTORY OF HERO CYCLES

Hero cycle journey started before independence. The four Munjal

brothers, hailing from a small town called Kamalia, now in Pakistan,
are the men who are behind the mission. Brotherhood apart, what
knit the men together was the wealth of will, integrity, ambition &

19
determination. In the year 1944, they decided to start a business of bicycle spare parts in
Amritsar. Its is modest beginning and the next 3 years saw the business grow rapidly.But
the dark clouds of partition eclipsed their plans of the future. With renewed vigour and
optimism, the operational base was shifted to Ludhiana. By 1956, the brothers had began
manufacturing key components of bicycles and as a logical way forward, began to
assemble the entire cycle at their manufacturing plant in Ludhiana. In the early days, the
plant had a capacity for 25 cycles per day. Over the next few years, the Bicycle Unit
started growing in stature and size, attracting skilled engineers, technocrats,
administrators and entrepreneurs. From a modest beginning of mere 639 bicycles in the
year 1956, Hero Cycles products over 18500 cycles a day today, the highest in global
reckoning. With the 48% share of the Indian market, this volume has catapulted Hero
in the Guinness Books of World Records in 1986 and edge over global players is being
maintained since then.

A tiny acorn has now become a mighty Oak. From cycle to two - wheelers was a natural
step, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate
of companies, either in the form of collaborations, joint ventures or fully owned
subsidiaries, with more than Rs. 10000 Crore turnover annually. Hero Group, besides
being the world’s largest manufacturers of bicycles, motorcycles and chains to this date,
has diversified into newer segments like Information Technology, IT Enabled Services
and Financial Services.

INTRODUCTION

Hero", the brand name symbolizing the steely ambition of the Munjal brothers, came into
being in the year 1956. From a modest manufacturer of bicycle components in the early

20
1940's to the world's largest bicycle manufacturer today, the odyssey was fueled by one
vision - to build long-lasting relationships with everyone, including workers, dealers and
vendors. This philosophy has paid rich dividends through the years.

Hero, a name synonymous with two wheelers in India is today a multi-unit, multi-
product, geographically diversified Group of companies. Through fully integrated
operations, the Munjals roll their own steel, make critical components such as free wheels
for their bicycles, and have the foresight to simultaneously diversify into myriad
ventures, like product designing, IT enabled services, finance and insurance, just to name
a few.

Like every success story, Hero's saga contains an element of spirit and enterprise; of
achievement through grit and determination, coupled with vision and meticulous
planning. Throughout its success trail, the Hero Group and its members have displayed
unwavering passion of setting higher standards for themselves and delivering simply the
best to their customers.

In Hero Cycles Limited, the just-in-time inventory principle has been working since the
beginning of production in the unit and is functional even till date. The vendors bring in
the raw material and by the end of the day the finished product is rolled out of the
factory. This is the Japanese style of production and in India, Hero is the first company to
have mastered the art of the just-in-time inventory principle.

THE VISION

21
"Hero Group is continuously striving for synergy between technology, systems and human
resources to provide products and services that meet the quality, performance, and price
aspirations of the customers. While doing so, they maintain the highest standards of ethics and
societal responsibilities, constantly innovate products and processes, and develop teams that keep
the momentum going to take the group to excellence in everything they do."

THE MISSION STATEMENT

"Its our mission to strive for synergy between technology, systems and human resources,
to produce products and services that meet the quality, performance and price aspirations
of our customers. While doing so, we maintain the highest standards of ethics and
societal responsibilities. "

This mission is what drives us to new heights in excellence and helps us forge a unique
and mutually beneficial relationship with all our stakeholders. We are committed to move
ahead resolutely on this path, shown to us by visionaries like Mr. Satyanand Munjal, Mr.
Om Prakash Munjal, the late Mr. Dayanand Munjal and late Mr. Raman Kant Munjal.
Mr Brijmohan Lall Munjal, Chairman & MD - THE HERO GROUP.

COMPANY PROFILE

Name of Company HERO CYCLES LTD.

Year of Establishment 1956

22
Registered Office Hero Nagar, G.T
Road, Ludhiana.

Constitution Closely held public

Company.

Work—plant Unit no-1 (cycle &

C.R Division) Hero
Nagar, G.T Road,
Ludhiana.

Unit no-11
Plot no8, site 4
Sahibabad
Industrial Area,
Ghaziabad (U.P).

Unit no-111
New Hero Auto
Rim Division &
New Cycle Division
Focal point phase 8

OWNERSHIP OF MANAGEMENT

Board of Directors

SH. BRIJMOHAN LAL MUNJAL (CHAIRMAN)

23
SH. SATYANAND MUNJAL (CO-M.D. OF WORKS)

SH. OM PARKASH MUNJAL (M.D. OF MKTG. & ADMIN.)

SH.VIJAY KUMAR MUNJAL (M.D. OF INTN’L MARKETING)

SH. SURESH CHANDERA MUNJAL (M.D. OF DOMESTIC MARKETING)

SH. ASHISH KUMAR MUNJAL (M.D. OF UNIT TO SAHIBABAD)

SH. SUNIL KANT MUNJAL (M.D. OF C.R. DIVISION)

SH. PANKAJ MUNJAL (M.D. OF NEW HERO AUTO DIVISION)

SH. S.K.RAI (M.D OF WORKS)

Dr. M.A.ZAHIR (DIRECTOR)

Dr. D.R.SINGH (DIRECTOR )

AUDITORS
B.D BANSAL & Co.
Chartered Accountants
34-A, Court Road,
Amritsar.

ACHIEVEMENTS OF HERO CYCLE

The Group and its management have acquired a number of accolades and achievements
over the years:

24
• Hero Group Management style has been acclaimed internationally by World Bank
and BBC, UK. Hero Group is discussed as a case study at London Business
School, UK and INSEAD, France. World Bank has acclaimed Hero Cycles as a
role model in vendor development based on a world-wide study. The London
Business School, UK, has done a case study on the Group as model of
entrepreneurship.
• Boston Consulting Group has ranked Hero Group as one of the top ten Business
Houses on Economic value, in India.
• HSBC-Merril Lynch has estimated Hero Group to be amongst the top value
creators in the five years 2001-05.
• The Hero Group is recognized as a long term partner and an ideal employer:
 Hero Group's partnership with Honda Motors, Japan is over 20 years old
 Hero Group's Partnership with Showa Manufacturing Corporation, Japan
is over 18 years old.
• Group Chairman, Mr Brijmohan Lall Munjal received the coveted "Ernst &
Young Entrepreneur of the Year" award for 2001.
• Hero Cycles was ranked 3rd amongst top Indian companies Review 2000 - Asia's
leading companies award (2003) by Far Eastern Economic Review.
• Hero Cycles is the World's largest manufacturer of Bicycles with annual sales
volume of over 4.8 million cycles.
• Engineering Exports Promotion Council has awarded Hero Cycles with the Best
Exporter Award for the last 28 years in succession.

RECENT DEVELOPMENTS

25
 A technology tie-up with National Bicycle Industries of Japan, led to the
development and launch of the ‘World One’ series of cycles, which are the most
easy-to-ride cycles in India. Hero Cycles has also introduced new frame designs
and features in the premium segments. These include the A-frame, the D-frame,
and the Y-frame, speedometers and indicators among others. The launch of the
‘Star Girl’ in a unique swan-shaped frame and constituted with high-end plastic is
another recent development and is setting a new trend in ladies bikes in the
country.

Hero Cycles has always believed in meeting the aspirations of a nation on the
move. Though the times and the markets have changed enormously, the company
believes that cycles

can still be the driving force of the rural economy. By introducing a loan facility
through a nationalised bank, Hero Cycles has enabled low-income customers to
purchase cycles on easy terms. In this way, the company has fulfilled an important
social obligation.

MILESTONES

Hero’s success saga contains the element of courage, great, determination, enterprises
and perseverance coupled with vision and meticulous planning :

26
1956
Hero Cycles Ltd. is established.

1961
Rockman Cycle Industries Ltd. established, which is today the largest manufacturer of
bicycle chains & hubs in the world.

1963
Bicycles exports take off from India – a faray into the international market.

1971
Highway Cycles was set up. It is today the largest manufacturer of single speed & multi-
speed freewheels in the country.

1975
Hero Cycles Limited became the largest manufacturer of bicycles in India.

1978
Majestic Auto Limited was formed and Hero Majestic Moped was introduced.

1981
Munjal Casting established.

1984
Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to
manufacture Motorcycles. It is now the world’s largest producer of two-wheelers.

1985
Munjal Showa Ltd. established to manufacture shock absorbers and sturts and is today
one of the topmost shock absorber manufacturer companies in this country.

1985
100 cc Hero Honda Motorcycle was launched, which, later on in 1988, became No.1
among all motorcycles in India.

27
1986
Hero Cycles Limited entered the Guinness Books of World Records as the largest bicycle
manufacturer in the world.

1987
Hero Motors, a division of Majestic Auto Limited set up in collaboration with Steyr
Diamler Puch of Austria.

1987
Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to
manufacture and export state-of-the-art bicycles and light products in its full automated
plant at Wagodia.

1987
Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind.Ltd., established as an
ancillary to Hero Honda. It has the largest die casting plant in India.

1988
Hero Puch was introduced by Hero Motors Ltd. which was a revolutionary machine to set
new records of petrol efficiency in 50 to 65 cc engines.

1989
Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero
Cycles Limited.

1990
Hero Cold Rolling Division established, which is one of the most modern steel cold
rolling plants in India.

1991
Hero Honda received National Productivity Council Award and also the Economic Times
– Harvard Business School Association Award against 200 contenders.

28
1991
Hero Cycles introduced Kidd – the first branded bike in children’s segment.

1992
Hero Cycles introduces Impact, the first citibike in India.

1992
Munjal Showa Ltd. received national safety award.

1993
Hero Exports was established as International Trading Division for group & non-group
products.

1995
Hero Corporate Services Ltd. was established.

1995
The first exerbike from Hero Group was introduced with the name – Allegro.

1996
Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was
launched by Hero Motors Ltd.

1996
Munjal Showa Ltd. received British Council’s National Safety Award.

1998
Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler engines
in various cubic capacities.

1998
Munjal Auto Components established to manufacture gear shaft & gear blanks for
motorcycles.

29
2000
The first fully automated bicycles by the name ‘POWERBIKE’ was introduced by Hero
Cycles Limited.
Hero Corporate diversified into I.T. and I.T. Enabled Services through its services
segment Hero Corporate Services Limited.

2001
Hero Honda emerges as the market leader in motorcycles with the sales of over a million
motorcycles and a market share of 47%.

2001
Hero Global Design established to offer engineering services in CAD/CAM/CAE related
to new product development design, engineering, manufacturing.

2002
Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita
Group, Japan, to manufacture high end bicycles.

2002
Fastener World established.

2002
Easy Bills Limited established to offer utility bill collection and retail services.

2003
Super Starter Series launched by Hero Cycles Limited.

2003
Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax GmbH
of Germany.

2003
Hero Honda continues to be the world’s largest manufacturer of two-wheelers with the
market of more than 48%.

30
2004
Hero Retail Insurance Business established.

2004
Super Smart Series introduced by Hero Cycles Limited.

SOCIAL RESPONSIBILITIES

31
Hero Cycles has fulfilled its social obligation. It runs Schools, Colleges, Hospitals, Heart
Research Foundations, Mobile Medical Vans, maintains Parks, etc. Charged with their
mission nationalistic fervor, the Hero Group has always been actively involved in Social
and Medicare activities, such as providing medical facilities for the under privileged,
Hospitals, Heart Research Foundation and Mobile Medical Vans. Hero also runs schools
and colleges, maintains parks and public facilities.

Healthcare

Raman Munjal Memorial Hospital is a 100-bed hospital with a well-equipped

laboratory, a fully functional operation theatre, an out patient department as well
as a casualty section.

A fully equipped mobile clinic provides comprehensive health care to the rural
masses in Dharuhera.

The medical centre on the factory premises of the Group Companies is open for
the sub-urban and rural communities of the surrounding areas. The medical
centre is also equipped to provide First Aid and ambulance facility for road
accident victims.

Other efforts, under the auspices of Hero Cycles Limited include:

32
Eye Camps: With over 15,000 patients examined and about 1700 cataract
operations performed so far, these Eye Camps have also aided patients with free
accommodation, food and medicines.

Family Planning Camps: Held since 1993 at the Civil Hospital, Rewari and
Bawal, these camps offer monetary incentives to the masses to adopt family
planning measures.

Blood Donations Camps: These camps are being organised on a regular basis
since 1992. 464 units have been donated to Indian Red Cross Society in the last
camps.

ENT Check up Camps: Conducted by specialists from AIIMS, these camps have
been organized since November 1997

Heart Check-up Camps: Since July 1988, free camps are being organized in
collaboration with Escorts Heart Institute and Research Centre, where specialised
diagnosis methods like Echocardiography and ECG are used.

Rehabilitation Camps: Conducted with the assistance of the District

Rehabilitation Centre, Red Cross Society, Rewari, these camps help physically
challenged villagers to rehabilitate and re-employ themselves. Many patients have
found a new lease of life on account of the physical aids given to them.

Dermatology Camps: Held for the first time in October 1999, the camp saw
around 460 patients, where 365 patients underwent treatment for various skin
ailments. Furthermore, three Acupressure camps were also held in January 2000
where 450 persons were offered treatment and advice.

School Health Programmes: The Raman Munjal Vidya Mandir was the first
school to participate in this programme. Students underwent annual medical check

33
up to detect nutritional deficiencies and were advised on improving and
monitoring personal hygiene, immunisation as well as prevention & control of
communicable diseases.

In-house Health Activities: The company takes a keen interest in the welfare of
its employees with the dissemination of health information among them by means
of lectures, group sessions, printed material, audio visual aids, display boards, etc.

AIDS Awareness Programmes: In association with CIL Hero Honda has done
immense work to promote awareness about AIDS.

Education
The Raman Kant Munjal Trust fund, instituted in 1992, has helped set up a
primary school in Dharuhera. Today the Raman Kant Munjal Vidya Mandir has
grown into one of the best senior secondary schools in Daruhera. The school is
affiliated to the Central Board of Secondary Education.

Environment
Hero Group Companies have strived to provide environmental friendly products as well
as manufacturing units. Hero Honda's "We Care" programme was initiated with a focus
on environmental conservation and awareness, and now extends its influence to multi-
dimensional activities, for the socio-economic betterment of society.
The 4-stroke Hero Honda motorcycles undergo a high technology process to meet the
most demanding of pollution norms at every level. Hero mopeds and motorcycles having
the lowest pollution emission levels in their categories on Indian roads.

GROWTH CHART OF HCL

34
 Year Sales (In Crores) Profit before tax (In Crores)
2002 959.44 91.56
2003 895.87 67.90
2004 971.53 94.17
2005 1094.48 73.58
2006 1136.93 63.62
2007 1330.87 121.13
2008 1285.00 77.23

GROWTH CHART
1400

1200
Sales & Profit

1000

800

600 Sales (In Crores)

400 PBT (In Crores)

200

0
2002 2003 2004 2005 2006 2007 2008

Year

HERO GROUP COMPANIES

Hero Group ranks amongst the Top 10 Indian Business Houses comprising 18

35
companies, with an estimated turnover of US$1.8 billion during the fiscal year
2003-2004.

36
 Hero Cycles Limited

Hero Honda Motors Limited

Hero Cold Rolling Division

Hero Motors Limited

Hero Exports
LO GO

Majestic Auto Limited

Rockman Cycle Industries

LOG O

Highway Cycle Industries

Sunbeam Auto Limited

Munjal Auto Industries Limited

Munjal Showa Limited

Munjal Castings

Munjal Auto Components

37
Hero Global Design
 PRODUCTS

The cycles market – especially the premium segment – has seen hectic activity
with a number of players jostling for market superiority. The Hero Cycles product
range has expanded to include a variety of models, innovative features and price
points to meet this growing competition.

The Hero Hawk – a bike with curved handle bars for customers who craved
speed – was among the first of such innovative products introduced by the
company.

The Hero Ranger – a bike with thick tyres, strong fork and straight handle bars –
was launched to meet customers’ demand for a tough bike. The Ranger led to the
creation of a new category called All Terrain Bikes (ATBs). Today, the ATB is the
fastest growing segment and the Ranger name, created by Hero Cycles, is generic
to this segment. The Ranger Tribe, targeted at teenagers

The Hero Impact, a super light citybike, was developed to cater to the urban
customers’ need for a light bike.

38
The Hero Neon, with its international looks and Hero Miss India – with light
metal meant as a light bike for girls were other products launched by Hero Cycles.
Hero also introduced cycles with shock absorbers, high speed gears,
speedometers and number plates.

The company has also experimented with cycle frames. One of the most
successful innovations is the Y-frame which was introduced with the launch of the
Hero Buzz, a bike for Generation Y. The Ranger Swing sports an A-frame, while

Razorback has a D-frame. The company has also spotted the growing opportunity
in the fitness segment and launched a range of fitness equipment, including cycles,
exercisers, steppers and joggers.

39
CHAPTER-3

OBJECTIVE
OF STUDY
AND
RESEARCH

40
 METHODOLO
GY

OBJECTIVES:

CONCEPTUAL :-( Financial Technique: Working Capital Ratios)

To prepare a report after analysis and interpretation of finding from

balance sheet as well as profit and loss account by applying various mathematical and
financial tools and techniques.

FACTUAL :-( Analysis of facts (results) derived from the financial technique

41
 • The main purpose of our study is to render a better understanding of the
concept “Working Capital Management”.

• The present earning capacity or profitability of HERO CYCLES Ltd

• The short-term liquidity and long-term solvency.

• The financial stability of a business.

• To analyze different ratios so to judge the availability and effective usage

of working capital .

RESEARCH METHODOLOGY

Research

42
Research is the systematic process of collecting and analyzing information to increase our
understanding of the phenomenon under study. It is the function of the researcher to
contribute to the understanding of the phenomenon and to communicate that
understanding to others.

This chapter consists of research procedure which were used to collect data and
information regarding………… it consists of sequence of steps. These are closely inter
linked and inter dependent. Each step has been formulated and conducted very carefully
so to efficient outcome.

Meaning
Research methodology is a way to systematically solve the research problem.
The methodology of study is usually related to the subject or the issue that is being
investigated.

According to D. Slesinger and M. Stephenson ‘Research’ may be defined as

“the manipulation of things, concepts or symbols for the purpose of generalizing to
extend, correct or verify knowledge, whether that Knowledge aids in the construction of
theory or in the practice of an art”. Thus it is an original contribution to the existing stock
of knowledge of making for its advancement.

In this, we study the various steps that are generally adopted by a researcher in
studying research problem.

• Determin/define the problem

• Specify what information is needed
• Identify the sources of information
• Decide the techniques for acquiring the information
• Gather and process the information
• Analysis and interpret the information
• Present the findings

43
 Universe of the Study

The universe of the study has been limited to …………………..

The various sources of information are:

1. Primary sources
2. Secondary sources

Primary sources

• Consulting with trainer and with seniors

• Consulting With officials of other department
• Annual report of the Co.

Secondary sources
• Like previous years annual reports, reports on working capital for research,
analysis and comparison of the data gathered.
• While doing this project, the data relating to working capital, cash management,
receivables management, inventory management and short term financing was
required. .
• A detailed study on the actual working processes of the company is also done by
timely studying the happenings at the company.

44
CHAPTER – 4

CONCEPT
OF
WORKING
CAPITAL

45
 INTRODUCTION

Working capital refers to the cash that a business requires for day-to-day operations or
more specifically, for financing the conversion of raw materials into finished goods
which the company sells for payment. Working Capital is a life blood and nerve centre of
business. Just as circulation of blood is essential for the survival of the human being,
similarly working capital is necessary for the survival of every business organization,
whether it is a small organization or a big organization.

Every business needs funds for two purposes-for establishment and to carry out its day-
to-day operations. Long terms funds are required to create production facilities through
purchase of fixed assets, such as plant & machinery, land & building, furniture & fixtures
etc. Investment in these assets present that part of the firm’s capital which is blocked on a
permanent or fixed basis and is called fixed capital. Funds are also needed for short-term
purposes as for the purchase of raw material, payment of wages & other day-to-day
expenses etc. These funds are known as working capital.

46
In simple words, working capital refers to that part of the firm’s capital which is required
for financing short term or current assets such as, cash, marketable securities, debtors and
inventories In other words, the working capital is the excess of current assets over current
liabilities.

WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

FACTORS DETERMINING THE WORKING CAPITAL

The working capital requirement of the concern depends upon a large numbers of
factors such as nature and the size of business, the character of their operations,
the length of production cycles, the rate of stock turnover and the state of
economic situation. It is not possible to rank them because all such factors are of
different importance and influence of individual factor changes for a firm
overtime. However, the following are important factors generally influencing the
working capital requirements.

 Nature and character of business.

 Size of business\scale of operation.
 Production policy.
 Manufacturing process\length of production cycle.
 Seasonal variation.
 Working capital cycle : The working capital cycle can be defined as:

The period of time which elapses between the point at which cash begins to be
expended on the production of a product and the collection of cash from a
customer

47
The way working capital moves around the business is modelled by the working capital
cycle. This shows the cash coming into the business, what happens to it while the
business has it and then where it goes. A simple working capital cycle may look
something like:-

Between each stage of this working capital cycle there is a time delay. For some
businesses this will be very long where it takes them a long time to make and sell the
product. They will need a substantial amount of working capital to survive. Others
though may receive their cash very quickly after paying out for raw materials etc...
(perhaps even before they've paid their bills) - they will need less working capital.

For all businesses though they need to plan how much cash they are going to have. The
best way of doing this is a CASH FLOW FORECAST.

48
TYPES OF WORKING CAPITAL

Working capital may be classified in two ways:

a) On the basis of concept
b) On the basis of time

On the basis of concept, working capital is classified as gross working capital and net
working capital. This classification is important from the point of view of the financial
manager.

GROSS WORKING CAPITAL:

CAPITAL This is a wider term in relation to the
working capital. It includes all current assets. Thus the gross working capital is the capital
invested in total current assets of the company. Current assets include-

 Cash in hand and bank

 Bills receivables
 Sundry debtors
 Short term loans and advances
 Inventory of stock

49
  Prepaid expenses

Gross Working Capital = Total Current Assets

COMPANY’S CURRENT ASSETS

Years 2008 2007 2006 2005

1) Inventories 1,106,936,341 805,661,034 766,521,142 650,041,883

2) Sundry 1,968,290,674 2,228,592,486 1,860,512,457 1,828,130,505

Debtors
3) Cash & Bank 151,600,603 22,134,657 69,481,654 77,168,419
Balance
4) Loan & 851,293,187 457,780,835 337,661,837 391,097,916
Advances
Gross W. Capital 4,078,120,805 3,514,169,012 3,034,177,090 2,946,438,723

Analysis: Here company increases his gross working capital in the current year as
compared to the previous years. This type of situation is good for the company as it helps
in augmenting the efficiency of the business of the company.

NET WORKING CAPITAL: is the difference between the current assets

and current liabilities. Therefore it is called net working capital. When current assets

50
 exceed current liabilities,then the working capital is positive otherwise negative. Current
liabilities include-

 Bill Payable
 Sundry creditors
 Outstanding expenses
 Short term loans
 Dividend Payable
 Bank Overdraft

COMPANY’S CURRENT LIABILITIES

Years 2008 2007 2006 2005

1) Acceptance of 279,111,124 157,411,551 150,091,940 102,955,677
5) Interest 12,261,309 68,013,967 33,978,467 7,201,337
Bill payable
2) Sundryaccrued But1,538,854,031 1,644,148,925 1,354,212,056 1,084,407,168
not due
Creditors
3)
6) Security
Other 28,356,723
51,619,677 33,074,813
47,873,984 33,033,817
34,312,313 33,108,985
21,625,843
Deposits
liabilities
Total Current Liability 1,942,587,980 1,978,589,143 1,640,425,867 1,270,204,280
4) Advance 32,385,116 28,065,885 34,797,274 20,905,270
against Orders

(Excluding provisions)

51
 Analysis: Here total current liability of the company in current year has reduced as
compared to the previous year. Reduction in current liability is good for the company as
it reduces the burden of making payment to the creditors, on the company.

Years 2008 2007 2006 2005

1) Current 1,942,587,980 1,978,589,143 1,640,425,867 1,270,204,280
liabilities

2) Provisions 174,692,064 195,750,077 223,706,638 164,026,142

Total Liability 2,117,280,044 2,174,339,220 1,864,132,505 1,424,230,422

(Including provisions)

COMPANY’S NET WORKING CAPITAL

Net Working Capital = Current Assets – Current Liabilities

Years 2008 2007 2006 2005

1) Current Assets 4,078,120,805 3,514,169,012 3,034,177,090 2,946,438,723

2) Current 1,942,587,980 1,978,589,143 1,864,132,505 1,434,230,422

liabilities

Net Working Capital 2,135,532,825 1,535,579,869 1,170,044,589 1,512,208,301

52
Analysis: Net working capital of the company has increased in the current year which
shows that current assets are more than the current liabilities. This type of situation is
good for the company as the liability of company is reducing and investment in the
current assets by the company is increasing.

On the BASIS OF TIME, working capital is classified as PERMANENT OR FIXED

WORKING CAPITAL and TEMPORARY OR VERIABLE WORKING
CAPITAL:

PERMANENT OR FIXED WORKING CAPITAL: Permanent

working capital is the minimum amount which is required to ensure effective utilization
of fixed facilities and or maintaining the circulation of current assets. There is always a
minimum level of current assets which is continuously required by the enterprise to carry
out its normal business operations. For example, work-in-progress, finished goods and
cash balance. This minimum level of current assets is called permanent working capital
as this part of the capital is permanently blocked in current assets. As the business grows,
the requirements of permanent working capital also increase due to the increase in current
assets.

TEMPORARY OR VARIABLE WORKING CAPIAL:

Temporary working capital is the amount of working capital which is required to
meet the seasonal demands and some special exigencies. Variable working capital can
be further classified as seasonal working capital and special working capital. Most of
the enterprises have to provide additional working capital to meet the seasonal and
social needs. The capital required to meet the seasonal needs of the enterprise is
called seasonal working capital. Special working capital is that part of working
capital which is required to meet exigencies such as launching of extensive marketing
campaign for conducting research, etc

53
 Financing Of Working Capital
A firm can adopt different financial policies to finance its current assets. There are
various types of sources for financing working capital. These are as follows:

Sources of Working Capital

Permanent or Long Term Temporary or Short Term

1. Shares 1. Commercial banks

2. Debentures 2. Indigeneous
bankers

3. Public deposits 3. Trade creditors

4. Ploughing back of profits 4. Instalment credit

5. Loans from financial institutions 5. Advances

6. Accounts
receivable
7. Accrued expenses
8. Commercial
paper

Financing Of Long Term Working Capital

54
Permanent working capital should be financed in such a matter that the enterprise
may have its uninterrupted use for a long period. There are five sources of long
term working capital:

1. Shares: Issue of shares is the most important source for raising long term
capital. A company can issue various types of shares like equity shares,
preference shares and deffered shares. As\far as possible, a company should
raise the maximum amount of permanent capital by issue of shares.

2. Debentures: A debentures is an instrument issued by the company

acknowledging to its debt to its holder. The debenture holders are the
creditors of the company. A fixed rate of interest is paid on the debentures.
The debentures may be of various kinds such as unsecured, secured,
redeemable, irredeemable, convertible debentures and non convertible
debentures. The debentures as a source of finance have a number of
advantages both to investors and company.

3. Public Deposits: Public deposits are the fixed deposits accepted by a

business enterprise directly from the public. This source of raising short term
and medium term finance was very popular in absence of banking facilities.
Public deposits as a source of finance have a large number of advantages such
a convenient source of finance, taxation benefits, no need of securities and
inexpensive source of finance.

55
4. Ploughing Back of Profits: It means the reinvestment by the concern of its
surplus earning in its business. This method of finance has a large number of
advantages as it is the cheapest rather cost free source of finance, there is no
need to keep securities, it ensures stable dividend policy.

5. Loan From Financial Institutions: Financial institutions such as

commercial banks, insurance corporations, idbi etc also provides short term,
medium term and long term loans. This source of finance is more suitable to
meet the medium term demands of working capital.

Financing Of Short Term Working Capital

The main source of short term working capital are as follows:

1. Indigenous Bankers: Private money lenders and other country bankers used
to be the only source of finance prior to the establishment of commercial
banks. They used to charge very high rate of interest. Even today some
business houses have to depend upon indigenous bankers for obtaining loans
to meet their working capital requirements.

56
2. Trade Credit: Trade credit refers to the credit extended by the suppliers of
goods in the normal course of business. At present commerce is build upon
credit, trade credit arrangement of a firm with its suppliers is an important
source of finance. It may also take the form of bills payable whereby the
buyer signs a bills of exchange payable on a specified future date.

3. Instalment Credit: This is another method by which the assets are purchased
and the possession of goods is taken immediately but the payment is made in
instalments over a pre determined period of time. In this interest is charged on
the unpaid price or it may be adjusted in the price.

4. Commercial Paper: It is an important money market instrument for raising

short-term finances. Commercial papers represents the unsecured promissory
notes issued by firms to raise short term funds. Firms, banks, insurance
companies, individuals etc. With short-term surplus funds invest in
commercial papers. Investors would generally invest in commercial paper of
a financially sound and creditworthy firm. In India, commercial papers of 91
to 180 days maturity are being floated. The interest rate will be determined in
the market.

5. Advances: Some business houses get advantages from their customers and
agents against orders and this source is a short term source of finance for

57
 them. It is a cheap source of finance and in order to minimise their investment
in working capital.

6. Commercial banks: Commercial banks are most important source of short

term capital. The major portion of working capital loans are provided by
commercial banks. They provide a large variety of loans to meet the specific
requirements of a firm. The different form in which the banks normally
provide loans and advances are as follows:

(a) Loans
(b) Cash credits
(c) Overdrafts
(d) Discounting of bills.

IMPORTANCE OF ADEQUATE WORKING CAPITAL

Working Capital is a life blood and nerve centre of business. Just as the circulation
of blood is essential in the human bodies for maintaining life, working capital is
very essential to maintain the running of business. No business can run
successfully without an adequate amount of working capital.

Merits of working capital are as follows:

• Solvency of business: Adequate working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.
• Goodwill: Sufficient working capital enables a business concern to make
prompt payments.

58
 • Easy loans: A concern having adequate working capital high solvency and
good credit standing can arrange loans from banks and other on easy terms.
• Cash discounts: Adequate working capital also enables a concern to avail
cash discounts on the purchase and hence it reduces costs.
• Regular supply of raw materials: Adequate working capital ensures
regular and continuous supply of raw materials.
• Regular payments of salaries, wages & other day to day commitments :
A company which has adequate working capital can make regular payments
of salaries, wages & other day to day commitments with raises the morale
of its employees, increase their efficiencies, reduces wastages and enhance
production and profits.
Ability to face crises: Adequate working capital also enables a concern to face
business crises in emergencies such as depression because in such periods,
generally, there is much pressure on working capital.

59
CHAPTER - 5

ANALYSIS OF
WORKING
CAPITAL

60
 SCHEDULE OF CHANGES IN WORKING
CAPITAL

CURRENT ASSETS 2008 2007 INCREASE DECREASE

INVENTORIES 1,106,936,341 805,661,034 301,275,307

SUNDRY DEBTORS 1,968,290,674 2,228,592,486 260,301,812
CASH & BANK BALANCE 151,600,603 22,134,657 129,465,946
LOANS &ADVANCES 851,293,187 457,780,835 393,512,352
TOTAL (A) 4,078,120,805 3,514,169,012

CURRENT LIABILITIES &

PROVISIONS
Bills Payable 279,111,124 157,411,551 121,699,573
Sundry Creditors 1,538,854,031 1,644,148,925 105,294,894
Security Deposits 28,356,723 33,074,831 4,718,108
Advances Against Orders 32,385,116 28,065,885 4,319,231
Interest Accrued 12,261,309 68,013,967 55,752,658
Other Liabilities 51,619,677 47,873,984 3,745,693
Provisions 174,692,064 195,750,077 21,058,013
TOTAL(B) 2,117,280,044 2,174,339,220

NET WORKING 1,960,840,761 1,339,829,792

CAPITAL(A-B)
INCREASE IN WORKING 621,010,969 621,010,969
CAP
TOTAL 1,960,840,761 1,960,840,761 1,011,077,278 1,011,077,278

TECHNIQUES OF WORKING CAPITAL ANALYSIS

The importance of working capital management cannot be over emphasized in

view of the 3 times and energy spent by management on working capital

61
decision .Working capital firm is analyzed by outsiders like banks, trade creditors,
financial institutions etc.
The objective of analysis is to evaluate solvency, liquidity and the cost of
financing. A study of chances in the uses and the sources of working capital are
necessary to evaluate the efficiency with which the working capital is employed in
business. This involves the need of working capital analysis, which can be done
through the following techniques

RATIO ANALYSIS APPROACH:

Ratio analysis is a technique of analysis and interpretation of financial
statements. It is a process of establishing and interpreting various ratios for
helping in making certain decisions.

• Leverage Ratios which show the extent that debt is used in a company's
capital structure.
• Liquidity Ratios which give a picture of a company's short term financial
situation or solvency.
• Operational Ratios which use turnover measures to show how efficient a
company is in its operations and use of assets.
• Profitability Ratios which use margin analysis and show the return on sales
and capital employed.
• Solvency Ratios which give a picture of a company's ability to generate
cash flow and pay it financial obligations.

NEED OF RATIO ANALYSIS:

The need of ratio analysis due to following facts:
1) Business facts shown in financial statements do not carry any
importance individually. There importance lies in the fact that they are

62
 interpreted. Hence there is a need for establishing relationship between
various related items.
2) Ratio-analysis is a tool for interpretation of financial statements is also
needed because ratios have analyst to have a deep peep into the data
given in the financial statements.

Several ratios measure how effectively and efficiently working capital is being used.
(Key Working Capital Ratios : Stock Turnover(in days), Receivables Ratio(in days) ,
Payables Ratio(in days) , Current Ratio, Quick Ratio, Working Capital Ratio)

ANALYSIS OF WORKING CAPITAL:

CURRENT RATIO:

63
 Current ratio is the relationship between the current assets and current liabilities.
This ratio is also known as working capital ratio. It is a measure of general
liquidity and is most widely used to make the analysis of a short-term financial
position.

Current Ratio = Current Assets

Current Liabilities

Current Assets

Years 2008 2007 2006 2005

1) Inventories 1,106,936,341 805,661,034 766,521,142 650,041,883

2) Sundry Debtors 1,968,290,674 2,228,592,486 1,860,512,457 1,828,130,505

3) Cash & Bank 151,600,603 22,134,657 69,481,654 77,168,419

Balance
4) Loan & 851,293,187 457,780,835 337,661,837 391,097,916
Advances
Total current assets 4,078,120,805 3,514,169,012 3,034,177,090 2,946,438,723

64
 Current Liabilities

Years 2008 2007 2006 2005

1) Acceptance 279,111,124 157,411,551 150,091,940 102,955,677
of Bill
payable
2) Sundry 1,538,854,031 1,644,148,925 1,354,212,056 1,084,407,168
Creditors
3) Security 28,356,723 33,074,813 33,033,817 33,108,985
Deposits

4) Advance 32,385,116 28,065,885 34,797,274 20,905,270

against
Orders
5) Interest 12,261,309 68,013,967 33,978,467 7,201,337
accrued But
not due
6) Other 51,619,677 47,873,984 34,312,313 21,625,843
liabilities

7) Provisions 174,692,064 195,750,077 223,706,638 164,026,142

Total current 2,117,280,044 2,174,339,220 1,864,132,505 1,424,320,422

liabilities

YEAR 2008 2007 2006

2005

Current Ratio = 1.93 1.61 1.63 2.06

65
 As, Current Ratio has increased in yr.2008 as compared to yr 2007 and yr.2006,
this indicates that liquidity position is good and company’s commitment
to meet its short-term obligation in time.

LIQUID RATIO:
Liquid ratio is also known as acid test ratio and quick ratio. It is a more rigorous
test of liquidity then the current ratio. The term ‘liquidity’ refers to the ability of a
firm to pay its short-term obligations as and when they become due. It is the
relationship between the quick assets and current liabilities.

Liquid Ratio = Liquid Assets

Current Liabilities
Liquid Assets

Years 2008 2007 2006 2005

1) Sundry Debtors 1,968,290,674 2,228,592,486 1,860,512,457 1,828,130,505

2) Cash & Bank 151,600,603 22,134,657 69,481,654 77,168,419

Balance
3) Loan & 851,293,187 457,780,835 337,661,837 391,097,916
Advances
Total liquid assets 2,971,184,464 2,708,507,978 2,267,655,948 2,296,396,840

Current Liabilities

66
Years 2008 2007 2006 2005
1) Current 1,942,587,980 1,978,589,143 1,640,425,867 1,270,204,280
liabilities
2) Provisions 174,692,064 195,750,077 223,706,638 164,026,142

Total current 2,117,280,044 2,174,339,220 1,864,132,505 1,424,230,422

liabilities

YEAR 2008 2007 2006 2005

Liquid Ratio 1.40 1.24 1.21 1.61
As there is considerable increase in liquid ratio in yr.2008 as compared to yr.2007
and yr.2006, this implies that company is liquid and has the ability to meet its
current or liquid liabilities in time. Also it shows that fast moving inventories.

ABSOLUTE LIQUID RATIO

This ratio tells the relationship between the absolute liquid assets and current
liabilities. Debtors and bills receivables are more liquid than inventories. But cash
ratio involves only absolute liquid assets. Absolute liquid assets involve only cash
and bank and short term securities.

Absolute Ratio = Absolute Liquid Assets

Current Liabilities

Absolute Liquid Assets:

Years 2008 2007 2006 2005

Cash & Bank 151,600,603 22,134,657 69,481,654 77,168,419
Balance
Total Absolute 151,600,603 22,134,657 69,481,654 77,168,419
Liquid Assets

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 Current Liabilities:

Years 2008 2007 2006 2005

1) Current 1,942,587,980 1,978,589,143 1,640,425,867 1,270,204,280
liabilities
2) Provisions 174,692,064 195,750,077 223,706,638 164,026,142

Total current 2,117,280,044 2,174,339,220 1,864,132,505 1,424,230,422

liabilities

YEAR 2008 2007 2006 2005

ABSOLUTE RATIO 0.0716 0.0101 0.037 0.05
The acceptable norm for this ratio is 50% or 0.5:1 i.e. Re.1 worth absolute liquid
assets are considered adequate to pay Rs.2 worth current liabilities in time as all
the creditors are not expected to demand cash at the same time and then cash may
be realized from debtors and inventories. Thus ratio is 0.0716 which is quite
unsatisfactory as it is much lower than the rule of thumb i.e. 0.5.

4. Inventory Turnover Ratio:-

Inventory turnover ratio also known as stock velocity is normally calculated
as sales/average inventory or cost of goods sold/average inventory. It indicates
whether inventory has been efficiently used or not. It indicates no. of times
the stock has been turned over during the period.

Inventory turnover ratio = Total Net Sales

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 Average Inventory

2005

Average Inventory = Opening Inventory + Closing Inventory

2
= 602,706,898 + 650,041,883
2
=626,374,390

Inventory turnover ratio = 10,944,819,048

626,374,390

= 17.47

2006
Average Inventory = 650,041,883 + 766,521,142
2
=708,281,512

Inventory turnover ratio = 11,369,337,410

708,281,512

= 16.05
2007
Average Inventory = 766,521,142 + 805,661,034
2
=786,091,088

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Inventory turnover ratio = 13,308,705,116
786,091,088

= 16.93

2008
Average Inventory = 805,661,034 + 1,106,936,341
2
=956,298,822

Inventory turnover ratio = 12,850,038,969

956,298,822
= 13.44

YEAR 2008 2007 2006 2005

INVENTORY 13.44 16.93 16.05 17.47

TURNOVER RATIO

As it can be seen that inventory turnover ratio has decreased in yr 2008 as

compared to yr 2007 and yr.2006, this is an unfavourable position. It
implies that there is inefficient management of inventory in the concern and
there is over- investment in inventories.

5.DEBTORS TURNOVER RATIO:

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Debtor’s turnover ratio indicates the velocity of debt collection of firm. In simple
words, it indicates the number of times average debtors are turned over during a
year.

Debtor turnover ratio = Total Net Sales

Average Debtors

2005
Average Debtors = Opening Debtors + Closing Debtors
2
Average Debtors = 1,657,395,966 + 1,828,130,505 = 1,742,763,236
2

Debtor turnover ratio = 10,944,819,048 = 6.28

1,742,763,236

2006
Average Debtors = 1,828,130,505 + 1,860,512,457 = 1,844,321,481
2

Debtor turnover ratio = 11,369,337,410 = 6.16

1,844,321,481

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2007
Average Debtors = 2228592486 + 1860512457 = 2,044,552,471
2

Debtor turnover ratio = 13308705116 = 6.51

2,044,552,471

2008
Average Debtors = 2,228,592,486 + 1,968,290,674 = 2,098,441,580
2
Debtor turnover ratio = 12,850,038,969 =6.12 times
2,098,441,580

YEAR 2008 2007 2006 2005

DEBTORS
TURNOVER 6.12 6.51 6.16 6.28
RATIO

As there is decline in debtors turnover ratio this indicates that there is inefficient
management of debtors or in other words, there are less liquid debtors of
company.

6. WORKING CAPITAL TURNOVER RATIO:

Working capital is directly related with the sales of the firm. Working capital
turnover ratio indicates the velocity of the utilization of the net working capital.
This ratio indicates the number of time the working capital is turned over in the
course of a year.

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Working Capital Turnover Ratio = Cost of sales/Sales

Net Working Capital

2007
Working Capital Turnover Ratio = 13,308,705,116 = 9.93
1,339,829,792

2008
Working Capital Turnover Ratio = 12,850,038,969 = 6.55
1,960,840,761

As there is decline in working capital turnover ratio in yr 2008 as compared to yr

2007. This shows that there is inefficient utilization of working capital. But W.C
Turnover ratio is too much in yr 2007 so this is also not a good situation for a
concern and hence care must be taken while interpreting this ratio.

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CHAPTER-6

OPERATING
CYCLE OF HERO

74
 CYCLES
LIMITED

OPERATING CYCLE

The operating cycle refers to the length of the length of time between the firms
paying the cash for the material, entering into the production process\stock and the
inflow of cash from debtors. There is a complete cycle from cash to cash where in
cash gets converted into raw material, work-in-progress, finished goods debtors
and finally in cash. Short-term funds are required to meet the requirements of the
funds during this time period this time period depends on the length of time within
which the original cash gets converted into cash again. The determination of
working capital cycle helps in the forecast, control and management of working

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capital. It indicates the total time lag and the relative significance of constituent
parts.

FINISHED GOODS

WORK-IN-
DEBTORS PROGRESS

CASH RAW MATERIAL

Events of Operating Cycle

The operating cycle consists of following events, which continues throughout the
life of business.
• Conversion of cash into raw material.
• Conversion of raw material into work in progress.
• Conversion of work in progress into finished goods.
• Conversion of finished goods into accounts receivable.
• Conversion of accounts receivable into cash.

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 RAW MATERIAL STORAGE PERIOD

Years 2008 2007 2006 2005

1) Average of raw 340,386,927 288,006,647 249,705,297 218,942,766
material
(Opening stock+ closing stock/2)
2) Annual 10,154,298,847 10,351,310,382 8,260,850,478 8,073,320,165
consumption of
Raw material
(Opening stock+ purchase-closing stock)

3) Daily 27819997 28359754 22,632,467 22,118,685

consumption
(Annual consumption/365)

4) Raw material 12 days 10 days 11 days 10 days

storage
(Average of raw material/Daily consumption)

WORK-IN-PROGRESS
Years 2008 2007 2006 2005
1) Average 214,324,043 176,557,779 160,347,144 150,078,798
of W.I.P.
(Opening stock+ closing stock/2)

2) Annual cost 11,107,520,306 11,224,569,20 9,214,954,71 9.027,214,837

of production 4 1
(Purchases+ manufacturing expenses)

3) Average daily 30,431,562 30,752,244 25,243,986 24,732,095

cost

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 (Annual cost/365)

4) Conversion 8day 9days 6days 6days

period
(Average of W.I.P./Consumption)

FINISHED GOODS STORAGE PERIOD

Years 2008 2007 2006 2005
1) Average 168,614,269 99,099,035 81,762,392 79,465,726
inventory
(Opening stock+ closing stock/2)
2) Annual cost 10,966,241,345 13,797,654,590 11,810,612,13 10,654,069,007
of sales 1
(Raw material consumed+ expenses)
3) Average 30,044,497 37,801,793 26,884,261 26,294,161
daily cost of
sales
(Annual sales/365)
4) Storage 6 days 3days 3days 3days
period
(Average inventory/daily consumption)

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 AVERAGE PAYMENT PERIOD
Years 2008 2007 2006 2005
1) Average 1,591,501,478 1,652,932,236 1,345,833,420 1,202,783,999
creditors
(Opening stock+ closing stock/2)

2) Annual 10,295,577,808 10,382,131,472 8,522,140,258 8,434,353,232

purchases
(Purchases during the year)

3) Daily 28,207,062 28,385,625 23,348,329 23,107,817

purchases
(Purchases/365)

4) Payment 56days 58days 57days 52days

period
(Average creditors/purchases)

OPERATING CYCLE OF HERO CYCLES LIMITED

Operating cycle = Raw material + W.I.P + finished goods+ Debtors

period

2008 =12+8+6+60
= 86

2007 = 10+9+3+56

79
 = 78

2006 = 11+6+3+55
= 75

2005 = 10+6+3+52
= 71

Analysis: The operating cycle period has shown an increase in the different
years. In the current year, operating cycle period is 86 days which means
that the money will be blocked in a particular activity for 86 days. This is
too longer period which is not good for the company as it leads to delay in a
particular activity.

CASH CYCLE OF HERO CYCLES LIMITED

Cash Cycle = Operating cycle – Payment

2008 =86-56
=30

2007 = 76-58
= 18 days

80
 2006 = 75-57
= 18 days

2005 = 71-52
= 19 days

Analysis: The cash cycle of the company in current year is 30 days. This
means that a company can recover cash from it’s debtors in 30 days, which
is also an optimum policy of HCL to recover cash from it’s debtors. But if it
is not able to recover cash within 30 days, after that it charges interest from
the debtors. At the same time it also offer incentives to the customers if the
payment has been recovered before 30 days.

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SWOT

ANALYSIS

OF

82
 HERO CYCLES
LIMITED

STRENGTHS:

 The progress of HCL has always depended heavily on the competence,

motivation, performance and dynamism of people at all levels.

 HCL’s key strength has always been it’s employees and their commitment to the
progress of the company.

 Strong and enduring consumer brand loyalty around the world.

 High market share of the company since long time.

 Leading global brands.

 Efficient management.

 Proper discipline

 Awareness about new technology

 Quality consciousness

 Proper arrangement for market scanning.

 Launching of new models according to the customer requirements.

 Goodwill

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  Leadership quality

 Price policy.

WEAKNESSES:

 Process of inventory should be on JIT system.

 Advertisement is not done regularly.
 Non-upgradation of foreign technology.
 The composition of the current assets is not good.
 A few products and services offered to the higher income group.

OPPORTUNITIES:

 Company can secure more shares in the International Market.

 Government is also helping in promoting their business as it’s R&D centre is

being re-organized by government giving them a competitive edge.

THREATS:

 Increase in steel prices

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  Avon is coming up with many new offers.

 Atlas is dominating in standard segment.

RECOMMENDATIONS
• The Company is enjoying a good current position. It should take steps to further
improve its position by repositioning the composition of current assets as large
amount has been blocked in debtors and inventories.

• Period of credit sale should be reduced so that utilization of blocked funds with
debtors can be properly and timely utilized.

• Inventory control should be on JIT basis so that stock of material as well

as wastage of funds can be reduced.

• Expenses have increased a lot so detail note must be given to know the
reason of such increase.

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 FINDINGS
• Hero Cycles Limited, they follow the moderate policies of working capital. They
enjoy the benefits of both conservative and aggressive policy.

• They are financing fixed working capital from long term sources and temporary
working capital from short term sources.

• The optimum current ratio is 2:1 but Hero Cycle is achieving 1.67.

• According to the operating cycle of HCL, their inventory turnover ratio is very
good and it helps in solvency of the business.

Thus HCL has an efficient management of working capital.

CONCLUSION
The HCL is one of the well-established units of cycle industry. The performance of this
company is satisfactory. The will build organizational structure of HCL is increasing.

1. The company is not adopting the uniform credit policy. Credit is given to the
consumers on seeing there past performance. In some cases it is 15 days to 45
days along with interest of 15% to 18%. Today customer is a king. Now it is a
buyer market. If a company adopts uniform credit policy, it can create a felling of
professionalism. The company should treat small and big customers equally.
2. The company should negotiate with bank on the interest rate issue. 70% of the
total working capital need is filled from Canara Bank and IDBI, Punjab National
Bank.
3. There is no capacity utilization up to maximum possible extent. It is near about
80%.

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4. Some qualities of steel sheets involve a large amount of inventory holding cost
because those qualities are not easily available.
5. All though the procedure followed is quite good but none of the relevant
techniques to minimize the cost of inventory are being applied.

BIBLIOGRAPHY

• www.herocycles.com
• http://www.ludhianaindustry.com/world_production_data.htm
• www.bike-eu.com/news/1785/ludhiana-bicycle-industry
• www.google.com
• Annual Report of Hero Cycles Ltd. 2007-08

• http://automobiles.indiabizclub.com/profile/1687488~hero+cycles+ltd.~ludhiana_india

• www.scribd.com/

• Reference to a book:
spectrum (2008), management accounting, sharma publications,Amritsar-
Jalandhar.

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