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WORKING CAPITAL:
Cash is the lifeline of a company. If this lifeline deteriorates, the company's
ability to fund operations, reinvest and meet capital requirements and
payments also deteriorate. Understanding a company's cash flow health is
essential for making investment decisions. A good way to judge a company's
cash flow prospects is to look at its working capital management (WCM).
Working capital of a company reveals more about the financial condition of a
business than almost any other calculation. It tells you what would be left if
a company raised all of its short term resources, and used them to pay off its
short term liabilities. The more working capital, the less financial strain a
company experiences. Working capital also gives investors an idea of the
company's underlying operational efficiency. Money that is tied up in
inventory or money that customers still owe to the company can't be used to
pay off any of its obligations. So, if a company is not operating in the most
efficient manner (slow collection) it will show up in the working capital. This
can be seen by comparing the working capital from one period of time to
another; slow collection may signal an underlying problem in the company's
operations.
DEFINITION:
The definition of working capital is that it is the difference between an
organizations current assets and its current liabilities. Of more importance is
its function which is primarily to support the day-to-day financial operations
of an organization, including the purchase of stock, the payment of salaries,
wages and other business expenses, and the financing of credit sales. Its a
measure of both a company's efficiency and its short-term financial health.
The better a company manages its working capital, the less the company
needs to borrow. Even companies with cash surpluses need to manage
1
working capital to ensure that those surpluses are invested in ways that will
generate suitable returns for investors.
There are two concepts of working capital.
They are
Gross working capital and
Net working capital.
The term gross working capital, also referred to as working capital means the
total current asset. The term net working capital can be defined in two ways:
The net working capital, as a measure of liquidity is quite useful for internal
control. The net working capital helps in comparing the liquidity of the same
firm over time.
Therefore:
Current Assets - Current Liabilities = Working Capital
A positive working capital means that the company is able to pay off its
short-term liabilities. A negative working capital means that a company
currently is unable to meet its short-term liabilities with its current assets
(cash, accounts receivable, inventory).Management must ensure that a
business has sufficient working capital. Too little of the working capital will
result in cash flow problems highlighted by an organization exceeding its
agreed overdraft limit, failing to pay suppliers on time, and being unable to
claim discounts for prompt payment. In the long run, a business with
insufficient working capital will be unable to meet its current obligations and
will be forced to cease trading even if it remains profitable on paper.
working capital, it is likely to become insolvent and may be even forced into
bankruptcy.
not an easy task. The scope of the study is confined to the sources that
Kotak Mahindra Group tapped over the years under study i.e. 2010-15.
Due to the busy schedule of the executives in the company, all the required
primary data could not be collected, which might affect the results of the
study
Short period of time is one of the limitations, due to which a detailed study
could not be conducted on the topic.
You cant expand, cant pay your staff, cant pay yourself and cant
pay your suppliers. So in a nutshell, no cash flow, or working capital, no
viable business.
Firm fails to maintain the relationship with the banks due to non
requirement of fun.
RESEARCH METHODOLOGY
The study of Working Capital management is based on primary as well as
secondary data.
Data relating to. Has been collected through
PRIMARY
DATA:
SECONDARY
DATA:
Secondary data is the data that have been already collected by and readily
available from other sources. Such data are cheaper and more quickly obtainable
than the primary data.
DATA ANALYSIS
The collected data has been processed using the tools of
Ratio analysis
Graphical analysis
Year-year analysis
These tools access in the interpretation and understanding of the Existing
scenario of the Capital Structure.
The primary data was gathered through personal interaction with the
director of the company.
The secondary data was collected from companys annual reports from
2010-11 to 2014-15, various books and Internet.
INDUSTRY PROFILE
History:
A bank is a financial institution that accepts deposits and channels those
deposits into lending activities. Banks primarily provide financial services to
customers while enriching investors. Government restrictions on financial
activities by banks vary over time and location. Banks are important players
in financial markets and offer services such as investment funds and loans.
In some countries such as Germany, banks have historically owned major
stakes in industrial corporations while in other countries such as the United
States banks are prohibited from owning non-financial companies. In Japan,
7
banks are usually the nexus of a cross-share holding entity known as the
keiretsu. In France, bancassurance is prevalent, as most banks offer
insurance services (and now real estate services) to their clients. The level of
government regulation of the banking industry varies widely, with countries
such as Iceland, having relatively light regulation of the banking sector, and
countries such as China having a wide variety of regulations but no
systematic process that can be followed typical of a communist system. The
oldest bank still in existence is Monte dei Paschi di Siena, headquartered in
Siena, Italy, which has been operating continuously since 1472.
Entry regulation:
Currently
in
most
jurisdictions
commercial
banks
are
regulated
by
Definition:
9
In most English common law jurisdictions there is a Bills of Exchange Act that
codifies the law in relation to negotiable instruments, including cheques, and
this Act contains a statutory definition of the term banker: banker includes a
body of persons, whether incorporated or not, who carry on the business of
banking' (Section 2, Interpretation). Although this definition seems circular, it
is actually functional, because it ensures that the legal basis for bank
transactions such as cheques do not depend on how the bank is organized or
regulated.
The business of banking is in many English common law countries not
defined by statute but by common law, the definition above. In other English
common law jurisdictions there are statutory definitions of the business of
banking or banking business. When looking at these definitions it is
important to keep in minds that they are defining the business of banking for
the purposes of the legislation, and not necessarily in general. In particular,
most of the definitions are from legislation that has the purposes of entry
regulating and supervising banks rather than regulating the actual business
of banking. However, in many cases the statutory definition closely mirrors
the common law one. Examples of statutory definitions:
1.
months] ... or with a period of call or notice of less than that period;
2.
loans are your liabilities but the bank's assets, so they are debit accounts
(which should also have a positive balance).
Where bank transactions, balances, credits and debits are discussed below,
they are done so from the viewpoint of the account holderwhich is
traditionally what most people are used to seeing.
Economic functions:
1. Issue of money, in the form of banknotes and current accounts subject
to cheque or payment at the customer's order. These claims on banks
can act as money because they are negotiable and/or repayable on
demand, and hence valued at par. They are effectively transferable by
mere delivery, in the case of banknotes, or by drawing a cheque that
the payee may bank or cash.
2. Netting and settlement of payments banks act as both collection and
paying agents for customers, participating in interbank clearing and
settlement systems to collect, present, be presented with, and pay
payment instruments. This enables banks to economies on reserves
held for settlement of payments, since inward and outward payments
offset each other. It also enables the offsetting of payment flows
between geographical areas, reducing the cost of settlement between
them.
3. Credit intermediation banks borrow and lend back-to-back on their
own account as middle men.
4. Credit
quality
improvement
banks
lend
money
to
ordinary
Law of banking:
Banking law is based on a contractual analysis of the relationship between
the bank (defined above) and the customerdefined as any entity for which
the bank agrees to conduct an account.
The law implies rights and obligations into this relationship as follows:
1. The bank account balance is the financial position between the bank
and the customer: when the account is in credit, the bank owes the
balance to the customer; when the account is overdrawn, the customer
owes the balance to the bank.
2. The bank agrees to pay the customer's cheques up to the amount
standing to the credit of the customer's account, plus any agreed
overdraft limit.
3. The bank may not pay from the customer's account without a mandate
from the customer, e.g. a cheque drawn by the customer.
4. The bank agrees to promptly collect the cheques deposited to the
customer's account as the customer's agent, and to credit the
proceeds to the customer's account.
5. The bank has a right to combine the customer's accounts, since each
account is just an aspect of the same credit relationship.
13
Types of banks:
Banks' activities can be divided into retail banking, dealing directly with
individuals and small businesses; business banking, providing services to
mid-market business; corporate banking, directed at large business entities;
private banking, providing wealth management services to high net worth
individuals and families; and investment banking, relating to activities on the
financial markets. Most banks are profit-making, private enterprises.
However, some are owned by government, or are non-profit organizations.
14
Central banks are normally government-owned and charged with quasiregulatory responsibilities, such as supervising commercial banks, or
controlling the cash interest rate. They generally provide liquidity to the
banking system and act as the lender of last resort in event of a crisis.
Private Banks: banks that manage the assets of high net worth
individuals.
Savings bank: in Europe, savings banks take their roots in the 19th or
sometimes even 18th century. Their original objective was to provide
easily accessible savings products to all strata of the population. In
some countries, savings banks were created on public initiative; in
others, socially committed individuals created foundations to put in
15
make
only
what
they
consider
to
be
socially-responsible
investments.
Investment banks "underwrite" (guarantee the sale of) stock and bond
issues, trade for their own accounts, make markets, and advise
corporations on capital market activities such as mergers and
acquisitions.
Both combined:
Universal
banks,
more
commonly
known
as
financial
services
16
COMPANY PROFILE
17
Kotak Mahindra Bank Ltd is a one stop shop for all banking needs. The
bank offers personal finance solutions of every kind from savings
accounts to credit cards, distribution of mutual funds to life insurance
products. Kotak Mahindra Bank offers transaction banking, operates
lending verticals, manages IPOs and provides working capital loans.
Kotak has one of the largest and most respected Wealth Management
teams in India, providing the widest range of solutions to high net
worth individuals, entrepreneurs, business families and employed
professionals.
For more information, please visit the Kotak Mahindra Bank website
www.kotak.com/bank/personal-banking/
Kotak Mahindra Old Mutual Life Insurance Ltd is a 74:26 joint venture
between Kotak Mahindra Bank Ltd., its affiliates and Old Mutual plc. A
Company
that
combines
its
international
strengths
and
local
Depository Services.
more
information,
please
visit
the
KMPL
website
http://carloan.kotak.com
Kotak International Business
more
information,
please
visit
the
KPEG
website
www.privateequityfund.kotak.com
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Kotak Realty Fund deals with equity investments covering sectors such
as hotels, IT parks, residential townships, shopping centers, industrial
real estate, health care, retail, education and property management.
The investment focus here is on development projects and enterprise
level investments, both in real estate intensive businesses.
Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985,
it has been a steady and confident journey leading to growth and success.
The milestones of the group growth story are listed below year wise.
VISION
To be the most trusted Global Indian Financial Services brand and the most preferred financial
services employer with focus on creating value.
OUR STORY
Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a
steady and confident journey leading to growth and success. The milestones of the group growth
story are listed below year wise.
OUR BUSINESSES
Kotak Mahindra is one of India's leading banking and financial services group, offering a wide
range of financial services that encompass every sphere of life.
21
Milestones
2015
2013
2012 .
Bank
Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra
was presented with the Financial Leadership Award at NDTV Profit Biz Excellence
Award.
2011 .Kotak
Mahindra Bank and Cisco won the Asian Banker Award for
20
10
200
Dubai
200
8
20
05
06
20
20
04
20
Kotak Mahindra Finance Ltd. converted into a commercial bank the first Indian company to do so.
03
2001
200
Kotak Mahindra tied up with Old Mutual plc. for the Life
Insurance business.
19
98
19
The Auto Finance Business is hived off into a separate company Kotak
96
Mahindra
Prime
Limited
(formerly
known
as
Kotak
19
95
Company
19
92
19
91
199
0
198
Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase
market
7
198
Kotak
Mahindra
Finance
Ltd
started
the
activity
of
Bill
Discounting
6
Awards
Recent achievements
At Kotak Mahindra Group we take a client-centric view and constantly
innovate to provide you with the best of services and infrastructure. We have
regularly received accolades that stand testimony to our success in this
endeavour. Some of our recent achievements are:
Banking
ICAI Award
Excellence in Financial Reporting under Category 1 - Banking Sector for
the year ending 31st March, 2014.
24
Asiamoney
Best Local Cash Management Bank 2014.
IDG India
Kotak won the CIO 100 'The Agile 100' award 2013.
IDRBT
Banking Technology Excellence Awards Best Bank Award in IT
Framework and Governance Among Other Banks' 2009.
Banking Technology Award for IT Governance and Value Delivery, 2008.
IR Global Rankings
Best Corporate Governance Practices - Ranked among the top 5
companies in Asia Pacific, 2009.
FinanceAsia
Best Private Bank in India, for Wealth Management business, 2009.
Euromoney
Best Private Banking Services (overall), 2009.
Miscellaneous
Ltd. the Bronze Award in the category of Best Local Trade Bank in India
at the TFR Awards 2011.
Businessworld
'Most Valuable CEO' overall, 2010 awarded to Mr. Uday Kotak,
Executive Vice Chairman & Managing Director.
CNBCTV 18
'Best Performing CFO in the Banking/Financial Services sector by
CNBCTV 18 CFO Awards 2010 awarded to Mr. Jaimin Bhatt.
GIREM
GIREM awarded Kotak Realty Funds Group, the "Investor of the Year"
Award for 2009.
Hewitt
10th Best Employer in India, 2007, 2008 & 2009.
CNBC TV 18
Indian Business Leader of the Year, 2008 awarded to Uday Kotak,
Executive Vice Chairman & Managing Director.
26
Banking information
The Bank publishes the standalone and consolidated results on a quarterly
basis. The standalone results is subjected to "Limited Review" by the auditors
of the Bank. The same are also reviewed by the Audit Committee before
submission to the Board. Along with the quarterly results, an earnings update
is also prepared and posted on the website of the Bank. Every quarter, the
Executive
Vice-Chairman
and
Managing
Director
and
the
Executive
Financial Calendar: For each calendar quarter, the financial results are
reviewed and taken on record by the Board during the last week of the
month subsequent to the quarter ending. The audited annual accounts as at
31st March are approved by the Board, after a review thereof by the Audit
Committee. The Annual General Meeting to consider such annual accounts is
held in the second quarter of the financial year.
Stock Exchanges on which listed:
Corporate Responsibility
Community investment and development
Kotak Mahindra views Corporate Social Responsibility as an investment in
society and in its own future. Kotak uses the power of its human and financial
capital to help in transforming communities into vibrant, desirable places for
people to live. The group leverages its core competencies in three areas:
Sustainability
An integral part of all Kotak Mahindra Group activities is to be
consistently responsible to shareholders, clients, employees, society
and the environment.
Economic Development
By helping people achieve their financial goals, Kotak strengthens the
fabric of communities and helps them overcome unemployment and
poverty to help them shape their future.
28
Doing My Bit
A growing number of employees are committed to civic leadership and
responsibility with the support and encouragement of the Kotak Group.
A number of employees have been involved in strengthening
communities through voluntary work, payroll giving and management
inputs.
Senior Management
Mr. Uday S. Kotak
He was featured as one of the Global Leaders for Tomorrow at the World
Economic Forum's annual meet at Davos in 1996. He was also featured
among the Top Financial Leaders for the 21st Century by Euromoney
magazine. He was named as CNBC TV18 India Business Leader of the Year
2008 and as the most valued CEO by businessworld in 2010.
Mr. C Jayaram
500247
KOTAKBANK
REVIEW OF LITERATURE
WORKING CAPITAL MANAGEMENT
Management of working capital plays a very important role in the financial
management of a company because maintaining a balance of income to debt
can be difficult and owners must be diligent to assure that it is kept.
Sometimes it takes a little assistance to maintain levels of fluidity or make
major purchases.
If working capital dips too low, a business risks running out of cash. Even
very profitable businesses can run into trouble if they lose the ability to meet
their short-term obligations. Working capital financing can be used as a fast
cash option to cushion the periods when the flow is not ideal or readily
available. Even when owners are meticulous in managing working capital,
31
Current assets:
33
The term current assets refer to those assets which in the ordinary course of
business can be, or will be, converted into cash within one year without
under going any diminution in the value and without disrupting the
operations of the firm. The major current assets are cash, cash equivalent,
marketable securities, accounts receivable, inventory, prepaid expenses and
other short term investments.
Debtors
Debtors are people or other firms who owe money to the firm. This will
usually happen where the firm has sold goods with a period of credit. The
firm sells the good or service but allows the purchaser a period of credit to
pay - usually a month. During this month the purchaser owes the firm the
money and is therefore a debtor.
If the firm has debts these are considered an asset, because when the
debtors pay the firm will have converted the debt into cash in the bank.
Because most debts are relatively short-term they are considered current
assets the amount of debtors a firm has depends on the line of business they
are in.
CASH
In a business the term cash may have a broader meaning. Cash is an asset
to the business and is usually considered to be one of the current assets.
Under the heading cash on the balance sheet may be included a number of
items of varying liquidity. A small amount may actually be cash (or readies)
held in tills or as petty cash, but the majority is likely to be held in various
bank accounts. However, since money in current accounts rarely earns
interest, if a business has a surplus of cash it may invest it in various ways.
34
Some will have to be in very liquid accounts so that if necessary they can get
at it very quickly, but some may be tied up for longer periods of time.
Inventory
Inventory is also a current asset which can be either raw materials, finished
items available for sale, or goods in the process of being manufactured.
Inventory is recorded as an asset on a company's balance sheet.
Raw material
An item used to produce something else is called a "raw material." Some raw
materials are easy to spot, but many require detective work.
Raw material of a company may be imported or indigenous. Raw material
should be managed in such a way that flow of production is not interrupted.
Reordering quantity and time should be estimated in a proper manner.
Work in process
An operation is composed of processes designed to add value by
transforming inputs into useful outputs. Inputs may be materials, labor,
energy, and capital equipment. Outputs may be a physical product (possibly
used as an input to another process) or a service. Processes can have a
significant
impact
on
the
performance
of
business,
and
process
35
Finished Goods
Definition: Commodities that will not undergo further processing and are
ready for sale to the final demand user, either an individual consumer or
business firm. This includes unprocessed foods such as eggs and fresh
vegetables, as well as processed foods such as bakery products and meats.
This also includes durable goods such as automobiles, household furniture
and appliances, and Nondurable goods such as apparel and home heating
oil.
Prepaid Expenses
In the course of every day operations, businesses will have to pay for goods
or services before they actually receive the product sometimes companies
decide to prepay taxes, salaries, utility bills, rent, or the interest on their
debt. These would all be pooled together and put on the balance sheet
under the heading prepaid expenses. By their very nature, Prepaid Expenses
are a small part of the balance sheet.
Current liabilities
The term current liabilities are those liabilities which are intended at the time
of their inception, to be paid in the ordinary course of business, within a
year, out of the current assets or earnings of the concern. The basic current
liabilities are accounts payable, bills payable, bank overdraft and outstanding
expenses and other short term debts.
36
Creditors
Creditors (Accounts Payable) are suppliers whose invoices for goods or
services have been processed but who have not yet been paid.
In other words, creditors are people to whom the company owes the money.
The term creditor is frequently used in the financial world, especially in
reference to short term loans, long term bonds, and mortgages.
The term creditor derives from the notion of credit. In modern America, credit
refers to a rating which indicates the ability of a borrower and likelihood to
pay back his or her loan. In earlier times, credit also referred to reputation or
trustworthiness.
37
to
family
members
should
be
treated
based
on
the
38
The current portion of both deferred tax assets and deferred tax liabilities are
to be recorded as current assets or current liabilities.
CASH MANAGEMENT
Good cash management can have a major impact on overall working capital
management.
The key elements of cash management are:
Cash forecasting;
Balance management;
Administration;
Internal control.
Cash Forecasting:
Good cash management requires regular forecasts. In order for these to be
materially accurate, they must be based on information provided by those
managers responsible for the amounts and timing of expenditure. Capital
expenditure and operating expenditure must be taken into account. It is also
necessary to collect information about impending cash transactions from
other financial systems, such as creditors and payroll.
39
They cannot earn interest or reduce overdraft until they are banked;
Where possible, cash floats (mainly petty cash and advances) should be
avoided. If, on review, the only reason that can be put forward for their
existence is that "we've always had them", they should be discontinued.
There may be situations where they are useful, however. For example, it may
be desirable for peripheral parts of departments to meet urgent local needs
from cash floats rather than local bank accounts.
Internal Control:
Cash and cash management is part of a department's overall internal
control system. The main internal cash control is invariably the bank
reconciliation. This provides assurance that the cash balances recorded in
40
the accounting systems are consistent with the actual bank balances. It
requires regular clearing of reconciling items.
The key to successful cash management is milestones:
o
CREDITORS MANAGEMENT:
Creditors are the businesses or people who provide goods and services in
credit terms. That is, they allow us time to pay rather than paying in cash.
There are good reasons why we allow people to pay on credit even though
literally it doesn't make sense! If we allow people time to pay their bills, they
are more likely to buy from your business than from another business that
doesn't give credit. The length of credit period allowed is also a factor that
can help a potential customer deciding whether to buy from a company or
not: the longer the better.
Creditors will need to optimize their credit control policies in exactly the
same way as the debtors' turnover ratio.
CREDITORS TURNOVER RATIO:
Creditors' Turnover
Average Creditors
(Cost of Sales/365)
41
As with the stock turnover ratio, creditor values relate to the costs of raw
materials, goods and services.
DEBTORS MANAGEMENT
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:
Bad debts.
Placing the responsibility for collecting the debt upon the center that
made the sale;
42
To control the cost of credit allowed & to keep it at the minimum possible
level.
365_____________
industries. For example, a figure of 10 days may sound very impressive, but
if this was the figure for a chain of supermarkets it would be high. Therefore
no debt is incurred and retail firms will tend to have very few debtors and a
low debt collection period. Firms who do a lot of business on credit though
will have much higher debt collection periods.
Debtors' Turnover:
Debtors control is a vital aspect of working capital management. Many
businesses need to sell their goods on credit, otherwise they might find it
difficult to survive if their competitors provide such credit facilities; this could
mean losing customers to the opposition.
The formula for debtors' turnover is:
Debtors' Turnover
The way working capital moves around the business is modeled by the
working capital cycle. This shows the cash coming into the business, what
happens to it while the business has it and then where it goes.
The working capital cycle shows the movement of cash into and out of the
business. The components of working capital cycle are the debtors, creditors,
raw materials and cash.
The cycle starts with buying of raw materials on credit from the suppliers.
These suppliers become the creditors of the company. The raw materials
44
undergo through different value addition stages and are converted into
finished goods. The finished goods are sold to the customers on credit who
become the debtors of the company. At the end of the credit period the
company gets the cash from the debtors whom they pay to the creditors and
the cycle goes on.
It is must for any company to have an ideal working capital cycle. It should
neither be too long nor too short. If the cycle is too long the funds get stuck
up with the debtors and prompt payment to the creditors cannot be made.
A simple working capital cycle may look something like:
45
Payment
CASH
CREDITORS
Collection
Supply
RAW MATERIALS
DEBTORS
Sales
Production
FINISHED GOODS
W.I.P
Value added conversion
A firm can draw funds from its banks within the maximum credit limit
sanctioned. It can draw funds in the following forms.
Overdrafts
Cash credit
Bills purchasing or discounting
Working capital loan
Letter of credit
TANDON COMMITTEE:
Like many other activities of the banks, method and quantum of
short-term finance that can be granted to a corporate was
mandated by the Reserve Bank of India till 1994. This control was
exercised on the lines suggested by the recommendations of a
study group headed by Shri Prakash Tandon.
The study group headed by Shri Prakash Tandon, the then
Chairman of Punjab National Bank, was constituted by the RBI in
July 1974 with eminent personalities drawn from leading banks,
financial institutions and a wide cross-section of the Industry with
a view to study the entire gamut of Bank's finance for working
capital and suggest ways for optimum utilization of Bank credit.
This was the first elaborate attempt by the central bank to
organize the Bank credit. The report of this group is widely known
as Tandon Committee report.
Most banks in India even today continue to look at the needs of
the corporate in the light of methodology recommended by the
Group.
47
48
Tandon
Committee.
norms)
Current
Liabilities
i.e.
CL]
METHODS
FOR
DETERMINING
PERMISSIBLE
BANK
BORROWINGS
1st method
2nd method
(a
Current
100
100
)
(b
assets(CA)
Current
20
20
)
(c)
liabilities(CL)
Working
80
80
(d
(CA-CL)(a-b)
Borrowers
20(25% of c)
25(25% 0f a)
)
(e
contribution
Permissible
60
55
bank finance,
capital
(c-d)
gap
49
Based on the level of activity decided and the unit cost and sales price
projections, the banks calculate at the annual sales and cost of
production.
The quantum of current assets (CA) in the form of Raw Materials, Workin-progress, Finished goods and Receivables is estimated as a multiple
of the average daily turnover. The multiple for each of the current
assets is determined generally based on the industry norms.
50
The current liabilities (CL) in the form of credit availed by the business
from its creditors or on its manufacturing expenses are deducted from
the current assets (CA) to arrive at the Working Capital Requirement
(WCR).
Norms were fixed regarding the quantum of various current assets for
different industries (as multiples of the average daily output) and the
Maximum Permissible Bank Financing (MPBF) was capped at a certain
percentage of the working capital requirement thus arrived at.
Ratio Analysis:
The ratio analysis is one of the most powerful tools of financial analysis. it is
the process of establishing and interpreting various ratios (Quantities
relationship between figures and groups of figures).it is with the help of
ratios that the financial statements can be analysis more clearly and decision
are made from such analyses.
A ratio is simple arithmetic expression of the relationship of one to another.
According to accountants Handbooks by Ixen and Bedford a ratio is an
expression of the quantities relationship between two numbers.
Types of Ratios:
i. Liquidity Ratios
ii. Leverage Ratios
iii. Profitability Ratios
iv. Activity Ratios
i.
Liquidity Ratio
Current ratio= current assets/current liabilities
Quick ratio= quick assets/current liabilities
Measures firms ability to meet its obligation; leverage ratios show the
proportions of the debt equity in financing the firms assets; activity
ratios reflect the firm efficiency in utilizing its assets, and profitability
ratios measure overall performance and effectiveness of the firm.
ii.
Leverage Ratio
Leverage ratio= debt/equity ratio
The short-term creditors, like bankers and suppliers of raw materials,
are more concerned with the forms current debt paying ability. On the
other hand, long term creditors like debenture holders financial
institution etc. are more concerned with the firms long term financial
52
iii.
Profitability Ratio
Profitability refers to net result of business operation two types of
ratios are used to measure profitability. These are profit margin ratios
rate of return ratios.While profit margin ratios shows the relationship
between profit and investment.
The important profit margin ratios are:
Operating
profit
ratio=operating
expenses/net
sales*100
iv.
Activity Ratio
interpreting
comparative
and
liquidity
position
2. Long term financial position
3. Profitability of the concern
54
(All amounts
are in Cr)
Year
Curre
Growth
Current
Growth
nt
Rate
Liabilitie
(%)
W.C
100
4857.12
117.2798
2701.92
-
161.1132
1194.93
98.07509
7997.23
12516.0
122.6639
2010-
Assets (%)
17701.
11
2011-
69
17766.
100
100.363
12
2012-
01
23075.
4
129.884
13
2013-
31
31800.
6
137.810
23803.06
14
2014-
29
41713.
9
131.174
29197.75
15
78
Rate Net
s
12844.57
15064.09
24270.24
55
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
-5000
2010-11
2011-12
2012-13
2013-14
2014-15
Interpretation:
The Current assets and the current liabilities of Kotak Mahindra are in the
increasing stage but at the financial year 2014-2015 it is in the decreasing
stage because of increasing in the current liabilities and the growth rate is
131.17. The net working capital is also in the increasing stage.
Sales(Income)
2845.84
3222.70
3676.54
4811.12
7028.66
Networking
Capital
4857.12
2701.92
-1194.93
7997.23
12516.03
Ratio
0.585911
1.192744
-3.07678
0.601598
0.561573
56
14000
12000
10000
2010-11
8000
2011-12
6000
2012-13
2013-14
4000
2014-15
2000
0
-2000
SALES (Income)
NET W.C
RATIO
Interpretation:
The Net working capital of Kotak Mahindra are In the increasing stage but
at the financial year 2014-2015 it is in the decreasing stage because of
increasing in the sales and the growth rate is 131.17. The net working capital
is also in the increasing stage.
TURNOVER RATIO:
Debtors Turnover Ratio expresses the relationship between debtors and
sales. A high Debtors Turnover Ratio or low Debt collection period is
indicative of sound credit management policy.
Net
Credit
Sales(Income)
2845.84
Avg. Debt
Ratio
21542.90
0.132101
57
2011-12
3222.70
21549.00
0.149552
2012-13
3676.54
30026.98
0.122441
2013-14
4811.12
40984.92
0.117388
2014-15
7028.66
55132.04
0.127488
60000
50000
40000
2010-11
2011-12
30000
2012-13
2013-14
20000
2014-15
10000
0
NET CREDIT SALE (Income)
AVERAGE DEBT.
RATIO
INERPRETATION:
From the above table, it is observed that the Kotak Mahindra debtors
turnover ratio shows a good sigh. The company noted a maximum ratio of
14.95 in the year 2011-12 and the maximum ratio in the year of 2014-15 is
12.74.
58
If we observed the above table the ratio is increasing the year 2010--11 is
13.21 to 14.95 in the year 2011-12 in the year but it is decreased to 12.74 in
the year 2014-15. It shows a good sign for the company.
Current Ratio:
It is the ratio of the current assets current liabilities this ratio is used to know
the companys ability to meet its current obligations. The standard norm for
the current ratio is 2:1
Current ratio = current Assets / Current liabilities.
Table showing current ratio of Kotak Mahindra Ltd during the period
2010-11 to 2014-15
59
(A
ll amounts are in Cr)
Current
Year
Current Assets
2010-11
17701.69
Liabilities
12844.57
2011-12
17766.01
15064.09
2012-13
23075.31
24270.24
Ratio
1.378146
1.179362
0.950766
2013-14
31800.29
23803.06
1.335975
2014-15
41713.78
29197.75
1.428664
45000
40000
35000
30000
2010-11
25000
2011-12
20000
2012-13
2013-14
15000
2014-15
10000
5000
0
CURRENT ASSETS
CURRENT LIABILITRIES
RATIO
INTERPRETATION:
It is observed that the Kotak Mahindra current rationing a increasing trend;
the companys liquidity position is satisfactory. The current ratio increased
slightly up to 2011-12 is 1.33. But in 2012-13 it declined because of increase
60
Quick Ratio:
Quick ratio is relation between quick assets and current liabilities. The term
quick assets, which can be converted into cash with a short notice. This
category also includes cash bank balances short term investments and
receivables.
Quick ratio = Quick Assets / current liabilities
Table showing quick ratio of Kotak Mahindra during the period 2010-11 to
61
2014-15.
(All
amounts are in Cr)
Current
Year
Quick Assets
2010-11
17701.69
Liabilities
12844.57
2011-12
17766.01
15064.09
2012-13
23075.31
24270.24
2013-14
31800.29
23803.06
2014-15
41713.78
29197.75
Ratio
1.378146
1.179362
0.950766
1.335975
1.428664
45000
40000
35000
30000
2010-11
25000
2011-12
20000
2012-13
2013-14
15000
2014-15
10000
5000
0
QUICK ASSETS
CURRENT LIABILITRIES
RATIO
INTERPRETATION:
It is observed that the Kotak Mahindra current rationing a increasing trend;
the companys liquidity position is satisfactory.
62
Particulars
2010-
2011-
2012-13
Sundry
11
21542.
12
21549.
30026.9
Debtors
90
00
995.35
2085.67
15552.
16625.
20775.0
22
Balance with 439.18
34
145.32
5
214.59
1
363.26
39315
53102.3
72785.2 96845.8
Cash
and 1710.2
Balance with 9
RBI
Advances
3
618.06
35.60
bank
Total
39244.
6
60000
50000
40000
30000
20000
10000
0
2010-11
2011-12
2012-13
2013-14
2014-15
INTERPRETATION:
64
It prepared by a business
concern in order to know the profit earned and loss sustained during a
specified period. It explains what has happened to a business as a result of
operations between two balance sheet dates. For this purpose it matches the
revenues and cost incurred in the process of earning revenues and shows the
net profit earned or loss suffered during a particular period.
The nature of Income which is a focus of the income statement can be well
understood if business is taken as an organization that uses Input to
produce Output. The output of the goods and services that the business
provides to its customers. The values of these outputs are the goods and
services that the business provides to its customers. The values of these
outputs art the amounts paid by the customers for them. These amounts are
called revenues in the accounting. The inputs are the economic resources
used by the business in providing these goods and services. These are
termed expenses in accounting.
The comparative balance sheet analysis is the study of the same items,
group of items and computed items in two or more balance sheets of the
same enterprise on different dates. The changes in periodic balance sheet
items reflect the conduct of a business. The changes can be observed by
comparison of the balance sheet at the beginning and at the end of a period
and these changes can help in informing an opinion about the progress of
and enterprise.
.
65
2014
2015
Sundry Debtors
40984.92
55132.04
2107.72
2016.49
363.26
618.06
Advances
29329.31
39079.23
Total
72785.21
96845.82
Borrowings
11723.95
16595.52
Other Liabilities
3032.36
2553.67
Contingent Liabilities
12291.30
17319.52
Total
27047.61
36468.71
45737.6
60377.11
66
Increase\decrease
working capital
in
net
14639.51
120000
100000
80000
60000
40000
20000
0
Interpretation:
The networking capital of Kotak Mahindra has been increased to 60377.11 Cr
the financial position i.e. the performance of Kotak Mahindra has increased
and the current assets defects its current liability.
67
2013
2014
Sundry Debtors
30026.98
40984.92
2085.67
2107.72
214.59
363.26
Advances
20775.05
29329.31
Total
53102.29
72785.21
Borrowings
6140.51
11723.95
Other Liabilities
2869.42
3032.36
Contingent Liabilities
4156.15
12291.30
Total
13166.08
27047.61
39936.21
45737.6
working capital
in
net
5801.39
68
80000
70000
60000
50000
40000
30000
20000
10000
0
INTERPRETATION:
The networking capital of Kotak Mahindra has been increased to 45737.60 Cr
the financial position i.e. the performance of Kotak Mahindra has increased
and the current assets defects its current liability.
69
2012
2013
Sundry Debtors
21549.00
30026.98
995.35
2085.67
145.32
214.59
Advances
16625.34
20775.05
Total
39315.01
53102.29
Borrowings
5904.07
6140.51
Other Liabilities
3257.34
2869.42
Contingent Liabilities
4486.28
4156.15
Total
13647.69
13166.08
25667.32
39936.21
working capital
in
net
14268.89
70
60000
50000
40000
30000
20000
10000
0
INTERPRETATION:
The networking capital of Kotak Mahindra has been increased to 39936.21Cr
the financial position i.e. the performance of Kotak Mahindra has increased
and the current assets defects its current liability.
71
2011
2012
Sundry Debtors
21542.90
21549.00
1710.29
995.35
439.18
145.32
Advances
15552.22
16625.34
Total
39244.59
39315.01
Borrowings
5119.25
5904.07
Other Liabilities
3175.75
3257.34
Contingent Liabilities
7172.79
4486.28
Total
15467.79
13647.69
23776.80
25667.32
working capital
in
net
1890.52
72
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
INTERPRETATION:
The networking capital of Kotak Mahindra has been increased to 25667.32 Cr
the financial position i.e. the performance of Kotak Mahindra has increased
and the current assets defects its current liability.
73
FINDINGS
1. The Kotak Mahindra net working capital is satisfactory between the
years 2012-13, since it shows decreasing trend but after that it is in
declining position.
2. The current ratio of Kotak Mahindra is satisfactory during the period of
study 2010-11 to 2014-15. It is increased but after that it is declining.
3. The average quick ratio of Kotak Mahindra is not good though the quick
ratio is showing maximum value of 1.24 in the year 2010-11 and then
it is declining.
4. Fixed assets turnover ratio of Kotak Mahindra has been increased. And
the company has to maintain this.
5. Inventory turnover ratio of Kotak Mahindra is also increased gradually,
without any fit falls up to 2010-11. In the year 2010-11 it is inclined,
and again it has increased in the year 2014-15. Good inventory
management is good sign for efficient management.
6. Total Assets turnover ratio of Kotak Mahindra is not satisfactory
because it is always below one, except in the year 2014-15 having a
value of 2.14.
7. Return on investment is not satisfactory. This indicates that the
companys funds are not being utilized in a better way.
74
SUGGESTIONS
1. position of funds should be utilized properly.
2. Better Awareness to increase the sales is suggested.
3. Cost cut down mechanics can be employed.
4. Better production technique can be employed.
5. The investment on raw material should be made as per the
requirement. Unnecessary investment may block up the funds.
6. Neither too high nor too low inventory turnover ratios may reduce
profit and liquidity position of the industry. So, proper balance should
be made to increase profits and to ensure liquidity.
7. The raw material should be acquired from the right source at right
quality and at right cost.
8. The process that was being used by Kotak Mahindra Group with the
purchasing department should undergo changes; so that, it enhances
the delivery of a product without compromising its quality by improving
the utilization of materials, labor and equipment.
75
CONCLUSIONS
1. The Kotak Mahindra Net Profit Ratio is showing negative profit in the
year 2010--11. These event is an expected one because since from the
previous two years it is showing the decline stage in Net Profit Ratio.
2. Profit Margin of Kotak Mahindra is decreasing and showing negative
profit because there is increase in the price of copper.
3. The Kotak Mahindra Net Working Capital Ratio is satisfactory.
4. The Kotak Mahindra return on Total Assets ratio shows a negative sign
in the year 2010-11.
5. The Operating Ratio of Kotak Mahindra increased in the year 2010-11.
6. The Operating Ratio of Kotak Mahindra satisfactory. Due to increase in
cost of production, this ratio is decreasing. So the has to reduce its
office administration expenses.
76
BIBLIOGRAPHY
BOOKS REFFERED:
Financial Management Written By M.Y. Khan & P.K. Jain
Financial Management Written By Prasanna Chandra
Financial Management Written By I. M. Pandey
Financial Management Written By S. N. Maheswari
Websites:
www.kotak.com
www.bankingindia.com
www.evanimics.com
www.damodaram.com
www.investopedia.com
www.valuebasedmanagement.net
77