SUMMER PROJECT REPORT ON

“FINANCIAL PLANNING AND FORECASTING”

Submitted in the partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

AMRITA SCHOOL OF BUSINESS

By

Vignesh S
(BL.BU.P2MBA09059)

Under the guidance of

Industry Guide Faculty Guide

V. Karthikeyan Prof. Usha Nandhini

Manager - Finance PGP Chair

Royal Classic Group Amrita School of Business

Tirupur Bangalore
 DECLARATION

I, Vignesh S, a second year MBA student of Amrita School of Business, Amrita Vishwa
Vidyapeetham hereby declare that project titled “Financial Planning and Forecasting” was
done by me under guidance of Dr. Usha Nandhini, (PGP Chair-MBA Program), Amrita
School of Business and Mr. V. Karthikeyan, Manager – Finance, Royal Classic Group
Tirupur during April – June 2010.

I also declare that this project is not submitted by me for award of any degree, diploma,
literature or recognition earlier.

Vignesh S

18th June, 2009

Bangalore
 ACKNOWLEDGEMENT

I am grateful to thank Royal Classic Group for giving me this great opportunity to do
my Summer Internship Project with them. I take the privilege to sincerely thank
Mr.R.Sivaraman, Executive Director, Royal Classic Group, in creating the opportunity for a
summer project in the finance department. I would like to thank D. Joshua Chithambaram
Vice President-Finance, my Industry Guide Mr. V. Karthikeyan Manager -Finance, Royal
Classic Group for his guidance and support during the entire course of the project.

I am also thankful to Mr. Kirthivasan, (Industry coordinator for summer internship)

Brand Executive, Royal Classic Group, for making everything possible for me during the
entire course of the project. I am thankful to the Core Finance Team, of the company for their
guidance, support and encouragement to give my best during the Internship Program. I
specially thank all the Managers, Officers and the Staff members with whom I interacted
during the course of my project for their support and cooperation.

I also take great pleasure in thanking my faculty guide, Dr. Usha Nandhini
Chairperson MBA program, Amrita School of Business, Bangalore, for giving me the moral
support and inspiration to perform well and make the Summer Internship Project successful.

I then take the opportunity to thank Ms. Chitra Harshan, Placement Coordinator,
without whose help, I wouldn’t have got such a wonderful corporate exposure at Royal
Classic Group, Tirupur.

I would like to heart fully extend my thanks and gratitude to my family for supporting
and instilling confidence in me in all ways. Above all, I thank the Almighty for His presence
within me and without whose grace the endeavor of mine would not have been successful.
 Executive Summary

The internship project on “Financial Planning and Forecasting” has been a very good
experience. Every manufacturing company has to forecast its financial position for better
decision – making. An organization risks can be reduced and the efficiency can be increased
through efficient planning. At the same time company needs to plan about its future
investment to increase the productivity and profitability.

In a manufacturing company, the inventories and debtors occupy large amount which are
major components of current assets. The efficient management of these components would
increase the profitability and flexibility of the firm.

This project is a sincere effort to plan, forecast and analyze the financial position of Royal
Classic Group for the future period. The project is executed in an efficient manner. The
preparation of forecasted financial statements has undergone a various hard-hitting processes
to arrive at the amount of each item of financial statements.

The study on effectiveness of management of debtors was made to suggest some areas of
improvements to the company. For the study of the debtors, I reviewed the credit policy
document of the company, credit assessment methodology that the company follows to find
out the credit worthiness of its customers, the financing method adopted by the company to
finance its debtors, the collection method and then finally classification of debtors according
to the segment to which they belong to.

The financial statements analysis like Ratio analysis, Breakeven Analysis, Operating cycle &
cash cycle and Growth rate has been carried out to know the financial position of the
company in the future period.

The internship is a viaduct between the organization and the institute. This made me to
engage in a project that helped me to learn management of finance practically. And in the
process I could contribute substantially to the organization’s growth.

The experience that I gathered over the period of my internship has certainly provided the
management knowledge which I trust will help me in future.
 Contents

Sl. No. Contents Page No.

1. Industry Profile

2. Company Profile

Financial Planning and Forecasting –

3.
Introduction
4. Objective

5. Forecasted Financial Statements

6. Assumptions

7. Analysis of Forecasted P&L A/c

8. Analysis of Balance Sheet

9. Debtors Management

10. Ratio Analysis – Forecasted

11. Breakeven Analysis
12. Operating Cycle & Cash Cycle
13. Growth Rate
14. Recommendations
15. Conclusion
16. Bibliography
 Industry Profile

Textile Industry – Holistic Approach

A Textile company the purpose of restructuring scheme is defined as “whose

business includes yarn spun on spinning systems, weaving, knitting, processing,
texture made-up, readymade garmenting and composite milling operations in the
organized sector”.

US and European markets dominate the global textile trade, accounting for 64% of
clothing and 39% of the textile market. With the dismantling of quotas, global textile
trade is expected to grow to US$ 670 billion by 2011.

The history of development in World Textile Industry was started in Britain as the
spinning and weaving machines were invented in that country. The World Trade
Organization (WTO) has taken so many steps for uplifting this sector. In the year
1995, WTO had renewed its Multi Fiber Arrangement (MFA) and adopted Agreement
on Textiles and Clothing (ATC), which states that all quotas on textile and clothing
will be removed among WTO member countries. However the level of exports in
textiles from developing countries is increasing even if in the presence of high tariffs
and quantitative restrictions by economically developed countries. Moreover the role
of multifunctional textiles, eco-textiles, e-textiles and customized textiles are
considered as the future of textile industry.

It is worth noting that China, Hong Kong, South Korea and Taiwan have registered
their presence significantly in the world textile market through conscious efforts while
they continued to globalize their textile economy. The Indian textile industry has
witnessed significant growth during the last decade in terms of installed spindleage,
production of yarn (both spun - filament), output of cloth and its per capita availability
as also exports.

The Textile Industry is one of the booming industry, of that Asian Countries plays a
vital role in Global Textile Market. US and European countries dominates global
textile market as they import higher.
Indian Textile Industry

Indian Textile Industry is one of the leading textile industries in the world. Though
was predominantly unorganized industry even a few years back, but the scenario
started changing after the economic liberalization of Indian economy in 1991. The
opening up of economy gave the much-needed thrust to the Indian textile industry,
which has now successfully become one of the largest in the world.

India textile industry largely depends upon the textile manufacturing and export. It
also plays a major role in the economy of the country. India earns about 27% of its
total foreign exchange through textile exports. Further, the textile industry of India
also contributes nearly 14% of the total industrial production of the country. It also
contributes around 3% to the GDP of the country.

Textile Industry in India is the second largest employment generator after agriculture.
It holds significant status in India as it provides one of the most fundamental
necessities of the people. Textile industry was one of the earliest industries to come
into existence in India and it accounts for more than 30% of the total exports. In fact
Indian textile industry is the second largest in the world, next to China.

Textile Industry is unique in the terms that it is an independent industry, from the
basic requirement of raw materials to the final products, with huge value-addition at
every stage of processing. Indian textile industry is constituted of the following
segments: Readymade Garments, Cotton Textiles including Handlooms, Man-made
Textiles, Silk Textiles, Woollen Textiles, Handicrafts, Coir, and Jute.

Current Facts of Indian Textile Industry

 India holds position as world’s second highest cotton producer.

 Acreage under cotton reduced about 1% during 2008-09.
 The productivity of cotton which was growing up over the years has
decreased in 2008-09.
 Substantial increase of Minimum Support Prices (MSPs).
 Cotton exports couldn't pick up owing to disparity in domestic and
international cotton prices.
 Imports of cotton were limited to shortage in supply of Extra Long staple
cottons.
Tamil Nadu

Tirupur known by various names such as knits city, Cotton city is famously called
the Textile city of India. Tirupur has the largest and fastest growing urban
agglomerations in Tamil Nadu. The knitwear industry which is the soul of Tirupur has
created millions of jobs for all class of people. There are nearly about 3000 sewing
units, 450 knitting units, hundreds of dyeing units and other ancillary units which are
un-countable. The annual for-ex business for the past year 2008 stands at Rs.
8,000cr. Due to the climate and availability of raw material and work force Tirupur
has had made a large contribution to the export of knitwear garments. It is called the
Knits Capital of India as it caters to famous brands retailers from all over the world.
Nearly every international knitwear brand in the world has a strong production share
from Tirupur. It has a wide range of factories which export all types of Knits fabrics
and supply garments for Kids, Ladies, Men's garments - both underwear and tops.
The city is known for its hosiery exports and provides employment for about 300,000
people. Tirupur Exporters Association – popularly known as TEA - was established
in the year 1990. This is an Association exclusively for exporters of cotton knitwear
who has production facilities in Tirupur. From the modest beginning TEA has grown
into a strong body of knitwear exporters. Today, TEA has a membership of 672 Life
members and 155 Associate Members. The members of the Association, from the
beginning, have resolved to develop their organization focusing on:

1. Multilateral growth of knitwear industry and exports

2. Development of infrastructural needs for Tirupur.
3. Implementation of schemes for the benefit of the society and public.
4. Promotion of constructive co-operation with workers with fair division of
rewards.
5. General up-liftment of quality of life in Tirupur.

For foreign buyer TEA:

1. Offers conferencing and secretarial services.

2. Helps in locating suitable suppliers.
3. Helps in resolving disputes.
 Company Profile

The Royal Classic Group was founded by three brothers:

Mr.R.Gopalakrishnan
Chairman,
A first Generation Entrepreneur,
29 Years of Experience in the industry.

Mr.R.Shanmugam
Managing Director,
A Diploma Holder in Electrical Engineering
27 Years of rich experience in the industry
In-Charge of export marketing, Innovation of new projects and banking

Mr.R.Sivaram
Executive Director,
A Diploma Holder Civil Engineering,
21years of experience in the industry
In-Charge of all domestic activities & IT System Administration

Vision:

Most Preferred global men’s wear fashion brand in the mid-premium segment.
Classic Polo aims to be and remain the leading retailer of world-class men’s wear in
India and become a compulsory part of men’s wardrobe solution by 2011.

Mission:

To grow horizontally and vertically in all formats (MBO, EBO, Chain Stores) through
continuous innovation by offering unparallel value to create customer delight.
The Royal Classic Group (RCG) began in 1991 as an exporter and gradually grew
into an Rs.425cr textile giant with brands under it wings through its 100% vertical
integration state-of-the-art in-house production. In February 2001, the company
launches its maiden T-Shirt brand Classic Polo, making its foray into the domestic
market. Within a short time, this brand figured among the top casual T-Shirt brands
in India. RCG acquired Smash, another T-Shirt brand, in September 2004 and
launched its exclusive premium men’s intimate wear under the brand name smash in
April 2005.

Classic Polo was awarded as the brand for the year 2005-06 for men’s casual.
Although, Classic Polo is primarily a T-Shirt brand, the range also offers a complete
lifestyle/wardrobe like exclusive T-Shirts, Shirts, Trousers, Denims, Sweaters,
Jackets, Loungewear etc.,

Royal Classic Group has production capacity of 15000 T-Shirts, 4000 Shirts and
4000 Trousers per day with consistent quality 0.01% defective percentage. Hand
picked cotton is used for production. RCG jointly has covered about 5000 acres of
wet land on contract farming. By providing the best seeds and timely manure, RCG
is getting an average productivity of 10Quintals/hectare, which is much higher from
conventional Cotton Farming.

Infrastructure

Innovations in manufacturing programs of garment occur in our production facilities

very often. Our specialization reflects in the quality of the goods delivered, as the
workers, executives and machinery are trained and tuned for that purpose.

 Cotton farming
 Ginning and Pressing
 Spinning
 Yarn
 Knitting
 Dyeing and finishing
 Garmenting
 Captive Power Plant
Cotton Farming:-
RCG has jointly covered about 5000 acres of wet land on contract farming. By
providing the best seeds and timely manure, RCG is getting an average productivity
of 10 Quintals/Hectare which is much higher from conventional cotton farming

RCG is ensuring about minimum guaranteed price for the farmers and hence apart
from its finest quality produce harvested, RCG enjoys a corporate social
responsibility by enlightening about 2000 families involved in cotton /farming.
Constant workshops and seminars are conducted at fields to educate and safe
transportation methods. The present area is planned to go up to 70000 acres in next
3 years.

Modern Ginning and pressing:-

From kappa’s cotton, this unit segregates the cotton seeds and good quality cotton
(lint) and this operation is done with least number of workers and totally under a
pneumatic drive system ensuring least human contacts. Ginning has capacity of 200
bales per day with an average weight of 170 Kgs/bale and as the cultivation
improves can reach up to 400 bales per day.

Spinning:-
The ginned cotton is covered into spun yarn in this unit with the following state-of-
the-art machineries.

Yarn:-
The company deals in 100% cotton yarn, 100% polyester yarn, all types blended
yarns, 100% gassed mercerized yarn, twisted yarn, various mélange yarn, etc… Our
spacious stock yard stores every type of yarn for supply to the regional factories,
apart from our own knitwear factories.
Advanced yarn testing facility is an added advantage. Yarn can be tested both at the
source point of the spinning mill and locally, which ensures best quality of yarn.
Knitting:-
Knitting dept has an array of latest computer controlled knitting machines from
reputed international brands. The in-house facility, which includes a knitting design
studio, is one of the best in the knitting industry. There are 46 circular knitting
machines that can knit jacquards, interlocks, ribs, and jerseys, in any pattern or
structure as needed. The capacity is 10 tons per day. There are 9 flat knitting
machines and that knit jacquards, plain, strips, and self designs with a capacity of
8500 pieces per day. Our circular machinery includes: (All Brand new MAYER and
CIE machines)

Dyeing and finishing:-

Our modern soft flow dyeing plant with Effluent Treatment Plant (ETP) has a
processing capacity of 10 tons per day. The soft flow dyeing plant has 7 vessels
imported from Taiwan. Supported by computerized color prediction, measurement
and matching systems from Data Color International, USA (Spectra Flash SF 600)
the plant can deliver evenly color fabrics, streaks free.
Dyed Fabrics are processed through balloon paddler from stretch plus, Switzerland
to remove the moisture neat and to give the fabric a better feeling and finish. Fabrics
are further processed through relax imported from Calator Ruckh, Germany.

Garmenting:-
The completely integrated facilities is topped by our garmenting division with skilled
pattern masters, cutting masters, tailors, and supporting workmen who are well
trained. The product specialization gives an excellent finish to the garment s they
make.
The entire production wing is housed under one roof with scientific work systems and
quality control systems,

Captive Power Plant:-

Presently they have installed 4 windmills of total 3.0 MW capacities which are
currently taking care of the entire requirements of the group. The company is
planning to add couple of more machines to take care of the future needs.
Solar Panel
The new solar heating Plant has been deployed at our dyeing division as the
replacement of exiting Fire Wood with the capacity of 10000 Liters per Day at 90D
and 20000 liters at 80. It has replaced the usage of 10 tons of Firewood/Day. In turn
we are saving almost 1000 trees a day.

Deployment of STP (sewage treatment Plant)

With the help of STP, RCG is purifying 1 Lac Liter of sewage water every day and it
is used for agriculture purposes.
Objective:

The main objective of the study is to understand the financial position of the
company, refers to the development of long-term strategic financial plans that
guide the preparation of short-term operating plans and budgets, which focus
on analyzing the pro forma statements and preparing the cash budget.
 Financial Planning and Forecasting

Financial Planning and Forecasting is the estimation of value of a variable or set of

variables at some future point. A Forecasting exercise is usually carried out in order
to provide an aid to decision – making and planning in the future. Business
Forecasting is an estimate or prediction of future developments in business such as
Sales, Expenditures and profits. Given the wide swings in economic activity and the
drastic effects these fluctuations can have on profit margins, business forecasting
has emerged as one of the most important aspects of corporate planning.

Forecasting has become an invaluable tool for business to anticipate economic

trends and prepare themselves either to benefit from or to counteract them. Good
business forecasts can help business owners and managers adapt to a changing
economy.

Financial planning and forecasting represents a blueprint of what a firm proposes to

do in the future. So, naturally planning over such horizon tends to be fairly in
aggregative terms. While there are considerable variations in the scope, degree of
formality and level of sophistication in financial planning across firms, we need to
focus on common elements which include Economic assumptions, Sales forecast,
Pro forma statements, Asset requirements and the mode of financing the
investments.

In general usage, a financial plan can be a budget, a plan for spending and saving
future income. This plan allocates future income to various types of expenses, such
as rent or utilities, and also reserves some income for short-term and long-term
savings. A financial plan can also be an investment plan, which allocates savings to
various assets or projects expected to produce future income, such as a new
business or product line, shares in an existing business, or real estate.

Financial forecast or financial plan can also refer to an annual projection of income
and expenses for a company, division or department. A financial plan can also be an
estimation of cash needs and a decision on how to raise the cash, such as through
borrowing or issuing additional shares in a company.
While a financial plan refers to estimating future income, expenses and assets, a
financing plan or finance plan usually refers to the means by which cash will be
acquired to cover future expenses, for instance through earning, borrowing or using
saved cash.

Corporations use forecasting to do financial planning, which includes an assessment

of their future financial needs. Forecasting is also used by outsiders to value
companies and their securities. This is the aggregative perspective of the whole firm,
rather than looking at individual projects. Growth is a key theme behind financial
forecasting, so growth should not be the underlying goal of corporation – creating
shareholder value is enabled through corporate growth.

The benefits of financial planning for the organization are

 Identifies advance actions to be taken in various areas.

 Seeks to develop number of options in various areas that can be
exercised under different conditions.
 Facilitates a systematic exploration of interaction between investment
and financing decisions.
 Clarifies the links between present and future decisions.
 Forecasts what is likely to happen in future and hence helps in avoiding
surprises.
 Ensures that the strategic plan of the firm is financially viable.
 Provides benchmarks against which future performance may be
measured.

There are three commonly used methods for preparing the pro forma financial
statements. They are:

1. Percent of Sales Method

2. Budgeted Expense Method.
3. Variation Method.
4. Combination Method.
Percent of Sales Method

The percent of sales method for preparing pro forma financial statement are fairly
simple. Basically this method assumes that the future relationship between various
elements of costs to sales will be similar to their historical relationship. When using
this method, a decision has to be taken about which historical cost ratios to be used.

Budgeted Expense Method

The percent of sales method, though simple, is too rigid and mechanistic. For
deriving the pro forma financial statements, we assume that all elements of costs
and expenses bore a strictly proportional relationship to sales. The budgeted
expense method, on the other hand calls for estimating the value of each item on the
basis of expected developments in the future period for which the pro forma financial
statements are prepared. This method requires greater effort on the part of
management because it calls for defining likely developments.

Variation Method

Variation method on the other hand, calls for estimating the items on the basis of
percentage increase or decrease of comparing with the same item of base year. It is
quite flexible throughout the future period. This method is not like budgeted method,
the value estimating for an item under this method is entirely dependent on the
historical data.

Combination Method

It appears that a combination of above explained three methods works best. For
certain items, which have a fairly stable relationship with sales, the percent of sales
method is quite adequate. For other items, where future is likely to be very different
from the past, the budgeted expense method or variation method is eminently
suitable. A combination method of this kind is neither overly simplistic as the percent
of sales method nor unduly onerous as the budgeted expense method or variation
method.
 Assumptions

The method used for this study is combination method which eminently works best
for an organization.

The assumptions made for forecasting are as follows:

1. The sales are expected to increase by 20% every year.

2. All expenses are estimated under percentage of sales method.
3. Tax is estimated on the basis of profit.
4. Proposed Dividend to be increased by Rs. 5,000,000 every year.
5. Dividend tax is payable on the basis of proposed dividend.
6. Secured and unsecured loans to be decreased by 5% every year.
7. Tax liability on percentage of sales method.
8. Fixed assets are expected to increase by 2% every year.
9. Work-in-progress of capital is expected to decrease by 10% every year.
10. Investments are expected to increase by 5%.
11. Current assets like inventories and sundry debtors are expected to increase
by 2% every year.
12. Cash and it equivalents on the basis of percentage of sales method.
13. Loans and advances are estimated to increase by 5% every year.
14. Current liabilities are expected to increase by 5% every year.
15. Provisions are expected to increase by 10% every year.
 Analysis of Profit & Loss Account

Income

Sales

The firm has sales as Exports as well as Domestic. The total sales include 59.8% of Export
sales, 39.7% of Domestic sales and 0.4% of second sales. The sales are forecasted to
increase by 20%p.a in the coming three years taking 2008-09 as base year.

This shows that company is more Export oriented than the Domestic Sales.

Expenditure

Raw Materials Consumed

Raw materials on which company spend most of its working capital consists of 39.3% of
Total Sales Value. This shows that there is a heavy expenditure on raw materials. It is
forecasted to increase by 20% in the coming three years.

The company should try to optimize the expense on raw material, as in the inflationary
economy capital blocked with raw material will lose its value in the subsequent year which
can be utilized in other profitable investments.

Cost of Human Resources

The cost of Human Resources for the firm is 11.1% of the Total Sales Value which is quite
satisfactory. This is expected to increase by 20% which means that company is expected to
give an increment in wages as well as recruit more employees.

Other Manufacturing Expenses

Other Manufacturing Expenses include Electricity Charges, Processing Charges,

Consumables and Repair & Maintenance which constitutes 20.1% of Total Sales Value. It is
expected to increase by 20% in coming three years. The other manufacturing expenses of
the company are quite high which is needed to be controlled.
Administrative Overheads

This includes Rent, Repairs and Maintenance, Insurance Charges, Legal and Consultancy
Fees and Audit Fees. Administrative Overheads constitutes about 5.5% which is quite
satisfactory. It is also expected to increase by 20% in the coming three years.

Selling and Distribution Overheads

The Selling and Distribution overheads include Advertisement Charges, Salary for sales
executives, Carriage Outwards, Commission, Discount and Incentives. These expenses
constitute 7.5% of Total Sales Value. Out of the total selling and distribution expenses, the
expense on commission discount and carriage is quite high which should be minimized and
the same amount can be used for Advertisement to promote brands of the company.

Finance Charges

Finance charges which mainly includes interest on loans from Banking and Non-Banking
Corporations. It constitutes 11.2% of Total Sales Value which is quite high, which shows
that, company has high value of debt in comparison to its equity.

Dividend

The trend for the dividend shows that it is increasing by Rs50 Lakhs Every Year which
means company is able to attract its investor by announcing dividend timely. This also
shows that the company has a reasonable operating profit. This is good indication for the
company.
Analysis of Balance Sheet

Sources of Funds

Share Capital

A share is the unit into which the capital of the company is divided. The promoters take
futuristic look and decide on the maximum capital i.e. Authorized Capital which is about
Rs7.5Cr for the firm. The amount actually paid by the shareholders is called paid-up-capital
of the company which is Rs5 Cr for the firm. The company has issued 2062650 Equity
shares and 2937350 Preference shares.

Reserves and Surplus

The Net Profit is increasing by 20% for the forecasted three years out of which the retained
amount after paying dividend is carried to Balance sheet under Reserves and Surplus head.
In ultimate analysis reserves belong to shareholders. Therefore, the total amount due to the
shareholders constitutes the capital and reserves. The presence of sizeable reserves in a
balance sheet is an advantage as it adds to the financial strength of the company.

Secured Loans

Secured Loans represent borrowings by the company against charging of its specific assets.
It is expected to decrease by 5% in coming three years. This shows the firm is expected to
utilize its Reserves and Surplus for its operations and its dependence on secured loans has
decreased.

Unsecured Loans

These include borrowings of the company without creation of any charge on its assets. It is
expected to decrease by 5% in coming three years. This shows that the firm is expected to
finance its short term needs by utilizing own funds for its operations.

Deferred Tax Liability

According to the data, the company seems to postpone a huge amount of taxes to the future
years and the company is utilizing the same amount as a source of fund for itself. As the Net
Profit is increasing by 20% every year it is also expected to increase by 20% in the future
years.
Current Liabilities and Provisions

Current Liabilities include short-term liabilities of the company and the provisions. The short-
term liabilities include sundry creditors for Trade, Expenses, and Capital Goods. It is
expected to increase by 5% as the operations of the company are growing but at the same
time company is able to pay its liabilities on time. The company is making the provisions
appropriate to the taxing policy of the company.

Application of Funds

Fixed Assets

As the company is expanding its business, the fixed assets like Land and Buildings, plant
and machinery of the company is expected to increase by 2%. The company has their own
power plant which includes four windmills. The company has separate production plants for
yarn, knitting, compacting, stitching and packaging. They have their own logistics for
domestic distribution.

Investment

The company is investing its surplus amount from retained earnings in shares of Corporation
Bank and South Indian Bank Ltd. The company has 200 Equity shares of Corporation Bank
and 360 Equity shares of South Indian Bank Ltd. The company has also invested in Tirupur
Infrastructure Bonds and Win Win Enterprises Pvt Ltd.

The company is expected to increase its investment by 5% p.a. for the coming three years.

Current Assets

Inventories

Inventories constitute more than 50% of the total current assets. As the Textile Industries
has longer production cycles the firm needs to maintain inventories but the management of
inventories should be efficiently carried out so that this investment does not become too
large as it result in blocked capital which could be put to productive use elsewhere. This is of
greatest significance in the inflationary economy because of the depreciation in the value of
money. The inventories of the company are expected to increase by 2% p.a. which is
satisfactory with respect to sales.
Sundry Debtors

Investment in receivables involves both benefits and costs. The extension of trade credit has
a major impact on sales, cost and profitability. Liberal policy leads to larger debtors at the
same time increase in sales. So the company needs to have a standard credit policy to
maintain a balance between receivables and sales. The sundry debtors are expected to
increase by 2% which is quite satisfactory with respect to sales which are increasing by
20%.

Cash and Bank Balances

According to the data, the cash and bank balances has increased by 20%, which is a good
indication in aspect of liquidity of the company. This is a good sign for the creditors as it
means company is able to meet its current obligations.

Loans and Advances

According to the data, the cash and bank has increased by 20%, which means company’s
liquidity position is good enough and it is able to give loans and advances to its subsidiary
company for carrying its operations.
 DEBTORS MANAGEMENT

Royal Classic Group has a large proportion of the sales in cash and a small amount
of sales on credit. Although there is credit sales the credit policies are very
aggressive in nature and the company follows restrictive measures. The sales of the
firm are both domestic sales and international sales. The total debtors are classified
into 4 main segments:

 Exporters
 MBO-Distributors
 Urban Retail Division
 Others

There are 132 debtors for the financial year ending 31 st march 2010, which includes
both MBO & EBO. There are 26 debtors with an outstanding amount of Rs 4.047cr
for classic fashion division (MBO Distributors). The total debtors are classified into 4
main regions:

 East
 North
 South
 West

Analysis:

East: East region has second highest sales which amount to Rs 6.777 cr but at the
same time debtors turnover is low i.e. 2.91 times in a year with a collection period of
125.4 days which is just twice of the credit period given by the firm. There is a need
of some aggressive policy at the same time maintaining high sales.

North: Here the firm has started the business recently, so it is too early to know the
exact debtors turnover and the firm will have flexible policy. The firm should aim at a
trade-off between profit (benefit) and risk (cost).
South: This is the region with highest sales, debtors turnover is also very good i.e.10
times in a year with the collection period of 36.4 days which is less than the credit
period given by the company.

West: This region also has high debtor’s turnover of 7.57 times in year, with
collection period of 48 days which is less than the credit period given by the firm. The
company should go for flexible credit policy aiming at higher sale.

Credit Policy

Discounting (or) Receivable purchase: The customers to whom the goods are
sold on credit, many of those receivables are discounted with the banks. In other
words the banks agree to purchase the company receivables and later on the due
date the company collects the amounts from the debtors and pay them to the bank.
This facilitates the company with the earlier realization of funds and no default risk.

Partly Credit policies: Under some circumstances the company also sells goods on
credit to its cash customers. It is purely a business call and this happens rarely .It
happens in the case of second sale. Under the following circumstances the goods
are offered on credit:

 To clear period ending stocks which require the customer some period to sell
 To sell old goods which are 180 days or more older
 Sometimes in case an old customer is in some temporary financial trouble, then the
relation with customer forces to sell goods on credit.
 Ratio Analysis

Ratio analysis is a widely-used tool of financial analysis. It is the process of the determining
of the items and group of items in the statements. It can be used to compare the risk and
return relationships of firm of different sizes. Ratio can assists management in its basics
function of forecasting, planning, coordination, control and communication.

Benefits of ratio analysis:-

 Helpful in analysis of financial statements.
 Helpful in comparative study.
 Helpful in locating the weak spots.
 Helpful in forecasting.
 Estimate about the trend of the business.
 Fixation of ideal standards.
 Effective control.
 Study of financial soundness.

Types of ratios

Ratios can be classified into four broad groups.

 Liquidity Ratios
 Leverage ratios
 Profitability Ratios
 Activity Ratios

Liquidity Ratios

They indicate the firm’s ability to meet its current obligation out of current resources and
reflect the short - term financial strengths/solvency of a firm. Liquidity implies from the
viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. The
proper balance between the two contradictory requirements that is liquidity and profitability is
required for efficient financial management. The ratios which indicate the liquidity of the
firms are

 Current Ratio
 Quick Ratio/ Acid test Ratio
Current Ratio

The current ratio of the firm measures its short – term solvency that is its availability to meet
short – term obligations. As a measure of short – term or current term financial liquidity, it
indicates the rupees of current assets available for each rupee of current liabilities obligation
payable. The higher the current ratio the larger is the amount of rupees available per rupee
of current liability, the more is the firm’s ability to meet current obligations and greater is the
safety of funds of short – term creditors. Thus, current ratio is a measure of margin of safety
to the creditors.

Total Current Total Current Current

Year
Assets Liabilities Ratio

2010-11 1616102521 1254990145 1.29

2011-12 1669271632 1217053762 1.37

2012-13 1726349950 1181591804 1.46

1.46
1.50
1.45 1.37
1.40
1.35 1.29

1.30
1.25
1.20
2010-11 2011-12 2012-13

Current Ratio

The industrial standard norms for current ratio are 1.33:1. The expected current ratio for
the year 2010-11 is 1.29, for 2011-12 is 1.37, for 2012-13 is 1.46. The company is
expected to meet the standard norms from the financial year 2011-12 onwards. It shows
that the liquidity position of the company is expected to improve in the coming years. In
the year 2010-11 it is expected to have Rs.1.29 for each rupee of current liabilities. It is
expected to increase 1.37 and 1.46 for every rupee of current liabilities in the year 2010-
11 and 2011-12 respectively.
Quick Ratio

The quick ratio is a measure of firm’s ability to convert its current assets quickly into cash in
order to meet its current liabilities. It refers to the amount which is readily available with the
company to meet its current liabilities. The quick ratio is the ratio between quick current
assets and current liabilities. The quick current assets do not include stock and prepaid
expenses. But, now a day’s majority of the companies assume that prepaid expenses are
also quick assets by considering it is recoverable.

Total Quick Total Current

Year Quick Ratio
Assets Liabilities

2010-11 762888147 1254990145 0.61

2011-12 798826193 1217053762 0.66

2012-13 838320485 1181591804 0.71

0.71
0.72
0.70
0.68 0.66
0.66
0.64 0.61
0.62
0.60
0.58
0.56
0.54
2010-11 2011-12 2012-13

Quick Ratio

The industrial standard norms for quick ratio are 1:1. The expected quick ratio for the year
2010-10, 2011-12 and 2012-13 is 0.61, 0.66 and 0.71 respectively. Of these, the quick ratio
is expected to increase by 0.05 every year. It is expected that in the financial year 2012-13
(0.71) is satisfactory. It means most of the current assets are blocked with unsalable
inventories. This needs to be managed aggressively.
Leverage Ratios

Leverage Ratios measures the financial strength of the company. The long – term solvency
of a firm can be examined by using leverage ratios. The leverage ratio may be defined as
financial ratios which throw light on the long – term solvency of a firm as reflected in its
ability to assure the long – term lenders with regard to periodic payment of interest during
the period of the loan and repayment of principal on maturity or in predetermined
installments at due dates. These ratios are based on relationship between borrowed funds
and owners capital. These ratios computed from balance sheet. The ratios which indicate
the leverage position of the firm are

 Debt – Equity Ratio

 Debt – Assets Ratio

Debt – Equity Ratio

The relationship between borrowed funds and owner’s capital is a measure of the long –
term financial solvency of a firm. This ratio reflects the relative claims of creditors and
shareholders against the assets of the firm. Alternatively, this ratio indicates the relative
proportions of debt and equity in financing the assets of a firm.

Debt - Equity
Year Total Debt Equity
Ratio

2010-11 1183019942 860746887 1.37

2011-12 1171920382 943142093 1.24

2012-13 1141029961 1040846391 1.10

 1.37
1.24
1.40
1.10
1.20
1.00
0.80
0.60
0.40
0.20
0.00
2010-11 2011-12 2012-13

Debt-Equity Ratio

The industry standard norms for debt – equity ratio are less than 1.65. The firm is expected
to have 1.37, 1.24 and 1.10 for the year 2010-11, 2011-12 and 2012-13 respectively. It
shows that the firm is expected to utilize its own funds more for investments. This also
shows that the firm is quite confident about the returns on its investment and it is also going
to attract creditors as they have less risk.

Debt – Assets Ratio

Debt – assets ratio is the relationship between creditors’ funds and total assets of the
company. Here, the outside liabilities are related to the total capitalization of the firm and not
merely to the shareholder equity. This ratio indicates the total assets financed by outsiders of
the company.

Year Total Debt Total Assets Debt - Assets Ratio

2010-11 2082161858 3151042611 0.66

2011-12 1978053765 3203129538 0.62

2012-13 1879151077 3258926145 0.58

 0.66
0.68
0.66 0.62
0.64
0.62 0.58
0.60
0.58
0.56
0.54
0.52
2010-11 2011-12 2012-13

Debt-Assets Ratio

The industry standard norms for debt – assets ratio are 0.50-1.00. It is expected to have
debt – assets ratio of 0.66, 0.62 and 0.58 for the 2010-11, 2011-12 and 2012-13
respectively. This shows that the company is expected to utilize its own funds for future
investments. The firm is taking its own risk by being confident about the returns on its
investment. This also shows that the company is trying to reduce its borrowings to finance
the assets.
Turnover Ratios

Turnover ratios determine how quickly certain current assets are converted into cash. It
measured in times. The three relevant turnover ratios are

 Debtors Turnover
 Creditors Turnover
 Inventory Turnover
 Fixed Assets Turnover

Debtors Turnover Ratio

The debtor’s turnover ratio supplements the information regarding the liquidity of one item of
current assets of the firm. The ratio measures hoe rapidly receivables are collected. A high
ratio is an indicative of shorter time – lag between credit sales and cash collection. A low
ratio shows that debts are not being collected rapidly.

Debtors
Year Net Sales Avg Debtors Turnover

2010-11 3514686561 403526275 8.71

2011-12 4217623874 411596800 10.25

2012-13 5061148649 419828736 12.06

12.06
14.00 10.25
12.00 8.71

10.00
8.00
6.00
4.00
2.00
0.00
2010-11 2011-12 2012-13

Debtors Turnover Ratio

The industry standard norms for debtors turnover ratio is 6times. The expected debtor
turnover ratio for the year 2010-11, 2011-12 and 2012-13 is 8.71, 10.25 and 12.06
respectively. It is expected to increase every year rapidly. It shows that the company is quite
prompt over its collection and the credit policy of the firm quite aggressive.

Creditors Turnover Ratio

The creditor’s turnover ratio is an important tool of analysis as a firm can reduce its
requirement of current assets by relying on supplier’s credit. The extent to which trade
creditors are willing to wait for payment can be approximated by creditor’s turnover ratio. A
low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows
that accounts are settled rapidly.

Net Credit Creditors

Year Purchase Avg Creditors Turnover

2010-11 2392973673 371676164.7 6.44

2011-12 2868576684 390259972.9 7.35

2012-13 3439240462 409772971.6 8.39

10.00 8.39
7.35
8.00 6.44

6.00

4.00

2.00

0.00
2010-11 2011-12 2012-13

Creditors Turnover Ratio

The industrial standard norms for creditors turnover ratio is 6 times. The expected creditor’s
turnover ratio for the year 2010-11, 2011-12 and 2012-13 are 6.44, 7.35 and 8.39
respectively. It is expected to increase by every year rapidly. It shows that the company is
quite prompt over its payments and policy adopted by the company seems to be aggressive.
Inventory Turnover Ratio

Inventory turnover ratio indicates how fast inventory is sold. A high ratio is good from the
viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast
and stays on the shelf or in the warehouse for a long time.

Inventory Turnover
Year Net Sales Closing Stock Ratio

2010-11 3514686561 847655111 4.15

2011-12 4217623874 864608214 4.88

2012-13 5061148649 881900378 5.74

7.00

6.00 5.74
4.88
5.00
4.15
4.00

3.00

2.00

1.00

0.00
2010-11 2011-12 2012-13

Inventory Turnover Ratio

The industry standard norms for inventory turnover ratio are 6 times. The expected inventory
turnover ratios for 2010-11, 2011-12 and 2012-13 are 4.15, 4.88, and 5.74 respectively. This
shows that the inventories will stored in shelf and sales will not happen fast. As it increasing
rapidly it may be able to turnover the inventories more in the upcoming years.
Fixed Assets Turnover Ratio

Fixed assets turnover ratio indicates the efficiency with which firm uses its fixed assets to
generate sales. It is the relationship between costs of goods sold and fixed assets. The
higher the turnover ratio, the more efficient is the management and utilization of the assets
while lower turnover ratios are indicative of underutilization of available resources and
presence of idle capacity.

Fixed Assets Turnover

Year Net Sales Net Fixed Assets Ratio

2010-11 3514686561 1956741440 1.80

2011-12 4217623874 1995876269 2.11

2012-13 5061148649 2035793794 2.49

2.49
2.11
2.50 1.80

2.00

1.50

1.00

0.50

0.00
2010-11 2011-12 2012-13

Fixed Assets Turnover Ratio

The fixed assets turnover ratios are expected to increase rapidly in the upcoming years. It
shows that the firm is trying to utilize maximum of available resources as the value of fixed
assets are also increasing.
Return on Assets

The return on assets measures the profitability of the total funds or investments of a
firm. It is relationship between Profit after Tax before Interest and Average Total
Assets.

Return on
Year PBIT Total Assets Assets

2010-11 535977572 3151042611 0.17

2011-12 643173086 3203129538 0.20

2012-13 771807703 3258926145 0.24

0.24
0.25
0.20

0.20 0.17

0.15

0.10

0.05

0.00
2010-11 2011-12 2012-13

Return on Assets

The industry standard norms for return on assets are 14%. It is expected return on
assets for the year 2010-11, 2011-12 and 2012-13 are 17%, 20% and 24%
respectively. It shows that the company is expected to get good returns on assets. It
also shows that the operating efficiency is good.
Return on Capital Employed

The return on capital employed provides a test of profitability related to sources of

long – term funds. It also provides sufficient insight into how efficiently the long –
term funds of owners and lenders are being used. The higher the ratio, the more
efficient is the use of capital employed.

Total Capital Return on Capital

Year PBIT Employed Employed

2010-11 535977572 2718308097 0.20

2011-12 643173086 2748758299 0.23

2012-13 771807703 2781836344 0.28

0.28
0.30 0.23
0.20
0.25

0.20

0.15

0.10

0.05

0.00
2010-11 2011-12 2012-13

Return Capital Employed

The industry standard norms for Return on capital employed are 14%. The expected
return on capital employed for the year 2010-11, 2011-12 and 2012-13 are 20%, 23%
and 28% respectively. It shows that the firm will able to use its capital fund efficiently
on its operations.
Return on Investment

The purpose of this ratio is to ascertain how much percentage of income is generated by the
use of capital. It measures the overall effectiveness of management in generating profits with
its available assets.

Net Fixed Assets& Working Return on

Year PBIT Capital investment

2010-11 535977572 3046143391 0.18

2011-12 643173086 3107691963 0.21

2012-13 771807703 3171952635 0.24

0.24
0.21
0.25
0.18
0.20

0.15

0.10

0.05

0.00
2010-11 2011-12 2012-13

Return on Investment

The industry standard norms for return in investment are 14%. The expected return
on investment for the year 2010-11, 2011-12 and 2012-13 are 0.18, 0.21 and 0.24
respectively. It shows that the firm earns good returns on their investment and it is
expected to increase rapidly.
 Ratio Analysis Breakeven

The break even analysis of ratios is calculated by considering the industrial standard
norms for Ratios. This is an analysis which helps the management to know current
financial position of the company. This is used to find the appropriate amount of
financial items needed to satisfy the Industrial standard norms for ratios.

Current Ratio

Total Current Total Current Current Std BE Current BE Current

Year
Assets Liabilities Ratio Norms Assets Liabilities

2010-11 1616102521 1254990145 1.29 1669136892 1215114677

2011-12 1669271632 1217053762 1.37 1.33 1618681503 1255091452

2012-13 1726349950 1181591804 1.46 1571517099 1298007481

The industry standard norms for current ratio are 1.33:1. The expected value of
break even current assets is high and break even current liabilities are low in the
year 2010-11. This shows that the current ratio for the year 2010-11 is not up to the
mark, it is back by 0.04. So, the company has to adopt some necessary policies to
increase the current assets or to reduce the current liabilities.

The firm can take decisions to reduce the current liabilities rather than increasing the
current assets because for increasing the current assets either the company has to
reduce their investments on fixed assets or to convert inventories into debtors or
cash. The conversion of inventories to debtors or cash depends on sales, which
depends on market position. So, the firm can have a control on current assets like
Sundry Creditors.

As the firm is expected to have the current ratio better in comparison with industry
standard norms for the year 2011-12 and 2012-13 it shows that the routine is
expected to increase by 0.04 and 0.13 for the year 2011-12 and 2012-13
respectively.
Quick Ratio

Total Quick Total Current Quick Std BE Quick BE Current

Year
Assets Liabilities Ratio Norms Assets Liabilities

2010-11 762888147 1254990145 0.61 1003992116 953610184

2011-12 798826193 1217053762 0.66 0.8 - 1 973643009 998532741

2012-13 838320485 1181591804 0.71 945273443 1047900606

The industry standard norms for quick ratio is 0.8 – 1. The expected break even
quick assets are high and break current liabilities are low. The data shows that the
firm is not expected to meet its industry standard norms till the year 2012-13. It is
back by 0.19, 0.14 and 0.09 for the year 2010-11, 2011-12 and 2012-13 respectively.
The firm has to adopt necessary policies to make the quick ratio as a standard one
as it represents the ready cash available to its liabilities.

The current ratio is expected to meet its standards by the year 2011-12 whereas in
case of quick assets it is not so. It shows that the majority of its current assets are
held by inventories. So the firm has to convert its inventories to either cash or sundry
debtors. At the same time the firm has to reduce its current liabilities like sundry
creditors to meet its standard norms.

As per the above breakeven analysis, there are two different breakeven current
liabilities figure which has very high difference. This is because of value of current
assets and quick assets in which inventories hold larger amount.
Debt – Equity Ratio

Debt - Equity Std

Year Total Debt Equity BE Debt BE Equity
Ratio Norms

2010-11 1183019942 860746887 1.37 1420232364 716981783

2011-12 1171920382 943142093 1.24 < 1.65 1556184454 710254777

2012-13 1141029961 1040846391 1.10 1717396545 691533310

The industry standard for debt – equity ratio is less than 1.65. The expected
breakeven debt is high and break even equity is low. The data shows that the firm is
expected to have good ratio between debt and equity which is back by 0.28, 0.41
and 0.55 for the year 2010-11, 2011-12 and 2012-13 respectively.

From the data two observations can be made, (i) Firm is expected to utilize its own
funds for its investments or (ii) Firm is expected to reduce its investments.

If the firm is expected to utilize its funds for investments, it is quite confident about its
returns on its investment and it also attracts the creditors as they have less risk.

If the firm is expected to reduce its investments either the firm has got enough
investments or the firm may not be confident about their returns on investments.

Debt – Assets Ratio

Debt - Assets Std

Year Total Debt Total Assets BE Debt BE Assets
Ratio Norms

2010-11 2082161858 3151042611 0.66 1575521305 4164323716

2011-12 1978053765 3203129538 0.62 0.5 - 1 1601564769 3956107530

2012-13 1879151077 3258926145 0.58 1629463073 3758302153

The industry standard norms for debt to assets ratio is 0.5 – 1. The expected
breakeven debt is low and breakeven asset is high which shows that the firm
satisfies the standard norms in upcoming years. The firm is expected to have good
ratio between debt – assets which is back by 0.34, 0.38 and 0.42 for the year 2010-
10, 2011-12 and 2012-2013 respectively when compared with maximum value.
It also shows that the firm is expected to utilize its own funds for financing its own
assets as the debt decreases correspondingly assets increases.

As per the above breakeven analysis, there are two different breakeven debt values
with slight difference. From this analysis it is better to consider the breakeven debt of
debt to assets figure because the firm goes for borrowings to finance its assets and
not maintain the standard for debt to equity ratio. Anyway it also satisfies the
standards of debt – equity too.

Inventory Turnover Ratio

Inventory Std BE Closing

Year Net Sales Closing Stock BE Sales
Turnover Ratio Norms Stock

2010-11 3514686561 847655111 4.15 5085930669 585781094

2011-12 4217623874 864608214 4.88 6 5187649282 702937312

2012-13 5061148649 881900378 5.74 5291402268 843524775

The industry standard norms for inventory turnover ratio are 6 times. The expected
breakeven sales are high and breakeven closing stock is low. The data shows that
the firm does not meet its standards till the year 2012-13. It is back by 1.85, 1.12 and
0.26 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt
necessary policies to increase the sales or to decrease its inventories. There is also
possibility that the firm may adopt conservative policy on its raw materials like cotton
as the price of cotton fiber is increasing.

At the same time, the firm has to increase its sales by adopting better marketing
policies and promotion strategies or to reduce the inventories by having a control its
production and raw materials.
Debtors Turnover Ratio

Debtors
Year Net Sales Avg Debtors Std Norms BE Sales BE Debtors
Turnover

2010-11 3514686561 403526275 8.71 2421157648 585781094

2011-12 4217623874 411596800 10.25 6 2469580801 702937312

2012-13 5061148649 419828736 12.06 2518972417 843524775

The industry standard norms for debtors turnover ratio is 6 times. The expected
breakeven sales are low and breakeven debtors are high. The data shows that the
company has very good debtor’s turnover which shows that the firm is able to collect
its receivables from its debtors, which is up by 2.71, 4.25 and 6.06 for the year 2010-
11, 2011-12 and 2012-13 respectively.

As per the above breakeven analysis, there are two different breakeven sales figure
with very high differences. From this analysis it is better to consider the debtors
turnover ratio because it is impossible to increase the sales by 200% approximately
as per the inventory turnover data. This shows that the firm holds very huge amount
of inventory which can also be derived from quick ratio. So the firm has to take
necessary steps to control its inventory.

Creditors Turnover Ratio

Net Credit Avg Creditors Std

Year BE Purchase BE Creditors
Purchase Creditors Turnover Norms

2010-11 2392973673 371676165 6.44 2230056988 398828945

2011-12 2868576684 390259973 7.35 6 2341559838 478096114

2012-13 3439240462 409772972 8.39 2458637829 573206744

The industry standard norms for creditors turnover ratio is 6 times. The expected
breakeven purchase is low and breakeven creditors are high. The data shows that
the company is expected to have good creditor’s turnover ratio which means that
they are payables are compensated on fine time interval. It is up by 0.44, 1.35 and
2.39 for the year 2010-11, 2011-12 and 2012-13 respectively. This policy attracts the
creditors to have business with this company.
Return on Assets

Return on Std
Year PBIT Total Assets BE PBIT BE Assets
Assets Norms

2010-11 535977572 3151042611 0.17 441145966 3828411226

2011-12 643173086 3203129538 0.20 0.14 448438135 4594093471

2012-13 771807703 3258926145 0.24 456249660 5512912165

The industry standard norms for return on assets are 0.14 (14%). The expected
breakeven PBIT is low and breakeven Assets are high. The data shows that the
company meets its standard norms in upcoming years and it is also expected to
have better returns when compared standard norms. It is up by 0.03, 0.06 and 0.10
for the year 2010-11, 2011-12 and 2012-13 respectively. This shows that the assets
are used efficiently and the operating efficiency is also good.

Return on Capital Employed

Total Capital Return on Capital Std BE Capital

Year PBIT BE PBIT
Employed Employed Norms Employed

2010-11 535977572 2718308097 0.20 380563134 3828411226

2011-12 643173086 2748758299 0.23 0.14 384826162 4594093471

2012-13 771807703 2781836344 0.28 389457088 5512912165

The industry standard norms for Return on Capital Employed (ROCE) are 14%. The
expected breakeven PBIT is low and breakeven Capital Employed is high. The data
indicates that the firm meets its standards in upcoming years. It is up by 0.06, 0.09
and 0.14 for the year 2010-11, 2011-12, 2012-13 respectively. It indicates that the
firm has enhanced returns when compared with standard norms.

As per the above breakeven analysis, there are two different breakeven PBIT
figures. From these it is better to consider the breakeven PBIT from Return on
Assets (ROA) because Capital employed does not include Current Liabilities. So the
firm expects return on the basis of total assets employed for the business as it is the
efficient one.
 Operating Cycle & Cash Cycle

Operating cycle and cash cycle are two important components of working capital
management. Together they determine the efficiency of a firm regarding working
capital management.

Operating cycle refers to the delay between the buying of raw materials and the
receipt of cash from sales proceeds. In other words, operating cycle refers to the
number of days taken for the conversion of cash to inventory through the conversion
of accounts receivable to cash. It indicates towards the time period for which cash is
engaged in inventory and accounts receivable. If an operating cycle is long, then
there is lower accessibility to cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements: accounts payable,
cash, accounts receivable, and inventory replacement.
The following formula is used for calculating operating cycle:

Operating cycle = age of inventory + collection period

Cash cycle is also termed as net operating cycle, asset conversion cycle, working
capital cycle or cash conversion cycle. Cash cycle is implemented in the financial
assessment of a commercial enterprise. The more the figure is increased, the higher
is the period for which the cash of a commercial entity is engaged in commercial
activities and is inaccessible for other functions, for instance investments. The cash
cycle is interpreted as the number of days between the payment for inputs and
getting cash by sales of commodities manufactured from that input.

The fundamental formula that is applied for the calculation of cash conversion cycle
is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing

Period) - (Average Payables Processing Period).

Inventory Receivable Payable Operating Cash

Year
Period Period Period Cycle Cycle

2010-11 88.03 41.91 56.69 129.94 73.24

2011-12 74.82 35.62 49.66 110.44 60.79

2012-13 63.60 30.28 43.49 93.88 50.39

 140.00 129.94

120.00 110.44
93.88
100.00
73.24
80.00
60.79 Operating Cycle
60.00 50.39
Cash Cycle

40.00

20.00

0.00
2010-11 2011-12 2012-13

Analysis: A short cash cycle reflects sound management of working capital. On the
other hand, a long cash cycle denotes that capital is occupied when the commercial
entity is expecting its clients to make payments. As per the standard norm it should
be less than 120 days for a textile industry. The forecasted data shows that the
efficiency of accessibility of cash for other instances is good as it is low when
compared with standard norms.
 Growth Rates

Firms generally state corporate goals in terms of growth rates. Growth is often the
central theme of corporate planning. It is year – over – year change expressed in
percentage. The emphasis on maximizing shareholder value as the principal goal of
the firm, the exertion of planners with growth seems like riddling.

While firms are interested in growth, they may be reluctant to raise external equity.
There are two growth rates to overcome this reluctance in the context of long – term
financial planning. They are,

1. Internal Growth Rate.

2. Sustainable Growth Rate.

Internal Growth Rate

The internal growth rate is the maximum growth rate that can be achieved with no
external financing. This is the growth rate that can be sustained with retained
earnings, which represent internal financing.

The formula used to calculate internal growth rate is

Return on Plough back

Year Internal Growth Rate
Assets Ratio

2010-11 0.17 0.83 16%

2011-12 0.20 0.81 19%

2012-13 0.24 0.80 23%

 Internal Growth Rate
23%
25% 19%
16%
20%

15%

10%

5%

0%
2010-11 2011-12 2012-13

The data shows the internal growth rate for the forecasted year. It seems that the
firm will have fine internal growth rate in the upcoming years. The firm is expected to
have 16%, 19% and 23% for the year 2010-11, 2011-12 and 2012-13 respectively
with no external financing requirements.

Sustainable Growth Rate

The sustainable growth rate is the maximum growth rates that can a firm can
achieve without resorting to external equity finance. This is the growth rate that can
be sustained with the help of retained earnings matched with debt financing, in line
with debt – equity policy of the firm.

This is an important growth rate because firms are reluctant to raise external equity
finance for the following reasons:

1. The dilution of control, consequent to the external equity issue, may not be
acceptable to the existing controlling interest.
2. There may be a significant degree of under pricing when external equity is
raised.
3. The cost of issue tends to be high.
The formula used to calculate sustainable growth rate is

Return on Plough back Sustainable growth

Year
Equity Ratio rate

2010-11 0.11 0.83 9.7%

2011-12 0.12 0.81 10.5%

2012-13 0.13 0.80 11.5%

Sustainable Growth Rate

11.5%
11.5%

11.0% 10.5%

10.5%
9.7%
10.0%

9.5%

9.0%

8.5%
2010-11 2011-12 2012-13

The data shows the sustainable growth rate of the firm for forecasted year. It seems
that the firm will have fine sustainable growth rate in the upcoming years. The firm is
expected to have 9.7%, 10.5% and 11.5% for the year 2010-11, 2011-12 and 2012-
13 respectively without resorting to external equity requirements.
 Recommendations

 Conversion of open credit customers to bank financed customers: The

Company has a policy of discounting or receivable purchase with the bank,
which can be converted to discounting without recourse or receivable
purchase backed by Insurance scheme. In case of non- payment of such
bills, the sufferer will be the factor (bank) or insurance company, firm will bear
almost no risk.

 Credit sales to retailers: The Company should use other parameters also to
determine the credit scoring of a debtor. The parameters often used for credit
rating are customer’s profile, its market share, technology standards, capital
investment, credit history and ability to pay debts on time.

 Securitization from open credit customers: Though the company tries to

finance all its customers through bank, it becomes necessary under some
circumstances for the company to sell its goods to customers who are not
under the bank finance scheme. Thus converting such customers under the
financing scheme may not also be possible. So, the company can make
provisions for circumstances for the securitization of such customers.
Collection of post dated cheque may also be a good instrument.

 The indirect expenses for the company are high which as a result leads to low
net profit margin (4.06%) for the company. It may be due to inefficiency of the
marketing department and production department leading uncontrolled
promotional and other expenses on processing the fabrics and materials,
inefficient utilization of resources which should be controlled.

 As per the data, majority of the current assets are blocked with slow moving
inventories because of which company is facing liquidity problem which is
expected to have 4.15, 4.88, and 5.74 for the upcoming years where the
standard norm is 6. The quick ratio is not up to the mark because of the value
of inventory. The firm has to control its capacity on over production or the firm
has to adopt proper promotional strategies to move the goods. So, the firm
should work towards the efficient management of inventories.
 The debt – equity ratio is good from the creditors point of view but not from
the company’s point of view. The firm is expected to have 1.37, 1.24 and 1.10
for the upcoming years because it is expected to use the available reserves
and surplus for further investments. The company should go for long term
loans to broaden their investment as well as tax shield on its profit.

 As fixed assets turnover ratio is less than the standard it shows that the
company’s operating efficiency is not up to the mark. As, the textile industry is
facing the economic problem like exchange rate against US dollar for export
trade and the cost major raw material i.e. cotton has been increasing rapidly,
they have restricted their usage of fixed assets like plant and machinery. The
company should try to improve its operating performance by efficient use of
fixed assets for the future.

 Though the company tries to finance all its customers through bank, it
becomes necessary under circumstances for the company to sell its goods to
customers who are not under the bank finance scheme. Thus converting such
customers under the bank financing scheme may not also be possible. So,
the company can make provisions for circumstances under which such sale
will take place and review it regularly.
 Conclusion

The project is executed by considering the financial 2009 – 10 as a base year

because the whole economy was experiencing recession in the previous years. The
company is expected to have good financial position in future as it is expected to
have good turnovers of sales, debtors, creditors and its assets. The firm is also
expected to have ratios between debt, equity and its assets which show the firm
uses its own funds for further investments which are a raising flag for its investors.
As, the firm is facing the difficulty on indirect expenses and its inventories however,
the above mentioned are some of the recommendations that could improve the
financial position of the company if implemented.

Note: The recommendations are brought to the notice of the company after the
effective study on economic conditions and proper analysis of financial statements
during the period of my study. I would like to thank the company, Royal Classic
Group for giving me this great opportunity of doing this project. I would then like to
give a great thanks to my mentor Mr. D.Joshua Chithambaram (Vice President
Finance) & Mr. V. Karthikeyan (Manager-Finance) for their continuous and
unending support during my project study. Finally, I would also like to thank all other
senior managers and officials who were able to spend their valuable time with me in
discussion of the subject area of my project and others for providing me the financial
data any other requirements for my study and successful completion of my project,
and thus contributed a great value to my project.
 Bibliography

 Financial Management – Prasanna Chandra

 Management Accounting – M.Y. Khan and P.K. Jain
 Advanced Accountancy – S.M. Shukla
 Financial Statements – Royal Classic Group
 www.wikipedia.org
 www.rcg.in
 www.mapsofindia.com