Professional Documents
Culture Documents
Project On Working Capital
Project On Working Capital
PROJECT REPORT
ON
DEVELOPED BY,
MISS. UPADHYE PRIYANKA VINAYAK
FROM
MAHINDRA SONA LTD.
TO
UNIVERSITY OF PUNE
(2008- 2009)
P. D. V. V. P. FOUNDATION’S
INSTITUTE OF BUSINESS MANAGEMENT
AND RURAL DEVELOPMENT,
AHEMADNAGAR
1
DECLAIRATION:
And the result embodies in this project report not been submitted
to any other university or institute for the award of degree or diploma.
IBMRD, AHEMADNAGAR.
Date:
Miss. Upadhye Priyanka V.
Place:
2
ACKNOWLEDGEMENT:
3
OBJECT OF THE PROJECT:
4
OBJECTIVE OF THE PROJECT
5
METHODOLOGY OF THE STUDY
RESEARCH
The various sources of information can be broadly classified in two categories namely
primary and secondary.
6
INDEX:
7
CONTENT PAGE
NO.
8
v. CHANGES IN WORKING CAPITAL
vi. FINANCIAL REPORT
vii. PROFIT AND LOSS ACCOUNT
7. CONCLUSION 79
8. RECOMMENDATIONS 80
9
COMPANY
PROFILE
i. INTRODUCTION
ii. HISTORY
iii. PRODUCTS AND APPLICATIONS
iv. MILESTONES
v. ORGANIZATIONAL CHART
vi. PLANT LAYOUT
10
COMPANY PROFILE:
‘Mahindra Sona Limited’ was formed in collaboration with Dana
Corporation of USA, over two decades ago through access to
international technology and has since emerged as a leading
independent manufacturer of Automotive Components which include
Propeller Shafts/ Carden Shafts, UJ Components and automotive
Clutches. Progressively, ‘Mahindra Sona Limited’ has expanded its
product range to meet demands of various Automotive Manufacturers.
The facilities contain more than 9300 sq. meters of manufacturing space
strategically located in western India providing easy accessibility to
various vehicle manufacturers and provide ample scope for future
expansion to almost five times the current size. ‘Mahindra Sona
Limited’ has a strong team of 380 motivated employees, of which, 50
are qualified engineers and professionals.
HISTORY: The Company has long history, which dates back to the
year 1885 when M/s Turner Hoare and company started its activity in
imports and exports of traditional Indian consumer goods.
In 1968, M/s Turner Hoare and company took over another Company,
M/s East Atlantic Company and realistic market potential entered into
execution of engineering projects like Hydro pneumatic ash handling
system, mechanical cleaning like vibroscreen, traveling water screens
and bagged Import Substitution award twice. In 1977, with equity
participation of Dana Corporation, USA, the company went into
technical collaboration to manufacturer automotive components like
11
Propeller Shaft, Axle Shafts, Universal Joint Kits, and Automotive
Clutches.
12
‘Mahindra Sona limited’ manufactures the automotive components for
automotive applications like Passenger cars, Multi-utility vehicles,
Sports utility vehicles, Light Commercial vehicles, Medium
Commercial vehicles, and Heavy Commercial vehicles.
MSL Drive Shafts also cater to wide Industrial Applications like Earth
Moving Equipments, Engine Dynamometer Testing and Radiator Fan
Drives for Railways, Steel Rolling Mills, and Printing Machineries etc.
13
Commercial vehicles, Medium Commercial vehicles, and Heavy
Commercial vehicles.
PRODUCTS:
o Propeller Shafts
o Universal Joints
o Steering Joints
o Clutch
1. PROPRLLER SHAFTS:
Applications:
o Heavy Duty Vehicles
o Light Commercial Vehicles
o Passenger Cars
o Three Wheelers
o Earth Moving Equipments
o Constructing Machinery
2. AXLES:
Applications;
o Multi Utility Vehicles
3. CLUTCHES:
Applications;
o Multi Utility Vehicles
o Passenger Cars
14
MILESTONES:
15
10. 1999: Exports to USA begins.
16
BOARD OF
DIRECTORS
Mr. B. S. Patwardhan
Mr. J. V. Prabhu
Management
Managing Director
Representative
Mr. U. D. Phatak
Mr. J. S. Mr. S. R. Kundaje Mr. R. V.
Vice President
Chaudhary General Manager Vadhavkar
(A & F)
Sr. Vice President (Technical Series) General Manager
Company
(Marketing) (Materials)
Secretary
Purchase, SOA,
Product Suppliers, QS
Marketing (OEM Production- engineering, UJ Development,
after Marketing and Clutch Customer
Customers) Universal process, Product Schedule Liaison,
Branch Offices, Joints, Testing, R and D, Material
CAD, QA, Quality Scheduling, OSP
New Business A/C, Finance, Clutch, Tool
Opportunities, Costing, MIS Room, Finance
System, CIP, Schedule, Plant
Industries Job Ordering,
Customer Maintenance Department
Engineering, Packing, Dispatch,
Satisfaction, Capital Sales
Publicity, Brand and Shop Expenditure, Info Administration,
Management Scheduling systems, HR, RM Stores,
Administration Material
Documentation.
Mr. A. D. Kale Mr. R. M.
D. G. M. Sawai
Accounting D. G. M.
and Costing and
Finance MIS
Sales and
Cash and Purchase Purchase and Sales accounts
Exports
Bank Receivables Sales Accounts costing
activities
17
18
BUILT UP AREA INLUSIVE YARDS: 9450 Sq. M.
PLANT LAYOUT
INTRODUCTION:
The topic was provided by the project guide in the organization. The
organization wanted to know how efficiently the working capital management
is working. The various ratios relating to the working capital shows the
efficient management of current asset and current liabilities is done.
VACANT
LAND
During the past decade there has been a burst in each and every business in
India. Competition has increased considerable within this decade. This has
ETP
forced the organization to reduce the cost rather than increasing its market
price for its product. Cost reduction can be achieved by various method like,
proper inventory management, managing debtors and creditors and other
UTILITIES
current assets and liabilities, value engineering etc. To achieve all the things
CANTEEN
19
STORA
PLANT
MAIN
GATE
C
E
F
F
I
WORKING CAPITAL
ROAD
POLICY
M
C
I
N
20
PROJECT ON WORKING CAPITAL
21
understandable because current liabilities arise in the context of current
assets.
22
o Fixed working capital :
To carry on business a certain minimum level of working capital is
necessary on a continuous and uninterrupted basis and for all practical
purpose this requirement will have to be met with long term sources.
This requirement is referred to as permanent or fixed working capital.
o Variable working capital :
Any amount over and above the permanent level of working capital is
known as temporary, fluctuating or variable working capital. This
portion of the working capital is needed to meet fluctuations in demand
consequent upon changes in production as a result of seasonal changes.
23
KINDS OF
WORKING
CAPITAL
ON THE ON THE
BASIS OF BASIS OF
CONCEPT TIME
SEASONAL
REGULAR RESERVE SPECIAL
WORKING
WORKING WORKING WORKING
CAPITAL CAPITAL CAPITAL
CAPITAL
24
NEED FOR WORKING CAPITAL:
The objective of financial decision making to maximize the
shareholder’s wealth, it is necessary to generate sufficient profit. The
extent to which profits can be earned will naturally depend upon sales.
However, sales can not be easily converted into cash. Therefore, a need
for working capital in the form of current assets to deal with the
problem arising out the lack of immediate realization of cash again good
sold.
Of technically, this is referred to as the operating or cash cycle. This
cycle consists three phases;
PHASE 1-
Conversion of cash into inventory i.e. purchase of raw material,
conversion of raw material, conversion of raw material into work-in-
progress and finished goods.
PHASE 2-
Conversion of inventory in to receivables i.e. allowing customers credit
sales.
PHASE 3-
Conversion of receivables into cash i.e. receivables are collected.
25
Working capital policy is divided into seven sections;
26
Current assets financing policy: The investment in current assets may
be broken into two parts: Permanent Current Assets and Temporary
Current Assets. The former represents what the firm requires even at the
bottom of its
Cycle; the latter reflects the variable component that moves in line with
seasonal fluctuations.
27
meet the working capital needs of his/her firm. There is a two step
procedure for this:
28
CHARACTORISTICS OF CURRENT ASSETS:
While managing working capital, bear in mind two
characteristics of current assets;
i) Short life span
ii) Swift transformation into other asset forms.
Current assets have a short life span. Cash balances may be held idle for
a week or two, accounts receivables may have a lifespan of 30 to 60 days, and
inventories may be held for 2 to 60 days. The lifespan of current assets depends
upon the time required in the activities of procurement, production, sales and
collection and the degree of synchronization among them.
Each current asset is swiftly transformed into other asset forms: cash is
used for acquiring raw materials; raw materials are transformed into finished
goods (this transformation may involve several stages of work in process);
finished goods, generally sold on credit, are converted into accounts receivable
(bank debt); and finally, accounts receivable, on realization, generate cash.
The short lifespan of working capital components and their swift
transformation from one form into another has certain implications;
Decisions relating to working capital management are repetitive of
frequent.
The difference between profit and present value is insignificant,
29
The close interaction among working capital components implies
that efficient management of other components. For example, if the
firm has a large accumulation of the finished good inventory, it
may have to provide more liberal credit terms or show laxity in
credit collection. Another example; if the firm has a crunch it may
have to offer generous discounts.
Finished
Goods
Accounts Work in
Receivable Process
Wages, salaries,
Factory overheads
Raw materials
Cash Suppliers
30
FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS:
The working capital needs of a firm are influenced by numerous
factors. The important ones are;
Nature of business
Seasonality of operations
Production policy
Market conditions
Conditions of supply
Credit Policy
Inventory Policy
Abnormal Factors
Business Cycle
Growth And Expansion
Level Of Taxes
Dividend Policy
Price Level Changes
Operating Efficiency
31
b. Seasonality of operations: Firms which have marked seasonality in
their operations usually have highly fluctuating working capital
requirements. To illustrate, consider a firm manufacturing ceiling fans.
The sale of ceiling fan reaches a peak during summer months and drops
sharply during winter period. The working capital requirements of such
a firm are likely to increase considerably in summer months and
decrease significantly during winter period. On the other hand, a firm
manufacturing product like lamps, which have fairly even sales round
the year, tends to have stable working capital
32
can be served with some delay. Further, in such a situation the firm can
insist on cash payment and avoid lock-up of funds in accounts
receivable- it can even ask for advance payment, partial or total.
For the sake of simplicity, assets are divided into two classes, viz. fixed
assets and current assets. Fixed assets are assumed to grow at a
constant rate which reflects the secular growth in sales. Current assets,
too, are expected to display the same long-term rate of growth; however,
they exhibit substantial variations around the trend line, thanks to
seasonal (or even cyclical) patterns in sales and/or purchases.
33
the latter reflects the variable component that moves in line with
seasonal fluctuations.
Several strategies are available to a firm for financing its capital
requirements. These strategies are illustrated by lines A, B and C in
following diagram.
34
Fluctuating Current
Fluctuating Current
Asset fluctuating
Asset Requirements
requirement
A
C
Requirements
Capital
Permanent Current
Asset Requirements
Fixed Asset
Requirement
Time
CAPITAL REQUIREMENTS AND THEIR FINANCING
35
OPERATING
CYCLE
AND
CASH CYCLE
i. OPERATING CYCLE ANALYSIS
ii. DURATION OF LIFE CYCLE
iii. MATCHING OR HEDGING APPROACH
iv. CONSERVATIVE APPROACH
v. AGGRESSIVE APPROACH
36
OPERATING CYCLE AND CASH CYCLE:
The investment in working capital is influenced by four keys events in
the production and sales cycle of the firm:
Purchase of raw materials
Payment for raw materials
Sale of finished goods
Collection if cash for sales
The firm begins with the purchase of raw materials which are
paid for after a delay which represents the accounts payable period. The
firms convert the raw material into finished goods and then sell the
same. The time lag between the purchase of raw materials and the sell of
finished goods is the inventory period. Customers pay their bills
sometimes after the sales. The period that elapses between the date of
sale and the date of collection of receivables is the accounts receivable
period (debtor’s period).
The time that elapses between the purchase of raw materials and
the collection of cash for sales is referred to as the operating cycle,
37
whereas the time length between the payments for raw material
purchases and the collection of cash for sales is referred to as the cash
cycle. The operating cycle is the sum of inventory period and the
accounts receivable period, whereas the cash cycle is equal to the
operating cycle less the accounts receivable period.
Accounts Payable
Period
Firm Receives Cash Paid For
invoice Materials
Operating Cycle
Cash Cycle
38
OPERATING CYCLE ANALYSIS:
Operating cycle:
The concept of operating cycle implies the time period that is
required from the time cash is put on the business along with other
inputs to the time it is recovered from the amount of sales made by the
firm. A firm puts cash on as an input and the inputs like raw materials
are purchased with the cash. The raw materials are converted into
finished product and for this additional cash may be required. The
finished product is converted into sale and if the sale is made for cash,
the operating cycle is complete as cash is recovered back. On the other
hand, if sales are on credit, sales are converted into debtors and debtors
are converted into cash.
39
length of the operating cycle will also be of a shorter duration. For
example, in case of hotels and restaurants, the manufacturing process is
relatively short which reduces the duration of the operating cycle. In
case of heavy engineering industries, since the manufacturing process
itself is very lengthy, the operating cycle also becomes very long.
40
DURATION OF LIFE CYCLE:
The duration of life cycle is equal to the sum of duration of each of
these stages less the credit period allowed by the suppliers of the firm.
O=R+W+F+D-C
41
Average trade creditors
C = -----------------------------------------------------------------------------
Average credit purchase per day
CONSERVATIVE APPROACH:
The financing policy of a company is conservative when it depends
more on long term funds for financing needs.
In this approach, company finances permanent assets with long term
financing. In this way company has no temporary assets, company
stores liquidity by investing surplus funds into marketable securities.
This plan mainly depends upon long term financing and so less risky.
42
AGGRESSIVE APPROACH:
While financing assets, company may select aggressive approach when
a company uses more short term financing than warranted by matching
approach. In this policy, company finances a part of its permanent
current assets are also financed by short term finance. The relatively
more used of short term financing makes this aggressive approach more
risky.
RATIO ANALYSIS:
A ratio is simple arithmetical expression of the relationship of one
number to another. It may be defined as the indicated quotient of the
two mathematical expressions.
A ratio is defined as, “The indicated quotient of two
mathematical expressions.” And as, “The relationship between two or
more things.” Ratio analysis is powerful tool of financial analysis.
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.
LIQUIDITY RATIO:
Liquidity refers to the ability of a concern to meet its current obligations
as and when it becomes due. These should be convertible into cash for
paying obligations of short term nature. If current assets can pay off
current liabilities, then liquidity position will be satisfactory. On the
other hand, if current liabilities may not be easily met out of current
assets then liquidity position will be bad. To measure liquidity of a firm,
the following ratios can be calculated;
i. Current Ratio
ii. Quick or Acid Test or Liquid Ratio
iii. Absolute Liquid Ratio or Cash Position ratio
A. CURRENT RATIO:
Current ratio may be defined as the relationship between current assets
and current liabilities. This ratio is also known as the Working Capital
Ratio, which is a measure of general liquidity and is most widely used
to make the analysis of short term financial position or liquidity of a
firm.
44
Current Assets
Current Ratio = --------------------------------------
Current liabilities
OR
B. LIQUID RATIO:
Liquid ratio or quick or acid test ratio may be defined as the relationship
between liquid assets and current or liquid liabilities. An asset is said to
be liquid if it can be converted into cash within a short period without
loss of value. In that sense, cash in hand and cash at bank are the most
liquid assets.
Liquid Assets
Liquid Ratio = --------------------------------
Liquid Liabilities
45
D. CURRENT ASSET TURNOVER RATIO:
Funds are invested in various assets in business to make sales and earn
profit. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, the larger is the
amount of sales or profits. Activity ratios measure the efficiency or
effectiveness with which a firm manages its resources or assets. These
ratios are called as “Turn-over ratios” because they indicate speed with
which assets are converted into sales.
46
F. INVENTORY TURNOVER RATIO:
This is also known as Stock Velocity. It indicates whether inventory has
been efficiently used or not. The purpose is to see whether only required
minimum funds have been locked up in inventory. The ratio indicates
number of times the stock has been turned over during the period and
evaluates the efficiency with which a firm is able to manage its
inventory.
Inventory Sales
Turnover Ratio = ----------------------
Inventory
Gross Profit
Gross Profit Ratio = ---------------------- Î 100
Net Sales
47
Net Profit after Tax
Net Profit Ratio = -------------------------- Î 100
Net Sales
= No. of Times
Net Purchases
Creditors Turnover Ratio = -------------------------------
Average Trade Creditors
K. DEBT-EQUITY RATIO:
48
Debt-equity ratio, also known as “External- Internal Equity Ratio” is
calculated to measure the relative claims of outsiders and the owners (i.
e. shareholders) against the firm’s asset. The ratio indicates the
relationship between the outsider’s funds and the shareholders funds.
Outsider’s funds
Debt-Equity Ratio = ---------------------------
Shareholders funds
49
WORKING capital
financing
i. INTRODUCTION
ii. TYPES OF FINANCING WORKING CAPITAL
iii. SOURCES OF FINANCING WORKING CAPITAL
iv. REGULATION OF BANK FINANCE
v. OTHER FORMS OF FINANCING
50
WORKING CAPITAL FINANCING:
INTRODUCTION:
The investment in raw materials, stock-in-progress, finished goods, and
receivables (the principal constituents of current assets) often varies a great
deal during the course of the year. Hence, the financial manager generally
spends a good chunk of his time in finding money to finance current assets.
51
E.g. Trade credit and outstanding expenses. The main features of these
sources are that they are cost free.
Normally permanent working capital is financed by long term sources where
as temporary working capital is financed by short term sources.
While taking the decision of financing working capital requirement, certain
factors are to be taken into consideration;
i. cost of financing
ii. flexibility
o Cost of Financing: The interest rates increased with the time. Longer the
maturity of debit greater the interest rate. The decision of the company is
guided by risk-return trade off.
o Flexibility: Short term funds are more flexible. Short term funds can be
easily refunded as compared to long term funds, because long term funds
can not be refunded before its maturity period. Financing for the domestic
order is majority met by letter of credit. In case of any shortage company
uses the surplus into various activities such as;
a) short term investments
b) Inter corporate deposit – In case any sister factory is in need of
funds, the surplus fund is used as given to the sister concern.
c) Paying for Overdrafts
52
CASH FLOW STATEMENT:
Cash flow statements indicate movement of cash only. The preparation
of cash flow statement is important to understand the paradoxical
situation in which the firm finds difficulty in honoring its short period
business
Indicated by the funds flow statement (working capital basis).
53
DIFFERENCE BETWEEN FUNDS FLOW AND CASH FLOW
STATEMENT:
54
INVENTORY MANAGEMENT:
INTRODUCTION:
There are three types of inventories: raw materials, work in progress,
and finished goods.
a. Raw materials are materials and components that are inputs in
making the final product.
b. Work-in-process also called stock-in-process refers to goods in
the intermediate stages of production.
c. Finished goods consist of final products that are ready for sale.
55
DATA ANALYSIS
AND
INTERPRETATION
i. BALANCE SHEET OF MSL
ii. CURRENT ASSETS
iii. CURRENT LIABILITIES
iv. CHANGES IN WORKING CAPITAL
v. FINANCIAL REPORT
56
DATA ANALYSIS AND INTERPRETATION:
Loan Funds:-
Secured Loan III 68886274.5 81342342.9 96630797.7 67521776.4
Unsecured Loan IV 15262110 15262110 15262110 15262110
Application of funds :-
Fixed Asset
Gross Block VI 235246054.5 276634041.3 326875086 342719935.2
Less: Depreciation/ Amortization VII 147383485.2 167001049.8 182503653.3 197105247
Net Block VIII 87862569.3 109632991.5 144371432.7 145614688.2
Capital WIP & Capital advance IX 9909356.4 17384400 234702 1606675.5
Less:-
Current liabilities XV 175436987.4 254001050.1 185920966.8 184014939.6
Provisions XVI 43245342 77385900.6 76023437.4 81081735.3
57
CURRENT ASSET
2003-2004 2004-2005 2005-2006 2006-2007
Investment (At cost, Unless otherwise specified)
Unquoted:- 1021410 1021410
Shares (Non-trade & fully
paid up )
Inventories
Stores & Spares 2799252.9 3824108.1 2588202 2404312.2
Tools 7104163.5 8571260.7 10014266.7 9406374.3
Raw Material 18819824.4 27509949 29815432.2 33502496.4
WIP 56680064.1 89319083.4 66041937 64072076.4
FG 11441706.3 23605578 8447974.2 13279263.3
Total 96845011.2 152829979.2 116907812.1 122664522.6
Sundry debtors
Outstanding over six months
Considered Good 656801.1 2990799 2532024 2043717.3
Considered doubtful 724526.1 724526.1 724526.1 724526.1
Less:-
Provision for doubtful debts 724526.1 724526.1 724526.1 724526.1
58
Excise, etc
59
Year CA
2004 378816206.4
2005 529016873.4
2006 526600441.8
2007 590726547.9
Change in CA
7
6
5
4
3
Current Assets
2
1
0
INTERPRETATION:
The CA has Shown an increasing trend in the year 2005-2006 as compared to
2004-2005.whereas in the year 2006-2007 there has been a negligible decrease
in CA.
60
CURRENT LIABILITIES
2003-2004 2004-2005 2005-2006 2006-2007
Acceptances 8309551.5 3502710.9
Provisions
2003-2004 2004-2005 2005-2006 2006-2007
Provision for warranties [note 7] 4714534.8 4569586.2 4242493.8 3882312
61
Year CL
2004 218682329.4
2005 331386950.7
2006 261944404.2
2007 265096674.9
Changes in CL
3.5
3
2.5
2
1.5
1
Current Liabilities
0.5
0
2004 2005 2006 2007
Year
INTERPRETATION:
The Current Liabilities has Shown an increasing trend in the year 2005-2006
as compared to 2004-2005.whereas in the year 2006-2007 there has been a
negligible increase in Current Liabilities.
62
TRENDS:- WORKING CAPITAL CHANGE
YEAR CHANGES IN YEAR CURRENT ASSET YEAR CURRNNT
WORKING LIABILITIES
CAPITAL
2003-2004 160134237 2003-2004 378816566.4 2003-2004 218682329.4
2004-2005 197629922.7 2004-2005 529016873.4 2004-2005 331386950.7
2005-2006 264722324.4 2005-2006 526666728.6 2005-2006 261944404.2
2006-2007 326529873 2006-2007 591626547.9 2006-2007 265096674.9
63
Year CA CL Working
Capital
2004 378816206.4 218682329.4 160133877
2005 529016873.4 331386950.7 197629922.7
2006 526600441.8 261944404.2 264656037.6
2007 590726547.9 265096674.9 325629873
7
6
5
4
3
al
Capit
ing 2
Work 1
0
2004 2005 2006 2007
Year
INTERPRETATION:
The Working Capital has Shown an increasing trend in the year 2005-2006 as
compared to 2004-2005.whereas in the year 2006-2007 there has been a
negligible decrease in Working Capital.
64
Financial Report
year ended year ended year ended year ended
31st 31st 31st 31st
march2004 march2005 march2006 march2007
Income 934.03 1427.9 1430.92 1715.15
Profit before
depreciation 132.38 197.87 209.64 265.03
Less:-
Depreciation 21.71 22.67 17.54 19.05
Profit before tax 110.67 175.2 192.1 245.98
Less:-
Provision for tax
Current year 43 80 70 82.5
Earlier year 1.34 6.61 1.52
Deferred tax (Net) 5.88 5.17 2.06 3.47
Profit after tax for
current year 72.21 100.37 126.65 165.43
Profit for earlier
year brought
forward 45.7 85.2 139.69 210.4
Profit available for
appropriation 118.01 185.57 266.04 375.83
Propose Dividend 22 30.8 37.4 44
Income tax on
Dividend 2.82 4.03 5.52 7.47
65
RATIO ANALYSIS
i. CURRENT RATIO
ii. LIQUID RATIO
iii. ABSOLUTE LIQUID RATIO
iv. CURRENT ASSET TURN-OVER RATIO
v. WORKING CAPITAL TURN-OVER RATIO
vi. INVENTORY TURN-OVER RATIO
vii. GROSS PRIFIT RATIO
viii. NET PROFIT RATIO
ix. DEBTORS TURN-OVER RATIO
x. INVESTMENT IN RECEIVABLES
xi. OPERATING CYCLE
xii. ROSS OPERATING CYCLE
xiii. NET OPERATING CYCLE
xiv. CREDITORS TURN OVER RATIO
xv. DEBT-EQUITY RATIO
66
A. CURRENT RATIO:
CURRENT RATIO
2.5
1.5
RATIO
1
0.5
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Current Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.
67
B. LIQUID RATIO:
LIQUID RATIO
2
O
TI 1.5
A
1
R
0.5
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Liquid Ratio of a company shows slight decrease from the
year 2004-2005. But later on it goes on increasing from 2006-2007.
68
C. ABSOLUTE LIQUID RATIO:
INTERPRETATION:
The Absolute Liquid Ratio of a company shows a deep decrease
in the year 2004-2005. But later on it goes on increasing from 2006-
2007.
69
D. CURRENT ASSETS TURNOVER RATIO:
2.6
2.5
O
TI 2.4
A 2.3
R
2.2
2.1
2
1.9
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Current Asset Turnover Ratio of a company shows deep
increase from the year 2003-2004. Then it shows slight increase. But
later on it goes on increasing from 2006-2007.
70
E. WORKING CAPITAL TURNOVER RATIO:
INTERPRETATION:
The Working Capital Turnover Ratio of a company shows deep
increase from the year 2003-2004. And it again decreases till the year
2005-2006. In the year 2006-2007, it remains almost same.
71
F. INVENTORY TURNOVER RATIO:
INVENTORY TURN
YEAR OVER RATIO
2003-2004 8.434500155
2004-2005 8.15870867
2005-2006 10.70374882
2006-2007 12.30358393
10
RATIO8
6
4
2
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Inventory Turnover Ratio of a company shows slight
decrease from the year 2004-2005. But later on it goes on increasing till
the year 2006-2007.
72
G. GROSS PROFIT RATIO:
6
4
2
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Gross Profit Ratio of a company shows slight increase from
the year 2004-2005. But later on it goes on increasing from 2006-2007.
73
H. NET PROFIT RATIO:
10
6
RATIO
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Net Profit Ratio of a company shows slight decrease from
the year 2004-2005. But later on it goes on increasing till 2006-2007.
74
I. DEBTORS TURNOVER RATIO:
3.8
3.6
RATIO
3.4
3.2
3
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Debtors Turnover Ratio of a company goes on increasing till
2006-2007.
75
J. INVESTMENT IN RECEIVABLES:
INVESTMENT IN RECEIVABLES
2003-04 2004-05 2005-06 2006-07
PARTICULERS 97 DAYS 91 DAYS 89 DAYS 83 DAYS
COLLECTION COLLECTION COLLECTION COLLECTIO
PERIOD PERIOD PERIOD PERIOD
SALES (NET) 739404639 1141814417 1148901203 1384830506
LESS:-
FIEXED COST (20%) 147880927.8 147880927.8 147880927.8 147880927.8
VARIABLE COST (60%) 443642783.4 685088650.2 689340721.8 830898303.6
RETURN ON
INVESTMENT 44826406.24 59218930.94 58213067.82 63467715.79
BAD DEBTS (1%) 7394046.39 11418144.17 11489012.03 13848305.06
NET BENEFIT 95660475.17 238207763.9 241977473.5 328735253.8
INVESTMENT IN RECEIVABLES
350
300
250
200
150
100
MILLION RS.)
50
0
NET BENEFIT (AMOUNT IN 2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Investment in Receivables of a company shows deep
increase from the year 2004-2005. And then it shows very slight
increase. But later on it goes on increasing till 2006-2007.
76
OPERATING CYCLE
2004 2005 2006 2007
1) RAW MATERIAL
CONVERSION PERIOD
A) Raw material consumption 460469385 742734765 654570475 78207301
B) Raw material consumption per
day 1438966 2321046 2045532 2443978
C) Raw material Inventory 18819824 27509949 29815432 33502496
D) Raw material holding day's 13 11 14 13
3) FINISHED GOOD
CONVERSION PERIOD
A) Cost of good's sold 675026762 1045956816 1020944442 121115467
B) Cost of good's sold per day 2109458 3268615 3190451 3784858
C) Finished good's inventory 11441706 23605578 8447974 13279263
D) FG inventory holding day's 5 7 3 4
4) COLLECTION DAY'S
A) Credit sales 739404639 1141814417 1148901203 13848305
B) Sales per day 2310639 3568170 3590316 4327595
C) Debtors 222813224 324030586 320144611 36009178
D) Debtor outstanding day's 97 91 89 83
GROSS OPERATING CYCLE 140 133 126 117
5) CREDITORS DEFERRAL
PERIOD
A) Credit purchase 464389295 751424889 656875958 78576007
B) Purchase per day 1451216 2348202 2052737 2455500
C) Creditors 153880852 235319454 163748168 15891969
D) Creditors outstanding day's 106 100 80 65
NET OERATING CYCLE / CCC 34 33 46 52
77
K. GROSS OPERATING CYCLE:
YEAR
INTERPRETATION:
The gross operating cycle is going down every year.
78
I. NET OPERATING CYCLE:
60
50
40
30
20
NO. OF DAYS
10
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Net Operating Cycle has increased from the year 2004-05 to 2007-08.
79
M. CREDITORS TURNOVER RATIO:
6
5
4
3
RATIO
2
1
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Creditors Turnover Ratio of a company shows slight increase
from the year 2004-2005. But later on it goes on increasing till 2006-
2007.
80
N. DEBT-EQUITY RATIO:
DEBT-EQUITY RATIO
0.6
O 0.5
TI 0.4
A
0.3
R
0.2
0.1
0
2003-2004 2004-2005 2005-2006 2006-2007
YEAR
INTERPRETATION:
The Debt-equity Ratio of a company shows decrease from the
year 2004-2005 till 2006-2007.
81
CONCLUSION:
1. From the current ratio and quick ratio, it can be concluded that, the
liquidity of the company has increased. The quick ratio has increased
because of control of inventory and increase in cash balance.
2. Inventory turn over ratio is increasing which reflects that the
inventory is fast moving.
3. Payables deferral period has reduced from 106 days to 65 days, this
shows that the company is paying its creditors faster.
4. Company has more investments in current assets which mean higher
liquidity with lower risk, so the policy followed by the company is
conservative.
82
RECOMMENDATIONS:
1. The company should review its credit policy for debtors. The
debtor’s collection period has reduced but it should reduce
further. This will reduce the working capital requirement of
the company.
2. The company should invest in short term
investments as working capital is continuous.
3. As a working capital is showing an
increasing trend, it should not increase further as it affects the
profitability due to blockage of funds.
83