A STUDY ON

CAPITAL BUDGETING
IN

K P R FERTILISERS LIMITED
A project submitted to the A.U.,
In partial fulfillment for the award of the
Degree of

MASTER OF BUSINESS
ADMINISTRATION
SUBMITTED BY
K.Raja Rajeswara Rao

Declaration
I hereby, declare that the project work
entitled A Study On Capital Budgeting
with reference to
KPR FERTILIZERS
LIMITED is a bonafide work done by me.
I further state that this project is not
submitted elsewhere for the award of any Degree
or Diploma either in partial or full to any
University. The content of this Report is based
on the Data and information collected by me.

K.Raja Rajeswara
Rao
Place: Balabadrapuram
Date:

PROJECT STUDY REPORT

N D E

S. no

Chapter

Subject details

Project study

1.1 Project title

1.2 Project work-introduction
1.3 Importance of study
1.4 Sketch of study
1.5 Methodology of study
1.6 Limitations of study

Organization & Industry

(of Study)

2.1 Fertilizer Industry Profile

2.2 Company (of study) Profile

Financial Management

3.1 General Theories

3.2 Finance Management
3.3 Practice in Industries

Project Reports of the

Company ( under Study)

4.1 Project Appraisal Report of the Lender

Bank
4.2 Projected Balance Sheet (10 yrs)
4.3 Projected Profit and Loss Account (10 yrs)
4.4 Projected Cash Flow Statement (10 yrs)
4.5 Balance Sheets of the Co. (3 yrs)
4.6 Profit and Loss Accounts of the Co. ( 3 yrs)
4.7 Cash flows Statements of the Co.(3 yrs)

4.8 Funds Flow Statements of the Co. ( 3 yrs)

4.9 DSCR calculations

Capital Budgeting

5.1 Theoretical sketch

5.2 Practice in Industries --financial projections
5.3 Project promotion
5.4 Project financial management
5.5 Project working statements

General Findings and

Conclusions

6.1 Observations, Analysis and Interpretation

6.2 CONCLUSIONS AND Suggestions

Introduction
Finance in the modern business world is regarded as life blood of a
business enterprise. Finance function has become so important that it has given
birth to Financial management as a separate subject. So this subject

has

universal applicability and importance. Financial management is that

part of

managerial activity, which is concerned with the planning and controlling of the
Person, Entity or Firms financial resources. It was a branch of economics till
1890 and even though it emerged as a separate entity of discipline,

it draws

heavily on economics as mother for its theoretical concepts.

Financial management is broadly concerned with the acquisition and use
of funds by a Business firm.

It deals with:

How large should the Firm be and how fast should

it grow?
What should be the composition of the Firms
levels?
What should be the mix of the Firms financing?
How should the Firm analyze, plan and control its
financial affairs?
While the first three questions express Ezra Solomons conception of
Financial management as discussed in his clerical world. The Theory of
Financial Management ,the fourth one represents an addition that is very
relevant in the light of the responsibilities shouldered by Finance managers in
practice. The modern thinking in financial management accords a far greater
importance to management in decision making and formulation of policy.
Financial management occupies key position in top management and plays a
dynamic role in solving complex management problems. They are now
responsible for shaping the fortunes of the enterprise and are involved in
allocation of capital to various uses.
1.3 IMPORTANCE OF STUDY:

Financial management is of greater importance in the present

Corporate world. It is a science of money, which permits the authorities to
generate Funds and get into stabilised growth.
The significance of Financial management can be summarized as under:
It assists in the assessment of financial needs of Industry ,large or small
and indicates the internal and external resources for meeting them.
It assesses the efficiency and effectiveness of the financial initiation in
mobilizing individual or corporate savings. It also prescribes various
means for such mobilization of

savings into desirable investment

channels.
It assists the management while investing funds in profitable projects by
analyzing the viability of that project through capital budgeting
techniques.
It permits the management to safeguard the interest of shareholder by
properly utilizing funds procured from different sources and regulates ,
controls the Funds to procure maximum yields.

1.4 Significance of the Study:

Financial Management in an Industrial organization consists of both capital
projects management and working capital management, former covering
projects both in promotional stage, implementation stage, while the latter
relates to operational activities. .

Now-a-days, study of Capital Budgeting including

Project Finance and its management is necessary , because we can assess the
viability of the Project

and implement effectively for long term and short

term , good working results. For capital budgeting, lot of preliminary efforts
have to be made in selecting long term sources, assessing long term uses,
review during implementation. Analysing the Projects by assessing financial
ratios helps in viability of the Projects and reviewing the progress from
time to time.

Generally, Projections of capital budgeting is made keeping in view

7

to

10

years

projections,

as

projects

occupy gestation period,

implementation period, and loan repayment period etc.,

We can also understand how the allocation of financial resource in the

implementation of new project or expansion project , diversification or existing
project of any Company can be economically and fruitfully done.

While the Project financing of any Project has similar methods

and processes,

my study has centered around its special application of the

Projects in Fertiliser Industry, by analyzing the information and data of the

Projects undertaken by KPR Fertilisers Limited for its existing, expansion
and diversification Projects.

I have also utilized the opportunity to assess the Procedures

Practices in Industry to implement the Projects and

and

how effectively they

undertake financial management for achieving good working results.

The Financial planning for the fertilizers projects in the KPR Fertilizers
Limited, allocation of financial resources for the projects have been studied by
me towards the Project.

1.5 OBJECTIVES OF THE STUDY

Analyzing weather project is financially viable or not.
Analyzing return on investment by evaluating
investment with evaluation techniques such as
payback period, internal rate of return, net present
value etc.

 Analyzing different sources of finance for a financial

viable project.
Determining proper financial structure for project.
Rising of funds after considering structure and
sources of finance.
Investment of amount raised in project related costs.
Finally achieving the targeted results .

1.6 METHODOLOGY OF THE STUDY:

Methodology is a systematic procedure of
collecting information
phenomenon.

and

data in order to analyze and verify a

The collection of information is done through two

principal sources.
1.

Primary Data.

2.

Secondary Data.

10

Primary data
It is the information and data collected directly from
Finance department for studies and analysis.

This is done

mainly

through interviews with concerned officers and staff of the Organization

under study , either individually or collectively, and some of the
information

has

been

verified

or

supplemented

with

personal

observations.
The data collection includes meetings of

the concerned Managers and

Officers of Finance department of the Organization .

SECONDARY DATA
This is obtained from the Annual reports, websites,
Company journals, Magazines , Industry Journals , brochures and other
sources of information available with the Organization.

LIMITATIONS OF THE STUDY:

Though the project study is completed successfully ,

the work is subject to the limitations explained below:
Since the procedure and policies of the Company do
not allow disclosing confidential financial information, the
project has to be completed with the available data given
to us.
The period of study that is 8 weeks is not enough to
conduct detailed study of the Financial management

11

techniques adopted by the Organization for the project

planning, implementation.
The study is carried out basing on the information and
documents provided by the Organization and based on the
interaction with the various employees of the respective
departments., when they spared time for the study.

12

CHAPTER-II
ORGANISATION AND INDUSTRY UNDER STUDY

2.1. Fertiliser

INDUSTRY PROFILE

The Organization in which I have undertaken study is a Fertilizer

Industry. The Financial Management Procedures & Systems are common to all
Industries with some special features particular to specific industries. Hence,
the Fertiliser Industry Profile as studied is enunciated hereunder :

Fertilizer Industry:
India has been predominantly considered as an agricultural
dependent economy. Agriculture plays a very dominant role as

13

more than one-fourth of our GDP come from this sector. Nearly
70% of population depends on the agriculture for their livelyhood. The basic need for an agricultural dependant economy is
fertilizers and urea is one of the main fertilizers. India is the
second largest manufacturing country in the world.
All fertilizers consist if three main ingredients.
Nitrogen(N) -- which promotes general plant growth
Phosphorous(P) -- which promotes flowering
Potassium (K) -- which promotes strong roots.
1. The

ingredients

are

mixed

in

various

combinations

because plants have different needs.

2. The combinations are indicated by a three number code:
3. The first number is the percent of nitrogen (N)
4. The second number is the percent of phosphorus (P)
5. The third number is the percent of potassium (K)

About Fertilizer
Fertilizer is simply, plant food. Just like the human body
needs vitamins and minerals, plants need nutrients in order to
grow. Plants need large amounts of three nutrients nitrogen,
phosphorus, and potassium. These are commonly referred to
as macronutrients. Fertilizer makers take those three nutrients
from nature and put them into soluble forms that plants can
easily use.

14

There are a number of other nutrients plants need in small

amounts.

These are referred to as the minor nutrients, or

micronutrients.

These many nutrients are typically produced

separately, but end up being mixed together in varying

amounts to match the needs of a particular crop. The analysis
found on each bag or bulk shipment of fertilizer tells the farmer
or consumer the amount of nutrients being supplied.

States

have a system of laws and regulations that ensure the fertilizer

is properly labelled and delivers the amount for nutrients stated
on the bag.

Our world would be vastly different without commercial

fertilizers. Following World War II, new technologies allowed for
the rapid expansion of fertilizer production.

Coupled with

growing food demand and the development of higher-yielding

crop varieties, fertilizer helped fuel the Green Revolution.
Today, the abundance of food we enjoy is just one way
fertilizers help enrich the world around us.
While fertilizers provide many important benefits that are
necessary for our way of life, the improper use of fertilizers can
harm

our

environment.

Weve

used

the

most

recent

developments in science to study our products and make sure

safety comes first.

Fertilizer:
Fuel for growing plants just like humans and animals,
plants need adequate water, sufficient food, and protection

15

from diseases and pests to be healthy. Commercially produced

fertilizers give growing plants the nutrients they crave in the
form they can most readily absorb and use: nitrogen (N),
available phosphate (P) and soluble potash (K), Elements
needed in smaller amounts, or micronutrients, include iron (Fe),
zinc (Zn), copper (Cu) and boron (B).Each crop year, certain
amounts of these nutrients are depleted and must be returned
to the soil to maintain fertility and ensure continued, healthy
future crops.

Scientists project that the earths soil contains

less than 20 percent of the organic plant nutrients needed to

meet our current food production needs.

Therefore, through

the scientific application of manufactured fertilizers, farmers

are meeting the challenge of the future, today.
Another component of plant DNA is phosphate, which
helps plants to use water efficiently. It also helps to promote
root growth and improves the quality of grain and accelerates
its ripening.

And potassium, commonly called potash, is

important because it is necessary for photosynthesis, which is

the production, transportation and accumulation of sugars in
the plant.

Potash makes plants hardy and helps them to

withstand the stress of drought and fight off disease.

Fertilizer Types:
Because every crop is different and the soils and weather
conditions crops are grown in vary dramatically around the
world, commercial fertilizers, which are manufactured from
natural sources, come in many formulations.

16

Combining air with hydrogen using natural gas as the

feedstock makes ammonia, the building block for nitrogen
fertilizers.

Ammoniated phosphates, which include mono

ammonium phosphate (MAP) and dominium phosphate (DAP),

are made by reacting ammonia with phosphoric acid. Muriate
of potash, also called potassium chloride, is made from mine
ores that have been processed to remove naturally occurring
salts.

Ammonium

nitrate

is

solid

fertilizer

containing

approximately 34 percent nitrogen that is water soluble and

used in various fertilizer solutions. Aqua ammonia is another
nitrogen-based fertilizer made by combining ammonia with
water.

It contains up to 25 percent nitrogen and is either

applied directly to the soil or is used to manufacture phosphate

fertilizers.

Nitrogen solutions are water solutions of ammonia,

ammonium nitrate and, sometimes, urea, a solid fertilizer
containing approximately 45 percent nitrogen, and other
soluble compounds of nitrogen. Nitrogen solutions are used in
ammoniating super phosphate, the manufacture of complete
fertilizer and for direct injection into the soil.

They vary in

composition and nitrogen content and are sometimes applied

under pressure.

Nitrogen (N):-

17

Nitrogen is a part of all plant proteins and is a component

of DNA and RNA the blueprints for genetic characteristics.
It is necessary for plant growth and chlorophyll production.
Nitrogen is the building b lock for many fertilizers. Where does
N come from? Nitrogen is present in vast quantities in the air,
making up about 78 percent of the atmosphere. Nitrogen from
the air is combined with natural gas in a complex chemical
process to make ammonia.

Phosphorus/Phosphate(P):
Phosphorus as a nutrient is sometimes most valuable to
plants when put near the seed for early plant health and root
growth. Plant root uptake is dependent on an adequate supply
of soil P. Phosphorus is relatively insoluble in water. The water
in most soils must replace all of the P in the soil water 2 to 3
times each day to meet the crops demand for P. Phosphorus
compounds help in directing where energy will be used.
Phosphorus compounds are needed in plant photosynthesis to
repackage and transfer energy.

Phosphate is also a

component of DNA, so it is one of the building blocks of genes

and chromosomes. Phosphorus is involved in seed germination
and helps plants to use water efficiently. Where does P come
from?

Phosphorus

occurs

in

natural

geological

deposits.

Deposits can be found in the U.S. and other parts of the world.

Potassium/Potash (K):
Potassium protects plants against stresses.

Potassium

protects plants from cold winter temperatures and helps them

18

to resist invasion by pests such as weeds and insects.

Potassium stops wilting, helps roots stay in one place and
assists in transferring food.

Potassium is a regulator.

It

activates plant enzymes and ensures the plant uses water

efficiently.

Potassium is also responsible for making sure the

food you buy is fresh. Where does K come from? The element
potassium is seventh in order of abundance in the Earths crust.

Through long-term natural processes K filters into the

oceans and seas. Over time, these bodies of water evaporate,
leaving behind mineral deposits.

Although some of these

deposits are covered with several thousands of feet of earth, it

is mined as potash or potassium chloride. Potash ore may be
used

without

complex

chemical

conversion;

just

some

processing is necessary to remove impurities such as common

salt.

Fertiliser Industry at a glance:

Since 1883 the industry has worked to promote the
advances in the development and application of fertilizers that
have helped to feed a hungry world. The revolutionary concept
of plant nutrition was born from the discovery of the biological
role of chemical elements in plant nutrition and the need to
feed a growing population concentrated away from the farm in
the rising industrial centers of the world.

19

Because of modern fertilizers, world food production since

1960 has more than doubled, keeping pace with the population
explosion.

Today, the fertilizer industry is poised to help

produce the food that will be needed to feed the worlds

projected 9 billion people in 2025.
The fertilizer industry is essentially concerned with the
provision of three major plant nutrients nitrogen (N),
phosphorous (P) and potassium (K) in plant available form.
Each nutrient is responsible for different aspects of plant
growth and health.

Fertilizers regulations:
Regulated for quality and safety like other manufactured
goods, fertilizers are regulated for quality and safety at the
federal and state levels. Every state in the country, plus Puerto
Rico,

has

its

own

fertilizer

regulatory

program,

usually

administered by the state department of agriculture.

State Regulations:
State regulation is concerned with consumer
protection, labeling, the protection of human health and the
environment, and the proper handling and application of
fertilizers. Fertilizers are regulated at the state level because
soil conditions vary dramatically from state to state across the
country. For example, the rocky, thin soils of New England are
vastly different from the deep,

20

Rich black soils of the Midwest Corn Belt. A different level of

fertilizer nutrients in the soil, different crops (potatoes versus
corn, for instance) and different weather and cropping patterns
require state-specific regulation.
Where Science and safety come first the modern
commercial fertilizer industry was founded on the revolutionary
scientific discovery in the last part of the 18 th century that
chemical elements play a direct role in plant nutrition.

This

initial concept was supported by direct scientific experiment

and opened the way for industrial-scale manufacturing of
fertilizers of all types in the 19 th century, beginning with super
phosphate in 1843. This was followed by ammonium sulphate,
sodium nitrate and, finally, in the first two decades of the 20 th
century, the manufacturing of synthetic nitrogen fertilizers
directly from atmospheric nitrogen.

Assessing Fertilizer Safety:

Fertilizer research and development historically have been
focused on maximizing economic crop yields from given rates
of nutrient application.

Since the advent of the modern

environmental movement in the 1960s, research has also been

concerned with minimizing potentially adverse human health
and environmental effects from fertilizer manufacture and
application.

As part of its continuing commitment to safety, in

1996. The Fertilizer Institute initiated a comprehensive safety

21

assessment project to determine the risks, if any, of metals in

fertilizer. Small amounts of metals are found in phosphate and
potash fertilizers due to their presence in the mined ore bodies.
In

addition

to

phosphate

micronutrient fertilizers.

and

potash

products,

some

Which come from both mined ores

and recycled wastes, also contain metals.

Fertilizers Enrich our World:

Improvements in agricultural efficiency through research
and technology increase food output while protecting the
environment and enriching our world in numerous ways.

Fertilizers

feed

the

growing

world.

As

the

worlds

population continues to climb toward an estimated 8.5 billion in

2040, experts estimate that food production must increase
more than two percent annually to even maintain current diets.
Commercial fertilizers will be key in the fight to feed the
growing world.
Fertilizers protect the environment. The efficient use of
fertilizer also helps to conserve the natural environment. With
fertilizers and modern high yield farming practices, more food is
produced per acre each year, so land may be conserved.
Fertilizers, used properly, help to prevent the widespread loss
of habitat that results from wasteful slash and burn low-yield
farming, which is a major global environmental threat.

Fertilizers at work in industry:-

22

Aside
components

from
are

their
central

benefits
to

to

such

agriculture,
industrial

fertilizer

process

as

semiconductor chip making, resin manufacture, cattle feed

production, metal finishing, the manufacture of detergents,
fiberglass insulation and more, even rocket fuel.

Global Fertilizer Consumption

Major Fertilizer Producing Countries:

Million metric tons, years ending June 30*
COUNTRY

2002-

2003-04 2004-05 2005-06

2006-07

23

03
Nitrogen
China

20.2

21.5

22.8

21.5

22.1

India

10.1

10.5

10.9

10.9

107

13.8

13.5

11.2

9.9

10.6

4.1

4.1

5.0

5.4

5.5

3.7

3.7

4.1

3.9

3.5

United
States
Russian
Federation
Canada

Phosphate
United

9.0

9.0

8.5

7.3

7.6

China

6.4

6.7

6.4

6.7

7.4

India

3.0

3.2

3.4

3.7

3.9

1.9

1.7

2.0

2.3

2.4

1.4

1.4

1.4

1.5

1.4

States

Russian
Federation
Brazil

Potash
Canada

9.0

9.2

8.2

9.2

8.2

3.4

3.5

4.0

3.7

4.3

Belarus

3.3

3.4

3.6

3.4

3.7

Germany

3.4

3.6

3.5

3.4

3.5

Israel

1.5

1.7

1.7

1.7

1.8

Russian
Federation

24

Source: Food and Agriculture Association (FAO) and The

Fertilizer Institute (TFI)
* For countries that report their fertilizer statistics on a
calendar-year basis, data are shown under the fertilizer year
that begins in that calendar year; for example, 2001 data are
under 2002/07

2.2 COMPANY PROFILE

INTRODUCTION:The Organization in which I have undertaken Project Study
is K.P.R.FERTILISERS LIMITED

Company : K.P.R. Fertilizers Ltd

K.P.R. Fertilizers Ltd is a Company incorporated under
Companies Act 1956 on 02.01.2007 as a Private Ltd Company
with Registered Office at Balabhadrapuram, East Godavari
district, Andhra Pradesh.
Subsequently the Company has been converted into a Public
Ltd Company with CIN: U24129AP2007PLC052216 effective
from 19-12-2008.

K.P.R.Group:
This Company has been promoted by a Group of
Agriculturist families lead by Mr. Kovvuri Papa Reddy, resident

25

of Komaripalem, Biccavolu Mandal, East

Godavari District,

Andhra Pradesh ,

an Agriculturist for over 3 decades. He has

promoted

Agricultural

several

based

industries,

including

Poultries, Rice Mills, Fertilizer, Chemical Industries etc., and is

known as K.P.R. Group of Industries, extending operations both
in Andhra Pradesh and Karnataka.
Management :

The Board of Directors of the Company consists of the

following:
1. Sri Kovvuri Papa Reddy,

Chairman

2. Sri Karri Venkata Mukunda Reddy,

Managing Director

3. Sri Kovvuri Rajasekhara Reddy,

Executive Director

Company Secretary & Chief Financial Officer :

Sri P. Narayana Rao. B.A., M.Com., LL.B.,FCMA., FCS.

Industrial Units:
KPR Fertilisers Limited has the following Industrial and
Manufacturing Units:

1. Pesticides Unit at Balabhadrapuram, East Godavari dt., Andhra Pradesh.

2. Fertilizers Unit at Biccavolu, East Godavari Dt., Andhra Pradesh
3. Fertilizers Unit at Halvarthy, Koppel dt., Karnataka

26

4. Wind Mill Unit at Tirunelveli Dt., Tamilnadu

These units are run by experienced and skilled personnel and

working operations are managed efficiently.
Products:
The industrial Units manufacture the following Products:
1. Pesticides (Insecticides, Herbicides), Micro nutrients
2. Fertilisers (SSP, NPK Mixtures, DCP), Sulphuric Acid
1. Company History:
K.P. R Fertilisers Limited (the Company) is a Public Limited
company incorporated under Companies Act, 1956,
registered in India with the Registrar of Companies, Govt of
India, Andhra Pradesh, Hyderabad with CIN:
U24129AP2007PLC05226.
This Company was originally incorporated on 02.01.2007
under Companies Act, 1956 in Andhra Pradesh State ,
originally as a Private Limited company.
This Company has been promoted by a group of
Agricultural families in Andhra Pradesh , lead by Mr.
Kovvuri Papa Reddy who have over 3 decades of experience in
Agriculture and related Industrial and business activities
including Rice mills, Poultries, Pesticides etc., and hails from
Komaripalem, Biccavolu Mandal, East Godavari District, Andhra
Pradesh. The other main promoters are Mr. Karri Venkata
Mukunda Reddy and Mr. Kovvuri Rajasekhar Reddy, both hailing
from the same place with rich industrial & business experience
of over two decades.

27

Later, the Private Limited company has been

into Public limited company on 19.12.2008 .

converted

It is a Prime company of KPR Group of Industries set up in

private sector.

2. Industries
The Company is undertaking Fertiliser Industry and is also
engaged in incidental businesses such as Pesticides, Chemicals,
Seeds and Power.
Registered Office of the Company.
The Registered Office of the Company is situated as enunciated
below:
3.

D.No. 8-2-416
Stone Vally Apts, C2
Banjara Hills, Road No.4
Hyderabad- 500 034
Andhra Pradesh
India
Ph: 91-40-23354777
Fax: 91-40-23359936

4. Corporate & Administrative Office of the Company

The Corporate & Administrative office of the Company is
situated as follows:
D No: 8-256,Tatanagar
Balabhadrapuram -533343
East Godavari District
Andhra Pradesh

28

India
Ph: 91-8857 236767, 237367
Fax: 91-8857 23333
Email:

fertilisers@kprgroup.in

2: Board of Directors of the Company :

The Company is m
anaged by the Board of Directors as detailed below:

Name of the
Director

Experi
ence
Yrs

Dt. of
Appoint
ment

Designation

Kovvuri Papa
Reddy

36

02.01.20 Chairman
07

Karri Venkata
Mukunda
Reddy

26

02.01.20 Managing
07
Director

Kovvuri
Rajasekhar
Reddy

10

02.01.20 Executive
07
Director

29

Company Secretary & Chief Financial Officer :Mr. P.Narayana

Rao, B.A, M.Com, LLB., FCMA., FCS

The Company is also supported by qualified and experienced

Managerial, Administrative and Technical Personnel

Manufacturing concerns/ Undertakings.

This Company has the following Manufacturing concerns:
5.

1. Fertilisers Unit at Biccavole , East Godavari Dt., Andhra

Pradesh
2. Pesticides Unit at Balabhadrapuram, East Godavari dt.,
Andhra Pradesh
3. Fertilisers Unit at Halvarthy , Koppal Dt., Karnataka

The Company is in Fertiliser Industry and

the following major products:

manufactures

1. Fertilisers-- SSP
NPK Mixtures
DCP (Animal feed)
DAP (trading)
Mineral mixtures
Micro nutrient fertilisers
Sulphuric acid
Pesticides-Pesticides
Herbicites,Insecticites

30

CHAPTER III
FINANCIAL MANAGEMENT

31

3.1 Financial Management-General theories.

FINANCE
INTRODUCTION:Finance is a specialized field found under the
general classification of business administration finance can
be defined as the management of the flow of the money
through any organization whether it could be corporation,
Government, bank, agency etc., and finance concerns

itself

with the actual flows of money, as well any clients against

money. As a business discipline, finance can be differentiated
from accounting and economics. Accounting is concerned with
the reporting, recording and measuring of business transaction.
Where as finance used the information provided by accounting
system of make decision to help organization to achieve their
objectives.

Economics

is

concerned

with

analyzing

the

allocation of resources in society.

32

It studies transactions among people involving

goods and services with or without the exchange of money,
business face problem dealings with the Acquisitions of funds to
carry their activities and with determination of optimum
methods of employing funds. In finance tools help the manager
to determine activities will provide the greatest return on
invested

capital,

a successful

business

management

for

enterprise use a good oriented financial structure.

The finance manager performs certain tasks that help

to achieve the goals of the financial department. These goals in
turn help of objectives. The important goals of financial
management are:
1. Wealth maximization of shareholders.
2. Liquidity, profitability of the firm.

Financial analysis is the process of identifying strengths

and

weaknesses

of

the

firm

by

properly

establishing

relationship between the items of the balance sheet and profit

and loss account.

Meaning Of Financial Management:-

33

Financial management is an appendage of the financial

functions. We have already discussed the financial functions
and the significance with the creation of a complex industrial
structure this function has growth so much that it has give birth
to a separate subject Financial Management which is today
recognized as the most important branch of business activity in
isolation from its financial implications. The management may
accept or reject a business proposition on the base of its
financial availabilities.
Financial management is that point of management which
is concerned is that mainly with raising funds in most economic
and suitable manner, using these funds as profitable as
possibly

planning

future

operations

controlling

current

accounting budgeting. Statistics and other means. Financial

management cant responsibility for obtaining and efficiently.
Utilization funds necessary for the efficient
use of an enterprises planning is the one of the most important
activity of the financial management.
Financial management is the dynamic
evolving or making of day-to-day activities of a firm. Raymond
chambers observe Financial Management may be considered
to be the management of the function. It should be taken to be
a profit extra active device. Financial management does not
mean management of business organizations with a wave to
making profits.

Nature:-

34

Financial

management

is

the

branch

of

overall

management family, which is concerned with the planning and

controlling of the financial resources of an enterprise. As a
separate and independent discipline of academics it is of recent
organ prior to this the subject was studied as an activity of
economics.
The subject as lately attained from both
academicians as well as practicing managers since the subject
to financial management as still developing there fore the
academicians are taking great interest in it as there are
severally are as where controversies do exist and unanimous
view points have not been formed as at the subject equally
interests the practicing managers, this is so because the
subject provided them the conceptual and analytical insight to
enable them to make the most crucial decision pertaining to
the business relating to finance.
As regards the scope and the coverage of the
subject finance management as under one fundamental
charge. Previously the subject was identified as an activity
concerned with the raising of funds, it is currently covering
not only procuring the funds but their efficient utilization
as well.

Scope Of Financial Management:What are the firms financial activities, how are they
related to the firm other activities for production of goods,
some provide services to customers.

35

The approach to the scope and functions of financial

management is divided for purposes of exposition, into two
broad categories:A. Traditional approach.
B. Modern approach.

A.Traditional approach:The

traditional

approach

to

the

scope

of

financial

management refers to its subject matter in the academic

literature in the initial stages of its evaluation as a separate
branch of academic study. The term corporate finance as the
name suggests, the concern of the corporation finance is the
financing function was treated by the traditional approach in
the narrow sense of procurement of funds by corporate
enterprises

to

meet

their

financing

needs.

The

term

procurement was used in a broad sense so as to include the

raising funds externally. Thus defined, the field of study dealing
with finance was treated as encompassing three inter-related
aspects of raising and administrating resources from outside:
1.The industrial arrangement in the form of financial
institution which

comprise the organization of the

capital market.
2.Financial instruments through which funds are raised from
the capital markets and the related aspects of practices and
the procedural aspects of capital markets.
3.The legal and accounting relationships between a firm and
its sources of funds.

36

B.Modern Approach:The

modern

approach

views

the

term

financial

management in a broad sense and provides a conceptual and

analytical framework for financial decision making. According to
it, the finance function covers both acquisitions of funds as well
as their allocation. Thus, apart from the issues involved in
acquiring

external

funds,

the

main

concern

of financial

management is the efficient and wise allocation of funds to

various uses. Defined in a broad sense, it is viewed as an
internal part of overall management.
The new approach is an analytical way of viewing the
financial problems of a firm. The main content of this approach
are:- what is the total volume of funds an enterprise should
commit? What specific assets should the funds required be
financial alternatively, the principal contents of the modern
approach to financial management can be said to be:
1. How large should an enterprise be, and how fast
should it grow?
2. In what form firm should it hold assets?
3. What should be the composition of its liabilities?
The three questions posed above cover between them the
major financial problems of a firm, in the modern sense of the
term, can be broken into three major decisions as functions of
finance. They are:
a. The Investment decision.
b. The Financing decision.

37

c. The Dividend policy decision.

Functions Of Financial Management:The function of rising funds investing them in assets and
distributing returns earn from assets to share holders are
respectively know as financing investment and dividend
decisions while performing these functions. A firm attempts to
balance cash inflows and outflows. This is liquidity and we may
add it to the list of important finance decisions of functions.
Those functions financial management include:
1. Investment or long-term asset mix decision.
2. Financing or capital-mix decision.
3. Dividend or profit allocation decision.
4. Liquidity or short term asset mix decision.
A firm performs finance function simultaneously and
continuously in the normal course of the business. They dont
necessarily occur in a sequence. Finance functions called for
skillful planning, control and execution of firms activities.

1.INVESTEMENT DECISION:Investment decision or capital budgeting involved the

decision of allocation of capital or commitment of fund to longterm assets that would yield benefits in the future. Two
important aspects of the investment decision are:
a. The evaluation of the prospective profitability of new
investments.

38

b. The measurement of a cut of rate against.

2. Financing Decision:Financing decision is the second important function

to be performed by the financial manager. Broadly he or she
much decide when, where and how to acquire funds to meet
the firm investment needs. The central issue before him or her
is to determine the proportion of equity and debt. The mix of
equity and debt is known as the firms capital structure. The
financial manager is able to determine the best combination of
debt and equity he or she must raise the appropriate amount
through the best available sources. In the practice, a firm
considers any other factors such as control, flexibility and loan
covenants, and legal aspects in deciding its capital structure.

3. Dividend Decision:Dividend decision is the third major financial decision. The

financial manager must decide whether the firm should
distribute all profits or retain them or distribute a portion and
retain the balance. Like that debt policy, the dividend policy
should be determined in term of its impact on the shareholders
value. The optimum dividend policy is one that maximizes the
market value of the firms shares. Thus if shareholders are not
in different to the firms dividend policy the financial manager
must determine the optimum dividend paid out ratio; equal to
the

percentage;

of

dividends

to

earning

available

to

shareholders

39

4. Liquidity Decision:Current assets management that effects, a firms liquidity

is at another important finance function. A conflict exists
between profitability and liquidity while managing current
assets. If the firm doesnt invest sufficient funds in current
assets it becomes liquid. But it would loss profitability, as idle
current assets would not earn anything. Thus a proper trade off
must be achieved between profitability and liquidity.

Objectives Of Financial Management:To make wise decisions a clear understanding of the

objectives. Which, are ought to be achieved is necessary. The
objective provides a framework for optimum financial decision
making in their words, of operating the internal investment and
financing of a firm.
The alternative approach is the financial literature. There
are two widely discussed approaches.
1. Profit maximization.
2. Wealth maximization.

1. Profit Maximization:Profit maximization means maximizing the rupee

income of firms. Firms produce goods and services. They may
function in a market economy, or in a government controlled

40

economy. In a market economy prices of goods and services are

determined in competitive market. Firms in a market economy
are expected to produce goods and services desired by society
as efficiently as possible. Goods and services in great demand
command higher prices. This result in higher profit for firms
ultimately with intensifying competition an equilibrium price is
reached at which demand and supply match prices are
determined by the demand and supply condition as well as
competitive forces, and they guide the allocation of resources
of various productive activities.
It is thus generally held by the economists following
smiths logic that under the condition of free competition.
Businessmens purchasing their own self-interest also serves
the interest of society. It is also assured that when individual
firms pursue the interest of maximizing profits, societys
resources are efficiently utilized. In the economic theory the
behavior of a firm either produces maximum output for a given
amount

of

output.

Thus

the

underlying

logic

of

profit

maximization is efficiency.

2. Wealth Maximization:The objective of share holders wealth maximization is

an appropriate and operationally feasible criterion measure to
choose among the alternative financial actions. It provides an
unambiguous measure of what financial management should
seek to maximize in making investment and financing decision
on behalf of owners.

41

Share holders wealth maximization means maximization

of the net present value of a course of action to share holders.
The net present value of a course of action is the difference
between the present value of its benefits and the present value
of its costs. A financial action that has a positive N.P.R. creates
wealth for share holders and there fore is desirable. Between a
numbers of mutually exclusive projects the one with the
highest N.P.R. should be adopted. Therefore the wealth will be
maximized of these criteria are followed in making financial
decision.

Financial Statements:Meaning:
A firm communicates financial information to the
users through financial statements and reports. The financial
statements contain summarized information of the firms
financial affairs, organized systematically. They are means to
present the firms financial situation to the users. Preparation of
the financial statements is the responsibility of the top
management. Investors and financial analysts examine the
firms performance and use these statements in order to make
investment decisions. They should be prepared very carefully
and contain as much information as possible.
Two basic financial statements prepared for the
purpose of external reporting to owners, investors and creditors
are

A. Balance sheet.

42

B. Profit & Loss A/c.

For internal management purpose, i.e., planning and

controlling much more information is needed than the
information contained in the financial statements. Therefore,
the financial accounting information is presented in different
statements and reports in such a way to serve the internal
needs of management.

Objectives:Financial statements are prepared from the

accounting records maintained by the firm. The general
accepted accounting principles and procedures are followed to
prepare these financial statements. The basic objective of the
financial statements is to assist decision-making. The various
other objectives are:
1. To provide reliable financial information about economic
resources and obligations of a business enterprises.
2. To provide reliable information about changes in net
resources of an enterprise that result from profit directed
activities.
3. To provide financial information that assists in estimating
the earning potential of the enterprise.
4. To provide other needed information about changes in
economic resources and obligations.

43

5. To disclose to the extent possible other information related

to financial statement that is relevant to the statement
users

Nature And Scope Of Financial Statements:A.Balance Sheet:Balance sheet is one of the most significant financial
statements. It indicates financial condition or the state of affairs
of a business at a particular moment of time. More specifically,
balance sheet contains information about resources and
obligations of a business entity and about its owners interest in
the business at a particular point of time. Thus, the balance
sheet of a firm prepared on 31st December reveals the firms
financial position on the specific date. In the language of
accounting, balance sheet communicates information about
assets, liabilities and owners equality for a business firm as on
specific date. It provides a snap shot of the financial position of
the firm at the class of firms accounting period.
1)

Assets:Assets represent the economic resources, what a firm

owns and other valuable possessions. These possessions should

be capable of being measured in monetary terms. Assets are of
future benefits.

44

They represent
a) Stored purchasing power (cash).
b) Money claims (receivable).
c) Tangible and intangible items that can be sold or used in
business to generate earnings.

Tangible items include land, building, plant, equipment

or stock of materials and finished goods and all such other
items, which have physical substance. Intangible items dont
have physical existence, but they have value to the firm. They
include patents, copyrights, trade name and goodwill.
Assets may be classified as current assets and long-term
assets. Current assets sometimes also called as liquid assets
are those resources of the firm, which is either healthy form of
cash or expected to be converted to cash within the accounting
period or the operating cycle of the business. The accounting
period is of one year duration. The operating cycle is the time
period, which is taken, convert raw material into finished goods,
sell finished goods and convert receivables (goods sold on
credit) into cash. In majority of the cases, the operating cycle is
equal to or less than the accounting period. Current assets
generally include cash, marketable securities, book debts
(account receivables) and stock of raw materials, work in
process and financial goods.

1.Cash:-

45

Cash is the most liquid current asset. It is the current

purchasing power in the hands of the firm and can be used for
the purpose of acquiring some resources or some obligations.
Cash includes actual money in hand and cash deposits in bank
account.

2.Marketable securities:These are the temporary or short-term investments

shares, bonds and other securities. These securities are readily
marketable and can be converted into cash within the
accounting period. A firm usually invests in marketable
securities when it has temporary surplus cash. A number of
Indian companies invest their surplus cash in the unit trust of
Indias units or other securities.

3.Book debts or accounts receivables:These are the amounts due from debtors to whom goods
or services have been sold on credit. These amounts generally
realizable into cash within the accounting period. The firm may
not realize all book debts. Some may remain uncollected the
debts which will never be collected are called bad debts.
Accounting generally makes an estimate or provision for bad
debts and shows good debts separately from bad debts in the
balance sheet.

4.Bills Receivables:It represents the promise made in writing by debtors

to pay definite sum of money after some specified period of

46

time. Bills are written by the firm and become effective when
expected by debtors.

5.Stock or Inventory:It includes raw material, work in progress and finished

goods in the case of manufacturing firms. Raw materials and
work in progress inventories are needed for smooth production.
The stocks of finished goods are kept for serving customers on
a continuing basis. A merchandised business may not have raw
materials and work in progress inventories as it has no
manufacturing activities. Inventories are carried in the balance
sheet in the original cost or the market price, which ever is less.
The inventories are the least liquid current assets have to be
collected.

6.Prepaid expenses and accrued income:These are also including on current assets, prepaid
expenses are the expenses future period paid in advance.
Examples are prepaid rent, prepaid insurance and taxes. They
are current assets because their benefits will be received within
the accounting period. Accrued incomes are the benefits, which
the firm has earned but they have not been received in cash
yet. They include items such as accrued dividend, accrued
commission or interest.

7.Long Term Assets:-

47

Long term assets are held for periods longer than the
accounting period, they are held for use in business, and not for
the purpose earning power of a firm due to special advantages
that it possess. Costs of intangible fixed assets are amortized
over their useful lives.
The term gross block is used to represent the original
cost of total fixed assets. When accumulated depreciation is
subtracted from the gross block, the difference is called net
block.

8.Investments:Long-term investments represent firms investment in

shares, debentures and bonds of other firms of government
bodies for profits and control. These investments are held for a
period of time greater than the accounting period. Usually the
long term investments are shown at the original costs, but the
current market prices may be given parenthesis.

9.Other assets:All other assets, which cant be included in any of the

above categories, are grouped as other assets. Usually, they
represent differed changes, prepayments for services are
benefits for period longer than the accounting period are
referred to as deferred changes and include advertising
expenditure, preliminary expenses.

48

b)

Liabilities:Liabilities are the debts payable in future by the firms

to its creditors. They represent economic obligations to pay

cash or provide goods or services in some future period.
Generally, borrowing money or purchasing goods or services on
credit creates liabilities. Example of liabilities are creditors, bills
payable, wages and salaries payable, interest payable, tax
payable, bonds, debentures borrowing from bank and financial
institutions, public deposits etc.,
Liabilities may be of two types: current liabilities and longterm liabilities.
1. Current Liabilities:These are the debts payable within an accounting
period. Current assets are converted into cash to pay current
liabilities may be incurred to liquidate the existing current
liabilities. The typical example of current liabilities is creditors,
tax payable, bills payable, and bank overdraft, outstanding
expenses and income received in advance.

2.Sundry Creditors:It represents current liabilities towards suppliers from

whom the firm has purchased raw materials on credit. This
liability is also known as account payable and it is shown in the
balance sheet till the payment has been made to the creditors .

3.Bills Payable:49

These are the promises made in writing by the firm to

make payment of a specified sum to creditors at some specific
date. Bills are written by creditors over the firm and become
bills payable once the firm accepts them. Bills payable have life
of less than a year; therefore they are shown as current liability
in the balance sheet.

4.Bank Borrowings:It forms a substantial part of current liabilities of a

large number of companies in India. Commercial banks
advance short term credit to firms for financing their current
assets. Banks also provides funds for financing the firms fixed
assets: such loans will be

grouped under long term liabilities .

5.Provisions:They include provision for taxes or provision of

dividends. Every business has to pay taxes on its income.
Usually it takes sometime to finalize the amount of tax with tax
authorities. Therefore the amount of tax is estimated and
shown as provision for taxes or tax for liability in the balance
sheet. Similarly provision for paying dividends to shareholders
may be created and shown as current liability.

6.Outstanding Expenses And Income Received In

Advance:These are other example of current liabilities. The
firm may own payments to its employees and other at the end
of accounting period for the services received in the current

50

year. These payments are payable with a very short period.

Examples of outstanding expenses are wage payable, rent
payable and commission payable. A firm can sometimes
receive income for groups or services to be supplies in future.
As goods or services have to provide within the accounting
period, such receipts are shown as current liabilities in the
balance sheet.

7. Long-Term Liabilities:These are sometimes called as fixed liabilities or the

obligations or debts payable in period of time greater than the
accounting period. These usually represent borrowing of a
longer period of time. They include debentures, bonds and
secured long-term loans from financial institutions.
When the firm has to raise large sum of money as debt
from the public, it issues debentures or bonds. A debenture or
bond is a general obligation of a firm to pay interest and return
principal sum on the agreement. Loan raised through the issue
of debentures are secured or unsecured.
Secured loans are mortgages are the long-term
borrowing with fixed assets pledged as security, mortgages are
shown as secured long term liabilities in the balance sheet.
Term-loans from financial institutions and banks are secured
against the assets of the firm.

8.Owners Equity:The financial interests of owner are called owners

equity. The owners interest is residual in nature, reflecting the

51

excess of the firms assets over its liabilities. As liabilities are

the claims of outside parties. Owners equity represents
owners claims against the business entity as of the balance
sheet date. But the nature of the owners claim is not same as
the claims of creditors. Creditors claim is defined and has to be
met within a specified period. The claim of owners changes and
amount payable to them can be determines only when the firm
is liquidated. Since assets are recorded at costs, there can be
considerable difference between the owners book claim and
original claim.
Incase of company owners of a firm are called
shareholders equity or shareholders fund or capital or share
capital. It has two parts namely paid-up share capital and
reserves

and

surplus

(retained

earnings)

representing

undistributed profits. Paid up capital is the amount of funds

directly contributed by the shareholders If shareholders are
actually required to pay more than the stated or pay valor per
share, the amount is separately known as share premium

The second part of the share capital is referred to as

retained earnings or surplus and reserves. The difference
between the total earnings to date and the total amount of
dividends to dare is reserves and surplus. Undistributed profits
may be earmarked for some specific purpose, such as
replacement or debenture redemption. Reserves which are not
earmarked are called free reserves.

52

In India, the term reserves and surplus is used for

retained earnings. This can be misleading as the term can
notes something tangible, something left over. In fact, the
tangible items owned by the business are shown on the assets
side of the balance sheet
The term net worth is used for the owners equity.
The term is misleading. Ii can note the erroneous meaning that
owners equity in the balance sheet is recorded at the book
value.

Functions Of Balance Sheet:The three important functions served by the balance

sheet are:
1. It gives concise summary of the firms resources and
obligations

(liabilities and owners equity).

2. It is a measure of the firms liquidity.

3. It is a measure of the
4. Firms solvency.
In the definition of accounting we noted that it has
a custodian or stewardship role to play fulfills this function. It
reports to owners and others the state of affairs assets owned
by the firm and the claims against them. It reflects the
economic result of management policies.

Profit & Loss Account:-

53

Bankers and other lenders consider the balance

sheet as significant statement. It indicates the firm financial
strength, as measured by its resources and obligations.
However, creditors particularly bankers and financial analysts in
India have recently started paying more attention to the firms
earning capacity as measure of its financial strength. The
income statement or the profit & loss a/c reflects the earning
capacity and potential of the firm.
The profit & loss a/c is the scoreboard of the firms
performance during a particular period of time. The generally
accepted is to show one year events in the profit & loss a/c.
since the profit & loss a/c
reflects the result of the operations for the period of time, its a
flow statement. In contrast, the balance sheet is a stock or a
statement as it shows assets, liabilities and owners equity at a
point of time.

The profit & loss a/c presents the summary of the

revenues, expenses and net income or net loss of a firm for a
period of time. Thus, it serves as a measure of the firms
profitability. The net income, which is an indicator of the firms
profitable operations, it is the amounts by which the revenues
earn during the period exceed expenses during that period of
time. If the firm operation proves to be unprofitable, total
expenses will exceed total revenues and the difference is
referred to as net loss.

54

Revenues are the amounts, which customers pay to

the firm for providing them goods and services. The firm uses
economic resources in providing goods and services to the
customers. The cost of the economic resources use to earn
revenues during a period of time are called expenses.
Thus, to determine net income/loss the accounting
system matches the expenses incurred during the accounting
period against the revenues earned during the period. This
matching of the expenses with revenue is called as matching
concept. The time period for which matching is done is called
the accounting period. Normally it could be one year duration.
Therefore the income statement is prepared on annual basis.

Nature Of Revenues:Revenues are the values of output supply to the

customers. More specifically revenue is the gross inflow of
assets or the gross decrease in liabilities that results from
certain profit directed activities of the firm that can change
owners equity. As such revenue can rise from
1. The sale of products to customers.
2. Rendering service are the supply of the firms resources
to others,

resulting in the receipt of rent, interest, dividend,

royalties, commission, fees, etc.,

3. The sale of assets of the firm other than those held has
stock in trade such as plant, machinery, land, buildings and
investments.

55

The example of revenues from rendering services is

that of a doctor who perform services for patients and then bills
him say Rs. 100. The doctor may receive payment in cash
immediately or increase the accounts receivable. In any case,
the revenue has resulted and there has been inflow of assetcash or receivable and increase in the owners equity.
The firm can also earn revenue by loaning its
economic resources. For example a firm can lend its excess
funds and earn interests. Similarly a part of funds buildings may
rent. The firm also extends its marketing facilities to others and
earns revenue by way of commission or fees. Revenue in all
these cases will recognize at the time when the owners equity
increases.
Revenues are sometimes categorized as operating
revenues and non operating revenues. Revenues arising from
the main operations or business of the firm are called operating
revenue. For example gross proceeds from the sale of products
manufactured by the firms are operating revenue. Revenues
are incidental or in directed to the main operation of the firm
are called non-operating revenues. For example the gross
proceeds from the sale of old equipment or non-operating
revenue. Generally its recognized when the goods have been
sold or services have been rendered. The earning process is
treated complete with the sale of or the performance of the
service. When the product has been sold or service performs,
the firm in exchange would have received as inflow of assets in
the form of cash or receivable or decrease in liabilities. From a

56

legal point of view, a sale take place when title to or ownership

of the goods passes from seller to buyer.

Nature Of Expenses:Simply stated the cost of earning revenue is called the

expense. Expenses occurred when the assets are consumed or
liabilities are increased in order to produce revenue. Expenses
represent a gross decrease in asset or gross increase in
liabilities that result from profit directed activities that change
owners equity.
If a firm pays wages to the workers, then it incurs an
expense. The firm used the services of its workers in
manufacturing the products. Which have been sold and
resulted in revenue. The wages are paid in cash, the assets
have decreased. As this does not affect liabilities the decrease
will be in owners equity. Even the wages are not paid in cash
rather are payable still an expense is incur. If the workers have
rendered
the services, the firm has an obligation to pay them. So there is
an increase in liabilities of the firm. A net assets of the firm
decrease due to increase in liabilities, owners equity decrease.
Cost is not same thing as an expense. Cost is an outlay
to acquire Cost is distinguished as expired cost and UN expired
cost. Expired cost is the Once, which have held to produce
revenues expired cost are recognized in the income statement
and also known as revenue expenditure. Unexpired cost is
those cost which will help to produce revenue in future. Such

57

cost is recognized as assets in balance sheet. Thus, assets

become expenses are used up and loss. Their ability to
generate revenue in the future period. Unexpired cost is also
known as capital expenditure.
The accrual concept is followed in recognizing
expenses. Expenses are recognizing in the income statement in
the period during which the cost expired. In contrast the case
concept recognizes expenses only when cash is paid. Like
revenues, expenses can be classified as operating and nonoperating expenses.
Expenses relating to the main operation or business
of the firm are called operating expenses. Example includes
manufacturing expenses general and administrative and selling
and distributing expenses. Expenses that are incidental are in
directed to the main operation of the firm are called nonoperating expenses.

3.2 Finance Management

Finance management takes important decisions regarding

capital investments, working capital

procurement and
utilisation, dividend decisions, liquidity decisions, besides
normal finance and accounts management activities.

1.Strategic financial management:

58

Strategic financial management is resorted to when the

Industry is looming under depression or suffering from severe competition
from the large scale industries. The ability of the finance management is
reflected in formulating contingent plans in adverse situations. They also
keep different sources of finance in the capital structure to diversify
when necessity arises. A successful finance manager formulates the
Project cost suitably , so that the project is not effected due to the
contingencies.

2.Foreign investment decisions:

Foreign direct investment is generally allowed by RBI subject
to certain norms and conditions. The instruments in international market
are euro loans ,commercial papers, floating rate instruments, loans
syndication, EURO deposits, international bonds, EURO bonds, GDR , ADR
deposits. Many multinational companies maintain funds in multi currencies
to reduce the risk in foreign exchange fluctuations and reduce the effects of
foreign currency transactions. There are companies who take advantage
of the foreign exchange fluctuations in their favour by strategic planning

3.Mutual fund:
MF generally provide risk coverage to the investors to gain advantage
over the frequent fluctuations of share prices of individual companies
investment

4.Venture capital:
With a view to encourage the first generation entrepreneurs, venture
capital is provided to the new entrepreneurs to assist them in large investments
in the project in initial stages by Venture capital institutions.

59

5.Time value of Money:

It was simply a rupee that is receivable today is more valuable than a
rupee receivable in future. Its main object is the basics if the mathematics of
finance that is the time value of money in financial decision making is
extremely important.

6.Simple interest:
Simple interest is the interest paid (earned) on only the original
amount or principal borrowed (lent). Simple interest is a function of three
components (variables) such as principle amount borrowed or lent, interest
per annum and the number of years for which the interest rate is
calculated.

7.Compound interest:
There is significant difference between simple and compound interest.
In simple interest there is no opportunity to earn interest each on interest
where as in compounding interest each interest payment is (reinvested)
having the opportunity to earn interest on interest.
8.Present Value:
The concept of the present value is the exact opposite of the
compound value. compound value is helpful to know the interest added to
principle amount at a given compound interest rate and given number of
years, where as in the present value we can know the present value of a
sum that is receivable in future.
Simple present value is the future cash inflow is the amount of
current that is of equivalent of the present value.
The process of determining present value of a future cash flows (cash
inflow or outflow) is called discounting.

60

Organization of finance function:

Finance function is very essential for any business undertaking. It is
necessary to set up a sound and efficient department for the purpose of
achieving its objectives.

There is no tailor made structure of finance function. The importance

of the finance function depends on the size of the firm. financial
management is an integral part of the overall management of the firm.in
small firms, the finance functions are generally performed by the
accounting departments.

In large firms, there is a separate department of finance headed by

a specialist known by different designations such as vice president,
director of finance officer and so on.

The functions is described below:

1.Treasurer:
The main concern of the treasurer is with the
financing of the firm included in the range of his functions are
a. Obtaining finance
b. Banking Relationship
c. Investor Relationship
d. Short term financing
e. Cash management
f. Investments
g. Insurance

61

2.Controller:
The functions of the controller are related
mainly to accounting and control. The typical functions
performed by him include:
a. Financial accounting
b. Internal audit
c. Taxation
d. Management accounting and control
e. Budgeting, planning
f. Economic appraisal and so on.

3.3 Financial
Management
(Practice in Industries)
The authority for Management of Corporate body
(Industrial Organisation) is Board of Directors of the
Company.

The Board consists of Chairman, Managing Director,

Executive Director, Director (Finance), Director (Commercial),
Director (Technical) etc.,
They are assisted by

62

Professionals such as Company Secretary and Chief

Financial Officer.
The Key Managerial Personnel are assisted by various
executives at different levels. They are :
Vice President (Finance), (Commercial), (Engineering),
( Technical), General Managers, Dy General Managers,
Asst. General Managers, Sr Managers, Managers, dy.
Managers, asst. Managers, Sr officers, officers, sr. Assistants,
assistants, jr. Assistants.
There are several committees which coordinate functional
activities such as purchase committee, budget committee,
etc.,

Finance Management and administration:

The Finance and Accounts Department under the control
of Vice President (Finance) or General Manager ( Finance)
consists of the following sections, which depict the
functional activities undertaken by the financial management
and administration of the Company:

1. Central Accounts
2. Cost accounts
3. Purchase accounts
4. Stores accounts
5. Fixed assets and insurance accounts
6. Establishment accounts
7. Time office accounts
8. Building materials accounts

63

9. Civil construction accounts

10.

Forest accounts

11.

Cash and bank accounts

12.

Finance section

13.

Sales tax section

14.

Central excise and service tax section

15.

Income tax section

16.

Internal audit section

17.

Legal claims section

18.

Branch accounts

19.

Electronic data processing accounts

20.

Management Accounts

All these sections undertake the comprehesive activties

finance management and administration of the Organisation

of

64

CHAPTER-IV
PROJECT REPORTS OF THE COMPANY
( UNDER STUDY)

4.1 Project Appraisal and evaluation by Lending

Banks (practices_).

The project financial estimates of K. P. R Fertilizers LTD

,the public limited company which has undertaken expansion projects is
furnished Annexure.
Review of the project financial statements:
KPR Fertilizers Ltd is a public limited company which is engaged
in fertilizers industries has undertaken the projects in March 2010 and applied to
bank for appraisal and sanction of the loans

65

Rs. in crores
. Power plant with20mw capacity based on gas

19.60

. DMS plant 30tpd (AP)

3.50

3. Allam 30 tpd (AP)

2.50

4. CSA 30 tpd

10.10

5. Dms Karnataka 30tpd

9.90

6. Alum 30tpd Karnataka

3.50

7. Sulphuric acid plant30tpd

8. Dcp 30tpd

35.00
9.30

These expenses are undertaken in Fertilizer unit at Biccavolu and also

similar unit in Karnataka .The capacity of the projects is mentioned in the
project report . The infrastructure facilities like availability of plant,
construction of buildings ,details of plant and machinery, availability of water
,full arrangements for procurements of raw materials, arrangements for
marketing of products, arrangement of time and disposal and various temporary
storage approvals are detailed in the report. The time schedules for
implementation of the projects is detailed in the report. The project report
envisages commercial projections for 2 units in January 2011 and 2 units in
October 2011.
The summary of the project cost (Capital Budget) is as follows:
Rs .in Crores
Buildings
32.00

66

Plant and machinery

134.90
Working capital margin
0.60
Preliminary and
3.10

Total
170.60

Means of finance:
The project cost is proposed to be meet as follows

a). Promoters contribution

49.25
b). Term loans of bank
121.35

Total
170.60

67

The bank insists that the company should bear margin

money of about 30 to 40 %, while the bank approves term loan for the balance
amount of the project cost. The detailed financial workings are provided in the
project financial statements.
The retained earnings in the profitability statement are
arrived at by deducting material cost , manufacturing expenses ,depreciation
administration and selling expenses from Total Income and after providing
for tax and dividends. The retained earnings together with depreciation is
considered by the bank for computing internal accruals..
The summary of computation of the Operating Budget is as follows :

. Sales

Material consumption

Manufacturing expanses

Depreciation

Administration

Selling

Stock variation

EBDIT

68

 Operating profit

PBT

PAT

Provision for tax divided

Retained earnings

In the projected balance sheet ,the estimates of internal accruals of

the current year in the projection of next 10 years is made. there is provision of
25crores additional share capital in 2010-11 and 25crores 2011there is
substantial increase surplus every year which indicates generation of addition
approvals who can also observe from BF and CF that the term loans provided
for the banks is reflected there in and repayment of the loans.
The long term loans are completely repaid by 2009-18 that
is the end of 8th year the reserves have accumulated up to 470cr by 2018-19
which indicates that the concern go in farther expanses and capital expenditure
for sestinas and growth for subsequent years
The bank borrowings for working capital have been pegged
at 91cr prices. which occurs further increase if production levels have to be
increase the cash and bank balances have increased to 353.83cr which indicates
scope for capital investment the inventory levels are maintain by the companies
at the current production levels for with provision for influencer prices the fixed
asserts also continued subject to expanse.

Cash flow:
69

The cash flow statement indicates the company is borrowing about

120cr during 2011-12 to meet the capital expenditure of 166.95cr during the
period as regards equity the cash generation during 2011-12 is about 83cr which
after repayment loans to extent of 35cr as contributed for the capital expenditure
of the project.
The company as also gored up the working capital by about 69cr
out of which they able to procure bank borrowing by way of cash credit living
balance to be meant out of internal approvals. Every year there was surplus in
the cash flow which indicates scope farther expanses.

Important financial ratios:

DSCR was ranging from 1.60 to 8.30 in the tenure and an
average 2.34 the intuitions recognized companies with DSCR of two and above
is good for considering sanction of term loans.

Debt equity ratio:

Debt equity ratio was 2.02 while for the project the bank
concerned 2.46 for the projects as per the sensitivity analysis they have assessed
that if the raw material price increases for 5 % the average DSCR will fall for
2.34 1.84 while the IRR false for 21.18% 2.16.40%
BEP is important ratio the bank as assets the BEP
is 47.92% which indicates that if the concerts makes 48% it comes under profit
area

Internal rate of return:

For the project the IRR is conceder at 21.18% which indicated that is
the project get backs in the investments in about 5years.evaenthough the
payback period 5 years the banks allowed in 6 years to allow marginal
constancies the bank as also allowed an moratorium 6 months to the project to
enable it to sustain, get over the teething problems and commercial repayment
of the loans as of now the company is again planning for their expanses to
utilize to surplus approval is available to them.

70

Project appraisal and evaluation statement and

report of the company By Lending bank.
(ANNEXURE)

I. Brief particulars of the capital investments proposed:(Such as

setting up of a new unit, need for modification/expansion etc...)

The capital investment is required for expansion of the present

manufacturing facilities:

The company is proposing to setup:

Power plant with 20MV capacity based on gas with a project cost of
Rs.90.60 crores in AP
Unit to manufacture DMS with a capacity of 30 TPD with a project cost
of Rs.9.55 crores in AP
Unit to manufacture Alum with a capacity of 30 TPD with a project cost
of Rs.3.25 crores in AP
Unit to manufacture CSA with a capacity of 30 TPD with a project cost of
Rs.10.10 crores in AP
Unit to manufacture DMS with a capacity of 30 TPD with a project cost
of Rs.9.55 crores in Karnataka

71

 Unit to manufacture Alum with a capacity of 30 TPD with a project cost

of Rs.3.25 crores in Karnataka
Unit to manufacture CSA with a capacity of 30 TPD with a project cost of
Rs.9.30 crores in Karnataka
Sulphuric Acid plant with a capacity of 200 TPD with a project cost of
Rs.35.00 crores
Project to manufacture DCP with a capacity of 30 TPD with a project cost
of Rs.9.30 crores
The investment will be made to construct factory buildings and to acquire
plant and machinery.
The unit expansion is proposed at kopal Taluk, Karnataka and
Blabhdrapuram in Andhra Pradesh.

II.Technical aspects of the proposal (enclose feasibility report)

1.1.

Name of the product to be

Manufactured

* 5SP

NPK 20.20.0
NPK 14 35 14
NPK 17 17 17
DCP
Pesticides
Seeds
Mineral Mixture
Sulphuric Acid
Power
DMS
Alum
CSA

72

1.2.

Uses of the product

SSP
NPK

Fertilizer
Fertilizer

DCP

Cattle and Poultry

Feed (feed Supplement)

Pesticide

To control pests

Seeds

Seeds dealt are Paddy and

Maize

Power

Connected to Grid

1-3 Manufacturing process

1-4 Capacity for each product

Product

Capacity

Pesticides
Single Super

600 TPD

Phosphate
(SSP) Powder
NPK

540TPD

DCP

50TPD

Sulphuric Acid
DMS

200TPD
30TPD

73

Alum

30TPD

CSA

30TPD

Power Plant
Units in Karnataka
SSP

150TPD

NPK Mixtures

300TPD

DCP

30TPD

Sulphuric Acid

200TPD

DMS

30TPD

Alum

30TPD

1-5.Particulars of collaboration, if any

Not applicable

(Names of collaborators and details of

Collaboration agents):
1-6.Location advantages
the unit is located at Halavarthy, Koppel
Taluk, Karnataka
and Biccavolu in
Andhra Pradesh
which have many
advantages.
- There are no civic restrictions
for establishing
The
fertilizer
manufacturing
industry in the Area
-

The location is in Karnataka and

Andhra Pradesh

74

And the demand for the

products in the area can be met
from both the unit
- The place is in the midst of area
where paddy is grown and the
product is used as nutrient and
fertilizer
- The power supply position is
satisfactory
- The
place
has
industrial
atmosphere
and
no
labor
problems are envisaged
- The promoters have good
reputation and have high social
standing
1-7 Infrastructure facilities required and arrangements
made for the same:
Land
proposed

The land exists and no additional land is now

for
Expansion

Building
proposed

project.

The buildings are proposed for installing the

Machinery.
The additional buildings are estimated at

Rs.32.00 crores
Plant & Machinery

The machinery proposed is for:

200 TPD Sulphuric Acid Plant in

Karnataka
30 TPD DCP Plant in Karnataka
30 TPD DMS Plant in Karnataka
30 TPD Alum Plant in Karnataka

75

30 TPD DMS Plant in Andhra

Pradesh
30 TPD Alum Plant in Andhra
Pradesh
30 TPD CSA Plant in Andhra
Pradesh
20

MW Power Plants in Andhra

Pradesh
The company obtained quotations and will be purchased from
Standard manufacturers
Power & Fuel
2000 KVA

The Power requirement is estimated at

Labor
will be deployed

The total employees estimated for plant

From Local areas

Water
available in the

The water is drawn from the bore well

Factory site.

1-8. Arrangements made

required are:
For procurement of raw
Materials:

the raw materials

Rock Phosphate
Sulphuric acid
Sculpture
Urea
DAP
Dolomite
MOP
Lime

76

Bauxite
The rock phosphate and sulphur are imported and other
materials
Are purchased locally for the present. The letter of credit
arrangement will be
Used for import of raw Materials.
1-9.Arrangments made
market geographically

The Company has segmented the

And for marketing of expands their

network in the
States of Andhra Pradesh, Orissa and
Karnataka.
The company commenced their
operations in Andhra
Pradesh now by appointing dealers in
all the
Districts. The dealer network
Consists of 600 outlets and
The company has been adding the
dealers every month.
The dealers are also appointed in
Orissa and
Karnataka.

The needs of Dealers in Karnataka and

Orissa are met from the proposed unit in
Karnataka.

77

78

79

IV) Reasonability of other items of expenditure projected

80

a. Stores and spares

b. power and fuel

c. direct lab our

d. repairs and maintenance

e. Depreciation

f. Administrative and selling

expenses
g. interest
h. Net profit before tax
i. taxation

j. net profit after tax

The cost of spares is included in

consumable and are estimated at 0.51%
of sales on average for project duration
of 10year period
The cost of power is worked out to
1.16% of sales on average for 10-year
period. This is in tune with industry
standards ,the captive power generated
is also included in the cost while same
amount is taken as income for sulphuric
acid plant
The labor cost works out to 1.59% of
sales on average for 10 years period
The cost of repairs and maintenance is
taken at different rates based on the type
of assets. the average cost works out to
6.61% on sales on average for 10 year
project duration
The depreciation is provided as per
straight line method at the rates;
Buildings;
3.28%
Plant &machinery; 5.34%
The administrative expenses work out to
2.64% of sales on average for a period
of 10%
The interest is provided at 12.25% on
term loan and at 12.0% on working
capital for the purpose of calculations
The net profit before taxes works out to
11.67% on average for 10-year period
The income tax is provided as applicable
to income tax act at 11% in case of MAT
and 30% in case of income tax and
surcharge there on
The net profit after taxes works out to
8.03% on average for 10-year period

4.2 PROJECTED BALANCE SHEET (10 yrs)

(Rs. In Crores)

YEARS ->

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

81

LIABILITI
ES
Share
capital
Reserves
and
surplus
Long term
loans
Unsecure
d loans
Bank
borrowing
s
Other
current
liabilities
Total
liabilitie
s
ASSETS
Cash &
bank
balances
Inventory
Receivabl
es
Other
current
Assets
Gross
fixed
Assets
Less:
Acc.
depreciati
on
Capital
work in
progress
Net fixed
assets
Deposits
Preliminar
y
expenses
investme

25.2
3
30.6
2

49.8
8
59.3
9

74.4
8
95.3
5

74.4
8
138.
19

74.4
8
183.
84

74.4
8
233.
52

74.4
8
287.
30

74.4
8
344.
88

74.4
8
406.
00

74.48

73.0
4
4.02

116.
24
4.02

159.
84
4.02

128.
59
4.02

98.0
0
4.02

68.7
3
4.02

40.9
6
4.02

21.8
6
4.02

8.86

0.00

4.02

4.02

60.0
0

85.0
0

91.0
0

91.0
0

91.0
0

91.0
0

91.0
0

91.0
0

91.0
0

91.00

41.5
6

58.5
0

63.0
6

66.0
9

67.6
7

69.3
7

71.0
6

72.6
9

74.3
2

75.87

234.
47

373.
03

487.
75

502.
37

519.
01

541.
12

568.
82

608.
93

658.
68

715.
4

30.7
2

42.0
9

63.1
7

84.6
2

112.
14

144.
96

182.
48

231.
63

289.
60

353.8
3

78.6
5
19.0
0
9.15

110.
19
34.7
1
14.8
4

118.
15
41.6
7
15.4
4

122.
46
46.9
5
16.4
3

124.
95
49.1
3
17.4
5

127.
56
50.4
1
18.6
1

130.
82
51.7
8
19.7
6

133.
24
53.2
3
20.8
3

136.
32
54.7
8
21.8
9

139.5
9
56.44

101.
38

178.
33

268.
33

268.
33

268.
33

268.
33

268.
33

268.
33

268.
33

268.3
3

5.24

10.7
9

22.9
0

39.9
5

56.1
5

71.5
8

86.3
1

100.
42

113.
97

127.0
1

96.1
4
0.40
0.43

167.
54
0.90
2.76

245.
42
1.00
2.90

228.
37
1.00
2.54

212.
18
1.00
2.18

196.
75
1.00
1.82

182.
02
1.00
1.45

167.
91
1.00
1.09

154.
36
1.00
0.73

141.3
1
1.00
0.37

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

470.0
3

22.84

82

nts
Total

234.
47

373.
03

487.
75

502.
37

519.
01

541.
12

568.
82

608.
93

658.
68

4.3 Projected PROFITABILITY STATEMENT (10 yrs)

YEARS
Installed
capacity
Capacity
utilization
Production
Net Sales

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Sales
Total(A)
Expenditure
1.Raw materials

235.29
235.29

421.84
421.84

531.17
531.17

583.94
583.94

598.75
598.75

614.49
614.49

631.23
631.23

649.07
649.07

668.11
668.11

688.46
688.46

217.48

347.34

402.89

433.62

445.01

457.19

470.23

484.19

499.19

515.29

2.Stores &
spares
3.power & fuel
4.Wages &
salaries
5.Repairs &
maintenance
6.Other mfg.
Expenses
7.Depreciation
8.Prel.expenses
Cost of
production
Selling & Adm.
Expenses
Interest- bank
Borrowings
Interest- term
loans
Interest- others
Change in WIP
&FG
Total operating
expenses(B)
Operating
profit(A-B)
Provision for
tax

1.32

2.04

2.83

3.00

3.06

3.13

3.20

3.27

3.35

3.43

4.15
3.13

5.16
5.91

6.46
8.68

6.92
9.22

6.97
9.54

7.03
9.88

7.08
10.22

7.14
10.59

7.19
10.96

7.34
11.36

1.55

2.47

3.75

3.78

3.79

3.79

3.79

3.79

3.79

3.79

3.40

5.62

7.48

7.92

8.07

8.22

8.39

8.56

8.74

8.93

3.64
0.08
234.75

5.55
0.27
374.36

12.12
0.36
444.57

17.05
0.36
481.87

16.20
0.36
493

15.43
0.36
505.03

14.73
0.36
518

14.11
0.36
532.01

13.55
0.36
547.13

13.04
0.36
563.54

4.32

9.78

15.12

15.84

16.20

16.57

16.96

17.36

17.78

18.23

2.41

5.56

7.46

8.66

9.62

9.62

9.62

9.62

9.23

9.23

5.28

8.97

17.33

18.25

14.47

10.69

7.01

3.98

1.94

0.56

0.50
27.00

1.20
16.96

1.30
3.44

1.50
1.91

1.70
1.54

1.70
1.65

1.70
1.76

1.70
1.89

1.70
2.03

1.70
2.19

220.27

382.89

482.34

524.22

533.45

541.95

551.51

562.77

575.74

591.06

15.02

38.95

48.83

59.73

65.31

72.54

79.72

86.30

92.37

97.39

2.84

10.18

12.87

16.89

19.65

22.86

25.94

28.72

31.25

33.36fl

Profit after tax

Dividend

12.18
0.00

28.77
0.00

35.96
0.00

42.84
0.00

45.65
0.00

49.68
0.00

53.78
0.00

57.58
0.00

61.12
0.00

64.03
0.00

83

Retained
Earnings

12.18

28.77

35.96

42.84

45.65

49.68

53.78

28.72

31.25

64.03

4.4 Projected Cash Flow Statement

YEARS ->
SOURCES OF
FUNDS
Cash Generation
Increase in equity
Long term loans
Bank borrowings
Advances for
capital goods
Increase in other
current liabilities
Total(A)

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

15.90
12.21
22.72
45.93
-5.60

34.59
24.65
55.35
25.00

48.44
24.60
66.00
6.00

60.25 62.21
0.00 0.00

65.47
0.00

68.88
0.00

72.05
0.00

75.03
0.00

77.44
0.00

21.25

16.93

4.56

3.03

1.69

1.69

1.63

1.64

1.55

67.16

70.57

73.68

76.6

78.98

Capital
expenditure
Capital work-inprogress
Decrease in long
term loans
Increase in current
assets
Preliminary
expenses
Investments/others
Total(B)
Opening cash
balance
Surplus /deficit
(A-B)
Closing cash
balance

34.99

76.95

90.00

0.10

0.50

0.10

3.48

12.15

22.40

31.25 30.59

29.27

27.77

19.10

13.00

8.86

64.07

52.94

15.53

10.58 5.68

5.06

5.27

5.44

5.69

5.89

0.50

2.60

0.50

-9.13
94.02
12.33

0.00
0.00
0.00 0.00
145.15 128.52 41.83 36.27
30.72 42.09 63.17 84.62

0.00
0.00
0.00
0.00
0.00
34.33 33.04 25.54 18.69 14.75
112.14 144.96 182.48 231.63 289.60

18.38

11.37

21.08

21.45 27.52

32.82

30.72

42.09

63.17

84.62 112.14 144.96 182.48 231.63 289.60 353.83

1.58

112.40 156.52 149.60 63.28 63.79

37.52

49.14

57.92

84

64.24

4.5 Balance Sheets of the Co. (4 yrs)

Balance sheet
S
N

Heads

L I A

Balance Sheets (for 4 years )

As at
31.03.20
11
Rs. Lakhs

As at
31.03.20
10
Rs.
Lakhs

1424.40

As at
31.03.20
09

As at

Rs. Lakhs

31.03.08
Rs.
Lakhs

1424.40

1301.60

583.35

1424.40

1424.40

1301.60

583.35

30.00
1737.60
15.00

30.00
1737.60
15.00

30.00
1246.40
15.00

0.00
0.00
0.00

2952.28
4734.88
6159.28

891.58
2674.18
4098.58

223.79
1515.19
2816.79

149.88
149.88
733.23

10268.38
5682.06
181.06

7172.32
3371.61
140.41

5100.37
1407.34
69.13

891.43
554.41
59.02

16131.50

10684.3
4

6576.84

1504.86

1610.23
70.99
8789.94

0
460.51
0

0
209.04
0

42.34
21.89
0

B I L I T I E S

1 SHARE CAPITAL
Equity share capital (paid up)
Total 1
2 RESERVES AND SURPLUS
General Reserve
Share premium
Investment subsidy
Profit and Loss Account
(Surplus)
Total 2
Net Worth (1 & 2 )
3 SECURED LOANS
Term Loans from Bank:
Cash Credit from Bank
Vehicle Loans:

Total 3
4 UNSECURED LOANS
Unsecured Loans
others
Buyers credit

85

Total 4
5 DEFERRED TAX LAIBILITY

GRAND TOTAL (L)

10471.16

460.51

209.04

64.23

1403.09

1081.22

401.92

34165.03

16324.6
5

10004.59

2302.32

4903.74
131.74

881.15
28.16

4772
1697.4

852.99
601.57

6469.4

1454.56

1 FIXED ASSETS

17782.00

12667.4
7
530.06
12137.4
1
48.37
12185.7
8

2 INVESTMENTS

1145.50

CURRENT ASSETS , LOANS AND

3 ADVANCES
INVENTORIES
Raw Materials
Packing materials
Stores, Spare Parts
Finished Products
Work in Process
Sub total
SUNDRY DEBTORS
Accounts Receivables
Subsidy Receivables

4357.23
371.35
268.39
1826.50
255.61
7079.08

2380.71
227.94
0
604.44
296.57
3509.66

1563.58
148.18
0
380.48
24.31
2116.55

546.15
86.85
0
198.77
79.51
911.28

3607.91
792.02

1557.57
305.2

590.74
747.59

335.05
191.91

Sub total
CASH AND BANK BALANCES
Cash on hand
Bank Balances with Scheduled
Banks:
in CurrentAccounts
in Deposit Accounts
Sub total
LOANS AND ADVANCES

4399.93

1862.77

1338.33

526.96

5.28

2.61

2.31

12.58

296.89
1412.28
1714.45

121.58
548.34
672.53

1227.73
142.93
1372.97

24.27
90.83
127.68

Advances to Suppliers
Advances to Capital jobs

2130.29
202.39

0
0

0
925.07

0
37.78

Gross Block
Depreciation
NET BLOCK
Capital works in progress
Tot a l 1

14654.50
1165.37
13489.13
4292.87

86

Security Deposits
Duties and taxes
others
Sub total
TOTAL 3 (CA)

1324.07
614.89

241.75
82.75

19.14
214.93

139.99
6.66

4271.64
17465.10

324.5
6369.46

1159.14
5986.99

184.43
1750.35

0.00
0.00
1370.41

314.74
50.63
1405.49

560.42
3.05
1688.42

29.59
0.03
772.11

1370.41

1770.86

2251.89

801.73

691.07
166.09

307.07
152.67

122.01
77.9

32.61
68.25

Sub total
TOTAL 4 (CL)
Net Current Assets (3-4)

857.16
2227.57
15237.53

459.74
2230.6
4138.86

199.91
2451.8
3535.19

100.86
902.59
847.76

GRAND TOTAL (A)

34165.03

10004.59

2302.32

10004.59

2302.32

CURRENT LIABILITIES AND

4 PROVISIONS
Current Liabilities
Sundry Creditors- Capital
Sundry Creditors- Expenses
Sundry Creditors- Suppliers
Sundry Creditors-- FLCs
Dealers deposits
Duties and taxes
Other Liabilities
Sub total
Provisions
Provision for Income(Corporate)
tax
Provision for Equity dividend

34165.03

16324.6
4
16324.6
5

87

4.6 Profit and Loss Accounts of

the Co. ( 4yrs)
PROFIT & LOSS ACCOUNT
201011
Rs
lakhs
A

Price Subsidy
sub total
2 Other Income
3 Increase/decrease in Stocks
Total
EXPENDITURE

1 Materials consumption
Manufacturing and other
2 expenses
3 Salaries , wages , benefits
Administrative and Misc.
4 expenses
Selling and distribution
5 expenses
Total
C

E B D I T

6 Interest and financial expenses

D

200809
Rs
lakhs

2007-08
Rs lakhs

INCOME

1 SALES

200910
Rs
lakhs

GROSS PROFIT

21720.
65
5933.1
3
27653.
78
221.02
1181.1
29055.
9

10526.
29
940.55
11466.
84
187.06
496.21
12150.
11

8855.2
0
1583.2
0
10438.
40
40.13
126.52
10605.
05

20547.
52
1391.1
7
475.43

6958.3
7

7880.5
6

3501.31

967.47
350.24

493.14
26.45

190.3
57.92

747.33

410.27

536.02

121.47

53.3
23214.
75
5841.1
5

22.52
8708.8
7
3441.2
4
1236.0
8
2205.1
6

18.45
8954.6
2
1650.4
3

14.24

1958.9
3882.2
5

511.12
1139.3
1

3842.44
191.91
4034.35
0
278.28
4312.63

3885.24
427.39
148.49
278.9

88

7 Depreciation
E NET PROFIT (PBT)
8 Provision for taxation
9 Deferred tax liability
F
G
H
1
0
1
1
1
2
1
3
I

PROFIT (after tax) (PAT)

P and L balance b/f
BALANCE (available for
approprns)
Provision for Equity Dividend
Provision for Corporate tax on
Dividend
Provision for General
Reserves
Provision for Bonus shares
SURPLUS (carried over to
Balance sheet)

642.52
3239.7
3
691.07
321.87
2226.7
9
891.58
3118.3
7

398.32
1806.8
4
307.07
679.3

103.58
1035.7
3
122.00
401.92

28.16
250.74
32.61
0.00

820.47
223.79
1044.2
6

511.81
149.88

218.13
0.00

661.69

218.13

142.44

130.5

66.59

58.34

23.66

22.18

11.32

9.91

30.00
330.00
2952.2
7
2952.2
8

891.58

223.78

149.88

891.58

891.58

891.58

4.7 Cash flows Statements of the

Co.(3 yrs)
Cash Flow Statement for the
year ended 31st March

31.3.11

31.3.10

2010-11
Rs lacs

2009-10
Rs lacs

31.03.0
9
200809
Rs lacs

Cash Flow from Operating Activities

Net Profit After Tax

2226.80

820.46

511.81

Provision For Income Tax

Provision For Deferred Tax
Depreciation
Interest
Foreign Exchange Fluctuation

691.07
321.87
642.52
1658.49
8.58

307.07
679.30
398.32
1097.46
-

122.01
401.92
103.58
406.55

Operating Profit before Working Capital

Adjustments

5549.33

3,302.61

Adjustments for :

89

1,545.8
7

Adjustments for :
(Increase)/ Decrease in Inventories
(Increase)/ Decrease in Trade and other
receivables
Increase)/ (Decrease) in Trade Payables &
others

Cash Generated from Operations

Direct Taxes Paid
Fringe Benefit Tax Paid

Net Cash Flow from Operations

B

3569.42

1,393.10

6484.30

310.20

-400.45

-481.02

1,205.2
9
1,786.0
9
1,447.1
3

1,738.69
118.01
3.99

1.62
30.00
2.61

1,616.69

-30.99

4904.84
307.07

5211.91

Cash Flow from Investing Activities

Subsidy Received

7,763.74

Investments

Net Cash used in Investing Activities

7392.80

6,116.35

122.80

0
-425.82
14273.4
0

491.20
424.91

Purchase of Fixed Assets

Sale of Fixed Assets
Capital work in Progress

2136.29
133.48
4244.49
1145.50

1,647.39

15
-4,023
-1,094

0.00
5,101.7
9

Cash Flow from Financing Activities

Share Capital
Share Premium
Share Application Money
Proceeds from Long Term Borrowings
Repayment of Long Term Borrowings
Repayment of Unsecured Loans
Increase / (Decrease) in working Capital
Finance
Dividends Paid (Including Tax thereon)
Interest Paid
Preliminary Expenses

3,934.07
-

1610.23

-152.68
1658.49

388.25
1,246.4
0
0.91
5,255.9
8
-42.34

-77.91
1,097.46
1.62

90

-68.25
-401.27
-1.62

Foreign Exchange Fluctuation

13646.6
4

3,799.23

6,378.0
6

1041.93

-700.43

1245.2
8

OB

672.53

1,372.96

CB

1714.46

672.53

Net Cash Flow from Financing Activities

Net Increase /(Decrease) in Cash and Cash
D Equivalents
Cash and Cash Equivalents at the
Beginning of the Year
Cash and Cash Equivalents at the End of
the Year

4.8 Funds Flow Statements of

the Co. ( 3 yrs)
Funds flow
statement
S
N

Heads

2010-11
Cash flow
4/10 to
03/11
Rs. Lakhs

2009-10
Cash
flow
4/09 to
03/10
Rs.
Lakhs

2008-09
Cash
flow
4/08 to
03/09
Rs. Lakhs

91

127.68
1,372.9
6

L I A

B I L I T I E S

1 SHARE CAPITAL
Equity share capital (paid up)
Total 1
2 RESERVES AND SURPLUS
General Reserve
Share premium
Investment subsidy
Profit and Loss Account
(Surplus)
Total 2
Net Worth (1 & 2 )
3 SECURED LOANS
Term Loans from Bank:
Cash Credit from Bank
Vehicle Loans:
Total 3
4 UNSECURED LOANS
Unsecured Loans
others
Buyers credit
Total 4
5 DEFERRED TAX LAIBILITY

GRAND TOTAL (L)

A

122.80

718.25

0.00

122.80

718.25

0.00
0.00
0.00

0.00
491.20
0.00

30.00
1246.40
15.00

2060.70
2060.70
2060.70

667.79
1158.99
1281.79

73.91
1365.31
2083.56

3,096.06
2,310.45
40.65

2,071.95
1,964.27
71.28

4,208.94
852.93
10.11

5,447.16

4,107.50

5,071.98

1610.23
-389.52
8789.94
10,010.6
5

0
251.47
0

-42.34
187.15
0

251.47

144.81

321.87

679.30

401.92

17,840.3
8

6,320.06

7,702.27

4,022.59
103.58
3,919.01

4,244.50
5,596.22

7,763.73
398.32
7,365.41
1,649.03
5,716.38

1,145.50

0.00

0.00

1 FIXED ASSETS
Gross Block
Depreciation
NET BLOCK
Capital works in progress
Tot a l 1
2 INVESTMENTS

0.00

1,987.03
635.31
1,351.72

1,095.83
5,014.84

92

CURRENT ASSETS , LOANS AND

3 ADVANCES
INVENTORIES
Raw Materials
Packing materials
Stores, Spare Parts
Finished Products
Work in Process
Sub total
SUNDRY DEBTORS
Accounts Receivables
Subsidy Receivables
Sub total
CASH AND BANK BALANCES
Cash on hand
Bank Balances with Scheduled
Banks:
in CurrentAccounts
in Deposit Accounts
Sub total
LOANS AND ADVANCES
Advances recoverable
Advances to Suppliers
Advances to Capital jobs
Security Deposits
Duties and taxes
others
Sub total
TOTAL 3 (CA)
CURRENT LIABILITIES AND
4 PROVISIONS
Current Liabilities
Sundry Creditors- Capital
Sundry Creditors- Expenses
Sundry Creditors- Suppliers
Sundry Creditors-- FLCs
Buyers credit
Dealers deposits
Duties and taxes
Other Liabilities
Sub total
Provisions
Provision for Income(Corporate)
tax
Provision for Equity dividend

1,976.52
143.41
268.39
1,222.06
-40.96
3,569.42

817.13
79.76
0.00
223.96
272.26
1,393.11

1,017.43
61.33
0.00
181.71
-55.20
1,205.27

2,050.34
486.82

966.83
-442.39

255.69
555.68

2,537.16

524.44

811.37

2.67

0.3

-10.27

175.31
863.94
1,041.92

-1106.15
405.41
-700.44

1203.46
52.1
1,245.29

2130.29
202.39
1082.32
532.14

0
-925.07
222.61
-132.18

0
887.29
-120.85
208.27

3,947.14
11,095.6
4

-834.64

974.71

382.47

4,236.64

-314.74
-50.63
-35.08

-245.68
47.58
-282.93

530.83
3.02
916.31

-400.45

-481.03

1,450.16

384.00
13.42

185.06
74.77

89.40
9.65

93

Sub total
TOTAL 4 (CL)
Net Current Assets (3-4)

GRAND TOTAL (A)

397.42
-3.03
11,098.6
7

259.83
-221.20

99.05
1,549.21

603.67

2,687.43

17,840.
39
17,840.3
8

6,320.0
5

7,702.2
7

6,320.06

7,702.27

4.9 DSCR CALCULATIONS

(Till the end of the year by which term loan Is proposed to be repaid)
(Rs. In Crores)
Year

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Cover

94

Profit after tax

12.18

28.77

35.96

42.84

45.65

49.68

53.78

57.58

61.12

64.03

Depreciation
Preliminary
expenses written
off
Interest on term
loan
Total(A)
Service
Term loans
installments
Interest on term
loan
Total(B)
DSCR(A-B)
AVERAGE DSCR

3.64
0.08

5.56
0.27

12.12
0.36

17.05
0.36

16.20
0.36

15.43
0.36

14.73
0.36

14.11
0.36

13.55
0.36

13.04
0.36

5.28

8.97

17.33

18.25

14.47

10.69

7.01

3.98

1.94

0.56

21.19

43.55

65.77

78.50

76.68

76.16

75.88

76.03

76.97

78.00

3.48

12.15

22.40

31.25

30.59

29.27

27.77

19.10

13.00

8.86

5.28

8.97

17.33

18.25

14.47

10.69

7.01

3.98

1.94

0.56

8.77
2.42

21.12
2.06

39.73
1.66

49.50
1.59
2.34

45.06
1.70

39.96
1.91

34.78
2.18

23.08
3.29

14.94
5.15

9.42
8.28

DEBT/EQUITY

2.02(AS ON 31.03.09)

Sensitivity Analysis:
The sensitivity analysis is done to know the impact of fall in sales price
(furnish working along with
and increase in raw material price
process note)
Parameter
Average DSCR (%)
IRR (%)
BEP (%)
Normal
2.34
21.18
47.92
Raw material price increases 1.84
16.40
61.04
by 5%
Sales price falls by 5%
1.69
14.85
66.86
Raw material price increases 1.76
15.64
63.82
by 2.5% and sales price falls
by 2.5%
Internal Rate of Return 21.18%(Furnish workings along with the process note)

CAPITAL BUDGETING STATEMENTS:

1. years balance sheets, P/L,Differences, and Fixed Assets Diff.

95

CHAPTER-V
CAPITAL BUDGETING

5.1 Capital Budgeting--Theoretical

Sketch
Capital budgeting is a complex process, which may be
divided into six broad phases:

96

Planning,

Analysis, Selection, Financing, Implementation, and

Review.
The following chart shows the relationship among these phases
Planning

Analysis

Selection

Financing

Implementatio
n

Review

1.Idea generation:
The search for promising project ideas is the first step in
capital budgeting process. In other words the planning phase of
a firms capital budgeting process is concerned with articulation
of its broad investment strategy and the generation and
preliminary search of project proposals. Identifying a new
worthwhile project is a complex problem. It involves careful
study from many different angles. Ideas can be generated from

97

the sources like performance analysis of existing industries,

examination of input and output of various industries, review of
import and export data, study of the suggestions of financial
institutions and development agencies.

2.Evaluation or analysis:
In the preliminary screening when a project proposal
suggests that the project is prima facia worthwhile , then it is
required to go for evaluation analysis has to take from the
aspects like, marketing, technical, financial, economic, and
ecological analysis. This phase focuses on gathering data,
preparing , summarizing relevant information about various
alternatives projects available, which are being considered for
inclusion in the capital budgeting process. costs and benefits
are determined based on the information gathered of all
alternatives projects.

3.Selection:
Selection or rejection of project follows analysis phase.
Projects are evaluated by using a wide range of evaluation
techniques. Which are divided into traditional (non discounted)
and modern(discounted). Selection or rejection of a project
depends on the technique used to evaluate and its acceptance
rule. The acceptance rules are different for each and every
method.

4.Financing the selection project:

After the selection of the project the next step in financing.
Generally the amount required is known after selection of the
project under this phase financing arrangements have to be
made. There are two broad sources available such as

98

equity(shareholders)
and
debt(loan
debentures, working capital advances).

funds-term

loans,

5.Execution or implementation:
Planning is paper work and implementation is physically
implementing the selected project. Implementation of an
industrial project involves the stages like, engineering designs,
negotiations and contracting, construction, training and plant
commissioning. Translating an investment proposal from paper
work to concrete work is complex, time consuming and risky
tax.

6.Review of the project:

Once the project is converted from paper work into
concrete work, and then there is need to review the project.
Performance review should be done periodically, in which phase
actual performance is compared with the predetermined
performance.
Techniques of capital budgeting:
This section discuses the important evaluation techniques
for capital budgeting. Included in the methods of appraising an
investment proposal are those which are objective quantified
and based on economic costs and benefits.
The methods of appraising capital expenditure proposals
can be classified into two broad categories:
A. Traditional
B. Modern

A. Traditional techniques:

99

It is the one of the type of techniques. it was also

called as a non-discounted cash flow. The traditional techniques
are further subdivided into two, such as:
1. Payback period
2. ARR

1. Payback period:
The payback method is the traditional method of
capital budgeting. It is one of the most popular and widely
recognized technique of evaluating investment proposals.
Pay back method is the exact amount of time
required for a firm to its initial investment in a project as
calculated from cash inflows. it is the simplest and perhaps, the
most widely employed , quantitative method for appraising
capital expenditure decisions.
Advantages of Pay back:
It is very simple and easy to understand.
Cost involvement in calculating PBP is very less with the
comparison of modern methods.
Limitations of Pay back:
It ignores cash flows after payback period
It does not take into consideration time value of money.
There is no rational basis for setting a minimum payback
period.

2. ARR:
The average rate of return (ARR) method of
evaluating proposed optional expenditure is also known as the
accounting rate of return method. it is based upon accounting
information rather than cash flows. There is no unanimity
regarding the definition of the rate of return.

100

There are a number of alternative methods for calculating

the ARR. The most common usage of the average rate of return
expresses it as follows ARR.
Advantages of ARR method:
It is very simple to understand and easy to calculate.
Information can easily be drawn from accounting records.
It takes into account all profits of the projects life period.
Limitations of the ARR:
It ignores the concept of time value of money
It does not follows the fact profits can be reinvested.
It does not differentiate between the size of the
investment required for each project.

B. Modern techniques:
Modern techniques take into consideration
almost all the deficiencies of the traditional methods and they
consider all benefits and cost occurring during the the projects
entire life period.
Modern techniques again subdivided into three:
1.Net present value
2.Internal rate of return
3. Profitability index
1.Net present value:
It is the process of calculating present values of
each inflows using cost of capital as an appropriate rate of
discount and substract present value of cash outflows from the
present value of cash inflow and find the net present value ,
which may be positive or negative. It is also known as
discounted benefit cost ratio method.

101

Advantages of NPV method:

It takes into account the time value of money.
It uses all cash inflows occurring over the entire life period
of the project including scrap value of the old project.
It takes into consideration the changing discount rate.
It is particularly useful for the selection of mutually
exclusive projects.
Limitations of the NPV method:
It is difficult to understand when compared with PBP and
ARR.
It does not give satisfactiory results when the comparison
of two projects with different life periods.

2.Internal rate of return:

It is also known as yield on investment,
marginal efficiency of capital, marginal productivity, rate of
return and so on.
The internal rate of return is usually the rate of
return that a project earns. It is defined as the discount rate
which equates the aggregate present value of the net cash
inflows (CFAT)with the aggregate present value of cash outflows
of a project.
Advantages of IRR:
It takes into account the time value of money.
It considers cash flows throughout the project life.
It gives more psychological satisfaction to the user, since
it is calculated by the method of trail and error.

Limitations of IRR:

102

 It is difficult to understand and to calculate since it

involves tedious calculations.
It implies that profits can be reinvested at internal rate of
return, which is not logical.
It produces multiple rate of returns which can be
confusing.
3. Profitability index:
Profitability index measures the present value
of returns per rupee invested. This is another discounted cash
flow method of evaluating investment proposals. It is similar to
NPV method. Profitability index also known as discounted
benefit cost ratio.
Profitability index = present value cash inflows/ present value
of cash out
Advantages of PI:

It gives due consideration to time value of money.

It considers all cash flows to determine PI.
It can also be used to choose mutually exclusive projects
by calculating the incremental benefit cost ratio.
It is consist with the objectives maximization of
shareholders wealth.
Classification of capital budgeting decisions:

Based on Firms existence

New firms

Existing firms

Assets to be acquired

replacement and modernization

Capacity utilization in initial stages

expansion decision

Ancillary units

diversification decisions

103

5.2

Capital Budgeting practices in Industries

Capital Budgeting includes budgeting of capital expenditure on new

projects, expansion projects, diversification projects, and normal capital
expenditure.
At present our study relates to capital budgeting decisions ,in case of existing
firm regarding expansion projects .
While going for such capital budgeting decisions ,we pass through several
activities including feasibility study as follows.
Feasibility study is a test by which an Investment in a Project is evaluated.
There are three types of feasibility studies for projects by nature as follows:
1. Market feasibility
2. Technical feasibility
3. Financial feasibility.
MARKET FEASIBILITY:
For conducting market feasibility, the details of the type
of product proposed in the Project is important.
If proposed product in a new country is successfully marketed
in other countries, then its market feasibility is assessed by comparing broad
economic and cultural indicators in both the countries.
Market feasibility for a proposed product which results in increase in existing
capacity will be different.
The market feasibility study for a project selling in the market consists of:
Study of economic factors and indicators:
There must be a detailed study of economic factors and indicators of the
products of the Industry .
Demand estimation:
Projection of potential demand is very crucial step in the project feasibility
study.

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These include:
End user profile
Study of influencing factors
Regional, national and export market potential
Infrastructure facilities facilitating demand
Demand forecasting
Supply estimation:
Basing on the data collected and available ,supply from the Manufacturing
firms and the market must be estimated.
Identification of critical success factors:
There must be identification of critical success factors such as :
1. Availability of raw materials
2. Transportation facilities
3. Power facilities
4. Supply of skilled and semiskilled labourers etc.

Estimation of demand supply gap. :

Existing demand and supply have to be compared with new or changed

demand and supply with suitable projections that will result in the demand
supply gap bridged.
Technical Feasibility:
The factors considered are
1. Availability of commercially viable technology and its alternatives.
2. Suitable of the technology to local environment and its usefulness is to be
assessed by the quality of material, power, skilled labor, environmental
conditions, water supply etc.
3. Technological innovation rate of the product.

105

4. Production process.
5. Capacity utilization rate and its justification.
6. Availability of raw material and other resources.
Example: power, gas, water, labour etc.
7. Plant and equipment with fabrication facilities.
8. Feasible product mix with possibilities of joint and by- products.
9. Facilities for effluent disposal.
10.The commercial side of technical feasibility has to be studied along with
the technical aspects so that commercial viability of the technology can
be evaluated.
FINANCIAL FEASIBILITY:
Demand and price estimates are determined from market
feasibility.
Project costs along with operating costs are determined from technical
feasibility base
The estimates have to be made keeping in view:
(a) Tax implications of prevailing tax laws,
(b) Financial costs involved from financing alternatives for the project.
Financial feasibility requires detailed financial analysis based on certain
assumptions, workings and calculations such as:
1. Projections for prices of products ,cost of various resources for
manufacturing goods, capacity utilization. The actual data of comparable
projects are included in the estimates.
2. Period of the project is estimated from the basis of product life cycle,
business cycle, period of debt funds etc. and value of the products at the
terminal period of estimation are forecasted.
3. Financial alternatives are considered and a choice of financing mix is
made with regard to cost of funds and repayment schedules.

106

4. Financial statements prepared in the project feasibility report viz

.Projected profit and loss account, balance sheet and cash flow statement
and repayment schedule.
5. Basic workings in different schedules like interest and repayment
schedule, net working capital schedule, working capital loan, interest on
loans and repayment schedule, depreciation schedule for Income tax , and
depreciation schedule for companies Act purpose.
6. Financial indicators calculated from data available in various financial
statements.

RATIOS USED:
Basic financial parameters used for judging viability of the
project are Debt service coverage ratio (DSCR), net present value (NPV),
or internal rate of return (IRR). Some firms use payback period, interest
coverage ratio as additional tools.
Interest coverage indicates timely and safe payment of interest to
lenders of money.
Interest coverage ratio =

PAT + depreciation + interest

Interest

The ratio indicates how many times the operating cash flow before
interest
is earned against the
interest liability.
Debt service coverage ratio =

PAT + depreciation + interest

Interest + principal sum repayment

An average DSCR of 1.5 is considered good. It is safety indicator for

lenders of money.
RISK ASSESSSMENT: basic indicators of financial viability use profit or cash
flow estimates subject to risk or uncertainty. Evaluation of risk is necessary to
the adoption of break even and sensitivity analysis.

Financial budgets:

107

Industrial concerns or service companies prepare annual

budgets for their working operations with working results for working
capital budget. They compute production budget , sales budget ,expenses
budget and various product wise production and sales budgets. They are
prepared monthly, quarterly , half yearly, annually or periodically as they
require. They compare the actuals with the budgets, analyse the reasons
for variations and undertake rectification measures or revise the targets
suitably.
There are
concerns
profitability every day.

which prepare

daily budgets and review the

. They also prepare funds flow /cash flow budget for the next 7 to 10
years, to cover and examine repayments of loans and interest to the
Institutions promptly.
Master budget is prepared consolidating all the elementary budgets.
Flexible budgets are also prepared by Industries to enable readjustment of
production ,sales /marketing suitably from time to time.

Capital structure:
Capital structure determination is required not only at the
time of setting up of the project , but also during Project implementation
besides the periods of expansion and modernization.
The industrial economy encourages industries to expand their production
from time to time ,to get over the effect of cost inflation and gain advantages
of large scale production , of maximization of production from time to time.
Capital is required for land,building ,plant and machinery and other assets
invested as capital in the industries for production activities and for
achieving good working results.

5.3 FINANCIAL PROJECTIONS OF CAPITAL

PROJECTS:
In assessing the financial viability of a project it is necessary to look at the
forecasts of financial conditions and cash flows viz.

108

 Projected balance sheet

Projected cash flow.
PROJECTED BALANCE SHEET:
THE BALANCE SHEET SHOWING VARIOUS PARTICULARS OF ASSETS
AND LIABILITY ACCOUNTS, reflect THE FINANCIAL CONDITION OF
the FIRM AT A GIVEN POINT OF TIME.
FORMAT OF BALANCE SHHET
LIABILITES

ASSETS

Share capital

Fixed assets

Reserves and surplus

Investments

Secured loans

Current assets, loans and advances

Unsecured loans

Miscellaneous expenditure and losses

Current liabilities and provisions

Liabilities side of balance sheet shows resources of finance employed by

the entity.
Assets side of balance sheet shows how funds have been utilized in the
business.

For preparing the projected balance sheet at the end of year n+1, the following
information is required.
Balance sheet at the end of year n
Projected income statement and distribution of earnings for year n+1

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 Sources of external financing proposed to be tapped in year n+1

Expected changes in current liabilities in year n+1
Proposed repayment of debt capital during year n+1
Outlays on and the disposal of fixed assets during year n+1
Changes in level of current assets during n+1
Changes in preliminary expenses during year n+1

5.4 Project financial management

Investment decisions:
The Financial institutions who lend for the Projects to
the Industries generally assess payback period, IRR, sensitivity analysis,
debt equity ratio ,debt coverage ratio etc
The following are the primary and general financial statements insisted by
the project financial institutions for considering sanction of borrowings,
after Project appraisal:

110

1. Projected working results for the next 10 years, actuals

years and estimates for the current year

for the last 3

2. Profit and loss account for the tenure, on similar lines

3. Balance sheet as at the end of at the year of tenure, on similar lines
4. Cash flow/fund flow of all the years of tenure on similar lines.
5. Ratio analysis to determine the strength of the Project , financial
viability and loan repayment and interest payment capacity besides
ability to meet the contingencies
5. In view of cost inflation prevailing each year ,DCF techniques are adopted
to assess the NPV of the returns of the project are assessed during the
operational tenure.
6. The institutions are generally tempted to finance the projects which
indicate shorter payback period. Payback period is assessed by working out
the number of years in which the capital investment can be recovered from
the net working results of the undertakings. The duration time of the
project implementation and the gestation period should be as low as possible
to avail inflationary cost and other incidental costs besides reaping the
results as quickly as possible. IRR is assessed by the institution both for the
industry as whole and compared with that of the entity, to understand the
performance ability of the concern.

7. Stock exchanges help investors by providing flexibility in capital investment

and transferability depending upon operating results of the concerns from time
to time.
Capital budgeting also considers mergers and takeovers as a source of
funding Projects when the industries are affected b competition of the
larger industries.

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5.5 Capital Expenditure

Statements of the Co. ( 3 yrs)
Rs lakhs
S
N

Fixed Assets

Fixed
1 Land

CB
31.03.20
08

200809
Additio
ns

CB
31.03.20
09

200910
Additio
ns

CB
31.03.20
10

201011
Additio
ns

CB
31.03.20
11

Assets

2 Buildings

50.48

64.50

114.98

46.68

161.66

331.90

493.56

225.73

1325

1550.73

1821.8
0

3372.53

717.04

4089.57

112

533.91

2549.4
4

3083.35

5577.8
9

8661.24

697.32

9358.56

Electrical Installatoins

86.94

86.94

4.21

91.15

3 Furniture and Fixtures

3.04

9.81

12.85

6.63

19.48

28.5

47.98

4 Computers

5.14

6.43

11.57

11.20

22.77

15.34

38.11

62.85

67.41

130.26

212.60

342.86

192.71

535.57

881.15

4022.5
9

4903.74

7763.7
4

12667.4
8

1987.0
2

14654.5
0

601.57

1094.1
9

1695.76 -1647.4

48.37

4244.5
0

4292.87

601.57

1094.1
9

1695.76 -1647.4

48.37

4244.5
0

4292.87

1482.72

5116.7
8

6116.3
5

12715.8
5

6231.5
2

18947.3
7

3 Plant and Machinery

5 Trucks and Vehicles

sub total
Capital works in
progress
1 Buildidngs
2 Plant and Machinery

sub total

Grand total

6599.5

113

CHAPTER-VI

General Findings and Conclusions

6.1 Observations,
interpretation

Analysis and

114

This company has incurred capital expenditure during

several years as follows:

1.2008-2009

5116.78 lakhs

2009-2010

6116.35 lakhs

2010-2011

6231.52 lakhs

2. This consists of project expenditure as follows

2008-09
2009-10
Buildings
1821.80

2010-11
1325.00
717.04

Plant & Machinery

701.53
Total
7486.63

5664.83

3874.44
1418.57

Project in progress
4244.50
Net Total
6116.35

2549.44

1094.19

-1647.39

5116.78
6231.52

3. The Capital Expenditure is met from the following

sources

115

1.
2.
3.
4.

Equity
Equity --internal
accruals
Debt( Rupee
Term loans)
Others(USL,
Subsidy etc.,)
total

2008-09 200910
718.23
122.80
1365.31 1158.99

201011
0.00
2060.70

4208.94

2207.15 3096.06

2611.70

2627.41 1074.76

5116.78 6116.3 6231.5

5
2
4. Term loans sanctioned with the bank have a
moratorium upto one year.
5. The Rupee term loan is repayable in 40 quarterly
installments.
6. The Company has undertaken new projects, expansion
projects, diversification projects as explained above.
7. The projects containing detailed estimates of Capital
Expenditure have been submitted to the Bank for
appraisal, Evaluation and approval.
8. Detailed long term projections of Cash flow of the
Company have been submitted to the bank which contains
actuals for the last three years, estimates of the current
year and projections for the next 8 years covering the loan
repayment period.
9. The Bank has evaluated various financial ratios such as
debt Equity ,DSCR,PBP, etc.
10. The bank verifies repayment capability of the company.
11. The Bank approves Financing Capital Expenditure of the
projects as follows with the respective margins.
Buildings

35%

116

Machinery

25%

12. The Capital Expenditure Budgets of the company

consists of Short term , Medium term, Long term including
expansion projects ,Diversification projects, Modernizing
projects.
13. The Company also includes normal Capital Expenditure
towards
Furniture
Vehicle
Computer
Other normal machinery items

14. I have studied how the project reports are prepared

,appraised evaluated and implemented and how the
financial management take steps for day to day
administration and management in execution of the
projects containing Capital Budgets.

15. The Company also Reviews from time to time the actual
Capital Expenditure incurred and take corrective steps for
mitigating the variations.

16. The Company also provides for contingency in the

Capital Expenditure Budgets which are later absorbed in
the course of time.

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6.2 CONCLUSIONS AND SUGGESTIONS

The organization in which I have undertaken project study
titled capital budgeting is a growing large industrial organization
implementing various new projects, diversification projects and
expansion projects.

The company has availed rupee term loan and

foreign currency term loans from the bank as one of the
resources.

To meet the equity part they have raised share

capital as well as met from internal accruals arising from
operations from time to time.

The company has been repaying term loans and

paying interest regularly and there are no defaults.
The company is continuously paying
shareholders every year.

dividends to the

With a view to avail the concessional rate of interest

prevailing in foreign loans, they have resorted to availing
foreign currency loans for shorter periods.

118

I had the opportunity of understanding the

practices in industries in regard to capital budgeting including
project finance management, project evaluation, techniques,
capital budgeting procedures, investment decisions.

I utilised the opportunity to understand the

capital investment decisions, appraisal by the banks, ratio
analysis and evaluation made by them.

I had the privilege of studying the overall

financial management practices in industries, project finance
management and capital budgeting statements of a successful
industrial organization with the assistance of good finance
management.

119