kd report........ final
TRANSCRIPT
DECLARATION
I do hereby declare that the project report entitled “A Study on Descriptive
Analysis of Working Capital Management of J.K.Tyre” is an authentic work developed
by Kumar Deep Banoriya Student of MBA 2nd year under the guidance of Mr.
P.K.Patankar for the partial fulfillment of the requirements for the award of the degree of
“Post Graduate, Master of Business Administration” By the Gautam Budhha
Technical University, Uttar Pradesh, from the local centre the City College, College of
Science & Engineering(Jhansi), I also declare that any or all contents incorporated in this
project have not been submitted in any form for the award of any degree or diploma of any
other institution or university.
PLACE: SIGNATURE OF THE STUDENT
DATE:
1
ACKNOWLEDGEMENT
Foremost, I would like express my gratitude to Mr. P. K. Patankar for taking out time
from his hectic schedule for being my mentor. He has been a wonderful guide and a
counselor. He has shown immense patience in dealing with all my queries, however petty
they may have been. I fall short of words in thanking him. My sincere thanks to all the
respondents who spared their valuable time in giving me the required information and my
apology for testing their patience.
Special thanks to the Head Dr. M. K. Sharma and the entire faculty.
I also wish sincere and humble thanks to all my friends and colleagues who encouraged and
inspired me from time to time. It is only because of them that I did not lose the sight of my
track and completed the research.
I thank my parents who supported me and provided me with all the help required during my
summer training period and the preparation the project report.
2
PREFACE
To start any business, First of all we need finance and the success of that business entirely depends
on the proper management of day-to-day finance and the management of this short-term capital or finance
of the business is called Working capital Management. Working Capital is the money used to pay for
the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent,
energy bills, payments for supplies and so on.
I have tried to put my best effort to complete this task on the basis of skill that I have achieved
during the last one year study in the institute. I have tried to put my maximum effort to get the accurate
statistical data. However I would appreciate if any mistakes are brought to my by the reader.
Kumar Deep Banoriya
MBA 2nd yr
3
EXECUTIVE SUMMERY
The major objective of the study is to have proper understanding of the working capital of J.K
Tyre Ltd., Banmore & to suggest measures to overcome the shortfalls if any. Funds needed for short term
needs for the purpose like raw materials, payment of wages and other day to day expenses are known as
working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term
financing are known as working capital management. It involves the relationship between a firm’s short-
term assets and its short term liabilities. By definition, working capital management entails short-term
definitions, generally relating to the next one year period. The goal of working capital management is to
ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both
maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with
inventories management, Receivable management, cash management & Payable management.
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ABSTRACT
The management of Working Capital is one of the most important and challenging aspect of the
overall financial management. Merely more effective and efficient management of working capital can
ensure survival of a business enterprise. Working Capital Management is concerned with the problems
that arise in attempting to manage the Current Assets, Current Liabilities and the interrelation that exists
between them. This is a two-dimensional study which examines the policy and practices of cash
management, evaluate the principles, procedures and techniques of Investment Management, Receivable
and Payable Management deals with analyzing the trend of working capital management and also to
suggest an audit program to facilitate proper working capital management in Indian Tyre Industry.
The study covers a production of year viz, -2007-June 2011. For the purpose of investigation both
primary and secondary data is used. The collected data is analyzed by applying research tool which
include accounting tools like Analysis, Cash Flow Analysis, Common Size and Trend Analysis. They
reveal that there is a standoff between liquidity and profitability and the selected corporate has been
achieving a tradeoff between risk and return. Efficient management of working Capital and its
components have a direct effect on the profitability levels of tyre industry
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OBJECTIVES OF THE STUDY
The primary aim of our study is to examine and assess management of working capital of JK Tyre
industry. In this broader framework an attempt will be made to meet out the following specific objectives
of the study
1. To study the components of Working Capital Management in J.K.TYRE Industry.
2. To assess at length, prevalent practices of inventory management, cash management and receivables
management on the profitability and liquidity of firms in the Tyre Industry.
3. To analyze the relative proportion of different sources of finance for working capital of J.K.TYRE
Industry.
4. To get the practical exposure to deal and find out the working capital requirements.
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TABLE OF CONTENTS
1. INTRODUCTION 08
2. ABOUT THE ORGANIZATION 09-28
3. UNDERSTANDING THE WORKING CAPITAL 29-47
8. WORKING CAPITAL ANALYSIS 48-49
9. ANALYSIS OF SHORT TERM FINANCIAL POSITION 50-56
10. CURRENT ASSET MOVEMENT RATIO 57-64
11. INVENTORIES 65-69
13. INVENTORY MANAGEMENT 70
14. CASH MANAGEMENT 71
15. WORKING CAPITAL CYCLE 72-74
16. SOURCES OF ADDITIONAL WORKING CAPITAL 75
17. HANDILING RECEIVABLES MANAGEMENT 76-81
19. RESEARCH METHODLOGY 82-84
19. DATA INTERPRETATION AND ANALYSIS 85
12. ANALYSIS OF FINANCIAL STATEMENTS 86-96
20. SUGGESTIONS 97
22. LIMITATIONS OF THE STUDY 99
23. CONCLUSION 100
24. REFERENCES 101
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INTRODUCTION
Working Capital Management refers to all management decisions and actions that ordinarily
influence the size and effectiveness of the working capital. It is concerned with the most effective choice
of working capital sources and the determination of appropriate levels of the current assets and their use. It
focuses attention to the managing of current assets, current liabilities and the relationships that exist
between them. In the present day of rising capital cost and scarce funds, the importance of working capital
needs special emphasis. It has been widely accepted that the profitability of a business concern likely
depends upon the manner in which its working capital is managed. The inefficient management of
working capital not only reduces profitability but ultimately may also lead a concern to financial crises.
On the other hand, proper management of working capital leads to a material savings and ensures financial
returns at the optimum level even on the minimum level of capital employed. Both excessive and
inadequate working capital is harmful for a firm. Excessive working capital leads to unremunerative use
of scarce funds. On the other hand, inadequate working capital usually interrupts the normal operations of
a business and impairs profitability. There are many instances of business failure for inadequate working
capital Example. Modi Rubbers. Further, working capital has to play a vital role to keep pace with the
scientific and technological developments that are taking place in the area of tyre industry. Also, the
current financial parameters of tyre industry are much less than the desired level. In this context, an
attempt has, therefore, been made to undertake an in depth study on working capital management of
Indian Tyre Industry.
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ABOUT THE ORGANISATION
The advent of JK Organization on the industrial landscape of India almost synchronizes with the
beginning of an era of industrial awareness - an Endeavour for self reliance and the setting up of a
dynamic Indian industry. This was way back in the middle of the19th century. And the rest that followed
is history “Excellence comes not from mere words or procedures. It comes from an urge to strive and
deliver the best. A mindset that says, when it is good enough, improve it. It is a way of thinking that
comes only from a power within.”
9
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CORE VALUES
JK Organization has been a forerunner in the economic and social advancement of India. It always
aimed at creating job opportunities for a multitude of countrymen and to provide high quality products. It
has striven to make India self reliant by pioneering the production of a number of industrial and consumer
products, by adopting the latest technology as well as developing its own know-how. It has also under
taken industrial ventures in several other countries. JK Organization is an association of industrial and
commercial companies and charitable trusts. Its member companies, employing nearly 50,000 persons are
engaged in the manufacture of a variety of products and in diverse fields of commerce.
Trusts are devoted to promoting industrial, technical and medical research, education, religious
values and providing better living and recreational facilities. With the spirit of social consciousness
uppermost in mind, J.K. Organization is committed to the cause of human advancement.
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VISION
To be amongst the most admired companies in India, committed to excellence
MISSION
Be a Customer Obsessed Company - Customer First 24x7
No.1 Tyre Brand in India
Most profitable Tyre Company in India
Motivated and Committed team for excellence in performance
Be a Green Company
Deliver Enhanced Value to all stakeholders
Enhance global presence through Acquisition / JV / Strategic Partnerships
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HISTORY OF JK TYRE & INDUSTRY LTD
Ever since its inception it has been JK Tyre's belief in the value of technological superiority that
has made it grown by leaps and bounds. This division produces and sells tyres and tubes under the brand
name "JK Tyre" for Truck, Buses, Passenger Cars, Jeeps, Light Commercial Vehicles, Multi Utility
Vehicles and Tractors. The company pioneered Steel Radial Technology in India in 1977and continues to be
the industry leader in the Radial segment in India. JK Tyre is the only Tyre Manufacturer in the country to
produce high performance 'T' & 'H' -rated steel radial tyres. JK Tyre has consciously followed a policy of
continuously modernizing and expanding its tyre manufacturing facilities to retain its edge in the market
place. Our customer base covers virtually the entire Original Equipment Manufacturers (OEMs) in India
together with Replacement Market for four wheeler vehicles, Defense and State Transport Units. Besides
India, we have a worldwide customer base in over 45countries across all 6 continents.
To keep pace with the market demand as well as technological leadership in Indian market,
J.K.Industries acquired Vikrant Tyres Limited, Mysore in 1997. J.K.Industries and Vikrant Tyres Limited
are the only tyre companies in India to have received all three ISO 9001, QS 9000 and ISO14001
certificates. This indeed is a true reflection of our commitment to system oriented approach. The company
has technical collaboration with M/s Continental AG, Germany, which is among the top five tyre
manufacturers In the world to keep pace with latest technological developments. To stay at the forefront of
technological advancements a state of art Research & Development Centre, HASETRI, was set up, which
remains the nerve centre for with three plants located in Rajasthan, Madhya Pradesh and Karnataka, JK Tyre
is the largest manufacturer of truck and bus tyres in India. The truck and bus tyres produced account for
nearly74% of the total tyre business in India, thus giving JK Tyre an undisputed position. Additionally,
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YEARLY ACHIEVEMENTS
• 1951- The Company was incorporated as a private limited company in West Bengal
in 14thFebruary, 1951 until31stMarch 1970 The company was engaged in the managing
agency business thereafter the company decided to undertake manufacturing activities and
obtained a letter of intent in February 1972 for the manufacture of automobile tyres and
tubes.
1972- The letter of intent was converted into an industrial license in February for the
manufacture of 4lakh nos. each automobile tyre and tubes per annum. The company was
converted into a public limited company on 1stApril 1974. the manufacturing project was
promoted by Straw Products Ltd and J.K. Synthetics Ltd. Co., U.S.A.,(a subsidiary of
General Tire& Rubber Co., U.S.A.) for technical services for a period of 5years and sales
agreement for the supply of technical know-how, engineering and documentation for
operational facilities (for a period of 8 years from23.08.1973).- Under the collaboration
agreement, the company has the right to use on its products the wording Made in
collaboration with General Tire International Co., U.S.A
1982- The company’s technical collaboration agreement with General tire International
Co., was renewed for a further period of 5 years.
1987- The overall working resulted in substantial profits despite a 51 days strike as
well as go-slow from 14thOctober. The strike had since then been resolved and amicable
settlement was reached. Efforts were on to launch a new pattern in steel belted radial tyres.
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1988- New steel radial tyres for Maruti Gypsy and Tata mobile were introduced. The
company proposed to incur an expenditure of Rs.300 lakhs for installation of latest and
sophisticated R&D equipment.
1989- Several new patterns and sizes of tyres were introduced including a semi-lug
Nylon tyre, all of which were well received in the market
1990- Han deep Investment Ltd., Hid rive Finance Ltd., Panchanan Investment Ltd.,
and Radial Finance Ltd., J.K. International Ltd., Shivdham Properties Ltd., and J.K. Asia
Pacific, Ltd., are
1991- The J.K. International division expanded its activities by opening its office in
Moscow besides starting company’s subsidiaries in UK &Honkong. The radial tyres for
tractors and business launched in the previous years were well received.
1992- New radial tyres ‘Brute’ and ‘Ultima’ were introduced. The company was in
the process of developing steel belted radial tyres the prestigious cars in the Mercedes Benz,
Peugeot, Daewoo race and Opel Astra. A new pattern developed for Bus and tucks “PE-T8
was well received in the market’.
1994- The company maintained its pace of growth, despite steep rise in raw material
and input costs and competition. The company effected an all round cost reduction and
attained higher capacity utilization at both the Tyre plants at Jaykaygram and Banmore.- The
T-rated Ultima tyres launched for new generation cars found its acceptance in DCM
Daewoo’s ‘Ceilo’. Also J.K. steel radial was chosen for Mercedes Benz India. Subsidiaries of
the Company
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1995- The company undertook to develop steel radials for GM’s ‘Astra’. Pal’s
‘Peugeot’ Fiat’s, ‘UNO’ and M&M’s ‘Ford’.- The company launched a premium truck Tyre
‘Jet Trek’ – 39 which was introduced to meet the need of the heavy load market.- The new
tractor rear tyre ‘SONA’ was well received in the market.
1996- During this period, a new car tyre Jet Drive XS, the widest nylon car tyre of
Maruti 800 was launched. Along with new semi-lug and heavy duty lug tyre for trucks, anew
lug tyre for super heavy load applications Jet Trak-39 was also introduced. In the radial
category, Ultima XR Radial, a terrain tyre was introduced. All these products were well
received in the market.- Both the tyre plants operated to full capacity. In line with JK Tyre, the
radials unit introduced the dual contact high traction and high performance Aqua sonic steel
radial car Tyre. The unit also developed also developed India’s first and only H-rated Ultima
Xs’ especially for Mercedes-Benz Cars.
2000- The company proposes to reduce its debt by Rs.125crore in the current fiscal
from the current level of Rs.635 crore by way of loan repayment.- The company and Indian
Oil Corporation have entered into a marketing alliance for installing digital air pressure
gauges and setting up sales and services outlets at IOC petrol stations throughout the country.
2001- Raghupati Singhania managing director of J.K. Industries has been appointed
the 19th Chairman of Automotive Tyre Manufacturers association, the representative body of
Tyre industry in India.
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2002- J.K. Industries Ltd. has informed BSE that CRISIL has assigned a P1+rating to
the Commercial Paper programmer of the company.
2003- J.K. Industries Ltd. has a new Marketing Director in Mr. Ajay Kapila. Before
joining J.K. Industries Ltd., Mr. Kapila was Senior Vice-President (sales and Marketing) at
Kinetic Engineering Ltd. He was also Director on board and operational head of Kinetic’s
direct selling arm-Kinetic Marketing Services Ltd.
2004- J.K. Industries Ltd. has informed that its securities are delisted from Delhi
Stock Exchange Association Ltd (DSE) w.e.f. January 29, 2004.
2007- J.K. Industries Ltd. has informed that the name of the company has been
changed from J.K. Industries Ltd. To J.K. Tyre & Industries Ltd. w.e.f. April 02, we the
people of J.K. Tyre will have organization committed to quality in everything we do. We will
continuously anticipated and understand our customers’ requirements. Convert these into
performance standards for our products and services and meet these standards every time. Full
customer satisfaction-both internal and external is our motto.
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JK ORGANISATION - A CENTURY OF TRUST
Innovation and passion to perform have always been the driving forces at J K
Organization. J. K. Organization, is one of the leading Private Sector Groups in India,
Was founded over 100 years ago - it's been a century of multi-business, multi-product
and multi-location business operation.
JK TYRE- WHEELS TO THE NATION
JK Tyre has five Modern plants in India which are
strategically located at
Mysore, Karnataka (3)
Banmore, Madhya Pradesh
Kankroli, Rajasthan
JK Tyre pioneered radial technology in India way back in 1977, and is the Radial Leader in the
country being the only tyre manufacturer offering the entire range of 4 wheeler radials i.e. for Trucks
& Buses, LCVs, Cars and Farm. With strong adherence to quality and customer service we are not only a
leading brand in India but also a strong global player with a presence in 77 countries across 6 continents
offering a wide range of products backed by world class technology. JK Tyre enjoys a premium brand
status in various advanced markets, including the USA and Australia.
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OUR FIRSTS - LEADING THE WAY
Ever since its inception, JK Tyre has been a leader
rather than a follower. We have garnered many
Firsts to our credit like;
First Indian tyre company to introduce All
Steel Truck & Bus Radials in India in 1999
Pioneered Radial technology in India by
introducing passenger radials in 1977
First Indian tyre company to be
recognized a 'SUPERBRAND' by Global Advertising Professionals
First in India to launch 'Eco-friendly - Green tyre'
First in India to launch 'Dual Contact' - Aqua sonic tyre
First to launch 'Asymmetric' tyre
First in India to launch high performance tyre -
H rated - Speed of above 190 kms upto 210 kms
V rated - Speed of above 210 kms upto 240 kms
Z rated - Speed of above 240 kms. Upto 300 kms.
World's first tyre manufacturer to get QS 9000 certification for all its multi-location
operations
World's first tyre manufacturer to get ISO 9001 certification for its entire operations.
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CUSTOMER SATISFACTION - OUR CREDO
Customer Satisfaction has always been our prime focus. We are indeed proud of our highly experienced
and professional team for winning the trust of customers and building strong relationships with them.
Our 115 company owned stocking points serve over 4000 dealers across the country.
We have set up 130 JK Tyre Steel Wheels - a unique concept in car tyre retailing which
provides value added services like wheel balancing, alignment and tyre care to customers.
Our Truck Radial Care Centers offer after-sales service for Truck/Bus Radials, which
operate on 365 days / 24 hours basis. A large number of such centers have been set up along all major
National Highways.
JK Tyre has been among the top two tyre companies in respect of Customer Satisfaction, as
per JK Power Asia Pacific Study, for many years.
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R & D, TECHNOLOGY OUR DRIVING FORCE
J.K tyre has always been pushing the limits of possibilities. Our research centers have been our
nerve centers for extensive research and development. These are
Mr.Hari Shankar Singhania Elastomer and Tyre Research Institute (HASETRI) -
Jaykaygram, Kankroli (Rajasthan) and Faridabad (Haryana)
Dr.Raghupati Singhania Center of Excellence for Tyre and Vehicle Mechanics - Chennai
(Tamil Nadu)
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MOTORSPORTS - PUTTING INDIA ON THE FAST TRACK
JK Tyre is synonymous with Motorsports in India. By investing in Infrastructure and
instituting championship, JK Tyre has taken upon Itself to put India on the world Motorsports
map.
FUTURE PLANS
India is fast emerging as a global automobile hub particularly for small cars. It offers immense
Opportunities for JK Tyre to grow its business both organically and inorganically.
We have been constantly exploring ways of increasing our presence in different world markets,
through alliances and acquisitions in tyre and related business. In all our endeavors, our core focus is on
customer delight. Enlarging the customer base, providing them with better quality of services and more
value added products, will continue to be the key areas of our thrust.
SOCIAL RESPONSIBILITY AND COMMUNITY SERVICE
22
As a responsible corporate organization, JK Tyre is committed to social and community service. Giving
back to society and the environment is one of our core principles. We have implemented many
programmes in order to enrich people in and around our workplaces. In order to provide an all round
development and growth, our social programs are diversified to include
Healthcare
Education
Environment initiatives
Sports programmes
HEALTH CARE
We have been running and supporting a number of
health programmes not only for our employees, but
also for people living in and around the areas we
operate from. Some of our efforts in this area are:
Free Medical Camps were
organized at our Tyre Plants in
collaboration with various reputed
hospitals in rural areas
Where no medical facilities are available.
Around 1000 people availed the benefit of general medical treatment.
Eye Camps were organized at Banmore. Almost 2500 people for tested and 500 eye
operations were conducted.
23
Programmes on Development of Mentally Retarded Children was supported by
donations and contributions made by employees of Vikrant Plant at Mysore. This was
organized in collaboration with the District Hospital.
In collaboration with Population
Foundation of India, we adopted 60 villages in the
Rajsamand District of Rajasthan for running
a Population Control Programmes titled
"Parivartan". Services such as
Ante-Natal and post - natal Check-ups,
Immunization, Growth Monitoring of Children upto 5 years, identification and treatment of
various diseases and other common ailments are provided free of cost. This has significantly
reduced Maternal and Child Mortality rates. The programmes also regularly counsel the
community members on issues of Family Welfare and Population Control, including free
distribution of contraceptives.
"Pushpawati Singhania Research Institute" (PSRI) which is a Super Specialty Hospital for
Digestive, Liver and Renal Diseases, Delhi is an initiative by JK Tyre. The Institute organizes a
number of health care programmes like, Free Medical-checkups, Blood Donation Camps etc.
We provide all support to TCI and the Bill & Melinda Gates Foundation in their endeavor to
spread awareness for HIV /AIDS. Centers have been set up on the National Highway / Transport
Nagar to help and council truck drivers who are considered to be highly vulnerable to the diseases.
So far, more than 1, 25,000 people have attended the clinics, of which 25% were treated for
sexually transmitted infections. We also support "Infotainment Melas"
EDUCATION
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We recognize the great importance of education for building the future of our country, and are
committed to its contribution. With this belief, Lakshmipat Singhania School at Jaykaygram was
established. It gives us great pride to note that our students have excelled and are recognized for their
efforts in Rajasthan. We also help and support various educational institutions who are involved in
providing quality education for the children in villages. This includes free distribution of books,
computers etc. We are also helping raise the level of education amongst the elders by initiating Adult
Literacy Programmes in remote and backward villages. Example: small villages adjoining Mysore
(Karnataka), Kankroli (Rajasthan) Banmore (Madhya Pradesh) etc.
Children Career Counseling is provided for almost 500 children in Mysore. 10 Ekal
Vidyalayas are active in remote villages of Rajasthan. Mid Day Meal programmes are given to a number
of schools.
J.K Tyre has so far spread our programs across 33 locations benefiting more than 3,500 people.
J K Tyre having contributed 7500 adults moving towards literacy as of June 2011, out of 20,000 plus for
the J K Group as a whole.
ENVIRONMENT
25
Environment Management is taken up as a critical function at all our locations. Massive plantation
programmes have been organized at all the manufacturing locations to improve ecology. Some of these
initiatives are:
In the last five years, 1, 00,000 Trees have been planted.
In an effort to increase greenery in the surrounding villages, public parks have been
adopted.
Assistance is provided to Government authorities for maintenance of civic amenities like
parks, bus shelters, etc.
Public conveniences have been constructed by our Company at village schools in Mysore.
Neighboring villages have been adopted and temporary water huts are provided during
summer months.
We arrange the spraying of special chemicals on large water bodies so that water
evaporation can be reduced and it can be conserved during the long summer months.
SPORTS
26
Our various sporting activities not only encourage a team spirit amonst our employees, but is also
extended to sports enthusiasts of the neighboring areas. Apart from conducting different innovative sports
events, we also promoting indoor and outdoor sports facilities for our employees. J.K.TYRE also
sponsored Indian Jaycee's Gwalior Alankaran Samaroh 2007 wherein eminent personalities of
different fields were honoured. JK Tyre is also known for its efforts in the field of Motor Sports, having
started the annual events for "JK Tyre National Racing Championship" in 1997 and "JK Tyre National
Karting Championship" in 2000. We are extremely proud of this initiative as it has nurturing talent such
as, Narain Karthikeyan, Karun Chandhok, and Aarman Ebrahim, and many others. And putting India on
the World Car Racing Map.
JK Tyre has five Modern plants in India which are strategically located at
Mysore, Karnataka (3)
Banmore, Madhya Pradesh
Kankroli, Rajasthan
JK Tyre has also enhanced its global reach by taking over Tornel a renowned Mexican
company, which has 3 plants in Mexico. All these plants are equipped with World’s most
advanced manufacturing and testing machines
ABOUT BANMORE TYRE PLANT
27
Started its production in 1991 and the first tyre rolled out 25thmarch 1991.The initial capacity of
the plant was 4.5 mt/ day. Radial tyre production in passenger and light commercial vehicle segment was
added in 1996. The plant is continuously improving its capacity, particularly in radial segment. Present
radial capacity is 9000 tyre/ day. Total investment is in last three years for in capacity in radial tyre is
apporx Rs117 crore. The expansion of radial plant is still on. Our customer’s base virtually covers the
entire Original equipment manufacturers [OEM] in India together with replacement market for four
wheeler, defense and state transport undertaking. Besides India, we have worldwide customers base
exporting to more then60 countries. Plant manages their process through documented procedures based
upon ISO/TS16949QMS and ISO 14001 EMS [for plant only].These described only all the activities in
structured manner to be performed at all BU & SSU level. These procedures are audited at least twice in
six months, once each by internal and external auditors. These audits ensure that systems are effectively
functioning and continual improvement is achieved.
UNDERSTANDING THE WORKING CAPITAL
28
Capital required for a business can be classified under two main categories via,
1) FIXED CAPITAL
2) WORKING CAPITAL
Every business needs funds for two purposes for its establishment and to carry out its day- to-day
operations. Long terms funds are required to create production facilities through purchase of fixed assets
such as p & m, land, building, furniture, etc. Investments in these assets represent that part of firm’s
capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for
short-term purposes for the purchase of raw material, payment of wages and other day – to- day expenses
etc.
CONCEPT OF WORKING CAPITAL
There are two concepts of working capital:
1. GROSS WORKING CAPITAL
2. NET WORKING CAPITAL
Gross working capital is the total of all current assets. Net working capital is the difference between
current assets and current liabilities. Though the later concept of working capital is commonly used it is an
accounting concept with little sense to say that a firm manages its net working capital. What a firm really
does is to take decisions with respect to various current assets and current liabilities.
NATURE OF ENTERPRISE
29
The nature and the working capital requirements of an enterprise are interlinked. While a
manufacturing industry has a long cycle of operation of the working capital, the same would be short in an
enterprise involved in providing services. The amount required also varies as per the nature; an enterprise
involved in production would require more working capital than a service sector enterprise.
MANUFACTURING/PRODUCTION POLICY
Each enterprise in the manufacturing sector has its own production policy, some follow the policy
of uniform production even if the demand varies from time to time, and others may follow the principle of
'demand-based production' in which production is based on the demand during that particular phase of
time. Accordingly, the working capital requirements vary for both of them.
WORKING CAPITAL CYCLE
30
In manufacturing concern, working capital cycle starts with the purchase of raw materials and ends
with realization of cash from the sale of finished goods. The cycle involves the purchase of raw materials
and ends with the realization of cash from the sale of finished products. The cycle involves purchase of
raw materials and stores, its conversion in to stock of finished goods through work in progress with
progressive increment of labor and service cost, conversion of finished stick in to sales and receivables
and ultimately realization of cash and this cycle continuous again from cash to purchase of raw materials
and so on.
OPERATIONS
31
The requirement of working capital fluctuates for seasonal business. The working capital needs of
such businesses may increase considerably during the busy season and decrease during the slack season.
Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible.
MARKET CONDITION
If there is high competition in the chosen product category, then one shall need to offer sops like
credit, immediate delivery of goods etc. for which the working capital requirement will be high.
Otherwise, if there is no competition or less competition in the market then the working capital
requirements will be low.
CREDIT POLICY
The credit policy is concerned in its dealings with debtors and creditors influence considerably the
requirements of the working capital. A concern that purchases its requirements on credit and sells its
products/services on cash requires lesser amount of working capital. On the other hand a concern buying
its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound
to be tied up in debtors or bills receivables.
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BUSINESS CYCLE
Business Cycle refers to alternate expansion and contraction in general business activities. In a
period of born i.e. when the business is prosperous there is a need for larger amount of working capital
due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at the time of
depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are
faced in collections from debtors and firms may have a large amount of working capital lying ideal
AVAILABILITY OF RAW MATERIAL
If raw material is readily available then one need not maintain a large stock of the same, thereby
reducing the working capital investment in raw material stock. On the other hand, if raw material is not
readily available then a large inventory/stock needs to be maintained, thereby calling for substantial
investment in the same.
GROWTH AND EXPANSION
Growth and expansion in the volume of business results in enhancement of the working capital
requirement as business grows and expands, it needs a larger amount of working capital. Normally, the
need for increased working capital funds precedes growth in business activities.
EARNING CAPACITY AND DIVIDEND POLICY
Some firms have more earning capacity than others due to the quality of their products, monopoly
conditions etc. Such firms with high earning capacity may generate cash profits from operations and
contribute to their capital. The dividend policy of a concern also influences the requirements of the
working capital.
PRICE LEVEL CHANGES33
Generally, rising price level requires a higher investment in the working capital. With increasing
prices, the same level of current assets needs enhanced investment.
MANUFACTURING CYCLE
The manufacturing cycle starts with the purchase of raw material and is completed with the
production of finished goods. If the manufacturing cycle involves a longer period, the need for working
capital would be more. At times, business needs to estimate the requirement of working capital in advance
for proper control and management. The factors discussed above influence the quantum of working capital
in the business. The assessment of working capital requirement is made keeping these factors in view.
Each constituent of working capital retains its form for a certain period and that holding period is
determined by the factors discussed above. So for correct assessment of the working capital requirement,
the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is
assigned to the respective current assets, depending on its level of completion.
OTHER FACTORS34
Certain other factors such as operating efficiency, management ability, irregularities a supply,
import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement
of working capital.
NET WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES.
COMPONENT OF WORKING CAPITAL BASIS OF VALUATION
Stock of raw material Purchase cost of raw materials
Stock of work in process At cost or market value, whichever is lower
Stock of finished goods Cost of production
Debtors Cost of sales or sales value
Cash Working expenses
Each constituent of the working capital is valued on the basis of valuation Enumerated above for the
holding period estimated. The total of all such valuation becomes the total estimated working capital
requirement. The assessment of the working capital should be accurate even in the case of small and micro
enterprises where business operation is not very large. We know that working capital has a very close
relationship with day-to-day operations of a business. Negligence in proper assessment of the working
capital, therefore, can affect the day-to-day operations severely. It may lead to cash crisis and ultimately to
liquidation. An inaccurate assessment of the working capital may cause either under-assessment or over-
assessment of the working capital and both of them are dangerous
CONSTITUENTS OF CURRENT ASSETS
35
1) Cash in hand and cash at bank
2) Bills receivables
3) Sundry debtors
4) Short term loans and advances.
5) Inventories of stock as:
a. Raw material
b. Work in process
c. Stores and spares
d. Finished goods
6. Temporary investment of surplus funds.
7. Prepaid expenses
8. Accrued incomes.
9. Marketable securities. In a narrow sense, the term working capital refers to the net working. Net
working capital is the excess of current assets over current liability, or, say:
Net working capital can be positive or negative. When the current assets exceeds the current liabilities
are more than the current assets. Current liabilities are those liabilities, which are intended to be paid in
the ordinary course of business within a short period of normally one accounting year out of the current
assts or the income business.
CONSTITUENTS OF CURRENT LIABILITIES
36
1. Accrued or outstanding expenses.
2. Short term loans, advances and deposits.
3. Dividends payable.
4. Bank overdraft.
5. Provision for taxation, if it does not amt. to app. of profit.
6. Bills payable.
7. Sundry creditors
The gross working capital concept is financial or going concern concept whereas net working capital is
an accounting concept of working capital. Both the concepts have their own merits. The gross concept is
sometimes preferred to the concept of working capital for the following reasons:
1. It enables the enterprise to provide correct amount of working capital at correct time.
2. Every management is more interested in total current assets with which it has to operate then the source from where it is made available.
3. It take into consideration of the fact every increase in the funds of the enterprise would increase its working capital.
4. This concept is also useful in determining the rate of return on investments in working capital. The net working capital concept, however, is also important for following reasons:
o It is qualitative concept, which indicates the firm’s ability to meet to its operating expense
and short-term liabilities.o It indicates the margin of protection available to the short term creditors.
o It is an indicator of the financial soundness of enterprises.
o It suggests the need of financing a part of working capital requirement out of the permanent
sources of funds.
CLASSIFICATION OF WORKING CAPITAL37
Working capital may be classified in two ways:
On the basis of concept.
On the basis of time.
On the basis of concept working capital can be classified as gross working capital and net working capital.
On the basis of time, working capital may be classified as:
Permanent or fixed working capital.
Temporary or variable working capital
PERMANENT OR FIXED WORKING CAPITAL
Permanent or fixed working capital is minimum amount which is required to ensure effective
utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to
maintain a minimum level of raw material, work- in-process, finished goods and cash balance. This
minimum level of current assets is called permanent or fixed working capital as this part of working is
permanently blocked in current assets. As the business grow the requirements of working capital also
increases due to increase in current assets.
TEMPORARY OR VARIABLE WORKING CAPITAL
38
Temporary or variable working capital is the amount of working capital which is required to meet
the seasonal demands and some special exigencies. Variable working capital can further be classified as
seasonal working capital and special working capital. The capital required to meet the seasonal need of the
enterprise is called seasonal working capital. Special working capital is that part of working capital which
is required to meet special exigencies such as launching of extensive marketing for conducting research,
etc. Temporary working capital differs from permanent working capital in the sense that is required for
short periods and cannot be permanently employed gainfully in the business.
39
IMPORTANCE OR ADVANTAGE OF ADEQUATE WORKING CAPITAL
Ø Solvency of the Business: Adequate working capital helps in maintaining the solvency of the
business by providing uninterrupted of production.
Ø Goodwill: Sufficient amount of working capital enables a firm to make prompt payments and
makes and maintain the goodwill.
Ø Easy loans: Adequate working capital leads to high solvency and credit standing can arrange
loans from banks and other on easy and favorable terms.
Ø Cash Discounts : Adequate working capital also enables a concern to avail cash discounts on
the purchases and hence reduces cost.
Ø Regular Supply of Raw Material: Sufficient working capital ensures regular supply of
raw material and continuous production.
Ø Regular Payment Of Salaries, Wages And Other Day TO Day Commitments:
It leads to the satisfaction of the employees and raises the morale of its employees, increases their
efficiency, reduces wastage and costs and enhances production and profits.
40
Ø Exploitation Of Favorable Market Conditions: If a firm is having adequate working
capital then it can exploit the favorable market conditions such as purchasing its requirements in
bulk when the prices are lower and holdings its inventories for higher prices.
Ø Ability To Face Crises: A concern can face the situation during the depression.
Ø Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence of the investors
and can raise more funds in future.
Ø High Morale: Adequate working capital brings an environment of securities, confidence, high
morale which results in overall efficiency in a business.
41
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its business operations.
It should have neither redundant or excess working capital nor inadequate nor shortages of working
capital. Both excess as well as short working capital positions are bad for any business. However, it is the
inadequate working capital which is more dangerous from the point of view of the firm.
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the firm and business
cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective credit policy which causes
higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and other financial
institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions
DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arises due to
the time gap between production and realization of cash from sales. There is an operating cycle involved
in sales and realization of cash. There are time gaps in purchase of raw material and production;
production and sales; and realization of cash.
42
NEED FOR WORKING CAPITAL
· For the purpose of raw material, components and spares.
· To pay wages and salaries
· To incur day-to-day expenses and overload costs such as office expenses.
· To meet the selling costs as packing, advertising, etc.
· To provide credit facilities to the customer.
· To maintain the inventories of the raw material, work-in-progress, stores and spares and finished
stock.
For studying the need of working capital in a business, one has to study the business under varying
circumstances such as a new concern requires a lot of funds to meet its initial requirements such as
promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The
amount needed for working capital depends upon the size of the company and ambitions of its promoters.
Greater the size of the business unit, generally larger will be the requirements of the working capital. The
requirement of the working capital goes on increasing with the growth and expensing of the business till it
gains maturity. At maturity the amount of working capital required is called normal working capital.
43
FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS
1. NATURE OF BUSINESS: The requirements of working is very limited in public utility
undertakings such as electricity, water supply and railways because they offer cash sale only and supply
services not products, and no funds are tied up in inventories and receivables. On the other hand the
trading and financial firms requires less investment in fixed assets but have to invest large amt. of working
capital along with fixed investments.
2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement of
working capital.
3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
4. LENTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw material and
other supplies have to be carried for a longer in the process with progressive increment of labor and
service costs before the final product is obtained. So working capital is directly proportional to the length
of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger
working capital than in slack season.
6. WORKING CAPITAL CYCLE: The speed with which the working cycle completes one cycle
determines the requirements of working capital. Longer the cycle larger is the requirement of WC
44
7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the question
of working capital and the velocity or speed with which the sales are affected. A firm having a high rate of
stock turnover will needs lower amt. of working capital as compared to a firm having a low rate of
turnover.
8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its product /
services on cash requires lesser amt. of working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need for
larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion of business, etc. On
the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection
from debtor and the firm may have a large amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require large amt.
of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY:
Some firms have more earning capacity than other due to quality of their products, monopoly
conditions, etc. Such firms may generate cash profits from operations and contribute to their working
capital. The dividend policy also affects the requirement of working capital. A firm maintaining a steady
high rate of cash dividend irrespective of its profits needs working capital than the firm that retains larger
part of its profits and does not pay so high rate of cash dividend.
OTHERS FACTORS: THESE ARE: 45
Operating efficiency.
Management ability.
Irregularities of supply.
Import policy.
Asset structure.
Importance of labor.
Banking facilities, etc
MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting to manage
the current assets, current liabilities. The basic goal of working capital management is to manage the
current assets and current liabilities of a firm in such a way that a satisfactory level of working capital is
maintained, i.e. it is neither adequate nor excessive as both the situations are bad for any firm. There
should be no shortage of funds and also no working capital should be ideal. WORKING CAPITAL
MANAGEMENT POLICES of a firm has a great on its probability, liquidity and structural health of the
organization. So working capital management is three dimensional in nature as
1. It concerned with the formulation of policies with regard to profitability, liquidity and risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
WORKING CAPITAL ANALYSIS
46
As we know working capital is the life blood and the centre of a business. Adequate amount of
working capital is very much essential for the smooth running of the business. And the most important
part is the efficient management of working capital in right time. The liquidity position of the firm is
totally effected by the management of working capital. So, a study of changes in the uses and sources of
working capital is necessary to evaluate the efficiency with which the working capital is employed in a
business. This involves the need of working capital analysis.
The analysis of working capital can be conducted through a number of devices, such as:
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS
A ratio is a simple arithmetical expression one number to another. The technique of ratio analysis
can be employed for measuring short-term liquidity or working capital position of a firm.
The following ratios can be calculated for these purposes:
1. Current ratio. 6. Payable turnover ratio.
2. Quick ratio 7. Working capital turnover ratio.
3. Absolute liquid ratio 8. Working capital leverage
4. Inventory turnover. 9. Ratio of current liabilities to tangible net worth
5. Receivables turnover.
2. FUND FLOW ANALYSIS
47
Fund flow analysis is a technical device designated to the study the source from which additional
funds were derived and the use to which these sources were put. The fund flow analysis consists of:
a. Preparing schedule of changes of working capital
b. Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position (working capital)
business enterprise between beginning and ending of the financial dates.
3. WORKING CAPITAL BUDGET
A budget is a financial and / or quantitative expression of business plans and polices to be pursued
in the future period time. Working capital budget as a part of the total budge ting process of a business is
prepared estimating future long term and short term working capital needs and sources to finance them,
and then comparing the budgeted figures with actual performance for calculating the variances, if any, so
that corrective actions may be taken in future. He objective working capital budget is to ensure availability
of funds as and needed, and to ensure effective utilization of these resources. The successful
implementation of working capital budget involves the preparing of separate budget for each element of
working capital, such as, cash, inventories and receivables etc.
ANALYSIS OF SHORT – TERM FINANCIAL POSITION
48
The short –term creditors of a company such as suppliers of goods of credit and commercial banks
short-term loans are primarily interested to know the ability of a firm to meet its obligations in time. The
short term obligations of a firm can be met in time only when it is having sufficient liquid assets. So to
with the confidence of investors, creditors, the smooth functioning of the firm and the efficient use of
fixed assets the liquid position of the firm must be strong. But a very high degree of liquidity of the firm
being tied – up in current assets. Therefore, it is important proper balance in regard to the liquidity of the
firm. Two types of ratios can be calculated for measuring short-term financial position or short-term
solvency position of the firm.
1. LIQUIDITY RATIOS.
2. CURRENT ASSETS MOVEMENTS ‘RATIOS.
A) LIQUIDITY RATIOS
Liquidity refers to the ability of a firm to meet its current obligations as and when these become
due. The short-term obligations are met by realizing amounts from current, floating or circulating assts.
The current assets should either be liquid or near about liquidity. These should be convertible in cash for
paying obligations of short-term nature. The sufficiency or insufficiency of current assets should be
assessed by comparing them with short-term liabilities. If current assets can pay off the current liabilities
then the liquidity position is satisfactory. On the other hand, if the current liabilities cannot be met out of
the current assets then the liquidity position is bad. To measure the liquidity of a firm, the following ratios
can be calculated:
1. CURRENT RATIO 2. QUICK RATIO 3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
49
Current Ratio, also known as working capital ratio is a measure of general liquidity and its most
widely used to make the analysis of short-term financial position or liquidity of a firm. It is defined as the
relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
Current assets include cash, marketable securities, bill receivables, sundry debtors, inventories and
work-in-progresses. Current liabilities include outstanding expenses, bill payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its
current obligations in time. On the hand a low current ratio represents that the liquidity position of the firm
is not good and the firm shall not be able to pay its current liabilities in time. A ratio equal or near to the
rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.
50
CALCULATION OF CURRENT RATIO
Example (Rupees in crore)
Year 2008 2009 2010
Current Assets 81.29 83.12 13,6.57
Current Liabilities 27.42 20.58 33.48
Current Ratio 2.96:1 4.03:1 4.08:1
INTERPRETATION
As we know that ideal current ratio for any firm is 2:1. If we see the current ratio of the company
for last three years it has increased from 2006 to 2008. The current ratio of company is more than the ideal
ratio. This depicts that company’s liquidity position is sound. Its current assets are more than its current
liabilities.
2. QUICK RATIO
51
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be defined as the
relationship between quick/liquid assets and current or liquid liabilities. An asset is said to be liquid if it
can be converted into cash with a short period without loss of value. It measures the firms’ capacity to pay
off current obligations immediately.
QUICK RATIO = QUICK ASSETS CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its current liabilities
in time and on the other hand a low quick ratio represents that the firms’ liquidity position is not good. As
a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick assets are equal
to the current liabilities then the concern may be able to meet its short-term obligations. However, a firm
having high quick ratio may not have a satisfactory liquidity position if it has slow paying debtors. On the
other hand, a firm having a low liquidity position if it has fast moving inventories.
52
CALCULATION OF QUICK RATIO
Example (Rupees in Crore)
Year 2008 2009 2010
Quick Assets 44.14 47.43 61.55
Current Liabilities 27.42 20.58 33.48
Quick Ratio 1.6 : 1 2.3 : 1 1.8 : 1
INTERPRETATION
A quick ratio is an indication that the firm is liquid and has the ability to meet its current liabilities
in time. The ideal quick ratio is 1:1. Company’s quick ratio is more than ideal ratio. This shows company
has no liquidity problem.
53
3. ABSOLUTE LIQUID RATIO
Although receivables, debtors and bills receivable are generally more liquid than inventories, yet
there may be doubts regarding their realization into cash immediately or in time. So absolute liquid ratio
should be calculated together with current ratio and acid test ratio so as to exclude even receivables from
the current assets and find out the absolute liquid assets. Absolute Liquid Assets includes
ABSOLUTE LIQUID RATIO = ABSOLUTE LIQUID ASSETS
CURRENT LIABILITES
ABSOLUTE LIQUID ASSETS = CASH & BANK BALANCES.
54
CALCULATION OF ABSOLUTE LIQUID RATIO
Example (Rupees in Crore)
Year 2008 2009 2010
Absolute Liquid Assets 4.69 1.79 5.06
Current Liabilities 27.42 20.58 33.48
Absolute Liquid Ratio 17 : 1 .09 : 1 15 : 1
INTERPRETATION
These ratio shows that company carries a small amount of cash. But there is nothing to be worried
about the lack of cash because company has reserve, borrowing power & long term investment. In India,
firms have credit limits sanctioned from banks and can easily draw cash.
55
B) CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn profits. The efficiency with
which assets are managed directly affects the volume of sales. The better the management of assets, large
is the amount of sales and profits. Current assets movement ratios measure the efficiency with which a
firm manages its resources. These ratios are called turnover ratios because they indicate the speed with
which assets are converted or turned over into sales. Depending upon the purpose, a number of turnover
ratios can be calculated. These are
1. Inventory Turnover Ratio
2. Debtors Turnover Ratio
3. Creditors Turnover Ratio
4. Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include high amount of
debtors due to slow credit collections and moreover if the assets include high amount of slow moving
inventories. As both the ratios ignore the movement of current assets, it is important to calculate the
turnover ratio.
56
1. INVENTORY TURNOVER OR STOCK TURNOVER RATIO
Every firm has to maintain a certain amount of inventory of finished goods so as to meet the
requirements of the business. But the level of inventory should neither be too high nor too low. Because it
is harmful to hold more inventory as some amount of capital is blocked in it and some cost is involved in
it. It will therefore be advisable to dispose the inventory as soon as possible.
INVENTORY TURNOVER RATIO = COST OF GOOD SOLD
AVERAGE INVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sales. Usually a
high inventory ratio indicates an efficient management of inventory because more frequently the stocks
are sold the lesser amount of money is required to finance the inventory. Whereas low inventory turnover
ratio indicates the inefficient management of inventory. A low inventory turnover implies over investment
in inventories, dull business, poor quality of goods, stock accumulations and slow moving goods and low
profits as compared to total investment.
AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
2
57
CALCULATION OF INVENTORY TURNOVER
Example (Rupees in Crore)
Year 2006 2007 2008
Cost of Goods sold 110.6 103.2 96.8
Average Stock 73.59 36.42 55.35
Inventory Turnover Ratio 1.5 times 2.8 times 1.75 times
INTERPRETATION
This ratio shows how rapidly the inventory is turning into receivable through sales. In 2007 the
company has high inventory turnover ratio but in 2008 it has reduced to 1.75 times. This shows that the
company’s inventory management technique is less efficient as compare to last year.
58
2. INVENTORY CONVERSION PERIOD:
INVENTORY CONVERSION PERIOD = 365 (NET WORKING DAYS) INVENTORY TURNOVER RATIO
Example (Rupees in Crore)
Year 2006 2007 2008
Days 365 365 365
Inventory Turnover Ratio 1.5 2.8 1.8
Inventory Conversion Period 243 days 130 days 202 days
INTERPRETATION
Inventory conversion period shows that how many days’ inventories take to convert from raw
material to finished goods. In the company inventory conversion period is decreasing. This shows the
efficiency of management to convert the inventory into cash.
59
3. DEBTORS TURNOVER RATIO
A concern may sell its goods on cash as well as on credit to increase its sales and a liberal credit
policy may result in tying up substantial funds of a firm in the form of trade debtors. Trade debtors are
expected to be converted into cash within a short period and are included in current assets. So liquidity
position of a concern also depends upon the quality of trade debtors. Two types of ratio can be calculated
to evaluate the quality of debtors.
A) Debtors Turnover Ratio B) Average Collection Period
DEBTORS TURNOVER RATIO = TOTAL SALES (CREDIT) AVERAGE DEBTORS
Debtor’s velocity indicates the number of times the debtors are turned over during a year.
Generally higher the value of debtor’s turnover ratio the more efficient is the management of debtors/sales
or more liquid are the debtors. Whereas a low debtors turnover ratio indicates poor management of
debtors/sales and less liquid debtors. This ratio should be compared with ratios of other firms doing the
same business and a trend may be found to make a better interpretation of the ratio.
AVERAGE DEBTORS = OPENING DEBTOR+CLOSING DEBTOR
2
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CALCULATION OF DEBTORS TURNOVER RATIO
Example (Rupees in Crore)
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Average Debtors 17.33 18.19 22.50
Debtor Turnover Ratio 9.6 times 8.3 times 7.5 times
INTERPRETATION
This ratio indicates the speed with which debtors are being converted or turnover into sales. The
higher the values or turnover into sales. The higher the values of debtors turnover, the more efficient is the
management of credit. But in the company the debtor turnover ratio is decreasing year to year. This shows
that company is not utilizing its debtor’s efficiency. Now their credit policy become liberal as compare to
previous year
61
4. AVERAGE COLLECTION PERIOD:
AVERAGE COLLECTION PERIOD = NO. OF WORKING DAYS DEBTORS TURNOVER RATIO
The average collection period ratio represents the average number of days for which a firm has to
wait before its receivables are converted into cash. It measures the quality of debtors. Generally, shorter
the average collection period the better is the quality of debtors as a short collection period implies quick
payment by debtors and vice-versa.
AVERAGE COLLECTION PERIOD = 365 (NET WORKING DAYS)
DEBTORS TURNOVER RATIO
Year 2006 2007 2008
Days 365 365 365
Debtor Turnover Ratio 9.6 8.3 7.5
Average Collection Period 38 days 44 days 49 days
INTERPRETATION
The average collection period measures the quality of debtors and it helps in analyzing the
efficiency of collection efforts. It also helps to analysis the credit policy adopted by company. In the firm
average collection period increasing year to year. It shows that the firm has Liberal Credit policy. These
changes in policy are due to competitor’s credit policy.
62
5. WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio indicates the velocity of utilization of net working capital. This ratio
indicates the number of times the working capital is turned over in the course of the year. This ratio
measures the efficiency with which the working capital is used by the firm. A higher ratio indicates
efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital
turnover is not a good situation for any firm.
WORKING CAPITAL TURNOVER RATIO = COST OF SALES
NET WORKING CAPITAL
WORKING CAPITAL TURNOVER = SALES NETWORKING CAPITAL
Example (Rs In Crore)
Year 2006 2007 2008
Sales 166.0 151.5 169.5
Networking Capital 53.87 62.52 103.09
Working Capital Turnover 3.08 2.4 1.64
INTERPRETATION
This ratio indicates low much net working capital requires for sales. In 2008, the reciprocal of this
ratio (1/1.64 = .609) shows that for sales of Rs. 1 the company requires 60 paisa as working capital. Thus
this ratio is helpful to forecast the working capital requirement on the basis of sale.
63
INVENTORIES
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Inventories 37.15 35.69 75.01
INTERPRETATION
Inventories are a major part of current assets. If any company wants to manage its working capital
efficiency, it has to manage its inventories efficiently. The graph shows that inventory in 2005-2006 is
45%, in 2006-2007 is 43% and in 2007-2008 is 54% of their current assets. The company should try to
reduce the inventory upto 10% or 20% of current assets.
64
KEY RATIOS
65
CASH BANK BALANCE
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Cash Bank Balance 4.69 1.79 5.05
INTERPRETATION
Cash is basic input or component of working capital. Cash is needed to keep the business running
on a continuous basis. So the organization should have sufficient cash to meet various requirements. The
above graph is indicate that in 2006 the cash is 4.69 crore but in 2007 it has decrease to 1.79. The result of
that it disturbs the firms manufacturing operations. In 2008, it is increased upto approx. 5.1% cash
balance. So in 2008, the company has no problem for meeting its requirement as compare to 2007.
DEBTORS
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Debtors 17.33 19.05 25.94
INTERPRETATION
Debtors constitute a substantial portion of total current assets. In India it constitute one third of
current assets. The above graph is depict that there is increase in debtors. It represents an extension of
credit to customers. The reason for increasing credit is competition and company liberal credit policy.
66
CURRENT ASSETS:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Current Assets 81.29 83.15 136.57
INTERPRETATION
This graph shows that there is 64% increase in current assets in 2008. This increase is arising
because there is approx. 50% increase in inventories. Increase in current assets shows the
liquidity soundness of company.
CURRENT LIABILITY:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Current Liability 27.42 20.58 33.48
INTERPRETATION
Current liabilities shows company short term debts pay to outsiders. In 2008 the current liabilities
of the company increased. But still increase in current assets is more than its current liabilities.
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NET WOKRING CAPITAL:
Example (Rs. in Crore)
Year 2005-2006 2006-2007 2007-2008
Net Working Capital 53.87 62.53 103.09
INTERPRETATION
Working capital is required to finance day to day operations of a firm. There should be an
optimum level of working capital. It should not be too less or not too excess. In the company there is
increase in working capital. The increase in working capital arises because the company has expanded its
business.
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INVENTORY MANAGEMENT (A)
Inventory Turnover ratio signifies the amount of sale generated with each unit invested in raw
material. The inventory utilization by J.K. is quite effective but and need to take measures to increase to
stock turnover. This is possible only by shortening the operating cycle in days taken from the point of
purchase of raw material to its conversion to the final sale to the consumers and the money getting back
into the organization to be utilized again by the company to purchase raw materials for the next operating
cycle.
• The raw material holding period identifies the number of days the raw material stays in the
company before being put into the production process. The raw material holding period of J.K.
Tyres have to reduce the number of holding days.
• J.K .tyres has already started taking the initiative to reduce the number of holding days from 61
days to 30 days. This can be done by avoiding stocking up of raw materials.
• The finished goods holding period of company is very less of 12 days as compared to others
industries, which is around 18-20 days in others industries.
• Reducing the number of holding days whether raw materials or finished goods is important as
this will shorten the operating cycle which would increase the working capital turnover
indicating its efficient use.
• J.K. Tyre has the highest inventory to current assets ratio of around 50%. This means that a lot
of money is blocked in excess inventory storage which should be reduced.
• The Debtors Turnover Ratio of is very high which is quite appreciable. This is due to the fact
that the average collection period of is very short of around an average of 24 days as compared
to others ranging from 50 to 55 days.
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CASH MANAGEMENT
• Cash management throws light on the judicious and efficient use of cash (which is the most
liquid asset of an organization). J.K. seems to have the best cash management system since it is
the policy of management to invest excess cash into profitable investment avenues.
• J.K.Tyre needs to look into its cash management system and bring some changes as there
seems to be unnecessary idle cash lying in the business which could otherwise be used more
productively.
• J.K.Tyre already has started with remedial measures of utilizing excess cash into suitable
ventures.
• The percentage of cash out of total current assets of J.K.Tyre is very high ranging from 15% -
20% as the company needs to utilize the excess cash and bring down the percentage. This will
also help the company to increase its profitability
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WORKING CAPITAL CYCLE
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's
primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is
operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the
business will eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital and investment. The cheapest
and best sources of cash exist as working capital right within business. Good management of working
capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of
providing credit to customers and holding stocks can represent a substantial proportion of a firm's total
profits.
There are two elements in the business cycle that absorb cash - Inventory (stocks and work-in-progress)
and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and
Equity and Loans.
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Each component of working capital (namely inventory, receivables and payables) has two
dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS
MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors
more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the
business will generate more cash or it will need to borrow less money to fund working capital. As a
consequence, you could reduce the cost of bank interest or you'll have additional free money available to
support additional sales growth or investment. Similarly, if you can negotiate improved terms with
suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund
future sales.
If you....... Then......
Collect receivables (debtors) faster You release cash from
the cycle
Collect receivables (debtors) slower Your receivables soak up
cash
Get better credit (in terms of duration or
amount) from suppliers
You increase your cash
resources
Shift inventory (stocks) faster You free up cash
Move inventory (stocks) slower You consume more cash
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It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If
you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is
tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay
dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they
remove liquidity from the business.
More businesses fail for lack of cash than for want of profit.
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SOURCES OF ADDITIONAL WORKING CAPITAL
Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit
Long-term loans
If you have insufficient working capital and try to increase sales, you can easily over-stretch the financial
resources of the business.
This is called overtrading. Early warning signs include:
o Pressure on existing cash
o Exceptional cash generating activities e.g. offering high discounts for early cash payment
o Bank overdraft exceeds authorized limit
o Seeking greater overdrafts or lines of credit
o Part-paying suppliers or other creditors
o Paying bills in cash to secure additional supplies
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o Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).
HANDLING RECEIVABLES (DEBTORS)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster.
Every business needs to know.... who owes them money.... how much is owed.... how long it is owing....
for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small businesses who can least
afford it. If you don't manage debtors, they will begin to manage your business as you will gradually
lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad
debt.
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COMPARISON WITH VARIOUS INDUSTRIES
The major observations of the study are as follows:-
• The selected sample companies have been following either an aggressive or conservative
approach:
APOLLO - Aggressive approach
J.K - Aggressive approach
CEAT - No definitive approach
MRF - Conservative approach
• All the companies have a positive net working capital except in the case of Ceat Ltd. in 2005-
2006 and 2006-2007. On an average, the net working capital is largest in MRF followed by
Apollo, J.K. and Ceat.
• When quick assets are compared with current liabilities, it is revealed that the former are
insufficient to cover current liabilities in case of J.K. Tyres. For Ceat Ltd. there has been a
sudden decline in quick ratio in the year 2005-2006 and 2006-2007. MRF and Apollo are in
good position to pay off current debts from quick assets.
• If standard current ratio is to be taken as 2:1 then Apollo and MRF have current ratios equal to
or more than two. But in case of J.K. and Ceat the current ratio is less than two which reflects
a poor liquidity position of these two enterprises.
• There is a standoff between liquidity and profitability position of the tyre companies. These
two don’t go hand in hand, as in case of MRF where liquidity levels are very high as compared
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to the industry standards but profitability levels do not rise up to expectations even though
MRF has the largest market share. There is an inverse relationship between the two as analyzed
from financial reports. Higher the liquidity levels, lower would be the profitability and vice-
versa, therefore, tyre companies have to maintain a delicate balance between the two.
• The efficient management of Working Capital and its components has a direct effect on the
profitability levels of the tyre companies:-
With increase in working capital turnover of Apollo and MRF, the net profit ratio
has also improved
• The efficient management of Working Capital and its components has a direct effect on the
profitability levels of the tyre companies:-
With increase in working capital turnover of Apollo and MRF, the net profit ratio
has also improved 14 International Research Journal of Finance and Economics -
Issue 46 (2010)
An efficient receivables management by Apollo has led to short operating cycle
which has led to high debtor turnover ratio and high profitability levels of the
company. High collection period from debtors of J.K., Ceat and MRF is apparent
from their low DTR and further low profitability levels.
• Although J.K. has the highest working capital turnover ratio, much above the industry level, it
shows no effect on the profitability levels. This may be due to over-trading which the company
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should look into as early as possible. Also, there is a gradual decline in the liquidity level and
the company should be aware of a liquidity crises coming up.
• The tyre companies have on an average half of their total assets in the form of current assets.
The average ratio of current assets to total assets is largest for MRF followed by Ceat, Apollo
and J.K. Of the total different components of current assets, the share of inventories in total
assets, on an average, is largest followed by receivables and cash. Over a period of time, the
share of cash has declined except in case of MRF. Since inventories occupy a major share in
current assets and its share has increased over a period of time, the tyre industry should pay
more attention to management of inventories. The increasing share of inventories indicates that
current assets seem to have become less liquid.
For financing any working capital requirements, the tyre companies generally prefer:
Bank overdraft/Bank cash credit for immediate solution.
Short term loans from Banks generally secured by hypothecation of Inventories and book debts.
Loans from financial Institutions like IDBI, IFCI, and ICICI by hypothecation of immovable
properties. The study of the turnover ratios compiled over a period of 8 years show that there has been an
improvement in utilization of current assets
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Recognize that the longer someone owes you, the greater the chance you will never get paid. If the
average age of your debtors is getting longer, or is already very long, you may need to look for the
following possible defects:
weak credit judgment
poor collection procedures
lax enforcement of credit terms
slow issue of invoices or statements
errors in invoices or statements
Customer dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate
attention. Look for the warning signs of a future bad debt. For Example.........
o longer credit terms taken with approval, particularly for smaller orders
o use of post-dated checks by debtors who normally settle within agreed terms
o evidence of customers switching to additional suppliers for the same goods
o new customers who are reluctant to give credit references
o Receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one which most people dislike for many reasons and therefore put
on the long finger because they convince themselves there is something more urgent or important that
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demands their attention now. There is nothing more important than getting paid for your product or
service. A customer who does not pay is not a customer.
MANAGING PAYABLES (CREDITORS)
Creditors are a vital part of effective cash management and should be managed carefully to enhance
the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create
liquidity problems. Consider the following:
o Who authorizes purchasing in your company - is it tightly managed or spread among a number of
(junior) people?
o Are purchase quantities geared to demand forecasts?
o Do you use order quantities which take account of stock-holding and purchasing costs?
o Do you know the cost to the company of carrying stock?
o Do you have alternative sources of supply? If not, get quotes from major suppliers and shop
around for the best discounts, credit terms, and reduce dependence on a single supplier.
o How many of your suppliers have a returns policy?
o Are you in a position to pass on cost increases quickly through price increases to your customers?
o If a supplier of goods or services lets you down can you charge back the cost of the delay?
o Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time
basis?
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There is an old adage in business that if you can buy well then you can sell well. Management of your
creditors and suppliers is just as important as the management of your debtors. It is important to look after
your creditors - slow payment by you may create ill-feeling and can signal that your company is
inefficient (or in trouble!).
RESEARCH METHODOLOGY
The methodology, I have adopted for my study is the various tools, which basically analyze
critically financial position of to the organization:
I. COMMON-SIZE P/L A/C IV. COMPARTIVE BALANCE SHEET
II. COMMON-SIZE BALANCE SHEET V. TREND ANALYSIS
III. COMPARTIVE P/L A/C VI. RATIO ANALYSIS
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The above parameters are used for critical analysis of financial position. With the evaluation of
each component, the financial position from different angles is tried to be presented in well and
systematic manner. By critical analysis with the help of different tools, it becomes clear how the
financial manager handles the finance matters in profitable manner in the critical challenging
atmosphere, the recommendation are made which would suggest the organization in formulation of a
healthy and strong position financially with proper management system.
FORMULATING THE RESERCH DESIGN
This is the first step under which the problem is stated in general way and the ambiguities that is
understanding and rephrasing the problem thoroughly and rephrasing the same into meaningful terms from
a analysis point of view. The research problem under the present project was to study the data of various
funds. For this research process was to be formulated and the execution which would result in desired
data.
PREPARING THE RESERCH DESIGN
The function of research design is to provide for the collection of relevant evidence with minimal
expenditures of efforts, time & money.
RESERCH DESIGN
Type of Research
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Sample Design
TYPE OF RESEARCH
The type of research under present is an analytical research. In analytical research, we use tact and
information already available, and analyze these to make critical evaluation of the material. Hence the
same would be done. In this project I had collected fact, data and information.
SAMPLE DESIGN
A sample design is a definite plan determines the data is actually collected for obtaining a sample.
Researcher must select a sample design which should be reliable and appropriate for this project.
COLLECTION OF DATA
Observational design relates to the condition under which the observations are to make.
Observational design in respect to research there are several ways of collecting the data which differ
considerably in context of money, time cost and resources at the disposal of the researcher
DATA CAN BE OBTAIN FROM TWO IMPORTANT SOURCES
Primary data
Secondary data
PRIMARY DATA
Primary data are the data collected afresh and for the first time thus happen to be in character. Primary
data collected by the following ways
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Observation
Interview
Schedule
Questionnaire
SECONDARY DATA
Secondary data are the data that are already collected and are only analyzed by different sources are as
follows
Corporate magazines
Manuals of various companies
Journal, newspapers and books
The secondary data is collected from financial statement, journal of national repute books of national
and international authors as well as the annual report of the company. In addition to this internet excess
will make more effective and meaningful.
DATA INTERPRETATION AND ANALYSIS
INVENTORIES MANAGEMENT AT J.K TYRE
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J.K TYRE is a large scale manufacturing company involved in Manufacturing of tyres for
different vehicles like cars & trucks. Therefore, it has to maintain large quantity of inventories at
production units for its smooth running and functioning.
CASH MANAGEMENT AT J.K TYRE
J.K TYRE has been accumulating huge cash surpluses over last several years, which enables the
organization to maintain adequate cash reserves and to generate required amount of cash.
RECEIVABLES MANAGEMENT AT J.K TYRE
J.K TYRE has set up its marketing office at all metro cities in India i.e. Mumbai, Kolkata, New
Delhi, Chennai, Bangalore, and Pondicherry. This marketing office obtains sales order from Tyres dealers
in India as well as globally. On the basis of order received for different range of tyres it marks production
planning
PERFORMANCE HIGHLIGHTS
J.K TYRE & Industries (JK Tyre) reported 23% growth in net sales to Rs1, 051cr (Rs854cr),
which was below our expectations. This was largely because of lower-than-expected performance at the
operating front due to a substantial increase in raw material cost. The company reported an OPM of 7.8%
on account of the qoq increase in raw material cost. Net profit at Rs26.7cr (Rs13.6cr) came in below our
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expectations. Management is optimistic about generating good volumes in FY2010 on the back of strong
demand, capacity expansion across segments and the Tornel acquisition. The stock is currently available
at attractive valuations of 4.2x and 3.7x FY2011E and FY2012E EPS, respectively. We maintain Buy on
the stock
FY2010 FINANCIAL PERFORMANCE
JK Tyre reported net sales of Rs 3,678cr on a standalone basis for FY2010 and Rs 4, 571cr on a
consolidated basis. Net profit came in at Rs163cr on a standalone and at Rs224cr on a consolidated basis.
The numbers are not comparable with the previous fiscal as previous fiscal numbers are for eighteen
months. The tonnage stood at 56,700MT for 4QFY2010 and
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2, 40,000MT for FY2010.
OUTLOOK AND VALUATION
In FY2010, the tyre industry benefited largely from the increased original equipment manufacturer
(OEM) demand and spike in replacement demand. Going ahead, we are positive on the sector as OEM off-
take is expected to improve, benefitting the overall auto industry’s volume growth. However, the recent
run-up in raw-material prices is a concern and expected to exert some pressure on the company’s
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operating margin. On account of the lower-than-expected 4QFY2010 performance, we estimate the
company to generate EPS of Rs43.2 (Rs45.5) in FY2011E and Rs48.4 (Rs53.5) in FY2012E. We maintain
Buy on JK Tyre with a revised Target Price of Rs242 (Rs267), at which the stock would trade at 5x, 3.3 xs
and 0.8x FY2012E EPS, EV/EBITDA and P/BV, respective
MARGINAL TOP-LINE GROWTH; STRIKE AFFECTS SALES
JK Tyre reported 23% yoy growth in net sales to Rs1, 051cr (Rs854cr) in 4QFY2010. In tonnage
terms, the company registered 11.2% yoy growth in volume to 56,700MT in 4QFY2010 (51,500MT in
3QFY2010 and 51,000MT in 4QFY2009). JK Tyre announced a hike in prices in 3QFY2010 and
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4QFY2010 to pass-through the raw-material cost increase. An average of ~5% hike across the segments
was applicable from January 2009 to abbreviate the increase in raw-material costs. The average
procurement price of rubber in 4QFY2010 stood at Rs145/Kg compared to Rs119/Kg in 3QFY2010.
OPM BELOW EXPECTATION DUE TO INCREASED RAW MATERIAL
COST
The company’s operating profit increased 14.5% yoy to Rs82.2cr (Rs71.8cr). However, on a qoq
basis, OPM dropped by 449bp yoy to 7.8% (11.7% in 3QFY2010), which was below our estimates. This
was primarily on account of the 586bp qoq jump in raw-material cost. The company attributed the
substantial contraction in OPM to change in product mix and higher rubber prices. OPM growth was also
partially arrested by the spike in other expenditure, which comprised discounts and other selling and
distribution expenses. The company also hiked prices by 5% in 4QFY2010 and has guided on subsequent
price hikes in the event of increasing rubber prices. Management has guided to sustain margins of 10–
10.5% in FY2011E.
NET PROFIT BELOW EXPECTATIONS AT Rs 26.7Cr
For 4QFY2010, JK Tyre recorded a 96.1% yoy increase in net profit to Rs26.7cr (Rs13.6cr), which was
below our estimates, primarily on account of a low base of last year and significant payback in working
capital loans leading to a fall in interest costs (debt on books of standalone entity is Rs860cr).
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PROFIT & LOSS STATEMENT CONSOLIDATED Rs Cr
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CAPACITY EXPANSION PLANS
Currently, JK Tyre is running at almost full capacity and is partially unable to meet increasing
OEM demand. Therefore, the company has major expansion plans on the anvil across segments, with most 91
of the capacities coming on board from 2011E–2012E. The company’s total capacity post the expansions
is slated at 12.6mn tyres annually. The company incurred a capex of Rs315cr for FY2010 and has lined up
a capex of Rs750cr for FY2011E. The company has overall capital expenditure plans of Rs930cr in the
next two years, out of which Rs776cr is for a Greenfield facility at Chennai, which could be operational
by 2012. This facility will produce 25 lakh passenger car radials, 2 lakh bus radials and 2 lakh truck
radials. The remaining capex will be used for expanding the facility at the Mysore plant from 8 lakh to 10
lakh radials at a cost of Rs154 cr. The expansion is expected to be completed by March 2011.
Consequently, the company’s domestic capacity will reach 1.25cr tyres a year in 2012. JK Tyre is
currently expanding its off-road tyre (ultra large-size tyre) capacity by 3,000 tyres a year to 42,000 tyres
per year, primarily for Bharat Earth Movers (BEML), at a cost of Rs120cr.
The company has, in fact, delivered the first batch of its ultra large-size tyres to BEML ahead of
schedule. JK Tyre has completed its truck and bus radial (T&BR) capacity expansion plan, with an
investment of Rs315cr, and will have increased capacity from 307,000 tyres to 800,000 tyres per year by
October 2010. This capacity has been running at almost 100% capacity utilization in November and
December 2009. Therefore, management plans to increase its radial capacity by another 4 lakh tyres to 12
lakh tyres per year over the next three years.
MANAGEMENT OUTLOOK
Management is positive about the auto industry’s growth, including the commercial vehicle and
the passenger vehicle segments, and has planned capacity expansions to meet the demand arising from the
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uptrend in the auto industry in general. With new international players entering the compact car segment
particularly, management expects the industry to witness ~18% annual growth in the passenger car radial
segment over the next couple of years. Management is also optimistic on an upturn in the CV cycle and
off-take from its strong clients, Ashok Leyland and Tata Motors. Further, management expects the T&BR
segment to register 8–10% annual growth over the next couple of years. The acquisition of Tornel, which
is majorly into truck, LCV, farm and industrial tyres in the bias category and truck, LCV and high-speed
passenger car tyres, has given JK Tyre a strong hold in the
South American market, which will help increase contribution from the company’s international
business Debt levels for the company as in March 2010 have gone down from Rs1,100cr to Rs860cr on a
standalone basis, and from Rs1, 382cr to Rs1, 158cr on a consolidated basis. The company continues to
maintain cash at a normal level of Rs50–60cr.Production volumes for JK Tyre for FY2011E could be up
by 20–25% as demand from passenger cars, trucks and buses remains robust. Currently, demand for tyres
is exceeding the supply. The company should also benefit from full capacity utilization at the Kankroli
tyre plant in FY2011E. The disruption in operations last year due to the illegal strike by workmen led to a
decline of Rs300cr in sales and a loss of Rs30–35cr at the EBITDA level.
BALANCESHEET CONSOLIDATED Rs Cr
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CASH FLOW STATEMENT CONSOLIDATED Rs Cr
94
FINANCIAL STATEMENT ANALYSIST
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It is the process of identifying the financial strength and weakness of a firm from the available
accounting data and financial statements. The analysis is done
LIMITATIONS OF FINANCIAL STATEMENTS:
Though financial statements are relevant and useful for a concern, still they do not present a final
picture a final picture of a concern. The utility of these statements is dependent upon a number of factors.
The analysis and interpretation of these statements must be done carefully otherwise misleading
conclusion may be drawn.
1. Financial statements do not given a final picture of the concern. The data given in these
statements is only approximate. The actual value can only be determined when the business is sold or
liquidated.
2. Financial statements have been prepared for different accounting periods, generally one year,
during the life of a concern. The costs and incomes are apportioned to different periods with a view to
determine profits etc. The allocation of expenses and income depends upon the personal judgment of the
accountant. The existence of contingent assets and liabilities also make the statements imprecise. so
financial statement are at the most interim reports rather than the final picture of the firm.
3. The financial statements are expressed in monetary value, so they appear to give final ad accurate
position. The value of fixed assets in the balance sheet neither represent the value for which fixed assets
can be sold nor the amount which will be required to replace these assets. The balance sheet is prepared on
the presumption of a going concern. The concern is expected to continue in future so fixed assets are
shown at cost less accumulated depreciation. Moreover, there are certain assets in the balance sheet which
will realize nothing at the time of liquidation but they are shown in the balance sheets.
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4. The financial statements are prepared on the basis of historical costs or original costs. The value of
assets decreases with the passage of time current price changes are not taken into account. The statement
are not prepared with the keeping in view the economic conditions. The balance sheet loses the
significance of being an index of current economic realities. Similarly, the profitability shown by the
income statements may be representing the earning capacity of the concern.
5. There are certain factors which have a bearing on the financial position and operating result of the
business but they do not become a part of these statements because they cannot be measured in monetary
terms. The basic limitation of the traditional financial statements comprising the balance sheet, profit &
loss A/c is that they do not give all the information regarding the financial operation of the firm.
Nevertheless, they provide some extremely useful information to the extent the balance sheet mirrors the
financial position on a particular data in lines of the structure of assets, liabilities etc. and the profit & loss
A/c shows the result of operation during a certain period in terms revenue obtained and cost incurred
during the year Thus, the financial position and operation of the firm.
SUGGESTIONS
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1. Have the right mental attitude to the control of credit and make sure that it gets the priority it
deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and customers.
4. Be professional when accepting new accounts, and especially larger ones.
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references,
industry sources etc.
6. Establish credit limits for each customer... and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if operating in a
volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.
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LIMITATIONS OF THE STUDY
A) The limitations inherent in secondary data are bound to exist in the research as well.
B) The primary data has been collected from the previous financial statements of J.K.Tyre and as such is
biased to certain extent.
C) The study of working capital is done in Banmore plant which is not enough to understand the whole
working of the industry
E) The primary data has been collected during the working hours and as such reveal the result in its limits.
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CONCLUSION
After studying the components of working capital management system of J.K.Tyre It is found that the
company has a sound and effective policy and its performance is very good even in this bad recession
Situation Company has managed to post good profit. Company is competing well at the domestic as well
as the international level and it is among the low cost producers of Tyres in the world only because of its
proper management of finance, specially the short term finance known as the working capital. The
company is a matured one and it has contributed well in the countries growth and development and will
also continue to perform and contribute to the whole nation. In conclusion, we can say that the companies
management is an effective one and knows well the management of finance, its working capital
management system is very good
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REFERENCES
Books
[1] Anthony, R.N. et.al.(1998). Management Accounting Taxes and cases Illinois. Richard D.
Irwin Inc.
[2] Agarwal N.P. and Mangal S.K.(1988). Readings in Financial Management Jaipur: Rupa
Publishers.
[3] Bhalla, V.K. (1987). Financial Management, Delhi; Khosla Publishing House.
[4] Chaddha R.S. (2002). Inventory Management in India, Mumbai Allied Publication.
[5] Gupta M.C., Profitability Analysis. (1989). Jaipur, Pointer Publishers.
[6] Gupta, S.P. (2002). Statistical Methods, New Delhi: Sultan Chand & sons.
[7] Horward, L.R., Working Capital: Its Management and control. (1987). London: McDonald and events
Ltd.
REPORTS/OFFICIAL PUBLICATIONS
[1] Annual reports of selected Companies of the selected period.
Periodicals/Journals/Bulletins
[1] The Journal of Industries and Trade Lok Udyog, New Delhi.
[2] The Indian Accounting journal and Finance
[3] The Accounting Review
WEBSITES
[1] www.ICAI.org
[2] www.mrftyres.com
[3] www.ceatyres.com
[4] www.apollotyres.com
[5] http://www.jktyres.com/
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