Divyesh Report

8/2/2019 Divyesh Report

1/79

Dr.J.K.Patel Institute of Mngt.1

A

PROJECT REPORT

ON

WORKING CAPITAL MANAGEMENT

OF

AUSTIN ENGENEERING COMPANY

Submitted to

Dr.J.K.PATEL INSTITUTE OF MANAGEMENT

IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE AWARD FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

Under

Gujarat Technological University

UNDER THE GUIDANCE OF

Faculty Guide Company Guide

Prof. Amita Garg Amit joshi

Submitted by:

Divyesh C. Mungara

Enrollment No: 107920592056

M.B.AI Sem- 3rd

DR.J.K.PATEL INSTITUTE OF MNGT.VADODARA

M.B.A PROGRAMME

Affiliated To Gujarat Technology University

Ahmedabad

July-2010-2012


2/79


PREFACE

There is an ancient proverb practice makes a man perfect. It indicatespractice makes the person more practical and provide a training and knowledge

.Practical knowledge is must for any field to have the practical knowledge andhave proposed my project work on Austin Engineering Co.

Industrial training makes perfect in term how, when and where thetheorical knowledge is useful to save the business problem.

This report is a reflection of what I observed & come to know during mytraining to this industry


3/79


ACKNOWLEDGEMENT

The successful and timely completion of this training would not havebeen possible without the kind co-operation and support of the various

department heads of the AUSTIN ENGINERING COMPANY LIMITED, whoco-operatively provided the honest information .

Let me begin my acknowledgement by thinking the whole staff ofAUSTIN ENGINERING COMPANY LIMITED, for the co operation andthe support during our summer project. Mr.AMIT JOSHI

I am very grateful to all the faculties of my college because they alsogive the right guidance. They have always been a source of inspirationand I would like to thank them for all their support and care in their effortstowards the summer internship and the project which was our part of summer

training.

Thanking You,

Date: 15th July 2010

Place: Junagadh

Yours Faithfully,

(Divyeshmungara)


4/79


DECLARATION

I, Divyesh C mungara, here by declare that the report for Summer TrainingProject entitled AUSTIN ENGINERING COMPANY LIMITED is a result of my

own work and my indebtedness and other work publication reference, if any,have been duly acknowledged.s

Place: sign:

Date:


5/79


INDEX

S.NOPARTICULARS PAGE

NO

1 EXECUTIVE SUMMARY 6

2 LITERATURE REVIEW 7

3 INTRODUCTION TO COMPANY. 8

4 FINANCIAL INFORMATION 23

5 STATEMENT OF PROBLEM / NEED FOR STUDY 28

6 OBJECTIVE OF STUDY 29

7 RESEARCH METHODOLOGY 30

8 CONTENTS 33

9 DATA ANALYSIS AND INTERPRETATION 46

10 LIMITATION OF STUDY 76

11 FINDINGS 77

12 RECOMMENDATIONS 78

13 BIBLIOGRAPHY 79


6/79


EXECUTIVE SUMMARY

Working Capital refers to that part of the firms capital, which is required for

financing short-term or current assets such as cash, marketable securities,

debtors and inventories. Funds, thus invested in current assets keep

revolving fast and are constantly converted into cash and this cash flow out

again in exchange for other current assets.

Corporate executives devote a considerable amount of attention to the

management of working capital. Working capital is the life blood of any

business, without which the fixed assets are inoperative.

To study how the company manage its current assets to maintain

better financial position.

To know the reasons of deviations in the working capital position of the

company.

To study the liquidity management of the company

To study the inventory management of the company

To study the receivables management of the company


7/79


LITERATURE REVIEW

BASIC CASH FLOW MANAGEMENT

Managing cash must take an equal stature with Net Income. In financialmanagement, "cash is king" is a frequent motto. So your first step inmanaging cash is to elevate the importance of cash. The basic process formanaging cash is straightforward. Try to maintain an adequate level of cashto meet current obligations and invest idle cash into earning assets. Earningassets must have high liquidity; i.e. you must be able to convert investmentsback into cash quickly. Additionally, you want to protect your cash balance bypaying obligations only as they come due. Managing cash also involvesaggressive conversion of current assets into cash. Inventory levels must beconverted into accounts receivables and accounts receivables must beconverted into cash. Ratios should be used to monitor the conversion of cash,

such as number of days in inventory and number of days in receivables. Cashbalances are the end result from a combination of cycles: inventory,purchasing, receivables, payables, etc. The key is to properly manage thesecycles for conversion into cash. Once conversion cycles are identified, cashforecasts can be prepared for managing cash. Weekly cash reports are usedto monitor balances. Since everything ultimately passes through your cashaccount, a strong internal control system is required. This involves theseparation of duties in handling cash, reconciling cash accounts, adequatesupport for cash disbursements, and other control procedures. The overallobjective is to protect cash just like any other asset through a system ofinternal controls.

Matt H. Evans

INTRODUCTION TO COMPANY


8/79



9/79


INDEX

Sr. No. PARTICULARS Page No.

1. COMPANY PROFILE 10

2. BOARD OF DIRECTOR 12

3. VISION AND MISSION 13

4. MILE STONE 14

5. SIZE AND FORM OF ORGENIZATION 16

6 MANPOWER

7. ORGENIZATION STRUCTURE 17

8. FUTURE PLAN AND ACHIVEMENT 18

9. PRODUCT RANGE 19

10. SUPPLIER AND CUSTOMER 20

11. QUALITY CONTROL 22


10/79


COMPANY PROFILE

Name of the unit : - Austin Engineering Company Ltd.

Year of the

Establishment :- 1973

Form of

Organization :- Medium Scale

Registered Office :- Austin Engineering Co. Ltd.

Dist. : Junagadh

Tal. : Bhesan

Patala 362 030

Address of Junagadh

Office :- 101, G.I.D.C. Estate,

Vadal Road,

Junagadh 362 003.

Phone Numbers :- (91-285) 2660144, 2660069

Fax Numbers :- (91-285) 2661505

E-mail Address :- [email protected]

Auditors :- Dhirubhai Dand & Co.

Chartered Accountants
mailto:[email protected]:[email protected]


11/79


Gokul Chamber,

Junagadh 362 001.

Cost Auditors :- S.B. Parikh & Co.

Cost Accountants,

Vadodara.

Bankers :- Bank of Baroda, Junagadh.

Registrar & Transfer

Agent :- Sharepro Services,

Satam Estate,

3rd floor,

Above Bank of Baroda,

Cardinal Gracious Road,

Andheri (E)

Mumbai 400 099


12/79


BOARD OF DIRECTORS

Mr. N.C.Vadgama : Chairman & Executive Director

Mr. S.M.Thanki : Managing Director

Mr. R.N.Bambhania : Joint Managing Director

Mr. J.R.Bhogayta : Executive Director

Mr. S.V.Vaishnav : Non Executive Director

Mr. B.R.Sureja : Non Executive Director

Mr. K.J.Mehta : Non Executive Director

Mr. D.B.Nakum : Non Executive Director


13/79


VISION

Always improve continuously Utilize resources in most efficient way

Be versatile to adopt changes Serve society in most efficient manner

MISSION

To implement the ISO/ TS 16949 quality system

To increase the marketing capability up to 2100 mm diameter


14/79


MILE STONE

1973Partnership firm formed by five technocrats.Started manufacturing needle roller cage assemblies with the manpower of 10

and the capital investment of 3500 US Dollars.

1974Started manufacturing cylindrical roller bearings and deep groove ball bearingsup to 50mm diameter.

1975Started manufacturing single row spherical roller bearings.

1978Partnership firm converted into Private Limited Company.

Started manufacturing tapered Roller Bearing up to 100mm diameter.

1980Manufacturing capacity of all aforesaid bearings increased up to 150mmdiameter.

1982Started supplying bearings for gear box application to Premier AutomobilesLimited (FIAT-Italy Collaboration) for passenger cars.

1984

Started supplying case carburized specially heat treated ground components(exclusive supplier) and King-pin bearings to TELCO for light and heavycommercial vehicles.

1985Converted into Public Limited Company and offered shares to public.

1986Started New Plant (Unit II) with installation of machinery and testing/measuringequipment imported from Germany. Started exporting bearings to developedcountries such as UK, USA, and Italy.

1987Started manufacturing import substitute bearings for military tanks and armedvehicles of Indian Defense Department.

1990Increased manufacturing capacity to 600mm diameter. Started manufacturingdouble row tapered and spherical roller bearings.


15/79


1991Awarded indefinite rate contract with All India State Road Transport Undertakings(ASRTU) for 78 sizes of bearings for their passengers vehicles.

1993

Started manufacturing flexible roller bearings.

1995Manufacturing capacity increased to 800mm diameter.

1997Started manufacturing flush ground single row angular contact ball bearings forUS and European Markets.

1998Started production of four row tapered roller and mutli-row cylindrical rollerbearings for roll-neck application in steel plants.

1999Awarded ISO 9001 Certification for design and manufacturing of all type of rollingbearings from TUV Rheinland.

2000Established AEC Europe S.R.L in Milan, Italy.

2002Developed stainless steel (Grade 440C) bearings (for Atomic Energy Plant).

2003Developed and supplied Screw Down bearing (equivalent to Torrington 202TTSX 942 EE2000).

2004Developed Slim bearings (Constant Section Bearings) up to 18 inch.Established Accurate Engineering Inc. (WOS of AEC Ltd.) in USA.

2006Awarded ISO/TS 16949:2002 Certification for design and manufacturing of alltype of rolling bearings from TUV Rheinland.

2008Developed crossed cylindrical and tapered roller bearings.


16/79


SIZE AND FORM OF THE ORGANIZATION

On the basis of size, there are mainly three size of organization.

1. Large Scale Organization2. Medium Scale Organization.

3. Small Scale Organization

AEC is a Medium Scale unit as it has 7 caroreS of equity equipment andmachinery .And it has employed 655workers.threfpre we can say that AEC is aLARGE scale unit. The form of organisation can be classified as under:

FORM OF OWNERSHIP

Sole proprietorship

Partnership Co-operative society Company Pvt. Ltd Public Ltd. Government

As far as the Austin Engineering Company Limited is a public limitedcompany because it has element of public limited company. It is an incorporatedassociation which is an artificial person created by law having a common seal,

different capital ,transferable share, limited liability, wide distribution of risk andlarge membership etc.

MANPOWER

Sr. No. Description Employees

01. OFFICE AND ADMINISTRATION 131

02. QUALITY ASSURANCE 070

03. DIRECT MANUFACTURING 20004. INDIRECT MANUFACTURING 199

05. ENGINEERS 035

06. SUPERVISORS 02

TOTAL 655


17/79


ORGANIZATION STRUCTURE

An organization is group of people working together towards to achieve oneor more targeted Goals. A good organization structure is the basis of anysuccessful organization for an effective system There are mainly following type oforganization structure.

Types of Organization Structure

As far as AEC Co. Ltd. Is concern it has adopted Line & Stafforganization Structure. In this type of structure line of authority &responsibility moves downward. Here individual & a group of specialists advisethe line officer for the special aspects. It would be clear by following organization

LINE

ORGANIZATION

FUNCTIONAL

ORGANIZATION

STAFF

ORGANIZATION

DIVISIONAL

ORGANIZATION

LINE &

STAFF


18/79


FUTURE PLANS

Due to nature of confidentiality, it is obvious that an organization maynot find it appropriate. Certain key plant, however the management of AEC ltdshared the following information.

Development slewing rim bearings for heavy earth moving &construction equipment

Increase adherence to the training calendar Reduce new development cycle time, machine idealness, electrical &

mechanical breakdowns Etc.

ACHIVEMENT

Back up roller bearings for sendzimei cold strip mills Multi raw cylindrical roller bearings & for two tapered roller bearings for

roll neck, application in rolling mills. Flush ground single row angular contact ball bearings.

Precision class cylindrical roller bearings for machine tools spindleapplication.

Flexible roller bearings

Thin series ball bearings

Large diameter, spherical roller thrust bearing

Moreover, the co is having 9001: 2000 certificate


19/79


PRODUCT RANGE

There are varieties of bearings that are right now in existence. They canbe classified according to the size and use of it. In the world market, 20,000types of bearings are traded and used. Specifically AEC ltd. produces around4,500 different types of bearings, which can be classified into two maincategories.

Ball Bearing, Roller Bearing.

Roller bearing can be classified into four types.

Spherical roller bearing (SRB) Taper roller bearing (TRB) Cylindrical roller bearing (CRB) Needle roller bearing (NRB) Flexible roller bearing (FRB)


20/79


SUPLLIERS

1) Mahindra & Mahindra Ltd-steel bars2) Indian Seamless Metal type ltdsteel pipe3) Social steel ltd-Roller Material4) Needumeelbra Industries ltd.-steel rolls5) Sanjay udhyog-Brass Cages

CUSTOMERS

MAJOR CUSTOMERS

BHARAT HEAVY ELECTRICALS LTD. BHOPAL

BHARAT HEAVY ELECTRICALS LTD. TRICHI

BHILAI STEEL PLANT BHILAI

BOKARO STEEL PLANT BOKARO STEEL CITY

C.V.R.D.E. CHENNAI

EICHER TRACTORS LTD. FARIDABAD

FAIRFIELD ATLAS LTD. BELGAUM

INDIAN AIRLINES LTD. CHENNAI

INDIAN RAILWAYS PATIALA

L & T KOMATSU LTD. BANGLORE

OIL & NATURAL GAS COMMISSION KARAIKAL

ROURKELA STEEL PLANT ROURKELA

VOLTAS LIMITED THANE

VOLTAS LIMITED CHINCKPOKALI


21/79


LIST OF MAJOR EXPORT CUSTOMERS

AEC-EUROPE S.R.L. ITALY

ASSOCIATED DYNAMIC LTD. U.S.A.

BEARINGS LIMITED U.S.A.

FAIRFIELD MANUFACTURING CO. U.S.A.

GULF UNITED INC. U.S.A.

PARKER HANNIFIN CORP. U.S.A.

R & M ENERGY SYSTEMS U.S.A.

TVS AUTO PARTS SRILANKA

DOUGLAS & SONS SRILANKA


22/79


QUALITY CONTROL

Moreover the Company is an ISO 9001-2000 Company. It is also good atthe social responsibility. The general statement of Austin is as under:

We are committed to satisfy customer needs and expectations continuously by

Developing and providing quality products.

Measuring, Monitoring and improving process performance. Continuously improve work culture by providing adequate training &

develop good interpersonal relation.

Here, Austin Engineering Company Ltd. has given special attention onthe quality of the product. It is also an ISO 9001:2000 awarded companybecause of its quality. Moreover, they have developed a QUALITY POLICY forbetter quality control. The company is also having certain testing instruments for

testing the product at different levels. The product process includes fiveinspection stages which show the companys efforts to maintain its quality.

Different instruments are necessary for measuring accuracy of theproduct, which are given below

Testing instruments:-

SpectrometerMagna field crack detectionSurface roughness tester

Roundness testerElectronic comparatorAir gauge comparator


23/79


FINANCIAL INFORMATION


24/79


INTRODUCTION

Financial management is the managerial activity, which is concerned withplanning and controlling of firms financial resources. As we know that this

discipline is on resent origin, financial management consist of two words mainlyfinance and management.

Finance may be defined as firm that important resources which arerequired at all the stage of different activity on the other hand management isprocess of planning, organizing, directing and controlling. IT is worth to notedown that managerial functions are applied to the finance. It means planning &controlling activities of finance is major activity under the financial management.

According to Hogard, Financial management is the application ofplanning & controlling functions to the finance functions.

From above definition it is quite clear that effective utilization of funds ismajor concerned from financial manager. Needless to mention that finance playsevery vital role in any organization.


25/79


ORGANIZATION OF FINANCIAL MANAGEMENT

Organization of finance department means that division Tandclassification of various functions that are to be performing by the financial

department. Because of importance of financial department it is necessary tosetup sound & effective organization chart depends generally subject to change.Internal factor such, as size and nature of the business and external are taxpolicy etc

FINANCE DEPARTMENT

Chairman & Director

General Manager

Finance Manager

Accountant Financial Officer

Excise Clerk Accountant Clerk

Organization of finance department means that division and classificationof various functions that are to be perform by the financial department. Becauseof importance of financial department it is necessary to setup sound & effectiveorganization chart depends generally subject to change. Internal factor such, as

size and nature of the business and external are tax policy etc.


26/79


FINANCIAL PLANNING

Planning always plays an important role for arranging differentactivity of the organization. As planning determine future course of action in

present. Financial planning relates with financial activities of the organization.More clearly Financial planning means deciding in advance, the financialactivities to be carried on to achieve the basic objectives of the firm. Financialplanning is the most affecting factor to financial resources and position of thecompany. So Financial manager should formulate financial plan after consideringrunning condition and position of the firm. Financial planning is highly related withdisbursement of income and creation of income. The success of business ishighly on financial planning.

The process of estimating the funds requirements of a firm and determining thesources of funds is called financial planning.

( I.M.pandey)

Above definition simplifies that financial planning relates withdetermining the future course of action related with financial department.

Financial planning or plan can be formulated for different period of as following.

Long Term Planning Medium Term Planning Short Term Planning

Austin Engineering Co. Ltd. has good financial planning. Bankof Baroda provides finance to the company. In long term planning this companythink about expansion of business & modernization of company.

CAPITAL STRUCTURE

Capital structure is completely different from Capitalization capitalstructure refers to the make up of its Capitalization. Capital structure is thepermanent financing of firm represented by long term debt, preferred stock andnet worth. Capital structure is used to represent the proportionate relationship

between debt & equity. Capital structure also includes loans, bonds, shareissued, reserves etc.

Capital structure of Austin Engineering Co. Ltd. is perfectly maintained. Noshortage of capital is aroused because of enough capital. The company hasenough capital resources whenever it is required. So, company has no problemabout capital structure.


27/79


Particular Amt

Authorized capital

34,77,800 equality shares (Rs. 10) 34,778,000

Reserve & surplus 367,104,781

Loan Fund:

Secured loan 93,064,494

FIXED ASSETS MANAGEMENT

Capital is invested in firm of company in two ways:

I. Fixed AssetsII. Current Assets

To run the business working capital is must but at the time of starting ofbusiness fixed assets are also must. Fixed assets in long-term capital, whichaffects in more than one year. Once the capital is invested in fixed assets thecompany cannot convert it into cash in one year or we can say that during the lifetime of business fixed assets cant be converted into cash.

Fixed assets mean the assets, which are fixed and permanent in nature,which remaining the organization for a long time period. Generally fixed assets isthat type of assets which have long duration like heavy machinery land, building,furniture, goodwill, vehicles, computers etc.

Fixed assets 160465800

7%

74%

19%

Authorized capital

Reserve & surplus

Secured loan


28/79


current assets 534102425

FIXED ASEESTS MANAGEMENT

STATEMENT OF PROBLEM / NEED FOR STUDY.

It is useful for the management.

It gives information to the company about the cash management

With the help of working capital management, current assets and currentliability can be managed.

To know about the investment in current assets or fixed asset

To help the balanced working capital

It gives information about the debtor and creditor conversation period so ithelps to balanced them.

To manage inventory efficiently and effectively in order to avoid unnecessaryinvestment.

23%

77%

Fixed assets

current assets


29/79


OBJECTIVES OF THE STUDY

Study of the working capital management is important. Because unlessthe working capital is managed effectively, monitored efficiently, planed properly

and reviewed periodically at regular intervals to remove bottlenecks.

To study the working capital management of Austin EngineeringCompany Ltd.

To study the liquidity position through various working capitalrelated ratios.

To study the operating and cash cycle of the company.

To study of components of various working capital management.


30/79


RESEARCH METHODOLOGY

Research methodology is a way to systematically solve the researchproblem. It may be understood as a science of studying now research is donesystematically. In that various steps, those are generally adopted by a researcherin studying his problem along with the logic behind them. It is important forresearch to know not only the research method but also know methodology. Theprocedures by which researcher go about their work of describing, explaining andpredicting phenomenon are called methodology. Methods comprise theprocedures used for generating, collecting and evaluating data. All this meansthat it is necessary for the researcher to design his methodology for his problemas the same may differ from problem to problem.

To recognize the various type of information which are necessaryfor the study of working capital management.

Collection of data from various department of AEC to analyze the

working capital management of AEC For understanding the various reports, personal interviews are

conducted.

With the help of various techniques like:- Operating Cycle analysis- Ratio Analysis- Common size statement- The overall position of AEC is studied and analyzed

Suggestions are given on the basis of findings for betterunderstanding of working capital management.

Data collection is important step in any project and success of anyproject will be largely depend upon now much accurate you will be able to collectand how much time, money and effort will be required to collect that necessarydata, this is also important step. Data collection plays an important role inresearch work. Without proper data available for analysis you cannot do theresearch work accurately.


31/79


TYPES OF DATA COLLECTION

There are two types of data collection methods available.

1. Primary data collection

2. Secondary data collection

1) Primary dataThe primary data is that data which is collected fresh or first hand, and for first

time which is original in nature. Primary data can collect through personalinterview, to support the secondary data.

2) Secondary data collection method (literature review)

The secondary data are those which have already collected and stored.Secondary data easily get those secondary data from records, journals, annualreports of the company etc. It will save the time, money and efforts to collect thedata. Secondary data also made available through trade magazines, balancesheets, books etc. This project is based on primary data collected throughpersonal interview of head of account department, head of department and otherconcerned staff member of finance department. But primary data collection hadlimitations such as matter confidential information thus project is based onsecondary information collected through four years annual report of thecompany, supported by various books and internet sides. The data collectionwas aimed at study of working capital management of the company.

Project is based on

1) 30 Annual report of AEC2) 31 Annual report of AEC3) 32 Annual report of AEC4) 33 Annual report of AEC

SCHEDULE

The complete project will be for duration of 6 weeks. The project has beendivided into 2 stages with approximate time period allotted to each stage. Boththe stages along with their approximate timelines are as follows:

STAGE 1 (APPROX 3 WEEKS)

The study of companys current assets and current liability by analysis of last 4years annual report of the company.


32/79


STAGE 2 (APPROX 3 WEEKS)

The study of the overall working capital of the company and comparison with lastyear and analysis the data and give conclusion.

SCOPE OF THE STUDY

Studying the working capital of Austin Engineering Company ltd andcomparing it with previous years working capital.

It become quite difficult rather impossible to make judgment about theworking capital management of company by way of analyzing the financial

statements of one year.

To get a view about the business happiness, the past data of someyear relating to the problem are studied and trend is determined. The presentstudy covers a period of years from 2007 2011. A large period may proveinconvenient while a short period would not give desired results. A period of fourto six years is to be considered to be the optimum one.

The present study has been undertaken to analyze the working caital isbeing managed in the company and how far it contributes to the overall objectiveof optimum use of organizations wealth.


33/79


CONTENTS

Working capital management

Working capital management is concerned with the problems arise inattempting to manage the current assets, the current liabilities and the inter

relationship that exist between them. The term current assets refers to thoseassets which in ordinary course of business can be, or, will be, turned in to cashwithin one year without undergoing a diminution in value and without disruptingthe operation of the firm. The major current assets are cash, marketablesecurities, account receivable and inventory. Current liabilities ware thoseliabilities which intended at there inception to be paid in ordinary course ofbusiness, within a year, out of the current assets or earnings of the concern. Thebasic current liabilities are account payable, bill payable, bank over-draft, andoutstanding expenses. goal of working capital management is to manage thefirms current assets and current liabilities in such way that the satisfactory levelof working capital is mentioned. The current should be large enough to cover its

current liabilities in order to ensure a reasonable margin of the safety.

Meaning:-

Working capital refers to the cash a business requires for day-to-dayoperations or more specifically, for financing the conversion of raw material intofinish goods, which the company sells for payment. The better the companymanage its working capital, the less the company needs to borrow. Evencompanies with cash surpluses need to manage working capital to ensure thatthose surpluses are invested in ways that will generate suitable return for

investors.

Objectives:-

The basic objectives of working capital management are:-

Optimist the level of investment in C.A. and reduction in C.L. It should maintain the marginal ratio in C.A and should note is not more then

the cost of capital employed to finance the C.A.


34/79


Definition: -

The management of short term asset and short run resource is said to beworking capital management or current asset management

Need of working capital management

Mainly the working capital is needed for day-to-day activities of a firm. Every firmaims at maximizing the worth of its shareholders. In its strive to do so, a firmshould earn sufficient return from its operation. The firm has to invest enoughfund in current assets for generating sales. Current assets are needed becausesales do not get converted into cash instantaneously.

CONCEPTS OF WORKING CAPITAL

Working capital is often defined as the excess of current assets overcurrent liabilities. There are two concepts of working capital.

1. Gross working capital2. Net working capital

Gross working capital

Gross working capital refers to the firms investment in the current assets.

Current assets are the assets which can be converted into cash within anaccounting year and include cash short term securities, bills receivables, debtors,and stock.

Net working capital


35/79


Refers to the difference between current assets and current liabilities.Current liabilities are those claims of outsiders which are expected to mature forpayment within an accounting year and include creditors, bills payable, andoutstanding expenses.

Net working capital can be positive or negative. A positive net workingcapital will arise when current assets exceed current liabilities.

A negative net working capital occurs when the current liabilities are inexcess of current assets.

TYPE OF WORKING CAPITAL

The operating cycle creates the need for current assets (working capital).However the need does not come to an end after the cycle is completed toexplain this continuing need of current assets a destination should be drawnbetween permanent and temporary working capital.

TYPES OF WORKING CAPITAL:

1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working

capital also arises continuously. But the magnitude of current assets needed isnot always same; it increases and decreases over time. However there is alwaysa minimum level of current assets. This level is known as permanent or fixedworking capital.

2. Temporary Working Capital:

The extra working capital needed to support the changing production andsales activities, is called variable or functioning or temporary working capital. Thiscan be shown in the following diagram:-


36/79


Amount of Working Capital

Temporary capital

Permanent Capital

Time


37/79


DETERMINANTS OF WORKING CAPITAL

Nature of business Length of production cycle

Size and growth of business Business/ Trade cycle

Terms of purchase and sales Profitability

Operating efficiency

COMPONENTS OF WORKING CAPITAL

Inventories

Sundry debtors

Cash and bank balance

Loan and advance Liability

Provision

OPERATING AND CASH CONVERSION CYCLE

A firm should aim at maximizing the wealth of its shareholders, so thefirm should earn sufficient returns from its operations. Earning a steady amountof profit requires successful sales activity. The firm has to invest enough funds incurrent assets for generating sales. Current assets are needed because sales donot convert into cash instantaneously. There is always an Operating cycleinvolved in the conversion of sales into cash.


38/79


There is difference between current and fixed assets in terms of theirliquidity. A firm requires many years to recover the initial investment in fixedassets such as plant and machinery or land and building. On the contrary,investment in current assets is turned over many times in a year. Investment incurrent assets such as inventories and debtors (accounts receivable) is realized

during the firms operating cycle that is usually less than a year.

OPERATING CYCLEis the time duration required to convert sales, after theconversion of resources into inventories, into cash.

The operating cycle of manufacturing company involves three phases:

Acquisition of resources such as raw material, labor power and fuel etc.

Manufacture of the product which includes conversion of raw materialsinto work-in-progress into finished goods.

Sale of the product either for cash or on credit. Credit sales createaccount receivable for collection.

These phases affect cash flows, which most of the time, are neithersynchronized nor certain. They are not synchronized because cash flows usuallyoccur before cash inflows.

Cash inflows are uncertain because sales and collections which give rise

to cash inflows are difficult to forecast accurately, on the other hand, arerelatively certain. The firm is, therefore, required to invest in current assets for asmooth, uninterrupted functioning. It needs to maintain liquidity to purchase rawmaterials and pay expenses such as wages and salaries, other manufacturing,administrative and selling expenses and taxes as there is hardly a matchingbetween cash inflows and outflows. Cash is also held to meet any futureexigencies. Stocks of raw materials and work-in-progress are kept to ensuresmooth production and to guard against non-availability of raw material and othercomponents. The firm holds stock of finished goods to meet the demand ofcustomers on continuous basis and sudden demand from some customers.Debtors are created because goods are sold on credit for marketing and

competitive reasons. Thus, a firm makes adequate investment in inventories, anddebtors, for smooth, uninterrupted production and sale.


39/79


Length of Operating Cycle

The length of the operating cycle can be calculated in two ways:

a) Gross Operating Cycle

b) Net Operating Cycle

a) Gross Operating Cycle

The grass operating cycle of a manufacturing concern is the sum ofInventory Conversion Period and debtors (receivable) conversion period. Thus,Gross Operating Cycle is gives as follows.

Inventory conversion Period + Debtors Conversion Period

Inventory Conversion Period:

The inventory conversion period is the total time needed for producingand selling the product. It is the sum of (1) raw material conversion period, (2)work-in-progress conversion period, and (3) finished goods conversion period.

Raw material conversion period

The raw material conversion period is the average time period taken toconvert material into work-in-progress. Raw material conversion period dependson: (a) Raw material consumption per day, and (b) Raw material inventory. Rawmaterial consumption par day is given by the total raw material consumptiondivided by the number of days in the year (say 365). The raw material conversionperiod is obtained when raw material inventory is divided by raw materialconsumption per day.

Work-in-progress conversion period

Work-in-progress conversion period is the average time taken to complete thesemi-finished or work-in-progress. It is given by the following formula:

Raw material conversion period = Raw material inventory X 365

[Raw material consumption]

Work-in-progress conversion period = work-in-progress inventory X 365

[Cost of production]


40/79


Work-in-progress conversion period = work-in-progress inventory X 365

[Cost of production]

Finished goods conversion periodFinished goods conversion period is the average time taken to sell the finishedgoods. It can be calculated as follows-

Finished goods conversion period = Finished goods inventory X 365

[Cost of goods sold]

Debtors conversion period:

Debtors conversion period is the average time taken to convert debtors intocash. It represents the average collection period. It is calculated as follows:

Debtors conversion period= Debtors X 365

[Credit sales]

b) cash conversion or Net operating cycle

Net operating cycle is the difference between Gross operating cycle andcreditors (payables) Deferral period.

Creditors deferral period:

Creditors deferral period is the average time taken by the firm in paying

its suppliers. It is calculated as follows:

Finished goods conversion period = Finished goods inventory X 365

[Cost of goods sold]

Debtors conversion period= Debtors X 365

[Credit sales]

Creditors deferral period= Creditors X 365

[Credit purchases]


41/79


Creditors deferral period= Creditors X 365

[Credit purchases]

In practice, a firm may acquire resources (such as raw materials) on credit andtemporarily postpone payment of certain expenses. Payables, which a firm candefer, are spontaneous sources of capital to finance investment in currentassets. The creditors deferral period is the length of time the firm is able to defer

payments on various resource purchases.

Net operating cycle is also referred to as cash conversion cycle. Itis the net time interval between cash collections from sale of the product andcash payments for resources acquired by the firm. It also represents the timeinterval over which additional funds, called working capital, should be obtained in

order to carry out the firms operations. The firm has to negotiate working capitalfrom sources such as commercial banks. The negotiated sources of workingcapital financing are called non-spontaneous sources. If net operating cycle ofa firm increases, it means further need for negotiated working capital.

There are two ways of calculations of cash conversion cycle. One isthat depreciation and profit should be excluded in the computation of cashconversion cycle since the firms concern is with cash flows associated withconversion at cost; depreciation is a non-cash item and profits are not costs.

A contrary view air that a firm has to ultimately recover total costs andmake profits; therefore the calculation of operating cycle should includedepreciation, and even the profits.

The above operating cycle concept relates to a manufacturing firm.Non-manufacturing firms such as wholesalers and retailers will not have themanufacturing phase. They will acquire stock of finished goods and convert theminto debtors and debtors into cash. Further, service and financial enterprises willnot have inventory of goods (cash will be their inventory). Their operating cycles

will be the shortest. They need to acquire cash, then lend (create debtors) andagain convert lending into cash.


42/79


BALANCED WORKING CAPITAL POSITION

The firm should maintain a sound working capital position. It should haveadequate working capital to run its business operations. Both excessive as well

as inadequate working capital positions are dangerous from the firms point ofview. Excessive working capital means holding costs and idle funds, whichearn no profits for the firm. The dangers of excessive working capital are asfollows:

It results in unnecessary accumulation of inventories. Thus, chances ofinventory mishandling, waste, theft and losses increase.

It is an indication of defective credit policy and slack collection period.Consequently, higher incidence of bad debts results, which adversely

affects profits.

Excessive working capital makes management complacent whichdegenerates into managerial inefficiency.

Tendencies of accumulating inventories tend to make speculative profitsgrow. This may tend to make dividend policy liberal and difficult to copewith in future when the firm is unable to make speculative profits.

Inadequate working capital is also bad as it not only impairs the firmsprofitability but also results in production interrupts and in efficiencies and sales

disruptions. Inadequate working has the following dangers:

It stagnates growth. It becomes difficult for the firm to undertake profitableprojects for non-availability of working capital funds.

It becomes difficult to implement operating plans and achieve the firmsprofit target.

Operating inefficiencies creep in when it becomes difficult even to meetday-to-day commitments.

Fixed assets are not efficiently utilized for the lack of working capital funds

Paucity of working capital funds render the firm unable to avail attractivecredit opportunities etc.


43/79


The firm looses its reputation when it is not in a position to honor its short-term obligations. As a result, the firm faces tight credit terms.

An enlightened management should, therefore maintain the right amount

of working capital on a continuous basis. A firms net working capital position isnot only important as an index of liquidity but it is also used as a measure of thefirms risk. Risk in this regard means chances of the firms being unable to meetits obligation on due date. The lenders consider a positive net working capital asa measure of safety. All other things being equal, the more the net workingcapital a firm has, the less likely that it will default in meeting it current financialobligations.

OPERATING CYCLE

The operating cycle is also known as cast to cash cycle, is durationrequired to convert sales after the conversion of resources intoinventories, into cash. The various phases of operating cycle can bedepicted as given bellow.


44/79


Sound financial management of a company involves matching the sourcesand uses of cash so that the obligations come due as assets and mature intocash.

Cash

Sales

Raw material

Inventory

Collection Purchases

Finished goods

Work in progress

Accounts


45/79


Net Operating Cycle

Inventory Consumption

Period (1)

Gross Operating Cycle(I ) Payable Deferral Period (II)

Work in Progress

Consumption Period

(B)

Debtor Consumption Period

(2)

Finish Good

Consumption Period

(C)

Raw material

Consumption Period

(A)


46/79



47/79


CALCULATION OF OPERATING CYCLE OFAUSTIN ENGINEERING COMPANY LIMITED

1) Inventory consumption period :-A) Raw material consumption period :-

Raw material consumption = Raw material inventory X 365Period Raw material consumed

2010-11

Raw material inventory - Rs. 47015654

Raw material consumed - Rs. 167206137


= 47015654 X 365

167206137

= 103 days

2009-10

Raw material inventory - Rs. 51383518



= 51383518 X 365

254740308

= 74 days

2008-09

Raw material inventory - Rs.52780916

Raw material consumption = Raw material inventory X 365

Period Raw material consumed


48/79




= 52780916 X 365

280859547

= 69 days

2007-08

Raw material inventory - Rs.34875306



= 34875306 X 365

224264481

= 57 days

B) Work in Progress Conversion Period :-

Work in Progress Conversion = Work in progress inventory X 365Period cost of production

2010-11

Work in progress inventory - Rs. 132199542

Cost of production - Rs. 447166018

Work in Progress Conversion = Work in progress inventory X 365

Work in Progress Conversion = Work in progress inventory X365

Period cost of production


49/79


Period cost of production

= 132199542 X 365

447166018

= 108 days

2009-10




= 168911388 X 365

525738685

= 117 days

2008-09




= 172052829 X 365

464692523

= 135 days

2007-08

Work in progress inventory - Rs. 109771931Cost of production - Rs. 404089452


= 109771931 X 365404089452


50/79


= 99 days

C) Finish goods consumption period :-

Finish goods consumption = Finish goods inventory X 365Period Cost of goods sold

2010-11

Finish goods inventory - Rs. 64098318

Cost of goods sold - Rs. 433156377


= 64098318 X 365

433156377= 54 days

2009-10




= 50088677 X 365

520433711

= 35 days

2008-09




= 44783703 X 365463296547

= 35 days

Finish goods consumption = Finish goods inventory X 365

Period Cost of goods sold


51/79


2007-08



Finish goods consumption = Finish goods inventory X 365

Period Cost of goods sold

= 43387727 X 365

400008998

= 40 days

1) Inventory consumption period = Raw material consumption period + Workin Progress Conversion Period +Finish goods consumption period

2010-11

Inventory consumption period = A + B + C

= 103 + 107 + 54

= 264 Days

2009-10


= 74 + 117 + 35

= 226 Days

Inventory consumption period = RM + WIP + FG


52/79


2008-09


= 69+ 135+ 35

= 239 Days

2007-08


= 57 + 99 + 40

= 196 Days

Particular 2010-11 2009-10 2008-09 2007-08

Raw material 103 74 69 57

Work in progress 107 117 135 99

Finished goods 54 35 35 40

Total 264 226 239 196


53/79


INVENTORY HOLDING

2) Debtors conversion period :-

2010-11

Debtors - Rs. 151569700

Credit sales - Rs. 688623368

Debtors conversion period = Debtors X 365

Credit sales

103

7469

57

107 117

135

99

54

35 3540

0

20

40

60

80

100

120

140

160

2010-11 2009-10 2008-09 2007-08

Raw material Work in progress Finished goods


Credit sales


54/79


= 151569700 X 365688623368

= 80 Days (Approximate)

2009-10

Debtors - Rs. 164825535



Credit sales

= 164825535 X 365843295105


2008-09

Debtors - Rs. 179198533



Credit sales

= 179198533X 365

772355659


2007-08

Debtors - Rs.187721269



55/79



Credit sales

= 187721269 X 365

691409903


i) Gross operating cycle= Inventory conversion period + Debtorsconversion period

Gross operating cycle = ICP + DCP

2010-11

Gross operating cycle = Inventory conversion period + Debtors conversion period

= 264 + 80

= 344 days

2009-10


= 226 + 71

= 297 days

2008-09

Gross operating cycle = ICP + DCP


56/79



= 239+ 85

= 324 days

2007-08


= 196 + 99

= 295 days

ii) Payable Deferral Period:

Payable Deferral Period = Creditors X 365Credit purchase

2010-11

Creditors = 101401996Credit purchase = 166001474


= 101401996 X 365166001474

= 223 days

2009-10

Creditors = 109221663Credit purchase = 256420436


= 109221663 X 365256420436

= 155 days

2008-09

Creditors = 127268939Credit purchase= 302048126


= 127268939 X 365302048126



57/79


= 154 days

2007-08

Creditors =114797145Credit purchase= 230830480


= 114797145 X 365230830480

= 182 days

Net Operating cycle

Net Operating cycle= Gross Operating Cycle - Payable Deferral Period

2010-11

Gross operating cycle = 344Payable Deferral Period = 223Net Operating cycle = Gross Operating Cycle - Payable Deferral Period

= 344 - 223= 121 days

2009-10

Gross operating cycle= 297Payable Deferral Period= 155Net Operating cycle= Gross Operating Cycle - Payable Deferral Period

= 297-155= 142 days

2008-09

Gross operating cycle= 324Payable Deferral Period= 154

Net Operating cycle= Gross Operating Cycle - Payable Deferral Period= 324-154= 170 days

2007-08

Gross operating cycle= 295

Net Operating cycle= Gross Operating Cycle - Payable Deferral Period


58/79


Payable Deferral Period= 182Net Operating cycle= Gross Operating Cycle--Payable Deferral Period

= 295-182= 113 days

121

142

170

113

0

20

40

60

80

100

120

140

160

180

2010-11 2009-10 2008-09 2007-08

Days

Years

Net operating cycle

Days

Years Inventory conversionperiod

Debtorsconversion

period

Creditorsconversion

period

Days

2010-11 264 80 223 121

2009-10 226 71 155 142

2008-09 239 85 154 170

2007-08 196 99 182 113


59/79


Interpretation

From the above calculation we conclude that in current year there isimprovement in net operating cycle it shows that good position as compare to

previous two years. Still there is need to improvement in net operating cycle.From the table we can see that creditors allows more days credit. Butinventory conversion period is increasing year by year so there is need toreduce the inventory conversion period.

Calculation of Net Working Capital of AUSTIN ENGINEERING COMPANYLIMITED

Sources of Funds 2010-11 2009-10 2008-09 2007-08

Current Asset

Inventories 254321914 285516305 284664968 202923402

Sundry Debtors 151569700 164825535 179198533 187721269

Cash & Bank Balance 64391467 19178538 17833875 7297136

Loan &advances 54261808 64582047 63106942 53471291

(A) Total CurrentAsset

524544889 543102425 544804318 451413098

Current Liability


60/79


Liabilities 132349343 169730997 160455232 148318214

Provisions 43789818 45724425 48556136 28050606

(B) Total CurrentLiability 176139161 215455422 209011368 176368820

Net WorkingCapital(A-B)

348405728 327647003 335792950 275044278

WORKING CAPITAL RATIO ANALYSIS

Ratio analysis is the powerful tool of financial statements analysis. A ratiois define as the indicated quotient of two mathematical expressions and as therelationship between two or more things. The absolute figures reported in thefinancial statement do not provide meaningful understanding of the performanceand financial position of the firm. Ratio helps to summaries large quantities offinancial data and to make qualitative judgment of the firms financialperformance.

1. Efficiency ratio

The ratios compounded under this group indicate the efficiency of theorganization to use the various kinds of assets by converting them the form ofsale. This ratio also called as activity ratio or assets management ratio. As theassets basically categorized as fixed assets and current assets and the currentassets further classified according to individual components of current assets viz.investment and receivables or debtors or as net current assets, the important ofefficiency ratio as follow

1. Working capital turnover ratio

2. Inventory turnover ratio

3. Receivable turnover ratio

4. Current assets turnover ratio

2. Liquidity ratio


61/79


The ratios compounded under this group indicate the short term positionof the organization and also indicate the efficiency with which the working capitalis being used. The most important ratio under this group is follows

1. Current ratio

2. Quick ratio

3. Absolute liquid ratio

Working capital turnover ratio:

Working capital turnover ratio = Sales

Net working

Particular 2010-11 2009-10 2008-09 2007-08

Sales 669249673 816685475 729950074 648628921

Net working capital 348405728 327647003 335792950 275044278

W.C TOR 1.92 2.5 2.2 2.35

Interpretation

High working capital ratio indicates the capability of the organization toachieve maximum sales with the minimum investment in working capital.Companys working capital ratio shows mostly more than two, except for the year

1.92

2.52.2

2.35

0

0.5

1

1.5

2

2.5

3

2010-11 2009-10 2008-09 2007-08

Times

Years

Working capitals turn over ratio

Working capital turnover ratio = Sales

Net working capital


62/79


2010-11 because of excess of cash balance in current assets which occurreddue to encashment of deposits. In the year 2009-10 the ratio was around 3, itindicates that the capability of the company to achieve maximum sales with theminimum investment in working capital.

Inventory turnover ratio:

Inventory TOR = Cost of goods sold

Average inventory

Particular 2010-11 2009-10 2008-09 2007-08

COGS 433156377 520433711 463296547 400008998

Average Inventory 269919109 285090636 243794185 192118715

Inventory TOR 1.60 1.83 1.90 2.08

Interpretation

Inventory turnover ratio indicates the efficiency of the firm in producingand selling its products. It was observed that Inventory turnover ratio indicatesmaximum sales achieved with the minimum investment in the inventory. As such,the general rule high inventory turnover is desirable but high inventory turnoverratio may not necessary indicates the profitable situation. An organization, inorder to achieve a large sales volume may sometime sacrifice on profit, inventoryratio may not result into high amount of profit.

1.6

1.83 1.92.08

0

0.5

1

1.5

2

2.5

2010-11 2009-10 2008-09 2007-08

Times

Years

Inventory turnover ratio

Inventory TOR = Cost of goods sold

Average inventory


63/79


Receivable turnover ratio

Receivable turnover ratio = Gross sales

Average account receivables

Particular 2010-11 2009-10 2008-09 2007-08

Gross Sales 688623368 843295105 772355659 691409903

Sundry Debtors 151569700 164825535 179198533 187721269

Receivable TOR 4.54 5.12 4.31 3.68

Interpretation

Receivable turnover ratios that receivables turned around the sales weregreater than 4 times. The actual collection period are more than normal collectionperiod allowed to customer. It shows that as compare to previous year thedebtors are decrease but it lead to decrease in gross sales also. The companyallows less credit sales but it may be affect adversely on the total sales of the

company.

Current assets turnover ratio

Current assets TOR= Sales

Current asset

4.54

5.12

4.31

3.68

0

1

2

3

4

5

6

2010-11 2009-10 2008-09 2007-08

Times

Years

Receivable turnover ratio

Receivable turnover ratio = Gross sales

Average account receivables

Current assets TOR= Sales

Current assets


64/79


Particular 2010-11 2009-10 2008-09 2007-08

Sales 669249673 816685475 729950074 648628921

Current Assets 524544889 543102425 544804318 451413098

C.A. TOR 1.28 1.50 1.34 1.44

Interpretation

Current assets turnover ratio is calculate to know the firms efficiency ofutilizing the current assets .current assets includes the assets like inventories,sundry debtors, bills receivable, cash in hand or bank, marketable securities,prepaid expenses and short term loans and advances. This ratio includes theefficiency with which current assets turn into sales. A higher ratio implies a moreefficient use of funds thus high turnover ratio indicate to reduced the lock up offunds in current assets. An analysis of this ratio over a period of time reflectsworking capital management of a firm.

It was observed that current assets turnover ratio does not indicate anytrend over the period of time. Turnover ratio was 1.28 in the year 2010-11 and

increase to 1.5 in the year 2009-10 , but it decreased in the year 2008-09,because of high cash balance. Cash did not help to increase in sales volume, ascash is non earning asset.

Liquidity ratio

Current ratio

1.28

1.5

1.34

1.44

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

1.55

2010-11 2009-10 2008-09 2007-08

Time

s

Years

Current Assets Turnover Ratio

Current Ratio = current assets

Current liability


65/79


Particular 2009-10 2008-09 2007-08 2006-07

Current Assets 524544889 543102425 544804318 451413098

Current liabilities 176139161 215455422 209011368 176368820

Current Ratio 2.98 2.52 2.61 2.55

Interpretation

Current assets include cash and those assets which can be converted intocash within a year, such marketable securities, debtors and inventories. Allobligations within a year are include in current liabilities. Current liabilities includecreditors, bills payable accrued expenses, short term bank loan income taxliabilities and long term debt maturing in the current year. Current ratio indicatesthe availability of current assets in rupees for every rupee of current liability.

The current ratio indicates the availability of funds to payment of currentliabilities in the form of current assets. A higher ratio indicates that there weresufficient assets available with the organization which can be converted in cash,without any reduction in the value. As ideal current ratio is 2:1, where currentratio of the firm is more than 2:1, it indicates the unnecessarily investment in thecurrent assets in the form of debtor and cash balance. Ratio is higher in the year

2.98

2.52

2.612.55

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

2010-11 2009-10 2008-09 2007-08

Times

Years

Current Ratio


66/79


2010-11 where cash balance is more than requirement which came throughencashment of deposits of funds.

Quick ratio

Quick ratio = Current assets Inventory

Current liabilities

Particular 2010-11 2009-10 2008-09 2007-08

C.A Inventories 270222975 257586120 260139350 248489696


Quick Ratio 1.53 1.20 1.24 1.40

Interpretation

Quick ratios establish the relationship between quick or liquid assets andliabilities. An asset is liquid if it can be converting in to cash immediately orreasonably soon without a loss of value. Cash is the most liquid asset .otherassets which are consider to be relatively liquid and include in quick assets aredebtors and bills receivable and marketable securities. Inventories areconsidered as less liquid. Inventory normally required some time for realizing into

1.53

1.2 1.241.4

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2010-11 2009-10 2008-09 2007-08

Times

Years

Quick Ratio

Quick ratio = Current assets Inventory

Current liabilities


67/79


cash. Their value also be tendency to fluctuate. The quick ratio is found out bydividing quick assets by current liabilities.

The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio ismore than 1:1 over the period of time, it indicates that the firm maintains the overliquid assets than actual requirement of such assets.

Absolute liquid ratio

Particular 2010-11 2009-10 2008-09 2007-08

Cash & Bank Balance 64391467 19178538 17833875 7297136


Absolute liquid ratio 0.36 0.089 0.085 0.041

Interpretation

Even though debtors and bills receivables are considered as more liquidthen inventories, it cannot be converted into cash immediately or in time.Therefore while calculation of absolute liquid ratio only the absolute liquid assetsas like cash in hand cash at bank, short term marketable securities are taken in

0.36

0.089 0.085

0.041

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

2010-11 2009-10 2008-09 2007-08

Times

Years

Absolute liquid ratio

Absolute liquid ratio = Absolute liquid assets

Current liabilities


68/79


to consideration to measure the ability of the company in meeting short termfinancial obligation.

Absolute liquid ratio indicates the availability of cash with company issufficient because company also has other current assets to support currentliabilities of the company. In the year 2010-11 absolute liquid ratio increasedbecause of company carry more cash balance, as a cash balance is ideal assetscompany has to take control on such availability of funds which is affect on costof the funds.

INVENTORY MANAGEMENT

Inventory constitutes the most important part of current asset. On anaverage, inventory are 60% of current asset in Public limited companies in India.

Because of the large size of the inventory maintained by the firms, aconsiderable amount of fund is required to be committed to them. It is thereforeabsolutely imperative to manage inventory efficiently and effectively in order toavoid unnecessary investment.

The term inventory refers to the stock pile of products as firm is offering forsales and the component that make up the products .

Raw Material Work in progress Finished goods

The Raw material inventories contain the items that are purchased by thefirm from others and are converted into finished goods through manufacturingprocess.

The work in progress inventory consists of items that are purchased by thefirm from others and are converted into finished goods through manufacturingprocess.

Work in progress inventories consist of items currently being used inproduction process. They are normally semi-finished goods that are at variousstage of production in multi stage production process.

Finish goods represent final of completed products available for sole. Theinventory of such goods consists items that have been produced but are yet to besold.


69/79


OBJECTIVES OF INVENTORY MANAGEMENT

The basic responsibility of the financial manager is to make sure that thefirms cash flows are managed efficiently. Efficient management of inventoryshould ultimately result in the maximization of the owners wealth. The objectivesof inventory management consist of two counterbalancing parts:

1. To minimize investments in inventory2. To meet the demand of the product by efficiently organizing the production

and sales operation.

SIGNIFICANCE OF INVENTORY

Inventory constitutes in every business concern the most significant pert ofworking capital current asset. Inventory in Indian industries constitute more than60% of current assets. About 40% to 60% of the cost of product contains materialcost.

NEED TO HOLDING INVENTORY

The managing inventory arises only when the company hold inventories.Managing inventories involve tying up of the companys funds and incurrence of

storage and handling coat.

1. Transaction motives:-It emphasizes the need to maintain inventories to facilitate smooth

production and sales operation.

2. Precautionary motive:-

It necessitates holding of inventories to guard against the risk ofunpredictable changes in demand and supply forces and others.

3. Speculative Motive:-It influences the decision to increase or reduce inventory level to take

advantage of price fluctuation.

FACTORS DETERMINING LEVEL OF INVENTRY

1. Type and nature of business

2. Anticipated sales volume

3. Price level variation / availability of funds

4. Demand of finish goods

5. Production process


70/79


SIZE OF INVENTORIES

Particular 2010-11 2009-10 2008-09 2007-08

Raw material 47015654 51383518 52780916 34875306

Work in progress 132199542 168911388 172052829 109771931

Finished goods 64098318 50088677 44783703 43387727

Others 11008400 15132722 15047520 14888438

Total 254321914 285516305 284664968 202923402

Indices 125.33 140.70 140.28 100


71/79


Interpretation

From the above we can say that as compare to base year the size of theinventories are increasing in 2008-09 and 2009-10 by 40.28% and 40.70%respectively. But it is decreasing in 2010-11. It shows good position in the currentyear but still there is need to improvement. The reason of decreasing in size ofinventory is decreasing in raw material and work in progress inventories.

125.33

140.7 140.28

100

0

20

40

60

80

100

120

140

160

2010-11 2009-10 2008-09 2007-08

Indices

Years

Size Of Inventories


72/79


RECEIVABLE MANAGEMENT

The term receivable is defined as Debt owned to the firm by customerarising from sales of goods or service in the ordinary course of business

When a firm makes an ordinary sale of goods on services and does notreceive payment, the firm grants trade credit and creates account receivable,which could be collected in the future. Receivable management is also tradecredit management.

Firm now days also enjoy the benefit of Negative Working capital. Herethey enjoy the benefit of gating various Products, Raw material and other thingson credit for manufacturing of final product. Here this benefit received by the firmis on the basis of good will and bargaining strength of the company. NegativeWorking capital adds to a larger benefit then expected by the creditor. For thesereason now days companies have started to raise the payment period to itcreditor.

Objective of receivable management

The sales of goods on credit basis are an essential part of the moderncompetitive economic system. The credit sales are generally made up onaccount in the sense that there are formal acknowledgements of debt obligationthrough a financial instrument. As a marketing tool, they are intended to promotesales and there by profit. However extension of credit involves risk and cost,

management should weigh the benefit as well as cost to determine the goal ofreceivable management. Thus the objective of receivable management is topromote sales and profit until that point is reached where the return oninvestment in further funding of receivables is less .than the cost of funds raisedto finance that additional credit.

Particular 2010-11 2009-10 2008-09 2007-08

Sundry Debtors 151569700 164825535 179198533 187721269

Indices 80.74 87.80 95.46 100


73/79


Interpretation

From the above calculation we can see that as compare to base year thedebtors are decreasing every year so it indicates that company allows less creditsales every year, but it may be effect adversely in total sales of the company.

80.74

87.895.46

100

0

20

40

60

80

100

120

2010-11 2009-10 2008-09 2007-08

Indices

Years

Size Of Receivable


74/79


Working capital finance

Bank finance for working capital

Banks are the main institutional source of working capital finance in India.After trade credit, bank credit is the most important source of financing workingcapital requirements of the firm in India. A bank considers a firms sales andproduction plans and the desired level of current assets in determining itsworking capital requirement.

Forms of bank finance

1. Overdraft

Under the overdraft facility, the borrower is allowed to withdraw funds inexcess of balance in his current account up to certain specified limit during thespecified period. Though the overdrawn is repayable on demand, they generallycontinue for a longer period by annual renewal of the limits.

2. Cash credit

Cash credit facility is similar to the overdraft management. The barroweris allowed to withdraw funds up to certain sanctioned credit limit. He does not

require the entire amount at once. He can periodically withdraw to the extent ofhis requirement and repay by depositing surplus funds in his cash credit account.Interest is payable on the amount actually utilized by the borrower.

3. Bills Purchasing or Discounting

Under the purchase or discounting of bills, a borrower can obtain creditfrom bank against its bills. The bank purchase or discount the borrower bills,

bank holds bills as security for credit. When bill is discounted, the borrower ispaid the discount amount bill i.e The full amount of the bill minus the discountcharged by the bank. The bank collects the full amount on maturity.


75/79


4. Working capital loan

A borrower may sometime require temporary working capital in excess ofsanctioned credit limit to meet unforeseen expenses. Banks provide suchaccommodation through demand lone account. The borrower is required to payhigher rate of interest about the normal rate of interest on such additional credit.


76/79


SCOPE & LIMITATIONS OF THE STUDY

Scope of the study

The scope of the study is identified after and during the study isconducted. The study of working capital is based on operating cycle, cash

management, inventory management.

Limitations of the study

Following limitations were encountered while preparing this project:

1) Limited data:-

This project has completed with annual reports; it just constitutes one part of datacollection i.e. secondary. There were limitations for primary data collectionbecause of confidentiality.

2) Limited period:-This project is based on five year annual reports. Conclusions andrecommendations are based on such limited data. The trend of last five year mayor may not reflect the real working capital position of the company

3) Limited area:-

Also it was difficult to collect the data regarding the competitors and theirfinancial information. Industry figures were also difficult to get.


77/79


FINDINGS

Working capital management is important aspect of financial management.The study has been conducted on working capital ratio analysis, working capitalcomponents which helped the company to manage its working capital efficiencyand affectively.

Working capital of the company was increasing and showing positiveworking capital every year. It shows good liquidity position.

Positive working capital indicates that company has the ability ofpayments of short terms liabilities.

Working capital increased because of increment in the current assets ismore than increase in the current liabilities.

The company has more cash and bank balance in current year it showsthat inefficient management.

The inventory conversion period of the company has increasing everyyear so it shows that there is more days to convert the raw material intofinished products.

Debtors of the company are decreasing every year it shows that companyallows less credit sales

Problem Identification

Current assets are more than current liabilities indicate that company usedlong term funds for short term requirement, where long term funds aremost costly then short term funds.

Current assets components shows sundry debtors were decreased inevery year it shows good position but the collection period are increasedin current year so it shows that inefficient management.


78/79


RECOMMENDATIONS

Net operating cycle

Net operating cycle days decreasing as compare to previous years but there isneed to improvement.

Improvement can be done by

If we see the debtors are decreasing year by year but the collectionperiod are increasing in current year so by improving the collectionperiod we can improve the net operating cycle.

The inventory conversion period is high as compare to previous yearsso by reducing the inventory conversion period we can improve the netoperating cycle. The inventory conversion period include the rawmaterial conversion period, work in progress conversion period andfinished good conversion period. Here the work in progress and raw

material conversion period is very high so by reducing that period wecan improve net operating cycle.

Cash and bank

The cash and bank of the company is very high it shows inefficient cashmanagement so as the company has to improve cash management.

High cash balance shows rosy picture in all liquidity ratio such ascurrent, quick and absolute liquid ratios. but it leads to inefficientutilization of funds.

current assets turn over ratio is also showing poor result although sales

is high which is due to more cash balance with organization which playmajor role in formation of current assets.

Credit Policy

The company is decreasing the sundry debtors but there is no need todecreasing the debtors it affects the sales of the company so, there is need toimproving the cash collection period rather than less credit sales.

Finished goods inventory is high in current year because in currentyear sales is decreasing as compare to previous year. So there is needto proper forecasting of sales.


79/79

BBIIBBLLIIOOGGRRAAPPHHYY

KKhhaann aanndd JJaaiinn,, FFiinnaanncciiaall MMaannaaggeemmeenntt

PPrraassaannnnaa CChhaannddrraa,, FFiinnaanncciiaall MMaannaaggeemmeenntt

II.. MM.. PPaannddeeyy,, FFiinnaanncciiaall MMaannaaggeemmeenntt

wwwwww.. AAeecc--bbeeaarriinnggss..ccoomm

CCoommppaannyyss AAnnnnuuaall RReeppoorrtt

Prospectus of Austin Engineering Company Ltd.

Marketing Management by (Philip Kotler)

Documents

Divyesh Report