Working capital Management

A Study of Working Capital Management of Taj Mahal Palace with Oberoi Hotel

SUBMITTED BY Pratik Janak Desai

MMS I SEMESTER II ACADEMIC YEAR 2012-13

PROJECT GUIDE PROF. AFTAB SHAIKH

SUBMITTED TO: H K Institute of Management Studies and Research, Jogeshwari, Mumbai 400102

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Students Declaration
I hereby declare that this report submitted in partial fulfillment of the requirement of the award for the Master in Management Studies to H K Institute of Management Studies and Research is my original work and not submitted for award of any degree or diploma fellowship or for similar titles or prizes. I further certify that I have no objection and grant the rights to H K Institute of Management Studies and Research to publish any chapter/ project if they deem fit in Journals/Magazines and newspapers etc. without my permission. Place Date Name Class : Mumbai : 30th June : Pratik Desai : MMS I Sem. II

Roll No. : 5

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Certificate
This is to certify that the dissertation submitted in partial fulfillment for the award of Master in Management Studies of H K Institute of Management Studies and Research is a result of the bonafied research work carried out by Mr.Pratik Desai under my supervision and guidance, no part of this report has been submitted for award of any other degree, diploma, fellowship or other similar titles or prizes. The work has also not been published in any Journals/Magazines.

Date: Place:

30th June Mumbai

Projectguide: Prof. Aftab Shaikh Core Faculty HKIMSR

Dr. Prof. Krishna C. Pandey Director HKIMSR

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ACKNOWLEDGEMENT
It is difficult to acknowledge precious a debt as that of learning as it is the only debt as that is difficult to repay except through gratitude. I would like to give our vote of thanks first and foremost to Dr. Prof. K C Pandey, Director HKIMSR, for giving me an opportunity to work on the project and giving me full support in completing this project.

I am thankful to my guide Prof. Aftab Shaikh for his support. Last but not the least; I would like to thank my parents & my friends for their full Corporation & continuous support during the course of this assignment.

(Pratik Desai)

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Table of Contents
CHAPTER 1 CHAPTER 2 : 1.1 : 2.1 : 2.1.1 : 2.1.2 : 2.1.3 : 2.2 : 2.2 : 2.3 CHAPTER 3 CHAPTER 4 : 3.1 : 4.1 : 4.2 Executive Summary Introduction Introduction to capital Introduction to working Capital Introduction to Hotel Industry Objectives Methodology Limitations of the Report Analysis & Findings Conclusions Bibliography

Pg no.
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8 09 15 20 21 22 23 36 37

CHAPTER 1
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1.1 Executive Summary

Liberalization, Privatization and Globalization or (LPG) as it is refer in short today have change the scenario of corporate world and management of enterprises in our country. It has now become more important not to just manage an organization but to achieve corporate excellence simultaneously as the future belongs to learning and performing organization. As every business concern irrespective of its size, nature and age need fund to carry out business operations such as purchase of raw material, payment of wages and other day to day expenses, working capital become an important and integral part of business. Working capital is the life blood and never center of any business because no business can run successfully without an adequate amount of it. Unless organization learn to manage its working capital, success, will be elusive. Thus, the effectiveness of an organization depends on the strength of its working capital management as it is core to the whole system. In the context of Indians Hotel Industry working capital management holds a greater significance because Hotel which forms as one of the important part of any infrastructural facility, in recent years has become more crucial for achieving rapid economic growth of our country. I have conducted this project to analyze and understand the working capital management Of Hotel industry for the period of five years. The data which I have collected for this project is secondary data and working capital analysis has been prepared through analysis for the period of five years.

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Keeping this background in view, an attempt is made to examine the working capital practices of Indian Hotel industries. The project contains the basic postulates of working capital and impact of shortcomings in the management of it. All this has been done to get a clear view of the techniques of working capital management of India Hotel industry.

CHAPTER: 2
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2.1 INTRODUCTION 2.1.1 CAPITAL

Capital (political), the area of a country, province, region, or state regarded as enjoying primary status, usually but not always the seat of the government. Capital (economics), a factor of production which is not wanted for itself but for its ability to help in producing other goods Financial capital, any form of wealth capable of being employed in the production of more wealth.

Capital can also represent the accumulated wealth of a business, represented by its assets less liabilities.

Capital can also mean stock or ownership in a company.

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2.1.2 WORKING CAPITAL

Introduction of Working Capital Management The term working capital is commonly used for the capital required for day-to-day operations of a business. Generally, two concepts of working capital are the gross working capital and the net working capital. Gross refers to the firm's total investment in the current assets. Net supports the view that working capital is the difference of current assets and current liabilities. Net working capital may be positive or negative, although gross working capital is always positive. According to the other school of thought (Net concept), the working capital refers to the difference between current assets and current liabilities. It is the excess of current assets over current liabilities. Current liabilities refer to the claims of outsiders which are expected to mature for payment within an accounting year and include creditors for goods, bills payable, bank overdraft, accrued expenses, etc. A positive net working capital arises when current assets exceed current liabilities and a negative net working capital arises when current liabilities exceed current assets. Both aspects have equal importance for management the first focuses the attention on the optimum investment in and financing of the current assets whereas the second indicates the liquidity position of the firm and suggests the extent to which working capital needs may be finance by permanent sources of funds. A company starting with purchases of raw materials, components on a cash or credit basis. These materials will be converted into finished goods after undergoing the stage of work in process. For this purpose, the company has to make payments towards wages, salaries and other

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manufacturing costs. Payments to suppliers have to be make on purchase in the case of cash purchases and on the expiry of credit period in the case of credit purchases. Further, the company has to meet other operating costs such as selling and distribution costs, general, administrative costs and non-operating costs as well as financial costs. In case the company sells its finished goods on a cash basis, it will receive cash along with profit with least delay. When it sells goods on a credit basis, it will pass through one more stage, viz., accounts receivable and gets back cash along with profit on the expiry of the credit period. Once again, the cash will be used for the purchase of materials and/or payment to suppliers and the whole cycle termed as working capital or operating cycle repeats itself. This process also indicates the dependence of each stage or component of working capital on its previous stage or component.

The dependence of one component of working capital on its previous Stage/component is described above highlighting the inter-dependence among the components of working capital. However, there can be other kinds of inter-dependence which are not dictated by the usual sequence of manufacturing and selling operations. For example, in case the manufacturing process may require a raw material which is in short supply. Then the company may have to make advance payment in anticipation of the receipt of that raw material. This will cause an immediate drain on cash resources unlike a situation where credit purchase of raw materials can be made. Similarly, if there is an excessive accumulation of finished goods inventory, the company may have to

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provide more liberal credit period and/or relax its existing credit standards which will increase sundry debtors. In situations of greater need for cash even providing cash discount as part of the credit terms for sale which is likely to boost the cash resources, may have to be resorted to. In such cases, the relative benefits and costs may have to be taken into consideration before taking decisions.

Working capital management is the device of finance. Working Capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the interrelationship 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 firm s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.

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Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold.

Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit Basis . Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and

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Working capital Management

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.

Sources of Working Capital

Trade Credit An arrangement to buy goods or services on account, that is, without making immediate cash payment ,For many businesses, trade credit is an essential tool for financing growth. Trade credit is the credit extended by suppliers who let us buy now and pay later. Any time a business man takes delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit. Effective use of trade credit requires intelligent planning to avoid unnecessary costs through forfeiture of cash discounts or the incurring of delinquency penalties. But every business should take full advantage of trade that is available without additional cost in order to reduce its need for capital from other sources.

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Working capital Management

Bank Financing for Working Capital Banks are main institution source of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital in India. A bank considers a firm sales and production plane and desirable levels of current assets in determining its working capital requirements The amount approved by bank for the firms working capital is called trade limit. Credit limit is the maximum funds which a firm can obtain from bank system. In practice bank do not lend. 100% credit limit; they deduct margin money.

2.1.3 INTRODUCTION TO THE HOTEL

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INDUSTRY
According to the British laws a hotel is a place where a bonafied traveler can receive food and shelter provided he is in a position to for it and is in a fit condition to receive. Hotels have a very long history, but not as we know today, way back in the 6 th century BC when the first inn in and around the city of London began to develop. The first catered to travelers and provided them with a mere roof to stay under. This condition of the inns prevailed for a long time, until the industrial revolution in England, which brought about new ideas and progress in the business at inn keeping. The invention of the steam engine made traveling even more prominent. Which had to more and more people traveling not only for business but also for leisure reasons. This lead to the actual development of the hotel industry as we know it today. Hotel today not only cater to the basic needs of the guest like food and shelter provide much more than that, like personalized services etc. Hotels today are a Home away from home.

THE TATA GROUP

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Working capital Management

The Tata Group is one of the Indias oldest, largest and most respected business conglomerates. The Groups business are spread over seven business sectors. The TATA Group comprises of 90 operating Companies in seven business sectors: -Services -Information Systems & Communications -Engineering -Materials -Consumer Products -Energy -Chemicals

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Working capital Management

Jamshetji Tata founded the Group in the mid 19th century. Today the Tata Group is rapidly growing business based in India with significant international operations. The Tata name has been respected in India for 140 years for its adherence to strong values and business ethics. The Groups 28th publicly listed enterprises have a combined market capitalization of some 98.86 billion$, among the highest among Indian business houses and a shareholder base of 3.5 million. The Tata family of companies shares a set of 5 core values: Integrity, Understanding, Excellence, Unity and Responsibility. The history of Mumbai and The Taj Mahal Palace are dramatically intertwined. The Hotel is Mumbais first harbor landmark (built 21 years before The Gateway of India) and the sight of the first license bar in the city. For more than a century the Taj has played an intrinsic part in the life of the city, hosting Maharajas, dignitaries and eminent personalities from across the globe. Today it is a Leading Hotel of the World and favorite destination for discerning business travelers. A treasure-trove of invaluable memorabilia, there is a story to tell behind every pillar, a landmark deal in every boardroom, and a storied celebration under every awning. Come be a part of the legend.

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Working capital Management

VISION, VALUES AND GAMEPLAN VISION Embrace Talent and harness Expertise to Leverage standards of Excellence in the Art of Hospitality to grow our International Presence, increase Domestic Dominance and create Value for all Stakeholders VALUES People- Diversity, Integrity & Respect- People are our greatest asset and a key to our success. We respect diversity of people, idea, cultures and honor the value of individuals in a team. Passion for Excellence- We believe in perfection to achieve excellence. We continuously improve processes to surpass global benchmarks. Exceed Expectation- By exceeding expectation of all stakeholders and protecting the interest of our shareholders and playing by the rules. Innovation- We encourage innovation, embrace change growth through knowledge and learning. Sense of urgency and accountability- We accept responsibility and deliver on promises with sense of urgency and agility. Social Responsibility- We commit to improve the quality of life of the communities we serve and our concern for environment by returning to society what we earn. Joy at work- We recognize and respect each other in all interactions and set the example for our guests, busine4ss associates and colleagues. We encourage a fair environment that supports equal opportunity to attract, develop and retain the best talent and Endeavour to have fun too.

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Working capital Management

GAME PLAN The Indian hotels company limited is the largest Hotel, leisure and hospitality company in south Asia. The companys hotel business emphasizes the global operation of hotels and resorts in the luxury, upper-upscale and economy segments .The Companys brand names include Taj hotel resorts and palaces, Vivanta by Taj hotels and resorts ,the gateway hotels and resorts and ginger hotels. Dedicated to the highest standards of hospitality, services and continuous innovation for over a hundred years, the Taj group includes owned, leased and managed hotels totaling 108 hotels, in 12 countries, on 5 continents with 12913 rooms. Our aim is to be recognized as one of the top global hotel groups providing exceptional customer satisfaction in each of our hotels. The growth strategy of or group is to operate 20,000 Rooms, in 25 major destinations around the world and achieve a group Turnover of US$ 2billion, with 33% share from international operations, by 2014.

2.2 OBJECTIVES

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Working capital Management

To Study the working capital management of Taj Mahal Palace and Oberoi Hotel.

To study the liquidity position of both the hotels through various working capital related ratios.

2.3 METHODOLOGY

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The project is based on secondary data. Past five years data has been taken for the analysis of Taj Mahal Palace and Oberoi Hotel. Data has been collected from various sources like internet, Annual report etc.

Further charts, graphs, tables and working capital ratios has been taken for the analysis

2.4 LIMITATION
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The project is based only on secondary data. Data was available for five years only.

Chapter 3 3.1 Analysis and Findings

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Below are the ratios of 2 Hotels (Taj Mahal Palace and Oberoi hotel) for the period of 5 years: Current Ratio: The current Ratio is the ratio of current liabilities it is calculated as: Current Ratio = Current assets Current Liabilities The current assets include cash and Bank Balance, Marketable securities, Bills Receivable, Inventories, Loans and advances, Advances Payment and prepaid expenses. The current liabilities include creditors, bills payable bank overdraft short-term loans, outstanding expense & income tax payable, unclaimed divided and proposed dividend. The current ratio measures the ability of the firm to meet its current liabilities. The current assets get converted into cash into the operational cycle of the firm and provide the fund needed to pay current liabilities .

Table 1
2007 0.67 Current Ratio 2008 2009 0.03 0.425 2010 0.58 2011 0.68

Taj hotel

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Oberoi

0.49

0.46

0.31

0.33

0.37

Diagram 1

Interpretation: If we analyze the five year data and graph from table 1 and table 1, Taj hotel has shown good trend compare to Oberoi. In 2006 the ratio 0.67 which shows that the current ratio is approximately not equal to 2:1, it indicates the unnecessarily investment in the current assets in the form of debtors and cash balance. From 2007 the ratio of Taj hotel has shown adown trend and has maintained not more than 1 Oberoi holds comparatively bad position as reflected by the low ratio which means that the liquidity position of the firm is not good and shall not be able to pay its current liabilities.

QUICK RATIO

The Quick Ratio is sometimes called the "acid-test" ratio and is one of the

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best measures of liquidity. It is figured as shown below: Quick Ratios = Current assets inventories Current liabilities bank over draft Quick Ratio establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converted into cash immediately or reasonable soon without loss of value. Cash is the most liquid asset. Other assets which are considered to be relatively liquid and include in liquid assets are debtors and bill receivable and marketable securities. The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. An acid-test of 1:1 is considered satisfactory unless the majority of "quick assets" are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities. Table : 2
Quick ratio 2007 Taj hotels oberoi 0.6 0.38 2008 0.74 0.35 2009 0.33 0.19 2010 0.49 0.23 2011 0.6 0.28

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Interpretation: From table 2 and diagram 2 it is clear that Taj Hotel and Oberoi does not meet the standard ratio of 1:1 and the company has insufficient balance of payment of current liability.

INVENTORY TURNOVER RATIO :

This ratio tells the story by which stock is converted into sales. Usually, a high inventory turnover ratio revels the liquidity of the inventory, i.e. how many times on an average; inventory is sold during the year. Needless to say that if a firm maintains minimum stock level in order to maximum sales by quick rotation of inventory; no doubt, the profit will be maximum since the holding cost of inventory will be minimum. Inventory turnover Ratios =Cost of goods sold Average inventory

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Table : 3
Inventory Turnover Ratio 2007 2008 2009 2010 34.39 33.08 25.26 24.69 21.63 22.9 19.4 20.98 2011 28.59 23.43

Taj Hotel Oberoi

Diagram :3

Interpretation: From table 3 and diagram 3 it is clear that Taj Hotel have consistent inventory turnover ratio though the ratio is slightly down in financial year 2007 and 2010 but it is efficient in converting its stock into sales. Oberoi display a similar inconsistence in their ratios. The management of
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these industries needs to take steps to establish a better efficiency in managing their inventory. Efficiency ratio

Working Capital Turnover ratio

It signifies that for an amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by firm. It may thus compute net working capital turnover by dividing sales by working capital. Working Capital turnover Ratios =Sales Net working capital Table: 4
Working capital turnover ratio 2007 2008 2009 2010 Taj Hotel Oberoi 51.72 5.58 8.01 11.59 2.63 9.74 6.67 8.31 2011 -5.27 15.45

Diagram : 4
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Interpretation: From the table 4 and diagram 4 it is clear that Taj Hotel limited have a huge working capital ratio in 2007 then there is huge fall in trend to 8.01 and even went negative in 2011. While Oberoi performance is fluctuating.

Debtors Turnover ratio

Debtors turnover indicates the number of times debtors turnover each year. Generally the higher the value of debtors turnover more is the management of credit. Debtors Turnover ratio = Sales Debtor

Table : 5

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Taj Hotel Oberoi

Debtors turnover ratio 2007 2008 2009 7.54 8.48 9.11 9.46 9.94 18.71

2010 7.16 12.69

2011 8.28 11.38

Daigram : 5

Interpretation: After analyzing the table 5 and diagram 5 it can be said that Taj Hotel is efficient to bring down the sundry debtors from financial year 2009 to 2010 which means that cash recovered from debtors can be used for investment plans. Similarly in Oberoi Hotel Debtors turnover ratio shows increasing trend from 2007 to 2009 . But from 2010 company managed to bring down the turnover ratio which shows a good sign as cash recovered from debtors can be used for investment plans. Total Assets Turnover ratio

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The ratio shows the firm ability in generating sales from all financial sources committed to total assets. Total Assets Turnover Ratios = Sales Total assets Table 6
Total assets turnover ratio 2007 2008 2009 2010 Taj Hotel Oberoi 0.34 0.42 0.29 0.49 0.19 0.44 0.2 0.42 2011 0.22 0.51

Diagram 6

Interpretation: The above table 6 and diagram 6, indicates that Taj hotel ratio has been decreased from 2007 to 2010 which indicates that the company is making insufficient utilization and its efficiency is decreasing. The ratio reveals idle capacity. The ratio of Oberoi has been increased from 2007 to 2011 is more or less consistent which indicates that oberoi hotels are able to utilized their assets.

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Total Debt/Equity ratio The ratio shows the relation describing the lender contribution for each rupee of owners contribution. Debts equity ratio is those calculated to know the extent of outsider fund and shareholder funds used in acquiring the assets for a firm in other words, it is calculated to measure the relative claim of outsiders and share holder against the assets of a firm. It is also called as external internal equity ratio or debt to net worth ratio. Debt or outsider fund: An outsider fund refers to long term liabilities. Some writer are of the opinion that preference share should be considered as outsiders funds for the reason that dividend payable on these shares is fixed and the amount of these shares may be redeemed after expiry a stipulated period. Similarly, there is a controversy regarding current liabilities also. Some writers are of the opinion that current liabilities should be considered as outsiders funds for the reason that they represent the firm obligations to outsiders. However we are of the opinion that debt equity ratio may be calculated excluding current liabilities because they are repayable with in a very short period and these liabilities widely fluctuate during a year. Shareholder funds: Equity share capital + preference share capital + all accumulated profits (i.e. both revenue and capital reserves) less accumulated losses. A low debt equity ratio indicates that the interests of outsiders are safe and guarded and a firm need not worry about their payment. On the other hand, a high debt equity ratio indicates that the claims of outsiders are more than the shareholders, their interests are not safe and they (outsider) have to bear the probable future losses.

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Total Debt/Equity ratio = Sales Net Worth

Table 7
Total debt/equity ratio 2007 2008 2009 Taj Hotel Oberoi 0.73 1.62 0.77 1.94 0.49 1.65 2010 0.62 1.56 2011 0.57 1.77

Diagram 7

Interpretation: From table 7 and diagram 7, The ratio of Taj is less than 1 which indicates

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that the companies are exposing themselves to large amount of equity. The above graph indicates that the ratio of Oberoi from financial year 2007 to 2011 is high and it also means that the company is in risky position especially if interest rates are on the rise and it has been aggressive in financing its growth with debt.

4.1 CONCLUSION
Study the working capital management of Taj Mahal Palace and Oberoi

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Hotel and to study the liquidity position of both the hotels through various working capital related ratios.Taj is better than oberoi in many of the factors which is been taken into consideration from above ratios. .

BIBLIOGRAPHY
Books and Magazine I.M Pandey Financial Management M.Y. Khan and P.K Jain, Financial management.

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K.V. Smith management of Working Capital. Websites

www.indiainfoline.com www.sify.com www.moneycontrol.com www.scribd.com

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