financial model (2)

8/22/2019 Financial Model (2)

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PREFACE

Finance is an important to business as blood is to the human body. It is adequate flow of

finance with which business is started and run smoothly in an efficient way. Proper

management of financial resources is of prime importance in any business and financial

analysis leads towards this direction. The present project report shows financial health of JCT

Ltd. (JAGATJIT COTTON TEXTILE). The picture of financial position in the company is

shown. However, the work is subject to time constraints but still it is the analysis of annual

report of company and can supplement the interpretation in having crucial decision in regard

to financial management. As in todays competitive world, it is essential to have a sound

financial position to make a firm capable of facing tough and competitive business

environment.


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EXECUTIVE SUMMARY

Companies strive from day to day to make their business publicly strong, financially strong,

and appeasing and profitable for its shareholders. Shareholders as well as the company's

management use several tools to determine a company's health and direction. These tools

are better known as ratio analysis. Ratios are among the more widely used tools of financial

analysis because they provide clues to and symptoms of underlying conditions. Ratios help

measure a company's liquidity, activity, profitability and leverage. These four measured

sections show how ratio analysis is used in decision-making, how a firm can measure its

financial situation and financial performance, and the strengths and weaknesses of the

company. Although ratios report mostly on past performances, they can be predictive too, and

provide lead indications of potential problem areas.

Research aims to evaluation of ratio analysis in investment decision making, and to know the

financial position of the company. The report aims to provide appropriate information about

the industries and financial position with its ratios analyses technique. In literature review

part where the extract materials from various books, magazines, news papers and internet

resources. Research also consist the research methodology and data analyses and

interpretation.

Figures were obtained from comparative balance sheets and profit and loss statements from

the relevant years as well as additional information that were forwarded by the board. This

information enabled the development of percentage and ratio analysis which was then used to

create the report. The investigation revealed that the company had not improved its position

compared to previous years. The profitability of the company was significantly not better

whilst the liquidity had remained reasonably steady. The solvency of the company had

declined however, which affected the long-term obligations of the business. Overall, the

company is in a not much sounder position.


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There are some suggestions

Company is following very conservative credit policy for its Debtors and there is needto increase the credit period for its debtors in order to increase its Sales and Profits.

The companys fixed assets are continuously declining. There is a need to increase thefixed assets by raising low cost Outsiders Funds.

The company is paying large amount on Non Operating Expenses due to which thecompanys overall profitability position is not good. The company should have to

control its interest and financial charges in order to bring down the Non Operating

Expenses.


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CHAPTER-1

AN INTRODUCTION TO THE THAPAR GROUP

Where growth is not only an obsession

So long as we have confidence in the value of the goal and excitement at the

prospect of setting forth in to unfamil iar terr itory and the wil l to do new

things, I have no doubt that the future of I ndia and the future of I ndian

enterprise are both safe and glorious.

Lala Karam Chand Thapar (19001962)

Founder of the Thapar Group


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A visionary who wanted to lay the foundation of an enterprise that would help India through

her formative years, founded the Thapar Group in the early 1920s. As pioneers they are the

fourth largest industrial conglomerate in the country, with over 54 different companies and 80

manufacturing plants. Assets have accumulated over Rs. 24000 million with an annual

turnover of about $2 billion. The group grows annually at the rate of over 19%. The group

has diversified industrial interests that include paper, Chemicals, Textiles, Manmade Fibers,

Glass, Electronics, Heavy Engineering, Diesel Engines, Power Equipment, Motor and Pump

sets, Gensets, transmission and Distribution Equipments etc. Beyond this, the Thapar Group

manufactures equipment for industries related to Aviation, Mining, Marine, Metallurgy, Oil

exploration, Shipping, and Mechanical handling. Industrial products like Electronic Process

Instrumentation Boilers and Furnaces, Steam and Energy Control Equipment are also the part

of Thapar Groups activities. Software Growth is another area that Thapar Group has

explored.

Flagship that represents the Thapar Group:

Ballarpur Industries Ltd. JCT Ltd. Compton Greaves Ltd. Greaves Cotton and Company Ltd.

The companies have gone beyond their initial industrial interest and pioneered a wide range

of products and services through their subsidiaries. The Thapar Groups spectacular growth

in a span of over 80 years is a result of two factors:

A clear philosophy that governs the mission of business across all levels of hierarchyand the openness of mind to share global technologies with those who are willing and

brave.

The Thapar Groups manufacturing values ensure associations only with the worldsbest and most capable corporations.

The group owes its success to a well known attitude of doing business globally and

nationally, an attitude that involves lighting changes, both in terms of technology,


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infrastructure, and ability to adopt the changing scenario at home and abroad, and a warm

management philosophy that always puts people first.


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JCT LIMITED AN OVERVIEW

In the field of cotton and blended fabric, JCT has always been a trendsetter. It is one of the

leading manufacturers and exports of cotton textiles in the country.

JCT limited Phagwara; a composite unit having spinning, weaving, and processing facilities

is a blue chip company of the Thapar Group and was incorporated on 28th October, 1946

under the name of M/S Jagatjit Cotton Textile by the government of India under the post war

development plan. It was decided to locate the mill in the north India and after much

discussion; Kapurthala was selected as a site for textile venture. It was M/S karamchand

Bros. Ltd. who entered into a final contract with the government of India to set a mill at

Phagwara (Punjab). The disadvantage of unfavorable weather was offset by other factors

such as cheap labor, availability of raw material, and governments aid. Thus, the company

came into existence in 1946.

In the initial years, the business was on a small scale and the company was manufacturing

only cotton fabrics. That is why it is called JAGATJIT COTTON TEXTILE Ltd.

Afterwards the company also started manufacturing cotton yarn, and nylon t filament yarn.

JCT has made a big dent in synthetic markets by producing plain and fancy suiting; bothpiece dyed and fiber dyed and dyed yarn shirting in innumerable designs and weaves to cater

the different segments of the market. The policy of management to reinvest its profits year

after led the mill to grow rapidly into one of the leading textiles mill in the country. In 1995,

Rs. 300 Crores was invested for the modernization of the Phagwara unit. This unit is now one

of the most modern units with the state of art technology.

The management for over three decades has implemented the concept of participative

management. The workers/employees and their representatives are fully involved in the

management and running the affairs of the company. This policy of management has

generated tremendous goodwill for the company amongst its employees and the result is that

the company has a committed workforce of about 5000 workers and 530 employees and the

most cordial employee-employer relationship. As this is the era of cutthroat competition, JCT

believes in quality, which results in leadership, and as result, this has led them to tremendous

growth. JCT fabrics have captured profitable sections in the market. There has been a


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constant growth in the man-made fiber with a wide variety of nylon and polyester filament

yarn.

LOCATION OF JCT

The mill is situated in Phagwara town on G.T. Road, the national highway number -1. It is 40

Kilometers from Ludhiana towards Amritsar. The location of the mill is of great advantage as

transportation of goods is cheaper, easier and quick.

JCT PHAGWARA COMPLEX

The complex consists of a mill and the Thapar colony. In the mill, there is a main production

unit, administration offices, go downs, stores, canteen, dispensary and the turbines for the

generation of electricity. The residential complex known as Thapar Colony is for the officers

and other employees. It includes gymnasium club and a lake for boating. The whole complex

thus, is like a small town in itself.


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J.C.T.FACTUALS

Established in : 1946 Operation of production : 1951 In 1950s Installed Capacity

Spindle : 17856 Looms : 390

Present Installed Capacity Spindles : 63244 Open End Rotors : 1488 Looms : 450 Conventional

171 Sulzer

28 Air-Jet

Annual Turnover (in Rs. Corers) : Exceeding Rs.300 Manpower : Workers 4500(app.)

(Engagement)

Staff 550 (app.)

Regd.Office : Village ChohalDistrict. Hoshiarpur

46001 (Punjab)

Corporate Office : Thapar House124, Janpath New Delhi-110001


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BOARD OF DIRECTORS

MR.APAR SINGH

DUGGAL

MR.MAHESH SAHAI

MR. GORDHAN

KATHURIA

MR. SAMIR THAPAR

MR.SATYA PALNARANG

MR.VIPUL SINGLE


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OBJECTIVES OF THE GROUP

To consolidate and develop core business areas mainly: synthetic and textiles. To attain the position amongst the leading composite textiles mills in India and to

retain its position among the top companies in the synthetic fiber industry.

To expand and diversify into allied product areas and simultaneously increase globalpresence & develop international together with domestic market to achieve rapid

growth.

To evolve into a quality conscious, customer oriented and fast expandingorganization.

CORPORATE PHILOSOPHY

JCT believes in dignity of human beings. JCT believes that there exists a psychological contract between the organization

and the employees and growth of both is interlinked. JCT strive to attract, develop and retain the best talent available. JCT doesnt believe in any discrimination on the basis of caste, creed, religion,

gender.

JCT believes in the concept of right person at the right job. JCT values merit and recognizes ability. JCT encourages teamwork and believes that this enhances problem solving

capabilities. JCT actively promotes sports and other cultural activities for cohesiveness and

harmony.

JCT knows that is the part of the changing environment and that it has to be proactive to such

changes. JCT continuously strives to be a better corporate citizen.


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HISTORY OF THE JCT

Year Events 1946 The Company was incorporated on 28

th

October in Kapurthala.The main object of the company is to manufacture cotton textile goods. The products

manufactured are sheetings, shirting, cambric, dhotis, sarees, coating, mazril, mulls, etc.

Counts ranging from 12s to 60s are spun and the cloth width varies from 27 inches to 66

inches.

1950 430 preference & 30,910 Number of equity shares allotted. 1815 prefence &

36135 shares forfeited.

1962 The Company acquired Benares Cotton and Silk Mills.- 4,16,364 number of

rights of equity shares issued (prem. Rs 5, prop. of 1:1)

1963 Preference shares entitled to gross dividend of 6.5% P.A

1967 4,16,275 No. of equity shares issued in prop. 1:2

1973 The Company entered in to a collaboration agreement with Thonburi Textile Mills, ltd.,

Bangkok whereby the Company was to render technical Knowhow for modernizing the

existing weaving and processing facility besides its expansion by 21,600 spindles. This

agreement was slightly revised during 1978-79.

1975 25,000 11% pref. shares issued.

1978 Shree Sadul textile, ltd. was merged with the Company on 28 th October and the

merger was effected from 1st February 1977.

-Taplon Synthetics Ltd. was amalgamated with the company with effect from 1st

Feb. 1979. As per the scheme of amalgamation, 2, 02,535.Number of Equity

Shares of the company were allotted to the members of Taplon synthetics Ltd. after

Cancelling 28,200 No. of equity shares held by the company as investment in Taplon

Synthetics Ltd.

-2,38,108 No. of Equity Shares and 24,839 pref. shares allotted to members of

Shree Sadul Textiles Ltd. upon its merger with the company.

1979 With effect from 1st February, Taplon synthetics Ltd was merged with the

Company

-7, 64,117 bonus Equity shares issued in proportion of 1:2 2,760 bonus equity shares

remained to be allotted to non-resident shareholder.


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1980- 2277026 rights equity shares issued at par in prop. 1:1, 319 bonus shares

allotted to non residents (244) bonus shares remain to be allotted. 202535 No. of Equity

Shares issued to members of Taplon Synthetics upon its merger.

1981 - The Company received a letter of intent from the Punjab State Industrial Development

Corporation to participate in a 15,000 tonnes per annum, polyester staple fibre project to be

set up at Hoshiarpur in the Company's nylon plant premises.

-A technical collaboration agreement was entered into with E.I. Dupont, De Nemours of

USA. A new Company under the name and style of Punjab Polyfibres, Ltd. was incorporated

to implement this project.

-A letter of intent was received to increase the capacity from 15,000 tonnes to 30,000 tonnes

per annum.

-The Company entered into a management & Technical Know-how Assistance Agreement

with Chempaka Negri Lakshmi Textile SND, BHD at Malaysia

1983- 100000 13.5% pref. shares were issued. Rate of dividend on these pref. shares was

increases to15% from 16th may 1984.These pref. shares are redeemable during 30 th

April1996-99

1986 - To improve the profitability of the Hoshiarpur unit, the Company took steps to convert

a substantial part of its production capacity for the manufacture of polyester filament yarn.

-A letter of intent was received for the manufacture of 15,000 TPA of polyester filament

yarn.

-At Sriganganagar unit operations were adversely affected due to workers strike for 3 months

during October to December.

1987 - The Company offered 7,58,334-12.5% partly convertible secured redeemable

debentures (E-Series) of Rs.120 each for cash at par on rights basis in the ratio of 1

debentures were allotted to retain over-subscription.

1988 - The Company took up implementations of the PFY project in stages. It was planned

to add one spinning line to produce specialty yarn, in the first stage.

- A dyeing plant was installed at Hoshiarpur, to increase the production of dyed yarn. In

addition, a waste recycling plant was installed to increase the recovery of caprolactum from

waste. In April, the name of the Company was changed from `Jagatjit Cotton Textile Mills,

Ltd.' to JCT, Ltd.


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1990 - With effect from 1st April the undertakings of Kidarnath Kishanchand Pvt. Ltd.,

(KKPL) and Sterling Steels & Wires, Ltd. (SSWL) were amalgamated with the Company.

As per the scheme of amalgamation the following shares were allotted without payment in

cash.

1991 - The profitability was adversely affected by various factors such as increase in interest

rates, devaluation, and partial convertibility of Rupee etc.

-The performance of the nylon and polyester filament yarn division was affected due to steep

increase in excise duty, poor off take of textile material, increase in the cost of the basic raw

material viz., caprolactum and import curbs.

-Also the textile division was affected by the general recession in the textile market and

unprecedented rise in cotton prices.

1992- The Company offered 9723759 No. of equity shares of Rs. 10 each at a premium of

Rs.40 per Shares.

-During October-November the Company offered 36637091. No. of equity shares of Rs.10

each for cash at premium of Rs.40 per shares on rights basis in the prop. 1:1 (all were taken

up).

1993 - With a view to consolidating its position in the synthetic fiber industry, the Company

undertook to set up a grass-root polyester simplex with facilities to manufacture polyester

staple fiber, textile grade chips, PET resins up to 11,000 TPA all in the first phase.

-With the rise in prices of cotton, it was proposed to shift production towards polyester

blended fabrics. New varieties of cloth with high value addition were introduced.

-The Textile division embarked upon a plan of modernization wherein older equipments were

to be replaced with modern and efficient equipment.

-Both 20000-5% and 24869-5% (income tax free) cumulative preference shares were

redeemed.

1994 - The steel division entered into a tie up with a Korean Company for manufacture of

wire ropes.

-JCT Fibers Ltd., was merged with the Company. It was proposed to increase the polymer

capacity to 65,000 TPA from 33,000 TPA. The said additional polymer was to be processed

partly on polyester filament yarn and partly on polyester staple fibers.

-The Company also undertook to invest in downstream equipment to manufacture additional

polyester filament yarn and additional polyester staple fiber.


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-Under a modernization/replacement programmer, the Company proposed to install 48 high

speed sophisticated looms and open end spinning machines at Phagwara.

2001 - The Company has decided hive-of its synthetic fiber division in Punjab and has also

proposed to restructure its equity capital by reducing the face value of its shares from Rs 10

to Rs.2.50

-MM Thapar group flagship JCT has decided to induct three new professionals on the board.

The new inductees are Raj Mohan Singh, head of the company's Phagwara unit, finance head;

T N Subramanian and; S P Narang, secretary, The Institute of Company Secretaries of India .

2003 -JCT Members approve delisting from 3 exchanges (Ludhiana, Delhi and Kolkata)

2004- JCT buys Senegal mill. JCT Limited, a pioneer in textiles in north India, is all set to

spread its operations overseas. Through its subsidiary, CNLT Malaysia, JCT has acquired a

composite textile mill in Senegal on a long-term lease

2005- JCT gets UN nod for carbon trading. Textile major JCT's rice husk-based power

project at its plant in Phagwara, Punjab, has been registered with the UN panel for clean

development mechanism (CDM) projects. CDM projects are those that qualify to trade

carbon credits.

2007- JCT signs MOU with Dakshidin Corporation to produce water pumping & power

generation Wind Mills, Dakshidin Signs MOU With Indian Conglomerate, JCT Limited,

Enters Multi-Billion Dollar Indian Market.

CORPORATE PROFILE OF JCT LTD.

JCT Limited, the flagship company of the Thapar Group, has been a fore-runner in the field

of Textiles ever since its inception in 1951. The Group has combined turnover of US $2

Billion in the year 2004-05. The groups constant endeavor has been to upgrade

manufacturing processes and capacity to world standards, which has resulted in

collaborations with some of biggest multinational corporations like TEIJIN SEKIE from

Japan, NOY-VALLESINA, Zimmer AG, Hitachi Ltd., Corning, Mitsubishi Corporation,

General Electrical, Westing house and David Brown.

JCT Limited, under the leadership of Mr. M Thapar (Chairman) and Mr. Samir Thapar (Vice

Chairman) is premier Indian Cotton Textiles and Nylon Filament Yarn manufacturer having

manufacturing facilities in Northern India. JCT Limited is well renowned brand name in


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Cotton Textiles and Synthetic yarn communities in India and abroad. For their regular and

consistent exports Govt. of India has awarded Export house status to the company for past

10years on regular basis.

JCT belongs to THAPAR GROUP, one of the most reputed business groups in India. The

Thapar group of companies was founded in early 1920s by Late Lala Karam Chand Thapar,

which grew in size and scale to become the fourth largest conglomerate in the country during

early 1990s with over 40 companies and 75 manufacturing plants. JCT Limited is an India-

based company. The Company operates in two business segments: Textiles and Filament.

JCT is a leading name in the domestic and overseas textile markets

with operations in two distinct business viz. cotton/blended textiles and nylon filament yarn.

It ploughs on proudly as a multi-market company that is driven and fueled by culture and

values that demand a high standard of performance and work ethics to establish itself as

makers of finest products in the country. JCT Limited follows a balanced model for growth

corporate responsibility and contribution towards social causes such as literacy and

environment, sports and sportspersons development areas important as innovations in

production techniques.

Domestic Market: The Company is a leader in Domestic segment and derives premium

on its products. We are the first one to introduce Micro Denier Products in collaboration with

Val Lesina- Italy. The group owes its success to a well known attitude of doing business,

globally and nationally. An attitude that involves effecting lightning changes, both in terms of

technologies and infrastructure and the ability to adapt to changing scenarios at home and

abroad. Company has strong hold and efficient distribution across India and abroad.


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International Market: The courage to look beyond national fences has today made

filament division as leading exporter of value added product Nylon Filament Yarns from

India. Today JCT has many Global Customers, satisfied with their product and service, few

of their regular international markets are:


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SWOT ANALYSIS OF JCT Ltd.

Strengths

Expertise in design & colours of woven clothes. Cheap labour. Easy availability of raw material. Good name in the market. At present JCT is market leader in cotton clothes. JCT is continuously trying for diversification. Good network and extensive use of computers. There are no major strikes and problem since 1969. Workers and managers are cost conscious.

Weaknesses

Not competitive on quality. Outdated machinery. Inadequate market information to both employee and employer. Large number of uneducated and unmotivated employees. No separate training department is there. Unaccustomed to produce high fashion and considerable volumes. Working system lacks network. Till the last year JCT did not have any customers service department. Overheads are very high.


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Opportunities

Good on basis to have the best quality in India Market. Trying to discover the new markets. The market is open for export and JCT should focus on it. The company should make an attempt to improve the distributors chain, increase

number of dealers and retail shops in urban areas.

The company should go to the users through exclusive showrooms. Techniques being used in the modern firm for better utilizations of present resource. Step into readymade market for its growth.

Threats

Competition with volume markets like China, Indonesia, and Bangladesh etc. Labour advantage lost as developed nations introduce new technology. Growth of discount and range market case for price competitiveness and volumes. New bloods/ competent are not ready to join the company.


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PRODUCT OVERVIEW

JCT ltd has product range of material including 100% cotton, 100% polyester, 100% nylon as

well as various blends like cotton/polyester, cotton/nylon and polyester/viscose, single and

piled yarns (both with counts and ranging from 6s to 100s) as well as cotton lycra and P/C

lycra stretch material (which is dupont USA approved). Depending upon the requirement,

even bamboo and linen fibers are used to create special effects.

The company pioneered the manufacture of organic cotton, a special eco-friendly type of

fabric that is available in up to 160cm of sheet width. This organic cotton is grown on land

free of any harmful chemicals, insecticides etc.and is regularly exported to USA. JCT ltd is

certified with ISO 9001, Oeko-tex 100 class 2 and GOTS/skal certificates for fabrics of this

nature, namely wide width sheeting, dyed bottom-weight twills, dyed shirting twills, natural

twills, canvas and flannels.

The companys strength lies is in the bottom weights and piece dyed shirting for both fash ion

and work wear in all age groups. They use a variety of weaves like twills, plains, dobbies,

ripstops, cords, satins, oxfords, ducks, drills, tussores, ottomans etc. End product includes

fashion wear, sportswear, outerwear, active wear for defence purposes and school uniform.

The organic cotton fabric meanwhile is used for everything from infants wear to technical

segments like medical wear.

Material: 100% Cotton, 100% Polyester, 100% Nylon Various blends of Cotton/Polyesterand Cotton/NylonBlends of Polyester/ Viscose, Cotton with Lycra, Poly Cotton with Lycra.

100% Bamboo, Bamboo Cotton blends, Cotton Linen blends.

Yarns: Count ranging from 6s to 100s, in single as well as plied yarns, Core Spun Lycra and

slub yarns

Weaves: Variety of weaves like Twills, Plains, Dobbies, Ripstops, Cords, Satins, Oxfords,

Ducks, Drills, Tussores, Ottomans etc.

Weight: Cotton and Polycotton 90 GSM to 450GSM

Polyester and Nylon: 60 GSM to 250 GSM


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Finishes And Coating: Micro sanding, soft finish, peach finish, Calendaring.

Water and oil repellant, Teflon, Nano, Wrinkle free/ easy care

Fire retardant, Inspect repellant, UV resistant, Anti microbial.

Stiff finish, Highly breathable, Moisture Management, Rot proof, etc.

PU coating, acrylic coating, Water repellent, fire retardant, breathable coating, Silver and

Gold coating, PVC Coating & various other effects.

Prints And Yarn Dyes: Variety of designer prints for body fabrics and linings

(Camouflages,floral, blotches, etc.)

Designer yarn Dyes for Bottom weights and shirting.

Organic Cotton: JCT is pioneer in manufacturing organic cotton fabrics in India - specially

designed eco-friendly fabrics.


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RESOURCES

Plant Overview

JCT Limited commenced its textile operations in 1946. The Phagwara unit of JCT Limited is

a composite textile unit having Spinning, Weaving Processing facilities. Today JCT Limited

is an ISO 9001:2000 certified company and has secured GOTS Certificate for Organic

Processing. It is also one of the few globally recognized OEKO TEX-100 certified companies

of Class-II category.

The company produces fine and superfine cotton fabrics. The synthetic fabric range includes

plain superfine suiting, shirting and dress materials in myriad designs and weaves. In

addition, JCT also markets a delightfully warm range of up-market shirting and uniformsmaterial in various textures, hues and designs.

The fashion climate in the world is changing constantly. A company in the business of

manufacturing fashion fabric needs to react with lightening speed to effect process changes.

JCT Limiteds flamboyant innovativeness in styling and design satisfies the hunger of the

fashion conscious. The company has a dedicated R&D setup that keeps looking for

significant improvements in spinning, weaving and processing techniques - an exercise

crucial to design breakthroughs. Elaborate computerized testing facilities are in place to

monitor quality right from the fibre stage; HVI fibre testing along with various other

equipment monitor physical and chemical characteristics of textiles. Uster classimat,

Evenness Tester from `Uster of Switzerland and Computerized Colour Matching Machines

further ensure 100% quality assurance to buyers around the World.


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Machine and Plant Capacity

The main features of the processing section are 3 Continuous Dyeing Ranges from Monforts,

Germany and Benninger, Switzerland, 2 Continuous Bleaching Ranges and Mercersing

machines from Benninger. The present capacity of the plant is 130000 mtrs per day, which

includes 10000 mtrs of yarn dyed fabrics. All the fabrics can be dyed and finished in various

kinds like peach finish, Anti crease or wrinkle free, water repellent, Fire Retardant and

various coatings to add value to the finished product. The unit has full-fledged laboratory to

perform tests, computerized and modern colour matching facilities to ensure that fabric

complies international standards. Printing machine from Stovec is another feature of

processing section.

Weaving section has 283 looms in mix of Sulzer Projectile, Airjet , rapier looms. It has

capability to produce 100% cotton, and poly cotton blended fabrics in large variety of

weights, weaves and counts. These machines are Sulzer and Picanol and well supported with

preparatory machines from Benninger, Switzerland.

The unit is having 3 spinning sections - Open End Spinning, Cotton Ring Spinning and

Blended Ring Spinning. All machines equipped with new technology from the companies,

like Zinser, Trutzschler, Trumac, LMW, Erfangi, Crossrol & Vouk. Company has about

54000 Ring Spindles and 1488 Rotors in its spinning section.

JCT has captive power plants of 5.5 MW and 8MW, which is based on biomass fuels like,

rice husk. These plants are well equipped with state of the art pollution control devices.


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JCT New Plant

Going ahead, JCT has set up a new plant to produce Nylon/Polyester Filament basedPerformance Fabrics. JCTs new plant has production capacity of 50000 mtr per day inspecial performance synthetic fabrics. There is a huge market for this kind of fabric in

various segments. Various International Brands, with their source basis in India, import over100 million meters of this kind of fabric from Far east Countries to convert into various typesof garments for Sportswear, Workwear, Outerwear and Defence purposes.

The JCTs new plant is the first of its type in whole of South Asia. The production from thisplant fills in the gap in the supply chain. With most brands strengthening their sourcing basefor garmenting out of India, procurement of this fabric from Far East was a nightmare inlogistics. With increasing demand on shortening the supply chain, the availability of suchfabrics in India will save 20 to 25 days for sourcing such garments out of India. The planthas capabilities to produce different functional finishes and special coating effects.

The plant is equipped with state-of-the-art technology with water jet weaving machines fromTsudakoma, Japan. Processing machinery from Il Sung and other suppliers from Korea &

Taiwan.


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Bankers

BANKERSOF JCT

ALLAHABADBANK

PUNJABNATIONAL

BANK

PUNJAB &SIND BANK

STATE BANK

OF INDIA

STATE BANKOF

PATIYALA

STATE BANKOF

TRAVANCORE


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MAJOR DEPARTMENT OF JCT LIMITED

In todays competitive world, the process of production is very important but the stand of the

company becomes strong and sound if it moves towards productivity. This increase in

productivity has to be achieved without sacrificing the quality of the end product. To meet the

required objectives, the mill is divided into three main functions contributing equally to the

effective and efficient working of the mill. These three major function are subdivided into

departments and further into sections these three functions are as follows:

A) Production FunctionB)Non Production FunctionC)

Service Function

A)Production Function comprises of the following departments:

1) Spinning

A) Cotton SpinningB) Synthetic SpinningC) Spinning Auto-Coro/ Open End SpinningD) Spinning MaintenanceE) Post Spinning

2)Weaving

A) Weaving Property ConventionalB) Weaving ConventionalC) Weaving Preparatory SulzerD) Weaving Sulzer

3)Processing

A) Synthetic ProcessingB) Cotton ProcessingC) FinishingD) Printing


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B)Non Production Function comprise of the following departments:

1)Warehouse

A) MendingB)

Grey Folding

C) Cotton WarehouseD) Synthetic WarehouseE) Exports Warehouse

2)Marketing

A) Domestic MarketingB) RMG MarketingC) Exports

3) Raw Material Department4) Fabric Development Department5) Production Planning Department6) Research and Development7) ISO Department

C)Service Function comprises of the following Department:

A) Human Resource DepartmentB) Finance and Accounts DepartmentC) Information Technology DepartmentD) Administration DepartmentE) Purchase DepartmentF) Engineering DepartmentG) Labour & Industrial Relation Department


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PRODUCTION DEPARTMENT

A)Spinning

1. Cotton Spinning

Synthetic Spinning

This department also produces yarn but uses the blend of Polyester and Cotton

(PC) or Polyester and Viscose (PV). The process of synthetic spinning differs as

per the PC and PV blends.

2. Spinning Autoconer/ Open end spinning

The spinning autocoro section works under the open end technology. The section

gives many advantages over the conventional spinning process.

3. Spinning Maintenance

This department is responsible for the preventive maintenance of all the three

spinning sections. This section deals with many cases like replacement of broken

machinery parts and cleaning of the machines. This section plays a major role in

the working of the spinning machinery.

4. Post Spinning

This section comes after the final spinning in the ring frame section. The main

objectives of the section are:

To make bigger packages of yarn so that the efficiency of the windingmachine can be increased.

To clear the yarn from the thin and thick places (correcting the faults). It isessential to impact proper tension to the yarn so as to reduce snarls and

hence breakages in the future process.

Different machines used in the process are:

Cone winding Cheese winding Ring doubling machine TFO Autoconer


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B)WEAVING

1. Weaving Preparatory

The main objectives of this section are:

To prepare the sheet of warp yarns (warping) as per the designs and thepercentage of colors threads used. To prepare the packages for weft yarn. To seize the yarn so that the thread can withstand strains in the weaving

process (sizing).

Drawing in / Tying in.

2. Weaving Conventional

This section provides gray fabric based on weaving machines used for fabric

manufacturing.

3. Weaving Sulzer

As the mass of the shutte (weft carrying package in conventional weaving) is very

high, so the acceleration or the acceleration of the shuttle is very less. So we can

increase the production by using lightweight weft carrier. Sulzer technique is

based upon this principle and is widely used in JCT.

4. Weaving Air jet

C)PROCESSING

Process house

The department comes into action when fabric from the weaving section is

obtained in the grey stage. Different chemical treatments are given to the fabric so

as to improve its appearance and properties. This section is divided in three main

units:

Benninger Plant Cotton Processing Synthetic Processing


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NON PRODUCTION DEPARTMENTS

Non Production Departments comprises of the following:

A) Warehouse

It is a department where the final product is brought and is prepared for dispatch.

Grey cloths come to Ware House direct from loom. Following Process / Activity is

being operated in this section:

1. Mending : This process is used to find defects in the cloth under lights.2. Inspection : An inspection machine is used to check the fault.3. Planting : Planting machine is used to measure the cloth.4.

Grading : Processed cloth is graded on the basis of quality.

There are certain faults and damages, which are left in the cloth even if the cloth is

processed carefully. Following are the types of damages possible:-

Crack Patties Double picks Lashing Floats Shuttle floats Designing cuts Swai Phutki Draw picks Missing ends Reed marks Stain Salvage Torn

Packing is done on the basis of following standards:

Suiting:-

1. Plain Suiting 200 meters one bale2. Fancy Suiting 120 meters one bale3. Matty 150-160 meters one bale

Shirting:-

1. Plain Suiting 200 meters one bale2.

Fancy Suiting 200 meters one bale

3. Rubia 400-500 meters one bale


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That part of the cloth which is not included in the bales or the rejected parts of cloth

are future divided into chindies, fents and rags depending on their lengths

Warehouse Cotton

Warehouse Synthetic Warehouse Grey Export

B) MARKETING DEPARTMENT

After the manufacturing process is over, it is the duty of the marketing department to sell

these manufactured goods to the retailers and wholesalers at profitable rates. The

marketing department has three sections:

Domestic Marketing

JCT is largest supplier of fabrics for ministry of defense and has been areliable supplier for past 25 years.

JCT has a strong presence in school uniforms and institutional suiting andshirting.

JCT has the largest dealer and distribution network.RMG Marketing

Fabric supply to garment exporters in India.

Most of the business is nominated and is routed through buying houses. Major buying houses are Gap, Triburg, Impulse, Nike, etc which India Offices

are for retail chains across the world.

Buying House acts as a monitor. It approves the quality, finalises the deliveryschedule with mills and assigns the garmenting responsibility to a garmenter

which ships the garments to the respective destinations.

Exports

Directly sending the fabric to overseas markets. 1/3th of the production is exported to Europe, USA, S.Africa, Middle-East,

Far-East, Australia and Latin America.

Different market has different dynamics. Some markets like Nepal, Srilanka,Bangladesh, etc are thriving purely because of Quotas.

JCT works with overseas agents on commission basis. Catering to following countries- USA, Italy, Spain, Holland, Czech Republic,

Greece, Portugal, Germany, France, Singapore, Mauritius, South Africa,

Kenya, Bangladesh, Nepal, Australia, Madagascar, Egypt, UAE, Turkey,

Kuwait, Baharain etc.


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Type of buyers-Buying houses, readymade garment manufacturer, Stockiest,Traders etc.

Exports turn over-1 million meters per month. Type of fabric-dyed, bladched, grege, now more orientation towards dyed. Whole world distributed in five zones. Total 8 per son in marketing. 6 per son in pre & post shipping. 80% business through L/c, balance on advance payment or on CAD basis.

C) RAW MATERIAL DEPARTMENTThe major function of this department is to check the desire amount of raw material in the

stores and to meet the demands of the production department. In JCT the following raw

material is purchased:

i). Cotton Bales ii). Organic Cotton

iii). Polyester Fiber iv). Viscose

v). Cotton Yarn vi). Polyester Viscose Yarn

vii). Polyester Filament Yarn viii). Grey Fabric

List of the sources of raw material:

Cotton bales are purchased from Madhya Pradesh, Maharashtra, Gujarat,Rajasthan and Punjab.

DCH-32 Type cotton is purchased from Madhya Pradesh. LRA super, NHH-44, MECH-1, DHY are purchased from Maharashtra. V-797, J-34 are purchased from Rajasthan.

D) FABRIC DEVELOPMENT

To grow effectively in the industry, development is very necessary. Changes in the

ongoing processes are made to create an improvement in the design and the quality of the

fabric. Fabric development department is working in this direction. It is directly related

with the marketing department and also to the whole mill directly or indirectly. As per the

requirement of the marketing department, the desired design and the quality of the fabric

is developed. The whole process is carried on with the help of computers.

E) PRODUCTION PLANNING

This department acts as a conduct between the marketing department and the production

department. The main objectives of the planning department are:


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Checking the feasibility of the order and the specifications placed by thecustomer.

To plan the entire production process to meet a particular order in the set timelimit.

To give data specification to the fabric development department. To ensure that the fabric so produced confirms the specifications of the order and

the marketing department.

Coordinating all the departments to ensure smooth functioning. All changes in the production are made with the consent of the planning

department.

Thus, this department focuses on the utilization of the full capacity of all the productionunits. It works for the proper management.

F) RESEARCH AND DEPARTMENT

The main objective of this department is inspecting and testing. It insures quality from

input to finished product. Following are the machines which are used in this department.

a) Shirley Trash Analyzers: This machine is used to test raw material and tocompare with norms.

b) Projection Microscope: This machine is used to identify manmade fibers as wellas cotton fibers.

c) Uster Evenness Test: This is used to check mass per units length of silver.d) Black Model: This is an old method of testing uster evenness.e) Fiber Bundle Strength Tester: This is meant for testing the strength of fibers.f) Comp sorter Balance: This machine is used to measure counts.g) Winding Machine: This machine is used to sense the faults.h) Fabric Yarn tester: This is used to test the strength of fabric.i) Conditioning Chamber: This chamber helps to condition the material.

G) ISO CELL

This is the cell for the International Standards Organization. The scope of this department

is Department; Production & Marketing of Cotton & Blended Yarns & Fabric for apparel

uses. This is basically a quality management system. The British standards Institution


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(BSI) gives the ISO standards and certification. JCT at present is an ISO- 9001:2000

certified company. This certification relates to the following:

Development

Production Servicing

The BSI gives the certification after a through audit and followed by half yearly

sevilience Audit. An internal audit is carried at an interval of 6 months. The external audit

includes the following:

Observation Non conformity Suggestion for further improvement

The internal audit is done by a team of 16 members (one from each department). JCT

limited it yet to go for the ISO-14001 & 18001 Certification.

SERVICE DEPARTMENTS

A) Engineering Department

The main purpose of this department is to repair the damaged machine parts and to

manufacture the new parts so that the time can be saved, rather than getting it repaired

from the outside sources. This department has six sections:

Workshop Utility Power House Electronics & Electrical Civil & Constructions Effluents Treatment Plant

B) Human Resource DepartmentIt is that branch of management that deals efficiently with the proper utilization of human

resources and to get the maximum output. The major focus areas include

Man Power Planning Recruitment and Training TQM-Quality Circle, Kaizen & Cross Functional Teams Employee Performance Employee Welfare Personal Records


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It also takes care of discipline matters, personnel information system etc. It also provides

strategic and logistic support to the industrial relation matters of the company.

C) Information Technology Department

This is one of the services Department of the Company. It Interacts with all the other

departments of the company and is responsible for the smooth flow of the information

from various department to management helping them in prompt & appropriate decision.

The main objectives of this department are:-

To develop software for various reports as per the need of different departments. To maintain the efficient working of the various modules of Ramco Applications

& in house Developed Software.

To maintain the security of data and different reports in the company. To provide online information to different departments for they are efficient

working.

To develop new software and reports for various departments for the smooth flowof information.

To provide & maintain the network as well as the Computer hardwares of thecompany.

D) Finance and Accounts Department

Finance department is one of the important sections of the company. The main idea

behind maintaining the records is to judge the accurate position of the company regarding

the profits made or the losses incurred by the company. The objectives of the finance

department are:

To ascertain the results of the business activities carried on during the year. To show the financial position of the business as on a particular date. To meet the requirements of the taxation authorities, investors, management and

owners.This department is divided into following section:

1) Raw Material Section2) Store Section

Stores Accounting Insurance C Form and D Form

3) Establishment Section Salary

Wages LTA


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Medical Allowances Bonus

4) General Account Furniture Maintenance

Other Expenses Refreshment Expenses

5) Bank (Finance)6) Debtors Account

Direct Through Banks

7) Assets and Depreciation Accounts Original Cost Depreciation WDV

8) Costing Pre-Production Costing Routine Costing Productions Returns

9) Budgeting Budgets are prepared monthly, quarterly and yearly as per the requirement.

E) Purchase Department

All the purchases made by the mill are made through this department (except the raw

materials). This department manages the purchase of the following items:

New Machinery Dyes and Chemicals Packing Materials Capital Goods Spare parts for all machines

F) Administration DepartmentThe administration department ensures Office Establishment, Dispatch, Transportation,

Records Leave & Insurance of the company. The main objectives of this department are:

Office Establishment Transportation Records Leave Insurance


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G)Factory Department

The factory department ensures safety, security and welfare of the workers of the

company. The main objectives of this department are: To ensure safety and security of the staff and workers. Disciplinary actions in regard to workers. Recruitments of workers and allotment of departments. To keep the record of the attendance of the staff members and the workers. To prepare the statement of the salary and wages of the staff and the workers.

This department is also called the personnel department. It ensures the safety, security

and welfare of the staff and workers. It takes care of disciplinary actions and sports. This

department is further divided into following sections:-

1. Time Office: This section deals with recording of time of workers, staff members andtrainees with the help of numbered cards.

2. Safety Department: There are three safety officers in JCT. If an accident occursinside the plant then proper enquiry is done so that this could be avoided in the future.

3. Security Department: This department makes all arrangements of security in thefactory.

4. Establishment: This department makes the records of wages and salaries of staff andworkers. Employees Staff Insurance Corporation provides the staff members freemedical services.


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CHAPTER-2

OBJECTIVES OF THE STUDY

1. To demonstrate the size of the market opportunity.2. To explain the business model.3. To show the path to profitability.4. To quantify the investment requirement.5. To facilitate valuation of the business

RESEARCH METHODOLOGY

Research design stands for the framework of research. The research design utilized in thisstudy

is descriptive.

Data Collection

Data refers to information or facts. It is not only refers numerical figures but also includesdescriptive facts. While deciding about the method of data collection to be used for the study,The researcher should keep in mind about two types of data, such as primary data andsecondary data.

Primary Data

I have collected the primary data through some face-to-face formal interviews with staff.

Secondary Data

Secondary data means data that are already available in the organization. The researcher hasto look into sources for the data from where he can obtain data. The secondary data mayeither be published or unpublished.

Published data will be available in

Magazines

Journals, books

Reports by management, scholars, economist etc

The secondary data for conducting the study has been taken from Financial Statement that isIncome Statement, Balance Sheet Statement, Annual Reports of Company and some other

financial records.


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CHAPTER-3

COUSRE OVERVIEW

'Project Finance Modeling' is designed to help middle and senior managers deal with

financial models from disparate sources, enabling them to be compared and analyzed on a

consistent and focused basis.

The principal aim of the course is to teach participants to create, use and analyses a project

finance model .These skills can be used to support credit approvals and reviews by lenders

and to support organizations which run or sponsor projects. This will be done by reviewing

best practice in model structures and logic, and using tools to highlight areas of risk,

particularly in sensitivity analysis.


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FINANCIAL MODEL

A financial model is anything that is used to calculate, forecast or estimate financial numbers.Models can therefore range from simple formulae to complex computer programs that may

take hours to run.

At the simple end a valuation ratio, such as the price earnings ratio (PE), is a simple valuation

model. Although the term model is rarely used for something quite as simple as a

straightforward, commonly used ratio, it is commonly used for slightly more complex

formulae of a similar nature.

Specific methods of calculating numbers are often called models: for example, application of

a discounted cash flow (DCF) to dividends to value a share would be called a dividenddiscount model.

Spreadsheets used for budgeting and for forecasting profit and cash flow are also financial

models.

More specialist computer software is used for more complex models, especially those that

require a more complex application of statistics and financial mathematics.

In areas such as risk management and economic forecasting, the models used are extremely

complex. Models such as value at risk are implemented using specially written computer

programs. Investment banks employ quantitative analysts and computer programmers who

specialize in devising and implementing financial models.


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FINANCIAL MODEL DEFINITION

Mathematical representation of key financial and operational relationships. Comprising of

one or several sets of equations, it is used in analyzing how a business will react to different

economic situations or events, and in estimating the outcome of financial decisions beforecommitting any funds. A financial model generally includes cash flow projections,

depreciation schedules, debt service, inventory levels, rate of inflation, etc. It may also

quantify the financial impact of the firm's policies, and of restrictions or covenants imposed

by investors and/or lenders. A cash budget (whether computed by hand or with a spreadsheet

program) is a basic financial model.


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DEFINITION OF MODEL AND MODELING

A model is a program which has been develops to copy the way a system work in real life.

It uses mathematical formulas and calculations to predict what is likely to happen based ondata recording about what actually did happen in the past.

The reason people use modeling and financial modeling in particular is that they want to

predict the future.

This is done by carefully setting up a model that they think will do this.

I say think because sometimes setting up a complicated financial model is as much an art as

science.

WHO DOES FINANCIAL MODELING?

Anybody dealing with any decision related to money (wish there was somebody who did not

require that!). If you are involved in financial decision making/ planning related to large

corporate, then you would definitely need financial modeling day in and day out. Financial

modeling is a mandatory activity for investment bankers, bankers, project finance persons,

equity research folks, PE & VCs.


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IMPORTANCE OF FINANCIAL MODELING

Financial modeling acts as a useful tool which enables business options and risks to beestimated in a cost-effective way against various assumptions, recognize optimal solutions inestimating financial returns and understand the effect of resource constraints thus leading to

more effective business decisions.

Financial modeling can be referred as an art and like any other art form, it requires constantpractice and commitment to develop expertise in this area. In the present day world, manycompanies are becoming globally integrated with the international economy through the wayof acquiring/establishing international operations. This calls for the requirement of strongfinancial models which can assist in performing the evaluation of every countrys operations,reflect on multiple currencies in their model, estimate varying capacity utilizations toestimate the optimal capacity under changeable industry demand-supply scenarios and similarmore cases.

In the financial services industry, the use and perceived importance of financial modeling is

increasing considerably across multiple fields. Investment bankers for example are now

employing financial modeling and valuation analysis to help guide them through mergers and

acquisitions as well as public offerings to make sure they can increase their customers

investments. Commercial corporate bankers meanwhile are using the very same techniques to

analyze companies abilities to service debt. Private equity funds model a chosen business

financial statements to calculate the effectiveness of that investment; pension funds even and

insurance companies use modelling and valuation to identify assets for their portfolios.

Such widespread use demonstrates the effectiveness of financial modeling which is becomingan integral determining factor in many companies success. Financial and valuation skills arebecoming more important all the time for company owners and executives in multiple fieldsas a way to asses aspects of strategic planning and analyze uncertainty. With financialmodelling companies can engage in calculated risks that will minimize the danger of failurewhile maximizing the potential rewards. By learning these skills then you will be able tocreate comprehensive models of companies, prepare valuation of a business, project orscenario and accelerate your career and your company as a result.


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FINANCIAL MODEL TYPES

Financial models are often developed over the course of months and years, and manyfinancial analysts get caught up the grind of building, auditing and maintainingexisting financial models on a daily basis, losing the big picture of understanding best

practice modeling solutions used in business and economic decision analysis.

It is therefore useful for a good financial analyst to take a step back, examine thebroad categories of financial models that are commonly used, and determine theoptimal approach for the financial and business modeling of different scenarios andsituations.

Let us first re-visit the basics, and look at how financial models can be related to itsusage in modeling an economy, industry or company.

Types of financial model:

Macroeconomic Financial ModelsThe models are usually econometric analysis based, built by government departments,universities or economic consulting firms, and used to forecast the economy of acountry. Macroeconomic models are used to analyze the like effect of government

policy decisions on variables such as foreign exchange rates, interest rates, disposableincome and the gross national product (GNP).

MacroeconomicFinancial Models

Industry FinancialModels

Corporate FinancialModels


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Industry Financial ModelsIndustry models are usually econometric based models of specific industries oreconomic sectors. Industry models are often similar to macroeconomic models, andtypically used by industry associations or industry research analysts to forecast key

performance indicators within the industry in question.

Corporate Financial ModelsCorporate financial models are built to model the total operations of a company, andoften perceived to be critical in the strategic planning of business operations in largecorporations and startup companies alike.

Almost all corporate financial models are built in Excel, although specializedfinancial modeling software are increasingly being used especially in largecorporations to ensure standardization and accuracy of multiple financial models, orto comply with spreadsheet management requirements imposed by the SarbanesOxley financial reporting act.

Now that weve looked at the context of financial models from an economic and financialanalysis perspective, let us now examine financial models specifically from a financialmodeling build perspective.Financial models can generally be classified into 3 categories:

Deterministic Financial Models

Simulation Based Financial Models

Specialized Financial Models


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Deterministic Financial Models

In a deterministic model, a financial analyst enters a set of input data into a spreadsheet,programs the spreadsheet to perform a series of mathematical calculations, and displays anoutput result.

Most deterministic financial models are built by performing an analysis on historical data toderive the relationship between key forecast variables. In a corporate context, historicalaccounting relationships are often used to forecast key revenue and cost variables.

Most deterministic models use one or two dimensional sensitivity analysis tables built intothe model to analyze the question of risk and uncertainty in the models output results. Eachsensitivity analysis table allows a financial analyst to perform a what if analysis on 1 or 2variables at a time. The advantage of sensitivity tables are its simplicity and ease ofintegration into existing deterministic financial models that have already been built.

Multiple sensitivity analysis tables can be combined in a scenario manager. The scenariomanager is useful when there are interdependencies between the changing variables, asfinancial analysts can configure and change multiple variables in each scenario.

In certain scenarios, multiple regression analysis is used to determine the mathematicalrelationship between multiple variables in a deterministic financial model, and such analysisis termed econometric analysis.

The deterministic model is probably the most common type of financial model used inbusiness and finance today. Most financial forecasting models used for revenue management,

cost management and project financing are primarily deterministic based financial models.

Simulation Based Financial Models

While a deterministic financial model is normally structured in such a way that a single pointestimate is used for each input variable, simulation based financial models work by enteringthe likely distribution of key inputs defined by the mean, variance and type of distribution.

Simulation models use these range of inputs to recalculate the defined mathematical equation

in the financial model through a few hundred iterations, normally 500 or more. The results ofthe analysis will produce the likely distribution of the result, therefore providing an indicationof the expected range of results instead of a single point estimate.

Where risk is a dominant factor in the financial modeling scenario being analyzed, a reliableestimation of the likely range of results is often more useful than a single point estimate.Simulation based financial models therefore allows a financial analyst to model the questionof risk and uncertainty using a higher level of granularity.


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Specialized Financial Models

Specialized financial models are narrower in scope and essentially sophisticated calculatorsbuilt to address a specific business problem or financial computation. Cost managementmodels, marginal contribution analysis models and option pricing models are examples of

specialized financial models.

The examples have been grouped into the following categories:

1.Financial Statements Models

o Income Statemento Balance Sheeto DCF Valuationso Whole-Of-Businesso

2.Business Planning Models

o Forecast Business Planning Modelso Historical & Forecast Business Planning Models

3. Dashboard Outputs

4. Powerful Charts


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ADVANTAGES OF FINANCIAL MODELING

1.

Models try and minimize financial risk, as u know if u do this then this is likely tohappen2. Models provide quick answer to things that may take month to actually happen.

Automatic recalculation means that if a change is made in the model then all relatedformulae and value change.

3. As long the person is familiar with the model and a good set of rules to follow than itis easy to run the model.

4. They provide consistent resultthe same input will always produce the same answerso a decision to make that loan to a customer by a finance employee does notdepend on how that person is feeling that day.

5. What if.. Statements can be asked without rebuilding a model from scratch eachtime the test is executed.

6. Graphs can be shared between different people in different locations.

DISADVANTAGES OF FINANCIAL MODELING

1. Some model might be too simple to be of any use.2. Many variables need to be considered and it is easy to miss things out. This may leadto misleading results.3. Producing an effective model may be time consuming.4. Some situations will need expensive, bespoke software.5. You cannot account for every possible variable in a financial model. Banks might

model how much money they think people will save or borrow. But they cannot knowthe effect that the current financial crisis will actually have on real life behavior.


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FINANCIAL MODEL GUIDELINES

The model comprises the following sheets:

1. Parameters sheet: - contains parameters with pre-set amounts;2. Assumptions sheet: provides input categories for capital expenditure or large scale

periodical expenditure, income, operating expenditure and key operational statistics;3. Statement of Cash Flows: contains capital expenditure, income and operational cost by

line item categories;4. Results sheet: provides a summary of the key results;5. Supplementary data worksheets: to allow more detailed calculations to be performed

and cross reference to the Assumption sheet; and6. Example sheet: provides the calculation of revenue, coal and carbon dioxide

omissions.


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5 THINGS TO KNOW ABOUT CREATING A FINANCIAL

MODEL FOR OUR BUSINESS

When pitching your business to venture investors, sharing a well designed financial model is

very important! Why? Because how a financial model is designed helps investors learnsome things about you and your business: it provides insights into how you think about yourbusiness, helps clarify what are the main assumptions that drive it and also implicitly sendsmessages about how you are approaching the business. Is this obvious? Not if you look atthe inconsistent quality of financial models we see every day. For some entrepreneurs, it isalmost like an afterthought. So I thought about creating a list of things that entrepreneursand managers need to keep in mind as they design a model for their business. This adviceapplies to young startups as well as established or even public companies.

1. Keep it simple.: This is most important. You are into all the details of your business.You really like to be on top of everything. And might be tempted to create a model that

covers every eventuality and every variable. Dont. The purpose of a financial model to beshared with investors is to get them excited about your business. You may have budgetspreadsheets that go into a lot of detail. But the place for that complexity is in your backoffice, not the model you share with investors. Think of the model as a way to tell the storyof your business. It should be easy for someone to follow and understand. This requireseffort and time and you need to put in the effort. Examples?: make sure you use a format thatis easy to follow, dont have too many unnecessary sheets in your file, clearly state and labelthe assumptions vs. the calculations, dont create too many assumptions/variables if they arenot consequential to the business; emphasize the appropriate time period for your business(monthly, quarterly, yearly).

2. Build bottoms-up/ validate top-down. This is especially important for startups orearly stage businesses. I have seen projections that start with a huge market and then arevenue plan that is driven by an assumption of market share: The market for this service

will be $2BN in 2011 and if we get 2% of that market, which I think we can, we will be a$40MM business. That is an instant loss of credibility. You need to build a revenue and


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cost plan based on actionable assumptions that you control and can demonstrate. That iswhat I mean by bottoms-up. You then need to revisit it and ask yourself whether thenumbers, esp. the later year numbers make sense top-down, i.e. Is the market penetration bynumber of customers believable?

3. Altitude is important.This is closely related to the 1st point. Make sure you can seethe forest and not just the trees. You need to know what level of detail is important to youraudience. Understanding how much ink toner you are going to use is not relevant unless youare in the publishing industry. The level of detail has to be relevant to what your investor istrying to understand. Most likely whether the business has potential, can it grow fast, be

profitable or require too much capital; not whether you can predict the travel budget of yoursalesperson in year 5. You model also needs to be relevant to the stage of your business. Atthe stage of an idea, you should only have general assumptions around key items. Not thingsyou cant predict that are irrelevant. Creating too much detail not only makes it hard tounderstand your business; it also says you are not in touch with reality, so make sure youfly at the right level.

4. Find the key driversOur financial model is not a crystal ball into the future. Andinvestors are not asking you to predict the future. What they want to understand is whatdrives your business. What will accelerate or slow down your business, what will make itmore profitable or less capital intensive? In every business there are a few numbers that

business performance is most sensitive to. The most important thing you can do with yourmodel is help identify those things that drive your business: the key drivers. Is it salesconversion, number of customer calls per sales person, cost per widget by volume, growth indemand, etc? Understanding and clearly explaining what those are has a double bonus: ithelps investors understand your business and also sends the message that you are on top of

your business. Both build trust and confidence in investing.

5. Well spaced bread crumbsWe need to help investors understand the story of yourbusiness. We need to guide them so that they stay engaged and interested. You need tomake it easy. Here is a practical example: create a power point presentation to explain our

business model. One of the companies we looked at recently came prepared with apresentation that highlighted all their main assumptions, compared those key assumptions toother competitors and highlighted why they thought they were conservative and reasonable intheir projections. That made it a lot easier to follow and significantly shortened the amountof time we would have to spend on due diligence.


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STEPS IN CREATING A MODEL

Whether you are creating a financial model using Excel or VBA, you must take a Systematicapproach. A systematic approach always involves planning ahead and this takes some time.Most people do not like to plan and think they can save Time by starting to build a model

right away without spending time on planning. However, for all but the simplest models, nottaking the time upfront to do some Planning and not taking a systematic approach ends up

being both frustrating And a waste of time.

Here are the key steps you should follow in creating both Excel and VBA models. The detailsvary somewhat depending on whether you are working with Excel or VBA, and I will discussthem in later chapters. You should keep two other things in mind. First, in practice, you donot have to follow the steps strictly in this order, nor do you have to finish one completely

before going onto the next one. Most of the time you will have to go back and forth to someextent. It will depend on the circumstances. Second, over time, you should try to create your

own variation on this basic approach and learn to adapt it to different situations. Excel andVBA are flexible tools and you can usually make changes almost at any stage without a greatdeal of difficulty. But this still will take more time. than if you do it right the first time, andmaking changes later increases the chances of missing some of the other changes that have togo with them.


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Define and Structure the Problem

Define the Input and Output Variables of theModel

Decide Who Will Use the Model and How

Often

Understand the Financial and Mathematical

As ects of the Model

Design the Model

Create the Spreadsheets or Write the VBA

Codes

Protect the model

Document the model

Update the Model as Necessary

Update the Model as Necessary

Test the model


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Step1: Define and Structure the Problem

In real life, problems rarely come neatly defined and structured. Unless you take the timeupfront to define and structure the problem and agree on them with the user (your boss, forexample), you may end up having to extensively change the model you first create. When

your boss asks you a question whose answer requires developing a model, she often has onlya vague idea of what she is really seeking. As a finance person and a modeler, you areresponsible for putting it all in more concrete terms before proceeding. Start by discussingand defining why the model is needed and what decisions, if any, will be made based on itsoutputthat is, what questions the model is supposed to answer. Then establish how accurateor realistic the outputs need to be. As we discussed, all models have to capture therelationships among their variables, and discovering and quantifying these can take a lot oftime. How much effort you put into doing this should depend on how important the project isand how accurate or realistic the outputs need to be.

Step 2: Define the Input and Output Variables of the Model

Make a list of all the inputs the model will need and decide who will provide them or wherethey will come from. This is crucial. For example, if you are creating a model to do the

business plan for your company, the inputs must come from the business managers. Youcannot just guess what sales growth rates they will be able to achieve, how much they willhave to spend on plants and equipment to support those sales growths, and so forth. You maynot need the actual numbers upfront, but the list of inputs should be established based on yourdiscussions with the business managers so that you can make them independent variables inyour model. Otherwise you may have go back later on and change a lot of things in themodel. Make a list of the tabular, graphical, and other outputs the model needs to create. Tosome extent, these should be driven by the decisions that will be made based on them. Oneadvantage of Excel is that a lot of the output can be just printouts of your spreadsheets,

provided the spreadsheets have been laid out properly. If you plan ahead and lay out yourspreadsheets with the outputs in mind, you will save yourself a lot of time later on.

Step 3: Decide Who Will Use the Model and How Often

Who will use the model and how often it will be used make a lot of difference. In this book, Iam assuming that you are developing the models either for your own use or for use by others

who are familiar with Excel and understand the model, at least to some extent. When youcreate models for others use, it involves much more work. You have to make sure that th esepeople cannot enter data that do not make sense, they cannot accidentally damage parts of themodel, and they can get the necessary outputs automatically and so forth. These arecollectively called the user interface, and the more elegant, more easy to use, and more robustyou want to make a model, the more work it is. You also have to plan for many of thesefeatures ahead of time. How frequently a model will be used is another important issue. If amodel is going to be used only once in a while, then it does not matter if it takes a long timeto run or if it takes some extra work every time to create the outputs. A model that will beused frequently, however, should be designed differently.


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Step 4: Understand the Financial and Mathematical Aspects of the Model

It is important to remember that the computer cannot do any thinking; you have to tell itexactly how all the calculations in the model will have to be done. In most situations, if youdo not know how you would do the calculations by hand, you are not going to be able to

write the necessary formulas or instructions for the computer to do it. It does not pay to startbuilding the model until you are sure you could solve the problem by hand. It usually takesbeginners a lot of time to create a model and they often think that it is their Excel or VBAskills that are slowing things down. This may be partly true, but at least as often the problemis in their understanding of the finance and mathematics of the model they are trying tocreate. You will save lot of time if you do not even sit down in front of the computer to createa model until you are sure that you know how to solve the problem.

Step 5: Design the Model

There are two aspects to designing a model. One is to sketch the steps that Excel or VBA willhave to follow to solve the problem. For simple models, you may want to write down onlythe broad steps or perhaps even do it in your head. For more complex problems, however,you should work on paper and use a degree of detail that suits your level of experience andthe complexity of the problem. The less experience you have, the more detailed the sketchshould be. Once again, remember that this may seem like a waste of time, but ultimately itwill save you time compared to plunging into your spreadsheet or VBA program withoutsuch a sketch of the model. The other aspect of design is planning how the model will be laidout in Excel or VBA. Are you going to do the entire model in one spreadsheet (or VBAmodule) or split it into several spreadsheets (or VBA modules or procedures)? Editing anExcel or VBA model is easy. So you do not have to decide every detail ahead of time, butyou need to have an overall design in mind or on paper depending on the complexity of the

problem and your level of experience. As I discussed before, you also need to think about thekind of user interface you want to create and the reports you want the model to produce.

Step 6: Create the Spreadsheets or Write the VBA Codes

For most models, this is the big step. Most of this book covers the details of this

Step, so there is no need to get into them here.

Step7: Test the Model

Almost no model works correctly the first time it is used; you have to find the problems(bugs) and fix them. The bugs that prevent the model from working at all or produceobviously wrong answers are generally easier to find and fix. However, models often includehidden bugs that create problems only for certain values or certain combinations of values forthe input variables. To find them, you have to test a model extensively with a wide range ofinput variables. You have to take somewhat different approaches to testing and debugging amodel depending on whether you are working with Excel or VBA. Both Excel and VBA

provide some special tools for this purpose; I will discuss these tools and provide suggestions

on how to debug models in Excel and VBA in later chapters.


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Here are a few helpful hints that apply to both:

There is no standard approach to testing and debugging a model. You almost always haveto use your ingenuity to figure out what will be the best way to test and debug a particularmodel. Your ability to do so will improve with experience.

The better you understand a problem and a model, the easier it will be to

Debug it. If you understand how changes in certain independent variables affect the values ofcertain dependent variables, then you can change the values of the independent variables tosee if the dependent variables are changing in the right direction and by the right orders ofmagnitude. This is one of the best tools, especially for debugging large models, and youshould do a lot of testing using this approach. You can also use this approach to hunt downthe sources of the problems: Starting from a value that looks wrong, backtrack through thevalues of the intermediate dependent variables to see where the problem may be originating.This approach may sound somewhat vague and abstract, but with experience you will find

that you can locate and fix most bugs rapidly using this approach.

checking a models output against hand-calculated answers is a common and effectiveapproach to debugging. In some situations, doing hand calculations may not be practical, butyou may be able to use Excel itself to do some side calculations to test individual parts of themodel.

Step8: Protect the Model

Once you have completed a model, and especially if you are going to give it to others to use,you should consider protecting it against accidental or unauthorized changes. In addition, youmay also want to hide parts of the model so that others cannot see certain formulas, data, andso on. Excel provides several flexible tools that you can use to hide and protect parts or all ofyour model. A good strategy is to cluster and color code all the inputs cells of a model and

protect and hide everything else in the workbook. There is less need to protect VBA modulesbecause most users do not even know how to open them. Nonetheless, if you think it isnecessary, you can protect parts of your VBA models as well.

Step 9: Document the Model

Documenting a model means putting in writing, diagrams, flowcharts, and so on, the

information that someone else (or you yourself in the future) will need to figure out what itdoes, how it is structured, and what assumptions are built into it. One can then efficiently andeffectively make changes to (update) the model if necessary. For large systems (for example,the reservation systems for airlines), the amount of necessary documentation can beenormous; it is often put on CDs for Easy access and use. Professional system developmentorganizations have elaborate standards for documentation, because different pieces of largesystems are developed by different peoplemany of whom may not be around for very long.Also, it is almost certain that the systems will have to be constantly updated. Over time,anyone who creates models develops his own system of documentation. As long as you keepin mind the objectives I mentioned before, you have a lot of leeway to come up with yourown system as well. Both Excel and VBA offer a number of features that let you easily do a

lot of the documentation as you work on your model. You should take full advantage of themand do as much of your documentation as possible while creating the model.


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This is important for two reasons. First, if you write your documentation when things arefresh in your mind, it will save you time later and you will be less likely to forget todocument important things. Second, everyone hates (or learns to hate) documentation. It is nofun at all, especially if you try to do it all at once at the end of the project. If you do not workon the documentation until the end, chances are you will never do it. Then, if you have to use

the model again a few months later or have to update it, you will end up spending hours oreven days trying to figure out what you did. Do your documentation as you go along andfinish it immediately after your model is done. You have to take somewhat differentapproaches to when you document Excel and VBA models. I will discuss how in theappropriate later chapters.

Step10: Update the Model as Necessary

This is not a part of the initial model development, but almost all models require updating atsome point, either because some things have changed or because you want to adapt it to dosomething else. This is where the documentation becomes useful. Depending on how much

updating is involved, you may want to go through all of the above steps again. You shouldalso thoroughly update the documentation and include in it the information on who updatedit, when and why, and what changes were made.

financial model (2)

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