TAFE ag nit OVR

WORKING CAPITAL

OF

TAFE TRACTORS

INTRODUCTION

INTRODUCTION

Working capital is the money and assets that business uses to finance the day to day operations that produce the goods or services supplied to customers”.

The capital required for running the day to day business activities of a firm is known as “Working Capital”. It refers to that part of total capital employed which has been invested for financing of current assets and payment of day to day expenses.

E.g.- Inventories, Debtors, Bill receivable etc.

“Working Capital is the amount of fund necessary to cover the cost of operating the enterprises.”

Working Capital Gap = Current Assets - Current Liabilities

Working capital has two concepts:-

a) Gross concept : - Gross working capital usually referred to as working capital represent investment in current assets. The gross concept of working capital focuses the attention on two aspects of current management.These are:i) Optimum investment in current assets.ii) Financing of current assets.This mean the level of investment in current assets should be adequate.

b) Net concept : - Net working capital is difference between current assets and current liabilities. The net concept of working capital is an accounting concept that deals with management of net value of current assets in long run. Net concept of working capital

i) Indicates liquidity position of the firm.ii) Suggests the extent to which working capital needs may be financed by permanent source of funds.

OBJECTIVE OF STUDY

Aims and objective act as the limiting boundaries and keep the researcher on

track and help to avoid any mistakes and errors during the project work.

The aims and objective of this project are listed below:

1) To learn more about working capital management and it’s financing from

banks.

2) To know the importance of working capital from the company’s point of

view.

3) To study the impact of working capital on liquidity position of the firm.

4) To study the impact of working capital on the balance sheet of the

company.

LIMITATION OF STUDY

1) Inter firm comparison is not possible because it is a multi product firm with varying Competitors having multi product profile.2) Working Capital Management is a vast subject covering many domains of current assets and current liabilities management. It is not possible to cover all the aspects in such a short tenure of the project.

RESEARCH METHODOLOGY

Research is essentially a logical and an organized enquiry seeking facts through objective methods in order to discover the relationship among them and to refer from the broad principles or laws. It is really a method of critical thinking.

Research may be defined as a systematic and objective analysis and recording of controlled abservations that may lead to the development of generalization of principles or theories resulting in prediction and possibly ultimate control of events.

Methodology is often used in a narrow sense to refer to methods, technology or tools employed fpr the collection data as well as its processing. This is also used sometimes to designate data collection to arrive at the conclusion. In fact it describes that what should have been done. It provides answer to some of the major question while research like what must be done, how it will be done, what data will be needed, what data gathering devices will be employed, how sources of data will be analysed to arrive at the conclusion. For systematic research scientific approach is necessary. It is therefore essential to follow systematic methodology to arrive at a proper conclusion.

There several ways of collecting the appropriate data, which defers considerable in context of money, cost, time and other resources at the dispersal of the researcher. The data for this project has been collected by primary as well as secondary sources.

PRIMARY SOURCES:-

The primary data will be collected from various books of financial management and various other reference materials.

SECONDARY SOURCES:-

The data required for the study will be collected from annual reports of the company of the respective years. The company provided the annual reports. The analysis has been completed with the help of various tools and techniques of ratio analysis to evaluate company performance. Company’s Website and other Internet sources.The project mainly depends upon the secondary data.

COMPANY PROFILE

TAFE is a US$750 million tractor major incorporated in 1960 at Chennai in India, in

collaboration with Massey Ferguson (now owned by AGCO corporation, USA). TAFE

acquired the Eicher tractors business, its engine plant at Alwar and transmissions plant at

Parwanoo through a wholly owned subsidiary “TAFE Motors and Tractors Limited.

A member of the Amalgamations Group of Chennai, this company has four plants

involved in tractor manufacturing at Mandidheep (Bhopal), Kallidaipatti (Madurai),

Doddabalbur (Bangalore) and in Chennai.

Apart from being among the top five tractor manufacturers in the world, TAFE is also

involved in making diesel engines, gears, panel instruments, engineering plastics, hydraulic

pumps, plantations and passenger car distribution through other divisions and wholly owned

subsidiaries.

TAFE Motors and Tractors Limited has, apart from the tractor manufacturing plant at

Mandideep mentioned above, a Diesel Engine plant at Alwar, Rajasthan producing a range of

air cooled and water cooled diesel engines up to 80 HP with plans are on to increase the

product range up to 125 KVA. The Transmissions Division located at Parwanoo in Himachal

Pradesh produces a range of transmission components both for captive use as well as for sale

to OE manufacturers.

TAFE Access Limited is a wholly owned subsidiary of TAFE involved in the

manufacture and marketing of farm implements, trailers and accessories, distribution of

passenger cars, manufacture of hydraulic pumps and panel instruments to discerning

customers both in India and overseas.

TAFE’s Engineering Plastics Division produces a range of components for the

consumer electronics, IT, white goods and automotive sector and has the distinction of being

awarded Toyota Quality Award.

TAFE’s Power Source Division produces a range of automotive batteries for both 2-

wheeler and 4-wheeler applications for sale through AMCO Batteries Ltd. As well as for sale

directly through a dedicated distribution channel under the brand name of “Speed”.

TAFE, first tractor company to be recognized for strong commitment to excel at CII -

EXIM Bank Award for Excellence.

The commendation to Tractors and Farm Equipment Limited (TAFE), for “Strong

commitment to excel on the journey towards excellence”, was announced at the 15th Quality

Summit conducted by the Confederation of Indian Industry (CII) held at the NIMHANS

auditorium in Bangalore recently. The commendation is based on an independent assessment

of the organization on the basis of specified criteria which include Leadership, Policy &

Strategies, Partnership & resources, Processes, Key results, People Results, Customer results

and Society results.

VISION –

“To achieve the distinction of the First Choice among the farming community of

India and a Growing Presence in International Markets through setting Leadership

standards of Performance and Customer Care in the Agricultural Machinery

Business.”

CORE VALUES -

Customer satisfaction: We may not be able to wipe the sweat from the customer's brow but

we can certainly put a smile on their face.

Quality in products and services: An uncompromising focus on quality not just in products

but in all that we do.

Human resources: We are not just individuals doing our respective jobs. We are partners in

progress. Our people matter.

Proactive response to change: We create value by anticipating, preparing and facing

changes in a world where the only thing that is permanent, is change itself.

Environment and society: While serving our company, we don't forget our commitment to

serve our society for everything that it has given us.

Trust & long term relationships with stake holders: We value relationships and we live it,

with our business associates.

Business ethics: Our strong foundation has been ethical practices and open and transparent

operations.

C H E N N A I

TAFE’s first plant which now houses

TAFE’s R & D and the total machining

operations of key tractor components.

K A L L A D I P A T T I

Most modern Tractor assembly plant at

Kalladipatti near Madurai set among verdant

fields and orchards.

D O D D A B A L P U R

Tractors assembly plant at

Doddaballapur near Bangalore.

M A N D I D E E P

The Eicher Tractor plant at

Mandidheep also houses Eicher R & D

facilities apart from a new line to manufacture

the Massey Ferguson range.

A L W A R

Alwar is in Rajasthan where the Eicher

diesel engines are made for captive

consumption at TAFE Motors and Tractors as

well as for supply to other original equipment manufacturers in industrial, marine

construction equipment and generator sets applications. Capacity: 30,000 engines for

agricultural, industrial and Diesel Generator set applications.

P A R W A N O O

Parwanoo is in Himachal Pradesh

where transmission components, cam shafts

etc are made for captive consumption by

TMTL.

FACT SHEET

TAFE, Tractors And Farm Equipment, is a Chennai, India based tractor manufacturer, is a

unit of the Amalgamation Group. TAFE was established in 1961 to market and manufacturer

tractors under the license of Massey Ferguson. TAFE manufactures Simpson engines from

designs under license from the Perkins Company.

TAFE is one of the largest tractor manufacturers in India over 500 dealers and outlet in India

alone. TAFE is 24% owned by the AGCO Corporation of Duluth, Georgia, the owner of the

Massey Ferguson brand, and manufacturers’ tractors and components for AGCO for

exportation. TAFE is also active in exporting their own TAFE branded tractors.

TAFE has agreements with other companies to brand and market tractors under the TAFE

name to the USA. TAFE USA imports tractors from TAFE in India, as well as tractors

manufactured by LS Tractors in South Korea, (formerly LG Tractors), which are branded as

TAFE.

In June 2004, TAFE purchased Eicher motors Tractors and Engines business, along with the

Eicher brand name for tractors. This put them in the #2 position for market share of tractors

in India.

BUSINESS AREA

TAFE Limited is also involved in the following areas, apart from its core business of

manufacturing and marketing tractors.

TAFE has developed a range of matching trailers, implements and accessories

These are marketed through TAFE’s dealer network by a totally owned subsidiary, TAFE

access Limited (TAL).

TAFE through TAL is also involved in the marketing and distribution of lubricants and

greases for tractors through its dealer network.

TAFE is also involved in the packaged power industry through its Power Source Division.

TAFE has in-house facilities for the manufacture of Hydraulic pumps and Gears for tractors.

A related facility for the manufacture of panel instruments, not only for captive use but also

for the growing automobile industry in India is an integral part of the company.

TAFE has also diversified into Engineering plastics and Production of tools and dies for this

industry.

MARKETING NETWORK

TAFE has a network of more than 500 dealers, branches, service outlets as well as its own

sales officers and depots covering the entire width and breadth of India, TAFE is committed

to providing complete farming solutions to its customers and empowering them to work

towards increase farm productivity, prosperity and profits.

COMMUNITY SERVICE

TAFE’s factory at HYDEARBAD, stands in perfect harmony with nature. The Simpson

Industrial Estate, where the factory is located, also houses a serene bird sanctuary.

At Paddur Village, where TAFE’s Product Training Centre and “J” Farm are located , TAFE

has an ongoing Village Development Program which provides primary health services,

drinking water, Education and Vocational Training to the villagers from in and around

Paddur.

RESEARCH

METHODOLOGY

RESEARCH METHODOLOGY:

NEED FOR STUDY

Every company needs working capital to run its day to day business activities smoothly and uninterruptedly. We hardly find a business firm which does not require any amount of working capital. TAFE has a dilemma regarding to the liquidity, cash and accounts receivables management. So in this direction I have undergone a study on working capital management.

Objectives of the study:

To study and analyze the working capital management of TAFE.

Research design: Analytical

Sources of data: secondary data

The data required for the study is mainly based on the secondary data.

The required information is collected from the annual reports of the TAFE comprising

of balance sheets and profit & loss accounts.

The related data is obtained from the printed and published financial statements of

TAFE.

Tools of analysis:

Scheduled changes in working capital Ratio analysis. Trend analysis.

Period of study:

Data for a period of 6 years has been taken for the study i.e., starting from 2004-05 TO 2009-10

Working capital management

Working capital management an overview:

Introduction:

Working capital is probably the most often used financial management concept verbally and misused practically .literally, no organization can exist with out the existence of working capital. Independent of nature of an organization, its constitutions and activity requires working capital.

Working capital management is a significant facet of financial

Management .working capital management refers to the current assets as

Well as current liabilities .its importance starts from two reasons:

investment in current assets represents substantial position of the total investment.

investment in current assets and level of current liabilities have to be geared quickly to changes in sales.

WORKING CAPITAL DEFINITIONS:

“Working capital refers to a firm’s investment in shorter currents, cash, short term securities, accounts receivables and inventory.”

- Weston and Beigham

“Working capital is the excess of current assets over current liabilities.”

- Guttmann and Doughhall

“Working capital is an amount of funds necessary to cover of operating the enterprise.”

- Shubbin

Principles of working capital management

Introduction:

“The interaction between current assets and current liabilities is therefore the main theme of the theory of working capital.”

Managing the current assets is similar to that of fixed assets in the sense that in both cases a firm analyses their effects on its returns and risks. The management of fixed assets however differs in three different ways:

In managing fixed assets, time is very important factor, consequently discounting and compounding techniques play a significant role in capital budgeting and a minor one in the management of current assets.

The large holdings of current assets, especially cash, strengths the firms liquidity position, but also reduces the overall profitability. Thus a risk – return trade off is evolved in holding current assets.

Levels of fixed as current assets depend up on expected sales, but it is only current assets which can be adjusted with sales fluctuations in the short run. Thus the firm has a great flexibility in managing current assets.

Types of working capital:

These are of two types:

Permanent working capital Temporary working capital

Permanent working capital

The magnitude of current assets needed is not always the

Same it increases and decreases over the period of time.

Permanent working capital is the amount of funds required

For the production of the goods and services to satisfy the

demand .These are different from fixed assets which are in the business and retained their form of a long period but

this kind of working capital is constantly changing from

one current asset to another.

Secondly the amount of value

represents by the permanent working capital never leaves

the business properly.

Thirdly the size of the permanent Working capital will increase so long as there is growth in the business.

Temporary working capital:

Depending upon the changes in the production and sales,

the need for the working capital over the above permanent working capital will influence. The extra working capital required, to support the changing production and the sales activities is called temporary working capital.

Need for working capital:

The need for working capital is to run day to day business activities smoothly and uninterruptedly and cannot be over emphasized earning a

Steady amount of profit requires successful sales activities. We hardly find a business firm which does not require any amount of working capital. Indeed, firms differ in their requirements. The firm has to invest enough funds in current assets for generating sales. Currents assets are needed because sales do not convert into cash instantaneously. There is an operating cycle involved for conversion of sales to cash.

CONCEPTS OF WORKING CAPITAL:

The concept of working capital is divided into two concepts:

1. Gross working capital and2. Net working capital.

Gross working capital:

It refers to firm’s investments in current assets. Current assets are the assets which can be converted into cash with in the accounting period and that include cash, short term securities, debtors, bills receivables and stock.

Net working capital:

It refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected mature for the payment within an accounting period and include creditors, bills payables and outstanding expenses.

Net working capital may be positive or negative. A positive net working capital arises when current assets exceed current liabilities and vice versa.

Changes in working capital:

The changes in the level of working capital occur because of the following basic reasons:

1. Policy changes 2. Technological changes3. Sales growth4. Price level changes5. Growth and expansion of business6. Availability of credit

Policy changes:

The major causes for changing in working capital are because of policy changes initiated by management. Policy changes can also be known as current asset policy. It may be defined as the relationship between the current assets and also the volume of the sales.

Technological change

These can cause a significant change in the working capital. If a new process emerges as a result of technological development this shortens the operating cycle. It reduces the need of working capital and vice versa.

Sales growth:

The working capital needs of firm increases its sales growth. It precisely determines the relationship between the volume of sales and working capital before growth takes place. It is necessary to make advance planning of working capital for a growth firm on continuous basis.

Price level change:

The increasing shifts in price level function of financial manager are difficult. The effect of price level changes on working capital requirements of the firm. Raising price levels will require a firm to maintain higher amount of working capital. Firms will feel the effects of increasing general price level differently as individual prices may move differently.

Growth and expansion of business:

As a corporation grows, it is logical that a huge amount of working capital will be required. It is difficult to determine precisely the relationship between the growths in the volume of business of a corporation and the increase in the working capital. The composition of a working capital in a going corporation also shifts with an economic circumstances and corporate practice. Growing industries require more working capital than those that of static, other things being equal.

Availability of credit:

The working capital requirement of a film is affected by credit terms granted by its creditors. A firm will need a less working capital of a liberal credit from banks also influences the working capital needs to the firm. A firm which can get bank credit easily on favorable conditions will operate with a less working capital than a firm without such a facility.

Determinants of working capital:

The determinants of working capital are as follows:

Nature of business:

Working capital requirements of the firm are basically influenced by the nature of its business. The larger scale of operations will need more working capital than small firms.

Demand conditions:

The firm experiences seasonal and cyclical fluctuations in the demand for their services. The firm’s investments, inventories and book debts will also increase. To meet the requirements of funds for fixed assets and current assets under the boom period.

Manufacturing cycle:

The manufacturing cycle comprises purchase and use of raw materials and the production of finished goods. Longer the manufacturing, larger will be the firm’s working capital requirements.

Production policy:

A study policy will cause the inventories to accumulate during the off season period and the firm will be exposed to greater inventory costs and risks. This may adopt variable production policy varying its production schedules in accordance with changing demand. Thus production policy will differ from one firm to another firm, depending upon circumstances of individual firms.

Sales growth:

The working capital needs of the firm increase as its sales grow. It is difficult to precisely determine that the relation between volume of sales and

working capital needs. Current assets will have to be employed before growth takes place. It is necessary to make advance planning of working capital for a growing firm on continuous basis.

Price level changes:

The increasing shifts in price level function of financial manager are difficult. The effect of price level changes on working capital requirements of the firm. Raising price levels will require a firm to maintain higher amount of working capital. Firms will feel the effects of increasing general price level differently as individual prices may move differently.

Availability of credit:

The working capital requirement of a firm is affected by credit terms granted by its creditors. A firm will need less working capital of a liberal credit from banks also influences the working capital needs to the firm. A firm which can get bank credit easily on favourable conditions will operate with a less working capital than a firm without such a facility.

Goals of working capital management:

The two important aims of working capital management are profitability and solvency. To ensure solvency the firm should be very liquid, which means large current asset holdings. However there is cost associated with the maintaining of sound liquid position. Since the funds invested in current assets are higher due to higher investments, the firm’s profitability will suffer. To have high profitability, the firms may sacrifice solvency and maintain a relatively low level of current assets, which may expose into a greater risk of cash shortage and stock outs. The finance managers would have to look into both these objectives, so that one may not suffer at the expenses of the other. Hence while managing the working capital, the objective of the firm is to achieve an optimal combination of risk return trade off.

If the working capital pool is to function efficiently, the following matters must receive the attention of the management:

1. The level of investment in stock.2. The level of investment in debtors.3. The ability of the concern to deal with its creditors.4. The maturing obligations such as taxes and dividends.

Factors affecting the working capital problems:

The requirements of working capital differ from industry, within the same industry from company and within the company from time to time. A wide variety of factors influence the volume of investment in working capital which may be external and internal and management must be familiar with these.

Nature of business:

The amount of working capital is related to the nature and volume of the business. In concerns, where the cost of the raw materials is to be used in the manufacture of product in very large in production to its total cost of its manufacturing the requirements of the working capital will be very large.

Size of the business:

Size of the business unit is also determining factor in estimating the total amount of working capital.

Depreciation policy:

In every manufacturing business, depreciation is the most important element of the working capital structure. The management should try its best of the maintain the structure in a health start of earning satisfactory profits.

Profit Level:

The net profit level earned by the business firms the most important element of the working capital structure. The management should try its best of the structure a healthy start of earning satisfactory profits

Taxes:

Taxation has an important impact of the earned by an enterprise. Nearly on half of the profits earned is drained off. Tax liability when assessed will be a drain on working capital fund. The management should be to calculate this liability and make provision for the payment when due.

Credit policy:

Credit policy of a firm has a direct bearing in the level working capital liberal credit policy demands a higher level of working capital. If there is a lack in collection efforts, the problem would be further intensified necessity higher levels of working capital.

Dividend policy:

Dividend policy is a dominant influence on working capital position of an organization divined policy connects liquidity the ability of the concern to find necessary cash to meet the dividend payment. When once the dividend declared and the same has same has to be paid in cash.

Attitude risk

The level of working capital is also influenced by the attitude of the management towards the risk. If the management is more concern with the liquidity then there is need of higher level of working capital.

Components of working capital

The components working capital are:

CURRENT ASSETS CURRENT LIABILITIES 1.Cash and bank balances

2. Sundry debtors

3. Bulls receivables 4.Prepaid expenses 5. Investments(marketable securities-maturing with in one year) 6. Fixed deposits with banks (maturing within one yea) 7.Instalment of deferred(receivable due within one year) 8. Raw materials and components used in the process.

1. Short-term borrowing including bill purchased and discounted form banks and others. 2. Unsecured loans maturing within one year. 3. Public deposits maturing within one year 4. Sundry creditors. 5. Bills payables. 6. Interest & other charges due for payments for payment. 7. Advance/progress payments form customers. 8. Deposits form dealers selling agents. 9. Outstanding expenses.

10. Statutory liabilities:9. Stocks in process including semi finished goods. 10. Finished goods including semi finished goods.

Provident fund dues Provision for taxation Sales tax, excise, etc.,

DATA ANALYSIS

SCHEDULE OF CHANGES IN WORKING CAPITAL:

SCHEDULE OF CHANGES IN WORKING CAPITAL FOR THE YEARS 2005 AND 2006:

Components of Working Capital

As on 31st March 2005

(Rs.000’s)

As on 31st March,2006

(Rs.000’s)

Change in Working Capital(Rs.000’s)

Current Assets Inventories

2,62,83,573 3,79,51,084 1,16,67,511

Sundry Debtors 3,83,10,554 3,35,14,656 -47,95,898

Cash and Bank Balances

1,77,73,563 2,36,07,635 58,34,072

Loans and Advances 5,80,48,119 7,57,60,621 1,77,12,502

Total Current Assets 14,04,15,809 17,08,33,996 3,04,18,187

Current Liabilities Liabilities

17,74,50,595 18,06,26,351 31,75,756

Provisions 1,24,88,477 2,30,69,166 1,05,80,689

Total Current Liabilities

18,99,39,072 20,36,95,517 1,37,56,445

Working Capital=C.A-C.L

-4,95,23,263 -3,28,61,521 1,66,61,742

Interpretation:

The working capital for the years 2004-05 and 2005-06 are both negative. The net working capital has increased in 2005-06 when compared with the previous year 2004-05. This is due to the increase in current assets (inventories and loans & advances) when compared with the previous year 2004-05.

C.Inve

ntories

debtors

cash an

d bank

loan an

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total cu

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50000000

100000000

150000000

200000000

250000000

Series1



As on 31st March,2006(Rs.000’s)



Current Assets

Inventories

379,51,084 3,17,03,150 -62,47,934

Sundry Debtors 571,58,686 5,36,70,786 -34,87,900

Cash and Bank Balances

236,07,635 3,43,96,844 1,07,89,209

Loans and Advances 5,25,05,223 4,38,67,117 -86,38,106

Total Current Assets(C.A)

17,12,22,628 16,36,37,897 -75,84,731

Current Liabilities

Liabilities

17,85,27,717 17,31,00,827 -54,26,890

Provisions 2,30,69,166 3,38,98,939 1,08,29,773

Total Current Liabilities(C.L)

20,15,96,883 20,69,99,766 54,02,883

Net Working capital=C.A-C.L

-3,03,74,255 -4,33,61,869 -1,29,87,614

Interpretation:

The net working capital for the years 2005-06 and 2006-07 are both negative. The net working capital has decreased in 2006-07 when compared with the previous year 2005-06. This is due to the decrease in current assets (inventories, debtors and loans & advances) when compared with the previous year 2005-06.

debtors cash and bank

loan and advances

current assstes

current liabilites

total current liabilites

provisions

-50000000

0

50000000

100000000

150000000

200000000

250000000

300000000

3053281023437496-7095314






Current assets Inventories

3,05,32,810 2,34,37,496 -70,95,314

Sundry Debtors 2,94,51,975 3,97,94,505 1,03,42,530

Cash and Bank Balances3,43,96,844 11,55,74,751 8,11,77,907


Total Current Assets(C.A)

16,24,67,557 27,58,46,954 11,33,79,397

Current liabilities

Liabilities

17,31,00,827 14,92,80,684 -2,38,20,143

Provisions 3,38,98,939 5,88,66,140 249,67,201


20,69,99,766 20,81,46,824 11,47,058

Net Working Capital= C .A-C.L

-4,45,32,209 6,77,00,130 11,22,32,339

Interpretation:

The net working capital for the year 2006-07 is negative and for the year 2003-04 is positive. The net working capital has increased drastically in 2007-08 when compared with the previous year 2006-07. This is due to the increase in total current assets (Sundry debtors, cash & bank balances and loans & advances) when compared with the previous year 2006-07 and also due to the decrease in liabilities.

C.Inve

ntories

debtors

cash an

d bank

loan an

d adva

nces

curre

nt asss

tes

curre

nt liab

ilites

total cu

rrent li

abilit

es

provis

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-50000000

0

50000000

100000000

150000000

200000000

250000000

300000000

Series1Series2Series3



As on 31st March,2008 (Rs.000’s)


(Rs.000’s)

Change in Working Capital (Rs.000’s)

Current Assets Accrued Interest

5,07,100 15,02,900 9,95,800

Inventories 2,22,08,200 2,24,53,500 2,45,300

Sundry Debtors 6,36,08,600 6,63,58,700 27,50,100

Cash and Bank Balances 11,55,13,300 21,93,11,300 10,37,98,000


Total current Assets(C.A)

26,34,78,000 38,47,76,200 12,12,98,200

Current Liabilities

Liabilities

15,09,42,700 1,45,38,6200 -55,56,500

Provisions 4,97,77,200 7,46,17,800 2,48,40,600


20,07,19,900 22,00,04,000 1,92,84,100

Net working capital=C.A-C.L

6,27,58,100 16,47,72,200 10,20,14,100

Interpretation:

The net working capital has increased drastically in 2008-09 when compared with the previous year 2008-09. This is due to the increase in total current assets (Sundry debtors, cash & bank balances and loans & advances) when compared with the previous year 2008-09

and also due to the decrease in liabilities.

C.Inve

ntories

debtors

cash an

d bank

loan an

d adva

nces

curre

nt asss

tes

curre

nt liab

ilites

total cu

rrent li

abilit

es

provis

ions

-50000000

0

50000000

100000000

150000000

200000000

250000000

300000000

Series1Series2Series3




(Rs.000’s)


(Rs.000’s)


Current Assets

Inventories

2,24,53,500 2,78,92,200 54,38,700

Accrued Interest 14,36,800 63,62,700 49,25,900

Sundry Debtors 6,63,70,300 6,30,20,500 -33,49,800

Cash and Bank Balances 21,93,113 30,57,94,800 30,36,01,687


Total current Assets(C.A) 38,47,87,900 49,53,90,900 11,06,03,000

Current liabilities

Liabilities

14,61,54,100 16,12,32,400 1,50,78,300

Provisions 7,38,61,600 8,88,22,300 1,49,60,700


22,00,15,700 25,00,54,700 3,00,39,000

Working capital = C.A-C. L 16,47,72,200 24,53,36,200 8,05,64,000

Interpretation:

The net working capital for the year 2008-09 and for the year 2009-10 are both positive. The net working capital has slightly increased in 2005-06 when compared with the previous year 2008-09. This is due to the increase in total current assets (Accrued interest, cash & bank balances and loans & advances) when compared with the previous year 2008-09.

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d bank b

alance

loans a

nd adva

nces

total cu

rrent a

ssets

liabilit

es

provis

ions-50000000

0

50000000

100000000

150000000

200000000

250000000

300000000

350000000

Series1

TREND ANALYSIS

Year Sales Current Assets Current Liabilities

2004-05 100 100 100

2005-06 109.51898 21.939708 6.1376582

2006-07 118.10717 15.704605 8.982193

2007-08 170.7619 87.641265 5.6759401

2008-09 188.44544 174.0346 15.834882

2009-010 211.63229 252.8028 31.649954

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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intepretation:

The sales of the company are growing but the current assets are increasing at a higher proportion. This is due to the piling-up of book debts and large amount of cash balances.

RATIO ANALYSIS

LIQUIDITY RATIOS:

1) CURRENT RATIO:

Current Ratio= (Current assets- Current liabilities)

Year

Current Assets

(Rs.000’s)

Current Liabilities

(Rs.000’s)

Current Ratio

2004-2009 14,04,15,809 18,99,39,072 0.739268

2009-2006 17,12,22,628 20,15,96,883 0.849332

2006-2007 16,24,67,557 20,69,99,766 0.784868

2007-2008 26,34,78,000 20,07,19,900 1.312665

2008-2009 38,47,87,900 22,00,15,700 1.748911

2009-2010 49,53,90,900 25,00,54,700 1.98113

Interpretation:

The current ratio well below the standard ratio 2:1 during the years 2009-2010, indicates low liquidity position of the TAFE. Liquidity has improved during the later part of study period with current ratio above 1.5:1

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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QUICK RATIO OR LIQUID RATIO:

Quick ratio = Current Assets- Inventory

Current liabilities

Year Current Assets

(Rs.000’s)

Inventory

(Rs.000’s)

Current Liabilities

(Rs.000’s)

Quick Ratio

2004-2005 14,04,15,809 2,62,83,573 18,99,39,072 0.6008887

2006-2006 17,12,22,628 3,79,51,084 20,15,96,883 0.6610794

2006-2007 16,24,67,557 3,05,32,810 20,69,99,766 0.6373666

2007-2008 26,34,78,000 2,22,08,200 20,07,19,900 1.2020223

2008-2009 38,47,87,900 2,24,53,500 22,00,15,700 1.646857

2009-2010 49,53,90,900 2,78,92,200 25,00,54,700 1.8695857

Interpretation:

The Quick ratio of the company should be 1:1 to represent a satisfactory financial condition. The quick ratio has been unsatisfactory upto the year 2006-2007. From the year 2007-2008 the quick ratio is too high for TAFE indicating excess liquidity.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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SUPER QUICK (CASH) RATIO:

Cash or Super Quick Ratio= Cash

Current liabilities

Year Cash(Rs.000’s) Current Liabilities

(Rs.000’s)

Cash Ratio

2004-2005 1,77,73,563 18,99,39,072 0.093575

2005-2006 2,36,07,635 20,15,96,883 0.117103

2006-2007 3,43,96,844 20,69,99,766 0.166169

2007-2008 11,55,13,300 20,07,19,900 0.575495

2008-2009 21,93,11,300 22,00,15,700 0.996798

2009-2010 30,57,94,800 25,00,54,700 1.222912

Interpretation:

This ratio is still more stringent test of liquidity. Generally cash ratio of 0.5:1 will be taken as a standard one. The cash ratio from the year 2007-08 to the year 2009-10 is in increasing order. TAFE is holding enormous cash balances which are a drag on its profitability.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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LIQUIDITY RATIOS:

Year Current Ratio Quick Ratio Cash Ratio

2004-05 0.739 0.6 0.093

2005-06 0.849 0.661 0.117

2006-07 0.784 0.637 0.166

2007-08 1.312 1.202 0.575

2008-09 1.748 1.646 0.996

2009-10 1.981 1.869 1.222

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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INVENYORY MANAGEMENT1) INVENTORY TURNOVER RATIO:

Inventory Turnover Ratio = (Sales/Inventory)

Year

Sales

(Rs.000’s)

Inventory

(Rs.000’s)

Inventory Turnover Ratio

2004-2005 11,59,66,611 2,62,83,573 4.412133

2005-2006 24,29,72,056 3,79,51,084 6.402243

2006-2007 25,29,31,493 3,05,32,810 8.283925

2007-2008 31,39,93,400 2,22,08,200 14.13862

2008-2009 33,45,00,400 2,24,53,500 14.89747

2009-2010 36,13,89,400 2,78,92,200 12.95665

Interpretation:

For the TAFE this ratio has been increased during the years 2007-08 to 2008-09 and then it decreases in the year 2008-09. This shows the less effort or laziness on the part of management to provide connections on demand.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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3) DAYS OF INVENTORY HOLDING:

No. of days of Inventory holding = (No. of days in a year/ Inventory Turnover Ratio)

Year Days Inventory Turnover Ratio

Days of Inventory Holding

2004-2005 365 4.412133 82.72643

2005-2006 365 6.402243 57.01127

2006-2007 365 8.283925 44.06124

2007-2008 365 14.13862 25.81582

2008-2009 365 14.89747 24.5008

2009-2010 365 12.95665 28.17086

Interpretation:

The inventory holding period in 2008-09 is 82 days, 2009-10 is 57 days, 2006-07 is 44 days, 2007-08 is 25 days, 2008-09 is 24 days and 2009-10 is 28 days. The inventory holding period was decreasing from the years 2008-09 to 2008-09 and then in 2009-10 it has increased.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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RECEIVABLES MANAGEMENT

1) DEBTORS TURNOVER RATIO:

Debtors Turnover Ratio = (Sales /Debtors)

Year Sales

(Rs.000’s)

Debtors

(Rs.000’s)

Debtors Turnover Ratio

2004-2005 11,59,66,611 3,83,10,554 3.027015

2005-2006 24,29,72,056 5,71,58,686 4.250833

2006-2007 25,29,31,493 2,94,51,975 8.58793

2007-2008 31,39,93,400 6,36,08,600 4.936336

2008-2009 33,45,00,400 6,63,70,300 5.039911

2009-2010 36,13,89,400 6,30,20,500 5.734474

Interpretation:

The liquidity position of the firm depends on the quality of debtors. Generally the higher the value of debtor’s turnover, the more efficient is the management of credit. For TAFE it has increased from 2008-09 to 2006-07 and decreases in the year 2007-08, later it increases slightly in the next years 2008-09 and 2009-10.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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AVERAGE COLLECTION PERIOD:

Average Collection Period = No. of days in a year

Debtors Turnover Ratio

Year Days in a year Debtors Turnover Ratio

Average Collection Period

2004-2005 365 3.027015 120.5808

2005-2006 365 4.250833 85.86552

2006-2007 365 8.58793 42.50151

2007-2008 365 4.936336 73.94148

2008-2009 365 5.039911 72.42191

2009-2010 365 5.734474 63.65013

Interpretation: The target of debtors collection period for TAFE is 40 to 45 days. But only in 2006-07 the target has been achieved. In the other years the collection period is not upto the expectations.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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TURNOVERRATIOS:

1) CURRENT ASSETS TURNOVER RATIO:

Current Assets Turnover Ratio = Sales

Current Assets

year Sales

(Rs.000’s)

current assets

(Rs.000’s)

current assets turnover ratio

2004-2005 115966611 140415809 0.82588

2005-2006 242972056 171222628 1.419042

2006-2007 252931493 162467557 1.556812

2007-2008 313993400 263478000 1.191725

2008-2009 334500400 384787900 0.869311

2009-2010 361389400 495390900 0.729504

Interpretation:

Current assets turnover ratio is a measure of the efficiency of the firm in utilizing the current assets for sales generation. The current assets turnover ratio in the year 2008-09 is 0.825, 2009-10 is 1.419, 2006-07 is 1.556, 2007-08 is 1.191, 2008-09 is 0.869 and 2009-2010 is 0.729. Decrease in current asset ratio after the year 2006-03 shows the decrease in sales and under utilization of current assets

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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WORKING CAPITAL TURNOVER RATIO:

Working Capital Turnover Ratio = Sales

Net current Assets

year Sales

(Rs.000’s)

Net Current Assets

(Rs.000’s)

Working Capital Turnover Ratio

2008-2009 115966611 -49523263 -2.34166

2009-2006 242972056 -30374255 -7.99928

2006-2007 252931493 -44532209 -5.67974

2007-2008 313993400 62758100 5.003233

2008-2009 334500400 164772200 2.030078

2009-2010 361389400 245336200 1.473037

Interpretation:

Working capital turnover ratio indicates whether or not working capital has been

efficiently utilized in making sales. This ratio measures the relationship between

working capital and sales. This ratio shows the number of times the working capital

results in sales. Working capital turnover ratio is negative for the company from the

year 2008-04 to 2006-2007 because of negative working capital. Afterwards in the

next year 2007-08 it has drastically increased to 5. It is due to the increase in current

assets of the company. In 2008-09 working capital turnover ratio decreases again due

to decrease in working capital (due to increase in the provisions i.e., current

liabilities). In the next year 2009-10 also the working capital turnover ratio decreases

due to the decrease in sundry debtors (current asset) due to the inefficient

management of accounts receivables.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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PROFITABILITYRATIOS:

1)GrossProfiRatio: GrossProfitRatio=GrossProfit Sales

year Gross Profit

(Rs.000’s)

Sales

(Rs.000’s)

Gross Profit Ratio

Gross Profit Ratio in %

2008-01 40952595 115966611 0.353141 35.31%

2009-02 82995036 242972056 0.341583 34.15%

2006-03 60442262 252931493 0.238967 23.89%

2007-04 114358900 313993400 0.364208 36.42%

2008-05 121298000 334500400 0.362624 36.26%

2009-06 158185700 361389400 0.437715 43.77%

Interpretation:

The gross profit ratio of the company in 2008-05 is 35.31%, 2009-06 is 34.15%, 2006-07 is 23.89%, 2007-08 is 36.42%, 2008-09 is 36.26% and 2009-10 is 43.77%. The gross profit of the company decreases in 2009-06 and 2006-07, increases in 2007-08, then partially decreases in 2008-09 and again increases in2009-10.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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NET PROFIT RATIO:

Net profit ratio= profit after tax

Sales

Year Net Profit(PAT) (Rs.000’s)

Sales

(Rs.000’s)

Net Profit Ratio

2008-01 7470538 115966611 0.06442(6.44%)

2009-02 63121695 242972056 0.25979(25.97%)

2006-03 14444492 252931493 0.057108(5.71%)

2007-04 59765300 313993400 0.190339(19.03%)

2008-05 101832900 334500400 0.304433(30.44%)

2009-06 89396900 361389400 0.24737(24.73%)

Interpretation:

The net profit ratio in 2008-05 is 6.44%, 2009-02 is 25.97%, 2006-07 is 5.71%, 2007-08 is 19.03%, 2008-09 is 30.44% and 2009-10 is 24.73%. The net working capital is fluctuating. It increases in 2009-08 and decreases in 2006-07, then increases in 2007-08 and 2008-09. In 2009-10 it again decreases. This ratio indicates the management’s efficiency in sales. This ratio indicates the firms capacity to withstand adverse economic conditions.

2004-05 2005-06 2006-07 2007-08 2008-09 2009-100

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FINDINGS

FINDINGS:

The gross profit ratio has been increased over the years, but the net profit ratio has not increased as fast as gross profit ratio. It implies that operating expenses are increasing with increase in sales.

Net increase in working capital of Rs.1, 666.17 crores in 2008-08, net decrease in working capital of Rs.1298.76 crores in 2009-10, net increase in working capital of Rs.11,223.23 crores, 10808.41 crores and 8086.4 crores in the next years 2010-09, 2009-08 and 2008-10 respectively.

The current ratio in the year 2010-2008 is 0.739, 2008-2009 is 0.849, 2008-2009 is 0.784, 2010-2008 is 1.312, 2008-2008 is 1.748 and 2009-2010 is 1.981 which is below the standard ratio 2:1, indicates low liquidity position of the TAFE company.

Quick ratio of the company in the year 2010-2008 is 0.6, 2008-2008 is 0.66, 2008-2009is 0.63, 2009-2008 is 1.20, 2008-2009 is 1.64 and 2009-2010 is 1.86. The quick ratio of the company should be 1:1 to represent a satisfactory financial condition. The quick ratio has been unsatisfactory upto the year 2009-2010. From the year 2010-2009 the quick ratio of the company is satisfactory. This ratio is a measure of judging the ability of the company to pay off its current obligations.

The cash ratio is still more stringent test of liquidity. Generally an absolute liquid ratio or cash ratio of 0.5:1 will be taken as a standard one. The super quick ratio from the year 2010-09 to the year 2009-10 is in increasing order.

For the TAFE Company the inventory turnover ratio has been increased during the years 2010-09 to 2008-2009and then it decreases in the year 2009-10. This shows the less effort or laziness on the part of management to dispose the inventory at the earliest (i.e., provide connections on demand).

The inventory holding period in 2010-08 is 82 days, 2008-08 is 57 days, 2008-10 is 44 days, 2010-09is 25 days, 2008-08 is 24 days and 2008-10 is 28 days. The inventory holding period was decreasing from the years 2010-08 to 2008-08 and then in 2009-10 it has increased.

If the number of days of collection period increases, it shows the inability to collect the bills receivables. In the year 2010-08 the average collection period is 120 days, 2008-09 is 85 days, 2008-09 is 42 days, 2010-08 is 73

days, 2008-09 is 72 days and 2009-10 is 63 days. The bills receivables period has been decreased from 2010-09 to 2008-09but in 2010-08 it has again increased, later it decreases in the next years 2008-09 and 2009-10.

The current assets turnover ratio in the year 2010-08 is 0.825, 2008-08 is 1.419, 2008-09 is 1.556, 2010-09 is 1.191, 2008-08 is 0.869 and 2008-2009 is 0.729. Decrease in current asset ratio after the year 2008-09 shows the decrease in sales and under utilization of current assets.

Working capital turnover ratio is negative for the company from the year 2010-09to 2008-2009 because of negative working capital. Afterwards in the next year 2010-09 it has drastically increased to 5. It is due to the increase in current assets of the company. In 2008-09 working capital turnover ratio decreases again due to decrease in working capital (due to increase in the provisions i.e., current liabilities). In the next year 2008-09 also the working capital turnover ratio decreases due to the decrease in sundry debtors (current asset) due to the inefficient management of accounts receivables.

The gross profit ratio of the company in 2010-09 is 35.31%, 2008-08 is 34.15%, 2008-09is 23.89%, 2010-09 is 36.42%, 2008-09 is 36.26% and 2009-10 is 43.77%. The gross profit of the company decreases in 2008-09 and 2009-10, increases in 2010-09, then partially decreases in 2008-09 and again increases in2008-09.

The net profit ratio in 2009-08 is 6.44%, 2008-09 is 25.97%, 2008-10 is 5.71%, 2010-09 is 19.10%, 2008-08 is 30.44% and 2008-10 is 24.73%. The net working capital is fluctuating. It increases in 2008-08 and decreases in 2008-9, then increases in 2010-09 and 2008-09. In 2008-09 it again decreases. This ratio indicates the management’s efficiency in sales. This ratio indicates the firm’s capacity to withstand adverse economic conditions.

SUGGESTIONS

SUGGESTIONS:

The profits of the company are declining although the current assets are increasing. This is due to the bad debts for the company. The management is not efficient in collecting the bills receivables. The company should develop an optimum credit policy.

TAFE Company has to forecast the working capital requirements and optimize the working capital for increasing profitability. They should invest cash in short term investments. The company is maintaining more cash ratio. This reflects that they are keeping cash with them. This will affect the profitability of the company. So the company should invest in short term securities so as to earn more profits.

Decrease in profits is due to the increase in operating and administrative expenses. So the company has to decrease unnecessary administrative and operating expenses like vehicle running expenses, postage, power and fuel and rent for the buildings.

The working capital of the TAFE Company is fluctuating. This will create a doubt in the minds of shareholders and creditors. So the company should educate its employees that working capital management does produce profits.

BIBLIOGRAPHY

BIBLIOGRAPHY

BOOKS

Financial Management - I.M.Pandey

Financial Management -S.N.Maheshwari

Financial Management Theory and Practice - Prasanna Chandra

Management Accounting-Principles and Practice- Shashi K.Gupta and R.K.Sharma

A Hand Book on TAFE Accounts; Accounting & Financial Statements – C.V.R.Reddy

Documents

TAFE ag nit OVR