FINANCIAL MANAGEMENT

In our present day economy, finance is defined as the provision

of money at the time when it is required. Every enterprise, whether big,

medium of small, needs finance to carry its operations and to achieve its

targets. In fact, finance is so indispensable today that it is rightly said to be

the lifeblood of an enterprise. Without adequate finance, no enterprise can

possibly accomplish its objectives.

Financial management is applicable to every type of

organization, irrespective of its size kind of nature. It is as useful to a small

concern as to a big unit. A trading concern gets the same utility from its

application as a manufacturing unit may expect. This subject is important

and useful for all types of ownership organizations. Every management

aims to utilize its funds in a best possible and profitable way. So this

subject is acquiring a universal applicability.

It is indispensable in any organization as helps in:(I) Financial planning and successful promotion of an enterprise;

(II) Acquisition of funds as and when required at the minimum possible

cost;

(III) Proper use and allocation of funds;

(IV) Taking sound financial decisions ;

(V) Improving the profitability through financial controls;

(VI) Increasing the wealth of the investors and the nation; and

(vii) Promoting and mobilizing individual and corporate savings.

OBJECTIVES OF FINANCIAL MANAGEMENT

Financial management is concerned with procurement and use

of funds. Its main aim is to use business funds in such a way that the firm’s

value/earnings are maximized. There are various alternatives available for

using business funds. Each alternative course has to be evaluated in detail.

The pros and cons of various decisions have to look into before

making a final selection. The decisions will have take into consideration the

commercial strategy of the business. Financial management provides a

framework for selecting a proper course of action and deciding a viable

commercial strategy. The main objective of a business is to maximize the

owner’s economic welfare. This objective can be achieved by:

1. Profit Maximization

2. Wealth maximization

1. Profit maximization: Profit earning is the main aim of every economic activity. A

business being an economic institution must earn profit to cover its costs

and provide funds for growth. No business can service without earning

profit. Profits are a measure of efficiency of a business enterprise. Profits

also serve as a protection against risks which cannot be ensured. The

accumulated profits enable a business to face risks like fall in prices,

competition from other units, adverse government policies etc. Thus, profit

maximization is considered as the main objective of business:

(i) When profit – earning is the aim of business then profit maximization

should be the obvious objective.

(ii) Profitability is a barometer for measuring efficiency and economic

prosperity of a business enterprise, thus, profit maximization is justified

on the grounds of rationality.

(iii) Economic and business conditions do not remain same at all the times.

There may be adverse business conditions like recession, depression,

severe competition etc. A business will be able to service under

unfavorable situation only if it has some past earnings to rely upon.

Therefore a business should try to earn more and more when situation

is favorable.

(iv) Profits are the main sources of finance for the growth of a business.

So, a business should aim at maximization of profits for enabling its

growth and development.

(v) Profitability is essential for fulfilling social goals also. A firm by pursuing

the objective of profit maximization also maximizes socio- economic

welfare.

2. Wealth maximizationWealth maximization is the appropriate objective of an

enterprise financial theory asserts that wealth maximization is the single

substitute for stockholder’s utility. When the firm maximizes the

stockholder’s wealth, the individual stockholder can use this wealth to

maximize his individual utility. It means that by maximizing stockholder’s

wealth firm is operating consistently towards maximizing stockholder’s

utility.

FINANCIAL STATEMENTS

A financial statement is a collection of data organized according to

logical and consistent accounting procedures. Its purpose is to convey

an understanding of some financial aspects of a business firm. It may

show a position at a movement in time, as in the case of balance sheet,

or may reveal a series of activities over a given period of time, as in the

case of an income statement.

Objectives of financial statements:Financial statements are the sources of information on the basis of

which conclusions are drawn about the profitability and financial position

of a concern. They are the major means employed by firms to present

their financial situation of owners, creditors and the general public. The

primary objective of financial statements is to assist in decision making.

The Accounting Principles Board of America (APB) states the following

objectives of financial statements:

(i) To provide reliable financial information about economic resources and

obligations of business firm.

(ii) To provide other needed information about changes in such economic

resources and obligations.

(iii) To provide reliable information about changes in net resources

(resources less obligations) arising out of business activities.

(iv) To provide financial information that assists in estimating the earning

potentials of business.

F INANCIAL STATEMENT ANALYSIS

Financial analysis is the process of determining financial

strengths and weakness of the firm by establishing strategic relationship

between the items of the items of the balance sheet, profit and loss account

and other operative data. In the words of Myers, “financial statements

analysis is largely a study of relationship among various financial factors in

a business as disclosed by a single set of statements, and a study of the

trend of these factors as shown in series of statements.

A financial ratio (or accounting ratio) is a relative magnitude of two

selected numerical values taken from an enterprise's financial statements.

Often used in accounting, there are many standard ratios used to try to

evaluate the overall financial condition of a corporation or other

organization. Financial ratios may be used by managers within a firm, by

current and potential shareholders (owners) of a firm, and by a firm's

creditors. Financial analysts use financial ratios to compare the strengths

and weaknesses in various companies.[1] If shares in a company are traded

in a financial market, the market price of the shares is used in certain

financial ratios.

Ratios can be expressed as a decimal value, such as 0.10, or given as an

equivalent percent value, such as 10%. Some ratios are usually quoted as

percentages, especially ratios that are usually or always less than 1, such

as earnings yield, while others are usually quoted as decimal numbers,

especially ratios that are usually more than 1, such as P/E ratio; these latter

are also called multiples. Given any ratio, one can take its reciprocal; if the

ratio was above 1, the reciprocal will be below 1, and conversely. The

reciprocal expresses the same information, but may be more

understandable: for instance, the earnings yield can be compared with

bond yields, while the P/E ratio cannot be: for example, a P/E ratio of 20

corresponds to an earnings yield of 5%.

Sources of data for financial ratios

Values used in calculating financial ratios are taken from the balance sheet,

income statement, statement of cash flows or (sometimes) the statement of

retained earnings. These comprise the firm's "accounting statements" or

financial statements. The statements' data is based on the accounting

method and accounting standards used by the organization.

Purpose and types of ratios

Financial ratios quantify many aspects of a business and are an integral

part of the financial statement analysis. Financial ratios are categorized

according to the financial aspect of the business which the ratio measures.

Liquidity ratios measure the availability of cash to pay debt.[2] Activity ratios measure how quickly a firm converts non-cash assets to cash

assets.[3] Debt ratios measure the firm's ability to repay long-term debt. [4]

Profitability ratios measure the firm's use of its assets and control of its

expenses to generate an acceptable rate of return. [5] Market ratios measure investor response to owning a company's stock and also the cost

of issuing stock.[6] These are concerned with the return on investment for

shareholders, and with the relationship between return and the value of an

investment in company’s shares.

Financial ratios allow for comparisons

between companies

between industries

between different time periods for one company

between a single company and its industry average

Ratios generally are not useful unless they are benchmarked against

something else, like past performance or another company. Thus, the

ratios of firms in different industries, which face different risks, capital

requirements, and competition are usually hard to compare.

Accounting methods and principles

Financial ratios may not be directly comparable between companies that

use different accounting methods or follow various standard accounting

practices. Most public companies are required by law to use generally

accepted accounting principles for their home countries, but private

companies, partnerships and sole proprietorships may not use accrual

basis accounting. Large multi-national corporations may use International

Financial Reporting Standards to produce their financial statements, or they

may use the generally accepted accounting principles of their home

country.

There is no international standard for calculating the summary data

presented in all financial statements, and the terminology is not always

consistent between companies, industries, countries and time periods.

3. PROFITABILITY RATIO:

Definition of 'Profitability Ratios'

A class of financial metrics that are used to assess a business's ability to

generate earnings as compared to its expenses and other relevant costs

incurred during a specific period of time. For most of these ratios, having a

higher value relative to a competitor's ratio or the same ratio from a

previous period is indicative that the company is doing well.

An ability to earn maximum from maximum use of available resources by

the business concerns is known as ‘Profitability’. The status of profitability

depends upon the quantum of sales,nature of costs and proper use of

financial resources. The profitability ratios are used to calculate the

efficiency of operating of the company. Profits are ultimate goal of every

company and it should be continuously evaluated in terms of profits.

Profitability analysis comprises the stydy of sales , analysis of cost of goods

sold , analysis of gross margin on sales , analysis of operating expenses ,

analysis of operating profit & analysis of profit in relation to sales and

capital.

INTRESTED PARTIES IN PROFITABILITY RATIOS:

● MANAGEMENT

● CREDITORS

● OWNERS

Generally four major profits are calculated, they are

i. Gross profit ratio

ii. Net profit ratio

iii. Expense ratio

iv. Return on capital employed

i.Gross profit ratio:The first profitability ratio in relation to sales reflects the

efficiency with which management produces each unit of product. The

Gross profit ratio may be interpreted by comparing the ratio of the same

concern over a period of time or comparing the ratio of the two similar

concerns or by comparing the ratio of a year with some standard fixed by

management . Normally , a higher ratio is always considered good &

serves as a index of higher profitability. It is calculated by dividing the

Gross Profit with Sales.

Gross profitGross Profit ratio = x 100

Sales

ii. Net profit ratio:

It is also called as Net Profit to Sales Ratio. Net profit ratio

explains the net profit of the company after paying taxes of particular

period. It establishes relation between net profit and sales & as such

expressed as percentage to sales.

Net Profit Net profit ratio= X 100 Sales

iii.EXPENSE RATIO:

Each expense is related to sales & expressed as percentage to sales. Its formula is :-

ExpenseExpense ratio = x 100

Sales

iv. RETURN ON CAPITAL EMPLOYED:

Return on capital employed is an accounting ratio used in finance, valuation, and accounting.

The formula

(Expressed as a %)

It is similar to Return on Assets (ROA), but 1 takes into account sources of financing. Net Operating Profit After Tax (NOPAT) is equal to EBIT * (1 -

tax) -- the return on the capital employed should be measured in after tax terms.

Operating income

EBIT stands for Earnings before interest and tax

Capital employed

In the denominator we have net assets or capital employed instead of total assets (which is the case of Return on Assets). Capital Employed has many definitions. In general it is the capital investment necessary for a business to function. It is commonly represented as total assets less current liabilities (or fixed assets plus working capital requirement).

ROCE uses the reported (period end) capital numbers; if one instead uses the average of the opening and closing capital for the period, one obtains Return on Average Capital Employed (ROACE).

Application

ROCE is used to prove the value the business gains from its assets and liabilities. A business which owns lots of land will have a smaller ROCE compared to a business which owns little land but makes the same profit.

It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.

Drawbacks of ROCE

The main drawback of ROCE is that it measures return against the book value of assets in the business. As these are depreciated the ROCE will increase even though cash flow has remained the same. Thus, older businesses with depreciated assets will tend to have higher ROCE than newer, possibly better businesses. In addition, while cash flow is affected by inflation, the book value of assets is not. Consequently revenues increase with inflation while capital employed generally does not (as the book value of assets is not affected by inflation)).

COMPANY PROFILETata Motors Limited (formerly TELCO, short for "Tata Engineering and Locomotive Company") is an Indian multinational automotive manufacturing company headquartered in Mumbai, Maharashtra, India and a subsidiary of the Tata Group. Its products include passenger cars, trucks, vans, coaches, buses and military vehicles. It is the world's eighteenth-largest motor vehicle manufacturing company, fourth-largest truck manufacturer and second-largest bus manufacturer by volume.[5]

Tata Motors has auto manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad and Pune in India, as well as in Argentina, South Africa, Thailand and the United Kingdom. It has research and development centres in Pune, Jamshedpur, Lucknow and Dharwad, India, and in South Korea, Spain, and the United Kingdom. It has a bus manufacturing joint venture with Marcopolo S.A.,a construction equipment manufacturing joint venture with Hitachi and a joint venture with Fiat in India.

Founded in 1945 as a manufacturer of locomotives, the company manufactured its first commercial vehicle in 1954 in a collaboration with Daimler-Benz AG, which ended in 1969. Tata Motors entered the passenger vehicle market in 1991 with the launch of the Tata Sierra, becoming the first Indian manufacturer to achieve the capability of developing a competitive indigenous automobile.[6] In 1998 launched the first fully indigenous Indian passenger car, the Indica.

Tata Motors acquired the South Korean truck manufacturer Daewoo Commercial Vehicles Company in 2004.

Tata Motors purchased the British premium car maker Jaguar Land Rover (Jaguar, Land Rover and Range Rover cars) in 2008.

Tata Motors is listed on the Bombay Stock Exchange, where it is a constituent of the BSE SENSEX index, the National Stock Exchange of India and the New York Stock Exchange. Tata Motors is ranked 314th in the 2012 Fortune Global 500 ranking of the world's biggest corporations.

Tata entered the commercial vehicle sector in 1954 after forming a joint venture with Daimler-Benz of Germany. After years of dominating the commercial vehicle market in India, Tata Motors entered the passenger vehicle market in 1991 by launching the Tata Sierra, a multi utility vehicle. After the launch of three more vehicles, Tata Estate (1992; a station wagon design based on the earlier 'TataMobile' (1989), a light commercial vehicle), Tata Sumo (1994; LCV) and Tata Safari (1998; India's first sports utility vehicle).

Tata launched the Indica in 1998, the first fully indigenous Indian passenger car. Although initially criticised by auto-analysts, its excellent fuel economy, powerful engine and an aggressive marketing strategy made it one of the best selling cars in the history of the Indian automobile industry. A newer version of the car, named Indica V2, was a major improvement over the previous version and quickly became a mass-favourite. Tata Motors also successfully exported large quantities of the car to South Africa. The success of Indica played a key role in the growth of Tata Motors.[7]

In 2004 Tata Motors acquired Daewoo's South Korea-based truck manufacturing unit, Daewoo Commercial Vehicles Company, later renamed Tata Daewoo.[8]

On 27 September 2004, Tata Motors rang the opening bell at the New York Stock Exchange (NYSE) to mark the listing of Tata Motors.[9]

In 2005, Tata Motors acquired a 21% controlling stake in the Spanish bus and coach manufacturer Hispano Carrocera.[10] Tata Motors continued its market area expansion through the introduction of new products such as buses (Starbus & Globus, jointly developed with subsidiary Hispano

Carrocera) and trucks (Novus, jointly developed with subsidiary Tata Daewoo).

In 2006, Tata formed a joint venture with the Brazil-based Marcopolo, Tata Marcopolo Bus, to manufacture fully built buses and coaches.[11]

In 2008, Tata Motors acquired the British car maker Jaguar Land Rover, manufacturer of the Jaguar, Land Rover and Daimler luxury car brands, from Ford Motor Company.[12][13][14][15]

In May 2009 Tata unveiled the Tata World Truck range jointly developed with Tata Daewoo.[16] Debuting in South Korea, South Africa, the SAARC countries and the Middle-East by the end of 2009.[16]

Tata acquired full ownership of Hispano Carrocera in 2009.[17]

In 2010, Tata Motors acquired an 80% stake in the Italian design and engineering company Trilix for €1.85 million. The acquisition formed part of the company's plan to enhance its styling and design capabilities.[18]

In 2012, Tata Motors announced it will invest around  6 billion on developing Futuristic Infantry Combat Vehicles in collaboration with DRDO.[19]

In 2013, Tata Motors announced it will sell in India, the first vehicle in the world to run on compressed air (engines designed by the French company MDI) and dubbed "Mini CAT".

SOCIAL RESPONSIBILITIES OF TATA:

The role of a responsible citizen does not go unheeded in Telcon, in the

true spirit of the Tata group. Telcon works in close collaboration with a

number of NGOs to channelize its work. Telcon's thrust remains

educations, environment and health.

Environment:

●

In an environment protection drive several multiple thousands of tree

samplings were planted in Dharwad and Jamshedpur inside the factory

premises and in the Telcon townships. This remains an ongoing annual

activity, never to give up.

● Educational assistance to the physically disabled:

Assistance is extended to schools imparting special education such as

the Spastic Society of Southern India School and Karnataka School for

the Deaf. Sponsorship of education for children of Leprosy patients

residing in self-settled colonies, in collaboration with Nav Jagran Manav

Samaj.

● Social development:

Awareness programmes for women in villages in areas of hygiene,

education and all-round development. Industrial training to worthy school

children.

● Infrastructure support to local educational institutions:

Construction of boundary wall and toilets and supply of furniture to village

schools in Belur. Assistance to schools in Jamshedpur to set up computer

laboratories and sports facilities.

● Public Health and Family Welfare :

Telcon sponsors immunization programmes in collaboration with Parivar

Kalyan Sansthan that extends medical help to thousands of children who

have no access to basic health programmes. The year is dotted with blood

donation and medical camps. Family planning counseling and programmes

are held in collaboration with Parivar Kalyan Sansthan whereby people are

imparted lectures and operations are performed.

OBJECTIVES OF STUDY

1. To study the Gross Profit Ratio of Tata Motors for 3 assessment years.

2. To study the Net Profit Ratio of Tata Motors for 3 assessment years.

3. To study the Expense Ratio of Tata Motors for 3 assessment years.

4. To study the Return on Capital Employed for 3 assessment years.

RESEARCH METHODOLOGY

The research design refers to preplanning of what a researcher

does in his study. The design adopted in the study comes under

exploratory and evaluatory research. Since the data collected from the

financial statements of the company is analyzed under various financial

and tactical tools.

Modes of Data collection;

The study is based on one type data , obtained from the Tata

Motors ltd.,

They are:

Secondary data

Secondary Data; Secondary data is based on the past data i.e. [three years Annual

Reports 2011-2014]

Sampling –Sample area : Tata MotorsTools for Data Analysis & Interpretation : Percentage method

Tools for Data Presentation : I have used tools like table , bargraph & chart for presenting my data regarding the topic.

DATA ANALYSIS & INTERPRETATION

1. Gross Profit Ratio : Of Assessment Year 2011-12

Gross profit ratio = Gross profit / Sales *100

=8.99/ 488.70 8 100 = 1.83

Of Assessment Year 2012-13 Gross profit ratio = 37.88/629.45 * 100 = 6.01

Of Assessment Year 2013-14Gross profit ratio = 60.19/816.83 * 100 = 7.36

Year Gross Profit Ratio (Rs in Cr)2011-12 1.832012-13 6.012013-14 7.36

INTERPRETATION –

In the above graph , years are taken on x-axis & Gross profit ratio is taken on y- axis . From the given data it can be interpreted that there was an increase in GPR by 228.41% from the financial year 2011-12 to 2012-13. Further there was an increase of 22.46 % in the year 2013-14.

2. NET PROFIT : Of Assessment Year 2011-12

Net profit ratio = Net profit / Sales * 100 =4.13 /488.70 * 100 =0.84

Of Assessment Year 2012-13Net Profit Ratio = 20.67/629.45 * 100 = 3.28

Of Assessment Year 2013-14Net profit ratio = 40.76/816.83 * 100 =4.99

Year Net Profit Ratio (Rs in Cr)2011-12 0.842012-13 3.282013-14 4.99

INTERPRETATION –In the above graph years are taken on x-axis & Net profit ratio is taken on y-axis . From the given data it can be interpreted that there was an increase in NPR by 244% from the financial year 2011-12 to 2012-13. Further there was an increase of 52.13% in the year 2013-14.

3. EXPENSE RATIO :

Of Assessment Year 2011-12 Expense Ratio = Expense / Sales * 100 =438.78/488.70*100 = 89.78

Of Assessment Year 2012-13Expense ratio =553.87/629.45 * 100 =87.99

Of Assessment Year 2013-14Expense ratio = 731.76/816.83*100 = 89.58

Year Expense Ratio (Rs in Cr)2011-12 89.782012-13 87.992013-14 89.58

INTERPRETATION –In the above graph , years are taken on x-axis & Expense ratio is taken on y-axis . From the given data it can be interpreted that there was an increase in expense ratio by 1.99% from the financial year 2011-12 to 2012-13. Further there was an decrease of 1.80% in the year 2013-14.

4. RETURN ON CAPITAL EMPLOYED :

Of Assessment Year 2011-12Return on Capital Employed = Profit before interest & tax / capital employed *100 =8.99/100*100 =8.99

Of Assessment Year 2012-13Return on capital employed = 37.88/100 * 100 =37.88

Of Assessment Year 2013-14 Return on capital employed = 60.19/100*100 =60.19

Year Expense Ratio (Rs in Cr)2011-12 8.992012-13 37.882013-14 60.19

INTERPRETATION –In the above graph , years are taken on x-axis & Return on capital employed is taken on y-axis .From the given data it can be interpreted that there was an increase in return on capital employedby 321.35% from the financial year2011-12 to 2012-13. Further there was an increase of 58.89%in the year 2013-14.

FINDINGS

PERCENTAGE OF INCREASE IN PROFITABILITY RATIO:

YEAR GPR NPREXPENSE

RATIORETURN ON CAPITAL

EMPLOYED2011-12 -- -- -- --2012-13 228.40% 244% 1.99% 321.35%2013-14 22.46% 52.13% 1.80% 58.89%

Operating loss decreased up to the year 2014 .

The tata motors ltd. earned net profit in all the years.

It had been maintaining high inventory levels for all the years.

In most of the years debtor’s collection period was very high.

The funds were also raised through debts with high interest rates.

Some funds are lost in operations.

RECOMMENDATIONS

TML should adopt cost control measures by drawing inspiration from

prospering VEHICLE factories.

TML should reduce operating and administrative expenses, it will

increase overall efficiency of the firm.

A high level of debt introduces inflexibility in the firms operations due to

increasing interference and pressures from creditors. A high debt

company is able to borrow funds on very restrictive terms and

conditions. So, it should raise owners funds.

CONCLUSION

PROFITABILITY RATIO ANALYSIS is defined as systematic use of

ratio to interpret the financial statements so that strength and

weakness of firm as well as historical performance and current

financial condition can be determined.

The profitability ratio is an aid to management in making decisions.

The ratio if discriminately and wisely interpreted be useful tool of

financial analysis.

According to analysis of profitability ratios of three years of Tata

Motors Co., I came to know that the company made a good effort to

increase the profit. It has used the all the assets effectively to get

good returns. The ratios like gross profit ,net profit & return on capital

employed all are increasing year by year it shows that company is in

profit making. Tata Motors has good brand name and it has

maintained a good relationship between customers. And it can

increase its profit still better in the upcoming time period.

LIMITATIONS

1. Time was the major constraint.

2. It was a tedious task to get the current annual reports or exact financial position of the firm.

3. It was expensive to get the data & prepare the project report.

4. The study is done only on Balance Sheet & Profit and loss a/c of the company.

BIBLIOGRAPHYBOOKS

Financial Management

Dr. S.P. GUPTA

2009

Sahitya Bhawan Publications

Financial Management Theory and Practice

Prasanna Chandra

Sixth Edition

Tata Mc Graw Hill Publishing company.

Management Accounting Principles and Practice

R. K. Sharma Sahashi K. Gupta

Eight edition

kalyani publishers.

WEBSITES

www.google.com

www.financial-education.com

www. Wikipedia.in

www.tatamotors.co.in

THANK YOU