A RESEARCH REPORT ON

ANALYSIS THE NEED OF WORKING CAPITAL MANAGEMENT

Submitted In Partial Fulfillment Of Requirements For The Master Of Business Administration Degree Of Punjab Technical University, Jalandhar 2007-2009

SUBMITTED TO
PUNJAB TECHNICAL UNIVERSITY

SUBMITTED BY Soumendra Kumar Mohapatra MBA-4th Sem Roll # 720743032

ASIAN BUSINESS SCHOOL FILMCITY, NOIDA

ACKNOWLEDGEMENT

On completing this project, it is my pleasure to thank all those who have helped me during the course of the project. I am thankful to Mr. G.S. Khera, faculty Guide, ABS, Film City, Noida, who allowed me to carry out the study and use their different officials and important documents useful for my project and prepare a report on Analysis the Need of Working Capital Management. Lastly I am extremely thankful to all the members of Advance Product Private Limited for their undue and kind cooperation and valuable guidance.

SOMENDRA KUMAR MOHAPATRA

Table Of Contents

Chapter No

Chapter-1.0 Executive Summary Chapter-2.0 Objective of the Study Chapter-3.0 Scope of the study Chapter-4.0 Introduction: ADVANCE PRODUCT
PRIVATE LIMITED

Chapter-5.0 Working capital management Chapter-6.0 Data Collection Chapter-7.0 Data Interpretation and Analysis Chapter-8.0 Limitations Bibliography

EXECUTIVE SUMMARY

Working capital Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for raw materials, pay bills and so on. The money available to them to do this is known as the firms working capital. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. However, the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal.

Working capital is therefore:-

WORKING CAPITAL = Current ||

Assets - Current liabilities

stock + debtors + cash Thus working capital is the same as net current assets, and is an important part of the top half of the firm's balance sheet. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses

have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.

Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster

a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions:- 1)TIME and 2) MONEY.

When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce

Inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; you effectively create free finance to help fund future sales.

Objectives of the study

The need for investing in current assets and elaborate the concept of operating cycle. To know the necessity of managing current assets and current liabilities. To know the principles of current assets investment and financing To focus on the proper mix of Short term and Long term financing for current assets. To find out the profitability of the company.
To find out the degree of flexibility in managing current assets.

To know the firm liquidity position i.e., the ability or capacity of the firm to meet its short term obligations out of current assets. To know the overall performance of the business. To focus on the shareholders wealth maximization principle as operationally desirable finance decision criterion.

 To focus on the decision making role of accounting system. To analysis the nature, content, form, and utility of 2 financial statement viz. Balance sheet and Profit And Loss statement. To study the need for analyzing the changes in a firms funds and cash flow position. To study the utility of financial ratios in credit analysis and competitive analysis as well as in determining the financial capacity of the firm.

Scope of the study

This project will be a learning device for the finance student.

Through this project we would study the various methods of the working capital management.

The project will be a learning of planning and financing working capital.

This will show different methods of holding inventory and dealing with cash and receivables.

This will show us the liquidity position of the company and also how do they maintain a particular liquidity position.

The company could also benefit from our views and recommendations. They could get at least some hints and get better off.

Problems

First, given the level of sales and the relevant cost considerations, what are the optimal amounts of cash, accounts receivable and inventories that a firm should choose to maintain?

Second, given these optimal amounts, what is the most economical way to finance these working capital investments? To produce the best possible results, firms should keep no unproductive assets and should finance with the cheapest available sources of funds. Why? In general, it is quite advantageous for the firm to invest in short term assets and to finance short-term liabilities.

Research Methodology And Data Collection:

Research is an art of scientific investigation. Research comprises defining and redefining problems, formulating hypothesis or suggested solution; collecting, organizing and evaluating data; making deductions and reaching conclusions; and at least carefully testing the conclusions to determine whether they fit the formulating hypothesis.

Research Methodology:

Research Methodology is a way to systematically solve the research problem. It may be understood as the science of studying how research is done scientifically. In it we study the various steps that are generally adopted by a researcher in studying his research problem along with the logic behind them. It is necessary for the researcher to know not only the research methods/techniques but also the methodology.

This study will be based on :

1. Secondary Research 2. Primary Research through structured questionnaire administration

Data Collection

Since research is combination of secondary data collection through desk research and primary data through the author of this study collected the information from the personal interviews of the member of financial department of the firm. Secondary Data: All relevant information connected with this study was assembled from following sources:-

Foreign and Indian Books. Banking and Financial Journals. Through website.

Primary Research: To evaluate various attributes needed to conduct this study questionnaire was designed in line with the objectives of study i.e., to study following Data:

Balance Sheet

 Profit and Loss Account Cash Flow Statement Personal Interview

Data Interpretation and Analysis The data collected from secondary sources was assembled, screened, sorted, Evaluated in line with the objectives of the study and has been incorporated in this Project. The data collected from the Balance Sheet, Profit and Loss Account, and Cash Flow Statement and through interview was mostly qualitative in nature. Through the primary data following statements are analyses: Operating Cycles Analysis Common Size Statement Trend Analysis Ratio Analysis Correlation Analysis

All the above statements are helpful to know the financial position of the firm, need of working capital and needs of resources etc.

LIMITATIONS OF THE STUDY

This is my first project in finance and I am inexperienced (although our professor helped us a lot). The company APL has not revealed all the information to us, as no organization reveals its facts to outsiders. Time has been a killer to me as I got only 2 days in APL and exactly 2 hours/day of discussions. I also got eight weeks to complete my project. The values in the projects are given in monetary terms and not in quantitative terms. All the things are in rupees and nothing is in kilograms or meters.

CHAPTER 2 OBJECTIVES

Objectives of the study

The need for investing in current assets and elaborate the concept of operating cycle. To know the necessity of managing current assets and current liabilities. To know the principles of current assets investment and financing To focus on the proper mix of Short term and Long term financing for current assets. To find out the profitability of the company. To find out the degree of flexibility in managing current ssets. To know the firm liquidity position i.e., the ability or capacity of the firm to meet its short term obligations out of current assets. To know the overall performance of the business.

 To focus on the shareholders wealth maximization principle as operationally desirable finance decision criterion. To focus on the decision making role of accounting system. To analysis the nature, content, form, and utility of 2 financial statement viz. Balance sheet and Profit And Loss statement. To study the need for analyzing the changes in a firms funds and cash flow position. To study the utility of financial ratios in credit analysis and competitive analysis as well as in determining the financial capacity of the firm.

CHAPTER 3 SCOPE OF THE STUDY

Scope of the study

This project will be a learning device for the finance student.

Through this project we would study the various methods of the working capital management.

The project will be a learning of planning and financing working capital.

This will show different methods of holding inventory and dealing with cash and receivables.

This will show us the liquidity position of the company and also how do they maintain a particular liquidity position.

The company could also benefit from our views and recommendations. They could get at least some hints and get better off.

CHAPTER 4 INTRODUCTION ADVANCE PRODUCT PRIVATE LIMITED

INTRODUCTION ADVANCE PRODUCT PRIVATE LIMITED

Mrs. Nishi Gupta founded APL in the year 1988. It works as a major supplier of power cords to electronic industry. It is a leading OEM supplier of ISI marked power cords to nationally reputed brands of home appliances and information technology products. Power cord has longer life and permanent connections to avoid many failure of the gadget.

Advance Product Private Limited is a company having an all India presence and promoted by A Lady Entrepreneur and supported by highly skilled professionals in their respective fields. It is the basic policy of the company to produce high quality products standards (BIS). Co. is all set for getting certification of ISO 9001 very soon for quality systems. Co.s regular and reputed customers are, spread all over the country, which speaks about the quality of the products. The Co. deal with about 45 reputed companies like BPL Refrigerators, National Panasonic, Usha Lexus, TVS Electronic Limited etc. and some computer manufacturer like Accord Communication Ltd., Compaq India Ltd., and Novel Infocom etc.

This Co. maintains the high standards of quality and strict schedules of supplies to its esteemed customers. It can manufacture the power cord as per the customer specifications regarding the connection, make, length and colour, monoglam, shape and packing etc. It has own tool room and mould as per customer.

Our Vision

APL aims at becoming one of the top 10 Co. in the Indian Cable industry by 2008, a leading Indian player by 2013 and a Asian player by 2025.

Dedicated to a Vision As a new age dawns on the cable industry, new paradigms are brought into play. Rapid advancement in technology and science have ushered in a New World of thought.

APL efforts to explore this brave new world will be an ongoing one. The growth drivers of innovations in research, holistic approach to safety, quality, high technology and combined expertise of its people will be the new routes to leadership in highly competitive cable industry.

To carry on the business of manufacturers, merchants, importers, exporters and agents of all kinds of cables, whether of copper or aluminium or any other metal by any process or methods being employed by researches on any metal or non metal or any other types of material required or may be innovated in future.

Directors 1) Nishi Gupta ( Managing Director) 2) K.K. Mehta ( Director ) 3) S.K. Gupta (Director)

Registered Office B- 1 & 2, Magnum House 1 Karampura Commercial Complex Shivaji Marg, New Delhi - 110015 Bankers Bank of Baroda SSI Branch, Rajindera Place Auditors A.K. Batra & Associates 40/2971, Beadon Pura, Karol Bagh

Organisation Chart

Managing Director

Director (Administration, Customer Service)

G.M. (Production)

G.M. (Finance)

Manager (Production) Sr. Supervisor

Manager (Purchase) Purchase Officer

Manager (Q.C.) Q.C. Supervisor

Sales Manager Sales Personnel

Accounting Head Account Officer

Production Personnel

Purchase Personnel

Q.C. Personnel

Account Personnel

CHAPTER 5 WORKING CAPITAL MANAGEMENT

MANAGING WORKING CAPITAL

Working capital

Firms need cash to pay for all their day-to-day activities. They have to pay wages, pay for raw materials, pay bills and so on. The money available to them to do this is known as the firms working capital. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. However, the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal.

Working capital is therefore:-

WORKING CAPITAL = Current ||

Assets - Current liabilities

stock + debtors + cash

Thus working capital is the same as net current assets, and is an important part of the top half of the firm's balance sheet. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.

Current assets minus current liabilities. Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative, depending on how much debt the company is carrying. In general, companies that have a lot of working capital will be more successful since they can expand and improve their operations. Companies with negative working capital may lack the funds necessary for growth. Also called net current assets or current capital.

Working Capital Needs

Working capital is used to pay short-term obligations such as accounts payable and buying inventory. If working capital dips too low, risk running out of cash. Even very profitable businesses can run into trouble if they lose the ability to meet their short-term obligations.

Definitions Annual growth The percent growth expect over the next year. Total current assets This is any cash or asset that can be quickly turned into cash. This includes prepaid expenses, accounts receivable, most securities and inventory. Total current liabilities This is a liability in the immediate future. This includes wages, taxes, and accounts payable.

Current ratio Current Assets divided by current liabilities. Current ratio helps to determine enough working capital to meet short-term financial obligations. A general rule of thumb is to have a current ratio of 2.0. Although this will vary by business and industry, a number above two may indicate a poor use of capital. A current ratio under two may indicate an inability to pay current financial obligations with a measure of safety. Working capital Working capital is used by lenders to help gauge the ability for a company to weather difficult financial periods. Working capital is calculated by subtracting current liabilities from current assets. Due to differences in businesses and the fact that working capital is not a ratio but an absolute amount, it is difficult to predict what the ideal amount of working capital would be for your business. To calculate working capital requirements this calculator uses the "Current Ratio" to determine a target amount of working capital.

1. Working Capital Cycle Cash flows in a cycle into, around and out of a business. It is the business's lifeblood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash Inventory (stocks and work-in-progress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions:- 1)TIME and 2) MONEY. When it comes to managing working capital - TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it

will need to borrow less money to fund working capital. As a consequence, a firm could reduce the cost of bank interest or it will have additional free money available to support additional sales growth or investment. Similarly, if a firm can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; firm effectively create free finance to help fund future sales.

If you .......

Then ...... You release cash from the cycle Your receivables soak

Collect receivables (debtors) faster Collect receivables (debtors) slower

up cash Get better credit (in terms of duration You increase your cash or amount) from suppliers resources You free up cash You cash consume more

Shift inventory (stocks) faster Move inventory (stocks) slower

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plughole, they remove liquidity from the business. 2. Sources of Cash Sources of additional working capital include the following:

Existing cash reserves

Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from

shareholders

Bank overdrafts or lines of credit Long-term loans

If a firm has insufficient working capital and try to increase sales, It can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include:

Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment

Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing

Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a Cheque).

3. Handling Receivables (Debtors) Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... How long it owes.... for what it is owed.

Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business, in particular on small businesses that can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: 1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves.

2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10.Consider charging penalties on overdue accounts. 11.Consider accepting credit /debit cards as a payment option. 12.Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.

Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects:

Weak credit judgment Poor collection

procedures

Lax

enforcement

of

credit terms

Slow issue of invoices or

statements

Errors in invoices or

statements

Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt.

For example...

Longer credit terms taken with approval, particularly for smaller orders

Use of post-dated checks by debtors who normally settle within agreed terms

Evidence of customers switching to additional suppliers for the same goods

New customers who are reluctant to give credit references Receiving part payments from debtors. Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers.

Get external help if your own efforts fail. Don't feel guilty asking for money.... Its yours and you are entitled to it.

Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem.

When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying.

Make it your objective is to get the money - not to score points or get even.

4. Managing Payables (Creditors) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following:

Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people?

Are purchase quantities geared to demand forecasts? Do you use order quantities, which take account of stock holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well then you can sell well. Management of your creditors and suppliers is just as important as the

management of your debtors. It is important to look after your creditors slow payment by you may create ill-feeling and can signal that your company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with you to enhance the future viability and profitability of your company.

5. Inventory Management

Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stock-holding periods will be influenced by the nature of the business. For example, a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them. Nowadays, many large manufacturers operate on a just-in-time (JIT) basis whereby all the components to be assembled on a particular today, arrive at the factory early that morning, no earlier - no later. This helps to minimize

Manufacturing costs as JIT stocks take up little space, minimize stock holding and virtually eliminate the risks of obsolete or damaged stock. Because JIT manufacturers hold stock for a very short time, they are able to conserve substantial cash. JIT is a good model to strive for as it embraces all the principles of prudent stock management. The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and, thereby, minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include:

What are the projected sales of each product? How widely available are raw materials,

components etc.?

How long does it take for delivery by suppliers? Can you remove slow movers from your product

range without compromising best sellers?

Remember that stock sitting on shelves for long periods of time ties up money which is not working for you. For better stock control, try the following:

Review the effectiveness of existing purchasing and inventory systems.

Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many.

Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it.

Consider having part of your product outsourced to another manufacturer rather than make it yourself.

Review your security procedures to ensure that no stock "is going out the back door!

Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges.

Used in Used In Production Process Working Capital Cycle Used to Pyrchase Accrued Direct Labor and Materials.

Accrued Fixed Operating Expenses

Generates Inventory Cash and marketable securities

Via sales Generates

Collection Process External Financing

Used to Purchase

Accounts receivable

Return to Capital Suppliers of Capital

Fixed Assets

Fig: RESOURCE FLOWS FOR A MANUFACTURING FIRM

Cash Flow Forecasts

CASH RECIEPTS

DISBURSEMENT BANK 1

DEPOSI T BANK 1

CUSTOMERS

DEPOSI T BANK 2 DEPOSI T BANK 3

INDIAN OVERSEAS BANK / STATE BANK OF INDIA / STATE BANK OF PATIALA

SUPPLIERS

CASH PAYMENTS

DISBURSEMENT BANK 1

Fig: Cash Flow in the Firm 1. Importance of Cash When planning the short- or long-term funding requirements of a business, it is more important to forecast the likely cash requirements than to project profitability etc. Whilst profit, the difference between sales and costs within a specified period, is a vital indicator of the performance of a business, the generation of a profit does not necessarily guarantee its development, or

even the survival. Bear in mind that more businesses fail for lack of cash than for want of profit. 2. Cash Vs Profit Sales and costs and, therefore, profits do not necessarily coincide with their associated cash inflows and outflows. While, a sale may have been secured and goods delivered, the related payment may be deferred as a result of giving credit to the customer. At the same time, payments must be made to Suppliers, staff etc., cash must be invested in rebuilding depleted stocks, new equipment may have to be purchased etc. The net result is that cash receipts often lag cash payments and, whilst profits may be reported, the business may experience a short-term cash shortfall. For this reason it is essential to forecast cash flows as well as project likely profits. 3. Calculating Cash flows Normally, the main sources of cash inflows to a business are receipts from sales, increases in bank loans, proceeds of share issues and asset disposals, and other income such as interest earned. Cash outflows include payments to suppliers and staff, capital and interest repayments for loans, dividends, taxation and capital expenditure.

Net cash flow is the difference between the inflows and outflows within a given period. A projected cumulative positive net cash flow over several periods highlights the capacity of a business to generate surplus cash and, conversely, a cumulative negative cash flow indicates the amount of additional cash required to sustain the business. Cash flow planning entails forecasting and tabulating all significant cash inflows relating to sales, new loans, interest received etc. and then analyzing in detail the timing of expected payments relating to suppliers, wages, other expenses, capital expenditure, loan repayments, dividends, tax, interest payments etc. The difference between the cash in- and out-flows within a given period indicates the net cash flow. When this net cash flow is added to or subtracted from opening bank balances, any likely short-term bank funding requirements can be ascertained. 5. Planning to Plan Before using a model for short-term cash flow forecasting, a manager or entrepreneur should:

Decide the central purpose of the exercise (internal planning and control, negotiate a loan etc.).

Identify the target audience (directors, bank manager etc.) Set the time intervals and horizon (e.g. monthly for twelve months) Sort out the level of detail required. Check that all the necessary key assumptions and data are to hand and have been adequately researched.

Compile opening balances for all items which will involve cash flows within the forecasting period. Think through the likely impact of the critical assumptions on the cash flow projections. If necessary, prepare preliminary forecasts manually to confirm their overall direction and consider the underlying strategic issues relating to sales, funding, costs, stocks etc. As a guide, sales forecasts and debtor & creditor terms are likely to have the most profound impacts on short-term cash flows.

When preparing cash flow projections, be aware of the dangers of:

Overstating sales forecasts Underestimating costs and delays likely to be encountered

Ignoring historic trends or performances by debtors etc. Making unduly-optimistic assumptions about the availability of bank loans, credit, grants, equity etc.

Seeking spurious accuracy whilst failing to recognize matters of strategic importance

These problems can arise as the result of a lack of foresight or knowledge, or because of excessive optimism. They can lead to under-estimation of the cash and other resources required sustaining or developing a business with potentially disastrous consequences. When forecasting bank requirements and preparing cash flow projections, realistic views should always be taken about future prospects. There is often merit in compiling "worst" case projections to complement "most likely" or "best" forecasts and to accept that the "worst" case might occur and to plan accordingly. 7. Ways of Improving Cash flow Once the cash flow projections have been prepared, they should be critically examined and used as a management tool to control and improve the business's expected cash position. Issues which might be examined include the following:

30+ Ways of Improving Net Cash flow 1. Increase payments). 2. Reduce direct and indirect costs and overhead expenses. 3. Defer discretionary projects which cannot achieve acceptable cash paybacks (e.g. within one year ???). 4. Increase prices especially to slow payers. 5. Review the payment performances of customers - involve sales force. 6. Become more selective when granting credit. 7. Seek deposits or multiple stage payments. 8. Reduce the amount/time of credit given to customers. 9. Bill as soon as work has been done or order fulfilled. 10.Improve systems for billing and collection. 11.Use the 80/20 rule to control inventories, receivables and sales (particularly those involving cash

payables. 12.Improve systems for paying suppliers. 13.Generate regular reports on receivable ratios and aging. 14.Establish and adhere to sound credit practices - train staff. 15.Use more pro-active collection techniques. 16.Add late payment charges or fees where possible. 17.Increase the credit taken from suppliers. 18.Negotiate extended credit from suppliers. 19.Make prompt payments only when worthwhile discounts apply. 20.Reduce inventory (stock) levels and improve control over work-in-progress. 21.Sell off or return obsolete/excess inventory. 22.Utilize factoring, or discount facilities, to accelerate

receipts from sales. 23.Defer or re-stage all capital expenditure. 24.Use alternative financing methods, such as leasing, to gain access to the use (but not ownership) of productive assets. 25.Re-negotiate bank facilities to reduce charges. 26.Seek to extend debt repayment periods. 27.Net off or consolidate bank balances. 28.Sell off surplus assets or make them productive. 29.Enter into sale and lease-back arrangements for productive assets. 30.Defer dividend payments. 31.Raise additional equity. 32.Convert debt into equity. 33.Make medium- and short-term cash flow forecasts and

update them regularly

CONCEPTS OF WORKING CAPITAL There are four concepts of Working Capital: Gross Working Capital refers to the firms investment in current

assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, shortterm securities, debtors, (accounts receivable or book debts) bill receivable and stock. The Gross Working Capital concepts focuses attention on two aspects of current assets management: a) How to optimize investment in current assets? b) How should current assets be financed?

The consideration of the level of investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more not less, to the needs of the business firms. Another aspect of the gross working capital points to the need of arranging funds to finance current assets.

 Net Working Capital refers to the differences between current assets

and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. A positive Net working capital will arise when current assets exceed current liabilities. A negative working capital occurs when current liabilities are in excess of current assets. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Net working capital also covers the question of judicious mix of long term and short term funds for financing current assets. A firm net working capital position is not only important as an index of liquidity but it is also used as a measure of risk. Risk in this regard means chances of the firm being unable to meet its obligation on due date. The lender considers a positive net working as a measure of Safety. All other things being equal, the more the net working capital a firm has, the less likely that it will default in meeting its current financial obligations. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position.

 Permanent Working Capital: There is always a minimum level of

current assets which is continuously required by the firm to carry on its business operation. This minimum level of the current assets is referred to as permanent, or fixed, working capital. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in the production and sales, the need for working capital, over and above permanent working capital, will fluctuate. For example, extra inventory of finished goods will have to be maintained to support the peak periods. On the other hand, investment in raw material, work in process and finished goods will fall if the market is slack.

Amount of Working Capital (Rs)

Permanent

TIME

Fig: Permanent Working Capital

Temporary Working Capital: The extra working capital, needed to

support the changing production and sales activities is called

fluctuating, or variable, or temporary working capital. Temporary working capital is created by the firm to meet liquidity requirements that will last only temporarily.

Amount of working capital (Rs)

Temporary Time Fig: Temporary Working Capital

Amount of working capital (Rs)

Temporay Permanent Time Fig:Temporary And Permanent Working Capital

It is shown that permanent working capital is stable over time, while temporary working capital is fluctuating sometimes increasing and sometimes decreasing. However, the permanent working capital line need not be horizontal if the firms requirement for permanent capital is increasing (or decreasing) over a period. For a growing firm, the difference between permanent and temporary working capital can be depicted through fig. 3.

Determinants of Working capital There are no set rules and formulae to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. Also, the importance of factors changes for a firm over time. The following are the factors, which generally influence the working capital requirements of firms:

1) Nature of Business - Trading and financial firms have a very

small investment in fixed assets, but require a large sum of money to be invested in working capital. Retail store, for example, must carry large stocks of a variety of goods to satisfy varied and continuous demands of their customers. Some manufacturing

businesses, such as tobacco manufacturers and construction firms, also have to invest substantially in working capital and a nominal amount in fixed assets. Working capital requires most of the manufacturing concerns to fall between the two extreme requirements of trading firms and public utilities. Such concerns have to make adequate investment in current assets depending upon the total assets structure and other variables.

2) Sales and Demand Conditions -

The working capital needs of a

firm are related to its sales. It is difficult to precisely determine the relationship between volume of sales and working capital needs. In practice current assets will have to be employed before growth take place. It is, therefore, necessary to make advance planning of working capital for a growing firm on a continuous basis.

A growing firm may need to invest funds in fixed assets in order to sustain its growing production and sales. Sales depend on demand conditions. Most firms experience seasonal and cyclical fluctuation in the demand for their products and services. These business variations affect the working capital requirement, specially the

temporary working capital requirement of the firm. When there is an upward swing in the economy, sales will increase, correspondingly, the firms investment in inventories and debtors will also increase. Under boom period, additional investment in

fixed asset may be made by some firms to increase their productive capacity. This act of firms will require further additions of working capital. To meet their requirements of funds for fixed assets and current assets under boom period, firms generally resort to substantial borrowing. On the other hand when there is a decline in the economy, sales will fall and consequently, levels of inventories and debtors will also fall. Under recessionary condition, firms try to reduce their short term borrowings.

Seasonal Fluctuations not only affect working capital requirement but also create production problems for the firm. During Periods of peak demand, increasing production may be expensive for the firm. Similarly, it will be more expensive during slacks periods when the firm has to sustain its working force and physical facilities without adequate production and sales. Unlike cyclical

fluctuation, seasonal fluctuation generally conforms to a steady pattern. Therefore, the financial arrangements for seasonal working capital requirements can be made in advance. However, the financial plan or arrangement should be flexible enough to take care of some abrupt seasonal fluctuation.

3) Technology and manufacturing Policy: The manufacturing cycle (or the inventory conversion cycle) comprises of the purchase and use of raw materials and the production of finished goods. Longer the manufacturing cycle, the larger will be the firms working capital requirements. If there are alternative technologies of manufacturing a product, the technological process with the shortest manufacturing cycle may be chosen. In order to minimize their investment in working capital, some firms, specifically firms manufacturing industrial products, have a policy of asking for advance payments from their customers. 4) Credit Policy: The credit policy affects the working capital; by influencing the level of debtors. The credit terms to be granted to customer may depend upon the norms of the industry to which the

firm belongs. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. A

liberal credit policy, without rating the credit worthiness of customers, will be detrimental to the firm and will cerate a problem of collecting funds later on. A high collection period will mean tieup of large funds in book debts. Slack collection procedures can increase the change of bad debts. 5) Availability of Credit : The availability of credit from banks also influence the working capital needs of the firm. A firm, which can get bank credit easily on favorable conditions, will operate les working capital than a firm without such a facility.

6) Operating Efficiency : The operating efficiency of the firms relates to the optimum utilization of resources at a minimum costs. The firm will be effectively contributing operating costs and utilizing current assets. The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization of resources improves profitability and, thus, helps in releasing the pressure on working capital.

Although it may not be possible for a firm to control prices of materials or wages of labour, it can certainly ensure efficient and effective use of its labour, material and other resources.

7) Price Level Changes: The increasing shifts in price level make functions of financial manager difficult. He should anticipate the effect of price level changes on working capital requirements of the firm. Generally, rising price levels will require a firm to

maintain higher amount of working capital. Same levels of current assets will need increased investment when prices are increasing. However, companies which can immediately revise their product prices with rising price levels will not face a severe working capital problem. Further, effects of increasing general price levels will be felt differently by firms as individual prices may move differently. It is possible that some companies may not be affected by rising prices while others may be badly hit by it. Thus, effect of rising prices will be different for different companies. Some will face no working capital problem, while working capital problems of others may be aggravated.

Balanced Working Capital Position

The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangers from the firms point of view. Excessive working capital means idle funds which earn no profits for the firm. Paucity of working capital not only impairs the firms profitability but also results in production interruptions and inefficiencies. The dangers of excessive working capital are as follows:

It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits. Excessive working capital makes management complacent which degenerates into managerial inefficiency.

 Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits. Inadequate working capital is also bad and has the following dangers:

It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non- availability of working capital funds. It becomes difficult to implement operating plans and achieve he firms profit target. Operating inefficiencies creep in when I becomes difficult even to meet day to day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds. Thus, the firms profitability would deteriorate. Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. The firm loses its reputation when it is not in a position to honour its short term obligations. As a result the firm faces tight credit terms.

An enlightened management should, therefore, maintain the right amount of working capital on a continuous basis. Only then a proper functioning of business operation will be ensured. Sound financial and statistical techniques, supported by judgment, should be used to predict the quantum of working capital needed at different time periods.

CHAPTER 6 DATA COLLECTION BALANCE SHEET PROFIT AND LOSS ACCOUNT CASH FLOW STATEMENT

DATA COLLECTION

BALANCE SHEET (Original Data)

(Rs. in Lacs)
Period ended

June 1997

June 1998
12

June December 1999

12

March 2002
15

March 2003
12

2000
18

No. Of months

12

SOURCES OF FUNDS:
Share Capital Reserves & Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Deferred Liabilities Total Liabilities 1,500.00 1,886.58 3,386.58 1,468.02 517.74 1,985.76 266.74 5,639.08 1,500.00 3,582.34 5,082.34 5,792.07 1,044.67 6,836.74 370.55 12,289.63 1,500.00 4,094.83 5,594.83 6,223.96 1,722.40 7,946.36 298.88 13,840.07 1,500.00 2,987.99 4,487.99 6,547.78 1,407.53 7,955.31 341.34 12,784.64 1,717.08 861.46 2,578.54 8,280.82 373.50 8,654.32 351.06 11,583.92 1,717.08 851.10 2,568.18 8,275.67 296.22 8,571.89 342.68 11,482.75

APPLICATION OF FUNDS:
Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Current Assets, Loans & Adv. Inventories Sundry Debtors 927.63 575.17 1,283.46 2,272.79 1,229.23 1,828.18 1,295.60 1,148.58 935.38 1,045.18 541.70 835.12 1,816.06 (301.91) 1,514.15 439.43 2,176.65 5,533.96 (622.80) 4,911.16 791.35 2,352.93 7,466.30 (1,152.75) 6,313.55 238.90 4,295.73 7,717.73 (2,005.81) 5,711.92 4,215.33 7,672.56 (2,595.29) 5,077.27 4,282.08 7,503.98 (2,917.31) 4,586.67 4,368.83

Cash and Bank Balance Other Current Assets Loans and Advances Less: Current Liab. & Prov. Sundry Creditors Adv. From customers Interest accrued But not Due Other Liabilities Provisions Net Current Assets Misc. Expenditure not w/o Total Assets

35.63 1.11 727.59

69.68 54.40 2,561.13

66.78 97.98 1,333.22

25.86 376.57 4,082.51

120.88 512.37 4,100.85

59.99 0.79 4,663.29

(179.49) (368.27) (10.29) (226.77) (301.84) 1,180.47 328.38 5,639.08

(520.62) (587.54) (168.62) (396.99) (618.62) 3,949.54 284.65 12,289.63

(787.14) (345.18) (163.91) (322.22) (198.07) 2,738.87 253.02 13,840.07

(723.14) (3,273.77) (12.97) (239.74) (27.09) 2,651.81 205.58 12,784.64

(726.61) (3,621.06) (23.06) (242.98) (34.52) 2,066.43 158.14 11,583.92

812.29 2,671.96 4.03 178.93 32.94 2,400.74 126.51 11,482.75

Profit & loss Account (Original)

(Rs. in Lacs)

Particulars

June 1997

June 1998
12

June 1999
12

December 2000
18

March 2002
15

March 2003
12

No. Of months

12

INCOME:
Sales Other Income Stock Adjustments Total Income (A) 5,611.61 385.21 182.57 6,259.39 11,009.25 559.05 237.57 11,805.87 6,160.96 747.10 264.43 7,172.49 3,348.97 1,025.40 77.89 4,452.26 3,446.45 564.19 (226.88) 3,783.76 4,340.46 233.54 (322.13) 4,251.87

EXPENDITURE
Raw Materials Excise Duty Other Manufacturing Exp. Employee Cost Selling and Admin. Exp. Interest & Financial Charges Depreciation TOTAL (B) 280.11 454.47 247.64 153.72 4,375.38 1,884.01 (300.00) 463.38 868.03 470.49 325.66 9,133.59 2,672.28 (325.00) 448.72 855.42 1,129.58 547.67 6,315.21 857.28 (180.00) 840.10 739.35 1,439.34 865.05 5,748.11 (1,295.85) (1.37) 740.48 624.14 1,382.67 620.93 5,214.45 (1,430.69) (4.96) (720.34) 645.59 537.84 790.80 464.17 4,259.93 (8.06) (3.06) 1,869.91 3,800.86 1,796.77 1,164.53 1,012.29 954.96

PROFIT/LOSS (A-B)
Provision For Taxation Prior Period Expenses Adjustment For Earlier years

(4.77) Short/ Excess provisions Proposed Dividend, not approved (96-97)

10.84

0.21

25.38

29.46

0.76

150.00

Corporate Tax on Dividend, not approved (96-97) B/F Surplus Balance in P&L A/c 1,511.79 404.95 15.00 -

PROFIT AVAILABLE
1,579.24 2,358.12 677.49 404.95 (1,721.58) (10.36)

FOR APPROPRIATION

Cash flow Statement (Original)

(Rs. in Lacs)
Period ended

June 1998

June 1999
12

December 2000
18

March 2002
15

March 2003
12

No. Of months

12

CASH FLOW FROM OPERATING

ACTIVITIES
Net profit before Tax & other items Adjustments: Depreciation Exchange rate fluctuations Profit/loss on sale of investments (net) Profit/loss on sale of fixed asset (net) Interest paid Interest received Dividend received Miscellaneous income Miscellaneous exp. Written off 325.66 (30.67) 127.50 (46.82) 470.49 (82.72) (125.28) (85.78) 31.63 584.01 Operating profits W.C. changes Adjustments for: Trade and other receivables Inventories Trade and other payables (3,584.45) (355.83) 906.10 (3,034.18) Cash generated from operating 222.11 1,628.94 54.23 (40.40) 1,642.77 3849.22 (2,348.28) (66.37) 2,625.79 211.14 631.57 (50.74) 360.22 370.92 680.40 1,016.29 159.20 393.68 (948.08) (395.20) 838.96 3,256.29 547.67 49.47 (32.55) 7.25 1,129.58 (115.60) (128.08) (140.60) 31.63 1,349.17 2,206.45 865.05 (4.35) (5.70) (8.98) 1,439.34 (458.87) (5.00) (152.65) 47.44 1,716.28 420.43 620.93 0.02 (2.92) 1,382.67 (143.49) (138.07) 47.44 1,766.58 335.89 464.17 (1.70) (7.43) 11.60 790.80 (1.94) (44.91) 31.63 1,242.22 1,234.16 2,672.28 857.28 (1,295.85) (1,430.69) (8.06)

activities Interest paid Income/wealth tax paid (net) Exchange rate fluctuations Prior paid expenses (interest) Excess provisions in earlier years (470.49) (314.16) 30.67 (753.98) Cash from operating activities (531.87) (1,129.58) (179.79) (49.47) (1,358.84) 2,490.38 (1,439.34) 24.01 4.35 (1,410.98) 779.41 (1,382.67) (4.96) (0.02) (720.34) 29.46 (2,078.53) (1,062.24) 0.91 (791.40) 47.56 (790.80) (3.21) 1.70 -

(B)

CASH FLOW FROM INVESTMENT

ACTIVITIES
Purchase of fixed assets Investments (net) Interest received Dividend received Miscellaneous income (4,027.77) (303.78) 82.72 125.28 85.78 (4,037.77) (1,405.26) (1,910.25) 115.60 128.08 140.60 (2,931.23) (15.54) 86.10 458.87 5.00 152.65 687.08 16.64 (66.75) 143.49 138.07 231.45 44.91 (17.64) 22.26 (86.75) 1.94

Net cash used in investment (4,569.64) activities (440.85) (92.33) (830.79) 29.92

(C) CASH FLOW FROM FINANCNG ACTIVITIES

Issue of equity share capital Proceeds from borrowings (net of 4,954.79 repayment) Capital issue exp. Dividend paid (50.26) (300.84) 4,603.69 (600.00) 437.95 51.41 925.81 (90.81) 1,037.95 51.41 708.73 (90.81) 217.08 -

Net cash used in financing activities

34.05

(2.90)

(40.92)

95.02

(60.89)

Net increase in cash and cash equivalents Opening cash and cash equivalents Closing cash and cash equivalents 35.63 69.68 34.05 69.68 66.78 (2.90) 66.78 25.86 (40.92) 25.86 120.88 95.02 120.88 59.99 (60.89)

Original Annual Accounts Modified for analysis

BALANCE SHEET (Analyzed Data)
(Rs. in Lacs) March 2000 12 March 2001 12 March 2002 12 March 2003 12 March 2004 12 March 2005 12

Period ended No. Of months

SOURCES OF FUNDS:
Share Capital Reserves & Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Deferred Liabilities Total Liabilities APPLICATION OF FUNDS: Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments 4,604.49 542.58 4,061.91 703.37 2,308.86 6,983.22 1,020.26 5,962.96 377.01 3,810.03 7,592.02 1,579.28 6,012.74 119.45 4,255.53 7,708.70 2,123.71 5,584.99 4,228.68 7,672.56 2,595.29 5,077.27 4,282.08 7,503.98 (2,917.31) 4,586.67 4,368.83 1,500.00 3,158.40 4,658.40 4,711.06 912.94 5,624.00 344.60 10,672.00 1,500.00 3,966.71 5,466.71 6,115.99 1,552.97 7,668.96 316.80 13,452.47 1,500.00 3,541.41 5,041.41 6,385.87 1,564.97 7,950.84 320.11 13,312.36 1,500.00 2,562.68 4,106.10 6,894.39 1,200.72 8,095.11 343.29 12,544.50 1,717.08 861.46 2,578.54 8,280.82 373.50 8,654.32 351.06 11,583.92 1,717.08 851.10 2,568.18 8,275.67 296.22 8,571.89 342.68 11,482.75

Current Assets, Loans & Adv. Inventories Sundry Debtors Cash and Bank Balance Other Current Assets Loans and Advances Less: Current Liab. & Prov. Sundry Creditors Adv. From customers Interest accrued But not (129.04) Due Other Liabilities Provisions Net Current Assets Misc. Expenditure not w/o Net Total Assets (354.43) (539.07) 3,257.28 295.58 10,627.00 (340.91) (303.09) 3,041.54 260.93 13,452.47 (280.99) (112.58) 2,695.34 229.30 13,312.36 (240.46) (28.58) 2,534.74 196.09 12,544.50 (242.98) (34.52) 2,066.43 158.14 11,583.92 178.93 32.94 2,400.74 126.51 1,1482.75 (165.09) (88.44) (14.99) (23.06) 4.03 (435.34) (532.72) (720.44) (405.77) (755.44) (1,809.48) (724.31) (3,343.23) (726.61) (3,621.06) 812.29 2,671.96 1,194.50 1,848.39 61.17 41.08 2,102.74 1,242.79 1,939.33 67.51 87.08 1,640.20 1,262.42 1,488.38 46.32 237.28 2,707.86 1,223.56 1,127.90 44.86 403.73 4,086.18 935.38 1,045.18 120.88 512.37 4,100.85 541.70 835.12 59.99 0.79 4,663.29

Profit & loss Account (Analyzed Data)

(Rs. in Lacs) March 2000
PERIOD 12 9,679.84 515.59 223.82 10,419.25

Particulars

March 2001
12 7,373.03 700.10 257.71 8,330.84

March 2002
12 3,214.73 699.48 105.05 4,019.26

March 2003
12 2,363.78 625.54 (6.44) 2,982.88

March 2004
12 2,757.16 451.35 (181.50) 3,027.01

March 2005
12 4,340.46 233.54 (322.13) 4,251.87

INCOME:
Sales Other Income Stock Adjustments Total Income (A)

EXPENDITURE
Raw Materials Excise Duty Other Manufacturing Exp. Employee Cost Selling and Admin. Exp. Interest & Financial Charges Depreciation TOTAL (B) 3,318.12 2,170.30 417.56 764.64 414.78 282.68 7,944.04 2,444.04 (318.75) 6.94 Excess provisions Proposed Dividend, not approved (9697) Corporate Tax on Dividend, not approved (96-97) B/F Surplus Balance in P&L A/c PROFIT AVAILABLE FOR APPROPRIATION 2,163.40 1,097.65 7.50 1,511.17 1,127.12 7.50 958.37 (20.37) (20.37) (1,721.59) (10.36) 75.00 75.00 2,297.80 1,392.50 452.39 858.57 964.81 492.16 7,019.81 1,311.03 (216.25) 2.87 1,031.46 450.49 532.23 583.53 1,002.07 569.44 4,452.86 (433.60) (45.69) 12.74 784.73 279.51 568.15 494.50 996.20 556.71 3,916.95 (934.07) (1.68) (144.07) 18.58 809.83 318.97 592.38 499.31 1,106.14 496.57 4,171.56 (1,144.55) (3.97) (576.27) 23.57 954.96

645.59 537.84 790.80 464.17 4,259.93 (8.06) (3.06) 0.76

PROFIT/LOSS (A-B)
Provision For Taxation Prior Period Expenses Adjustment For Earlier years Short/

CHAPTER 7 DATA INTERPRETATION AND ANALYSIS OPERATING CYCLE STATEMENT RATIO ANALYSIS

 COMMON SIZE STATEMENT TREND ANALYSIS CORELATION ANALYSIS

DATA INTERPRETATION AND ANALYSIS

The data collected from secondary sources was assembled, screened, sorted, Evaluated in line with the objectives of the study and has been incorporated in this Project. The data collected from the Balance Sheet, Profit and Loss Account, and Cash Flow Statement and through interview was mostly qualitative in nature. Through the primary data following statements are analyses:

Operating Cycles Analysis

 Correlation Analysis Common Size Statement Trend Analysis Ratio Analysis

All the above statements are helpful to know the financial position of the firm, need of working capital and needs of resources etc. OPERATING CYCLE

Operating Cycle is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The Operating Cycle of a manufacturing company involves three phases:

Acquisition of resources such as Raw material, Labour, Power and

Fuel etc.
Manufacturing of the product which includes conversion of raw

material into work in progress into finished goods.

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

account receivable for collection.

These phases affect cash flows, which most of the time, are neither synchronized nor certain. They are not synchronized because cash outflows usually occur before cash inflows. Cash inflows are not certain because sales and collections which give rise to ash inflows are difficult to forecast accurately. Cash Outflows, on the other hand, are relatively certain. The firm

is, therefore, required to invest in current assets for a smooth, uninterrupted functioning.

Stock of raw material and work in process are kept to ensure smooth production and to guard against non availability of raw material and other components.

The firm holds stock of finished goods to meet the demands of customers on continuous basis and sudden demand from some customer.

Gross Operating Cycle(GOC) is also known as the length of the operating cycle is the sum of i) Inventory conversion Period(ICP) and ii) Debtors Conversion Period(DCP). The Inventory conversion period is the total time

needed for producing and selling the product. The Debtors conversion period is the time required to collect the outstanding amount from the customers.

The Payables Deferral Period (PDP) is the length of time the firm is able to defer payments on various resource purchases.

Net Operating Cycle also represents the cash conversion cycle. It is net time interval between cash collection from sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations. The firm has to negotiate Working capital from sources such as commercial banks. The negotiated sources of working capital financing are called non- spontaneous sources. If net operating cycle of a firm increases, it means further need for negotiated working capital.

Purchase

Payment

Credit Sales

Collection

RMCP + WIPCP + FGCP Inventory conversion period Payables Receivable conversion price Net operating cycle Gross operating cycle

FIG:

OPERATING CYCLE OF A MANU7FACTURING FIRM

(B) OPERATING CYCLE ANALYSIS Calculation for Holding Periods: Particulars PERIOD 1 2 3 4 Raw Material Consumed Average Raw Material Inventory Raw Material Turnover (1/2) Raw Material Holding Period (365 days/ Raw Material Turnover) 5 6 7 8 Cost of Production Average Work-in-Progress Work-in-progress Turnover (5/6) Work-in-Progress Holding Period (365 Days/7) 9 10 11 12 Cost of Goods Sold Average Finished Goods Inventory Finished Goods Turnover (9/10) Finished Goods Holding Period (365 Days/11) 13 14 Credit Sales Average Debtors March March 2000 12 3,318. 12 644.91 5.15 71 Days 5,753. 59 270.6 1 21.26 17 Days 5,682. 16 59.69 85.19 4 Days 9,111. 32 1,248. 2001 12 March 2002 12 (Rs. In lacs) March 2003 12 784.73 440.89 1.78 205 Days March 2004 12 809.83 371.34 2.18 167 Days March 2005 12 954.96 282.23 3.38 108 Days

2,297. 1,031.4 80 647.25 3.55 103 Days 6 499.82 2.06 177 Days

3,841. 1,887.6 1,642.7 1,916.6 2,483.7 78 497.26 7.73 47 Days 5 711.33 2.56 137 Days 9 769.39 2.14 170 Days 9 666.44 2.88 126 Days 9 418.00 5.94 63 Days

3,884. 1,909.1 1,638.8 1,902.6 2,504.5 98 73.80 52.64 7 Days 2 41.47 46.00 8 Days 3 32.72 50.09 7 Days 8 41.70 45.62 8 Days 6 38.32 65.35 6 Days

6,753. 2,984.7 1,499.3

730.12 79 5 0 1,893. 1,713.8 1,308.1 1,086.5

606.89 940.15

15 16

Debtors Turnover (13/14) Debtors Conversion Period (365 Days/15)

15 7.30 50 Days 3,532. 23 294.78 11.98 30 days

86 3.57 102 Days 2,088. 37 577.93 3.61 101 days

6 1.74 210 Days 946.03 737.98 1.28 285 days 1.15 317

4 0.67 545

4 0.64 570 Days 759.09 769.45 0.99 370 days

Days 752.31 739.88 1.02 359 days

Days 703.15 725.46 0.97 376 days

17 18 19 20

Credit Purchases Average Creditors Creditors turnover (17/18) Deferral Payment Period (365 Days/19) Eg:

The length of the Operating Cycle of a manufacturing firm: Gross Operating Cycle = Inventory + Debtors conversion period conversion period 1) GOC = = = ICP + DCP

92 + 50 142 DAYS + FGCP + 4

2) ICP = RMCP + WIPCP = = 71 + 17 92 DAYS

3) Payable deferral period (PDP) = 30 DAYS 4) Net operating Cycle = Gross + Operating cycle NOC = = = GOC PDP 30 Payable deferral period

142 112 DAYS

Years

200 0

200 1 158

200 2 247

200 3 340

200 4 470

2005 377

Net Working Capital (In Days) 112

Net Working Capital Net working capital (In days) 500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 net working years capital 112 158 247 340 470 377

CORRELATION ANALYSIS

The Correlation is a statistical tool which studies the relationship between two variables and correlation analysis involves various methods and

techniques used for studying and measuring the extent of the relationship between two variables.

Definitions: Correlation is an analysis of the co-variation between two or more variables - By A.M.Tuttle. When the relationship is of a quantitative nature, the appropriate statistical tool for discovering and measuring the relationship and expressing it in a brief formula is known as correlation. - By Craxton and Cowden. Two variables are said to be correlated if the change in one variable results in a corresponding change in the other variable. Types of Correlation
a) Positive and Negative Correlation: i) Positive Correlation: If

the values of the two variables deviate in the same direction i.e., if the increase in the values of one variable results, on an

average, in a corresponding increase in the value of the other variable and vis-a-versa. ii) Negative Correlation: If the values of the two variables deviate in the opposite direction i.e., if the increase in the values of one variable results, on an average, in a corresponding decrease in the value of the other variable and vis-a-versa.

b) Linear and Non Linear Correlation: i) Linear Correlation:

The Correlation between two variables is said to be linear if corresponding to a unit change in one variable, there is a constant change in the other variable over the entire range of the values. ii) Non Linear Correlation: The Correlation between two

variables is said to be non linear if corresponding to a unit change in one variable, there is not a constant change but at a fluctuating rate in the other variable over the entire range of the values.

Coefficient of Correlation

The Coefficient Correlation (rxy) is a numerical measures of linear relationship between two variables series and is defined as the ratio of the covariance between X and Y, to the product of the standard deviation of X and Y, Symbolically,
Cov. (x,y) S.Dx . S.Dy S.Dx = 1/n (x-x )2 S.Dy = 1/n (y-y ) 2

r=
Cov. (x,y) = 1/n (x-x )(y-y )

rxy

(x-x )(y-y ) (x-x )2 (y-y ) 2

Part I Financial Ratios Selected for Correlation Analysis

Period ended
No. Of months (X1) Current Ratio (X2) Quick Ratio (X3) Cash Position Ratio (X4) Working Capital Turnover Ratio (X5) Inventory Turnover Ratio (X6) Debtors Turnover Ratio (X7) Cash Turnover Ratio (X8) Net Working Capital Ratio (X9) Current Assets Turnover Ratio 50 days (X10) Average Collection Period days (Y) PBDIT to Total Assets 0.251 0.180 0.070 0.037 0.028 0.082 102 210 days 317 days 545 days 570 days

March March 2000

12 2.64 2.04 1.2% 4.33 5.82 7.30 27.28 0.32 2.61

March 2002
12 1.88 1.47 0.8% 1.12 1.52 1.74 53.53 0.21 0.60

March 2003
12 1.58 1.30 0.7% 0.90 1.32 1.15 95.45 0.21 0.37

March 2004
12 1.44 1.24 1.8% 1.20 1.76 0.67 56.09 0.18 0.41

March 2005
12 1.65 1.50 0.1% 1.94 3.39 0.64 40.91 0.21 0.68

2001
12 2.57 1.93 1.4% 2.34 3.88 3.57 30.08 0.23 1.44

EG:
X1 2.6 X2 2.0 U (X1-1.65) V( X2-1.47) 0.99 0.57 U2 0.9801 V2 o.3249 UV 0.5643

2.5

1.9

0.92

0.46

0.8464

0.2116

0.4232

1.8

1.5

0.23

0.03

0.0529

0.0009

0.0069

1.6

1.4

1.5

1.3

-0.07

-0.17

0.0049

0.0289

0.119

1.4

1.2

-0.21

-0.23

0.0441

0.0529

0.0483

U = 1.86

V = 0.66

U2=1.948 4

V2=0.619 2

UV=1.054 6

ruv

n UV ( U)( V) [n U2 ( U)2][ n V2 ( V)2]

6*1.0546 1.86* 0.66 [6* 1.9484 ( 1.86)2] [6* 0.6192 (0.66)2]

0.981

Correlation Among Ratios

X1 X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 Y

X2 0.981

X3 0.846 0.842

X4 0.642 0.696 0.624

X5 0.751 0.850 0.743 0.717

X6 0.490 0.598 0.496 0.566 0.746

X7 0.984 0.974 0.843 0.681 0.800 0.550

X8 0.814 0.847 0.649 0.736 0.844 0.677 0.878

X9 0.901 0.932 0.837 0.768 0.930 0.706 0.940 0.957 0.978

X10 -0.328 -0.647 -0.530 -0.476 -0.725 -0.916 -0.445 -0.445 -0.565 -0.573

0.960

0.986

0.853

0.742

0.904

0.864

0.975

0.911

GRAPHICAL REPRESENTATION OF CORRELATION ANALYSIS 1)

X1 X1 X2 0.981 X3 0.846 X4 0.642 X5 0.751 X6 0.490 X7 0.984 X8 0.814 X9 0.901 X10 -0.328

X1 X1 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 -0.4 0.981 0.984 0.642 0.751 0.49 0.814 0.901

0.846

X1

X2

X3

X4

X5

X6

X7

X8

X9

X10 -0.328

2)
X1 X2 X2 X3 0.842 X4 0.696 X5 0.85 X6 0.598 X7 0.974 X8 0.847 X9 0.932 X10 -0.647

X2 X2 1.5 1 0.5 0 -0.5 -1 X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 -0.647 0.842 0.696 0.85 0.598 0.974 0.847 0.932

3)
X1 X3 X2 X3 X4 0.624 X5 0.743 X6 0.496 X7 0.843 X8 0.649 X9 0.837 X10 -0.53

X3 1 0.5 0 -0.5 -1 X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 -0.53 0.624 0.743 0.496 0.843 0.837

0.649

X3

4)

X1 X4

X2

X3

X4

X5 0.717

X6 0.566

X7 0.681

X8 0.736

X9 0.768

X10 -0.476

X 4

X 4

1 0.5 0 -0.5 -1 X1 X2 X 3 X4 X5 X6 0.717

0.736 0.768 0.566 0.681

X 7

X 8

X9

X 10 -0.476

5)
X1 X5 X2 X3 X4 X5 X6 0.746 X7 0.8 X8 0.844 X9 0.93 X10 -0.725

X 5 1.5 1 0.5 0 -0.5 -1 X 1 X 2 X 3 X 4 X 5 X 6 X 7 X 8 0.746 0.8 0.844

X 5

0.93

X 9 X 10 -0.725

6)
X1 X6 X7 X2 X3 X4 X5 X6 X7 0.55 X8 0.677 0.878 X9 0.706 0.94 X10 -0.916 -0.445

X6 1.5 1 0.5 0 -0.5 -1 -1.5 X1 X2 X3 X4 X5 X6

X7

0.55

0.878 0.677

0.94 0.706

X7

X8

X9

-0.445 X10 -0.916

7)
X1 X8 X9 X2 X3 X4 X5 X6 X7 X8 X9 0.957 X10 -0.445 -0.565

1 .5 1 0 .5 0 -0 .5 -1 X 1 X 2 X 3 X 4 X 5 X 6 X 7 X 8 X 9 -0 6 .5 5 X0 1 -0 4 .4 5 0 5 .9 7 X 8 X 9

8)
X1 Y 0.96 X2 0.986 X3 0.853 X4 0.742 X5 0.904 X6 0.864 X7 0.975 X8 0.911 X9 0.978 X10 -0.573

Y 1.5 1 0.5 0 -0.5 -1 X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 -0.573 0.96 0.9860.853 0.9040.8640.9750.9110.978 0.742 Y

COMPARATIVE STATEMENTS ANALYSIS A simple method of tracing periodic changes in the financial performance of a company is to prepare comparative statement. Comparative financial statement will contain items at least for two years. Changes increases and decreases in Income statement and Balance sheet over period can be shown in two ways: 1) Aggregate Changes Changes. 2) Proportional

Aggregate Changes can be indicated by drawing special columns for aggregate amount or percentage, or both, of increases and decreases. Recording percentage calculated in relation to a common base in special columns on the other hand, shows relative, or Proportional, Change. For e.g. in case of Profit and Loss statement, Sales figure is assumed to be common base (and therefore, equal to 100) and all other items are expressed as percentage of sales. Similarly, the Balance sheet items are expressed as percentage of total assets or total funds. The financial statements prepared in terms of common base percentages are called common size statements. This kind of analysis is called Vertical analysis and it indicates static relationships since relative changes are studied at a specific date.

An investigation of the comparative statements helps to highlight the significant facts and points out the items which need further analysis. From analytical point of view, such statements are quite useful to investors.

(3) Common Size Statement Analysis Calculation of Common Size Statement of Balance Sheet
Period ended March 2000
No. Of months 12

March 2001
12

March 2002
12

March 2003
12

March 2004
12

March 2005
12

SOURCES OF FUNDS:
Share Capital Reserves & Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Deferred Liabilities TOTAL 14.12 29.72 43.84 44.33 8.59 52.92 3.24 100.00 11.15 29.49 40.64 45.64 11.55 57.01 2.35 100.00 11.27 26.60 37.87 47.97 11.76 59.73 2.40 100.00 12.30 20.43 32.73 54.96 9.57 64.53 2.74 100.00 14.82 7.44 22.26 71.49 3.22 74.71 3.03 100.00 14.95 7.41 22.36 72.07 2.58 74.65 2.99 100.00

APPLICATION OF FUNDS:
Gross Block Less: Accum. Depreciation Net Block 43.33 5.11 38.22 51.91 7.58 44.33 57.03 11.86 45.17 61.45 16.93 44.53 66.23 22.40 43.83 65.35 25.41 39.94

Capital Work in Progress Investments

6.62 21.72

2.80 28.32

0.90 31.96

33.71

36.97

38.05

Inventories Sundry Debtors Cash and Bank Balance Other Current Assets Loans and Advances Current Assets

11.24 17.39 0.58 0.39 19.79 49.39

9.24 14.42 0.50 0.65 12.19 37.00

9.48 11.18 0.35 1.78 20.34 43.13

9.50 8.99 0.36 3.22 32.57 54.89

8.07 9.02 1.04 4.42 35.40 57.96

4.72 7.27 0.52 0.01 40.61 53.13

Sundry Creditors Adv. From customers Interest accrued But not Due Other Liabilities Provisions Current Liabilities

4.10 5.01 1.21 3.34 5.07 18.73

5.36 3.02 1.23 2.53 2.25 14.39

5.67 13.59 0.66 2.11 0.85 22.88

5.77 26.65 0.12 1.92 0.23 34.69

6.27 31.26 0.20 2.10 0.30 40.13

7.07 23.27 0.04 1.56 0.28 32.22

Net Current Assets(CA-CL)

30.65 2.78

22.61 1.94 100.00

20.25 1.72 100.00

20.20 1.56 100.00

17.83 1.37 100.00

20.91 1.10 100.00

TOTAL

100.00

Calculation of Common size statement of Working Capital Components

Period ended

March 2000

March 2001
12

March 2002
12

March 2003
12

March 2004
12

March 2005
12

No. Of months

12

CURRENT ASSETS Inventories Sundry Debtors Cash and Bank Balance Other Current Assets Loans and Advances

100.00 22.76 35.22 1.17 0.78 40.07

100.00 24.97 38.97 1.36 1.57 32.95

100.00 21.98 25.92 0.81 4.13 47.16

100.00 17.17 16.38 0.65 5.86 59.34

100.00 13.93 15.57 1.80 7.63 61.07

100.00 8.88 13.69 0.98 76.44

CURRENT LIABILITIES Sundry Creditors Adv. From customers Interest accrued But not Due Other Liabilities Provisions Net Working Capital

37.93 8.30 10.15 2.46 6.75 10.27 62.07

38.89 14.48 8.15 3.32 6.85 6.09 61.07

53.06 13.16 31.51 1.54 4.89 1.96 46.94

63.19 10.52 48.54 0.22 3.49 0.42 36.81

69.22 10.82 53.93 0.34 3.62 0.51 30.78

60.65 13.31 43.80 0.07 2.93 0.54 39.35

Calculation of Common Size Statement of Profit and Loss Account

Particulars
No. Of months A B Net Sales (Sales-Excise Duty) Raw Materials

March 2000
12 100.00 36.45

March March March March 2001

12 100.00 33.73

March 2005
12 100.00 23.65

2002
12 100.00 35.19

2003
12 100.00 36.90

2004
12 100.00 33.62

C D E

Other Manufacturing Exp. (Exclude 23.84 Excise Duty) Employee Cost Increase/decrease in Finished & WIP Goods 4.59 2.46 37.58 8.39 5.66 34.85 3.11 31.74 4.56 27.18 3.42 23.76 20.44 6.64 3.78 42.96 12.60 10.28 40.64 7.23 33.41 14.16 19.25 3.13 16.12 15.37 18.16 3.59 34.87 19.91 23.86 38.82 19.43 19.39 34.19 (14.80) 1.12 (15.92) 13.14 26.72 (0.30) 22.94 23.25 29.41 29.10 26.18 2.92 46.84 43.92 (0.78) (43.14) 13.24 24.59 (7.53) 21.02 20.73 18.74 19.03 20.62 (1.59) 45.92 (47.51) (0.81) (46.70) 13.97 15.99 (7.98) 38.41 13.32 5.78 30.87 11.49 19.38 19.58 (0.20) 0.06 (0.26)

F G H I J K

Gross Profit (A-B-C-D+E) Selling and Administration Exp. Other Income Operating Profit (F-G+H)) Depreciation Profit/Loss Before Interest & Tax (J-I)

L M N O

Interest & Financial Charges Profit/Loss Before Tax (K-L) Taxation Profit/loss After Tax (M-N)

TREND ANALYSIS In financial analysis the direction of changes over a period of years is of crucial importance. Time series or trend analysis of ratios indicates the direction of change. This kind of analysis is particularly applicable to the items of profit and loss account. It is advisable that trends of sales and net income may be studied in the light of two factors: the rate of fixed expansion or secular trend in the growth of the business and the general price level. It might be found in practice that a number of firms would show a persistent growth over a period of years. But to get a true trend of Growth, the sales figure should be adjusted by a suitable index of general prices. When the resulting figures are shown on a graph, we will get trend of growth devoid of

price changes. Another method of securing trend of growth and one which can be used instead of the adjusted sales figures or as check on them is to tabulate and plot the output or physical volume of sales expressed in suitable units of measure. If the general price level is not considered while analyzing trend of growth, it can mislead management. They may become unduly optimistic in periods of prosperity and pessimistic in dull periods. For, Trend analysis, the use of index numbers is generally advocated. The procedure followed is to assign the number 100 to items of the base year and to calculate percentage changes in each items of other years in relation to the base year. This Procedure may be called as trend percentage method. (2) Index Analysis :Calculation of Index Trend of Balance Sheet
Period ended
No. Of months

March 1998
12

March 1999
12

March 2000
12

March 2001
12

March 2002
12

March 2003
12

SOURCES OF FUNDS:
Share Capital Reserves & Surplus Total Shareholders Funds Secured Loans Unsecured Loans Total Debt Deferred Liabilities TOTAL 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 125.59 117.35 129.82 170.11 136.36 91.93 126.59 100.00 112.13 108.22 135.55 171.42 141.37 92.89 125.27 102.89 81.14 88.14 146.34 131.52 143.94 99.62 118.04 114.47 27.28 55.35 175.77 40.91 153.88 101.87 109.00 114.47 26.95 55.13 175.66 32.45 152.42 99.44 108.05

APPLICATION OF FUNDS:
Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Other Current Assets Loans and Advances Current Assets Sundry Creditors Adv. From customers Interest accrued But not Due Other Liabilities Provisions Current Liabilities 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 151.66 188.04 146.80 53.60 165.02 104.04 104.92 110.36 211.98 78.00 94.84 165.49 76.17 127.94 96.19 56.22 97.23 93.38 88.28 126.59 76.17 164.88 291.07 148.03 16.98 184.31 105.69 80.52 75.72 577.60 128.78 109.42 173.53 339.67 68.54 79.28 20.88 153.07 82.75 77.58 125.27 33.21 167.42 391.41 137.49 183.15 102.43 61.02 73.34 982.79 194.42 131.22 166.38 672.58 11.62 67.84 5.30 218.60 77.82 66.34 118.04 24.42 166.63 478.32 125.00 185.46 78.31 56.55 197.61 1247.25 195.02 127.95 166.91 679.73 17.87 68.56 6.40 233.51 63.44 53.50 109.00 28.48 162.97 537.67 112.91 189.22 45.35 45.18 98.07 1.92 221.77 116.25 186.59 501.57 3.12 50.48 6.11 185.88 73.70 42.80 108.05 45.28

Net Current Assets(CA-CL) Miscellaneous Expenditure TOTAL Sales

Calculation of Index trend of Profit and Loss Account

Particulars
No. Of months A B C D E Net Sales (Sales-Excise Duty) Raw Materials Other Manufacturing Exp.(Exclude 100.00 Excise Duty) Employee Cost Increase/decrease in Finished & WIP Goods F G H I J K Gross Profit (A-B-C-D+E) Selling and Administration Exp. Other Income Operating Profit (F-G+H)) Depreciation Profit/Loss Before Interest & Tax (J-I) L M N O Interest & Financial Charges Profit/Loss Before Tax (K-L) Taxation Profit/loss After Tax (M-N) 100.00 100.00 100.00 100.00 232.61 52.97 68.43 50.74 241.59 (17.52) 10.57 (21.57) 240.44 (37.74) (5.42) (42.39) 266.68 (46.24) (6.29) (51.99) 190.66 (0.33) 0.74 (0.48) 100.00 100.00 100.00 100.00 100.00 100.00 85.56 112.28 135.79 87.25 174.10 68.43 29.58 76.31 135.67 35.87 201.44 (10.57) 14.26 64.68 121.33 19.51 196.94 (5.42) 14.80 65.30 87.54 14.45 175.73 (6.29) 44.82 70.34 45.29 39.30 164.20 (0.74) 100.00 100.00 64.16 108.77 115.10 20.76 126.56 46.94 12.88 132.08 (2.88) 14.70 138.98 (81.09) 25.98 147.78 (143.92)

March 2000
12 100.00 100.00

March 2001
12 74.82 68.25

March 2002
12 32.20 31.09

March 2003
12 23.35 23.65

March 2004
12 30.29 24.41

March 2005
12 44.35 28.78

RATIO ANALYSIS The following, easily calculated, ratios are important measures of working capital utilization. Ratio Stock Turnover (in days) Formulae Result Interpretation Average = x On average, you turn over the value Stock * 365/ days of your entire stock every x days. Cost of You may need to break this down Goods Sold into product groups for effective stock management.

Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies due to you. If your official credit terms are 45 day and * = x it takes you 65 days... why? days One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days.

Receivables Ratio (in days)

Debtors 365/ Sales

Payables Ratio (in days)

On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If Creditors * you pay earlier, say, to get a 365/ discount this will decline. If you = x Cost of Sales simply defer paying your suppliers days (or (without agreement) this will also Purchases) increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Total Current = x Assets/ times Total Current Liabilities Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 time e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming

Current Ratio

demands. (Total Current Assets Quick Ratio Inventory)/ Total Current Liabilities (Inventory + Working Receivables Capital Payables)/ Ratio Sales Similar to the Current Ratio but = x takes account of the fact that it may times take time to convert inventory into cash. A high percentage means that As % working capital needs are high Sales relative to your sales.

Period ended No. Of months Current Ratio Quick Ratio Cash Position Ratio Working Capital Turnover Ratio Inventory Turnover Ratio Debtors Turnover Ratio Cash Turnover Ratio Net Working Capital Ratio Current Assets Turnover Ratio Average Collection Period PBDIT to Total Assets Payables Ratio (in days)

March March 2000

12

March 2002
12

March 2003
12

March 2004
12

March 2005
12

2001
12

2.64 2.04 1.2% 4.33 5.82 7.30 27.28 0.32 2.61

2.57 1.93 1.4% 2.34 3.88 3.57 30.08 0.23 1.44

1.88 1.47 0.8% 1.12 1.52 1.74 53.53 0.21 0.60

1.58 1.30 0.7% 0.90 1.32 1.15 95.45 0.21 0.37

1.44 1.24 1.8% 1.20 1.76 0.67 56.09 0.18 0.41

1.65 1.50 0.1% 1.94 3.39 0.64 40.91 0.21 0.68

50 days 0.251 30 days

102 days 0.180 101 days

210 days 0.070 285 days

317 days 0.037 359 days

545 days 0.028 376 days

570 days 0.082 370 days

CHAPTER 8 LIMITATION

LIMITATION AND PROBLEMS OF THE STDY

LIMITATIONS OF THE STUDY This is my first project in finance and I am inexperienced (although our professor helped us a lot).

 The company APL has not revealed all the information to us, as no organization reveals its facts to outsiders. Time has been a killer to me as I got only 2 days in APL and exactly 2 hours/day of discussions. I also got eight weeks to complete my project. The values in the projects are given in monetary terms and not in quantitative terms. All the things are in rupees and nothing is in kilograms or meters. Problems. First, given the level of sales and the relevant cost considerations, what are the optimal amounts of cash, accounts receivable and inventories that a firm should choose to maintain? Second, given these optimal amounts, what is the most economical way to finance these working capital investments? To produce the best possible results, firms should keep no unproductive assets and should finance with the cheapest available sources of funds. Why? In general, it is quite advantageous for the firm to invest in short term assets and to finance short-term liabilities

BIBLIOGRAPHY

BIBLIOGRAPHY

FINANCIAL MANAGEMENT I M PANDEY. FUNDAMENTAL OF STATISTICS S. C. GUPTA. BUSINESS PLAN PREPARATION THE OPEN LEARNING PROGRAM IN ENTERPRENEURSHIP. ANNUAL REPORT