A REPORT

ON
WORKING CAPITAL MANAGEMENT IN SMIIEL (A
UNIT OF MOTHERSON SUMI SYSTEM LIMITED),
NOIDA SECTOR 59

By

Aarti Agarwal

MBA II semester
FMS-WISDOM
Banasthali University
2014

Submitted To

Submitted to

MOTHERSON SUMI SYSTEM LIMITED

DEPARTMENT
NAME OF MENTOR
FACULTY:-

MBA
NAME
DI

VYA MEHTA

TABLE OF CONTENTS
Acknowledgement
List of illustrations
Abstract
1. Introduction
1.1 Significance of topic, About company
1.2 Objectives & Limitations
1.3

IMPORTANCE OF WORKING CAPITAL

RATIOS
2. Literature Review
3. Methodology
4. Analysis of Data / Finding
5. Conclusion & Recommendations.
Bibliography

Abstract
For increasing shareholder's wealth a firm has to analyze the effect of fixed assets
and current assets on its return and risk. Working Capital Management is related
with the Management of current assets. The Management of current assets is
different from fixed assets on the basis of the following points:
1. Current assets are for short period while fixed assets are for more than one
year.
2. The large holdings of current assets, especially cash, strengthens liquidity
position but also reduces overall profitability, and to maintain an optimum
level of liquidity and profitability, risk return trade off is involved in
holding current assets.
3. Only Current Assets can be adjusted with sales fluctuating in the short run.
Thus, the firm has greater degree of flexibility in managing current Assets.
The management of Current Assets helps affirm in building a good market
reputation regarding its business and economic condition.
Working capital may be regarded as the life blood of business. Working capital is
of major importance to internal and external analysis because of its close
relationship with the current day-to-day operations of a business. Every business
needs funds for two purposes:-

A. Long term funds are required to create production facilities through purchase of
fixed assets such as plants, machineries, lands, buildings, etc.
B. Short term funds are required for the purchase of raw materials, payment of
wages, and other day-to-day expenses. . It is otherwise known as revolving or
circulating capital
It is nothing but the difference between current assets and current liabilities. i.e.
Working Capital = Current Assets Current Liabilities.

Acknowledgement

I am grateful for the assistance of several people who have contributed

their ideas and valuable suggestion for the fulfillment of this report. In this
context, I would like to thanks Mr. (HOD), Lecturers , College Name
for helping me to give a final structure of this report.
I would like to give my special thanks to Mr. .. (Sales
Manager), SMIIEL for providing me the official help and mental support for the
completion of this report.

I would once again offer my sincere thanks to all the office members for
their help, without their willingness and co-operation , nothing would have been
completed.

(Aarti )

INTRODUCTION

Working capital is the life blood and nerve centre of a business. Just as circulation of
blood is essential in the human body for maintaining life, working capital is very
essential to maintain the smooth running of a business. No business can run successfully
without an adequate amount of working capital.
Working capital refers to that part of firms capital which is required for financing short
term or current assets such as cash, marketable securities, debtors, and inv entories. In

other words working capital is the amount of funds necessary to cover the cost of
operating the enterprise.

Meaning:
Working capital means the funds (i.e.; capital) available and used for day to day
operations (i.e.; working) of an enterprise. It consists broadly of that portion of assets of a
business which are used in or related to its current operations. It refers to funds which are
used during an accounting period to generate a current income of a type which is
consistent with major purpose of a firm existence.

Definition
Roland Berger Strategy Consultants study on working capital management: Optimizing
current assets helps tap into cash potential and build buffers against insolvency

Our study entitled "Working capital Cash for recovery" looks at 216 European
companies with total sales of EUR 3,700 billion and total EBIT of EUR 422
billion

Presently, the insolvency risk is increasing as higher cash requirements coincide

with reduced cash supply and high financing costs

Internal sources of finance are becoming more interesting: one of the main lever
is tapping into the cash potential in working capital

The companies surveyed had a combined potential of EUR 353 billion in Q1

2009, roughly one third more than in 2008

Relative to tied-up working capital, utilities and engineered products companies

have the greatest cash reserves hidden in their working capital

In the current economic situation, companies are facing a higher risk of insolvency. On
the one hand, they need more cash; on the other, lenders are more tightfisted than usual
and the financing costs are higher. In its study entitled "Working capital Cash for
recovery", Roland Berger Strategy Consultants has analyzed 216 European companies by
taking a close look at their internal sources of finance. The result? At the moment,
releasing the cash reserves hidden in working capital offers the greatest potential for
improving liquidity. According to the Roland Berger experts, the companies surveyed had
a total cash potential of EUR 353 billion. This turned out to be especially true for utilities
and engineered products companies.
"In the current recession, working capital is emerging as a key source of internal
finance," says Roland Schwientek, Partner at Roland Berger's Operations Strategy
Competence Center. Increased cash requirements and a reduced cash supply with higher
financing costs combine to increase the likelihood of insolvency. In their study called
"Working capital Cash for recovery", the experts highlight alternative sources of
internal finance: "As some traditional sources of cash have dried up, the most promising
solution is to tap into the liquidity potential hidden in working capital," says Schwientek.
According to the experts, internal finance based on optimized working capital is much
more effective than external finance. Even small improvements in receivables,
7

inventories and payables can generate significant reductions in external finance

requirements.
Survey of 216 European companies
The survey was based on an analysis of 216 European companies from key industry
sectors, such as automotive, chemicals & oil, consumer goods & retail and
pharmaceuticals. The companies surveyed achieved combined sales of EUR 3,700 billion
and total EBIT of EUR 422 billion or some 30% of the gross domestic product generated
by the EU25.
According to the Roland Berger experts, the companies surveyed had total cash potential
of EUR 353 billion in the first quarter of 2009. The previous study conducted in 2004 had
revealed no more than EUR 193 billion. Despite the financial crisis, the cash potential
was also up a full 32% year on year. At 41%, payables offer the greatest potential,
followed by receivables (37%) and inventories (22%).
Significant differences between industries
In terms of working capital tied up, utilities and engineered products companies have the
greatest potential. Average net working capital days are the lowest in telecommunications
and the highest in the airline industry. The mining and automotive industries are leaders
in receivables management, while the construction and telecommunications sectors come
out on top in inventory management. The telecommunications, construction and utility
industries lead the way in payables management.

Success factors for sustainability

There are a number of success factors that help ensure the sustainable success of working
capital projects. Roland Berger offers a comprehensive toolset (Cash Navigator, "Bible of
Levers" toolbox, EVA/cash calculator, customer risk and value flow analysis) designed to
improve working capital management. "In times of crisis, when we are facing a
significantly higher risk of insolvency, companies should have a very clear idea of their
potential and use it. Nobody can afford to leave billions of euros idle in their working
capital," stresses Roland Berger expert Schwientek in pointing out the need for effective
working capital management.

Objectives of working capital:

Every business needs some amount of working capital. It is needed for following
purposesFor the purchase of raw materials, components and spares.

To pay wages and salaries.

To incur day to day expenses and overhead costs such as fuel, power, and office
expenses etc.

To provide credit facilities to customers etc.

Factors that determine working capital:

The working capital requirement of a concern depend upon a large number of factors
such as
? Size of business
? Nature of character of business.
? Seasonal variations working capital cycle
? Operating efficiency
? Profit level.
? Other factors.

Sources of working capital:

The working capital requirements should be met both from short term as well as long
term sources of funds.
? Financing of working capital through short term sources of funds has the benefits of
lower cost and establishing close relationship with banks.
? Financing of working capital through long term sources provides the benefits of reduces
risk and increases liquidity.

Types of working capital:

Working capital can be divided into two categories-

10

Permanent working capital:

It refers to that minimum amount of investment in all current assets which is

required at all times to carry out minimum level of business activities.

Temporary working capital:

The amount of such working capital keeps on fluctuating from time to time on the
basis of business activities.

Advantages of working capital:

It helps the business concern in maintaining the goodwill.
It can arrange loans from banks and others on easy and favorable terms.
It enables a concern to face business crisis in emergencies such as depression.
It creates an environment of security, confidence, and over all efficiency in a business.
It helps in maintaining solvency of the business.

Disadvantages of working capital:

Rate of return on investments also fall with the shortage of working capital.
Excess working capital may result into over all inefficiency in organization.
11

Excess

working

capital

means

idle

funds

which

earn

no

profits.

Inadequate working capital cannot pay its short term liabilities in time. 1.1

COMPANY PROFILE
SMIIEL (a unit of Motherson Sumi Systems Ltd.)
Located in Noida, India, SMIIEL (a unit of Motherson Sumi Systems Ltd.) is a
commercial Tool Room supplying to a wide spectrum of industries. SMIEL-TD develops
small to medium size molds for a wide range of applications which include, wiring
harness components, automotive applications, white goods, medical and electrical
equipment.
Product & Services of the company includes product designing, tool designing, tool
manufacturing, specialisation in high precision injection molding tools and press
stamping tools
Motherson Sumi Systems Limited is the flagship company of the Samvardhana
Motherson Group and was established in 1986. It is a joint venture between Samvardhana
Motherson Group and Sumitomo Wiring Systems (Japan). SMIIEL is a focused, dynamic
and progressive company providing customers with innovative and value-added products,
services and solutions.

12

SMIIEL facility in Noida Sector 59

The Company is listed at the stock exchanges since 1993. The acquisition of mirror
business from Visiocorp (now renamed as Samvardhana Motherson Reflectec) and
Peguform (now named Samvardhana Motherson Peguform) has helped SMIIEL evolve
as one of the worlds leading manufacturers of automotive rear view mirrors and a
leading manufacturers of instrument panels, bumpers and door trims in Europe.
The company is one of the leading manufacturers of automotive wiring harnesses and
mirrors for passenger cars in India. It is also a leading supplier of plastic components and
modules to the automotive industry. Over the years SMIIEL has collaborated with global
technology leaders and has further leveraged its competency in existing areas to create
products fulfilling the technical needs of its customers. SMIIEL and its joint ventures
have invested in state-of-the-art technologies and infrastructure to ensure superior
efficiencies & total customer satisfaction.
SMIIEL is strengthening its position as a globally preferred solutions provider by offering
end-to-end solutions encompassing designing from basic data to prototyping, tooling,
moulding, assembly and integrated modules. The ability to provide this end-to-end
13

solution in each product category and combine these solutions in the form of full system
solutions has enabled the Company to evolve as a preferred supplier. These solutions are
supported by the flexibility to supply from any of the alternative manufacturing bases and
logistic models best suited to customer requirements. .
SMIIEL has developed a network of manufacturing bases, design centers, logistics
centers, marketing support and sourcing hubs across a diversified geographical base.
SMIIEL has presence in 25 countries which includes India (Noida , Gurgaon, Manesar,
Faridabad , Pune, Bengaluru, Chennai, Kandla, Pathredi, Tapukara, Lucknow &
Puducherry), UAE., Sri Lanka, Singapore, China, South Korea, Japan, Germany, UK.,
Czech Republic, Austria, Hungary, Italy, Spain, France, Ireland, U.S.A, Mexico, South
Africa, Australia, Mauritius, Brazil, Portugal, Slovakia and Thailand to provide timely
and quality delivery to its customers worldwide. SMIIEL has manufacturing bases across
six continents - Asia, Europe, North America, South America, Africa & Australia to
support its customers. SMIIELs diverse global customer base comprises of almost all
leading automobile manufacturers globally.
The Samvardhana Motherson Group is a focused, dynamic and progressive Group
providing customers with value added products, services and innovative solutions.
The Group has core competencies in manufacturing of Electrical Distribution Systems
(EDS), automotive rearview mirrors and polymer processing. These competencies are
supported by specialization in engineering & design, information technology, tool
manufacturing and metal machining.
Product Range

14

It has been SMIIELs endeavour to constantly add new products in its product line with
the objective of emerging as a single-service interface for multiple customer needs. The
Company has collaborated with technology leaders in their respective fields to bring
relevant technologies for the products required by its customers. SMIIELs diversity of
product range coupled with the depth within each product portfolio, has helped the
company garner leadership in its area of operations.

The product range of the company along with its subsidiaries and joint ventures
includes:
Automotive Rear View Mirrors
Wiring Harnesses
Wires
Wiring Harness Components
Seals

Grommets
Tubes
Fuse Boxes

Injection Moulded Products

Blow Moulded Products
Liquid Silicone Rubber Moulded Components
Injection Moulding Tools
Extruded Rubber Products
Precision Machined Metal Components
Modules
IP/ Cockpit
Door Trims
Bumpers

Air intake manifolds

Air filter systems
HVAC Systems

Waste Recycling System

SMIIEL Wiring Harness Division
The wiring harness division of SMIIEL is one of the largest manufacturers of wiring
15

harnesses in India, serving the entire cross-section of the automotive industry.

SMIIEL also supplies wiring harnesses to Material Handling, Earth Moving and
Farm Equipment, White Goods & Electronics, Elevators, Office Automation and
Medical Equipment industries.
The Samvardhana Motherson Group is a focused, dynamic and progressive Group
providing customers with value added products, services and innovative solutions.
The Group has a diversified product range to serve multiple industries, with automotive
industry being the main industry served.
The Group business portfolio comprises electrical distribution systems (wiring
harnesses), automotive rearview mirrors, polymer processing, injection moulding tools,
elastomer processing, modules and systems, machined metal products, cutting tools, IT
services, engineering & design, CAE services, vehicle air conditioning systems, lighting
systems, cabins for off-highway vehicles, cutting tools and thin film coating metals.
The Group has invested in technologies that provide manufacturing support, including
compressors, paint coating equipment, auxiliary equipment for injection moulding
machines and automotive manufacturing engineering services.

Key Facts
One of the largest manufacturers of exterior rearview mirrors in the world
One of the largest manufacturers of IP modules, door trims and bumpers in Europe
One of the largest manufacturers in India for:
Wiring harnesses and rearview mirrors for passenger cars

16

Moulded components and modules

Cabins for large size dump trucks
Gear cutting tools.
CBN & PCD cutting tools.
Plastic air intake manifold.
Presence in 25 countries across the globe.
Group Turnover USD 5.4 billion approx. ( 2012-13)
Joint ventures in key technology areas.
Over 62, 000 qualified professionals.

History

1975

1977

Motherson was founded

First Cable factory started

Technical agreement with Tokai Electric Co.

1983

(Now Sumitomo Wiring Systems - Japan) for

Wiring Harness

1986

JV with Sumitomo Wiring Systems Japan

17

1989

1992

1994

Injection Moulding

Cutting Tool Manufacturing

Tool Room for small and Medium sized Moulds

(upto 650 Tons)

Cockpit Assemblies

Automotive Mirrors

Blow Moulding

Rubber Injection Moulding

First Overseas office established (Austria)

IT and Design Company

1995

1997

1998

1999

2000

18

Representetive Office at Singapore

Liquid Silicon Rubber Injection moulding

Machined Metal Components

Wiring Harness manufacturing at Sharjah

Design Centre at Ireland

Offices in USA & UK established

Tool Room at Sharjah

European Headquaters at Germany

Sheet Metal Die Design

Injection Moulding & metal Machining

2001

2002

2003

2004

2005

in Germany

JVs for

o Environment Management Systems

19

o Automotive Manufacturing Engineering

Plastic Moulding & Metal Machining

at Germany

2006

PVC Tube Manufacturing

Wiring Harness Manufacturing in UK

Bus Airconditioning Systems

Auxiliary Equipment for Injection moulding

machines

2007

Cabins for off road vehicles in India

Rubber parts Manufacturing in Australia

JVs for

o HVAC Systems, Meterclusters, Body

Control Modules & Compressors
o Bimetal BandSaws
o Thin Film coating metals

20

JV for Lighting Systems, Pedal Box Assembly &

Air Intake manifolds

2008

JV for Precision machined metal components

Visiocorp becomes a part of Samvardhana

Motherson Group and renamed Samvardhana
Motherson Reflectec (SMR)

2009

Gear cutting tool manufacturing through a new

venture Motherson Advanced Tooling Solutions

Polymer Compounding

JV for HVAC Systems for commercial vehicles &

Off highway vehicles

2010

2011

JV for Gear Cutting Tools

Freezers & Retail Refrigeration

Peguform becomes a part of Samvardhana

Motherson Group

21

JV with Vacuform 2000 (Pty) Limited for thermo

formed polyethylene components and blow
moulded components for automotive and other
applications.

2012

JV with Sintermetal S.A. to produce sintered

parts for suspension and powertrain.

1.2 OBJECTIVES OF THE STUDY

The study areas for this Project include various functions of Finance department.
The main objectives for the project are as follows:
To analyze the Working Capital of the Company and also analyze its
various determinants in the Company.
To measure the size of Working Capital in a Power Generating Company,
To determine the efficiency of Working Capital and measure the
Operational Efficiency of the Company.

LIMITATIONS OF THE STUDY

22

As each project has its own limits, I also face certain constraints during my
project. I tried my best to overcome these limits but still certain boundaries cannot
be broken. Limitations of report are:
Before coming to this organization I had very little knowledge of working
capital management. Though I have gone through extensive study, I must
admit that I had tried my best to give expert comments on the topic.
Eight Weeks time was not sufficient to understand the topic to the expertise
level or I can say to understand the topic in a comprehensive manner.
Hence this research report has a time constraint with it.
The data, on which the whole report is based, is comparison of three years
i.e. 2010, 2011 and 2012 as it is difficult to compare lot of data in short
span of time.
This project report has been completed keeping in mind the pocket limit.
The survey has been carried out in the corporate office itself and not the
manufacturing plants. So the information about the inventory may be exact
or may be having some differences with actual figures.
As information on core working capital is hard to get and difficult to
explain, it is based just on the minimum inventory level. It might leave the
reader with his/her doubts.

23

Most of the report is based on the Secondary data using financial ratios but still,
one doubt give rise to some other doubt, which is actually a major constraint in
every research project.

1.3 IMPORTANCE OF WORKING CAPITAL RATIOS

Ratio analysis can be used by financial executives to check upon the efficiency
with which working capital is being used in the enterprise. The following are the
important ratios to measure the efficiency of working capital. The following,
easily calculated, ratios are important measures of working capital utilization.

Formulae

Result

Interpretation

Stock

Average Stock * = x days On average, you turn over the value of

Turnover

365/

your entire stock every x days. You may

(in days)

Cost of Goods

need to break this down into product

Sold

groups for effective stock management.

Obsolete stock, slow moving lines will
extend overall stock turnover days. Faster
production, fewer product lines, just in

24

time ordering will reduce average days.

Receivables Debtors * 365/

Ratio

Sales

(in days)

= x days It takes you on average x days to collect

money due to you. If your official credit
terms are 45 days and it takes you 65
days... why?
One or more large or slow debts can drag
out the average days. Effective debtor
management will minimize the days.

Payables

Creditors * 365/ = x days On average, you pay your suppliers every

Ratio

Cost of Sales (or

x days. If you negotiate better credit terms

(in days)

Purchases)

this will increase. If you pay earlier, say,

to get a discount this will decline. If you
simply defer paying your suppliers
(without agreement) this will also increase
- but your reputation, the quality of service
and any flexibility provided by your
suppliers may suffer.

25

Current

Total Current

= x times Current Assets are assets that you can

Ratio

Assets/

readily turn in to cash or will do so within

Total Current

12 months in the course of business.

Liabilities

Current Liabilities are amount you are due

to pay within the coming 12 months. For
example, 1.5 times means that you should
be able to lay your hands on $1.50 for
every $1.00 you owe. Less than 1 times
e.g. 0.75 means that you could have
liquidity problems and be under pressure
to generate sufficient cash to meet
oncoming demands.

Quick

(Total Current

= x times Similar to the Current Ratio but takes

Ratio

Assets -

account of the fact that it may take time to

Inventory)/

convert inventory into cash.

Total Current
Liabilities
Working

(Inventory +

As %

A high percentage means that working

Capital

Receivables -

Sales

capital needs are high relative to your

Ratio

Payables)/
26

Sales

sales.

LITERATURE REVIEW
RELATIONSHIP B/W PERMANENT AND TEMPORARY
WORKING CAPITAL

Amount of Working Capital

Permanent and Temporary Working Capital

Temporary

Permanen
t

27
Time

In this figure, it shows that the permanent level is fairly constant, while temporary
working capital is fluctuating- increasing and decreasing in accordance with

Amount of Working Capital

seasonal demands.

Temporary

Permanent

Time
In this figure shows that, in case of an expanding firm, the permanent working
capital line may not be horizontal. This is because the demand for permanent
current assets might be increasing or decreasing to support a rising level of
activity.
COMPONENTS OF WORKING CAPITAL
28

There are two components of working capital:

Current Assets: Current assets are those assets which can be converted into cash
in the normal course of business within a short period say a maximum of one year.
They are also called floating or circulating assets because they cannot be put to
constant use. The list of current assets is:
1. Cash in hand & Bank balances.
2. Bills Receivables.
3. Sundry Debtors.
4. Short term loans and advances.
5. Inventories of stocks
6. Prepaid expenses.
7. Accrued income.
Current Liabilities: Current Liabilities are those liabilities which are intended
to be paid in the ordinary course of business within a short period of normally one
accounting year out of the current assets or the income of the business. Example of
current liabilities is:
1. Bills Payable.
29

2. Sundry creditors or Accounts payable.

3. Accrued or outstanding Expenses.
4. Short term loans and advances and deposits.
5. Bank overdraft.
WORKING CAPITAL CYCLE
Cash flows in a cycle into, around and out of a business. It is the business's life
blood and every manager's primary task is to help keep it flowing and to use the
cash flow to generate profits. If a business is operating profitably, then it should, in
theory, generate cash surpluses. If it doesn't generate surpluses, the business will
eventually run out of cash and expire.
The faster a business expands the more cash it will need for working capital and
investment. The cheapest and best sources of cash exist as working capital right
within business. Good management of working capital will generate cash will help
to improve profits and reduce risks. Bear in mind that the cost of providing credit
to customers and holding stocks can represent a substantial proportion of a
company's total profits.

30

There are two elements in the business cycle that absorb cash - Inventory (stocks
and work-in-progress) and Receivables (debtors owing you money). The main
sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables)

has two dimensions TIME and MONEY. When it comes to managing working
capital -TIME IS MONEY. If you can get money to move faster around the cycle
(e.g. collect money due from debtors more quickly) or reduce the amount of
money tied up (e.g. reduce inventory levels relative to sales), the business will
generate more cash or it will need to borrow less money to fund working capital.
As a consequence, you could reduce the cost of bank interest or you'll have
additional free money available to support additional sales growth or investment.
Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit
or an increased credit limit; you effectively create free finance to help fund future
sales.
31

More businesses fail for lack of cash than for want of profit.

Need for Working Capital

A successful sales program is necessary for earning profits by any business
enterprise. However sales do not convert into cash instantly; there is
invariably a time lag between the sale of goods and receipts of cash.
A sufficient amount of working capital is necessary to sustain sales activity.
Technically this is referred to as the operating or cash cycle.
The operating cycle can be said to at the heart of the need for working
capital.

Phase 3

Receivables

Phase 2

Cash

Phase 1
Operating Cycle

Inventory

Working Capital is needed for the following purposes:

1) For the purpose of raw materials, components
32

2) To pay wages and salaries

3) To incur day-to-day expenses and overhead costs such as fuel, power
and office expenses, etc.
4) To meet the selling cost as packing, advertising etc.
5) To provide credit facilities to the customer.
6) To maintain the inventories of raw material, work-in-progress and
finished goods.

DETERMINANTS OF WORKING CAPITAL

General nature of business
The working capital requirements of an enterprise are basically related to the
conduct of the business. The public utilities have certain features which have
a bearing on their working capital needs. The two relevant features are:
1. The cash nature of the business that is cash sales.
2. Sale of services rather than commodities.
At the other extreme are trading and financial enterprises. The nature of
their business is such that they have to maintain a sufficient amount of cash,
inventories and book debts. The proportion of current assets to total assets
measures the relative requirements of working capital of various industries.
Production Cycle

33

The term production cycle or manufacturing cycle refers to time involved in

the manufacture of goods. It covers the time span between the procurement of
raw materials and the completion of the manufacturing process leading to the
production of finished goods. Funds have to be necessarily tied up during the
process manufacturing necessitating enhanced working capital. In other
words, there is some time gap before raw material converts to finished goods.
To sustain such activities the need for working capital is obvious. The longer
the times span (i.e. the production cycle), the larger will be the tied up funds
and, therefore, the larger is the working capital needed and vice versa.
Business Cycle
The working capital requirements are also determined by the nature of the
business cycle. Business fluctuations leading to cyclical and seasonal changes
that, in turn, cause a shift in the working capital position, particularly for
temporary working capital requirements. The variations in business
conditions may be in two directions:1. Upswing phase when boom conditions prevail.
2. Downswing phase when economic activity is marked by decline.
During the upswing of business activity, the need for working capital is likely
to grow to cover the lag between increased sales and receipt of cash as well as
to finance purchases of additional material to cater to the expansion of the
level of activity. Additional funds may be required to invest in plant and
machinery to meet the increased demand. The downswing phase of business
34

cycle has exactly an opposite effect on the level of working capital

requirement. The need for working capital in recessionary conditions is
bound to decline. Thus business fluctuations influence the size of working
capital mainly through the effect on inventories. The response of inventory to
business cycles is mild or violent according to nature of the business policy.
Production Policy
In the case of certain business the demand for products is seasonal, the
production policy followed in such case have two options open to such steady
enterprises

are :-

Either they confine their production only to periods when goods are
purchased or they follow a steady production policy throughout the year and
produce goods at a level to meet the peak demand. Working capital planning
has to incorporate this pattern of requirements of funds when production and
seasonal sales are steady. The nature of some products may be such that
accumulation of inventories may create a special risk and cost problems. For
them, a production policy in tune with the changing demands may be
preferable. Therefore, production policies have to be formulated on the basis
of individual setting of each enterprise and the magnitude and dimension of
the working capital problems will accordingly vary.
Credit Policy
The credit policy influences the requirement of working capital in two ways:-

35

1. Through credit terms granted by the company to its customers/ buyers

of goods.
2. Credit terms available to the company from its creditors.

The credit terms granted to customers have a bearing on the magnitude of

working capital by determining the level of book debts. The credit sales result
in higher book debts (receivables). Higher book debts mean more working
capital. The working capital requirements of a business are, thus affected by
the terms of purchase and sale, and the role given to credit by a company in
its dealings with creditors and debtors.
The prevailing trade practices as well as changing economic conditions affect
credit terms fixed by an enterprise. Adoption of rationalized credit policies
are a significant factor in determining the working capital needs of an
enterprise. A company that operates in a highly competitive market to win
and retain customers may be forced to offer generous credit terms to them.
The investment in book debts will consequently be of a higher order,
necessitating large working capital in another way. The degree of competition
is, therefore, an important factor influencing working capital requirements.
Growth and Expansion
As a company grows its logical to expect that a larger amount of working
capital is required. It is difficult to determine precisely the relationship
between the growth in volume of business of a company and the increase in its
36

working capital. The composition of working capital in a growing company

also shifts with economic circumstances and corporate practices. The critical
fact, however, is that the need for planning of working capital is, therefore, a
continuing necessity for a growing concern.
Vagaries in the Availability of Raw Material
There may be some materials, which cannot be procured easily either because
of their sources, are few or they are irregular. To sustain smooth production,
therefore, the company might be compelled to purchase and stock them far in
excess of genuine production needs. This will result in an excessive inventory
of such materials. Procurement of some essential raw materials is difficult
because of their sporadic supply. This happens very often with raw materials
that are in short supply and are controlled to ensure equitable distribution.
The buyer has in such cases very limited options as to the quantum and
timing of procurement. It may so happen that a bulk consignment may be
available but the company may be short of funds, while when surplus funds
are available the commodities may be in short supply. This element of
uncertainty would lead to a relatively high level of working capital.
Profit Level
The level of profits earned differs from enterprise to enterprise. The nature of
the product, hold on the market, quality of management and monopoly power
would by and large determine the profit earned by a company. It can be
generalized that a company dealing in a high quality product, having a good
37

marketing arrangement and enjoying monopoly power in the market, is likely

to earn high profits and vice versa. Higher profit margin would improve the
prospects of generating more internal funds thereby contributing to the
working capital pool. The net profit is a source of working capital to the
extent that it has been earned in cash. In practice, the net cash inflows from
operations cannot be considered as cash available for use at the end of cash
cycle. Even as a companys operations are in progress, cash is used for
augmenting stock, book debts and fixed assets. It must, therefore be seen that
cash generation has been used for furthering the interest of the enterprise.
The availability of internal funds for working capital requirements is
determined not merely by the profit margin but also by the manner of
appropriating profits. The availability of such funds would depend upon the
profits appropriations for taxation, dividend, reserves and depreciations.
Level of taxes
The first appropriation out of profit is payment or provision for tax. The
amount of taxes to be paid is determined by prevailing tax regulations. The
management has no discretion in this respect. Very often taxes have to be paid
in advance on the basis of the profit of proceeding year. Tax liability is, in a
sense, short term liability payable in cash. An adequate provision for tax
payments is, therefore an important aspect of working capital planning. If tax
liability increases, it leads to an increase in the requirement of working
capital and vice versa. The service of tax experts can be availed of to take
38

advantage of the various concessions and incentive through avoidance as

opposed to evasion of taxes. Tax planning can, therefore, be said to be an
integral part of working capital planning.
Dividend Policy
Another appropriation out of profits that has a bearing on working capital is
dividend payment. The payment of dividend consumes cash resources and
thereby, affects working capital to that extent. If the company does not pay
dividend but retains the profits, working capital increases. A company should
retain profits to preserve cash resources and, at the same time, it must pay
dividends to satisfy the expectations of investors. When profits are relatively
small, the choice is between retention and payment. There are wide variations
in industry practices as regards the interrelationship between working capital
requirements and dividend payment. In some cases, shortage of working
capital has been a powerful reason for reducing or even skipping dividends in
cash. There are occasions, on the other hand, when dividend payments are
continued in spite of inadequate earnings in a particular year because of
sound liquidity. Dividend policy is thus, a significant element in determining
the level of working capital in an organization.
Depreciation Policy
Depreciation policy also exerts an influence on the quantum of working
capital. Depreciation charges do not involve any cash outflows. The effect of
depreciation policy on working capital is, therefore, indirect. Depreciation
39

affects the tax liability and retention of profits. Depreciation is allowable

expenditure in calculating net profits. Enhanced rates of depreciation lower
the profits and, therefore, the tax liability and, thus more cash profits. Higher
depreciation also means lower disposable profits and, therefore, a smaller
dividend payment. Thus cash is preserved. If current capital expenditure falls
short of the depreciation provision, the working capital position is
strengthened and there may be no need for short-term borrowing. If on the
other hand, the current capital expenditure exceeds the depreciation
provision; either outside borrowing will have to be adapted to prevent the
working capital position from being adversely affected. It is in these ways that
depreciation policy is relevant to the planning of working capital.

Price Level Changes

Changes in the price level also affect the requirements of working capital.
Rising prices necessitate the use of more funds for maintaining an existing
level of activity. For the same level of current assets higher cash outlay are
required. The effect of rising prices is that a higher amount of working capital
is needed. The implications of changing price levels on working capital
position vary from company to company depending on the nature of its
operations, its standing in the market and other relevant considerations.

40

Operating Efficiency
The operating efficiency of the management is also an important determinant
of the level of working capital. The management can contribute to a sound
working capital position through operating efficiency. Although the
management cannot control the rise in prices, it can ensure the efficient
utilization of resources by eliminating waste, improving coordination, and a
fuller utilization of existing resources, and so on. Efficiency of operations
accelerates the pace of cash cycle and improves the working capital turnover.
It releases the pressure on working capital by improving profitability and
improving the internal generation of funds.
FACTORS AFFECTING WORKING CAPITAL MANAGEMENT
1) Nature and Size of Business:
The requirement of working capital of a firm is widely related to the nature and
size of business unit. For example, trading and financial firms require a large
amount of investment in working capital but a significantly smaller amount of
investment in fixed assets. Similarly, a service oriented firm, e.g. transport or
electricity generation, needs a modest working capital requirement since it has a
very short operating cycle and sales are made on cash basis. Moreover, the size of
the firm is also important factor because, smaller firm needs smaller amount of
working capital on the basis of its production activities and vice-versa.

41

2) Length of Production cycle: The time taken to convert raw material into
finished product is known as the production cycle. The level of working
capital depends upon the production cycle. Longer the production cycle,
more will be the need for working funds in order to finance the current
assets during the prolonged manufacturing cycle and vice-versa.
3) Seasonal Operation: If a firm is operating in goods and services having
seasonal fluctuation in demand, then the working capital requirement will
also fluctuate with every change. In cold drink factory, the demand will
certainly be high during summer season and therefore, more working
capital is required to maintain higher production.
4) Market Competitiveness: The market competitiveness has an important
bearing on the working capital needs of a firm. In view of the competitive
conditions prevailing in the market, the firm may have to offer liberal credit
firm to the customer resulting in hire debtors.
5) Credit Policy: The credit policy means the totality of terms and conditions
on which goods are sold and purchased. A firm has to interact with two
types of credit policies at a time. For example, a firm might be purchasing
goods and services on credit terms but selling goods only for cash. The
working capital requirement of this firm will be lower than that of a firm
which is purchasing cash but has to sell on credit basis.
6) Supply Conditions: The time taken by supplier of raw materials, goods
etc after placing an order, also determines the working capital requirements.
42

A goods a received as soon as or in a short period after placing an order,

then the purchaser will not like to maintain a high level of inventory of that
goods and vice-versa.
7) Growth and Diversification of Business: Growth and Diversification of
business call for larger volume of working fund. The need of increased
working capital does not follow the growth of business operations but
precedes it. Working capital needs is in fact assessed in advance in
reference to the business plan.
8) Other Factors:

For example, banking relation, price level changes,

operating efficiency, taxation policy, dividend policy etc. also influence the
requirement of working capital.
IMPORTANCE OF ADEQUATE WORKING CAPITAL
1) Solvency of the Business: Adequate working capital helps in maintaining
solvency of the business by providing uninterrupted flow of production.
2) Goodwill: Sufficient working capital enables a business concern to make
prompt payments and hence helps in creating and maintaining goodwill.
3) Easy Loans: A concern having adequate working capital, high solvency
and goods credit standing can arrange loans from banks and other financial
institutions on easy and favourable terms.

43

4) Cash Discount: Adequate working capital also enables a concern to avail

cash discounts on the purchases and hence it reduces the cost.
5) Regular supply of raw material: Sufficient working capital ensures
regular supply of raw materials and continuous production.
6) Ability to face crises: Adequate working capital enables a concern to face
business crises in emergencies, such as, depression because during such
period, generally, there is much pressure on working capital.
7) High morale: Adequacy of working capital creates and environment of
security, confidence, high morale and creates overall efficiency in a
business.
IMPACT/HARM

OF

REDUNDANT

OR

EXCESSIVE

WORKING

CAPITAL
* Excessive WC means idle funds, which earn no profits for the business, cannot
earn proper rate of return on its investment.
* When there is a redundant WC, it may lead to unnecessary purchasing and
accumulation of inventories causing more chances if theft, waste and losses.
* Excessive WC implies excessive debtors and defective credit policy, which may
cause higher incidences of bad debts.

44

* It may result into overall inefficiency in the organizations.

* When there is excessive WC relation with banks and other financial institutions
may not be maintained.
* The redundant WC gives rise to speculative transaction.
* Due to low rate of return on investments the value of shares may also fall.
* In case of redundant WC there is always a chance of financing long terms assets
from short terms funds, which is very harmful in long run for any organization.

DANGER OF SHORT OR INADEQUATE WORKING CAPITAL

*A concern, which had inadequate WC, cannot pay its short-term liabilities in
time. Thus it will lose its reputation and should be not be able to get good credit
facilities.
* It cannot buy its requirements in bulk and cannot avail discounts. It stagnates
growth.
* It becomes difficult for the firms to exploit favourable market conditions and
undertake profitable projects due to non-availability of WC funds.
45

* The firm cannot pay day-to-day expenses of its operations and its credit
inefficiencies, increases cost and reduces the profits of the business.
* It becomes impossible to utilize efficiently the fixed assets due to nonavailability of liquid funds thus, the firms profitability would deteriorate.
* The rate of return on investments also falls with the shortage of WC.
* Operating inefficiency creeps in and it will become difficult to implement
operating plans and achieve the firms profit targets.

FACTORS REQUIRING CONSIDERATION WHILE ESTIMATING

WORKING CAPITAL
The average credit period expected to be allowed by suppliers.
Total costs incurred on material, wages.
The length of time for which raw material are to remain in stores before
they are issued for production.
The length of the production cycle (or) work in progress.

46

 The length of sales cycle during which finished goods are to be kept
waiting for sales.
The average period of credit allowed to customers.
The amount of cash required to make advance payment.

RESEARCH METHODOLOGY
The study is conducted based on secondary data sources. Secondary sources of
data mainly include annual reports of SMIIEL. Statement of changes in working
capital for the past 5 years is done using the data taken from these financial
reports. Similarly time series analysis of operating cycle and calculations of ratios
47

is done. Apart from this, the website of SMIIEL. is referred to know the services,
services facilities, network etc. Industry analysis is done based on the information
gathered from newspapers and websites of Indian steel ministry & other sector
related websites.

WORKING CAPITAL ANALYSIS

The basic goal of Working Capital Management is to manage the current assets
and current liabilities of a firm in such a way that the level of Working Capital is
neither inadequate nor excessive as both the situations are bad for any firm. There
should be no shortage of funds and also no working capital should be idle.
48

Working Capital Management policies have a great impact on the profitability,

liquidity and structural health of the firm. So working capital management can be
seen as three dimensional in nature as it is concerned with1. Formulation of Policies with reference to profitability, liquidity and risk.
2. Decisions about the composition and level of current assets.
3. Decisions about the composition and level of current liabilities
Working Capital Analysis: Adequate amount of working capital is very much
essential for the smooth running of any business. It directly affects the liquidity
positions of the firm. Hence it is necessary to evaluate the efficiency with which
the working capital is employed in the business. This can be achieved by carrying
out the Working Capital Analysis.
The analysis of working capital can be conducted through a number of devices
such as:
1. Ratio Analysis
2. Funds Flow Analysis
3. Budgeting
Ratio Analysis: A ratio is a simple arithmetical expression one number to another.
The technique of ratio analysis can be employed for measuring short-term
49

liquidity or working capital position of a firm. The following ratios can be

calculated for the purpose of (a) Liquidity Ratios and (b) Current Assets
movements Ratios
Fund Flow Analysis: Fund flow analysis is a technical device designated to study
the sources from which additional funds were derived and the use to which these
sources were put. The fund flow analysis consists of (a) Preparing schedule of
changes of working capital and (b) Statement of sources and application of funds.
It is an effective management tool to study the changes in financial position
(working capital) business enterprise between beginning and ending of the
financial dates.
Working Capital Budget: A budget is a financial or quantitative expression of
business plans and policies to be pursued in the future time period. Working
Capital budget as a part of the total budgeting process of a business is prepared
estimating future long term and short term working capital needs and sources to
finance them, and then comparing the budgeted figures with actual performance
for calculating the variances, if any, so that corrective actions may be taken in
future. The objective of working capital budget is to ensure availability of funds as
and when needed, and to ensure effective utilization of these resources.
Analysis of Short Term Financial Position of the Firm (Ratio Analysis):

50

1. Liquidity Ratio: Liquidity refers to the ability of a firm to meet its current
obligations as and when these become due. The short-term obligations are
met by realizing amount from current, floating or circulating assts. The
current assets should either be liquid or near about liquidity. These should
be convertible in

cash for paying obligations

of short-term nature. The

sufficiency or insufficiency of current assets should be assessed by comparing

them with short-term liabilities. If current assets can pay off the current
liabilities then the liquidity position is satisfactory. On the other hand, if the
current liabilities cannot be met out of the current assets, then the liquidity
position is bad.

To measure the liquidity of a firm, the following ratios can be

calculated:
a) Current Ratio
b) Quick Ratio
c) Absolute Liquid Ratio

2. Efficiency Ratio or Current Asset Movement Ratio:

Funds are invested in various assets in business to make sales and earn profits. The
efficiency with which assets are managed directly affects- the volume of sales. The
51

better the management of assets, larger is the amount of sales and profits. Current
assets movement ratios measure the efficiency with which a firm manages its
resources. These ratios are called turnover ratios because they indicate the speed
with which assets are converted or turned over into sales. Depending upon the
purpose, a number of turnover ratios can be calculated. Some are a) Working capital Turnover Ratio
b) Debtors Turnover Ratio
c) Average Collection Period
NET WORKING CAPITAL OF HONDA MOTORS (in millions)

Year

Current
Assets

Current
Liabilities

Net Working Capital (Current

assets - Current liabilities)

2007

1,35,468

80,941

54,527

2008

1,29,073

67,476

61,597

2009

1,57,245

61,402

95,843

2010

2,21,827

70,263

1,51,564

2011

2,55,488

79,299

1,76,189

2012

3,09,253

1,06,886

2,02,367

2013

3,08,157

1,07,581

2,00,576

52

Net Working Capital

250000
200000
150000
100000
50000
0

2007

2008

2009

2010

2011

2012

2013

Analysis
The Working Capital of SMIIEL has increased considerably over the years. The
firm has achieved brilliant changes in the Working Capital from the year 2007 to
2013. The graph clearly depicts that from the year 2008, Working Capital has been
increasing at a very high rate. Also the current liabilities declined during the year
2007 to 2013. The increase in Net Working Capital can be attributed to Increase in inventory such as Components and Spare Parts, Fuel Oil, Stock
of Coal, Chemical and Consumables etc.
Increase in cash and bank balance (which include increase in current
account and term deposit account)

53

 Overall increase in Debtors

Increase in loan and advances
CURRENT RATIO
Current Ratio is a measure of general liquidity and it is most widely used to make
the analysis of short term financial position or liquidity of a firm. I shows the
ability of a firm to meet its short term obligations. Current ratio is given by
Current Ratio = Current Assets/Current Liabilities
Current Assets include cash, marketable securities, bill receivables, sundry datas,
inventories and work in progress. Current liabilities include outstanding expenses,
bills payable, dividend payable etc.
A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the other hand, a low current
ration represents that the liquidity position of the firm is not good and the firm
shall not be able to pay its current liabilities in time. A Ratio equal or near to the
Rule of Thumb of 2:1 that is current assets double the current liabilities is
considered to be satisfactory.
NET WORKING CAPITAL OF HONDA MOTORS (in millions)

Year

Current

Current

Current Ratio (Current

54

Ratio

Assets

Liabilities

Assets/Current
Liabilities)

2007

1,35,468

80,941

1,35468 / 80,941

1.67

2008

1,29,073

67,476

1,29,073 / 67,476

1.91

2009

1,57,245

61,402

1,57,245 / 61,402

2.56

2010

2,21,827

70,263

2,21,827 / 70,263

3.15

2011

2,55,488

79,299

2,55,488 / 79,299

3.22

2012

3,09,253

1,06,886

3,09,253 / 1,06,886

2.89

2013

3,08,157

1,07,581

3,08,157 / 1,07,581

2.86

Current Ratio
3.5
3
2.5
2
1.5
1
0.5
0

2007

2008

2009

2010
55

2011

2012

2013

Analysis:
The above graph shows firm's current ratio is increasing year by year. From this
graph, it is clear that SMIIEL. has sufficient funds in the form of current assets to
meet its short term obligations except in the years 2007 & 2008.
In the year 2007 & 2008, SMIIEL. liquid position was not good because its
current assets were not sufficient to meet its current liability. But after 2008,

SMIIEL. position got stronger to meet its current obligation. The reason for
increase in current ratio is increase in current assets. The current asset is increasing
every year at a higher rate after 2008. The reasons are:
1) Increase in Fuel Oil, Spare Parts and Naphtha in inventory.
2) Increase in unsecured debts and other debts in sundry debtors.
3) Increase in Cash balance of Term Deposit account of the firm..
4) Increase the advances and deposits with customer in loan & advances.
5) Increase in creditors both for capital expenditure and for goods & services.
6) Increase in Bond and term loan in current liability.

QUICK RATIO:

56

Quick Ratio is a more rigorous test of liquidity than current ratio. Quick Ratio may
be defined as the relationship between Quick/Liquid assets and Current or Liquid
liabilities. An asset is set to be liquid, if it can be converted into cash within a short
period without loss of value. It measures the firm's capacity to pay off the current
obligations immediately.
Quick Ratio = Quick Assets/Current Liabilities
Quick Assets includes marketable securities, cash in hand, cash in bank and
debtors. As a Rule of Thumb, ratio 1:1 is considered satisfactory. It is generally
thought that if quick assets are equal to current liabilities, then the concern may
be able to meet its short term obligations. However, a firm having high quick
ratio may not have a satisfactory liquidity position, if it has slow paying debtors.
Quick ratio of HONDA MOTORS (in millions)

Year

Quick

Current

Quick Ratio (Quick

Assets

Liabilities

Assets/Current

Ratio

Liabilities)
2007

1,18,088

80,941

1,18,088 /80.941

1.45

2008

1,11,296

67,476

1,11,296/67,476

1.64

2009

1,33,840

61,402

1,33,840/61,402

2.17

2010

1,96,725

70,263

1,96,725/70,263

2.79

57

2011

2,28,731

79,299

2,28,731 / 79,299

2.88

2012

2,76,819

1,06,886

2,76,819/1,06,886

2.59

2013

2,74,680

1,07,581

2,74,680/1,07,581

2.55

Quick Ratio
3.5
3
2.5
2
1.5
1
0.5
0

2007

2008

2009

2010

2011

2012

2013

Analysis:
From this graph, it is seen that the firms quick ratio is very sound. From the
beginning i.e. 2007 to 2013, SMIIEL. has a good liquidity position. In the year
2009 and 2010, it is very high which is 2.8 and 2.88, but after that it has decreased,
the reason for which are:
58

 Increase in Cash & Bank balance of SMIIEL.

Increase in Loan & Advances
Overall there is increase in debtors
Overall there is increase in current liabilities

ABSOLUTE LIQUIDITY RATIO:

Although receivables, debtors and bills receivables are generally more liquid than
inventories, yet there may be doubts regarding the realization into cash
immediately or in time. So, absolute liquid ratio should be calculated together with
current ratio and acid test ratio so as to exclude even receivables from the current
assets and find out the absolute liquid tests.
Absolute Liquid Ratio = Absolute Liquid Asset/Current Liabilities Absolute
Liquid Assets = Cash & Bank balance + Marketable Securities
Absolute Liquid Ratio (in millions):

Year

Absolute

Current

Absolute liquid ratio

Liquid

Liabilities

(Absolute Liquid

Assets

Assets/Current
59

Ratio

Liabilities)
2007

6,091

80,941

6,091 / 80,941

0.07

2008

60,783

67,476

60,783 / 67,476

0.90

2009

84,714

61,402

84,714 / 61,402

1.37

2010

1,33,146

70,263

1,33,146 / 70,263

1.89

2011

1,49,332

79,299

1,49,332 / 79,299

1.88

2012

1,62,716

1,06,886

1,62,716 / 1,06,886

1.52

2013

1,44,595

1,07,581

1,44,595 / 1,07,581

1.34

60

Absolute Liquid Ratio

2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0

2007

2008

2009

2010

2011

2012

2013

Analysis:
From this graph, it is seen that the firm has sufficient cash balance to meet its
current obligations except in the year 2007. In the year 2007, the firm's ratio was
0.07 which was very low. In 2010 & 2011, after that the firm has achieved a very
strong cash balance to meet its obligations but we can see that the ratio decreased
in 2012 & 2013. The main reason for this decrease can be attributed to increase in
cash & bank balance at a very high rate with a subsequent increase in current
liabilities.

61

CURRENT WORKING CAPITAL TURN-OVER RATIO:

Working Capital Turn-Over ratio indicates the pace of utilization of Net Working
Capital. This ratio measures the efficiency with which the Working capital is used
by the firm. A high ratio indicates efficient utilization of working capital and a low
ratio indicates otherwise. But a very high WCTR is not good situation for any
firm.
WCTR = Net Sales/Net Working Capital
DEBTOR TURN-OVER RATIO
Debtor turnover ratio indicates the pace of debt collection of firm. A high debtor
turnover ratio indicates the efficient management of debtor or more liquidity is the

62

debtor. Similarly low debtor's turnover ratio implies inefficient management of

debtor and less liquidity debtor. There is no rule of thumb for an ideal debtor
turnover ratio. It varies from firm to firm.
DTK = Turnover Ratio/Debtors Debtor
Turnover Ratio (in millions)

Year

Total sales

Debtors

Debtor Turnover Ratio

(Total Sales/Debtors)

Ratio

2007

1,90,081

18,986

1,90,081 / 18,986

10.00

2008

2,27,076

22,107

2,27,076 / 22,107

10.27

2009

2,62,910

17,041

2,62,910 / 17,041

15.42

2010

3,72,808

20,884

3,72,808 / 20,884

17.85

2011

3,72,615

29,827

3,72,615 / 29,827

12.49

2012

4,21,454

35,842

4,21,454 / 35,842

11.76

2013

4,65,685

66,514

4,65,685 / 66,514

7.00

63

Debtor Turnover Ratio

20
18
16
14
12
10
8
6
4
2
0

2007

2008

2009

2010

2011

2012

2013

Analysis :
It is seen from the graph that the debtor turnover ratio of the firm has grown in the
period from 2007 to 2010. It shows the firms efficient management of debts. The
reasons for increase in debtor turnover ratio is1) Increase in Sales activity
2) Liberal Credit Policy by the firm
But after that firm's debtor turnover ratio has declined. The reasons for the same
could be -

64

1) Increase in sales at a lower rate

2) Restricted Credit Policy by the firm
AVERAGE COLLECTION PERIOD
Average collection period represents the average number of days, the firm has to
wait before its receivable are converted in to cash. It measures the quality of
debtor. Generally shorter the average collection period the better is quality of
debtor. Similarly the higher collection period implies inefficient collection
performance which in turn adversely affects the liquidity or short term paying
capacity of the firms out of its current liability.
Also, longer the average collection period, there are more chances of bad debt.
Though there is no rule of thumb for the average collection period, it is generally
given 2 to 3 months. It also varies from firm to firm.
Average Collection Period of HONDA MOTORS (in millions)

Year

No. of days

Debtor

Average collection period

in a year

turnover

(No. of working days in a

ratio

year/debtor turnover

Days

ratio)
2007

365

10.00

365/10.00

37

2008

365

10.27

365/10.27

36

65

2009

365

15.42

365/15.42

24

2010

365

17.85

365/117.85

20

2011

365

12.49

365/12.49

29.49

2012

365

11.76

365/11.76

31.04

2013

365

7.00

365/7.00

52.14

Average Collection Period

60
50
40
30
20
10
0

2007

2008

2009

2010

2011

2012 2013

Analysis
As it is seen that the firm has restricted the credit policy, by which its average
collection period has declined from the year 2007 to 2010. But after that it has

66

increased due to liberal credit policy. SMIIEL. is focusing 100% payment and
also giving incentive to debtor in form of 2% discount on the billing. It is allowing
2 months credit to its debtor.
RECEIVABLES MANAGEMENT
Receivables constitute a significant part of current asset of the firm. Receivable
represent amount owed to the firm as a result of sale of goods or service in the
ordinary course of business. These are the claim of the firm against its customer.
This receivable is known as trade credit or trade receivable. It is an investment
because it blocks some portion of firm's funds. The purpose of maintaining or
investing in receivables is to meet competition and to increase the sales and profit.
Receivable management is the process of making decision relating to investment
in trade debtors.
Factors Influencing Receivable:
1. Credit Policy: A firm with aggressive credit policy will have a low size of
receivable while a firm has liberal credit policy will higher size receivable.
2. Term of Credit : If the term of credit period is allowed more, then the
receivable will be more. While credit period is short, then the size of
receivable will be less.

67

3. Expansion Plan: When firm enter into a new market for expansion of its
business, it gives credit facility to attract its customer by which receivables
get increased.
Tools of Receivable Management:
Receivable management consists of various factors such as 1. Forming Credit Policy
2. Executing Credit Policy
3. Formulating & Executing Collection Policy
Forming Credit Policy:
A suitable credit policy is essential for efficient management of receivables. A
optimum credit policy is the one which maximizes value of the firm. A credit
policy is related to decisions such as credit standard, length of standard, length of
credit period, cash discount and discount period etc.
(a) Credit Standards:
Credit standards are the criteria which a firm follows in selecting customer for the
purpose of credit extension. By liberalizing credit policy the volume of sales will
get increased which result into increase the profit. It also increases the volume of
sales which enhance the risk of bad debts and delayed receipt. On the other hand, a
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tight credit policy will decrease the volume of sales which result in decrease in the
chances of bad debt loses.
(b) Credit Period:
Credit period refers to the time period allowed to the customer for making the
payment. There is no binding on fixing the terms of credit. It varies from firm to
firm depending on its objective. A firm lengthens its credit period will block more
money which ultimately involves more debt collection cost and more bad debt
losses. The firm may tighten its credit period; if its customers are defaulting too
frequently and bad debt losses are building up.
(c) Discount period:
The collection of receivables is influenced by the period allowed for availing
discount. It is the additional period allowed for the customer- to avail discount and
make payment.
(d) Cash Discount:
It is a reduction of payment offered to customers to induce them to repay credit
obligations within a specific period of time which will be less than normal credit
period. It is given to speed up the collection of receivables.
Executing Credit Policy:

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(a) Collecting Credit Information

It refers to the collection of information about customers regarding their financial
position for giving credit. This information helps in improving the quality of
receivable which ultimately reduces the chances of bad debt losses. This
information can be collected from financial statement, credit rating agencies,
backs etc.
(b) Credit Analysis
Credit analysis is the determination of the degree of risk associated with the
account, the capacity of the customer to borrow and its ability and
willingness to pay the credit amount. At the time of credit analysis the
manager keeps in various factors like Character, Capacity, Capital, Condition
and Collateral.
c) Credit Decision
Credit decision is taken by the manager by matching the creditworthiness of the
customer with the credit standard of the firm.
Collect Policy:
Collection refers to obtaining payment of past due account. A good collection
policy accelerates the collection from slow payer and reduces the bad debt losses.
It keeps the debtor alert and urges them to pay their dues promptly. The collection
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policy is either strict or lenient. A strict collection policy enables early collection
and reduces bad debt losses but it reduces the volume of sales and increases the
collection cost. A lenient policy increases the bad debt losses and increase debt
collection period. The credit manager makes or frames some collection effort for
collecting the credit amount from customers. Some are a) Sending a letter informing the customer regarding the past due status that
are overdue.
b) Making a telephone call to the customer.
c) Employing a collection agency
d) Taking a legal action against the customer
The firms need to continuously monitor and control its receivable to ensure the
success of collection efforts. There are two methods for evaluating the
management of receivable. Such are (a) Average Collection Period:
It represents the average number of days for which a firm has to wait before its
receivable is converted into cash. It measures the quality of debtor. Generally the
shortage of average collection period the better is the quality of debtor.

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Average Collection Period = (Debtors No. of working days in a

year/Annual Credit Sales)
(b) Aging Schedule:
It represents the debtors according to the age or length of time of the outstanding
debtor.
Receivables Analysis of HONDA MOTORS (in millions)

Year

Operating Activity

2007

4,699

2008

13,747

2009

8,678

2010

12,523

2011

29,827

2012

35,842

2013

66,514

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Receivables Analysis
70000
60000
50000
40000
30000
20000
10000
0

2007

2008

2009

2010

2011

2012

2012

Analysis :
The graph above shows that the receivables were low in the period from 2007 to
2010. It shows that the firm had followed a strict credit policy in the given period.
After that it liberalized its credit policy in subsequent years resulting in increase in
debtors as compared to previous years.

CURRENT WORKING CAPITAL

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Margins for the full year (FY13) too were lower by 130 basis points at 10.5% over
FY12. This is in fact the third consecutive decline in SMIIEL. EBITDA margins
since FY11 when it reported healthy margins of 12.8%.
HONDA MOTORS's interest cost as a percentage of sales rose by 36 basis points
in FY13 to 1.61% even as its total debt declined by over 10% over the previous
year to Rs 8,800 crore.
Given an almost flat growth in profit before interest and tax (PBIT) over the past
year, there is a visible deterioration in the company's interest coverage ratio
compared to the previous couple of years.
The management has said that there has been an increase in its average
borrowings (long term) pursuant to an increase in operating activities. Also, cost of
funds has also gone up from an average of 8.1% in FY12 to 8.8% in FY13, leading
to a spike in interest outflow.
The increase in borrowing levels, though in line with the volume growth of
company's operations has impacted SMIIEL. working capital. According to the
management, the working capital in relation to sales deteriorated to 16% for the
year against 12% a year ago.
Given the ambitious revenue targets that SMIIEL. has guided for FY14 in a tight
credit environment, there could well be further stress on working capital this

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fiscal. The company has guided for a growth of 20% in order inflows and 15-17%
growth in revenues for FY14.
For a company which started as the finance arm of SMIIEL. in 1994 to help meet
the working capital requirements of its dealers and vendors, it was imperative to
go on a shopping spree to mark its presence in various financial verticals:
insurance, financing, mutual funds, broking and wealth management. SMIIEL.
Finance first tested the M&A waters in 2009 when it bought out the assets of DBS
Cholamandalam Asset Management) marking its entry into the Indian mutual fund
industry. In 2012, it acquired Indo Pacific Housing Finance and Family Credit,
which provides auto loans.
The big one came in the same year (2012) when it bought out the Indian assets of
Fidelity Mutual Fund. It is said SMIIEL. Finance paid Rs 530-550 crore to buy
Fidelity's assets under management worth around Rs 8,800 crore (at the time of the
acquisition). The acquisition was important for SMIIEL. Finance as a sizeable
portion of Fidelity's assets were equities, which fetch fund houses higher profit
margins than debt.

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SUGGESTIONS AND RECOMMENDATIONS

GENERAL SUGGESTIONS:
1.

Close scrutiny of present rise in inflation in cost of various

raw

materials

should be done, and without

compromising

on

the

quality, cheapest

materials should be acquired and thus try to reduce the cost of production.
2.

The

creativity of employees

should

motivation

be

increased by
and

involving them in extracurricular activities and making them understand

how creativity plays a role in success of any organization.
3.

Proper planning of the investment should be made and

financial
managers should be employed to take proper decisions and thus increase
the profitability and liquidity of the organization.

RECOMMENDATIONS:
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1. SMIIEL. should institutionalize a continuous improvement program for

operational as well as managerial efficiencies. As a matter of subject we will
focus on managerial efficiency which is an inherent problem for any public
sector unit. To some extent this problem can be solved by reducing the
shareholding of Government can go for regular well structured disinvestment
programs and sell its holding to the public. This will create an automotive
pressure on the management and will force the management to strive for
improved efficiency in order to maintain the faith and goodwill of the
company.
2. Firms should try to maintain its quick ratio which is presently higher than the
normal ratio i.e. 1:1. Also the absolute liquid ratio is very high.

CONCLUSION
From the ratios observed in the study I conclude that SMIIEL. is maintaining a
good Working Capital Management base. India's number one power major is
financially well equipped to raise the fund required for its planned Capacity
Addition Programme. The internal accruals of the Company would be sufficient to
finance the equity component for the new projects. Given its low gearing and
strong credit ratings, the company is well positioned to raise the required
borrowings without going for any other following Public Offering.
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Therefore in conclusion we can say that SMIIEL.. is financially capable enough

to carry out its planned Capacity Addition programme and would continue to
enjoy the topmost position in the power sector for a long time in the future.

BIBLIOGRAPHY
1. Financial Management Book written by
a. M.Y. Khan & P.K. Jain
b. I.M. Pandey
c. Prasanna Chandra
d. R.K.Sharma & Shashi K.Gupta
2. Data from Past Records of the Company.
3. Company website: www.Honda Motors.com

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