A STUDY TO IDENTIFY WORKING CAPITAL MANAGEMENT

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 PREFACE

Over the past two decades, the behavioural dimension of employee existence

has come to assume the proportion of a factor of paramount significant in

determining individual productivity and, thereby, organizational effectiveness

and efficiency.

Insurance is legal contract that protects people from the financial costs that

result from loss of life, loss of health, lawsuits, or property damage. Insurance

provides a means for individuals and societies to cope with some of the risks

faced in everyday life. People purchase contracts of insurance, called policies,

from a variety of insurance organizations.

Almost everyone living in modern, industrialized countries buys insurance.

For instance, laws in most states require people who own a car to buy

insurance before driving it on public roads. Lenders require anyone who

finances the purchase of a home or car with borrowed money to insure that

property. Business partners take out life insurance on each other to make sure

the business will succeed even if one of the partners dies.

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 INDEX

PREFACE

COMPANY PROFILE

INTRODUCTION OF SUBJECT

HYPOTHESIS

METHODOLOGY

OBJECTIVE OF STUDY

LIMITATIONS

RESEARCH METHODOLOGY

DATA REPRESENTATION

DATA ANALYSIS

FINDINGS & SUGGESTION

CONCLUSION

BIBLIOGRAPHY/WEBLIOGRAPHY

ANNEXURE

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 INDUSTRY PROFILE
AUTOMOBILE INDUSTRY

Automobiles has become an indispensable part of our life, an

extension of human body that provides us faster, cheaper and

more convenient mobility every passing day. Behind this

betterment go the efforts of those in the industry in the form of

improvement through technological research. What actually behind

this betterment of the automobiles are the opinions, likes,

requirements and dislikes of those who use those vehicles? These

wheeled machines affect our lives more than one.

The automobile industry is one of the most important industries in

the world, affecting not only the economy but also the cultures of

the world. It provides jobs for millions of people, generates billions

of dollars in the worldwide revenues and provides the basis for a

multitude of related service and supporting industries. Automobile

revolutionaries in the 20th century, changing forever the way

people live, travel and do business.

The automobile has enabled people to travel and transport goods

faster and opened wider market areas for business and

commerce. The auto industry has also reduced the overall cost of

transportation by using methods such as mass production, mass

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marketing and globalization of production. Between 1886 and

1898, about 300 automobiles were built, but was no real

established industry. A century later auto makers and auto buyers

expanding globally, auto making became world largest

manufacturing activity, with nearly 58 million new vehicles built

each year worldwide.

Before independence in the 1940s, India had no automobile

industry to speak of cars were brought in to the country in a

knocked down condition from England. They were reassembled to

serve the market provided by the British ruling class and some

Indian elites.

Today the automobile industry is fast maturing. It sells about 8.10

million vehicles, which is nearly 18 times more than the 45000

sales that were realized in 1984. Most of the automobile giant in

the world like Peugeot, Mercedes Benz, Ford, Fiat, Daewoo,

HONDA, Hyundai, Honda and even Bentley have invested

substantially in setting up production facilities in India.

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OPPORTUNITIES FOR THE INDIAN AUTOMOBILE INDUSTRY

Global automobile companies are setting up manufacturing

facilities in India. Also, many Indian automobile manufacturers

have announced their plans to increase the export of vehicles from

India. The year 2002-2003 has already seen a significant 65%

increase in export volumes during the period April to March. This

trend is expected to continue with more global OEMs sourcing

vehicles from their Indian plants. Additionally, the introduction of

newer technologies such as Electronic Diesel Control Systems to

reduce emission levels, safety devices such as Air Bags, Anti-lock

Braking Systems, etc, auger well for the company and the

automotive sector as a whole. These technologies not only offer

increased safety for drivers and passengers, but also result in

greater comfort and better drivability. While there exist many

opportunities for growth in business there are also quite a few

factors. Which act as an impediment? The lack of any significant

change in the labor law reforms also continues to be a matter of

concern. It is essential that legal reforms be put in place at the

earliest to provide more flexibility in manufacturing operations and

enable the industry to quickly adjust the work force in line with

fluctuating market condition.

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CHALLENGES FOR THE INDIAN AUTOMOBILE INDUSTRY

As we move into the new millennium, the Indian Automobile

Industry faces some tremendous opportunities and also great

challenges. The growth in automobile sales has been impressive

for the past ten years since liberalization began. However with

liberalization, the customer has been presented with wide range of

choices in automobiles to suit every requirement and budget.

Competition has meant that manufactures margins have been

squeezed severely and they are all under pressure to cut costs to

be profitable and competitive. Some of the older manufacturers

like premier automobiles (manufacturers of Lambretta scooters)

and ideal jawa (manufactures of ambassador and contessa cars)

is in trouble due to the declining sales of its car’s, as most

customers prefer the newer models available in the market. Even

the dominant player Maruti has seen its market share decline

rapidly due to its models being old and jaded is in addition facing

labour problems in its plant.

To add to the problem, come April 2001, under the WTO

agreement, India will have to permit import of fully built

automobiles, which thereto was not permitted. The foreign

manufactures such as GM, Ford and Daimler Chrysler will almost

certainly import vehicles from their large portfolio of models and

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makes further segmenting the into niches, although how

competitive they are in terms of price remains to be seen.

The challenge before the industry is to figure out the strategy for

the survival and growth. It is clear from the picture painted above

that the industry will have to increase volumes in each segment to

achieve lower cost of manufacture. One way to achieve this will be

to go for exports in a big way. Maruti is already exporting vehicles,

as are Mahindra, Telco, Daimler Chrysler and more recently

Daewoo. The overseas markets will have to be exploited more

aggressively, but this will mean the companies will have to invest

more in Research and development of new models with better

features.

The second opportunity is to become contract manufacturers for

overseas company. A number of Japanese and Korean companies

have been following this strategy very successfully. Hindustan

Motors is said to be considering this option. The third opportunity is

to overcome the vulnerability of the automobile market to oil prices

by designing vehicles, which can offer lower fuel consumption.

Recent reports suggest the government is exploring the possibility

of introducing Gasohol, which is a mixture of petrol and alcohol.

Gasohol has been very successful in Brazil. Since Alcohol is a by-

product of the sugar industry, this is a very logical step that should

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have been taken many years ago. Even a small percentage

reduction in the consumption of petroleum per vehicle can make a

big difference to the balance of payments.

The industry must focus its R&D efforts in line with the global

trends, which is to build vehicles that are considerably more fuel

efficient and less polluting. With growing awareness among the

public about pollution and the effective campaigns carried out by

the NGOs, this will increasingly become an important selling

feature. It was surprising to see how the industry kept stalling the

introduction of pollution norms for vehicles on tine pretext that they

needed more time to get the technology.

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 COMPANY PROFILE

Establishment 24 September 1948

Founder Soichiro Honda Takeo Fujisawa

Headquarters Minato,Tokyo,Japan

Area served Worldwide

Key people Satoshi Aoki (Chairman) Takanobu Ito (CEO)

Industry Automobile, Truck, Motorcycle Manufacturer

Products Automobile, Truck, Motorcycle, Scooters, ATVs,

Electrical Generators, Robotics, Marine equipments, Jets,

Jet Engines, and Lawn and Garden equipments. Honda and

Acura Brands

History

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HSCI was established in December 1995, with Honda Motor Co., (Japan) and Siel

Ltd. (India) as the key promoters. Honda’s models are strongly associated with

advanced design and technology, apart from its established qualities of durability,

reliability and fuel-efficiency.

Honda Siel Cars’ state-of-the-art manufacturing unit was set up in 1997 at Greater

Noida, U.P. and currently has a capacity of 50,000 cars annually. The company is

planning to raise its capacity to 100,000 cars per annum by the end of 2007.

HSCI has recently launched the all-new, third generation CR-V and new Accord in its

portfolio. The all-new Honda CR-V comes in 2 variants- 6 speed manual transmission

system and 5-speed automatic transmission system with Grade Logic Control for

smooth and effortless performance.

Honda’s most successful global model, the eighth generation Civic was launched in

July 2006 and has already become segment leader within a short span of time. The

Honda City ZX, the largest selling sedan in India, is today recognized as one of the

most successful car brands in India. To ensure consumer’s safety, Honda has recently

added new features like Airbags and ABS in the VTEC version of the car.

In 2006, three of Honda’s four cars in the Indian market – City, Accord and CR-V,

have ranked first in the TNS Total Customers Satisfaction Award.

The company operates under the stringent standards of ISO 9001 for quality

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management and ISO 14001 for environment management.

Honda in India

Honda Siel Cars India Ltd., (HSCI) was incorporated in December 1995 as a joint

venture between Honda Motor Co. Ltd., Japan and Siel Limited, a Siddharth Shriram

Group company, with a commitment to providing Honda’s latest passenger car

models and technologies, to the Indian customers.

The Honda City, its first offering introduced in 1997, revolutionized the Indian

passenger car market and has ever since been recognized as an engineering marvel in

the Indian automobile industry. The success of City as well as all its other models has

led HSCI to become the leading premium car manufacturer in India.

The total investment made by the company in India till date is Rs. 1620 crores. The

company has a capacity of manufacturing 100,000 cars.

Honda Philosophy

THE HONDA PHILOSOPHY EXPRESSED IN THIS ILLUSTRATION SHOWS THE COMPANY

PRINCIPLE, MANAGEMENT POLICIES AND THE ‘HONDA WAY’ BASED UPON THE

FUNDAMENTAL BELIEFS OF ‘RESPECT FOR THE INDIVIDUAL’ AND ‘THE THREE JOYS’

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FUNDAMENTAL BELIEFS

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Ownership Pattern

Honda Siel Cars India Ltd., (HSCI) was incorporated in December 1995 as a joint

venture between Honda Motor Co. Ltd., Japan and Siel Limited, a Siddharth Shriram

Group company. HSCI currently holds 99.9% ownership and rest 0.1% lies with

Siddharth Shriram Group company.

Manufacturing Capacity

HSCI’s state-of-the-art manufacturing unit was set up in 1997 at Greater Noida, U.P

with an investment of Rs. 450 crores. The green-field project is spread across 150

acres of land. The initial installed capacity of the plant was 30,000 cars per annum,

which was thereafter increased to 50,000 cars on a two-shift basis. The capacity has

further been enhanced to 1, 00,000 units annually in February 2008. The capacity

expansion was necessitated by the excellent performance of all the Honda models,

particularly the growing demand for City ZX in India. Several modifications were

done by the company with the objective of offering higher quality products to its

customers, faster and quicker. The expansion process also included expansion of the

covered area in the plant, from 1,07,000 sq.m. to 1,31,794 sq.m.

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HSCI currently produces the Honda City ZX, Civic and Accord models in India and

the premium SUV, CR-V is sold as a fully imported unit from Japan. The company

operates under the stringent standards of ISO 9001 for quality management and ISO

14001 for environment management.

Sales and Distribution Network

Honda Siel Cars India has a strong sales and distribution network spread across the

country. The network includes 80 facilities in 51 cities.

Having established itself as a leading Customerin the metros, the company is now

focusing on increasing its presence in tier-II towns and cities and plans to increase its

dealership network to more than 100 by the end of 2008-09 fiscal year.

The company is targeting 100 dealer outlets across India by 2009, as per their

expansion strategy which is based on the '1 dealer per 1000 cars' formula.

Product Range

HONDA SIEL CARS’ PRODUCT RANGE IN INDIA INCLUDES THE HONDA CITY ZX IN THE MID-

SIZE SEGMENT, CIVIC IN THE LOWER D SEGMENT AND ACCORD IN THE LUXURY SEGMENT

AND THIRD GENERATION ALL-NEW CR-V (BOTH 2.0L 2 WD AND 2.4L 4WD) IN THE SUV

SEGMENT. WHILE THE CITY ZX, CIVIC AND ACCORD ARE MANUFACTURED AT THE

COMPANY’S PLANT, THE CR-V IS IMPORTED FROM JAPAN AS A COMPLETELY BUILT UNIT.

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 PRODUCT PROFILE

1. HONDA CITY ZX

City ZX is today recognized as one of the most successful car brands in the country.

Its success is a replica of the success of its predecessor - the original Honda City,

launched way back in 1997. In fact, HSCI took a historic step in 2003, when it

introduced the New-City at a time when the original City was still performing

brilliantly – and it was an immediate success. The City ZX was launched two years

later in 2005 as an enhanced version of the New-City and is strongly associated with

durability, reliability, quality and fuel-efficiency.

THE CITY ZX RANGE INCLUDES 4 VARIANTS - EXI, GXI, CVT (AUTOMATIC TRANSMISSION)

AND VTEC. WHILE EXI, GXI AND CVT VARIANTS COME WITH THE ADVANCED COMBUSTION

SYSTEM OF THE 1.5 LITRE INTELLIGENT DUAL & SEQUENTIAL IGNITION (I-DSI) ENGINE, CITY

VTEC EMBODIES A 1.5 LITRE VTEC (VARIABLE VALVE TIMING AND LIFT ELECTRONIC

CONTROL) ENGINE. THE VTEC VERSION WAS REINTRODUCED IN THE NEW CITY

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INRESPONSE TO CUSTOMER DEMAND. THE CITY VTEC COMES WITH SPORTY EXTERIORS

AND PLUSH INTERIORS, CATERING TO THE PREMIUM SEGMENT CUSTOMERS. ON THE

OUTSIDE, 14” ALLOY WHEELS ADORN THE CAR, FRONT AND REAR FOG LAMPS AND REAR

DISC BRAKE. THE INTERIORS ARE MORE LAVISH WITH LEATHER STEERING, CENTRE

CONSOLE AND BEIGE AND BLACK UPHOLSTERY.

THE CITY IS MANUFACTURED WITH 79% INDIGENIZATION LEVEL AND CURRENTLY ENJOYS

25% MARKET SHARE IN ITS SEGMENT.

2. HONDA CIVIC

HSCI launched the 1.8S Civic in India in July 2006, which became a runaway

success. The company has also launched the 1.8v version of the Civic in June2007.

The Civic is Honda’s largest selling model globally and is now sold in

approximately 160 nations and regions worldwide. The Civic made its debut, with a

two-door model in July 1972, followed shortly by a three-door version. The series

was a major hit, especially among young people and for three consecutive years,

from 1972 to 1974, the Civic won the ‘Car of the Year Japan’ award. Civic’s

development process contrasted completely with Honda tradition. Rather than

pursue development based primarily on the vision of Company founder Soichiro

Honda, the Civic’s development team traveled to various world markets, gained

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local knowledge and experience first-hand, and then set about creating a car that “is

needed right now.”

Overseas production of Civic began in Indonesia in 1975, and Civic vehicles are now

made in 11 countries, including North America, Europe, Asia and South America.

Total cumulative production of Civic models at the end of calendar 2004 was

approximately 16 million units—making it one of the most popular models in Honda

history.

THE CIVIC HAS AN INDIGENIZATION LEVEL OF 72% AND ENJOYS 45% MARKET SHARE IN ITS

SEGMENT.

3. HONDA ACCORD

Accord comes with fresh new exterior styling, enhanced interiors and several new

value-added features. The Accord has a new-look; sporty rear with revamped LED

Tail lamps and rear bumper garnish that further enhances its stunning exterior

styling. Adding greater value to the 2.4 lt model, the new car now has premium

wood & leather steering wheel and turn indicators on side-view mirrors, features

which were earlier available only in the V6 model. For easy and convenient

parking, the new Accord has front and rear Parking Assistance Sensors, which warn

the driver of obstacles in his way while parking. The Accord V6 now has enhanced

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safety in the form of Vehicle Stability Assist (VSA) technology and also new 10-

spoke 16” alloy wheels.

Accord, which has been a popular premium sedan ever delight the customers with

its class-leading performance and luxury features such as leather upholstery, dual-

zone climate control and six-CD changer.

The Accord is manufactured with 34% indigenization level and currently enjoys

27% market share in its segment.

4. HONDA CR-V

The 3rd generation CR-V was introduced in November 2006. The all-new, third

generation Honda CR-V offers its customers a distinctive combination of ‘the comfort

of a sedan with the thrills of a SUV’. The engine is a 2.4-liter DOHC i-VTEC, which

delivers a powerful torque of 162 ps @ 5,800 rpm. Real-time 4WD is a unique feature

of the car, which is the first in its class. The Real-time 4WD intelligently detects

adverse road conditions and switches to 4-wheel drive instantly. In normal conditions

the all-new CR-V operates in front wheel drive mode but in wet, muddy roads or off-

road conditions, it automatically switches to 4-wheel drive instantly. An enlarged

clutch and stiffened transmission parts help distribute 20% additional torque to the

rear wheels which ensures smooth drive in bad road conditions without compromising

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on safety or fuel consumption. HSCI recently introduced the 2.0L 2WD (2-Wheel

Drive) Honda CR-V, which is more agile & has a sporty handling. The new lighter

engine gives good fuel efficiency, without compromising on performance.

The CR-V currently enjoys 37% market share in its segment.

4. HONDA JAZZ

Honda Jazz is the company’s first offering in the premium compact car segment. The

Jazz is a segment-defining car that has won accolades and adoration all over the

world. Widely acclaimed for its dynamic styling, spacious interiors, versatile utility

and remarkable performance, the Honda Jazz brings added fun and excitement to the

driving experience.

The Jazz’s dynamic performance is achieved by a newly developed four-cylinder 1.2-

liter i-VTEC engine, featuring Programmed Fuel Injection that delivers maximum

output of 90 PS (66 kW) @ 6,200 rpm and Torque of 110 Nm (11.2 kg-m) @ 4800

rpm while giving impressive fuel economy of 16.1 km/l, as per ARAI test data. Safety

of passengers and pedestrians is a top priority for Honda and all safety equipment is

standard across all variants. The Jazz practicality has been enhanced with three-mode

“Magic Seat” configuration to achieve multiple seating and cargo-carrying

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configurations for long or tall objects in addition to the standard five-passenger mode.

The Honda Jazz is available in two variants - Honda Jazz and Jazz Select edition in

Manual Transmission. Additionally, both the variants are available in 2 attractive

types - Mode & Active.

Sales Performance

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Page 22
 INTRODUCTION OF WORKING CAPITAL

Working Capital:-

The life blood of business, as is evident, signified funds

required for day-to-day operations of the firm. The management of

working capital assumes great importance because shortage of

working capital funds is perhaps the biggest possible cause of

failure of many business units in recent times. There it is of great

importance on the part of management to pay particular attention

to the planning and control for working capital. An attempt has

been made to make critical study of the various dimensions of the

working capital management of NGL.

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 money flow to satisfy both maturing short-term debt

and upcoming operational expenses.

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 Every business needs investment to procure fixed assets,

which remain in use for a longer period. Money invested in these

assets is called ‘Long term Funds’ or ‘Fixed Capital’.

Business also needs funds for short-term purposes to

finance current operations. Investment in short term assets like

cash, inventories, debtors etc., is called ‘Short-term Funds’ or

‘Working Capital’. The ‘Working Capital’ can be categorized, as

funds needed for carrying out day-to-day operations of the

business smoothly. The management of the working capital is

equally important as the management of long-term financial

investment.

Every running business needs working capital. Even a business

which is fully equipped with all types of fixed assets required is

bound to collapse without

o adequate supply of raw materials for processing;

o cash to pay for wages, power and other costs;

o creating a stock of finished goods to feed the market demand

regularly; and,

o The ability to grant credit to its customers.

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 All these require working capital. Working capital is thus like the

lifeblood of a business. The business will not be able to carry on

day-to-day activities without the availability of adequate working

capital.

Working capital cycle involves conversions and rotation of

various constituents Components of the working capital. Initially

‘cash’ is converted into raw materials.

Subsequently, with the usage of fixed assets resulting in value

additions, the raw materials get converted into work in process and

then into finished goods. When sold on credit, the finished goods

assume the form of debtors who give the business cash on due

date. Thus ‘cash’ assumes its original form again at the end of one

such working capital cycle but in the course it passes through

various other forms of current assets too. This is how various

components of current assets keep on changing their forms due to

value addition. As a result, they rotate and business operations

continue. Thus, the working capital cycle involves rotation of

various constituents of the working capital.

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 While managing the working capital, two characteristics of

current assets should be kept in mind viz. (i) short life span, and (ii)

swift transformation into other form of current asset.

Each constituent of current asset has comparatively very short

life span. Investment remains in a particular form of current asset

for a short period. The life span of current assets depends upon

the time required in the activities of procurement; production, sales

and collection and degree of synchronization among them. A very

short life span of current assets results into swift transformation

into other form of current assets for a running business.

These characteristics have certain implications:

 Decision regarding management of the working capital has

to be taken frequently and on a repeat basis.

 The various components of the working capital are closely

related and mismanagement of any one component

adversely affects the other components too.

 The difference between the present value and the book

value of profit is not significant.

The working capital has the following components, which are

in several forms of current assets:

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 o Stock of Cash

o Stock of Raw Material

o Stock of Finished Goods

o Value of Debtors

o Miscellaneous current assets like short term investment

loans & Advances

A number of definitions have been formulated: perhaps the

most widely acceptable would be;

“WORKING CAPITAL represents the excess of CURRENT

ASSETS over CURRENT LIABILITIES “ The same may be

designated in the following equation:

WORKING CAPITAL= CURRENT ASSETS –

CURRENT LIABILITIES:

Funds thus invested in current assets keep revolving fast

and are being constantly converted in to cash and this cash flows

out again in exchange for other current assets. Thus it is known as

revolving or circulating capital or short term capital.

These are two concepts of working capital:-

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 a. Gross Working Capital.

b. Net Working Capital.

Gross working capital is the total of all current assets. Net

working capital is the difference between current assets and

current liabilities. Though the later concept of working capital is

commonly used it is an accounting concept with little sense to say

that a firm manages its net working capital. What a firm really does

is to take decisions with respect to various current assets and

current liabilities.

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 CONSTITUENTS OF CURRENT ASSETS AND CURRENT

LIABILITIES

Current Assets

 Inventories – Raw materials and components, Work in

progress, Finished goods, other.

 Trade Debtors.

 Loans and Advances.

 Investments.

 Cash and Bank balance.

Current Liabilities

 Sundry Creditors.

 Trade Advances.

 Borrowings.

 Provisions.

The working capital needs of a business are influenced by

numerous factors. The important ones are discussed in brief as

given below:

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Nature of Enterprise

The nature and the working capital requirements of an

enterprise are interlinked. While a manufacturing industry has a

long cycle of operation of the working capital, the same would be

short in an enterprise involved in providing services. The amount

required also varies as per the nature; an enterprise involved in

production would require more working capital than a service

sector enterprise.

Manufacturing/Production Policy

Each enterprise in the manufacturing sector has its own

production policy, some follow the policy of uniform production

even if the demand varies from time to time, and others may follow

the principle of 'demand-based production' in which production is

based on the demand during that particular phase of time.

Accordingly, the working capital requirements vary for both of

them.

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Working Capital Cycle

In manufacturing concern, working capital cycle starts with

the purchase of raw materials and ends with realization of cash

from the sale of finished goods. The cycle involves the purchase of

raw materials and ends with the realization of cash from the sale of

finished products. The cycle involves purchase of raw materials

and stores, its conversion in to stock of finished goods through

work in progress with progressive increment of labor and service

cost, conversion of finished stick in to sales and receivables and

ultimately realization of cash and this cycle continuous again from

cash to purchase of raw materials and so on.

Operations

The requirement of working capital fluctuates for seasonal

business. The working capital needs of such businesses may

increase considerably during the busy season and decrease

during the slack season. Ice creams and cold drinks have a great

demand during summers, while in winters the sales are negligible.

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Market Condition

If there is high competition in the chosen product category,

then one shall need to offer sops like credit, immediate delivery of

goods etc. for which the working capital requirement will be high.

Otherwise, if there is no competition or less competition in the

market then the working capital requirements will be low.

Credit Policy

The credit policy is concerned in its dealings with debtors

and creditors influence considerably the requirements of the

working capital. A concern that purchases its requirements on

credit and sells its products/services on cash requires lesser

amount of working capital. On the other hand a concern buying its

requirements for cash and allowing credit to its customers, shall

need larger amount of funds are bound to be tied up in debtors or

bills receivables.

Business Cycle

Business Cycle refers to alternate expansion and contraction

in general business activities. In a period of born i.e. when the

business is prosperous there is a need for larger amount of

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working capital due to increase in sales, rise in prices, optimistic

expansion of business etc. On the country at he time of depression

i.e. when there is a down swing of the cycle, business contracts,

sales decline, difficulties are faced in collections from debtors and

firms may have a large amount of working capital lying ideal

Availability of Raw Material

If raw material is readily available then one need not

maintain a large stock of the same, thereby reducing the working

capital investment in raw material stock. On the other hand, if raw

material is not readily available then a large inventory/stock needs

to be maintained, thereby calling for substantial investment in the

same.

Growth and Expansion

Growth and expansion in the volume of business results in

enhancement of the working capital requirement. As business

grows and expands, it needs a larger amount of working capital.

Normally, the need for increased working capital funds precedes

growth in business activities.

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Earning Capacity and Dividend policy

Some firms have more earning capacity than others due to

the quality of their products, monopoly conditions etc. Such firms

with high earning capacity may generate cash profits from

operations and contribute to their capital. The dividend policy of a

concern also influences the requirements of the working capital. A

firm that maintains steady high rate of cash dividend irrespective of

its generation of profits needs more capital than the firm retains

larger part of its profits and does not pay high rate of cash

dividend.

Price Level Changes

Generally, rising price level requires a higher investment in

the working capital. With increasing prices, the same level of

current assets needs enhanced investment.

Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw

material and is completed with the production of finished goods. If

the manufacturing cycle involves a longer period, the need for

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working capital would be more. At times, business needs to

estimate the requirement of working capital in advance for proper

control and management. The factors discussed above influence

the quantum of working capital in the business. The assessment of

working capital requirement is made keeping these factors in view.

Each constituent of working capital retains its form for a certain

period and that holding period is determined by the factors

discussed above. So for correct assessment of the working capital

requirement, the duration at various stages of the working capital

cycle is estimated. Thereafter, proper value is assigned to the

respective current assets, depending on its level of completion.

Other Factors

Certain other factors such as operating efficiency,

management ability, irregularities a supply, import policy, asset

structure, importance of labor, banking facilities etc. also

influences the requirement of working capital.

Component of Working Capital Basis of Valuation

 Stock of raw material Purchase cost of raw materials

 Stock of work in process At cost or market value, whichever

is lower

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  Stock of finished goods Cost of production

 Debtors Cost of sales or sales value

 Cash Working expenses

Each constituent of the working capital is valued on the basis

of valuation Enumerated above for the holding period estimated.

The total of all such valuation becomes the total estimated working

capital requirement.

The assessment of the working capital should be accurate

even in the case of small and micro enterprises where business

operation is not very large. We know that working capital has a

very close relationship with day-to-day operations of a business.

Negligence in proper assessment of the working capital, therefore,

can affect the day-to-day operations severely. It may lead to cash

crisis and ultimately to liquidation. An inaccurate assessment of

the working capital may cause either under-assessment or over-

assessment of the working capital and both of them are

dangerous.

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 WORKING CAPITAL MANAGEMENT

Working Capital Management refers to management of

current assets and current liabilities. The major thrust of course is

on the management of current assets .This is understandable

because current liabilities arise in the context of current assets.

Working Capital Management is a significant fact of financial

management. Its importance stems from two reasons:-

 Investment in current assets represents a substantial portion

of total investment.

 Investment in current assets and the level of current liabilities

have to be geared quickly to change in sales. To be sure,

fixed asset investment and long term financing are

responsive to variation in sales. However, this relationship is

not as close and direct as it is in the case of working capital

components.

The importance of working capital management is effected in

the fact that financial manages spend a great deal of time in

managing current assets and current liabilities. Arranging short

term financing, negotiating favorable credit terms, controlling the

movement of cash, administering the accounts receivable, and

Page 37
monitoring the inventories consume a great deal of time of

financial managers.

The problem of working capital management is one of the

“best” utilization of a scarce resource.

Thus the job of efficient working capital management is a

formidable one, since it depends upon several variables such as

character of the business, the lengths of the merchandising cycle,

rapidity of turnover, scale of operations, volume and terms of

purchase & sales and seasonal and other variations.

Page 38
CONSEQUENCES OF UNDER ASSESSMENT OF WORKING

CAPITAL

o Growth may be stunted. It may become difficult for the

enterprise to undertake profitable projects due to non-

availability of working capital.

o Implementation of operating plans may become difficult and

consequently the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be

achieved due to non availability of the working capital.

o The business may fail to honour its commitment in time,

thereby adversely affecting its credibility. This situation may

lead to business closure.

o The business may be compelled to buy raw materials on

credit and sell finished goods on cash. In the process it may

end up with increasing cost of purchases and reducing

selling prices by offering discounts. Both these situations

would affect profitability adversely.

o Non-availability of stocks due to non-availability of funds may

result in production stoppage.

Page 39
 o While underassessment of working capital has disastrous

implications on business, over assessment of working capital

also has its own dangers.

CONSEQUENCES OF OVER ASSESSMENT OF WORKING

CAPITAL

o Excess of working capital may result in unnecessary

accumulation of inventories.

o It may lead to offer too liberal credit terms to buyers and very

poor recovery system and cash management.

o It may make management complacent leading to its

inefficiency.

o Over-investment in working capital makes capital less

productive and may reduce return on investment. Working

capital is very essential for success of a business and,

therefore, needs efficient management and control. Each of

the components of the working capital needs proper

management to optimize profit.

The working capital in certain enterprise may be classified

into the following kinds.

Page 40
1. Initial working capital.

The capital, which is required at the time of the

commencement of business, is called initial working capital. These

are the promotion expenses incurred at the earliest stage of

formation of the enterprise which include the incorporation fees.

Attorney's fees, office expenses and other expenses.

2. Regular working capital.

This type of working capital remains always in the enterprise

for the successful operation. It supplies the funds necessary to

meet the current working expenses i.e. for purchasing raw material

and supplies, payment of wages, salaries and other sundry

expenses.

3. Fluctuating working capital.

This capital is needed to meet the seasonal requirements of

the business. It is used to raise the volume of production by

improvement or extension of machinery. It may be secured from

any financial institution which can, of course, be met with short

term capital. It is also called variable working capital.

Page 41
4. Reserve margin working capital.

It represents the amount utilized at the time of contingencies.

These unpleasant events may occur at any time in the running life

of the business such as inflation, depression, slump, flood, fire,

earthquakes, strike, lay off and unavoidable competition etc. In this

case greater amount of capital is required for maintenance of the

business.

Page 42
 FINANCING WORKING CAPITAL

Now let us understand the means to finance the working

capital. Working capital or current assets are those assets, which

unlike fixed assets change their forms rapidly. Due to this nature,

they need to be financed through short-term funds. Short-term

funds are also called current liabilities. The following are the major

sources of raising short-term funds:

i. Supplier’s Credit

At times, business gets raw material on credit from the

suppliers. The cost of raw material is paid after some time, i.e.

upon completion of the credit period. Thus, without having an

outflow of cash the business is in a position to use raw material

and continue the activities. The credit given by the suppliers of raw

materials is for a short period and is considered current liabilities.

These funds should be used for creating current assets like stock

of raw material, work in process, finished goods, etc.

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks

extend loans to businesses to help them create necessary current

Page 43
assets so as to achieve the Required business level. The loans are

available for creating the following current

Assets:

 Stock of Raw Materials

 Stock of Work in Process

 Stock of Finished Goods

 Debtors

Banks give short-term loans against these assets, keeping

some security margin.

The advances given by banks against current assets are

short-term in nature and banks have the right to ask for immediate

repayment if they consider doing so. Thus bank loans for creation

of current assets are also current liabilities.

iii. Promoter’s Fund

It is advisable to finance a portion of current assets from the

promoter’s funds. They are long-term funds and, therefore do not

require immediate repayment. These funds increase the liquidity of

the business.
Page 44
 MANAGEMENT OF INVENTORY

Inventories constitute the most significant part of current

assets of a large majority of companies in India. On an average,

inventories are approximately 60 % of current assets in public

limited companies in India.

Because of the large size of inventories maintained by firms

maintained by firms, a considerable amount of funds is required to

be committed to them. It is, therefore very necessary to manage

inventories efficiently and effectively in order to avoid unnecessary

investments. A firm neglecting a firm the management of

inventories will be jeopardizing its long run profitability and may fail

ultimately.

The purpose of inventory management is to ensure availability of

materials in sufficient quantity as and when required and also to

minimize investment in inventories at considerable degrees,

without any adverse effect on production and sales, by using

simple inventory planning and control techniques.

Needs to hold inventories:-

There are three general motives for holding inventories:-

Page 45
  Transaction motive emphasizes the need to maintain

inventories to facilitate smooth production and sales

operation.

 Precautionary motive necessities holding of inventories to

guard against the risk of unpredictable changes in demand

and supply forces and other factors.

 Speculative motive influences the decision to increases or

reduce inventory levels to take advantage of price

fluctuations and also for saving in re-ordering costs and

quantity discounts etc.

MANAGEMENT OF CASH

Cash is the important current asset for the operation of the

business. Cash is the basic input needed to keep the business

running in the continuous basis, it is also the ultimate output

expected to be realized by selling or product manufactured by the

firm.

The firm should keep sufficient cash neither more nor less.

Cash shortage will disrupt the firm’s manufacturing operations

while excessive cash will simply remain ideal without contributing

Page 46
anything towards the firm’s profitability. Thus a major function of

the financial manager is to maintain a sound cash position.

Cash is the money, which a firm can disburse immediately

without any restriction. The term cash includes coins, currency and

cheques held by the firm and balances in its bank account.

Sometimes near cash items such as marketing securities or bank

term deposits are also included in cash. Generally when a firm has

excess cash, it invests it is marketable securities. This kind of

investment contributes some profit to the firm.

Need to hold cash

The firm’s need to hold cash may be attributed to the

following three motives:-

The Transaction Motive:

The transaction motive requires a firm to hold cash to

conduct its business in the ordinary course. The firm needs cash

primarily to make payments for purchases, wages and salaries,

other operating expenses, taxes, dividends, etc.

Page 47
 MANAGEMENT OF RECEIVABLES

A sound managerial control requires proper management of

liquid assets and inventory. These assets are a part of working

capital of the business. An efficient use of financial resources is

necessary to avoid financial distress. Receivables result from

credit sales.

A concern is required to allow credit sales in order to expand

its sales volume. It is not always possible to sell goods on cash

basis only. Sometimes other concern in that line might have

established a practice of selling goods on credit basis. Under these

circumstances, it is not possible to avoid credit sales without

adversely affecting sales.

The increase in sales is also essential to increases profitability.

After a certain level of sales the increase in sales will not

proportionately increase production costs. The increase in sales

will bring in more profits. Thus, receivables constitute a significant

portion of current assets of a firm. But for investment in

receivables, a firm has to insure certain costs. Further, there is a

risk of bad debts also. It is therefore, very necessary to have a

proper control and management of receivables.

Page 48
Needs to hold cash:

Receivables management is the process of making decisions

relating to investment in trade debtors. Certain investments in

receivables are necessary to increase the sales and the profits of a

firm. But at the same time investment in this asset involves cost

consideration also. Further, there is always a risk of bad debts too.

Thus, the objective of receivable management is to take a

sound decision as regards investments in debtors. In the words of

Bolton, S.E., the need of receivables management is “to promote

sales and profits until that point is reached where the return of

investment in further funding of receivables is less than the cost of

funds raised to finance that additional credit.”

IMPORTANT TERMS

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is

the business's life blood and every manager's primary task is to

help keep it flowing and to use the cash flow to generate profits. If

a business is operating profitably, then it should, in theory,

Page 49
generate cash surpluses. If it doesn't generate surpluses, the

business will eventually run out of cash and expire.

The faster a business expands , the more cash it will need

for working capital and investment. The cheapest and best sources

of cash exist as working capital right within business. Good

management of working capital will generate cash will help

improve profits and reduce risks. Bear in mind that the cost of

providing credit to customers and holding stocks can represent a

substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb

cash - Inventory (stocks and work-in-progress) and Receivables

(debtors owing you money). The main sources of cash are

Payables (your creditors) and Equity and Loans.

Page 50
Each component of working capital (namely inventory, receivables

and payables) has two dimensions ........TIME ......... and MONEY.

When it comes to managing working capital - TIME IS MONEY. If

you can get money to move faster around the cycle (e.g. collect

monies due from debtors more quickly) or reduce the amount of

money tied up (e.g. reduce inventory levels relative to sales), the

business will generate more cash or it will need to borrow less

money to fund working capital. As a consequence, you could

reduce the cost of bank interest or you'll have additional free

money available to support additional sales growth or investment.

Similarly, if you can negotiate improved terms with suppliers e.g.

get longer credit or an increased credit limit; you effectively create

free finance to help fund future sales.

Page 51
 If you....... Then......

Collect receivables (debtors) You release cash from the

faster cycle

Collect receivables (debtors) Your receivables soak up

slower cash

Get better credit (in terms of You increase your cash

duration or amount) from resources

suppliers

Shift inventory (stocks) You free up cash

faster

Move inventory (stocks) You consume more cash

slower

It can be tempting to pay cash, if available, for fixed assets

e.g. computers, plant, vehicles etc. If you do pay cash, remember

that this is now longer available for working capital. Therefore, if

cash is tight, consider other ways of financing capital investment -

loans, equity, leasing etc. Similarly, if you pay dividends or

Page 52
increase drawings, these are cash outflows and, like water flowing

downs a plug hole, they remove liquidity from the business.

SOURCES OF ADDITIONAL WORKING CAPITAL

Sources of additional working capital include the following:

 Existing cash reserves

 Profits (when you secure it as cash!)

 Payables (credit from suppliers)

 New equity or loans from shareholders

 Bank overdrafts or lines of credit

 Long-term loans

If you have insufficient working capital and try to increase

sales, you can easily over-stretch the financial resources of the

business.

This is called overtrading. Early warning signs include:

o Pressure on existing cash

Page 53
 o Exceptional cash generating activities e.g. offering high

discounts for early cash payment

o Bank overdraft exceeds authorized limit

o Seeking greater overdrafts or lines of credit

o Part-paying suppliers or other creditors

o Paying bills in cash to secure additional supplies

o Management pre-occupation with surviving rather than

managing

Frequent short-term emergency requests to the bank (to help

pay wages, pending receipt of a cheque).

Page 54
 HANDLING RECEIVABLES (DEBTORS)

Cash flow can be significantly enhanced if the amounts

owing to a business are collected faster. Every business needs to

know.... who owes them money.... how much is owed.... how long

it is owing.... for what it is owed.

Slow payment has a crippling effect on business; in particular

on small businesses who can least afford it. If you don't manage

debtors, they will begin to manage your business as you will

gradually lose control due to reduced cash flow and, of course, you

could experience an increased incidence of bad debt.

The following measures will help manage your debtors:

 Have the right mental attitude to the control of credit and

make sure that it gets the priority it deserves.

 Establish clear credit practices as a matter of company

policy.

 Make sure that these practices are clearly understood by

staff, suppliers and customers.

 Be professional when accepting new accounts, and

especially larger ones.

Page 55
  Check out each customer thoroughly before you offer credit.

Use credit agencies, bank references, industry sources etc.

 Establish credit limits for each customer... and stick to them.

 Continuously review these limits when you suspect tough

times are coming or if operating in a volatile sector.

 Keep very close to your larger customers.

 Invoice promptly and clearly.

 Consider charging penalties on overdue accounts.

 Consider accepting credit /debit cards as a payment option.

 Monitor your debtor balances and ageing schedules, and

don't let any debts get too large or too old.

Recognize that the longer someone owes you, the greater the

chance you will never get paid. If the average age of your debtors

is getting longer, or is already very long, you may need to look for

the following possible defects:

 Weak credit judgement

 Poor collection procedures

 Lax enforcement of credit terms

 Slow issue of invoices or statements

 Errors in invoices or statements

 Customer dissatisfaction.

Page 56
 Debtors due over 90 days (unless within agreed credit terms)

should generally demand immediate attention. Look for the

warning signs of a future bad debt. For example.........

o longer credit terms taken with approval, particularly for

smaller orders

o use of post-dated checks by debtors who normally settle

within agreed terms

o evidence of customers switching to additional suppliers for

the same goods

o new customers who are reluctant to give credit references

o Receiving part payments from debtors.

The act of collecting money is one which most people dislike

for many reasons and therefore put on the long finger because

they convince themselves there is something more urgent or

important that demand their attention now. There is nothing more

important than getting paid for your product or service. A customer

who does not pay is not a customer.

Page 57
 MANAGING PAYABLES (CREDITORS)

Creditors are a vital part of effective cash management and

should be managed carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous

purchasing function can create liquidity problems. Consider the

following:

o Who authorizes purchasing in your company - is it tightly

managed or spread among a number of (junior) people?

o Are purchase quantities geared to demand forecasts?

o Do you use order quantities which take account of stock-

holding and purchasing costs?

o Do you know the cost to the company of carrying stock?

o Do you have alternative sources of supply? If not, get quotes

from major suppliers and shop around for the best discounts,

credit terms, and reduce dependence on a single supplier.

o How many of your suppliers have a returns policy?

o Are you in a position to pass on cost increases quickly

through price increases to your customers?

o If a supplier of goods or services lets you down can you

charge back the cost of the delay?

Page 58
 o Can you arrange (with confidence!) to have delivery of

supplies staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well

then you can sell well. Management of your creditors and suppliers

is just as important as the management of your debtors. It is

important to look after your creditors - slow payment by you may

create ill-feeling and can signal that your company is inefficient (or

in trouble!).

Remember, a good supplier is someone who will work with

you to enhance the future viability and profitability of your company

Page 59
 KEY WORKING CAPITAL RATIOS

The following, easily calculated, ratios are important

measures of working capital utilization.

Ratio Formulae Result Interpretation

Stock Average =x On average, you turn over

Turnover Stock * 365/ days the value of your entire stock

(in days) Cost of every x days. You may need

Goods Sold to break this down into

product groups for effective

stock management.

Obsolete stock, slow moving

lines will extend overall stock

turnover days. Faster

production, fewer product

lines, just in time ordering will

reduce average days.

Receivables Debtors * =x It takes you on average x

Ratio 365/ days days to collect monies due to

(in days) Sales you. If you’re official credit

terms are 45 day and it takes

Page 60
 you 65 days... why?

One or more large or slow

debts can drag out the

average days. Effective

debtor management will

minimize the days.

Payables Creditors * =x On average, you pay your

Ratio 365/ days suppliers every x days. If you

(in days) Cost of negotiate better credit terms

Sales (or this will increase. If you pay

Purchases) earlier, say, to get a discount

this will decline. If you simply

defer paying your suppliers

(without agreement) this will

also increase - but your

reputation, the quality of

service and any flexibility

provided by your suppliers

may suffer.

Current Total =x Current Assets are assets

Ratio Current times that you can readily turn in to

Page 61
 Assets/ cash or will do so within 12

Total months in the course of

Current business. Current Liabilities

Liabilities are amount you are due to

pay within the coming 12

months. For example, 1.5

times means that you should

be able to lay your hands on

$1.50 for every $1.00 you

owe. Less than 1 times e.g.

0.75 means that you could

have liquidity problems and

be under pressure to

generate sufficient cash to

meet oncoming demands.

Quick Ratio (Total =x Similar to the Current Ratio

Current times but takes account of the fact

Assets - that it may take time to

Inventory)/ convert inventory into cash.

Total

Current

Page 62
 Liabilities

Working (Inventory + As % A high percentage means

Capital Receivables Sales that working capital needs

Ratio - Payables)/ are high relative to your

Sales sales.

Other working capital measures include the following:

 Bad debts expressed as a percentage of sales.

 Cost of bank loans, lines of credit, invoice discounting

etc.

 Debtor concentration - degree of dependency on a

limited number of customers.

Once ratios have been established for your business, it is

important to track them over time and to compare them with ratios

for other comparable businesses or industry sectors.

When planning the development of a business, it is critical that the

impact of working capital be fully assessed when making cash flow

forecasts.

Page 63
Page 64
 HYPOTHESIS

A hypothesis is a tentative statement that proposes a

possible explanation to some phenomenon or event. A useful

hypothesis is a testable statement which may include a prediction.

A hypotheses should not be confused with a theory. Theories are

general explanations based on a large amount of data. For

example, the theory of evolution applies to all living things and is

based on wide range of observations.

When Are Hypotheses Used?

The key word is testable. That is, you will perform a test of

how two variables might be related. This is when you are doing a

real experiment. You are testing variables. Usually, a hypothesis is

based on some previous observation such as noticing that in

November many trees undergo color changes in their leaves and

the average daily temperatures are dropping. Are these two events

connected.

 New Plant and Machinery will improve the production

of NGL

 Export market may improve the market share of the

company.

Page 65
Page 66
 Research Methodology is a way to systematically solve the

research problem. It may be understood as Science of studying

how research is done, Scientifically in it we study the various steps

that generally adopted by a reseacher in studying his reseach

problem along with the logic behind them. “Accuracy of the study

depends on the systematic application of the method.” The

researcher has to decide the method to be used that helps him to

get a desired direction in a systematic way.

Definitions According to Clifford Woody

“Research comprises defining and redefining problems,

formulating or hypothesis or suggested solutions collecting:

organizing and evaluating data making deductions and reaching

conclusions to determine whether they fit the formulating

hypothesis.”

Thus, Research Methodology is a strategy that guides a

researcher in providing answers to research questions and for this

research survey is being done. Research in common parlance

refers to a search for knowledge. In fact research is an act of

scientific investigation.

Sampling Size-

Balance sheet of last 5 years of Commercial HONDA,

Jabalpur

Page 67
Page 68
 OBJECTIVE OF THE STUDY

The following are the main objective which has been undertaken in

the present study:

1. To determine the amount of working capital requirement and

to calculate various ratios relating to working capital.

2. To make an item wise study of the components of the

working capital.

3. To suggest the steps to be taken to increase the efficiency in

management of working capital.

Page 69
 LIMITATIONS

There may be limitations to this study because the study

duration (summer placement) is very short and it’s not possible to

observe every aspect of working capital management practices.

Steps of Research process The seven major steps

Determine or define the problem or

opportunity that is faced

Specify what information is needed

Identify the sources of the information.

Decide on the techniques for accruing the

information

Gather and process the information

Analyze and interpret the meaning.

Present the findings to the decision makers.

Page 70
 BALANCE SHEET (Rs. in millions)

PARTICULARS Mar'10 Mar'09 Mar'08 Mar'07 Mar'06

Liabilities 12 12 12 12 12

Months Months Months Months Months

Share Capital 144.50 144.50 144.50 144.50 144.50

Reserves & 11,690.60 9,200.40 8,270.90 6,709.40 5,308.10

Surplus

Net Worth 11,835.10 9,344.90 8,415.40 6,853.90 5,452.60

Secured Loans 26.50 0.10 0.10 63.50 71.70

Unsecured Loans 794.90 698.80 900.10 567.30 0.00

TOTAL 12,656.50 10,043.80 9,315.60 7,484.70 5,524.30

LIABILITIES

ASSETS

Gross Block 10,406.70 8,720.60 7,285.30 6,146.80 4,954.60

(-) Acc. 5,382.00 4,649.80 3,988.80 3,487.10 3,259.40

Depreciation

Net Block 5,024.70 4,070.80 3,296.50 2,659.70 1,695.20

Capital Work in 387.60 861.30 736.30 238.90 92.00

Progress.

Investments. 7,176.60 3,173.30 5,180.70 3,409.20 2,051.20

Page 71
Inventories 1,208.80 902.30 1,038.00 713.20 881.20

Sundry Debtors 809.90 918.90 655.50 747.40 654.80

Cash And Bank 98.20 1,939.00 324.00 1,422.80 1,401.60

Loans And 1,739.10 1,809.80 1,173.00 1,072.60 933.10

Advances

Total Current 3,856.00 5,570.00 3,190.50 3,956.00 3,870.70

Assets

Current Liabilities 3,160.00 3,250.90 2,718.90 2,288.60 1,704.80

Provisions 628.40 380.70 369.50 490.50 480.00

Total Current 3,788.40 3,631.60 3,088.40 2,779.10 2,184.80

Liabilities

NET CURRENT 67.60 1,938.40 102.10 1,176.90 1,685.90

ASSETS

Misc. Expenses 0.00 0.00 0.00 0.00 0.00

TOTAL ASSETS 12,656.50 10,043.80 9,315.60 7,484.70 5,524.30

(A+B+C+D+E)

Page 72
 PROFIT & LOSS ACCOUNT (Rs. in millions)

Mar'11 Mar'10 Mar'09 Mar'08 Mar'07

12 12 12 12 12

Months Months Months Months Months

INCOME:

Sales Turnover 32,174.10 23,381.50 21,200.40 17,358.40 14,898.80

Excise Duty 2,856.40 2,652.10 3,133.60 2,552.00 2,700.90

NET SALES 29,317.70 20,729.40 18,066.80 14,806.40 12,197.90

Other Income 0.00 0.00 0.00 0.00 0.00

TOTAL 29,935.40 21,277.00 18,522.90 15,167.50 12,466.00

INCOME

EXPENDITURE:

Manufacturing 1,278.20 909.70 670.60 489.80 359.60

Expenses

Material 22,435.40 16,339.80 13,622.00 11,063.70 9,223.70

Consumed

Personal 545.60 471.10 356.20 288.40 228.70

Expenses

Selling 916.00 738.20 560.20 499.90 356.00

Expenses

Administrative 404.60 389.20 326.30 274.50 170.60

Page 73
Expenses

Expenses 0.00 -22.30 -19.80 -14.30 -6.70

Capitalised

Provisions 0.00 0.00 0.00 0.00 0.00

Made

TOTAL 25,579.80 18,825.70 15,515.50 12,602.00 10,331.90

EXPENDITURE

Operating Profit 3,737.90 1,903.70 2,551.30 2,204.40 1,866.00

EBITDA 4,355.60 2,451.30 3,007.40 2,565.50 2,134.10

Depreciation 825.00 706.50 568.20 271.40 285.40

Other Write-offs 0.00 0.00 0.00 0.00 0.00

EBIT 3,530.60 1,744.80 2,439.20 2,294.10 1,848.70

Interest 33.50 51.00 59.60 37.60 20.40

EBT 3,497.10 1,693.80 2,379.60 2,256.50 1,828.30

Taxes 1,094.90 457.10 763.30 705.30 560.90

Profit and 2,402.20 1,236.70 1,616.30 1,551.20 1,267.40

Loss for the

Year

Non Recurring 44.30 -55.90 37.90 -23.00 -83.70

Items

Other Non 51.10 37.90 76.60 33.40 5.40

Page 74
Cash

Adjustments

Other 0.00 0.00 0.00 0.40 0.00

Adjustments

REPORTED 2,497.60 1,218.70 1,730.80 1,562.00 1,189.10

PAT

KEY ITEMS

Preference 0.00 0.00 0.00 0.00 0.00

Dividend

Equity Dividend 173.30 101.10 144.50 130.00 101.10

Equity Dividend 119.93 69.96 100.00 89.96 69.96

(%)

Shares in Issue 2,889.10 2,889.10 2,889.10 2,889.10 2,889.10

(Lakhs)

EPS - 86.45 42.18 59.91 54.07 41.16

Annualised

(Rs)

RATIOS

Mar'10 Mar'0 Mar'0 Mar'0 Mar'0

9 8 7 6

Page 75
Per share ratios

Adjusted EPS (Rs) 83.15 42.81 55.94 53.69 43.87

Adjusted EPS (Rs) 83.15 42.81 55.94 63.09 53.75

Reported EPS (Rs) 86.45 42.18 59.91 54.07 41.16

Reported cash EPS (Rs) 115.00 66.64 79.57 63.46 51.04

Dividend per share 6.00 3.50 5.00 4.50 3.50

Operating profit per share (Rs) 129.38 65.89 88.31 76.30 64.59

Book value (excl rev res) per 409.65 323.4 291.2 237.2 188.7

share (Rs) 5 8 3 3

Book value (incl rev res) per share 409.65 323.4 291.2 237.2 188.7

(Rs.) 5 8 3 3

Net operating income per share 1,014.7 717.5 625.3 512.4 422.2

(Rs) 7 0 4 9 0

Free reserves per share (Rs) 403.82 318.4 286.2 231.8 183.1

5 8 9 8

Profitability ratios

Operating margin (%) 12.74 9.18 14.12 14.88 15.29

Gross profit margin (%) 9.93 5.77 10.97 13.05 12.95

Net profit margin (%) 8.34 5.72 9.34 10.29 9.53

Adjusted cash margin (%) 10.78 9.13 11.79 12.01 12.45

Adjusted return on net worth (%) 20.29 13.23 19.20 22.63 23.24

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Reported return on net worth (%) 21.10 13.04 20.56 22.78 21.80

Return on long term funds (%) 28.80 17.48 27.35 30.74 33.47

Leverage ratios

Long term debt / Equity 0.03 0.06 0.05 0.08 0.01

Total debt/equity 0.06 0.07 0.10 0.09 0.01

Owners fund as % of total source 93.51 93.04 90.33 91.57 98.70

Fixed assets turnover ratio 2.82 2.38 2.48 2.41 2.46

Liquidity ratios

Current ratio 1.02 1.53 1.03 1.42 1.77

Current ratio (inc. st loans) 0.91 1.51 0.91 1.40 1.77

Quick ratio 0.67 1.26 0.66 1.13 1.31

Inventory turnover ratio 30.47 30.46 22.93 28.76 18.78

Payout ratios

Dividend payout ratio (net profit) 8.09 9.70 9.78 9.72 9.69

Dividend payout ratio (cash profit) 6.08 6.14 7.36 8.28 7.81

Earning retention ratio 91.59 90.44 89.53 90.21 90.91

Cash earnings retention ratio 93.74 93.92 92.25 91.67 92.58

Coverage ratios

Adjusted cash flow time total debt 0.25 0.35 0.41 0.34 0.04

Financial charges coverage ratio 130.02 48.06 50.46 68.23 104.6

Page 77
Fin. charges cov.ratio (post tax) 100.18 38.75 39.57 49.76 73.28

Component ratios

Material cost component (% 77.21 77.10 77.25 73.36 77.25

earnings)

Selling cost Component 3.12 3.56 3.10 3.37 2.91

Exports as percent of total sales 15.49 7.24 4.10 3.90 4.78

Import comp. in raw mat. 12.89 11.70 10.84 12.62 18.75

consumed

Long term assets / total Assets 0.76 0.59 0.74 0.61 0.49

Bonus component in equity capital - - - - -

(%)

Page 78
Page 79
 MARKET SHARE OF THE COMPANY

FROM PAST 5 YEARS

2003- 2004- 2005- 2006- 2007-

Particulars
2004 2005 2006 2007 2008

Domestic
32% 29% 27% 26% 25%
market

Export
38% 39% 40% 41% 43%
market

INTERPRETATION:-

The table above shows the Market share of the company in

domestic market as well as export market. On comparing as you

can see the market share of the company in domestic is not faired

well as the percentage of market share is falling from 32% in 2003

to 25% in 2008.Where as you can see that the market share of the

company of export market is gradually increasing from 38% in

2003 to 43% in 2007.

Page 80
Page 81
 5 YEARS PERFORMANCE HIGHLIGHTS

Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

32,174.1 23,381.5 21,200.4 17,358.4 14,898.8

Sales 0 0 0 0 0

Operating 3,737.90 1,903.70 2,551.30 2,204.40 1,866.00

profit

Interest 33.50 51.00 59.60 37.60 20.40

Gross 2,402.20 1,236.70 1,616.30 1,551.20 1,267.40

profit

EPS (Rs) 86.45 42.18 59.91 54.07 41.16

Page 82
EARNING PER SHARE-Rs.

The portion of a company's profit allocated to each

outstanding share of common stock. Earnings per

share serves as an indicator of a company's profitability.

Calculated as:

When calculating, it is more accurate to use a weighted

average number of shares outstanding over the reporting

term, because the number of shares outstanding can change

over time. However, data sources sometimes simplify the

calculation by using the number of shares outstanding at the

end of the period.

Diluted EPS expands on basic EPS by including the

shares of convertibles or warrants outstanding in the

outstanding shares number.

Page 83
 EPS
100
90 86.45
80
70 59.91
60 54.07
50 42.18 41.16
40
30
20
10
0
Mar-10 Mar-09 Mar-08 Mar-07 Mar-06

DATA ANALYSIS AND INTERPRETATION

IMPORTANT RATIOS OF NGL

TOTAL
3,856.00 5,570.00 3,190.50 3,956.00 3,870.70
ASSETS

TOTAL
3,788.40 3,631.60 3,088.40 2,779.10 2,184.80
LIABILITIES

(ASSETS-

LIABILITIES)
67.60 1938.40 102.10 1176.90 1685.90
WORKING

CAPITAL

Page 84
Definition:

Working capital turnover ratio indicates the velocity of the

utilization of net working capital. This ratio represents the number

of times the working capital is turned over in the course of year

and is calculated as follows:

Formula of Working Capital Turnover Ratio:

Following formula is used to calculate working capital

turnover ratio

Working Capital Turnover Ratio =

Cost of Sales / Net Working Capital

The two components of the ratio are cost of sales and the

net working capital. If the information about cost of sales is not

available the figure of sales may be taken as the numerator. Net

working capital is found by deduction from the total of the current

assets the total of the current liabilities.

Page 85
 (ASSETS- LIABILITIES) WORKING CAPITAL
2500

1938.4
2000
1685.9

1500
1176.9

1000

500

67.6 102.1
0
1 2 3 4 5

Page 86
 CURRENT RATIO

Current ratio may be defined as the relationship between

current assets and current liabilities. This ratio is also known as

"working capital ratio". It is a measure of general liquidity and is

most widely used to make the analysis for short term financial

position or liquidity of a firm. It is calculated by dividing the total of

the current assets by total of the current liabilities.

Following formula is used to calculate current ratio:

[Current Ratio = Current Assets / Current Liabilities]

Or

[Current Assets : Current Liabilities]

Components:

The two basic components of this ratio are current assets

and current liabilities. Current assets include cash and those

assets which can be easily converted into cash within a short

period of time, generally, one year, such as marketable securities

or readily realizable investments, bills receivables, sundry debtors,

(excluding bad debts or provisions), inventories, work in progress,

etc. Prepaid expenses should also be included in current assets

Page 87
 because they represent payments made in advance which will not

have to be paid in near future.

Current liabilities are those obligations which are payable

within a short period of tie generally one year and include

outstanding expenses, bills payable, sundry creditors, bank

overdraft, accrued expenses, short term advances, income tax

payable, dividend payable, etc. However, some times a

controversy arises that whether overdraft should be regarded as

current liability or not. Often an arrangement with a bank may be

regarded as permanent and therefore, it may be treated as long

term liability. At the same time the fact remains that the overdraft

facility may be cancelled at any time. Accordingly, because of this

reason and the need for conversion in interpreting a situation, it

seems advisable to include overdrafts in current liabilities.

March- March- March- March- March-

2009 2008 2007 2006 2005

Current
1.02 1.53 1.03 1.42 1.77
Ratio

Page 88
 Current ratio
2
1.77
1.8

1.6 1.53
1.42
1.4

1.2
1.02 1.03
1

0.8

0.6

0.4

0.2

0
Mar-10 Mar-09 Mar-08 Mar-07 Mar-06

Interpretation

During the year March 2005 it is 2.64 which increased to

2.94 in the year March 2009 it is showing an increase in sales this

can be confirmed from the increase in Sundry Debtors and

inventory.

Page 89
 QUICK RATIO

Liquid ratio is also termed as "Liquidity Ratio", "Acid Test

Ratio" or "Quick Ratio". It is the ratio of liquid assets to current

liabilities. The true liquidity refers to the ability of a firm to pay its

short term obligations as and when they become due.

Components:

The two components of liquid ratio (acid test ratio or quick

ratio) are liquid assets and liquid liabilities. Liquid assets normally

include cash, bank, sundry debtors, bills receivable and

marketable securities or temporary investments. In other words

they are current assets minus inventories (stock) and prepaid

expenses. Inventories cannot be termed as liquid assets because

it cannot be converted into cash immediately without a loss of

value. In the same manner, prepaid expenses are also excluded

from the list of liquid assets because they are not expected to be

converted into cash. Similarly, Liquid liabilities means current

liabilities i.e., sundry creditors, bills payable, outstanding

expenses, short term advances, income tax payable, dividends

payable, and bank overdraft (only if payable on demand). Some

time bank overdraft is not included in current liabilities, on the

Page 90
argument that bank overdraft is generally permanent way of

financing and is not subject to be called on demand. In such cases

overdraft will be excluded from current liabilities.

Formula of Liquidity Ratio

Liquid Ratio = Liquid Assets / Current Liabilities

Quick ratio
1.4 1.31
1.26
1.2 1.13

0.8 0.67 0.66

0.6

0.4

0.2

0
Mar-10 Mar-09 Mar-08 Mar-07 Mar-06

Page 91
 INVENTORY TURNOVER RATIO

Stock turn over ratio and inventory turn over ratio are the

same. This ratio is a relationship between the cost of goods sold

during a particular period of time and the cost of average inventory

during a particular period. It is expressed in number of times. Stock

turn over ratio / Inventory turn over ratio indicates the number of

time the stock has been turned over during the period and

evaluates the efficiency with which a firm is able to manage its

inventory. This ratio indicates whether investment in stock is within

proper limit or not.

Components of the Ratio:

Average inventory and cost of goods sold are the two

elements of this ratio. Average inventory is calculated by adding

the stock in the beginning and at the end of the period and dividing

it by two. In case of monthly balances of stock, all the monthly

balances are added and the total is divided by the number of

months for which the average is calculated.

Page 92
 FORMULA OF INVENTORY TURNOVER RATIO:

The ratio is calculated by dividing the cost of goods sold by

the amount of average stock at cost.

Inventory Turnover Ratio =

Cost of goods sold / Average inventory at cost

Generally, the cost of goods sold may not be known from the

published financial statements. In such circumstances, the

inventory turnover ratio may be calculated by dividing net sales by

average inventory at cost. If average inventory at cost is not known

then inventory at selling price may be taken as the denominator

and where the opening inventory is also not known the closing

inventory figure may be taken as the average inventory.

Inventory turnover ratio

35
30.47 30.46
30 28.76

25 22.93

20 18.78

15

10

0
Mar-10 Mar-09 Mar-08 Mar-07 Mar-06

Page 93
 ACCOUNTS RECEIVABLES RATIO

A concern may sell goods on cash as well as on credit.

Credit is one of the important elements of sales promotion. The

volume of sales can be increased by following a liberal credit

policy. The effect of a liberal credit policy may result in tying up

substantial funds of a firm in the form of trade debtors (or

receivables). Trade debtors are expected to be converted into

cash within a short period of time and are included in current

assets. Hence, the liquidity position of concern to pay its short term

obligations in time depends upon the quality of its trade debtors.

Definition:

Debtors turnover ratio or accounts receivable turnover ratio

indicates the velocity of debt collection of a firm. In simple words it

indicates the number of times average debtors (receivable) are

turned over during a year.

Formula of Debtors Turnover Ratio:

Debtors Turnover Ratio =

Net Credit Sales / Average Trade Debtors

Page 94
 The two basic components of accounts receivable turnover

ratio are net credit annual sales and average trade debtors. The

trade debtors for the purpose of this ratio include the amount of

Trade Debtors & Bills Receivables. The average receivables are

found by adding the opening receivables and closing balance of

receivables and dividing the total by two. It should be noted that

provision for bad and doubtful debts should not be deducted since

this may give an impression that some amount of receivables has

been collected. But when the information about opening and

closing balances of trade debtors and credit sales is not available,

then the debtors turnover ratio can be calculated by dividing the

total sales by the balance of debtors (inclusive of bills receivables)

given. and formula can be written as follows.

Debtors Turnover Ratio =

Total Sales / Debtors

Page 95
 Debtor Turnover Ratio
7.61
8 7.23
6.44 6.6
7 6.12
6
5
4
3
2
1
0
March 09 March 08 March 07 March 06 March 05

Page 96
 FINDINGS

 SUGGESTIONS

 CONCLUSION

Page 97
 FINDINGS & SUGGESTION

Operations

The gross turnover of the company increased to Rs. 73.40

crores from Rs. 62.52 crores in the previous year. During the year,

revenue from exports increased to Rs. 2.75 crores as compared to

Rs. 1.40 crores in the previous year.

The Profit before tax improved to Rs. 9.92 crores as

compared to Rs. 6.82crores in the previous year. Net profit after

tax was Rs.5.86 crores as against Rs. 4.34 crores in the previous

year.

The improvement in profitability was primarily as a result of

higher production and savings in fuel cost.

Final Redemption of 9% Cumulative Preference Shares .

Pursuant to the Scheme of Arrangement approved by the Honble

High Court of Calcutta, the company paid the third and final

instalment in respect of the final redemption of 9% Cumulative

Redeemable Preference

The Directors are pleased to recommend, for approval of

the Members a Dividend of 25% i.e. Rs.2.50 per share on

Page 98
4,033,058 Equity Shares of Rs.10/- each of the Company for the

financial year 2008-09. The dividend on equity shares, if approved

at the ensuing Annual General Meeting, will be paid to Members

whose names appear in the Register of Members as on 8th

September, 2009 and to Members whose names appear on that

date as Beneficial Owners as furnished by National Securities

Depository Limited (NSDL) and Central Depository Services (India)

Limited (CDSL).

Page 99
 CONCLUSION

In today’s dynamic market place, it is not enough to excel in your

current environment you must also envision the future. You must

develop winning strategies and more importantly, sustain them.

Success depends upon your ability to welcome change and ensure

that learning, design and execution become natural rhythms in

your organization.

Organization needs to assimilate new technology and learn to

manage ambiguity and diversity. The need of all stakeholders-

employees, customers, supplier’s garments the community and the

environment need to be taken into account to sustain in this

scenario.

Thus, consumer behavior/buying behavior programmer provides

the solution to these problems.

Consumer behavior/buying behavior programmers strengthen the

leadership and communication capacity of the individuals and the

organizations. They challenge the executives to think and manage

more effectively in a changing business world. They offer analytical

insights and skills and provide a thorough knowledge base so that

today’s manager can emerge as leaders of tomorrow.

Page 100
It can thus conclude that in today’s competitive world the

challenges posed by the ever changing global business scenario

can be met very effectively through buying behavior. Thus, it is

essential to have such programmers, which not only cater to the

organizational needs but also help in reconciling them with

individual personal needs.

Page 101
Page 102
 BIBLIOGRAPHY

Financial Management : Prasanna Chandra

I.M. Pandey

Financial Management E Book : Dressler, Soeren

Chelsom, Lawrence

Corporate Accounting : Saklecha

Cost Accounting : S.M. Shukla

Income Tax : Saklecha

WEBLIOGRAPHY

 Company Balance / Profit & Loss Account / Auditors Report

etc.

 www.narmdageltaines.com

 www.indiainfoline.com

 www.about.com

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