PROJECT REPORT ON WORKING CAPITAL MANAGEMENT & Expenses analysis With reference to

MINDA Industries ltd, Switch Division, pune

Submitted in partial fulfillment of the requirements of the degree of MASTER OF BUSINESS ADMINISTRATION KANNUR UNIVERSITY BY RAMEES THANAKKARAMMAL (B0GMBA1064) UNDER THE GUIDANCE OF PROF. DR KIRAN RAVEENDRAN

CHINTECH SCHOOL OF MANAGEMENT STUDIES CHINMAYA INSTITUTE OF TECHNOLOGY KANNUR 2012

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PREFACE
To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-to-day finance and the management of this short-term capital or finance of the business is called Working capital Management. Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on. I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to my by the reader GUIDANCE OF

PROF. DRAVEENDD E C L A R A T I O N
I, undersigned here by state that the report, titled Working Capital Management at Minda Industries Ltd is a genuine and benefited work presented by me under the guidance of Prof. Dr. Kiran Raveendran. The empirical findings in this project report are based on the data collected by myself. The matter presented in this report is not copied from any source. I understand that any such copy is liable to the punishment in way the university authority deems fit. The work has not been submitted for the award of any degree of diploma earlier to Kannur University, or any other universities. The Project Report is submitted to Kannur University in the partial fulfillment of the degree of Master in Business Administration.

Date:

Signature,

Place

(RAMEES THANAKKARAMMAL)

CERTIFICATE
This is to certify that the project entitled A Study on working capital management and expenses analysis at Minda Industries Ltd, Pune is a bona fide record of work done by Ramees Thanakkarammal, 4th semester MBA and submitted in partial fulfilment of the

requirement for the degree of MASTER OF BUSINESS ADMINISTRATION, of Kannur University under my supervision.

Place: Kannur Date:

Mr. Kiran Raveendran (Supervising guide)

CERTIFICATE
This is to certify that the project entitled A Study on working capital management and expenses analysis at Minda Industries Ltd, Pune is a bona fide record of work done by Ramees Thanakkarammal, 4th semester MBA and submitted in partial fulfillment of the requirement for the degree of MASTER OF BUSINESS ADMINISTRATION, of Kannur University under my supervision.

Place: Kannur Date:

Dr. K.K Falgunan (Principal)

ACKNOWLEDGEMENT
First and foremost I would like to thank God for enabling me to complete the work successfully.. I would like to express my sincere gratitude to my project guide Mr.Anand.Bakare, Manager (Cost Accounting), for his valuable guidance and encouragement at every phase of the project. I would also like to express my sincere gratitude to Mr. Dinesh Agarwal, Finance department head for giving me the permission to carry out the project work in Minda Industries Ltd Company and also I am greatly thankful for his valuable suggestions and contributions in making this project a success. I take the privilege to extend my hearty thanks to the other members of Finance & Accounting Dept., Minda Industries Ltd, for the valuable suggestion throughout the project duration. I further wish to place on record my deep sense of gratitude to Dr. K.K.Falgunan, Principal of Chinmaya Institute of Technology for giving me the sustained encouragement and support in carrying out this study. I offer my sincere thanks to, Dr. Kiran Raveendran, Assistant Professor, Chinmaya Institute of Technology, Kannur, for his guidance and encouragement throughout the project. Finally I thanks to my parents and friends and others who assisted me in this work.

RAMEES THANAKKARAMMAL.

TABLE OF CONTENTS
Sr. No 1 2 a) b) 3 Contents Page No

4 5

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6 7 8 a) b) c) 9

UNDER

EXECUTIVE SUMMARY
The major objective of the study is to proper understanding the working capital of Minda Industries Ltd & to suggest measures to overcome the shortfalls if any. In the Year 1958, a visionary Mr. S.L. Minda laid the foundation of Minda group. He like any other entrepreneur, started small garage kind operation with only five employees. He started supplying Ammeters to Enfield India (Motorcycles). Later, Mr. Nirmal K. Minda

expanded the single location & product to multi locations & products. Presently Minda Group has following automotive products: 2/3 Wheeler & Off Road Switches Horns 4W switches Lighting CNG/LPG Alternate Fuel Kits

Minda Group is manufacturing world class automotive components with stringent quality controls and has become the most favored vendor of automotive components to Indian OEM's.

Minda has developed substantial export market and are supplying our products to global OEM's & Replacement markets. It has strong presence in South East Asia, Europe and USA. Minda Group is actively studying other exports markets for future growth. In business, many companies spend most of their time concentrating on increasing their current profits. They try to increase the profits by either reducing the cost of production or by controlling the expenses of the company. However, too few companies worry very much about managing another equally important area, the area of working capital management. Working capital, also known as net current assets, is the excess of current assets over current liabilities. Existence of working capital is imperative in any firm. A large amount of funds are invested on fixed assets that can be used at an optimum level only if supported be sufficient

working capital. If the level of working capital required by the firm is not properly maintained then it results in unnecessary blocking of funds. Insufficient working capital, on the other hand,

put different hindrances in smooth working of the firm. Therefore, the working capital management needs attention of all the financial managers. The project undertaken by me was to Working Capital Management At Minda Industries Ltd . The very first step is to determine the amount of working capital requirements by each unit. It was a learning experience for me as at Minda employees stresses on role clarity at all levels. Role clarity along with Teamwork & co-operation helps us achieving the organizational objective.

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PART A WORKING CAPITAL MANAGEMENT

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CHAPTER 1 INTRODUCTION TO THE STUDY

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PART A 1.1 Introduction About Working Capital

As the name implies that working capital is made up of two words working and capital when we talk about the finance we have to look towards working capital because working capital is the capital, which helps to run to business or this, is the capital through which organization is in position to pay day-to-day-expenses.

Working capital is the fresh blood of business organization. Working capital is what makes a company work. It is impossible to carry on any business only with fixed capital, working capital is must. Inadequacy of working capital chooks any business to death.

A healthy working capital is reflected inadequate inventories, lowest level of debtors, and minimum utilization of bank facilities for working capital.

The term working capital refers to the amount of capital, which is readily available to an organization. That is, working capital is the difference between resources in cash or readily convertible into cash (current asset) and organizational commitments for which cash will soon be required (current liabilities)

WORKING CAPITAL = CURRENT ASSET CURRENT LIABILITIES.

Definition:Working capital is defined as Current asset minus current liabilities. Or Excess of current asset over current liabilities and Provisions. Working capital means current assets of the company that are changed in the ordinary course of business from one into another as for ex. From cash t inventories, inventories to receivables and receivables into cash. -Gersenberg
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Working capital measures how much in liquid assets a company has available to build its business. The number can be positive or negative; depending on how much debt the company is carrying. In general, companies that have a lot working capital will be more successful since they can expand necessary for growth. It is also called net current assets or current capital.

The definition of working capital is fairly simple; it is the difference between an organizations current assets and its current liabilities. Current Assets: Are resources, which are in cash or will soon be converted into cash in the ordinary course of business. It includes following:

Current Assets Inventory Loan and advances Liquid assets (cash and bank deposits) Debtors and bill receivable

Current liabilities: Are commitments, which will soon require cash settlement in the ordinary course of business. It includes following:

Current liabilities Creditors and payables Provision Bank overdraft Other short term liabilities

Features of working capital

The organization also can make certain amount of modification by the help of working capital. Working capital can also provide assistance to pay off the day-to-day expenses.
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The working capital can be easily converted into hard cash whenever required. The working capital changes with the volume or output of business. The working capital is essential for maintaining the financial position of the organization. Working capital also protects the organization from going bankrupt.

The definition of working capital is fairly simple; it is the difference between an organizations current assets and its current liabilities. Of more importance is its function which is primarily to support the day to day financial operations of an organization, including the purchase of stock, the payment of salaries, wages and other business expenses, and the financing of credit sales. As the working capital cycle indicates, working capital comprises a number of different items and its management is difficult since these are often linked. Hence alerting one item may impact adversely upon other areas of the business. For example, a reduction in the level of stock will see a fall in storage costs and reduce the danger of goods becoming obsolete. It will also reduce the level of resources that an organization has tied up in stock. However, such an action may damage an organizations relationship with its customers as they are forced to wait for new stock to be delivered, or worse still may result in lost sales as customers go elsewhere. Extending the credit period might attract new customers and lead to an increase in turnover. However, in order to finance this new credit facility an organization might require a bank overdraft. This might result in the profit arising from additional sales actually being less than the cost of the overdraft. Management must ensure that a business has sufficient working capital. Too little will result n cash flow problems highlighted by an organization exceeding its agreed overdraft limit, failing to pay suppliers on time, and being unable to claim discounts for prompt payment. In the long run, a business with insufficient working capital will be unable to meet its current obligations and will be forced cease trading even if it remains profitable on paper.

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1.2 Scope of study:

The management of working capital helps us to maintain the working capital at satisfactory level by managing the current assets and current liabilities. It also helps to maintain proper balance between profitability, risk and liquidity of the business significantly. By managing the working capital, current liabilities are paid in time. If the firm makes payment to it creditors for raw material in time, it can have the availability of raw material regularly, which doesn t cause any obstacles in production process. Adequate working capital increases paying capacity of the business but the excess working capital causes more inventory, increases the possibility of delay in realization of debts. On the other hand, absence of adequate working capital leads to decrease in return on investment. The goodwill of the firm is also adversely affected due to the inability to pay current liabilities in time. Hence, the management of working capital helps to manage all the factors affecting the working capital in the most profitable manner.

1.3 Statement of the problem :

Every business needs funds for two purposes. One for the establishment of business and the other to carry out the day-to-day operations. It needs some amount of working capital to meet daily obligations. The need for working capital arises due to the time gap between the production and realization of cash from sales. Management of working capital is concerned with the problem that arise in attempting to manage current asset, current liabilities and the inter relationship that exist between them. Effective and efficient working capital of a firm has a profound effect on its profitability liquidity and the structural health of the organization. To establish the best possible trade-off between the profitability of net current assets employed and the ability to pay current liabilities as they fall due, working capital management is very important. This study makes an attempt to identify the issues related with the working capital management of Minda Industries Ltd and to analyze the impact of working components on the total profitability. Various components of working capital have to be identified in order to bring about an efficient working capital management system. Therefore a study on the working capital management of Minda Industries Ltd becomes relevant in the above mentioned scenario.
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1.4 Objectives of the study:

The following are the main objective which has been undertaken in the present study: To determine the amount of working capital requirement and to calculate various ratios relating to working capital. To analyzing, interpreting and studying Financial Statements. To make an item wise study of the components of the working capital. To suggest the steps to be taken to increase the efficiency in management ofWorking capital. Towards managing working capital To simplifying the complex data as anybody can understand easily. To measure the efficiency for taking proper actions or decisions. For proper & necessary information to management to take decision & to draw conclusion. To give suggestions for better utilization of various financial resources. To evaluation of the financial performance of the company of past, present and anticipated future. Tries to identify the firm's financial strengths and weaknesses and provides the essential foundation for financial decision making and planning

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1.5 Research methodology

In any project research methodology used is very important because it is one which really leads you o the success. While research any specific research project the following step is to be followed Define the research problem Specifying the research Objective Preparing the list of information needed Design the data collection for the project Collect the required data Interpret the data

Research Methodology includes various steps. There should be a systematic way of collection of data and presentation of the project report. Proper decisions have to be taken based on the data collected. A researcher may select any of the following data: 1. Primary Data 2. Secondary Data Primary Data Primary Method is the method, which uses primary data in other words when data are collected afresh and for the First time and thus happen to be original in character. There are various methods by which data can be collected. The important ones are

Observation method Interview method Questionnaire method

Interview:

In this project Interview method is used. A modern technique of collecting information is taking interview of respondents. Interview is the dialogue between two persons or two groups. In the case of personal interview the information collected in structured way. In this project I have

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collected some of the information from the Companys staff to get the live data. For my project of working capital I required the help of staff from Accounts and finance Department.

Secondary Data The study has used secondary data that was taken from secondary sources like companys website, companys balance sheet and profit & loss account and various internal reports published by MINDA INDUSTRIES LTD..This study comprising of working capital management of the company MINDA INDUSTRIES LTD. has been analyzed and studied. By undertaking the existing systems, analysis and inferences were made on their efficiency and effectiveness.

The data has been analyzed with the help of some selected ratios and percentage method. The ratios are compared on the basis of trend analysis and a comparative analysis has been done. My research emphasis on the working capital management of the companys last five years and analyze and conclude it from my view.

1.6 Limitation of the study:

As our project is based on the data recorded by the company, we face the limitation of extracting that particular data because our access is limited for the sake of confidential information of the company. The study is only limited to the available information in the department. The duration of the study was very limited.

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Chapter scheme
1st Chapter deals with introduction, statement of problem, methodology & data collection and limitation of the study objective. Review of literature 2nd Chapter deals with company profile and industry profile. 3rd Chapter gives analysis and interpretation of the data collection. 4th Chapter deals with findings, suggestions and conclusion.

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CHAPTER 2 REVIEW OF LITERATURE AND THEORIES

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LITERATURE REVIEW
The importance of efficient working capital management (WCM) is indisputable. Working capital is the difference between resources in cash or readily convertible into cash (Current Assets) and organizational commitments for which cash will soon be required (Current Liabilities). The objective of working capital management is to maintain the optimum balance of each of the working capital components. Business viability relies on the ability to effectively manage receivables, inventory, and payables. Firms are able to reduce financing costs and/or increase the funds available for expansion by minimizing the amount of funds tied up in current assets. Much managerial effort is expended in bringing non-optimal levels of current assets and liabilities back toward optimal levels. An optimal level would be one in which a balance is achieved between risk and efficiency. A recent example of business attempting to maximize working capital management is the recurrent attention being given to the application of Six Sigma methodology. Six Sigma methodologies help companies measure and ensure quality in all areas of the enterprise. When used to identify and rectify discrepancies, inefficiencies and erroneous transactions in the financial supply chain, Six Sigma reduces Days Sales Outstanding (DSO), accelerates the payment cycle, improves customer satisfaction and reduces the necessary amount and cost of working capital needs. There appear to be many success stories, including Jennifer Townes (2002) report of a 15 percent decrease in days that sales are outstanding, resulting in an increased cash flow of approximately $2 million at Thibodaux Regional Medical Center. Furthermore, bad debts declined from $3.4 million to $600,000. However, Waxers (2003) study of multiple firms employing Six Sigma finds that it is really a get rich slow technique with a rate of return hovering in the 1.2 4.5 percent range. Even in a business using Six Sigma methodology, an optimal level of working capital management needs to be identified. Industry factors may impact firm credit policy, inventory management, and bill-paying activities. Some firms may be better suited to minimize receivables and inventory, while others maximize payables. Another aspect of optimal is the extent to which poor financial results can be tied to sub-optimal performance. Fortunately, these issues are testable with data published by CFO magazine (Mintz and Lazere 1997; Corman 1998; Mintz
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1999; Myers 2000; Fink 2001), which claims to be the source of tools and information for the financial executive, and are the subject of this research. The importance of working capital management is not new to the finance literature. Over twenty years ago, Largay and Stickney (1980) reported that the then-recent bankruptcy of W.T. Grant, a nationwide chain of department stores, should have been anticipated because the corporation had been running a deficit cash flow from operations for eight of the last ten years of its corporate life. As part of a study of the Fortune 500s financial management practices, Gilbert and Reichert (1995) find that accounts receivable management models are used in 59 percent of these firms to improve working capital projects, while inventory management models were used in 60 percent of the companies. More recently, Farragher, Kleiman and Sahu (1999) find that 55 percent of firms in the S&P Industrial index complete some form of a cash flow assessment, but did not present insights regarding accounts receivable and inventory management, or the variations of any current asset accounts or liability accounts across industries. Thus, mixed evidence exists concerning the use of working capital management techniques. Theoretical determination of optimal trade credit limits are the subject of many articles over the years (e.g., Schwartz 1974; Scherr 1996), with scant attention paid to actual accounts receivable management. Across a limited sample, Weinraub and Visscher (1998) observe a tendency of firms with low levels of current ratios to also have low levels of current liabilities. Simultaneously investigating accounts receivable and payable issues, Hill, Sartoris, and Ferguson (1984) find differences in the way payment dates are defined. Payees define the date of payment as the date payment is received, while payors view payment as the postmark date. Additional WCM insight across firms, industries, and time can add to this body of research. Maness and Zietlow (2002, 51, 496) presents two models of value creation that incorporate effective short-term financial management activities. However, these models are generic models and do not consider unique firm or industry influences. Maness and Zietlow discuss industry influences in a short paragraph that includes the observation that, An industry a company is located in may have more influence on that companys fortunes than overall GNP (2002, 507). In fact, a careful review of this 627-page textbook finds only sporadic information on actual firm levels of WCM dimensions, virtually nothing on industry factors except for some boxed items with titles such as, Should a Retailer Offer an In-House Credit Card (128) and
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nothing on WCM stability over time. This research will attempt to fill this void by investigating patterns related to working capital measures within industries and illustrate differences between industries across time.

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CHAPTER 3 Industry and Company Profile

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Indian automobile components industry A Profile Overview

The Indian auto ancillary industry has come a long way since it had its small beginnings in the 1940s. If the evolution of the industry is traced in India, it can be classified into three distinct phases namely: Period prior to the entry of Maruti Udhyog Ltd, period after the entry of Maruti Udhyog Ltd and Period post Liberalization. The period prior to the entry of Maruti Udhyog Ltd was characterized by small number of auto majors like Hin dustan Motors, Premier Automobiles, Telco, Bajaj, Mahindra &M a h i n d r a , l o w t e c h n o l o g y a n d a s s u r e d b u s i n e s s f o r m o s t o f t h e a u t o c o m p o n e n t manufacturers The Indian auto components industry has experienced healthy sequential growth over the last one-and-a-half years, following a period of de-growth in 2008-09. The recovery could be attributed to factors such as strong buoyancy in the end-user industry; recovery of the global economy; improved consumer sentiment and return of adequate liquidity in the financial system. The revival of the auto industry was initially driven by the fiscal stimulus program of the government. Nevertheless, the fact that the growth momentum has sustained even after withdrawal of such incentives in February 2010 highlights the strength of the underlying domestic demand. ICRA expects the trend of automobile sales volume growth, and in turn the auto ancillary business growth to hold over the short-to-medium term aided by strong underlying domestic demand across all automobile segments [comprising two-wheelers (2W), threewheelers (3W), passenger vehicles (PVs) and commercial vehicles (CVs)], thrust on low-cost sourcing by Original Equipment Manufacturers (OEMs) and Tier-1 players based from developed markets, aggressive supply side push from automotive Original Equipment Manufacturers (OEMs) in the form of new model launches and expected continuation of facilitators like easy access to vehicle financing, notwithstanding possible challenges related to pressures on commodity prices, interest rate hardening and fuel price deregulation. While almost all segments of the automobile industry have posted a steady growth over the last 18 months, the recovery in the Medium and Heavy Commercial Vehicle (M&HCV) segment has been the slowest to gather momentum. The segment had also experienced the sharpest volume decline in 2008-09, which had translated into significantly lower off-take and
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losses for suppliers of M&HCV components - and had contributed to around 40% of rating downgrades in the universe of auto and auto component manufacturers Downgraded by ICRA in 2008-09 and 2009-101. However, with domestic economic activity having gained traction, ICRA expects the M&HCV segment volumes over the near term to surpass the levels achieved in the pre downturn period, which should result in improvement in the credit profiles of auto component suppliers dependent on this segment.

Since a majority of revenues of the auto component industry are derived from supplies to the domestic OEMs, the growth prospects of the former are largely determined by performance of the user OEMs. Given below are the volume growth expectations pertaining to individual automobile segments:

PV segment:
Amongst the various automobile segments (PV/ CV/ 2W) in India, the PV segment is the largest by value and accounts for nearly half the size of the ~Rs. 2,300 billion auto OEM segment, followed by the CV segment and the 2W segment that together account for the balance half in an almost equal proportion. Thus, given the large size of the PV segment, its pace of growth has a relatively higher influence on the growth prospects of the auto components industry as a whole. After recording a robust 20%+ volume growth in 2009-10 and 2010-11, the PV segment volumes (domestic + exports) grew by a meager 4.3% in 10m, 2011-12 marred both by circumspect consumer sentiment that impacted demand as well as supply constraints caused first by the tsunami in Japan (in March 2011), then by production disruption at the countrys largest PV manufacturer Maruti Suzuki (intermittently over the June-October 2011 period) and then by floods in Thailand (disrupting production output of select OEMs during the November-January 2012 period). This apart, the supply chain of PV OEMs also suffered to an extent due to incidences of labour unrest at factories of auto component manufacturers such as Ceat (23 days in October 2011) and Mahindra Forgings (mainly in Q2, 2011-12). The adverse impact of most of these supply side shocks seems to have fully played out:

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The supplies of components that were being imported from Japan have either been restored now or OEMs sourcing from alternate geographies is being done by PV

An amicable agreement betweenMaruti Suzuki and its Labour Union is understood to have been reached in end-October 2011 Honda Siel (India) was sourcing several electronic and underbody parts for Brio, Jazz and City models from its Thailand plant. As per companys statements, the supplydisruption due to Thailand floods that had started in the first week of November 2011 and had got aggravated in December 2011, has now been resolved as thecompany commenced normal production at its plant from February 17, 2012 onwards.Assuming there are no additional supply shocks and as consumers adjust to the new normal characterized by relatively higher vehicle prices and high fuel costs; demandsentiment is likely to get some relief on the interest rate front during 2012-13. Over the medium term, ICRA expects the PV industry to record a volume CAGR of ~11% over 2011-16E (inclusive of 201112E, a year in which volume growth is likely to be low at around 3%).

CV segment:
After registering a strong 30%+ volume growth over 2009-10 and 2010-11, the growth in the CV industry has somewhat slowed down during the current fiscal.In 10m, 2011-12, the CV industry posted a volume growth of 19.5% YoY supported by 28.7% growth in the LCV segment and a relatively muted 8.6% growth in the M&HCV segment. Steadily rising interest rates, contracting industrial output and a considerable increase in vehicle prices along with high base of previous years have been the main factors constraining growth. The sharp rise in overall cost of ownership combined with almost stagnant freight rates are exerting pressure on the profitability and cash flows of fleet operators. Our channel check suggests that several operators have postponed their expansion plans in view of the prevailing high interest rates and slower industrial output. Capacity utilization has gradually declined and freight rates continue to remain stagnant despite rise in operating expenditure for operators. On the financing front, some of the financiers have also tightened lending norms in addition to the rise in interest rates. Overall, the near term risks against M&HCV demand have increased significantly, though structurally, the demand drivers over a longer period remain intact.
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Given the current environment where the growth in industrial activity remains low and the operating environment for fleet operators remains weak, ICRA expects the industry to defer capacity addition. As a result, the outlook over the near term appears subdued which may result in a slowdown in new vehicle sales. Among segments, M&HCV segment which tends to be influenced more by macro-economic indicators is likely to register a weaker performance over the near term as against the steadily growing LCV segment. The proliferation of the hub-andspoke model, improving last mile connectivity and strong demand originating from rural segment is likely to drive demand in the LCV segment over the medium term.

2W segment:
The Indian 2W industry recorded a volume growth (domestic + exports) of 16.6% (YoY) in 10m, 2011-12; which although healthy, was significantly lower than the 25%+ volume growth rates seen in 2009-10 and 2010-11. Overall, ICRA expects the domestic 2W industry to report a volume growth of ~13% in 2011-12E as we expect growth to moderate further in Q4, 2011-12 due to base effect. In an environment where the northward movement of inflation, fuel prices and interest rates has been the nemesis of the Indian automobile industry at large, the 2W industry has been the most resilient so far. The growth has been supported by various structural positives associated with the domestic 2W industry including favourable demographic profile, moderate 2W penetration levels (in relation to several other emerging markets), under developed public transport system, growing urbanization and expected strong replacement demand, besides moderate share of financed purchases. ICRA expects these strengths, coupled with the OEMs thrust on exports, to aid the 2W industry to report a volume CAGR of 10-12% over the medium term to reach a size of 21-23 million units (domestic + exports) by 2015-16E. With this being the backdrop, the revenue growth of the auto components industry is likely to be a close reflection of the blended growth of individual automotive segments. That said, the performance of individual auto component manufacturers will continue to vary depending on their revenue mix (OEMs/ Replacement Market), segment leaning (PV/CV/2W) and geographical diversification (domestic/ exports). Overall, auto component manufacturers who have a growing presence in the replacement market and also have geographically dispersed customer base, are likely to be better

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equipped to offset the expected moderation in business volumes of select domestic automobile segments over the short term.

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COMPANY PROFILE

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MINDA INDUSTRIES LTD - A PROFILE

Date of Establishment Revenue Market Cap Corporate Address MD & Chairman FinancialsTotal Income Net Profit Company Secretary BankersAuditors 1992 220.386 ( USD in Millions ) 2851.797741 ( Rs. in Millions ) B-64/1,Wazirpur Industrial Area,New Delhi-110052, Mr. Nirmal Kumar Minda Rs. 9269.080151 Million ( year ending Mar 2011) Rs. 348.454018 Million ( year ending Mar 2011) H C Dhamija RN Saraf & Co

NK MINDA Group is one of the leading global manufacturers of automobile components and a leading supplier of proprietary automotive solutions to Original Equipment Manufacturers (OEMs). For nearly five decades, N K Minda Group has been supplying the automotive industry with innovative engineered products that are efficient, safe, responsive and enhance comfort levels.The Group's product portfolio comprises of Switches, Batteries, Lighting, Horns, Mirrors and Alternate Fuel Kits LPG. We are committed to developing customer relationships that last. Over the years we have developed a tradition of listening to our customers, so we could tailor our offerings to their current and future needs, thereby defining our groups excellence benchmarks. N K Minda Group has 23 manufacturing plants in India, Indonesia and Vietnam, and sales offices in Japan, Europe and China. We are continually looking to increase our global footprint. At the same time, we are building on our core strengths in the existing markets. Over the past fifty years, we have grown consistently and rapidly through a carefully controlled and well managed expansion of our portfolio of products, and have thereby experienced consistent growth. The group employs nearly 6000 people and is headquartered in Manesar, Haryana, India. We have engineering, research and development centers in Bangalore, Manesar, Pantnagar, Pune & Sonepat. The companies have joint ventures and technical agreements with world renowned manufacturers such as Tokai Rika- Japan, Soft Italia- Italy, Kyoraku -Indonesia & Emer-Spa, Italy. We aim to provide ground-breaking products which help our clients integrate high quality with cost efficiency. NK Minda Group has an annual turnover of Rs.8.32 billion (USD 208 million). The Group has been clocking a Compound Annual Growth Rate (CAGR) of 40% in Annual Turnover (ATO). From Rs. 5.45 billion in FY 2005-06, it grew to Rs. 8.32 billion in FY 2006-07. Today, the Group has a total of 19 plants spread across India and Indonesia. Recognising the importance of the ASEAN market the group has set up a Greenfield manufacturing facility in Indonesia
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through a group company named PT Minda ASEAN Automotive which has commenced production and exports to other ASEAN countries. NK Minda Group works with the leading auto components specialists globally to bring the most technologically advanced products to its customers. The Group has joined hands with global leaders to constantly fine-tune its offerings and has some of the most reputed automotive component manufacturers as its joint-venture partners such as: Tokai Rika Co. Ltd., Japan Fiamm SpA, Italy. The Key Mantras that have propelled the NK Minda Group growth story are: - Relentless pursuit for excellence - Benchmarking ourselves against the best - Focus on developing world-class facilities - Emphasis on providing innovative design solutions - Continuous thrust on product improvement - Constant up gradation of skill sets in the workforce

Lineage:
NK MINDA Group, after being founded in 1958, has grown into a multinational corporation known for diversified automobile component products with US$ 297 million in net sales in FY 2009-2010. We are rapidly expanding our ability to deliver technically superior auto components to a broad spectrum of customers including Indian & Global OEMs. Our products are reliable, safe, pioneering, efficient, and environmentally sustainable. We have a tradition of being an innovative group. We concentrate heavily on product research and development as a basis for inventive ideas. We work hard at anticipating and meeting our customers changing requirements through continuous market research and technology partnerships. We aim to provide products which help our clients integrate high quality with cost efficiency.

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VISION & MISION

Vision:

Group to be Global Benchmark in QPCDSM by 2012-13 and pioneer in

Technology by 2014-15 Group Turnover 10K crore by 2014-15 International Business to be 25% of turnover by 2014-15

Mision: To continually enhance stakeholders value through global competitiveness while contributing to society Values: The NK Minda Group has identified 5 core values and works towards inculcating these in its day-to-day working: Customer Is Supreme: - We understand and anticipate customer needs and exceed their expectations. We aggressively pursue new business, determined to add value for our customers with ingenuity, determination and a positive approach to every task, a can-do spirit, and We always ask "How can we serve our customers best?"

Live Quality: - We nurture quality as an attitude at UNO MINDA. We are quality driven and "Apply a Quality Minded Approach to everything we do". We are passionate about quality and its continuous improvement through teamwork

Encourage Creativity & Innovation To Drive 3 Ps (People, Processes And Products) We demonstrate leadership by advancing new technologies, innovative manufacturing techniques, enhanced customer service, inspired management, and the application of best practices throughout our organization. We aggressively pursue new business, determined to add value for our customers with ingenuity, determination and a positive approach to every task, a can-do spirit, and a restless determination to continually improve and excel. We utilize our ability to combine strength with speed in responding enthusiastically to every new opportunity and every new challenge
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We encourage and inspire learning amongst our people.

Respect For Work-Place Ethics Work smartly with passion, integrity, conviction and commitment. We work in team with a shared purpose and value individual ability and diversity as essential to promote harmony and open communication. Each of us succeeds individually - when we as a team achieve success. We respect and adhere to company policies, systems and procedures. We will be well informed and respect the regulations, rules, and compliance issues that apply to our businesses around the world. We respect the values and cultures of the communities in which we operate

Management Team
Mr. Nirmal Kumar Minda : Chairman & Managing Director, N K Minda Group Corporate Functional Heads: Mr. Anand Minda Mr. Sudhir Jain Mr. P K Srivastava Domain Heads: Mr.V K Jain CEO Mr.A K Goel CEO Mr.Ravi Mehra CEO Mr.Pradeep Tewari CEO Mr.Naresh Warrier CEO Mr.Arun Nagpal CEO : : : : : : Battery Domain Interior, Controls & Safety Domain Electrical & Electronics Domain Chasis & Motors Systems Domain Engine & Exhaust Domain, Body & Structural CleanTech & Institutional Business Domain : : : Executive Director Group CFO Head Group Human Resource

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Corporate Milestones

35

Awards & Recognitions

2011 MRPL Manesar received ACMA Bronze Trophy for Excellence in Technology in the Non SME Category 2010 MRPL Manesar received ACMA Gold Award for Manufacturing Excellence 2010 BAL TPM EXCELLENCE AWARD to Minda Switch Pune Plant 2010 MINDA Acoustic received Outstanding Performance Award - 2010 from Mahindra Automotive & Farm Equipment Sectors 2010 Blow Molding received Best Localization Award from Toyota Kirloskar Motor, Bangalore 2010 MRPL Manesar received Gold Trophy in Good Green Governance Award 2010 MRPL Manesar Received Gold Award from Quality Circle Forum Delhi Chapter 2010 MRPL Manesar received Energy Conservation Award from Government of India 2010 Grand Development Award 2010-11 to MIL Switch Div. from HMSI 2010 TAFE has awarded Minda-Lighting Sonepat as a SELF CERTIFIED SUPPLIER 2009 ACMA Silver Trophy for Excellence in Technology in the NON SME Category this year. (MIL 2wh Switch - Gurgaon) 2009 ACMA Gold Trophy for Recognition under Manufacturing excellence this year (MINDARIKA PVT. LTD) 2009 ACMA Gold Trophy for Recognition under Quality & Productivity excellence this year. (MIL 2wh Switch Pantnagar) 2008 "Excellence in Quality" award from TATA Motors. The award was conferred on 16th Oct 2008 during Tatas Annual Suppliers Meet 2008 held in Mumbai. 2007 Minda launches Automotive batteries for OEM and Aftermarket

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2007

Minda Industries Limited wins the National R&D Award 2007 by Department of Scientific & Industrial Research, Ministry of Science & Technology

2005 2005 2004 2004

Bajaj Award for Excellence to MindaIndustries Limited Achievement Award from Honda for quality & delivery to Minda Industries Limited Received TKML cost achievement award for Mindarika NABL accredition for Minda Industries Limited labs 2003 Received TS 16949 certification for Lighting Division

2003 2003

Received TS 16949 & ISO 14001 certification for Horn Division Received ISO 14001 and OHSAS 18001 certification for Switch Division 2003 Received TS 16949 and ISO 14001 certification for Mindarika 2003 Received Maruti's Manufacturing Excellence Award for Mindarika

2003 Received FORD Q1 award for Mindarika 2001 Implemented ERP-BAAN in Mindarika 2001 Won 1 st prize in Honda Supplier Quality Circle Competition for 2nd time in Mindarika 2001 Won 1 st prize in CII North Region Quality Circle Competition in Mindarika 2001 Received QS 9000 certification for Horn Division 2001 Implemented ERP-BAAN in Mindarika 2000 Started BEST (Business Excellence through Simple Techniques) journey in association with CII 2000 Won 1st prize in Honda Supplier Quality Circle Competition in Mindarika 2000 Won Runners Up trophy in CII North Region Quality Circle Competition 2000 Won Safety & Environment Award from Haryana State Labour Department in Mindarika 1998 Received Maruti's Best Performance Award 2 nd time in Mindarika 1998 Received QS 9000 certification for Mindarika 1987 Received Maruti's Best Performance Vendor Award in Mindarika 1997 Received ISO 9001 certification for Switch Division other switches 1996 Received ISO 9001 certification at Mindarika 1996 Got approval as R&D Centre for Ministry of Science and Technology.

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 Handle Bar System Assembly Handle Bar Switches Electronic Systems Lever & Holder Assembly Brake Switch Grips Gear Shift Switch Modular Switch Panel Switch

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Off Road

Panel Switch Rotary Switches Starter Switches Plunger Switches Rocker Switches Lever Combination Switch Ignition Switch

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Lever Combination Switches Signal Switch Light Switch Dimmer & Passing Switch Wiper Switch Washer Switch Hazard Switch Intermittent Time Control RR Washer / Wiper Switches Horn Switch Panel Switches Hazard Warning Switch RR Defog Switch FR Fog Lamp Switch RR Fog Lamp Switch RR Wiper Washer Switch Blower & A/C Switch A/C Switch Power Window switches Auto Up & Auto Down functions. Window Lock Door Lock In addition:
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The switches are with child safety features. Master Control Switch is with the Driver Oil pressure switches Operating Pressures ranging from 0.25 to 1.0 kg/sq cm. Variety of End connections For use by heavy vehicles & agricultural equipment Manufacturers HVAC panel Assemblies A/c Switch Blower Switch Air Direction Control Fresh & Re-circulation Control Temperature Adjustment Control Ashtray & Lighters Cigar Lighters with or without Illumination. Ashtrays with or without Illumination. Plunger Type Switches Stop Lamp Switches Reverse Lamp Switches Door Lamp Switches Trunk Lid/ Parking Brake Switches MINDA TYC AUTOMOTIVE - LIGHTING Minda TYC produces a variety of world-class lighting products for the2/3 wheelers and off roaders as well as 4 wheeler vehicles. The various product offerings include: Tail Lamp Side Indicators Head Lamps Work Lamp Front Fog Lamps Rear Fog Lamps Warning Triangles High Mounting Stop Lamps Switches. The various product offerings include:
Brake Switch

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Horns:
2/3 Wheelers 4 Wheelers

CNG/LPG Kits:
Minda Autogas designs and develops Alternate fuel kits for: 2/3 wheelers Passenger Cars Gensets

Batteries
VROOM

Other Products
Sensors Automotive Security Systems Die Casting

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Domestic Customers

2 Wheelers

4 Wheelers

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 Tractors

International Customers

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45

The concept of working capital

The concept of working capital can be divided in to two parts. A. Gross working capital B. Net working capital.

Both net and gross working capital is important and they have equal significance from management point of view.

A. Gross working capital:Gross working capital refers to the firms investment in current asset. Current asset are those asset which can be converted in to cash with in an accounting year and including cash short term securities, debtors, bills receivable and stock.

B. Net working capital:-

Net working capital refers to the difference between current asset and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within accounting year and positive or negative. A positive net working capital will arise when current asset exceed current liabilities.

The gross working capital concept focuses attention on two aspect of current assets management.

a) How to optimize investment in current assets? b) How should current assets be financed?

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Both the question is the most important decision making action in the management. It should be give due consideration before taking decision.

The consideration of the level of investment in current assets should avoid two danger points i) excessive and ii) inadequate investment in current assets should be just adequate, not more or less, to the need of the business firm. 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 solvency of the business because its inability to meets its current obligation. It should realize that the working capital need of the firm may be fluctuation 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. Another aspect of gross working capital points to the need of arranging funds to finance current asset. Whenever a need for working capital fund arises due to the increasing level of business activity or for any other reason financing arrangement should not be allowed to remain idle, but should be invested in short term securities. Thus the finance manager should have knowledge of the source of funds as well as investment of fund.

Net working capital is quantitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be finance by permanent source of fund. A weak solvency of the company and makes it unsafe and unsound.

Net working capital concept also covers the question of judicious mix of long term and short term funds for financing current assets. For every firm, there is a minimum amount of net working capital which is permanent. Therefore, a portion of working capital should be finance with the permanent sources of fund such as share capital, debenture and longterm debt, preference share capital or retained earnings. Management must decide the extent to which current assets should be financed with equity capital and/or borrowed capital.

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So we can say that both gross and net working capital is equally important for the efficient management of working capital.

PERMANENT AND TEMPARARY WORKING CAPITAL: The operating cycle is a continuous process and, therefore the need of current asset is felt constantly. But the magnitude of current asset is not always the same, it increases and decreases overtime. However there is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent, or fixed, working capital. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in the production and sales, the need of working capital, over and above permanent working capital, will fluctuate. For example, extra inventory of finished goods will have to be maintained to support the peak periods of sales, and investment in receivables may also increase during such periods. On the other hand, investment in raw material, work-in progress and finished goods will fall if market is slack. The extra working capital, needed to support the changing production and sales activities is called fluctuating, or variable, or temporary working capital. Both kinds of working capital are necessary to facilitate production and sales through the operating cycle, but temporary working capital are created by the firm to meet liquidity requirements that will last only temporarily.

Balanced working capital position The firm should maintain sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as in adequate working capital positions are dangerous from the point of view of firm. Excessive working capital means idle funds earn no profit for the firm. Paucity of working capital not only impairs the firms profitability but also results in production interruptions and inefficiencies. RESULTS OF EXCESSIVE WORKING CAPITAL It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses insure.

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It is indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits. Excessive working capital makes management complacent which degenerate into managerial inefficiency.

RESULTS OF INADEQUATE WORKING CAPITAL. It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. It becomes difficult to implement operating plans and to achieve the firms profit target. Operating inefficiencies creep in when it becomes difficult to meet day-to-day commitments.

DETERMINANTS OF WORKING CAPITAL

NATURE OF BUSINESS: Working capital requirements of firm are basically influenced by the nature of its

business. Trading and financial firms have small investment in the fixed assets but require very large amount of money to be invested in working capital. Working capital requires most of manufacturing concerns to fall between the extreme requirements of trading firms and public utilities.

SALES AND DEMAND CONDITION:

The working capital needs of a firm are related its sale. It is determine to precisely determine the relationship between the volume of sales and working capital needs. In current assets will have to be employed before the growth take place.

A working firm may need to invest its fund in fixed assets in order to sustain its production its sales. This will in turn increase investment in current assets in order to support enlarge scale operation. Such a firm faces other financial problem when it retains substantial
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potential its profit. It would not be able to dividend to its shareholders it therefore imperative the proper planning be done such by such companies to finance their increasing needs of working capital. Sales depend demand condition. Most firms experiences seasonal and cyclical functional demand of their product and services. This business variation working capital required especially temporary working capital requirement of the firm. Where there is upward swing in the economy, sales will increase; when there is a decline in economy, sales will fall and consequently, level of inventories and debtors will also fall.

PRICE LEVEL CHANGES The increasing shifts in price level make functions of financial manager difficult. He should anticipate the effect of price level changes of working capital requirement of the firm. Generally, rising price levels will require a firm to maintain higher amount of working capital. Same levels of current assets will need increase investment when prices are increasing. However companies which an immediately revise their product prices with rising price levels will not face server working capital problem.

TECHNOLOGY AND MANUFACTURING POLICY:

The manufacturing cycle comprises of the purchases and use of raw materials and production of finished goods. Longer the manufacturing cycle larger will be the firms working capital requirements. For example the manufacturing cycle in the case of a boiler, depending on its size, may range to six to twenty four months. On other hand, the manufacturing cycle of products such as detergent powder, soap, chocolate etc may be a few hours. An extent manufacturing time pan means a larger tie-up of funds in inventories. Thus in there are alternative technologies in manufacturing a product, the technological process with shortest manufacturing cycle may be chosen. Once manufacturing technology has been selected, it should

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be ensured that manufacturing cycle is completed within the specified period. Any delay in manufacturing process result in accumulation of work-in-process and waste of time. A strategy of constant production may be maintained in order to resolve the working capital problems arising due to seasonal changes in demand for the firms product. A steady production policy will cause inventories to accumulate during the off-season period and he firm will be exposed to greater inventory costs and risks. Thus, if cost and risks of maintaining a constant production schedule are high, the firms may adopt a variable production policy varying its production schedules in accordance with changing demand.

CREDIT POLICY:
The credit policy of the firm affects the working capital by influencing the level of debtors. The credit to be granted to customers may depend upon the industry to be granted to customers may depend upon the norms of the industry to be granted to use discretion in granting credit terms to its customers. The firm should be prompt in talking collection procedures can increase the chance of bad debts. In order to ensure the unnecessary funds are not tied up in debtors, the firm should follow the rationalized credit policy based on the credit standing of customers and other relevant factors. The firm should evaluate the credit standing of new customers and periodically review the worthiness of the exiting customers.

AVAILABILITY OF CREDIT:
The working capital requirements of firms are also affected by credit terms granted by its creditors. A firm will need less working capital if liberal credit terms are available to it. Similarly the availability of credit from banks also influences the working capital needs of the firm. A firm, which can get bank credit easily on favorable condition, will operate less working capital of a firm without such a facility.

OPERATING EFFICIENCY:

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The operating efficiency of the relates to optimum utilization of resources at minimum costs. The firms will be effectively contributing in keeping the working capital investment at a lower level if it is efficient in controlling operating cause and utilizing current assets. The use of working capital improved and pace of cash conversion cycle is accelerated with operating efficiency. Better utilization and pace cash conversion cycle is accelerated with operating efficiency. Better utilization of resources profitability and thus helps in releasing the pressure on working capital. IMPORTANCE OF WORKING CAPITAL The importance of working capital management is reflected in the fact that finance managers spend a great deal of time in managing current assets and liabilities. Working capital is also helpful in profitability. As we know that the current ratio is the indication of firms short-term solvency. It is also known as the excess of current assets over current liabilities. So highly the working capital means higher the current assets and higher the current assets mean company will be promptly able to meet his obligation. So the company goes in to liquidation is less. So, Working capital = Current Assets Current Liability Current Assets = Strong Position of the company to pay his Obligation But lower the working capital means less of current assets over current liability and lower the current assets means the company will not be able to pay his obligation and the chances of company to in to liquidation is more. Current Asset = position of the company to pay his obligation is less. So the working capital should be as per the need of the organization. Again the amounts of working capital also affect the profitability of the profitability of the company. If we have higher the working capital then we have more of current asset over current liability. And more of current assets mean company has more money. In this situation the company has idle resource which does not earn anything for the company. And this is the burden

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for the company. In other words they have resource which Company cannot utilize in effective manner.

WORKING CAPITAL = Current Asset-Current Liability

Current asset means the company has idle resource and company have idle resource.

The working capital is also helps in overall profitability measurement. The ROI better the position of the company in terms of profit. So this ratio shows companies operational efficiency.

ROI = Profit before Interest and Tax X 100

Capital employed

So higher the ROI greater the position of the company. So we can say that higher the ROI means lower the capital employed.

Capital employed = share capital + reserve and surplus + long term dept. In other words,

Capital employed= fixed asset + working capital

Both capital employed and ROI inversely proportionate. It means that higher the ROI then lower the capital employed and lower the ROI higher will be the capital employed.

EX: - if PBIT=200000, now if capital employed is 100000 then ROI= 200000/100000=20%

And if capital employed= 150000 then ROI=200000/150000=13.33%

It shows that higher the capital employed lower will be the profitability.

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FACTORS AFFECTING WORKING CAPITAL

The working capital needs of a firm are affected by numerous factors. The important factors are follows: NATURE OF BUSINESS In some business organization, the sales are mostly on a cash basis and the operating cycle is also very short. In the concern the working capital requirement is comparatively less. Mostly services giving companies come in the category. In manufacturing concerns, usually the operating cycle is very long and a firm has to give credit to customers for improving scales. In such a case the working capital requirement is more. PRODUCTION POLICY Working capital requirement is also fluctuate according to production policy. Some products have seasonal demands but in order to climate the fluctuation in the working capital, the manufacture plant production is steady flow through the year. These policies will even out the fluctuation in the working capital. MARKET CONDITIONS Due to consumption in the market the demands for working capital fluctuate. In a comparatively environmental business firm has to give liberal credit to customers. Similarly it will have to maintain large inventory of finished goods to service the customers promptly, in this situation the large amount of working capital will require.

SEASONAL FLUCUATION: A firm who is producing the seasonal demands requires more working capital during peak seasons which the demand for working capital will go down during slack seasons.
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GROWTH AND EXPANSION ACTIVITES: The working capital needs of the firms increase as it grows in terms of sales or fixed assets. A growing fund may need to invest funds in fixed assets in order to sustain its growth production and sales. These will in turn increase investment in current assets, which will result in increase in working capital needs.

OPERATING EFFICIENCY: The operating efficiency of the firm relates to optimum utilization of resources at minimum cost. The firm will be effectively contributing to its working capital if it is efficient in controlling operating costs the working capital is better utilized and cash cycle is reduce which working capital needs. CREDIT POLICY The working capital requirement of a firm is depend a great extend on the credit policy followed by firm for its debtors. A liberal credit policy will result in huge funds blocked in debtors which will enhance for the working capital. If the creditors are ready to supply materials and goods on liberal credit, working capital requirement are substantially reduced.

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FINANCING CURRENT ASSETS

Working capital is a critical factor in the sustainability and viability of any business. At the same time, financing working capital can be very costly. Proper management of working capital is of vital strategic importance.

A firm can adopt different financing policies. There are three types of financing policies as under

LONG TERM FINANCING: The sources of long term financing include ordinary share capital, preference share capital, debentures long term borrowings from financial institution and reserve and surplus. SHORT TERM FINANCING: The short term financing is obtained for the period less than one year; it is arranged in advance from bank and other suppliers of the short-term finance in the money market short-term finance includes working capital funds from banks, public deposit, commercial paper, factoring of receivables etc. SPONTANEOUS FINANCING: Spontaneous financing refers to the automatic source of short-term funds arising in the Norman course of a business. Trade creditors and outstanding expenses are examples of spontaneous financing. There is no explicit cost of spontaneous financing. A firm is expected to utilize these source of finance to the fullest extent. To have effective working capital we need mix of short-term and long-term sources of finance. Depending on the mix of short and long term financing, the approach followed by a company may be referred to as: Matching Approach Conservative Approach Aggressive Approach

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MATCHING APPROACH: The firm can adopt a financial plan which matches the expected life of assets with the expected life of the source funds raised to finance assets. Thus a ten-year loan may be raised to finance a plant with an expected life of ten years: stocks of goods sold in thirty days commercial paper or a bank loan. The justification to exact matching is that, since the purpose of financing is to pay for assets, the source of financing and assets should be relinquished simultaneously. Using long term financing for the short-term assets is expensive, as fund will not be utilized for the full period. Similarly financing long term assets with short term financing is costly as well as incontinent as arrangement for the new short term financing will have to be made on a continuing basis.

Temporary working capital ASSETS P.W.C.

Short term financing

Long-term financing

Time

P.W.C.:-permanent working capital P.W.C.:-permanent working capital

Financing under Matching Approach

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CONSERATIVE APPROACH: A firm may adopt the conservative approach in financing in its current and fixed assets. The financing policy of the firm said to be conservative when it depends more on long term funds for financing needs. Under a conservative plan, the firm finances its permanent assets and also a part of temporary current assets the idle long term funds can be invested in the tradable securities to convertible securities to conservative liquidity. The conservative plan realizes heavily on long term financing and therefore the firm has less risk of facing the problem of shortage of funds.

AGGERSSIVE APPROACH:A firm may be aggressive in financing its assets. An aggressing policy is said to follow by the firm when it uses shorter financing a part of its permanent current assets with short term financing. Some extremely aggressive firms may even finance a part of their fixed assets with short time financing. The relatively more use of short term financing makes the firm more risky.

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SOURCES OF WORKING CAPITAL

CASH CREDIT: In this method, bank sanctions a particular limit up to which a borrower can barrow. He can withdraw the amount as per his requirements. Interest is charged only on the amount withdrawn and not on time when entire amount sanctioned. TRADE CREDIT: The trade credit implies the credit allowed by the supplier to the purchasing firm. It is only the postponement of the payment of the creditors. Trade credit is a useful mode of financing working capital and many firms rely on such credit, the biggest advantage of trade credit to the purchaser is that it is available easily or almost instantly. BANK OVERDRAFT: In this method, a customer is allowed to withdraw amount than the balance credit in the bank. Interest is charged only on the amount which is withdrawn as overdraft. Bank overdraft arrangements can offer wide flexibility once relation between the bank and the customer are developed. This is the most common method of banking financing.

LETTER OF CREDIT: It is the document issued by the bank formally on behalf of its client and contains the conditions under which bank will act as a guarantor against the commitments and financial obligation of the customer.

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BILL DISCOUNTING: A bill of exchange which is drawn by a creditor on his debtor is a negotiable instrument. It contents an unconditional order to pay a certain sum of money after certain period of time to the creditor. But the creditors have to wait till the time of maturity date before he receives the payments. His money till the time period is over. In order to remove this difficulty, the creditor can discount the bill with his bank. The bank deducts the same amount as a discount from the amount of the bill and the remaining amount is paid to the creditors.

WORKING CAPITAL LOANS: In addition to the above mentioned ways of financing, something working capital loans may also be sanctioned by the banks.

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SOURCES OF ADDITIONAL WORKING CAPITAL

Handling receivables (Debtors)
Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know..who owes them money.. How much is owed Late payments erode profits and can lead to bad debts. Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt. The following measures will help manage your debtors: 1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them. 7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly. 10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option.

12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.
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Recognize that the longer someone owes you, the greater the chance you will never get paid. If the average age of your debtors is getting longer, or is already very long, you may need to look for the following possible defects:

weak credit judgments poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention. Look for the warning signs of a future bad debt. For example......... longer credit terms taken with approval, particularly for smaller orders use of post-dated checks by debtors who normally settle within agreed terms evidence of customers switching to additional suppliers for the same goods new customers who are reluctant to give credit references Receiving part payments from debtors. Profits only come from paid sales. The act of collecting money is one which most people dislike for many reasons and therefore put on the long finger because they convince themselves there is something more urgent or important that demands their attention now. There is nothing more important than getting paid for your product or service. A customer who does not pay is not a customer. Here are a few ideas that may help you in collecting money from debtors:

Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail.
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Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the remainder. It lessens the problem. When asking for your money, be hard on the issue - but soft on the person. Don't give the debtor any excuses for not paying. Make it your objective is to get the money - not to score points or get even.

NEED OF WORKING CAPITAL

As we know that this is capital that obtained to fulfill their obligations. The need of working capital can be understood by the way of operating cycle. It is also known as working capital.

Reason of operating cycle Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for generating sales. Current assets are needed because sales do not convert into cash instantaneously. There is always an operating cycle involved in conversion of sales into cash.

Phases determining the length operating cycle

Operating cycle has three phases which are as follows:

1. Acquisition of resources such as raw material, labour, power and fuel etc. 2. Manufacturing of the product which includes conversion of raw material into work in progress into finished goods. 3. Sales of the product either for cash or on credit. Credit sales create account receivable for collection.

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These phases the cash flows, which are the most of the time, are neither synchronized nor certain. They are not synchronized because the cash outflows usually occur before cash inflows are difficult to forecast accurately. Cash outflows, on the other hand, are relatively certain. The firm is, therefore, required to invest in current assets for a smooth functioning. It needs to maintain the liquidity for purchase of raw materials and pay expenses such as wages and salaries, other manufacturing, administrative and selling expenses and taxes as there is hardly a matching between cash inflows, Stock of raw materials and work in progress are kept to ensure smooth production and to guard against non-availability of raw materials and components. The firm holds the stock of finished Goods to meet the demand of customers on continuous basis and sudden demands for some customers. Demands are created because goods are sold on credit for marketing and competitive reasons. Thus, a firm makes adequate investment in inventories, and debtors, for smooth unintentional production and sale. WORKING CAPITAL CYCLE. Cash flows in a cycle into, around and out of a business. It is the businesss lifeblood and every managers primary task is to keep flowing and to use the cash flow to generate profits. If a business is operating profitably, that it should, in theory ,generates cash surpluses, if it doesnt generates surpluses, the business will eventually run out of cash and expire.

The faster a business expands the more cash it will need for working capital and investment. The cheapest and the best source of cash exist as working capital right within the business. Good management of working capital will generates cash will improve profits and reduce the risk. Bear in mind that the cost of providing credit to customers and holding stocks can represents substantial proportion of a firms total profit. Operating Cycle is the time duration required to convert sales, after the conversion of resource in to inventories, into cash.

The operating cycle of a manufacturing company involves three phases :

1. Acquisition of resources such as raw material, labour, power and fuel etc.
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2. Manufacturing Process which includes conversion of raw material in to work in progress in to finish good. 3. Sale of the product either cash or credit. Credit sales create account receivable for collection CREDIT SALES

CASH

CASH SALES

FINISHED GOODS

RAW MATERIAL

WORK IN PROGRESS

Operating cycle:
There is a difference between current assets and current liabilities in the terms of their

liquidity. A firm requires many years to cover the initial investment in fixed assets such as plant and machinery or land and building. On the contrary, investment in current assets is turned over many times in a year. Investment in current assets such as inventories and debtors (account receivables) is realized during the firms operating which is usually less than a year.

Operating cycle is the time duration required to convert sales, after the conversion of resource in to inventories, into cash.

Operating cycle of a manufacturing company involves three phases:

1. 2.

Acquisition of resources such as raw material, labour, power and fuel etc. Manufacturing of the product which includes conversion of raw material into work in

progress into finished goods.

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3.

Sale of the product either for cash or on credit. Credit sales create account receivable for

collection. These phases the cash flow, which most of the time, are neither synchronized nor certain. They are not synchronized because the cash outflows usually occur before cash inflows are difficult to forecast accurately. Cash outflows, on the other hand, are relatively certain. The firm is, therefore, required to invest in current assets for a Smooth functioning. It needs to maintain the liquidity for purchase of raw materials and pay expenses such as wages and salaries, other manufacturing, administrative and selling expenses and taxes as there is hardly a matching between cash inflows, stock of raw materials and work in progress are kept to ensure smooth production and to guard against non-availability of raw materials and components. The firm holds the stock of finished goods to meet the demand of customers on continuous basis and sudden demand for some customers. Demands are created because goods are sold on credit for marketing and competitive reasons. Thus, a firm makes adequate investment in inventories, and debtors, for smooth unintentional production and sale.

This clearly shows that when we manufacture any kind service, the conversion of the cash takes place after some time. First the money enters into the business in the form of cash which is used to produce the raw material or services. After that, raw material is entered into the conversion, that process is called work in progress. Then it is transformed into finished goods which wait for sell. Sale can be of credit or cash. Cash sales give money immediately but credit sales require some time to convert into cash. How the length of the operating cycle determined? The length of the operating cycle of manufacturing firm is the sum of: 1. 2. Inventory Conversion Process Debtors Conversion Process

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The inventory conversion period is the total time needed for producing the selling the product. It includes 1. 2. 3. Raw Material Conversion Process Work In Progress Conversion Process Finished Goods Conversion Process

The debtors conversion period is the time required to collect the outstanding amount from customer. Total inventory conversion period and debt conversion period is referred to as gross operating cycle. So, Gross Operating Cycle = Inventory Conversion Period + Debtors Conversion Period Inventory conversion is the sum of Raw Material Conversion Period (RMCP) Work in Process Conversion Period and Finished Goods Conversion Period

ICP=RMCP+WIPCP+FGCP Operating cycle = R + W + F + D - C R = Raw material storage period W = Work in progress holding period F = Finished goods storage period D = Debtors collection period C = Credit period availed

Raw material conversion period should depend on:

1. 2.

Raw material consumption per day Raw material inventory

Raw Material Conversion Period =Raw Material Inventory x 360/Raw Material Consumption =RMI x 360 / RMC

Work-in-Progress Conversion Process

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=Work-in-progress inventory x 360/Cost of Production =WIPI x 360/COP

Finished Goods Conversion Period =Finished Goods Inventory X 360/Cost of Production =FGI x 360

Debtors Conversion Period (DCP) =Debtors (D) X 360/Credit Sales at Cost =D X 360/Credit Sales at Cost

Creditors Conversion Period = Creditors (CRS) X 360/ Credit Purchase =CRS X 360/Credit Purchase

Net operating cycle (NOC) is the difference between gross operating cycle and payables deferral period.
NET OPERATING CYCLE = GROSS OPERATING CYCLE PAYABLES

Working capital operating cycle Investment in working capital is influenced by four key events in the production and sales cycle. These events are: purchase of raw materials, payment for their purchase, the sale of finished goods, and collection of cash for the sales made. Definition of operating cycle The time lag between the purchase of raw materials and the collection of cash for sales is referred to as the operating cycle for the company.

The time lag between the payment for raw materials purchases and the collection of cash

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from sales is referred to as the cash cycle. Operating cycle of the company The entire sequence of operations in a company can be summarized as follows:

The operating cycle for a company primarily begins with the purchase of raw materials, which are paid for after a delay representing the creditor's payable period.

These purchased raw materials are then converted by the production unit into finished goods and then sold. The time lag between the purchase of raw materials and the sale of finished goods is known as the inventory period.

Upon sale of finished goods on credit terms, there exists a time lag between the sale of finished goods and the collection of cash on sale. This period is known as the accounts receivables period.

The following ratios will help in managing debtors, creditors and inventories 1. Stock Turnover ratio = Cost of goods sold / Average Stock 2. Debtors Turnover ratio = [(Debtors+ Bills receivable*365] / Net credit sales 3. Debtors Turnover rate = Credit sales / (Average Debtors + Bills receivable ) 4. Creditors Turnover ratio = [(Creditors + Bills payable)*365] / Credit purchases 5. Creditors Turnover rate = Credit purchases / Average Creditors

The operating cycle can be depicted as:

The stage between purchase of raw materials and their payment is known as the creditors payables period.
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The period between purchase of raw materials and production of finished goods is known as the inventory period.

The period between sale of finished goods and the collection of receivables is known as the accounts receivable period.

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Managing Working Capital

1. Working Capital Cycle
Cash flows in a cycle into, around and out of a business. It is the business's life blood and every manager's primary task is to help keep it flowing and to use the cash flow to generate profits. If a business is operating profitably, then it should, in theory, generate cash surpluses. If it doesn't generate surpluses, the business will eventually run out of cash and expire. The faster a business expands, the more cash it will need for working capital and investment. The cheapest and best sources of cash exist as working capital right within business. Good management of working capital will generate cash will help improve profits and reduce risks. Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits. There are two elements in the business cycle that absorb cash - Inventory (stocks and work-inprogress) and Receivables (debtors owing you money). The main sources of cash are Payables (your creditors) and Equity and Loans.

Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital
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- TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales. If you ....... Collect receivables (debtors) faster Then ...... You release cash from the cycle Collect receivables (debtors) slower Your receivables soak up cash Get better credit (in terms of duration or amount) You increase your cash from suppliers resources Shift inventory (stocks) faster Move inventory (stocks) slower You free up cash You consume more cash

It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business.

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

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2. Sources of Additional Working Capital

Sources of additional working capital include the following: Existing cash reserves Profits (when you secure it as cash !) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

3. Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed. The following measures will help manage your debtors: 1. Have the right mental attitude to the control of credit and make sure that it gets the priority it deserves. 2. Establish clear credit practices as a matter of company policy. 3. Make sure that these practices are clearly understood by staff, suppliers and customers. 4. Be professional when accepting new accounts, and especially larger ones. 5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank references, industry sources etc. 6. Establish credit limits for each customer... and stick to them.

7. Continuously review these limits when you suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to your larger customers. 9. Invoice promptly and clearly.
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10. Consider charging penalties on overdue accounts. 11. Consider accepting credit /debit cards as a payment option. 12. Monitor your debtor balances and ageing schedules, and don't let any debts get too large or too old.

Key Working Capital Ratios

The following, easily calculated, ratios are important measures of working capital utilization. Ratio Formulae Result Interpretation On average, you turn over the value of your entire stock every x days. You may need to break this Stock Turnover (in days) Average Stock * 365/ Cost of Goods Sold = x days down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies Receivables Ratio (in days) due to you. If your official credit terms are 45 day Debtors * 365/ Sales = x days and it takes you 65 days... why?

One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days.

Payables Ratio (in days)

Creditors * 365/ Cost of Sales (or = x days Purchases)

If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of

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service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount Total Current Ratio Assets/ Total Liabilities Current = Current times you are due to pay within the coming 12 months. x For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 time e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. (Total Assets Quick Ratio Inventory)/ Total Liabilities (Inventory Working Receivables + - As Sales % A high percentage means that working capital needs are high relative to your sales. Current Current = times x Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.

Capital Ratio Payables)/ Sales

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ESTIMATION OF WORKING CAPITAL

Estimation of working capital is one of the most important but complex of all the business. As explained in the earlier topic excessive current assets result into higher amount of working capital which ensure safety but at the cost of profitability. On the other hand, if investment in current assets is reduced it will lower the amount of working capital but there will be a greater risk accomplished by higher profitability. A firm has to ensure the balance the two and doing this it is early it is of paramount importance to prepare an estimate of capital budget. A statement showing estimation of working capital is also known as working capital budget. The greatest advantage of preparation of working capital budget is that it facilities planning of the level of holding current assets. Similarly it also helps to compare the project working capital and actual work-in-capital. Working capital can be estimated by many ways. Here there are three ways to calculate the working capital requirement.

1. Estimating the components of working capital. 2. Percentage method. 3. Operating cycle method. Estimation of components of working capital. In this method we will estimate out requirement of different components of working capital. Mainly we will have to estimate our current assets and current liability. 1. estimating current assets: In the prediction of working capital, it is essential to the current assets. Current assets include the following assets.

Stock of raw material. Sundry debtors. Any advance payment of expense. Cash and bank balance.

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2. Estimating current liability:The second step in estimating working capital requirement is to estimate the current liabilities. The current liability includes trade creditors; bill payable how much the credit will be allows by that creditors should be estimated carefully. In cash of other current liability, what will expect delay in the payment of such liability should be estimated. 3. Contingency margins:The difference between estimated current assets and current assets and will be the net working capital will be the net working capital requirements. To be on the safer side a contingency margin of 10% to 15% may be added in the figure calculated as per the above explanation.

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WORKING CAPITAL MANAGEMENT POLICY

ACTION ON STOCKS
Keep stock levels as low as possible, consistent with not running out of stock and not ordering stock in uneconomically small quantities. "Just-in-Time" stock management is fine, as long as it is "Just-in-Time" and never fails to deliver on time. Consider keeping stock in suppliers' warehouses, drawing on it as needed and saving warehousing cost.

ACTION ON DEBTORS / CUSTOMERS

Assess all significant new customers for their ability to pay. Take references, examine accounts, ask around. Try not to take on new customers who would be poor payers. Re-assess all significant customers periodically. Stop supplying existing customers who are poor payers - you may lose sales, but you are after QUALITY of business rather than QUANTITY of business. Sometimes poor-paying customers suddenly find cash to settle invoices if their supplies are being cut off. If customers can't pay / won't pay let your competitors have them - give your competitors a few more problems. Consider factoring sales invoices - the extra cost may be worth it in terms of quick payment of sales revenue, less debtor administration and more time to carry out your business rather than spend time chasing debts. Consider offering discounts for prompt settlement of invoices, but only if the discounts are lower than the costs of borrowing the money owed from other sources.

ACTION ON CREDITORS
Do not pay invoices too early - take advantage of credit offered by suppliers - it's free.

Only pay early if the supplier is offering a discount.

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POINTS TO BE KEPT IN MIND WHILE SECTIONING WORKING CAPITAL LIMITS

The current assets and the current liabilities are classified as per the RBI guidelines.

The minimum current ratio to be maintained is 1.33:1.

The estimates about the sales, current assets, current liabilities excluding the bank borrowings, and networking capital should be realistic.

The company should submit the quarterly operating statements.

The company should submit the copies of annual accounts regularly.

The company should comply with provisions of the selective credit control and provisions of the Foreign Exchange Regulation Act, 1973, if applicable.

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CHAPTER 4 DATA ANALYSIS & INTERPRETATION

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Schedule of changes in working capital

Schedule of changes in working capital is prepared with the help of current asset and current liabilities. This statement shows changes in current asset and current liabilities. The purpose of this statement is to find out the net changes in working capital. It is also known as working capital variation statement. An Increase current asset causes an increase in working capital. A decrease in current asset causes a decrease in working capital. An increase in current liabilities causes a decrease in working capital. A decrease in current liabilities causes an increase in working capital. Statement of changes in working capital 2006-07 and 2007-08 Table No : (In Lakhs)

Particulars A. Current Asset Inventories Sundry Debtors Cash & Bank Loans & Advances Total Current Asset B. Current Liabilities Acceptances Sundry Creditors Others Total Current Liabilities Net Current Asset (A-B) Total Increase Working Capital

2006-07
1107.1 0.84 11.98 113.5 1233.42

2007-08
905 755.7 85.6 127.9 1874.2

Increase

Decrease
202.1

754.86 73.62 14.4

79.4 2207.7 116.1 2519.3 -1285.88

41.2 1957.2 148.9 2296.2 -422

38.2 25.05 32.8

906.13

234.9 671.23

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INFERENCE: This statement shows changes in current asset and current liabilities. From the above table it can be seen that the working capital of both the year is negative because the companys current liability is higher than the current asset. Hence it can be inferred that in the year in the year 2007-08 increase in working capital due to increase in current asset and decrease in current liabilities. Statement of changes in working capital 2007-08 and 2008-09 Table No : (In Lakhs)

Particulars A. Current Asset Inventories Sundry Debtors Cash & Bank Loans & Advances Total Current Asset B. Current Liabilities Acceptances Sundry Creditors Others Total Current Liabilities Net Current Asset (A-B) Total Increase Working Capital INFERENCE:

2007-08
905 755.7 85.6 127.9 1874.2

2008-09
865.5 1375.4 32.2 377.7 2650.8

Increase

Decrease
39.5

619.7 53.4 249.8

41.2 1957.2 148.9 2147.3 -273.1 . .

153.3 1894.7 74.5 2122.5 528.3

112.1 62.5 74.4

1006.4

205 801.4

From the above table it can be shown that the current asset in the year 2008-09 has increased when compared with the previous year. There has been increase the components of current asset like sundry debtors, loans & advances etc, thus it can be inferred that in the year 2008-09 increased in working capital due to increase in current asset and decrease in current liabilities.

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Statement of changes in working capital 2008-09 and 2009-10 Table No : Particulars A. Current Asset Inventories Sundry Debtors Cash & Bank Loans & Advances Total Current Asset B. Current Liabilities Acceptances Sundry Creditors Others Total Current Liabilities Net Current Asset (A-B) Total Increase Working Capital INFERENCE: Working capital in the year 2009-10 is -25 which is lower when compared to the previous year 2008-09 i.e. 528.3. It has to be noted that working capital has declined in spite of huge sundry creditors of Rs. 3279.6 Lakhs. 2008-09
865.5 1375.4 32.2 377.7 2650.8

(In Lakhs) 2009-10

1590.8 2540.1 -1006.4 355.2 3479.7

Increase
725.3 1164.7

Decrease

1038.6 22.5

153.3 1894.7 74.5 2122.5 528.3

148.2 3279.6 77 3504.8 -25.1

5.1 1384.9 2.5

1895.1 553.4

2448.5

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Statement of changes in working capital 2009-10 and 2010-11 Table No : (In Lakhs)

Particulars A. Current Asset Inventories Sundry Debtors Cash & Bank Loans & Advances Total Current Asset B. Current Liabilities Acceptances Sundry Creditors Others Total Current Liabilities Net Current Asset (A-B) Total Increase Working Capital INFERENCE:

2009-10
1590.8 2540.1 -1006.4 355.2 3479.7

2010-11
1966.7 3211.8 16.7 260.8 5456

Increase
375.9 671.7 1023.1

Decrease

94.4

148.2 3279.6 77 3504.8 -25.1

0 3924.7 90.7 4015.4 1440.6

148.2 645.1 13.7

2218.9

753.2 1465.7

From the above table it can be shown that the current asset in the year 2010-11 has increased when compared with the previous year. There has been increase the components of current asset like sundry debtors, inventories etc, thus it can be inferred that in the year 2010-11 increased in working capital due to increase in current asset.

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Working Capital
Working Capital = Current Asset Current Liability
Table No : Year Current Asset Current Liabilities Working Capital 2007-08 1874.2 2147.35 -273.15 2008-09 2650.87 2122.59 528.28 2009-10 3479.7 3504.8 -25.1 (In Lakhs) 2010-11 5456.1 4015.4 1440.6

Figure 1

Working Capital
2000 1500 1000 500 0 -500 2007 2008 Working Capital 2009 2010

SOURCES: PRIMARY DATA INFERENCE: In the above graph we can inferred that the companies working capital has become negative in the year 2007-08 and 2009-10, the main reason for that during these month the companies sundry creditors has increased in great extent. But in the year 2008-09 and 2010-11 it has became positive. So during these years companies current assets are more than the current liabilities, it means organization has working capital efficiency

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Ratio Analysis
The ratios thus calculated are classified into 4: Liquid Ratio Turnover Ratio Leverage Ratio Test of Solvency

I.

Liquid Ratio

a) Current Ratio:
This ratio is calculated by dividing current assets by current liability. This ratio indicates how much current assets are there against each rupee of current liabilities. Current ratio is also known as solvency ratio as it indicates how the expected current claims are covered by current assets. Ideal ratio is 2:1 current assets are that you can readily convert into cash or will do so within 12 months in the course of business. Current liabilities are amount you are due to pay within the coming 12 months. Current Assets Current Ratio = Current Liabilities Table No : (In Lakhs) Year Current Asset Current Liabilities Ratio 2007-08 1874.2 2147.35 0.87:1 2008-09 2650.87 2122.59 1.25:1 2009-10 3480 3532.7 0.99:1 2010-11 5456.1 4054.46 1.35:1

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Figure 2
1.5 0.87 1.29 0.99 1.37

1 Ratio 0.5

0 2007 2008 Year

Current Ratio

2009

2010

999 SOURCES: PRIMARY DATA INFERENCE: Following are the current ratios (0.87:1)2007-08, (1.29:1) 2008-09, (0.99:1) 2009-10 and (1.37:1) 2010-11. The standard ratio is 2:1 .The higher the current ratio is, the more capable the company is to pay its obligations. But in this case the current ratio is less than the standard ratio, so it shows the unsatisfactory short term liquidity.

b) Quick Ratio Quick Asset Quick Ratio = . Current Liability

Table No : Year Quick Asset Current Liabilities Ratio 2007-08 969.2 2147.35
0.45

(In Lakhs) 2009-10 1889.3 3532.7

0.53

2008-09 1785.3 2122.59

0.83

2010-11 3489.3 4054.46

0.87

Figure 3

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1 0.9 0.8 0.7 0.6 0.5 Ratio 0.4 0.3 0.2 0.1 0

0.83 0.53

0.87

0.45

2007

2008 Year Quick Ratio

2009

2010

SOURCES: PRIMARY DATA INFERENCE: From the above graph we can interpret that concurrently increase and decrease. The ideal quick ratio is 1.33:1, but here we can see that the all ratios are below that ideal ratio. So this ratio shows the unsatisfactory day-to-day solvency, low cash balance and over investment.

II.

Turnover Ratio

a) Inventory Turnover Ratio

The objective is to determine the efficiency with which the inventory is utilized. It indicates the speed with which the inventory is converted into sales. In general, a high ratio indicates e fficient performance. However, too high ratio and too low ratio sho uld be called for furth er investigation. A too high ratio may be the result of very low inventory levels which may result in frequent stock outs and thus the firm may incur high stock out costs. On the other hand, a too low ratio may be the result of excessive inventory levels, slow moving or obsolete inventory and thus, the firm may incur high carrying costs. Thus, a firm should have neither ve ry high ratio nor low ratio.(Stock out means customer going out of shop due to unavailability of stock.)

Net Sales Inventory Turnover Ratio = Avg. Stock

Table No : Year Net Sales Avg. Stock I.T.R 2007-08 17601.9 1006.0 17.5 2008-09 16669.2 885.2 18.83 2009-10 16006.1 1228.1 13 (In Lakhs) 2010-11 27587.2 1778.7 15.5

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Figure 4
ITR

Times 17.5 19 13 15.5

2007

2008 Year

2009

2010

SOURCES: PRIMARY DATA INFERENCE: From the above graph it can be seen that the inventory turnover ratio has increased from 17.5 to 18.83 in the year 2007-08 to 2008-09, and then it decreased13 in the year 2009-10 and again it has increased 15.5 in the year 2010-11. High Inventory turnover ratio indicates the good inventory management.

Inventory Holding Period

12 MONTHS(365 Days) Inventory Holding Period = ---------------------------------------------INVENTORY TURNOVER RATIO

Table No : Year I.T.R Days Holding Period 2007 17.5 365 21 2008 18.83 365 19 2009 13 365 28 (In Lakhs) 2010 15.5 365 23.5

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Holding Period 21 19

28 23.5

Days

2007

2008 Year

2009

2010

INFERENCE: From the above graph it can be seen that the Inventory holding period has been invariably fluctuating for the four years.

b) Debtors Turnover Ratio

The objective is to determine this ratio is to analyses the efficiency with which the trade debtors are managed. It sho ws t h e ef fi ci e n c y of c ol l e ct i on pol i c y o f t h e fi rm . It i s a l w a ys a good i de a t o col l e ct qui c kl y, money from debtors as uncertainty of collection increases with credit policy being liberal. However a fi rm s hou l d un d ert a k e c os t be ne fi t s t u d y o f l i be r al c r ed i t pol i c y, i f be n ef i t i s m o r e t han co st t h an i t should increase credit period. High Debtors T/O ratio =shorter debtors ratio = quick recovery of money Low debtors T/O ratio = higher debtor ratio = delay in recovery of money Net Sales Debtors Turnover Ratio = Sundry Debtors Table No : (In Lakhs) Year Net Sales Sundry Debtors Ratio 2007 17601.9 755.7 23.29 2008 16669.2 1375.5 12.12 Figure 4 Figure 5 2009 16006.1 2540.09 6.3 2010 27587.2 3211.8 8.59

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Debtors Turnover Ratio

Debtors Turnover Ratio 23.29

12.12 6.3 8.59 0 2007 2008 2009 2010 0

INFERENCE: From the above debtors turnover ratio graph it can be shows that DTR has been decreasing from 2007-08 to 2009-10, and then it has increased slightly in 2010-11. The DTR which shows that the number of times the debtors are turned over cash during a year.

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Debtors Collection Period 365 Avg. collection Period = DTR

Year
D.T.R Days A.C.P( Days)

2007-08 23.29
365 15.67

2008-09 12.12
365 30.12

2009-10 6.3
365 57.94

2010-11 8.59
365 42.49

Table No : Figure

(In Lakhs)

Collection Period
70 60 50 40 30 20 10 0 2007-08 2008-09 2009-10 2010-11 Collection Period

SOURCES: SECONDARY DATA INFERENCE: From the above graph it can be shown that there is an increase in debtors and decrease in sales, so avg. collection period is increasing year by year until 2010-11. In 2010-10 it was slightly decreased, that shows that recovery from debtors is improving. It shows the how many days we collect the money.

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c) Creditors Turnover Ratio

Purchases Creditors Turnover Ratio = Creditors Table No : Year Purchases Creditors CTR 2007-08 16017.29 1957.17 8.18 (In Lakhs) 2008-09 11479.25 1894.73 6.06 Figure 2009-10 11250.24 3279.59 3.43 2010-11 19820.3 3924.71 5.05

CTR
9 8 7 6 5 4 3 2 1 0 2007-08 2008-09 2009-10 2010-11 CTR

SOURCES: SECONDARY DATA INFERENCE: From the above graph and table it can be seen that the credit turnover ratio has shown as declining trend from 2007-08 to 2009-10, and it has increased in 2010-11. These ratios indicate the speed/ velocity of payment to creditors and how rapidly payables are paid to the supplier.

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Average Payment Period

365 Avg. Payment Period = CTR Table No : Year
C.T.R Days

(In Lakhs) 2007-08 8.18

365 45

2008-09 6.06
365 60

2009-10 3.43
365 106

2010-11 5.05
365 72

Avg. Payment Period(Days)

Figure

Payment Period (Days)

120 100 80 60 40 20 0 2007-08 2008-09 2009-10 2010-11

Payment Period (Days)

SOURCES: SECONDARY DATA INFERENCE: The avg. payment period shows that the how many days firm makes payment to the creditors. It reveals the ability of the firm to avail the credit facility from the supplier throughout the year. Generally low CTR shows the favorable and it is good for the company.

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d) Working Capital turnover Ratio

Cost of Sale Working Capital turnover Ratio = --------------------------Net working capital

Table No : (In Lakhs) 2009-2010 16006.1 -52.8 -302 2010-11 27587.2 1464.4 20.1

Year
Net Sales W.C (C.A-C.L) W.C.T.R

2007-08 17601.9 -282.2 -62.4

2008-09 16669.2 631.1 32.5

SOURCES; PRIMARY DATA

Figure 5

Working Capital Turnover Ratio

100 0 Axis Title -100 -200 -300 -400 2007-08 2008-09 2009-10 2010-11 Working Capital Turnover Ratio

INFERENCE: A lower working capital turnover ratio indicates the inefficiency in utilization of resources and the r9atio has declined. Hence we can see that the components of working capital is consistently increasing which is consider as negative sign from the point of view of finance.

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Asset turnover Ratio =

Sales -------------------Fixed Asset

Table No : (In Lakhs) 2008-09 16669.2
9090.9

Year
Net Sales

2007-08 17601.9
7632.9

2009-10 16006.1
10744.6

2010-11 27587.2
13945.2

Total Assets ATR

2.31

1.83

1.5

1.97

SOURCES; PRIMARY DATA

Figure 6

Asset Turnover Ratio

Asset Turnover Ratio 2.31 1.83 1.5 1.97

2007-08

2008-09

2009-10

2010-11

INFERENCE: From the above graph reveals that the companies turnover ratio has decreased from 2007-08 to 2009-10, then in the year 2010-11 it has slightly increased. As compared to other years in 200708 it was found that the asset turn over ratio was high and its started to decrease in the coming years, in 2009-10 it was found that in 2009-10 the asset turnover ratio was lowest as compared to other years.

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Profitability Ratios Net Profit Ratio It expresses the relationship between net profits after taxes to sales. The ratio is

widely used as a measure of overall profitability and is very useful to proprietors as it gives an idea of the efficiency as well as profitability of the business to a limited extent

Net profit After Tax Net Profit Ratio = Net sales Table No : Year Net profit Net Sales Ratio 2007-08 2628.4 17601.9 14.93 2008-09 2591.7 16669.2 15.55 2009-10 3190.7 16006.1 19.93 (In Lakhs) 2010-11 3696.7 27587.2 13.4 X 100

Net Profit Ratio

20
Ratio

19.93 14.93 15.55 13.4

10 0
2007-08 2008-09 2009-10 2010-11 Year

N/P Ratio
INFERENCE: From the above graph it can be seen that the net profit ratio has increased from 2007-08 to 2009-10, and in the following year 2010-11 it was found that it was decreased. In the above graph it can be seen that 2009-10 is the year in which the firm has achieved maximum profit i.e. 19.93 as compared to other year.
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Gross Profit Ratio Th e obj e ct i v e i s t o det er m i n e t h e e f fi ci en c y wi t h whi ch pro du ct i on an d/ o r p ur c ha s e op e ra t i o ns ar e carried on. This ratio indicates (a) an average gross margin earned on a sale of Rs. 100, (b) the limit beyond which t h e f al l i n sa l e s pr i c e s wi l l de fi ni t el y r e sul t i n l o ss es . An d ( c) w ha t p o rt i o n of s al es i s l e ft t o co ve r op e r at i n g ex p en se s an d n on op e ra t i n g ex pe ns es l i k e t o p a y di vi de nd an d t o cr e at e r es e r ve s. Hi gh e r the ratio, the more efficient the production and /or purchase management. Gross Profit = X 100 Net Sales Table No : 2007-08 2008-09 3012.7 16669.2 18.07 2009-10 3622.3 16006.1 22.63

G/P Ratio

(In Lakhs) 2010-11 4013.7 27587.2 14.55

Year

3129.4 G/P 17601.9 Net Sales Ratio 17.78 SOURCE: PRIMARY DATA

Gross Profit Ratio

25 20 Ratio 15 10 5 0 2007 2008 Year 2009 17.78 18.07 22.63 14.55

2010

INFERENCE: From the above graph it can be referred that the company achieved high g/p ratio 22.63in 2009-10, it was further found that in 2010-11 it decrease to 14.55.

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Total Assets Turnover Ratio:

Through find out this ratio it can be helps to understand how efficiently assets are employed in business. This ratio suggests how a rupee of asset contributes to earn sales more the ratio more efficiently assets are used in gainful operation. Total Assets Turnover Ratio = Net Sales / Avg. Total Assets Table No : (In Lakhs)

Particulars
Avg. Fixed Asset Avg. Current Asset Total Avg. Assets Net Sales
T.A.T.R

2007-08
2262.65 1553.8 3816.45

2008-09
2282.9 2262.55 4545.45

2009-10
2307 3065.3 5372.3

2010-11
2504.7 4467.9 6972.6

17601.9
4.61

16669.2
3.67

16006.1
2.98

27587.2
3.96

5 4.5 4 3.5 Axis Title 3 2.5 2 1.5 1 0.5 0 2007-08 2008-09 2009-10 2010-11 Holding Period

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Inference: From the above graph and table it can be inferred that the company sales are decreasing in the year 2008-09 and 2009-10, so the ratio decreasing. In the year 2010-11 company sales is at the highest compared to the previous years, So that the ratio started to move to upward.

Fixed Assets turnover ratio:

The objective is to determine the efficiency with which the fixed assets are utilized. It i n di c at es t h e fi r m s ab i l i t y t o ge ne r at e s al es p e r r up e e o f i n v est m en t i n fi x e d a s s et s . In gen e ra l , higher the ratio, the more efficient the management and utilization of fixed assets is and vice versa. Fixed Assets turnover ratio = Net Sales / Avg. Fixed Assets Table No : Year Net Sales Avg. F.A F.A.T.R 2007-08 17601.9 2262.65 7.78 2008-09 16669.2 2282.9 7.30 2009-10 16006.1 2307 6.94

(In Lakhs) 2010-11 27587.2 2504.7 11.01

100

12 11.01 10 8 6 4 2 0 2007-08 2008-09 2009-10 2010-11 7.78 7.3

6.94

Inference: Here we can see that the net sales of the company decreases respectively in 200809, 2009-10. Along with that average fixed asset also decreases. So it would be resulted that F.A.T.R has decreased in the year 2008-09 and 2009-10. But In the year 2010-11, the company sales and avg. fixed assets increases. So it will be resulted that the ratio has increased from 6.94 to 11.01.

Current Assets turnover ratio:

This ratio is calculated by dividing current assets by current liability. This ratio indicates how much current assets are there against each rupee of current liabilities. Current ratio is also known as solvency ratio as it indicates how the expected current claims are covered by current assets. Ideal ratio is 2:1 current assets are that you can readily convert into cash or will do so within 12 months in the course of business. Current liabilities are amount you are due to pay within the coming 12 months.

Current Assets turnover ratio = Sales / Avg. Current Assets

Table No : Year Net Sales Avg. C.A 2007-08 17601.9 1553.8 2008-09 16669.2 2262.55 2009-10 16006.1 3065.3

(In Lakhs) 2010-11 27587.2 4467.9

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C.A.T.R

11.33

7.37

5.22

6.17

Year 2006 2007 2008 2009 2010

X 1 2 3 4 5

W.C (Y) -11847800 -2821000 5129000 -575000 14127000 1 4 9 16 25

XY -11847800
Axis Title

12 10 8 6 4 2

-5642000 15387000 -2300000 70635000

Total

15

4012200

55

66232200

2007-

Inference: In the above graph we can interpret that the ratio has continually decreases until financial year 2010-11. In 2010-11 onwards the ratio has started to increase because of net sales and avg. current asset of the company has increased in 2010-11 year.

Trend Projection

102

n byx = n

(5*66232200) (15*4012200) = (5*55) (15*15) 331161000 - 60183000 = 275 - 225 = 5419560

(y ) (y 802440) y y x i.e

= byx(x-) = 5419560(x-3) = 802440 = 5419560 16258680 = 5419560x 17061120 =6 = (5419560*6) 17061120 = 15456240
103

104

PART B EXPENSE ANALYSIS

105

1.1 INTRODUCTION
The expenses of a company can be classified into three categories: -

Material Expenses Labor Expenses Overhead Expenses

Material expenses are those expenses, which contribute to the material cost of the company. These include the cost of raw material, freight and octroi charges, Labour charges, power and fuel and any other cost which is directly related to the material consumption for the purpose of production of finished goods.

Labour Expenses include the expenses related to the manpower of the company. These include salaries and wages, recruitment and training expenses, and other staff welfare expenses.

Overhead Expenses can be further divide into administration overhead and selling & distribution overheads. The administration overhead includes the expenses related to the office like rent, insurance, taxes, printing and stationary and many more. The selling & distribution expenses include commission on sales, warranty expenses, travelling expenses and many more.

Definition:Expense ratios indicate the relationship of various expenses to net sales. The operating ratio reveals the average total variations in expenses. But some of the expenses may be increasing while some may be falling. Hence, expense ratios are calculated by dividing each item of expenses or group of expense with the net sales to analyze the cause of variation of the operating ratio.

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The ratio can be calculated for individual items of expense or a group of items of a particular type of expense like cost of sales ratio, administrative expense ratio, selling expense ratio, materials consumed ratio, etc. The lower the operating ratio, the larger is the profitability and higher the operating ratio, lower is the profitability. While interpreting expense ratio, it must be remembered that for a fixed expense like rent, the ratio will fall if the sales increase and for a variable expense, the ratio in proportion to sales shall remain nearly the same. Formula of Expense Ratio: Following formula is used for the calculation of expense ratio: Particular Expense = (Particular expense / Net sales) 100

Types of expenses1. Cost of Goods Sold:A manufacturing business or any business that sells products has a cost of goods sold category. These expense accounts typically include beginning and ending inventory valuations, freight and shipping of product, bad debts created by sales and non-payment, and other costs that directly relate to the items sold by the company. Some organizations also include compensation expenses that are directly related to the products made and/or sold, e.g., sales compensation or direct labor. 2. Operating Expenses:Usually the largest expense category (by the number of accounts, at least) are operating expenses, which identify all normal costs that relate to the day-to-day necessities of the organization. In this category, basic accounting rules specify the inclusion of compensation, benefits, local, state, and federal payroll taxes, office expenses, supplies, postage, travel and entertainment, advertising (amounts not included in the cost of goods sold category), repairs and maintenance, depreciation (the non-cash expense of writing "down" the cost of some assets over

107

time), mortgage or rent of facilities, utilities (telephone, electricity, heat, and air conditioning), and professional fees (accountants and attorneys). Non-Operating Expenses (or Other Expenses):This category typically includes all other expenses that the organization deems outside of operations. For example, corporate income taxes are often placed in this category. Companies identify federal and state corporate income taxes after they determine their net income (or net profit) for the fiscal or calendar year. Unlike compensation, travel, or repairs, income taxes are not calculated (or paid) until after all operations for the accounting period have closed. Employee and Officer Expense Accounts:Accounting expense account classifications should not be confused with employee and officer expense accounts, which are usually operating expenses. Employee and officer expense accounts are not typically specified in the income statement (profit and loss statement) for a good reason. These accounts are designed to categorize amounts spent by employees, management, and/or board of director members for the efficient performance of their duties. For example, travel and lodging is often a major component of expense accounts. However, on the income statement, the total for all forms of travel and lodging will correctly appear in the travel or travel and entertainment account on the income statement.

Function/ Purpose
Expenses ratio are supplementary to the operating ratio. Expenses ratio helps us to know the cause behind overall change in the operating ratio. Management can take corrective action accordingly. Expense ration indicates the efficiency of management in controlling the expenses and thereby improving profitability. Expenses ratio over a number of years should be studied to find out trend. While interpreting these ratio , it must be kept in mind that if are fixed in nature ,ratio would decrease as sales increase but if expenses are variable, same percentage would be maintained.

Break-up Of Operating Ratio into Various Expenses Ratios:

Break-up of cost of goods sold ratio gives us two major ratios viz. Material Expenses & Labour Expenses Ratio. Decrease in Labour expenses Ratio would mean either increase in efficiency of the labour or lesser use of labour force by the concern due to mechanization.
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Decrease in Material Expenses Ratio would mean increase in the yield. These ratios thus explain the increase or decrease in Gross Profit Ratio.

Manufacturing and Nonmanufacturing Costs:Manufacturing (direct materials, direct labor, factory overhead) and non-manufacturing costs; product and period costs; raw materials, work-in-process and finished goods; cost of goods manufactured and cost of goods sold; cost accounting cycle.

IA

manufacturing company incurs both manufacturing costs (also called

product costs) and nonmanufacturing costs or expenses (also called selling and administrative expenses).

109

 Manufacturing Costs and their classificationManufacturing costs are the costs that a company incurs in producing a product .There are 3 types of manufacturing costs: Direct Materials (DM) Raw materials and parts, directly traceable to the product. Materials must attach themselves to, and become part of, the finished product to be considered Direct Materials. Direct Labour (DL) Wages and other payroll costs of the employees that directly work to convert Direct Materials into finished products. These costs are directly traceable to the product. Manufacturing Overhead (MOHD) All the other costs related to producing products that don't qualify as Direct Materials or Direct Labor. Picture a manufacturing plant and all the costs of the plant. Now subtract DM and DL. Everything that's left is Overhead. These costs are indirectly traceable to the product. Variable Factory Overheads examples are electricity, heating, water, indirect material, indirect labour etc. Fixed Factory Overheads example are depreciation, property taxes , property insurance, salaries for non- production employees etc.

Non-Manufacturing Costs
Some costs are specifically not manufacturing costs, and therefore not DM, DL or OHD. These are costs not related to the manufacturing plant or producing the product. The include the following two categories: Selling Costs :-

The costs associated with selling the product are Selling Costs. These include sales salaries and commissions, advertising, stores and their related fixtures and equipment. General and Administrative Costs :110

The costs associated with the central management and home office of a company, and general costs of being incorporated, are classified as General and Administrative (GA) costs. This includes buildings, offices, equipment, salaries, etc. that are part of the administrative arm of the business, provided these costs can't be traced directly or indirectly to the manufacturing function. Period Costs :-

Some costs don't have any future value, and only relate to the current period. These include Selling costs and GA costs. Other period costs include income taxes and interest expense.

Benefits of Expenses Analysis

A cost benefit analysis is done to determine how well, or how poorly, a planned action will turn out. Although a cost benefit analysis can be used for almost anything, it is most commonly done on financial questions. Since the cost benefit analysis relies on the addition of positive factors and the subtraction of negative ones to determine a net result, it is also known as running the numbers. A cost benefit analysis finds, quantifies, and adds all the positive factors. These are the benefits. Then it identifies, quantifies, and subtracts all the negatives, the costs. The difference between the two indicates whether the planned action is advisable. The real trick to doing a cost benefit analysis well is making sure you include all the costs and all the benefits and properly quantify them. Should we hire an additional sales person or assign overtime? Is it a good idea to purchase the new stamping machine? Will we be better off putting our free cash flow into securities rather than investing in additional capital equipment? Each of these questions can be answered by doing a proper cost benefit analysis

1.2 scope of the study

The expense analysis helps us to identify the deviations of different expenses incurred during the year from those incurred in the last year. These expenses are analyzed in comparison

111

to sales because as the sales increases there will be definitely an increase in expenses but the ratio of increase in expenses to sales must not increase. We have to search out the gaps and weak points due to which the expenses are increasing. These gaps are filled by proper managerial actions, to maintain the contribution and profits of the company. The efficiency of the company is not only judged by the increasing sales. If we want to know a company better, we must analyze the expenses as compared to sales. If the expenses are reducing irrespective of increasing sales, it resembles the increasing operational efficiency of the company. Thus expense analysis is very important for a company at different levels in the lifetime of the company to control its expenses.

1.3 Objective
The objective of the Expense Analysis is as follows: To analyze the different expenses of the company To search reasons of increase in the expenses To find out measures to control the expenses

Research Methodology
The sampling Method Non random sampling method was used for the study. For the purpose of this study following departments were selected Purchase department Accounts department Stores & Bonded department

Sources of data For the successful completion of the present study, the data required for analysis had been collected from one sources, namely., Secondary Sources SECONDARY DATA: Data were collected mainly from the past records, company documents like income statement and balance sheet , auditors report, journal website, etc.

112

DATA ANALYSIS & INTERPRETATION

113

The expenses as a percentage to net sales of the company has following components distributed Components Of Cost Material Cost Labor Cost Overheads Cost Profit in the given ratio Components Of Cost Material Cost Labor Cost Overheads Cost Profit
Net Sales 90 80 70 60 50 40 30 20 10 0 2007-08 2008-09 2009-10 2010-11 Material Cost Labor Cost Overheads Cost Profit

2007-08
75% 6% 3% 16%

2008-09
75% 5% 3% 17%

2009-10
69% 7% 4% 20%

2010-11
78% 6% 3% 13%

2007-08 13182.9 924.6 439.4 2628.4 17601.9

2008-09 12422.7 738.7 431.3 2591.6 16669.2

2009-10 10945.8 1051.4 496.1 3190.7 16006.1

2010-11 21272.1 1617.8 685.1 3696.9 27587.2

Inferences:

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From the above graph we can analyses that as in the case of material cost 2007-08 to 2008-09 it remains same (75%, In 2009-10 the material cost was decreased (69%), but the next year the material cost was increased at higher rate(78%). As in the case of labor cost it has been decline from 2007-08 to 2008-09 and in 2009-10 it has became increased and in the year 2010-11 it was declined slightly. As in the case of overhead cost in the year 2009-10 is 4% and the remaining years i.e.2007-08, 2008-09 and 2010-11 are same(3%). In the case of profit the company achieved maximum profit in 2009-10 i.e. 20% of sales but in 2010-11 it was declined. Components Of Cost 2007-08 2008-09 2009-10 2010-11 Salaries, Wages & Bonus Sales % of Sales 77.0
17601.9 0.43

590.5
16669.2 3.54

869.5
16006.1 5.43

1336
27587.2 4.84

Salaries, Wages & Bonus

Table No : Figure (In Lakhs)

% of Sales
6 5 4 3 2 1 0 2007-08 2008-09 2009-10 2010-11 % of Sales

SOURECES: PRIMARY DATA Inference:

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The above table reveals that % of salaries, wages & bonus compared with sales has remain same in all year (.44%). But above graph showed the changes in salaries, wages & bonus in a different year. If we can analyze that salaries, wages & bonus are high in the year 2010-11.

Welfare Expenses
Table No : (In Lakhs)

Figure

% On Sales
0.8 0.7 0.6 Axis Title 0.5 0.4 0.3 0.2 0.1 0 2007-08 2008-09 2009-10 2010-11 % On Sales

SOURECES: PRIMARY DATA Inference: The above graph reveals that the welfare expenses has been increased from 2007-08 to 2010-11.Thus it shows the increasing trend.

116

Components Of Cost Welfare Expenses Sales Promotion Sales % of Sales

2007-08 99.6 2.4

17601.9 0.013 0.56

2008-09 94.9 3.5

16669.2 0.02 0.57

2009-10 120.4 1.5

16006.1 0.009 0.75

2010-11 187.0 1.7

27587.2 0.006 0.67

Sales Promotion
Table No : (In Lakhs)

Figure

% Of Sales
0.025 0.02 0.015 % Of Sales 0.01 0.005 0 2007-08 2008-09 2009-10 2010-11

SOURECES: PRIMARY DATA Inference:

117

Following are the amount of sales promotion in 07-08 Rs 2.4 , 08-09 was Rs 3.5 and in 09-10 it was Rs 1.5 and 10-11 it was 1.7. In the above table we can shown that in 08-09 Components Of Cost Travelling & Conveyance Sales % of Sales 156.3
17601.9 0.89

2007-08

2008-09 119.6
16669.2 0.72

2009-10 158.8
16006.1 0.99

2010-11 214.3
27587.2 0.77

company was spending more amount for sales promotion activities than other years.

Travelling & Conveyance

Table No : (In Lakhs)

Figure

% Of Sales
1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007-08 2008-09 2009-10 2010-11 % Of Sales

SOURECES: PRIMARY DATA Inference:

118

From the above graph it can be shown that the travelling & conveyance expenses has been increased except the year 2008-09, in 2008-09 it was slightly decreased. It can be inferred that the following are the % of travelling expenses when compared with the sales, in 07-08 it was 0.89%, 08-09 it was 0.72, 09-10 it was 0.99 and 2010-11 it was 0.77. Components Of Cost Communication Expenses Sales % of Sales 13
17601.9 0.07

2007-08

2008-09 12.3
16669.2 0.07

2009-10 12.6
16006.1 0.08

2010-11 16.0
27587.2 0.06

Communication Expenses
Table No : Figure (In Lakhs)

% Of Sales

0.08 0.06 0.04 0.02 0 2007-08 2008-09 % Of Sales 2009-10 2010-11 % Of Sales

SOURECES: PRIMARY DATA Inference:

119

From the above graph it can be inferred that from 2007-08 to 2009-10 the % of communication expenses on sales has been increased. But in the year 2010-11 it was slightly decreased to 0.06.

Components Of Cost General Charges Sales % of Sales

2007-08 36.1
17601.9 0.20

2008-09 37.2
16669.2 0.22

2009-10 46.0
16006.1 0.29

2010-11 63.2
27587.2 0.23

General Charges
Table No : (In Lakhs)

Figure

% Of Sales
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007-08 2008-09 2009-10 2010-11 % Of Sales

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SOURECES: PRIMARY DATA Inference: In the above graph we can interpret that the % of general charges on sales has continually increases until financial year 2010-11, but In 2010-11 it was declined slightly. Components Of Cost Legal Professional Charges Sales % of Sales 10.3
17601.9 0.06

2007-08

2008-09 19.7
16669.2 0.12

2009-10 26.3
16006.1 0.16

2010-11 39.8
27587.2 0.14

Legal Professional Charges

Table No : Figure (In Lakhs)

% Of Sales
0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 2007-08 2008-09 2009-10 2010-11 % Of Sales

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SOURECES: PRIMARY DATA Inference: The above table reveals that % of legal professional charges compared with sales has shown as increasing trend from 2007-08 to 2009-10. But it was slightly decreased in 2010-11. Components Of Cost Other Repairs Sales % of Sales 2007-08 45.6
17601.9 0.26

2008-09 40.3
16669.2 0.24

2009-10 12.8
16006.1 0.08

2010-11 17.8
27587.2 0.06

Other Repairs
Table No : Figure (In Lakhs)

% Of Sales
0.3 0.25 0.2 0.15 0.1 0.05 0 2007-08 2008-09 2009-10 2010-11

% Of Sales

SOURECES: PRIMARY DATA Inference:

122

From the above table it can be inferred that the other repair charges percentages when compared with sales was decreasing year by year. It was shown as declining trend in each year.

Components Of Cost Lease Rent & Hire Charges Sales % of Sales

2007-08 0
17601.9 0

2008-09 0.14
16669.2 0.0008

2009-10 0
16006.1 0

2010-11 4.3
27587.2 0.015

Lease Rent & Hire Charges

Table No : Figure (In Lakhs)

123

Excise Duty Sales

3137.7
17601.9

2344.3
16669.2

1322.4
16006.1

2577.7
27587.2

% Of Sales
0.018 0.016 0.014 0.012 0.01 0.008 0.006 0.004 0.002 0 2007-08 2008-09 2009-10 2010-11 % Of Sales

SOURECES: PRIMARY DATA Inference: From the above graph it can be reveal that the year 2007-08 and 2009-10 there is no lease rent & hire charges. But the year 2008-09 it was .14 lakhs and 2010-11 it was 4.3 lakhs. The percentage of lease rent & hire charges compared with the sales are as follows : in 2008-09 it was 0.0008 and in 2010-11 it was 0.015.

124

% of Sales

17.83

14.06

8.26

9.34

Excise Duty
Table No : Figure (In Lakhs)

% Of Sales
% Of Sales

17.83 14.06

8.26

9.34

2007-08

2008-09

2009-10

2010-11

SOURECES: PRIMARY DATA Inference: The above table reveals that % of excise duty compared with sales has shown as decreasing trend from 2007-08 to 2009-10. But it was slightly increased in 2010-11.

Fright & Forwarding Charges

Table No :
125

(In Lakhs)

Figure

Components Of Cost Fright & Forwarding Charges Sales % of Sales

2007-08 48.4
17601.9 0.27

2008-09 77.75
16669.2 0.47

2009-10 81.6
16006.1 0.51

2010-11 123.24
27587.2 0.45

% Of Sales
0.6 0.5 0.4 0.3 0.2 0.1 0 2007-08 2008-09 2009-10 2010-11 % Of Sales

SOURECES: PRIMARY DATA Inference: In the above graph shows that % of fright & forwarding charges compared with sales, from 07-08 to 09-10 at increase in trend has been observed. But in the year 2010-11 it has been slightly declining.

126

Power & Fuel Charges

Table No : (In Lakhs)

Components Of Cost Power & Fuel Charges Sales % of Sales

2007-08 167.3
17601.9 0.95

2008-09 123.3
16669.2 0.74

2009-10 154.5
16006.1 0.96

2010-11 186.3
27587.2 0.67

Figure

% Of Sales
% Of Sales

0.95 0.74

0.96

0.67

2007-08

2008-09

2009-10

2010-11

SOURECES: PRIMARY DATA Inference: In the above graph reveals that % of power and fuel charges compared with sales , from 07-08 to 08-09 a decline has been observed. An increase trend has been observed from 08-09 to 09-10 and slight decline in 10-11. The main reason of decline and rise is due to fluctuation in sales .

127

Raw material consumed

Changes in Raw material consumed as compare to Sales.

Components Of Cost Raw Material Consumed Sales % of Sales

2007-08 12880.15 17601.9 73.17

2008-09 12110.49 16669.2 72.65

2009-10 10581.49 16006.1 66.11

2010-11 20632.66 27587.2 74.79

% Of Changes
76 74 72 70 68 66 64 62 60 2007-08 2008-09 2009-10 2010-11 % Of Changes

Inference: From the above graph and table it can be seen that raw material cost are decline in 200708 to 2009-10 due to decreasing sales, and the year 2010-11 it was increasing due to the increasing the sales.

Stores & Spares

Changes in store and spares consumed as compare to Sales.

128

Stores & Spares Sales % of Sales

209.36 17601.9
1.19

132.38 16669.2
0.79

313.99 16006.1
1.96

452.45 27587.2
1.64

% Of Changes
2.5

1.5 % Of Changes 1

0.5

0 2007-08 2008-09 2009-10 2010-11

Inference: From the table & graph it can be sown that the Stores and spares consumed was invariably fluctuating in various years. Following are the % change in stores and spares consumed: 2007-08 = 1.19%, 2008-09 = 0.79, 2009-10 = 1.96 and 2010-11 = 1.64

129

ANNEXURES

130

Balance Sheet
Particulars
1. Sources of funds
1) Shareholders Funds a) Equity share capital b) Reserves and surplus 2) Loan Funds a) Secured Loans b) Unsecured Loans Total 11523 226 1427.2 13176.2 14114.7 276.3 1427.2 1581.83

(Rs In Lakhs)

2007-08

2008-09

2009-10

2010-11

16942.1 269.1 1427.2 1863.84 20639 5411.3 1427.2 3047.77

2. Application of Funds
1) Fixed Assets a) Gross Block b) Less : Depreciation c) Net block d) Capital Work In Progress Total 2) Investments 3) Current Assets, Loans and Advances a) Inventories b) Sundry Debtors c) Cash & Bank balance d) Loans & Advances Sub Total a) Current Liabilities b) Provisions Net Current Assets 4) Deferred Tax Liability 5) Miscellaneous Expenditure Total 4253 1993.4 2259.5 2259.6 4621.9 2321.7 2300.2 6 2306.2 4948.8 2640.9 2307.8 .. 2307.8 5556.8 2908.6 2648.2 53.9 2702.1

905 755.7 85.6 127.9 1874.2 -905.15 0.9 10916.8 13176.3

865.5 1375.4 32.2 377.7 2650.8 -1087.67 1.54 13512.05

1590.8 2540.1 -1006 355.2 3480.1 -1287.87 2.79 16330.05

1966.7 3211.8 16.7 260.8 5456 -2234.77 2.79 27776.59

15818.3

18638.4

30477.5

SOURECES: SECONDARY DATA

131

Profit & Loss Account

Particulars
Income
Sale Less : Excise Duty Other Income Stock Transfer Total 20739.6 3137.7 9.1 .. 17611 .. 16674.9 19013.5 2344.3 5.7 ..

(Rs In Lakhs)

2007-08

2008-09

2009-10 2010-11
17328.5 1322.4 57 .. 16063.1 27650.8 30165 2577.7 63.5

Expenditure
Material & Manu. Employee Costs Operations Expenses Financial Expenses Total Less: Recoverable Expenses Cash Operative Expenses Deduct: Non-cash Operating Expenses Depreciation for the year 13182.9 924.6 439.4 115.6 14662.5 .. 2948.5 .. 320.1 2628.4 .. .. .. .. .. 345 2591.6 .. .. .. 2936.7 .. 333.1 3190.7 .. .. 12422.7 738.7 431.3 145.4 13738.1 .. 3523.8 .. 303.8 3696.9 10945.8 1051.4 496.1 46 12539.3 .. 4000.7 21272.1 1617.8 685.1 75 23650

Profit Before Tax (PBT)

Less : Provision - Income Tax Less : Deferred Tax Add : Excess/ Short provision of incometax written back

.. 2628.4 8894.7 .. .. 11523 11523

.. 2591.6 11523 .. .. 14114.7 14114.7

.. 3190.7 13751.4

.. 3696.9 16942.1

Profit After Tax (PAT)

Add : Balance B/F Less : Adjustment relating to earlier years Less : Depreciation relating to earlier years

Amount Available For Appropriation Profit Carried to Balance Sheet

16942.1 16942.1

20639 20639

SOURECES: SECONDARY DATA

132

CHAPTER 5 FINDINGS, SUGGESTIONS AND CONCLUSION

133

Findings
This Ratio is helpful to maintain the cost of the product. The company successfully following Just-In-Time (J I T) system. The company is successfully following TPM and 5s system. The KAIZEN system is following very excellent manner in all department. Is help in the decision making the time of the investment decision as it shows the production made in the specified period. Inventory turnover ratio is simultaneously increasing and decreasing which means inventory is used in not in a better way so it is not good for the company. Ratio help in the determining the liquidity. The companys sale has decreased in the financial year 2008-09 and 2009-10. The Various Ratios help in the determining the price of the product.

SWOT ANALYSIS
134

STRENGTHS
Product range Strong presence in India Backward integration Infrastructure Multi location plants with proximity to Customer. Dedicated workforce Design studio Global presence

WEAKNESS
New technology doesnt adopted quickly Supplier base Product reliability OEMs perception of Minda prices being high.

OPPORTUNITY
ASEAN China Off Road Europe & global after market Global Market Indonesia plant

THREATS
Growing Indian competition Cost down pressures from OEMs Chinese manufacturers entry New Competitors

135

Suggestions
It can be said that overall financial position of the company is normal but it is required to be improved from the point of view of profitability.. Creditors increasing year by year so the company should maintain the low level of creditors because the company can pay them easily whenever required. Company should spent more funds to its sales promotion activities. Company should try to increase Volume based sales so as to stand in the competition. Current Liability increasing year by year, In the financial year 2007-08 and 2009-10 the current liability has increased more than its current liabilities, so it should be consider seriously. Should keep better and proper asset liability proportion. Company should maintain a proper level of inventory , it will avoid the unnecessary blockage of funds. The companies must have adequate cash and bank balance to face any situation. The company has low cash & bank balance in the financial year 2008-09.

136

Conclusion
After studying the components of working capital management system of Minda Industries Ltd. It is found that the company has a sound and effective policy and its performance is good even in the bad recession situation company has managed to make profit. Company is competing well at the domestic as well as the international level and it is among the leading automobile components producers in the country only because of its proper management of finance, specially the short term finance known as the working capital. In conclusion ,we can say that the companies management is an effective one and knows well the management of finance, its working capital management system is very good because of which only the company has reached in the category of top class producer in the country.

137

BIBLIOGRAPHY

138

Bibliography
Financial Management .. Financial Management ..
S.N Maheshwary

I.M.Panedy

Annual Report of MINDA INDUSTRIES LTD, SWITCH DIVISION, PUNE. Auditors Report. UNO MINDAS official website.www.mindagroup.com www.google.com www.icra.in/Files/Articles/2010-January-Auto-Ancillary-Industry www.wikepedia.com www.investopedia.com

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