EXECUTIVE SUMMARY

Working capital management plays an important role in day to day operations of

the business; hence the performance of the company mainly depends on it. The
management of working capital involves managing inventories, accounts receivable and
payable, and cash. The project aims to study the Working Capital Management that is
undertaken by the concern, to determine the Operating Cycle and Cash Cycle. This
study also includes the analysis of the projected working capital requirements of the
company and provides certain suggestions to improve the performance of the company.
The Project highlights the investment options of the company, the methods used
to control the accounts receivables, Monitoring and controlling of inventories. The
Project is undertaken to determine the various sources of finance that are used to
support the current assets of the company. The Project analyses Working Capital
leverage and Working Capital Components. Here, the Working capital management
takes place on two levels:
1) Ratio analysis that can be used to monitor overall trends in working capital and
to identify areas requiring closer management.
2) The individual components of working capital can be effectively managed by
using various techniques and strategies like credit, inventory, cash and liquidity
management.
Both Primary and Secondary data are used for the project. Primary data are
collected from the organization through interactions with the financial executives
Secondary data that are used here are the projected annual report, various details
including monthly sales, monthly receivables.

CONTENTS

Description

Page. No

Acknowledgement

Executive Summary

II

Contents

III

List of tables

IV

List of charts

1 Introduction
1.1 Topic

1.2 Company Profile

1.3 Need for the study

1.4 Objective of the study

1.5 Scope of the study

1.6 Limitations of the study

10

2 Literature Review

11

3 Research Methodology

18

4 Data Analysis and Interpretation

19

5 Findings

51

6 Suggestions

57

7 Conclusion

60

Bibliography

61

II

LIST OF TABLES

Table No.

TITLE

Page No.

Inventory Period For The Year 2003-2007

21

Accounts Receivable Period For The Year 2003-2007

21

Operating Cycle For The Year 2003-2007

22

Monthly Sales And Receivables Of The Year 2007

24

DSO Of The Year 2007

24

Collection Procedure Of The Year 2007

25

Ageing Schedule

26

Current Assets Of The Year 2007

32

Current Liabilities Of The Year 2007

32

10

Inventory Turnover Ratio

36

11

Debtors Turnover Ratio

37

12

Average Collection Period

39

13

Current Ratio

40

14

Quick Ratio

42

15

Components Of Working Capital

43

16

Working Capital Turnover Ratio

44

17

Net Working Capital

45

18

Sales

46

19

Current Assets

47

20

Current Liabilities

48

21

Expenses

49

III

LIST OF CHARTS

CHART NO. CHART NAME

PAGE NO.

Operating Cycle For The Year 2003-2007

22

DSO For Each Quarter For The Year 2007

25

Inventory Turnover Ratio

37

Debtors Turnover Ratio

38

Average Collection Period

39

Current Ratio

41

Quick Ratio

42

Working Capital Turnover Ratio

44

Projections On Net Working Capital

46

10

Projections On Sales

47

11

Projections On Current Assets

48

12

Projections On Current Liabilities

49

13

Projections On Expenses

50

LIST OF FIGURES

FIGURE NO.

FIGURE NAME

PAGE NO.

Operating Cycle And Cash Cycle

IV

19

1. INTRODUCTION
1.1Topic
Working capital management involves the relationship between a firm's shortterm assets and its short-term liabilities. The goal of working capital management is to
ensure that a firm is able to continue its operations and that it has sufficient ability to
satisfy both maturing short-term debt and upcoming operational expenses. The
management of working capital involves managing inventories, accounts receivable and
payable, and cash.
Working Capital is the money used to make goods and attract sales. The less
Working Capital used to attract sales, the higher is likely to be the return on investment.
Working Capital management is about the commercial and financial aspects of
Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher
the profit margin, the lower is likely to be the level of Working Capital tied up in creating
and selling titles. The faster that we create and sell the books the higher is likely to be
the return on investment. Thus:
WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES
In a department's Statement of Financial Position, these components of working
capital are reported under the following headings:
Current Assets

Liquid Assets (cash and bank deposits)

Inventory

Debtors and Receivables

Current Liabilities

Bank Overdraft

Creditors and Payables

Other Short Term Liabilities

Approaches to Working Capital Management

Working capital management takes place on two levels:
1) Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management.
2) The individual components of working capital can be effectively managed by
using various techniques and strategies.
1) Ratio analysis:
Key working Capital Ratios:
a) Stock Turnover Ratio
Formula: Average Stock * 365 / Cost of goods sold
Result = x days
b) Receivables Ratio (in days)
Formula: Debtors * 365/ Sales
Result = x days
c) Payables Ratio (in days)
Formula: Creditors * 365/Cost of Sales (or Purchases)
Result = x days
d) Current Ratio
Formula: Total Current Assets/ Total Current Liabilities

VI

Result = x times
e) Quick Ratio
Formula: (Total Current Assets - Inventory)/Total Current Liabilities
Result = x times
f) Working Capital Ratio
Formula: (Inventory + Receivables - Payables)/Sales
Result = As % Sales
2) Specific Strategies
a) Inventory Management
Inventories are lists of stocks-raw materials, work in progress or finished goodswaiting to be consumed in production or to be sold. A department also needs a system of
internal controls to efficiently manage stocks and to ensure that stock records provide
reliable information.
The total balance of inventory is the sum of the value of each individual stock
line. Stock records are needed to provide an account of activity within each stock line; as
evidence to support the balances used in financial reports.
Inventory management is an important aspect of working capital management
because inventories themselves do not earn any revenue. Holding either too little or too
much inventory incurs costs.
The best ordering strategy requires balancing the various cost factors to ensure
the department incurs minimum inventory costs.

VII

b) Debtor Management
Debtors (Accounts Receivable) are customers who have not yet made payment
for goods or services which the department has provided. 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 objective of debtor management is to minimize the time-lapse between
completion of sales and receipt of payment. The costs of having debtors are:
Opportunity costs (cash is not available for other purposes);
Bad debts.

Debtor management includes both pre-sale and debt collection strategies. 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.
c) Creditor Management
Creditors (Accounts Payable) are suppliers whose invoices for goods or services
have been processed but who have not yet been paid. Creditors are a vital part of
effective cash management and should be managed carefully to enhance the cash
position.
Organizations often regard the amount owing to creditors as a source of free
credit. However, creditor administration systems are expensive and time-consuming to
run. The over-riding concern in this area should be to minimize costs with simple
procedures.
While it is unnecessary to pay accounts before they fall due, it is usually not
worthwhile to delay all payments until the latest possible date., Regular weekly or
fortnightly payment of all due accounts is the simplest technique for creditor
management.

VIII

d) Cash Management
Good cash management can have a major impact on overall working capital
management. Cash Management identify the cash balance which allows for the
business to meet day to day expenses, but reduces cash holding costs.
The key elements of cash management are:

Cash forecasting;

Balance management;

Administration;

Internal control.

e) Other components
Working capital, defined as the difference between current assets and current
liabilities, may also include the following factors:
Prepayments to creditors;
Current portions of long-term liabilities;
Revenue received before it has been earned;
Provisions.

IX

1.2 Company Profile

ACC Limited is Indias foremost manufacturer of cement and ready mix
concrete with a countrywide network of factories and marketing offices.
Established in 1936, ACC has been a pioneer and trend-setter in cement and
concrete technology. ACCs brand name is synonymous with cement and enjoys
a high level of equity in the Indian market. Among the first companies in India to
include commitment to environment protection as a corporate objective, ACC has
won several prizes and accolades for environment friendly measures taken at its
plants and mines. The company has also been felicitated for its acts of good
corporate citizenship.
ACC has a unique track record of innovative research, product
development and specialized consultancy services. It is an important benchmark
for the cement industry in respect of its production, marketing and personnel
management processes. ACC is the only cement producer in India with its own
in-house research and development facility. This unit, recognized by the
Department of Scientific & Industrial Research (DSIR) in the Ministry of Science
and Technology, is engaged in research and development activities related to
cement and concrete areas. The R & D programme addresses a spectrum of
activities that cover technical services for quality and technology up-gradation
and development of products and processes in the companys core business.
Given the inherent variability in the mineral resources used in cement
manufacture, considerable attention has been devoted to continuously optimizing
process conditions including raw materials proportioning to ensure the highest
quality.
Sustainable development is recognized by us as a process of
development that "meets the needs of the present without compromising the
ability of future generations to meet their own needs". We believe this constitutes
balancing the Triple Bottom Line - defined as the achievement of three
interdependent and mutually reinforcing goals of economic development, social
development, and environmental protection.

1.3 Need for the study

Working capital Management is referred as short term Financial
Management which is in the terms of the timing of cash. The need of
working capital management is to:
Ensure that a firm is able to continue its operations and that it has
sufficient ability to satisfy both maturing short-term debt and
upcoming operational expenses.
Maintain the optimum balance of each of the working capital
components.
Increase the Profitability of the company.
Highlight the necessity of managing current assets and current
liabilities

XI

1.4 Objectives of the study

PRIMARY OBJECTIVE:
1)

Determine Operating Cycle and Cash Cycle.

2)

Evaluation of Cash requirements for working capital.

3)

Analyzing and controlling of accounts receivables.

4)

Monitoring and Controlling of Inventories.

5)

Analysis of Working Capital Leverage.

SECONDARY OBJECTIVE:
1)

Analyze

the

ratios

which

affect

the

Working

capital

Requirements of the company and estimate the projections for

the year 2007.
2)

Analysis of working capital components.

XII

1.5 Scope of the study

In the project, we take into consideration
The Annual report of various years.
The Profit and Loss Statement of various years.
Detailed description and data regarding cash discounts,
collection effort, terms of payment of customers, credit policy
variables, interest rates, credit risk, average collection period,
credit period.
Information about the raw materials, their annual usage and the
price of each raw material.
Information about the sources of finance and their Investment
options.

XIII

1.6 Limitations of the study

Profit Criterion for Working Capital is not analyzed due to lack
of data regarding the initial investment.
Primary data that are collected by interacting with the financial
executives may not be accurate.
Details regarding the inventories such as the price of the raw
materials are not revealed by the organization.
Few assumptions are made in calculating the aging schedule.
Credit Management is done for the ACC cement works
Company, Madukkarai only whereas the rest of the project is
done for the whole ACC Company.

XIV

2. LITERATURE REVIEW
Working Capital Management: Difficult, but rewarding1
The article focuses on the importance of management of the working capital in a
business enterprise. From the perspective of the chief financial officer (CFO), the
concept of working capital management is relatively straightforward: to ensure that the
organization is able to fund the difference between short-term assets and short-term
liabilities. In practice, though, working capital management has become the Achilles' heel
of scores of finance organizations, with many CFOs struggling to identify core working
capital drivers and the appropriate level of working capital. By understanding the role
and drivers of working capital management and acting to reach the "right" levels of
working capital, companies can minimize risk, prepare for uncertainty and improve
overall performance. The most effective programs for both improving working capital
performance and forecasting are those that look beyond the local organization and
consider the broader corporate environment. While working capital forecasting is critical
to a company's ability to make informed strategic business decisions, many CFOs
struggle with the process.
As a result, companies can be limited in their ability to weather unforeseen or adverse
events and ensure that cash is readily available where it is needed, regardless of the
circumstances. By understanding the role and drivers of working capital management
taking steps to reach the "right" levels of working capital, companies can minimize risk,
effectively prepare for uncertainty and improve overall performance.
For most CFOs, the greatest challenge with respect to working capital management is
the need to understand and influence factors that are out of their direct control, in order
to obtain a complete picture of the company's needs. The CFO's span of control can be
limited in terms of functional silos, though corporate finance may well have some powers
of influence over operating units. While organizations generally concentrate on the right
processes, such as cash, payables and their supply chain, they are less likely to take
into account various internal and external constraints that can
dictate how effectively those processes are executed. For example, the legal and
business environments can have a significant impact on performance. Similarly, internal

XV

considerations such as organizational structure, shared systems, autonomous

business units, multinational operations and even information technology can impact
working capital, creating barriers that can hinder a CFO's ability to truly understand, and
therefore manage, the company's needs. The human factor is another important
consideration. If management is focused purely on top-line growth, insufficient attention
may be applied to cash flow management and forecasting.
A hard-line focus on year-end or quarter-end results can produce a flattering, but
inaccurate, picture of working capital performance and lead to counter-productive
behavior. Consider the impact on working capital of a year-end sales push where
production has been building up inventory (which may not be the appropriate inventory)
to meet this artificial demand and the quality of receivables deteriorates during the yearly
part of the following year. While there is no magical solution for effecting robust working
capital management, there are a number of prerequisites for gaining control of the
complex process.

Efficiency of Working Capital Management and Corporate Profitability2

Efficient working capital management is an integral part of the overall corporate strategy
to create shareholder value. We investigate the relation between the firm's net-trade
cycle and its profitability. This relationship is examined using correlation and regression
analysis, by industry and working capital intensity. Using a Compustat sample of 58,985
firm years covering the period 1975-1994, we find, in all cases, a strong negative relation
between the length of the firm's net-trade cycle and its profitability. In addition, shorter
net-trade cycles are associated with higher risk-adjusted stock returns.
Efficient working capital management is an integral component of the overall corporate
strategy to create shareholder value. Working capital is the result of the time lag
between the expenditure for the purchase of raw materials and the collection for the sale
of the finished product. The continuing flow of cash from suppliers to inventory to
accounts receivable and back into cash is usually referred to as the cash conversion
cycle. The way in which working capital is managed can have a significant impact on
both the liquidity and profitability of the company. Smith (1980) first signaled the
importance of the trade-offs between the dual goals of working capital management, i.e.,
liquidity and profitability. In other words, decisions that tend to maximize profitability tend

XVI

not to maximize the chances of adequate liquidity. Conversely, focusing almost entirely
on liquidity will tend to reduce the potential profitability of the company.
This paper empirically investigates the relationship between the firm's efficiency of
working capital management and its profitability. It is an empirical question whether a
short cash conversion cycle is beneficial for the company's profitability; A firm can have
larger sales with a generous credit policy, which extends the cash cycle. In this case, the
longer cash conversion cycle may result in higher profitability. However, the traditional
view of the relationship between the cash conversion cycle and corporate profitability is
that, ceteris paribus, a longer cash conversion cycle hurts the profitability of a firm. For
Example, America's leading retailing giants, Wal-Mart and Kmart, reported very different
returns over 1994, notwithstanding a similar capital structure, i.e., about 31% debt
financing. The return on sales, assets, and equity were respectively 0.87%, 1, 74%, and
4, 91 % for Kmart while they were 3.25%, 10,1% and 24,9% for Wal-Mart. The difference
in profitability can be partly explained by the different cash conversion cycle, i.e. 61 days
for Kmart and only 40 days for Wal-Mart,' A 21 -day shorter cash cycle applied to Kmart's
1994 sales of $34 billion, assuming a 10% cost of capital results in savings of $198.3
million a year.

Measuring

associations

between

Working

Capital

and

Return

on

Investment3
Investigates the associations between traditional and alternative working capital
measures and return of investment (ROI) of industrial firms listed on the Johannesburg
Stock Exchange. Importance of working capital management in decision making;
Measurement based on profitability and liquidity concepts; Large influence of traditional

working capital leverage ratio on ROI.

The two conflicting goals of working capital management are profitability and liquidity.
This article looks at return on investment as a measure of profitability and some
traditional and more recently developed working capital concepts as liquidity measures.
Associations were measured between profitability and the liquidity concepts by using
chi-square analysis and stepwise forward regression. The statistical test results showed
that a traditional working capital leverage ratio, current liabilities divided by funds flow,

XVII

displayed the greatest associations with return on investment. Well-known liquidity

concepts such as the current and quick ratios registered insignificant associations whilst
only one of the newer working capital concepts, the comprehensive liquidity index,
indicated significant associations with return on investment.
Promoters of working capital theory share the axiom that profitability and liquidity
comprise the salient (albeit frequently conflicting) goals of

working capital

management. The conflict arises because the maximization of the firm's returns could
seriously threaten the liquidity, and, on the other hand, the pursuit of liquidity has a
tendency to dilute returns. Over the years analysts have employed traditional ratio
analysis as a primary instrument in the measurement of corporate liquidity. Many wellestablished liquidity ratios, for example the current ratio, are simple to apply and have
some theoretical merit: increases in, say, accounts receivable will increase the current
ratio (current assets/current liabilities), suggesting improved liquidity. However, the ability
to match short-term obligations has only improved from a liquidation perspective
(providing current assets may be liquidated at current market value), and not from a
going-concern approach (Shulman & Dambolena, 1986: 35). Liquidity for the on-going
firm is not reliant on the liquidation value of its assets, but rather on the operating cash
flow generated by those assets (Soenen, 1993: 53).
In recent literature some alternative working capital concepts have been advocated as
likely (and possibly improved) measures of liquidity. Four such measures are the cash
conversion cycle, the net trade cycle, the comprehensive liquidity index and the net
liquid balance. The purpose of this article is to report on some results of research
undertaken to measure associations between traditional and alternative working capital
measures and return on investment (ROI), specifically in industrial firms listed on the
Johannesburg Stock Exchange (JSE).
The article proceeds with an assertion of the problem to be investigated, followed by a
short description of the traditional and alternative working capital measures included in
the study. It then advances to the method of research and a brief discussion on the data
set, variables used and the statistical tests applied.

XVIII

Working Capital Measure Examined3

Traditional working capital ratios may be classified according to whether they measure
working capital position, working capital activity or leverage (Emery, 1984: 26; Lovemore
& Brummer, 1993: 83). Working capital position ratios, typically the current and quick
ratios, measure the degree to which the firm's currently maturing obligations are covered
by currently maturing assets. The current ratio is regarded as a broad measure of
liquidity and is expressed as current assets divided by current liabilities. The quick ratio
is considered to be a narrow measure of liquidity and is expressed as current assets
minus inventory divided by current liabilities.
Working capital activity ratios attempt to measure the relative efficiency of the firm's
resources by relating the level of investment in different current assets to the level of
operations (Gallinger & Healey, 1991: 73). Frequently cited activity measures are
inventory turnover, accounts receivable turnover, accounts payable turnover and sales to
net working capital. Inventory turnover is defined as the cost of sales over average
inventory. Accounts receivable turnover measures the speed of converting accounts
receivable into cash, and is calculated as credit sales divided by accounts receivable.
Accounts payable turnover reveals the effectiveness of the management of a firm's
short-term financing, and is represented by credit purchases divided by accounts
payable. Sales to net working capital centres on the proficiency of the utilization of
working capital, and the higher the ratio, the greater the proficiency will be.
Leverage measures provide evidence of cash obligations attributable to the firm's longterm financing, demonstrating the existence of debt capacity that could be used to
provide additional liquidity (Emery, 1984: 26). Frequently used leverage measures
include long-term loan capital divided by net working capital, accounts receivable divided
by accounts payable, and total current liabilities divided by gross funds flow. Long-term
loan capital divided by net working capital provides evidence of the magnitude of the
long-term loan capital financing of working capital. Accounts receivable divided by
accounts payable reflects the degree to which credit extended by the firm is financed by
the credit supplied by creditors. Total current liabilities divided by gross funds flow,
expressed in years, reflects the ability of the firm to repay the various short-term funds

XIX

received from its gross funds flow, the latter being defined as the income after taxation
plus the net nonfunds flow items of the firm (BFA, 1989: 39-40).
Alternative working capital measures developed over the years (in an effort to surmount
the imperfections of conventional ratio analysis) include the cash conversion cycle, the
comprehensive liquidity index, the net liquid balance and the net trade cycle. The cash
conversion cycle, developed by Richards & Laughlin (1980: 33-34), may be computed as
follows: the average collection period of accounts receivable is added to the average
age of the inventory; the sum of the two statistics represents the firm's operating cycle,
from which the average payment period is subtracted. In this way, the working capital
cycle is quantified to portray the residual time interval for which nonspontaneous
financing needs to be negotiated to compensate for the unsynchronized nature of the
firm's working capital investment flows.
The net trade cycle, similar to the cash conversion cycle, measures liquidity on a flow
basis. Where the measure differs from the cash conversion cycle, instead of computing
number of days of cost of goods sold in inventory and number of days of purchases in
accounts payable, the net trade cycle calculates days of sales in both (Kamath,
1989: 26).
The comprehensive liquidity index developed by Melnyk & Berati (Scherr, 1989: 357372), is a liquidity-weighted version of the current ratio, where each current asset and
liability is weighted based on its nearness to cash. The weighting is done by multiplying
the monetary value of each current asset or liability by one minus the inverse of the
asset or liability's turnover ratio. Where more than two turnovers are required to generate
cash from the asset, the inverse of each of these ratios is deducted, and the results
added for all the current assets and liabilities. The added totals depict liquidity-adjusted
measures of total current assets and liabilities. In this way the current ratio can be
computed, based on the adjusted values for current assets and liabilities.
The net liquid balance approach, applied by Shulman & Dambolena (1986: 35-38),
differentiates operational assets from liquid assets in an attempt to measure the true
liquid balance of financial assets after operational needs have been met. The net liquid
balance may be defined as cash plus marketable securities less all liquid financial
obligations including notes payable and the current portion of long-term debt (Kamath,
1989: 28). A positive net liquid balance would indicate the true liquid surplus of a firm,

XX

while a negative net liquid balance would indicate a dependence on short-term external
funding. The net liquid balance divided by total assets could be regarded as a relative
measure of liquidity.

Gross Margin Return on Working Capital: A Project Management Technique 4

Presents the Gross Margin Return on Working Capital for project management
technique. Improvement of return of assets criteria for product management;
Significance of graphic presentations in implementing the technique; Relevance of the
technique to gross margin percent and inventory turnover.
1. Harris, Andrew, Working Capital Management: Difficult, but rewarding, P 52-53.
2. Hyun-han Shin, Soenen, Luc, Efficiency of Working Capital Management and
Corporate Profitability, P37-45.
3. Smith, M. Beaumont, Begemann, E., Measuring Working Capital and Return on
Investment, P1-5.
4. Metcalf, Jerry, Gross Margin Return on Working Capital: A Project Management
Technique, P 27.

XXI

3. RESEARCH METHODOLOGY

RESEARCH DESIGN:
Descriptive Research

SOURCE OF DATA:
Both primary and secondary sources of data have been used in the project.

PRIMARY DATA:
Primary data have been collected from the organization. These data were obtained from
the interactions with the financial executives in the company. These are in the form of
verbal reports, computer reports, etc.

SECONDARY DATA:
Secondary data are drawn from annual reports, records, sales report, Purchase order
and Inventory Report.

TOOLS USED FOR ANALYSIS:

Financial Ratio Analysis

Trend Analysis

Time Series Analysis

XXII

4. DATA ANALYSIS AND INTERPRETATION

WORKING CAPITAL MANAGEMENT
4.1 To Determine Operating Cycle and Cash Cycle
The time that elapses between the purchase of raw materials and the collection
of cash for sales is referred to as the Operating Cycle, whereas the time length between
the payment of raw material purchases and the collection of cash for sales is referred to
as the Cash Cycle.

Figure 1CASH CYCLE AND OPERATING CYCLE

The Operating Cycle is the sum of the inventory period and the accounts
receivable period, whereas the Cash Cycle is equal to the Operating Cycle less the
accounts payable period.

From the financial statement of the firm, we can estimate the inventory period,
the accounts receivable period, and the accounts payable period. All the data is given in
Rs. Crore)

Average Inventory

XXIII

Inventory Period

=
(Annual Cost of goods Sold / 365)
(600.95 + 542.38) / 2
=

= 73.8 days
(2,823.9 / 365)
Average Accounts Receivable

Accounts Receivable Period

=
Annual sales / 365

(199.17 + 190.54) / 2
=

= 22.2 days
(3,203.41 / 365)

Average Accounts Payable

Accounts Payable Period

=
Annual Cost of goods sold / 365

(103.78 + 105.65) / 2
=

= 13.53 days
(2,823.9 / 365)

Operating Cycle

= Inventory Period + Accounts Receivable Period

= 73.8 days

+ 22.20 days

= 96 days
Cash Cycle

= Operating Cycle - Accounts Payable Period

= 96 days

- 13.53 days

= 82.47 days
Thus, ACC limited takes about 82.47 days to collect payment form its customers

XXIV

from the time it pays for its inventory purchases.

4.2 TIME SERIES ANALYSIS

TABLE 4.2.1: INVENTORY PERIOD FOR THE YEAR 2003-2007

Year

Average Inventory
(in Rs. Crore)

Annual Cost of goods

Sold (in Rs. Crore)

Inventory Period
(in days)

2003

357.10

1,670.56

78.02

2004

416.53

1,890.11

80.43

2005

472.66

2,010.10

85.83

2006

644.00

2,800.98

83.92

2007

571.67

2,823.90

73.80

TABLE 4.2.2: ACCOUNTS RECEIVABLE PERIOD FOR THE YEAR 2003-2007

Year

Average Accounts
Receivable
(in Rs. Crore)

2003

202.07

3,384.43

21.79

2004

178.95

3,657.01

17.86

2005

207.05

3,560.44

21.23

2006

208.59

4,227.22

18.01

2007

194.86

3,203.41

22.20

Annual Sales
(in Rs. Crore)

XXV

Accounts Receivable
Period (in days)

TABLE 4.2.3: OPERATING CYCLE FOR THE YEAR 2003-2007

Year

Inventory Period
(in days)

Accounts Receivable
Period (in days)

Operating Cycle
(in days)

2003

78.02

21.79

99.81

2004

80.43

17.86

98.29

2005

85.83

21.23

107.06

2006

83.92

18.01

101.93

2007

73.8

22.20

96.00

CHART 4.2.1: OPERATING CYCLE FOR THE YEAR 2003-2007

XXVI

4.3 CREDIT MANAGEMENT

4.3.1 Control of Account Receivables

The customers of ACC limited are of two types. One is the direct customers and
the other one is the dealers. Dealers maintain the security deposits with the
company and the company will provide two times of the value of the security
deposits as credit. In case of direct customers, these customers have to pay 60% of
the amount as advance payment. Cash discount of 2 percent is allocated to all the
customers. The remaining credit amount is paid by the customers in installments.
For example, if the sale is made between 1 and 7th of the month, then the first
installment should be made on 14th of the same month. So, the average credit
period is only about 10 days. If the customers are not paying their installments
properly, no cash discount is allowed to them. The organization verifies the bank
statement of their customers before providing credit ti their customers.

DAYS SALES OUTSTANDING

The days sales outstanding(DSO) at a given time t may be defined as the ratio
of accounts receivable outstanding at that time to average daily sales figure during the
preceding 30 days, 90 days, or some other relevant period.
Accounts receivables at time t
DSO t = _____________________________

__________ Eq 8

Average daily sales

The figure can be interpreted as either the average time lag between a credit
sale and payment for the sale or as the average days worth of credit sales tied up in
account receivables. Since the collection period measures account receivables per unit
sales, a change in the collection period is a rough measure of changing collection
experience.
However, a major weakness of the ratio for this purpose is that it is quite
sensitive to seasonal variation in sales. Consequently, unless sales are quite stable
overtime, the collection period can mask fundamental changes in collection experience.
To illustrate the calculation of this measure, consider the monthly sales and
receivable for ACC Limited for the year 2007.

XXVII

TABLE 4.3.1.1: MONTHLY SALES AND RECEIVABLES OF THE YEAR 2007

Accounts Received
(rupees in lakhs)

Outstanding
Receivables
( rupees in lakhs )

Month

Sales
(rupees in lakhs)

January

856

770.4

90.8

February

795

801.1

80.1

March

784

785.1

79.0

April

1,056

1,484

106.0

May

1,002

1,007.4

100.0

June

442

498

45.9

July

564

551.8

55.6

August

462

472.2

45.3

September

768

737.4

75.4

October

890

877.8

90.5

November

873

874.7

85.6

December

774

783.9

77.2

TABLE 4.3.1.2: DSO OF THE YEAR 2007

Quarter

Calculation

Days Sales Outstanding

First

785.1/ [( 856 + 795 + 784)/90]

29.00

Second

498/ [ (1056+1002+442) / 90 ]

17.93

Third

737.4 / [ (564+ 462+768)/ 90 ]

36.99

Fourth

783.9 / [(890 + 873 + 774) /90]

27.81

XXVIII

CHART 4.3.1.1: DSO FOR EACH QUARTER FOR THE YEAR 2007

INTERPRETATION
The table above shows that the Days Sales Outstanding for each quarter of the
year 2007. For the first quarter the DSO was 29 days, for the second quarter it was
17.93 days, for the third quarter it was 36.99 days and for the fourth quarter it was
27.81days. It decreased in the second quarter, increased in the third quarter but
decreased in the third quarter and again increased in the fourth quarter.

4.3.2 COLLECTION PROCEDURE

TABLE 4.3.2.1: COLLECTION PROCEDURE OF THE YEAR 2007
Percentage of receivables
collected during the

January
Sales

February
Sales

March
Sales

April
Sales

May
Sales

June
Sales

At the time of sales

60

60

60

60

60

60

First following week

10

10

10

10

10

10

Second following week

10

10

10

10

10

10

Third following week

10

10

10

10

10

10

Fourth following week

10

10

10

10

10

10

XXIX

INTERPRETATION
The Collection Procedure for the first six months of the year 2007 has been
estimated. The credit sales during the month of January are collected as follows: 60
percent is paid as the advance payment in the month in which sale is made. 10 percent
in the first following week, 10 percent in the second following week, 10 percent in the
third following week, 10 percent in the fourth following week. From the collection pattern
it seems that the collection is stable and they have a formalized procedure for collecting
the amount from their customers.

4.3.3 AGEING SCHEDULE

The ageing Schedule given below classifies outstanding accounts receivables at
a given point of time into different age brackets.

TABLE 4.3.3.1: AGEING SCHEDULE

Percent of receivables
received

Percent of receivables
outstanding

0 10 days

60%

40%

11 20 days

70%

30%

21 30 days

80%

20%

31 40 days

90%

10%

41 50 days

100%

Age Group (in days)

INTERPRETATION
From the ageing schedule table, it is clear that ACC Limited collects 60% as its
advance payments and the customers pay their remaining amount in four instalments.
The first instalment 10 percent is received within 20 days from the day of sale, the
second instalment 10 percent is received within 30 days from the day of sale, the third
instalment 10 percent is received within 40 days from the day of sale and the last
instalment is received within 50 days from the day of sale. All its debt is collected within
50 days.

XXX

4.4 INVENTORY MANAGEMENT

4.4.1 MONITORING AND CONTROL OF INVENTORIES
ABC Analysis
In most inventories a small proportion of items accounts for a very substantial
usage (in terms of the monetary value of annual consumption) and a large proportion of
items accounts for a very small usage (in terms of the monetary value of annual
consumption). ABC analysis, based on this empirical reality, advocates in essence a
selective approach to inventory control which calls for a greater concentration of effort on
inventory items accounting for the bulk of usage value. This approach calls for
classifying inventories into three broad categories, A, B, and C. Category A, representing
the most important items, generally consists of 15 to 25 percent of inventory items and
accounts for 60 to 75 percent of annual usage value. Category B, representing items of
moderate importance, generally consists of 20 to 30 percent of inventory items and
accounts for 20 to 30 percent of annual usage value. Category C, representing items of
least importance, generally consists of 40 to 60 percent of inventory items and accounts
for 10 to 15 percent of annual usage value.
In ACC Limited, the raw materials used for consumption are Limestone, Gypsum
and fly ash. Category A represents the item Gypsum which consists of 15 to 25 percent
of inventory items and accounts for 60 to 75 percent of annual usage value. Category B
represents the item fly ash which consists of 20 to 30 percent of inventory items and
accounts for 20 to 30 percent of annual usage value. Category C, representing
Limestone which consists of 40 to 60 percent of inventory items and accounts for 10 to
15 percent of annual usage value.

Measures of Effectiveness
For purposes of monitoring the effectiveness of inventory management it is
helpful to look into the following ratios and indexes:
Cost of goods sold
Overall inventory turnover ratio =
Average total inventories at cost

XXXI

2,823.9
=

= 4.94 days
571.67
Average consumption of raw material

Raw Material inventory turnover ratio =

Average raw material inventory
175.19
=

= 0.49 days
359.57
Cost of Manufacture

Work- in- process inventory turnover ratio =

Average Work in Progress inventory at cost
2,685.03
=

= 16.03 days
167.47
Cost of goods sold

Finished goods inventory turnover ratio =

Average inventory of finished goods at cost
2,823.9
=

= 39.54 days
71.42

4.5 ESTIMATION OF WORKING CAPITAL NEEDS

The most appropriate method for calculating the working capital needs of a firm is the
concept of operating cycle. Three approaches used to estimate the working capital
requirements are:
Current assets holding period: To estimate working capital requirements on the basis
of average holding period of current assets and relating them to costs based on the
companys experience in the previous years. This method is essentially based on the

XXXII

operating cycle concept.

Ratio of sales: To estimate the working capital requirements as a ratio of sales on the
assumptions that the current assets change with sales.
Ratio of fixed investment: To estimate working capital requirements as a percentage of
fixed investment.
The calculations are based on the following assumptions regarding each of the
three methods:
METHOD 1:
Inventory: One months supply of each of raw material, semi-finished goods and
finished materials.
Debtors: one months sales.
Operating cash: one months total cost.
METHOD 2: 25-35% of annual sales
METHOD 3: 10-20% of fixed capital investment
Calculations:
METHOD 1:
Raw material: one months supply: 362.06 / 12 = Rs 30.17 Crore.
Semi-finished material: One months supplies (based on raw material plus assume
one-half of normal conversion cost):
(30.17+ (184.84+31.23+299.52+3.32+99.43+60.14)/2)/12 = Rs 42.22 Crore.
Finished material: one months supply: 71.42/12 = Rs 5.95 Crore.
The total inventory needs = 30.17 + 42.22 + 5.95 = Rs 78.34 Crore.
After determining the inventory requirements, projection for debtors and operating cash
should be made:
Debtors: One months sales: 3,203.41 / 12 = Rs 266.95 Crore.

XXXIII

Operating cash: One months total cost: 2,595/12 = Rs 216.25 Crore

Thus the total working capital required is: 78.34 + 266.95+216.25 = Rs 561.54 Crore
METHOD 2:
The average ratio is 30 percent. Therefore, 30 percent of annual sales, Rs
3203.41 is Rs 961.023 crore.
METHOD 3:
The ratio of current assets to fixed investment ranges between 10 to 20 percent.
The average ratio is 15 percent. The 15 percent of the fixed investment Rs 293.75 Crore
is Rs 44.06 crore.
The accuracy of these methods depends on various factors. The production
factor and credit and collection policy of the firm would have an impact on working
capital requirements. Therefore, they should be given weightage in projecting working
capital requirements.

4.6 WORKING CAPITAL LEVERAGE

Working Capital Leverage reflects the sensitivity of return on Investment (earning
Power) to changes in the level of current assets. To express the formula for working
capital leverage the following symbols are used:
CA

= value of current assets (gross working capital)

CA = change in the level of current assets

FA

= value of net fixed assets

TA

= value of total assets (TA = CA +FA)

EBIT = Earnings before Interest and Taxes

ROI = Return on Investment defined as EBIT/ TA

XXXIV

Calculations:
Current assets = 1,421.16
Change in the level of current asset = 207. 45
Fixed asset = 3,122.03
Total asset = current asset + fixed asset = 1,421.16 + 3,122.03 = 4,543.19
EBIT = 2,976.92
ROI = EBIT/ TA
= 2,976.92/4,543.19 = 0.655

CA
Working Capital Leverage =
TA + CA
1,421.16
=
4,543.19 + 0.17*(1,421.16)
=

0.297

4.7 WORKING CAPITAL FINANCING

Maximum Permissible Bank Finance
Three methods are there to determine the maximum permissible bank finance.
CA = Currents Assets as per the norms laid down
CL = non-bank current liabilities like trade credit and provisions
CCA= Core Current Assets (this represents the permanent component of working
capital).
The methods for determining the MPBF are described below:
Method 1: MPBF = 0.75 (CA CL)
Method 2: MPBF = 0.75 (CA) CL
Method 3: MPBF = 0.75 (CA CCA) - CL

XXXV

TABLE 4.7.1: CURRENT ASSETS OF THE YEAR 2007

Current Assets

in Rs. Crore

Inventories

600.95

Sundry Debtors

199.17

Cash and Bank Balances

102.79

Other Current Assets

31.79

Loans and Advances

486.76

Total

1,421.16

TABLE 4.7.2: CURRENT LIABILITIES OF THE YEAR 2007

Current Liabilities

In Rs. Crore

Sundry Liabilities

913.28

Provisions

316.77

Total

1,230.05

Calculations:
Method 1:
MPBF = 0.75 (CA CL)
= 0.75(1,421.16 1230.05)
= Rs 143.33 Crore
Method 2:
MPBF = 0.75 (CA) CL
= 0.75(1,421.16) - 1,230.05
= - 164.18

XXXVI

Method 3:
MPBF = 0.75 (CA CCA) - CL
= 0.75(1,421.16-391.06) 1,230.05
= -457.43

Interpretation:
The first method can be adopted. The current liabilities including MPBF are
Rs 1,373.38 Crore. Therefore, the current ratio is 1.03.

4.8 ANALYSIS OF WORKING CAPITAL COMPONENTS

In order to understand the length of time for which resources are committed to
various components of working capital, operating cycle analysis can be done. An
extension of this analysis which may be referred as the weighted operating cycle
analysis may be done to reflect the magnitudes of resources commitments.
Operating Cycle Analysis
The operating cycle of a firm begins with the acquisition of raw materials and
ends with the collection of receivables. There are four aspects of the operating cycle
which involve commitment of resources: raw material stage; work- in- progress stage;
finished goods stage; and accounts receivable stage. There is one aspect of the
operating cycle which provides resources; accounts payable stage (this is the period for
which credit is provided by the suppliers of the raw materials).
The duration of the Operating Cycle may be defined as
Doc = DRM + Dwip + Dfg + Dar - Dap
Where

Doc = duration of the Operating Cycle

DRM = duration of the raw materials and stores stage
Dwip = duration of work-in-progress stage
Dfg =

duration of finished goods stage

Dar =

duration of accounts receivable stage

Dap =

duration of the accounts payable stage

XXXVII

Duration of the Raw materials and Stores Stage: This represents the number of
days for which raw materials and stores remain in inventory before they are issued
for production. It may be calculated as:
Average stock of raw materials and stores
DRM =
Average raw materials and stores consumed per day
145.19
=

= 16.71 days
8.69

Duration of Work-in-Process stage: This represents the number of days required in

the work-in-process stage. It may be measured as:

Average work-in-process inventory

Dwip =
Average work-in-process value of raw materials committed per day
167.47
=

= 26.58 days
6.3

Duration of the Finished Goods Stage: This reflects the number of days for which
finished goods remain in inventory before they are sold. It may be calculated as:
Average finished goods inventory
Dfg =
Average cost of goods sold per day
71.42
=

= 9.23 days
7.74

XXXVIII

Duration of the Accounts receivable Stage: This denotes the number of days required to
collect the accounts receivable. It may be measured as:
Average accounts receivable
DRM =
Average sales per day
194.86
=

= 22.19 days
8.78

Duration of the Accounts Payable stage: This represents the number of days for which
the suppliers of raw materials offer credit. It may be calculated as:
Average accounts Payable
DRM =
Average credit purchases per day
104.72
=

= 8.38 days
12.50

The duration of the Operating Cycle may be defined as

Doc = DRM + Dwip + Dfg + Dar - Dap

= 16.71 + 26.58 + 9.23 + 22.19 - 8.38

= 66.33 days

XXXIX

4.9 RATIO ANALYSIS

Key Working Capital Ratios
4.9.1 Inventory Turnover Ratio
Inventory turnover ratio is the number of times the inventory is turned over in the
business during a particular period and it measures the relationship between sales and
average inventory. This ratio measures how quickly inventory is sold and indicates
whether investment in inventory is within proper limits or not, signifying the liquidity of the
inventory. Higher the ratio more the sales and minimum level of inventory is held and
hence possessing good inventory management.

TABLE 4.9.1: INVENTORY TURNOVER RATIO

Year

Sales

Average Inventory

Ratio

2003 2004

3,348.43

357.10

9.37

2004 2005

3,657.01

416.53

8.77

2005 2006

3,560.44

472.66

7.53

2006 2007

4,227.22

644.00

6.56

2007

3,363.46

629.13

5.34

INTERPRETATION
During the year 2003-04 the inventory turnover ratio was 9.37. It shows a
decreasing trend thereafter. The lowest ratio was during 2007 and was 5.34 because of
decrease in sales and maximum level of inventory held on stock.

XL

CHART 4.9.1: INVENTORY TURNOVER RATIO

4.9.2 DEBTORS TURNOVER RATIO

Debtors turnover ratio is the relationship between net credit sales and average
debtors. This ratio shows how quickly receivables or debtors are converted to cash. It is
also called accounts receivable. Sound credit and collection period results in efficient
receivables management. Net credit sales include sale of products, recoveries, excise
duty adjustment and products consumed internally. The higher the ratio, the better debts
are being collected more promptly.

TABLE 4.9.2: DEBTORS TURNOVER RATIO

Year

Net Credit Sales

Average Debtors

Ratio

2003 2004

3,348.43

165.41

20.24

2004 2005

3,657.01

173.22

21.11

2005 2006

3,560.44

195.38

18.22

2006 2007

4,227.22

212.11

19.92

2007

3,363.46

242.62

13.86

INTERPRETATION
XLI

The debtors turnover ratio of ACC during 2003-04 was 20.24 and reduced to
13.86 in 2007. The ratio shows a declining trend. This was due to delay in collection of
debts. This shows inefficient credit management of the company. So it is to be concluded
that debtors turnover ratio shows unsatisfactory position of ACC because of decreasing
trend in the ratio.

CHART 4.9.2: DEBTORS TURNOVER RATIO

4.9.3 AVERAGE COLLECTION PERIOD

Average collection period measures the liquidity of the firm and it is the time
taken for collection of debts. It is calculated by dividing days in a year by debtors
turnover ratio. Shorter collection of debts and quick payments by debtors increase the
liquidity of the firm. The longer collection period shows delayed payment by debtors and
hence declining liquidity position.

XLII

TABLE 4.9.3: AVERAGE COLLECTION PERIOD

Year

Days in a year

Debtors Turnover Ratio

Days

2003 2004

360

20.24

18

2004 2005

360

21.11

17

2005 2006

360

18.22

20

2006 2007

360

19.92

18

2007

360

13.86

26

CHART 4.9.3: AVERAGE COLLECTION PERIOD

INTERPRETATION
Average collection period of ACC during 2003-04 was 18 days; it has decreased
to 17 days in 2004-05 again to 20 and 18 days in 2005-06 and 2006-07 and finally
increased to 26 days. This increase was due to the inefficiency in managing debtors by
company.

4.9.4 CURRENT RATIO

XLIII

Current ratio may be defined as the relationship between current asset and
current liabilities. This ratio is known as working capital ratio and is a measure of general

Liquidity. Desirable current ratio is 2:1. Current ratio of a firm represents the assets
which

Can be converted into cash within a short period of time, not exceeding one year.
Current Liabilities include liabilities and provisions which are short term maturing
obligations to be net within a year. The higher the current ratio, the more the firms
ability to meet current obligations and greater the safety of funds of short term
creditors.

TABLE 4.9.4: CURRENT RATIO

Year

Current Assets

Current Liabilities

Ratio

2003 2004

951.53

631.04

1.50

2004 2005

949.05

720.25

1.31

2005 2006

1,199.72

905.08

1.32

2006 2007

1,371.29

1,057.41

1.29

2007

1,420.88

1,250.41

1.13

INTERPRETATION
The current ratio has decreased from the year 2003 to 2007. The current assets
are greater than current liabilities in all these years. This shows that the company is
always maintaining the current assets more than the current liability.

XLIV

CHART 4.9.4: CURRENT RATIO

4.9.5 QUICK RATIO

Quick ratio can be defined as the relationship between quick assets and current
liabilities. Quick assets are cash like assets representing all current assets other than
inventory. It is also called Acid test ratio. It is more severe and stringent test of a firms
ability to meet current obligations assessing how liquid the firm would be if the business
operations come to an abrupt halt. A quick ratio of 1:1 is considered as a fair indication of
the good financial condition of a business concern.

XLV

TABLE 4.9.5: QUICK RATIO

Year

Quick Assets

Current Liabilities

Ratio

2003 2004

594.43

631.04

0.94

2004 2005

532.52

720.25

0.73

2005 2006

727.06

905.08

0.80

2006 2007

727.29

1,057.41

0.68

2007

791.75

1,250.41

0.63

INTERPRETATION
The quick ratio during the year 2003-2004 was 0.94 which was very close to the
standard ratio and indicated a good financial condition of the business. Then there was a
constant decrease over the years. This is because of the increase in the current
liabilities.

CHART 4.9.5: QUICK RATIO

XLVI

4.9.6 WORKING CAPITAL TURN OVER RATIO

Net working capital ratio is the measure of the efficiency of the employment of
the working capital. It finds out the relationship between the cost of sales and the
working capital. It helps in determining the liquidity of a firm in as much as it gives the
rate at which the inventories are converted to sales and then to cash. Working Capital
Turnover ratio is calculated in order to analyze how working capital has been effectively
utilized in making sales. The higher the ratio the lower the investment in working capital
and greater the profit.

TABLE 4.9.6.1: COMPONENTS OF WORKING CAPITAL

Components

2003 2004 2004 2005 2005 2006 2006 2007

2007

Current Assets
Investories

357.10

416.53

472.66

644.00

629.13

Debtors

202.07

178.95

207.05

208.59

217.87

37.78

45.66

113.93

87.29

106.44

6.04

3.15

3.56

4.65

31.50

Loans & Advances

348.54

304.76

402.52

426.76

435.94

Total

951.53

949.05

1,199.72

1,371.29

1,420.88

555.54

639.90

773.44

844.34

931.93

75.50

80.35

131.64

213.67

318.48

Total

631.04

720.24

905.08

1,057.41

1,250.41

Net Current Assets

320.49

228.80

294.64

313.88

170.47

Cash & Bank balances

Other current assets

Current Liabilities
Sundry Liabilities
Provisions

TABLE 4.9.6.2: WORKING CAPITAL TURNOVER RATIO

XLVII

Year

Net sales

Net working capital

Ratio

2003 2004

3,348.43

320.49

10.44

2004 2005

3,657.01

228.80

15.98

2005 2006

3,560.44

294.64

12.08

2006 2007

4,227.22

313.88

13.46

2007

3,363.46

170.47

19.73

INTERPRETATION
The working capital ratio of ACC during the year 2003-2004 was 10.44 which
have increased during the next few years. The highest net sales were in the year
2006-2007 and lowest working capital was in the year 2007. This shows that there was
lowest investment and greater profit.

CHART 4.9.6: WORKING CAPITAL TURNOVER RATIO

4.10 TREND ANALYSIS

XLVIII

A trend means a basic tendency of a series to grow or decline over a period of

time. The concept of trend doesnt include short range oscillation, but rather a steady
movement over a long time. The tendency of a particular data to grow over a period of
time is known as growth factor. On the other hand the tendency of economic data to fall
over a period of time is declining factor. The trend has either growth factor or declining
factor. It may have either upward or downward movement.

4.10.1 PROJECTIONS FOR THE YEARS 2006 AND 2007

The Method of Least Squares has been used for making projections for net
working capital, sales, current assets, current liabilities and expenses. By the method of
least squares a straight line trend can be fitted to a given time series of data. It is
mathematical as well as analytical data. The trend line is called the line of best fit. The
actual figures and the trend values have been plotted in a graph. The following items
have been projected.

TABLE 4.10.1: Net Working Capital

Year

Net Working
Capital (y)

Deviation
(x)

x2

xy

Trend

2003

320.49

(2)

(640.98)

297.28

2004

228.80

(1)

(228.80)

287.15

2005

294.64

0.00

277.02

2006

313.88

313.88

266.89

2007

227.29

454.59

256.76

2008

246.63

2009

236.50

CHART 4.10.1: PROJECTIONS ON NET WORKING CAPITAL

XLIX

INFERENCE
The trend for Net Working Capital is a decreasing trend. It decreases from Rs
298 Crore to Rs 236 Crore in the period of seven years.

TABLE 4.10.2: Sales

Year

Sales (y)

Deviation (x)

x2

xy

Trend

2003

3,348.43

(2)

(6,696.86)

3,287.03

2004

3,657.01

(1)

(3,657.01)

3,571.29

2005

3,560.44

0.00

3,855.54

2006

4,227.22

4,227.22

4,139.80

2007

4,484.61

8,969.23

4,424.06

2008

4,708.32

2009

4,992.57

Chart 4.10.2: Projection on Sales

INFERENCE
The trend for Sales is an increasing trend. It is expected to increases from
Rs 3,287 Crore to Rs 4,992 Crore in the period of seven years.

TABLE 4.10.3: Current Assets

Year

Current
Assets (y)

2003

Deviation (x)

x2

xy

Trend

951.53

(2)

(1,903.06)

811.58

2004

949.05

(1)

(949.05)

1,042.40

2005

1,199.72

0.00

1,273.22

2006

1,371.29

1,371.29

1,504.04

2007

1,894.51

3,789.01

1,734.86

2008

1,965.68

2009

2,196.50

CHART 4.10.3: Projection on Current Assets

LI

INFERENCE
The trend for current asset is an increasing trend. It is expected to increases to
Rs 2,196 Crore for the year 2007.

TABLE 4.10.4: Current Liabilities

Year

Current
Liabilities (y)

Deviation (x)

x2

xy

Trend

2003

631.04

(2)

(1,262.08)

514.30

2004

720.25

(1)

(720.25)

755.25

2005

905.08

0.00

996.20

2006

1,057.41

1,057.41

1,237.15

2007

1,667.21

3,334.43

1,478.10

2008

1,719.05

2009

1,960.00

CHART 4.10.4: Projection on Current Liabilities

LII

INFERENCE
The trend for current liabilities is an increasing trend. It is expected to increases
to Rs 1,960 Crore for the year 2007.

TABLE 4.10.5: Expenses

Year

Current
Assets (y)

Deviation (x)

x2

xy

Trend

2003

2,840.69

(2)

(5681.38)

2,973.54

2004

3,203.72

(1)

(3203.72)

3,129.19

2005

3,518.23

0.00

3,284.85

2006

3,281.55

3281.55

3,440.50

2007

3,580.04

7160.08

3,596.15

2008

3,751.81

2009

3,907.46

CHART 4.10.5: Projections on Expenses

LIII

Inference
The trend for Expense is an increasing trend. It is expected to increases to
Rs 3,907 Crore for the year 2007.

LIV

5. FINDINGS
5.1 DETERMINATION OF OPERATING CYCLE AND CASH CYCLE

The inventory period for ACC Limited is 73.8 days, the accounts receivable
period is 22.2 days and the accounts payable period is 13.53 days. So, the
operating cycle is 96 days and the cash cycle is 82.47 days. The firm has higher
operating and cash cycle. Thus, ACC limited takes about 82.47 days to collect
payment from its customers from the time it pays for its inventory purchases.

5.2 TIME SERIES ANALYSIS

5.2.1 Inventory Period
Inventory period for the year 2003 2007 are 78, 80, 86, 84 and 74 days. The
inventory period has been increasing from the year 2003 2006 and it has decreased in
the year 2007.
5.2.2 Accounts Receivable Period
Accounts receivable period for the year 2003 2007 are 22 days, 18 days, 21
days, 18 days, 22 days. The accounts receivable period has decreased from 22 days to
18 days in the year 2006 but it has again increased to 22 days in the year 2007.
5.2.3 Operating Cycle
Operating Cycle for the year 2003 2007 are 100 days, 98 days, 107 days, 102
days, 96 days. The operating Cycle has increased to 107 days in the year 2005 and it
has been decreased to 96 days in the year 2007.

5.3 Credit Management

5.3.1 Control of Accounts Receivables
Days Sales Outstanding
For the first quarter the DSO was 29 days, for the second quarter it was 17.93
days, for the third quarter it was 36.99 days and for the fourth quarter it was 27.81days.

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It decreased in the second quarter, increased in the third quarter but decreased in the
third quarter and again increased in the fourth quarter.
COLLECTION PROCEDURE
The Collection Procedure for the first six months of the year 2007 has been
estimated. The credit sales during the month of January are collected as follows: 60
percent is paid as the advance payment in the month in which sale is made. 10 percent
in the first following week, 10 percent in the second following week, 10 percent in the
third following week, 10 percent in the fourth following week. From the collection pattern
it seems that the collection is stable and they have a formalized procedure for collecting
the amount from their customers.
AGEING SCHEDULE
From the ageing schedule table, it is clear that ACC Limited collects 60% as its
advance payments and the customers pay their remaining amount in four installments.
The first installment 10 percent is received within 20 days from the day of sale, the
second installment 10 percent is received within 30 days from the day of sale, the third
installment 10 percent is received within 40 days from the day of sale and the last
installment is received within 50 days from the day of sale. All its debt is collected within
50 days.

5.4 INVENTORY MANAGEMENT

5.4.1 MONITORING AND CONTROL OF INVENTORIES
In ACC Limited, the raw materials used for consumption are Limestone, Gypsum
and fly ash. Category A represents the item Gypsum which consists of 15 to 25 percent
of inventory items and accounts for 60 to 75 percent of annual usage value. Category B
represents the item fly ash which consists of 20 to 30 percent of inventory items and
accounts for 20 to 30 percent of annual usage value. Category C, representing
Limestone which consists of 40 to 60 percent of inventory items and accounts for 10 to
15 percent of annual usage value.
5.4.2 MEASURE OF EFFECTIVENESS
The overall inventory turnover ratio is 5 days; the raw material turnover ratio is

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0.5 days, work-in-progress inventory turnover ratio is 16.03 days and finished goods
inventory turnover ratio is 40 days. The ratio is higher due to more sales and minimum
level of inventory is held and hence possessing good inventory management.

5.5 ESTIMATION OF WORKING CAPITAL NEEDS

Three methods are used for calculating the cash requirements for working
capital. The working capital requirements calculated by the three methods are Rs 562
Crore, Rs 961 Crore and Rs 44 Crore. The accuracy of these methods depends on
various factors. The production factor and credit and collection policy of the firm would
have an impact on working capital requirements. Therefore, they should be given
weightage in projecting working capital requirements.

5.6 WORKING CAPITAL LEVERAGE

Working Capital Leverage reflects the sensitivity of return on Investment (earning

Power) to changes in the level of current assets. The working capital leverage
thus calculated is 0.3. It means that the percentage change in ROI is 0.3 times
the percentage change in Current Assets.

5.7 WORKING CAPITAL FINANCING

Three methods are used for determining the Maximum Permissible Bank Finance
(MPBF). The MPBF is calculated as Rs143.33 Crore. Thus, the current ratio is 1.16.

5.8 ANALYSIS OF WORKING CAPITAL COMPONENTS

The duration of the raw materials and stores stage is 16.71 days, duration of
work-in-progress stage is 26.58 days, duration of finished goods stage is 9.23days,
duration of accounts receivable stage is 22.19 days and duration of the accounts
payable stage is 8.38 days. Therefore, the duration of Operating Cycle is 66.33 days.

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5.9 RATIO ANALYSIS

5.9.1KEY WORKING CAPITAL RATIO
5.9.1.1 INVENTORY TURNOVER RATIO

During the year 2003-04 the inventory turnover ratio was 9.37. It shows a
decreasing trend thereafter. The lowest ratio was during 2007 and was 5.34
because of decrease in sales and maximum level of inventory held on stock. The
increasing trend in the year 2007 after the amalgamation of ACC with Holcim, the
multinational cement manufacturing company, has shown the increase in sales
and the profit and thereby the substantial increase in the performance of the
company.

5.9.1.2 DEBTORS TURNOVER RATIO

The debtors turnover ratio of ACC during 2003-04 was 20.24 and reduced to
13.86 in 2007. The ratio shows a declining trend. This was due to delay in collection of
debts. This shows inefficient credit management of the company. So it is to be concluded
that debtors turnover ratio shows unsatisfactory position of ACC because of decreasing
trend in the ratio. The study reveals that the debtors turnover is increased and thereby
an increase in the average debt collection period indicates an unsatisfactory position of
trade receivables position. This was mainly due to increase in the price of the product
due to the unavailability of the raw materials like fly ash and coal.
5.9.1.3 AVERAGE COLLECTION PERIOD
Average collection period of ACC during 2003-04 was 18 days; it has decreased
to 17 days in 2004-05 again to 20 and 18 in 2005-06 and 2006-07 and finally increased
to 26 days. This increase was due to the inefficiency in managing debtors by company.
5.9.1.4 CURRENT RATIO
The current ratio has decreased from the year 2003 to 2007. The current assets
are greater than current liabilities in all these years. This shows that the company is
always maintaining the current assets more than the current liability.
5.9.1.5 QUICK RATIO

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The quick ratio during the year 2003-2004 was 0.94 which was very close to the
standard ratio and indicated a good financial condition of the business. Then there was a
constant decrease over the years. This is because of the increase in the current
liabilities.
5.9.1.6 WORKING CAPITAL TURNOVER RATIO
The working capital ratio of ACC during the year 2003-2004 was 10.44 which
have increased during the next few years. The highest net sales were in the year
2006-2007 and lowest working capital was in the year 2007.This shows that there was
lowest investment and greater profit.

5.9.2 Trend Analysis

5.9.2.1 Net Working Capital
As from the projections on net working capital, it is clear that the net working
capital has decreasing trend. It was found that it would decrease from Rs297 Crore to
Rs236 Crore. This is due to the decrease in the current liabilities. The firm is reducing its
current liabilities by paying back to its creditors from its profit.
5.9.2.2 SALES
As from the projections on sales, it is clear that the sales have an increasing
trend. It was found that it would increase from Rs 3,287 Crore to Rs 4,992 Crore. The
increase in the sales is due to the availability of raw materials and reduction in the price
of the cement.
5.9.2.3 CURRENT ASSETS
As from the projections on current assets, it is clear that the current assets have
an increasing trend. It was found it would increase from Rs 811 Crore to Rs 2,196 Crore.
The increase in the current assets is due to increase in the inventories, cash and bank
balances, loans and advances. The inventories have increased from Rs 357 Crore in the
year 2003 to Rs 630 Crore in the year 2007, the cash and bank balances have
increased from Rs 37 Crore in the year 2003 to 106 in the year 2007. The loan and
advances have increased from Rs 348 Crore to Rs 435 Crore.

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5.9.2.4 CURRENT LIABILITIES

As from the projections on current liabilities, it is clear that the current liabilities
have increasing trend. It has been increased from Rs 514 Crore to Rs1960 Crore. The
increase in the current liabilities is due to increase in the Sundry liabilities and
provisions. The Sundry Liabilities have increased from Rs 555 Crore in the year 2003 to
Rs 932 Crore in the year 2007; the provisions have increased from Rs 75 Crore in the
year 2003 to Rs 318 Crore in the year 2007.
5.9.2.5 EXPENSES
As from the projections on Expenses, it is clear that the expenses shows
increasing trend. It was found that it would increase from Rs 2,973 Crore to
Rs 3,907 Crore. The increase in the expense is due to increase in the price of the raw
materials.

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6. SUGGESTIONS
6.1 DETERMINATION OF OPERATING CYCLE AND CASH CYCLE
The Operating Cycle is high for ACC Ltd because the inventory period is high as
it manufactures Cement which needs its raw material, work in progress and finished
goods to be stocked for longer period and more time is taken to manufacture Cement
which cannot be avoided. But due to effective planning, the demand can be estimated in
advance and the raw materials can be purchased at the required time thus reducing raw
material inventory and the Cement can be manufactured on demand.

The accounts receivable period is less which is satisfactory. The organization

follows a standard procedure to collect from its debtors. So, the firm can follow the
same procedure.

6.2 CREDIT MANAGEMENT

The Control of accounts receivables is done through DSO and Collection
Procedure. From DSO, it is clear that the firm has improved their collection effort. The
firm should strictly follow the same collection procedure to decrease the DSO further.

From the Ageing Schedule, it is clear that the firm collects all its debt within 40
days which is better but to further improve it should collect its debt within 25 days.

6.3 INVENTORY MANAGEMENT

The Overall inventory turnover period is very high which means that the inventory
is sold quickly. This ratio is also used to check that the investment in inventory is within
the proper limits, signifying the liquidity of the inventory. The firm can increase the
inventory turnover ratio by increasing the sales by decreasing the price of the cement.
Higher the ratio more the sales and minimum level of inventory is held and hence
possesses good inventory management.

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6.4 ESTIMATION OF WORKING CAPITAL NEEDS

The analysis of the projected working capital requirement has given
way to certain measures that can be incorporated so that the operating profit
of the company can be increased.

6.5 WORKING CAPITAL LEVERAGE

Working Capital Leverage is used to find out the sensitivity of return on

Investment (earning Power) to changes in the level of current assets. So, the firm
should increase the current assets further to increase the return on investments.

6.6 RATIO ANALYSIS

INVENTORY TURNOVER RATIO
The inventory turnover ratio is high indicates good inventory management. The
firm can further increase the inventory turnover if the firm replenishes its inventory in too
many small lot sizes but it would be costly. Thus, this high inventory turnover ratio should
be investigated further.
DEBTORS TURNOVER RATIO
The Debtors turnover ratio is high which indicates the number of times
debtors turnover each year. Higher the value of debtors turnover, more
efficient is the management of credit. This ratio has been decreasing, so
proper method should be followed to increase the debtor turnover.
AVERAGE COLLECTION PERIOD
The average collection period indicates the quality of debtors. It has
been increased which shows the decrease in the quality of debtor. The firm
should not relax its credit and collection policy in order to decrease the
average collection period.
CURRENT RATIO
The current ratio should be 2 to 1. But the current ratio has been decreasing.
Even though the ratio is less than 2, the company is doing well. So, too much reliance
should not be made on the current ratio.

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QUICK RATIO
The quick should be 1 to 1.But, the quick ratio is less than 1.Eventhough the ratio
is less than 1, and the firm is prospering and paying its current obligations in time.
Anyway the firm should concentrate to increase the quick assets because the quick ratio
remains as an important index of the firms liability.
WORKING CAPITAL TURNOVER RATIO
The working capital turnover ratio is very high due to the increase in sales. The
firm should maintain this ratio high by increasing the sales further by decreasing the
price of the cement.

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7. CONCLUSION

The project revealed that the Working capital has a direct impact on cash
flow in a business. Since cash flow is the name of the game for all business
owners, a good understanding of working capital is imperative to make any
business enterprise successful. Companies must seek granular detail to
identify the underlying drivers of working capital. By understanding the role
and drivers of working capital management and taking steps to reach the
"right" levels of working capital, companies can minimize risk, effectively
prepare for uncertainty and improve overall performance. Successfully
improving working capital management requires a different approach. The
better a company manages its working capital, the less the company needs
to borrow.
The financial performance of The Associated Cement Companies is in a good
and acceptable position. The study reveals that the firm has increased sales which
results in the increased profitability. From the analysis it is obvious that the company has
an upward trend. The company is maintaining a good liquidity position to meet all its
current obligations. Though there were slight deviation in the financial year 2002-03, still
the overall profitability was high, which shows that the company has a good growth
trend. Thus the company ensures the shareholders wealth maximization which is the
major objective of the company.

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BIBLIOGRAPHY
1) V.K.Bhalla (2002), Financial Management and Policy: Text and Cases, Third Edition,
Anmol Publication Pvt. Ltd, New Delhi

2) James C. Van Horne, John M. Wachowicz, Jr. (1995), Fundamentals Of Financial

Management, Ninth Edition, Prentice Hall Of India Pvt. Ltd, New Delhi

3) Haim Levy (1998), Principles of Corporate Finance, First Edition, South Western
College (An International Thomson Publisher), USA

4) I M Pandey (1978), Financial Management, Ninth Edition, Vikas Publishing House Pvt
Ltd, New Delhi

5) Prasanna Chandra (1984), Financial Management, Theory and Practice, Fifth Edition,
Tata Mc Graw-Hill Publishing Company Ltd, New Delhi

6) George E.Pinches (1990), Financial Management, Third Edition, Harper Collins

Publishers, NewYork

7) Bhabatosh Banerjee (1984), Financial Policy and Management Accounting, Seventh

Edition, Prentice-Hall of India Pvt Ltd, New Delhi

8) Cooper, The Credit Management essential guide 2006, Credit Management, Pg 28.

9) Richard seadon, DSO Benchmarking, Risk Management Innovation, Pg 36-37.

10) Matthew Waes, Liam Reddy, Effective Collections, Credit Management, Pg3839.

11) http:www.acc.com

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