Cash Management in Amg Escorts Ltd_2011

A PROJECT REPORT

ON

“CASH MANAGEMENT IN AMG ESCORTS LTD”

Submitted to

UP Technical University, Lucknow

In the partial fulfillment for the award of the

degree of

MASTER OF BUSINESS ADMINISTRATION

Session 2008-2010

Project Report On Cash Management In AMG Escorts Ltd

PREFACE

India’s long-term economic prospects, even today, depend to a large

extend on the agricultural sector, which contributes a quarter to the gross

domestic project and provides livelihood to 2/3 of the population. A

gradual and perceptible shift from subsistence farming to enterprise

farming is harbinger of modernization of the agriculture economy and this

will increase the contribution of the sector to the overall GDP in the time

to come. The central government as well as several state governments is

giving due priority to agriculture and rural developments.

A tractor is a product, which has maximum utility in the agricultural

sector. The tractor industry is segmented on the basis of the power of the

tractor engine measured in terms of horsepower (HP). The maximum

consumption is for 30-40 HP tractors. With the increase in the availability

of low cost finance for longer tenures, the sale of the tractors is expected

to go up. The new trend observed in this sector is the shift in consumption

from majority in the northern states to other parts of the country, too. The

soil in the northern states is alluvial in nature and thus requires a low

powered tractor for tilling it. However, states located in the western and

southern parts of the country where the soil being laterite or black etc. is

harder and needs high-powered tractors.

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ACKNOWLEDGEMENT

It is my privilege to acknowledge profound gratitude & indebtedness towards

my respected & learned teachers for their inspiration, constructive criticism

& valuable suggestions. Their precious guidance & unrelenting support kept

me on track through my training.

This project report prepared by me is a result of several helping hands of the

Marketing Department of Escorts Ltd. The knowledge of our management

studies is absolutely incomplete without its proper implementation and

application in diversified corporate world of today.

I am highly obliged to Mr.AVINASH GANGWAR (Area Manager) as their

knowledge and experience has been a guiding light during my project. I offer

a sincere thanks to Dr SANDEEP KUMAR GARG (Project Guide) for their

full-fledged cooperation, care and immense amount of help without which it

would have been really difficulty to complete this project.

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STUDENT DECLARATION

I, student of “Masters in Business Administration” SUNDER DEEP COLLEGE

OF MANAGEMENT & TECHNOLOGY GHAZIABAD, hereby declare that the

dissertation/thesis entitle ‘Study of Cash Management’ of the Escort Agri

Machinery Group (AMG) submitted in fulfillment of the training; is my original

work and is not submitted for the award for any other degree, fellowship or

similar title or prize.

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EXECUTIVE SUMMARY

If the development capital is what establishes a business, cash flow is what

keeps it going. One of the most common downfalls of business is

unexpectedly high running cost. What is important is not just the size of

operating costs, but the cash flow-that is when money has to be paid out in

relation to the stream of income arriving in. Thus cash flow management is

of prime importance.

Escorts Ltd. is the holding company of the Escorts Group. Post restructuring,

agri-machinery or tractors have become the focus area of operations. Other

businesses i.e. two- wheelers, IT, Telecom, construction equipment, are

controlled through subsidiaries and joint venture. Post hive off of its pistons

business to a joint venture with a foreign collaborator, Escorts is focusing on

its ‘core competence’ of tractors. Escorts have strong hands in house

engineering skills, a wide distribution/service network and brand franchise.

The project is small attempt to study the cash management in Escorts Agri-

Machinery group. Added to this fact, that mechanization level in India is

currently very low as compared to the world standards.

To analyze the performance, published balance sheets of Escorts Limited,

CASH FLOW STATEMENTS are been used. This project report is based on

financial data up to 2007-08 only. The financial year for escorts is from

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01/10/20XX to 31/09/20XX. Escorts is maintaining the following records

which is indicative of its professional approach:

Maintaining proper set of accounting records.

Maintaining an accurate cash book with bank statement

Daily cash inflow & cash outflow.

Marking regular forecast of cash requirement based upon planed

sales volume.

Ageing of debts/credits with comparisons to previous month

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TABLE OF CONTENTS

EXECUTIVE SUMMARY.............................................................................................................5OBJECTIVES OF THE TRAINING...............................................................................................9ABOUT THE TRACTOR INDUSTRY......................................................................................10

INTRODUCTION....................................................................................................................11FUTURE OF TRACTOR INDUSTRY...................................................................................14MARKET SHARE OF TRACTOR INDUSTRY...................................................................15TRACTOR INDUSTRY PERFORMANCE...........................................................................16

COMPANY’S PROFILE..............................................................................................................17ESCORTS SYMBOL...............................................................................................................18VISION......................................................................................................................................19MISSION..................................................................................................................................20QUALITY POLICY...................................................................................................................21BACKGROUND AND BUSINESS.......................................................................................22BOARD OF DIRECTORS......................................................................................................24OUTLINE ORANISATION – ESCORTS GROUP..............................................................25SUBSIDERIES.........................................................................................................................27BANKERS................................................................................................................................28

AGRI MACHINERY GROUP.....................................................................................................29INTRODUCTION....................................................................................................................30AGRI MACHINERY GROUP CONTRIBUTION.................................................................32MODERNIZATION OF AGRI MACHINERY GROUP......................................................33PRODUCTS.............................................................................................................................34COMPANY’S FUTURE..........................................................................................................35

CASH MANAGEMENT..............................................................................................................36INTRODUCTION....................................................................................................................37CASH FLOW MANAGEMENT.............................................................................................38CASH MANAGEMENT SYSTEM.........................................................................................39IMPORTANCE OF CASH MANAGEMENT........................................................................40CASH MANAGEMENT STRATEGIES................................................................................41CASH OUTFLOW...................................................................................................................42CASH INFLOW.......................................................................................................................43

CASH FLOW STATEMENT......................................................................................................44IMPORTANCE.........................................................................................................................47DAILY CASH FLOW REPORT.............................................................................................48

CASH BUDGET..........................................................................................................................58BANK RECONCILIATION.........................................................................................................61CASH RATIOS............................................................................................................................65RECEIVABLE MANAGEMENT................................................................................................74PAYABLE MANAGEMENT.......................................................................................................79RESEARCH METHODOLOGY.................................................................................................81SWOT ANALYSIS.......................................................................................................................83


STRENGTH..............................................................................................................................84WEAKNESSES.........................................................................................................................84THREATS.................................................................................................................................84

PRODUCT............................................................................................................................84PRICING...............................................................................................................................86COSTING.............................................................................................................................86

OPPORTUNITY........................................................................................................................87FINDINGS....................................................................................................................................88CONCLUSION.............................................................................................................................90RECOMMENDATIONS..............................................................................................................92LIMITATIONS..............................................................................................................................96BIBLIOGRAPHY..........................................................................................................................98ANNEXURES...............................................................................................................................99

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OBJECTIVES OF THE TRAININGIt is well known fact that we remember 20% of what we hear, we

remember 40% of what we see but we remember 75% of what we do.

Undergoing M.B.A is the first step to prepare myself as a manager and

visualize the ever-dynamic business world and my main objective while

taking up the training was to familiarize myself with the working of the

finance department of Escort Agri Machinery Group (AMG)

To present study in Escort Agri machinery group mainly focus on the

following:

Resources of cash inflow of the company.

Cash flow factors which have effect of cash inflow.

Cash flow statement in the company.

Cash flow management in the company


ABOUT THE TRACTOR INDUSTRY

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INTRODUCTIONIndia’s long-term economic prospects, even today, depend to a large

extend on the agricultural sector, which contributes a quarter to the gross

domestic project and provides livelihood to 2/3 of the population. A

gradual and perceptible shift from subsistence farming to enterprise

farming is harbinger of modernization of the agriculture economy and this

will increase the contribution of the sector to the overall GDP in the time

to come. The central government as well as several state governments is

giving due priority to agriculture and rural developments.

A tractor is a product, which has maximum utility in the agricultural

sector. The tractor industry is segmented on the basis of the power of the

tractor engine measured in terms of horsepower (HP). The maximum

consumption is for 30-40 HP tractors. With the increase in the availability

of low cost finance for longer tenures, the sale of the tractors is expected

to go up. The new trend observed in this sector is the shift in consumption

from majority in the northern states to other parts of the country, too. The

soil in the northern states is alluvial in nature and thus requires a low

powered tractor for tilling it. However, states located in the western and

southern parts of the country where the soil being laterite or black etc. is

harder and needs high-powered tractors.

Tractor industry in India has passed through various hazes before

reaching where it is today. During 1945 to 1960 demand was met entirely


through import. There were 37,000 tractors by 1960. Production began in

1861 with five manufactures producing a total of 880 units per year. By

1965 it increased to over 5,000 units per year and by 1970 annual

production rose to more than 20,000 units. Six new manufacturing were

established during 1971-1980. In 1971 Escorts also started local

manufacturing of Ford Tractors in collaboration with Ford, UK. During

1990, annual production rose to 1, 40,000 units making India an exporter

to countries, mainly to Africa. After De-licensing of tractor industry,

production exceeded 2, 55,000 units in 1997.

The growth of the industry over the last three decades resulted in the

entry of several new entrants including all the major multinational

companies. The industry now consists of 14 manufactures with an

aggregate installed capacity of approximately 4.50 lack tractors. In the

tractor industry, following are the key manufacturers:

Mahindra& Mahindra Limited (M&M),

Gujarat Tractors Limited,

Tractors and Farm Equipment Limited,

Hindustan Machine Tools Limited,

Bajaj Tempo Limited

Since 2000, however the industry declined to a level of 1.72 lack tractors

in the year 2002-2003, a decline of 33.3% over three years.

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Despite the steep decline in the industry, Escorts consciously decided to

aggressively reduce channel inventory further by approximately 3,500

units reduces in the previous year. This has not only impacted their

revenue and profit adversely but has also enabled the company to

balance the cash flow of company effectively.

Tractors form an integral part of farm mechanization and have a crucial

role to play in increasing agriculture productivity. In India, 90% of the

tractors are financed by banks- credit at concessional rates. Availability of

credit therefore is the most crucial factor, impacting tractor demand.

Increased use of irrigation facilities, shift towards multi-cropping,

consolidation of lands holdings, promotion of cooperatives and higher

investment in agriculture also contributes to higher tractor demand.

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FUTURE OF TRACTOR INDUSTRY The tractor industry in India has been on a growth trajectory since the

second half of 2003-04, after going through a minimum variation for

consecutive years. The key factors driving this growth are increasing farm

incomes, aggressive financing resulting in easy availability of low-cost

credit, sharp inventory correction and strong export growth.

The demand in tractor industry is expected to grow mainly due to the

agricultural sector, with the expected increase in agricultural production.

Also, the shift in trend for demand towards higher HP tractors is expected

to continue. This will be further strengthened by the launch of several

new models. In the next 2-3 year, demand for tractors is expected to

increase significantly in the eastern states, where traditionally, tractor

usage has been low. Exports are expected to increase significantly as

several Indian players are targeting the “hobby farming” segment in the

U.S, which is considerably large. Also, tractors of most Indian

manufacturers comply with the emission standards accepted in the U.S.

Most exports are likely to be through overseas partnerships or joint

ventures. McKinley has also forecasted tractor population requirements of

75 lacs over the next 18 years vs. current population of 26 lacs. The

extension of the 150 per cent deduction on R&D expenditure up to March

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31, 2009, in the Budget 2008-09 will also benefit the industry in terms of

new product development besides increase in the area under irrigation

under the Bahrat Nirman Project and the micro irrigation scheme.

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MARKET SHARE OF TRACTOR INDUSTRY

FOR THE YEAR 2007-08:

TRACTOR INDUSTRY PERFORMANCE

COMPANY 2005-06 2006-07 2007-08

ESCORT

FARMTRAC

11138

18287

23200

32800

20950

26900

TOTAL (ESCORT + FARMTRAC)

29425 56000 47850

MAHINDRA & MAHINDRA

PTL

TAFE

EICHER

HMT

SONALIKA

BTL(FML)

L & T

FORD NEW HOLLAND

85028

31396

7900

32017

4464

19951

13214

8450

102500

30010

52400

27700

6500

36200

5050

19720

19400

7195

98700

28040

53400

25450

4770

30920

4820

28530

23250

4520

TOTAL INDUSTRY 302435 362675 350300


COMPANY’S PROFILE

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ESCORTS SYMBOLThe Escorts symbol means more than a seen by eye. It has been prepared

with certain objective in mind and is symbol in more than one way.

The philosophy behind Escorts and the ‘e’ in the Escorts is “enterprise”.

The hexagon is a symbol of productivity. Precision when interposed as a

nut. It symbolizes a craft man ship and mending productivity. The sprains

super imposed on the hexagon represent the workers and the people of

Escorts. This forms the letter ‘E’ the first of Escorts a company even of

more changing unveiling the future


VISIONWith a vision of becoming a truly global player, Escorts has invested Rs. 60

Crores towards strengthening new product development programs and

enhancement of R&D capabilities. Additionally, Rs4bn have been invested in

modernization of Escorts manufacturing facilities so as to bring at par with

international standards.

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MISSIONFor an Enterprise business mission embodies of its endeavor, which acts

as a guiding light for continuous development & growth.

Mission of ESCORTS is:

Engineering Changes through core competency for greater synergy

reinforcing bonds with customers & establishing powerful symbiotic

relationship with international allies, preparing global market. The

company wants to make a lasting difference to its shareholders, its

customers, its business associates, its employee and the country as a

whole. The company also gives better quality and better technology to

customer and treats every customer as “special” to build respect for, and

loyalty to, Escorts.


QUALITY POLICYWe shall strive to continuously improve to meet the ever – rising

expectation of our customers at the lower cost. Each one of us must fulfill

the need of our customer, both internal and external with the highest

degree of commitment thereby creating a quality organization geared to

ensure total customer satisfaction and the sustained health and

prosperity of our business.

Customer Orientation: To fulfill the requirement of our internal and

external customer.

Process Orientation: To optimize and harmonize interrelated process

rather than individual function.

Preventive Behavior: To prevent the mistake to happen.

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BACKGROUND AND BUSINESSThe Escorts Group, with Escorts Limited as its flagship company, is among

India’s leading corporations operating in the diverse field of agri

machinery, construction & material handling equipment, automotive &

railway ancillaries information technology and financial services. The

group has 15 modern manufacturing facilities & an extensive marketing

network spread across the country. The genesis of Escorts goes back to

1944 when two brothers, Mr. H.P. Nanda and Mr. Yudi Nanda, launched a

small agency house, Escorts Agents Ltd., in Lahore. The company’s

principal activities were trading and representing leading overseas

manufacturers for the sale of their products in India. One of its

dealerships was for the “Massey Ferguson” brand of tractors.

In December 1959, Escorts agents ltd. was converted into a public limited

company and was renamed as Escorts Limited (EL). In January 1960, EL

decided to set up manufacturing facilities for making tractors in India

under the “Escorts” brand name in the 25-40 Horsepower categories. EL

promoted Escorts Tractors Limited in 1969 as joint venture with Ford

Motor Company of USA for the manufacturing of ‘Ford’ series of tractors.

The tractors manufactured were in the 45-50 HP range and ETL became

the market leader in this segment with a share of above 50%. Consequent

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to FMC’s disposal of tractors operations to Ford New Holland, USA, Ford

new holland acquired the shares of FMC in ETL. Following an agreement in

1995 to end the joint venture association, EL acquired the entire stake of

ford new holland in August 1995, making Escorts tractors ltd. a subsidiary

of Escorts Ltd.

Over the years, Escorts has ensured ahead and evolved into one of India’s

largest conglomerates. Till 1993-94, all these activities were being carried

out in various divisions of EL. EL undertook a major restructuring exercise

between 94-98 spinning off the divisions into separate companies.

The restructuring exercise comprised consolidation of the agri-machinery

business by merger of ETL with EL and having off various divisions into

separate companies. Biwheeler division was spun off to Escorts Yamaha

Motors Ltd., construction equipment division to Escorts construction

equipment Ltd., telecommunication equipment division to Escorts

communication Ltd., EL booked gains of Rs. 2091 million over the four

year period 1994-95 to 1997-98 though the sale of these the sale of these

divisions.

The main products of Escorts group currently comprise of agri-machinery,

information technology, health care, financial services, railway

components, auto components, construction and material handling

equipment.

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BOARD OF DIRECTORS

Managing Director &Chairman Mr. Rajan Nanda

Joint Managing Directors Mr. Nikhil Nanda

Directors Dr. M.G.K. Menon

Dr. S.A. Dave

Dr. P.S. Pritam

Mr. S.C. Bhargava

Sr.Vice President-

Law & Company Secretary Mr. G.B. Mathur

Exec. Vice President &

Group Chief Financial Officer Mr. R.K.Budhiraja


OUTLINE ORANISATION – ESCORTS GROUP

Chairman & Managing Director – Sh. Rajan Nanda

Secretariat

Flagship Operating Division

Escorts Limited Faridabad

Agri Machinery Engineering International Business

Corporate Center Faridabad Escorts Research Institute of Farm Center, Faridabad Mechanization,

Bangalore

Personnel Finance Project Escorts Heart Research Escorts Medical

Institute, New Delhi Center, Faridabad

Administration and Law Export andSecurity Communication

Associates Companies Subsidiary Companies

Escorts Employees Welfare Trust Faridabad

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OUTLINE ORANISATION – ESCORTS LIMITED (Cont…)

Chairman & Managing Director – Sh. Rajan Nanda

Secretriat

Corporate Office Registered Office Corporate Center, Faridabad New Delhi

Personnel Finance

Project Law

Administration Export and and Security Communication

Agri Machinery Automotive AncillariesMarketing Division and Railway Equipment Division

Farmtrac Division Escorts Tractor Division

Corporate Office Functional Units Corporate Office Functional Units(Line Duties) (Production & Operation) (Line Duties) Production & Operation)

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SUBSIDERIES Escorts Asset Management Ltd.

Escorts Automotive Ltd.

Escorts Class Ltd.

Escorts Construction Equipment Ltd.

Escorts Heart Institute and Research Centre Ltd

Escorts Hospital and Research Centre Ltd.

Escorts Securities Ltd.

Escorts Telecommunication Ltd.

Esconet Services ltd.

Cellnext Solutions Pvt. Ltd.

I Serv India Solutions Pvt. Ltd.

Escosoft Technologies Ltd.

Escosoft Technologies (USA) Ltd.

Escosoft Technologies (UK) Pvt. Ltd.

Escosoft Singapore Pvt. Ltd.

E-Soft (Mauritius) Holdings Ltd.

Escotel Mobile Communication Ltd.

Escotel Telecommunication Ltd.

Escorts Agrimachiner

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BANKERS IDBI BANK.

ABN AMRO BANK N.V.

BANK OF BARODA.

CITIBANK, N.A.

DEUTSCHE BANK AG.

HONGKONG & SHANGHAI BANKING CORPORATION LIMITED.

HDFC BANK LIMITED.

PUNJAB NATIONAL BANK.

STATE BANK OF INDIA.

STATE BANK OF TRAVANCORE.

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AGRI MACHINERY GROUP

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INTRODUCTIONHaving pioneered farm mechanization in the country, Escorts has played

a pivotal role in the agricultural growth of India for over five decades. One

of the leading tractor manufacturers of the country, Escorts produces

tractors in the 27-75 HP range and has already sold over 6 lakh tractors.

Escorts AGRI MACHINERY GROUP (AMG) was set up in 1960 and they

rolled out their batch of tractors in 1965 under the brand name of Escorts.

Today its tractors are marketed under three brand names, viz. Escort,

Powertrac and Farmtrac.

Escorts Brand of tractors is symbolic of reliability and enjoys the

confidence of the farming community for the last 40 years.

Powertrac Brand of tractors is the most fuel-efficient tractor in their

respective categories that offer excellent value for money and have

helped the farmer improve their quality of life.

Farmtrac Brand is the most powerful premium range of tractors that

give maximum productivity to the farmers.

Spanning these three brands, the company has a full range of tractors to

cater to the domestic as well as overseas markets. The company is

developing state-of-the-art highly fuel efficient engines with the

assistance of AVL of Australia and have also entered into a Joint venture

35


with CARRARO SPA of Italy for the manufacturing of transmission and

axles.

To sustain the present momentum and to realize the future goals, Escorts

has invested Rs. 60 crore towards strengthening new product

development programs and enhancement of R&D capabilities.

Additionally, Rs.400 crore has been invested towards modernization of its

manufacturing facilities bringing them to international standards. The

company has one of the most comprehensive distribution networks

comprising of over 500 dealership / outlets and 30 area offices spread

across the country. It has a manufacturing capacity of 75000 tractors per

annum. Escorts Agri Machinery Group is looking at forward and backward

integration through genetic engineering.

In line to their vision for becoming a major player in sub 100 HP segment

by 2011 in the global markets, they have increased their reach from a

major regional player to major global markets, which stretch from North

America to Australia covering all the continents. Despite the strict

competition by other major tractor manufactures they have been able to

gain constant volumes in the global market. Their target for this year is to

export 25% volumes of their total production volumes.

To consolidate its presence in the overseas markets, the company has

ventures in the USA and Europe (Poland). It has recently acquired a

majority stake in Long Agribusiness LLC, a tractor distributing company in

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USA and Poland Escort Spolka Z.O.O., Poland. Besides the USA and

Poland, Escorts has strong presence in Turkey, Australia, Bangladesh, Sri

Lanka, Nepal, Kenya, Tanzania and South Africa etc. though its dealers

network in these countries. Escorts have very ambitious plans to expand

the network in other potential countries in the coming year. By the end of

next year, the company hopes to be largest exporter of tractors in the

Indian tractor industry.

AGRI MACHINERY GROUP CONTRIBUTION

AMG contribution is Almost Half of the Total Revenues of Escort Group.

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MODERNIZATION OF AGRI MACHINERY GROUP

Escorts Agri Machinery Group (AMG) has invested over US $7.5 million in

state of the Art & Research and Development Center. Virtual prototypes

of components and aggregate assemblies are made and assembled on

computer workstations using 3D technology. Their performance is

checked on computers using simulation techniques thus saving a lot of

time for the end-user as well as lowering development costs. The R&D

center uses advanced 3D modeling, analysis and simulation software for

engines, transmission and vehicles. Physical prototypes are then

extensively tested for performance, durability and reliability. Facilities

include a high –technology engine laboratory featuring fully computerized

test-beds with on line control, data collection, and analysis.


PRODUCTS

Escorts Farmtrac

E-325 Josh F T –30

E-335 F T –35

E-335P F T –45

E-430 F T –45Live PT

E-430XL F T –50DB

E-435 F T –50

E-440(6+2 & 8+2)PT F T –60

E-440(6+2 & 8+2)XL F T –60DB

E-450 F T –60Deluxe

E-450(8+2)PT F T –60Live PT

E-450(8+2)XL F T –70

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COMPANY’S FUTUREThe growing domestic demand for food gains and agri products promises

a very good future for company’s business. With exemption of excise duty

on tractors and growing importance of agriculture sector in the growth of

Indian economy India can become a major exporter of agri products and

increased demand both domestic and export will call for increased yields.

Tractors population today is concentrated in 10% of villages and even

today 70% of the villages do not have tractor .Crisil infa has estimated an

annual demand 3.0 lacks to 3.20 lakhs of tractors by 2007-08 vs.

2.4 lakhs in 2006-07. All these show great potential for growth in the

industry and thus in the company

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CASH MANAGEMENT

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INTRODUCTIONCash is the important current asset for the operation of the business.

Cash is a medium of exchange to purchase the goods and services and to

discharge the liabilities. Cash is the basic input needed to keep the

business running on a continuous basis; it is also the ultimate output

expected to be realized by selling the service or product manufactured by

the firm. The firm should keep sufficient cash, neither more nor less. Cash

shortage will disrupt the firm’s manufacturing operations while excessive

cash will simply remain idle, without contributing anything towards the

firm’s profitability. Thus a major function of the financial manager is to

maintain a sound cash position.

Cash is the money which a firm can disburse immediately without any

restriction. The term cash includes coins, currency and cheques held by

the firm, and balances in its bank accounts. Sometimes near cash terms,

such as marketable securities or bank time deposits, are also included in

cash. The basic characteristic of near cash asset is that they can readily

be converted into cash. Generally, when a firm has excess cash, it invests

it in marketable securities. This kind of investment contributes some profit

to the firm.

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CASH FLOW MANAGEMENTCash flow management is a process of monitoring, analyzing, and

adjusting one’s business cash flows. The most important aspect of cash

flow management is avoiding extended cash shortages, caused by having

too great a gap between cash inflows and outflows. Therefore, one

needs to perform a cash flow analysis on a regular basis, and use cash

flow forecasting so that one can take the steps necessary to head off cash

flow problems.

Cash management involves the efficient collection, disbursement and

temporary investment of cash. The treasurer department of a company is

usually responsible for the firm’s cash management system. A cash

budget, instrumental in the process, tell us how much cash we likely to

have it, and for how long.

In cash flow management I studied many statements like as follows:

Cash flow Statement

Cash Budget

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http://sbinfocanada.about.com/cs/management/g/cashflowanal.htm


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CASH MANAGEMENT SYSTEMWith timely information reporting a firm can generate significant income

by properly managing collections, disbursement cash balance and cash

equivalents investment,

Collection Disbursement

Cash

Cash Equivalents

Control through Information Report


IMPORTANCE OF CASH MANAGEMENTCash management assumes more important than other current assets

because cash is the most significant and the least productive asset that a

firm holds. It is significant because it is used to pay the firms obligations.

However cash is unproductive. Unlike fixed assets or inventories, it does

not produce goods for sale. Therefore, the aim of cash management is to

maintain adequate control over cash position to keep the firm sufficiently

liquid and to excess cash in some profitable way.

Cash management is also important because it is difficult to predict cash

flow accurately, particularly the inflows and there is no perfect

coincidence between the inflows or outflows of cash. During some

periods, cash outflows will exceed cash inflows, because payments for

taxes, dividends, or seasonal inventory build up. At other times, cash

inflows will be more than cash payments because there will be large cash

sales and debtors may be realized in large sums promptly.

Cash management is significant because cash constitutes the smallest

portion of the total current assets, yet management’s considerable time is

devoted in managing it.

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CASH MANAGEMENT STRATEGIESThe firm should develop appropriate strategies for cash management. The

firm should evolve strategies regarding the following four facets of cash

management:

Cash planning Cash inflow and outflow should be planned to project

cash surplus or deficit for each period for each period of the planning

period. Cash budget should be prepared for this purpose.

Managing the cash flows The flow of cash should be properly

managed. The cash inflows should be accelerated while, as far as

possible, the cash outflows should be decelerated.

Optimum cash level The firms should decide about the appropriate

level of cash balances. The cost of excess cash and danger of cash

deficiency should be matched to determine the optimum level of cash

balances.

Investing surplus cash The surplus cash balances should be properly

invested to earn profits. The firm should decide about the division of such

cash balance between short-term investment opportunities such as bank

deposits, marketable securities, or inter- corporate lending.

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CASH OUTFLOWFor cash management, the control of cash outflows, which is directly

related to organizational arrangements for budget execution, can pose

more difficulties than the control of cash inflows. However, issues related

to cash management should not be confused with issues related to the

distribution of responsibilities for accounting control and administration of

the payment system. The major purpose of controlling cash outflows is to

ensure that there will be enough cash until the date payments are due

and to minimize the costs of transactions, while keeping cash outflows

compatible with cash inflows and fiscal constraints. The first condition for

ensuring that cash outflows fit fiscal constraints is good budget

preparation and budget implementation covering both cash and

obligations. However, during budget implementation, cash outflows must

also be regulated through cash plans to smooth cash outflows.


CASH INFLOWIt is necessary to minimize the interval between the time when cash is

received and the time it is available for carrying out expenditure

programs. Collected revenues need to be processed promptly and made

available for use. When tax collection is done by the tax administration

offices (or by Treasury offices) the administrative organization of these

offices may have to be reviewed and their equipment modernized.

Commercial banks by virtue of the banking sector infrastructure are often

able to collect revenues more efficiently than tax offices, which should

therefore focus instead on tracking taxpayers. When revenues are

collected by commercial banks, arrangements must be defined to foster

competition and ensure prompt transfer of collected revenues to

government accounts. Systems of bank remuneration through float, which

consists of authorizing the banks to keep the revenues collected for a few

days, present inconveniences. Stringent rules to ensure prompt transfers

must be established. Moreover, bank remuneration through fees is more

transparent and promotes competitive bidding. An appropriate system of

penalties for taxpayers is also an important element in avoiding delays in

revenue collection.

51


CASH FLOW STATEMENT

52

MEANING:

IT IS a summary of firm’s cash receipts and cash payments during

period of time.

The purpose of cash flow statement is to report a firm’s cash inflow and

outflows, during a period of time, segregated in to three categories:

operating, investing and financing activities.

The statement of cash flow explains changes in cash and cash equivalent

such as treasure bill and the activities that increase and decrease cash.

The cash flow statement may be presented using either a “direct method”

(Which is encouraged by financial accounting standards board) or an

“Indirect Method” (which is likely to be the method followed by good

majority of firms). The only difference between the direct and indirect

method of presentation concern the reporting of operating activities; the

investing and financing activities section would be identical under either

method. Under the direct method, operating cash flow reported directly

by major classes of operating cash receipts (from customers) and

payment (to suppliers and employees). A separate indirect reconciliation

of Net income to net cash flow from operating activities must be provided.

The reconciliation starts with reported net income and adjusts this figure

for non-cash income statement items and related changes in balance

sheet items to determine cash provides by operating activities.


Cash flow statement has three activities like as follow:

Operating Activities:- Shows impact of transactions not defined as

investigation or financing activities. These cash flows are generally the

cash effects or transaction that enters into the determination of net

income. Thus, we see items that not all statement users might think of as

‘operating’ flows-items such as dividends and interest received, as well as

interest paid.

Investing Activities:- Shows impact of buying and selling fixed assets or

equity securities of other entities.

Financing Activities:- Shows impact of all cash transactions with

shareholders and the borrowing and repaying transactions with lenders.

54


55

IMPORTANCE The effects of cash and non-cash investing and financing

transaction.

A manager can assess the reason for differences between net

income and net cash flow from operating activities.

It is also helpful for a company to generate future net cash inflows

from operations to pay debts, interest and dividends.

It gives indication to a company’s need for external financing.

A cash flow statement is straightforward and easy to understand.

It gives a strong indication of how viable the company will be over

time.

The extent of success or failure of cash planning can be known by

comparing the actual cash statement with the budgeted cash flow

statement and remedial measures can be taken.

It discloses the volume and the speed at which cash flows in

different segments of the business


DAILY CASH FLOW REPORTThe Daily Cash Flow report is prepared with an objective to keep

incessant check on the cash flows of the firm, which includes both inflow

and outflow cash. The cash flows are planned to project cash surplus or

deficit for each period i.e daily, monthly, quarterly, semi-annual & annual

basis. The framework of report highlights all the effects, which lead to

cash surplus or deficit. It is a measure, which calculates the details of

daily transaction in terms of sale and purchase, which further includes the

means through which they take place.

At Escorts-AMG, the daily cash flow report is designed in a format suiting

their requirements .The sales of tractors is their primary goal which

includes exports as well. The bills are presented for desired collection

from various channels i.e dealers, stockiest, distributors through which

the tractors are supplied in the market. Besides tractors they also deal in

engines, backend, implements which are included in the category of other

receipts. The receipts are other than collections as they aren’t generated

through sales. Next come the payments, which are made in discharge of

financial obligation towards various suppliers, bank payments, excise

duty, salary & wages etc.

Through the various collections, receipts and payment, we are now in a

position to derive the surplus or deficit which is the result of above

57


transactions. The surplus balance shows that the collections & receipts

are more than payments and vice-a-versa in case of deficit. Though

surplus is an indicator of sound financial position and deficits the other

way round, but excess surplus is also not considered healthy which has

reasons to it like inventory pile up and so on.

The last component of the cash flow report is the outstanding debtors,

which is calculated by subtracting billing & collection from opening o/s of

debtors in domestic, export and other categories. This way the day to day

cash transactions are maintained through the cash flow report which

leads to proper functioning of an organization’s resources both men &

material.

58

COMPONENTS:

The annual cash flow statement at Escort- AMG is prepared for the fiscal

period commencing from 01/10/20XX to 31/09/20XX. They are also

maintaining the daily cash flow report with a purpose of keeping constant

check on the daily flow of cash i.e. cash inflow and cash outflow, for

different products categories, their parts and other miscellaneous.

The main products at ESCORTS – AMG are “TRACTORS“, which are

available in three major categories:

Farmtrac

Powertrac

Escorts

These products are sold into the market through intermediaries like

dealers, stockists and distributors, these parties charge a commission for

the services provided by them.

Among these parties dealers are given priority over the stockists &

distributors for the delivering the product to the end customer and the

commission also varies in the same manner.

The following are the transactions that take place in the daily cash flow

report under the following main heads:

Particulars,


Year to date i.e. the very first day of the financial year till the

previous month’s end (in which the daily report is being made),

The previous month,

Plan for the ongoing month,

The particular day for which the report is being made,

Month to date (from the beginning of the current month till the day

for which report is being made).

SALES – This includes the number of tractors sold in the domestic

boundaries as well as overseas.

BILLING – It is the process of sending accounts to customers for goods or

services. The document used is called an invoice; the invoice may be

attached to the goods or forwarded separately. The average sale value of

each tractor is calculated as a follows:

Total sales of tractors

Number of tractors sold

COLLECTION – The collections is recovered from all those parties to

whom the products are being sold. The parties involved are:

Tractors ( Direct ) – This includes the sale made through dealers to the

end customer, for which a predetermined amount is given as commission

60


to the opposite party. If the dealer fails to make the sale till the due date,

than he has to pay interest on it thereon.

Tractors ( Stockists ) – This includes the sale made through stockists,

who doesn’t sell the product by themselves but sells them through

dealers. The credit period allowed to stockists by the company is less in

comparison than that of dealers, which yields to faster generation of

income.

Tractors ( Channel financing ) – This system is adopted to improve the

working capital of the company by avoiding inventory pile up and earning

speedy collections. Furthermore, Channel Financing is an innovative

option for extending working capital finance to dealers who have business

relationships with large companies. Channel Financing is the mechanism

through which a Bank / Financial Institution meets the various financial

needs of the company.

Channel Financing could cover: -

Discounting of trade bills drawn by a company & accepted

by its dealers/ distributors/ channel partners.

Providing overdraft facility to the dealers/ distributors who

have business dealings with large corporate.

OTHER RECEIPTS : An acknowledgment (usually tangible) that payment

has been made. The below mentioned are the transactions included in it:

61

http://ardictionary.com/Made/231

http://ardictionary.com/Been/1877

http://ardictionary.com/Has/1163

http://ardictionary.com/Payment/2720

http://ardictionary.com/That/2574

http://ardictionary.com/Tangible/642

http://ardictionary.com/usually/7573

http://ardictionary.com/Acknowledgment/1529

http://ardictionary.com/An/5460


Bill discounting: it is a major activity with some of the smaller banks.

Under this type of lending, banks takes the bill drawn by borrower or his

(borrower’s) customer and pay him immediately deducting some amount

as discount / commission. The bank then presents the bill to the

borrower’s customer on the due date of the bill and collects the total

amount. If the bill is delayed, the borrower or his customer pays the bank

a predetermined interest depending upon the terms of the transaction.

The following entries could be passed in the co.’s books:

Sales bill discounting: Following entries are passed during the sales

made by the company:

Party a/c dr. ..........

To sales a/c ...........

(Being sale made on credit)

Bank a/c dr. ..........

Bank charges a/c dr. …….

To party a/c ……..

(Being payment received)

Purchase bill discounting : Following entries are passed in the books

purchases made by the company :-

Purchase a/c dr. ……

62


To party a/c ……

( being purchases made)

Party a/c dr. ……

To bill discounting supplier a/c ……

( being paid to party through bank )

Bill discounting supplier a/c dr. …….

To bank a/c ……

( being payment made to bank)

Letter of credit : The LC can also be the source of payment for a

transaction, meaning that redeeming the letter of credit will pay an exporter.

Letters of credit are used primarily in international trade transactions of

significant value, for deals between a supplier in one country and a customer

in another. The parties to a letter of credit are usually a beneficiary who is

to receive the money, the issuing bank of whom the applicant is a client,

and the advising bank of whom the beneficiary is a client. Almost all letters

of credit are irrevocable, i.e., cannot be amended or canceled without prior

agreement of the beneficiary, the issuing bank and the confirming bank. In

this 100 % payment is not given to the supplier by the bank due to loss in

63


transition, rejection & shortage. If loss doesn’t occur than 100 % is given to

the supplier on the due date.

Packing credit: when we receive an export order from countries, than we

can avail loan from bank at nominal interest as packing credit loan. It

provides the exporters with working capital between the time of the receipt

of order and the time of shipment to arrange for production or procurement

of goods. Pre-shipment finance is of particular importance to small scale

manufacturers and exporters who do not possess sufficient financial

resources to meet the expenditure involved in the production of goods for

export.

Pre shipment finance is normally provided by the commercial banks. As in

the case of many other advances the bank takes into consideration a

number of factors before making the necessary other advances to exporters

viz., (1) honesty, integrity and capital of the borrower, (2) exporter’s

experience in the line, (3) security offered, (4) the margin of interest (5) the

bank’s experience about the exporter to ensure that his name does not

appear on the caution list of the Reserve Bank.

Pre- shipment: when the company receives order

Post shipment: when assignment is dispatched from the company.

The following entries to be passed in the books for packing credit loan:

Party a/c dr. ……

To export a/c ……

64


( being export order received)

Bank a/c dr. ……

Bank charges a/c dr. …….

To packing credit loan ……

( being loan granted by bank )

Bank a/c dr. ……

To party a/c …….

( being payment made to bank)

Pcl a/c dr. ……

To bank a/c ……

( being payment of loan made to bank)

Credit note: This note is presented to the other party for the payment to be

made by the opposite party. Whereas debit note is given to the company by

the other party in case of payment is to be made by the company.

65


PAYMENTS: It is the transfer of wealth from one party (such as a person or

company) to another. A payment is usually made in exchange for the

provision of goods, services or both, or to fulfill a legal obligation.

The payments at Escorts – AMG includes – Direct (hundis, LC ), bank

payment , excise duty which is levied on the parts of the tractors, LADT

( local area development tax), sales tax , salary and wages, vrs, spare parts,

implements, electricity, overhead, finance charges, capex is the capital

expenditure made to purchase the fixed assets or adding value to the

existing fixed asset, credit note, corporate loan, loan repayments, interest,

wcdl payment, packing credit & bill discounting.

OUTSTANDING : Outstanding debtors are calculated by the following

formula –

Closing O/S = Opening O/S + Billing - Collection

In this, values are calculated for debtors outstanding in different point of

time in domestic and overseas sales of tractors & its part.

66

CASH BUDGET

MEANING:

A forecast of estimated cash receipts and disbursements for a specified

period of time.

A cash budget is arrived at through a projection of future cash receipts

and cash disbursements of the firm over interval of time, it reveals the

timing and amount of expected cash inflows and outflows over the period.

With this, the firm will be able to determine its future cash needs, and

exercise control over the cash and liquidity of the firm. Though the cash

budget may be prepared almost any interval of time, its monthly

projection is most common.

In short, we can say that cash budget is a forecast of a firms future cash

flows arising from collection and disbursement, usually on a monthly

basis.

The key to the accuracy of most cash budgets is the sales forecast. This

forecast can be either internal or external analysis, in internal approach;

sales representatives are asked to project sales for the forthcoming

period, we can then consolidate these sales estimates for the product

line. The estimates for the various product lines are then combined in to

an overall sales estimate for the firm. The basic problem with an internal

approach is that it can be too myopic, often significant trends in the

economy and in the industry are overlooked.

http://www.investorwords.com/1462/disbursements.html

http://www.investorwords.com/2038/forecast.html


Many companies use an external analysis as well, in external approach

economic analysts make forecast of the economy and of industry sales for

several years to come. They may use regression analysis to estimate the

association between industry sales and the economy in general. After

these basic predictions of business conditions and the industry are made.

The next step is to estimate the market share by individual products,

price that are likely to prevail and the expected reception of new product.

By this way we can prepare an external forecast.

For Effective Cash Budget:

A firm may be able to delay its capital expenditure or its payment

for purchase,

Purpose of cash budget should be to determine the timing and

magnitude of prospecting financing needs so that the most

appropriate method of financing can be arranged,

A decision to obtain long term financing should be based on long-

range funds requirement.

On the basis of cash budget the manager should be able to plan to

invest excess funds in cash equivalents.

69


BANK RECONCILIATION

70

Bank reconciliation involves comparing the company’s record of transactions

and balances to the bank’s record of transactions and balances. The

company should go through every transaction in their account and make

sure the company and the bank agree on the transaction.

It’s important to go through the process of bank reconciliation. If the

company doesn’t, than it is taking few risks. Without bank reconciliation, the

company may not have a clear idea of how much cash is available in their

accounts. They might bounce Cheques and incur overdraft charges.

Without bank reconciliation, the company also exposes you to risk. People

may be stealing from the company’s account. If they never look through

each transaction, they’ll never know about it. If they don’t notify the bank

quickly enough, they may be out of luck. The same goes for bank mistakes.

With regular bank reconciliation the company can find problems quickly and

make them go away.

Bank reconciliation can be done manually, in excel & there’s electronic bank

reconciliation as well.

Though the manual way for handling company’s large bank accounts is not

appropriate, it is helpful when there are fewer transactions. But still it

important for any manager to learn it as it is the basic form of doing it.

For reconciling the company’s record of transaction with the bank balances,

there are three essential requirements:

Bank book


Bank statement

Bank reconciliation statement of preceding month

Than the above transactions need to be tally & unmatched have to be

reconciled accordingly. Below is an example of how is it done manually:-

BANK RECOCILIATION STATEMENTAS ON 31.05.09

A/C NO 000381400000156 GL CODE

DESCRIPTIONBal as per bank book AS ON 31.05.09Opening bal 83382.91 DR.LESS: MAY2009 BALANCE 2726955 CR. -2643572 CR.ADD : Amount cr. By us but not dr. by bank 3634103 DR. 3634103

LESS : Amount dr. by us but not cr. by bank 3722549 CR. 3722549

ADD : Amount cr. By bank but not dr. by us 2832114 DR. 2832114

LESS : Amount dr. by bank but not cr. By us 41989.68 41989.68

Balance as per bank statement 58106.87

72


73


CASH RATIOS

74

MEANING:

Cash ratios are also important tool of cash control. There are various ratios

which explain the efficiency of cash management or vice-versa. They are the

acids test ratio, cash ratio, receivables turnover ratio, inventory turnover

ratio, cash turnover ratio etc.

These are calculated as –

LIQUIDITY RATIOS

Liquidity ratio measures the ability of the firm to meet its current obligations.

It is necessary to strike a proper balance between high liquidity and lack of

liquidity. A high degree of liquidity means that a firm’s fund will be

unnecessarily tied up in current assets. Whereas lack of liquidity, implies

failure of a company to meet its obligations due to lack of sufficient liquidity.

The ratios, which are used for the analysis of Escorts liquidity position in this

report, are:

Current Ratio

Quick Ratio

CURRENT RATIO

Current ratio is calculated by dividing current assets by current liabilities:

Current ratio = Current Assets

Current Liabilities


2006-07 2007-08

Current Ratio 1.12 1.16

From the above table it can be interpreted that Escorts liquidity position is

not constant. As a conventional rule a current ratio of 2:1 or more is

considered satisfactory because in a worse situation, even if the value of

current assets becomes half, the firm will be able to meet its obligations.

Current ratio refers to a margin of safety for creditors therefore higher the

current ratio, the greater the margin of safety.

QUICK RATIO

Quick ratio establishes a relationship between quick or liquid assets and

current liabilities. An asset is liquid if it can be converted into cash

immediately or reasonably soon without a loss of value. Inventories are

considered to be less liquid therefore calculating quick ratio they are

deducted from current assets.

Quick Ratio = Current Assets – inventory

Current liabilities

2006-07 2007-08

Quick Ratio 0.90 0.99

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Escorts quick ratio in the current year has decreased in comparison to

previous year, yet it can be considered to be satisfactory, as it is 1:1

times of current liabilities. Although quick ratio is more penetrating test of

liquidity than current ratio, yet it should be used cautiously, as all debtors

may not be liquid and cash may be immediately needed to pay operating

expenses.

The value of quick ratio is decreasing every year. The satisfactory level of

the quick ratio is 1:1. This shows the worse situation of the company. The

current liabilities are more than the quick assets.

ACTIVITY RATIOS

Activity Ratios are used to evaluate the efficiency with which the firm

manages and utilizes its assets. The ratios are called Turnover Ratios as

they indicate the speed with which the firm manages and utilizes its

assets.

Activity ratios, which are used to analyze Escorts effectiveness in Asset

utilization, are

Inventory Turnover Ratio

Fixed Assets Turnover Ratio

Working Capital Turnover Ratio

Debtors Turnover Ratio

77


Creditors Turnover Ratio

INVENTORY TURNOVER RATIO

It indicates the efficiency of the firm in producing and selling its product.

It is calculated by dividing sales by avg. inventory. In a manufacturing

company inventory of finished goods is used to calculate inventory

turnover.

Inventory Turnover = Cost of goods sold

Avg. Inventory

2006-07 2007-08

Inventory Turnover 14.42 15.10

If the company is comfortably meeting the customer needs with 9.73 days

inventory of finished goods, all India basis.

It is a good achievement for the Escorts Limited.

FIXED ASSETS TURNOVER RATIO

A firm’s ability to produce a large volume of sales for a given amount of

net assets is the most important aspect of its operating performance.

Unutilized or underutilized assets increase the firm’s need for costly

78


financing as well as expenses for maintenance and upkeep. Fixed assets

turnover is calculated by dividing net sale by net fixed assets.

Fixed Assets Turnover = Sales

Fixed Assets

2006-07 2007-08

F.A.T 2.29 2.35

Escorts fixed asset turnover have increased in 2003-04. The fixed asset

turnover of 2.78 implies that it is producing Rs.2.78 of sales for one rupee

of capital employed.

The higher the ratio, more it is satisfactory…

It should be interpreted very cautiously because the denominator of the

ratio includes fixed asset net of depreciation. Thus old assets with lower

book value may create a misleading impression of high turnover without

any improvement in sales

DEBTORS TURNOVER RATIO

Debtor’s turnover indicates the number of times debtors’ turnover each

year. Higher the value of Debtors turnover, the more efficient is the

management of credit. The liquidity position of the firm depends on the

quality of the debtors to a great extent.

Debtors Turnover = Credit Sales

79


Avg. Debtors

2006-07 2007-08

Debtors Turnover 4.44 4.29

Escorts debtors turnover is quite lower. The debtor’s turnover ratio is high

at 2003-04. The ratio is decreasing. Also the debt collection period has its

own importance. The debt collection period of Escorts was 76 days in

2003-04 but it has increased to 95 days. This does not show the

satisfactory level. The shorter the collection period, the better the quality

of debtors, since a short collection period implies prompt payment by

debtors.

A too low collection period is also not necessarily favorable as it may

indicate a very restrictive collection and credit policy. Because of the fear

of bad debt loses the firm may be selling to those only whose financial

conditions are sound and who are very prompt in making the payments.

CREDITOR TURNOVER RATIO

Creditors Turnover = Total Purchases

Creditors

80


2006-07 2007-08

Creditors Turnover 3.55 3.45

Though the days are very high and apparently appears to substitute right

collection, this extended credit has its own drawback like:

High interest inbuilt in cost system.

Sub-quality creditors may be accepted.

Quality of material may be accepted.

The payment period of Escorts Limited is 90 days in 2007-08, which is

more reasonable than previous years. This helps to make good quality

product and also better relationship with suppliers.

WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio has its own significance in the business

organizations. It shows the efficiency of the firm i.e. how much sale that

the company gets with the utilization of the limited working capital.

Working Capital Turnover = Net Sales

Net Working Capital

2006-07 2007-08

81


Working.Cap.Turn. 113.45 28.30

In the case of working capital turnover ratio Escorts is significantly going

very downward. This is a very dangerous point of the firm. The company

should try to improve it earlier. It shows that the company requires more

money to generate sales.

82

RECEIVABLE MANAGEMENT

The term receivable is defined as “debt owed to the firm by customers

arising from sales of goods in the ordinary course of business”. The sale of

goods on credit is an essential part of modern day business. The credit

sales are generally made on open account in the sense that there are no

formal obligations through a financial instrument. However extension of

credit involves risks and cost. Management should weigh the benefits as

well as the cost to determine the goal of receivable management. The

benefits from receivables are the increased sales and profits anticipated

because of more liberal policy. When firm extend trade credit, i.e. invest

in receivables, they intend on increase the sales level. The motive of

liberal credit policy can be either growth oriented or sales retention. The

extension of credit has a major impact on sales, costs and profitability.

Other things being equal, a relatively liberal policy and therefore higher

investments in receivables will produce larger sales. However the cost will

be higher with liberal policies then with more stringent measures.

Therefore account receivable management should aim at a trade- of

between profit and risk.

The costs associated with the extension of credit and account receivables

are

collection cost

capital cost

delinquency cost


default cost

85

DECISION AREAS

CREDIT POLICIES:

The credit policy of a firm provides the framework to determine whether

or not to extend credit to a customer and also how much credit to extend.

It has two broad dimensions; the first is credit standard and second is the

credit analysis. Credit standards represent the basic criteria for the

extension of credit to customers. The trade- off with reference to credit

standards covers collection costs, average collection period, level of bad

debts losses and level of sales. With a relaxed credit standard the

collection costs, bad debts expenses and sales goes up and in reverse

case vice-versa happens. The second aspect of credit policy is credit

analysis. It begins with obtaining credit information of the customers and

ends up with the analysis of the obtained credit information. Information

can be collected either internally or externally. Internal source of credit

information is derived from the records of the firm. The analysis of credit

information should cover both qualitative as well as quantitative aspects.

The quantitative aspect is based on the available financial statements

whereas qualitative aspects cover the quality of management.

CREDIT TERMS:

The second decision area in accounts receivable management is the

credit terms. After the credit standard have been establish and the credit


worthiness of the customers is assessed, the management of a firm must

determine the terms and conditions on which trade credit will be made

available. Credit terms have three components: credit period, cash

discount and cash discount period. Credit period is the duration of time for

which trade credit is extended whereas cash discount is the amount by

which the over the due amount will be reduced thus benefiting the

customer. The credit terms like the credit standard affect the profitability

as well as the cost of the firm therefore a firm should determine the credit

terms on the basis of cost-benefit trade-off.

COLLECTION POLICIES:

The collection policies refer to the procedures followed to collect account

receivable when after expiry of the credit period they become due. This

policy covers two aspects: first is the degree of effort to collect the over

due and second is the type of collection efforts.

Escort Limited has a zero debt credit policy. However it is giving the

following facilities to its dealers to promote the sales, as liberal credit

policy has a direct impact on sales.

CHANNEL FINANCE FACILITIES:

The company arranges these facilities with various bankers for the

company dealers to support their cash needs. The goods are sold on

87


credit against hundis. Hundis can be drawn for 50 or 75 or 90 days

subject to qualifying criteria of bank.

CREDIT FACILITIES:

Escort provides thirty days interest free credit to the dealers. For this in

respect of all hundis the company bears 30 days interest and the

remaining cost of interest, delayed payment charges are borne by the

dealers.

PENALTY ON BOUNCING OF HUNDIES / CHEQUES:

Bouncing of hundis/ cheques drawn in favor of the company is viewed

very strongly and usually following actions are taken.

Tractor supplies are suspended and restored only after all dues are

cleared.

All charges debited by the bank such as collection charges, penal

interest are debited to the dealer.

The bank extending channel financing policy have clearly stated

that if a dealer has two or more bouncing he will be black listed and

his limit will be withdrawn with immediate effect. Company also

makes sales to such dealers only against letter of credit or demand

draft.

88


CASH DISCOUNT ON EARLY PAYMENT:

Cash discount of 1% is payable on tractors dispatched against funds

available in the form of letter of credit or demand draft. Interest is

charged/ paid at 12% per annum on outstanding/ credit balance early

payment incentive.

PAYABLE MANAGEMENT

89


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. A better strategy is to shrink the vendor base radically, then

use one’s clout to negotiable longer terms with the vendors. Vendor

rationalization is a process that can pay off in a big way. Apart from the

question that who should authorize purchasing in the company – should it

be tightly managed or speak among a number of (junior) people? The

following comes under good payable management.

Purchase quantities should be geared to demand forecasts.

Order quantities should be used which takes account of stock

holding and purchasing costs.

The cost to the company of carrying stock should be clearly defined.

A Company should have alternative sources of supply. It should get

quotes from Major suppliers and shop around for the best discounts,

credit terms and reduce dependence on a single supplier.

90


RESEARCH METHODOLOGY

91


After recession with my locality member.I can choose the project of cash

management.I discuss the project with my instructor Mr. Avinash Gangwar

Escort ltd.

He approved the project after that a simple course of action has been

followed for working on this project.Entire information and data were

gathered from the respective Annual Report of Escort ltd.all the figures are

taken from their balance sheet and profit and loss account of the respective

year and other internal documents which are personally shown by the

member of the company in our interest.

92


SWOT ANALYSIS

93


STRENGTH Better attraction and pulverization

Fuel efficient

Better performance on field

Low speed helps better use of implements

Effective on different soil conditions

WEAKNESSES Higher overhauling cost

Lesser credit period

No warrantee on spare parts

Ineffective to pull trailers

Unavailability of spare parts

Oil pump damage

Long term finance not available

Poor after sales service

THREATS

PRODUCT

The various disadvantages that Escorts faces in comparison to its nearest

competitors M&M/PTL are:

Unavailability of spare parts

94


Color of the tractor getting faded

Uncomfortable steering because of its height more than the driver’s

seat in few models

Less power to pull trolleys are compared to SWARAJ

Hydraulic getting jammed causing service costs.

The above problems in the project are a major irritant to the farmers; the

farmers have to visit several times to get the work done from dealer. The

different models cause a concern to the farmer to select, as he gets

confused with the large number of models in the market that is not easy to

differentiate. Different areas prefer different models even if the cost is same.

There is a high demand for second hand and old tractors that increases

servicing and on the other hand reduces sales.

95


PRICING

Non uniformity pricing: The price varies from dealer to dealer. In different

districts UP the dealers have different prices for same models, as they are to

blame the fiasco, as they do not stick to the company guidelines. The

company’s failure probably is that they are unable to enforce their guidelines

on the dealers.

COSTING

ABC costing should be followed as flat overheads are

charged on all the models. These results in a well performing

models getting less advantage to the other non performing

ones on which there are higher margins which puts it at a

disadvantage position compared to its competitors.

96

OPPORTUNITY Availability of spare parts

Better servicing

Good resale value

Interest rates on loans to be lowered

Effective pulling and ploughing capabilities

Warranty on spare parts

Low maintenance cost

More colorful and attractive models are required

FINDINGS

After analyzing the Cash Report and the data furnished by the company that

being collection centre and other things.As a result there is a float

cost(mailing, administrative and collection ).there is a possibility their cash

management much more efficiently.

As company has got a follow cash planning procedure that is preparation of

cash of cash budget which seems to be quite satisfactory as far as cash

management is concerned.

So we can say the liquidity of a firm is quite satisfactory.

CONCLUSION

As my Project report does not provide ample opportunity to make a in depth

study of a given project but what soever the information so collected can be

summarized as escort tractor ltd. Is a efficiently managed company.

Its product are widely accepted not only in India but outside India also.It is a

cash rich company having no liquidity problem in near future and having

efficient cash management system.

RECOMMENDATIONS

LOANS AND ADVANCES:

Special efforts should be made to analyze loans & advances, which are

between 35% to 56% of current assets. This can be classified between

production / operation relation related and non-production / operation

related. No production related cases might be financed from other

sources like debenture etc. and treated separately.

INVENTORY:

Inventory should be reviewed constantly to identify show / dead / obsolete

item and then disposed. Optimum level should be revised periodically,

keeping in view, distance of suppliers, production lead time of supplier,

transport problem if any and reliability of suppliers. This will help to avoid

obsolesce and dead inventory.

DEBTORS:

A study may be conducted if required by experts to pinpoint reason

behind Escorts high correction period of 95 days in 2007-08 against 50

days of Mahindra & Mahindra. It is due to quality of products, quality of

customer, the segment of customers marketing effort, distribution pattern

or other reasons.

CREDITORS:

Though high payout days may be apparently beneficial for the company,

it has very heavy long term cost like high interest cost, bad credit ratings

and shyness of good quality / standard suppliers.

RATIOS:

The company should try to improve its current situation. The ratios, which

are taken in this research to evaluate the company’s position, are Current

ratio, Quick ratio and Activity ratio. These ratios show the actual position

of the company. The Quick ratio is declining since 2001-02 till now. There

is a drastic declining in the working capital turnover ratio. This ratio goes

to –ve position in current year compared to previous. The Debts collection

period is 359 days for Exporters. This shows the poor collection policy.

The current ratio is 1.12 in 2006-07, which is not up to the ideal ratio. This

shows that the current assets are equal to the current liabilities. Not

satisfactory.

OTHERS:

More attention must be given to market forecasts can be made and

the surplus of inventory is reduced to minimum

Company should not follow the competitors only. New products

should be produced for the farmers having low income and small

holdings.

Proper market survey should be carried out. The company should

explore the export market to study the present and prospective

demand.

Proper inventory plans should be made in order to reduce the

carrying cost.

New market strategies should be devised from time to time. This is

because, even if the tractor is of good quality, the competitors may

produce the same product with additional features and at lower

prices.

Marketing network should be enhanced. Company should also

produce more tractors of higher H.P. But new developments should

be made continuously in order to survive in this competitive world.

LIMITATIONS

Although every effort has been in to collect the relevant information

through the sources available, still some relevant information could not be

gathered.

Busy Schedule of Concerned Executives: The concerned executives

were having very busy schedule because of which they were reluctant to

give appointment.

Time: The time duration could not provide ample opportunity to study

every detail of working capital management of the company.

Unawareness: Executives were unaware of many terms related to

working capital study while asking to them.

Confidential Information: As the company on account of confidential

report has not disclosed some figures. Moreover, in some cases separate

accounts of division are not separately maintained thereby, leading to

restrictions in study.

BIBLIOGRAPHY

BOOKS

Financial Management- S.K Gupta

Management Accountancy-D k Gole

Cost and Management Accountancy, S.N.Maheshwari

Financial Management And Policy, James C.Van Horne

WORLD WIDE WEB

www.escortsagri.com

www.economictimes.com

www.planware.com

www.icraindia.com

Other than Web

M.I.S of the company

Annual Reports

ANNEXURES

1SToct 2007- 30th 1st oct 2006 – 30th

September 2008 sept 2007Operating income 2,012.00 2,092.04Material consumed 1,470.66 1,540.01Manufacturing expenses 47.68 50.79Personnel expenses 202.63 204.02Selling expenses 114.57 118.63Administrative expenses 69.12 57.45Expenses capitalized - -Cost of sales 1,904.66 1,970.90Operating profit 107.34 121.14Other recurring income 0.04 20.85Adjusted PBDIT 107.38 141.99Financial expenses 55.93 89.78Depreciation 42.87 44.97Other write offs - 3.32Adjusted PBT 8.58 3.92Tax charges 47.13 -10.89Adjusted PAT -38.55 14.81Non recurring items 17.56 -21.25Other non cash adjustments 32.86 -Reported net profit 11.87 -6.44Earnings before appropriation -133.59 -145.46Equity dividend - -Preference dividend - -Dividend tax - -Retained earnings -133.59 -145.46

PROFIT AND LOSS ACCOUNT

BALANCE SHEET AS ON…..

1ST OCT 2007- 30th SEPT

2008 1st OCT 2006 – 30TH SEPT

2007 Equity share capital 90.71 83.69Share application money

- -

Preference share capital

- -

Reserves & surplus 645.49 563.38Secured loans 422.63 414.04Unsecured loans 14.44 31.10Total 1,173.27 1,092.21Gross block 1,415.93 1,436.96Less : revaluation reserve

466.46 471.90

Less : accumulated depreciation

593.41 583.24

Net block 356.06 381.82Capital work-in-progress

14.43 13.40

Investments 425.79 425.13Current assets, loans & advances

1,131.98 1,325.61

Less : current liabilities & provisions

776.14 1,069.68

Total net current assets

355.84 255.93

Miscellaneous expenses not written

11.00 15.93

Total 1,163.12 1,092.21Book value of unquoted investments

494.53 493.87

Market value of quoted investments

1.98 3.31

Contingent liabilities

168.40 318.74

Number of equity shares outstanding (Lacs)

907.09 836.94

CASH FLOW STATEMENT

PARTICULAR MARCH (2008)

MARCH (2007)

CASH FLOW FROM OPERATING ACTIVITIES N.P BEFORE TAX 26.14 -17.33Adjustment for:

provision for doubtful debts , obsolescence inventory & advances

16.36 1.89

Gain on sale of long term investment -1.22 Gain on sale of asset -4.8 -0.13

Depreciation 42.87 44..97Assets w/off 11.64 8.08

Interest expense 62.2 72.22Dividend income 0.04 -0.02

Interest income 12.93 -20.82Operating profit before change in w.capital 141.52 87.64

Adjustment for: Trade & receivable -65.36 -168.61

Money in escrow account 20.09 Inventory -43.68 13.79

Trade payable 58.02 67.05Misc.expenditure -3.21 -7.5

Op.profit after change in w.capital -34.14 -95.27Cash generated from operating activities 107.38 -7.63

Less-Direct taxes/refunds -6.25 -17.85NET CASH FLOW FROM OPERATING

ACTIVITIES101.13 -25.48

CASH FLOW FROM INVESTING ACTIVITIES Purchase of fixed assets -7.5 0.86

Proceeds from sale of fixed. Assets 14.26 -30.95 Loss on sale of investment -30.64

Movement in loan & advances -3.9 -16.27Sale of investment -0.66 32.33

Short term deposits with schedule banks 8.58 -2.31Interest received 3.21 20.7Dividend received -0.04 0.02

NET CASH FLOW FROM INVESTING ACTIVITIES 16.69 4.38

CASH FLOW FROM FINANCING ACTIVITIES Proceeds from share capital & securities premium 40.32 114.44Proceeds/repayment from long- term borrowings 234.09 80.6

Less:repayment of long term borrowing -41.68 -0.54Proceed/repayment from short-term borrowing -46.83 -146.82

Interest paid -66.27 -77.4NET CASH USED IN FINANCING ACTIVITIES -114.46 -23.72

Net increase / decrease in cash & cash equivalents

(30.03 -44.82

OPENING CASH BALANCE 60.83 105.65CLOSING CASH BALANCE 30.8 60.83

Documents

Cash Management in Amg Escorts Ltd_2011