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I would like to thank the management of ESCORTS AGRI MACHINERY GROUP for the wholehearted cooperation and guidance extended by them, which made my summar training project possible. I would like to thank Mr. R.V. Virmani (Manager, Finance) for providing me this opportunity to carry out the project. I am very grateful to him for his support and suggestions, which led to the successful completion of this project. I am also thankful to Mr. M.M. Halder for his vital inputs and valuable suggestions and continuous guidance, which have gone a long way in providing necessary impetus to my efforts in consummating this report and other staff members for their support and cooperation.
STUDENT DECLARATION
TABLE OF CONTENTS
SECTION 1
ESCORTS - AN OVERVIEW
1.1. COMPANY HISTORY 1.2. MISSION , VISION & VALUE 1.3. BUSINESS SECTORS 1.4. CORPORATE INFORMATION 1.5. FINANCIAL STRUCTURE AND HIGHLIGHTS
RECOMMENDATIONS
BIBLIOGRAPHY
EXECUTIVE SUMMARY
If development capital is what establishes a business, working capital is what keeps it going. One of the most common downfalls of business is unexpectedly high running cost. What is important is not just the size of operating costs, but the cash flows - that is when money has to be paid out in relation to the stream of income arriving in. Thus Working Capital Management is of prime importance. This project is a small attempt to study the working capital management in Escorts Agri Machinery Group. The project work can be divided into two sections. Analysis of the working capital position of the company using ratio analysis Study of Working Capital Management Techniques. Ratio analysis has been done on the basis of three years data. For calculating various ratios 300 days have been taken as number of working days after deducting Sundays and holidays. To analyze the performance, published Balance sheets of Escorts Limited (and not Escorts Consolidated) have been used. This project report is based on financial data up to 2010-2011 only, as companys financial year is 1st October to 30th September and its accounts for the current period will close only after 30th September. Working Capital Management basically comprises of: Receivables Management Inventory Management Cost management is the process by which companies control and plan the costs of doing business. Individual projects should have customized cost management plans, and companies as a whole also integrate cost management into their overall business model. There is no single accepted definition for this term, because it has such broad applications and possible strategies. When properly implemented, cost management will translate into reduced cost of production for products and services, as well as increased value being delivered to the customer. Cost Management basically comprises of:
Cost Reduction Cost Control Escorts is maintaining the following records which is indicative of its professional approach: Maintaining proper set of accounting records Maintaining an accurate cashbook reconciled with the bank statement Maintaining monthly statement showing profit performance and the working capital position Monitoring Receivables daily Making a regular forecast of cash requirements based upon planned sales volume Ageing of debtors/creditors with comparisons to previous months .
consolidation of lands holdings, promotion of cooperatives and higher investment in agriculture also contributes to higher tractor demand. After three years of decline, tractor industry grew by 11.5% in 2003-04 to a level of 1.92 lack tractors. The Indian tractor industry had been growing at an average compounded annual growth rate of 8% over the last three decades and attained a peak of 2.70 lacks tractors in 1999-2000. Since then, however the industry declined to a level of 1.72 lacks tractors in the year 2002-2003, a decline of 33.3% over three years. Despite the steep decline in the industry, Escort consciously decided to aggressively sell 3500 units in 2003-04 on top of approximately 8500 units reduced in the previous year. This has not only impacted their revenue and profits but has also enable the company to optimize its cash flow.
The tractor industry in India has been on growth trajectory since the second half of 20032004,after going through a bad phase for 4 consecutive years. The key factors driving this growth are increasing farm incomes, aggressive financing resulting in easy availability of low cost credit, sharp inventory correction and strong export growth. The demand in tractor industry is expected to grow mainly due to the agriculture sector, with the expected increase in agricultural production. Also the shift in trend for demand towards higher HP tractors is expected to continue. This will be further strengthened by the launch of new models. In the next 2-3 years demand for the tractors is expected to increase significantly in the eastern states, where traditionally tractor usage has been low. Export are expected to increase significantly as several Indian players are targeting the hobby farming segment in the US, which is considerably large. Also, tractors of most Indian manufactures comply with the emission standards accepted in the US. Most experts are likely to be through overseas partnership or joint ventures. McKinney has also forecasted tractor population requirement of 75 Lacks over the next 18 years vs. current tractor population of 26 lacks. The extension of the 150
percent deduction on R&D expenditure up to March 31,2007. In the budget 2005-06 will also benefit the industry in the terms of new products development besides increase in the area under irrigation under the Bharat Nirman project and the micro irrigation scheme.
Tractor industry plays an important part as agriculture sector has a major contribution to Indias GDP. Tractors are part of agricultural machinery industry. Tractors came to India through imports and later on were indigenously manufactured with the help of foreign collaborations. The manufacturing process started in 1961-62. Indian tractor industry is relatively young but now has become the largest market worldwide.
There are currently 14 players in the industry. Mahindra & Mahindra is the leading player in the industry. Monsoon season is a key driver for sales of tractors. A series of good or bad monsoon can affect the sales. In recent years the industry has registered a good growth in sales, both domestic as well as exports. This is also partly because of the initiative of the government to boost up agriculture and agricultural machinery industry.
ESCORTS LIMITED
1.1 INTRODUCTION The Escorts Group, with Escorts Limited as its flagship company, is among Indias leading corporations operating in the diverse fields of agri-machinery, telecommunications, healthcare, construction and material handling equipment, automotive and railway ancillaries, information technology, and financial services. The group has 12 modern manufacturing facilities and an extensive marketing network spread across the country. The genesis of Escorts goes back to 1944 when two brothers, H P Nanda and Yudi Nanda, launched a small agency house, Escorts Agents Ltd., in Lahore. Over the years, Escorts surged ahead and evolved into one of Indias largest conglomerates. The foundation of Escorts Ltd. was laid in the formation of Escorts (Agents) Ltd. on October 17, 1944 and Escorts (Agriculture and Machines) Ltd. in 1948. The two were later merged in 1953 to form Escorts Agents Private Ltd. The companys incorporation in its present name Escorts Ltd. was effected on January 18, 1960. Having initially started as a franchisee for Westing House Domestic Appliances, Escorts has come a long way in manufacturing and marketing a range of products. It pioneered farm mechanization in India through import and distribution of agricultural tractors. The manufacturing operations commenced in 1954 and since then a range of new products has been introduced in the country.
It was during this phase that Escorts went public. A fullfledged manufacturing establishment took roots with the commencement of Escorts own brand of tractors. The next major field of operations was motorcycles. The company also joined hands with Mahle to produce Indias most advanced pistons.
alliances with global players and improving market capitalization which resulted in each business becoming an independent entity with defined partnerships, technology, customers, and business economics. The recent past also witnessed a major shift in Escorts business focus when it broke away from its traditional identity of being a pure engineering company and made its foray into the service sectors of cellular telephony and healthcare delivery. The group has since re-evaluated its focus with a thrust on the areas of high growth, namely, agri-machinery, telecom, and healthcare. As Escorts marches forward, it does so with a clear vision, renewed commitment, and the ability to perform, the ultimate objective being to create value for its shareholders. Presently, the company has sold its stake in the businesses of motorcycles, earth-moving equipments, combined harvesters, and cellular services to its foreign partners. The idea behind restructuring was that it could focus in areas where it could create value.
AGRI MACHINERY The Indian tractor industry is dominated by low priced, rugged, versatile and low to medium powered tractors. The main reason being the inability of Indian farmer to invest heavily in farm mechanization. Tractors are categorized on the basis of horse power of engine. In India the popular range of tractors is 20-40 hp as compared to 60 hp in Europe and 90 hp in USA. Though large tractors are economically unviable in India but more recently high power tractors are also being sold in states like Punjab. Tractors available in India are of one fourth hp as compared to developed countries. Availability of the credit is the most crucial factor impacting tractors demand. In India 90% of the tractors are financed by bank credit at concessional rate. Increased use of irrigation facilities, shift towards high investment in agriculture are responsible for higher tractor demand in India.India is the worlds largest tractor market since 1996. Escorts have played a pivotal role in the agricultural growth of India for over five decades. It is one of the leading tractor manufacturers of the country. Escorts produces tractors in the 30-40 HP and above range and has already sold over 6 lac tractors. Its tractors are marketed under three brand names, viz. Escorts, Powertrac and Framtrac. Escorts brand of tractors are symbolic of reliability and trust and enjoy the confidence of the farming community for the last 40 years. Powertarc brand of tractors are the most fuel-efficient tractors in their respective categories that offer excellent value for money and have helped the farmers improve their respective categories that offer excellent value for money and have helped the farmers improve their quality of life. Framtrac brand are the most powerful premium range of tractors that give maximum productivity to the farmers. Spanning these three brands, the company has a full range of tractors to cater to the domestic as well as overseas markets. The company is developing state-of-the-highly fuel efficient engines with the assistance of AVL of Austria and has also entered into a joint venture with Carraro of Italy for the manufacturing of transmission and axles. To understand the tractor industry, one has to first look at the market segmentation based on HP. The industry can be spilt into five classes on the bases of horse power. A 0-25hp
B C D E
. Among the major player M&M, ESCORTS, PUNJAB TRACTOR& EICHER have a presence across all the major segments. EICHER which was predominantly a player in the 21-30 hp segment has now moved upward following the shrinking market in the low hp segment. To sustain the present momentum and to realize the future goals, Escorts is investing heavily for strengthening new product development programmes and enhancement of R&D capabilities. Additionally, funds have been invested towards modernization of its manufacturing facilities bringing them to international standards. The company has one of the most comprehensive distribution network comprising of over 1212 dealers, sub dealers, distributors and stockists. Escorts has over 30 area offices spread across the country. It has a manufacturing capacity of over 100000 tractors per annum. Escorts Agri Machinery Group is looking at forward and backward integration through food processing, food chains and genetic engineering. It will be expanding its product range by launching highly specialized tractors and draft implements. In line to their vision of becoming a major player in sub 100 HP segment in the global markets, they have increased their reach from a major regional player to major global markets which stretch from North America to Australia covering all continents. Despite the strict competition by other major tractor manufacturers they have been able to gain constant volumes in the global market. Their products are marketed mainly in USA, central and Easter Europe through Poland, Ghana, Tanzania, Malaysia, Australia, Tunisia, Chile, turkey, Sri Lanka, Kenya, Bangladesh, South Africa and many other countries. To consolidate its presence in the overseas markets, the company has venture in the USA and Europe (Poland). It has recently acquired a majority stake in a tractor distributing company in USA.
Escorts is selling tractors in Turkey, Australia, Bangladesh, Sri Lanka, Nepal, Kenya, Tanzania, South Africa etc. through its dealers network in these countries. Escorts have very ambitious plans to expand the dealers networks in other potential countries in the coming years. Technological and business collaboration with world leaders over the years, globally competitive indigenous engineering capabilities, over 1600 sales and service outlets and footprints in over 40 countries have been instrumental in making Escorts the Indian multinational. At a time when the world is looking at India as an outsourcing destination, Escorts is rightly placed to be the dependable outsourcing partner of world's leading engineering corporations looking at outsourcing manufacture of engines, transmissions, gears, hydraulics, implements and attachments to tractors, and shock absorbers for heavy trailers.
Escorts is one of the country`s biggest tractor makers. The company manufactures farm equipment, automotive components, railway ancillaries, construction machinery, shock absorbers and telecom equipment. It has a joint venture with Long Manufacturing of North Carolina for the manufacture, assembly and sale of tractors.
Background
In 1960, Escorts set up the strategic Agri Machinery Group (AMG) to venture into tractors.
In 1965, rolled out first batch of tractors under the brand name of Escorts.
In 1969 a separate company, Escorts Tractors Ltd., was established with equity participation of Ford Motor Co., Basildon, UK for the manufacture of Ford agricultural tractors in India.
In the year 1996 Escorts Tractors Ltd. formally merged with the parent company, Escorts Ltd.
MISSION
For an Enterprise business mission embodies of its endeavor, which acts as a guiding light for continuous development & growth.
Mission of ESCORTS is: Engineering Changes through core competency for greater synergy reinforcing bonds with customers & establishing powerful symbiotic relationship with international allies, preparing global market. The company wants to make a lasting difference to its shareholders, its customers, its business associates, its employee and the country as a whole. The company also gives better quality and better technology to customer and treats every customer as special to build respect for, and loyalty to, Escorts.
QUALITY POLICY
We shall strive to continuously improve to meet the ever-rising Expectations of our customers at the lowest cost. Each one of us must fulfill the need of our customer, both internal and external with the highest degree of commitment thereby creating a quality organization geared to ensure total customer satisfaction and the sustained health and prosperity of our business. Customer Orientation: To fulfill the requirement of our internal and external customer. Process Orientation: To optimize and harmonize interrelated process rather than individual functions. Preventive Behavior: To prevent the mistakes to happen
BRAND:
The Escorts brand shall continue to guard its legacy of being a brand that customers trust; where employees attain their full potential; and where nation building is a way of life.
The ESCORTS symbol means more than what could be seen by the eyes. It has been prepared with certain objective and is symbolic in more than one way. The philosophy behind ESCORTS and the E in the ESCORTS is ENTERPRISE the hexagon is a symbol of craftsmanship and productivity. The work and people in escorts are represented by the spanner superimposed on the hexagons which form a letter E. Escorts the single world company describes the character philosophy & success of the company which grew leaps and bounds for five decades Escorts has been in the core sectors like agriculture, transportation & resource for engineering change, through optimum product performance. In every step of the way, Escorts had inducted the latest technology by forming alliance with the most advanced engineering suited to Indian need and situation. To make sure the finished product and service is delivered, the company has an extra ordinary distribution & service network that stays with the customers.
Agri Machinery
Escorts Group
Construction Equipment Auto Suspension Parts Engineering division Railway Equipment Division
The agricultural machinery division the company manufactures Tractors and Paddy Tranplanters. Tractors of the company are marketed in the brand names Escort, Powertrac and Farmtrac. The construction and material handling equipment manufactured are Pick-n-Carry Cranes, Front End Loaders, 360 Slew Cranes, Articulated Boom Cranes, and Forklifts. With a million Escorts tractors rolled out and a production capacity of 100,000 tractors per annum, Escorts tractors are amongst the largest selling tractors in India where every third tractor is a Escorts brand. Escorts has led the modernization of major national infrastructure, from construction to creating high speed highways to railways. Escorts is a leading manufacturer of critical railway component for the last 40 years. The railway equipment division, produces railway equipments at state of the art manufacturing facility located at Faridabad, near New Delhi. It has facilities for advance product development, design, testing and validation. The inhouse R&D has played a critical role in bringing a high level of customer satisfaction, reliability and safety.
Segmental Revenue
5% 3% Agro Machinery Division Railway Equipment Division 92% Auto Component Division
Auto Components Business is the leading manufacturer of auto suspension products. It produces shock absorbers, sturts and telescopic front forks for passenger cars, commercial vehicles, motorcycles and scooters through its auto suspension product development plant. The Automotive Component Business located in Faridabad, has an annual production capacity of 5 million shock absorbers, front forks, and McPherson struts, manufactured at its state of the art manufacturing facilities. Another step forward in this direction is a comprehensive technical collaboration with world leaders Koyaba of Japan.
Mr. Nikhil Nanda Dr. M.G.K. Menon, Dr. S.A. Dave, Dr. P.S. Pritam, Mr. S.C. Bhargava
VICEPRESIDENT (LAW & COMPANY Mr. G.B. Mathur SECRETARY) EXEC. VICE PRESIDENT & GROUP Mr. O.K. Balraj CHIEF FINANCIAL OFFICER STATUTORY AUDITORS INTERNAL AUDITORS ADVISORS SOLICITORS M/s. S.N. Dhawan & Co. Grant Thorton KPMG India Pvt. Ltd. Crawford Bayley & Co. Andhra Bank, Citibank, IDBI Bank, PNB, BANKERS SBI, State bank of Hyderabad, State bank of Patiala State bank of Travancore.
2) Escorts Construction Equipment Limited has signed an agreement with the Chinese Hunan Zoomlion International Trade Co Ltd for marketing the latter's truck cranes in India.
3) Powertrac 4455 marks the companys entry in the 4-cylinder tractor segment.
4) The companys Net sales and PAT is expected to grow at a CAGR of 10% and 126% over FY08 to FY11E.
5) Escorts arm to market Chinese firm's truck cranes Escorts Construction Equipment Limited (ECEL), part of the Escorts Group, has signed an agreement with the Chinese Hunan Zoomlion International Trade Co Ltd for marketing the latter's truck cranes in India.ECEL will market a range of truck cranes of Hunan Zoomlion, including the 'All-Terrain Truck Cranes'. Currently ECEL has Pick-n-Carry cranes 5T-23T and Rough Terrain Slew Cranes 17T-40T under its product portfolio.
FINANCIAL STRUCTURE
SOURCE Equity Shares issued, subscribed and paid-up Secured Loan Unsecured Loan
FINANCIAL HIGHLIGHTS
Net Sales up 17% {2011: Rs. 3210 crores (2010 : Rs. 2746crores)} EBIDT down 37% {2011 : Rs. 110.11 crores (2010 : Rs. 175.09 crores)} Interest cost down 75% {2011 : Rs. 12 crores (2010: Rs. 47 crores)} Profit before tax down28% {2011: Rs. 136 crores, 6.8% of sales (2010: Rs.188 crores) Earnings per share down 20% {2011: Rs. 11.74 (2010: Rs. 14.67)} Consolidated Net Sales up 21% {2011:Rs. 3324 crores (2010: Rs. 4050crores)} Consolidated PAT down by 5 times {2011: Rs.125 crores (2010: Rs. 132 crores)} Consolidated EPS down 13% {Rs. 13.72 against Rs. 15.8 last year}
The consolidation of accounts is prepared in accordance with the requirement of Accounting Standard 21 (AS21)Consolidated Financial Statement, Financial Reporting of Interests in Joint Ventures issued by the Institute of Chartered Accountants of India. The consolidated financial statements include the financial statements of Escorts Limited (the Parent Company), its Subsidiary Companies and Joint Ventures.
MODERNIZATION OF AGRI-MACHINERY GROUP Escorts Agri Machinery Group (AMG) has invested over US $7.5 million in state of the Art & Research and Development Center. Virtual prototypes of components and aggregate assemblies are made and assembled on computer workstations using 3D technology. Their performance is checked on computers using simulation techniques thus saving a lot of time for the end-user as well as lowering development costs. The R&D center uses advanced 3D modeling, analysis and simulation software for engines, transmission and vehicles. Physical prototypes are then extensively tested for performance, durability and reliability. Facilities include a high technology engine laboratory featuring fully computerized test-beds with on line control, data collection, and analysis.
sales volume
600000 500000 400000 300000 200000 100000 0
sales volume
X Axis-Sales Volume
Y Axis-Year
Sales volume and Y-O-Y growth percentage Year 2007-2008 2008-2009 2009-2010 2010-2011 2011-2012(E) Sales volume 302948 304622 402608 480600 538300 Year on year growth(%) 2% .5% 32% 19.37% 12%
Domestic tractor sales grew by about 20 per cent in 2010-11. The robust growth rate can be attributed to normal monsoons in most states, strong farm output with high MSPs (Minimum Support Prices), increase in farm incomes and steady availability of Finance. In addition, schemes such as NREGA (National Rural Employment Guarantee Act) led to a shortage of agricultural labor, encouraging tractor use. Besides, Government initiatives like Bharat Nirman helped in boosting rural infrastructure, thereby encouraging non-farm tractor use. Sustained income and relatively low penetration led to a strong growth in the southern and western regions. In the northern region, the growth was subdued due to flood like Situations in Haryana and Punjab, and relatively high tractor penetration. The Eastern region also witnessed moderate growth due to delayed monsoon in Bihar, resulting in a drought like situation, impacting tractor sales. However still the tractor sales have shown an upward trend from 2009 onwards with growth increasing at the rate of 30-20% for the year 2009-2010 and 2010-2011.
The industry growth index Year on Year (growth percentage) Year Growth 2009 2% 2010 28% 2011 22% 2012(E) 11%
Owing to an increase in farm income, improving MSPs and higher farm output. Credit availability will also be stable with NBFCs increasing focus on tractor financing. The key drivers of rural farm incomes are estimated to grow by 11-14% percent in 2011-12, which will lead to another year of stable growth, further aiding tractor sales. Government initiatives towards rural development and usage patterns of farmers represent the major drivers that influence rural demand. For the current fiscal year 2011-2012 the sales is expected to increase at the rate of 11%-14% so the expected sales of the industry will be around 538300 units.
The Indian tractor industry has 13 national and a few regional participants. The market share is, however, concentrated amongst the top-five manufacturers, accounting for over 90% of total volumes. The Indian tractor industry is dominated by three players namely Mahindra & Mahindra Limited, TAFE and Escorts; together they contribute around 75 per cent of the total domestic market as of 2010-11. M&M continued to lead the industry in 2010-11. M&Ms market share is double that of TAFE, its nearest competitor. However, the entry of strong MNC players like John Deere (formerly L&T John Deere), New Holland India and Same Deutz Fahr in the Indian market during the last five years has further intensified competition.
Company M&M TAFE Escorts John Deere New Holland Others Total
Recent trends in the minimum support price (per quintal) Crop Kharif Crop Paddy cotton Jowar Rabi crop Wheat Mustard 2010-2011 2011-2012 Change
80 300 100
1120 1850
1285 2500
165 650
The government announces minimum support prices (MSPs) for major agricultural commodities each season and organizes purchase operations through the Food Corporation of India, and cooperative and other agencies designated by state governments. The graph showing MSP for various important products are as follow-
Y axis-Year
Conclusion The strong rural liquidity on back of rising income levels and appreciation of land prices has been a strong demand driver for growth in tractor volumes. The average income levels in the rural India have been rising on back of growth in minimum support prices (MSP) offered by the Government. The trend in MSP for major crops has been shown in the above graph and the MSPs of Wheat, jowar, cotton and paddy have grown at a healthy Growth Rate of 9-11% during 2004-05 to 2010-2011 period. The MSP has increased substantially from 2011 to 2012 so the industry can expect increase in the sales of tractors.
Average rainfall(mm)
1000 800 600 400 200 0 Average rainfall(mm)
sales volume
600000 500000 400000 300000 200000 100000 0
sales volume
The Graphs above show that there is a relationship between the level of rainfall and the sales of tractors in the market. But if we compare the 2009-2010 data the rainfall was scanty but still the sale of tractors increased, this shows that a direct relationship cannot be established between rainfall and tractor sale.
Conclusion The performance of agriculture, however, continues to depend on the monsoons on account of low irrigation levels in majority of the states (around 54% of the cultivated area in India is completely dependent on rains for irrigation) as evident from the above graph and the strong correlation between tractor penetration and the irrigation levels in various states. Tractor industry, thus, continues to remain dependent on monsoon in absence of any substantial increase in the irrigated area which has increased only to 46.8% in 2007-08 from 35.1% in 1990-91.
Agri-credit
The above graph shows the level of increase in the flow of credit to the agriculture sector. The credit is basically required for farm mechanization; tractor usage is one of the medium of mechanization. Credit flow is expected to increase form Rs 385000 crore to Rs 448000 crore i.e a 16.5% increase from the previous year.
Credit Facility Provider Public sector banks Private sector banks Non banking financing corporations (NBFC)
In addition to financing availability from PSU banks, the private banks and non-banking financing corporations (NBFCs) have also increased their presence in tractor financing which has improved the credit availability for tractor purchases. The NBFCs charge higher interest rates; however, the same is compensated through faster turnaround times and lesser documentation requirements. The NBFC penetration has been particularly significant in Sothern India with around 50% of the tractors being financed through them. One more source of credit for farmers is KCC- Kisan Credit Cards. Kisan Credit Card Scheme (KCC) aims at providing adequate and timely support from the banking system to the farmers for their short-term credit needs for cultivation of crops. This mainly helps farmer for purchase of inputs etc., during the cropping season. Credit card scheme proposed to introduce flexibility to the system and improve cost efficiency. The northern states enjoy high KCC penetration while the penetration in some of the states including Maharashtra, MP, Karnataka, Rajasthan and Bihar remain much lower in line with the lower institutional financing availability in these states. Credit Availability Differ from State to state.
Credit availability
70000 60000 50000 40000 30000 20000 10000 0 Credit availability
sale of tractors
70000 60000 50000 40000 30000 20000 10000 0 sale of tractors
The above two graphs show the relationship between credit availability and sale of tractor in 2011 in different states in India. From the above graph it can be concluded that there is a direct relationship between credit availability and sale of tractors.
Financing availability remains one of the key facilitators for increase in tractor penetration and going forward, the growth in tractor volumes remains dependent on the improvement in credit availability in states with lower institutional credit penetration. The Governments policy of supporting agriculture through farm credit under priority lending, however, remains a positive factor.
Cash flow statement has three activities like as follow: Operating Activities: - Shows impact of transactions not defined as investigation or financing activities. These cash flows are generally the cash effects or transactions that enter into the determination of net income. Thus, we see items that not all statement users might think of as operating flows-items such as dividends and interest received, as well as interest paid. Investing Activities;- Shows impact of buying and selling fixed assets or equity securities of other entities. Financing Activities:- Shows impact of all cash transactions with shareholders and the borrowing and repaying transactions with lenders.
Implication Of Cash Flow Statement Cash flow management plays important role the users gets a reasonably detailed picture of a companys operating, investing and financing transactions involving cash. This three part breakdown of cash flow aids in assessing the companys current and potential future strength and weaknesses. Strong internal generation of operating cash, over time would be considered a positive sign. Poor operating cash flow should prompt the analyst to check for unhealthy growth in receivable or inventory, Even strong operating cash flow, is not enough to ensure success, Even strong operating cash flow, is not enough to ensure success, We need to see the extent to which operating cash is funding needed investment debt reductions and dividends, Too much reliance on external financing sources to meet recurring needs may be a danger signal. In short the cash flow statement is a rich resource of information. The difficulty with this statement as with the other financial statements is that it must be used in conjunction with other statements and disclosures in order to attain any real depth of understanding
Importance of Cash Flow Statement The effects of cash and non-cash investing and financing transaction A manager can assess the reason for differences between net income and net cash flow from operating activities It is also helpful for a company to generate future net cash inflows from operations to pay debts, interest and dividends It gives indication to a companys need for external financing A cash flow statement is straightforward and easy to Understand. It gives a strong indication of how viable the company will be over time. The extent of success or failure of cash planning can be known by comparing the actual cash statement with the budgeted cash flow statement and remedial measures can be taken. It discloses the volume and the speed at which cash flows in different segments of the business
This is why analysis of the company's cash flow is necessary to understand its actual financial position.
Limitations of cash flow statement Cash flow statement cannot be treated equivalent to income statement because income statement takes both cash and non cash items and therefore net cash flow does not necessarily mean net income of the business. Cash flow statement is a technique of short-term financial position. It does not help much in knowing the long-term financial position.
Cash flow statement also does not indicate full information about the liquidity position because liquidity does not depend upon cash alone.
The cash position as depicted by the cash flow statement may not represent the real liquid position of the business since it can be easily influenced by postponing purchases and other payments.
Cash generated from operating activities Direct taxes Net cash from operating activities
(95.84) B. Cash from investing activities Purchase of fixed Assets Proceeds from sale of Fixed Assets Loans and advances Sale/purchase of investment Short term deposit with Banks Interest received Net cash from investing activities C. Cash from financing activities Proceeds from share capital Proceeds from long term borrowings Proceeds from short term borrowings Interest paid Dividend and tax paid Net cash from financing activities Net change in cash and cash equivalent Opening cash as on 01.10.2010 Closing cash as on 30.09.2011 67.64 6.35 (63.16) (18.47) (7.64) 111.23 79.53 190.76 (38.27) 2.74 (12.31) (1.55) 38.69
(163.09)