a study on working capital management
TRANSCRIPT
Chapter No.
Chapter Title Page no.
01. INTRODUCTION
1.1General Introduction
1.2Theoretical Background
02. DESIGN OF THE STUDY
2.1 Statement of the problem
2.2 Objectives of the Study
2.3 Scope of the Study
2.4 Research Methodology
2.5 Limitation of the Study
2.6 Operational definition of concepts
2.7 Overview of the Chapter
03. Company Profile
04. Analysis and Interpretation of Working Capital Management
05. Summary
Findings, Suggestion and Conclusions
06. Bibliography
Name of the authors and websites which is used for the project purposes at the end of the project
CHAPTER 1
INTRODUCTION OF
THE STUDY
1. INTRODUCTION
1.1 GENERAL INTRODUCTION OF THE STUDY
A managerial accounting strategy focusing on maintaining efficient levels of
both components of working capital, current assets and current liabilities, in
respect to each other. Working capital management ensures a company has
sufficient cash flow in order to meet its short-term debt obligations and operating
expenses. Implementing an effective working capital management system is an
excellent way for many companies to improve their earnings. The two main
aspects of working capital management are ratio analysis and management of
individual components of working capital. A few key performance ratios of a
working capital management system are the working capital ratio, inventory
turnover and the collection ratio. Ratio analysis will lead management to identify
areas of focus such as inventory management, cash management, accounts
receivable and payable management.
A measure of both a company's efficiency and its short-term financial health.
The working capital ratio is calculated as:
Positive working capital means that the company is able to pay off its short-term
liabilities. Negative working capital means that a company currently is unable
to meet its short-term liabilities with its current assets (cash, accounts receivable
and inventory).
Also known as "net working capital", or the "working capital ratio".
If a company's current assets do not exceed its current liabilities, then it may run
into trouble paying back creditors in the short term. The worst-case scenario is
bankruptcy. A declining working capital ratio over a longer time period could also
be a red flag that warrants further analysis. For example, it could be that the
company's sales volumes are decreasing and, as a result, its accounts receivables
number continues to get smaller and smaller.
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 cannot be used to pay off any of the
company's obligations. So, if a company is not operating in the most efficient
manner (slow collection), it will show up as an increase in the working capital.
This can be seen by comparing the working capital from one period to
another; slow collection may signal an underlying problem in the company's
operations.
1.2 THEORITICAL BACKGROUND OF STUDY
IMPORTANCE OF WORKING CAPITAL MANAGEMENT:
Decisions relating to and short term financing are referred to as working capital
management. These involve managing the relationship between a firm's and its .
As above, the goal of Corporate Finance is the maximization of firm value. In the
context of long term, capital investment decisions, firm value is enhanced through
appropriately selecting and funding NPV positive investments. These investments,
in turn, have implications in terms of cash flow and The goal of Working capital
management is therefore to ensure that the firm is able to and that it has sufficient
cash flow to service long term debt, and to satisfy both maturing short-term debt
and upcoming operational expenses. In so doing, firm value is enhanced when, and
if, the exceeds the cost of capital;
DECISION CRITERIA
Working capital is the amount of capital which is readily available to an
organization. That is, working capital is the difference between resources in cash
or readily convertible into cash (Current Assets), and cash requirements (Current
Liabilities). As a result, the decisions relating to working capital are always
current, i.e. short term, decisions.
In addition to working capital decisions differ from capital investment decisions in
terms of and profitability considerations; they are also "reversible" to some extent.
(Considerations as to \and return targets remain identical, although some
constraints - such as those imposed by - may be more relevant here).
Working capital management decisions are therefore not taken on the same basis
as long term decisions, and working capital management applies different criteria
in the main considerations are (1) cash flow / liquidity and (2) profitability / return
on capital (of which cash flow is probably the more important).
The most widely used measure of cash flow is the net operating cycle, or. This
represents the time difference between cash payment for raw materials and cash
collection for sales. The cash conversion cycle indicates the firm's ability to
convert its resources into cash. Because this number effectively corresponds to the
time that the firm's cash is tied up in operations and unavailable for other activities,
management generally aims at a low net count. (Another measure is gross
operating cycle which is the same as net operating cycle except that it does not take
into account the creditors deferral period.)
In this context, the most useful measure of profitability is (ROC). The result is
shown as a percentage, determined by dividing relevant income for the 12 months
by capital employed (ROE) shows this result for the firm's shareholders. As above,
firm value is enhanced when, and if, the return on capital, exceeds the. ROC
measures are therefore useful as a management tool, in that they link short-term
policy with long-term decision making.
MANAGEMENT OF WORKING CAPITAL
Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing
the general and the short term financing, such that cash flows and returns are
acceptable.
Identify the cash balance which allows for the business to meet day to day
expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for
uninterrupted production but reduces the investment in raw materials - and
minimizes reordering costs - and hence increases cash flow; see (EPQ).
Debtor’s management. Identify the appropriate, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion
cycle will be offset by increased revenue and hence Return on Capital (or vice
versa).
Short term financing. Identify the appropriate source of financing, given the
cash conversion cycle: the inventory is ideally financed by credit granted by the
supplier; however, it may be necessary to utilize a bank (or overdraft), or to
"convert debtors to cash" through.
COMPONENTS OF WORKING CAPITAL MANAGEMENT:
CURRENT ASSETS:
In , a current asset is an on the which is expected to be sold or otherwise used up
in the near future, usually within one year, or one operating cycle whichever is
longer. Typical current assets include, cash Equivalents, receivable, inventory, the
portion of prepaid accounts which will be used within a year, and short-term
investments. Operating cycle is the average time that is required to go from cash to
cash in producing revenues. On the, assets will typically be classified into current
assets and The is calculated by dividing total current assets by total. It is frequently
used as an indicator of a company’s liquidity, its ability to meet short-term
obligations.
A balance sheet account that represents the value of all assets that are reasonably
expected to be converted into cash within one year in the normal course of
business. Current assets include cash, accounts receivable, inventory, marketable
securities, prepaid expenses and other liquid assets that can be readily converted to
cash.
In personal finance, current assets are all assets that a person can readily convert
to cash to pay outstanding debts and cover liabilities without having to sell fixed
assets.
Current assets are important to businesses because they are the assets that are used
to fund day-to-day operations and pay ongoing expenses. Depending on the nature
of the business, current assets can range from barrels of crude oil, to baked goods,
to foreign currency.
In personal finance, current assets include cash on hand and in the bank, and
marketable securities that are not tied up in long-term investments. In other words,
current assets are anything of value that is highly liquid.
Current Assets = Cash +Bank + Debtors + Bills Receivable + Short Term
Investment + Inventory + Prepaid Expenses
CURRENT LIABILITIES:
A company's debts or obligations that are due within one year. Current liabilities
appear on the company's balance sheet and include short term debt, accounts
payable, accrued liabilities and other debts.
Essentially, these are bills that are due to creditors and suppliers within a short
period of time. Normally, companies withdraw or cash current assets in order to
pay their current liabilities.
Analysts and creditors will often use the current ratio, (which divides current assets
by liabilities), or the quick ratio, (which divides current assets minus inventories by
current liabilities), to determine whether a company has the ability to pay off its
current liabilities.
Current Liabilities = Creditors +Bank Overdraft+ Bills payables+ Outstanding
expenses+ Accounts payables
CONCEPTS OF WORKING CAPITAL
Working capital (abbreviated WC) is a financial metric which represents liquidity
available to a business, organization, or other entity, including governmental
entity. Along with fixed assets such as plant and equipment, working capital is
considered a part of operating capital. it is calculated as and net working capital is
calculated as assets minus. It is a derivation of working capital, that is commonly
used in valuation techniques such as DCFs (Discounted cash flows). If current
assets are less than current liabilities, an entity has a working capital deficiency,
also called a working capital deficit.
Working Capital = Current Assets
Net Working Capital = Current Assets − Current Liabilities
A company can be endowed with and but short of if its assets cannot readily be
converted into cash. Positive working capital is required to ensure that a firm is
able to continue its operations and that it has sufficient funds to satisfy both
maturing short-term debt and upcoming operational expenses. The management of
working capital involves managing inventories, accounts receivable and payable
and cash.
Finished Goods
Accounts Receivables
Work in Progress
Wages, Salaries Overheads
Cash
Raw Materials
Supplier of Raw Materials
WORKING CAPITAL CYCLE:
The working capital cycle can be defined as:
The period of time which elapses between the point at which cash begins to be
expended on the production of a product and the collection of cash from a
customer
The diagram below illustrates the working capital cycle for a manufacturing firm
CURRENT ASSETS CYCLE
The upper portion of the diagram above shows in a simplified form the chain of
events in a manufacturing firm. Each of the boxes in the upper part of the diagram
can be seen as a tank through which funds flow. These tanks, which are concerned
with day-to-day activities, have funds constantly flowing into and out of them.
• The chain starts with the firm buying raw materials on credit.
• In due course this stock will be used in production, work will be carried out on
the stock, and it will become part of the firm’s work in progress (WIP)
• Work will continue on the WIP until it eventually emerges as the finished product
• As production progresses, labor costs and overheads will need to be met
• Of course at some stage trade creditors will need to be paid
• When the finished goods are sold on credit, debtors are increased
• They will eventually pay, so that cash will be injected into the firm
Each of the areas – stocks (raw materials, work in progress and finished goods),
trade debtors, cash (positive or negative) and trade creditors – can be viewed as
tanks into and from which funds flow.
Working capital is clearly not the only aspect of a business that affects the amount
of cash:
• The business will have to make payments to government for taxation
• Fixed assets will be purchased and sold
• Lessors of fixed assets will be paid their rent
• Shareholders (existing or new) may provide new funds in the form of cash
• Some shares may be redeemed for cash
• Dividends may be paid
• Long-term loan creditors (existing or new) may provide loan finance, loans will
need to be repaid from time to time, and
• Interest obligations will have to be met by the business.
Unlike movements in the working capital items, most of these ‘non-working
capital’ cash transactions are not every day events. Some of them are annual events
(e.g. tax payments, lease payments, dividends, interest and, possibly, fixed asset
purchases and sales). Others (e.g. new equity and loan finance and redemption of
old equity and loan finance) would typically be rarer events.
CALCULATION
Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers
have the most direct impact:
(current asset)
(current assets), and
(current liability)
The current portion of (payable within 12 months) is critical, because it represents
a short-term claim to current assets and is often secured by long term assets.
Common types of short-term debt are bank loans and lines of credit.
An increase in working capital indicates that the business has either increased (that
is has increased its receivables, or other current assets) or has decreased , for
example has paid off some short-term creditors.
CHAPTER 2
RESEARCH
METHODOLOGY
CHAPTER 2
Design of the Study
A study on Working Capital Management in Sidhi Vinayaka Enterprises.
2.1 Statement of Problem:
Working capital management is the process of identifying the Net working capital.
Excess of Current assets over current liabilities results in working capital. Working
capital is the life blood of the business concern or Organized sectors. The future
plans of the firm should laid on in the views of firm financial strength and
weakness.
Working capital has been one of the most popular areas of research now a day. It
involves the efficient management of cash, Raw materials is processing into WIP
and finished goods, debtors management. It also takes into consideration of a
company perception about current liability i.e the creditors.
The efficient management of working capital is one of the important factor for
success failure of an organization. In the Indian scenario the small scale industry
undertakings have always been a matter of discussion regarding working capital
management. Therefore, in this context there is a need for a study on working
capital management in Small Scale Industrial sector undertaking.
2.2 Objectives of Study:
a) To study the fiancé department by utilizing the theoretical knowledge to
practical situations and to notice difference in practice.
b) To analyze the financial statement to study and Present conclusions.
c) To access the liquidity and solvency of the firm.
d) To evaluate the performance of cash, inventory/stock and receivables.
e) To suggest on Working capital structure.
This basically defines working capital management of the organization in the short
term or current period.
2.3Limitation of the Study:
a) Time was an important limiting factor
b) The study conducted in the Unit I , Unit II and Unit III
c) The study takes into consideration only past 3 years.
2.4 Analysis of Data:
Data has been analyzed by using some of the following techniques of financial
analysis.
a) Statement of changes in working capital
b) Charts and Graphs
c) Ratio Analysis
2.5 Sources of Data Collection:
a) Primary Data: This data has been collected from the Accounts and Finance
department of the company.
b) Secondary Data: Data has been collected from Annual Reports pertaining to
Unit I, Unit II and Unit III.
2.6 Methodology:
a) Data collection: This study is analyzed in nature requiring both primary as well
as secondary data. Primary data is collected through personal enquiries with
officials in Accounts and finance department. Secondary data is collected from
Annual Reports, books and news paper.
b) Accuracy: Accuracy of the reports depends on the responses given by the
respondent and accuracy of secondary data.
In order to study the performance of the Units as a whole a reference period of 3
years has been considered. The period is covered is from 2009-2010, 2008-2009,
2007-2008.
OPERATIONS DEFINED OF CONCEPTS.
1.CURRENT RATIO:
Current ratio is calculated by dividing current assets by current liabilities.
Current Ratio = Current Assets
Current Liabilities
Current assets = Inventories + Sundry Debtors + Cash,
Bank Balances + Other Current assets Loans and
advances, Marketable securities (Short term
investments)
Current Liabilities = Sundry Creditors + Acceptances + Other current liabilities +
Provisions.
The Standard (allowable) ratio is 2:1 or 1:5:1
2.QUICK RATIO:
Quick ratio is also called as Acid Test Ratio.
Quick Ratio = Current Assets – (Inventory + Prepaid Expenses)
Current Liabilities
The most advisable ratio is 1:1
3.NETWORKING CAPITAL RATIO:
It helps the firm to meet current obligations.
Networking Capital Ratio = Current Assets – Current Liabilities
Capital Employed
4. Current assets and networking capital to turnover ratio higher this ratio is the
efficiency of the management.
Current Assets Turnover Ratio = Current Assets
Sales (Turnover)
Networking capital turnover ratio = Networking Capital
Sales (Turnover)
5. DEBTOR TURNOVER RATIO: It indicates the quality of debtors and the
sincerity of their payment.
Debtors Turnover Ratio = Total Debtors + Loans and Advances
Sales/Turnover = All sales is considered Credit Sales
Collection Period = Debtors Turnover Ratio/365
6. INVENTORY TURN OVER RATIO:
This ratio indicates the firm’s efficiency of converting into receivables:
Inventory turnover ratio = Cost of goods sold
Average Inventory
Holding Period = Inventory Turnover Ratio/365
Cost of goods sold has been calculated by preparing a cost sheet
Keeping the PEL a/c balances for calculations.
7. CREDITORS TURNOVER RATIO: This ratio shows the firm’s ability to
meet current liabilities .
Creditors turnover ratio = Total Consumption
Total Creditors
Creditors = Only Sundry Creditors not provisions
Payment period = Creditors turnover ratio/365
OVERVIEW OF THE CHAPTER SCHEME
CHAPTER-I : Introduction to working capital, Definition. Need for working
capital, components of working capital, current assets, current liabilities, concepts
of working capital, types of working capital, factors influencing working capital,
Problems with excess of short age of working capital, optimum level of working
capital, operating cycle analysis, duration of operating cycle, principles of working
capital and its estimation, elements if working capital and sources.
CHAPTER-II:
It consists of methodology used for the study including the statement of the
problem, objectives, limitations, sources of data collection, methodology, operation
definitions of concepts and scope.
CHAPTER-III: COMPANY PROFILE
It includes a detail introduction of the company, Sidhi Vinayaka Enterprises.
CHAPTER-IV:
Working capital management at Sidhi Vinayaka Enterprises. This Chapter deals
with a detail theoretical analysis of the working capital and the constituents of the
sames.
CHAPTER-V:
ANALYSIS AND INTERPRETATION OF DATA:
This chapter analyses and interprets the performance of the division (Sidhi
Vinayaka Enterprises) in comparisons with the company as a whole from the data
collected.
CHAPTER-VI:
FINDINGS AND SUGGESTIONS: Findings, suggestions, and conclusions to
enhance the overall working capital of Sidhi Vinayaka Enterprises.
CHAPTER 3
COMPANY PROFILE
SIDHI VINAYAKA FAB ENGINEERING PVT LTD:
History: During the year 1995, an idea of starting a manufacturing unit on a very
small scale was conceived and the two Directors joined their hands together and
started the industry by name Sidhi Vinayaka Fab Engineering Pvt. Ltd.
Peenya Industrial Area (PIA) is the biggest industrial area in South East Asia,
which is having all the required facilities to feed any industrial requirements and is
just about 25 kms away from Bangalore International Airport. Our Industry is
situated in the vicinity of this PIA and we are the Life Member of this Association.
Our Industry is registered under Small Scale Industry under the Government Act.
We are one of the leading manufacturers and suppliers of Stainless Steel Pressure
Vessels, heavy & light engineering Pharmaceutical application equipments. We
also do general fabrication work of Alloy steels, conventional steel and special
grade steel like Hardox & Weldox, OHNS, HDS.
To perform the above activities, we have a natural ventilated total working area of
10,000 square feet (about 8000 sq. feet for manufacturing activities and about 2000
sq. feet for office & administration) with latest machineries, technologies and good
communication skills.
Vision
Customer is More than a King and our motto is “Quality Assurance & Customer
satisfaction”. To achieve this goal, our employees are playing a very important
role.
Mission
To achieve the goal by reaching higher level of quality, delivering economically in
long term relationship.
Quality Policy
1. Satisfied internal customer, External Customers, through excellence in Quality
of Products and Processes.
2. Continual Improvement in Products, Processes and Quality management system.
3. Satisfied, Motivated and Committed employees.
4. Safe and clean working conditions and Eco-friendly environment.
Certifications & Recognisation
1. Certified for U & UM Stamping by ASME.
2. Certificate No.36, 474
3. Our company is Certified ISO 9001-2000 for quality management system is
applicable to Fabrication of Stainless Steel & Sheet Metal Components by Lloyd’s
Register Quality 4.Assurance Certification No. MUM0061119 Dated: 15/7/2005.
5. SSI Registration on 2/8/96.
6. Peenya Industrial Association Life time Member Ship Certificate.
7. NSIC ISO 9001:2000 certified by Dun & Bradstreet information service India
Pvt. Ltd., Certification No:65-023-1447 dt: 22/8/2006.
Management Team
Md. Basheer Ahmed
Director - Technical
Mr. C. S. Sridhara
Director - Finance
We have a strong trained manpower of sixty five, supported by five qualified
administrative staff & two engineers. The manpower is given in-house regular
training under different fields such as job related work, industrial safety awareness,
fire fighting, first aid, eco- environment, self development etc.
Our employees follow the safety rules while manufacturing as per AWS standard
safety rule and health hazards from welding fumes & dust. In addition to the
statutory requirements, we have extended the welfare benefits like life insurance,
medical benefits, and transportation facilities to our employees. We have very
good industrial relations with our employees.
Quality Certificates
ISO 9001:2000 Certificate ASME - Mini Pressure Vessel ASME - Pressure Vessel
Services:
Our main occupation of work is welding, assembling, finishing, polishing, and
testing. We out source some of our jobs, who have both conventional & CNC
machining facilities, we will meet the customer schedules.
As our industry is situated in the industrial area and also with our good relationship
with the suppliers. Based on this, we plan and maintain our inventory level up to a
maximum of 5% of the turnover, to meet the needs of our valued customers during
the time of exigencies.
To meet the requirements of ASTM standard, chemical composition & mechanical
test, MTR to the raw materials for further clearance, we have third party laboratory
facilities for meeting the standards and visual inspection based on the customer
requirements.
For manufacturing, we follow the system of procurement, process and planning.
We select the tested and quality approved raw material to meet the drawing
specifications as per our checklist. Planning is done on daily, weekly and monthly
basis to meet the delivery schedules, in the areas of conventional machining, CNC
machining, tack welding, pre-polishing, stage inspection, radiography, DP test,
final finishing, visual inspection, dimensional inspection, and leak test etc.
To maintain the consistency in manufacturing, we have a check list for controlled
plan on each individual component.
Clients
Sl no. Customers Product/Projects
1. Millipore India Private Ltd Pressure vessels, tanks etc..
2.Faively Transport India Ltd (Sab-Wab
Co)Reservoirs & Railway products
3. GTRE (Gas turbine Research Institute) Turbine Spare Parts
4. CMTI (Central Machine Tool Institute) Liquid Seal
5. CCI Fluid Kinetics
6. National Aeronautical Laboratory
7. GE Pressure Vessels
8. Bosch Rexroth Spares parts
9. Flowserve Pump Assembly (Columns)
10. ITT Tanks
11. Ingersol-Rand Hardox Plates/rod equipments
12. Westphalia Saparaters India Ltd Mechanical separators
13. FMC TechnologiesFood Manufacturing
equipments
14. L & T Hydraulic cylinders
ORGANIZATIONAL CHART OF SIDHI VINAYAKA FAB ENGINEERING PVT. LTD.
MANAGING
PARTNERS
MR. BASHEER AHMED.
Marketing.
Business Development
Employee administration
MR. C.S. SRIDHAR
Finance & Accounts
K.JITHENDAR BABU.
Vendor Development.
Quality Assurance.MRS. GAYATHRI.
Office In chargerMR. VENKATESH.
Manager-Production &
Quality AssuranceMR. VENKATESH
MURTHY
MR. BABU.
Maintenance,
Mechanical, Electrical
and Shops.
CHAPTER 4
MR. KRISHNAPPA.
Production in Charge.
UNIT-I
MR. DARSHAN.
Quality Assurance
In Charge.
MR. MALLIKARJUNA.
Production In charge.
UNIT-II & UNIT-III
MR. KRISHNA
MURTHY.
Buffing &
Polishing.
MR. NANJUNDA
SWAMY.
General Fabrication.
MR. UMESH.
R. MIDASEER.
Fabrication.
MR MALTHESH
Fabrication.
MR. AKBAR ALI.
Machine Shop.
WORKING CAPITAL
MANAGEMENT
WORKING CAPITAL MANAGEMENT IN SIDHI VINAYAKA FAB
ENGINEERING PVT LTD
Cash Management
Meaning of Cash Management
The Term cash management is generally used for management of both
cash and near assets is the most liquid of all the current assets. Cash here includes
both cash and balance.
In a narrow sense, ‘cash’ means coins, currency notes, cheques, and drafts
held by banks, In a broad sensed it also includes new cash assets like marketable
securities and time deposits with bank such securities or deposits can immediately
be sold or converted into cash management is generally used for management of
both cash and new cash assets. A large cash position indicates high liquidity
position outlet for excess cash and are useful for meeting planned outflow of funds
objectives and management.
1)To collect the payment for the sales made through cheques.
2) To meet any emergency as and when the solution crops up.
3)To meet the disbursement need as per the payment schedule.
4)To prepare the cash budget incorporating the needs of various departments.
CHARACTERISTICS OF CASH MANAGEMENT.
1) Easy convertibility into cash on sale.
2) Provides a pool of liquidity at all times.
3) They also provide a short-term investment avenue for surplus cash.
GOALS OF CASH MANAGEMENT.
Primary goal of cash management in a firm is to trade off
Between liquidity in order to maximize long-term profit. This is possible the
use of funds in the working capital pool.
The overall objective is transformed into some of these goals.
a) To satisfy day-to-day cash requirements.
b) To provide for scheduled major payments.
c) To face unexpected cash drains.
d) To meet the requirements of banks relationships
e) To maximize operating cost of management.
MOTIVES FOR HOLDING CASH
The motives for holding cash are classified as follows:-
1)Transaction motive
2) Precautionary motive
3) Speculative motive
4) Compensation motive
TRANSACTION MOTIVE:
A company in its day-to-day business has to make payments and also receive cash
leading to daily cash outflow, so as to meet daily obligations a company is bound
to maintain an adequate cash balance.
PRECAUTIONARY MOTIVE:
This a motive of holding cash to meet unexpected contingencies in business like
strikes, penalties, or such other emergencies.
SPECULATIVE MOTIVE:
A company also keeps cash balance to time advantage of unexpected
opportunities typically outside the normal course of business such motive is
therefore of purely speculative nature.
COMPENSATION MOTIVE:
Banks provide certain services to their clients free of charges. They there for
usually require clients to keep an interest and thus compensate them for the free
service so provided.
Cash Collection
Cash Payment
Deficit Borrow
Surplus Invent
Business Operations
Operation & Control
CASH MANAGEMENT IN SIDHI VINAYAKA FAB ENGINEERING PVT
LTD
The Management is trying to hold minimum cash balance to minimize the
interest charges since loan fund is the most important source of working capital
and the company is paying heavy interest charges on its debt.
SIDHI VINAYAKA FAB ENGINEERING PVT LTD during 1980’s
introduced a cash management system called “ Centralized cash management
system.”
It is to be noted that most of the transaction are made through bank accounts
only. An estimate of the required cash flows are made at the beginning of very
month and target regarding cash flows are fixed to various departments. The
routine generation of funds is done through discounting of cash from the
department and customers.
While making the payments, priority is given to statutory payments, which would
invite legal consequences on default. Further the company takes 30-60 days to pay
is following the policy of payments to creditors only after the expiry of due date.
Day-To-Day Cash Management in SIDHI VINAYAKA FAB ENGINEERING
PVT LTD.
Based on the indents and travel advances requisition received from various
departments, and based on contingency requirements, an estimate of cash
requirements for the day is prepared by the cashier. A consolidated indent is
prepared and submitted to the manager (Account) for responsible for issuing
cheques.
The following are some of the important books, statements manuals maintained
by the company to manage and control cash:-
1) Cash management and bank manual.
The company prepare cash manual and bank manual, which includes all the
sales and regulations to be followed by the clerks, officers, managers and other
executives while receiving and issuing cash or cheques. This helps in maintaining
proper control over cash and bank transactions entered into by the company.
DAILY CASH STATEMENTS
At the end of each day, the daily cash statement is prepared which gives details
retaining all the cash payments and the cash receipts. It also gives a summary of
cash transactions i.e. opening balance, total payment, total receipt, and closing
balance as per the summary.
CASH BOOK
The cashbook is printed for the month showing the consolidated day-to-day
transactions i.e. receipts, payments, and the balance as on the date.
STRATEGIES OF CASH Management in SIDHI VINAYAKA FAB
ENGINEERING PVT LTD.
In order to resolve the uncertainly about cash flows due to lack of
synchronization, some strategies for cash management has been evolved, They are:
CASH PLANNING: Cash Inflows and Outflows are properly planned to
project cash surplus or deficit for the planning period i.e. daily, weekly or monthly
basis. A cash budget is prepared for this purpose, which is the summary statement
of the company’s excepted cash flows and out flows over a projected time. It is
mainly prepared for the purpose of knowing or estimating the future cash the future
of cash requirements.
MANAGEMENT OF CASH FLOWS: The inflow of cash should be
accelerated as for as possible and outflow of the cash should be decelerated. SVE
has a vast network of dealers, deposit, and distributors. The management has
implemented a policy of collecting cash on regular basis. Whenever there is a
failure in some of the units or other customers, to remit their dues, occasional visits
are made to mobilize cash. The concerned units remit the amount of bill collected
from customers.
Concerned departments remit the amount of the bill collected from customers.
Immediately to the head office through telephonic transfer.
The Head office meets the expenditure of the departments directly. So the blockage
of funds is prevented. This indicates that company follows the practice of
decentralized receipts and centralized disbursement.
INVENTING SURPLUS CASH:- The Surplus cash balance should be
properly invested to earn profits. The firm should should decide about the division
of such cash balance between alternative short-term investment opportunities such
as bank deposits, marketable securities, or inter corporate lending.
INVESTING IDLE CASH: The idle cash management system will depend on
the firms products, organization structure, competitions, cultures etc. The idle cash
earns nothing, therefore the company invests the excess cash either in short period
deposits or credits some part of the excess cash into the loan account, so that the
interest burden is reduced.
SAILENT FEATURES OF CASH MANAGEMENT in SIDHI VINAYAKA
FAB ENGINEERING PVT LTD.
1) All cash collections by the individual units are transferred to the corporate
office. This means the unit which collects the money, cannot spend it.
2) The head office then transfers back to the units their requirements of funds,
based on their monthly and weekly forecasts of the inflows and outflows.
3) Any shortage of funds will have to be met by the firm on its own borrowing
capacity.
The cash department at the division is responsible for making all the payments.
The main areas where the request of making payments comes form are:-
Bills payable section
Establishment section
Sales section
Service bill and stores
Bills payable are arranged in order of their due dates. So the payment is made on
that basis. Generally, the suppliers avail of a credit of 30-60 days. By registered
post. Payments are usually never made in cash instead of cheques except in rare
and special cases only.
The establishment department requires payment to be made to the employees with
respect to their wages and other dues payable them.
Payment can be either by cash or by bank (Upto to a Limit of Rs.10000) depending
on the choice of the employee salaries are usually paid at the respective section.
The payment requirements of the sales department arise on account of
adjustment in the bill like freight charges, package charges, discount given,
excise duty etc. the service bills arise on account of minor contracts, given
to outsiders or for the purchase of stores, the regular work of maintenance
etc that company may undertake from time-to-time in respect of its own
activities.
RECEIVABLE MANAGEMENT
Meaning:- It is a decision making process takes into account the certain of debtors,
debtor’s turnover and minimizing the cost of borrowing of working capital due to
locking of funds in account receivables management. The main objective of
account receivable management is to maximize sales and profit with liberal but
sound credit sales policy.
Debtors are often the largest of all the current assets of an enterprise. It is
claimed that debtors are the second liquid assets of all operating current assets next
only to cash and bank balances. However, they are the most troublesome and risk
prone assets of a firm. A well drawn out credit policy followed by careful
monitoring is the key to the financial viability of a business.
Through credit sales is a marketing tool to strength then the company’s
competitive position in the market, facilitating growth of business; a systematic
position in the market, facilitating growth of business; a systematic management of
receivables is vital for healthy working capital management.
The basic strategy adopted by many organizations to reduce their operating cash
requirements is to accelerate the collection period and to optimize average payable
period.
Receivable management involves a tradeoff between profitability and risk. The
optimum investment us determined by comparing benefits to be derived from a
particular level of investment with cost of maintaining that level.
Objectives of receivable management:-
The main objective receivable management is:-
To obtain the optimum value of sales.
To control the cost of credit and keep it at minimum
To maintain the optimum level of investment on receivables.
To reduce the average collection period.
ASPECTS OF RECEIVABLES MANAGEMENT
Determining credit policy
Determining credit terms
Evaluating the credit applications
Profitability
LiquidityCost & Benefits
Tight Credit policy
Liberal
Determining collection policies and methods
Control and analysis of receivables
DETERMINING CREDIT POLICY
The first decision area of receivable management is determining credit policy. In
developing an optimum credit policy, the financial manager should compare the
major considerations in costs are liquidity and opportunity cost. The tradeoff
between liquidity and profitability as shown in the following figure determines the
optimum credit policy.
The credit policy of a firm provides the framework to determine
Whether or not extent credit to a customer and
How much credit to extend
Goals of credit policy
A firm may follow a lenient or a stringent credit policy. The firm following a
lenient credit policy tends to sell on credit to customers on very liberal terms
and standards. Creditors are granted for longer periods even to those customers
whose credit worthiness is not fully known or whose financial position is
doubtful.
Receivables management consists of two major activities
1) Billing
2 Collections
Sales
CreditCash
Billing of Invoice
Delayed PaymentPrompt Payment
Remainder Calls Visiting In Person Aging Schedules
Trade credit plays a very important role in modern business. Hence its efficient
management will bring better financial control to an organization where a
substantial amount is tied up in sundry debtors,
Its analyze and proper management becomes indispensable.
Receivable management in SIDHI VINAYAKA FAB ENGINEERING PVT
LTD.
Sidhi Vinayaka Fab Engineering Pvt Ltd follows a firm but discretionary credit
policy depending upon customers and business. A liberal policy, which could be
deter mental to the organization, is avoided for different types of products,
different combinations of collection policies are carried out.
The unit under study is a multi product firm. Its customers vary from Millipore
India Private Ltd, GTRE (Gas turbine Research Institute), CMTI (Central Machine
Tool Institute), CCI Fluid Kinetics, CCI Fluid Kinetics, National Aeronautical
Laboratory, GE, Bosch Rexroth, Flowserve, ITT, Ingersol-Rand, Westphalia
Saparaters India Ltd, FMC Technologies, L & T. Its needs to have collection
policy suited to the needs of all its customers. Its also needs a good monitoring
system to monitor the debt management process. Due to centralize cash credit
systems; Thus classifications scheme cannot be under played. The main forms
reports are regularly sent to the head office with a clear classification, customer
wise showing clearly the dues of individual customers and how much collection
has taken place on a particular date. It also indicates the adjustments made on a
cast to case basis. There fore management information’s reports provides a
valuable information to monitor and control debtors.
BILLING PROCEDURE IN SIDHI VINAYAKA FAB ENGINEERING PVT
LTD.
Sidhi Vinayaka Fab Engineering Pvt ltd gets orders on the basis Job works and
Labour works. The whole billing and accounting procedure is automated. Its make
use of local area network (LAN) to connect the various units; the following are
involved in billing process:
1. Purchase order is received from the Commercial Department/Purchase
Department.
2. Purchase Department issue a manufacturing order
3. The excise cell consists of technical personnel classifies the product
according to the rules and calculators duty on it accordingly
4. The finance department calculates VAT and adjust the advance
received/differed debt after the invoice is raised.
The billing procedure and the credit terms will vary depending on the type of
contract. In case of power equipment components supplied by the unit, the power
equipment components supplied by the unit, the power group of the office will
collect a certain percentage as an advance.
A certain portion is the collected on reaching certain milestones as follows:
1. A certain percentage on dispatch on dispatch to customers
2. A certain percentage on delivery of the equipment at site
3. A certain percentage on commissioning of equipment
4. A certain percentage on testing of equipment.
The advance and differed receipts are collected by the power group and collected
to the units concerned and are followed by the units as well as power group.
COLLECTION PROCESS SIDHI VINAYAKA FAB ENGINEERING PVT LTD.
After the billing is over, than starts the collection from customers on due
dates. The company has classified the different heads of collection as
Direct Collection:
Amount will received from customers directly on schedule dates. Such direction
collection will enable the company to have inflow of cash early settle the accounts
automatically.
Cash Collection:
The amount received in cash is very meager. Company receives all its collections
through cheques or demand drafts.
Regional Operational Division collection (ROD)
The ROD’s are situated mainly in office and headed by Basheer Ahmed. It will
collect the amount from the customers and remit the same to head office daily.
Only book adjustments are corporate office and crediting debtors account. The
above adjustments are nothing but centralize cash credit adjustments. Every unit is
treated as a profit center and dispatches are also treated as inter unit billing and
book adjustments are made to affect the above the inter unit and office balances.
The inter dependence of one unit on the other from its final product creates
problem in getting payment form customer. For example in one unit has not
supplied a particular component in time to certain project, the mile stone
productions gets delayed and so does the payment.
Other project works are influenced by a host of factors outside the control of either
of the parties. This is the reason why delinquency of cost in such industries is
extremely high. In order to have a proper knowledge of the collection process in
various cases, the unit has made a list of reasons for the collections not being as per
schedule. These reasons include freight disallowances, defective supplies, price
variations clause etc. in case of capacitors and semi conductor devices where
private parties are the main customers, strict credit terms are enforced for a period
of 30-45 days only and cash discounts is given. 50% is received on supply for
photovoltaic and the unit charges about 10% as advance and rest on deliver.
MISCELLANEOUS COLLECTION:
Collection on sale of scrap, assets etc constitute miscellaneous collection. This
forms a very small portion of the total collection made of payment allowed to
sundry debtors in SIDHI VINAYAKA FAB ENGINEERING PVT LTD. Five
method of payments are generally made available to customers, they are
1. Direct payment : This method is extended to products, which are less
voluminous and easily dispatch able. The customer’s financial ability
is also considered in this case.
2. Letter of credit : This is the method mostly adopted and it is favourable
to the organization also, but the procedure when followed must ensure
a sound financial position of the customers.
3. Letter of agreement : In this mode, agencies such IDBI, Central
assistance, and power finance corporation assist the customer in
paying the bill to the respective to the customer firm for developments
and using that, they settle the payment on behalf the customer to the
respective unit.
4. Deferred payment : This could be said as the most widely practiced
one. In this method, the payment by the customer is expected as each
consignment of the product is dispatched to the party and usually the
customer, unit completion of the product with holds 2% of the gross
amount.
5. Competition : Generally higher the degree of competition, the more
than credit granted by a fir. However, there are exceptions, such as
firms in the Small scale industries in India.
6. Company’s bargaining powers : Id a company has a higher bargaining
power vis-à-vis it buyers. It may grant no or less credit. The company
will have a strong bargaining power if it has strong product, monopoly
power, brand image, large size or strong financial position.
7. Buyer’s Requirements : In a number of business sectors,
buyer’s/dealers are not able to operate without extended credit. This is
particularly so in the case of industrial products.
8. Buyer’s Status : large buyer’s demand easy credit terms because of
bulk purchase a higher bargaining power. SIDHI VINAYAKA FAB
ENGINEERING PVT LTD. Follows a policy of not giving much
credit to small relation since it is quite difficult to collect dues from
them.
9. Relationship with dealers : Companies sometimes extends credit to
dealers to build long term relationships with them or to reward them
for their loyalty.
10. Marketing Tool: Credit is used as marketing tool, particularly when a
new product is launched or when company wants to push its weak
product.
11. Industry Practice: Companies have been found guided by industry
practice . In addition, these companies continue giving credit because of
past practice rather than industry practice.
Transit Delays
This is a forced reason for extended credit in the case of a number of
companies in India SIDHI VINAYAKA FAB ENGINEERING PVT
LTD has evolved systems to minimize the impact of such delays.
The credit policy decision of SIDHI VINAYAKA FAB ENGINEERING PVT
LTD has two broad dimensions:
Credit Standards
Credit Analysis.
Credit Standards:
Credit standards mean the basic criteria for the extension of credit to
customers. In macro sense, credit is concerned with determining the appropriate
level of risk to accept in order to maximize profits. Credit standards defines the
level of investment in the current assets and examines the impact of liberalizing
credit policy of tightening it.
TOOLS FOR MANAGING ACCOUNT RECEIVABLES
1. Formulation of suitable credit and collection policies.
2. Computation of debtor’s turnover ratio and average collection period.
Debtor’s Turnover ratio=Annual Credit Sales/Avg Accounts Receivables
Average Collection period ratio=365/Debtors Turnover Ratio
Maintaining accounts receivables
Maintaining accounts receivables involves certain costs
1. Cost of financing
2. Administrative cost
3. Collection cost
4. Defaulting cost
Inventory Management
The term inventory is used to designate the aggregate of those items of
tangible assets which are
1. Finished goods ( salesable )
2. Work-in-progress (convertible )
3. Material and supplies (consumable )
In financial view, inventory defined as the sum of the value of raw material and
supplies, including spares, semi-processed material or work in progress and
finished goods. The nature of inventory is largely depending upon the type of
operation carried on. For instance, in the case of a manufacturing concern, the
inventory will generally comprise all three groups mentioned above while in the
case of a trading concern, it will simply be by stock- in- trade or finished goods.
Inventory management
In company there should be an optimum level of investment for any asset,
whether it is plant, cash or inventories. Again inadequate disrupts production and
causes losses in sales. Efficient management of inventory should ultimately
result in wealth maximization of owners wealth. It implies that while the
management should try to pursue financial objective of turning inventory as
quickly as possible, it should at the same time ensure sufficient inventories to
satisfy production and sales demand. The objectives of inventory management
consist of two counterbalancing parts:
1. To minimize the firm’s investment in inventory
2. To meet a demand for the product by efficiently organizing the firms
3. Production and sales operation.
This two conflicting objective of inventory management can also be expressed in
term of cost and benefits associated with inventory. That the firm should
minimize the investment in inventory implies that maintaining an inventory cost,
such that smaller the inventory, the better the view point .obviously, the financial
manager should aim at a level of inventory which will reconcile these conflicting
elements. Some objective as follow
1. To have stock available as and when they are required.
2. To utilize available storage space but prevents stock levels from
Exceeding space available.
3. To maintain adequate accountability of inventories assets.
4.To provide, on item by- item basis, for re-order point and order such quantity
as would ensure that the aggregate result confirm with the constraint and
objective of inventory control.
To keep low investment in inventories carrying cost an obsolesce losses to the
minimum.
Inventory components
The manufacturing firm s inventory consist following components
I) Raw material
ii) Work- in-progress
iii) Finished goods
To analyze the level of raw material inventory and work in progress inventory
held by the firm on an average it is necessary to examine the efficiency with
which the firm converts raw material inventory and work in progress into
finished goods
Inventory holding period
The reciprocal of inventory turnover gives average inventory holding in
percentage term. When the numbers of days in year are divided by inventory
turnover, we obtain days of inventory holding (DIH).
CHAPTER 5
ANALYSIS AND
INTERPRETATION OF
DATA
Table for calculation of Working Capital (Composition)
Particulars 2005 2006 2007 2008 2009
Current Assets
Inventory
Debtors
Cash
Other Current Assets
Loans & Advances
Total Current Assets
Current Liabilities
Creditors
Bank overdraft
Bills Payable
Provisions
Total Current Liabilities
Net Working Capital (CA-CL)
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX XX XX XX XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX
XX XX XX XX XX
XX XX XX XX XX
Table of Components of Working Capital (000's)
Particulars 2006 2007 2008 2009 2010 Current Assets: Inventory at cost 1,354 1,505 13,419 17,666 30,106 Debtors 19,710 21,901 36,209 59,467 53,902 Cash 412 399 2,569 628 547 Other Current Assets 2,410 1,339 2,401 5,246 7,092
Loans & Advances 678 713 673 1,424 1,702
Total Current Assets 24,564 25,857 55,271 84,431 93,349 Current Liabilities Creditors 15,077 18,682 39,601 68,699 76,648 Provisions 423 536 224 1,264 1,788 Other Current Liabilities 2,265 1,440 2,336 1,421 2,760
Total Current Liabilities 17,765 20,658 42,161 71,384 81,196
Net Working Capital (CA-CL) 6,799 5,199 13,110 13,047 12,153
1 3 5 7 9 11
0
50000
100000
150000
200000
250000
300000
Series5Series4Series3Series2Series1
COMMENT
The Networking Position of the Sidhi Vinayaka Fab Engineering Pvt ltd has shown a varying
trued in the period of observation. It had touched the Highest peak in 2008 representing 1.31
Crores and Lowest in 2007 representing 51.99 Lakhs due to the Highest sales in 2008.
Current Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd (000's)
Particulars 2006 2007 2008 2009 2010
Current Assets 24,564 25,857 55,271 84,431 93,349
Current Liabilities 17,765 20,658 42,161 71,384 81,196
Current Ratio 1.38 1.25 1.31 1.18 1.15
Formula Current Ratio = Current Assets
Current Liabilities
1 2 3 40
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
Series1Series2Series3Series4Series5
COMMENT
The Model and most advisable current ratio are 1.38:1 . This can be relaxed upto 1.25:1
The firm had experienced a very high fluctuations in current ratio during the period of
study from 1.38 in 2006 the higher and lowest of 1.15 in 2010.
Quick Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd (000's)
Particulars 2006 2007 2008 2009 2010
Quick Assets 23,210 24,352 41,852 66,765 63,243
Current Liabilities 17,765 20,658 42,161 71,384 81,196
Quick Ratio 1.31 1.18 0.99 0.94 0.78
Formula Quick Ratio= Current Assets - StockCurrent Liabilities
1 2 3 40
10000
20000
30000
40000
50000
60000
70000
80000
90000
Series1Series2Series3Series4Series5
COMMENT
In Quick assets the major constituent is a debtor. The model are must advisable ratio is 1:1.
The Quick ration of the firm has shown a slight fluctuation during the period of study. It
was highest in 2006 and lowest in 2010.
Net working Capital Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd (000's)
Particulars 2006 2007 2008 2009 2010 Net working Capital 15,759 18,651 40,153 69,375 79,186 Capital Employed 36,101 41,254 61,383 94,558 108,811 Net working capital Ratio 0.44 0.45 0.65 0.73 0.73
Formula Net working capital Ratio Net working Capital Capital Employed
1 2 3 40
20000
40000
60000
80000
100000
120000
Series1Series2Series3Series4Series5
COMMENT
This ratio represents the relationship between the capital employed and networking
capital. That is what portion of capital employed constitutes the working capital.
NWC ratio showed a fluctuating trend in respect of the firm, It went as high 0.73 in 2010
and fell to low 0.44 in 2006.
Current Assets to Turnover Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd (000's)
Particulars 2006 2007 2008 2009 2010 Current Assets 24,564 25,857 55,271 84,431 93,349 Turnover/Sales 47,593 55,992 1,06,593 1,85,978 1,81,702 Current Assets turnover ratio 0.52 0.46 0.51 0.45 0.51
Formula Current Assets turnover ratio= Current Assets
Turnover/Sales
47,593 55,992 1,06,593 1,85,978 1,81,70224,564 25,857 55,271 84,431 93,3492006 2007 2008 2009 2010
0.4
0.42
0.44
0.46
0.48
0.5
0.52
0.54
Series1Series2Series3
COMMENT
This ratio shows the efficiency of utilization of current assets generate sales. The current
assets turnover ratio of the firm has found efficiency 0.52 in 2006. This was only due to
high sales but as fell down to the lowest of 0.45 in 2009 showing inefficient convention of
current assets into sales.
Cash position of Sidhi Vinayaka Fab Engineering Pvt ltd 000s)
Year Cash in hand & Bank Balances2010 4122009 3992008 2,5692007 628
2006 547
1 2 3 4 50
500
1000
1500
2000
2500
3000
YearCash in hand & Bank Balances
COMMENT
The cash position and bank balance position totally consist of cash. This components have
varied year by year. The highest cash position in the year 2008 with 25.69 lakhs. When
compare to lowest in 2009 with 3.99 lakhs. The cash position is showing a very high
fluctuation.
Debtors Turnover Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd
Particulars 2006 2007 2008 2009 2010 Total Debtors 19,710 21,901 36,209 59,467 53,902 Sales/Turnover 47,593 55,992 1,06,593 1,85,978 1,81,702 Debtors Turnover Ratio 0.41 0.39 0.33 0.31 0.29 Debt Collection Period/Days 151 143 120 113 106
Formula Debtors Turnover Ratio= Total Debtors
Sales/Turnover
Collection period= Debtors turnover ratio X 365 days
47,593 55,992 1,06,593 1,85,978 1,81,70219,710 21,901 36,209 59,467 53,9022006 2007 2008 2009 2010
0
20
40
60
80
100
120
140
160
Series1Series2Series3Series4Series5
COMMENT
The Debtor’s turnover ratio shows the efficiency through which collection is made from
debtors. The firm has experienced up’s and down’s in this period with highest of 151 days
and low 106 days. This is a good trend.
Inventory Turnover Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd
Particulars 2006 2007 2008 2009 2010 Cost of Goods Sold 39,472 45,370 88,719 161,734 1,47,908 Opening Stock 797 1,354 1,505 13,419 17,666 Closing Stock 1,354 1,505 13,419 17,666 30,106 Average Stock 1474 2107 8215 22252 32719 Inventory Turnover Ratio 26.78 21.54 10.80 7.27 4.52 Days 14 17 34 50 81
Formula Inventory Turnover Ratio= Cost of Goods soldAverage Stock
Holding period = 365DaysInventory Turnover ratio
1 2 3 4 50
5000
10000
15000
20000
25000
30000
35000
2006 39,4722007 45,3702008 88,7192009 161,7342010 1,47,908
COMMENT
Inventory turnover indicates the efficiency of the company in selling the product that is the
relationship or the rate at which inventory is been converted into sales in a year or days.
The Inventory turnover ratio has been influenced by fluctuation only in 2007 and 2010
where 17 days and 18 Days respectively.
Creditors Turnover Ratio of Sidhi Vinayaka Fab Engineering Pvt ltd
Particulars 2006 2007 2008 2009 2010
Total Purchases 8,292 33,599 77,5621,34,622 1,19,489
Sundry Creditors 15,077 18,682 39,601 68,699 76,648 Creditors Turnover Ratio 0.55 1.80 1.96 1.95 1.56 Days 664 203 186 187 234
Formula Creditors Turnover Ratio= Total Purchases
Sundry Creditors
Payment period= 365Creditors Turnover Ratio
1 2 30
10000
20000
30000
40000
50000
60000
70000
80000
90000
2006 8,2922007 33,5992008 77,5622009 1,34,6222010 1,19,489
COMMENT
The Creditor turnover ratio shows how prompt is the company it current and shows its
credit worthiness. The firm until 2008 from 2006 had maintained an average of 234 days.
However, Due to reduced sales and under utilization of inventory the CTR raised to an
increasing rate of 664 days in 2006.
Statement of Changes in Working Capital
Particulars 2009 2010 IncreaseDecrease
Current Assets: Inventory at cost 17,666 30,106 12,440 -
Debtors 59,467 53,902 - 5,565 Cash 628 547 - 81 Other Current Assets 5,246 7,092 1,846 -
Loans & Advances 1,424 1,702 278 - Total Current Assets 84,431 93,349 Current Liabilities Creditors 68,699 76,648 - 7,949 Provisions 1,264 1,788 - 524 Other Current Liabilities 1,421 2,760 - 1,339 Total Current Liabilities 71,384 81,196 Net Working Capital (CA-CL) 13,047 12,153 14,564 15,458 Decrease in Working Capital 894 894
13,047 12,153 15,458 15,458
1 2 3 4 5 6 70
10000
20000
30000
40000
50000
60000
70000
80000
90000
100000
2009 17,666 59,467 628 5,246 1,4242010 30,106 53,902 547 7,092 1,702Increase 12,440 - - 1,846 278Decrease - 5,565 81 - -
COMMENT
The Statement of changes in working capital has been calculated by keeping 2009 at the base
year. The working capital decrease trend was found only in 2009 at 8.94 lakhs but then this trend
did not carry on and the net working capital went on falling from them. It was lower then the
base year. Between the five year networking capital has violating fluctuating in case of the firm
showing that decrease in current assets and also increase in liabilities this is not a good
development.
CHAPTER 6
FINDINGS AND
CONCLUSION’S
LIQUIDTY POISTION:
The liquidity position of the firm of the company as well as the corporate is
not satisfactory. Only the division in study during 2006 reached the most
advisable ratio being 2:1 2006 and 2010. However, the corporate during the
period of study has never reached the advisable limit. This must be considered
seriously, both by the electronics division and corporate.
The Quick ratio is also averaging 1.48 in firm at 1.23. This shows that the
inventories are the main components of current assets, which is causing a
slight amount of liquidity problem.
The overall average current ratio of firm being 2:1 for five years. This
was possible only due to high current ratio in the first 3 years but the
performance was dully in 2006 and 2010 at 1.61 and 1.64 it is still possible to
improve the performance.
The firm has maintained an average of 1.65 which is the representation
of a group of divisions all over the country which needs to be geared up to
improve the liquidity of the company.
INVENTORY POSITION:-
The inventory turnover position of the company on a whole is
satisfactory. However, the inventory turnover of the electronics division was
the lowest of 185 days that is alarming. This ratio was 113 days in 2006 but it
was 185 in 2010 this is not a healthy development.
The investment on scrap should be reduced to a considerable extent as
their may influence the inventory to a wide extent.
DEBTORS (ACCOUNTS RECEIVABLE) POSITION:-
The major component of current assets is debtors in firm. The average
collection period being 239 days for the division and 263 days for the
corporate shows a good sign of collection of debts. But a point should be born
that the debtors should be constantly supervised to as to assure prompt
repayment. As many of the company’s customers are stage there is a slight
slack new, which should be considered seriously.
CREDITORS POSITION (ACCOUNTAS PAYABLE):-
The company based on its good-will maintained an average of 240 days
payment period for 2006 to 2010 but due to fall in states and materials
purchased by credit the payment period was the highest in 2006 being 846
days that is more than 2 years this is not a good sign for the electronics
division. There for it should gear up its sales so as to keep a good position in
front of its creditors.
The corporate on the other hand has managed a decent payment period
of 467 days on an average during the period of observation. This position is
only due to good will of the company.
TURNOVER (SALES) POSITION:-
The sales of electronics division have met the lowest in the period of
study in 2005. This is not also a good sign and the division should take up
sufficient publicity and quality measures to boost up the sales, which
automatically brings up the liquidity position.
The corporate has maintained a reasonably good turnover and had met
the highest in previous year of 2007-08. This to be kept intact and raising.
NETWORKING CAPITAL-TO-CAPITAL EMPLOYED POSITION:-
The proposition of networking capital to overall capital employed in
regards to the firm was 0.613, 0.747, 0.713 to 1 in 2006 to 2010 but this came
drastically to 0.342 and lowest of 0.261 suggesting the increasing expenditure
of capital towards fixed assets. The step is welcome only if fixed assets are
productive but this has not shown the desired results and investment in
inventory especially scrap and loose should be supervised carefully.
The corporate sector has maintained and average of 0.661 this is due to
the overall performance of firm.
The networking capital of firm experienced a highest raise of 31.4% in
2000 and an extreme of a fall of 44.49% in 2003 when compared to base year
if 1999 but the corporate has always shown a raising trend of 15.5% to
70.93% from 1999 to 2003.
RECOMMENDATIONS:-
The unit can outsource some of its non-core activities to specialize
outside agencies.
The cost position should be centralized as it is currently maintained
more effectively.
The unit should develop alternative source of supply of materials like
other units which will in turn, reduce the cost of inventory. The
sourcing of materials should be at competitive rates.
The unit can have better inventory control by focusing on slow and
non-moving items. Less control should be on fast moving items and
least control on fast moving items.
The unit should tie-up with financial institutions for providing a
suitable financial package to its customers.
The company must follow a rigors system of credit evaluation and set
credit standards for its customers.
The company can obtain contingent commitment from the buyers as
part of sales terms.
A meaningful sales may be concluded by demanding the customers to
establish differed payments through irrevocable letter of credit.
The company should get bank guarantee while entering into contracts
with its customers.
Effective follow-up by commercial departments should be made to
accelerate the collection process.
CONCLUSION:-
It can be concluded that the overall performance of the company is
reasonably satisfactory. The electronics division must work harder to raise its
sales in certain areas the company has to focus more. The firm should try to
overcome hurdles, especially in the area of debtors and inventory
management.
Finally the firm being one of the outstanding public sector undertaking
in the country has performed considerably to withstand the high level
competition of international markets.
BIBLIOGRAPHY:-
Prasanna Chandra : Financial Management Theory & Practice
Khan and Jain : Financial Management
I.M. Pandey : Elements of Financial Management
S.N. Maheshwari : Financial Management
Annual Reports : Sidhi Vinayaka Fab Engineering Pvt ltd.