ON

“Working Capital Management And

Ratio analysis ”

Conducted at

"JBM Auto Ltd.(SPV)"Faridabad

In partial fulfillment for the degree ofMaster of Business Administration (M.B.A)

(Session 2005-2007)

Submitted to: Submitted by:Controller of Examination, Antima GoyalMaharishi Dayanand MBA IIIrd Sem.University Rohtak

DAV INSTITUTE OF MANAGEMENT

FARIDABAD- HARYANA

ACKNOWLEDGEMENT

A project report is never the sole product of a person whose name appears on

the cover. This is always the help, guidance and suggestions of many in preparations of

such a report. So, I have indebted to several people who have helped me in completing my

project “Working Capital Management And Ratio Analysis”.

I wish to express my sincere thanks to Mr. Rajesh Goyal, Finance Manager,

who gave me the opportunity to complete my summer project at JBM Auto ltd., Ballabgarh

(Haryana), a unit of JBM INDUSTRY. His keen interest, timely and constant

encouragement and generous cooperation gave me confidence and strength to progress

this report.

I am also thankful to all the employees working in finance department for their

continuous help and advice at different times.

I also want to express my special thanks to Mr. Mukesh yadav, HRD Deptt.

JBM for giving me their valuable opinions time to time. I would be failing my duty if I do not

mention my friends and classmates who helped me at various moments, during my project.

Specially, I am thankful to my parents and God for their blessings and showing

me the right way at all moments.

DECLARATION

I Antima Goyal, the student of M.B.A. III Semester of DAV Institute of

Manegement, Faridabad(Affiliated to M.D. University,ROHTAK) hereby declare that the

Summer Training Report on “WORKING CAPITAL MANAGEMENT” of JBM Auto ltd.

(JBM INDUSTRY) Is my original work and has not been submitted by any other

person.

I also declare that I have done my work sincerely and accurately even then if

any mistake or error had kept in it, I request the readers to point out these errors and guide

me to remove these errors in future.

Presentation Incharge Signature of the Candidate

PREFACE

Practical work experience is the integral part of individual learning. An

individual who is learning managerial concepts has to undergo this practical experience for

being a future executive.

Master of Business Administration is a two-year programme that inserts

management knowledge in an individual to make that individual completely professional for

which practical experience is must.

JBM AUTO LTD. (JBM INDUSTRY) offered me a project on Working Capital

Management to understand the current position through data provided by them.

I have also gained confidence to interact with different persons working at

reputed position, during the summer training, in preparing the project report. I have tried my

level best effort to make it reliable, compact and accurate organization.

CONTENTS OF THE PROJECT

1. COMPANY PROFILE

2. RESEARCH METHODOLOGY

3. WORKING CAPITAL AT A GLANCE

4. THEORTICAL ASPECTS OF WORKING CAPITAL MANAGEMENT

a. WORKING CAPITAL MANAGEMENT

b. RECEIVABLES MANAGEMENT

c. INVENTROY MANAGEMENT

d. CASH MANAGEMENT

5. ANALYSIS OF WORKING CAPITAL MANAGEMENT

1. COMPARATIVE P&L ACCOUNT

2. TREND ANALYSIS

3. CASH FLOW ANALYSIS

4. RATIO ANALYSIS

6. FINDINGS AND CONCLUSIONS

7. LIMITATIONS

8. BIBLIOGRAPHY

JBM GROUP AT GLANCE:-

The journey to excellence began in 1983, when the JBM Group entered the realm of

engineering activities with the establishment of Gurera Gas Cylinder Ltd for the manufacture

of LPG cylinder and entered into auto component industry in 1985 with the inception of Isuki

Auto India. Jay Bharat Maruti Limited a joint venture between JBM and Maruti Udhyog

Limited was formed in 1987 and is the flag ship company of the group today. With the

passing time group kept on setting new standards of excellence in the field of sheet metal

components, welded assemblies and tools manufacturing.

Last one decade has been one of consolidation and diversification. During this period Group

has embraced international system and processes, implementing them at all levels, in every

unit and across all parameters. The equipments and machines in all plants are state-of-art,

manned by highly skilled, professional workforce, ensuring the best quality and timely

delivery. Bolstered by robust bottom line and infrastructure, the range of JBM products is

vast and comprehensive – shaped blanks, sheet metals stampings, welded assemblies,

exhaust system, chassis and suspension parts, rear axles, wheel rims, press tooling, jigs

and fixtures, white goods components, high tensile fasteners, ERW tubes, LPG cylinder….

With support of its partners both local and international, the company stands poised atop a

launch pad to the future. Drive by a commitment to customer satisfaction and an

international standard of quality, JBM has not only won customer confidence but also

industry recognition through several awards and accolades.Fully geared to meet new

challenges, destined to touch newer heights in excellence JBM has ventured into Special

Purpose Vehicle.

JBM AUTO LIMITED (SPECIAL PURPOSE VEHICLE)

Today, India is fifth largest manufacturer of Commercial Vehicle and is further expected to

make impressive growth. With rapid improvement in the infrastructure e.g. road network and

OEM’s focus on improving the trucks and prime movers, market is looking for reliable, fast

moving and cost effective support vehicle like Tippers, Tipping trailers, liquid bulk carriers…

Ceasing the opportunity and unlocking the huge potential JBM decided to venture in to

Special purpose vehicle of which above is a small part. JBM is geared up to compete with

not only local players, unorganized competitions but with the world’s best.

JBM has focused design team, dedicated vendor base, adaptation of latest manufacturing

technologies, experienced and professional team of workmen and engineering to cater

demanding customers providing them global standards, good quality at most competitive

price.

To begin with we have started manufacturing these at Faridabad and are constructing

another plant in Haryana to produce trailer, tipper and other vehicles in the range.

Group Turnover

GurgaonJay Bharat Maruti Limited, Plant-IJay Bharat Maruti Limited, Plant-IINeel Metal Products LimitedThai Summit Neel Auto Pvt. Ltd.

Tamil NaduNeel Industries Private LimitedThyssenKrupp JBM Private Limited

Greater NoidaJBM Auto Components Limited, Plant-

II Haridwar

Neel Metal Products Limited Indore

JBM Auto Components Limited

FaridabadJBM AUTO Limited,SPVJBM Auto Components Limited, Plant-IJay Bharat Exhaust system LimitedJBM industries LimitedJaico Steel Fasteners Private Limited

Delhi

Neel Key Safety System Limited

PuneTSNA Private Limited at Chakan

Nasik

JBM Auto components Limited

Pondichery Neel Industries Pvt Limited

0

100

200

300

400

500

Turnover in MN (USD) 70 98.1 111 178 228 320 425

1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-20052005-2006 (Projection)

Group Companies

Customers

Products of JBM auto Ltd(SPV)

RESEARCH METHODOLOGY

When we talk of research methodology, we not only talk of the research methods but also

the comparison of the logic behind the methods, we used in this context of our research

study and explain why we are using a particular method or technique and why using the

others. Research methodology is a way to systematically solve the research problem. It may

be understood as a science of studying how research is done systematically. In this, we

study the various steps that are generally adopted by researcher in studying his research

problem along with the logic behind them.

“The present study is based upon the case study method of research to investigate

procedures at micro level”.

As the study is analyzing probing in nature, thus, entirely based on the secondary data

gathered through the annual reports of the industry. Therefore it provides a historical

perspective of decisions.

RESEARCH

Research refers to search for knowledge. Research is an original contribution to the existing

stock of knowledge making for its advancement. It is the pursuit of truth with the help of

study, observation, comparison and experiment. In short, the search for knowledge through

objective and systematic method of finding solution of the problem is research. The advance

learner’s dictionary of current English gives the meaning of research “a careful investigation

or inquiry especially through search for new facts in any branch of knowledge”.

RESEARCH METHODS

Research methods may be understood as those methods/techniques that are used for

conduction of research. All those methods which are used by the researcher during the

course of studying his research problem, are termed as research methods . Keeping in

view, the research methods can be put into following three groups:

In the first group we include those methods which are concerned with the

collection of data. These methods will be used where the data already

available are sufficient to arrive at the required solution.

The second group consists of those statistical techniques which are used to

establish relationships between the data and the unknown.

The third group consists of those methods which are used to evaluate the

accuracy of the obtained results.

COLLECTION OF DATA

There are several ways of collecting the appropriate data which differ considerably in

context of money, cost, time and other sources at the disposable of the researcher.

There are two types of data:

Primary data

Secondary data

Primary data

Primary data are those which are collected afresh and for the first time, and thus happen to

be original in character. In case of descriptive research, researcher performs survey

whether sample survey or census survey, thus we obtain primary data either through

Observation

Direct communication with respondent

Personal interview

Secondary data

Secondary data are those which have already been collected by someone else and have

already been passed through statistical process.

In this project report, both types of data have been used. Mainly, secondary data is used

such as annual reports of last two years of Grasim industries.

LIMITATIONS OF THE STUDY

This report is prepared with the help of secondary data.

Short time period.

Casual attitude of management towards trainees.

No appropriate working seat for trainees.

No stipend given to trainees by companies hence no responsibility is given to the

trainees.

WORKING CAPITAL AT A GLANCE

INTRODUCTION

IMPORTANCE

APPROACHES

DECISION CRITERIA

TYPES

FEATURES

DETERMINANTS

COMPONENTS

WORKING CAPITAL CYCLE

INTRODUCTION

A successful sales program is necessary for earning profits by any business

enterprise. Sales do not convert in cash instantly. There is a time lag between the sale of

goods and receipt of cash.

Therefore, there is a need for working capital in the form of current assets to

deal with the problem arising out of the lack of immediate realization of cash against goods

sold. Therefore sufficient working capital is necessary to sustain sales activity.

Working capital is a financial metric which represents the amount of day-by-day operating

liquidity available to a business. Along with fixed assets such as plant and equipment,

working capital is considered a part of operating capital. It is calculated as current assets

minus current liabilities. A company can be endowed with assets and profitability, but

short of liquidity, if these assets cannot readily be converted into cash

Definition of Working Capital:-

According to C.W. Gestenbergh-

“Working capital is ordinarily defined as the excess of the current

assets over current liabilities”.

According to Lawrence. J. Gitmen

“The most common definition of working capital is the difference of the

firm’s current assets and current liabilities.”

CURRENT ASSETS:-

In accounting, a current asset is an asset on the balance sheet which is expected to be

sold or otherwise used up in the near future, usually within one year, or one business cycle -

whichever is longer. Typical current assets include cash, cash equivalents, accounts

receivable, inventory, the portion of prepaid accounts which will be used within a year, and

short-term investments.

Major items in Current assets

Cash

Bank balances (Saving and short-term time deposits)

Accounts receivable

Inventories

Prepayments

Accrued income

CURRENT LIABILITIES:-

In accounting, current liabilities are considered liabilities of the business that are to be

settled in cash within the fiscal year.

For example accounts payable for goods, services or supplies that were purchased for use

in the operation of the business and payable within a normal period of time would be current

liabilities.

Bonds, mortgages and loans that are payable over a term exceeding one year would be

fixed liabilities. However the payments due on the long-term loans in the current fiscal year

could be considered current liabilities if the amount were material.

Working capital management

Decisions relating to working capital and short term financing are referred to as working

capital management. These involve managing the relationship between a firm's short-term

assets and its short-term liabilities. The goal of Working capital management is to ensure

that the firm is able to continue its operations and that it has sufficient cash flow to satisfy

both maturing short-term debt and upcoming operational expenses

Definition of working capital management:-

“Working capital management involves the relationship between a firm's short-term

assets and its short-term liabilities. The goal of working capital management is to

ensure that a firm is able to continue its operations and that it has sufficient ability to

satisfy both maturing short-term debt and upcoming operational expenses. The

management of working capital involves managing inventories, accounts receivable

and payable, and cash.” -From WWW.STUDYFINANCE.COM

The Importance of Good Working Capital Management

Working capital constitutes part of the Crown's investment in a department. Associated with

this is an opportunity cost to the Crown. (Money invested in one area may "cost"

opportunities for investment in other areas.) If a department is operating with more working

capital than is necessary, this over-investment represents an unnecessary cost to the

Crown.

From a department's point of view, excess working capital means operating inefficiencies. In

addition, unnecessary working capital increases the amount of the capital charge which

departments are required to meet from 1 July 1991.

Approaches to Working Capital Management

The objective of working capital management is to maintain the optimum balance of each of

the working capital components. This includes making sure that funds are held as cash in

bank deposits for as long as and in the largest amounts possible, thereby maximising the

interest earned. However, such cash may more appropriately be "invested" in other assets

or in reducing other liabilities.

Working capital management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital and to identify

areas requiring closer management (see Chapter Three).

The individual components of working capital can be effectively managed by using

various techniques and strategies (see Chapter Four).

When considering these techniques and strategies, departments need to recognise that

each department has a unique mix of working capital components. The emphasis that

needs to be placed on each component varies according to department. For example, some

departments have significant inventory levels; others have little if any inventory.

Furthermore, working capital management is not an end in itself. It is an integral part of the

department's overall management. The needs of efficient working capital management must

be considered in relation to other aspects of the department's financial and non-financial

performance.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques

for the management of working capital. These require managing the current assets -

generally cash and cash equivalents, inventories and debtors. There is also a variety of

short terms financing options which are to be considered.

.

Cash management – identify the cash balance which allows for the business to

meet day to day expenses, but it reduces cash holding costs.

Inventory management - identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials and hence

increases cash flow; see Just In Time (JIT) and Economic order quantity (EOQ).

Debtors management - identify the appropriate credit policy, i.e. credit terms which

will attract customers, such that any impact on cash flows and the cash conversion

cycle will be offset by increased revenue and hence Return on Capital (or vice

versa); see Discounts and allowances.

Short term financing - inventory is ideally financed by credit granted by the supplier;

dependent on the cash conversion cycle, it may be necessary to utilize a bank loan (or

overdraft), or to "convert debtors to cash" through "factoring".

Decision criteria

By definition, Working capital management entails short term decisions - generally, relating

to the next one year period - which are "reversible". These decisions are therefore not taken

on the same basis as Capital Investment Decisions (NPV or related, as above) rather they

will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number

of days from the outlay of cash for raw material to receiving payment from the

customer. As a management tool, this metric makes explicit the inter-relatedness of

decisions relating to inventories, accounts receivable and payable, and cash.

Because this number effectively corresponds to the time that the

firm's cash is tied up in operations and unavailable for other activities, management

generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC).

The result is shown as a percentage, determined by dividing relevant income for the

12 months by capital employed; Return on equity (ROE) shows this result for the

firm's shareholders. Firm value is enhanced when, and if, the return on capital, which

results from working capital management, exceeds the cost of capital, which results

from capital investment decisions as above. ROC measures are therefore useful as a

management tool, in that they link short-term policy with long-term decision making.

See Economic value added (EVA).

TYPES

Working capital can be classified either on the basis of concept or on the

basis of periodicity of its requirement.

1) ON THE BASIS OF CONCEPT

On the basis of concept working capital is of 2 types.

A) Gross working capital - Gross working capital is represented by the total Current

assets.

Gross working capital = Total current assets

B) Net working capital - Net working capital is the excess of current assets over current

liabilities.

Net working capital = Current assets – Current liabilities

2) ON THE BASIS OF REQUIREMENT

On the basis of requirement working capital is also of two types:

A) Permanent working capital - It is that amount of investment which should always be

there in the fixes or minimum current assets like inventory, accounts receivables or

cash balance etc. to carry out business smoothly. Such an amount cant be reduced if

the firms wants to carry on business operations without interruption.

B) Variable working capital - The excess the amount of working capital over permanent

working capital is known as variable working capital. It may also be subdivided into two

parts.

a) Seasonal working capital - Such capital is required to

meet out the seasonal demands of busy periods occurring at stated

intervals.

b) Special working capital - Such capital is required to meet out the extra-

ordinary needs for contingencies. Events like strike, fire, unexpected

competition, rising price tendencies, or initiating a big advertisement

campaign require such capital.

FEATURES:-

1) Working capital is regarded as the excess of current assets over current liabilities.

2) Working capital indicates circular flow of funds in the day-to-day activities of business.

That’s why it is also called circulating capital.

3) Working capital represents the minimum amount of investment in raw materials, work-in

progress, finished goods, stores and spares, accounts receivables and cash balance.

DETERMINANTS

1) Nature of business – The effect of the general nature of the business on working

capital requirements can’t be exaggerated. Rail, roads and other public utility services

have large fixes investment so they have the lower requirements of current assets.

Industrial and manufacturing enterprises, on the other hand, generally require a large

amount of working capital.

2) Production policies – if the production is evenly spread over the entire year, working

capital requirements are greater, because the inventories will be unnecessarily

accumulated during of season period. But if the production schedule favours a varying

production plan as per the seasonal requirements, working capital is required to a

greater extent during a specified season only. The production policies are affected by

so many factors availability of raw materials, labour, stocking facility etc & therefore,

whatever the productions policies are, the firm has to arrange its working capital

requirements accordingly.

3) Proportion of the cost of raw materials to total cost - In those industries where

cost of proportion is a large proportion of total cost of the goods produced,

requirements of working capital will be comparatively large.

4) Length of period of manufacturing – The time which elapses between the

commencement and end of the manufacturing process has an important bearing upon

the requirements of working capital. The manufacturing cycle may be shorter for

certain concerns & longer for others- it depends on the type of the product to be

manufactured, work to be done through machine labour & hand

5) Terms of purchase - If suppliers allow continuous credit, payment can be postponed

for some time and can be made out of the sale proceeds of the goods produced. In

such a case, the requirements of working capital will be reduced.

6) Dynamic Attitudes – As a company grows, it is logical to expect the large amount of

working capital will be required.

7) Business cycles – Requirement of working capital also varies with the business.

When the price level is up due to boom conditions, the inflationary conditions create

demand for more working capital. During depression also a heavy amount of working

capital is needed due to the inventories being locked unsold and book debts

uncollected.

8) Requirement of cash - The working capital requirements of a company are also

influenced by the amount of cash required by it for various purposes. The greater the

requirement of cash, the higher will be the working capital needs of the company.

9) Dividend policy of concern – If the management follows a conservative dividend

policy the needs of working capital can be met with the retained earnings. The

relationship between dividend policy and working capital is well established and mostly

companies declare dividend after a careful study of their cash requirements.

10) Other Factors - Other factors, which affect the requirement of working capital, are lack

of co-operation in production and distribution policies, transport and communication

facilities, the fiscal and tariff policies of the government etc.

COMPONENTS OF WORKING CAPITAL:-

Main components of working capital are as follows:

1) Cash – Cash is the most liquid and important component of working capital. Holding

cash involves cash in the sense that the present worth of cash held for a year is less

than the value of cash on today. During inflationary situations as exist today the cost of

holding includes the deterioration in the value of the cash due to inflation. Cash,

therefore, results in enhanced liquidity, but lower profitability. Despite in the cost

involved it is pertinent to hold cash because it facilitates the attainment of some

important motives.

2) Marketable Securities – Though marketable securities provides a such lower yield

that the firm’s operation assets. They serve two useful functions. Firstly, they act as a

substitute for cash, and secondly, are used as temporary investment. Where these

securities are held in lieu of the cash balance, they act as a substitute for transactional

or precautionary balances. Normally, these aren’t used as speculative balances, but

only as a guard against the possible shortage of bank credit.

Marketable securities (as temporary investment) may be held for one of the following

reasons:

Seasonal or cyclical operations

To meet known financial requirements. Construction of an additional

plant.

Immediately after the sale of long-term securities.

3) Account Receivable - Though accounts receivable are a vital investment of any

business organization, little analytical work as been done to determine credit policies.

Maintaining account receivable has its cost implications in that the firm’s monetary

resources are tied up. This is of greater significance in the inflationary economy,

because of the depreciation in the value of money. Basically, this is a two-step

account. When goods are shipped, inventories are reduced and

accounts receivable is created. When payment is made, this account is reduced and

the cash level increases. Accounts receivables are, therefore a function of the volume

of credit sales and the average length of time between sales and collections.

4) Inventory – Inventories represent a substantial amount of a firm’s current assets.

Management of inventories should be efficiently carried out so that this investment

doesn’t become too large, as it would result in blocked capital which could put to

productive use elsewhere. On the other hand, having too small an inventory could

result in loss of sale or loss of customer goodwill. An optimum level of inventory should

therefore be maintained.

WORKING CAPITAL CYCLE

Working capital cycle indicates the length of time between a firm’s paying for

materials entering into stock and receiving the cash from sale of finished goods. In a

manufacturing firm, the duration of time required to complete the sequence of events is

called operating cycle.

In case of a manufacturing company, the operating cycle is the length of time

necessary to complete the following cycle of events: -

1) Conversion of cash into raw materials

2) Conversion of raw materials into work-in-progress

3) Conversion of work-in-progress into finished goods

4) Conversion of finished goods into accounts receivable

5) Conversion of accounts receivable into cash

The above operating cycle is repeated again & again over the period depending upon the

nature of the business & type of product etc. the duration of the operating cycle for the

purpose of estimating working capital is equal to the sum of duration allowed by the

suppliers.

Working capital cycle can be expressed as:

R+W+F+D-C

Where,

R=Raw Material Storage Period = Average Stock of Raw Material / Average Cost of

production per day

W=Work in Progress Holding Period = Average Work in Progress Inventory/Average Cost of

Production per day

F=Finished Goods Storage Period = Average Stock of Finished Goods / Average. Cost of

Goods Sold per day

D=Debtors Collection Period = Average Book Debts/

Average Credit Sales per day

C=Credit Period Availed = Average Trade Creditors/Average Credit Purchases per day

OPERATING CYCLE OF MANUFACTURING BUSINESS

REALIZATION Accounts SALES

Receivables

Cash Finished Goods

PURCHASES PRODUCTION PRODUCTION PROCESS

Raw Materials Work-in-Process PROCESS

Composition of

Level of Current

Liabilities

THEORTICAL ASPECTS OF WORKING CAPITAL

MANAGEMANT

NATURE OF WORKING CAPITAL MANAGEMENT

Working capital management is three dimensional in nature-

1) It is concerned with the formulation of policies with regard to profitability, liquidity and risk.

2) It is concerned with the decisions about the composition and level of current assets.

3) It is concerned with the decisions about the composition and level of current liabilities.

Composition of Level

of Current Assets

Policies regarding to Profitability

Liquidity and Risk

GOAL OF WORKING CAPITAL MANAGEMENT

Working capital management is concerned with the problems that arise in

attempting to manage the current assets, the current liabilities and the interrelationship that

exists between them.

Current assets refer to those assets, which in the ordinary course of business

can be converted into cash within one year. Major current assets are:

Cash

Marketable securities

Accounts receivable

Inventory.

Current liabilities are those liabilities, which are intended, at their inception, to

be paid in the ordinary course of business within a year, out of the current assets or

earnings of the concern. Current liabilities are:

Accounts payable

Bills payable

Bank overdraft

Outstanding expenses.

Working capital is that portion of firm’s assets which is financed by long-

term funds. Interaction between current assets and current liabilities is the main theme

of the theory of working capital management.

Goal of working capital management is to manage the firm’s current assets and

liabilities in such a way so that a satisfactory level of working capital is maintained.

The second important segment of working capital management is deciding the optimum

level of investment in various current assets. There are three important current assets

cash, accounts receivables and inventory

RECEIVABLES MANAGEMENT

INTRODUCTION

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

sale of goods or services in the ordinary course of business”. When a firm makes an

ordinary sale of goods or services and doesn’t receive payment, the firm grants trade credit

accounts receivable, which could be collected in the future.

Receivables Management is also called trade credit management.

OBJECTIVE

The objective of receivables management is “to promote sales and profits

until that point is reached where the return on investment in further funding receivables is

less than the cost of funds raised to finance that additional credit”.

BENEFITS

Investments in receivables involve both benefits and costs. The extension of

trade credit has a major impact on sales, costs and profitability. Other things being equal, a

relatively liberal policy and, therefore, higher investments in receivables, will produce larger

sales. However, costs will be higher with liberal policies than with more stringent measures.

Therefore, accounts receivables management should aim at a trade-off

between profit (benefit) and risk (cost).

CREDIT POLICIY

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

1) Credit standards

2) Credit terms

3) Credit Analysis

Credit Standard

The term credit standards represent the basic criteria for the extension of credit to

those customers to whom goods could be sold on credit. If a firm has more slow-paying

customers, its investment in accounts receivables will increase. The firm will also be

exposed to higher risk of default.

Credit Terms

Credit terms specify duration of credit and terms of payment by customers.

Investment in accounts receivables will be high if customers are allowed extended time

period for making payments.

Credit Analysis

Credit analysis and investigation is an aspect of credit policies of a firm. Two basic

steps are involved in the credit investigation process:

A. Obtaining credit information

B. Analysis of credit information

It is on the basis of credit analysis that the decisions to grant credit to a customers as

well as the quantum of credit would be taken.

INVENTORY MANAGEMENT

INTRODUCTION

Inventories constitute the principal item in the working capital of the

majority of trading and industrial companies. In inventory we include raw materials,

finished goods, work-in-progress, supplies and other accessories. To maintain the

continuity in the operations of business enterprises, a minimum stock of inventory is

required.

Management of inventory is designed to regulate the volume of investment in

goods on hand and the types of goods carried in stock to meet the needs of production

and sales while at the same time, the investment in them is to be kept at a reasonable

level.

CONCEPT

The inventory management” is used in two ways- Unit Control and Value

Control. Production and purchase officials use this word in term of unit control whereas in

accounting this word is used in term of value control .Investment in inventory is one the

largest asset item of business enterprises particularly those engaged in manufacturing.

The proper management and control of the capital invested in the inventory

should be the prime responsibility of accounting department because resources invested in

inventory aren’t earning a return for the company. Rather, on the other hand, they are

costing the firm money both in terms of capital costs being incurred and loss of opportunity

income that is being foregone.

OBJECTIVES

The basic managerial objectives of inventory control are two-

1) The avoidance of over-investment or under-investment in inventories.

2) To provide the right quantity of standard raw material to the production department at the

right time.

TECHNIQUES OF INVENTORY CONTROL

1) The Selective Inventory Control or ABC System of Control

2) Maximum Stock Limit

3) Minimum Stock Limit

4) Re-ordering Level

5) Economic Order Quantity

6) Just In Time

7) Supply Chain Management

ABC System of Control:-

The various inventory items are, according to this system, categorized into three classes-

I. A

II. B

III. C

The item included in-group involve the largest investment. Therefore,

inventory control should be the most rigorous and intensive and the most sophisticated

inventory control techniques should be applied to these items. The C group consists of

items of inventory which involve relatively small investments although the numbers of

items is fairly large. These items deserve minimum attention. The B group stands

midway. It deserves less attention than A but more than C. It can be controlled by

employing less sophisticated techniques.

Maximum Stock Limit:-

This represents the quantity if inventory above which it should not be allowed to be kept.

The following formula may be applied to calculate the maximum stock-

Maximum Stock = Reorder Level – Minimum Consumption during Minimum

Lead Time + Lot Size.

Minimum Stock Limit:-

This represents the quantity below which stock should not be allowed to fall. The

main purpose of this level is to ensure that production isn’t held up due to storage of any

material.

Minimum Stock Limit = Re-order Level – Normal storage during Lead Time

Re- Ordering Level:-

It is the point at which if stock of the material in store reaches, the storekeeper

should initiate the purchase requisition for fresh supplies of the material. This level is fixed

somewhere between the maximum and minimum levels in such a way that the difference of

quantity of the material between the reordering level and the minimum level will be sufficient

to meet requirements of production upto the time of fresh supply of the material.

The reorder point = Lead time in days * Average daily usage of inventory

Economic Order Quantity:-

It is the quantity of inventory, which can be reasonably ordered at a time and

purchased economically. It is also known as Standard Order Quantity or Economic Lot Size.

By definition “Economic Order Quantity is that size or order at which the total cost of

ordering and holding are the minimum.

In determining the economic order quantity the problem is one to set a

balance between two opposing costs, namely, namely ordering costs and carrying costs.

The ordering costs are basically the costs of getting an item into the firm’s inventory.

Carrying costs, sometimes also known as holding costs are the costs of

possessing the materials. These costs are combined known as “Associated Costs”.

Hence, the management tries to reconcile them and this reconciliation point is

economic order quantity.

Just In Time:-

Just-in-time inventory system is designed to ensure that materials or supplies arrive at a

facility just when they are needed so that storage and holding costs are minimized. The just-

in-time system requires considerable cooperation between the supplier and the customer.

The customer must specify what will be needed, when, and in what amounts. The supplier

must be sure that the right supplies arrive at the agreed-on time and location.

Just In Time (business), an inventory strategy that reduces in-process inventory

Just-in-time compilation, a technique for improving the

performance of bytecode-compiled programming systems

Just in Time (Code Lyoko episode), an episode of the French animated television

series Code Lyoko

Jit (Corvette), An abbreviation for "Jawvette", also known as a Corvette.

Supply chain management:-

Supply chain management (SCM) is the process of planning, implementing, and

controlling the operations of the supply chain with the purpose to satisfy customer

requirements as efficiently as possible. Supply chain management spans all movement and

storage of raw materials, work-in-process inventory, and finished goods from point-of-origin

to point-of-consumption. The term supply chain management was coined by consultant

Keith Oliver, of strategy consulting firm Booz Allen Hamilton in 1982.

JBM AUTO Ltd. (SPV)BALANCE SHEET AS ON 31 MARCH, 2007

Schedule As at

31st march

2007

(Amt in Rs.)

1. SOURCES OF FUNDS

1 Shareholder's funds 1

Capital -

Reserve & Surplus 93860

0 93860

0

Secured Loans 2 1374855

5

Unsecured Loans

Inter-Unit Account 74421425

8910858

0

2. APPLICATION OF FUNDS

1 Fixed Assets 3

A. Gross Block 827573

1

Less: Depreciation 68965

9

Net Block 758607

2

Capital work in Progress 268104

7

2 Current assets, loans & advances 4

a. Inventories 4192254

0

b. Sundry Debtors 5762805

3

c. Cash & Bank Balances 22204

6

d. Inter Unit Account 1455755

1

e. Loans & Advances 2071774

7 13504793

7

Less: Current Liabilities & Provisions

Current Liabilities 5 56206476

Net Current assets 7884146

1

Deferred Tax Assets (Net) -

3 MISCELLANEOUS EXPENDITURE

(to the extent not written

off or adjusted) 6

Total 8910858

0 -

JBM AUTO LIMITED (SPV)

Profit & Loss Account For The Period 31st MARCH, 2007

Schedule As at

31st march

2007

(Amt in Rs.)

INCOME

Sales 7 34022321

8

Less : Excise Duty 3449694

2 30572627

6

INCREASE (DECREASE) IN WIP 22284

9

Other Income 139814

3 30734726

8

EXPENDITURE

Material & Manufacturing expenses 8 28327374

3

Employees' remuneration and benefits 9 1220299

1

Adminsitrative expenses 10 936391

3

Financial Charges 11 193983

1 30678047

8

Profit before depreciation & 56679

0

Amortisation

Less:

Depreciation

Profit before tax 56679

0

As at

31st march

2007

(Amt in Rs.)

b. Reserve & Surplus

OPENING BALANCE 37181

0

General Reserve

Add : Transferred from Profit & Loss Account

Securities Premium Account

Profit & Loss account 56679

0

938600

a) Vehicle Loans

1 ICICI Bank Limited

2 Citicorp

3 Stanchart Bank

4 Citi Bank

b)Other loans

1. Cash Credit from Bank from banks

-HDFC 1374855

5

2 Forign Currency Loan

- External Commercial Borrowing

c) Deferred Payment Credit

1. Sale Tax Intrest free loan -

13748555

a. Inter Corporate Deposit(JBES)

Interest accrued on ICD -

As at

31st march

2007

(Amt in Rs.)

Sheet Metal

a. Inventories

(as taken, valued and certified by the

Management)

Raw Material 2644996

5

Stock in process 1446863

9

Stores &spares 100393

6

Scrap 4192254

0

b.Sundry Debtors(Unsecured)

Debts outstanding or more than six months

- Considered Good -

Less: Provision for Doubtful Debts - -

Other Debts, Considered Good -

c. Cash & Bank Balances

Cash in hand 12204

6

With scheduled banks in :

Current Account

Fixed Deposits Account including

interest accrued (under banks' lien) 10000

0 22204

6

Less: Unclaimed Dividends  

Net Cash & Bank Balances 22204

6

d. Loans & Advances (Unsecured,Considered good)

Advances recoverable in cash or

in kind or for value to be received 196840

0

Advances to suppliers 159895

2

Security deposits 105500

0

Balance Of Modvat/ Cenvat 1604801

3

Balances With Excise Authority 4738

2

Advance Income Tax (Net of Provision) 2071774

7

31st march

2007

(Amt in Rs.)

Sundry Creditors 5070188

5

Other liabilities 550459

1

Interest accrued but not due 5620647

6

Proposed Dividend

Corporate Dividend Tax 5620647

6

(to the extent not written off or adjusted)

Exibition expenses

Sales

Finished Goods 33963296

1

Other Sales 59025

7

Job Work/ Other Receipts

Profit on sale of Fixed Assets -

Interest received 34022321

8

Other Income

Miscellaneous Income 4196

2

Notice Pay 2370

9

Fright Outward Received 133247

2 139814

3

As at

31st march

2007

(Amt in Rs.)

Raw material Consumed 27192500

5

Stores Consumed 295977

4

Manufacturing Expenses 514432

0

Power & Fuel 251901

5

Packing Material 6946

1

Machinery repair & maintenance 65616

8 28327374

3

Opening Stock :-

Work in process 1424579

0

Finished goods -

Scrap -

14245790

Closing Stock : -

Work in process 1446863

9

Scrap 1446863

9

Increase in Stocks (2228

49) 28305089

4

As at

31st march

2007

(Amt in Rs.)

Salary & wages 1076940

6

Contribution to ESI, PF & other Funds 85865

2

Staff & Workers Welfare 57493

3

Directors' Remuneration -

  1220299

1

Travelling & Conveyance 1673043

Communication in Expenses 38639

1

Printing & Stationary 25650

8

Rent (including Land Lease Rent) 420000

0

Rates & Taxes 21116

5

Insurance 9127

7

Repair & Maintenance

Building 513

5

Others 36417

4

Auditors' Remuneration

Audit fee -

Tax Audit Fees -

Others 902

7

Legal & Professional 1180

0

Vehicle Running & Maint. 30055

6

Advertisement & Business Promotion 16121

7

Bad Debts Written off

Bad & Doubtful Debts

Loss On Sale Of Vehicle

Loss On Sale Of Assets Other Than Vehicles

Exchange Fluctuation

Demerger Expenses

Freight Outward 131381

8

Bank Charges 19758

2

Miscellaneous Expenses 18222

0 936391

3

Interest - Term Loans -

Interest – Banks 193907

4

Interest – Others 75

7 193983

1

JBM AUTO LIMITED (SPV)GROUPING FORMING PART OF PROFIT & LOSS A/C.

For the year

31st march

2007

(Amt in Rs.)

SALES - JOB WORK / OTHER RECEIPTS

Sales- Job Work

Other Receipts

Tool Modification/ Other Charges

SERVICE TAX RECOVERED

SERVICE TAX RECOVERED-CESS

Sales - Job Work - Stock Transfer -

SALES - FINISHED GOODS

Sales – Components 30409542

7

Sales Return Finished Goods

Excise Duty Recovered 3463504

0

Excise Duty Recovered-Sec&Higher Edu 9643

5

Excise Duty Recovered-cess 80605

9 33963296

1

SALES OTHERS

Sales – Scrap 50744

0

Excise Duty Recovered - Scrap 8119

1

Excise Duty Recovered - Cess Scrap 162

6

Sales Others 59025

7

MISCELLANEOUS INCOME

Cash Discount Received

Insurance Claim Received

Liabilities W/Back W/Off

Sundry Balance W/Back / W/Off

Shortage & Excess

Miscellaneous Income 4196

2

Profit On Sale Of Fixed Assets

Rent - Tube investment -

Rent on vehicle

Exchange Fluctuation - Income 4196

2

RAW MATERIAL CONSUMED

Opening stock 1090025

7

Add: Purchases 287474713

Less: Closing stock

26449965

Stock in Transit 27192500

5

RAW MATERIAL PURCHASES

Raw Material Expenses

Raw Material – Sheet 1054213

4

Raw Material – Pipe 191038

2

Raw material- Stock Transfer Sheet

Raw material- Paint 478056

6

Raw Material – Others 10669

4

Raw Material-Hyd 408023

6

Less: Sales - Raw Material 863607

0

Raw Material - Components Tools & Dies 27309820

5

Stock Transfer-in transit

Sales - Raw Material- Stock Transfer

Material Procurement Expenses

Freight & Cartage Inward 108936

2

Others

Custom Duty - Raw Material 47584

0

Samples 2736

4

28747471

3

MANUFACTURING EXPENSES

Job Charges – Outside 80342

5

Job Charges – contractor 433789

5

Job Charges -Sales JBM FBD

Design & Drawing Charges 300

0

Machinery Hire Charges 514432

0

CONSUMABLE EXPENSES

Opening Stock 8040

6

Add: Purchases 378904

3 386944

9

Less: Closing Stock 90967

5 295977

4

CONSUMABLES PURCHASED

Consumables - Oil & Lubricant 6137

6

Consumables - Paint, Chemical, Thinner & AdhESIves 3099

9

Consumables - Welding & Gases 182586

7

Consumables - Hand Tools & Abrasives 19830

8

Consumables – Hardware

Consumables - Safety Items 10164

6

Consumables - MEASURING INSTRUMENTS 52

2

Consumables – Others 157032

5

Custom Duty - Consumables

Clearing Charges- Consumables 378904

3

REPAIR & MAINTENANCE - PLANT & MACHINERY

Opening stock 973

4

Add : Purchases 74069

5

75042

9

Less : Closing Stock 9426

1 65616

8

REPAIR & MAINTENANCE - P&M PURCHASE

Repair & Maintenance - Plant & Machinery 72723

0

Repair & Maintenance - Electric Installation 1346

5

Repair & Maintenance - Tools & dies

Repair & Maintenance - Stock Transfer

Clearing Charges- Spares 74069

5

REPAIR & MAINTENANCE OTHERS

Repair & Maintenance - General Electrical 9294

4

Repair & Maintenance - Office & Furniture 6183

3

Repair & Maintenance - Computers 7855

3

Repair & Maintenance - Others 13084

4 36417

4

AUDIT FEES

Audit Fees – Statutory

Audit Fees - Tax Audit

Audit Fees - Company Law Matter

Audit Fees – Certification

Audit Fees - Out Of Pocket Expenses 902

7 902

7

EMPLOYEE COSTS & BENEFITS

Salaries & Allowances

Wages 90

0

Salary 498247

7

Production Incentive - Worker 13798

5

Production Incentive - Staff

Special Allowance 125097

6

House Rent Allowance 196869

9

Conveyance Allowance 515302

Deputation Allowance

Stipend -

Amenities

Bonus

Ex – Gratia

Leave Encashment 1287

5

Compensation / Notice Pay

Leave Travel Assistance 9594

1

Leased House Expenses

Gratuity 26950

1

Medical Reimbursement 26928

6

Gift

Group Insuarnce

Group Mediclaim Insurance 6660

7

Group Insurance Policy 4321

1

Contractual Wages

Contractor Wages 73117

4

Security Charges 18449

8

House Keeping & Sanitation Expenses 23997

4 1076940

6

CONTRIBUTION TO ESI, PF ETC.

Employers Contribution To FPF 31965

6

Employers Contribution To PF 35873

0

Employers Contribution To ESI 11343

7

Employers Contribution To Welfare Fund

Link Insurance PF(LIC)

Link Insurance PF 15

5

Administrative Charges PF 5671

5

ESI Deducted From Contractors 5532

3

PF Deducted From Contractors

Employees Contribution To PF 4536

4

Employees Contribution To ESI

858652

STAFF & WORKERS WELFARE

Staff & Workers Welfare 4163

1

Uniform Expenses 1146

2

Medical Expenses 1629

8

Food & Beverage 20686

9

Staff Recuitment/ Training Expenses

Staff Recruitment Expenses 19246

7

Staff Training Expenses 10620

6

574933

DIERCTORS' REMUNERATION

Directors Remuneration

Directors Sitting Fees -

TRAVELLING & CONVEYANCE

Travelling - Domestic Employees 68300

3

Travelling - Domestic Others 3009

7

Travelling - Domestic Directors

Travelling – Foreign 69983

6

Travelling - Foreign Directors

Conveyance 25953

2

Taxi Charges 57

5 167304

3

RATES & TAXES

Rates, Fees & Taxes 21116

5

Filing Fees

Listing Fees

LAD Paid

Sales Tax Paid

Testing Fees

Calibration Charges

Service tax Paid on Good Tranport

Service tax -Cess Paid on Good Tranport

Sales Tax Paid

LAD Paid 21116

5

LEGAL & PROFESSIONAL CHARGES

Legal & Professional Charges - Retainership 750

0

Legal & Professional Charges 430

0

Stamp Paper Expenses 1180

0

VEHICLE RUNNING & REPAIR

Vehicle Running & Repair 20403

1

Drivers Salary

Vehicle Hire Charegs 9652

5 30055

6

ADVERTISEMENT & BUSINESS PROMOTION

Advertisement & Publicity 800

0

Business Promotion 5332

4

Entertainment 8989

3

Exhibition Expenses 1000

0 16121

7

PACKING MATERIAL CONSUMED

Opening Balance -

Add : Purchase 6946

1

Closing Stock -

69461

PACKING EXPENSES

Packing Expenses - Corrugated

Packing Expenses - Polythene

Packing Expenses – Others 6946

1

Packing Charges Recovered 6946

1

FREIGHT & CARTAGE OUTWARD

Freight & Cartage Outward - NCR 412

0

Freight & Cartage Outward - Export 127559

4

Export Expenses 3410

4 131381

8

POWER & FUEL

Electricity _State Electricity 80236

6

Fuel DG Set 163993

2

Fuel - Logistics & Others 6663

4

Water Charges 1008

3 251901

5

INTEREST ON TERM LOAN

Interest - Term Loans

Interest - Vehicle Finance -

OTHER FINANCIAL CHARGES

Bank Charges – BG

Bank Charges 6088

9

Limit Processing Charges

Exchange Fluctuation - Expense 46

7

Bank Charges – LC 13622

6 19758

2

BANK INTEREST

Interest - Cash Credit 180000

0

Interest - FCNR (B)

Interest - LC Usance 13907

4

193907

4

OTHER INTEREST

Interest - ICD'S

Interest – Others 75

7 75

7

COMMUNICATION EXPENSES

Telephone Expenses 20199

5

Cellular Expenses 15536

1

Internet / E-Mail Expenses 318

0

Postage Expenses 59

6

TELEPHONE/CELL SET EXPENSES 88

1

Courier Charges 2437

8 38639

1

PRINTING & STATIONERY

Computer Stationery 27

0

Computer Consumables 4041

2

Photocopy Charges 4115

7

Legal Forms

General Stationery 17466

9 25650

8

RENT

Lease Rent 420000

0

Lease Rent – Others 420000

0

MISCELLANEOUS EXPENDITURE

Meeting Expenses

Shortage & Excess 137

1

Newspapers, Books & Periodicals 907

0

Prior Period Expenses

Charity & Donation

ISO & QS Expenses

Agm Expenses

Meeting Expenses

Shareholders Service Expenses

Diwali Expenses 7987

7

Liabilities W/Back W/Off

Auditor's expenses m

Commission & Brokerage 4040

9

Membership & Subscription 422

8

Miscellaneous Expenditure 4726

5 18222

0

EXCISE DUTY PAID

Excise Duty Paid 3484722

0

Excise Duty Recovered - Raw Material Sales 134941

9

Excise Duty Recovered cess 2699

2

Service Tax Paid

Service Tax Cess Paid

Cess Paid 102613

3 3449694

2

INSURANCE PREMIUM

Insurance Premium – Fixed Assets 1963

4

Insurance Premium – Stock 4444

5

Insurance Premium - Vehicle

Insurance Premium - Transit 243

2

Insurance Premium - Others 2476

6 9127

7

METHODS OF WORKING CAPITAL ANALYSIS

There are so many methods for analysis of financial statements but

BHIWANI TEXTILE MILL used the following techniques:-

Comparative size statements

Trend analysis

Cash flow statement

Ratio analysis

A detail description of these methods is as follows:-

COMPARATIVE SIZE STATEMENTS:-

When two or more than two years figures are compared to each other than we called

comparative size statements in order to estimate the future progress of the business,it is

necessary to look the past performance of the company.These statements show the

absolute figures and also show the change from one year to another .

Benefits of this method to the JBM:-

To indicate the trends,these statements show the change in production, sales, and

expenses.

To make the data simple and more understandable.

TREND ANALYSIS:-

To analyse many years financial statements BTM uses this method.This indicates the

direction on movement over the long time and help in the financial statements.

Procedure for calculating trends:-

1. Previous year is taken as a base year.

2. Figures of the base year are taken 100.

3. Trend % are calculated in relation to base year.

Benefits :-

It is beneficial to find out the long run changes .

It is helpful in future forecasting.

CASH FLOW STATEMENT:-

Cash flow statements are the statements of changes in the financial position prepared on

the basis of funds defined in cash or cash equivalents. In short cash flow statement

summaries the cash inflows and outflows of the firm during a particular period of time.

Benefits for the JBM:-

To prepare the cash budget.

To compare the cash budgets .

To show the position of the cash and cash equivalents.

RATIO ANALYSIS:-

Ratios provide very useful tools for the manager to assess the organization by making two

basic types of comparisons.   First, the analyst can compare a present ratio with past (or

expected ) ratios for the organization to determine if there has been an improvement or

deterioration or no change over time.   Second, the ratios of one organization may be

compared with similar organizations or with industry averages at the same point in time

making sure that "apples are compared with apples and oranges with oranges."   This is a

type of "benchmarking" so that one may determine whether the organization is "average" in

performance or doing better or worse than others.

      Ratios are simple measures or comparisons of one thing to another.   These tools allow

vital comparisons that are not possible when dealing with a single number.   The insights

gained by ratio analysis will assist in gaining vital understanding but ratios will never give

answers, only clues.   Ratios are found in all types of organizations from sports to education

to business to the military to . . . .   You are probably well aware of some and have been

using them without really thinking that you were actually using ratio analysis.   For example,

when you were looking at different colleges, did you consider the student -

faculty ratio?   Have you talked about the average yards per carry that a particular back in

football has?   How about miles per gallon that you are getting with your car?

FINANCIAL RATIOS

      Perhaps the most commonly used ratios in business are financial ratios.  

These are developed by use of the income statement and the balance sheet.  

No one ratio will give sufficient information to judge the financial condition and

performance of the firm.   Other factors such as any seasonal businesses,

accounting differences and the like must also be considered.   Again, ratio

analysis will give clues but not answers.   Financial ratios cover four areas of

concern as follows:

Liquidity --the ability to have

cash ready when needed and

these include

           

Debt (Leverage)-- reveal the

relationship of your sources of

capital such as

Current Ratio    

Quick (Acid-test) Ratio Debt to Equity

Liquidity of Receivables       Debt to Assets

      Average collection period       Debt to Net Worth

      Receivables turnover  

Aging of Accounts Payable  

Inventory Turnover  

The liquidity and leverage (debt) ratios represent as assessment of the risk of the company.

Activity (profitability) ratios are measures of the return generated by the assets of the

company.

Only a few ratios will be covered in this note. This note was first prepared in 1986 by

Dr. W. Blaker Bolling, Professor of Management, Marshall University, for classroom

use only. Comments and suggestions are welcomed. Revised in January, 1992.

Revised with assistance from graduate assistants Amy McHenry and Sunil Anand in

June, 1996.

Profitability (Activity) – measure profit

in relation to sales, assets, or some other

base as indicators of efficiency such as

           

Coverage -- indicate ability to pay

your debts given the amount of

money coming in such as

     

Profitability to Sales         Times Interest Earned

      Gross Profit Margin         Cash Flow to Debt Maturities

     Net Profit Margin   Doomsday Ratio

Profitability to Investment    

      Rate of Return on Equity    

      Return on Assets    

      Turnover Ratio    

Two terms often used in conjunction with financial ratios are

      Working Capital = Current Assets - Current Liabilities

                              This simply gives a measure of how much capital (money) will be

                              left after the bills are paid.

      Cash Flow = Net Income + Depreciation

                              This simplified look at cash flow gives a measure of the actual cash

                              on hand since depreciation is an accounting method to estimate the

                              use of resources over time but does not involve actual cash. More     

detailed cash flow analysis is possible.

Liquidity Ratios:

Current Ratio

This ratio is a measure of the ability of a firm to meet its short-term obligations. It is perhaps

the best known measure of financial strength at a given point in time. In general, a ratio of 2

to 3 is usually considered good. Too small a ratio indicates that some potential difficulty in

covering obligations may exist. A high ratio may indicate that the firm has too may assets

tied up in current assets and is not making efficient use to them.

Current Ratio = Current Assets      

                            Current Liabilities

Current Ratio= 135048/56206

=2.4

Quick (Acid-Test) Ratio

The Quick (or Acid-Test) Ratio is the same as the current ratio except that it excludes

inventories from the current assets. Inventories are usually the least liquid portion of the

current assets and may be difficult to dispose of -- especially if they are slow-moving and/or

become obsolete. A typical quick or acid-test ratio would be about 1.0 for American

industries. However, this ratio must be used with caution as certain industries may carry a

great deal of inventory and others very little so this should be compared to others in the

same business.

Quick Ratio = Current Assets - Inventories

          Current Liabilities

Quick Ratio=93125/56206

=1.7

Average Collection Period

This ratio simply indicates how long the average account is outstanding in days. It measures

how efficiently you collect money due you from your customers. If this indicates that

payments are taking a long time to collect, then collection/billing procedures should be

reviewed. On the other hand, too short a period could cause customers to move to another

supplier that has more reasonable collection policies.

Average Collection Period = Receivables x Days in Year

                                  Annual Credit Sales

=57628 x 12/ 340223

=2 months

The "days in year" would be 365 if your company is open all the time. More frequently, it is

less.

Average Receivables Turnover

This ratio simply indicates how may times a year the accounts turn over. Please note this

ratio is the inverse of the average collection period. Some organizations will prefer this ratio,

others will prefer using the previous one.

Average Receivables Turnover = Annual Credit Sales

                                          Receivables

=340223/57628

=5.9 times

Average Age of Payables

This ratio will indicate how long it is taking the average account to be paid by the firm. This

may then compared to industry averages and management goals. An 86 would, for

example, indicate that the organization is taking almost three months to pay the bills and

probably not taking advantage of various discounts offered to prompt payers. Note that this

ratio is very useful in credit checks of firms applying for credit. Note also that others may be

checking your firm's average age of payables and this could affect your credit ratings and

your reputation with suppliers!

Average Age of Payables = Accounts Payable x 365

                                          Annual Purchases

=50702 x 12/287475

=2 months

Inventory Turnover

This widely used ratio tells you how fast your inventory is moving. It is an indicator of the

liquidity of inventory, since it tells the rapidity with which the inventory is turned over into

receivables through sales. The norm for American industries is about 9 but this will vary

from industry to industry. The higher the ratio, the more efficient the inventory management

of the firm, but too high a ratio could indicate a level of inventory that is too low with

resulting frequent stockouts and the potential of losing customers. It could also indicate

inadequate production levels to meet customer demand. Caution must be used with this

ratio (as with all of the others) since ratios reveal hidden meaning and must be interpreted

correctly. A ratio by itself will never give an answer! The preferred way to calculate this ratio

is

Inventory Turnover = Cost of Good Sold

                                          Average Inventory

=56949/26450

=2 times

Note: Average Inventory = (beginning inventory + ending inventory) / 2

Since it is often impossible or difficult to obtain beginning and ending inventories and/or

abbreviated financial statements may not show cost of goods sold, a more frequent

(common) way to estimate inventory turnover is

Inventory Turnover = Sales              

                                    Inventory

=340223/41923

=8 times

Debt (Leverage) Ratios:

Debt to Assets

This ratio is often called the debt ratio since it compares what is owed to the value of the

assets used by the organization. This monitors use of debt used to build your business. It

tells what percentage of your firm's assets are financed by borrowing. A firm reporting a

debt ratio greater that 100% is functionally bankrupt. As long as some equity exists, this

ratio has to be less that 100%. What may be considered an "acceptable" debt ratio changes

from time to time as well as from industry to industry so be very careful in using this ratio.

Debt to Assets = Total Liabilities         x 100

        Total Assets

=69955 x 100/145315

=48.14%

Profitability (Activity) Ratios:

Gross Profit Margin

This shows the average amount of profit considering only sales and the cost of the items

sold. This tells how much profit the product or service is making without overhead

considerations. As such, it indicates the efficiency of operations as well as how products are

priced. Wide variations occur from industry to industry. For example, movie theater

concessions may exceed 90% while retail grocery margins may only be a few percentage

points.

Gross Profit Margin = Sales - Cost of Goods Sold         x 100

                Net Sales

=283274 x 100/340223

=83.26%

EFFICIENCY RATIOS

 Efficiency ratios assist in telling if your operations are providing the most benefit for the

lowest cost. Any deviation from past performance, budget, or industry averages in efficiency

should be addressed. Efficiency is merely a relationship of output to input and can be

measured in any area of the business! Efficiency in not the same as effectiveness,

which is a measure of whether or not the right outcome was achieved given the

inputs. Something might be very efficient but not very effective and vice versa. Ideally, one

should strive for the optimal relationships where operations are appropriately effective and

very efficient, a very difficult task given that these measures often pull in opposite directions.

For example, finding a cheaper raw material may save money on one end of the operations

but could result in higher costs in production with rejects and rework plus the later costs

associated with dissatisfied customers, warranty work and the like. Cutting staff has been

popular with recent downsizing moves by many organizations but will they retain ability to

provide the level of service that customers require? Will the remaining workforce become

demoralized and less effective and less efficient? Ratio analysis will assist the manager in

making these vital decisions to perform a balancing act that is an art rather than a science.

Benefits of ratio analysis to JBM:-

1. Helpful in analysis of financial statements.

2. Helpful in comparitive study.

3. Helpful in locating the weak spots of the JBM.

4. Helpful in forecasting.

5. Estimate about the trend of the business.

6. Fixation of ideal standards.

7. Effective control.

8. Study of financial soundness.

FINDINGS:-

In JBM Auto Ltd. They have overdraft facility of 50lacs.

Debtors are allowed 2 months credit.

For working capital management they have conservative approach that is the all

liabilities are financed through long term funds.

They have sufficient current assets to pay for the current liabilities.

They don’t have share capital they transfer the fund through inter unit.

CONCLUSION

The ideal current ratio is 2:1. The greater the ratio better will be the short term

solvency of the firm and safer will be the interest of the short term creditors. so from

this we can say the current ratio of the JBM is ideal.

The quick ratio of JBM is 1.7:1. The ideal quick ratio of 1:1 is considered a standard

ratio the higher the ratio more will be the short term solvency of the business. So

quick ratio of JBM is ideal

Average collection period of debtors is two months. This indicates that debts are

realized in less time.

Inventory turnover ratio is two times this indicated that goods have not been retained

in the godown for a longer period.

Gross profit ratio is 83.26%. this is a sign of efficient management.

Average payable period of JBM is two months. This indicates that creditors have

followed liberal credit policy.

Average receivable turnover ratio is 5.9 times. This means that after the credit sales

the debts are realized in less time.

LIMITATIONS:-

Based on financial statements, these statements suffer from certain limitations.

Affected by window dressing.

Company provides only secondary data, so certain type of bias is in study.

Unsuitable for forecasting.

BIBLIOGRAPHY

Financial Management

By M.Y.Khan & P.K.Jain

Financial Management

By D. K. Goyal

Research Methodology

By C. R. Kothari

Annual Reports of JBM AUTO Ltd.

2006-07