INTRODUCTION It is rightly said that finance is the life-blood of business. No business can be carried on without a suitable source of finance. The financial manager is mainly responsible for raising the required finance for the business. There are several sources of finance and as such the finance has to be raised from the right kind of source. NEED FOR LONG TERM FINANCING Long term finance is needed due to the following reasons : i)Setting the firm : Long term finance is needed to set up the firm. It is required to purchase fixed assets such as land and building, plant and machinery, furniture etc. ii) Expansion : After establishment of the organisation it may go for expansion of business activities to increase the volume of business. Long term finance is required to finance expansion programme.iii) Modernisation : A business organisation may go for modernization to cope with the changing time. New Machines, technology is required to bring innovation. It requires finance. iv) Diversification : Long term finance is required to finance diversification schemes of the organisation. Diversification is necessary to meet the changing requirement of the organisation. v) Replacement : Existing machines become outdated due to passage of time. Such machines are required to be replaced by new machines. For this purpose finance is required

NEED OF SHORT TERM FINANCINGA business organisation needs short term financing due to the following reasons : I) Business cycle : Business cycle brings changes in demand and supply of products and services. In case of boom, there is more demand. Hence more capital is required.ii) Liquidity : It is the capacity of the orianisation to meet urgent needs. Short term financing helps to maintain liquidity of the organisation.iii) Operating efficiency : It required timely replacement of old machines and equipments and employment of more labour to improve operating efficiency. iv) Nature of business : Requirement of short term financing varies according to the nature of business. A manufacturing organisation requires more capital. to meet short term requirements.v) Credit sales : Credit sales reduce the cash balance of the organisation. In case of credit sales the organisation /requires more funds to carry day to day activities

CLASSIFICATION OF SOURCES OF FINANCE The sources of finance can be classified as follows : 1 According to Period i) Short-Term finance : The finance is generally required for a period of one year or the business cycle which may be slightly greater than period of one year. ii) Medium-Term finance : This is also called intermediate finance. The period of medium term finance may be 3 to 5 yearsiii) Long-Term finance : The Long term finance generally exceeds 5 years period. 2 According to OwnershipFinance can be classified on the basis of ownership as ownership capital and borrowed capital. 3 According to source of generation Capital can be raised through internal sources such as retained earnings and depreciation. Finance can also be generated through external sources such as shares and debentures etc.

AutomobiILE SECTOR BASED ON THEIR SOURCES OF FINANCEMAHINDRA & MAHINDRA(Amt in Cr)SOURCES OF FINANCE201220132014

EQUITY294.52295.16295.16

RETAINED EARNINGS11876.5714363.7616496.03

DEBTS3174.223227.072745.16

COMMENTS:1. Company Equity share capital has been constant this means that companys has not issued any new share capital in 3 years.2. Proportion of retained earnings has been increasing every year which is the positive sign of the company, i.e the companys profits has been increasing, in future company can utilized the amount of reserves for issue od bonus shares, purchase of asset or to settle any claim of debt.3. As compared to the year 2012 in year 2013 , the amount of debt has shown a increase of 1.67%.4. Company should reduce its debts proportion.

TATA MOTORS (AmT IN CR)SOURCES OF FINANCE201220132014

EQUITY634.75638.07643.78

RETAINED EARNINGS18991.2618496.7718532.87

DEBTS11011.6314268.6914515.53

Comments:1. Year by Year the portion of equity has been increasing as well as the portion of debt has been increasing.2. Retained earnings has been increasing on yearly basis.

ASHOK LEYLAND(Amt in cr)SOURCES OF FINANCE201220132014

EQUITY266.07266.07266.07

RETAINED EARNINGS2632.344189.044181.82

DEBTS3883.913504.822395.53

COMMENTS: Amt of equity has been constant where as the amount of retained earnings has has been doubles as compared to previous year 2012.Amt o f debt has showing a decreasing trend thats menas the companys is trying to reduce the debt proportion.EICHER MOTORS Ltd(Amt in cr)SOURCES OF FINANCE201220132014

EQUITY2727.0427.1

RETAINED EARNINGS602.05794.31206.56

DEBTS20.0140

Comments: Amt of equity has been increased on little proportion Company has reduced its debt burden. Reserves has been increased i.e the company is the company is able to pay its debt and the profits of the company are also increased.WORKING CAPITALEvery organization commercial as well as non-commercial requires some amount fixed capital for procurement of fixed asseis viz. 1and and building, plant and machinery, furnitures and fixtures, vehicles etc. In addition to fixed capital an organization requires additional capital for financing day to day activities. Such capital which is required for financing day to day activities is called as working capital. Working capital is required for smooth conduct of business activities. It is the working capital which decides success or failure of an organisation. It is the life blood of an organization. Shortage of working capital has always been the biggest cause of business failure. Lack of considerable foresight in planning working capital needs of the business, has forced even profitable business entities, the so called 'blue-chip' companies, to the brink of insolyency. Working Capital is the warm blood passing through the arteries and veins of the business and sets-it ticking. New firms wind up for want of working capital. Even giants tumble like pack of cards through the drying up of working capital reservoirs. Liquidity and profitability are the two aspects of paramount importance in a business. Liquidity depends on the profitability of business activities and 'profitability .is hard to achieve without sufficient liquid resources. Both these aspects are closely inter related. Control of working capital and forecasting working capital is a continuous process and therefore, part and parcel of the overall management of the business. In this chapter, we shall study the vital aspects such as concepts of working capital s importance in business activities and decision-making process.

DEFINITIONS . Working Capital, like many other financial and accounting terms, has been used different people in different senses. One school of thought believes, as all capital resources available to a business organisation - from shareholders, bondholders, and creditors (secured and unsecured) 'works' .up in the business activities to generate revenues and facilitate future expansion and growth, they are to be considered as 'working capital'. Another school of thought links "working capital" with current assets and current liabilities. According to them; the excess of current assets over current liabilities is to be rightly considered as the 'working capital' of a business organization.Before providing the apt definition of working capital needed for our discussion in, this chapter, let us analyze a few more definitions available on working capital. Hoagland defines working capital as follows 'Working capital is descriptive of that capital which is not fixed. But, the more common use of working capital is to consider it as the difference between the book value of the current assets and the current liabilities." This definition, as we have seen; is acceptable to the accountants. Gerestenberg defines working capital as follows : "Circulating Capital means current assets of a. company that are changed in the ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash". The definition of working capital given by Subbing is more illustrative. He defines working capital as "the amount of funds necessary to cover the cost of operating the enterprise. Working Capital in a going concern is a revolving fund, it consists of cash receipts from sales which are used to cover the cost of current operations". The Accounting Principles Board of the American Institute of Certified Public Accountants define working capital as under : "Working Capital is represented by the excess of current assets over current liable and identify as the relatively liquid portion of the total enterprise capital which constitutes a margin or buffer for maturing obligations within the ordinary operating cycle of the business.WORKING CAPITAL CYCLE Alternatively known as 'Operating Cycle Concept' of working capital. This concept is based on the continuity of flow of funds through business operations. This flow of value is caused by different operational activities during a given period of time. T h e operational activities of an organization may comprise : a) Purchase of raw materials, b) Conversion of raw materials into finished products, c) Sale of finished products and d) realization of accounts receivable. Material cost is partly covered by trade credit from suppliers and successive operational activities also involve cash flow. If the flow continues without any interruption, operational activities of the company will also continue smoothly. Movements of cash through the above processes is called 'circular flow of cash'. The period required to complete this flow is called 'the operating period' or 'the operating cycle.

SUPPLY CHAIN MANAGEMENT OF INDIAN AUTOMOBILE INDUSTRY

CASH MANAGEMENTASPECTS OF CASH MANAGEMENT Cash management has thefollowing aspects 1. Cash Budgeting Cash Budget This represents the cash receipts and cash payments and estimated cash balance for each month of the period for which budget is prepared. Cash budget is a device for controlling and co-coordinating the financial side of a business. Cash budget serves the following purposes : a) To ensure that sufficient cash is available whenever required, b) To point out any possible shortage of cash so that necessary steps can be taken to meet the shortage by making arrangement with the bank for overdraft or loan, c) To point out any surplus cash so that management can invest it in interest fetching securities. Preparation of Cash Budget : Usually the responsibility of preparing the cash budget lies on the Treasurer or other Financial Executive. Cash budget has to be prepared by estimating cash receipts and cash payments. Estimating Cash Receipts : Cash is received on the following accounts : a) Cash Sales, b) Collection from Debtors, c) Interest / Dividends on Investment, d) Sale of Assets etc., e) Loans, Advances, Deposits etc. likely The person who is responsible for the budget has to estimate how the budget period on the above accountsGROWTH DRIVERS Growth in the Road Sector An Enabling Regulatory Environment New Product Launches Easy Financing Schemes Increasing Consumer Demand Cost Competitiveness

The Demand for Indian Automobiles Increasing Globally.

Overall Economic Growth has been sustained.

Taxes & Duties are low.

Per Capita Income increasing.

The Country Working Population is Growing.

Most Indian Auto Players focusing on small cars segment.

Disposable income in Rural Agricultural sector is increasing.

The availability of Low Cost Skilled Manpower widespread.

CURRENT SCENERIO IN AUTOMOBILE INDUSTRY Higher Interest rates slow down the Growth of Auto Industry.

High Input cost (high commodity cost) denting the margins of auto players.

Lower Level Middle Class consumer still preferring Two Wheelers.

Inflation also played major role in slow growth of auto sector.

Higher Petrol price lead to more sales of Diesel & LPG fuel variant Cars.

CAPITAL BUDGETINGMEANING OF CAPITAL BUDGETING Capital budgeting refers to planning the deployment of available capital for the purpose of maximizing the long term profitability of the firm. It is the decision to invest its current funds most efficiently in the long term activities in anticipation of flow of future benefits over a series of years. Capital budgeting is the process to identify, analyze and select investment projects whose returns (cash flows) are expected to extend beyond one year. Investment decisions would include : i) Expansion ii) Acquisition iii) Modernization iv) Replacement of long term assets.Thus, Capital Budgeting decision means a decision relating to planning for Capital Assets as to whether or not money should be invested in long-term projects. e.g. setting up a factory or purchase of a new machine. It involves a financial analysis of the various proposals regarding a capital expenditure and to choose the best out of the various alternatives. .The Capital Budgeting decision therefore, involves a current year outflow or a series of cash outflows over a number of years in return for an anticipated flow of future returns over a period of time longer than one year. There is a relatively long time period between the initial outlay and the anticipated returns.NATURE OF CAPITAL INVESTMENTCapital budgeting decisions include acquisition, replacement, expansion and modernization of assets. Any investment decision with long-term implications can be looked at as a capital expenditure decision. When a pharmaceutical firm decides to invest in R D, a car manufacturer considers investment in a new plant, an airline plans to buy a fleet of aircraft, a hank plans computerization, a firm plans to launch a new product line. They are all capital budgeting decisions. These decisions have the following features: i) Usually involves huge outlays. ii) Decisions are difficult. iii) They have long-term consequences. iv) Growth of an organization depends on the quality of such decisions. v) Higher degree of risk is involved. vi) They benefit future periods. vii) They have the effect of increasing the capacity, efficiency, span of life regarding future benefits. viii) Funds are invested in long term activities.IMPORTANCE1.Affects financial stability : The capital budgeting decision involves acquisition of fixed assets, which are relatively costly, and therefore the decision affects the financial stability and condition of any organization to a greater extent. 2. Shapes destiny of a company : The decision and its correctness shape the destiny of a company's financial health. A wrong decision can endanger the very survival of the organization. 3. Not easily reversible: The decision, once taken is not easily reversible since the fixed asset bought may not. be suitable for any alternative usage. In this case the firm will incur more loss. 4. Difficult to take : This decision is not very easy to make as its benefits accrue only in the future. The future being uncertain, an element of risk is involved. A failure to estimate future cash inflows accurately can lead the entire organization into a financial crunch. Adding to this risk are the possibilities of shifts in consumer preference, technological advancement which cannot be predicted. 5.Maximise returns : Most of the organizations have a limited Capital Budget and a large number of projects compete for these limited funds. The firm must, therefore, ration them in a way to maximize long-term returns. Projects are therefore, to be ranked on the basis of criteria like rate of return, risks involved and the number of years over which its return is expected to accrue. Thus, the decision gathers even more importance in times of Capital Rationing. 6. Risk and uncertainty It involves huge amount of risk and uncertainty due to time factor. The amount of capital expenditure is recoverable over a very long period. 7. Improve profitability Finance is the life blood of an organisation. Most of the firms face difficulties i3 getting adequate finance. Hence, available finance has to be used in such a manner that it will improve profitability of the organisation. 8. Effect on other projects: Long term decisions affect the cash flow of other projects. Hence, the impact or other projects should be considered.Classification of Investment ProposalsMutually Exclusive proposals In the case of mutually exclusive proposals, the selection of one proposal precludes the choice of other proposals. The calculation of cash outflow and inflows are similar to that of replacement situations. These proposals compete with each other. For example, X Ltd is considering the purchase of machine X or machine Y. if the company has decided to purchase machine X, it will exclude the acceptance of machine Independent Investment ProposalsIt includes all such investments which 'are being considered by the management for performance of different types of tasks. Investment in machinery, automobiles, buildings, recreation centre are the examples of independent investment proposals. Acceptance of each of these projects is done on its merits without depending on the other projects. Contingent Investment Proposals There are certain projects which are contingent upon the acceptance of the others. For example, the management of a company may contemplate to build employees quarters and a Consumers Cooperative Stores: If it decides not to construct the quarters, the need of consumers' stores does not arise. If only the quarters are constructed, the employees will have problems in shopping. Such projects are called as Contingent projects. Replacement Proposals The investments which are contemplated for replacing old equipment so that the job can be performed more efficiently are replacements. In the case of replacement of an existing machine by a new one, the relevant cash out flows after tax should be considered. If the new machine is to replace the existing machine, the amount received from the sale proceeds reduces the cash outflow required to purchase the new machine. Calculation of cash outflow in such a case is illustrated as follows.

Modernization Decisions Replacement of a fixed asset due to technological obsolescence is known as modernization decision. The purpose is to improve the efficiency and reduce cost. For example, replacement of a Pentium IV computer by Intel Centrino Duo Computer. Expansion Decisions The existing production capacity is known as expansion decision. The -purpose is to avoid delay in delivery of goods/services to customers and increase revenue. Diversification Decision Commencement of new product/services lines is known as diversification decision. The purpose is to reduce the risk of reduction in revenues of existing products/ services For example : starting an insurance business by L & T Ltd.EVALUATION TECHNIQUES METHODSFollowing are the various methods' and criteria involved in a Capital Budgeting decision. They can be broadly classified into three broad categories :1. Techniques which recognize Payback of Capital employed.2. Techniques which consider Accounting Profit.3. Techniques which consider Time Value of Money.

1.Pay-Back Method (PB) : This is the simplest quantitative method for appraising capital expenditure case is decisions. This method evaluates the number of years it takes for the future cash inflows to pay back the initial cash outflow i.e. the original cost of an investment. It is the time by which the initial investment will be paid by the project. It is the time required for the project to break even. The cash inflows here mean the annual profits after tax but before depreciation. Depreciation is first reduced from the profits given since it is a valid allowable expenditure. This will give us the profit before tax from which the tax liability for the year is deducted to get the Profits Post Tax. However, depreciation does not involve any outflow of cash since it is not to be paid and is only an accounting charge. Therefore, in order to find the actual effective cash inflow it is then added back to the profits post-tax before comparing the same with the initial outflow to take the capital budgeting decision. Cash Flow Estimates : Following are the ingredient of cash flow : 1) Tax effect : Cash flow for capital budgeting has to be net of taxes. Hence, tax effect has to be given special consideration. In cases of loss, they can be carried forward and set off against future income. Hence, the benefit of tax savings will arise in future.2)Effect of depreciation : Depreciation is a non-cost item. It is deductible for determination of taxable income. Depreciation has an effect on taxable income and also the tax liability. Amount, of depreciation in capital budgeting is deducted to calculate profit and it is added back to the profit after tax to calculate cash inflow. For capital budgeting proposal, depreciation is calculated as per Income Tax Act. 3)Effect on other projects : Cash flow effects of the project under consideration must be considered. For example, a company is manufacturing a new product which competes with the existing product, it is likely that the cash flow of the existing product may be affected by the cash flow of the new product. In such a case, the cash flow of the new product should be adjusted. If the cash flow of the existing product is reduced because of new product, the cash flow from the new product should be deducted by the reduction in cash flow of the existing product.. 4) Effect of Working Capital : Working capital is the difference between current assets and current liabilities. When a new project is started, the requirement of cash, inventory and the liabilities of creditors may arise. The increase. in current assets may not match with current liabilities. The increase in working capital is added as an initial cost. Increase in working capital has a positive effect on the future cash inflows. Working capital has to be adjusted in the beginning as cash outflow. 5) Salvage Value : It is the price of an investment realized at the time of it termination. These cash proceeds are treated as cash inflows in the last year. In case of replacement decisions, in addition to the salvage value of the nevi investment, the salvage value of the existing investment now and at the end o its life are also to he considered. 6) Additional capital expenditure : In addition to initial cash outflow in Ion term assets at the start of the project the project, may need additional capital investment. Such additional expenditures are cash outflows taking place is later years. It has to be considered while calculating net cash flow during the life of the project.

1)While calculating Cash Flows depreciation and tax should be ignored in the following cases a) If the tax rate is not given b) If the question says, Ignore tax c) If the company is a zero tax company or it enjoys tax holiday 2. In absence of Information a) Same amount of working capital invested earlier is assumed to have been released in the last year of the life of the projectb) Salvage value estimated earlier is assumed to be realized in the last year of the project. c) The sales assumed to have been realised at the end of respective year d) The fixed cost and variable cost are assumed to have been incurred at the end of the respective year.e) Any saving of tax on negative profit before tax (i.e. loss) should be calculated assuming that the company has taxable income from other sources against which such loss can be set off.If any amount is paid or received at the beginning of any year, then the P.Vfactor of the year of payment/receipt preceding should be used.

Merits : i) This method is quite simple and easy to calculate. It clarifies that there is no profit in any project unless the pay-back period is over as till then, only the cost is recovered. ii) It favors projects with shorter pay-back periods since risks normally stand to he greater in long-term projects as future is uncertain. iii) The method is very useful in situations of Liquidity Crunch and high cost of capital as faster recovery of initial investment is necessary. iv) It is most suitable when the future is uncertain. v) It indicates to the prospective investors when their funds are likely to be repaid. vi) It does not involve assumptions about the future interest rates. Limitations: 1)The method stresses on capital recovery ignoring the overall profitability. It fails to consider the returns which accrue after the Pay-Back period is over. Two projects with equal Pay-Back periods will be given the same rankings although their inflows after the Pay-Back period may be different both in terms of years and quantum. ii) This method ignores the time value of money since the cash inflows are not discounted for the decision making process.

AVERAGE RATE OF RETURN

Internal Rate of Return (IRR) Method : This is the second time-adjusted rate of return method for appraising capital expenditure decisions. It is the discount rate at which the aggregate present value of inflows equal the aggregate present value of outflows i.e. the rate at which NPV = 0. In the Net Present Value Method, the discount rate is normally equal to the cost of capital which is external to the project under consideration.Merits : i) It also considers the time value of money. ii) It considers the cash flows over the entire life of a project. iii) It does not use the cost of capital to determine the present value. It itself provides a rate of return indicative of the profitability of the proposal. iv) It would also lead to a rise in share prices and to maximisation of shareholder's wealth in the same way as Net Present Value Method. Limitations : i) The procedure for its calculation is complicated & at times tedious. ii) Sometimes it leads to multiple rates which further complicate its calculation. iii) In case of more than one project, the project with the maximum IRR may be selected which may not turn out to be one which is the most profitable in the long run. iv) Projects selected on the basis of higher IRR may not be profitable. v) Unless the life of the project can be accurately estimated, assessment of cash flows cannot be done.