uno minda rameez
TRANSCRIPT
PROJECT REPORTON
WORKING CAPITAL MANAGEMENT & Expenses analysis
With reference to
MINDA Industries ltd, Switch Division, pune
Submitted in partial fulfillment of the requirements of the degree of MASTER OF BUSINESS ADMINISTRATION
KANNUR UNIVERSITYBY
RAMEES THANAKKARAMMAL(B0GMBA1064)
UNDER THE GUIDANCE OFPROF. DR KIRAN RAVEENDRAN
CHINTECH SCHOOL OF MANAGEMENT STUDIESCHINMAYA INSTITUTE OF TECHNOLOGY
KANNUR2012
1
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 GUIDANCE OF
2
PROF. DRAVEENDD E C L A R A T I O N
I, undersigned here by state that the report, titled “Working Capital Management at
Minda Industries Ltd” is a genuine and benefited work presented by me under the guidance of
Prof. Dr. Kiran Raveendran.
The empirical findings in this project report are based on the data collected by myself.
The matter presented in this report is not copied from any source. I understand that any such
copy is liable to the punishment in way the university authority deems fit.
The work has not been submitted for the award of any degree of diploma earlier to
Kannur University, or any other universities.
The Project Report is submitted to “Kannur University in the partial fulfillment of the
degree of “Master in Business Administration.”
Date: Signature,
Place (RAMEES THANAKKARAMMAL)
3
CERTIFICATE
This is to certify that the project entitled “A Study on working capital management
and expenses analysis at Minda Industries Ltd, Pune ” is a bona fide record of work done by
Ramees Thanakkarammal, 4th semester MBA and submitted in partial fulfilment of the
requirement for the degree of MASTER OF BUSINESS ADMINISTRATION, of Kannur
University under my supervision.
Place: Kannur Mr. Kiran Raveendran
Date: (Supervising guide)
4
CERTIFICATE
This is to certify that the project entitled “A Study on working capital management
and expenses analysis at Minda Industries Ltd, Pune” is a bona fide record of work done by
Ramees Thanakkarammal, 4th semester MBA and submitted in partial fulfillment of the
requirement for the degree of MASTER OF BUSINESS ADMINISTRATION, of Kannur
University under my supervision.
Place: Kannur Dr. K.K Falgunan
Date: (Principal)
5
ACKNOWLEDGEMENT
First and foremost I would like to thank God for enabling me to complete the work
successfully..
I would like to express my sincere gratitude to my project guide Mr.Anand.Bakare,
Manager (Cost Accounting), for his valuable guidance and encouragement at every phase of the
project.
I would also like to express my sincere gratitude to Mr. Dinesh Agarwal, Finance
department head for giving me the permission to carry out the project work in Minda Industries
Ltd Company and also I am greatly thankful for his valuable suggestions and contributions in
making this project a success. I take the privilege to extend my hearty thanks to the other
members of Finance & Accounting Dept., Minda Industries Ltd, for the valuable suggestion
throughout the project duration.
I further wish to place on record my deep sense of gratitude to Dr. K.K.Falgunan,
Principal of Chinmaya Institute of Technology for giving me the sustained encouragement and
support in carrying out this study.
I offer my sincere thanks to, Dr. Kiran Raveendran, Assistant Professor, Chinmaya
Institute of Technology, Kannur, for his guidance and encouragement throughout the project.
Finally I thanks to my parents and friends and others who assisted me in this work.
RAMEES THANAKKARAMMAL.
6
TABLE OF CONTENTS
Sr. No Contents Page No
1
2
a)
b)
3
4 10
5
6
7
8
a)
b)
c)
9
7
8
UNDER
EXECUTIVE SUMMARY
The major objective of the study is to proper understanding the working capital of Minda Industries Ltd & to suggest measures to overcome the shortfalls if any.
In the Year 1958, a visionary Mr. S.L. Minda laid the foundation of Minda group. He like
any other entrepreneur, started small garage kind operation with only five employees. He
started supplying Ammeters to Enfield India (Motorcycles). Later, Mr. Nirmal K. Minda
expanded the single location & product to multi locations & products.
Presently Minda Group has following automotive products:
2/3 Wheeler & Off Road Switches
Horns
4W switches
Lighting
CNG/LPG Alternate Fuel Kits
Minda Group is manufacturing world class automotive components with stringent quality
controls and has become the most favored vendor of automotive components to Indian
OEM's.
Minda has developed substantial export market and are supplying our products to global
OEM's & Replacement markets. It has strong presence in South East Asia, Europe and USA.
Minda Group is actively studying other exports markets for future growth.
In business, many companies spend most of their time concentrating on increasing their
current profits. They try to increase the profits by either reducing the cost of production or by
9
controlling the expenses of the company. However, too few companies worry very much about
managing another equally important area, the area of working capital management.
Working capital, also known as net current assets, is the excess of current assets over current
liabilities. Existence of working capital is imperative in any firm. A large amount of funds are
invested on fixed assets that can be used at an optimum level only if supported be sufficient
working capital. If the level of working capital required by the firm is not properly maintained
then it results in unnecessary blocking of funds. Insufficient working capital, on the other hand,
put different hindrances in smooth working of the firm. Therefore, the working capital
management needs attention of all the financial managers.
The project undertaken by me was “to Working Capital Management At Minda Industries
Ltd .” The very first step is to determine the amount of working capital requirements by each
unit.
It was a learning experience for me as at Minda employees’ stresses on role clarity at all
levels. Role clarity along with Teamwork & co-operation helps us achieving the organizational
objective.
10
PART AWORKING CAPITAL
MANAGEMENT
11
CHAPTER 1INTRODUCTIONTO THE STUDY
12
PART A
1.1 Introduction About Working Capital As the name implies that working capital is made up of two words “working” and
“capital” when we talk about the finance we have to look towards working capital because
working capital is the capital, which helps to run to business or this, is the capital through which
organization is in position to pay day-to-day-expenses.
Working capital is the fresh blood of business organization. Working capital is what
makes a company work. It is impossible to carry on any business only with fixed capital,
working capital is must. Inadequacy of working capital chooks any business to death.
A healthy working capital is reflected inadequate inventories, lowest level of debtors, and
minimum utilization of bank facilities for working capital.
The term working capital refers to the amount of capital, which is readily available to an
organization. That is, working capital is the difference between resources in cash or readily
convertible into cash (current asset) and organizational commitments for which cash will soon be
required (current liabilities)
WORKING CAPITAL = CURRENT ASSET – CURRENT LIABILITIES.
Definition:-
13
Working capital is defined as “Current asset minus current liabilities.” Or “Excess of
current asset over current liabilities and Provisions”.
“Working capital means current assets of the company that are changed in the ordinary course of
business from one into another as for ex. From cash t inventories, inventories to receivables and
receivables into cash.”
-Gersenberg
Working capital measures how much in liquid assets a company has available to build its
business. The number can be positive or negative; depending on how much debt the company is
carrying. In general, companies that have a lot working capital will be more successful since they
can expand necessary for growth. It is also called net current assets or current capital.
The definition of working capital is fairly simple; it is the difference between an
organization’s current assets and its current liabilities.
Current Assets: Are resources, which are in cash or will soon be converted into cash in “the
ordinary course of business.” It includes following:
Current Assets
Inventory
Loan and advances
Liquid assets (cash and bank deposits)
Debtors and bill receivable
Current liabilities: Are commitments, which will soon require cash settlement in “the ordinary
course of business.” It includes following:
Current liabilities
Creditors and payables
Provision
Bank overdraft
14
Other short term liabilities
Features of working capital
The organization also can make certain amount of modification by the help of
working capital.
Working capital can also provide assistance to pay off the day-to-day expenses.
The working capital can be easily converted into hard cash whenever required.
The working capital changes with the volume or output of business.
The working capital is essential for maintaining the financial position of the
organization.
Working capital also protects the organization from going bankrupt.
The definition of working capital is fairly simple; it is the difference between an
organization’s current assets and its current liabilities. Of more importance is its function which
is primarily to support the day to day financial operations of an organization, including the
purchase of stock, the payment of salaries, wages and other business expenses, and the financing
of credit sales.
As the working capital cycle indicates, working capital comprises a number of different
items and its management is difficult since these are often linked. Hence alerting one item may
impact adversely upon other areas of the business. For example, a reduction in the level of stock
will see a fall in storage costs and reduce the danger of goods becoming obsolete. It will also
reduce the level of resources that an organization has tied up in stock. However, such an action
may damage an organization’s relationship with its customers as they are forced to wait for new
stock to be delivered, or worse still may result in lost sales as customers go elsewhere.
Extending the credit period might attract new customers and lead to an increase in turnover.
However, in order to finance this new credit facility an organization might require a bank
overdraft. This might result in the profit arising from additional sales actually being less than the
cost of the overdraft.
Management must ensure that a business has sufficient working capital. Too little will
result n cash flow problems highlighted by an organization exceeding its agreed overdraft limit,
failing to pay suppliers on time, and being unable to claim discounts for prompt payment. In the
15
long run, a business with insufficient working capital will be unable to meet its current
obligations and will be forced cease trading even if it remains profitable on paper.
1.2 Scope of study:The management of working capital helps us to maintain the working capital at
satisfactory level by managing the current assets and current liabilities. It also helps to maintain
proper balance between profitability, risk and liquidity of the business significantly. By
managing the working capital, current liabilities are paid in time. If the firm makes
payment to it creditors for raw material in time, it can have the availability of raw material
regularly, which doesn t cause any obstacles in production process. Adequate working capital
increases paying capacity of the business but the excess working capital causes more inventory,
increases the possibility of delay in realization of debts.
On the other hand, absence of adequate working capital leads to decrease in return on
investment. The goodwill of the firm is also adversely affected due to the inability to pay
current liabilities in time.
Hence, the management of working capital helps to manage all the factors affecting the
working capital in the most profitable manner.
1.3 Statement of the problem :Every business needs funds for two purposes. One for the establishment of business and
the other to carry out the day-to-day operations. It needs some amount of working capital to meet
daily obligations. The need for working capital arises due to the time gap between the production
and realization of cash from sales. Management of working capital is concerned with the
problem that arise in attempting to manage current asset, current liabilities and the inter
relationship that exist between them. Effective and efficient working capital of a firm has a
profound effect on its profitability liquidity and the structural health of the organization. To
establish the best possible trade-off between the profitability of net current assets employed and
16
the ability to pay current liabilities as they fall due, working capital management is very
important.
This study makes an attempt to identify the issues related with the working capital
management of Minda Industries Ltd and to analyze the impact of working components on the
total profitability. Various components of working capital have to be identified in order to bring
about an efficient working capital management system. Therefore a study on the working capital
management of Minda Industries Ltd becomes relevant in the above mentioned scenario.
1.4 Objectives of the study:
The following are the main objective which has been undertaken in the present study:
To determine the amount of working capital requirement and to calculate various ratios
relating to working capital.
To analyzing, interpreting and studying Financial Statements.
To make an item wise study of the components of the working capital.
To suggest the steps to be taken to increase the efficiency in management ofWorking
capital.
Towards managing working capital
To simplifying the complex data as anybody can understand easily.
To measure the efficiency for taking proper actions or decisions.
For proper & necessary information to management to take decision & to draw
conclusion.
To give suggestions for better utilization of various financial resources.
To evaluation of the financial performance of the company of past, present and
anticipated future.
Tries to identify the firm's financial strengths and weaknesses and provides the essential foundation for financial decision making and planning
17
1.5 Research methodology
In any project research methodology used is very important because it is one which really
leads you o the success. While research any specific research project the following step is to be
followed
Define the research problem
Specifying the research Objective
Preparing the list of information needed
Design the data collection for the project
Collect the required data
Interpret the data
Research Methodology includes various steps. There should be a systematic way of
collection of data and presentation of the project report. Proper decisions have to be taken based
on the data collected. A researcher may select any of the following data:
1. Primary Data
2. Secondary Data
Primary Data
Primary Method is the method, which uses primary data in other words when data are
collected afresh and for the First time and thus happen to be original in character. There are
various methods by which data can be collected. The important ones are
Observation method
Interview method
18
Questionnaire method
Interview:
In this project Interview method is used. A modern technique of collecting information is
taking interview of respondents. Interview is the dialogue between two persons or two groups. In
the case of personal interview the information collected in structured way. In this project I have
collected some of the information from the Company’s staff to get the live data. For my project
of working capital I required the help of staff from Accounts and finance Department.
Secondary Data
The study has used secondary data that was taken from secondary sources like company’s
website, company’s balance sheet and profit & loss account and various internal reports
published by MINDA INDUSTRIES LTD..This study comprising of working capital
management of the company MINDA INDUSTRIES LTD. has been analyzed and studied. By
undertaking the existing systems, analysis and inferences were made on their efficiency and
effectiveness.
The data has been analyzed with the help of some selected ratios and percentage method.
The ratios are compared on the basis of trend analysis and a comparative analysis has been done.
My research emphasis on the working capital management of the company’s last five
years and analyze and conclude it from my view.
1.6 Limitation of the study: As our project is based on the data recorded by the company, we face the limitation of
extracting that particular data because our access is limited for the sake of confidential
information of the company.
The study is only limited to the available information in the department.
The duration of the study was very limited.
1.7 Chapter scheme
1st Chapter deals with introduction, statement of problem, methodology & data
collection and limitation of the study objective.
19
Review of literature
2nd Chapter deals with company profile and industry profile.
3rd Chapter gives analysis and interpretation of the data collection.
4th Chapter deals with findings, suggestions and conclusion.
CHAPTER 2REVIEW OF LITERATURE AND
THEORIES
20
*
LITERATURE REVIEW
The importance of efficient working capital management (WCM) is indisputable.
Working capital is the difference between resources in cash or readily convertible into cash
(Current Assets) and organizational commitments for which cash will soon be required (Current
Liabilities). The objective of working capital management is to maintain the optimum balance of
each of the working capital components. Business viability relies on the ability to effectively
manage receivables, inventory, and payables. Firms are able to reduce financing costs and/or
increase the funds available for expansion by minimizing the amount of funds tied up in current
assets. Much managerial effort is expended in bringing non-optimal levels of current assets and
liabilities back toward optimal levels. An optimal level would be one in which a balance is
achieved between risk and efficiency.
A recent example of business attempting to maximize working capital management is the
recurrent attention being given to the application of Six Sigma methodology. Six Sigma
methodologies help companies measure and ensure quality in all areas of the enterprise. When
used to identify and rectify discrepancies, inefficiencies and erroneous transactions in the
financial supply chain, Six Sigma reduces Days Sales Outstanding (DSO), accelerates the
payment cycle, improves customer satisfaction and reduces the necessary amount and cost of
working capital needs. There appear to be many success stories, including Jennifer Townes
(2002) report of a 15 percent decrease in days that sales are outstanding, resulting in an increased
cash flow of approximately $2 million at Thibodaux Regional Medical Center. Furthermore, bad
debts declined from $3.4 million to $600,000. However, Waxers (2003) study of multiple firms
employing Six Sigma finds that it is really a get rich slow technique with a rate of return
hovering in the 1.2 4.5 percent range.
21
Even in a business using Six Sigma methodology, an optimal level of working capital
management needs to be identified. Industry factors may impact firm credit policy, inventory
management, and bill-paying activities. Some firms may be better suited to minimize receivables
and inventory, while others maximize payables. Another aspect of optimal is the extent to which
poor financial results can be tied to sub-optimal performance. Fortunately, these issues are
testable with data published by CFO magazine (Mintz and Lazere 1997; Corman 1998; Mintz
1999; Myers 2000; Fink 2001), which claims to be the source of tools and information for the
financial executive, and are the subject of this research.
The importance of working capital management is not new to the finance literature. Over
twenty years ago, Largay and Stickney (1980) reported that the then-recent bankruptcy of W.T.
Grant, a nationwide chain of department stores, should have been anticipated because the
corporation had been running a deficit cash flow from operations for eight of the last ten years of
its corporate life. As part of a study of the Fortune 500s financial management practices, Gilbert
and Reichert (1995) find that accounts receivable management models are used in 59 percent of
these firms to improve working capital projects, while inventory management models were used
in 60 percent of the companies. More recently, Farragher, Kleiman and Sahu (1999) find that 55
percent of firms in the S&P Industrial index complete some form of a cash flow assessment, but
did not present insights regarding accounts receivable and inventory management, or the
variations of any current asset accounts or liability accounts across industries. Thus, mixed
evidence exists concerning the use of working capital management techniques.
Theoretical determination of optimal trade credit limits are the subject of many articles
over the years (e.g., Schwartz 1974; Scherr 1996), with scant attention paid to actual accounts
receivable management. Across a limited sample, Weinraub and Visscher (1998) observe a
tendency of firms with low levels of current ratios to also have low levels of current liabilities.
Simultaneously investigating accounts receivable and payable issues, Hill, Sartoris, and
Ferguson (1984) find differences in the way payment dates are defined. Payees define the date of
payment as the date payment is received, while payors view payment as the postmark date.
Additional WCM insight across firms, industries, and time can add to this body of research.
Maness and Zietlow (2002, 51, 496) presents two models of value creation that
incorporate effective short-term financial management activities. However, these models are
22
generic models and do not consider unique firm or industry influences. Maness and Zietlow
discuss industry influences in a short paragraph that includes the observation that, An industry a
company is located in may have more influence on that companys fortunes than overall GNP
(2002, 507). In fact, a careful review of this 627-page textbook finds only sporadic information
on actual firm levels of WCM dimensions, virtually nothing on industry factors except for some
boxed items with titles such as, Should a Retailer Offer an In-House Credit Card (128) and
nothing on WCM stability over time. This research will attempt to fill this void by investigating
patterns related to working capital measures within industries and illustrate differences between
industries across time.
23
CHAPTER 3Industry and Company
Profile
24
Indian automobile components industry – A Profile
OverviewThe Indian auto ancillary industry has come a long way since it had its
small beginnings in the 1940s. If the evolution of the industry is traced in
India, i t can be classified into three distinct phases namely: Period prior to the entry of
Maruti Udhyog Ltd, period after the entry of Maruti Udhyog Ltd and Period post
Liberalization. The period prior to the entry of Maruti Udhyog Ltd was
characterized by small number of auto majors l ike Hindustan Motors, Premier
Automobiles, Telco, Bajaj, Mahindra &M a h i n d r a , l o w t e c h n o l o g y a n d
a s s u r e d b u s i n e s s f o r m o s t o f t h e a u t o c o m p o n e n t manufacturers
The Indian auto components industry has experienced healthy sequential growth over the
last one-and-a-half years, following a period of de-growth in 2008-09. The recovery could be
attributed to factors such as strong buoyancy in the end-user industry; recovery of the global
economy; improved consumer sentiment and return of adequate liquidity in the financial system.
The revival of the auto industry was initially driven by the fiscal stimulus program of the
government. Nevertheless, the fact that the growth momentum has sustained even after
withdrawal of such incentives in February 2010 highlights the strength of the underlying
domestic demand. ICRA expects the trend of automobile sales volume growth, and in turn the
auto ancillary business growth to hold over the short-to-medium term aided by strong underlying
domestic demand across all automobile segments [comprising two-wheelers (2W), three-
wheelers (3W), passenger vehicles (PVs) and commercial vehicles (CVs)], thrust on low-cost
sourcing by Original Equipment Manufacturers (OEMs) and Tier-1 players based from
25
developed markets, aggressive supply side push from automotive Original Equipment
Manufacturers (OEMs) in the form of new model launches and expected continuation of
facilitators like easy access to vehicle financing, notwithstanding possible challenges related to
pressures on commodity prices, interest rate hardening and fuel price deregulation.
While almost all segments of the automobile industry have posted a steady growth over
the last 18 months, the recovery in the Medium and Heavy Commercial Vehicle (M&HCV)
segment has been the slowest to gather momentum. The segment had also experienced the
sharpest volume decline in 2008-09, which had translated into significantly lower off-take and
losses for suppliers of M&HCV components - and had contributed to around 40% of rating
downgrades in the universe of auto and auto component manufacturers
Downgraded by ICRA in 2008-09 and 2009-101. However, with domestic economic activity
having gained traction, ICRA expects the M&HCV segment volumes over the near term to
surpass the levels achieved in the pre downturn period, which should result in improvement in
the credit profiles of auto component suppliers dependent on this segment.
Since a majority of revenues of the auto component industry are derived from supplies to the
domestic OEMs, the growth prospects of the former are largely determined by performance of
the user OEMs. Given below are the volume growth expectations pertaining to individual
automobile segments:
PV segment: Amongst the various automobile segments (PV/ CV/ 2W) in India, the PV segment is the
largest by value and accounts for nearly half the size of the ~Rs. 2,300 billion auto OEM
segment, followed by the CV segment and the 2W segment that together account for the balance
half in an almost equal proportion. Thus, given the large size of the PV segment, its pace of
growth has a relatively higher influence on the growth prospects of the auto components industry
as a whole. After recording a robust 20%+ volume growth in 2009-10 and 2010-11, the PV
segment volumes (domestic + exports) grew by a meager 4.3% in 10m, 2011-12 marred both by
circumspect consumer sentiment that impacted demand as well as supply constraints caused first
26
by the tsunami in Japan (in March 2011), then by production disruption at the country’s largest
PV manufacturer Maruti Suzuki (intermittently over the June-October 2011 period) and then by
floods in Thailand (disrupting production output of select OEMs during the November-January
2012 period). This apart, the supply chain of PV OEMs also suffered to an extent due to
incidences of labour unrest at factories of auto component manufacturers such as Ceat (23 days
in October 2011) and Mahindra Forgings (mainly in Q2, 2011-12). The adverse impact of most
of these supply side shocks seems to have fully played out:
The supplies of components that were being imported from Japan have either
been restored now or sourcing from alternate geographies is being done by PV
OEMs
An amicable agreement betweenMaruti Suzuki and its Labour Union is
understood to have been reached in end-October 2011
Honda Siel (India) was sourcing several electronic and underbody parts for Brio,
Jazz and City models from its Thailand plant. As per company’s statements, the
supplydisruption due to Thailand floods that had started in the first week of
November 2011 and had got aggravated in December 2011, has now been
resolved as thecompany commenced normal production at its plant from February
17, 2012 onwards.Assuming there are no additional supply shocks and as
consumers adjust to the new normal characterized by relatively higher vehicle
prices and high fuel costs; demandsentiment is likely to get some relief on the
interest rate front during 2012-13. Over the medium term, ICRA expects the PV
industry to record a volume CAGR of ~11% over 2011-16E (inclusive of 2011-
12E, a year in which volume growth is likely to be low at around 3%).
CV segment: After registering a strong 30%+ volume growth over 2009-10 and 2010-11, the growth in
the CV industry has somewhat slowed down during the current fiscal.In 10m, 2011-12, the CV
industry posted a volume growth of 19.5% YoY supported by 28.7% growth in the LCV segment
and a relatively muted 8.6% growth in the M&HCV segment. Steadily rising interest rates,
contracting industrial output and a considerable increase in vehicle prices along with high base of
previous years have been the main factors constraining growth. The sharp rise in overall cost of
27
ownership combined with almost stagnant freight rates are exerting pressure on the profitability
and cash flows of fleet operators. Our channel check suggests that several operators have
postponed their expansion plans in view of the prevailing high interest rates and slower industrial
output. Capacity utilization has gradually declined and freight rates continue to remain stagnant
despite rise in operating expenditure for operators. On the financing front, some of the financiers
have also tightened lending norms in addition to the rise in interest rates. Overall, the near term
risks against M&HCV demand have increased significantly, though structurally, the demand
drivers over a longer period remain intact.
Given the current environment where the growth in industrial activity remains low and
the operating environment for fleet operators remains weak, ICRA expects the industry to defer
capacity addition. As a result, the outlook over the near term appears subdued which may result
in a slowdown in new vehicle sales. Among segments, M&HCV segment which tends to be
influenced more by macro-economic indicators is likely to register a weaker performance over
the near term as against the steadily growing LCV segment. The proliferation of the hub-and-
spoke model, improving last mile connectivity and strong demand originating from rural
segment is likely to drive demand in the LCV segment over the medium term.
2W segment: The Indian 2W industry recorded a volume growth (domestic + exports) of 16.6% (YoY)
in 10m, 2011-12; which although healthy, was significantly lower than the 25%+ volume growth
rates seen in 2009-10 and 2010-11. Overall, ICRA expects the domestic 2W industry to report a
volume growth of ~13% in 2011-12E as we expect growth to moderate further in Q4, 2011-12
due to base effect. In an environment where the northward movement of inflation, fuel prices and
interest rates has been the nemesis of the Indian automobile industry at large, the 2W industry
has been the most resilient so far. The growth has been supported by various structural positives
associated with the domestic 2W industry including favourable demographic profile, moderate
2W penetration levels (in relation to several other emerging markets), under developed public
transport system, growing urbanization and expected strong replacement demand, besides
moderate share of financed purchases. ICRA expects these strengths, coupled with the OEMs’
thrust on exports, to aid the 2W industry to report a volume CAGR of 10-12% over the medium
28
term to reach a size of 21-23 million units (domestic + exports) by 2015-16E. With this being the
backdrop, the revenue growth of the auto components industry is likely to be a close reflection of
the blended growth of individual automotive segments. That said, the performance of individual
auto component manufacturers will continue to vary depending on their revenue mix (OEMs/
Replacement Market), segment leaning (PV/CV/2W) and geographical diversification (domestic/
exports). Overall, auto component manufacturers who have a growing presence in the
replacement market and also have geographically dispersed customer base, are likely to be better
equipped to offset the expected moderation in business volumes of select domestic automobile
segments over the short term.
29
COMPANY PROFILE
30
MINDA INDUSTRIES LTD - A PROFILE
Date of Establishment - 1992
Revenue - 220.386 ( USD in Millions )
Market Cap - 2851.797741 ( Rs. in Millions )
Corporate Address - B-64/1,Wazirpur Industrial Area,New
Delhi-110052,
MD & Chairman - Mr. Nirmal Kumar Minda
FinancialsTotal Income - Rs. 9269.080151 Million ( year
ending Mar 2011)
Net Profit - Rs. 348.454018 Million ( year ending
Mar 2011)
Company Secretary - H C Dhamija
BankersAuditors - RN Saraf & Co
NK MINDA Group is one of the leading global manufacturers of automobile components and a leading supplier of proprietary automotive solutions to Original Equipment Manufacturers (OEMs). For nearly five decades, N K Minda Group has been supplying the automotive industry with innovative engineered products that are efficient, safe, responsive and enhance comfort levels.The Group's product portfolio comprises of Switches, Batteries, Lighting, Horns, Mirrors and Alternate Fuel Kits – LPG. We are committed to developing customer relationships that last. Over the years we have developed a tradition of listening to our customers, so we could tailor our offerings to their current and future needs, thereby defining our group’s excellence benchmarks. N K Minda
31
Group has 23 manufacturing plants in India, Indonesia and Vietnam, and sales offices in Japan, Europe and China. We are continually looking to increase our global footprint. At the same time, we are building on our core strengths in the existing markets. Over the past fifty years, we have grown consistently and rapidly through a carefully controlled and well managed expansion of our portfolio of products, and have thereby experienced consistent growth. The group employs nearly 6000 people and is headquartered in Manesar, Haryana, India. We have engineering, research and development centers in Bangalore, Manesar, Pantnagar, Pune & Sonepat. The companies have joint ventures and technical agreements with world renowned manufacturers such as Tokai Rika- Japan, Soft Italia- Italy, Kyoraku -Indonesia & Emer-Spa, Italy. We aim to provide ground-breaking products which help our clients integrate high quality with cost efficiency.
NK Minda Group has an annual turnover of Rs.8.32 billion (USD 208 million). The Group has been clocking a Compound Annual Growth Rate (CAGR) of 40% in Annual Turnover (ATO). From Rs. 5.45 billion in FY 2005-06, it grew to Rs. 8.32 billion in FY 2006-07. Today, the Group has a total of 19 plants spread across India and Indonesia. Recognising the importance of the ASEAN market the group has set up a Greenfield manufacturing facility in Indonesia through a group company named PT Minda ASEAN Automotive which has commenced production and exports to other ASEAN countries. NK Minda Group works with the leading auto components specialists globally to bring the most technologically advanced products to its customers. The Group has joined hands with global leaders to constantly fine-tune its offerings and has some of the most reputed automotive component manufacturers as its joint-venture partners such as: Tokai Rika Co. Ltd., Japan Fiamm SpA, Italy.The Key Mantras that have propelled the NK Minda Group growth story are:- Relentless pursuit for excellence- Benchmarking ourselves against the best- Focus on developing world-class facilities- Emphasis on providing innovative design solutions- Continuous thrust on product improvement- Constant up gradation of skill sets in the workforceLineage:
NK MINDA Group, after being founded in 1958, has grown into a multinational corporation known for diversified automobile component products with US$ 297 million in net sales in FY 2009-2010. We are rapidly expanding our ability to deliver technically superior auto components to a broad spectrum of customers including Indian & Global OEMs. Our products are reliable, safe, pioneering, efficient, and environmentally sustainable. We have a tradition of being an innovative group. We concentrate heavily on product research and development as a basis for inventive ideas. We work hard at anticipating and meeting our customers’ changing requirements through continuous market research and technology partnerships. We aim to provide products which help our clients integrate high quality with cost efficiency.
32
VISION & MISION
Vision: Group to be Global Benchmark in QPCDSM by 2012-13 and
pioneer in Technology by 2014-15
Group Turnover – 10K crore by 2014-15
International Business to be 25% of turnover by 2014-15
Mision:“To continually enhance stakeholders’ value through global
competitiveness while contributing to society”
Values:The NK Minda Group has identified 5 core values and works towards inculcating these in its day-to-day working:
Customer Is Supreme:- We understand and anticipate customer needs and exceed their
expectations.
- We aggressively pursue new business, determined to add value for
our customers with ingenuity, determination and a positive
approach to every task, a ‘can-do’ spirit, and
33
- We always ask "How can we serve our customers best?"
Live Quality:- We nurture quality as an attitude at UNO MINDA.
- We are quality driven and "Apply a Quality Minded Approach to
everything we do".
- We are passionate about quality and its continuous improvement
through teamwork
Encourage Creativity & Innovation To Drive 3 ‘P’s (People, Processes And Products)
We demonstrate leadership by advancing new technologies, innovative manufacturing techniques, enhanced customer service, inspired management, and the application of best practices throughout our organization.
We aggressively pursue new business, determined to add value for our customers with ingenuity, determination and a positive approach to every task, a ‘can-do’ spirit, and a restless determination to continually improve and excel.
We utilize our ability to combine strength with speed in responding enthusiastically to
every new opportunity and every new challenge
We encourage and inspire learning amongst our people.
Respect For Work-Place Ethics
Work smartly with passion, integrity, conviction and commitment.
We work in team with a shared purpose and value individual ability and diversity as essential to promote harmony and open communication. Each of us succeeds individually - when we as a team achieve success.
We respect and adhere to company policies, systems and procedures.
We will be well informed and respect the regulations, rules, and compliance issues that apply to our businesses around the world.
We respect the values and cultures of the communities in which we operate
Management Team
34
Mr. Nirmal Kumar Minda : Chairman & Managing Director, N K Minda Group
Corporate Functional Heads:
Mr. Anand Minda : Executive Director Mr. Sudhir Jain : Group CFO Mr. P K Srivastava : Head – Group Human Resource
Domain Heads:
Mr.V K Jain CEO : Battery Domain Mr.A K Goel CEO : Interior, Controls & Safety Domain Mr.Ravi Mehra CEO : Electrical & Electronics Domain Mr.Pradeep Tewari CEO : Chasis & Motors Systems Domain Mr.Naresh Warrier CEO : Engine & Exhaust Domain, Body & Structural Mr.Arun Nagpal CEO : CleanTech & Institutional Business Domain
Corporate Milestones
35
Awards & Recognitions
2011 MRPL Manesar received ACMA Bronze Trophy for Excellence in Technology in the
Non SME Category
2010 MRPL Manesar received ACMA Gold Award for Manufacturing Excellence 2010 BAL
TPM EXCELLENCE AWARD to Minda Switch Pune Plant
2010 MINDA Acoustic received “ Outstanding Performance Award - 2010“ from Mahindra –
Automotive & Farm Equipment Sectors
2010 Blow Molding received “Best Localization Award” from Toyota Kirloskar Motor,
Bangalore
2010 MRPL Manesar received Gold Trophy in Good Green Governance Award
2010 MRPL Manesar Received Gold Award from Quality Circle Forum – Delhi Chapter
2010 MRPL Manesar received Energy Conservation Award from Government of India
2010 “Grand Development Award 2010-11” to MIL – Switch Div. from HMSI
2010 TAFE has awarded Minda-Lighting Sonepat as a “SELF CERTIFIED SUPPLIER”
2009 ACMA Silver Trophy for Excellence in Technology in the NON SME Category this
year. (MIL 2wh Switch - Gurgaon)
2009 ACMA Gold Trophy for Recognition under Manufacturing excellence this year –
(MINDARIKA PVT. LTD)
2009 ACMA Gold Trophy for Recognition under Quality & Productivity excellence this year.
– (MIL 2wh Switch – Pantnagar)
2008 "Excellence in Quality" award from TATA Motors. The award was conferred on 16th
Oct 2008 during Tata’s Annual Supplier’s Meet 2008 held in Mumbai.
2007 Minda launches Automotive batteries for OEM and Aftermarket
2007 Minda Industries Limited wins the National R&D Award 2007 by Department of
Scientific & Industrial Research, Ministry of Science & Technology
2005 Bajaj Award for Excellence to MindaIndustries Limited
2005 Achievement Award from Honda for quality & delivery to Minda Industries Limited
2004 Received TKML cost achievement award for Mindarika
2004 NABL accredition for Minda Industries Limited labs 2003 Received TS 16949
certification for Lighting Division
36
2003 Received TS 16949 & ISO 14001 certification for Horn Division
2003 Received ISO 14001 and OHSAS 18001 certification for Switch Division 2003 Received
TS 16949 and ISO 14001 certification for Mindarika 2003 Received Maruti's
Manufacturing Excellence Award for Mindarika
2003 Received FORD Q1 award for Mindarika
2001 Implemented ERP-BAAN in Mindarika
2001 Won 1 st prize in Honda Supplier Quality Circle Competition for 2nd time in Mindarika
2001 Won 1 st prize in CII North Region Quality Circle Competition in Mindarika
2001 Received QS 9000 certification for Horn Division
2001 Implemented ERP-BAAN in Mindarika
2000 Started BEST (Business Excellence through Simple Techniques) journey in association
with CII
2000 Won 1st prize in Honda Supplier Quality Circle Competition in Mindarika
2000 Won Runners Up trophy in CII North Region Quality Circle Competition
2000 Won Safety & Environment Award from Haryana State Labour Department in Mindarika
1998 Received Maruti's Best Performance Award 2 nd time in Mindarika
1998 Received QS 9000 certification for Mindarika 1987 Received Maruti's Best Performance
Vendor Award in Mindarika
1997 Received ISO 9001 certification for Switch Division other switches
1996 Received ISO 9001 certification at Mindarika
1996 Got approval as R&D Centre for Ministry of Science and Technology.
37
Handle Bar System Assembly
Handle Bar Switches
Electronic Systems
Lever & Holder Assembly
Brake Switch
Grips
Gear Shift Switch
Modular Switch
Panel Switch
Off Road
Panel Switch
Rotary Switches
Starter Switches
38
Plunger Switches
Rocker Switches
Lever Combination Switch
Ignition Switch
Lever Combination Switches
Signal Switch
Light Switch
Dimmer & Passing Switch
Wiper Switch
Washer Switch
39
Hazard Switch
Intermittent Time Control RR Washer / Wiper Switches
Horn Switch
Panel Switches Hazard Warning Switch
RR Defog Switch
FR Fog Lamp Switch
RR Fog Lamp Switch
RR Wiper Washer Switch
Blower & A/C Switch
A/C Switch
Power Window switches
Auto Up & Auto Down functions.
Window Lock
Door Lock In addition:
The switches are with child safety features.
Master Control Switch is with the Driver
Oil pressure switches Operating Pressures ranging from 0.25 to 1.0 kg/sq cm.
Variety of End connections
For use by heavy vehicles & agricultural equipment Manufacturers
HVAC panel Assemblies A/c Switch
Blower Switch
Air Direction Control
Fresh & Re-circulation Control
Temperature Adjustment Control
Ashtray & Lighters Cigar Lighters with or without Illumination.
Ashtrays with or without Illumination.
40
Plunger Type Switches Stop Lamp Switches
Reverse Lamp Switches
Door Lamp Switches
Trunk Lid/ Parking Brake Switches
MINDA TYC AUTOMOTIVE - LIGHTINGMinda TYC produces a variety of world-class lighting products for the2/3 wheelers and off roaders as well as 4 wheeler vehicles. The various product offerings include:
Tail Lamp
Side Indicators
Head Lamps
Work Lamp
Front Fog Lamps
Rear Fog Lamps
Warning Triangles
High Mounting Stop Lamps
Switches. The various product offerings include:Brake Switch
Horns:
2/3 Wheelers
4 Wheelers
CNG/LPG Kits:
Minda Autogas designs and develops Alternate fuel kits for: 2/3 wheelers
Passenger Cars
Gensets
Batteries
VROOM
Other Products
41
Sensors
Automotive Security Systems
Die Casting
Domestic Customers
2 Wheelers
42
4 Wheelers
Tractors
International Customers
43
44
The concept of working capital
The concept of working capital can be divided in to two parts.
A. Gross working capital
B. Net working capital.
Both net and gross working capital is important and they have equal significance
from management point of view.
A. Gross working capital:-
45
Gross working capital refers to the firm’s investment in current asset. Current
asset are those asset which can be converted in to cash with in an accounting year and
including cash short term securities, debtors, bills receivable and stock.
B. Net working capital:-
Net working capital refers to the difference between current asset and current
liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within accounting year and positive or negative. A positive net working
capital will arise when current asset exceed current liabilities.
The gross working capital concept focuses attention on two aspect of current assets
management.
a) How to optimize investment in current assets?
b) How should current assets be financed?
Both the question is the most important decision making action in the
management. It should be give due consideration before taking decision.
The consideration of the level of investment in current assets should avoid two danger
points – i) excessive and ii) inadequate investment in current assets should be just
adequate, not more or less, to the need of the business firm. Excessive investment in
current assets should be avoided because it impairs the firms profitability as idle
investment earns nothing on the other hand, inadequate amount of working capital can
threaten solvency of the business because its inability to meets its current obligation. It
should realize that the working capital need of the firm may be fluctuation with changing
business activity. This may cause excess or shortage of working capital frequently. The
management should be prompt to initiate an action and correct imbalance.
46
Another aspect of gross working capital points to the need of arranging funds to finance
current asset. Whenever a need for working capital fund arises due to the increasing level
of business activity or for any other reason financing arrangement should not be allowed
to remain idle, but should be invested in short term securities. Thus the finance manager
should have knowledge of the source of funds as well as investment of fund.
Net working capital is quantitative concept. It indicates the liquidity position of the firm
and suggests the extent to which working capital needs may be finance by permanent
source of fund. A weak solvency of the company and makes it unsafe and unsound.
Net working capital concept also covers the question of judicious mix of long term and
short term funds for financing current assets. For every firm, there is a minimum amount
of net working capital which is permanent. Therefore, a portion of working capital should
be finance with the permanent sources of fund such as share capital, debenture and long-
term debt, preference share capital or retained earnings. Management must decide the
extent to which current assets should be financed with equity capital and/or borrowed
capital.
So we can say that both gross and net working capital is equally important for the
efficient management of working capital.
PERMANENT AND TEMPARARY WORKING CAPITAL:
The operating cycle is a continuous process and, therefore the need of current asset is felt
constantly. But the magnitude of current asset is not always the same, it increases and decreases
overtime. However there is always a minimum level of current assets which is continuously
required by the firm to carry on its business operations. This minimum level of current assets is
referred to as permanent, or fixed, working capital. It is permanent in the same way as the firm’s
fixed assets are. Depending upon the changes in the production and sales, the need of working
capital, over and above permanent working capital, will fluctuate. For example, extra inventory
47
of finished goods will have to be maintained to support the peak periods of sales, and investment
in receivables may also increase during such periods. On the other hand, investment in raw
material, work-in progress and finished goods will fall if market is slack.
The extra working capital, needed to support the changing production and sales activities is called fluctuating, or variable, or temporary working capital. Both kinds of working capital are necessary to facilitate production and sales through the operating cycle, but temporary working capital are created by the firm to meet liquidity requirements that will last only temporarily.
Balanced working capital position
The firm should maintain sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as in adequate working capital positions are dangerous from the point of view of firm. Excessive working capital means idle funds earn no profit for the firm. Paucity of working capital not only impairs the firm’s profitability but also results in production interruptions and inefficiencies.
RESULTS OF EXCESSIVE WORKING CAPITAL
It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses insure.
It is indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits.
Excessive working capital makes management complacent which degenerate into managerial inefficiency.
RESULTS OF INADEQUATE WORKING CAPITAL.
It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds.
It becomes difficult to implement operating plans and to achieve the firm’s profit target. Operating inefficiencies creep in when it becomes difficult to meet day-to-day
commitments.
DETERMINANTS OF WORKING CAPITAL
48
NATURE OF BUSINESS:
Working capital requirements of firm are basically influenced by the nature of its
business. Trading and financial firms have small investment in the fixed assets but require very
large amount of money to be invested in working capital. Working capital requires most of
manufacturing concerns to fall between the extreme requirements of trading firms and public
utilities.
SALES AND DEMAND CONDITION:
The working capital needs of a firm are related its sale. It is determine to precisely
determine the relationship between the volume of sales and working capital needs. In current
assets will have to be employed before the growth take place.
A working firm may need to invest its fund in fixed assets in order to sustain its
production its sales. This will in turn increase investment in current assets in order to support
enlarge scale operation. Such a firm faces other financial problem when it retains substantial
potential its profit. It would not be able to dividend to its shareholders it therefore imperative the
proper planning be done such by such companies to finance their increasing needs of working
capital. Sales depend demand condition. Most firm’s experiences seasonal and cyclical
functional demand of their product and services. This business variation working capital required
especially temporary working capital requirement of the firm. Where there is upward swing in
the economy, sales will increase; when there is a decline in economy, sales will fall and
consequently, level of inventories and debtors will also fall.
PRICE LEVEL CHANGES
The increasing shifts in price level make functions of financial manager difficult.
He should anticipate the effect of price level changes of working capital requirement of
49
the firm. Generally, rising price levels will require a firm to maintain higher amount of
working capital. Same levels of current assets will need increase investment when prices
are increasing. However companies which an immediately revise their product prices
with rising price levels will not face server working capital problem.
TECHNOLOGY AND MANUFACTURING POLICY:
The manufacturing cycle comprises of the purchases and use of raw materials and
production of finished goods. Longer the manufacturing cycle larger will be the firm’s working
capital requirements. For example the manufacturing cycle in the case of a boiler, depending on
its size, may range to six to twenty four months. On other hand, the manufacturing cycle of
products such as detergent powder, soap, chocolate etc may be a few hours. An extent
manufacturing time pan means a larger tie-up of funds in inventories. Thus in there are
alternative technologies in manufacturing a product, the technological process with shortest
manufacturing cycle may be chosen. Once manufacturing technology has been selected, it should
be ensured that manufacturing cycle is completed within the specified period. Any delay in
manufacturing process result in accumulation of work-in-process and waste of time.
A strategy of constant production may be maintained in order to resolve the working capital
problems arising due to seasonal changes in demand for the firm’s product. A steady production
policy will cause inventories to accumulate during the off-season period and he firm will be
exposed to greater inventory costs and risks. Thus, if cost and risks of maintaining a constant
production schedule are high, the firms may adopt a variable production policy varying its
production schedules in accordance with changing demand.
CREDIT POLICY:
The credit policy of the firm affects the working capital by influencing the level of
debtors. The credit to be granted to customers may depend upon the industry to be granted to
customers may depend upon the norms of the industry to be granted to use discretion in granting
credit terms to its customers. The firm should be prompt in talking collection procedures can
increase the chance of bad debts.
50
In order to ensure the unnecessary funds are not tied up in debtors, the firm should follow the
rationalized credit policy based on the credit standing of customers and other relevant factors.
The firm should evaluate the credit standing of new customers and periodically review the
worthiness of the exiting customers.
AVAILABILITY OF CREDIT:
The working capital requirements of firms are also affected by credit terms granted by its
creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly
the availability of credit from banks also influences the working capital needs of the firm. A
firm, which can get bank credit easily on favorable condition, will operate less working capital of
a firm without such a facility.
OPERATING EFFICIENCY:
The operating efficiency of the relates to optimum utilization of resources at minimum
costs. The firms will be effectively contributing in keeping the working capital investment at a
lower level if it is efficient in controlling operating cause and utilizing current assets. The use of
working capital improved and pace of cash conversion cycle is accelerated with operating
efficiency. Better utilization and pace cash conversion cycle is accelerated with operating
efficiency. Better utilization of resources profitability and thus helps in releasing the pressure on
working capital.
IMPORTANCE OF WORKING CAPITAL
The importance of working capital management is reflected in the fact that finance managers spend a great deal of time in managing current assets and liabilities.
Working capital is also helpful in profitability. As we know that the current ratio is the indication of firm’s short-term solvency. It is also known as the excess of current assets over current liabilities.
So highly the working capital means higher the current assets and higher the current assets mean company will be promptly able to meet his obligation. So the company goes in to liquidation is less.
51
So,Working capital = Current Assets – Current Liability
Current Assets = Strong Position of the company to pay his Obligation
But lower the working capital means less of current assets over current liability and lower the current assets means the company will not be able to pay his obligation and the chances of company to in to liquidation is more.
Current Asset = position of the company to pay his obligation is less.So the working capital should be as per the need of the organization. Again the amounts
of working capital also affect the profitability of the profitability of the company.
If we have higher the working capital then we have more of current asset over current liability. And more of current assets mean company has more money. In this situation the company has idle resource which does not earn anything for the company. And this is the burden for the company. In other words they have resource which Company cannot utilize in effective manner.
WORKING CAPITAL = Current Asset-Current Liability
Current asset means the company has idle resource and company have idle resource.
The working capital is also helps in overall profitability measurement.
The ROI better the position of the company in terms of profit. So this ratio shows companies
operational efficiency.
ROI = Profit before Interest and Tax X 100
Capital employed
So higher the ROI greater the position of the company. So we can say that higher the ROI means
lower the capital employed.
Capital employed = share capital + reserve and surplus + long term dept.
52
In other words,
Capital employed= fixed asset + working capital
Both capital employed and ROI inversely proportionate. It means that higher the ROI then lower
the capital employed and lower the ROI higher will be the capital employed.
EX: - if PBIT=200000, now if capital employed is 100000 then
ROI= 200000/100000=20%
And if capital employed= 150000 then
ROI=200000/150000=13.33%
It shows that higher the capital employed lower will be the profitability.
FACTORS AFFECTING WORKING CAPITAL
The working capital needs of a firm are affected by numerous factors. The important factors are
follows:
NATURE OF BUSINESS
In some business organization, the sales are mostly on a cash basis and the operating cycle is also
very short. In the concern the working capital requirement is comparatively less. Mostly services
giving companies come in the category. In manufacturing concerns, usually the operating cycle
is very long and a firm has to give credit to customers for improving scales. In such a case the
working capital requirement is more.
PRODUCTION POLICY
Working capital requirement is also fluctuate according to production policy. Some products
have seasonal demands but in order to climate the fluctuation in the working capital, the
53
manufacture plant production is steady flow through the year. These policies will even out the
fluctuation in the working capital.
MARKET CONDITIONS
Due to consumption in the market the demands for working capital fluctuate. In a comparatively
environmental business firm has to give liberal credit to customers. Similarly it will have to
maintain large inventory of finished goods to service the customers promptly, in this situation the
large amount of working capital will require.
SEASONAL FLUCUATION:
A firm who is producing the seasonal demands requires more working capital during peak
seasons which the demand for working capital will go down during slack seasons.
GROWTH AND EXPANSION ACTIVITES:
The working capital needs of the firms increase as it grows in terms of sales or fixed assets. A
growing fund may need to invest funds in fixed assets in order to sustain its growth production
and sales. These will in turn increase investment in current assets, which will result in increase in
working capital needs.
OPERATING EFFICIENCY:
The operating efficiency of the firm relates to optimum utilization of resources at minimum cost.
The firm will be effectively contributing to its working capital if it is efficient in controlling
operating costs the working capital is better utilized and cash cycle is reduce which working
capital needs.
CREDIT POLICY
The working capital requirement of a firm is depend a great extend on the credit policy followed
by firm for its debtors. A liberal credit policy will result in huge funds blocked in debtors which
54
will enhance for the working capital. If the creditors are ready to supply materials and goods on
liberal credit, working capital requirement are substantially reduced.
FINANCING CURRENT ASSETS
Working capital is a critical factor in the sustainability and viability of any business. At the same
time, financing working capital can be very costly. Proper management of working capital is of
vital strategic importance.
A firm can adopt different financing policies. There are three types of financing policies as under
LONG TERM FINANCING:
The sources of long term financing include ordinary share capital, preference share capital,
debentures long term borrowings from financial institution and reserve and surplus.
SHORT TERM FINANCING:
The short term financing is obtained for the period less than one year; it is arranged in advance
from bank and other suppliers of the short-term finance in the money market short-term finance
includes working capital funds from banks, public deposit, commercial paper, factoring of
receivables etc.
55
SPONTANEOUS FINANCING:
Spontaneous financing refers to the automatic source of short-term funds arising in the Norman
course of a business. Trade creditors and outstanding expenses are examples of spontaneous
financing. There is no explicit cost of spontaneous financing. A firm is expected to utilize these
source of finance to the fullest extent.
To have effective working capital we need mix of short-term and long-term sources of finance.
Depending on the mix of short and long term financing, the approach followed by a company
may be referred to as:
Matching Approach
Conservative Approach
Aggressive Approach
MATCHING APPROACH:
The firm can adopt a financial plan which matches the expected life of assets with the expected
life of the source funds raised to finance assets. Thus a ten-year loan may be raised to finance a
plant with an expected life of ten years: stocks of goods sold in thirty days commercial paper or a
bank loan. The justification to exact matching is that, since the purpose of financing is to pay for
assets, the source of financing and assets should be relinquished simultaneously. Using long term
financing for the short-term assets is expensive, as fund will not be utilized for the full period.
Similarly financing long term assets with short term financing is costly as well as incontinent as
arrangement for the new short term financing will have to be made on a continuing basis.
56
Short term financing
Long-term financing
P.W.C.
Temporary working capital
Time
ASSETS
P.W.C.:-permanent working capital
CONSERATIVE APPROACH:
A firm may adopt the conservative approach in financing in its current and fixed assets. The
financing policy of the firm said to be conservative when it depends more on long term funds for
financing needs.
Under a conservative plan, the firm finances its permanent assets and also a part of temporary
current assets the idle long term funds can be invested in the tradable securities to convertible
securities to conservative liquidity. The conservative plan realizes heavily on long term financing
and therefore the firm has less risk of facing the problem of shortage of funds.
AGGERSSIVE APPROACH:-
57
P.W.C.:-permanent working capital
Financing under Matching Approach
A firm may be aggressive in financing its assets. An aggressing policy is said to follow by the
firm when it uses shorter financing a part of its permanent current assets with short term
financing. Some extremely aggressive firms may even finance a part of their fixed assets with
short time financing. The relatively more use of short term financing makes the firm more risky.
SOURCES OF WORKING CAPITAL
CASH CREDIT:
In this method, bank sanctions a particular limit up to which a borrower can barrow. He
can withdraw the amount as per his requirements. Interest is charged only on the amount
withdrawn and not on time when entire amount sanctioned.
TRADE CREDIT:
58
The trade credit implies the credit allowed by the supplier to the purchasing firm. It is
only the postponement of the payment of the creditors. Trade credit is a useful mode of financing
working capital and many firms rely on such credit, the biggest advantage of trade credit to the
purchaser is that it is available easily or almost instantly.
BANK OVERDRAFT:
In this method, a customer is allowed to withdraw amount than the balance credit in the
bank. Interest is charged only on the amount which is withdrawn as overdraft. Bank overdraft
arrangements can offer wide flexibility once relation between the bank and the customer are
developed. This is the most common method of banking financing.
LETTER OF CREDIT:
It is the document issued by the bank formally on behalf of its client and contains the
conditions under which bank will act as a guarantor against the commitments and financial
obligation of the customer.
BILL DISCOUNTING:
A bill of exchange which is drawn by a creditor on his debtor is a negotiable instrument.
It contents an unconditional order to pay a certain sum of money after certain period of time to
the creditor. But the creditors have to wait till the time of maturity date before he receives the
payments.
His money till the time period is over. In order to remove this difficulty, the creditor can
discount the bill with his bank. The bank deducts the same amount as a discount from the amount
of the bill and the remaining amount is paid to the creditors.
WORKING CAPITAL LOANS:
59
In addition to the above mentioned ways of financing, something working capital loans
may also be sanctioned by the banks.
SOURCES OF ADDITIONAL WORKING CAPITAL
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
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. The following measures will help manage your debtors:
60
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.
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 judgments
poor collection procedures
lax enforcement of credit terms
slow issue of invoices or statements
errors in invoices or statements
Customer dissatisfaction.
61
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.........
longer credit terms taken with approval, particularly for smaller orders
use of post-dated checks by debtors who normally settle within agreed terms
evidence of customers switching to additional suppliers for the same goods
new customers who are reluctant to give credit references
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 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. Here are a
few ideas that may help you in collecting money from debtors:
Develop appropriate procedures for handling late payments.
Track and pursue late payers.
Get external help if your own efforts fail.
Don't feel guilty asking for money.... it’s yours and you are entitled to it.
Make that call now. And keep asking until you get some satisfaction.
In difficult circumstances, take what you can now and agree terms for the remainder. It
lessens the problem.
When asking for your money, be hard on the issue - but soft on the person. Don't give the
debtor any excuses for not paying.
Make it your objective is to get the money - not to score points or get even.
NEED OF WORKING CAPITAL
62
As we know that this is capital that obtained to fulfill their obligations.
The need of working capital can be understood by the way of operating
cycle. It is also known as working capital.
Reason of operating cycle
Earning a steady amount of profit requires successful sales activity. The firm has to invest
enough funds in current assets for generating sales. Current assets are needed because sales do
not convert into cash instantaneously. There is always an operating cycle involved in conversion
of sales into cash.
Phases determining the length operating cycle
Operating cycle has three phases which are as follows:
1. Acquisition of resources such as raw material, labour, power and fuel etc.
2. Manufacturing of the product which includes conversion of raw material into work in
progress into finished goods.
3. Sales of the product either for cash or on credit. Credit sales create account receivable
for collection.
These phases the cash flows, which are the most of the time, are neither synchronized nor
certain. They are not synchronized because the cash outflows usually occur before cash inflows
are difficult to forecast accurately. Cash outflows, on the other hand, are relatively certain. The
firm is, therefore, required to invest in current assets for a smooth functioning.
It needs to maintain the liquidity for purchase of raw materials and pay expenses such as wages
and salaries, other manufacturing, administrative and selling expenses and taxes as there is
hardly a matching between cash inflows, Stock of raw materials and work in progress are kept to
ensure smooth production and to guard against non-availability of raw materials and
components. The firm holds the stock of finished
Goods to meet the demand of customers on continuous basis and sudden demands for some
customers. Demands are created because goods are sold on credit for marketing and competitive
63
reasons. Thus, a firm makes adequate investment in inventories, and debtors, for smooth
unintentional production and sale.
WORKING CAPITAL CYCLE.
Cash flows in a cycle into, around and out of a business. It is the business’s lifeblood and
every manager’s primary task is to keep flowing and to use the cash flow to generate profits. If a
business is operating profitably, that it should, in theory ,generates cash surpluses, if it doesn’t
generates 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 the best source of cash exist as working capital right within the
business. Good management of working capital will generates cash will improve profits and
reduce the risk. Bear in mind that the cost of providing credit to customers and holding stocks
can represents substantial proportion of a firm’s total profit.
Operating Cycle is the time duration required to convert sales, after the conversion of
resource in to inventories, into cash.
The operating cycle of a manufacturing company involves three phases :
1. Acquisition of resources such as raw material, labour, power and fuel etc.
2. Manufacturing Process which includes conversion of raw material in to work in
progress in to finish good.
3. Sale of the product either cash or credit. Credit sales create account receivable for
collection
64
CREDIT SALES
CASH SALES
CASH FINISHED GOODS
Operating cycle:
There is a difference between current assets and current liabilities in the terms of their
liquidity. A firm requires many years to cover the initial investment in fixed assets such as plant
and machinery or land and building. On the contrary, investment in current assets is turned over
many times in a year. Investment in current assets such as inventories and debtors (account
receivables) is realized during the firm’s operating which is usually less than a year.
Operating cycle is the time duration required to convert sales, after the conversion of resource in
to inventories, into cash.
Operating cycle of a manufacturing company involves three phases:
1. Acquisition of resources such as raw material, labour, power and fuel etc.
2. Manufacturing of the product which includes conversion of raw material into work in
progress into finished goods.
3. Sale of the product either for cash or on credit. Credit sales create account receivable for
collection.
These phases the cash flow, which most of the time, are neither synchronized nor certain.
They are not synchronized because the cash outflows usually occur before cash inflows are
difficult to forecast accurately. Cash outflows, on the other hand, are relatively certain. The firm
is, therefore, required to invest in current assets for a
Smooth functioning. It needs to maintain the liquidity for purchase of raw materials and pay
expenses such as wages and salaries, other manufacturing, administrative and selling expenses
and taxes as there is hardly a matching between cash inflows, stock of raw materials and work in
progress are kept to ensure smooth production and to guard against non-availability of raw
materials and components. The firm holds the stock of finished goods to meet the demand of
customers on continuous basis and sudden demand for some customers. Demands are created
65
RAW MATERIAL WORK IN PROGRESS
because goods are sold on credit for marketing and competitive reasons. Thus, a firm makes
adequate investment in inventories, and debtors, for smooth unintentional production and sale.
This clearly shows that when we manufacture any kind service, the conversion of the
cash takes place after some time. First the money enters into the business in the form of cash
which is used to produce the raw material or services. After that, raw material is entered into the
conversion, that process is called work in progress. Then it is transformed into finished goods
which wait for sell. Sale can be of credit or cash. Cash sales give money immediately but credit
sales require some time to convert into cash.
How the length of the operating cycle determined?The length of the operating cycle of manufacturing firm is the sum of:
1. Inventory Conversion Process2. Debtors Conversion Process
The inventory conversion period is the total time needed for producing the selling the product. It includes
1. Raw Material Conversion Process2. Work In Progress Conversion Process3. Finished Goods Conversion Process
The debtor’s conversion period is the time required to collect the outstanding amount from customer.
Total inventory conversion period and debt conversion period is referred to as gross operating cycle.
So, Gross Operating Cycle = Inventory Conversion Period + Debtors Conversion Period
Inventory conversion is the sum of Raw Material Conversion Period (RMCP)
66
Work in Process Conversion Period and Finished Goods Conversion Period
ICP=RMCP+WIPCP+FGCPOperating cycle = R + W + F + D - CR = Raw material storage periodW = Work in progress holding periodF = Finished goods storage periodD = Debtors collection periodC = Credit period availed
Raw material conversion period should depend on:
1. Raw material consumption per day
2. Raw material inventory
Raw Material Conversion Period
=Raw Material Inventory x 360/Raw Material Consumption
=RMI x 360 / RMC
Work-in-Progress Conversion Process
=Work-in-progress inventory x 360/Cost of Production
=WIPI x 360/COP
Finished Goods Conversion Period
=Finished Goods Inventory X 360/Cost of Production
=FGI x 360
Debtors Conversion Period (DCP)
=Debtors (D) X 360/Credit Sales at Cost
=D X 360/Credit Sales at Cost
Creditors Conversion Period
67
= Creditors (CRS) X 360/ Credit Purchase
=CRS X 360/Credit Purchase
Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral
period.
NET OPERATING CYCLE = GROSS OPERATING CYCLE – PAYABLES
Working capital operating cycle
Investment in working capital is influenced by four key events in the production and sales
cycle. These events are: purchase of raw materials, payment for their purchase, the sale of
finished goods, and collection of cash for the sales made.
Definition of operating cycle
The time lag between the purchase of raw materials and the collection of cash for sales is
referred to as the operating cycle for the company.
The time lag between the payment for raw materials purchases and the collection of cash
from sales is referred to as the cash cycle.
Operating cycle of the company
The entire sequence of operations in a company can be summarized as follows:
The operating cycle for a company primarily begins with the purchase of raw
materials, which are paid for after a delay representing the creditor's payable period.
These purchased raw materials are then converted by the production unit into finished
goods and then sold. The time lag between the purchase of raw materials and the sale
of finished goods is known as the inventory period.
Upon sale of finished goods on credit terms, there exists a time lag between the sale
of finished goods and the collection of cash on sale. This period is known as the
accounts receivables period.
68
The following ratios will help in managing debtors, creditors and inventories
1. Stock Turnover ratio = Cost of goods sold / Average Stock
2. Debtors Turnover ratio = [(Debtors+ Bills receivable*365] / Net credit sales
3. Debtors Turnover rate = Credit sales / (Average Debtors + Bills receivable )
4. Creditors Turnover ratio = [(Creditors + Bills payable)*365] / Credit purchases
5. Creditors Turnover rate = Credit purchases / Average Creditors
The operating cycle can be depicted as:
The stage between purchase of raw materials and their payment is known as the
creditor’s payables period.
The period between purchase of raw materials and production of finished goods is
known as the inventory period.
The period between sale of finished goods and the collection of receivables is known
as the accounts receivable period.
69
Managing Working Capital
1. Working Capital CycleCash 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
70
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.
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
71
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
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.
2 . 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
72
More businesses fail for lack of cash than for want of profit.
3. 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.
The following measures will help manage your debtors:
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.
Key Working Capital RatiosThe following, easily calculated, ratios are important measures of working capital utilization.
Ratio Formulae Result Interpretation
Stock
Turnover
Average Stock *
365/
= x days On average, you turn over the value of your entire
stock every x days. You may need to break this
73
(in days)Cost of Goods
Sold
down into product groups for effective stock
management.
Obsolete stock, slow moving lines will extend
overall stock turnover days. Faster production,
fewer product lines, just in time ordering will
reduce average days.
Receivables
Ratio
(in days)
Debtors * 365/
Sales = x days
It takes you on average x days to collect monies
due to you. If your official credit terms are 45 day
and it takes you 65 days... why?
One or more large or slow debts can drag out the
average days. Effective debtor management will
minimize the days.
Payables
Ratio
(in days)
Creditors * 365/
Cost of Sales (or
Purchases)
= x days
On average, you pay your suppliers every x days.
If you negotiate better credit terms this will
increase. If you pay earlier, say, to get a discount
this will decline. If you simply defer paying your
suppliers (without agreement) this will also
increase - but your reputation, the quality of
service and any flexibility provided by your
suppliers may suffer.
Current Ratio Total Current
Assets/
Total Current
Liabilities
= x
times Current Assets are assets that you can readily turn
in to cash or will do so within 12 months in the
course of business. Current Liabilities are amount
you are due to pay within the coming 12 months.
For example, 1.5 times means that you should be
able to lay your hands on $1.50 for every $1.00
you owe. Less than 1 time e.g. 0.75 means that
you could have liquidity problems and be under
pressure to generate sufficient cash to meet
74
oncoming demands.
Quick Ratio
(Total Current
Assets -
Inventory)/
Total Current
Liabilities
= x
times
Similar to the Current Ratio but takes account of
the fact that it may take time to convert inventory
into cash.
Working
Capital Ratio
(Inventory +
Receivables -
Payables)/
Sales
As %
Sales
A high percentage means that working capital
needs are high relative to your sales.
ESTIMATION OF WORKING CAPITAL
Estimation of working capital is one of the most important but complex of all the
business. As explained in the earlier topic excessive current assets result into higher amount of
working capital which ensure safety but at the cost of profitability. On the other hand, if
investment in current assets is reduced it will lower the amount of working capital but there will
be a greater risk accomplished by higher profitability. A firm has to ensure the balance the two
and doing this it is early it is of paramount importance to prepare an estimate of capital budget. A
statement showing estimation of working capital is also known as working capital budget. The
greatest advantage of preparation of working capital budget is that it facilities planning of the
level of holding current assets. Similarly it also helps to compare the project working capital and
actual work-in-capital.
75
Working capital can be estimated by many ways. Here there are three ways to calculate
the working capital requirement.
1. Estimating the components of working capital.
2. Percentage method.
3. Operating cycle method.
Estimation of components of working capital.
In this method we will estimate out requirement of different components of working capital.
Mainly we will have to estimate our current assets and current liability.
1. estimating current assets:In the prediction of working capital, it is essential to the current assets.
Current assets include the following assets.
Stock of raw material.
Sundry debtors.
Any advance payment of expense.
Cash and bank balance.
2. Estimating current liability:- The second step in estimating working capital requirement is to estimate the
current liabilities. The current liability includes trade creditors; bill payable how much the credit
will be allows by that creditors should be estimated carefully. In cash of other current liability,
what will expect delay in the payment of such liability should be estimated.
3. Contingency margins:-
The difference between estimated current assets and current assets and will be the net
working capital will be the net working capital requirements. To be on the safer side a
contingency margin of 10% to 15% may be added in the figure calculated as per the above
explanation.
76
WORKING CAPITAL MANAGEMENT POLICY
ACTION ON STOCKS Keep stock levels as low as possible, consistent with not running out of stock and not
ordering stock in uneconomically small quantities. "Just-in-Time" stock management is
fine, as long as it is "Just-in-Time" and never fails to deliver on time.
Consider keeping stock in suppliers' warehouses, drawing on it as needed and saving
warehousing cost.
ACTION ON DEBTORS / CUSTOMERS
Assess all significant new customers for their ability to pay. Take references, examine
accounts, ask around. Try not to take on new customers who would be poor payers.
77
Re-assess all significant customers periodically. Stop supplying existing customers who
are poor payers - you may lose sales, but you are after QUALITY of business rather than
QUANTITY of business. Sometimes poor-paying customers suddenly find cash to settle
invoices if their supplies are being cut off. If customers can't pay / won't pay let your
competitors have them - give your competitors a few more problems.
Consider factoring sales invoices - the extra cost may be worth it in terms of quick
payment of sales revenue, less debtor administration and more time to carry out your
business rather than spend time chasing debts.
Consider offering discounts for prompt settlement of invoices, but only if the discounts
are lower than the costs of borrowing the money owed from other sources.
ACTION ON CREDITORS
Do not pay invoices too early - take advantage of credit offered by suppliers - it's free.
Only pay early if the supplier is offering a discount.
POINTS TO BE KEPT IN MIND WHILE SECTIONING
WORKING CAPITAL LIMITS
The current assets and the current liabilities are classified as per the RBI guidelines.
The minimum current ratio to be maintained is 1.33:1.
The estimates about the sales, current assets, current liabilities excluding the bank
borrowings, and networking capital should be realistic.
The company should submit the quarterly operating statements.
78
The company should submit the copies of annual accounts regularly.
The company should comply with provisions of the selective credit control and provisions of
the Foreign Exchange Regulation Act, 1973, if applicable.
79
CHAPTER 4DATA ANALYSIS
& INTERPRETATION
80
Schedule of changes in working capital
Schedule of changes in working capital is prepared with the help of current asset and
current liabilities. This statement shows changes in current asset and current liabilities. The
purpose of this statement is to find out the net changes in working capital. It is also known as
working capital variation statement.
An Increase current asset causes an increase in working capital.
A decrease in current asset causes a decrease in working capital.
An increase in current liabilities causes a decrease in working capital.
A decrease in current liabilities causes an increase in working capital.
Statement of changes in working capital 2006-07 and 2007-08
Table No : (In Lakhs)
Particulars 2006-07 2007-08 Increase Decrease
A. Current Asset
Inventories 1107.1 905 202.1
Sundry Debtors 0.84 755.7 754.86
Cash & Bank 11.98 85.6 73.62
Loans & Advances 113.5 127.9 14.4
Total Current Asset 1233.42 1874.2
B. Current Liabilities
Acceptances 79.4 41.2 38.2
Sundry Creditors 2207.7 1957.2 25.05
Others 116.1 148.9 32.8Total Current Liabilities 2519.3 2296.2
Net Current Asset (A-B) -1285.88 -422
Total 906.13 234.9
Increase Working Capital 671.23
81
INFERENCE:
This statement shows changes in current asset and current liabilities. From the above
table it can be seen that the working capital of both the year is negative because the company’s
current liability is higher than the current asset. Hence it can be inferred that in the year in the
year 2007-08 increase in working capital due to increase in current asset and decrease in current
liabilities.
Statement of changes in working capital 2007-08 and 2008-09
Particulars 2007-08 2008-09 Increase DecreaseA. Current Asset Inventories 905 865.5 39.5 Sundry Debtors 755.7 1375.4 619.7 Cash & Bank 85.6 32.2 53.4 Loans & Advances 127.9 377.7 249.8 Total Current Asset 1874.2 2650.8 B. Current Liabilities Acceptances 41.2 153.3 112.1 Sundry Creditors 1957.2 1894.7 62.5 Others 148.9 74.5 74.4 Total Current Liabilities 2147.3 2122.5 Net Current Asset (A-B) -273.1 528.3 Total …. …. 1006.4 205 Increase Working Capital 801.4
Table No : (In Lakhs)
INFERENCE:
From the above table it can be shown that the current asset in the year 2008-09 has
increased when compared with the previous year. There has been increase the components of
current asset like sundry debtors, loans & advances etc, thus it can be inferred that in the year
2008-09 increased in working capital due to increase in current asset and decrease in current
liabilities.
82
Statement of changes in working capital 2008-09 and 2009-10
Particulars 2008-09 2009-10 Increase DecreaseA. Current Asset Inventories 865.5 1590.8 725.3 Sundry Debtors 1375.4 2540.1 1164.7 Cash & Bank 32.2 -1006.4 1038.6 Loans & Advances 377.7 355.2 22.5Total Current Asset 2650.8 3479.7 B. Current Liabilities Acceptances 153.3 148.2 5.1 Sundry Creditors 1894.7 3279.6 1384.9 Others 74.5 77 2.5 Total Current Liabilities 2122.5 3504.8 Net Current Asset (A-B) 528.3 -25.1 Total 1895.1 2448.5Increase Working Capital 553.4
Table No : (In Lakhs)
INFERENCE:
Working capital in the year 2009-10 is -25 which is lower when compared to the previous
year 2008-09 i.e. 528.3. It has to be noted that working capital has declined in spite of huge
sundry creditors of Rs. 3279.6 Lakhs.
83
Statement of changes in working capital 2009-10 and 2010-11
Table No : (In Lakhs)
Particulars 2009-10 2010-11 Increase DecreaseA. Current Asset Inventories 1590.8 1966.7 375.9 Sundry Debtors 2540.1 3211.8 671.7 Cash & Bank -1006.4 16.7 1023.1 Loans & Advances 355.2 260.8 94.4Total Current Asset 3479.7 5456 B. Current Liabilities Acceptances 148.2 0 148.2 Sundry Creditors 3279.6 3924.7 645.1 Others 77 90.7 13.7 Total Current Liabilities 3504.8 4015.4 Net Current Asset (A-B) -25.1 1440.6 Total 2218.9 753.2Increase Working Capital 1465.7
INFERENCE:
From the above table it can be shown that the current asset in the year 2010-11
has increased when compared with the previous year. There has been increase the components of
current asset like sundry debtors, inventories etc, thus it can be inferred that in the year 2010-11
increased in working capital due to increase in current asset.
84
Working Capital
Working Capital = Current Asset – Current Liability
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Current Asset 1874.2 2650.87 3479.7 5456.1
Current Liabilities 2147.35 2122.59 3504.8 4015.4
Working Capital-273.15 528.28 -25.1 1440.6
Figure 1
2007 2008 2009 2010-400
-200
0
200
400
600
800
1000
1200
1400
1600
Working Capital
Working Capital
SOURCES: PRIMARY DATAINFERENCE:
In the above graph we can inferred that the companies working capital has become negative in the year 2007-08 and 2009-10, the main reason for that during these month the companies sundry creditors has increased in great extent. But in the year 2008-09 and 2010-11 it has became positive. So during these years’ companies current assets are more than the current liabilities, it means organization has working capital efficiency
85
Ratio AnalysisThe ratios thus calculated are classified into 4:
Liquid Ratio
Turnover Ratio
Leverage Ratio
Test of Solvency
I. Liquid Ratio
a) Current Ratio:This ratio is calculated by dividing current assets by current liability. This ratio indicates
how much current assets are there against each rupee of current liabilities. Current ratio is also known as “solvency ratio” as it indicates how the expected current claims are covered by current assets. Ideal ratio is 2:1 current assets are that you can readily convert into cash or will do so within 12 months in the course of business. Current liabilities are amount you are due to pay within the coming 12 months. Current Assets Current Ratio = Current Liabilities
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Current Asset 1874.2 2650.87 3480 5456.1
Current Liabilities 2147.35 2122.59 3532.7 4054.46
Ratio0.87:1 1.25:1 0.99:1 1.35:1
86
Figure 2
999
2007 2008 2009 20100
0.2
0.4
0.6
0.8
1
1.2
1.4
0.870000000000007
1.29
0.99
1.37
Current Ratio
Year
Ratio
SOURCES: PRIMARY DATA
INFERENCE: Following are the current ratios (0.87:1)2007-08, (1.29:1) 2008-09, (0.99:1) 2009-10 and
(1.37:1) 2010-11. The standard ratio is 2:1 .The higher the current ratio is, the more capable the
company is to pay its obligations. But in this case the current ratio is less than the standard ratio,
so it shows the unsatisfactory short term liquidity.
b) Quick Ratio
Quick Asset
Quick Ratio = ………………….
Current Liability
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Quick Asset969.2 1785.3 1889.3 3489.3
Current Liabilities 2147.35 2122.59 3532.7 4054.46
Ratio0.45 0.83 0.53 0.87
Figure 3
87
2007 2008 2009 20100
0.10.20.30.40.50.60.70.80.9
1
0.45
0.830000000000001
0.53
0.870000000000005
Quick Ratio
Year
Ratio
SOURCES: PRIMARY DATAINFERENCE:
From the above graph we can interpret that concurrently increase and decrease. The ideal
quick ratio is 1.33:1, but here we can see that the all ratios are below that ideal ratio. So this ratio
shows the unsatisfactory day-to-day solvency, low cash balance and over investment.
II. Turnover Ratio
a) Inventory Turnover RatioThe objective is to determine the efficiency with which the inventory is
utilized. It indicates the speed with which the inventory is converted into sales.
In general, a high ratio indicates e fficient performance. However, too high ratio
and too low ratio should be called for further investigation. A too high ratio may
be the result of very low inventory levels which may result in frequent stock – outs
and thus the firm may incur high stock – out costs. On the other hand, a too low ratio may be the
result of excessive inventory levels, slow moving or obsolete inventory and thus, the firm may
incur high carrying costs. Thus, a firm should have neither very high ratio nor low
ratio.(Stock out means customer going out of shop due to unavailability of stock.) Net Sales
Inventory Turnover Ratio =…………………… Avg. Stock Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Net Sales 17601.9 16669.2 16006.1 27587.2
Avg. Stock 1006.0 885.2 1228.1 1778.7
I.T.R 17.5 18.83 13 15.5
88
Figure 4
2007 2008 2009 2010
17.5 19
1315.5
I T R
Year
Times
SOURCES: PRIMARY DATAINFERENCE:
From the above graph it can be seen that the inventory turnover ratio has increased from 17.5 to 18.83 in the year 2007-08 to 2008-09, and then it decreased13 in the year 2009-10 and again it has increased 15.5 in the year 2010-11. High Inventory turnover ratio indicates the good inventory management.
Inventory Holding Period
12 MONTHS(365 Days)Inventory Holding Period = ----------------------------------------------
INVENTORY TURNOVER RATIO
Year 2007 2008 2009 2010
I.T.R 17.5 18.83 13 15.5
Days 365 365 365 365
Holding Period 21 19 28 23.5
Table No : (In Lakhs)
89
2007 2008 2009 2010
2119
28
23.5
Holding Period
Year
Days
INFERENCE:From the above graph it can be seen that the Inventory holding period has been invariably
fluctuating for the four years.
b) Debtors Turnover Ratio
The objective is to determine this ratio is to analyses the efficiency with which the trade debtors are managed. I t shows the eff ic iency of col lec t ion pol icy of the f i rm. I t i s a lways a good idea to col lec t quickly , money from debtors as uncertainty of collection increases with credit policy being liberal. However a f i rm should under take cost benef i t s tudy of l ibera l credi t pol icy, i f benef i t i s more than cost than i t should increase credit period.
High Debtors T/O ratio =shorter debtors ratio = quick recovery of moneyLow debtors T/O ratio = higher debtor ratio = delay in recovery of money
Net Sales Debtors Turnover Ratio = Sundry Debtors
Table No : (In Lakhs)
Year 2007 2008 2009 2010Net Sales 17601.9 16669.2 16006.1 27587.2
Sundry Debtors 755.7 1375.5 2540.09 3211.8Ratio 23.29 12.12 6.3 8.59
Figure 4
90
Figure 5
2007 2008 2009 2010
23.29
12.12
6.3
8.59
0 0
Debtors Turnover RatioDebtors Turnover Ratio
INFERENCE:From the above debtors turnover ratio graph it can be shows that DTR has been
decreasing from 2007-08 to 2009-10, and then it has increased slightly in 2010-11. The DTR which shows that the number of times the debtors are turned over cash during a year.
91
Debtors Collection Period 365
Avg. collection Period = D T R
Year 2007-08 2008-09 2009-10 2010-11
D.T.R 23.29 12.12 6.3 8.59
Days 365 365 365 365
A.C.P( Days) 15.67 30.12 57.94 42.49
Table No : (In Lakhs) Figure
2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
70
Collection Period
Collection Period
SOURCES: SECONDARY DATAINFERENCE:
From the above graph it can be shown that there is an increase in debtors and decrease in sales, so avg. collection period is increasing year by year until 2010-11. In 2010-10 it was slightly decreased, that shows that recovery from debtors is improving. It shows the how many days we collect the money.
92
c) Creditors Turnover Ratio
Purchases Creditors Turnover Ratio = Creditors
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Purchases 16017.29 11479.25 11250.24 19820.3
Creditors 1957.17 1894.73 3279.59 3924.71
C T R 8.18 6.06 3.43 5.05
Figure
2007-08 2008-09 2009-10 2010-110
1
2
3
4
5
6
7
8
9
C T R
C T R
SOURCES: SECONDARY DATAINFERENCE: From the above graph and table it can be seen that the credit turnover ratio has shown as declining trend from 2007-08 to 2009-10, and it has increased in 2010-11. These ratios indicate the speed/ velocity of payment to creditors and how rapidly payables are paid to the supplier.
93
Average Payment Period 365 Avg. Payment Period = CTR
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
C.T.R 8.18 6.06 3.43 5.05Days 365 365 365 365
Avg. Payment Period(Days)
45 60 106 72
Figure
2007-08 2008-09 2009-10 2010-110
20
40
60
80
100
120
Payment Period (Days)
Payment Period (Days)
SOURCES: SECONDARY DATAINFERENCE: The avg. payment period shows that the how many days firm makes payment to the creditors. It reveals the ability of the firm to avail the credit facility from the supplier throughout the year. Generally low CTR shows the favorable and it is good for the company.
94
d) Working Capital turnover Ratio
Cost of Sale Working Capital turnover Ratio = --------------------------- Net working capital
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-2010 2010-11
Net Sales 17601.9 16669.2 16006.1 27587.2
W.C (C.A-C.L) -282.2 631.1 -52.8 1464.4
W.C.T.R -62.4 32.5 -302 20.1
SOURCES; PRIMARY DATA
Figure 5
2007-08 2008-09 2009-10 2010-11
-350
-300
-250
-200
-150
-100
-50
0
50
100
Working Capital Turnover Ratio
Working Capital Turnover Ratio
Axis Title
INFERENCE:
A lower working capital turnover ratio indicates the inefficiency in utilization of resources and the r9atio has declined. Hence we can see that the components of working capital
is consistently increasing which is consider as negative sign from the point of view of finance.
Asset turnover Ratio = Sales
95
--------------------
Fixed Asset
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Net Sales 17601.9 16669.2 16006.1 27587.2
Total Assets 7632.9 9090.9 10744.6 13945.2
A T R 2.31 1.83 1.5 1.97
SOURCES; PRIMARY DATA
Figure 6
2007-08 2008-09 2009-10 2010-11
2.31
1.83
1.5
1.97000000000001
Asset Turnover RatioAsset Turnover Ratio
INFERENCE: From the above graph reveals that the companies turnover ratio has decreased from 2007-08 to 2009-10, then in the year 2010-11 it has slightly increased. As compared to other years in 2007-08 it was found that the asset turn over ratio was high and its started to decrease in the coming years, in 2009-10 it was found that in 2009-10 the asset turnover ratio was lowest as compared to other years.
96
Profitability Ratios
Net Profit Ratio It expresses the relationship between net profits after taxes to sales. The ratio is
widely used as a measure of overall profitability and is very useful to proprietors as it gives
an idea of the efficiency as well as profitability of the business to a limited extent
Net profit After TaxNet Profit Ratio = X 100
Net sales
Table No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Net profit 2628.4 2591.7 3190.7 3696.7
Net Sales 17601.9 16669.2 16006.1 27587.2Ratio 14.93 15.55 19.93 13.4
2007-08 2008-09 2009-10 2010-110
5
10
15
20 14.93 15.55
19.93
13.4
Net Profit Ratio
N/P Ratio
Year
Ratio
INFERENCE:From the above graph it can be seen that the net profit ratio has
increased from 2007-08 to 2009-10, and in the following year 2010-11 it was found that it was decreased. In the above graph it can be seen that 2009-10 is the year in which the firm has achieved maximum profit i.e. 19.93 as compared to other year.
97
Gross Profit Ratio
The object ive is to determine the eff ic iency wi th which product ion and/or purchase operat ions are carried on. This ratio indicates (a) an average gross margin earned on a sale of Rs. 100, (b) the limit beyond which the fa l l in sa les pr ices wi l l def ini te ly resul t in losses . And (c) what por t ion of sa les i s lef t to cover operat ing expenses and non – operat ing expenses l ike to pay dividend and to create reserves . Higher the ratio, the more efficient the production and /or purchase management.
Gross Profit G/P Ratio = ……………………………… X 100
Net SalesTable No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
G/P 3129.4 3012.7 3622.3 4013.7
Net Sales 17601.9 16669.2 16006.1 27587.2Ratio 17.78 18.07 22.63 14.55
SOURCE: PRIMARY DATA
2007 2008 2009 20100
5
10
15
20
25
17.78 18.0722.63
14.55
Gross Profit Ratio
Year
Ratio
INFERENCE:From the above graph it can be referred that the company achieved high g/p ratio 22.63in
2009-10, it was further found that in 2010-11 it decrease to 14.55.
98
Total Assets Turnover Ratio:
Through find out this ratio it can be helps to understand how efficiently assets are employed in business. This ratio suggests how a rupee of asset contributes to earn sales more the ratio more efficiently assets are used in gainful operation.
Total Assets Turnover Ratio = Net Sales / Avg. Total AssetsTable No : (In Lakhs)
Particulars 2007-08 2008-09 2009-10 2010-11Avg. Fixed Asset 2262.65 2282.9 2307 2504.7Avg. Current Asset 1553.8 2262.55 3065.3 4467.9Total Avg. Assets
3816.45 4545.45 5372.3 6972.6Net Sales 17601.9 16669.2 16006.1 27587.2T.A.T.R 4.61 3.67 2.98 3.96
2007-08 2008-09 2009-10 2010-110
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Holding PeriodAxis Title
99
Inference:From the above graph and table it can be inferred that the company sales are
decreasing in the year 2008-09 and 2009-10, so the ratio decreasing. In the year 2010-11 company sales is at the highest compared to the previous years, So that the ratio started to move to upward.
Fixed Assets turnover ratio: The objective is to determine the efficiency with which the fixed assets are utilized.
I t indicates the f i rm’s abi l i ty to generate sa les per rupee of investment in f ixed assets . In general , higher the ratio, the more efficient the management and utilization of fixed assets is and vice versa.
Fixed Assets turnover ratio = Net Sales / Avg. Fixed AssetsTable No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Net Sales 17601.9 16669.2 16006.1 27587.2
Avg. F.A 2262.65 2282.9 2307 2504.7
F.A.T.R 7.78 7.30 6.94 11.01
2007-08 2008-09 2009-10 2010-110
2
4
6
8
10
12
7.787.3 6.94
11.01
100
Inference:Here we can see that the net sales of the company decreases respectively in 2008-
09, 2009-10. Along with that average fixed asset also decreases. So it would be resulted that
F.A.T.R has decreased in the year 2008-09 and 2009-10. But In the year 2010-11, the company
sales and avg. fixed assets increases. So it will be resulted that the ratio has increased from 6.94
to 11.01.
Current Assets turnover ratio: This ratio is calculated by dividing current assets by current liability. This ratio indicates
how much current assets are there against each rupee of current liabilities. Current ratio is also known as “solvency ratio” as it indicates how the expected current claims are covered by current assets. Ideal ratio is 2:1 current assets are that you can readily convert into cash or will do so within 12 months in the course of business. Current liabilities are amount you are due to pay within the coming 12 months.
Current Assets turnover ratio = Sales / Avg. Current AssetsTable No : (In Lakhs)
Year 2007-08 2008-09 2009-10 2010-11
Net Sales 17601.9 16669.2 16006.1 27587.2
Avg. C.A 1553.8 2262.55 3065.3 4467.9
C.A.T.R 11.33 7.37 5.22 6.17
101
2007-08 2008-09 2009-10 2010-110
2
4
6
8
10
12
Holding Period
Holding Period
Axis Title
Inference:In the above graph we can interpret that the ratio has continually decreases until financial
year 2010-11. In 2010-11 onwards the ratio has started to increase because of net sales and avg. current asset of the company has increased in 2010-11 year.
Year X
W.C (Y) x2 XY
2006 1 -11847800 1 -11847800
2007 2 -2821000 4 -5642000
2008 3 5129000 9 15387000
2009 4 -575000 16 -2300000
2010 5 14127000 25 70635000
Total ∑ x=¿¿15 ∑ y=¿¿ 4012200 ∑ x2=¿¿55∑ xy=¿¿66232200
Trend Projection
102
n∑ (xy ) – ∑ x∑ y
byx = n∑ x2– ∑ (x)2
(5*66232200) – (15*4012200) = (5*55) – (15*15) 331161000 - 60183000 =
275 - 225 = 5419560
(y –ȳ) = byx(x-x)
(y – 802440) = 5419560(x-3)
y = 802440 = 5419560 – 16258680
103
y = 5419560x – 17061120
x = 6
i.e = (5419560*6) – 17061120
= 15456240
104
PART BEXPENSE ANALYSIS
105
1.1 INTRODUCTION
The expenses of a company can be classified into three categories: -
Material Expenses
Labor Expenses
Overhead Expenses
Material expenses are those expenses, which contribute to the material cost of the
company. These include the cost of raw material, freight and octroi charges, Labour
charges, power and fuel and any other cost which is directly related to the material
consumption for the purpose of production of finished goods.
Labour Expenses include the expenses related to the manpower of the company. These
include salaries and wages, recruitment and training expenses, and other staff welfare
expenses.
Overhead Expenses can be further divide into administration overhead and selling &
distribution overheads. The administration overhead includes the expenses related to the
office like rent, insurance, taxes, printing and stationary and many more. The selling &
distribution expenses include commission on sales, warranty expenses, travelling
106
expenses and many more.
Definition:-
Expense ratios indicate the relationship of various expenses to net sales. The operating
ratio reveals the average total variations in expenses. But some of the expenses may be
increasing while some may be falling. Hence, expense ratios are calculated by dividing each item
of expenses or group of expense with the net sales to analyze the cause of variation of the
operating ratio.
The ratio can be calculated for individual items of expense or a group of items of a
particular type of expense like cost of sales ratio, administrative expense ratio, selling expense
ratio, materials consumed ratio, etc. The lower the operating ratio, the larger is the profitability
and higher the operating ratio, lower is the profitability.
While interpreting expense ratio, it must be remembered that for a fixed expense like
rent, the ratio will fall if the sales increase and for a variable expense, the ratio in proportion to
sales shall remain nearly the same.
Formula of Expense Ratio:
Following formula is used for the calculation of expense ratio:
Particular Expense = (Particular expense / Net sales) × 100
Types of expenses-
1. Cost of Goods Sold:-
107
A manufacturing business or any business that sells products has a cost of goods sold
category. These expense accounts typically include beginning and ending inventory valuations,
freight and shipping of product, bad debts created by sales and non-payment, and other costs that
directly relate to the items sold by the company. Some organizations also include compensation
expenses that are directly related to the products made and/or sold, e.g., sales compensation or
direct labor.
2. Operating Expenses:-
Usually the largest expense category (by the number of accounts, at least) are operating
expenses, which identify all normal costs that relate to the day-to-day necessities of the
organization. In this category, basic accounting rules specify the inclusion of compensation,
benefits, local, state, and federal payroll taxes, office expenses, supplies, postage, travel and
entertainment, advertising (amounts not included in the cost of goods sold category), repairs and
maintenance, depreciation (the non-cash expense of writing "down" the cost of some assets over
time), mortgage or rent of facilities, utilities (telephone, electricity, heat, and air conditioning),
and professional fees (accountants and attorneys).
Non-Operating Expenses (or Other Expenses):-
This category typically includes all other expenses that the organization deems outside of
operations. For example, corporate income taxes are often placed in this category. Companies
identify federal and state corporate income taxes after they determine their net income (or net
profit) for the fiscal or calendar year. Unlike compensation, travel, or repairs, income taxes are
not calculated (or paid) until after all operations for the accounting period have closed.
Employee and Officer Expense Accounts:-
Accounting expense account classifications should not be confused with employee and
officer expense accounts, which are usually operating expenses. Employee and officer expense
accounts are not typically specified in the income statement (profit and loss statement) for a good
reason. These accounts are designed to categorize amounts spent by employees, management,
and/or board of director members for the efficient performance of their duties. For example,
travel and lodging is often a major component of expense accounts. However, on the income
statement, the total for all forms of travel and lodging will correctly appear in the travel or travel
and entertainment account on the income statement.
108
Function/ Purpose
Expenses ratio are supplementary to the operating ratio. Expenses ratio helps us to know
the cause behind overall change in the operating ratio. Management can take corrective action
accordingly. Expense ration indicates the efficiency of management in controlling the expenses
and thereby improving profitability. Expenses ratio over a number of years should be studied to
find out trend. While interpreting these ratio , it must be kept in mind that if are fixed in
nature ,ratio would decrease as sales increase but if expenses are variable, same percentage
would be maintained.
Break-up Of Operating Ratio into Various Expenses Ratios:
Break-up of cost of goods sold ratio gives us two major ratios viz. Material Expenses &
Labour Expenses Ratio. Decrease in Labour expenses Ratio would mean either increase in
efficiency of the labour or lesser use of labour force by the concern due to mechanization.
Decrease in Material Expenses Ratio would mean increase in the yield. These ratios thus explain
the increase or decrease in Gross Profit Ratio.
109
Manufacturing and Nonmanufacturing Costs:-
Manufacturing (direct materials, direct labor, factory overhead) and non-manufacturing
costs; product and period costs; raw materials, work-in-process and finished goods; cost of goods
manufactured and cost of goods sold; cost accounting cycle.
IA manufacturing company incurs both manufacturing costs (also
called product costs) and nonmanufacturing costs or expenses (also
called selling and administrative expenses).
Manufacturing Costs and their classification-
Manufacturing costs are the costs that a company incurs in producing a
product .There are 3 types of manufacturing costs:
Direct Materials (DM) –
Raw materials and parts, directly traceable to the product. Materials must attach
themselves to, and become part of, the finished product to be considered Direct
Materials.
Direct Labour (DL) –
Wages and other payroll costs of the employees that directly work to convert
Direct Materials into finished products. These costs are directly traceable to the product.
Manufacturing Overhead (MOHD) –
All the other costs related to producing products that don't qualify as Direct
Materials or Direct Labor. Picture a manufacturing plant and all the costs of the plant.
Now subtract DM and DL. Everything that's left is Overhead. These costs are indirectly
traceable to the product.
Variable Factory Overheads examples are electricity, heating, water, indirect
material, indirect labour etc.
Fixed Factory Overheads example are depreciation, property taxes , property
insurance, salaries for non- production employees etc.
Non-Manufacturing Costs –
110
Some costs are specifically not manufacturing costs, and therefore not DM, DL or
OHD. These are costs not related to the manufacturing plant or producing the product.
The include the following two categories:
Selling Costs :-
The costs associated with selling the product are Selling Costs. These include sales salaries
and commissions, advertising, stores and their related fixtures and equipment.
General and Administrative Costs :-
The costs associated with the central management and home office of a company, and
general costs of being incorporated, are classified as General and Administrative (GA) costs.
This includes buildings, offices, equipment, salaries, etc. that are part of the administrative arm
of the business, provided these costs can't be traced directly or indirectly to the manufacturing
function.
Period Costs :-
Some costs don't have any future value, and only relate to the current period. These include
Selling costs and GA costs. Other period costs include income taxes and interest expense.
Benefits of Expenses Analysis –
A cost benefit analysis is done to determine how well, or how poorly, a planned action
will turn out. Although a cost benefit analysis can be used for almost anything, it is most
commonly done on financial questions. Since the cost benefit analysis relies on the addition of
positive factors and the subtraction of negative ones to determine a net result, it is also known as
running the numbers.
A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the
benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference
between the two indicates whether the planned action is advisable. The real trick to doing a cost
benefit analysis well is making sure you include all the costs and all the benefits and properly
quantify them. Should we hire an additional sales person or assign overtime? Is it a good idea to
111
purchase the new stamping machine? Will we be better off putting our free cash flow into
securities rather than investing in additional capital equipment? Each of these questions can be
answered by doing a proper cost benefit analysis
1.2 scope of the study
The expense analysis helps us to identify the deviations of different expenses incurred
during the year from those incurred in the last year. These expenses are analyzed in comparison
to sales because as the sales increases there will be definitely an increase in expenses but the
ratio of increase in expenses to sales must not increase.
We have to search out the gaps and weak points due to which the expenses are
increasing. These gaps are filled by proper managerial actions, to maintain the contribution and
profits of the company.
The efficiency of the company is not only judged by the increasing sales. If we want to
know a company better, we must analyze the expenses as compared to sales.
If the expenses are reducing irrespective of increasing sales, it resembles the increasing
operational efficiency of the company.
Thus expense analysis is very important for a company at different levels in the lifetime
of the company to control its expenses.
1.3 Objective
The objective of the Expense Analysis is as follows: -
To analyze the different expenses of the company
To search reasons of increase in the expenses
To find out measures to control the expenses
Research MethodologyThe sampling Method
Non random sampling method was used for the study. For the purpose of this study
following departments were selected
Purchase department
Accounts department
112
Stores & Bonded department
Sources of data
For the successful completion of the present study, the data required for analysis had been
collected from one sources, namely.,
Secondary Sources
SECONDARY DATA: Data were collected mainly from the past records, company
documents like income statement and balance sheet , auditors report, journal website, etc.
DATA ANALYSIS &
113
INTERPRETATION
The expenses as a percentage to net sales of the company has following components distributed
in the given ratio
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Material Cost 13182.9 12422.7 10945.8 21272.1Labor Cost 924.6 738.7 1051.4 1617.8
Overheads Cost 439.4 431.3 496.1 685.1Profit 2628.4 2591.6 3190.7 3696.9
Net Sales 17601.9 16669.2 16006.1 27587.2Components Of Cost 2007-08 2008-09 2009-10 2010-11
Material Cost 75% 75% 69% 78%
Labor Cost 6% 5% 7% 6%
Overheads Cost 3% 3% 4% 3%
Profit 16% 17% 20% 13%
114
2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
70
80
90
Material CostLabor CostOverheads CostProfit
Inferences:From the above graph we can analyses that as in the case of material cost 2007-08 to 2008-09 it remains same (75%, In 2009-10 the material cost was decreased (69%), but the next year the material cost was increased at higher rate(78%). As in the case of labor cost it has been decline from 2007-08 to 2008-09 and in 2009-10 it has became increased and in the year 2010-11 it was declined slightly. As in the case of overhead cost in the year 2009-10 is 4% and the remaining years i.e.2007-08, 2008-09 and 2010-11 are same(3%). In the case of profit the company achieved maximum profit in 2009-10 i.e. 20% of sales but in 2010-11 it was declined.
Salaries, Wages & Bonus
Table No : (In Lakhs)Components Of Cost 2007-08 2008-09 2009-10 2010-11
Salaries, Wages &
Bonus77.0 590.5 869.5 1336
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.43 3.54 5.43 4.84
Figure
115
2007-08 2008-09 2009-10 2010-110
1
2
3
4
5
6
% of Sales
% of Sales
SOURECES: PRIMARY DATAInference:
The above table reveals that % of salaries, wages & bonus compared with sales has remain same in all year (.44%). But above graph showed the changes in salaries, wages & bonus in a different year. If we can analyze that salaries, wages & bonus are high in the year 2010-11.
Welfare Expenses
Table No : (In Lakhs)
Figure
116
2007-08 2008-09 2009-10 2010-110
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
% On Sales
% On Sales
Axis Title
SOURECES: PRIMARY DATAInference:
The above graph reveals that the welfare expenses has been increased from 2007-08 to
2010-11.Thus it shows the increasing trend.
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Welfare Expenses 99.6 94.9 120.4 187.0
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.56 0.57 0.75 0.67
Sales PromotionComponents Of Cost 2007-08 2008-09 2009-10 2010-11
Sales Promotion 2.4 3.5 1.5 1.7
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.013 0.02 0.009 0.006
117
Table No : (In Lakhs)
Figure
2007-08 2008-09 2009-10 2010-110
0.005
0.01
0.015
0.02
0.025
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
Following are the amount of sales promotion in 07-08 Rs 2.4 , 08-09 was Rs 3.5 and in
09-10 it was Rs 1.5 and 10-11 it was 1.7. In the above table we can shown that in 08-09
company was spending more amount for sales promotion activities than other years.
Travelling & ConveyanceTable No : (In Lakhs)
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Travelling &
Conveyance156.3 119.6 158.8 214.3
Sales 17601.9 16669.2 16006.1 27587.2
118
% of Sales 0.89 0.72 0.99 0.77
Figure
2007-08 2008-09 2009-10 2010-110
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
From the above graph it can be shown that the travelling & conveyance expenses has been increased except the year 2008-09, in 2008-09 it was slightly decreased. It can be inferred that the following are the % of travelling expenses when compared with the sales, in 07-08 it was 0.89%, 08-09 it was 0.72, 09-10 it was 0.99 and 2010-11 it was 0.77.
Communication ExpensesTable No : (In Lakhs)
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Communication
Expenses13 12.3 12.6 16.0
119
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales0.07 0.07 0.08 0.06
Figure
2007-082008-09
2009-102010-11
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
From the above graph it can be inferred that from 2007-08 to 2009-10 the % of communication expenses on sales has been increased. But in the year 2010-11 it was slightly decreased to 0.06.
General Charges
Components Of Cost 2007-08 2008-09 2009-10 2010-11
General Charges 36.1 37.2 46.0 63.2
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.20 0.22 0.29 0.23
120
Table No : (In Lakhs)
Figure
2007-08 2008-09 2009-10 2010-110
0.05
0.1
0.15
0.2
0.25
0.3
0.35
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
In the above graph we can interpret that the % of general charges on sales has continually increases until financial year 2010-11, but In 2010-11 it was declined slightly.
Legal Professional ChargesTable No : (In Lakhs)
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Legal Professional
Charges10.3 19.7 26.3 39.8
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.06 0.12 0.16 0.14
121
Figure
2007-08 2008-09 2009-10 2010-110
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
The above table reveals that % of legal professional charges compared with sales has shown as increasing trend from 2007-08 to 2009-10. But it was slightly decreased in 2010-11.
Other RepairsComponents Of Cost 2007-08 2008-09 2009-10 2010-11
Other Repairs 45.6 40.3 12.8 17.8
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.26 0.24 0.08 0.06
Table No : (In Lakhs)Figure
122
2007-08 2008-09 2009-10 2010-110
0.05
0.1
0.15
0.2
0.25
0.3
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
From the above table it can be inferred that the other repair charges percentages when compared with sales was decreasing year by year. It was shown as declining trend in each year.
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Lease Rent & Hire Charges
0 0.14 0 4.3
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0 0.0008 0 0.015
Lease Rent & Hire ChargesTable No : (In Lakhs)
123
Figure
2007-08 2008-09 2009-10 2010-110
0.002
0.004
0.006
0.008
0.01
0.012
0.014
0.016
0.018
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
From the above graph it can be reveal that the year 2007-08 and 2009-10 there is no lease rent & hire charges. But the year 2008-09 it was .14 lakhs and 2010-11 it was 4.3 lakhs. The percentage of lease rent & hire charges compared with the sales are as follows : in 2008-09 it was 0.0008 and in 2010-11 it was 0.015.
Excise Duty 3137.7 2344.3 1322.4 2577.7
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 17.83 14.06 8.26 9.34
Excise DutyTable No : (In Lakhs)
Figure
124
2007-08 2008-09 2009-10 2010-11
17.83
14.06
8.269.34
% Of Sales% Of Sales
SOURECES: PRIMARY DATAInference:
The above table reveals that % of excise duty compared with sales has shown as decreasing trend from 2007-08 to 2009-10. But it was slightly increased in 2010-11.
Fright & Forwarding ChargesTable No : (In Lakhs)
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Fright & Forwarding Charges
48.4 77.75 81.6 123.24
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.27 0.47 0.51 0.45
125
Figure
2007-08 2008-09 2009-10 2010-110
0.1
0.2
0.3
0.4
0.5
0.6
% Of Sales
% Of Sales
SOURECES: PRIMARY DATAInference:
In the above graph shows that % of fright & forwarding charges compared with sales, from 07-08 to 09-10 at increase in trend has been observed. But in the year 2010-11 it has been slightly declining.
Power & Fuel ChargesTable No : (In Lakhs)
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Power & Fuel Charges 167.3 123.3 154.5 186.3
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 0.95 0.74 0.96 0.67
Figure
126
2007-08 2008-09 2009-10 2010-11
0.950000000000001
0.740000000000003
0.960000000000001
0.670000000000004
% Of Sales% Of Sales
SOURECES: PRIMARY DATAInference:
In the above graph reveals that % of power and fuel charges compared with sales , from 07-08 to 08-09 a decline has been observed. An increase trend has been observed from 08-09 to 09-10 and slight decline in 10-11. The main reason of decline and rise is due to fluctuation in sales .
Raw material consumed
Changes in Raw material consumed as compare to Sales.
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Raw Material Consumed
12880.15 12110.49 10581.49 20632.66
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 73.17 72.65 66.11 74.79
127
2007-08 2008-09 2009-10 2010-1160
62
64
66
68
70
72
74
76
% Of Changes
% Of Changes
Inference:From the above graph and table it can be seen that raw material cost are decline in 2007-
08 to 2009-10 due to decreasing sales, and the year 2010-11 it was increasing due to the increasing the sales.
Stores & Spares
Changes in store and spares consumed as compare to Sales.
Components Of Cost 2007-08 2008-09 2009-10 2010-11
Stores & Spares 209.36 132.38 313.99 452.45
Sales 17601.9 16669.2 16006.1 27587.2
% of Sales 1.19 0.79 1.96 1.64
128
2007-08 2008-09 2009-10 2010-110
0.5
1
1.5
2
2.5
% Of Changes
% Of Changes
Inference:From the table & graph it can be sown that the Stores and spares consumed was
invariably fluctuating in various years. Following are the % change in stores and spares
consumed:
2007-08 = 1.19%, 2008-09 = 0.79, 2009-10 = 1.96 and 2010-11 = 1.64
129
ANNEXURES
Balance Sheet (Rs In Lakhs)
Particulars 2007-08 2008-09 2009-10 2010-111. Sources of funds 1) Shareholders Funds
130
a) Equity share capital … … … …
b) Reserves and surplus 11523 14114.7 16942.1 20639
2) Loan Funds
a) Secured Loans 226 276.3 269.1 5411.3
b) Unsecured Loans 1427.2 1427.2 1427.2 1427.2
Total 13176.2 1581.83 1863.84 3047.77
2. Application of Funds 1) Fixed Assets
a) Gross Block 4253 4621.9 4948.8 5556.8
b) Less : Depreciation 1993.4 2321.7 2640.9 2908.6
c) Net block 2259.5 2300.2 2307.8 2648.2
d) Capital Work In Progress … 6 .. 53.9
Total 2259.6 2306.2 2307.8 2702.1
2) Investments 3) Current Assets, Loans and Advances
a) Inventories 905 865.5 1590.8 1966.7
b) Sundry Debtors 755.7 1375.4 2540.1 3211.8
c) Cash & Bank balance 85.6 32.2 -1006 16.7
d) Loans & Advances 127.9 377.7 355.2 260.8
Sub Total 1874.2 2650.8 3480.1 5456
a) Current Liabilities -905.15 -1087.67 -1287.87 -2234.77
b) Provisions 0.9 1.54 2.79 2.79
Net Current Assets 10916.8 13512.05 16330.05 27776.59
4) Deferred Tax Liability …
5) Miscellaneous Expenditure …
Total 13176.3 15818.3 18638.4 30477.5
SOURECES: SECONDARY DATA
Profit & Loss Account (Rs In Lakhs)
Particulars 2007-08 2008-09 2009-10 2010-11IncomeSale 20739.6 19013.5 17328.5 30165Less : Excise Duty 3137.7 2344.3 1322.4 2577.7Other Income 9.1 5.7 57 63.5
131
Stock Transfer .. .. .. .. Total 17611 16674.9 16063.1 27650.8
ExpenditureMaterial & Manu. 13182.9 12422.7 10945.8 21272.1
Employee Costs 924.6 738.7 1051.4 1617.8Operations Expenses 439.4 431.3 496.1 685.1Financial Expenses 115.6 145.4 46 75 Total 14662.5 13738.1 12539.3 23650Less: Recoverable Expenses .. .. .. ..Cash Operative Expenses 2948.5 2936.7 3523.8 4000.7Deduct: Non-cash Operating Expenses .. .. .. ..Depreciation for the year 320.1 345 333.1 303.8
Profit Before Tax (PBT) 2628.4 2591.6 3190.7 3696.9Less : Provision - Income Tax .. .. .. ..Less : Deferred Tax .. .. .. ..Add : Excess/ Short provision of income-tax written back .. .. .. ..
Profit After Tax (PAT) 2628.4 2591.6 3190.7 3696.9Add : Balance B/F 8894.7 11523 13751.4 16942.1Less : Adjustment relating to earlier years .. ..Less : Depreciation relating to earlier years .. ..Amount Available For Appropriation 11523 14114.7 16942.1 20639
Profit Carried to Balance Sheet 11523 14114.7 16942.1 20639
SOURECES: SECONDARY DATA
132
CHAPTER 5FINDINGS, SUGGESTIONS
AND CONCLUSION
Findings
This Ratio is helpful to maintain the cost of the product.
The company successfully following Just-In-Time (J I T) system.
133
The company is successfully following TPM and 5’s system.
The KAIZEN system is following very excellent manner in all department.
Is help in the decision making the time of the investment decision as it shows the
production made in the specified period.
Inventory turnover ratio is simultaneously increasing and decreasing which means
inventory is used in not in a better way so it is not good for the company.
Ratio help in the determining the liquidity.
The company’s sale has decreased in the financial year 2008-09 and 2009-10.
The Various Ratios help in the determining the price of the product.
SWOT ANALYSIS
134
Suggestions
It can be said that overall financial position of the company is normal but it is required to
be improved from the point of view of profitability..
Creditors increasing year by year so the company should maintain the low level of
creditors because the company can pay them easily whenever required.
135
STRENGTHS
Product range Strong presence in India Backward integration Infrastructure Multi location plants with proximity
to Customer. Dedicated workforce Design studio Global presence
WEAKNESS
New technology doesn’t adopted quickly
Supplier base Product reliability OEMs perception of Minda
prices being high.
OPPORTUNITY
ASEAN China Off Road Europe & global after market Global Market Indonesia plant
THREATS
Growing Indian competition Cost down pressures from
OEMs Chinese manufacturer’s entry New Competitors
Company should spent more funds to its sales promotion activities.
Company should try to increase Volume based sales so as to stand in the competition.
Current Liability increasing year by year, In the financial year 2007-08 and 2009-10 the
current liability has increased more than its current liabilities, so it should be consider
seriously. Should keep better and proper asset liability proportion.
Company should maintain a proper level of inventory , it will avoid the unnecessary
blockage of funds.
The companies must have adequate cash and bank balance to face any situation. The
company has low cash & bank balance in the financial year 2008-09.
Conclusion
After studying the components of working capital management system of Minda
Industries Ltd. It is found that the company has a sound and effective policy and its
performance is good even in the bad recession situation company has managed to make profit.
Company is competing well at the domestic as well as the international level and it is among the
136
leading automobile components producers in the country only because of its proper management
of finance, specially the short term finance known as the working capital.
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 because of
which only the company has reached in the category of top class producer in the country.
137
BIBLIOGRAPHY
Bibliography
Financial Management ……………….. S.N Maheshwary
Financial Management ……………….. I.M.Panedy
138
Annual Report of MINDA INDUSTRIES LTD, SWITCH DIVISION, PUNE.
Auditors Report.
UNO MINDA’S official website….www.mindagroup.com
www.google.com
www.icra.in/Files/Articles/2010-January- Auto - Ancillary -Industry
www.wikepedia.com
www.investopedia.com
139