Professional Documents
Culture Documents
1) INTRODUCTION
A bicycle or cycle is pedal- driven, human powered vehicle with two wheels attached to a frame, one behind the other. First introduced in 19th century Europe, bicycle now numbers over one billion worldwide, providing the principle means of transportation in many regions, notably China & the Netherlands. It is also a popular form of recreation and has been adapted for use in many other fields of human activity, including childrens toys, adult fitness, military and police applSications, courier services and cycle sports. The basic shape and configuration of a typical bicycle has hardly changed since first chain driven model was introduced and developed around 1885, although many important details have been improved ,especially since the advent of modern materials and computer-aided design . These have allowed for a proliferation of specialized designs for individuals who pursue a particular type of cycling. The bicycle has affected history considerably, in both the cultural and industrial realms. Bicycle was seen in INDIA in year 1890. Import of cycles, however, started in 1905 and continued for more than 50 years. The Government in July 1953 announced complete ban on imports, but cycle kept on simmering in the country till 1961. In 1890 , selling price of an imported bicycle was around Rs. 45/-; in 1917, during the First World War the price jumped to Rs. 500/- but dropped considerably, month by month and came down to Rs. 35/- or so (U. K. makes) and Rs.15/- or so (Japanese models). It would be interesting to mention that in 1919, five persons in Punjab imported cycles and used them on The Mall, Shimla. These included one Bishop, two military men and two contractors including S. Pala Singh Bhogal (Grand Father of Mr. M.S. Bhogal of Ludhiana). Under special permission of the Governor, they were allowed to use cycles on 'The Mall' only for one hour in a day. They imported B.S.A. Cross Bar Cycle from U.K. and it used to be a kind of fair at that particular hour on the Mall in Shimla, the scene watched by hundreds of people every day. Later, a firm was formed under the name of Singh & Co. with shops on Railway Road, Jalandhar and Bazaar Vakillan, Hoshiarpur, which imported bicycles in the year 1930 onwards.
(1.2) MAINSTREAM TRENDS IN THE INDIAN BICYCLE INDUSTRY India is the second largest manufacturer of bicycles in the world with the annual production of 9-10 million bicycles. Bicycle Industry in India is largely organized, but the presence of the small players in the unorganized sector is also increasing. The standard bicycles are used commonly for the transportation of the light weight material. But in the past few years the organized sector of bicycle industry has faced a declined in the demand. The major cause of this is the non- availability of road-space for the bicycles. But now the bicycle manufacturing units are taking the help of advertisements and packaging in order to increase the demand.
(1.3) CHALLENGES FACED BY THE BICYCLE INDUSTRY IN INDIA Intense competition at the global level by the Chinese Bicycle Industry. Decreasing demand due to non-availability of road space for the bicycles. Easy availability of loans for the motor-bikes. More urbanization Increase in the standard of living of the people. Increase in the prices of iron and steel.
Hero Honda Motors Ltd. Hero Cycles Ltd. Munjal Showa Ltd. Sunbeam Auto Ltd. Majestic Auto Ltd. Hero Exports Munjal Auto Industries Ltd Rockman Industries Ltd. Highway Industries Ltd. Hero Honda Finlease Ltd. Hero Motors Ltd. Munjal Castings Satyam Auto Components Ltd. Hero Financial Services Ltd. Hero Corporate Service Ltd. Munjal Sales Corporation Hero Global Design Ltd. Easy Bill Ltd. Hero Management Service Ltd. Shivam Autotech
- Motorcycles Cycles, CR Steel Shock Absorbers Aluminium Castings Mopeds, Scooterette - International T.Arm - Auto Components Cycle Components Machine Tools Financial Services Two-Wheelers - Aluminium Castings Sheet Metals Financial Services - IT, Insurance, Training - Distribution Product Designing Payment Services IT Enabled Services - Auto Components
(1.8)
MAJOR PRODUCTS-
The hero cycle limited manufactures cycles & cycle parts; auto rims cold rolled strips as a main product. Co. has long portfolio of different range of cycles. Co. has 132 models in the list; cover all the 3 sections- gents, ladies & kids. It also manufactures cycle parts for its own requirement. After fulfilling the requirements of co. it can exports its remaining quantity. The main products are:i) ii) iii) iv) v) Cycles & Cycles parts Auto Rims Cold rolled strips E-bikes Auto components
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(1.9) MILESTONES
Heros success saga contains the element of courage, great, determination, enterprises and perseverance coupled with vision and meticulous planning: 1956 Hero Cycles Ltd. is established. 1961 Rockman Cycle Industries Ltd. established which is today the largest manufacturer of bicycle chains & hubs in the world. 1963 Bicycles exports take off from India a foray into the international market. 1971 Highway Cycles was set up. It is today the largest manufacturer of single speed & multispeed freewheels in the country. 1975 Hero Cycles Limited became the largest manufacturer of bicycles in India. 1978 Majestic Auto Limited was formed and Hero Majestic Moped was introduced. 1981 Munjal Casting established. 1984 Hero Honda Motors Limited established in joint venture with Honda Motors, Japan to manufacture Motorcycles. It is now the worlds largest producer of two-wheelers. 1985 Munjal Showa Ltd. established to manufacture shock absorbers and struts and is today one of the topmost shock absorber manufacturer companies in this country.
1985 100 cc Hero Honda Motorcycle was launched, which, later on in 1988, became No.1 among all motorcycles in India. 1986 Hero Cycles Limited entered the Guinness Books of World Records as the largest bicycle manufacturer in the world. 1987 Hero Motors, a division of Majestic Auto Limited set up in collaboration with Steyr Diamler Puch of Austria. 1987 Gujarat Cycles Limited, now known as Munjal Auto Centre Ltd. was established to manufacture and export state-of-the-art bicycles and light products in its full automated plant at Wagodia. 1987 Sunbeam Auto Limited, earlier a unit of Highway Cycle Ind.Ltd., established as an ancillary to Hero Honda. It has the largest die casting plant in India. 1988 Hero Puch was introduced by Hero Motors Ltd. which was a revolutionary machine to set new records of petrol efficiency in 50 to 65 cc engines. 1989 Ranger bicycles (a generic name for Mountain Bikes today) was introduced by Hero Cycles Limited. 1990 Hero Cold Rolling Division established which is one of the most modern steel cold rolling plants in India. 1991 Hero Honda received National Productivity Council Award and also the Economic Times Harvard Business School Association Award against 200 contenders.
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1991 Hero Cycles introduced Kidd the first branded bike in childrens segment. 1992 Hero Cycles introduces Impact, the first citibike in India. 1992 Munjal Showa Ltd. received national safety award. 1993 Hero Exports was established as International Trading Division for group & non-group products. 1995 Hero Corporate Services Ltd. was established. 1995 The first exerbike from Hero Group was introduced with the name Allegro.
1996 Hero Winner, a large wheeled scooter with a choice of 50 cc & 75 cc engines was launched by Hero Motors Ltd. 1996 Munjal Showa Ltd. received British Councils National Safety Award. 1998 Hero Briggs & Stratton Auto (P) Ltd. was set up to produce 4-stroke two wheeler engines in various cubic capacities. Munjal Auto Components established to manufacture gear shaft & gear blanks for motorcycles. 2000 The first fully automated bicycles by the name POWERBIKE was introduced by Hero Cycles Limited.
Hero Corporate diversified into I.T. and I.T. Enabled Services through its services segment Hero Corporate Services Limited. 2001 Hero Honda emerges as the market leader in motorcycles with the sales of over a million motorcycles and a market share of 47%. Hero Global Design established to offer engineering services in CAD/CAM/CAE related to new product development design, engineering, manufacturing. 2002 Hero Cycles Limited ties up with National Bicycle Industries, a part of Matsushita Group, Japan, to manufacture high end bicycles. Fastener World established. Easy Bills Limited established to offer utility bill collection and retail services. 2003 Super Starter Series launched by Hero Cycles Limited. Tie-up with Live Bridge Inc., U.S.A., Aprilia Scooters, Haly & Bombardier Rotax GmbH of Germany. Hero Honda continues to be the worlds largest manufacturer of two-wheelers with the market of more than 48%. 2004 Hero Retail Insurance Business established. Super Smart Series introduced by Hero Cycles Limited.
SH. BRIJMOHAN LAL MUNJAL SH. SATYANAND MUNJAL SH. OM PARKASH MUNJAL SH. VIJAY KUMAR MUNJAL SH. SURESH CHANDRA MUNJAL ASHISH KUMAR MUNJAL SH. SUNIL KANT MUNJAL SH. PANKAJ MUNJAL SH. S.K RAI DR. M.A ZAHIR DR. D.R SINGH
(CHAIRMAN) (CO-CHAIRMAN CUM M.D WORKS) (CHAIRMAN CUM M.D MKTG. & ADM.) (M.D INTNL MARKETING) (M.D DOMESTIC MKTG.) (M.D UNIT TO SAHIBABAD) (M.D C.R DIVISION) (M.D NEW HERO AUTO RIM DIV.) (M.D WORKS) ( DIRECTOR) ( DIRECTOR)
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(1.13)
We look over our shoulders, we see the past. We use it to make a better present and a beautiful tomorrow, as tomorrow isnt just another day; its another chance for us to better ourselves and to excel. Hero Cycles is a product of this philosophy. The philosophy that instils commitment, team work and foresight. Heros colossal journey started before Independence. The four Munjal brothers, hailing from a small town called Kamalia, now in Pakistan, are the men who are behind the mission. Brotherhood apart, what knit the men together was the wealth of will, integrity, ambition & determination. In the year 1944, they decided to start a business of bicycle spare parts in Amritsar. It is modest beginning and the next 3 years saw the business grow rapidly. But the dark clouds of partition eclipsed their plans of the future. With renewed vigour and optimism, the operational base was shifted to Ludhiana. By 1956, the brothers had began manufacturing key components of bicycles and as a logical way forward, began to assemble the entire cycle at their manufacturing plant in Ludhiana. In the early days, the plant had a capacity for 25 cycles per day. Over the next few years, the Bicycle Unit started growing in stature and size, attracting skilled engineers, technocrats, administrators and entrepreneurs. From a modest beginning of mere 639 bicycles in the year 1956, Hero Cycles products over 18500 cycles a day today, the highest in global reckoning. With the 48% share of the Indian market, this volume has catapulted Hero in the Guinness Books of World Records in 1986 and edge over global players is being maintained since then. From cycle to two - wheeler was a natural step, and the Hero Group came into being. The Hero Group, today, is a vast conglomerate of companies, either in the form of collaborations, joint ventures or fully owned subsidiaries, with more than Rs. 10000 Crore turnover annually. Hero Group, besides being the worlds largest manufacturers of bicycles, motorcycles and chains to this date, has diversified into newer segments like Information Technology, IT Enabled Services and Financial Services. The Hero Group has done business differently right from the inception and that is what has helped us to achieve break-through in whatever product category we have ventured in. The Group's low key, but focused, style of management has earned the plaudits amidst investors, employees, vendors and dealers, as also worldwide recognition. The growth of the Group through the years has been influenced by the number of factors: The Hero Group through the Hero Cycles Division was the first to introduce the concept of just-in-time inventory. The Group boasts of superb operational efficiencies. Every assembly line worker operates two machines simultaneously to save time and improve productivity. The fact that most of the machines are either developed or fabricated in-house, has resulted in low inventory levels.
In Hero Cycles Limited, the just-in-time inventory principle has been working since the beginning of production in the unit and is functional even till date. The vendors bring in the raw material and by the end of the day the finished product is rolled out of the factory. This is the Japanese style of production and in India; Hero is the first company to have mastered the art of the just-in-time inventory principle.
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Constant quality up gradation ensures that the company stays in the global mainstream and maintains its edge, through excellence. A technology tie-up with National Bicycle Industries of Japan led to the launch of the World 1 series of cycles, besides introduction of new frame designing and features like- A-frame, D-frame, Y-frame, and Swan shaped frame, speedometers & indicators among others.
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(1.17) INNOVATIONS
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(1.18) PROMOTIONS
Until 1986, the company had no need for mass communication. But as competition started growing, Hero Cycles begun to feel the need for creating lasting impression on the customers mind. In the mid 1980s Hero was perceived to be the manufacturer of the basic black bicycles. The company required an image change. It needed to communicate to customers the vast portfolio of products that it had, particularly in the recreational segment. The launch of innovative products and their use as image builders happened simultaneously. Since 1986, the communication strategy has been to build each product separately and create a unique positioning for them. In this way the Ranger was positioned as the bike for outdoor fun, Impact was the preferred choice among city riders and Jet was projected as the lightest running roadster while Hawk was the racers edge. Each of these launches and their promotion gave the Hero brand a new meaning. The brand has also used celebrities including film stars Sanjay Dutt, Rani Mukherjee, Hrithik Roshan and Ameesha Patel. The latest is Indias new bowling sensation, Irfan Pathan who has also been a real life Hero cycle user.
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(1.19)4 PS
TABLE-1.1
PRODUCT
PRICE
PLACE
PROMOTION
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Blood Donations Camps: These camps are being organised on a regular basis since 1992. 464 units have been donated to Indian Red Cross Society in the last camps. ENT Check up Camps: Conducted by specialists from AIIMS, these camps have been organized since November 1997 Heart Check-up Camps: Since July 1988, free camps are being organized in collaboration with Escorts Heart Institute and Research Centre, where specialised diagnosis methods like Echocardiography and ECG are used
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(1.21) PRODUCTS
Gents Ladies
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(1.22) ORGANIZATION STRUCTURE Finance DepartmentChairman Cum Managing Director (Sh.O.P. Munjal)
Marketing Department-
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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.
SECURITY ADMN BLOCK AND SYSTEMS LAWN TABULAR GENARATOR ROOM SCRAP YARD EXPORT STORE EXPORT PACKING CANTEEN RANGER E-BIKE UNIT
12. SCRAP YARD 13. RIM PLANT 14. BOILER HOUSE 15. PAINT SHOP 16.MAIN STORE 17.POLISH ROOM 18. EFFLUENT TREATMENT PLANT 19. E- BIKE MANUFACTURING UNIT 20. E- BIKE MANUFACTURING UNIT 21.RECEIPT AND DESPATCH STORE
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Sales (In Crores) 959.44 895.87 971.53 1094.48 1136.93 1330.87 1285.00 1490.19
Profit before tax (In Crores) 91.56 67.90 94.17 73.58 63.62 121.13 77.23 102.89
(Table-1.2)
GROWTH CHART
1600 1400
1200 1000 800 600 400 200 0 2002 2003 2004 2005 2006 2007 2008 2009 Sales (In Crores) PBT (In Crores)
Year
(Figure-1.1)
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The financial statement may be analyzed by computing trend series of information. The method determines the direction upwards or downwards and involves the computation of the percentage relationship that each statement item bears to the same in base year. The information for a number of years is taken up and one year generally first year is taken as base year. The figures of base year are taken as 100 and trend ratios for other years are calculated on the basis of the base year. Through the analysis we are able to see the trend of figures either upwards or downwards. 1. Trend Analysis of SalesYears 2004-05 2005-06 2006-07 2007-08 2008-09
Trend Of Sales
140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 Trend Of Sales 100 103.8786 117.0582 96.55338 115.9681
(Figure-1.2) InterpretationIt can be interpreted from the graph that the trend of the net sales has been fluctuating within a specific range. 2005 has been taken as the base year, so its trend has been assumed as 100, the sales increased in 2006 and 2007 but a dip was seen in the sales in 2008, this was due to varied reasons but most important was the because of the impact of recession in 2008, but the company revived its previous value of sales which grew in the year 2009.
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2.Trend Analysis of EPSYears 2004-05 2005-06 2006-07 2007-08 2008-09 EPS (in Rs.) 13.85 18.03 25.39 17.03 14.55 (Table-1.4) Trend 100 130.1805 140.8209 67.07365 85.43746
Trend(%)
160 140 130.1805 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 67.07365 100 85.43746 Trend(%) 140.8209
(Figure-1.3) Interpretation From the above graph it is easily interpreted that the trend in EPS has been fluctuating in huge ranges since 2005. In the years 2005, 2006 and 2007 it was ever rising but then there was a sudden dip in it in years 2008 due to less sales and less profit earned by the company as it could not give more money as dividend to the shareholders, but it again revived in year 2009.
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Net Profit (in Crores) 549,202,556 714,869,605 1,006,668,276 675,309,685 576,997,771 (Table-1.5)
Trend(%)
160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 67.08323 100 103.1639 85.44203 Trend(%) 140.8192
(Figure-1.4) InterpretationIt is analysed from the above graph that the company has been earning good amount of net profit in the years 2005, 2006 and 2007. But because of recession and due to less sales in the year 2008, the net profit also decreased but again it rose in the year 2009.
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WEAKNESS
Packaging material not of the required standards Damages during transportations Process of inventory is not according to the JIT system. Advertisement is not done regularly.
OPPORTUNITIES
Bihar. Its R&D department is being recognized by the Government. Company can increase its market share further by catering to the markets in UP and
THREATS
Local / non branded manufacturers of cycle parts. Chinese cycles entering the world market. Motor bike industry damaging cycle industry on big way.
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Meaning of Ratio
A ratio is a simple arithmetical expression of the relationship of one number to another. According to Accountants Handbook by Wixon, Kell and Bedford, a ratio is an expression of quantitative relationship between two numbers. According to Kohler, a ratio is the relation, of the amount a, to another, b, expressed as the ratio of a to b, a: b (a is to b); or as a simple fraction, integer, decimal, fraction or percentage. A financial ratio is the relationship between two accounting figures expressed mathematically. A ratio can be expressed as percentage by simply multiplying the ratio by 100. Ratios provide clues to the financial strength, soundness position or weakness of an enterprise. One can draw conclusions about the exact financial position of a concern with the help of ratios.
shareholders and management all make use of ratio analysis as a tool in evaluating the financial position and performance of a firm for granting credit, providing loans or making investments in the firm. With the use of ratio analysis, one can measure the performance of the firm is improving or deteriorating. Thus, ratios have wide applications and are if immense use of today.
1. Accuracy of financial statements: The ratios are calculated from the data available in financial statements. Before calculating ratios one should see whether proper concepts and conventions have been used for preparing financial statements or not. These statements should also be properly audited by competent auditors. The precautions will establish the reliability of data given in financial statements. 2. Objective or purpose of analysis: The type of ratios to be calculated will depend on the purpose for which these are required. The purpose or object for which ratios are required to be studied should always be kept in mind for studying various ratios. Different objects may require the study of different ratios. 3. Selection of ratios: Another precaution in ratios analysis is the proper selection of appropriate ratios. The ratios should match the purpose for which these are required. Only those ratios should be selected which can throw proper light on the matter to be discussed. 4. Use of standards: The ratios will give on indications of financial position only when discussed with reference to certain standard. These standards may be rule of thumb as in case of current ratio {2:1} and acid test ratio {1:1} may be industry standards, may budget or projected ratios etc. 5. Calibre of the analyst: The ratios are the only tools of analysis and their interpretation will depend upon the calibre and competence of the analyst. 6. He should be familiar with various financial statements and the significance of changes etc. 7. Ratios provide only a base: The ratios are only guidelines for the analyst he should not base his decisions entirely on them. He should study any other relevant information, situation in the concern, general economic environment etc. before reaching final conclusions. 8.
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2. Long term solvency and leverage ratios: Long term solvency ratios convey firms ability to meet the interest cost and repayment schedule of its long term obligations, example debt equity ratio and interest coverage ratio. Leverage ratio shows the proportions of debt and equity in financing of the firm. 3. Activity ratios: Activity ratios are calculated to measure the efficiency with which the resources of a firm have been employed. These ratios are also called Turnover ratios because it indicates the speed with which assets are being turned over in to sales example debtor turnover ratio.
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Current RatioCurrent Ratio is the relationship between the current assets and current liabilities. This ratio is also known as working capital ratio or 2:1 ratio. It is measure of general liquidity and is most widely used to make the analysis of a short- term financial position. Current Ratios- Current Assets Current Liabilities Year Current Assets Current Liabilities Current Ratio 2008-09 2007-08 4,500,174,202 4,078,120,805 1,897,907,454 2,117,280,044 2.37 1.92 (Table- 1.6) 2006-07 3,514,169,012 2,174,339,220 1.61
Current Ratio
Current Ratio 2.37 1.92 1.61
2007
2008
2009
(Figure-1.5) Interpretation- From the above table it is clear that the company has been investing more in the current assets than the current liabilities. An insight in to the balance sheet of the company shows that major portion of current assets consists of sundry debtors and loans and advances. Current Ratio has increased in year 2008-09 as compared to year 2007-08 which has further increased as compared to the year 2006-07. The ratio of year 2008-09 is near to the thumb rule of 2:1, this indicates that liquidity position is good and companys commitment to meet its short-term obligation in time is there.
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Liquid Ratio/ Quick Ratio/ Acid Test RatioIt is a more rigorous test of liquidity then current ratio. The term liquidity refers to the ability of a firm to pay its short-term obligations as and when they become due. It is between the liquid assets and current liabilities. Liquid Ratio - Liquid Assets Current Liabilities
liquid ratio
1.96
1.4 1.24
2007
2009
(Figure-1.6)
Interpretation- The quick ratio of the company is exceeding the rule of thumb of 1:1, indicating that the company is highly liquid so as to fulfil current liabilities well in time.
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Cash/ Absolute Liquid RatioCash ratio is the relationship between the absolute liquid assets and current liabilities. Debtors and bills receivables are more liquid than inventories. But cash ratio involves only absolute liquid assets. Absolute liquid assets involve only cash and short-term securities. Cash Ratio- Absolute Liquid Assets Current Liabilities
(Figure- 1.7) InterpretationIt is interpreted from the above graph and table that the company has enough cash to meet its short-term liabilities as in the year 2008-09 the amount of liquid cash is far more than the 50% of the net worth of liabilities, this means that the company is quite liquid.
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2) EFFICIENCY/ ACTIVITY RATIO:Activity ratio measures the efficiency and the effectiveness with which a firm can manage its resources. These are known as the Turnover ratios, because they indicate the speed with which assets are converted into cash. Major ratios are given as underInventory Turnover RatioThis ratio establishes the relationship between Cost of Goods Sold and Average Inventory. This ratio shows how frequently stock is converted into sales. A high Inventory turnover ratio indicates the efficient management of inventory because more frequently the stocks are sold; the lesser amount is required to finance the inventory. On the other hand lower this ratio indicates inefficient management of inventory. Inventory Turnover ratio= Cost of Goods Sold Average Inventory Years Cost of Goods Sold Average Inventory Inv.Turnover Ratio (in times) (Table-1.10) 2008-09 12,486,741,211 942,258,809 13.25 2007-08 11,244,610,812 956,298,688 11.75 2006-07 11,564,424,474 786,091,088 14.71
(Figure-1.8)
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InterpretationThe ratio indicates how fast inventory is sold. A high ratio is good from the point of view of liquidity. A low ratio signifies that inventory does sell fast and stays on the shelf for a long time. The ratio is such due to high level of inventory. As it can be seen that inventory turnover ratio has increased in the year 2008-09 as compared to 2007-08. This is a favourable position. It implies that there have been some improvements in efficient management of inventory in the concern.
Years Days in the year Inv. Turnover Ratio Inv. Conversion Period
(Table-1.11) InterpretationThe companys inventory conversion period is 27 days in the year 2008-09. It has decreased from 31 days in the year 2007-08. This simply means that the company takes around 27 days to convert the raw material into sales and this decrease is actually good for company as now there is less fear for the obsolesce of the material.
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Debtors Turnover RatioDebtors Turnover Ratio indicates the velocity of debt collection of firm. In simple words, it indicates the number of times average debtors are turned over during a year. Debtors Turnover Ratio- Annual Net Sales Average Debtors Years Annual Net Sales Average Debtors Debtors Turnover Ratio (in times) 2008-09 14,901,978,247 2,187,476,224 6.81 2007-08 12,850,038,969 2,098,441,580 6.12 (Table-1.12) 2006-07 13,308,705,116 2,044,552,471 6.51
(Figure- 1.9) InterpretationGenerally higher the value of the debtor turnover, more efficient the management would be. From the data it is clear that the debtors turnover ratio has increased to 6.81 in the year 2008-09, this indicates that there is efficient management of debtors. This indicates speedy and effective collection.
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Years No. of Days in the Year Debtors Turnover Ratio Average Collection Period of Debts
(Figure- 1.10) InterpretationCompanys average collection period is approximately 54 days. The company has decreased the time period from 59 days i.e approx. two months to 54 days. This indicates that the company has decreased the time allowed to the debtors to return the debt. This is a positive step for the company as the time should not be increasing in the long run.
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Creditors Turnover RatioThis ratio indicates the velocity with which the creditors are turned over in relation to purchases. Generally higher the ratio better it is or otherwise lower the creditor velocity, less favourable are the results. Creditors Turnover Ratio- Annual Purchases Average Creditors
(Figure-1.11) InterpretationThis is indicated from the above table that the creditors turnover ratio has increased in the year 2009 then from the year 2008. This implies that now the creditor velocity is more and the results are more favourable.
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Average Collection Period for Creditors- No. of days in a year Creditors Turnover Ratio
Year No. of days in a year Creditors Turnover Ratio Avg. Collection Period for Creditors
(Table-1.15)
(Figure-1.12) InterpretationThe payment to the creditors is being done in 46 days but the payment is collected from the debtors within 54 days, this indicates that
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Working Capital Turnover RatioWorking capital is directly related with the sales of the firm. Working capital turnover ratio indicates the velocity of the utilization of the net working capital. This ratio indicates the number of time the working capital is turned over in the course of the year. Working Capital Turnover Ratio= COGS Average Net Working Capital
(Table-1.16)
(Figure-1.13) InterpretationThe table indicates that the WCTR is decreasing in the year 2008-09, this indicates that the company is not using its working capital effectively.
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Gross Profit RatioGross profit ratio measures the relationship of gross profit to net sales and is usually represented as a percentage. Gross Profit Ratio- Gross Profit *100 Net Sales
(Figure-1.14) InterpretationThere has been decrease in the Gross Profit because the rate of increase in the sales is less than the rate of increase in cost of goods sold.
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Net-Profit RatioNet profit ratio established a relationship between net profit and sales. This ratio is the overall measure of firms profitability. Net Profit Ratio= Net Profit after Tax Net Sales *100
Years Net Profit after Tax Net Sales Net Profit Ratio
(Figure-1.15) InterpretationIt is clear from the table that the net profitability ratio has decreased in the year 2008-09 that simply means that the expenditure of the company on the material consumed and other company expenses has increased which has decreased the net profit of the company.
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Operating ratioCOGS+ Operating Expenses*100 Net Sales Year COGS Operating Expenses Net Sales Operating Ratio 2008-09 12,486,741,211 980,771,960 14,801,978,247 90.98 2007-08 11,244,610,812 943,965,030 12,850,038,969 94.85 (Table-1.20) 2006-07 11,564,424,474 872,792,384 13,308,705,116 93.45
Operating Ratio
96 95 94 93 92 91 90 89 2007 2008 2009 Operating Ratio
(Figure-1.16) InterpretationThe table indicates that the operating ratio has decreased in comparison with the previous year, but as a matter of fact; it is still very high, which is not good for the company as it shows the inefficiency of the company to manage its business operations. And there are small margins of profit available for the purpose of the payment of dividend and creation of the reserves.
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Solvency RatiosDebt-Equity RatioIt shows the relationship between external and internal equities & it is calculated to measure the claim of outsiders and owners against companys assets. The outsiders funds include all debts / liabilities to outsiders, whether in form of debentures, bonds, mortgage or bills. The shareholders funds include equity + preference share capital included capital reserve, revenue reserve and reserves representing accumulated profits and surpluses. Debt Equity Ratio = Long term Debts / Shareholders Funds * 100 Years Long Term Debts Shareholders Funds Debt Equity Ratio 2008-09 2,415,142,595 6,526,360,604 37.006 2007-08 2,538,217,041 5,992,951,800 42.35 (Table-1.21) 2006-07 1,732,223,697 5,364,231,022 32.29
(Figure-1.17) InterpretationThere has been a slight decrease in this ratio due to the fact that now the company is relying more on own funds then on outsiders funds.
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Equity RatioEstablishing the relationship between shareholders funds and total assets of the company, the components of this ratio are Equity ratio = Shareholders funds / Total assets * 100
(Table-1.22)
Equity Ratio
59 58.5 58 57.5 57 56.5 56 55.5 55 2007 2008 2009 Equity Ratio
(Figure- 1.18) InterpretationThe Company is relying more on shareholders funds than on loan funds. The equity ratio in 2008 is 56.28% and in 2009 is 58.44%. This means that the company is getting more of the owners capital for its operation rather than on getting the loans from various sources.
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Solvency RatioThis ratio indicates the relationship between total liabilities to total assets of the company. Solvency Ratio- 100-Equity Ratio Years 2008-09 2007-08 2006-07 Solvency Ratios 22.32 44 11.85 (Table-1.23)
Solvency Ratio
44.5 44 43.5 43 42.5 42 41.5 41 Category 1 Category 2 Category 3 Solvency Ratio
(Figure-1.19) InterpretationThe ratio in 2008 is 44% and in 2009 is 42%, so it implies lower the ratio of total liabilities to total assets, more satisfactory is the long term solvency position of the firm.
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Chapter-1 (1.1) Introduction To the Concept of Working Capital ManagementWorking capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at their inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
Definitions According to Guttmann & DougallExcess of current assets over current liabilities. According to Park & GladsonThe excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government).
(1.2) Need of working capital managementThe need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales cannot convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.
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(1.3) Gross working capital and Net working capitalThere are two concepts of working capital management
1) Gross working capitalGross working capital refers to the firms investment I current assets. Current assets are the assets which can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and inventory.
2) Net working capitalNet working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative. Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.Net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term variable capital means outlays for payrolls advanced to workers before the completion of work. He compared this with constant capital which according to him is nothing but dead labour. This variable capital is nothing wage fund which remains blocked in terms of financial management, in working-process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his variable capital.
(1.4) Types of working capitalThe operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital. 1) Permanent working capital The need for current assets arises, as already observed, because of the cash cycle. To carry on business certain minimum level of working capital is necessary on continues and uninterrupted basis. For all practical purpose, this requirement will have to be met permanent as with other fixed assets. This requirement refers to as permanent or fixed working capital
2) Temporary working capital Any amount over and above the permanent level of working capital is temporary, fluctuating or variable, working capital. This portion of the required working capital is needed to meet fluctuation in demand consequent upon changes in production and sales as result of seasonal changes
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Time (Figure-1.1) Graph shows that the permanent level is fairly constant; while temporary working capital is fluctuating in the case of an expanding firm the permanent working capital line may not be horizontal. This may be because of changes in demand for permanent current assets might be increasing to support a rising level of activity.
(1.5) Determinants of working capitalThe amount of working capital depends upon following factors1) Nature of business Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. e.g. public utility services like railways, infrastructure oriented project etc. There requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors. 2) Length of production cycle In some businesses like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quite high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high.
3) Size and growth of business In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size.
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4) Business/ Trade cycle If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favourable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.
5) Terms of purchase and sales Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher. 6) Profitability The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extent that they earned in cash may be used to meet the working capital requirement of the company.
7) Operating efficiency If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.
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Moussawi, LaPlante, Kiechnick and Baranchuk (2006) in their study, Corporate Working Capital Management- Determinants and Consequences have concluded that firms overinvest in working capital. Industry practices, firm size, future firm sales growth, the proportion of outside directors on a board, executive compensation (current portion), and CEO share ownership significantly influence the efficiency of a companys working capital management. Padachii (2006) in his study, Trends in Working Capital Management and its Impact on Firms Performance: An Analysis of Mauritian Small Manufacturing Firms has analysed the trend in working capital needs and profitability of firms are examined to identify the causes for any significant differences between the industries. The dependent variable, return on total assets is used as a measure of profitability and the relation between working capital management and corporate profitability is investigated for a sample of 58 small manufacturing firms. Zinn (2004) in his article, Thirty Years of Titanium Bicycles- The short history of bicyclings wonder material has presented the history of the bicycle as per different parts of the world. Mikkola (2002) in her study, Industry Structure and Modular Product Architectures: An Interpretation of Cycle Industry has concluded that different types of networks exist as ways of coping with the dynamics of industry demands that are based on modular product architectures. Luh and Wu (2001) in their research paper, A Study of Innovative Ideas Screening Model Applied to Bicycle Industry have concluded that Product innovation is a key factor for organizations sustainability. Idea screening largely determines the fate of a new product. If the probability of successful ideas can be enhanced effectively, enterprises would be more willing to invest in new products. Innovative Ideas Screening Model (IISM) can measure success potential of new products, objectively and effectively. Green products are trendy and bicycle is one with great potential. Bicycle industry contributes considerable revenue to Taiwan and the innovation of which is vital. Weinraub and Visscher (1998) in their article, Industry Practice Relating To Aggressive Conservative Working Capital Policies have looked at ten diverse industry groups over an extended time period to examine the relative relationship between aggressive and conservative working capital practices. Results strongly show that the industries had significantly different current asset management policies. Ulrich, Randall,Fisher,Reibstein (1997) in their article, Managing Product Variety : A Study of the Bicycle Industry have analysed the reasons of the difference between the practices, marketing strategies, distribution channel and varieties introduced in the market by six different bicycle manufacturing companies.
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Bianchi (1995) in his research paper, An Educational Dynamic Model for Net Working Capital Management in a Trading Wholesale Firm has sketched a dynamic model which might be useful in improving net working capital.
(2.2)- Need for StudyThe prime objective of the company is to obtain maximum profit thought the business. The amount of profit largely depends upon the magnitude of sales. However the sale does not convert into cash instantaneously. There is always a time gap between sale of goods and receipt of cash. The time gap between the sales and their actual realization in cash is technically termed as operating cycle. Additional capital required to have uninterrupted business operations, and the amount will be locked up in the current assets. Regular availability of adequate working capital is inevitable for sustained biasness orpations. If the proper fund is not provided for the purpose, the business operations will be effected; and hence this part of finance to be managed well.
(2.3) Objectives of the Study1. To study the working capital components such as receivables account, Payable account and inventory position of HCL. 2. To study the Gross and Net Operating Cycle of HCL. 3. To study the reasons for the changes in the working capital.
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Chapter- 3 Research Methodology IntroductionIt is a way to systematically solve the research problem; it may be understood as a science of study how research is done scientifically. Thus research methodology is not only concerned with research methods but also consider the methods used in conduct of research study and explain why particular methods or technique and others are not, so that research result are capable of being evaluated either by researcher himself or by others.
Scope of the study The study is based in Ludhiana only. The years of study comprises of 2004-05 to 2008-09. The study has been carries out for the manufacturing unit of HCL. Research Design-This study will be descriptive. This study is mainly concerned about
an existing problem and its basic nature cause and effect. It is concerned with discovering and testing certain variables with respect to their services. The study will focus on the working capital management of Hero Cycles Limited. And also the ways in which that can be justified. Moreover, this study was pre- planned and based majorly on the secondary data.
Data Collection and SourcesThe data has been collected by both Primary and Secondary sources-
Primary Sources: During the project work the primary data was collected with the help of
a unstructured interview of Mr. Bharat Goel, (Sr.VP Finance), Mr. Hardeep Kumar and Mr. Davinder (Assistant Managers, Finance).
Secondary
Sources: As per the Project the secondary data has been collected from-
Annual report of HCL 2007-08 Annual report of HCL 2008-09 Besides, many research papers, journals
data. Tools for Data Analysis- The data has been analysed with the help of tables and graphs. Even statistical techniques like ratios and trend analysis have also been used. sss Limitations of the study- Following limitations were encountered while preparing this project: 1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company.
3) Limited area:Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.
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Chapter-4 Working Capital Level and Analysis Working capital levelThe consideration of the level investment in current assets should avoid two danger points, excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firms profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can threaten the solvency of the firm because of its inability to meet its current obligation. It should be realized that the working capital needs of the firm may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.
(4.1) Current AssetsTotal assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year. To manage the current assets means to have current assets in such a proportion that they become profitable for the firm. They include Cash in bank and in hand Bills Receivables Sundry Debtors Short Term Loans and Advances Inventory of Stock Prepaid Expenses (Table -4.1)- Components of the Current Assets Years 2004-05 Inventories 650,041,883 Sundry Debtors 1,828,130,505 2005-06 766,521,142 1,860,512,457 69,481,654 2006-07 805,661,034 2,228,592,486 22,134,657 2007-08 1,106,936,341 1,968,290,674 151,600,603 2008-09 777,581,277 2,406,661,773 152,820,715
Cash and 77,168,419 Bank Balance Loans and 391,097,916 Advances Current Assets 2,946,438,723
337,661,837 3,034,177,090
457,780,835 3,514,169,012
851,293,187 4,078,120,805
1,163,110,437 4,500,174,202
Indices
100
102.9778
119.2687
138.4089
152.733
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180 160 140 120 100 100 80 60 40 20 0 2004-05 2005-06 2006-07 C.A Indices 2007-08 2008-09 119.2687 102.9778 138.4089 152.733
(Figure-4.1) InterpretationThe following points can be interpreted from the above table and figure In the year 2007-08, there is sudden rise in the inventory, which is because of the recession period. There was a slump in the sales and inventory was blocked in the company only. But in the year 2008-09, the things came back to normal. The sundry debtors were also less in the year 2007-08 because of the fall in the sales but in the year 2008-09, as soon as the sales increased the number of sundry debtors also increased. It is evident from the table that in the year 2008-09, the sundry debtors compute for the majority of the current assets. Cash in hand and Bank has also increased in both the consecutive years. But an inside view of balance sheet reveals that in the year 2007-08, the cash in hand has decreased considerably, but it has again increased in the year 2008-09, which is a good sign for the liquid health of the company. Loans and advances in the year 2008-09 have increased because the loans to the employees have increased and the advances have also increased because now the sales have increased and the company has sold the things on credit as well, as the advances include recoverable in cash or in kind.
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(4.2) Current liabilitiesCurrent liabilities mean the liabilities which have to pay in current year. It includes sundry creditors means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance. Bill Payable Sundry Creditors Outstanding Expenses Short-Term Loans Dividend Payable Bank Overdraft (Table- 4.2)- Components of Current Liabilities Years 2004-05 2005-06 150,091,940 2006-07 157,411,551 2007-08 279,111,124 2008-09 355,000,124
Acceptance 102,955,677 of Bills Payable Sundry Creditors Security Deposits Advance Against Orders Interest Accrued but not due Other Liabilities Current Liabilities Other Provisions Total Liabilities Indices
1,084,407,168 1,354,212,056 1,644,148,925 1,538,854,031 1,245,759,409 33,108,985 20,905,270 33,033,817 34,797,274 33,074,813 28,065,885 28,356,723 32,385,116 28,291,870 30,372,756
7,201,337
33,978,467
68,013,967
12,261,309
52,930,939
21,625,843
34,312,313
47,873,984
51,619,677
24,283,631
1,270,204,280 1,640,425,867 1,978,589,143 1,942,587,980 1,736,638,729 164,026,142 223,706,638 195,750,077 174,692,064 161,268,726
1,424,230,422 1,864,132,505 2,174,339,220 2,117,280,044 1,897,907,454 100 130.8869 152.6671 148.6614 133.2587
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180 160 140 120 100 100 80 60 40 20 0 2004-05 2005-06 2006-07 C.L Indices 2007-08 2008-09 130.8869 152.6671 148.6614 133.2587
(Figure-4.2) InterpretationIt is indicated from the above that there has been continuous rise in the current liabilities till the year 2007-08, but then in 2008-09, the liabilities have decreased as there is more increase in the current assets as compared to the current liabilities.
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(4.3) Companys Net Working Capital Trend AnalysisIn working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an analyst to make a study about the trend and direction of working capital over a period of time. Such analysis enables us to study the upward and downward trends in current assets and current liabilities and its effect on the working capital position. In the words of S.P. Gupta The term trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets, and current liabilities to grow or decline over a period of time According to R.C.Galeziem The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing. Emphasizing the importance of working capital trends, Man Mohan and Goyal have pointed out that analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. Years Current Assets Current Liabilities 2004-05 2,946,438,723 1,434,230,422 2005-06 3,034,177,090 1,864,132,505 2006-07 3,514,169,012 2,174,339,220 2007-08 4,078,120,805 2,117,280,044 2008-09 4,500,174,202 1,897,907,454
1,512,208,301
1,170,044,589
1,339,829,792
1,960,840,761
2,602,266,748
100
77.373
88.601
129.668
172.084
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NWC Indices
200 180 160 140 120 100 80 60 40 20 0 2004-05 2005-06 2006-07 2007-08 2008-09 NWC Indices
(Figure-4.3) InterpretationIt can be clearly observed from the above table and figure that there has been an incline in the working capital of the company in the last five years. The current assets have increased more than the increase in the current liabilities in the corresponding years so, the trend has always been positive except for the year 2005-06 because in this year the % increase in the current assets is less than the % increase in the current liabilities.
(4.4) Changes in working capitalThere are so many reasons to changes in working capital as follows1) Changes in sales and operating expenses:The changes in sales and operating expenses may be due to three reasons A) There may be long run trend of change e.g. the price of row material say oil may constantly raise necessity the holding of large inventory. B) Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. C) Changes in seasonality in sales activities. 2) Policy changes:The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume. 3) Technology changes:The third major point if changes in working capital are changes in technology because changes in technology to install that technology in our business more working capital is
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required a change in operating expenses rise or full will have similar effects on the levels of working following working capital statement is prepared on the base of balance sheet of last two year. Statement of Changes in Working CapitalParticulars Current Assets Inventories Sundry Debtors Cash and Bank Balance Loans and Advances Total (A) Current Liabilities Bills Payable Sundry Creditors Security Deposits Advances Against Orders Interest Accrued Other Liabilities Provisions Total (B) 2008-09 2007-08 Increase Decrease
279,111,124 1,538,854,031 28,356,723 32,385,116 12,261,309 51,619,677 174,692,064 2,117,280,044 1,960,840,761 641,425,987
Net Working 2,602,266,748 Capital (A-B) Net Increase in Working Capital Total 2,602,266,748
2,602,266,748
ObservationsWorking Capital has increased for the year 2008-09 because1. Inventory has decreased because now the company is following the concept of JIT and even the sales have increased. 2. Cash in hand has increased because now the operating cycle has reduced to 74 days from the 84 days. 3. Sundry Debtors have increased because of the increase in the sales. 4. Loans and advances have increased because the company has given more loans to the employees now. And moreover, because of the rise in the material cost i.e the steel prices, the costs have increased so the company needs more money to invest. 5. 6. Loans and advances have increased because of the increase in the material cost especially because of the increase in the steel prices.
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Years 2004-05 2005-06 2006-07 2007-08 Annual 8,395,203,214 8,466,639,105 10,371,148,825 10,193,568,544 Consumption of Raw Material (Opening Stock+ Purchase-Closing Stock) Years Daily Consumption 2004-05 23,000,557 2005-06 23,196,272 2006-07 28,414,106 2007-08 27,927,585
2008-09 11,344,847,987
2008-09 31,081,775
(Annual Consumption/365) Years 2004-05 2005-06 2006-07 2007-08 2008-09 Raw Material 13 days 15 days 14 days 15 days 13 days Storage (Average of Raw material/Daily Consumption of Raw Material)
Work-in-Progress (Table4.6)
Years Average WIP 2004-05 of 150,078,798 2005-06 160,347,144 2006-07 176,557,779 2007-08 214,324,043 2008-09 189,318,239
(Opening Stock+ Closing Stock/2) Years 2004-05 2005-06 2006-07 2007-08 2008-09 Annual Cost 9,373,267,120 9,604,384,313 11,586,302,311 11,362,216,753 12,577,620,191 of Production ARMC+ 50% P.E+ Manufacturing Expenses+ 50% Dep. + Op.St. of WIP- Closing St. Of WIP) Years 2004-05 Average Daily 25,680,183 Cost 2005-06 26,313,382 (Annual Cost/365) Years Conversion period 2004-05 6 days 2005-06 6 days 2006-07 6 days 2007-08 7 days 2008-09 5 days 2006-07 31,743,294 2007-08 31,129,361 2008-09 34,459,233
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2005-06 9,589,658,677
2006-07 11,564,424,474
2007-08 11,244,610,812
2008-09 12,486,741,211
2005-06 26,729,810
2006-07 33,143,500
2007-08 33,089,787
2008-09 38,008,299
(Annual Sales/365) Years Storage Period 2004-05 3 days 2005-06 3 days 2006-07 3 days 2007-08 5 days 2008-09 2 days
(Opening Debtors+ Closing Debtors/2) Years Annual Sales 2004-05 10,944,819,048 2005-06 11,369,337,410 2006-07 13,308,705,116 2007-08 12,850,038,969 2008-09 14,901,978,247
(Sales During the Year) Years Daily Sales 2004-05 29,985,805 2005-06 31,148,870 (Annual Sales/365) 2005-06 59 days 2006-07 36,462,206 2007-08 34,823,953 2008-09 40,827,338
2004-05 58 days
2006-07 56 days
2007-08 60 days
2008-09 54 days
2004-05 8,408,147,399
2005-06 8,522,140,258
2006-07 10,382,131,472
2007-08 10,295,577,808
2008-09 11,165,961,043
(Purchases During The Year) Years Daily Purchases 2004-05 23,036,020 2005-06 23,348,329 (Purchases/365) Years Payment Period 2004-05 47 days 2005-06 52 days 2006-07 53 days 2007-08 56 days 2008-09 46 days 2006-07 28,444,196 2007-08 28,207,062 2008-09 30,591,674
Operating Cycle= Raw Material Conversion Period + Work-in-Progress Conversion Period+ Finished Goods Conversion Period+ Debtors Collection Period.
2005-06
2006-07
2007-08
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2008-09
The Gross Operating Cycle Consists of Following Events, Which Continues Throughout the Life of Business Conversion of cash to raw material Conversion of raw material to work-in-progress Conversion of Work-in-progress into finished goods Conversion of finished goods into accounts receivable Conversion of accounts receivable into cash InterpretationIf the operating cycle is of less number of days for the company then it is considered to be good as this means that the company needs less of working capital but the profitability level is quite good. In the year 2008-09, the operating cycle has reduced by 10 days from the year 2007-08,i.e it is of 74 days in the year 2008-09 and was of 84 days in the year 2007-08. This indicates that as the sales have risen and the debtors collection period has reduced so, now the companys inventory is converted into cash rapidly. It is very good for the financial health of the company.
Table-4.10- Net Operating Cycle Cycle Years Gross Operating Cycle(Days) Average Payment period(days) Net Operating Cycle(days) 2004-05 80 2005-06 83 2006-07 79 2007-08 87 2008-09 74
47
52
75
56
46
33
31
26
31
28
65
S.D Indices
140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 S.D Indices
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Average collection period The average collection period measures the quality of debtors since it indicate the speed of their collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firms credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects. In determining the collectability of debtors and thus, the efficiency of collection efforts. In ascertaining the firms comparative strength and advantages related to its credit policy and performance. The debtors turnover ratio can be transformed in to the number of days of holding of debtors.
(Table-4.12)- Average Collection Period Years Annual Net Sales Average Debtors DTR Avg. Collection Period 2005 2006 2007 2008 2009 10,944,819,048 11,369,337,410 13,308,705,116 12,850,038,969 14,901,978,247 1,742,763,236 6.28 58 days 1,844,321,481 6.16 59 days 2,044,552,471 6.51 56 days 2,098,441,580 6.12 59 days 2,187,476,224 6.81 54 days
(Figure-4.5)
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Observations The size of receivables is steadily increasing it indicates that the company was allowing more credit year to year, but it was not bad signal because as receivables were supporting to the increase in the sales. Average collection period is reducing to present situation, but as compare with the normal collection period allowed to customer by HCL, it is clear that the company requires increasing its efficiency of collection of receivables. All the above factors directly or indirectly affect the debtors turnover ratio, current ratio and working capital ratio. For effective management of credit, the firm should lay down clear cut guidelines and procedure for granting credit to individual customers and collecting individual accounts should involve following steps: (1) Credit information (2) Credit investigation (3) Credit limits (4) Collection procedure.
To maintain adequate accountability of inventories assets. To provide, on item by- item basis, for re-order point and order such quantity as would ensure that the aggregate result confirm with the constraint and objective of inventory control. -To keep low investment in inventories carrying cost an obsolesce losses to the minimum (Table-4.13)- Size of the Inventory Particulars Raw Mat. WIP F.G Others Total Indices 2004-05 216,125,341 159,462,908 74,497,592 199,956,042 650,041,883 100 2005-06 283,285,253 161,231,380 89,027,192 232,977,316 766,521,142 117.92 2006-07 292,728,041 191,884,178 109,170,878 211,877,937 805,661,034 123.94 2007-08 388,045,813 236,763,908 228,057,660 254,068,960 1,106,936,341 170.29 2008-09 218,472,551 141,872,569 112,688,773 304,547,385 777,581,277 119.62
180 160 140 120 100 100 80 60 40 20 0 2005 2006 2007 Size of Inventory (Indices) 117.92 123.94
170.29
119.62
2008
2009
(Figure-4.6)
Inventory components The manufacturing firms inventory consist following components I) Raw material ii) Work- in-progress iii) Finished goods To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods.
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24
27
25
31
28
13 days
15 days
14 days
15 days
13 days
(Figure-4.7) InterpretationFrom the above table and figure it can be interpreted that in the year 2008-09, the inventory holding period has reduced, this implies that now the inventory id converted into cash quite rapidly. On the other hand, the raw material holding period has also decreased because as the sales have increased the demand for the products have increased so; the company is changing the raw material into finished goods as soon as possible.
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Chapter- 5
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(5.1)- ConclusionWorking capital management is important aspect of financial management. The study of working capital management of Jain Irrigation system ltd. has revealed that the current ration was as per the standard industrial practice but the liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratio analysis, working capital leverage, working capital components which helped the company to manage its working capital efficiency and affectively. Working capital of the company is increasing and showing positive working capital per year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities. Working capital increased because of increment in the current assets is more than increase in the current liabilities. Companys current assets were always more than requirement; it has a positive effect on profitability of the company. Current assets being more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. Current assets components shows sundry debtors were the major part in current assets in the year 2008-09; it shows that there is inefficient receivables collection management. Inventory is supporting to sales, thus inventory turnover ratio was increasing, and the company decreased the raw material holding period, in order to further increase the sales. Study of the operating cycle reveals that it became unmanageable in the year 2007-08 i.e 84 days due to recession; but the company directed it right in the year 2008-09, by managing its assets in a right way.
(5.2)RecommendationsRecommendation can be use by the firm for the betterment increased of the firm after study and analysis of project report on study and analysis of working capital. I would like to recommend. Company should raise funds through short term sources for short term requirement of funds, which comparatively economical as compare to long term funds. Company should take control on debtors collection period which is major part of current assets. Company has to take control on cash balance because cash is non earning assets and increasing cost of funds. Company should reduce the inventory holding period with use of zero inventory concepts. Over all company has good liquidity position and sufficient funds to repayment of liabilities. Company has accepted conservative financial policy and thus maintaining more current assets balance. Company is increasing sales volume per year which has supported the company to sustain its market share.
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Books ReferredJuneja,C.Mohan. and Bagga, Rajesh. Accounting for Management and Information Technology. Kalyani Publishers, Ludhiana. Khan,M.Y. and Jain,P.K. Cost Accounting and Financial Management. Tata McGraw-Hill Publishing Company Limited, New Delhi. Pandey, I.M. Financial Management. Vikas Publishing House Private Limited.
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