working capital management @ ifb automotive

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A Dissertation report on

A Study of Working Capital Management

atIFB Automotive Pvt. Ltd, Bangalore

Submitted in partial fulfillment of the requirements

of

M.B.A Degree Course of Bangalore University

By

UMA S.

Reg. No: 06XQCM6116

Under the guidance and supervisionOf

Prof. Sathyanarayana

Faculty, MPBIM

M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan

#43, Race Course Road,

Bangalore- 560 001

2006-08


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CERTIFICATE FROM THE PRINCIPAL

This is to certify the dissertation report titled A study of Working

Capital Management at IFB Automotive Pvt. Ltd has been prepared by

Uma S. bearing the registration No. 06XQCM6116 under the guidance and

supervision of Prof. Sathyanarayana of M.P.Birla Institute of Management

(Associate Bharatiya Bhavan), Bangalore. This has not formed the basis for

the award of any degree/diploma for any university.

Place: Bangalore Dr. Nagesh Malavalli

Date: Principal


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CERTIFICATE FROM THE GUIDE

This is to certify that the dissertation report entitled A study of

Working Capital Management at IFB Automotive Pvt. Ltd done by Uma S.

bearing registration No.06XQCM6116 is a bonafide work done under my

guidance during the academic year 2006-07 in partial fulfillment of the

requirement for the award of MBA degree by Bangalore University. To the

best of my knowledge this report has not formed the basis for the award of

any other degree.

Place: Bangalore Prof.Sathyanarayana

Date: Guide


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DECLARATION BY THE STUDENT

I hereby declare that this dissertation report titled A study of

Working Capital Management at IFB Automotive Pvt. Ltd is a record of

independent work carried out by me towards the partial fulfillment of

requirements for M.B.A course of Bangalore University at M.P.Birla

Institute of Management. This has not been submitted earlier for the award

of any degree or diploma.

Place: Bangalore Uma S

Date: Reg. No. 06XQCM6116


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ACKNOWLEDGEMENTS

It is my special privilege to extend my thanks to all of them who have helped me

and encouraged me in completing the internship successfully.

I owe a special debt of gratitude to Mr.Ravi for his support and encouragement

during my study.

I wish to extend my special gratitude to Mr. Mr. Nikhilesh Gupta for granting me

the permission to do a project at IFB Automotive private ltd.

I am indebted to my internal guide Prof. Sathyanarayana for his encouragement

and support for the completion of study.

I extend my sincere gratitude to our Principal Mr. Nagesh Malavalli.

I also wish to express my gratitude to everyone who directly and indirectly helped

me through this internship.

UMA S.


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TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

1. INTRODUCTION

1.1 BACKGROUND OF STUDY 2

1.2 STATEMENT OF THE PROBLEM 9

1.3 NEED AND IMPORTANCE OF THE STUDY 9

1.4 OBJECTIVE OF THE STUDY 10

1.5 SCOPE OF THE STUDY 10

2 INDUSTRY PROFILE

2.1 HISTORY 11

2.2 AUTOMOTIVE INDUSTRY IN INDIA 11

3 COMPANY PROFILE

3.1 ORIGIN 14

3.2 CORE VALUES 16

3.3 MILESTONES OF IFB 16

3.4 OBJECTIVES 17


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3.5 POLICIES 18

3.6 IFBs MAJOR CUSTOMERS 20

3.7 ORGANISATION STRUCTURE 21

3.8 PRODUCT PROFILE 22

4 LITERATURE REVIEW

4.1 PURPOSE 23

4.2 METHODOLOGY 23

4.3 RESEARCH PAPERS REFERRED 24

4.4 CONCLUSION 25

5 RESEARCH METHODOLOGY

5.1 TYPE OF RESEARCH 26

5.2 INSTRUMENTATION TECHNIQUES 26

5.3 ACTUAL COLLECTION OF DATA 27

5.4 TOOLS USED FOR ANALYSIS OF DATA 27

5. 5 LIMITATIONS OF THE STUDY 27


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6 COLLECTION OF DATA

6.1 GENERAL INDICATORS 28

6.2 SCHEDULE OF CHANGES IN WORKING CAPITAL 31

6.3 CALCULATION OF OPERATING CYCLE 35

6.4 COMPUTATION OF CASH CYCLE 36

6.5 WORKING CAPITAL RATIOS 37

6.6 ACTIVITY RATIOS 40

6.7 INVENTORY MANAGEMENT 54

6.8 ACCOUNTS RECIEVABLE MANAGEMENT 59

6.9 TREND ANALYSIS 61

6.10 COMMON SIZE STATEMENT 64

6.11 OTHER RATIOS 65

7 FINDINGS AND CONCLUSION

7.1 SUMMARY OF FINDINGS 73

7.2 SUGGESTIONS 75

7.3 CONCLUSIONS 75

7.4 SUGGESTIONS FOR FURTHER RESEARCH 76

BIBLIOGRAPHY 77


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LIST OF CHARTS

1. COMPOSITION OF CURRENT ASSESTS 282. COMPOSITION OF CURRENT LIABILITIES 303. OPERATING CYCLE TREND 354. CASH CYCLE TREND 365. CURRENT RATIO 386. QUICK RATIO 397. WORKING CAPITAL TURNOVER RATIO 418. FIXED ASSETS TURNOVER RATIO 439. CURRENT ASSETS TURNOVER RATIO 4410.TOTAL ASSET TURNOVER RATIO 4611.CASH TURNOVER RATIO 4812.DEBTORS TURNOVER RATIO 4913.AVERAGE COLLECTION PERIOD 5114.CREDITORS TURNOVER RATIO 5215.AVERAGE AGE OF PAYABLES 5316.COMPOSTION OF INVENTORY 5617.STOCK TURNOVER RATIO 5718.INVENTORY HOLDING PERIOD 58


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M.P.Birla Institute of Management1

Executive summary

.The research is conducted at IFB Automotive Private Ltd, India. IFB automotives private

limited is engaged in the manufacture of certain automobile components and motors for

domestic appliances. The industry scenario is such that it has a long selling cycle, and IFB

is no exception. IFB belongs to an industry where the operating cycle is long and the

working capital requirements are high. In such a scenario it dwells upon the management of

the company to play according to the dynamics of the industry in such a way that it leads to

an advantage to the company. The management should workout the optimal level of

working capital, which gives an ideal trade-off between liquidity and profitability. Hence

this study is conducted with an objective to analyze the various components of current

assets and liabilities, the extent of funds tied up in each, the trend changes, the efficiency

with which each component is managed and the overall efficiency of working

capital management.

At IFB automotive private ltd, the working capital management has shown decline in the

period of study. The management has realized the importance of liquidity and cash balances

as the real goals of the business.Towards this end, serious measures have been initiated to bring working capital and cash to

optimal levels.

The company has underperformed during the period of study. It has huge brought forward

losses and has paid back a considerable amount of loans and debts. This has led to negative

returns and the liquidity position of the company is affected.

The management has initiated measures to improve the liquidity position of the company

and also taken corrective measures to bring working capital to normal levels. The results are

awaited.


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1. INTRODUCTION

1.1 Background of study

"Cash is the lifeblood of business" is an often repeated maxim amongst financial managers.

Working capital management refers to the management of current or short-term assets and

short-term liabilities. Components of short-term assets include inventories, loans and

advances, debtors, investments and cash and bank balances. Short-term liabilities include

creditors, trade advances, borrowings and provisions. The major emphasis is, however, on

short-term assets, since short-term liabilities arise in the context of short-term assets. It is

important that companies minimize risk by prudent working capital management.

What Affects Working Capital Management?

Organizations are generally focused on cash, accounts payable, and supply chain issues.

However, external issues like the legal and business environment, or internal mechanisms

like organization structure and information systems, can significantly impact working

capital.

Owing to market pressures, companies are led to paying a lot of attention to producing good

quarterly results quarter after quarter. Undue focus on this may sometimes produce a

flattering but inaccurate snapshot of working capital performance. This also happens in

companies that have a marked seasonality of operations with working capital requirements

varying widely from quarter to quarter.

Working capital management is an important yardstick to measure a company's operational

and financial efficiency. This aspect must form part of the company's strategic andoperational thinking. Efforts should constantly be made to improve the working capital

position. This will yield greater efficiency and improve customer satisfaction.


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In general, Working Capital refers to the firms investment in current assets. It is defined as

the excess of current assets over current liabilities and provisions. In other words, it is the

net current assets or net working capital.

Working capital represents the total of all current assets. In other words, it is the gross

working capital. It is also known as circulating capital or current capital, for current

assets are rotating in nature. Where current liabilities and provisions exceed current assets,

the difference is referred to as negative working capital. Working capital is often referred to

as circulating capital. The use of the term circulating capital instead of working capital

indicates that its flow is circular in nature. Working capital, as an accountant defines it is

difference between current assets and currents liabilities.

CONCEPTS OF WORKING CAPITAL:

Concepts of workingCapital

Gross working capital Net working capital Operating cycle

Gross Working Capital: Gross working capital is the amount of funds invested in variouscomponents of current assets. This concept has the following advantages:-

Financial managers are profoundly concerned with the current assets;

Gross working capital provides the correct amount of working capital at the right time;


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It enables a firm to realize the greatest return on its investment;

It helps in the fixation of various areas of financial responsibility;

It enables a firm to plan and control funds and to maximize the return on investment;

For these advantages, gross working capital has become a more acceptable concept in

financial management.

Net Working Capital: Thenet working capital is the difference between current assets and

current liabilities. The concept of net working capital enables a firm to determine how much

amount is left for operational requirements.

Operating Cycle: It is the time duration required to convert sales, after the conversion ofresources into inventories, into cash. The operating cycle of a manufacturing company

involves three phases:

Acquisition of resources such as raw material, labor, power and fuel etc.

Manufacture of the product which includes conversion of raw material into work-in-

progress into finished goods.

Sale of the product either for cash or on credit. Credit sales create account receivable for

collection.

FACTORS DETERMINING WORKING CAPITAL:

Nature of Business/ Industry

Demand of Creditors

Cash Requirements

Volume of Sales

Seasonal Fluctuations

Technology and Manufacturing Policy

Credit Policy

Operating Efficiency.


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In IFB AUTOMOTIVE PVT LTD the determinants of working capital are nature of

business, production policy, market conditions and price level changes.

METHODS OF ESTIMATING WORKING CAPITAL: There are two methods whichare usually followed in determining working capital requirements. These are:-

1. Conventional Method: According to the conventional method, cash inflows and

outflows are matched with each other. Greater emphasis is laid on liquidity and greater

importance is attached to current ratio, liquidity ratio, etc; which pertain to the liquidity of a

business.

2. Operating Cycle Method: In order to understand what gives rise to differences in theamount of timing of cash flows, we should first know the length of time which is required to

convert cash into resources, resources into the final product, the final product into

receivables and receivables back into cash. We should know, in other words, the operating

cycle of an enterprise.

There are four major components of the operating cycle of a manufacturing company. These

are:

The cycle starts with free capital in the form of cash and credit, followed by

investment in materials, man power and other services

Production phase

Storage of the finished products terminating at the time-finished product is sold:

Cash or accounts receivable collection period, which results in and ends at the point

of, disinvestment of the free capital originally committed.

ADEQUACY OF WORKING CAPITAL:

Working capital should be adequate so as to protect a business from the adverse effects of

shrinkage in the values of current assets. It ensures to a greater extent the maintenance of a

companys credit standing and provides for such emergencies as strikes, floods, fire etc. It


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permits the carrying of inventories at a level that would enable a business to serve

satisfactorily the needs of its customers. It enables a company to operate its business more

efficiently because there is no delay in obtaining materials etc; because of credit difficulties.

INADEQUACY OF WORKING CAPITAL: When working capital is inadequate, a

company faces many problems. It stagnates the growth and it becomes difficult for the firm

to undertake profitable projects for non-availability of working capital funds. Difficulty in

implementing operating plans and achieving the firms profit targets. Operating

inefficiencies creep in when it becomes difficult even to meet day-to-day commitments.

Fixed assets are not utilized efficiently thus the firms profitability would deteriorate.

Paucity of working capital funds renders the firm unable to avail attractive credit

opportunities. The firm loses its reputation when it is not in a position to honor it short-term

obligations thereby leading to tight credit terms.

DANGERS OF EXCESSIVE WORKING CAPITAL:

Too much working capital is as dangerous as too little of it. Excessive working capital

raises problems.

It results in unnecessary accumulation of inventories. Thus chances of inventorymishandling, waste, theft and losses increase.

Indication of defective credit policy and slack collection period. Consequently, it

results in higher incidence of bad debts, adversely affecting profits,

Makes the management complacent which degenerates in to managerial

inefficiency.

The tendencies of accumulating inventories to make a speculative profit, which

tends to liberalize the dividend policy, make it difficult for the concern to cope in the

future when it is not able to make speculative profits.


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SOURCES OF WORKING CAPITAL:

Loans fromFinancialInstitutions

Floatingofdebenture

Acceptingpublicdeposits

Issue ofshares

Raisingfunds byinternalfinancing

Sources of Working Capital

In IFB AUTOMOTIVE PVT LTD the working capital source is mainly through cash credit.

WORKING CAPITAL CYCLE:

Cash

Debtors

Stock

Work in

progress

Raw

materials


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MEASURES TO IMPROVE WORKING CAPITAL MANAGEMENT

2. The essence of effective working capital management is proper cash flow

forecasting. This should take into account the impact of unforeseen events, marketcycles, loss of a prime customer, and actions by competitors. The effect of

unforeseen demands on working capital should be factored in.

3. It pays to have contingency plans to tide over unexpected events. While market

leaders can manage uncertainty better, other companies must have risk management

procedures. These must be based on an objective and realistic view of the role of

working capital.

4. Addressing the issue of working capital on a corporate-wide basis has certain

advantages. Cash generated at one location can well be utilized at another. For this

to happen, information access, efficient banking channels, good linkages between

production and billing, internal systems to move cash and good treasury practices

should be in place.

5. An innovative approach, combining operational and financial skills and an all

encompassing view of the company's operations will help in identifying and

implementing strategies that generate short term cash. This can be achieved by

having the right set of executives who are responsible for setting targets and

performance levels. They are then held accountable for delivering. They are also

encouraged to be enterprising and to act as change agents.

6. Effective dispute management procedures in relation to customers will go along way

in freeing up cash otherwise locked in due to disputes. It will also improve customer

service and free up time for legitimate activities like sales, order entry, and cash

collection. Overall, efficiency will increase due to reduced operating costs.

7. Collaborating with your customers instead of being focused only on your ownoperations will also yield good results. If feasible, helping them to plan their

inventory requirements efficiently to match your production with their consumption

will help reduce inventory levels. This can be done with suppliers also.


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1.2 STATEMENT OF THE PROBLEM:

Working capital is a very important resource for a manufacturing enterprise. While the fixed

assets provide infrastructure the current assets is used for the operations. The operating

profits arise out of the effective utilization of both resources but the optimization of profit

largely depends on the effective use of working capital.

The importance of the use of working capital is recognized throughout the world. Manager

dealing with cash, inventories, marketable securities, creditors and banks recognize the

optimization of each of these ingredients of working capital is the key to success in terms ofimproved bottom line. An efficiency of organization can be measured in terms of the

success of working capital management.

A study of working capital of any enterprise would therefore be welcome both by enterprise

and analyst. Researchers have developed many tools for evaluating the efficient

management of working capital. It is therefore proposed to study this interesting area with

special reference to IFB AUTOMOTIVE PVT LTD

1.3 NEED AND IMPORTANCE OF THE STUDY

The management of assets in any organization is an essential part of overall management.

The enterprises, at the time of formation attaches great importance to fixed assets

management, as a part of investment decision-making. However, in the overall day-to-day

financial management, after the initial investment, the management gives more importance

to managing working capital. If we look at any financial statement it will be evident that the

investment in fixed assets remain more or less static but the working capital is constantlychanging. A healthy working capital position is the sine-qua-non of a successful business.

This is reflected in adequate inventories, lowest level of debtors, minimum utilization of

bank facilities for working capital, etc. thus the study of working capital management

occupies an important place in financial management. Effective management of working


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capital compels finance managers to seek interdepartmental coordination for inventories

(purchase, supply planning, manufacturing, marketing, logistics), debtors (marketing),

creditors (purchase and manufacturing), cash (finance and other managers). The time lag

between the purchase of raw materials and the realization of cash from debtors forces thecompany to find money to finance its operations during that period.

1.4 OBJECTIVES OF THE STUDY:

The objectives of the project is to study

The different components of current assets and liabilities and the extent of funds tied

up in each

The trend of changes of each component To study the working capital management

To make suggestions based on the finding of the study

1.5 SCOPE OF THE STUDY:

The scope of the study encompasses management philosophy, strategy, policy of the

selected unit towards working capital. It also includes the management of receivables,

inventories and cash with the emphasis on the stock turnover and the like. Further, the lastfive years working capital performance of the selected unit is studied.


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2. INDUSTRY PROFILE

AUTOMOTIVE INDUSTRY

2.1 History:

In 1867 in stansted Que, Henry seth Taylor built a carriage powered by a steam engine. His

horseless carriage was the first automobile built in Canada.

In 1908 Ford opened his first car plant in Detroit, Michigan, a number of firms these were

already making carriages, bicycles and automobile making carriages bicycles and boat

engines, Detroit became the worlds largest of automobile making centre. In 1904 a group

of businessmen started the Ford Motor Corporation of Canada Ltd. This branch plant was

beginning of the automobile Industry in Canada.

2.2 Automotive Industry in India

Although India has been much discussed in recent years, and has been the recipient of major

foreign investment in its automotive industry, it has in many ways not received the attentionof the worlds other major developing country, China but this is about to change.

With the worlds second largest and fastest-growing population, there is no denying Indias

potential in both economic and population terms and the effect it will have on the auto

industry in the years to come. The country is already off to a good start, with a well-

developed components industry and a production level of one million four-wheeled vehicles

a year, plus a further five million two- and three-wheelers. India also has substantial

strength in mass production techniques and is particularly well served in the fields of

research and development and software design. Therefore, as always, the question is when

will expansion occur and to what level?


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Domestic Market

The Indian market for auto components can be classified into three segments as:

Original equipment manufacturer (OEM) accounting for around 60% of the demand. Replacement markets accounting for around 25% of the demand

Export market accounting for around 15% of the demand.

Growth of the Industry:

The auto component industry continued its excellent track record by registering a growth of

20% in the year 2004-05

Production

During the year 2003-04, auto component production grew by 20% to Rs.306 billion. In

2004-2005 the growth in production is expected to be around 13-15% led by the growth in

the OEM segment, which is likely to contribute around 45-50% of the above.

Quality:

The industry has been making rapid strides towards achievements of world-class qualitysystems by imbibing ISO 9000 /ISO 14001 /QS 9000 /TS 16949 quality systems.

Till now 331 companies in ACMA (Automotive Component Manufacturers Association)

membership have been certified to ISO 9000,

166 Companies have been certified to QS 9000 and

37 Companies are awarded to ISO 14001,

17 Companies have been certified with TS 16949.

2 Companies have won the Deming Prize, and

1 Company has won Japan Quality Medal.


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Exports:

The industry has been exporting more than 10% of its output for the last few years. The

exports during the year 2004-2005 grew by strong 32% to cross $1 billion.Principal export items include replacement parts, tractor parts, motor cycle parts, piston

rings, gaskets, engine valves, fuel pump nozzles, fuel injection parts, filter and filter

elements, radiators, gears, leaf springs.


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3.Company Profile

3.1 ORIGIN:

Automobiles have always caught the fascination of man. Since the invention of wheel till to

date, automobiles have stride part significant miles stones. Automobiles industry has not

only revolutionized the modern mans life, but also has made significant advances in the

technological front.

The entry of Suzuki Motor Company (SMC), Japan a major player in the globalautomobile industry, opened a new era in the Indian automobile annals. SMC with a joint

venture partnership with the government of India promoted a company called Maruti

Udyog Limited (MUL) for production of passenger cars in the early eighties. The created

bright business opportunity for industries involved in the manufacture of automobiles

components.

To take advantage of this challenge and opportunity, In 1974 Mr. Bijon Nag a Technocrat

Entrepreneur promoted Indian Fine Blanking Limited at Calcutta in Technical collaboration

with Hienrich schmid AG of Switzerland. The products are Fine Blanking components and

Tooling for Fine Blanking catering mainly to Automotive Industry. Indian Fine Blanking

(IFB) Industries Limited having its registered office situated at No. 14, TaratollaRoad,

Calcutta. And also set up on a manufacturing unit at Bangalore in the southern part of India

in 1989.

The company is named as IFB Automotive Seating and Systems Limited (IFBASSL),

imbibing the German technology for design, development, manufacturing, testing and

marketing of auto seat mechanisms, seat recliners, seat sliders and seat height adjusters.

The company has created a niche for itself in meeting the demands for both domestic and

south East Asian Automobile market.


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The company combined serial production of its product range conforming to International

Standards. In the last quarter of 1990 and within a short span has established itself as a

market leader for these products in this part of the world.

The companys corporate philosophy is to offer to its valuable customers safety critical

products to most stringent standards and this provide full value for their money. The

company has full-fledged design, development, manufacturing, assembly and testing

facilities for these products. IFBs guidance and strength in tool design, together with its

sophisticated precision tool rooms, combined with design, manufacturing and testing

strength make the company a powerful entity.

The In-house manufacturing facility is restricted to only critical components, where all other

components are sub-contracted. The product manufactured are finished in a modern

automatic pre-treatment and powder coating plant to ensure all the treated and painted parts

conform to required standards. The products are assembled in-house, using trained

personnel and are subjected to final inspection and testing before dispatching it to

customers.

The company has trained personnel involved in quality assurance and quality control

activities. Adequate facilities are provided for inspection, testing and certification of radial

play, angle check, fatigue, endurance, lever operation force, twisted hinge arm, static and

salt spray tests, besides other critical test parameters as required by the customers. The test

facilities are supported by sophisticated measuring recording instruments and gauges. The

company adopts stringent measures to adhere to desired level of quality standards in all

stages.

At present the company has manufacturing facilities one at Bangalore, at Madras and theother at Gurgaon. IFB APL, Bangalore operation consists of 3 divisions that is Seating

Division, Door Division and Motor Division producing different automotive subassemblies

and motors.


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3.2 Core Values and Philosophies of IFB

The companys corporate philosophy is to offer safety, critical products to most

stringent standards.

Serve the customers with high sense of Integrity.

Quality is given a top consideration.

Cost and speed will be the drivers for competitive advantage.

Respect for Human Resource.

Rewards for Commitment to targets.

3.3 Milestones of IFB

In 1989, IFB and RHW Germany signed a License agreement for producing Car Seat

Recliners. Today IFB is the largest supplier of Seat Recliners to all car manufactures in

India. Bosch siemens, Munich signed a license agreement for production of Front

Loading Washing Machines.

In 1991, Siemens came forward to sign an agreement with IFB for production of motors forwashing machines. Siemens is widely known as manufacture of high quality motors for

domestic appliances and motors for window regulators and seat adjusters being used in

Automobiles.

In 1992, Autoliv Sweden signed an agreement for design and manufacture of Safety Seat

Belts and other Retractors for the Indian Automobile Industry. Today IFB Group is the

largest supplier of safety seat belts for all varieties of Automobiles in the country with

market share of 50%. After 1992 the company gradually introduced new products into the

market.


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The product evolution is as follows.

YEAR PRODUCTS

1992 Lever Recliner

1998 Seat Tracks

1999 Door Beams

2001 Window Lifters

2002 Motors

2003

Door Latches

Manual Lumber

Power Seat Track & Recliner

2004

Door Modules

Powered Lumber

Seat Frames

3.4 OBJECTIVES OF IFB:

To provide a global infrastructure with world class facilities for design, analysis,

development, prototyping, testing and validation at a very competitive price to the

customer

To be a total solution provider for all critical auto Sub-Assembly

Introduction of new and innovative products into the market

Promote culture for learning.

Preferred supplier for automotive system in passenger car, utility vehicles and

commercial vehicles segments.

Aspire to be preferred company by all other associates.


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3.5 POLICIES

QUALITY POLICY AT IFB:

To visualize customer needs and provides satisfaction through prompt supply of

value added quality goods and services continuously.

To achieve and sustain excellence in performance through use of appropriate

technology, cost efficient operations and team work of all associates.

To have a world class Human Resource through training and motivating them for

higher aspirations and also maintain safe working environments.

MATERIAL POLICY

To visualize customers needs and provide satisfaction through prompt supply of

products

To continually improve the delivery performance through use of appropriate

technology / service, cost effective operations and team work of all associates.

To maintain sage work environment

ENVIRONMENT POLICY:

IFB APL supply automotive systems are committed to protect the environment and present

pollution by.

Optimum utilization of Natural Resources and energy

Adhering to statutory and applicable legal and other requirements

Awareness on EMS to employees and associates

Monitoring and continual improvements of environmental aspects.


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STRATEGIES

adopted by the company are

lass quality systems

Quality Systems,

tomotive leaders.

ESIGN CAPABILITY

The strategies being

IMPLEMENTATION / Adaptation to world c

Training of Employees and Suppliers in areas of Product / Usage,

SPC & Six Sigma Strategic partnership with global automotive leaders

Establishment of state-of-the-Art Test and R&D facilities.

Close interaction with consumers.

Strategic partnership with global au

JIT suppliers

D

d both in India and abroad

ISc & ISI for advanced design

alliance with global software solution providers

and Tooling

ESTING FACILITIES

Team of engineers traine

Tie up with premier Indian Institutes like IITs, I

research

Strategic

Experience & expertise in 3D scanning, Rapid Prototyping

T

, FMVSS, ADR, JIS etc.

as complete assembly level

RESENT STATUS OF THE ORGANISATION

Meets global standards like ECE

Facility to test products at component, mechanism as well

Closely working with ARAI ( Automotive Research of India) and other

P

l turnover is 110 crores.The company has captured a handsome market share, its annua


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JOINT VENTURE & COLLABORATIONS

ASSOCIATES

TATA Johnson Controls

Kuster ads.

Benteler

ectric Industrial Co., LtdImasen El

Tie up with premier Indian Institute like IITs, IISc & ISI for advanced design

3.6 IFBs MAJOR CUSTOMERS ARE:

Kwang Jin

research.

AI

IA

L CARS LTD.

MARUTHI SUZUKI

TELCO

HYUND

M & M

FORD

GM IND

HONDA SIE

EICHER MOTORS

FIAT INDIA


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3.7 THE ORGANIZATION STRUCTURE

The Company is thus well poised to take on the challenges of the future. To achieve this

company has seven heads, who are under Board of Directors, the President and the CEO

directly controls all these heads on a day-to-day basis. They are Design and

Development, Vendor Development and Commercial, Quality Assurance, Operations

and Materials, Finance, Accounts and Stores, Management Information Systems and

Human Resources.

However, these have been recognized recently, for greater synergy. The company isnow divided into the following departments:-

(a) Customer Relationship Management

(b)Supply Chain Management

(c) Design Services

(d)Finance and Administration

(e) Human Resource Management

PRESIDENT&

CEO

BOARD OF

DIRECTORS

CUSTOMERRELETIONSHIPMANAGEMENT

SUPPLYCHAINMANAGEMENT

DESIGNSERVICES

FINANCE ANDADMINISTRATI

ON

HUMANRESOURCEMANAGE


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3.8 PRODUCT PROFILE

MAJOR PRODUCTS OF THE COMPANY

Seat Sliders

Seat Recliners

Seat Latches

Window Regulators

Door Beams

Lumber Support

Break Boosters

Parking Breaks

Fine Blanking Components

Automotive Motors


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4 LITERATURE REVIEW

There is plenty of literature available on the topic of working capital management.Many textbooks and the relevant websites provide good coverage on the subject.

4.1 PURPOSE

Literature review is the beginning of the primary data collection. It acts as a

gateway to the familiarity exercise by getting exposed to the study field in details.

Literature review included texts, databases, internet, journals and dailies. The purpose of

literature review is innumerable in research work. Specific need for references and citationsmakes secondary data quite valid. Literature review forms the integral part of larger

research. Secondary data form sole basis for research in some instances. Above all,

secondary data has proven to be less costly, readily available, less time consuming and less

effort required compared to primary data.

Literature reviews provides support to validate secondary data hence complementing the

field data conclusion. It has also been observed that secondary data gives insight into the

research details. It is mandatory to examine secondary data as a prerequisite for accuracy

and relevance for primary data and subsequent analysis.

4.2 METHODOLOGY

Literature review heavily relied on published texts, annual reports of Kennametal

Widia India, accounting and financial database of the company, fact sheets of the

company, other manuals, internet and revered journals and case studies in the

field of working capital management were constantly reviewed.


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4.3 RESEARCH PAPERS REFERRED

a) Does Working Capital Management Affect Profitability of Belgian Firms? (by Marc

Deloof)

The relation between working capital management and corporate profitablity is investigated

for a sample of 1,009 large Belgian non-financial firms for the 1992-1996 period. Trade

credit policy and inventory policy are measured by number of days accounts receivable,

accounts payable and inventories, and the cash conversion cycle is used as a comprehensice

measure of working capital management.

The results suggest that managers can increase corporate profitablity by reducing the

number of days accounts receivable and inventories. Less profitable firms wait longer topay their bills.

b) Working Capital Optimization

Sixty five percent of 400 supply chain and finance professionals surveyed for this

benchmarking study indicated that working capital optimization was a high priority for their

company. This report helps companies identify best practices in how to move from working

capital optimization theory to practical initiatives that can improve their corporate financial

performance.

c) Effects of Working Capital Management on SME Profitability( by PEDRO

MARTNEZ-SOLANO , University of Murcia and PEDRO JUAN GARCA-TERUEL,

University of Murcia)

The objective of the research was to provide empirical evidence about the effects of

working capital management on the profitability of a sample of small and medium-sized

Spanish firms. A panel of 8,872 SMEs was covered. The results, which are robust to the

presence of endogeneity, demonstrate that managers can create value by reducing their

firm's number of days accounts receivable and inventories. Equally, shortening the cash

conversion cycle also improves the firm's profitability.


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4.4 CONCLUSION

The review of the literature provided a solid guideline to conduct the study. It

provided the secondary data required and the adequate guideline for the nature

of the primary data.


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5. RESEARCH METHODOLOGY:

5.1 TYPE OF RESEARCH

This project A Study on Working Capital Management of IFB Automotives Private

Ltd is considered as an analytical research.

Analytical Research is defined as the research in which, researcher has to use facts or

information already available, and analyze these to make a critical evaluation of the facts,

figures, data or material.

The project includes finding of primary data and secondary data. It includes surveys and

fact-finding enquiries. So, the project basically covers description of state of affairs, as it

exists at present. Here in this case, the researcher does not have control over the variables.

Here, the job done as a researcher is to use the facts and information already available. The

research is done with the aid of the annual reports, the company database textbooks and the

observation and interaction being the only source of primary data whatever is used. The

same set of information is analyzed to make the critical evaluation of the material. With the

given nature of research this is an analytical type of research wherein the analysis of the

existing set of affairs are used to arrive the effect of working capital management on the

return and profitability of the company.

5.2 INSTRUMENTATION TECHNIQUES

The techniques used for the collections of the financial statements, data and other

information as follows. The primary data were collected by interaction and observation. The

secondary data were collected from the published annual reports, budgeted manuals and the

audited balance sheet and profit and loss account, database of the company.


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5.3 ACTUAL COLLECTION OF DATA

The project makes use of both the primary as well as secondary data. Primary data were

collected by observation and interaction. In the course of time, the finance department

provided very appreciable co-operation during the interaction.

As for the secondary data, the various published materials were used along with the

database are the annual reports, fact-sheets, budgeted manuals, the audited balance sheet

and profit and loss account, accounting and financial database of the company.

5.4 TOOLS USED FOR ANALYSIS OF DATA

The data were analyzed using the following financial tools and techniques

Ratio analysis

Common size statements and Trend Analysis Statements

Statement of changes in working capital

5.5 LIMITATIONS OF THE STUDY

The analysis is limited to just five years of data study (from year 2003

to year 2007) for financial analysis The figures and facts claimed in the annual reports and in other forms are

taken at face value

The findings of the study are based on the information retrieved by the select unit.

Time constraint factor of the official, which restricted the scope of study.


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6. COLLECTION OF DATA, ANALYSIS AND

INTERPRETATION

6.1 GENERAL INDICATORS:

Components Of Current Assets

Current assets means assets that will either be used up or converted into cash within a years

time or normal operating cycle of the business whichever is longer. They include cash and

bank balances, marketable securities, inventory of raw materials, semi-finished and finished

goods, debtors, bills receivables and pre-paid expenses.

Table 1: COMPONENTS OF CURRENT ASSETS In Rs Crores

Particulars 2003 2004 2005 2006 2007

Inventories 20.62 19.59 34.32 28.74 39.73

Sundry Debtors 18.89 22.7 21.59 18.73 16.63

Cash and Bank 20.85 21.33 23.34 21.37 20.44

Loans and Advances 8.52 8.53 9.76 10.2 12.77

Total Current Assets 68.88 72.15 89.01 79.04 89.57

Increase(decrease) in Current Assets - 3.27 16.86 (9.97) 10.53

Chart 1: Composition of Current Assets

Composition of Current Assets

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007

years

p

ercent

Loans and advances

Cash

Sundry Debtors

Inventories


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ANALYSIS:

The table shows the composition of current assets in five years. There has been an increase

in current assets in the financial years 2004, 2005 and 2007. This is due to increase insundry debtors, cash and loans and advances level in that year. The year 2006 has seen a

sharp decrease in current assets. There is a decrease in all the components of current assets

except loans and advances in 2006. This has led to overall decrease in current assets by

11.2% compared to the previous year.

Components of Current Liabilities

Current liabilities are those liabilities or obligations, which are expected to mature in thenext twelve months. They include short-term loans and advances, accounts payable / sundry

creditors, provision for taxation, outstanding expenses and dividend payable.

Table 2: COMPONENTS OF CURRENT LIABILITIES

Particulars 2003 2004 2005 2006 2007

Current Liabilities

Sundry Creditors 38.21 39.07 54.59 51.56 69.19

Advances from Customers / Credit

balances

2.43 5.02 10.74 12.5 15.82

Trade and Other deposits 0.29 0.32 0.86 0.48 0.6

Unclaimed Dividend 0.1 0 0 0 0

Interest Accrued But Not Due 0.01 0.01 0.01 0 0

Other Liabilities 0.03 0.03 0 0 0

Provisions 0 0 0 0 0.04Total Current Liabilities 41.07 44.45 66.2 64.54 85.65

Increase(decrease) in Current

Liabilities

- 3.38 21.75 1.66 21.11

In Rs Crores


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Chart 2: Composition of Current Liabilities

Chart showing composition of Current Liabilities

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 2007

Years

Pe

rcent

Provisions

Other liabilities

Interest accrued but not due

Unclaimed Dividend

Trade and other deposits

Advances from customers

S.Creditors

ANALYSIS:

The table shows the composition of current liabilities for five years. There is an increase in

current liabilities in all the years. This is majorly due to the contribution made by sundry

creditors and loans and advances.


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6.2 Statement of Schedule of Changes in Working Capital:

The purpose of preparing this statement is for finding out the increase or decrease in

working capital and to make a comparison between two financial years.

Table 3:Schedule of Changes in Working Capital for the Year 2003 and 2004

Particulars 2003 2004 Increase Decrease

Current Assets, Loans & Advances

Inventories 20.62 19.59 1.03Sundry Debtors 18.89 22.7 3.81

Cash and Bank 20.85 21.33 0.48Loans and Advances 8.52 8.53 0.01

Current Liabilities

Sundry Creditors 38.21 39.07 0.86Advances from Customers / Credit balances 2.43 5.02 2.59Trade and Other deposits 0.29 0.32 0.03Unclaimed Dividend 0.1 0 0.1Interest Accrued But Not Due 0.01 0.01 -Other Liabilities 0.03 0.03 -

Provisions 0 0 -

Net decrease in Working capital 0.11

Total 4.51 4.51

In Rs Crores

ANALYSIS: During the financial years of 2003 and 2004 there was a net decrease in

working capital of Rs 0.11 crores. It indicates an inadequate working capital in IFB

AUTOMOTIVE PVT LTD. There is an increase in Sundry Debtors, Cash, Loans and

Advances, Sundry creditors, Credit balances and Trade deposits. There is a decrease ininventory and unclaimed dividend.


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Table 4: Schedule of Changes in Working Capital for the Year 2004 and 2005

In Rs Crores



Inventories 19.59 34.32 14.73Sundry Debtors 22.7 21.59 1.11Cash and Bank 21.33 23.34 2.01

Loans and Advances 8.53 9.76 1.23

Current Liabilities

Sundry Creditors 39.07 54.59 15.52Advances from Customers / Credit balances 5.02 10.74 5.72Trade and Other deposits 0.32 0.86 0.54Unclaimed Dividend 0 0 -Interest Accrued But Not Due 0.01 0.01 -

Other Liabilities 0.03 0 0.03Provisions 0 0 -


Total 18 22.89

ANALYSIS: During thefinancial years 2004 and 2005 there is decrease in sundry debtors

and other liabilities. There is an increase in Inventories, Cash, Loans and advances, Sundry

creditors, Advance from customers and trade deposits.

During the financial years of 2004 and 2005 there is a net decrease in working capital by

Rs. 4.89 crores and when compared to the financial years of 2003 and 2004 there is also a

decrease in working capital. This decrease in working capital in the previous financial years

is due to re-payment of loans.


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In Rs Crores





Current Liabilities

Sundry Creditors 54.59 51.56 3.03Advances from Customers / Credit balances 10.74 12.5 1.76Trade and Other deposits 0.86 0.48 0.38Unclaimed Dividend 0 0 -Interest Accrued But Not Due 0.01 0 0.01

Other Liabilities 0 0 -Provisions 0 0 -


Total 12.17 12.17

ANALYSIS:

During the financial years 2005 and 2006 there is decrease in Inventory, sundry debtors,Cash, Sundry Creditors, trade deposits and interest accrued. There is an increase in Loans

and advances and Advance from customers.


Rs. 8.31 crores and when compared to the financial years 2003 and 2004 and financial years

2004 and 2005 there is also a decrease in working capital. This decrease in working capital

in the previous financial years is due to re-payment of loans.


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In Rs Crores





Current Liabilities

Sundry Creditors 51.56 69.19 17.63Advances from Customers / Credit balances 12.5 15.82 3.32Trade and Other deposits 0.48 0.6 0.12Unclaimed Dividend 0 0 -Interest Accrued But Not Due 0 0 -

Other Liabilities 0 0 -Provisions 0 0.04 0.04


Total 24.14 24.14

ANALYSIS:

During the financial years 2005 and 2007 there is decrease in sundry debtors and cash.

There is an increase in Inventories, Cash, Loans and advances, Sundry creditors, Advance

from customers, trade deposits and provisions.


Rs. 10.58 crores and when compared to the financial years of 2003 and 2004, financial

years of 2004 and 2005, financial years of 2005 and 2006 there is also a decrease in

working capital. This decrease in working capital in the previous financial years is due to

re-payment of loans.


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6.3 CALCULATION OF OPERATING CYCLE:

Operating cycle = Inventory Period+ Average Collection period

Inventory Period = 365*Average Inventory/COGS

Year Avg.Inventory

COGS

Inventory

period

Average

Collection

Period (in days)

Operating

cycle

200320.12 137.99 53.22 76.96 130.18

200420.105 152.37 48.1612194 80.097 128.258

200526.955 201.32 48.87033082 63.845 112.715

2006 31.53 193.85 59.36781016 57.48 116.8482007

34.235 249.46 50.0912972 39.743 89.834

Chart 3: Operating Cycle Trend

Operating Cycle Trend

89.834

130.180

128.258

112.715

116.848

0.000

20.000

40.000

60.000

80.000

100.000

120.000

140.000

2003 2004 2005 2006 2007

years

numberofday

s

ANALYSIS: The Operating Cycle for the year 2003 is 131.502 days, for the year 2004 is

128.258 days, for the year 2005 is 112.715 days, for the year 2006 is 116.848 days and for

the year 2007 is 89.834 days. It can be observed that the operating cycle has reduced. The

lower the operating cycle the better. It indicates the efficient management of inventory and


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stores in the company. The company is moving towards better management and control of

working capital components, which is indicated by a lower operating cycle.

6.4 COMPUTATION OF CASH CYCLE:

operating cycle acc payable period(in days) Cash Cycle

131.502 191.94 -60.43764186

128.258 162.88 -34.6217806

112.715 77.59 35.12533082

116.848 223.48 -106.6321898

89.834 209.1 -119.2657028

Chart 4: Cash Cycle Trend

Cash Cycle Trend

-60.4

-34.6

35.1

-106.6-119.3

-140.0

-120.0

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0

60.0

2003 2004 2005 2006 2007

Years

Numberofdays

ANALYSIS:

The Cash cycle for the year 2003 is -60.43764186 days, for the year 2004 is -34.6217806

days, for the year 2005 is 35.12533082 days, for the year 2006 is -106.6321898 days and for

the year 2007 is -119.2657028 days. It can be observed that the company is facing problems


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with cash management and their payment period has increased which has led to the

decrease in the cash cycle and made it negative.

6.5 Working Capital Ratios:

A ratio can be defined as a statistical yard stick that provides a measure of relationship

between two figures. Ratio analysis is a technique of interpretation of financial statements.

The following ratios help in analyzing the working capital position:

CURRENT RATIO

The current ratio is an indicator of the firm's commitment to meet its short-term

liabilities. The current ratio is an index of the concern's financial stability since it shows the

extent of working capital, which is the amount by which the current assets exceed the

current liabilities. A very high current ratio would indicate inadequate employment of funds

while a poor current ratio is a danger signal to the management. It shows that business is

trading beyond its resources.

Current assets

Current ratio =

Current Liabilities

Year Current assets Current liabilities Current Ratio

2003 68.88 41.07 1.677

2004 72.15 44.45 1.623

2005 89.01 66.2 1.3452006 79.04 64.54 1.225

2007 89.57 85.65 1.045


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Chart 5: Current Ratio

Chart showing Current Ratio

1.677 1.6231.345

1.2251.045

1

10

2003 2004 2005 2006 2007

Years

CurrentRati

ANALYSIS: It is seen from the above table that during the year 2003, the current ratio was

1.677 times, during the year 2004 it was 1.623 times, 1.345 times in the year 2005, 1.225

times in the year 2006 and 1.045 times in the year 2007.

There is a decrease in the current ratio of the firm. The current liabilities have increased by

a higher percent than current assets for the past five years. The decrease in the ratio has

contributed to the decrease in working capital. The firm is not able to maintain the favorableratio of 2:1.

Quick Ratio or Acid Test Ratio:

Quick ratio is a refinement over current ratio as it shows the instant ability to meet the

current liabilities. Liquid assets means all the current assets less inventories, sticky debts,

etc., i.e. such assets as can be quickly converted into cash. The general norm for a healthy

quick ratio is 1:1. This ratio is also known as acid-test ratio.

QUICK RATIO =

CURRENT LIABILITIES


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Liquid assets=Current Assets-Inventory

Year Current

Assets

Inventory Liquid

Assets

Current

liabilities

Quick Ratio

2003 68.88 20.62 48.26 41.07 1.175

2004 72.15 19.59 52.56 44.45 1.182

2005 89.01 34.32 54.69 66.2 0.826

2006 79.04 28.74 50.3 64.54 0.779

2007 89.57 39.73 49.84 85.65 0.582

Chart 6: Quick Ratio

Chart showing Quick Ratio

1.175 1.182

0.826 0.779

0.582

0.1

1

10

2003 2004 2005 2006 2007

Years

Q

uickRatio

ANALYSIS: during the year 2003, the quick ratio is 1.175 times, during 2004, it is 1.182

times, during 2005, it is 0.826 times, during 206, it is 0.779 times and during 2007, it is

0.582.

It is seen from the above table that the firm had enough funds to cover current liabilities in

the years 2003 and 2004. But from 2005, quick ratio has reduced below the favorable ratio.


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More funds are blocked in Inventory and less liquid assets are available to cover current

liabilities.

6.6 ACTIVITY RATIOS

Working Capital Turnover Ratio:

This ratio indicates whether or not working capital has been effectively utilized in making

sales. If a firm makes higher volume of sales with relatively small amount of working

capital, it is an indicator of the operating efficiency of the company.

NET SALESWORKING CAPITAL TURNOVER RATIO =

WORKING CAPITAL

WORKING CAPITAL = Current Assets-Current Liabilities

Year Net Sales Working Capital Working Capital

Turnover Ratio2003 166.19 27.81 5.98

2004 189.53 27.7 6.84

2005 253.19 22.81 11.09

2006 256.02 14.5 17.66

2007 324.76 3.92 82.85


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Chart 7: Working Capital Turnover Ratio

Chart showing the Working Capital Turnover Ratio

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007

Years

Workingcapitalturnover

ratio

ANALYSIS: During the year 2003, Working Capital Turnover Ratio is 5.98 times. For the

year 2004, it is 6.84 times, for the year 2005, it is 11.09 times. For the year 2006, it is 17.66

times. There has been a drastic increase in Working Capital turnover ratio in 2007. It is

82.85 times in 2007. This is due to utilization of funds for repayment of loans. Though the

sales have increased, the working capital has also reduced. The company has not set aside

more funds for working capital.

The ideal working capital turnover ratio is 8 times. But during the year 2007, the company

has a ratio of 82.85 times which is very high which indicates inadequate working capital.


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Fixed Assets Turnover Ratio:

This ratio shows how well the fixed assets are being used to generate sales in the business.

This ratio is low if the existing capacities are not fully utilized. The industry standard is1.56

times.

It is calculated as:

COST OF SALES OR SALESFIXED ASSETS

TURNOVER RATIO =

FIXED ASSETS (after depreciation)

Year Sales Fixed Assets (after

depreciation)

Fixed assets turnover ratio

2003 166.19209.31

0.7942004 189.53 169.5 1.118

2005 253.19 138.62 1.827

2006 256.02 108.7 2.355

2007 324.76 82.72 3.926


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Chart 8: Fixed Asset Turnover Ratio

0.794

1.118

1.827

2.355

3.926

0

0.5

1

1.5

2

2.5

3

3.5

4

FixedAssetsTurnoverRatio

2003 2004 2005 2006 2007

Years

Fixed Asset Turnover Ratio

ANALYSIS: During the year 2003, the fixed assets turnover ratio is 0.794 times. In the

year 2004, it is 1.118 times, during the year 2005 it is 1.827 times. It is 2.355 times for the

year 2006 and 3.926 times for the year 2007.the ratio is less compared to the industry during2003 and 2004. but from 2005, the ratio for the company is above the industry standard.

Current Assets Turnover Ratio:

The current assets turnover ratio gives the relationship between a companys sales and

current assets. It shows the ability of the company to realize the cash from debtors as well as

the less amount of money blocked in inventories.

NET SALES

CURRENT ASSETS TURNOVER RATIO =

CURRENT ASSETS


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Year Net Sales Current Assets Current Assets

Turnover Ratio

2003 166.19 68.88 2.413

2004 189.53 72.15 2.522

2005 253.19 89.01 2.845

2006 256.02 79.04 3.239

2007 324.76 89.57 3.626

Chart 9: Current Assets Turnover Ratio

2.413 2.522

2.845

3.2393.626

0

0.5

1

1.5

2

2.5

3

3.5

4

CurrentA

ssetTurnover

Ratio

2003 2004 2005 2006 2007

Year

Chart Showing Current Assets Turnover Ratio

ANALYSIS: There is no standard or ideal current assets turnover ratio. It indicates the

gross working capital turnover ratio.

For the year 2003, it is 2.413 times. For the year 2004, it is 2.552 times, for the year 2005, itis 2.845 times. It is 3.329 times for the year 2006 and 3.626 times for the year 2007. The

Current Asset turnover ratio is improving over the years and it is not a good sign for the

company. The reason for the increase is increase of inventory and reduction of cash.


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Total Assets Turnover Ratio:

This ratio indicates the efficiency or inefficiency in the use of total resources or assets of a

concern. In other words, it is a measure of the overall performance of the business.

NET SALES

TOTAL ASSETS TURNOVER RATIO =

TOTAL ASSETS

Year Net Sales Total Assets Total Assets

Turnover Ratio

2003 166.19 176.06 0.944

2004 189.53 188.49 1.006

2005 253.19 228.02 1.11

2006 256.02 241.65 1.06

2007 324.76 278.29 1.167


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Chart 10: Total Assets Turnover Ratio

0.9441.006

1.111.06

1.167

0

0.2

0.4

0.6

0.8

1

1.2

TotalAssetsTurnoverRatio

2003 2004 2005 2006 2007

Years

Total assets (TA) include net fixed assets (NFA) and current assets (CA) (TA= NFA+CA).

ANALYSIS: The standard or ideal total assets turnover ratio is that the sales should be at

least two times the value of the assets. During the year 2003, the Total Assets turnover ratio

is 0.944 times, for the year 2004, it is 1.006 times. For the year 2005, it is 1.11 times, for the

year 2006, it is 1.06 times and for the year 2007 it is 1.167 times. There has been a gradual

increase in the total assets turnover ratio except for the year 2006. It indicates that the

company has not utilized its assets fully.


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Cash Turnover Ratio/Cash Velocity:

Cash turnover ratio is the ratio between cash and turnover or sales. This ratio indicates the

extent to which cash resources are efficiently utilized by enterprise. It is also helpful in

determining the liquidity of a concern.

This ratio is expressed as a proportion as

CASH TURNOVER RATIO = Net Annual Sales (Cash + Credit)

Cash in hand and at bank and readily realizable

investment or securities.

year Net Sales Cash Cash Turnover Ratio

2003 166.19 20.44 8.131

2004 189.53 21.37 8.869

2005 253.19 23.34 10.85

2006 256.02 21.33 12.003

2007 324.76 20.85 15.58


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Chart 11: Cash Turnover Ratio

8.131

8.869

10.85

12.003

15.58

0

2

4

6

8

10

12

14

16

CashTurnoverRatio

2003 2004 2005 2006 2007

Years

ANALYSIS: The standard or ideal cash turnover ratio is 10 times. During the year 2003,

the cash turnover ratio is 8.131 times. During the year 2004, the ratio is 8.869 times. During

the year 2005, the ratio is 10.85 times, during the year 2006, the ratio is 12.003 times and

during the year 2007, the ratio is 15.58 times. Year 2005 onwards the cash velocity of the

company has increased above the standard ratio. It indicates that the company is not

maintaining enough cash.


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Debtors Turnover Ratio: Debtors turnover ratio measures whether the amount of funds

tied up in debtors is reasonable and whether the company has been efficient in converting

debtors into cash.

Debtors turnover ratio=net credit sales/average debtors

Year Net Credit Sales Average Debtors Debtors Turnover Ratio

2003 83.095 17.52 4.743

2004 94.765 20.795 4.557

2005 126.595 22.145 5.717

2006 128.01 20.16 6.35

2007 162.38 17.68 9.184

Chart 12: Debtors Turnover Ratio

4.743 4.557

5.717

6.35

9.184

0

1

2

3

4

5

6

7

8

9

10

Debto

rsTurnoverRatio

2003 2004 2005 2006 2007

Years

Debtors Turnover Ratio


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ANALYSIS: During the year 2003 the ratio is 4.743 times. It is 4.557 times for the year

2004, 5.717 times for the year 2006 and 9.184 times during the year 2007. It indicates an

improvement in the debtor collection system of the company. The ratio is above the industry

standard of 5.94 times.

Average Collection period:

Debtors collection period measures the quality of debtors since it measures the rapidity or

the slowness with which money is collected from them a shorter collection period implies

prompt payment by debtors. It reduces the chances of bad debts. A longer collection period

implies too liberal and inefficient credit collection performance.

Average Collection period=365/Debtors turnover ratio

Year Debtors Turnover Ratio Average Collection Period(in days)

2003 4.743 76.96

2004 4.557 80.097

2005 5.717 63.845

2006 6.35 57.4802007 9.184 39.743


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Chart 13: Average Collection Period

Chart showing Average Collection Period

39.743

57.4863.845

80.097

76.96

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007

Years

AverageCollectionPeriod

(indays)

ANALYSIS:

The company gives 60 days credit period for its customers. And when compared with the

average collection period, it is seen that the collection period is longer than the credit period

for the years 2003, 2004 and 2005. It indicates insufficiency in the procedures for collecting

debts.

But the collection period has reduced during the years 2006 and 2007. It indicates that the

management has taken corrective measures to collect debts.

Creditors turnover Ratio (60% credit purchases)

This ratio measures the number of times the creditors balance turned in credit purchases.

The creditors turnover ratio indicates the speed with which the payments for credit

purchases are made to the creditors. It indicates the promptness or otherwise in making

payment of credit purchases. A higher creditors turnover ratio signifies that the creditors

are being paid promptly, thus enhancing the credit worthiness of the company. However, a


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very favorable ratio to this effect also shows that the business is not taking full advantage of

credit facilities, which can be allowed by creditors.

Creditors Turnover Ratio= Credit Purchases/Creditors

Year Credit Purchases Creditors Creditors Turnover

Ratio

2003 43.596 38.21 1.141

2004 52.53 39.07 1.345

2005 74.772 26.49 2.823

2006 50.526 51.56 0.979

2007 72.468 69.19 1.047

Chart 14: Creditors Turnover Ratio

1.1411.345

2.823

0.979 1.047

0

0.5

1

1.5

2

2.5

3

CreditorsTurnoverRatio

2003 2004 2005 2006 2007

Years

Creditors Turnover Ratio


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ANALYSIS: The Creditors turnover ratio during the year 2003 is 1.141 times. It is 1.345

times during 2004, 2.823 times during 2005, 0.979 times during 2006 and 1.047 times

during 2007. The creditors Turnover ratio is less and indicates inefficient cash management.

Average age of Payables

Average age of payables = 365* Average Creditors/Purchases

Year Average Creditors Purchases Age of Payables

2003 38.21 72.66 191.94

2004 39.07 87.55 162.88

2005 26.49 124.62 77.592006 51.56 84.21 223.48

2007 69.19 120.78 209.1

Chart 15: Average Age of Payables

191.94162.88

77.59

223.48209.1

0

50

100

150

200

250

Average

Age

of

Payables(indays)

2003 2004 2005 2006 2007

Years

Chart Showing Average Age of Payables


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ANALYSIS: The credit period that the suppliers have given to the company is 90 days.

When compared with the average age of payables, the company has a longer average age of

payables compared to the credit period availed by them. This indicates that they are utilizing

these funds for financing short-term requirements. The company has paid on time only in2005. This can affect the credit worthiness of the company.

6.7 INVENTORY MANAGEMENT

Inventories constitute the most significant part of the current assets of a large majority of

companies in India. On an average, inventories are approximately 40% of current assets, 50-

60% of Working capital and 20-30% of sales. Inventory management involves a tight

ropewalk between two conflicting goals not to have too high an inventory level, and not to

have one, which is too low. An undertaking neglecting the management of inventories will

be jeopardizing its long run profitability and fail ultimately. The reduction in excessive

inventories carries a favorable impact on the companys profitability.

The various forms of inventories existing in manufacturing companies are raw materials;

work in process and finished goods. The levels to be maintained in these three depend on

the nature of business.

The general motives for holding inventories are:

The transaction motive, which emphasizes the need to maintain inventories to

facilitate smooth production and sales operation.

The precautionary motive, which necessitates holding of inventories to guard against

the risk of unpredictable changes in demand and supply forces and other factors.

The speculative motive, which influences the decision to increase or reduce

inventory levels to take advantage of price fluctuations.

The objectives of inventory management can be broadly classified into operative and

financial objectives.


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Operating objectives aims at avoiding production bottlenecks by providing continuous

supply of all types of materials, promotion of manufacturing efficiency and prompt

execution of their orders to ensure better services to customers. The financial objectives of

inventory management includes effecting economy in purchasing through economic orderquantity and taking advantage of favorable markets, maintaining optimum level of

investment in inventories etc.

The various inventory control techniques used are

Setting inventory levels

ABC analysis

Ageing schedule

Operating cycle

Table 7: COMPONENTS OF INVENTORY

(in Rs. Crores)

Year

Particulars 2003 2004 2005 2006 2007

Raw Materials 3.3 4.64 9.03 8.98 12.71Work-in Progress 3.4 3.22 3.89 4.8 5.31Finished Goods 10.34 7.61 18.97 12.65 18.48

Stores and Spares 1.53 2.3 2.26 1.97 3.02Goods-in transit 0 0 0 0.15 0

Other Inventory 2.05 1.82 0.17 0.19 0.21

Total 20.62 19.59 34.32 28.74 39.73


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Chart 16: Composition of Inventory

Composition of Inventory

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007

Year

Percentage Other Inventory

Goods-in transit

Stores and Spares

Finished Goods

Work-in-progress

Raw Materials

INVENTORY TURNOVER RATIO (ITR):

This ratio reveals the effectiveness of a company's inventory management. Higher sales

turnover with relatively lower inventory is a desirable situation. This ratio shows the

number of times the inventory is being replaced during the year. So, higher the ratio the

better it is as it indicates efficient inventory management.

SALES OR COST OF GOODS SOLD

INVENTORY TURNOVER RATIO =

AVERAGE INVENTORY.


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Inventory Holding Period=365/Inventory Turnover Ratio

Year COGS Average

Inventory

Inventory Turnover

Ratio

Inventory Holding

Period (days)

2003 174.4 20.12 8.667 42.11

2004 203.58 20.105 10.123 36.06

2005 274.36 26.955 10.178 35.86

2006 253.73 31.53 8.047 45.36

2007 338.39 34.235 9.884 36.93

Chart 17: Stock Turnover Ratio

8.667

10.123 10.178

8.047

9.884

0

2

4

6

8

10

12

StockTu

rnoverRatio

2003 2004 2005 2006 2007

Years

Chart showing Stock Turnover Ratio


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Chart 18: Inventory Holding period

42.1136.06 35.86

45.36

36.93

0

5

10

15

20

25

30

35

40

45

50

Numberofdays

2003 2004 2005 2006 2007

Year

Inventory Holding Period

ANALYSIS:

The Inventory Turnover ratio is 8.457 times for the year 2003, 10.123 times for the year

2004, 10.178 times for the year 2005, 8.047 times for the year 2006 and 9.884 times for the

year 2007. The ratio has been growing steadily till 2005. But it has fallen to 8.047 timesduring 2006 and then it has shown some growth. There is inconsistency in the turnover ratio

and indicates that the company should take measures to increase it to a favorable extent.

Though the ratio is above the industry standard of 5.61 times on an overall basis, the ratio

has showed fluctuations.

The Inventory holding period has reduced from 42.11 days in 2003 to 36.93 days in 2007.

However, it had gone up in 2006 to 45.36 days. The management has initiated correctivemeasures to reduce Inventory Holding period.


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6.8 ACCOUNTS RECEIVABLES MANAGEMENT

Accounts receivables constitute a significant portion of the total current assets of the

business next after inventories. They are a direct consequence of trade credit, which has

become an essential marketing tool in modern business. While the extension of credit is

essential for sales promotion, credit sales result in accounts receivables with all their

attendant risks. When a firm sells goods for

cash, payments are received immediately and, therefore, no receivables are created.

However, when a firm sells goods or services on credit, the payments are postponed to

future dates and receivables are created. Usually, the credit sales are made on an open

account, which means that no formal acknowledgements of debt obligations are taken from

buyers. The only documents evidencing the same are a purchase order, shipping invoice or

even a billing statement. The policy of open account sales facilitates business transactions

and reduces to a great extent the paper work required in connection with credit sales.

Receivables are asset accounts representing amounts owed to the firm as a result of sale of

goods / services in the ordinary course of business. Receivables are the result of extension

of credit facility to the customers. The objective of such a facility is to allow the customers

as reasonable period of time in which they can pay for the goods purchased by them.

Receivables are a direct result of credit sale. Credit sale is resorted to by a firm to push upits sales, which ultimately result in pushing up the profits earned by the firm. At the same

time selling goods on credit results in blocking of funds in accounts receivables. Additional

funds are, therefore, required for the operation needs of the business, which involve extra

costs in terms of interest. Moreover, increase in receivables also increases chances of bad

debts. Thus creation of accounts receivables is beneficial as well as dangerous. The finance

manager has to follow a policy which uses cash funds as economically as possible in

extending receivables without adversely affecting the chances of increasing sales and

making more profits. Thus the objective of receivables management is to promote sales and

profits until that point is reached where the return on investment in further funding of

receivables is less than the cost of funds raised to finance that additional credit (i.e. cost of

capital).


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There are many factors, which influence the magnitude, the accounts receivables in a

company like cyclical influences, seasonal sales, and competitive credit terms.

Trend in Average Collection Period

39.743

57.4863.845

80.097

76.96

010

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007

Years

Numberofdays

Trend In Average Payment Period

191.94

162.88

77.59

223.48209.1

0

50

100

150

200

250

2003 2004 2005 2006 2007

Year

NumberofDays

The lower the collection period, better is the collection policy of the company. From this

point the year 2007 is the best, which has the lowest collection period compared to the other


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years. It shows that the company is following the new credit policy drafted strictly to lower

its collection period.

However, for the payment period, longer the period is the better for the company.

The payment period has remained best in 2006 followed by the year 2007. However this canaffect the credibility of the company if the company delays payment frequently.

6.9 Trend Analysis:

Trend analysis is a horizontal analysis of financial statements. The financial statements of

more than one year are analyzed and the changes are depicted and the analyst can find out

the direction of movement, i.e., whether the movement is favorable or unfavorable.Comparison of past data over a period of time with a base year is known as trend analysis.

Trend percentage or trend ratio analysis is a useful analytical device, since it reduces the

large amounts of absolute data into simple and easily readable percentages.

Trend percentage or trend analysis ratios are immensely helpful to the management in

knowing the present position and the trend of direction in which the enterprise is moving.

Through a study of the trend percentages or ratio over the past few years, the management

can know whether the enterprise is moving upward or going downward or remaining

constant


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Trend Analysis for the Companys Current Assets and Current Lia

working capital management @ ifb automotive

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