COMPREHENSIVE PROJECT STUDY
REPORT
ON
WORKING CAPITAL
MANAGEMENT
AND PROFITABILITY AT ATUL
AUTO LTD
Shapar (Veraval)
SUBMITTED TO
SAURASHTRA UNIVERSITY
IN PARTIAL FULFILLMENT FOR THE AWARD OF THE
MBA DEGREE
SUBMITTED BY
Jayesh S. Dobariya & Ankit Raichura
AFFILIATED TO SAURASHTRA UNIVERSITY,
RAJKOT
PREFACE
Today in the era of globalization where in emerging of varied types of trends of technological advancement is taking place to give the end user a product which is better than the best with the changes & development in the field of business economics & corporate world & emergence of various companies in the Indian market user had the cutting edge to invest into various fields in order to get the maximum benefit out of the existing schemes in the regulatory environment. The objective of this report is to understand the Working Capital Management and Profitability of Atul Auto Ltd. through various analyses.
ACKNOWLEDGEMENT
It gives me immense pleasure to present this project report on Working Capital Management and Profitability carried out at ATUL AUTO LTD. In partial fulfillment of post-graduate course M.B.A.
No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report.
I would like to thank Mr. Hitesh Popat sir to help me in granting permission in this organization. I am especially thankful to Mr. J.V. Adhiya sir (Vice President of Finance) for their valuable advice and guidance during my project completion. I am also thankful to Mr. Hiren Nayak sir (HR Depart.) for granting me permission for this project.
I would be failing in my duty if I do not express my deep sense of gratitude to Dr. Dharmesh S. Raval sir without his guidance it wouldn’t have been possible for me to complete this project work.
Lastly I would like to thank my parents, friends and well wishers who encouraged me to do this research work and all those who contributed directly or indirectly in completing this project to whom I am obligated to.
DECLARATION
We, Ankit J. Raichura Students of MBA IV (Finance) 2008-2010 studying at
M.H.Gardi School of Management, Anandpar, declare that the project work
entitled “Working Capital Management and Profitability of Atul Auto
Ltd.,Rajkot” Was carried by us in the partial fulfillment of MBA program under
the Saurashtra University, Rajkot.
This project was undertaken as a part of academic curriculum according to the university rules and norms and it has not commercial interest and motive. It is my original work. It is not submitted to any other organization for any other purpose.
Date : -Place :-Rajkot
____________________
TABLE OF CONTENT
SR
No.
Particulars
Page
No.
1. Executive Summary 01 2. COMPANY INFORMATION 1.1 Introduction 1.2 Brief History 1.3 Managing Team 1.4 Group of Companies1.5 Forms of organization and Size of Unit 1.6 Organization Structure 1.7 Contribution of Unit 02 04 05 06 07 08 10 11
3. WORKING CAPITAL MANAGEMENT
2.1 Introduction
2.2 Need of Working Capital
2.3 Concept of W.C. Management
2.4 Types of Working Capital
2.5 Importance of W.C. Management 2.6 Determination of Working Capital 2.7 Sources of working capital
2.8 Working Capital Components
12 13 14 15 16 19 20 22 23 4. RESEARCH METHODOLOGY 3.1 Introduction
3.2 Objective of the Study
3.3 Scope and Limitation of the Study 3.4 Linear Correlation Co-Efficient 3.5Types of data collection
3.6 Data Analysis 35 36 37 38 39 41 42
Return on Investments
Working Capital Size & Level Analysis
Working Capital Ratio Analysis and Comparison with Return on Investments.
43 45 57
EXECUTIVE SUMMARY
Atul Auto Ltd. is India’s reputed and leading manufacturer of Light Vehicle Transport. Atul group also in other businesses like Auto Finance, two wheeler and 4 wheeler distributors. Dealing in Petroleum Fuels and Products, Telecommunication and also in Real Estate.
Atul Auto Ltd. have a very good market share with product differentiation like goods carries, passenger carries, special carries. Atul Auto Ltd. covers the good market share in Gujarat, Uttaranchal, Rajasthan, Orissa and Uttar Pradesh. Atul Auto Ltd. exports their product in Nigeria, Egypt, Kenya, Tanzania, and plenty of African country.
Working capital is life blood of any business organization. This study shows the working capital management of Atul Atuo Ltd. It includes, working capital size and level analysis, working capital ratio analysis and comparison with profitability ratio (ROI).
In this study working capital ratios compare with profitability ratio (ROI). With the help of karl pearson’s correlation co-efficient statistical tools and found the relationship between those ratios. Through this we could found working capital impact on profitability of the Atul Auto Ltd.
Company
Information
Chap.
1
PROJECT AT A GLANCE
Name of the unit
: - ATUL AUTO LTD.
Plant ®istered office : - Survey No. 86, Plant No.1-4,
Near Microwave Tower, National Highway 8-B, Shapar (veraval),
Rajkot – 360 002.Gujarat.
Telephone & Fax No. : - +91 02827 2652996 / 98 / 99
Fax : - +91 2827 – 52254
Website : - www.atulautoltd.co.in
Established year : - 1983
Size of the organization : - Large Scale Industry
Form of organization : - Public Limited Company
Founder : - Jentibhai Chandra
Bankers : - State Bank of India State Bank of Saurashtra Citizens Co-op. Bank ltd. Laxmi Vilas Bank Ltd. HDFC Bank
Auditors : - Maharishi & Co. Chartered Accountant.
1.1
INTRODUCTION
20 years ago Jentibhai Chandra has started the business as a manufacturer of automobile- “Chhakara”. The business was started at Jamnagar on Small base. After some years diversification was made and they have started manufacturing of “DIESEL 3-WHEELERS” along with chhakara. With the aim to cover national market they have started emptier plant at Shapar (Veraval) because of better transportation services and many other things.
At present the company is running under the name “ATUL AUTO LIMITED”. Basically company is producing diesel engine vehicles. It produces 3-wheelers like chhakera, pick-up van, delivery van and passenger van.
Now a day’s company is selling its products mainly in Andhra Pradesh, Karnataka, Gujarat, Rajasthan, MP and Maharashtra. “ATUL AUTO LIMITED” is leading company as a manufacturer of diesel 3-wheelers.
1.2
BRIEF HISTORY
Today, when you see or travel by the convenient 'Chhakada' you rarely realize who invented this amazing people-friendly transportation vehicle. Well, we take pride in mentioning our founder’s name – the Late Mr. Jagjivanbhai
Karsanbhai Chandra. He was a man of vision. A Dreamer. An Inventor. A
Strategist. And an ingenious master-mind who loved challenges.
Back in the 1970’s, when transportation was a crucial problem especially in rural areas, he decided to blaze a new trail. He was thinking of an affordable mode of transportation which can benefit rural folks of Saurashtra. The road conditions were not good but the need for transportation was increasing day in and day out. After thorough research and planning, he came up with a vehicle which was skillfully engineered from a motorcycle. And this is how the first 'chhakada' was developed which later became a way of life for the people of Saurashtra.
The improvements in technologies were done from time to time to make it a sturdy and comfortable vehicle. And like father like son, Mr. Jayantibhai
Chandra also joined this mission. He took his illustrious father’s vision further.
He introduced diesel ‘chhakada’ with many new features, and soon 150,000 'chhakadas' were rolling all over Saurashtra making it easy for passengers.
On 1st may, 1992 the company has started plant at Shapar (Veraval) in Rajkot district to increase its sales and cover entire national market.
In the year 1996 “ATUL AUTO PRIVATE LIMITED” was converted in a Public Limited Company due to extra need of finance. Because as per the situation and demand of market they entered to launch some new products.
At present the company “ATUL AUTO LIMITED” has plant at Jamnagar, Rajkot, Haridwara and in Rajasthan also.
1.3
MANAGEMENT TEAM
Board of Directors
Mr. Jentibhai J. Chandra Chairman & Managing Director Mr. Shriharsh S. Jogalekar Vice Chairman
Mr. Mahendra J. Patel Executive Director Mr. Bharat J. Chandra Director
Mr. Rajesh S. Dhruv Director Mr. Rajendra H. Kukerja Director
Auditors
M/S Purohit Company & Company Charted Accounts
Jamnagar.
Bankers
1. State Bank Of India
2. Citizens Co-Operative Bank 3. Laxmi Vilas Co-Operative Bank 4. State Bank Of Saurashtra
Functional Managers
1. Finance Manager : Mr. J. H. Adhiya
2. Personal Manager : Mr. M.H. Desai 3. Marketing Manager : Mr. K. M. Cheriyan 4. Production Manager : Mr. P. J. Raval
Registered & Transfer Agent
Sharex India Private Ltd.
1. Atul Auto Industries
(Manufacturers of Diesel 3-Wheelers) 2. Atul Engines Ltd.
(Manufacturers of I.C. Engine) 3. Atul International
(Export- Import House) 4. Atul Motor Pvt. Ltd.
(Marketing Of Maruti Range of Cars& 4- Wheelers) 5. Atul Buildcon Pvt. Ltd.
(Real Estate Developers & Builders)
6. Khushbu Auto Pvt. Ltd. (Auto Finance Company) 7. Khushbu Auto Finance Ltd.
(Auto Finance Company)
8. New Chandra Motorcycle House
(Distributors of L.M.L., Vespa Scooter, Royal Enfield Motorcycles Auto Parts)
1.5 FORM OF ORGANIZATION AND SIZE OF UNIT
Form or organization can be divided mainly in four categories. There are two other forms also.Basic Forms
1. Sole Proprietor ship
2. Partnership
3. Private Limited Company
4. Public Limited Company
Other Forms
1. Public sector unit
2. Co-operative society
From above given all forms of organization “ATUL AUTO LIMITED” is a public limited company.
There are many features of public limited company some of there are given below,
Characteristics:
1. Free transfer of shares. 2. Large No. of Membership. 3. Artificial Legal Personality. 4. Limited liability.
Size of Unit
Size of unit can measured from in total capital divested in business. On the basis of capital investment, there are main two types of industry. But there are there other types also.
1. Small Scale Industry 2. Large Scale Industry
Other
1. Tiny Industry 2. Cottage Industry 3. Ancillary Industry
The total investment in large-scale industry; must be more than 20 corers and up to 100 corers. Total investment of “ATUL AUTO LIMITED” is more than 20 corers. That’s why it is large-scale industry.
1.
6 ORGANIZATION STRUCTURE
Authority and responsibility are the essential element on which type of organization depends. But there other element also like function, communication etc.
Organization can be divided in below given six types, 1) LINE ORGANIZATION
2) LINE & STAFF ORGANIZATION 3) MATRIX ORGANIZATION 4) FUNCTIONAL ORGANIZATION 5) PROJECT ORGANIZATION 6) COMMITTEE ORGANIZATION
From above given all type of organization “ATUL AUTO LIMITED” had adopted “LINE ORGANIZATION”.
1.
7 CONTRIBUTION OF UNIT
Contribution of unit to the industry refers to the share of proportion the company holds in entire industry.
“ATUL AUTO LIMITED” is manufacturer of 3-wheelers so its contribution is towards 3-wheelers automobile segment. In 3-wheeler passenger van and load carrier they have captured near about 18% to 20% of market. But if you take diesel 3-wheeler as a separate part they are a leading company.
In Saurashtra Region Company has captured near about 50% market. But in Gujarat region and in other state their contribution is less than that.
Working
Capital
Management
Chap.
2
2.1
INTRODUCTION
Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses.
Definition :
According to Guttmann &
Dougall-“Excess of current assets over current liabilities”.
According to Park &
Gladson-“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.
2.2 NEED OF WORKING CAPITAL MANAGEMENT
The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus, some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.2.3 CONCEPT OF WORKING CAPITAL
MANAGEMENT
There are two concepts of working capital management
1. Gross working capital
According to this concept, the total assets are termed as the gross working capital. It is also known as quantitative or circulating capital. Total current assets include, cash, marketable securities, account receivables, inventory, prepaid expense, advance payment of tax, etc. To quote Weston and Brigham, “Gross working capital refers to firm’s investment in short term assets such as cash, short term securities, accounts receivable and inventories.” This concept helps in making optimum investment in current assets and their financing. According to Walker, “Use of this concept is helpful in providing for the current amount of working capital at the right time so that the firms are able to realize the greatest return on investment.
2. Net working capital
Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative
Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ which according to him is nothing but ‘dead labour’. This ‘variable capital’ is nothing wage fund which remains blocked in terms of financial management, in work-in- process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his ‘variable capital’.
2.4
TYPES OF WORKING CAPITAL
The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.
1. Permanent working capital
The permanent working capital refers to that part of the working capital which is necessary for maintaining stock of raw material and finished goods at their normal level and for paying wages and salaries regularly. It is minimum amount of current assets which is needed for the smooth running of business. In other words, permanent working capital is that which is permanently locked up in current assets. Permanent working capital is off two kinds: A. Initial working
capital and B. Regular working capital A. Initial working capital
In the initial period of its operation, a company must have enough money to pay certain expenses. This amount will have to be supplied the owners themselves, because in the initial years, credit facilities may not be available from creditors, bank do not grant loans or overdrafts and credit-sales will have to be made.
Working
Capital
Permanent Working Capital Variable Working Capital Initial W.C. Regular W.C. Seasonal W.C. Special W.C.B. Regular working capital
It is the working capital required to continue the regular business operations. It is required for maintaining regular stock of finished goods to meet the customers demands, to pay regular business expenses etc. Regular working capital is the excess of current assets over current liabilities. This part of the working capital needed for smooth operations of the business.
2. Temporary working capital
It is the part of the working capital which is needed to meet the seasonal demands and special needs. This is called variable working capital because its amount varies according to the extent of extra demand. Variable working capital is of two types A. Seasonal working capital and B. Special working capital.
A. Seasonal working capital
Some business enterprises require a larger amount of current assets during a particular season. For instance sugar mills have to purchase sugarcane and employ more people to process it during a particular season.
Temporary W.C.
Permanent W.C.
Time W.C
B. Special working capital
In any business enterprise some unforeseen events take place when extra funds are needed to meet with the situation. E.g. during depression prices and sales decline considerably which necessitates extra working funds. During inflationary conditions, prices of raw material and finished goods up, hence extra money is needed to maintain the same level of stock. Unforeseen contingencies like strikes and lockouts fire and looting, etc. also force the management to provide for extra funds.
2.5 IMPORTANCE OF WORKING CAPITAL
MANAGEMENT
Working capital is considered as central nervous system of a firm. The importance of working capital management is reflected in the time most spent by financial managers in managing current assets and current liabilities. Maintenance of adequate working capital is necessary in order to discharge day to day liabilities and protect the business from adverse effects in times of emergencies. It aims at protecting the purchasing power of assets and maximizes the return on investment.
The goal of working capital management is to minimize the cost of working capital while maximizing a firm’s profit. The working capital management is concerned with determination of relevant levels of current assets and their efficient use as well as the choice of financial mix. The efficiency of a firm to earn profits depends largely on its ability to manage working capital. In other words, working capital management policies have a crucial effect on firm’s liquidity and profitability. Hence, working capital has to be effectively planned, systematically controlled and optimally utilized.
2.6
DETERMINATION OF WORKING CAPITAL
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quit high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high.
3. Size and growth of business
In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.
5. Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher.
6. Stock Turnover
By turnover is meant the ratio of sales to average stock held in business. The greater the turnover, the larger the volume of business that can be conducted with a given working capital. In other words, if the turnover is rapid, burden of working capital is not heavy.
7. Profitability
The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company.
8. Attitude of Management
If the attitude of the management is aggressive and they are primarily risk-takers, the need for working capital is reduced.
9. Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.
2.7 SOURCES OF WORKING CAPITAL
The main sources of working capital are as under:1. Shares and Debentures 2. Retained Earnings 3. Commercial Banks a. Loans b. Bank Overdraft c. Cash Credit 4. Commercial Paper 5. Certificate of Deposit 6. Commercial Bills Market 7. Factoring
8. Trade Creditor or Trade Creditors 9. Public Deposits
2.8 WORKING CAPITAL COMPONENTS
Mainly three components of working capital management1. Receivables Management 2. Inventory Management 3. Cash Management
Above three has equal importance to manage or handle working capital of any firm. Now we discuss detail of above three components.
1 . RECEIVABLES MANAGEMENT
The term receivable is defined as “debt owed to the firm by customers arising from sales of goods or services in the ordinary course of business.”
Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics
1. It involve element of risk which should be carefully analysis.
2. It is based on economic value. To the buyer, the economic value in goods
or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on.
3. It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.
Objective of Receivable Management
Maximizing the value of the firm: The basic objective of debtor’s management is to maximize the value of the firm by achieving a trade off between liquidity (risk) and return. The main purpose of receivables management is to minimize the risk of bad debts and not maximization of order. Efficient management of receivables expands sales by retaining old customers and attracting new customers.
Optimum Investment in Sundry Debtors: allowing credit, expands sales, but they involve block of funds, that have an opportunity cost, which can be reduced by optimum investment in receivables. Providing liberal credit increases sales consequently profits will increase, but increases investment in receivables result in increased costs.
Control and managing the cost of trade of credit: when there are no credit
sales, there will not be any trade credit cost. But credit sales increases profits, it is possible only when the firm is able to keep the costs at minimum.
Size of Receivable in Atul Auto Ltd.
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Sundry Debtors 62,934,110 87,395,034 81,660,540 39,619,066 35,213,006
Indices 100 138.87 129.75 62.95 55.95
Receivables Indices
Average Collection Period
The average collection period measures the quality of debtors since it indicate the speed of there collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firm’s credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects.
1. In determining the collectability of debtors and thus, the efficiency of
collection efforts.
2. In ascertaining the firm’s comparative strength and advantages related to
2. INVENTORY MANAGEMENT
The term ‘inventory’ is used to designate the aggregate of those items of tangible assets which are
1. Finished goods (‘saleable’) 2. Work-in-progress (‘convertible’) 3. Material and supplies (‘consumable’)
In financial view, inventory defined as the sum of the value of raw material and supplies, including spares, semi-processed material or work in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. For instance, in the case of a manufacturing concern, the inventory will generally comprise all three groups mentioned above while in the case of a trading concern, it will simply be by stock- in- trade or finished goods.
Components of Inventory
1. Raw Materials
Raw materials are those inputs that are converted into finished goods through manufacturing process. A major input for manufacturing a product. In other words, they are very much needed for uninterrupted production.
2. Work-in-Progress
Work-in-progress is that stage of stocks that are between raw materials and finished goods. Work-in-progress inventories are semi-finished products. They represent products that need to under go some other process to become finished goods.
3. Finished Products
Finished products are those products, which are ready for sale. The stock of finished goods provides a buffer between production and market.
4. Store and Spares
Stores and spares inventory (include office and plant cleaning materials like, soap, brooms, oil, fuel, light, bulbs etc.) are those purchased and stored for the purpose of maintenance of machinery.
Components of
Inventory
Raw Materials Work-in-progress Finished Product Stores and SparesInventory Management Motives
Managing inventories involves block of funds and inventory holding costs. Maintenance of inventory is expensive, then why to firm hold inventories? There are three general motives of holding inventories.
1. Transaction Motive
Transaction motive includes production of goods and sale of goods. It facilitates uninterrupted production and delivery of order at a given time (right time).
2. Precautionary Motive
This motive necessitates the holding of inventories for unexpected changes in demand and supply factors.
3. Speculative Motive
This compels to hold some inventories to take the advantage of changes in price and getting quantity discount.
Objectives of Inventory Management
In company there should be an optimum level of investment for any asset, whether it is plant, cash or inventories. Again inadequate disrupts production and causes losses in sales. Efficient management of inventory should ultimately result in wealth maximization of owner’s wealth. It implies that while the management should try to pursue financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demand. The objectives of inventory management consist of two counterbalancing parts:
1. To minimize the firms investment in inventory
2. To meet a demand for the product by efficiently organizing the firms production and sales operation.
This two conflicting objective of inventory management can also be expressed in term of cost and benefits associated with inventory. That the firm should minimize the investment in inventory implies that maintaining an inventory cost, such that smaller the inventory, the better the view point .obviously, the financial manager should aim at a level of inventory which will reconcile these conflicting elements. Some objective as follow
1. To have stock available as and when they are required.
2. To utilize available storage space but prevents stock levels from exceeding
space available.
3. To maintain adequate accountability of inventories assets.
4. To provide, on item – by- item basis, for re-order point and order such
quantity as would ensure that the aggregate result confirm with the constraint and objective of inventory control.
To keep low investment in inventories carrying cost an obsolesce losses to the minimum.
Size of Inventory Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 Raw Materials 44,769,200 67,035,755 125,346,150 111,552,584 145,870252 W.I.P. 26,221,991 28,418,545 64,199,726 71,465,522 24,723,408 Finished Goods 1,314,829 4,961,700 18,028,663 10,586,166 6,165,644 Total 72,306,020 100,416,000 207,574,539 193,604,272 176,759,304 Indices 100 138.88 287.08 267.76 244.46 Inventory Indices
Inventory components
The firm’s inventory consist following components 1. Raw material
2. Work- in-progress 3. Finished goods
To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods.
3. CASH MANAGEMENT
Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with reference to cash management is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft and demand deposits in banks.
The broader view of cash also induce hear- cash assets, such as marketable sense as marketable securities and time deposits in banks. The main characteristics of this deposits that they can be really sold and convert in to cash in short term. They also provide short term investment outlet for excess and are also useful for meeting planned outflow of funds. We employ the term cash management in the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that it was no earning power. Company have to always maintain the cash balance to fulfill the dally requirement of expenses.
Motives for Holding Cash
1. Transaction Motive
Cash balance is necessary to meet day-to-day transaction for carrying on with the operation of firms. Ordinarily, these transactions include payment for material, wages, expenses, dividends, taxation etc. there is a regular inflow of cash from operating sources, thus in case of JISL there will be two-way flow of cash- receipts and payments. But since they do not perfectly synchronize, a minimum cash balance is necessary to uphold the operations for the firm if cash payments exceed receipts.
Always a major part of transaction balances is held in cash, a part may be held in the form of marketable securities whose maturity conforms to the timing of anticipated payments of certain items, such as taxation, dividend etc.
2. Precautionary Motive
Cash flows are somewhat unpredictable, with the degree of predictability varying among firms and industries. Unexpected cash needs at short notice may also be the result of following:
1. Uncontrollable circumstances such as strike and natural calamities. 2. Unexpected delay in collection of trade dues.
3. Cancellation of some order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise in wages, etc.
The higher the predictability of firm’s cash flows, the lower will be the necessity of holding this balance and vice versa. The need for holding the precautionary cash balance is also influenced by the firm’s capacity to have short term borrowed funds and also to convert short term marketable securities into cash.
3. Speculative motive
Speculative cash balances may be defined as cash balances that are held to enable the firm to take advantages of any bargain purchases that might arise. While the precautionary motive is defensive in nature, the speculative motive is aggressive in approach. However, as with precautionary balances, firms today are more likely to rely on reserve borrowing power and on marketable securities portfolios than on actual cash holdings for speculative purposes.
4. Compensating Motive
According to I.M. Pandey, the amount of cash to be held for the first two motives, which are two most important motives, the following factors must be taken into account:
1. The expected cash inflows and outflows based on cash budget. 2. The degree of deviation between expected and actual net cash flows. 3. The maturity structure of the firm’s liabilities.
4. The firm’s ability to borrow at short notice in the event of any emergency. 5. The philosophy of management regarding liquidity and risk of insolvency.
Advantage of Cash Management
Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses
2. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary investment of cash and providing funds normal growth.
3. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure.
Size and Indices of cash in Atul Auto
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Cash & Bank 11,441,798 16,113,868 2,387,963 3,752,117 18,628,235
Cash cycle
One of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive ‘business wheel’. It is also known as ‘circulating capital’ which means current assets of the company, which are changed in ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash.
Basically cash management strategies are essentially related to the cash cycle together with the cash turnover. The cash cycle refers to the process by which cash is used to purchase the row material from which are produced goods, which are then send to the customer, who later pay bills. The cash turnover means the number of time firms cash is used during each year.
Research
Methodology
Chap.
3
3.1 INTRODUCTION
Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them.
It is important for research to know not only the research method but also know methodology. ”The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.” Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is important step in any project and success of any project will Be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step.
Data collection plays an important role in research work. Without proper data Available for analysis you cannot do the research work accurately.
3.
2 OBJECTIVE OF THE STUDY
Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company can not earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis.
1. To study the working capital management of Atul Auto Ltd.
2. To study the optimum level of current assets and current liabilities of the
company.
3. To study the liquidity position through various working capitals relate
ratios.
4. To study the working capital components such as receivables accounts,
cash management, Inventory position.
5. To study the way and means of working capital finance of the Atul Auto
Ltd.
3.
3 SCOPE & LIMITATIONS OF THE STUDY
Scope of the Study
The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of Jain Irrigation Systems Ltd. And even factors like competitor’s analysis, industry analysis were not considered while preparing this project.
Limitations of the Study
Following limitations were encountered while preparing this project:
1. Limited data
This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality.
2. Limited period
This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.
3. Limited Area
Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.
3.4
Linear Correlation Co-efficient
Meaning
Correlation is a measure of finding out the degree of relationship between two or more variables. It means the tendency of the variables to move together. Therefore, it means the movement of two or more variables in sympathy with another. This movement may be in the same or reverse direction.
The number representing the measure (or degree) of linear correlation between two variables is called the coefficient of correlation. It is represented by r. the value of r is greater than or equal to -1 and smaller than or equal to 1.
Definition
The relationship between two variables such that a change in one is accompanied by a positive or a negative change in the other and also a greater change in one is accompanied by a corresponding greater change in the other, is called correlation.
Properties of Coefficient of
correlation:-(1) The coefficient of correlation is an absolute relation measure.
(2) The value of coefficient of correlation r is invariant under change in units of measurement of variable X and Y.
(3)The coefficient of correlation between X and Y is equal to the coefficient
of correlation between Y and X I, e.; r(x, y) = r(y, x).
(4) The value of coefficient of correlation r is always greater than or equal to -1 and less than or equal to 1. That is -1 ≤ r ≤ 1.
(5)The coefficient of correlation is invariant under the change of origin and
Pearson product-moment correlation coefficient
In statistics, the Pearson product-moment correlation coefficient (sometimes referred to as the PMCC, and typically denoted by r) is a measure of the correlation (linear dependence) between two variables X and Y, giving a value between +1 and −1 inclusive. It is widely used in the sciences as a measure of the strength of linear dependence between two variables. It was developed by Karl Pearson from a similar but slightly different idea introduced by Francis Galton in the 1880s. The correlation coefficient is sometimes called "Pearson's r."
Pearson's correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations:
Pearson Correlation Assumptions
That the relationship between X and Y can be Represented by a straight line, i.e. it is linear.
That X and Y are metric variables, measured on an interval or ratio scale of measurement.
In using a t distribution to test the significance of the correlation coefficient
That the sample was randomly drawn from the population, and That X and Y are normally distributed in the population. This assumption is less important as the sample size increases.
3.
5 TYPES OF DATA COLLECTION
There are two types of data collection methods available. 1. Primary data collection2. Secondary data collection
1. Primary data collection method
Primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data.
2. Secondary data collection
The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc.
This project is based on primary data collected through personal interview of head of account department, head of production department and other concerned staff member of finance department. But primary data collection had limitations such has matter confidential information thus project is based on secondary information collected through five years annual report of the company. The data collection was aimed at study of working capital management of the company.
Project is based on
1. Annual report of Atul Auto Ltd. 2004-05
2. Annual report of Atul Auto Ltd. 2005-06 3. Annual report of Atul Auto Ltd. 2006-07 4. Annual report of Atul Auto Ltd. 2007-08 5. Annual report of Atul Auto Ltd. 2008-09
3.6 DATA ANALYSIS
After collection of the data the second step is analyze the data. In this report we use the Profitability Ratio (Return on Investment) and working capital Ratio. We compare both ratios with the Karl Pearson’s correlation co-efficient statistical tool.
With the help of primary data and mainly secondary data we could found the below results.
Return on Investments
Working Capital Size and Level Analysis
Working Capital Ratios Analysis
Comparison between Working capital ratios and Return on Investment.
To compare Working capital ratios and Return on Investment we have used Karl Pearson’s correlation co-efficient statistical tool. Because it is very effective
Return on
Investmen
Return on Investment
The profitability of the firm is measured by establishing relation of net profit with the total assets of the company. The ratio indicates the efficiency of utilization of assets in generating revenue.
Return on Investment = Year 2004-05 2005-06 2006-07 2007-08 2008-09 Net Profit 30,155,499 41,980,321 31,438,941 12,669,841 4,596,564 Total Assets 390,094,141 583,793,97 4 690,831,93 8 733,998,35 5 778,616,638 ROI 7.73 % 7.19% 4.55% 1.73% 0.59% Return on Investment
Observation
From year 2004-05 the return on investment were reduced continuously. Net sales in Rs. was increase but the no. of unit is reduced because raw material price and product prices hike. It’s happened due to the competition and competitors. In the year 2008-09 the return on investment reduces by 92% as compare to the year 2004-05. Its shows the inefficient utilization of the available resources.
Net Profit
Total Assets X 100
Working
Capital Size
&
Level
Analysis
AWORKING CAPITAL LEVEL
The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firm’s profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet it’s current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.
Size of Working Capital
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 A. Current Assets
Inventories 72,306,020 100,416,000 207,574,539 193,604,272 176,759,304 Sundry Debtors 62,934,110 87,395,034 81,660,540 39,619,066 35,213,006 Cash & Bank 11,441,798 16,113,867 2,387,963 3,752,117 18,628,235 Loans & Advances 56,145,885 94,058,239 63,045,027 76,001,619 77,265,386
Total of A (Gross W.C.) 202,827,813 297,983,140 354,668,069 312,977,074 307,865,931 B. Current Liabilities Current Liabilities 53,374,115 139,779,195 92,499,837 71,621,898 100,822,850 Provision 1,686,940 15,667,246 15,382,278 10,003,311 11,419,468 Total of B 55,061,055 155,446,441 107,882,115 81,625,209 112,242,318 Net W.C. (A-B) 147,766,758 142,536,699 246,785,954 231,351,865 195,623,613 (Amnt. In Rs.)
WORKING CAPITAL TREND ANALYSIS
In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an annalist to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current assets and current liabilities and it’s effect on the working capital position.
“The term trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets, and current liabilities to grow or decline over a period of time”
“The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing.”
Emphasizing the importance of working capital trends, “analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds.
Further, any one trend by it self is not very informative and therefore comparison with Illustrated their ideas in these words, “An upwards trends coupled with downward trend or sells, accompanied by marked increase in plant investment. Especially if the increase in planning investment by fixed interest obligation”
Working Capital Size trend
Years 2004-05 2005-06 2006-07 2007-08 2008-09
Net W.C (A-B) 147,766,758 142,536,699 246,785,954 231,351,865 195,623,613
W.C. Indices 100 96.46 167.01 156.56 132.39
Working Capital Indices
Observation
s
It was observe that in the year 2006-07 indices is very high because of mismatch of current assets and current liabilities. Current Assets increase by 19% and Current Liabilities decrease by 30%. After year 2006-07 company’s decreased its working capital continuously. By reducing working capital company might be increased its profitability in next years. The fall in working capital is a clear indication that the company is utilizing its short term resources with efficiency.
Current
Assets
Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year.
Current Assets Size
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Inventories 72,306,020 100,416,000 207,574,539 193,604,272 176,759,304 Sundry Debtors 62,934,110 87,395,034 81,660,540 39,619,066 35,213,006 Cash & Bank 11,441,798 16,113,867 2,387,963 3,752,117 18,628,235 Loans & Advances 56,145,885 94,058,239 63,045,027 76,001,619 77,265,386 Other Assets
Total of C.A. 202,827,813 297,983,140 354,668,069 312,977,074 307,865,931 C.A. Indices 100 146.91 174.86 154.31 151.79
Current Assets Indices
Composition of current assets
Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of funds in inventories affects the profitability of the business or the major portion of current assets is made up cash alone, the profitability will be decreased because cash is non earning assets.
Composition of Current Assets
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Inventories 35.65 33.70 58.33 61.86 57.41
Sundry Debtors 31.03 29.33 23.02 12.66 11.44
Cash & Bank 05.64 05.41 00.67 01.2 06.05
Loans & Advances 27.68 31.56 17.78 24.28 25.10
Total of C.A. 100 100 100 100 100
Current Assets Components
No. in % (No. in %)
Observation
It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects on profitability. Current assets include some funds investments for which company pay interest.
The balance of current assets is maintained in the years 2004-05 and 2005-06. As per my view in year 2006-07 is ideal because in this year Inventory was increase and Sundry Debtors, Cash & Bank Balance and Loan & Advances were decrease compare to last two financial years. In the year 2007-08 again Inventory was increase and Sundry Debtors and Cash & Bank were decrease but Loans & Advances increased. But it was not bed situation for the company.
In the year 2008-09 the Inventory was down by 7.19% compare to last year and Cash & Bank Balance and Loans & Advances were decrease. But Sundry Debtors was decrease by 9.64% compare to last year.
With the help of Composition of Current Assets company try to maintain and increase the inventory level and it’s profitable for the company. In last five years company reduces Sundry Debtors continuously, so we can say that company has no more risk regarding Bed Debts.
Current liabilities
Current liabilities mean the liabilities which have to pay in current year. It includes sundry creditor’s means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance.
Current Liabilities Size
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Current Liabilities 53,374,115 139,779,195 92,499,837 71,621,898 100,822,850 Provision 1,686,940 15,667,246 15,382,278 10,003,311 11,419,468
Total of B 55,061,055 155,446,441 107,882,115 81,625,209 112,242,318 Indices 100 282.32 195.93 148.24 203.85
Current Liabilities Indices
Observation
Current Liabilities graph not shown continuous growth. In the year 2008-09 current liabilities in increase compare to 2006-07 and 2007-08 years. It means company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm.
CHANGES IN WORKING CAPITAL
There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory. Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. Changes in seasonality in sales activities.
The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume. The third major point if changes in working capital are changes in technology because change sin technology to install that technology in our business more working capital is required. A change in operating expanses rise or full will have similar effects on the levels of working following working capital statement is prepared on the base of balance sheet of last two year.
Statement of changes in Working Capital
Particulars 2007-08 2008-09 Changes in W.C. Increase Decrease A. Current Assets
Inventories 193,604,272 176,759,304 16,844,968 Sundry Debtors 39,619,066 35,213,006 4,406,060 Cash & Bank 3,752,117 18,628,235 14,876,118
Loans & Advances 76,001,619 77,265,386 1,263,767 Other Assets Total of A 312,977,074 307,865,931 5,111,143 B. Current Liabilities Current Liabilities 71,621,898 100,822,850 29,200,952 Provision 10,003,311 11,419,468 1,416,157 Total of B 81,625,209 112,242,318 30,617,109 Net W.C. (A-B) 231,351,865 195,623,613 Net Decrease in W.C. 35,728,252 35,728,252 Total 51,868,137 51,868,137
Observation
As per the table data current assets decreased and current liabilities increased so the working capital decreased as compare to the previous year. Inventory decreased by 9% and current liabilities increased by 41% as compare to previous year.
WORKING CAPITAL LEVERAGE
One of the important objectives of working capital management is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current assets and by reducing the level of current liabilities the company can minimize the investment in the working capital thereby improvement in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on company’s profitability. The working capital management should improve the productivity of investment in current assets and ultimately it will increase the return on capital employed. Higher level of investment in current assets than is actually required means increase in the cost of Interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of ROCE (Return on Capital Employed) for changes in current assets. It is measures by applying the following formula,
Working capital Leverage =
Return on Capital Employed =
The working capital leverage reflects the sensitivity of return on capital employed to changes in level of current assets. Working capital leverage would be less in the case of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working capital management with the profitability of the company.
% Changes in ROCE % changes in Current Assets
EBIT Total Assets
Calculation of working capital leverages
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09 ROCE % 11.38 11.15 7.03 2.60 0.76 % Change in ROCE 0.611 -2.021 -36.950 -63.016 -70.769 % Change in C.A. 19.913 46.914 19.023 -11.755 -1.633 W. C. Leverages 0.031 -0.043 -1.942 5.361 43.337Working Capital Leverage Components
Observation
Working capital leverage increase in 2008-09 as compare to 2004-05 its shows the efficient use of current assets and current liabilities. In year 2006-07 lowest working capital leverages. Company reduces its current assets and tries to increasing in profitability.
Working Capital
Ratio Analysis &
Comparison with
INTRODUCTION
Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things”. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firm’s financial performance.
ROLE OF RATIO ANALYSIS
Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. On the basis of inventory turnover ratio or debtor’s turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ratio analysis is concerned with all the aspect of the firm’s financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.
