INTRODUCTION

WORKING CAPITAL:
Working capital is the life blood of business, as is evident, signified funds required
for day to day operation 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 & control for working
capital. An attempt has been made to make critical study of various dimensions of the
working capital management of HAL.

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

OBJECTIVES OF STUDY:
The following are the main objective which has been undertaken in the present study:

 To determine the amount of working capital requirement & to calculate various

ratios relating to working capital.
 To make an item wise study of the components of the working capital.
 To analyze the financial health & operational efficiency of the corporation.
 To suggest the steps to be taken to increase the efficiency in management of
working capital.

METHODOLOGY:

The data which are presented in this report have been taken from secondary
sources. The data of HAL, Engine Division, Koraput, for the year 2014-15, 2015-16,
2016-17, 2017-18 used in this report have been taken from the financial statement i.e., the
Income Statement, balance sheet for the relevant years. The procedural details have been
collected from the respective manuals, booklets etc. Some principles, procedures including
the various aspect of analysis have presented in this report by informal discussion with the
concern authority of this division.

For analyzing the performance of working capital management, simple

mathematical tools like percentage, average & ratios have been used in the project work.

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To know the financial performance of this division, calculation of operation cycle,
earnings before interest & taxes have been calculated.

The study was based on both primary & secondary data.

PRIMARY DATA: Primary data was collected through the discussion with concerned
Officers & Employees of HAL.

SECONDARY DATA: Secondary data was collected through the official record,
various publication of the organization, annual report & audited financial statement.

LIMITATION:

 Most of the information is collected from the secondary sources.

 There is a gap between the theoretical analysis & its practical & real life
application. The data available is limited to the koraput division. The overall data
of HAL is not available.
 As HAL comes under defense sector of central govt. there are some limitations
upon getting the data.
 Detailed information about certain parameters could not obtain due to
confidentiality.

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Our History

The history and growth of the Hindustan

Aeronautics Limited is synonymous with the growth of
Aeronautical industry in India for more than 77 years. The
Company which had its origin as the Hindustan Aircraft
Limited was incorporated on 23 Dec 1940 at Bangalore by
Shri Walchand Hirachand a farsighted visionary in
association with the Government of Mysore with an
Authorized Capital of Rs.4 crores (Paid up capital Rs.40
lakhs) and with the aim of manufacturing aircraft in India.
In March 1941, the Government of India became one of the shareholders in the Company
holding 1/3 of its paid-up capital and subsequently took over its management in 1942. In
collaboration with the Inter Continental Aircraft Company of USA, Hindustan Aircraft
Company commenced its business of manufacturing of Harlow Trainer, Curtiss Hawk
Fighter and Vultee Bomber Aircraft.

In Dec 1945, the company was placed under the administrative control of Min. of Industry
& Supply. In January 1951, Hindustan Aircraft Private Limited was placed under the
Administrative control of Ministry of Defense.

The Company had built aircraft and engines of foreign design under license, such as
Prentice, Vampire and Gnat aircraft. It also undertook the design and development of
aircraft indigenously. In August 1951, the HT-2 Trainer aircraft, designed and produced by
the company under the able leadership of Dr. V.M.Ghatge flew for the first time. Over 150
Trainers were manufactured and supplied to the Indian Air Force and other customers.
With the gradual building up of its design capability, the company successfully designed
and developed four other aircraft i.e. two seater 'Pushpak' suitable for flying clubs,
'Krishak' for Air Observatory Post(AOP) role, HF-24 Jet Fighter '(Marut)' and the HJT-16
Basic Jet Trainer '(Kiran)'.

Meanwhile, in August 1963, Aeronautics India Limited (AIL) was incorporated as a

Company wholly owned by the Government of India to undertake the manufacture of the
MiG-21 aircraft under license. In June 1964, the Aircraft Manufacturing Depot which was
set up in 1960 as an Air Force unit to produce the Airframe for the HS-748 transport
aircraft was transferred to AIL. Soon thereafter, the Government decided to amalgamate
Hindustan Aircraft Limited, with AIL so as to conserve resources in the field of aviation

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where the technical talent in the country was limited and to enable the activities of all the
aircraft manufacturing units to be planned and co-ordinated in the most efficient and
economical manner.

Amalgamation of the two companies i.e. Hindustan Aircraft Limited and Aeronautics India
Limited was brought about on 1st Oct 1964 by an Amalgamation order issued by the
Government of India and the Company after the amalgamation was named as "Hindustan
Aeronautics Limited (HAL)" with its principal business being design, development,
manufacture, repair and overhaul of aircraft, helicopter, engines and related systems like
avionics, instruments and accessories.

Growth & Consolidation:

In 1970, a separate division was set up exclusively for manufacture of 'Chetak' and
'Cheetah' Helicopters in Bangalore under license from M/s SNIAS, France. A new division
was also established to manufacture aircraft instruments and accessories at Lucknow.
License agreements were entered into with M/s Dunlop of U.K. for Wheels and Brakes,
Dowty for under carriages and Hydraulic equipment, and Normal air Garret for cabin air
pressurization and air-conditioning equipment, Smiths of UK, SFENA and SFIM of
France for panel instruments and Gyros, Martin Baker of UK for ejection seats and Lucas
for engine fuel systems, for fitment on Marut, Kiran, Ajeet, Chetak, Cheetah and Jaguar.
Similar type of arrangements was agreed with USSR authorities for manufacture of
accessories for MiG-21 series of aircraft.

Design and Development of Basant agricultural aircraft was undertaken between 1970 and
1974 and design and development of Ajeet, an improved version of Gnat was undertaken
between 1972 and 1980. In 1976 projects were sanctioned for design & development of
the HPT-32 elementary piston engine trainer, Kiran MK II (an improved version of Kiran
MK I / IA) and Ajeet Trainer as well as for Advanced Light Helicopter.

In 1971, Avionics Design Bureau at Hyderabad was formed for the development and
manufacture of IFF, UHF, HF, Radio components, Radio Altimeter, Ground Radars etc.,
During 1973, a Design wing was set up at Lucknow for design and development of
accessories such as under-carriage and hydraulic systems, air-conditioning and
pressurization systems, fuel control, generator control and protection units, static inverters
etc.

In 1979, after seeking a license agreement with British Aerospace, the Company started
manufacture of 'Jaguar' aircraft and with Rolls Royce-Turbomeca for Adour engines.

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License agreements were also signed with different firms for manufacture of Avionics and
accessories.

In 1982, the Company entered into an agreement with USSR and started production of
Swing-wing MiG-27M aircraft as a follow on project for MiG-21 BIS at Nasik Division of
the Company.

During 1983, Korwa Division of HAL in District Sultanpur (U.P.) was established for
manufacture of Inertial Navigation System (INS), Head up Display and Weapon Aiming
Computer (HUDWAC), Combined Map and Electronics Display (COMED), Laser Ranger
and Marked Target Seeker (LRMTS), Auto Stabilizer and Flight Data Recorder for Jaguar
and similar advanced systems for MiG-27M.

HAL is actively engaged and is contributing to the space programs of the country. A
separate Aerospace division was established in 1988. This Division is dedicated to space
programmer to meet the growing requirement of Indian Space Research Organization.

In order to capture the growing market in the industrial gas turbine engines, a new
Division called the Industrial & Marine Gas Turbine Division, was formed in 1998.
Currently the Division is undertaking Repair and Overhaul work related with Industrial
Avon Engines and Industrial 501K and 571K series. In addition, manufacture of LM 2500
engine is also being undertaken. The Division is doing the overhaul of various existing gas
turbines in the country, thus providing cost-effective services to users such as ONGC,
GAIL, TNEB, RSEB etc., for upkeep of their gas turbine.

An independent profit center for providing Airport related services was created in May
2000 with a view to synergize the operation of HAL Bangalore Airport. The main aim of
creation of this Airport Service Centre is to restructure the existing resources to provide
focused attention in relation with the exacting market needs of service segment related to
airlines operations and commercially exploit the available infrastructure of the Company
at Bengaluru.

With the signing of agreement with Russian partners to take up license manufacture of
SUKHOI 30 MKI Aircraft the Nasik Division which had been engaged in manufacture &
overhaul of MIG series Aircraft, had to be expanded. Accordingly it was decided in
February, 2002 to have two Divisions at Nasik i.e. Aircraft Manufacturing Division for Su-
30 MKI production and Aircraft Overhaul Division for overhaul and upgrade of existing
MIG Series aircraft.

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Consequent on decision to manufacture AL 31 FP Engine for SU 30 MK1 Aircraft, under
license from Russian Manufacturer, it was decided to establish a new Division at Koraput
to take up the project in February, 2002. The project activities under the new Division
have accordingly commenced.

In order to facilitate Helicopter Division to dedicate itself exclusively for ALH

manufacture and related activities, the manufacturing and repair / overhaul activities of
Chetak and Cheetah helicopters and their variants were transferred to the Barrack pore
Branch Factory and Barrack pore Division was formed and a new MRO Division created
to carry out ALH Overhaul activities in 2006.

Composites material is being used extensively in aircraft manufacturing for its low weight.
A new Aircraft Composite Division (ACD) was formed in Mar 2007 with a dedicated
manufacturing facility for composite materials for in-house projects such as ALH, LCA
etc.

Facilities Management Division was created in Dec 2007 for effective and focused
attention towards the common services at Bangalore.

In order to boost R & D activities in-house, Mission & Combat System R & D Center was
formed to concentrate on Mission systems, Aircraft upgrades and technology development
in Nov 2008.

Additionally, Strategic Electronics Factory at Kasaragod, Kerala, a unit of HAL

Hyderabad, was established in Nov 2012.

The in house development of Light Combat Aircraft (LCA) will give major boost to the
modernization program of our Defense Services. For production of LCA, a separate LCA
Tejas Division was established at Bangalore for production of Light Combat Aircraft in
Mar 2014.

R & D Centers: The Company has a comprehensive Design Organization. Out of 31

types of aircraft produced so far, 17 have been of indigenous design. The Company has
long experience in design and manufacture of a diversified range of aircraft and its
systems. For further growth of the Company it was considered necessary for HAL to
strengthen its R&D capability and accordingly the erstwhile Design Bureaus have been
restructured and reorganized into the following R&D Centers:

Sl. R & D Centre Activity

1 Aircraft R&D Centre,Design and Development of Fixed Wing aircraft (LCA, IJT, MTA,

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 Bangalore FGFA, UAV)

2 Rotary Wing Aircraft R&DDesign and Development of Rotary Wing aircraft (ALH, LCH,
Centre, Bangalore LUH, MLH, NRUAV)
3 Mission & CombatMission systems, Aircraft upgrades and technology development
Systems R&D Centre,
Bangalore
4 Aero Engine R&D Centre,Small, Medium Engines & Test Bed design
Bangalore
5 Strategic Electronics R&DAvionics Items.
Centre, Hyderabad
6 Transport Aircraft R&DDevelopment & Modification/ upgrades of Transport Aircraft
Centre, Kanpur
7 Aircraft Upgrades R&DAircraft/ System Upgrade Work on Russian Aircraft
Centre, Nasik
8 Aerospace Systems &Development of Mechanical, Hydraulic and Electrical accessories.
Equipment R&D Centre,
Lucknow
9 Gas Turbine R&D Centre,Design Improvement of Russian Engines
Koraput
10 Central Materials &Development of Materials, Castings, Forgings & New Processes
Processes Laboratory &
NDT Centre, Bangalore
11 Aerospace Systems &Developing Flight Data Recorders for various Aircraft, including
Equipment R&D Centre,the Light Combat Aircraft, Intermediate Jet Trainer, Jaguar, MIG 27
Korwa and Su-30 MKI. This center has also developed test equipment and
data retrieval units.

HAL Today (March 2018): The programs under progress at HAL are production of SU-30
MKI, Hawk-AJT, Light Combat Aircraft (LCA), DO-228 Aircraft, Dhruv-ALH and
Cheetal Helicopters, Repair Overhaul of Jaguar, Kiran MKI/IA/II, Mirage, HS-748, AN-
32, MIG 21, Su-30MKI, DO-228 aircraft and ALH, Cheetah / Chetak helicopters.

The Company takes up maintenance and overhaul services to cover the life cycle
requirement of all the old and new products. Presently, 13 types of aircraft/ helicopters and
17 types of engines are being overhauled. In addition, facilities exist for repair/ overhaul
of various accessories and avionics fitted on aircraft of Russian, Western and Indigenous
designs.

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HAL is meeting the requirements of structures for Satellite Launch Vehicles and Satellites
of ISRO through its dedicated Aerospace Division (ASD). HAL(ASD) has been the
mainstay partner of ISRO for five decades and has supported throughout in the journey by
providing hardware for satellites, SLV, ASLV, PSLV, GSLVMKII and GSLV MKIII
(LVM3).The division also integrates the L-40 booster rockets of GSLV MKII and delivers
it directly to the launch facility. HAL (ASD) has contributed in a major way towards all
the prestigious space missions of our country like Chandrayaan-1, Mars Orbiter, GSLV D5
and GSLV MKIII D1. The structures for the upcoming Chandrayaan-2 mission and
Human Space Program are already delivered. HAL(ASD) is establishing a comprehensive
manufacturing facility for cryogenic & semi cryogenic engines and for carrying out total
Integration of the PS2/GS2 stage of PSLV/GSLV MKII vehicle for ISRO.

Industrial and Marine Gas Turbine: The LM-2500 marine gas turbine engine, a 20 MW
aero derivative, is being produced and overhauled from the production line in the
Industrial and Marine Gas Turbine Division, Bangalore. The Division also undertakes
Repair and overhaul of Industrial Avon and Industrial 501K engines.

Development Project: The major on-going indigenous development programs are the
Light Combat Aircraft (LCA), Intermediate Jet Trainer (IJT), Light Combat Helicopter
(LCH), and Light Utility Helicopter (LUH), Weapon System integration on

ALH, Fifth Generation Fighter Aircraft (FGFA) and Basic Turboprop Trainer
HTT40. Design and Development of HTFE-25 and HTSE-1200 engines have
also been taken up. Technology development projects have been launched to
increase self-reliance in critical areas like the Aircraft Display systems,
Mission Computers, Automatic Flight Controls for helicopters, Aircraft
Accessories and avionics.

Our Customers

Major Domestic Customers

DEFENCE & SPACE CIVIL

Indian Air Force Border Security Force
Indian Army Oil & Natural Gas Cooperation of India
Indian Navy Govt. of Karnataka
Indian Coast Guard Govt. of Jharkhand

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Indian Space Research Organization Govt. of Maharashtra
Defense Research & Development Organization Geological Survey of India
Ordnance Factory Board Bharat Heavy Electricals Ltd.
Major International Customers

EXPORTS:(In Alphabetical Order)

Airbus Industries, France
Boeing, USA
Coast Guard, Mauritius
Ecuadorian Air Force, Ecuador
ELTA, Israel
GE Aviation, USA
Hamilton Sundstrand, USA
Honeywell International, USA
Israel Aircraft Industries, Israel
Mauritius Police Force, Mauritius
Moog Inc. USA
Namibian Air Force, Namibia
Nepal Army, Nepal
RAC MIG, Russia
Rolls Royce Plc, UK
Royal Air Force, Oman
Royal Malaysian Air Force, Malaysia
Royal Thai Air Force, Thailand
Ruag, Germany
Rosoboronexport, Russia
Suriname Air Force
Turbomeca, France
Vietnam Air Force, Vietnam

Engine Division Koraput

Brief History

The Division follows the 'Group Technology' with the Engine parts being
dismantled, viewed and loaded to different work centers for ROH activities.
Regular review of progress through latest IT enabled systems ensures timely
completion of assemblies and sub-assemblies of the engines. The stripped
components are subject to stringent quality checks using modern technology

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like CMM, NDT and other non-contact measurements. Repair and
refurbishing of worn-out parts and sub-assemblies are undertaken by skilled
workmen. Division is also manufacturing most of the components in-house,
which are required during overhaul. Repairs and Refurbishing Processes
include welding, hard alloy coatings, vibro-tumbling, micro-shot peening,
ultrasonic strain hardening, nickel alloy powder coating and a large number
of protective coatings. Assemblies, sub-assemblies and Engine accessories
undergo rigorous functional tests on various Hydraulic, Fuel and Electrical
Rigs. Quality control checks are carried out using various NDT methods, like
X-ray, Magna-flux, Dye-penetrant check and ultrasonic inspection besides
other conventional techniques. Overhaul of accessories is carried out in
environmentally controlled rooms. Every manufactured / overhauled Engine
undergoes rigorous tests on Engine test beds that simulate all flight
conditions. The preliminary and final acceptance test, hot test, endurance test
and gas dynamic stability tests are conducted through computerized controls.
Electronically assisted throttle, digital and analog read-outs help get real-time
simultaneous data and engine parameters during Engine testing.

TBO & TTL of different Engines are given below:

Project TBO TTL

R25 400 Hrs. 1200 Hrs.
R29 550 Hrs. 1500 Hrs.
RD33 300 Hrs. 1000 Hrs.

About Us:
Engine Division, koraput was established in the year 1964 to manufacture R11F2-300 Sr
III engines for fitment in MiG-21FL Aircraft under license from erstwhile USSR. In 1976
facilities were established to manufacture R25 engines for fitment in MiG-21BIS aircraft.
Subsequently Division also manufactured R29b and RD33 Engines under license from
Russia.

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Since the early 1970, overhauling facilities were established in the Division and Division
has been overhauling Aero Engines of Various types i.e. R11, R25, R29 and RD33 which
power MiG-21FL, MiG-21BIS, MiG-27 and MiG-29 respectively.

Over last five decades Division has manufactured more than 1300 engines and overhauled
more than 7000 Aero Engines of various types with an aim to ensure maximum aircrafts
flying.
R25/R29/RD33 Overhaul Projects

The Division follows the 'Group Technology' with the Engine parts being dismantled,
viewed and loaded to different work centers for ROH activities. Regular review of
progress through latest IT enabled systems ensures timely completion of assemblies and
sub-assemblies of the engines. The stripped components are subject to stringent quality
checks using modern technology like CMM, NDT and other non-contact measurements.
Repair and refurbishing of worn-out parts and sub-assemblies are undertaken by skilled
workmen. Division is also manufacturing most of the components in-house, which are
required during overhaul. Repairs and Refurbishing Processes include welding, hard alloy
coatings, vibro-tumbling, micro-shot peening, ultrasonic strain hardening, nickel alloy
powder coating and a large number of protective coatings. Assemblies, sub-assemblies and
Engine accessories undergo rigorous functional tests on various Hydraulic, Fuel and
Electrical Rigs. Quality control checks are carried out using various NDT methods, like X-
ray, Magna-flux, Dye-penetrant check and ultrasonic inspection besides other conventional
techniques. Overhaul of accessories is carried out in environmentally controlled rooms.
Every manufactured / overhauled Engine undergoes rigorous tests on Engine test beds that
simulate all flight conditions. The preliminary and final acceptance test, hot test,
endurance test and gas dynamic stability tests are conducted through computerized
controls. Electronically assisted throttle, digital and analog read-outs help get real-time
simultaneous data and engine parameters during Engine testing. TBO & TTL of different
Engines are given below:

Project TBO TTL

R25 400 Hrs. 1200 Hrs.

R29 550 Hrs. 1500 Hrs.

RD33 300 Hrs. 1000 Hrs.

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Rotables In addition to Engine IAF gives us additional task to overhaul Rotables. There
are more than 40 types of Rotables which are being overhauled in-house. All these
Rotables undergo vigorous Quality checks and testing procedure before being released to
bases for exploitation.
Supply of Spares and other major unit’s .The Division manufactures and supplies the
entire range of spares required for first and second-line servicing of engines at the IAF
bases and base repair depots.
Site Repair the Division undertakes site repair of Engines at the IAF bases by deputing site
repair teams regularly. Defect Investigation/Failure Analysis the Engines / Aggregates
which are received due to premature withdrawal from the units are studied and the causes
for defects/failures are investigated. After proper analysis and deliberation, corrective
action is taken to minimize the recurrence of defects in future. Workshops The Division
conducts workshops regularly to the customers at Koraput in specialized areas for better
understanding and utilization of the products. Positioning of Service Engineers the
Division has posted Service Engineers at various IAF bases to closely liaise and assess the
requirement of the customers. Based on the feed-back received from these Service
Engineers, the Division renders adequate support for fully utilizing the products.

Facilities:
Engine Division - Koraput has the following high tech facilities
 Large capacity lathes for tip tuning and tip grinding of rotor assemblies.
 Ultrasonic strain hardening and micro shot peening equipment for disc slots and
blade roots.
 Submerged and argon arc welding of stator casings.
 Honeycomb forming through progressive die.
 Radiographic quality elements on heat resistant steels, aluminum, magnesium,
nickel and titanium alloys.
 Manufacture of annual and can-annular flame tubes, combustion chambers, bearing
housings, diffuser and adjustable nozzle castings.
 Machining of a wide range of flanges and bushes.
 Facility for production of a wheel range of gears, splines, gear box casings, rings,
ring holders, bushes and brackets.
 Facility for normalizing, carburizing, Cyaniding, Nitriding, Alitising,
Solutionising, Aging, Diffusion Annealing, Sub-zero treatment and Vacuum &
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 inner gas heat treatment to achieve the desired mechanical and metallurgical
properties of materials.
 Facility for high temperature resistant enameling of flame tubes, adjustable nozzles
and other hot zone components.
 Carrying out defect investigation and fractography study along with metallurgical
analysis using SCANNING ELECTRON MICROSCOPE.
 Hot Iso-static Pressing of Titanium, Nickle based and Aluminum based parts to
reduce micro defects in casting results in increase of acceptance level of casting.
 ROBOTIC PLASMA COATING of Engine parts to reduce cycle time by less than
50%.
 Sand Rapid Prototyping Technology (RPT) for manufacturing of Sand moulds &
cores directly from the CAD model using 3D Sand Printing Technology
 Isothermal forging
 Vacuum Investment casting

Outsourcing:
Category of Aero Engine Parts Outsourced are:
Sheet Metal Parts
 Types: Brackets, Plain Washers, Lock Washers, Turbine Locks, Sealing Rings,
Braids, Gasket, Screen, Shield, Liner, Circlip
 Operations: Routing, Bending, Forming, Blanking, Piercing, Drilling etc.
Machined Parts
 Types : Bush, Ring, Bolts, Brackets, Blades, Discs, Shafts, Tie Rod, Flange,
Swirler, Deflector, Valve, Piston, Cylinders, Elbow, Axle , Ring Holders
Operations:
1. Conventional Machining, CNC Machining
2. Blades Machining, Blade Polishing
3. Internal, External, face & groove, Grinding, Gear profile Grinding
4. Thread Rolling
5. Machining after Nitriding / Ion- Nitriding
6. Gear Shapping, Hobbing, Spline Milling Worm, Worm Wheel
Non Metallic Component
 PTFE Rings, Bush, Shaft, Gasket
 Fiber Gasket

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Aero Engine Sub Assembly
Pump Casing
Tooling Item
 Ground Handling Equipment- Trolleys, Working Stand
 Measuring Tools – Rain plug Gauge, Thread Plug, Ring Gauge, Co-axiality Gauge
 Cutting Tools – Drills, Taps, Reamer, Threading dies, Broaches, Gear Hubs
 Hand Tools
 Press Tools – Blanking and Piercing dies, Moulds

Awards:
 Best Performing Division Award 2015-16 for the category Improvement in Value
addition per Employee over previous year
 National Safety Award – 2011 from Ministry of Labor.
 Excellence in Suggestion Scheme Context – 2013 dtd.12-02-2014
 Rajbhasa Karyayanwayan Puruskar – 1st, Corporate Office, Bangalore - 2016
 Rashtrya Bhasa Gaurav Award – 2016, Rashtrya Bhasha swabhiwan Nyas, New
Delhi.
 Karalay Deep Puruskar – 2016, Raj Bhasa Sansthan , New Delhi.
 Best performing Division- Category Outsourcing to sales ratio – 2012-13

Product:
RD33

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R29B

R25

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AL 31 FP

AL-31FP is a high temperature turbojet by-pass engine of modular design. A specific

feature of AL-31FP is an axi-symmetric vectoring nozzle with a thrust vector angle of
±15° in the vertical plane providing super maneuverability of the aircraft. The vectoring
nozzle control is integrated with the engine control system. AL-31FP engines ensure stable

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operation in all available evolutions of the aircraft in super maneuverability modes. AL-
31FP engines power advanced multipurpose Su-30 MKI fighters of the 4+ generation.
The Engine Division at Koraput, a unit of HAL's vast network, has the unique distinction
of being one amongst the few Aero Engine manufacturers in the world.
The spectrum of manufacturing facilities extends literally from the production of nuts and
bolts to discs, shafts, blades, forgings and castings - all that are required to make an Aero
Engine right from the Raw materials.
This spectrum is further enlarged to include overhaul of Aero Engines for the MiG family
and supply of spares required during service
R25 engine:
This is a Twin Spool, Axial Flow, Turbojet Engine fitted with after burner and a variable
area Jet nozzle. It powers the MiG-21 BiS multi-role Fighter Aircraft. The Engine has
provision for an emergency After-burner thrust boost, which can be selected below 4.5
KM altitude.
R-29B engine:
This Engine is a Twin spool, Axial flow Turbojet Engine incorporating After-burner
system and variable area Jet nozzle of convergent-divergent type. The Engine is equipped
with automatic Fuel regulation system, Turbo-starter, Anti-surge system, Temperature
controller, Constant speed drive for AC Generator and Two speed drive for Hydraulic
Pump. R-29B Engine powers MiG-27 M, a Multi-role Ground attack / Air combat
Aircraft.
Precision Components
The Division also produces precision components like: total gamut of Blades ranging from
Compressor Rotors and Stators to Turbine Blades and Nozzle Guide Vanes, intricate Cored
Magnesium Alloy Gear Casings, Compressor and Turbine Discs and Shafts, JIS class-
l/DlN 5 Spur, Helical Gears and DIN 6 straight and Hypoid / Spiral Bevel Gears
Ranging from module 1 to 6.

Salient Features
Feature R11 Mfg & O/H R25 Mfg & O/H R29B Mfg RD 33 O/H
Max.Diameter, mm 906 907 986 990

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Salient Features
Length, mm 4600 4615 4992 4260

Dry Weight, kg 1126 1210 1772 1050

Specific Fuel Consumption, 0.99 0.96 0.94 0.77

Dry mode, kg /kg thrust / hr.

Fuel Reheat Mode 2.37 2.25 1.80 2.05

SERVICES
Repairs, Major Servicing, Supply of Spares

Since the early 1970's, the Division has been overhauling Aero Engines to make fighter
Aircraft flight-worthy again for the Indian Air Force. The Division follows the 'Flow Line
Group Technology' with the Engine parts being dismantled, viewed and loaded to different
work centers.

Regular follow-up through On-line system ensures timely completion of sub-assemblies.

The stripped components are subject to detail micrometric and Non Destructive Testing
(NDT) checks. Repair and refurbishing of worn-out parts and sub-assemblies are
undertaken by skilled workmen. Repairs and Refurbishing Processes include welding,
hard alloy coatings, vibro-tumbling, micro-shot peening, ultrasonic strain hardening,
nickel alloy powder coating and a large number of protective coatings. Assemblies and
sub-assemblies undergo rigorous functional tests on various Hydraulic, Fuel and Electrical
Rigs.

Quality control checks are carried out using various NDT methods, like X-ray, Magna-
flux, Dye-penetrant check and ultrasonic inspection besides other conventional techniques.
Overhaul of accessories is carried out in environmentally controlled rooms. All the
accessories after overhaul are subjected to stringent tests on test rigs.

Every manufactured / overhauled Engine undergoes rigorous tests on Engine test beds that
simulate all flight conditions.

The preliminary and final acceptance test, hot test, endurance test and gas dynamic
stability tests are conducted through computerized controls.

Electronically assisted throttle, digital and analog read-outs help get real-time
simultaneous data and engine parameters during R-29B and RD-33 Engine testing.
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Sukhoi Engine Division Koraput

ABOUT US

Engine Division, Koraput was established in the year 2004 to manufacture AL31FP
Engines engines for fitment in Su-30MKI Aircraft under License from Russia. In 2007-08
facilities were established for overhauling of AL31FP Engines under license from Russia.
Over last five decades, Division has manufactured more than 350 engines and overhauled
more than 300 Aero Engines with an aim to ensure maximum aircrafts flying.

AL31FP Manufacturing & Overhaul Project Progress of manufacturing and overhaul

works is reviewed through latest IT enabled systems ensures timely completion of
assemblies and sub-assemblies of the engines. The stripped components are subject to
stringent quality checks using modern technology like CMM, NDT and other non-contact
measurements. Manufacturing, Repair and refurbishing of worn-out parts and sub-
assemblies are undertaken by skilled workmen. Division is also manufacturing most of the
components in-house, which are required during overhaul. Manufacturing, Repairs and
Refurbishing Processes include machining, welding, hard alloy coatings, vibro-tumbling,
micro-shot peening, ultrasonic strain hardening, nickel alloy powder coating and a large
number of protective coatings. Assemblies, sub-assemblies and Engine accessories
undergo rigorous functional tests on various Hydraulic, Fuel and Electrical Rigs. Quality
control checks are carried out using various NDT methods, like X-ray, Magna-flux, Dye-
penetrant check and ultrasonic inspection besides other conventional techniques. Overhaul
of accessories is carried out in environmentally controlled rooms. Every manufactured /
overhauled Engine undergoes rigorous tests on Engine test beds that simulate all flight
conditions. The preliminary and final acceptance test, hot test, endurance test and gas
dynamic stability tests are conducted through computerized controls. Electronically
assisted throttle, digital and analog read-outs help get real-time simultaneous data and
engine parameters during Engine testing.

TBO and TTL of AL31FP Engine is:

Project TBO TTL

AL31FP 1000 Hrs. 2000 Hrs.

19 | P a g e
Rotables:
In addition to Engine IAF gives us additional task to overhaul Rotables. There are more
than30 types of Rotables which are being overhauled in-house. All these Rotables undergo
vigorous Quality checks and testing procedure before being released to bases for
exploitation.

Supply of Spares and other major units The Division manufactures and supplies the entire
range of spares required for first and second-line servicing of engines at the IAF bases and
base repair depots. Site Repair the Division undertakes site repair of Engines at the IAF
bases by deputing site repair teams regularly. Defect Investigation/Failure Analysis
the Engines / Aggregates which are received due to premature withdrawal from the units
are studied and the causes for defects/failures are investigated. After proper analysis and
deliberation, corrective action is taken to minimize the recurrence of defects in future.

Workshops:
The Division conducts workshops regularly to the customers at Koraput in specialized
areas for better understanding and utilization of the products. Positioning of Service
Engineers
the Division has posted Service Engineers at various IAF bases to closely liaise and assess
the requirement of the customers. Based on the feed-back received from these Service
Engineers, the Division renders adequate support for fully utilizing the products.

FACILITIES:

Sukhoi Engine Division - Koraput has the following high tech facilities
 Creep feed grinding machine for machining of blades
 5-axes CNC blade milling machine for machining of blades
 Fatigue testing machine for blades
 Powder metallurgy equipment for metallic inserts.
 Single Crystal furnace for high pressure Turbine blade
 Manned chamber welding equipment for welding of Ti components
 Vacuum Heat Treatment furnace for Ion Nitriding and Alphatising
 Special furnaces for coating the engine parts
 Pneumo-thermo Press for achieving intricate contours on Titanium alloys
 Isothermal forming

20 | P a g e
 Electron Beam Welding
 Robotic plasma coating equipment
 MAP Coating equipment for coating of blades

OUTSOURCING:

Category of Aero Engine Parts Outsourced are:

Sheet Metal Parts

Types: Branch pipes, Brackets, Damper, Plain Washers, Filter mesh, Filter disc, Screen,
Deflector, Lock Washers, Turbine Locks, Sealing Rings, Braids, Gasket, Shield, Liner,
Circlip

Operations: Wire cut EDM, Routing, Bending, Forming, Blanking, Piercing, Drilling
etc.

Machined Parts:

Types: Turbine & Compressor Blades, Hollow guide vanes, Brazed guide vanes, Bi-
hexagonal bolts, Sphere, Graphite seals, Bush, Ring, Bolts, Brackets, Discs, Shafts, Tie
Rod, Flange, Swirler, Deflector, Valve, Piston, Cylinders, Elbow, Axle, Ring Holders

Operations:
 Conventional Machining, CNC Machining, EDM
 Blades Machining, Blade Polishing, Creep geed grinding
 Internal, External, face & groove, Grinding, Gear profile Grinding
 Thread Rolling, Graphite machining
 Machining after Nitriding / Ion- Nitriding
 Gear Shapping, Hobbing, Spline Milling Worm, Worm Wheel
Non Metallic Component:

 PTFE Rings, Bush, Shaft, Gasket

 Fibre Gasket
Aero Engine Sub Assembly:

 Pump Casing

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Tooling Items:

 Ground Handling Equipment- Trolleys, Working Stand

 Measuring Tools – Rain plug Gauge, Thread Plug, Ring Gauge, Co-axiality Gauge
 Cutting Tools – Drills, Taps, Reamer, Threading dies, Broaches, Gear Hubs
 Hand Tools
 Press Tools – Blanking and Piercing dies, Moulds

Awards:

1. Best Performing Division Award 2015-16 for the category Improvement in Value
addition per Employee over previous year
2. National Safety Award – 2011 from Ministry of Labor.
3. Excellence in Suggestion Scheme Context – 2013 dtd.12-02-2014
4. Rajbhasa Karyayanwayan Puruskar – 1st, Corporate Office, Bangalore - 2016
5. Rashtrya Bhasa Gaurav Award – 2016, Rashtrya Bhasha swabhiwan Nyas, New
Delhi.
6. Karalay Deep Puruskar – 2016, Raj Bhasa Sansthan, New Delhi.
7. Best performing Division- Category Outsourcing to sales ratio – 2012-13

Product

The Sukhoi Engine Division at Koraput, a unit of HAL's vast network, has the unique
distinction of being one amongst the few Aero Engine manufacturers in the world.
The spectrum of manufacturing facilities extends literally from the production of nuts and
bolts to discs, shafts, blades, forgings and castings - all that are required to make an Aero
Engine right from the Raw materials. This spectrum is further enlarged to include overhaul
of Aero Engines for the Su-30MKi aircraft and supply of spares required during service
AL31FP Engine
Engine AL31FP is a Double contoured, turbojet with two spool compressor with heat
exchanger system for cooling of turbine, with mixing of streams of outer and inner
contours after turbine, with after burner reheat and supersonic all-ratings adjustable jet
nozzle with rotating nozzle and controlled vectors of thrust. The engine is of a modular
construction ensuring higher technological characteristics of assembly, operation know-
how and flexibility during overhaul (worn-out or damaged module can be replaced with

22 | P a g e
new ones) in the operational bases. Precision Components the Division also produces
precision components like: total gamut of Blades ranging from Compressor Rotors and
Stators to Turbine Blades and Nozzle Guide Vanes, intricate Cored Magnesium Alloy Gear
Casings, Compressor and Turbine Discs and Shafts, Vector Jet Nozzle parts.

Feature AL31FP Engine

Max. Diameter, mm 1148
Length, mm 4945
Dry Weight, kg 2005
Specific Fuel Consumption, Dry mode, kg /kg thrust / hr. 0.69
Fuel Reheat Mode 1.93

SERVICES:

Manufacturing of New AL31FP Engines and Overhaul of AL31FP Engine & its
aggregates, Supply of Spares. The stripped components are subject to detail micrometric
and Non Destructive Testing (NDT) checks. Repair and refurbishing of worn-out parts and
sub-assemblies are undertaken by skilled workmen.

Manufacturing, Repairs and Refurbishing Processes include machining, welding,

hard alloy coatings, vibro-tumbling, micro-shot peening, ultrasonic strain hardening,
nickel alloy powder coating and a large number of protective coatings. Assemblies and
sub-assemblies undergo rigorous functional tests on various Hydraulic, Fuel and Electrical
Rigs.
Quality control checks are carried out using various NDT methods, like X-ray, Magna-
flux, Dye-penetrant check and ultrasonic inspection besides other conventional techniques.
Overhaul of accessories is carried out in environmentally controlled rooms. All the
accessories after overhaul are subjected to stringent tests on test rigs. Every
manufactured / overhauled Engine undergoes rigorous tests on Engine test beds that
simulate all flight conditions.
The preliminary and final acceptance test, hot test, endurance test and gas dynamic
stability tests are conducted through computerized controls. Electronically assisted
throttle, digital and analog read-outs help get real-time simultaneous data and engine

23 | P a g e
parameters during AL31FP Engine testing. Repairs, Major Servicing, Supply of Spares
Since the early 1970's, and the Division has been overhauling Aero Engines to make
fighter Aircraft flight-worthy again for the Indian Air Force. The Division follows the
'Flow Line Group Technology' with the Engine parts being dismantled, viewed and loaded
to different work centers. Regular follow-up through PC ensures timely completion of sub-
assemblies. The stripped components are subject to detail micrometric and Non
Destructive Testing (NDT) checks. Repair and refurbishing of worn-out parts and sub-
assemblies are undertaken by skilled workmen. Repairs and Refurbishing Processes
include welding, hard alloy coatings, vibro-tumbling, micro-shot peening, ultrasonic strain
hardening, nickel alloy powder coating and a large number of protective coatings.
Assemblies and sub-assemblies undergo rigorous functional tests on various Hydraulic,
Fuel and Electrical Rigs. Quality control checks are carried out using various NDT
methods, like X-ray, Magna-flux, Dye-penetrant check and ultrasonic inspection besides
other conventional techniques. Overhaul of accessories is carried out in environmentally
controlled rooms. All the accessories after overhaul are subjected to stringent tests on test
rigs. Every manufactured / overhauled Engine undergoes rigorous tests on Engine test
beds that simulate all flight conditions. The preliminary and final acceptance test, hot test,
endurance test and gas dynamic stability tests are conducted through computerized
controls.
Electronically assisted throttle, digital and analog read-outs help get real-time
simultaneous data and engine parameters during R-29B and RD-33 Engine testing.

LIAISON OFFICE:
Liaison Office London
Liaison Office Moscow
Liaison Office Delhi
Liaison Office Mumbai
Liaison Office Chennai
Liaison Office Visakhapatnam
Customer Service Cell, Delhi

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SUSTAINABILITY:

HAL, as a responsible PSU, strives to accomplish the vision of becoming a significant

global player in the Aerospace Industry and at the same time is focused on environment
protection, conservation of natural resources, welfare of employees and the society at
large. HAL has been demonstrating its sense of responsibility towards both the community
and the environment through various initiatives over the years, proactively nurturing
community growth and development. Several initiatives and measures have been
undertaken over the past few years to reduce the impact of HAL’s operations on
environment.

Water

1. The Company has installed Rain Water Harvesting (RWH) systems at all its
locations. Suitable buildings are identified and RWH systems are put in place to
collect and store the rain water. The stored rain water is used for gardening and
other non-potable uses.
2. The Company actively promotes water conservation by taking effective measures
like arresting of leakages, spreading awareness, etc.
3. The Company ensures that its operations do not pollute the environment. Sewage
and Effluent Treatment Plants are installed and the treated water is used for
gardening and other non-potable uses.
4. Under CSR, HAL has taken up the rejuvenation of Kumudvathi River in Tumkur
District, Karnataka State, in association with the International Association for
Human Values (IAHV), an NGO. The project has received accolades at various
forums.

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Energy
1. Energy Conservation is an ongoing effort in HAL’s operations. HAL has implemented
several energy conservation measures down the years which has resulted in lowering the
energy intensity of the operations. Few examples are listed below:

a) Refurbishing of furnace insulations

b) Installation of Variable Frequency Drives (VFD) in Air Compressors, Ventilation
Systems etc.
c) Installation of Solar Water Heaters
d) Improving the operation of Air Compressors and Heating, Ventilation and Air
Conditioning (HVAC) Plants
e) Replacement of Reciprocating Compressors with Screw Compressors.
f) Replacement of old Air Conditioners with star rated Air Conditioners.

2. As of 2017-2018, HAL is committed to replace the conventional type Light Fittings

with LED Light Fittings at all its locations. The work is currently under progress
(March -2018).
3. Apart from improving the energy efficiency in operations, HAL is also committed to
invest on reduction in consumption of energy sources from conventional resources. The
Company has committed to install 50 MW of Renewable Energy Power Plants to
reduce the carbon footprint. Wind and Solar Power Plants of more than 10 MW
capacity have been installed and nearly 30 MW is in the pipeline (March -2018).
4. A 3.5 MW Solar Power Plant is installed at HAL Airport, Bangalore (2015-16). The
power plant has a single-axis tracking mechanism which enhances the power generation
and avoids glare for the landing Aircraft. The plant has been installed under the

26 | P a g e
 Developer model and HAL purchases the power at a fixed tariff under a Power
Purchase Agreement (PPA) for a period of 25 years.

5. A 6.3 MW Wind Power Plant located at Harapanahalli in Davangere District of

Karnataka was commissioned on 31st March 2016. The plant generates around 150

27 | P a g e
 Lakh units per year.

6. Roof Top Solar Power Plants have also been installed at various Divisions of the
Company.

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Waste

1. As part of Municipal Solid Waste (MSD) Management activity, two units of Organic
Waste Converters (OWCs) were installed at the Senior Officers Quarters in Bangalore
during the year 2012-13.The OWC converts kitchen and other organic waste into garden
manure. It is a step towards achieving zero waste disposals in the townships.

2. In another initiative towards Solid Waste Management, two units of Biogas Plants with
a capacity of 500kg/day and 1000kg/day each were installed at the Central Test House
(CTH) area at HAL, Bangalore. Waste from the canteens is processed in this plant. The
biogas generated is being used for cooking.

3. Segregation at source has been implemented at all locations of HAL in order to manage
the waste effectively.

29 | P a g e
4. HAL also operates a Paper Recycling Unit at Bangalore to process the waste paper from
Offices for making Files, Folders and other Stationery Items. The plant has a capacity to
process 75 Kgs/day of waste paper. This is one of the initiatives taken by HAL towards
conservation of trees.

5. The Company also promotes awareness in the community regarding waste management
and Swatch Bharat. Some of the modes of engagement with the community are conducting
drawing and essay writing competitions in schools, skits, mini-marathons etc.

30 | P a g e
.

6. The Company has received a Certificate of Appreciation from the National Productivity
Council for its efforts in Reduce, Reuse & Recycle.

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FINANCE AND ACCOUNTING FUNCTION IN HAL (KORAPUT
DIVISION)

Finance and Accounting both play an important role in any business organizational
setup. The main function of any Finance and Accounting of an Organization are funds
management, cost reduction and financial appraisal.
Money is a very scar resource & is the most sought after commodity because all
the transaction of human society is settled in terms of money. Money & Finance are of not
one & the same things. Money stored in values, or kept in the shape of gold bars, or an
ornament is not finance. Money is static value expressed in currency of the country,
whereas, finance is an expression of dynamic function of money.
Depending upon the requirement & close monitoring of expenditure HAL, Koraput
Division has formed the following section for smooth running of the finance & accounts
departments & to maintain the liquidity position of the company.
 Bills payable section
 Payroll section
 Provident fund section
 Cash office section
 Finance section
 Material accounts section
 Costing section
32 | P a g e
  Bills receivable section
 Book-keeping section

BILLS PAYABLE SECTION

This section is mainly divided in 3 sub-divisions. Such as:
1. Bills payable (inland):- This section deals with the payment and accounting of
supplies & services rendered to the company.
2. Bills payable (civil work):- This section deals with the service rendered by the
contractor of the company.
3. Bills payable: - This section deals with the payment accounting of supplies &
services render by foreign collaborators to the company.

PAYROLL SECTION:
The main functions of payroll cover the following:
1. Receipt of approval leave application, over time authorization, attendance sheets
& employees gate pass etc.
2. Maintenance of leave records & feeding of attendance data to computer.
3. Disbursement of salary & wages.
4. Payment & recovery of advances.
5. Recovery of dues from employees.
6. Accounting of all payroll transactions.
7. Maintenance of employees punching cards etc.

PROVIDENT FUND SECTION:

This section mainly deals with the transaction preparing to PF such as:
1. Account of provident fund transaction.
2. Remittance of amounts recovered from employee to a fund called provident fund
trust fund.
3. Providing refundable & non-refundable loan & adjustment thereof.

CASH OFFICE:
This section is responsible for all receipt & payment of cash/cheques & Accounting of the
same in the book.

The main functions are as follows:

1. Receipt of cash, cheque, bank draft & issue of official receipt for the same.
2. Banking of all receipt.
3. With drawl of cash from bank to cater for daily need.
4. Payment of vouchers by cash/cheque.
5. Writing cash/cheque books.
6. Preparation of bank reconciliation statement.

33 | P a g e
 7. Safe custody of cash, cheque books, bank guarantees, fixed deposits receipts &
other investment etc.

FINANCE SECTION:
The main function are: Security & financial concurrent as per the delegation of power of
proposals for:
1. Capital expenditure
2. Revenue expenditure
3. Purchase of Material, stores tools & other services.
4. Manpower requirement
5. Incentives
6. Write off-of losses
7. Cases involving relaxation of rules
8. Sales of company assets
9. Contracts enter into with suppliers/collaboration/subcontractors
10. Estimates & errors of contracts in respect of Civil/Electrical/Plant Order

MATERIAL ACCOUNT SECTION:

This section covers the following:
1. Maintenance of material ledger cards for all materials held in stores
2. Accounting of receipts of all materials by various classes & issue of all materials
draws on work order & expenses accounts.
3. Reconciliation of balances with general ledger
4. Quality reconciliation of Bin card balances with materials ledger balances.
5. Accounting of inter divisional transfer of materials & its reconciliation.
6. Scrutiny of slow, non-moving inventories

COSTING SECTION:
The main function of this section are:
1. Preparation of fixed price quotation.
2. Preparation of operating statement.
3. Accounting & adjustment of differed revenue expenditure.
4. Accounting of non-production of overhead.
5. Preparation of man-hour rate.
6. Accounting of work in progress.
7. Setting of sales.
8. Submission of monthly reports to various agencies.

BILLS RECEIVABLE SECTION:

This section is responsible for preparation & submission of invoices to customer for the
supplier made & services rendered & follow up for recovery of the amount & accounting
of the same.

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 BOOK-KEEPING SECTION:
This section is the section in which the financial position of the organization can be
reflected through the preparation of profit & loss account and balance sheet. It is the apex
section of the finance & accounts department, which cover the following important
function:
1. Co-ordination of all section for relevant information.
2. Maintenance of journal & general ledger.
3. Preparation of Trial balance, Profit & Loss Account, Balance sheet.
4. Maintenance of Capital Asset Ledger
5. Preparation of fixed Asset & Depreciation schedule.
6. Furnishing of data for determining of income tax liability.
7. Preparation of performance budget.
8. Dealing with sales tax matters.
9. Disposal of surplus/condemned plant & machinery and other assets.
10. Reconciliation of control account of other division/corporate office.
11. Liaison and audit authority.
12. Submission of various types of reports / returns as & when required by corporate
office/ MD (MIG) & other agencies.
13. Updating the accounting policies/ procedure upon the guidelines issue by the
corporate office.

ACCOUNTING POLICY FOLLOWED BY HAL:

FIXED ASSTES:
 Land received from the state Government till 31st March 1969 has not been
valued. Such land which have been taken over by the company after 1st April
1969, have been valued at estimated fair price ruling on the date of taking
possession. Land other than above has been capitalized at cost to the company.
 Fixed assets acquired with financial assistance/subsidy from outside agencies
either wholly or partly is capitalized at net cost of the company.
 Minor Civil work including addition, alteration etc. costing individually
Rs.50000/- and below not resulting in additional floor space are charged to
revenue.
 Where the actual costs of the fixed/current assets are not readily ascertainable,
they are accounted initially on provisional basis but adjusted subsequently to
revenue.
 Assets declared surplus/discarded are retained in the books at cost and
depreciation provided till the end of the month, proceeding the month in which
they are disposed off. Proceeds from sales of assets in excess of net book value
are credited to profit and loss account.

35 | P a g e
  Expenditure on reconditioning, resetting and relay out of machinery and
equipment which does not increase the future benefits from the existing assets
beyond the previously assessed.
 Standard of performance based on the technical assessment is not capitalized.
 Cost of the initial pack of spares with plant, machinery & equipment is
capitalized and depreciation in the same manner as plant, machinery and
equipment.

A. TOOLS AND EQUIPMENTS:

Expenditure on special purpose tools, jigs and fixture including those specific to
project/product is initially capitalizes for amortization over production on technical
assessment and to the extent not amortized is carried forward as on assets.
Expenditure on maintenance, rework, recondition, periodical inspection,
referencing of tooling, replenishing of cutting tools and work of similar nature is
charged to revenue act at the time of issue.

B. RESEARCH & DEVELOPMENT:

 Research and development is built up by the appropriation from profit.
Research and development expenditure is debited to the profit and loss
account. To the extent the expenditure is meet out of the research and
development reserve to the profit and loss account.
 Expenditure on training personnel/foreign technical fees and expenses, pre-
production expenses, etc. specific to extent not amortized is carried
forward.
C. DEFERRED DEBTS:
Unpaid instalment payments under deferred payment terms for the cost of imported
material and tooling content of the equipment/products sold are accounted as
deferred debt from the customers and are recovered as and when the instalment are
paid.
D. SUNDRY DEBTORS:
Disputed/ time barred debts from the Government Department are generally not
treated as doubtful debts.
E. INVENTORIES:
 Raw material, components, stores and spare parts are value at cost.
 Work- in- progress/ stock in trade are valued at lower of cost on realizable
value.
 Adjustment is not made for under/ over observation in a year does not
exceeds 0.5% of the net operating expenses.

36 | P a g e
  Customs duty where applicable is loaded to cost of goods when cleared and
passed through customs.
 Stationary, uniform, medical and canteen, stores are charged to revenue at
the time of receipt.
 Semi-perishable, welfare and miscellaneous equipment (other than fixed
assets) costing individually Rs.20000/- and below are charged to revenue at
the time of issue and those costing above.
 Rs.20000/- is written off to revenue in two year of issue.
 Provision for redundancy is maintained at a suitable percentage/level of
value of closing inventory of raw materials and components, stores and
spare parts and construction material less the value of inventory for the
initial phase of the new project. Besides, where necessary, adequate
provision is made for redundancy of such materials in respect of completed/
specific project and other surplus/ redundant material pending transfer to
salvage stores.
 Stores declared surplus/ unserviceable/ redundant are charged to revenue.
 Material issued from main stores and lying unused at the end of the year is
not reckoned as inventory
F. INDIRECT EXPENSES ON EXPANSIONS:
Expenses on administration and supervision in respect of expansion facilities/ new
projects at the existing operating division are charged to revenue.
G. SALES:
Sales are set up on completion of contracted work on the basis of signaling out/
acceptance by the customer’s inspection of the product. Where sale price are not
established, sales are set up on provisional basis at price likely to be realized.
Research and development expenditure finance by the customer is billed and
account as sales.
H. RETIREMENT BENEFITS:
 Liabilities towards gratuity provided on yearly actuarial valuation in respect
of all employees remitted to a trust progressively.
 Provision for vocation leave is made on accrual basis and un-utilized leave
at the year-end is restated as if such benefits id payable at the close of the
year.
 Employer’s contribution of provident fund for the year is provided for at
the Govt. Stipulated rate and are remitted to trust.
I. INTEREST:

Interest on loan/ borrowing for different projects is charged to revenue.

J. DEPRECIATION:

37 | P a g e
 Depreciation on fixed assets is charged on ‘straight line method’. The rate of
depreciation on assets acquired on prior to 1.04.1989 is on the basis of estimated
life. The rate of depreciation is as prescribed in such XIV to the Companies Act
1956 for assets capitalized after 1.04.1986 (expect for assets separately listed in
notes to balance sheet). However, prorate depreciation charged to the assets from
the first day of the month of addition. Fixed assets costing Rs. 10000/- and below
are depreciated fully in the year of purchase. Where cost of internal partitions
exceeds Rs 50000/- they are depreciated with in a period of 5 years or the lease
period of premises whichever is less.

K. FOREIGN CURRENCY TRANSACTION:

Foreign Currency transaction are recorded and reported as per requirement of
Accounting Standard-II of ICAI except in respect of liability for deferred payments
on supplies/ services from the Russian federation arising in terms of inter Govt.
Agreement entered into between Govt. Of India and USSR Govt. of Russian
Federation. The liability is set up on the transaction date at the rate of exchange
notified by the RBI for deferred payments under the protocol arrangement between
the Government. The difference arising out of the re-calculating of Rubles into
rupee in terms of protocol arrangement is charged to the revenue at the time of the
year. However, the impact on this account is disclosed as note to the accounts.
L. CLAIM ON SUPPLIERS/UNDERWRITERS/CARRIERS. etc.
Claim on suppliers/ underwriters/ carriers towards loss/ damage and claims on
customs department for refund are accounted when claims are preferred.
M.DISPOSABLE SCRAP:
Saleable/ disposable scrap is valued at estimated realizable value.

38 | P a g e
 Information of
Received goods

Serial number
Total
And expiry date
Sales/purchase
Of goods
items

INVENTORY
CONTROL

Movement of
Removal or Goods within or
Other between
Disposition of location
goods

Valu and status

of stock

39 | P a g e
 INVENTORY
CONTROL

When to
Order? How much to order?

Fixed Order
Supply system Demand Lead Time
Rate of Supply

Fixed Period Instantaneous Deterministic

System Deterministic

Probabilistic Gradual Probabilistic

40 | P a g e
ADMINISTRATION CHART OF HAL (KORAPUT Division)

Executive Director

General Manager

Additional
General Manager

Deputy
General Manager

Chief Manager

Senior Manager

Manager

Deputy Manager

Enginer/Officer

Asst. Enginer/Asst. Officer

41 | P a g e
CONCEPTUAL PROFILE
“As no man can live without food & no vehicle can run without food fuel like that
no organization can run without finance”.

Finance is the lifeblood of any business. Financial analysis is the process of

identifying the financial strengths & weakness of the firm by properly establishing the
relationship between the items of balance sheet which summarizes the assets, liabilities &
owner’s equity & profit & loss account which summarizes the income & expenditure of
the firm over a particular period of time. This process of analysis is carried out by
establishing different as these statements prepared as such won’t help the firm very much
unless it is analyzed & interpreted.

Every business needs investment to procure fixed assets, which remain in use for a
longer period. Money invested in these assets is called “Long term funds” or “Fixed
capital”.

Business also needs funds for short term purposes to finance current operations.
Investment in short term assets like cash, inventories, debtors etc., is called ‘short term
funds’ or ‘working capital’

The working capital can be categorized, as funds needed for carrying out day-to-
day operations of the business smoothly. The management of the working capital is
equally important as the management of long term financial investment. Every running
business needs working capital. Even a business which is fully equipped with all type of
fixed assets required is bound to collapse without:-

 Adequate supply of raw materials for processing

 Cash to pay for wages, power & other costs
 Creating a stock of finished goods to feed the market demand regularly
 The ability to grant credit to its customers.

While managing the working capital, two characteristics of current assets should be kept
in mind viz.

I. Short life span, &

II. Swift transformation into other form of current assets.

42 | P a g e
THEORITICAL ASPECTS OF THE “CONCEPT”:-

Working capital is very important to the business. Working capital management is

concerned with the problems that arise in attempting to manage the current assets, the
current liabilities & the inter-relation solvency of a concern. The main goal of working
capital management is to manage the firm’s current assets & current liabilities in such a
way to satisfactory level of working capital maintained. This is so because if the firm
cannot maintain a satisfactory level of working capital, it is likely to become insolvent &
may be forced into bankruptcy. The current assets should be large enough to cover its
current liabilities in order to ensure a reasonable margin of safety. Each of the current asset
must be managed efficiently in order to maintain the liquidity of the firm while not
keeping too high level any one of them. Each of the short term source of financing must be
continuously managed to ensure that they are obtained & used in the beast possible way.

WORKING CAPITAL MANAGEMENT:

Working capital management refers to management of current assets and current

liabilities. The major thrust of course is on the management of current assets. This is
understandable because current liabilities arise in context of current assets. Working
capital management is significant fact of financial management. Its importance stems from
two reasons:

 Investment in current assets represents a substantial portion of total investment.

 Investment in current assets & the level of current liabilities have to be geared
quickly to change in sales. To be sure, fixed assets investment a long term
financing are responsive to variation in sales. However, this relationship is not as
close & direct as in the case of working capital components.

The important of working capital management is effected in the fact that finance
manages spends a great deal of time in managing current assets & current liabilities.
Arranging short term financing, negotiating favorable credit terms, controlling the
movement of cash, administering the accounts receivable, & monitoring the
inventories consume a great deals of time of financial managers.

The problem of working capital management is one of the “best” utilization of

scarce resources.

Thus the job of efficient working capital management is a formidable one, since it
depends on several variables such as characters of the business, the length of the

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 merchandising cycle, rapidly turnover, scale of operation, volume & terms of purchase
& sales & seasonal & other variation.

The working capital management refers to management of the working capital, or

to be more precise, the management of current assets. A firm’s working capital consists
of its investment in current assets, which include short term assets such as cash & bank
balances, inventories, receivables(including debtors & bills), & marketable securities.
So the working capital management refers to management of the level of these
individual current assets. The need for working capital arises from two
considerations:-

 First, existence of working capital is imperative in any firm. The fixed assets
which usually require a large chunk of total founds. Can be used to an optimum
level only if supported by sufficient working capital.

 Second, the working capital involves investment of funds of the firms.

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1.1 INTRODUCTION

1.2 DEFINITIONS OF WORKING CAPITAL

1.3 CONCEPT OF WORKING CAPITAL MANAGEMENT

1.4 CIRCULATION OF WORKING CAPITAL

1.5 TYPES OF WORKING CAPITAL

1.6 FACTORS DETERMINING OF WORKING CAPITAL

1.7 OPERATING CYCLE

1.8 WORKING CAPITAL TERM LOAN (WCTL)

1.9 ADEQUACY OF WORKING CAPITAL

1.10 EXCESS OF INADEQUACY OF WORKING CAPITAL

1.11 OPTIMUM LEVEL OF CURRENT ASSETS

1.12 LIQUIDITY VERSUS PROFITABILITY: RISK-RETURN

TANGLE

1.13 FIXED CAPITAL VERSUS WORKING CAPITAL

1.14 FINANCING CURRENT ASSETS

1.15 CONCLUSION

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 WORKING CAPITAL MANAGEMENT: CONCEPT,
IMPORTANCE AND OBJECTS

1.1 INTRODUCTION
The present research seeks to study in depth the Working Capital Management of
selected paper companies in India, with special emphasis on an examination of the
management performance in regard to financial management. It hardly needs mentioning
that inventory, accounts receivables and cash and its alert administration can go a long way
in solving the problem of the efficient working capital management. In fact, the present
research of working capital management needs special attention for the efficient working
and the business. It has been often observed that the shortage of working capital leads to
the failure of a business. The proper management of working capital may bring about the
success of a business firm. The management of working capital includes the management
of current assets and current liabilities. The present research undertakes to deal with the
net concept of working capital: excess of current assets over current liabilities.
A number of companies for the past few years have been finding it difficult to
solve the increasing problems of adopting seriously the management of working capital.
Business concerns intent on developing their business have to use to the utmost, their
available resources for the improvement and development of the business there by
enabling them to increase their profits. Working Capital and change in working capital,
especially in inventories, which is one of the components of working capital form a very
important part of the total gross-capital formation in the paper companies. Efficient and the
optimal utilization of fixed assets is very closely related to the proper management of
working capital. The present research attempts to recognize initially the importance of
working capital as a part of the total capital. It further goals to recognize the factors
influencing the working capital, its volume, and in the process try to suggest remedial
measures which might help in optimizing the use of working capital. It also considers as to
how precisely “financing working capital” and furthermore what should be mix of
different components of working capital.
Some important questions to which the research attempts to seek answer as follows:
-
1. Whether paper companies have planted their working capital requirement
properly.
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 2. Have the paper companies utilized the investment in current assets?
3. Have the paper companies controlled and utilized cash resources
effectively and profitably?
4. Whether paper companies resort to high build-up of inventory.
5. How far have the paper companies been successful in collecting their
`different administration of its various components: like as inventory,
account receivable, cash, and accounts payables.
Working Capital is the life blood of every business concern. Business firm
cannot make progress without adequate working capital. Inadequate working
capital means shortage of inputs, whereas excess of it leads to extra cost. So the
quantum of working capital in every business firm should be neither more nor less
than what is actually required. The management has to see that funds invested as
working capital in their organization earn return at least as much as they would
have earned return if it invested anywhere else. At the time of increasing capital
costs and scare funds, the area of working capital management assumes added
importance as it deeply influences a firm's liquidity and profitability. A notable
feature of utilization of funds is that they are of recurring nature. Therefore,
efficient working capital management requires a proper balance between
generation and utilization of these funds without which either shortage of funds
will cause obstruction in the smoother functioning of the organization or excess
funds will prevent the firm from conducting its business efficiently. So the main
objective of working capital management is to arrange the needed funds on the
right time from the right source and for the right period, so that a tradeoff between
liquidity and profitability may be achieved.
A firm may exist without making profits but cannot survive without
liquidity. The function of working capital management organization is similar that
of heart in a human body. Also it is an important function of financial
management. The financial manager must determine the satisfactory level of
working capital funds and also the optimum mix of current assets and current
liabilities. He must ensure that the appropriate sources of funds are used to finance
working capital and should also see that short term obligation of the business are
met well in time.

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1.2 DEFINITIONS OF WORKING CAPITAL

Definitions of Working Capital, as per various management experts are as under:

“Working Capital is the excess of C.A. over current liabilities.”

-H.G, Guthmann
“Working Capital is descriptive of that capital which is not fixed. But the
more common use of the Working Capital is to consider it as the difference
between the book value of the C.A. and current liabilities.”

-Hoglend. J. Bierman, and A. K. Mc Adams.

“Working Capital represents the excess of C.A. over current liabilities”

- J.L. Brown and L.R. Housard.
“Working Capital to a firm’s investment in short term assets cash short term
securities, accounts, receivables and inventories.”

-Weston the Brigham.

“Working Capital represents only the current capital assets.”

-Meal Baker Malott and Field.

“Working Capital means a sum of C.A”

-J.S. Mill.

“A Working Capital deficit exits if current liabilities exceed C.A.”

-Prof. C.W. Gerstoberg.55

“Working Capital equals the aggregate value of C.A. minus aggregate value
of current liabilities”

-Lincoln.
“Gross Working Capital may be used to refer to total C.A. and net working capital
refers to the surplus of C.A. over current liabilities”

-Prof. S.C. Kuchhal

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1.3 CONCEPT OF WORKING CAPITAL MANAGEMENT

There are two concepts of working capital viz, quantitative and

qualitative.

Some people also define the two concepts as gross concept and net concept.
According to quantitative concept, the amount of working capital refers to

‘Total of current assets’. What we call current assets? Smith called, ‘circulating
capital’. Current assets are considered to be gross working capital in this concept.
The qualitative concept gives an idea regarding source of financing capital.

According to qualitative concept the amount of working capital refers to “excess

of current assets over current liabilities.” L.J. Guttmann defined working capital as
“the portion of a firm’s current assets which are financed from long–term funds.”
The excess of current assets over current liabilities is termed as ‘Net
working capital’. In this concept “Net working capital” represents the amount of
current assets which would remain if all current liabilities were paid. Both the
concepts of working capital have their own points of importance. “If the objectives
is to measure the size and extent to which current assets are being used, ‘Gross
concept’ is useful; whereas in evaluating the liquidity position of an undertaking
‘Net concept’ becomes pertinent and preferable. It is necessary to understand the
meaning of current assets and current liabilities for learning the meaning of
working capital, which is explained below.
Current assets – It is rightly observed that “Current assets have a short
life span. These type of assets are engaged in current operation of a business and
normally used for short– term operations of the firm during an accounting period
i.e. within twelve months. The two important characteristics of such assets are, (i)
short life span, and (ii) swift transformation into other form of assets. Cash
balance may be held idle for a week or two; account receivable may have a life
span of 30 to 60 days, and inventories may be held for 30 to 100 days.” Fitzgerald
defined current assets as, “cash and other assets which are expected to be
converted in to cash in the ordinary course of business within one year or within
such longer period as constitutes the normal operating cycle of a business.”
Current liabilities – The firm creates a Current Liability towards
creditors (sellers) from whom it has purchased raw materials on credit. This
liability is also known as accounts payable and shown in the balance sheet till the

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payment has been made to the creditors. The claims or obligations which are
normally expected to mature for payment within an accounting cycle are known as
current liabilities. These can be defined as “those liabilities where liquidation is
reasonably expected to require the use of existing resources properly classifiable
as current assets, or the creation of other current assets, or the creation of other
current liabilities.”

1.4 CIRCULATION SYSTEM OF WORKING CAPITAL

Working capital is also known as ‘circulating capital or current capital’

Kulkarni has remarked that, “The use of the term circulating capital instead of
working capital indicates that its flow is circular in nature”.

Figure – 1.1 Circulation System of Working Capital

The funds in a business are obtained from the issue of share, the issue of
debentures, and other long-term arrangement and from operations of business. A
huge part of generated funds is used to acquire fixed assets, viz, plant and

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machinery, land building and some other fixed assets, while the remaining part of
the generated funds is used for day to day operations of the business e.g. to pay
wages and overheads expenses for the raw materials processed. This makes
possible the stocking of finished goods by whose sales either accounts receivables
are created or cash is received. In this process profits are generated. A part of the
profit is used to pay tax, interest and dividends, while the remaining part is
ploughed back in the business. The circulation system of working capital may be
depicted as shown in figure 1.1 as above page page. The cycle goes constantly
throughout the life of business.

1.5 TYPES OF WORKING CAPITAL

Following diagram clear the classification of working capital According to

the needs of business, the working capital may be classified into following two
basis:
1) On the basis of periodicity

2) On the basis of concept

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 Figure -1.2 Types of Working Capital
1). On the basis of periodicity:
The requirements of working capital are continuous. More working capital is
required in a particular season or the peck period of business activity. On the basis
of periodicity working capital can be divided under two categories as under:
a) Permanent working capital

b) Variable working capital

(a) Permanent working capital:

This type of working capital is known as Fixed Working Capital.
Permanent working capital means the part of working capital which is
permanently locked up in the current assets to carry out the business
smoothly. The minimum amount of current assets which is required to
conduct the business smoothly during the year is called permanent
working capital. For example, investments required to maintain the
minimum stock of raw materials or to cash balance. The amount of
permanent working capital depends upon the size and growth of company.
Fixed working capital can further be divided into two categories as under:
(I) Regular Working capital:
Minimum amount of working capital required to keep the primary
circulation. Some amount of cash is necessary for the payment of
wages, salaries etc.
(II) Reserve Margin Working capital:
Additional working capital may also be required for contingencies
that may arise any time. The reserve working capital is the excess
of capital over the needs of the regular working capital is kept
aside as reserve for contingencies, such as strike, business
depression etc.
(b) Variable or Temporary Working Capital:
The term variable working capital refers that the level of working
capital is temporary and fluctuating. Variable working capital may change
from one assets to another and changes with the increase or decrease in the
volume of business.

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 The variable working capital may also be subdivided into following two
sub-groups.
1.Seasonal Variable Working capital:

Seasonal working capital is the additional amount which is required during

the active business seasons of the year. Raw materials like raw-cotton or jute or
sugarcane are purchased in particular season. The industry has to borrow funds for
short period.
It is particularly suited to a business of a seasonal nature. In short, seasonal working
capital is required to meet the seasonal liquidity of the business.

2.Special variable working capital:

Additional working capital may also be needed to provide additional

current assets to meet the unexpected events or special operations such as
extensive marketing campaigns or carrying of special job etc.
Difference between Permanent and Variable Working Capital:
The distinction between permanent or fixed working capital and variable working
capital or temporary working capital is of great importance in operating cycle and
raising the funds. However, there is always a minimum level of current assets
which is continuously required by the firm to carry on its business operations. This
minimum level of current assets is referred to as permanent or fixed working
capital and is permanent in the same way as the firm’s fixed asset.

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 Figure – 1.3 Permanent and Temporary Working Capital
Depending on the change in production and sales, the need of working capital, over
and above the permanent working capital, will fluctuate.
For example, extra inventory of finished good will have to be maintained
to support the peak periods of sale and investment in receivables may also increase
during the period. Both the kinds of working capital-permanent and temporary –
are necessary to facilitate production and sale through the operating cycle, but
temporary working capital is created by the firm to meet liquidity requirements
that will last only temporarily. In above figure shows the difference between
percent and temporary working capital.
It is sh-own in below figure that permanent working capital is stable over
time, while temporary working capital is fluctuating-some times increasing and
sometimes decreasing. However, the permanent working capital line need not be
horizontal if the firm’s requirement for permanent capital is increasing or decreasing
over period. For a growing firm, the difference between permanent and temporary
working capital can be depicted the figure-1.4 as under.

Figure 1.4 – Percent and Temporary Working Capital Can be

depicted

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2) On the basis of concept: on the basis of concept working capital is
divided into two categories as under:
(A) Gross Working Capital:

Gross working capital refers to total investment in current assets. The

current assets employed in business give the idea about the utilization of
working capital and idea about the economic position of the company. Thus,
gross working capital the amount of funds invested in different current
assets. Gross working capital concepts is popular and acceptable concept in
the field of finance.
(B) Net Working Capital:

Net working capital means current assets minus current liabilities. The
difference between current assets and current liabilities is called the net
working capital. If the net working capital is positive business is able to
meet its current liabilities. Net working capital concept provides the
measurement for determining the creditworthiness of company.

1.6 FACTORS DETERMINING OF WORKING CAPITAL

Papers, with their fixed investment, appear to have the lowest requirement
for current assets. This does not mean that the problem of working capital may be
minimized in this field of enterprise, since ready funds are still essential to cover
disbursement for wages, interest on funds debt, purchase of materials and supplies,
etc. indeed, under such conditions the working capital position may become even
more strategic in character because of its relation to, and control of the large amount
of fixed assets. Thus, one of the outstanding problems of paper management in
recent years has been the maintenance of current position sufficiently strong to
permit vigorous operations. Public utilities, like the paper, have a fixed investment
which causes the current assets to constitute only a relatively small percentage of the
total assets. There is a difference between operating and holding companies, but
even then the funds required to cover current transactions are minor as compared
with those necessary to finance the long term structure.
Industrial companies, generally, require a large amount of working capital
although it various from business to business of lack of uniformity characterizing
each field of enterprise. However, the underlying determinants of the amounts of

55 | P a g e
fixed capital are required for operation; working assets may be expected to occupy a
smaller niche in the assets structure. For similar reasons, a rapid turnover of capital
will inevitably mean a large proportion of current assets. In the case of industries
with fixed investment, one of the primary uses of working capital is its conversion
into operating plant structure. In turn, it is expected that the income resized form
operations will normally replace such defections. This means that the flow of a
portion of working capital is circulating through fixed investment that its recovery is
dependent upon the income realized. Where the current assets are relatively more
important, a rapid sales turnover is usually found. Often, as a case of retail concerns,
the specific working assets constitute the object of sale and recovery is direct and
immediate. In manufacturing enterprises, a large share of working capital
management is more likely to become charged in form by conversion into finished
products, but even here, the potentiality of recovery is not delayed as long as in the
case of public utilities and paper companies. The need for working capital varies
with changes in the volume of business. A considerable proportion of current assets
is needed permanently as fixed assets. More than one production cycle may be in
process at one and the same time, for business operations on a continuing basis.
Materials are purchase and work is in progress. Finished inventory is sold. At the
same time new receivables accumulate and old ones are converted into cash. Cash is
utilized in the production process.

The following factor determine the amount of working capital

1. Nature of Companies:

The composition of an asset is a function of the size of a business and

the companies to which it belongs. Small companies have smaller
proportions of cash, receivables and inventory than large corporation. This
difference becomes more marked in large corporations. A public utility, for
example, mostly employs fixed assets in its operations, while a
merchandising department depends generally on inventory and receivable.
Needs for working capital are thus determined by the nature of an enterprise.

2. Demand of Creditors:

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 Creditors are interested in the security of loans. They want their
obligations to be sufficiently covered. They want the amount of security in
assets which are greater than the liability.
3. Cash Requirements:

Cash is one of the current assets which are essential for the successful
operations of the production cycle. Cash should not adequate and properly
utilized. It would be wasteful to hold excessive cash. A minimum level of
cash is always required to keep the operations going. Adequate cash is also
required to maintain good credit relation. Richards Osbom has pointed out
that cash has a universal liquidity and acceptability. Unlike illiquid assets, its
value is clear-cut and defines.
4. Nature and Size of Business:

The working capital requirements of a firm are basically influenced

by the nature of its business. Trading and financial firms have a very less
investment in fixed assets, but require a large sum of money to be invested in
working capital. Retail stores, for example, must carry large stocks of a
variety of goods to satisfy the varied and continues demand of their
customers. Some manufacturing business, such as tobacco manufacturing
and construction firms also have to invest substantially in working capital
and a nominal amount in the fixed assets. In contrast, public utilities have a
very limited need for working capital and have to invest abundantly in fixed
assets. Their working capital requirements and nominal because they have
cash sales only and supply services, not product. Thus, no funds will be tied
up in debtors and inventories. The working capital needs of most of the
manufacturing concerns fall between the two extreme requirements of
trading firms and public utilities. Such concerns have to make adequate
investment in current assets depending upon the total assets structure and
other variables. The size of business also has an important impact on its
working capital needs. Size may be measured in terms of the scale of
operation. A firm with larger scale of operation will need more working
capital than a small firm.
5. Time:

The level of working capital depends upon the time required to

manufacturing goods. If the time is longer, the size of working capital is

57 | P a g e
 great. Moreover, the amount of working capital depends upon inventory
turnover and the unit cost of the goods that are sold. The greater this cost, the
bigger is the amount of working capital.
6. Volume of Sales:

This is the most important factor affecting the size and components
of working capital. A firm maintains current assets because they are needed
to support the operational activities which result in sales. They volume of
sales and the size of the working capital are directly related to each other. As
the volume of sales increase in the investment of working capital-in the cost
of operations, in inventories and receivables.
7. Terms of Purchases and Sales:

If the credit terms of purchases are more favorable and those of sales
liberal, less cash will be invested in inventory. With more favorable credit
terms, working capital requirements can be reduced. A firm gets more time
for payment to creditors or suppliers. A firm which enjoys greater credit with
banks needs less working capital.
8. Inventory Turnover:

If the inventory turnover is high, the working capital requirements

will be low. With better inventory control, a firm is able to reduce its
working capital requirements. While attempting this, it should determine the
minimum level of stock which it will have to maintain throughout the period
of its operations.

9. Receivable Turnover:

It is necessary to have an effective control of receivables. A prompt

collection of receivables and good facilities for setting payable results into
low working capital requirements.

10. Business Cycle:

Business expands during periods of prosperity and declines during

the period of depression. Consequently, more working capital required
during periods of prosperity and less during the periods of depression.

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 During marked upswings of activity, there is usually a need for larger
amounts of capital to cover the leg between collection and increased sales
and to finance purchases of additional materials to support growing business
activity. Moreover, during the recovery and prosperity phase of the business
cycle, prices of raw materials and wages tend to rise and require additional
funds to carry even the same physical volume of business. In the downswing
of the cycle, there may be a brief period when collection difficulties and
declining sales together cause embarrassment by the resulting failure to
replenish cash. Later, as the depression runs its course, the concern may find
that it has a larger amount of working capital on hand than current business
volume may justify.
11. Value of Current Assets:

Decreases in the real value of current assets as compared to their

book value reduced the size of the working capital. If the real value of
current assets increases, there is an increase in working capital.
12. Variations in Sales:

Seasonal business requires the maximum amount of working capital

for a relatively short period of time.
13. Production Cycle:

The time taken to convert raw materials into finished products is

referred to as the production cycle or operating cycle. The longer the
production cycle, the greater is the requirements of the working capital. An
utmost care should be taken to shorten the period of the production cycle in
order to minimize working capital requirements.
14. Credit Control:

Credit control includes such factors as the volume of credit sales, the
terms of credit sales, the collection policy, etc. with a sound credit control
policy, it is possible for a firm to improve in cash inflow.

15. Liquidity and Profitability:

If a firm desires to take a greater risk for bigger gains or losses, it

reduces the size of its working capital in relation to its sales. If it is interested
in improving its liquidity, it increase the level of its working capital.
However, this policy is likely to result in a reduction of the sales volume,

59 | P a g e
 and therefore, of profitability. A firm, therefore, should choose between
liquidity and profitability and decide about its working capital requirements
accordingly.
16. Inflation:

As a result of inflation, size of the working capital is increased in

order to make it easier for a firm to achieve a better cash inflow. To some
extent, this factor may be compensated by the rise in selling price during
inflation.

17. Seasonal Fluctuations:

Seasonal fluctuations in sales affect the level of variable working

capital. Often, the demand for products may be of a seasonal nature. Yet
inventories have got to be purchased during certain seasons only. The size of
the working capital in one period may, therefore, be bigger than that in
another.
18. Profit Planning and Control:

The level of working capital is decided by the management in

accordance with its policy of profit planning and control. Adequate profit
assists in the generation of cash. It makes it possible for the management to
plough back a part of its earnings in the business and substantially build up
internal financial resources. A firm has to plan for taxation payments, which
are an important part of working capital management. Often the dividend
policy of a corporation may depend upon the amount of cash available to it.
19. Repayment Ability:

A firm’s repayment ability determines level of its working capital.

The usual practices of a firm are to prepare cash flow projections according
to its plans of repayment and to fix working capital levels accordingly.
20. Cash Reserves:

It would be necessary for a firm to maintain some cash reserve to

enable it to meet contingent disbursements. This would provide a buffer
against abrupt shortages in cash flows.
21. Operational and Financial Efficiency:

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 Working capital turnover is improved with a better operational and
financial efficiency of a firm. With a greater working capital turnover, it may
be able to reduce its working capital requirements.
22. Change in Technology:

Technological developments related to the production process have a

sharp impact on the need for working capital.

23. Firm’s Policies:

These affect the level of permanent and variable working capital.

Changing in credit policy, production policy, etc. are bound to affect the size
of working capital.
24. Activities of the Firms:

A firm’s stocking on heavy inventory or selling on easy credit terms

calls for a higher level of working capital for it than for selling services or
making Cash sales.
25. Attitude of Risk:

The greater the amount of working capital, the lower is the risk of liquidity.

`Whenever there is current strain, it has to be immediately diagnosed on the

basis of the red signals which manifest themselves in the operations. The restrictions
expressed as ratios of the elements of current assets and current liabilities are
frequently referred to as current position constraints and include the current ratio,
the acid test ratio, and the so-called “compensating balance” ratio. Contracts with
fund suppliers frequently provide for current-position constraints.
If stock not moving fast, and if there is an excess inventory buildup
corrective steps should be taken to sell the stock or bring down its level.
If the receivable have become sticky, effective recovery steps should be
taken to reduce the debts and to increase the collections. If the strain is allowed to
continue because of involvement in any other business or industry, the consequences
may be disastrous. In such situation, the ability to meet current demands
deteriorates; short term credits are not forthcoming; production is affected; sales
decline; cash flow decline; income may disappear; and the whole enterprise may get
into the red over a period of time. All the above points are the factors determining
working capital management in all the companies. Some factors are controlled and
some factor are not controlled by the management.

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 1.7 OPERATING CYCLE
The figure – 1.5 shows as under.

Figure- 1.5 Operating Cycle of Manufacturing Cycle:

The duration of time required to complete the sequence of events right from purchase of
raw material / goods for cash to the realization of sales in cash is called the operating
cycle, working capital cycle or cash cycle.

This cycle can be said to be at the heart of the need for working capital. In
the words of O.M. Joy: “The operating cycle refers to the length of time necessary to
complete the following cycle of events.”
The above operating cycle in figure relates to a manufacturing firm where
cash is needs to purchase raw materials and convert raw materials into work-in-
process is converted into finished goods. Finished goods will be sold for cash or
credit and ultimately debtors will be realized.

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 Figure 1.6 Operating Cycle of Non-Manufacturing Firm
The non-manufacturing firms, such as whole sellers and retailers, will not
have the manufacturing phase; they will have rather direct conversion of cash into
finished stock, into accounts receivables and then into cash. The operating cycle of a
non-manufacturing firm is shown as under.

The non-manufacturing firms, such as whole sellers and retailers, will not
have the manufacturing phase; they will have rather direct conversion of cash into
finished stock, into accounts receivables and then into cash. The operating cycle of a
non-manufacturing firm is shown as under.
In addition to this, some service and financial concerns may not have any
inventory at all. Such firm have the shorts operating cycle as shown in figure-1.7

Figuer-1.7 Operating Cycle of Service and Financial Firms

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1.8 WORKING CAPITALTERM LOAN (WCTL):

A working capital term loan (WCTL) should process specific characteristic as laid
down below:

 Working capital term loan is a shortage “long-term surplus” or net working

capital (NWC) in a unit that a bank chooses to fund.
 It is a long term need of the unit that is met by the bank though its short term
port-folio.
 Working capital term loan may be either clean or secured depending upon
the margin stipulated or the amount of working capital term loan in relation
to the chargeable current assts.
 It must be repaid is a prescribed maximum number of installments.

 It is not sanctioned as such but segregated out of existing outstanding, when

outstanding exceed the unit’s eligibility.
 It is a sort of ‘once-in-a-life-time’ loan. It is a post-facto corrective measure,
it should not be repeated normally.
 It should be repayable form long-term sources. If the repayment is form
short term sources, the permissible bank finance will fall correspondingly
and working capital term loan will rise there by neutralizing the process of
repayment.
Moreover, both physical and financial follow up can be used to complement each
other, if the concept of the ‘margin’ is refined and integrated into the maximum
permissible bank finance (MPBF)
MPBF = NWC + OSCL – NCCA/CCA Margin

Where NWC is net working capital, OSCL means other current liabilities less
creditors for purchases. NCCA are non-chargeable current assets on which no
drawls are permitted. CCA means chargeable current assets on which margin are
proposed to be stipulated. The application of margin would be coupled with the
deduction of the value of creditors for purchases from the advance value to arrive at
the drawing power. Once a margin is stipulated, it can be utilized as the operating
thumb rule for monitoring the borrower’s stake in the stocks charged to the bank as
well as a rough and ready method for keeping the drawings power within the MPBF
limits.

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1.9 ADEQUACY OF WORKING CAPITAL
N.K. Kulshrestha has observed that, “the need for maintaining an adequate working
capital can hardly be questioned. Just a circulation of blood is very necessary in the
human body to maintain life, smooth flow of funds is very necessary to maintain the
heath of the firm”. Adequate working capital becomes necessary because of the
following reasons:
 It protects a business form the adverse effects of shrinkage in the values of
current assets.
 It is possible to pay all the current obligations promptly and to take
advantages of cash discounts.
 It ensures to a greater extent the maintenance of a company’s credit standing
and provides for such emergencies as strikes, floods, fibers, etc.
 It permits the carrying of inventories at a level that would enable a business
to serve satisfactory the needs of its customers.
 It enables a company to extend favorable credit terms to customer.
 It enable a company to operate its business more efficiently because there is
no delay in obtaining materials, etc., because of credit difficulties.
 It enables a business to withstand periods of depression smoothly.

 There may be operating losses or decreased retained earnings.

 There may be excessive non-operating or extraordinary losses.

 The management may fail to obtain funds from other sources for the
purposes of expansion.
 There may be an unwise divided policy.

 Current funds may be invested in non-current assets.

 The management may fail to accumulate funds necessary for meeting

debentures on maturity.
 There may be increasing price necessitating bigger investments in
inventories and fixed assets.

1.10 EXCESS OF INADEQUACY OF WORKING CAPITAL

The firm should maintain a sound working capital position. It should have
adequate working capital to run its business operations. Both excessive as well as

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inadequate working capital positions are dangerous form the firm’s point of view.
Excessive working capital means idle funds which earn no profit for the firm.
Paucity of working capital not only impairs firm’s profitability but also results in
production interruption and inefficiencies.
When the company is inadequate, a company faces the following problem:

 It is not possible for it to utilize production facilities fully for want of

working capital.
 A company may not be able to take advantages of cash discount facilities.

 The credit-worthiness of the company is likely to be jeopardized because of

lack of liquidity.
 A company may not be able to take advantages of profitability business
opportunities.
 The modernization of equipment and even routine repairs and maintenance
facilities may be difficult to administer.
 A company will not be able to pay its dividends because of the no
availability of funds.
 A company cannot afford to increase its cash sales and may have to restrict
its activities to credit sales only.
 A company may have to borrow funds at exorbitant rates of interest.

 Its low liquidity may lead to low profitability in the same way as low
profitability results in low liquidity.
 Low liquidity would positively thirteen the solvency of the business. A
company is considered illiquid when it is not able to pay its debts on
maturity. It must be wound up under section 433 of the companies Act, 1956,
upon its inability to pay its debts.
An enlightened management should therefore, maintain an adequate amount of
working capital on a continuous basis. Sound financial and statistical techniques
by judgments should be used to predict the quantum of working capital.
 Commercial Bank (Bank Credit):
The major part of working capital is provided by commercial bank to their
customer. Commercial banks play an important role in providing capital to its
customers. Commercial banks are an important source of working capital in India.
The rate of interest charge by the Reserve Bank of India, from time to time. Here it

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is to be noted that the terms of leading of the banks are very strict. Followings SIX
CS are considered by the bank before sanctioning credited.
1. Capital 2. Capacity

3. Character 4. Collateral

5. Condition 6. Coverage

Banks provided working capital in the form of cash credit, overdraft,

discounting bills of exchanges etc. banks take into account the several factors of the
borrowing concern before fixing credit limit. Bank credit to commercial sector was
Rs. 21, 23,363 crores at the end of March 200723. There were 36,927 officers of
nationalized banks at the end of March 2007.

1.11 OPTIMUM LEVEL OF CURRENT ASSETS

The financial manager should determine the optimum level of current assets so that
the wealth of shareholders be maximized. In fact, optimum level for each type of
current assets should be fixed. The question of optimum investment in each type of
current assets is discussed. Here we simply discuss the basic concept involved in
determining the level of current assets.
Current Assets and Fixed Asset:
A firm needs fixed and current assets to support a particular level of output.
However, to support the same level of output, the firm can have difference levels of
current asset. As the firm’s output and sales increase, the need for current assets
increase in direct proportion to output; current assets increase at a decreasing rate
with output. This relationship is based upon the notion that it takes a greater
proportional investment in current assets when only a few units of output are
produced than it does later on when the firm can used its current assets more
efficiently.

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 Figure – 1.8 Alternative Current Assets Polices

The help of the above graph the most conservative policy is alternative A,
where CA/FA ratio is greatest at every level of output. Alternative C is the most
aggressive policy, as CA/FA ratio is lowest at all levels of output. Alternative B lies
between the conservative and aggressive polices and is an average policy.
Other things assuming constant, a conservative policy implies greater
liquidity and lover risk and poor liquidity. The current assets policy of the most
firms may fall between these two extreme policies.
The level of current assets can be measured by relating current asset to fixed
assets. Dividing current assets by fixed assets gives the CA/FA ratio. Assuming a
constant level of fixed assets, a higher CA/FA ratio indicates a conservative current
assets policy, and a lover CA/FA ratio means an aggressive current assets policy.

1.12 LIQUIDITY VERSUS PROFITABILITY: RISK-RETURN

TANGLE
The firm would make just enough investment in current assets, if it were
possible to estimate working capital needs exactly. Under perfect certainty, the
current assets holdings would be at the minimum level. A ledger investment in
current assets under certainty would mean a low rate or return investment for the
firm, as excess investment in current assets will not earn enough return. A smaller
investment in current assets, on the other hand, would mean interrupted production
and sales, because of frequent stock-outs and inability to creditor in time to
restrictive credit policy.

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 As it is not possible to estimate working needs accurately, the firm must decide
about the levels of current assets to be carried. The current assets holdings of the
firm will depend upon its working capital policy. It may follow a conservative or an
aggressive policy. These polices have different risk-return implications. A
conservative policy means lower return and risk, while an aggressive policy
produces higher return and risk.
The two important aims of the working capital management are: profitability and
solvency. Solvency, used in the technical sense, refers to the firm’s continuous
ability to meet maturing obligations. Lenders and creditors expected prompt
settlement of their claims as and when due. To ensure solvency, the firm maintains a
relatively large investment in current assets holdings. If the firm maintains a
relatively large investment in current assets, it will have no difficulty in paying the
claims of the creditors when they become due and will be able to fill all sales orders
and ensure smooth production. Thus, a liquid firm has less risk of insolvency; that
is, it will hardly experiences a cash shortage or stock-outs. However, there is accost
associated with maintaining a sound liquidity position. A considerable amount of the
firm’s funds will be tied up in current assets. And to the extent this investment is
idle, the firm’s profitability will suffer.

Details Company Company Company

A B C
Sales Units 200000 200000 200000

Rupees 3000000 3000000 3000000

Earnings before interest and taxes 300000 300000 300000

Current assets 1000000 800000 600000

Fixed assets 1000000 100000 1000000

Total assets 2000000 1800000 1600000

Return on total assets (EBIT/Total 15% 16.67% 18.75%

assets)
1.00 0.80 0.60
Current assets/Fixed assets

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 To have high profitability, the firm may sacrifice solvency and maintain a
relatively low level of current assets. When the firm does so, its profitability will
improve as less funds are tied up in idle current assets, but its solvency would be
threatened and would be exposed to greater risk of cash shortage and stock-outs. The
profitability-solvency tangle of the working capital management may further be
illustrated with the help of an example. Suppose, a firm has the following data for
future year: Sales (200000 Units) -3000000Earnings before interest and
taxes240000.Fixed assets -1000000The three possible current assets holdings of the
firm are: Rs. 1000000 Rs. 800000 and Rs.600000. it is assumed that fixed assets
level is constant and profit do not very with current assets levels. The effect of the
three alternative current assets polices is shown as above page28:

The calculation in table indicate that alternative A, the most conservative

policy, provides greatest liquidity to the firm, but also the lowest return on total
assets. On the other hand, alternative C, the most aggressive policy, yields highest
return but provides lowest liquidity and thus, is very risky to the firm. Alternative B
demonstrates a moderate policy and generates a return higher than alternative a bit
lower than alternative C and is less risky than alternative C but more risky than
alternative A. this is a simple example of risk-return trade off. In practice, things are
more difficult. Risk and returns are affected differently by different assets and,
therefore, generalization is not easy to make. The problem of the level of each type
of current asset is discussed in subsequent chapters.

The Cost Trade-off:

A different way of looking into the risk-return trade of is in terms of the cost
of maintaining a particular level of current assets. There are two different kinds of
costs involved26. First there is the cost of liquidity. If the firm carries too much
liquidity, the firm’s rate of return will be low. Funds tied up in idle cash and excess
inventory earn nothing, and receivables levels that are too large also reduce the
firm’s profitability. Thus, the cost of liquidity increases with the level of current
assets.

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 There is the cost of liquidity, which is the cost of having too little invested in
current assets. If the firm carries too little cash, it may not be able to pay bills
promptly at they mature. This may force the firm to borrow at high rates of interest.
This will also adversely affect the credit-worthiness of the firm and it will face
difficulties in obtaining funds in future. This all may force the firm into insolvency.

If the firm’s inventory level too low, sales may be lost and customers may
shift to competitors. Also, low level of book debts may be due to tight credit policy,

Which would impair sales further. Thus, the low level of current assets

Involves cost which increases as this level falls.

If selecting an optimal level of current assets, the firm should balance the
profitability solvency tangle by minimizing the total cost of liquidity and cost of
illiquidity.

In the above all points are discussed by the researcher on the view point of
management of current assets in paper companies.

Figure-1.9 The Cost Trade off

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1.13 FIXED CAPITAL VERSUS WORKING CAPITAL
The maximization of the rate of return on capital employed is the ultimate
goal of every company. The issue of fixed capital versus working capital could be
examined appropriately only in the light of the role played by them in the attainment
of this objective. In the maximization of the rate return, the fixed and working
capital play functional, complementary and proportional and technical roles. As
regards the functional role, it may be fairly well placed that fixed capital represents
the products component of the business, it is utilized with or act upon the current or
circulating capital to produce revenue or income for the enterprise; this itself is not
expected to be held or produce revenue or income for enterprise. The expenditure of
this class of capital is expected to be recovered only over a period of years through
depreciation charge which are an element of cost. On the other hand, investment in
working capital are relatively temporary in nature since the invested values are
capable of being recovered within a short period of time depending upon the
manufacturing as well as the collection cycles. In other words, it is the working
capital, which after its transmutation into saleable product actually generated
revenue for business.
Moreover, a low profit ratio could be geared to a high one by quickening the pace of
working capital cycle, which, besides providing the will-springs for newer cycle,
also increased the total realizable profit of a business organization. The
complementary relationship between working capital and fixed capital is readily
apparent. A fully equipped industrial company without a supply of material to
process or without cash to pay for workmen’s wages and other current expenses or a
store without merchandise to sell, is virtually useless. Consequently the working
capital position of any company may readily become the controlling factor for
determining the scope and character of its operation.

The proportional relationship between fixed and working capital is very important
in the maximization of the rate of return. Inadequate working capital may mean that
the fixed assets purchased form permanent capital cannot be utilized effectively.
Shortage of materials or labor may mean that the machine can be used for only part
of the available time.
On the other hand, if efficient use is not being made of current assets and
working capital. Because working capital requirements are excessive there may be
no resources left for the assets. If the low state of efficiency persists, the position

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 may become aggravated still further. Assets wear out or become very costly to
operate and profits are depleted, thereby making even the maintenance of adequate
working capital quite a problem.
A business unit can maximize its rate of return on the capital employed provided it
keeps pace with the scientific and technological developments taking place in the
field to which it pertains. It is common to suggest that as soon as some technological
and scientific development takes place, a business unit, in order to accelerate its
profitability, should immediately introduce the same to its productive processes. In
reality, however, the sufficiency of working capital determines the course of
decision in this regard.
According to Professor N.K. Sharma- “Innovation is regarded by many
economists and accountants as the mainspring of profit earnings; there is no doubt
that this is true for many industries. If new ideas, products, methods and techniques
are not germinated and brought into existence, a company will fail to keep its place
in the competition. Innovation implies among other things, research sound
organization and the willingness to undertake risks. Without adequate cash there can
be no progress. Research and development would be at a standstill and the essential
innovation would fail to appear.”
A comparison between the fixed and working capital could be made on the
basis of their investment relationship with each other.
It is found that in both the private and public sector Company’s working
capital, as a proportion of working capital employed share almost equal honors with
fixed capital. In the fifteen important industries of India the proportion of fixed
working capital and variable working capital was the show on next page. In table
form. It is evident from the table that with the exclusion of the industries had
working capital is very high proportions in their capital employed.

Sl.No. Company name Fixed capital (% to Working capital (% to

total capital employed) total capital employed)
1. Electricity Generation 75% 25%
2. Shipping Company 70% 30%
3. Aluminum Company 69% 31%
4. Paper Company 60% 40%
5. Iron and Steel Company 60% 40%

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6. Cement Company 55% 45%
7. Chemicals Company 51% 49%
8. Tea Company 50% 50%
9. Mineral Oils Company 47% 53%
10. Coal Company 45% 55%
11. Cotton Textile Company 42% 58%
12. Sugar Company 35% 65%
13. Engineering Company 33% 67%
14. Jute Company 32% 68%
15. Trading Company 15% 85%

Proportion of fixed and working capital to the total capital employed in

fifteen important companies in India as under. The electricity industry had fixed
capital in very high proportions because by its very nature this industry needs less of
working capital and its business operate on what it has installed as permanent
capital.
In time with the situation prevailing in the fifteen important Indian
industries, the percentage of working capital to fixed capital in the total capital
employed by the running companies of the Central Government is found both high
and ascending during the years 2006 to 2010. The percentage of working capital to
the capital employed for these companies was 36.3 in 2006. It rose to 42.2 percent in
2010. According to the Annual Survey of industries for the year 2010, the
percentage of working capital to the total capital employed in the case of all the
registered factories on an average was 69. Thus, it is clear that the size of working
capital in industrial companies tends to predominate the total capital employed by
them. This sufficiently indicates that the prime object of making a profit in industrial
companies must depend on the manner in which they administer their working
capital.
1.14 FINANCING CURRENT ASSETS
The firm must find out sources of funds to finance its current assets. It can
adopt difference financing policies. Three types of financing be distinguished: long
term financing, short-term financing and spontaneous financing. The important
sources of long term financing shares, debenture, preference share, retained earnings
and debt financial institutions. Short-term financing refers to those sources of short

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term credit that the firm must arrange in advance. These sources included short-term
bank loans, commercial papers and receivable. The firm must find out the sources of
funds to finance its current assets. In the words of O.M.
Joy: “in comparing financing plans we should distinguish between three different
kinds of financing: long-term financing, negotiated short-term financing and
spontaneous short-term financing”. The major source of spontaneous short-term
financing is trade credit and outstanding expenses. Therefore, a firm would like to
finance its current assets with spontaneous source of the fullest extent. Every firm is
expected to utilize spontaneous sources to the fullest extent. Thus, the real choice of
financing current assets is between short-term and long term sources. The following
three important approaches are applied in practice.
A.) Matching Approach:
The firm can adopt a financial plan which involves the matching of the
expected life of assets with the expected life of the source of funds raised to finance
assets. Thus, a ten years loan may be raised to finance a plant with an expected life
of ten years; stock to be sold thirty day may be financed with a thirty-day bank loan
or so on. Thus, when the firm follows matching approach, long-term financing will
be used to finance fixed assets and permanent current assets.

In Figure-1.10 shows the firm’s investment and financing patterns over time
under a matching plan. As the firm’s fixed assets and permanent current asset levels
increase, the long term-term financing level also increases. When temporary current
assets level increase, short-term negotiated financing increase, and when the firm
has no temporary current assets, it is also has no short-term negotiated financing.

B) Conservative Approach:

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 Conservative financing pleasure those plans that use more long-term
financing than is needed under a matching approach. The above figure-1.11
illustrates this approach. The firm is financing a portion of its temporary current
assets requirements with long-term financing. Also, in periods when the firm has no
temporary current assets, the firm has excess financing available that will be
invested in marketable securities.
These plans are called conservative because they involve relatively heavy
use of long-term financing.

Figuer-1.11

C) Aggressive Approach: A firm may be aggressive in

financing its assets. An aggressive policy is said to be followed by the
firm when it uses more short-term financing than warranted by the
matching plan. Under an aggressive policy , the firm finances a part of its
permanent current assets with short-term financing.

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 Some extremely aggressive firms may even finance a part of their fixed
assets with short-term financing. The relatively more use of short-term financing
makes the firm more risky. The aggressive financing policy is illustrated in above
Figure- 1.12.

1.15 CONCLUSION

The relative liquidity of the firm’s assets structure is measured by the current
assets to fixed assets ratio. The greater this ratio, the less risky as well as less
profitable will be the firm and vice versa. Similarly, the relative liquidity of the
firm’s financial structure can be measured by the short-term financing to total
financing ratio. The lower this ratio, the less risky as well as less profitable will be
the firm and vice versa. In shaping its working capital policy, the firm should keep
in mind these two dimensions – relative asset liquidity and relative financing
liquidity of the working capital management. A firm will be following a very
conservative working policy if it combines a high level of current assets with a high
level of long-term financing. Such a policy will not be risky at all and would be less
profitable. An aggressive firm, on the other hand, would combine low level of
current assets with a high level of long-term financing. .This will have high
profitability and high risk. In fact, the firm may follow a conservative financing
policy to counter its relatively illiquid assets structure in practice. The conclusion of
all this it that the considerations of assets and financing mixes are crucial to the
working capital management.

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 COMPARATIVE BALANCE SHEET AS ON 2014-15 & 2015-16
2014- 2015- Increase/ Change
PARTICULARS
2015 2016 Decrease in %
ASSETS
CURRENT ASSETS:
Trade Receivables (Debtors) 51284 41784 9500 18.52
Inventory 454842 407669 47173 10.37
Loan & Advances 764 599 165 21.60
Cash & bank balance 2 2 0 0.00
Other Current Assets 41647 58063 -16416 -39.42
TOTAL CURRENT ASSETS 548539 508117 40422 7.37

NON CURRENT ASSETS -(FIXED

ASSETS)
PROPERTY, PLANT &
EQUIPMENTS
Gross Block 243424 250982 -7558 -3.10
Less: Accumulated depreciation 91384 100741 -9357 -10.24
Net Block 152040 150241 1799 1.18
Capital work-in-progress 5025 7601 -2576 -51.26
INTANGIBLE ASSETS
Gross Block 81548 81618 -70 -0.09
less: Accumulated amortization 25472 26707 -1235 -4.85
Net Block 56076 54911 1165 2.08
Loans & Receivables 9690 10524 -834 -8.61
Other non-current assets 2696 2146 550 20.40
TOTAL NON CURRENT ASSETS 225527 225423 104 0.05
TOTAL ASSETS 774066 733540 40526 5.24
LIABILITIES
CURRENT LIABILITIES
Trade Payables (Creditors) 41080 31330 9750 23.73
Provisions 28902 47459 -18557 -64.21
Other Current Liabilities 263080 314661 -51581 -19.61
TOTAL CURRENT LIABILITY: 333062 393450 -60388 -18.13
SHARE HOLDERS FUND
Equity Share Capital 48097 -74625 122722 255.16
Reserve & Surplus -65780 20219 -85999 130.74
Total Shareholder fund -17683 -54406 36723 -207.67
NON CURRENT LAIBILITIES
Provisions 91598 93542 -1944 -2.12
Other non-current Liabilities 367089 300954 66135 18.02
TOTAL NON CURRENT
LAIBILITIES 458687 394496 64191 13.99
TOTAL LIABILITIES 774066 733540 40526 5.24

Interpretation:

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 From the concerned comparative balance sheet of 2014 -15 & 2015-16 I have analyzed
the statement to know the position of assets and liabilities.
I. As the information is quiet applicable for the constraint of data with regards to
total assets and total liabilities, in the year 2014-15 the total current assets moves
upward(increase) as compare to the year 2015-16 and the change in percentage of
(7.37%) of total current assets has been increased in the year2014-15 as compared
to 2015-16.
II. In the year 2014-15 the total current liabilities move downward(decrease) as
compare to the year 2015-16 and the change in percentage of (-18.13%) total
current liabilities has been decreased in the year2014-15 as compared to 2015-16.
The statement of provisions, reserves & surplus has also been increased in the
year2015-16.
III.In the year 2014-15 the total non-current assets move upward (increase) as
compare to the year 2015-16 and the change in percentage of (0.05%) of total non-
current assets has been increased in the year2014-15 as compared to 2015-16. But
when we look after the statement from the above the gross block, accumulated
depreciation, capital work in progress, amortization, loans & receivables has been
increased in the year 2015-16 with compared to 2014-15.
IV. In the year 2014-15 the total non-current liabilities move upward (increase) as
compare to the year 2015-16 and the change in percentage of (13.99%) of total
non-current assets has been increased in the year2014-15 as compared to 2015-16.

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 COMPARATIVE BALANCE SHEET AS ON 2015-16 & 2016-17
2016- Increase/ Change
PARTICULARS 2015-16
17 Decrease in %
ASSETS
CURRENT ASSETS:
Trade Receivables (Debtors) 41784 41330 454 1.09
Inventory 407669 359827 47842 11.74
Loan & Advances 599 581 18 3.01
Cash & bank balance 2 2 0 0.00
Other Current Assets 58063 31189 26874 46.28
TOTAL CURRENT ASSETS 508117 432929 75188 14.80

NON CURRENT ASSETS -(FIXED

ASSETS)
PROPERTY, PLANT & EQUIPMENTS
Gross Block 250982 260042 -9060 -3.61
Less: Accumulated depreciation 100741 114430 -13689 -13.59
Net Block 150241 145612 4629 3.08
Capital work-in-progress 7601 12654 -5053 -66.48
INTANGIBLE ASSETS
Gross Block 81618 82569 -951 -1.17
less: Accumulated amortization 26707 28184 -1477 -5.53
Net Block 54911 54385 526 0.96
Loans & Receivables 10524 10065 459 4.36
Other non-current assets 2146 1466 680 31.69
TOTAL NON CURRENT ASSETS 225423 224182 1241 0.55
TOTAL ASSETS 733540 657111 76429 10.42
LIABILITIES
CURRENT LIABILITIES
Trade Payables (Creditors) 31330 10013 21317 68.04
Provisions 47459 40145 7314 15.41
Other Current Liabilities 314661 169284 145377 46.20
TOTAL CURRENT LIABILITY: 393450 219442 174008 44.23
SHARE HOLDERS FUND
Equity Share Capital -74625 -17083 -57542 77.11
Reserve & Surplus 20219 43272 -23053 -114.02
Total Shareholder fund -54406 26189 -80595 148.14
NON CURRENT LAIBILITIES
Provisions 93542 83271 10271 10.98
Other non-current Liabilities 300954 328209 -27255 -9.06
TOTAL NON CURRENT LAIBILITIES 394496 411480 -16984 -4.31
TOTAL LIABILITIES 733540 657111 76429 10.42

Interpretation:

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 From the concerned comparative balance sheet of 2015 -16 & 2016-17 I have analyzed
the statement to know the position of assets and liabilities.
I. As the information is quiet applicable for the constraint of data with regards to
total assets and total liabilities, in the year 2015-16 the total current assets moves
upward(increase) as compare to the year 2015-16 and the change in percentage of
(14.80%) of total current assets has been increased in the year2015-16 as compared
to 2016-17.
II. In the year 2015-16 the total current liabilities moves upward (increase) as
compare to the year 2016-17 and the change in percentage of (44.23%) total
current liabilities has been increased in the year2015-16 as compared to 2016-17.
III.In the year 2015-16 the total non-current assets moves upward(increase) as
compare to the year 2016-17 and the change in percentage of (0.55%) of total non-
current assets has been increased in the year2015-16 as compared to 2016-17. But
when we look after the statement from the above the gross block, accumulated
depreciation, capital work in progress, amortization has been increased in the year
2016-17 with compared to 2015-16.
IV. In the year 2015-16 the total non-current liabilities moves downward(decrease) as
compare to the year 2016-17 and the change in percentage of (-4.31%) of total
non-current assets has been increased in the year2015-16 as compared to 2016-17.

COMPARATIVE BALANCE SHEET AS ON 2016-17 & 2017-18

Increase/ Change in
PARTICULARS 2016-17 2017-18
Decrease %
ASSETS
CURRENT ASSETS:
Trade Receivables (Debtors) 41330 99702 -58372 -141.23
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Inventory 359827 318351 41476 11.53
Loan & Advances 581 536 45 7.75
Cash & bank balance 2 2 0 0.00
Other Current Assets 31189 68576 -37387 -119.87
TOTAL CURRENT ASSETS 432929 487167 -54238 -12.53

NON CURRENT ASSETS -(FIXED

ASSETS)
PROPERTY, PLANT &
EQUIPMENTS
Gross Block 260042 281947 -21905 -8.42
Less: Accumulated depreciation 114430 128966 -14536 -12.70
Net Block 145612 152981 -7369 -5.06
Capital work-in-progress 12654 1238 11416 90.22
INTANGIBLE ASSETS
Gross Block 82569 85672 -3103 -3.76
less: Accumulated amortization 28184 30378 -2194 -7.78
Net Block 54385 55294 -909 -1.67
Loans & Receivables 10065 10833 -768 -7.63
Other non-current assets 1466 118 1348 91.95
TOTAL NON CURRENT ASSETS 224182 220464 3718 1.66
TOTAL ASSETS 657111 707631 -50520 -7.69
LIABILITIES
CURRENT LIABILITIES
Trade Payables (Creditors) 10013 14960 -4947 -49.41
Provisions 40145 62098 -21953 -54.68
Other Current Liabilities 169284 188022 -18738 -11.07
TOTAL CURRENT LIABILITY: 219442 265080 -45638 -20.80
SHARE HOLDERS FUND
Equity Share Capital -17083 28464 -45547 266.62
Reserve & Surplus 43272 54346 -11074 -25.59
Total Shareholder fund 26189 82810 -56621 -216.20
NON CURRENT LAIBILITIES
Provisions 83271 53082 30189 36.25
Other non-current Liabilities 328209 306659 21550 6.57
TOTAL NON CURRENT
LAIBILITIES 411480 359741 51739 12.57
TOTAL LIABILITIES 657111 707631 -50520 -7.69

Interpretation:
From the concerned comparative balance sheet of 2016 -17 & 2017-18 I have analyzed
the statement to know the position of assets and liabilities.
I. As the information is quiet applicable for the constraint of data with regards to
total assets and total liabilities, in the year 2016-17 the total current assets moves
downward(decrease) as compare to the year 2016-17 and the change in percentage

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 of (-12.53%) of total current assets has been decreased in the year2016-17 as
compared to 2017-18.
II. In the year 2016-17 the total current liabilities moves downward(decrease) as
compare to the year 2017-18 and the change in percentage of (-20.80%) total
current liabilities has been decreased in the year2016-17 as compared to 2017-18.
III.In the year 2016-17 the total non-current assets moves upward (increase) as
compare to the year 2017-18 and the change in percentage of (1.66%) of total non-
current assets has been increased in the year2016-17 as compared to 2017-18. But
when we look after the statement from the above the gross block, accumulated
depreciation, capital work in progress, amortization has been increased in the year
2017-18 with compared to 2016-17.
IV. In the year 2016-17 the total non-current liabilities moves downward(decrease) as
compare to the year 2017-18 and the change in percentage of (12.57%) of total
non-current assets has been increased in the year2016-17 as compared to 2017-18.

COMPARATIVE INCOME STATEMENT FOR THE PERIOD

2014-15 & 2015-6
PARTICULARS
Increase/ CHANG

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Interpretation:
From the concerned income statement of 2014-15 & 2015-16 I have analyzed the
statement to know the profit/ (loss).
I. The total revenue and total expenses, in the year 2014-15 moves
downward(decrease) as compare to the year 2015-16 and the change in percentage
(-1.72) of total revenue has been decreased in the year 2014-15 as compared to
2015-16. But when we look after the statement from the above the revenue from
operation and IFD sales were increased and other incomes were decreased in the
year 2014-15 with compared to 2015-16.
II. In the year 2014-15 the total expenditure moves upward (increase) as compared to
the year 2015-16 and the change in percentage (2.91) of total expenses has been
increased in the year 2014-15 as compared to 2015-16. When we look after the
statement from above cost of material, changes in inventories of finished goods,
work in progress, has been decreased and employee benefit expenses were
increased in 2015-16 compared to 2014-15.
III.In the year 2014-15 the profit/loss before exceptional items & tax moves
downward(decreased) as compared to the year 2015-16 and the change in
percentage (-94.09) of profit /loss has been decreased in the year 2014-15 as
compared to 2015-16.

Since the profit position of the statement in HAL is stream line, the respective year i.e.,
2015-16 profit is high with respect to income and expenditure.

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 COMPARATIVE INCOME STATEMENT FOR THE PERIOD
2015-16 & 2016-17
2015- Increase/ CHANGE
PARTICULARS 2016-2017
2016 Decrease IN %
INCOME:
Revenue From Operation 213810 272102 -58292 -27.26
Other Operating Revenue 6955 4561
NET REVENUE FROM
OPERATIONS(SALE) 220765 276663 -55898 -25.32
IFD SALE 479 829 -350 -73.07
Other Income 920 4615 -3695 -401.63
TOTAL REVENUE 222164 282107 -59943 -26.98

EXPENDITURE:
Cost Material Consumed 115766 135888 -20122 -17.38
Changes in Inventories of Finished Goods,
Work-in--Progress -11895 26168 -38063 319.99
Employee Benefit Expenses 34040 32307 1733 5.09
Depreciation & Amortization Expenses 11913 15172 -3259 -27.36
Other Expenses 17039 19409 -2370 -13.91
Charges Paid on Inter Divisional
Transfers(IDF) 13 1 12 92.31
Direct Input to WIP/Exp Capitalized 1021 388 633 62.00
Provision 31471 7099 24372 77.44
Inter service & Common Service 2552 2403 149 5.84
TOTAL EXPENSES 201920 238835 -36915 -18.28
PROFIT/(LOSS)BEFORE
EXCEPTIONAL ITEMS &TAX 20244 43272 -23028 -113.75

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Interpretation:
From the concerned income statement of 2015-16 & 2016-17 I have analyzed the
statement to know the profit/ (loss).
I. The total revenue and total expenses, in the year 2015-16 moves
downward(decrease) as compare to the year 2016-17 and the change in percentage
(-26.98) of total revenue has been decreased in the year 2015-16 as compared to
2016-17. But when we look after the statement from the above the revenue from
operation and IFD sales and other incomes were decreased in the year 2015-16
with compared to 2016-17.
II. In the year 2015-16 the total expenditure moves downward (decrease) as compared
to the year 2016-17 and the change in percentage (-18.28) of total expenses has
been decreased in the year 2015-16 as compared to 2016-17. When we look after
the statement from above cost of material, changes in inventories of finished
goods, work in progress, has been decreased and employee benefit expenses were
increased in 2015-16 compared to 2016-17.
III.In the year 2015-16 the profit/loss before exceptional items & tax moves
downward(decreased) as compared to the year 2016-17 and the change in
percentage (-113.75) of profit /loss has been decreased in the year 2015-16 as
compared to 2016-17.

The profit position of the statement in HAL is relatively increase, the respective year i.e.,
2016-17 profit is high with respect to revenue and expenses.

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 COMPARATIVE INCOME STATEMENT FOR THE PERIOD
2016-17 & 2017-18
Increase/ CHANGE
PARTICULARS 2016-2017 2017-2018
Decrease IN %
INCOME:
Revenue From Operation 272102 324198 -52096 -19.15
Other Operating Revenue 4561 10418
NET REVENUE FROM
OPERATIONS(SALE) 276663 334616 -57953 -20.95
IFD SALE 829 1508 -679 -81.91
Other Income 4615 3328 1287 27.89
TOTAL REVENUE 282107 339452 -57345 -20.33

EXPENDITURE:
Cost Material Consumed 135888 175721 -39833 -29.31
Changes in Inventories of Finished Goods,
Work-in--Progress 26168 22262 3906 14.93
Employee Benefit Expenses 32307 38085 -5778 -17.88
Depreciation & Amortization Expenses 15172 16735 -1563 -10.30
Other Expenses 19409 19866 -457 -2.35
Charges Paid on Inter Divisional
Transfers(IDF) 1 113 -112 -11,200.00
Direct Input to WIP/Exp Capitalized 388 0 388 100.00
Provision 7099 9349 -2250 -31.69
Inter service & Common Service 2403 2975 -572 -23.80
TOTAL EXPENSES 238835 285106 -46271 -19.37
PROFIT/(LOSS)BEFORE
EXCEPTIONAL ITEMS &TAX 43272 54346 -11074 -25.59

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Interpretation:
From the concerned income statement of 2016-17 & 2017-18 I have analyzed the
statement to know the profit/ (loss).
I. The total revenue and total expenses, in the year 2016-17 moves
downward(decrease) as compare to the year 2017-18 and the change in percentage
(-20.33) of total revenue has been decreased in the year 2016-17 as compared to
2017-18. But when we look after the statement from the above the revenue from
operation and IFD sales and other incomes were decreased in the year 2016-17
with compared to 2017-18.
II. In the year 2016-17 the total expenditure moves downward (decrease) as compared
to the year 2017-18 and the change in percentage (-19.37) of total expenses has
been decreased in the year 2016-17 as compared to 2017-18. When we look after
the statement from above cost of material, changes in inventories of finished
goods, work in progress, has been decreased and employee benefit expenses were
increased in 2016-17 compared to 2017-18.
III..In the year 2016-17 the profit/loss before exceptional items & tax moves
downward(decreased) as compared to the year 2017-18 and the change in
percentage (-25.59) of profit /loss has been decreased in the year 2016-17 as
compared to 2017-18.

As per the above statement the profit position of HAL is very good in the year 2017-18.
The income statement of HAL revels all the information of income and expenditure from
where profit before tax is in increasing trend.

RATIO ANALYSIS

The analysis of the financial statements and interpretations of financial results of a

particular period of operations with the help of 'ratio' is termed as "ratio analysis." Ratio

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analysis used to determine the financial soundness of a business concern. Alexander Wall
designed a system of ratio analysis and presented it in useful form in the year 1909.
Ratio can be used in the form of (1) percentage (20%) (2) Quotient (say 10) and (3) Rates.
In other words, it can be expressed as a: b (a as to b) or as a simple fraction, integer and
decimal. A ratio is calculated by dividing one item or figure by another item or figure.

Analysis or Interpretations of Ratios

The analysis or interpretations in question may be of various types. The following
approaches are usually found to exist:
a) Interpretation or Analysis of an Individual (or) Single ratio.
b) Interpretation or Analysis by referring to a group of ratios.
c) Interpretation or Analysis of ratios by trend.
d) Interpretations or Analysis by inter-firm comparison.

Accounting ratio are classified on the basis of the different parties interested in making use
of the ratios. A very large number of accounting ratios are used for the purpose of
determining the financial position of a concern for different purposes. Ratio may be
broadly classified into:
1) Classification of Ratios on the basis of Balance Sheet.

2) Classification of Ratios on the basis of Profit and Loss Account.

3) Classification of Ratios on the basis of Mixed Statement (or) Balance Sheet and
Profit and Loss Account.

This classification further grouped in to:

i. Liquidity Ratios
ii. Profitability Ratios
iii. Turnover Ratios
iv. Solvency Ratios
v. Overall Profitability Ratios

These classifications are discussed here under:

1. Classification of Ratios on the basis of Balance Sheet: Balance sheet ratios which
establish the relationship between two balance sheet items. For example, Current
Ratio, Fixed Asset Ratio, Capital Gearing Ratio and Liquidity Ratio etc.

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 2. Classification on the basis of Income Statements: These ratios deal with the
relationship between two items or two group of items of the income statement or
profit and loss account. For example, Gross Profit Ratio, Operating Ratio,
Operating Profit Ratio, and Net Profit Ratio etc.
3. Classification on the basis of Mixed Statements: These ratios also known as
Composite or Mixed Ratios or Inter Statement Ratios. The inter statement ratios
which deal with relationship between the item of profit and loss account and item
of balance sheet. For example return on Investment Ratio, Net Profit to Total Asset
Ratio, Creditor's Turnover Ratio, Earning Per Share Ratio and Price Earning Ratio
etc.

A chart for classification of ratios by statement is given below showing clearly the types of
ratios may be broadly classified on the basis of Income Statement and Balance Sheet.

1. Stock Turnover Ratio

2. Debtors Turnover Ratio

3. Payable Turnover Ratio

Classification of Ratios by Statement 4. Fixed Asset Turnover Ratio

5. Return on Equity
ON THE ON THE
ON THE
BASIS OF 6. Return on Shareholder's
BASIS OF Fund
BASIS OF
BALANCE 1. Gross Profit Ratio PROFIT &
PROFIT & 7. Return on Capital Employed
2. Operating Ratio 8. Capital Turnover Ratio
3. Operating Profit Ratio 9. Working Capital Turnover Ratio
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4. Net Profit Ratio 10. Return on Total Resources
5. Expense Ratio
11. Total Assets Turnover
6. Interest Coverage Ratio
 I. LIQUIDITY RATIOS
Liquidity Ratios are also termed as Short-Term Solvency Ratios. The term liquidity means
the extent of quick convertibility of assets in to money for paying obligation of short-term
nature. Accordingly, liquidity ratios are useful in obtaining an indication of a firm's ability
to meet its current liabilities, but it does not reveal h0w effectively the cash resources can
be managed. To measure the liquidity of a firm, the following ratios are commonly used:
i. Current Ratio.
ii. Quick Ratio (or) Acid Test or Liquid Ratio.
iii. Absolute Liquid Ratio (or) Cash Position Ratio.
Current Ratio:
Current Ratio establishes the relationship between current Assets and current Liabilities. It
attempts to measure the ability of a firm to meet its current obligations. In order to
compute this ratio, the following formula is used:
Current Ratio = Current Assets / Current Liabilities
The two basic components of this ratio are current assets and current liabilities. Current
asset normally means assets which can be easily converted in to cash within a year's time.
On the other hand, current liabilities represent those liabilities which are payable within a
year. The following table represents the components of current assets and current liabilities
in order to measure the current ratios.

YEAR CURRENT ASSETS CUREENT LIABILITIES RATIOS

2014-15 548539 333062 1.65
2015-16 508117 393450 1.29
2016-17 432929 219442 1.97
2017-18 487167 265080 1.84

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Interpretation:
The ideal current ratio is 2: 1. It indicates that current assets double the current liabilities
is considered to be satisfactory. Higher value of current ratio indicates more liquid of the
firm's ability to pay its current obligation in time. On the other hand, a low value of
current ratio means that the firm may find it difficult to pay its current ratio as one which
is generally recognized as the patriarch among ratios. By analysis the current ratio in HAL
is satisfactory.

Quick Ratio (or) Acid Test or Liquid Ratio:

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It is supplementary to the current ratio. The acid test ratio is a more severe and stringent
test of a firm's ability to pay its short-term obligations 'as and when they become due.
Quick Ratio establishes the relationship between the quick assets and current liabilities. In
order to compute this ratio, the below presented formula is used:
Liquid Ratio = Quick or Liquid Assets / Current Liabilities
Liquid assets =Current Assets – Inventory
CURRENT
YEAR QUICK ASSET LIABILITIES RATIOS
2014-15 93697 333062 0.28

2015-16 100448 393450 0.26

2016-17 73102 219442 0.33

2017-18 168816 265080 0.64

Interpretation:
As a convention or rule thumb quick ratio of 1:1 is considered satisfactory. By analysis the
ratio of HAL is found the advance from is kept at head office account. Cash & sundry
debtors have significantly reduced over the period. Overall the liquidity position is not
satisfactory.

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Absolute Liquid Ratio: It is also called as Cash Position Ratio (or) Over Due Liability
Ratio:
This ratio established the relationship between the absolute liquid assets and
current liabilities. Absolute Liquid Assets include cash in hand, cash at bank, and
marketable securities or temporary investments. The optimum value for this ratio should
be one, i.e., 1: 2. It indicates that 50% worth absolute liquid assets are considered adequate
to pay the 100% worth current liabilities in time. If the ratio is relatively lower than one, it
represents that the company's day-to-day cash management is poor. If the ratio is
considerably more than one, the absolute liquid ratio represents enough funds in the form
of cash to meet its short-term obligations in time. The Absolute Liquid ratio can be
calculated by dividing the total of the Absolute Liquid Assets by Total Current liabilities.
Thus,

Absolute Liquid Ratio = Absolute Liquid Ratio /Current Liabilities.

Absolute Liquid Assets = Cash, Bank & Short term Securities

ABSOLUTE LIQUD CURRENT

YEAR ASSETS LIABILITIES RATIOS
2014-15 2 333062 0.00001
2015-16 2 393450 0.00001
2016-17 2 219442 0.00001
2017-18 2 265080 0.00001

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Interpretation:
The acceptable norm of this ratio is 50%. But by analysis the liquidity ratio of HAL, it
shows that the absolute liquid assets are around 0% taking liquid assets below the required
level. So financial position is not good.

II. PROFITABILITY RATIO

The term profitability means the profit earning capacity of any business activity. Thus,
profit earning may be judged on the volume of profit margin of any activity and is
calculated by subtracting costs from the total revenue accruing to a firm during a particular
period. Profitability Ratio is used to measure the overall efficiency or performance of a
business. Generally, a large number of ratios can also be used for determining the
profitability as the same is related to sales or investments.
The following important profitability ratio are discussed below:
i. Net profit ratio

NET PROFIT RATIO:

Net Profit Ratio is also termed as Sales Margin Ratio (or) Profit Margin Ratio (or) Net
Profit to Sales Ratio. This ratio reveals the firm's overall efficiency in operating the
business. Net profit Ratio is used to measure the relationship between net profit (either
before or after taxes) and sales. This ratio can be calculated by the following formula:
NET PROFIT RATIO = Net Profit After Tax / Net Sales *100

YEAR NET PROFIT NET SALES RATIOS

2014-15 10430 213911 0.05

2015-16 20244 213810 0.09

2016-17 43272 272102 0.16

2017-18 54346 324198 0.17

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Interpretation:
The Net profit ratio of company shows consider increase. Company’s sales have increased
in all 4 years & the company will successfully growth and earning profit in year to year. In
2016-17 to 2017-18 the net profit is increased from 0.16 to 0.17 which is a greater sign.

SOLVENCY RATIOS
The term 'Solvency' generally refers to the capacity of the business to meet its short-term
and long term obligations. Short-term obligations include creditors, bank loans and bills
payable etc. Long-term obligations consists of debenture, long-term loans and long-term
creditors etc. Solvency Ratio indicates the sound financial position of a concern to carryon
its business smoothly and meet its all obligations.
Liquidity Ratios and Turnover Ratios concentrate on evaluating the short-term solvency of
the concern have already been explained. Now under this part of the chapter only the long-
term solvency ratios are dealt with. Some of the important ratios which are given below in
order to determine the solvency of the concern:
i. Debt - Equity Ratio
ii. Proprietary Ratio

Debt Equity Ratio:

This ratio also termed as External - Internal Equity Ratio. This ratio is calculated to
ascertain the firm's obligations to creditors in relation to funds invested by the owners. The
ideal Debt Equity Ratio is 1: 1. This ratio also indicates all external liabilities to owner
recorded claims. It may be calculated au:
Debt Equity Ratio = Outsiders Funds / Shareholder funds
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 YEAR TOTAL LIABILITY SHARE HOLDER EQUITY RATIOS

2014-15 774066 -17683 -43.77

2015-16 733540 -54406 -13.48

2016-17 657111 26189 25.09

2017-18 707631 82810 8.55

Interpretation:
The ideal Debt Equity Ratio is 1:1. This ratio indicate the proportion of owner’s stake in
the business. Excessive liabilities tend to cause insolvency. This ratio also tells the extent
to which the firm depends upon outsiders for its existence.
PROPRIETARY RATIO:
Proprietary Ratio is also known as Capital Ratio or Net Worth to Total Asset Ratio. This is
one of the variant of Debt-Equity Ratio. The term proprietary fund is called Net Worth.
This ratio shows the relationship between shareholders' fund and total assets. It may be
calculated as:

YEAR SHARE HOLDER EQUITY TOTAL ASSETS RATIOS

2014-15 -17683 774066 -0.02
2015-16 -54406 733540 -0.07
2016-17 26189 657111 0.04
2017-18 82810 707631 0.12
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Interpretation:
The financial stability of the ratios indicates in the year 2014-15 & 2017-18 is in stable.
Thereby the higher proprietary ratio will increased by the previous year.

Solvency ratio:
It shows the relation between total liability and total assets. It show how much total assets
are financed by outsider fund.

Solvency ratio = Total Liabilities to Outsiders / Total Assets

Total liability to outsiders = loan fund +deferred liability + current liability

YEAR TOTAL LIABILITIES TOTAL ASSETS RATIO

2014-15 100
774066 774066
2015-16 100
733540 733540
2016-17 100
657111 657111

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 2017-18 100
707631 707631

Interpretation:
In solvency ratio show the relation between total liability and total assets, here we show
the ratio of the all 4 year will score 100%.

FIXED ASSETS TO NET WORTH RATIO:

It show the relationship between the fixed assets to the shareholders funds. It show the
extent to which shareholders fund sunk into the fixesd assets. The ratio is not satisfactory.
Fixed Assets to Net Worth Ratio = Fixed Assets / Shareholders Funds

Year FIXED ASSETS SHARE HOLDER EQUITY RATIO

2014-15 225527 -17683 -12.75
2015-16 225423 -54406 -4.14
2016-17 224182 26189 8.56
2017-18 220464 82810 2.66

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Interpretation:
if the ration is less then 100%, it implies that owner fund are more then total assets and
part of the working capital is financed bu the shareholder. When the ratio is more then
100% , it implise that owners fund not sufficient to finance the fixed assets and the firm
has to depend upon outsiders to finance the fixed assets.

CURRENT ASSETS TO SHAREHOLDERS FUND:

It show the relationship between current assets to shareholders fund. It indicates the extent
to which the owners fund is invested incurret assets.
Current Assets to Shareholders Fund= Current Assets/ Shareholder Fund.

YEAR CURRENT ASSETS SHARE HOLDER EQUITY RATIO

2014-15 548539 -17683 -31.02

2015-16 508117 -54406 -9.34

2016-17 432929 26189 16.53

2017-18 487167 82810 5.88

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Interpretation:
There no rule of thumb for thes ratio and depending upon the nature of the business there
may be different ratio for different firms.

TURNOVER RATIOS
Ratios. Turnover Ratios highlight the different aspect of financial statement to satisfy the
requirements of different parties interested in the business. It also indicates the
effectiveness with which different assets are vitalized in a business. Turnover means the
number of times assets are converted or turned over into sales. The activity ratios indicate
the rate at which different assets are turned over.

Depending upon the purpose, the following activities or turnover ratios can be calculated:
i. Debt turnover ratio
ii. Capital turn ratio
i. Debt turnover ratio:
Debtor's Turnover Ratio is also termed as Receivable Turnover Ratio or Debtor's Velocity.
Receivables and Debtors represent the uncollected portion of credit sales. Debtor's
Velocity indicates the number of times the receivables are turned over in business during a
particular period. In other words, it represents how quickly the debtors are converted into
cash. It is used to measure the liquidity position of a concern. This ratio establishes the
relationship between receivables and sales.
Debt Turnover Ratio = Credit Sales / Average Trade Receivables
AVERAGE TRADE
YEAR CREDIT SALES RECEIVABLE RATIO

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 2014-15 213911 51432 4.16
2015-16 213810 46536 4.59
2016-17 272102 41722 6.52
2017-18 324198 70516 4.60

Interpretation:
The debtor turnover ratio of the year 2017-18 at 4.60 indicates that the debtors are being
turned over 4.60 times during the year. The debt collection preiod i.e.2.6 months[ 12/4.60=
2.6].

ii. Capital Turnover Ratio

This ratio measures the efficiency of capital utilization in the business. This ratio
establishes the relationship between cost of sales or sales and capital employed or
shareholders' fund. This ratio may also be calculated as:

Capital Turnover Ratio = Net Sales / Capital employed

YEAR NET SALES CAPITAL EMPLOYED RATIO

2014-15 213911 -17683 -12.10
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 2015-16 213810 -54406 -3.93
2016-17 272102 26189 10.39
2017-18 324198 82810 3.91

Interpretation:
The efficiency of capital utilization in the business is satisfactory in the year to year basis.
Though the position of this ratio indicates increasing trends in 2014-15 to 2016-17 but it
decrease in the current year.

FIXED ASSETS TURN OVER RATIO

YEAR SALES FIXED ASSETS RATIO

2014-15 213911 225527 0.95

2015-16 213810 225423 0.95

2016-17 272102 224182 1.21

2017-18 324198 220464 1.47

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Interpretation:
The working operation of the sales & fixed assets is in increasing trend from the year
2014-15 to 2017-18. The position of ratio is remain constant in the year 2014-15 & 2015-
16, ift indicates the activity of sales is informative.
WORKING CAPITAL TURN OVER RATIO
Working capital of a concern directly related to sales. The current assets like debtor, bills
receivables, cash, stock, etc. change with increase or decrease in sales. The working
capital turnover ratio is used to analysis the relationship between the money used to fund
operations and the sales generated from these operation. It is calculate by following
formula:
Working capital turnover ratio = sales/ working capital

YEAR SALES WORKING CAPITAL RATIO

2014-15 213911 215477 0.99
2015-16 213810 114667 1.86
2016-17 272102 213487 1.27
2017-18 324198 222087 1.46

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Interpretation:
From the above table it is observe that in the year 2014-15 WCTR is 0.99 which indicates
the efficiency of working capital position is decreased with respect to previous year. Based
on return on investment the efficiency is depends upon the working operation of sales.

INVENTORY TURN OVER RATIO

It measures how fast the inventory is moving and sales are generated. It also seen whether
only the required minimum funds have been locked up in inventory and the inventory has
been efficiently used or not. The higher the ratio, the more efficient the management of
inventories and vice versa. It is harmful to hold more inventory for certain reasons, such as
it unnecessarily blocks capital which can otherwise be profitably used somewhere else.

YEAR SALES AVERAGE INVENTORY RATIO

2014-15 213911 406915 0.53

2015-16 213810 431256 0.50

2016-17 272102 383748 0.71

2017-18 324198 339089 0.96

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Interpretation:
By interpretation the inventory turn over ratio of HAL, it is found that the inventory
turnover ratio in the year 2017-18 was 0.96 and it increased by 0.25 as compared to 2016-
17. In 2016-17 it was 0.71 it is increased by 0.21 compared to the year 2015-16.

FINDINGS:-

1. HAL PAT (Profit After Tax) is increasing from last year and the growth is
remarkable.
2. HAL has shown that it is very strong completion in AIRCRAFT sector in India.
3. Overall ratio of company is good and company need to work with more efficiency.
4. HAL investment policies are very much reliable.
5. The assets of the HAL were increasing from year to year this may help in increase
of production.
6. Inventory was increasing due to there may be insufficient sales according to the
production.
7. Production and sales were increasing from year to year this leads to gain more
profits.
8. Revenue from IFD (Inter Divisional Transfer) sales and other operations helps in
securing more income from the operations.

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RECOMMENDATIONS AND THE WAY FORWARD
The following recommendations are made to the authorities at HAL, Koraput division in
order to maintain improve on their current performance. The recommendations made are
based purely on my understanding of the situations. Some of the situation. Some of the
major things which I would like the authorities to take notice of include:

 Current ratio indicates the ability of a company to stay afloat irrespective of the
prevailing market situations. Internationally, a current ratio of 2:1 is accepted. The
investors also seek this ratio in order to examine whether the company has
adequate current resources so that it does not default on its obligation and is able to
generate sufficient returns to maximize shareholder’s money.

 Debtor’s turnover ratio needs a tune up as against creditor’s turnover. This ratio
helps to examine whether the management of the concerned organization is not
being complacent in recovery of its debts on time. Generally, it is required that
debtor’s turnover ratio be high as compared to creditors turnover which implies
that the firm is generation sales adequate enough to cover its production cost.

 The inventory turnover ratio for HAL has been success story for the last couple of
years. So the management should do everything possible thing to maintain this
inclination in the coming year and try to encourage its human resources to keep up
the good work.

 With many projects in line and at different levels of execution, it is required that all
the aspects are dealt with equal importance whether it is the case of long term
ratios or the short term ratios.

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CONCLUSION
 The working capital exercise in HAL also cover the long term working capital,
including annual planning and provides long term plan for application of internal
resources and debt servicing translated in to the corporate plan.

 The scope of working capital also includes expenditure on plant betterment, and
renovation, balancing equipment, capital additions and commissioning expenses on
trial runs generating units.

 Feasibility report of the project is prepared on the cost estimates and cost of
generation.

 The ultimate objective of any industry is maximize the profit. But, preserving
liquidity of the industry is an important objective too.

 The problem is that increasing profits at the cost of liquidity can bring serious
problems to the firm. Therefore, there must be a trade-off between these two
objectives of the industry.

 One objective should not be at cost of the other because both have their
importance. If we do not care about profit, we cannot survive for a longer period.
On the other hand, if we do not care about liquidity, we may face the problem of
sleekness.

The working capital management should be given proper consideration and will
ultimately affect the profitability of the firm/industry.

REFERENCES:

Books:
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  Praveen Kumar jai, Working Capital Management, (R B S A Publishers:
Jaipur) First Edition-1993, Page no-1 to 2.

 H. G. Guthmann, analysis of Financial Statements, (New Yourk: Prentice

Hall) IV Edition-1953,

 S.C. Kuchhal, Financial Management – An Analytical and Conceptual

Approach, (Allahabad: Chaitanya publishing House) – 1982.

 R.D. Kennedy and McMullen, Financial Statements – Form Analysis and

Interpretations, (1968), pp. 265-266.

 Parasanna Chandra, Financial Management Theory and Practice (New Delhi:

Tata McGraw Hill Publishing Company Ltd., 1984), p.260.

 V.L. Gole, Fitzerald’s Analysis and Interpretation of Financial Statement.

 P.V. Kulkarni, financial Management – A Conceptual Approach (with

problems and review questions) (Bombay: Himalaya
Publishing House), Seventh Edition 1996.

 I. M. Pandey Financial Management, (New Delhi: Vikas Publishing House

Pvt. Ltd), 1979

 M. Y. Khan and P. K. Jain, Financial management, (New Delhi: Tata

McGraw Hill Publishing Company Ltd.) ,1989

 S. N. Mittal, Management Accounting & Financial Management.

(New Delhi: Shree Mahavir Book Depot), 1986 Part-II, Chapter- II.

 M. Joy, introduction to financial management, (Homewood: Richard D.

Irwin, Inc., Illinois,) 1977, Page-406

 Van Horne, James C. financial management and Policy, (New Delhi: Prentice
Hall Of India Pvt. Ltd) , 1982, Page.390,

 Nand K. Sharma, Advance Financial Management, ( Jaipur: DND

Publications) First edition-2011, Page -115-118

Websites:

 www.google.com

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 www.halindia.com

 www.defencediscovery.com

Reports:

 Balance Sheet of HAL, Koraput Engine Division.

 Income Statement of HAL, Koraput Engine Division.

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