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Working Capital Management at Kirloskar Pneumatics Co. Ltd. by Rajesh Menon
Working Capital Management at Kirloskar Pneumatics Co. Ltd. by Rajesh Menon
ON
WORKING CAPITAL MANAGEMENT
AT
Submitted By:
Rajesh Menon (M.B.A-II)
In Partial Fulfillment for Degree of Master of Business
Administration during the year 2006-07
VISHWAKARMA INSTITUTE OF MANAGEMENT, PUNE.
ACKNOWLEDGEMENT
It is a matter of great satisfaction and pleasure to present this report
on Working Capital Management of KIRLOSKAR PNUEMATIC CO. LTD.
(KPCL), Pune
This project report could not have been completed without the
guidance of our director, Dr. SHARAD L. JOSHI & project guide Prof.
SMITA SOVANI. Their timely help & encouragement helped me to complete
this project successfully.
INDEX:No.
Particulars:
Page No:
Executive Summary
Company Profile
Theoretical Background
Research Methodology
60
Data Analysis
61
Findings
92
Recommendations
93
Bibliography
94
EXECUTIVE SUMMARY
Company being established as Kirloskar pneumatic company
limited in 1958, made an entry with manufacture of air compressor and
pneumatic tools & soon diversified by including air conditioning &
transmission equipments.
At Kirloskar Pneumatic up to date manufacturing facilities, including
CNC machines, Stringent quality control procedures and systems, research
& development, foundry, heat treatment facilities, screw rotor machines,
gear grinding machines, metallurgical laboratories, tool room and integrated
computer system, have all been set up with sole idea of achieving the
highest standards of quality & performance.
My Project is the study of working capital management.
The study was conducted at the head office of Kirloskar Pneumatic
Co. Ltd. Pune.
The project was of 2 months duration. During the project I
interviewed the executives & staff to collect the data, & also made use of
company records & annual reports. The data collected were then compiled,
tabulated and analyzed.
Working Capital Management is a very important facet of financial
management due to:
Investments in current assets represent a substantial portion of
total investment.
Investment in current assets & the level of current liabilities have to
be geared quickly to change sales.
Some the points to be studied under this topic are:
How much cash should a firm hold?
What should be the firms credit policy?
How to & when to pay the creditors of the firm?
How much to invest in inventories?
OBJECTIVES:
1) To identify the financial strengths & weakness of the company.
2) Through the net profit ratio & other profitability ratio, understand the
profitability of the company.
3) Evaluating company s performance relating to financial statement
analysis.
4) To know the liquidity position of the company with the help of current
ratio.
5) To find out the utility of financial ratio in credit analysis & determinig
the financial capacity of the firm.
OVERVIEW OF KPCL
Established in 1958, Kirloskar pneumatic company limited started with the
manufacture of air compressors and pneumatic tools. Immediately
thereafter the company expanded its activated in the field of air-conditioning
and refrigeration amchiney. Further diversification in the manufacture of
hydraulic power transmission equipment followed.
KPLC is among the first few companies in India to secure the ISO
9001certification in all its operations.
Product
groups
FINANCE DEPARTMENT
Major
Major
customers
competito
Market share
rs
in %
25
Screw
well drilling
Atlas
compressors
operation.
Copco,
diesel driven
Approx.
ELGI.
at 10KG/CM2
Screw
Textile,
Atlas
compressors
granites
copco,
electric motor
industries.
ELGI
Balanced
Power,
CPT,
opposed
Petrochemic
Ingersol
piston
al, Cement,
rand.
compressor
Steel
driven at 3 to
Industries.
10
driven at 7 to
10KG/CM2.
55
9 KG/CM2.
Vertical
All small-
reciprocating
scale
water culled.
industries.
IR, ELGI
20
Just started.
Driven at 7 to
9 KG/CM2
Centrifugal
Cement,
Atlas
compressor
Steel, Textile
copco,
Driven by 7
industries.
Demag.
All railways.
ELGI
KG/CM2 &
above.
Rlwys brake
60
Compressor.
Organization Chart
Mr.Suhas Kolhatkar (Vice President)
General
Ledger and
Branches
Cost Accounts
Drs. For Sales (Sec.)
Excise, Customs
Octroi, Insurance
& Internal Audit
Managers
Asst. Managers
Officers
INTRODUCTION:
10
Symbolically, it means,
Net Current Assets = Current Assets
Current Liabilities.
11
In short, the cash and credit in the business, is comparable to the blood in
the human body like finance s life and strength i.e. profit of solvency to the
business enterprise. Financial management is called upon to maintain
always the right cash balance so that flow of fund is maintained at a
desirable speed not allowing slow down. Thus enterprise can have a
balance between liquidity and profitability. Therefore the management of
working capital is essential in each and every activity.
12
The Goal of Capital Management is to manage the firm s current assets &
liabilities, so that the satisfactory level of working capital is maintained.
If the firm can not maintain the satisfactory level of working capital, it is
likely to become insolvent & may be forced into bankruptcy. To maintain the
margin of safety current asset should be large enough to cover its current
assets.
Main theme of the theory of working capital management is interaction
between the current assets & current liabilities.
13
defined by 2 ways,
CURRENT
LIABILITIES
14
If the firm wants to increase profitability, the risk will definitely increase.
If firm wants to reduce the risk, the profitability will decrease.
The extent to which profit can be earned is dependent upon the magnitude
of sales. Sales are necessary for earning profits. However, sales do not
15
convert into cash instantly; there is invariably a time lag between sale of
goods and the receipt of cash. WC management affect the profitability and
liquidity of the firm which are inversely proportional to each other, hence
proper balance should be maintained between two.
To convert the sale of goods into cash, there is need for WC in the form
of current asset to deal with the problem arising out of immediate realization
of cash against good sold. Sufficient WC is necessary to sustain sales
activity. This is referred to as the operating or cash cycle.
16
17
If you ...
Collect receivables
(debtors) faster.
Collect receivables
(debtors) slower.
Get better credit (in
terms of duration or
Then ...
You release cash from
the cycle.
Your receivables soak
up cash.
You increase your
cash resources.
faster.
Move inventory
(stocks) slower.
18
Operating cycle:
The working capital cycle refers to the length of time between the firms
paying the cash for materials, etc., entering into production process/stock &
the inflow of cash from debtors (sales), suppose a company has certain
amount of cash it will need raw materials. Some raw materials will be
available on credit but, cash will be paid out for the other part immediately.
Then it has to pay labour costs & incurs factory overheads. These three
combined together will constitute work in progress. After the production
cycle is complete, work in progress will get converted into sundry debtors.
Sundry debtors will be realized in cash after the expiry of the credit period.
This cash can be again used for financing raw material, work in progress
etc. thus there is complete cycle from cash to cash wherein cash gets
converted into raw material, work in progress, finished goods and finally into
cash again. Short term funds are required to meet the requirements of
funds during this time period. This time period is dependent upon the length
of time within which the original cash gets converted into cash again. The
cycle is also known as operating cycle or cash cycle.
19
working capital.
Thus the working capital cycle helps in the forecast, control &
management of working capital. It indicates the total time lag & the relative
significance of its constituent parts. The duration may vary depending upon
the business policies. In light of the facts discusses above we can broadly
classify the operating cycle of a firm into three phases viz.
1 Acquisition of resources.
2 Manufacture of the product and
3 Sales of the product (cash / credit).
First and second phase of the operating cycle result in cash outflows, and
be predicted with reliability once the production targets and cost of inputs
are known.
However, the third phase results in cash inflows which are not certain
because sales and collection which give rise to cash inflows are difficult to
forecast accurately.
Operating cycle consists of the following:
Conversion of cash into raw-materials;
Conversion of raw-material into work-in-progress;
Conversion of work-in-progress into finished stock;
Conversion of finished stock into accounts receivable through sales;
and
Conversion of accounts receivable into cash.
In the form of an equation, the operating cycle process can be expressed
as follows:
20
Operating cycle = R + W + F + D
21
The firm is therefore, required to invest in current assets for smooth and
uninterrupted functioning.
RMCP
WIPCP
FGCP
ICP
RCP
Payables (PDP)
NOC
GOC
22
Calculations:
On the basis of financial statement of an organization we can calculate the
inventory conversion period. Debtors / receivables conversion period and
the creditors conversion period and based on such calculations we can find
out the length of the operating cycle (in days) both gross as well as net
operating cycle.
As mentioned above, on the basis of information presented in the Balance
sheet and CMA statement of Kirloskar Pneumatics Company Limited, the
length of gross as well as net operating cycle is calculated as follows:
23
Particular
2001-02
2002-03
2003-04
2004-05
9132.58
11099.0
12084.0
15771.5
3597.64
3115.99
3336.02
3681.33
Prime
12730.2
14215.0
15420.0
19452.5
Cost
2103.89
1977.51
2080.21
2733.89
Cost of
14834.1
16192.5
17500.2
22186.8
Productio
284.22
1003.23
1025.54
1261.56
1003.23
1025.54
1261.56
1327.47
14115.1
16170.2
17264.2
22120.9
286.13
330.66
115.71
260.64
330.66
115.71
260.64
315.02
Cost of
14070.5
16385.1
17119.3
22066.5
Goods
s
Material
Cost
Labour
Cost
Direct
Expenses
Manufactu
ring Exp.
n
+Opening
WIP
- Closing
WIP
Cost of
Goods
Produced
+Opening
FG
-Closing
FG
Sold
24
a. RMCP =
Average Stock
x 360 = 54 days
Annual Consumption
b. WIPCP =
Average Stock
x 360 = 21 days
Cost of Production
c. FGCP =
Average Stock
x 360 = 5 days
87 = 116 days
= 59 days
2 WIPCP = 24 days
3 FGCP
= 4 days
25
1 RMCP
= 48 days
2 WIPCP = 23 days
3 FGCP
= 5 days
162 = 95 days
a. RMCP
= 64 days
b. WIPCP = 27 days
c. FGCP
= 9 days
137 = 75 days
26
The need for current assets arises because of the operating cycle. The
operating cycle is a continuous process and, therefore, the need for current
assets is felt constantly. But the magnitude of current assets needed is not
always a minimum level of current assets which is continuously required by
the firm to carry on its business operations. This minimum level of current
assets is referred to as permanent, or fixed, working capital. It is permanent
in the same way as the firms fixed assets are. Depending upon the changes
in production and sales, the need for working capital, over and above
permanent working capital, will fluctuate. For example, extra inventory of
finished goods will have to be maintained to support the peak periods of
sales, and investment in receivable may also increase during such periods.
On the other hand, investment in raw material, work-in-process and finished
goods will fall if the market is slack.
The extra working capital, needed to support the changing production and
sales activities is called FLUCTUATING, or VARIABLE, or TEMPORARY
working capital. Both kinds of working capital
PERMANENT and
The firm should maintain a sound working capital position. It should have
adequate working capital to run its business operations. Both excessive as
27
well as inadequate working capital positions are dangerous from the firm s
point of view. Excessive working capital not only impairs the firm s
profitability but also result in production interruptions and inefficiencies.
Inadequate working capital is also bad and has the following dangers:
28
The firm loses its reputation when it is not in a position to honour its
short-term obligations.
29
Availability of Credit
Operating Efficiency
Price Level Changes
Nature of Business:
Working capital requirements of a firm are basically influenced by the
nature of its business. Trading and financial firms have a very small
investment in fixed assets, but require a large sum of money to be invested
in working capital. Retail stores, for example, must carry large stocks of a
variety of goods to satisfy varied and continuous demand of their
customers. Some manufacturing business, such as tobacco manufacturers
and construction firm, also have to invest substantially in working capital
and a nominal amount in fixed assets. In contrast, public utilities have a
very limited need for working capital and have to invest abundantly in fixed
assets. Their working capital requirements are nominal because they may
have only cash and supply services, not products. Thus, no funds will be
tied up in debtors and stock (inventories). Working capital requires most of
the manufacturing concerns to fall between the two extreme requirements
of trading firms and public utilities. Such concerns have to make adequate
investment in current assets depending upon the total assets structure and
other variables.
30
Seasonal fluctuations not only affect working capital requirements but also
create production problems for the firm. During periods of peak demand,
increasing production may be expensive for the firm. Similarly, it will be
more expensive during slack periods when the firm has to sustain its
working force and physical facilities without adequate production and sales.
A firm may, thus, follow a policy of steady production, irrespective of
seasonal changes in order to utilize its resources to the fullest extent. Such
31
a policy will mean accumulation of inventories during off season and their
quick disposal during the peak season.
The increasing level of inventories during the slack season will require
increasing funds to be tied up in the working capital for some months.
Unlike cyclical fluctuations, seasonal fluctuations generally conform to a
steady pattern. Therefore, financial arrangements for seasonal working
capital requirements can be made in advance. However, the financial plan
or arrangement should be flexible enough to take care of some abrupt
seasonal fluctuations.
32
Credit Policy
The credit policy of the firm affects the working capital by influencing the
level of debtors. The credit terms to be granted to customers may depend
upon the norms of the industry to which the firm belongs. But a firm has the
flexibility of shaping its credit policy within the constraint of industry norms
and practices. The firm should be discretion in granting credit terms to its
customers. Depending upon the individual case, different terms may be
given to different customers. A liberal credit policy, without rating the creditworthiness of customers, will be detrimental to the firm and will create a
problem of collections. A high collection period will mean tie- up of large
funds in book debts. Slack collection procedures can increase the chance
of bad debts.
In order to ensure that unnecessary funds are not tied up in debtors, the
firm should follow a rationalized credit policy based on the credit standing of
33
Availability of Credit
The working capital requirements of a firm are also affected by credit
terms granted by its creditors. A firm will need less working capital if liberal
credit terms are available to it. Similarly, the availability of credit from banks
also influences the working capital needs of the firm. A firm which can get
bank credit easily on favorable condition will operate with less working
capital than a firm without such a facility.
Operating Efficiency
The operating efficiency of the firm relates to the optimum utilization of
resources at minimum costs. The firm will be effectively contributing in
keeping the working capital investment at a lower level if it is efficient in
controlling operating costs and utilizing current assets. The use of working
capital is improved and pace of cash conversion cycle is accelerated with
operating efficiency. Better utilization of resources improves profitability
and, thus, helps in releasing the pressure on working capital. Although it
may not be possible for a firm to control prices of materials or wages of
labour, it can certainly ensure efficiency and effective use of its materials,
labour and other resources.
34
REQUIREMENTS OF FUNDS
Fixed Capital
Working Capital
Preliminary Expenses
Raw Material
Inventories
Goods in Process
Others
35
Long-term source
(Fixed working capital)
Short-term source
(Temporary working capital)
a) Factoring
b) Floating of Debentures
b) Bill discounting
c) Bank overdraft
d) Issue of shares
d) Trade credit
e) Cash credit
f) Commercial paper
If you have insufficient working capital and try to increase sales, you can
easily over-stretch the financial resources of the business. This is called
overtrading. Early warning signs include:
36
Ordinary shares are also known as equity shares and they are the most
common form of share in the UK. An ordinary share gives the right to its
owner to share in the profits of the company (dividends) and to vote at
general meetings of the company.
Since the profits of companies can vary wildly from year to year, so can the
dividends paid to ordinary shareholders. In bad years, dividends may be
nothing whereas in good years they may be substantial.
The nominal value of a share is the issue value of the share - it is the value
written on the share certificate that all shareholders will be given by the
company in which they own shares.
The market value of a share is the amount at which a share is being sold on
the stock exchange and may be radically different from the nominal value.
When they are issued, shares are usually sold for cash, at par and/or at a
premium. Shares sold at par are sold for their nominal value only - so if
Rs.10 share is sold at par, the company selling the share will receive Rs. 10
for every share it issues.
If a share is sold at a premium, as many shares are these days, then the
issue price will be the par value plus an additional premium.
37
DEBENTURES
Debentures are loans that are usually secured and are said to have either
fixed or floating charges with them.
38
your sales ledger operations and to use more sophisticated credit rating
systems. Once you have set up a factoring arrangement with a Factor, it
works this way:
Once you make a sale, you invoice your customer and send a copy of the
invoice to the factor and most factoring arrangements require you to factor
all your sales. The factor pays you a set proportion of the invoice value
within a pre-arranged time - typically, most factors offer you 80-85% of an
invoice's value within 24 hours.
The major advantage of factoring is that you receive the majority of the
cash from debtors within 24 hours rather than a week, three weeks or even
longer.
INVOICE DISCOUNTING
Invoice discounting enables you to retain the control and confidentiality of
your own sales ledger operations.
The client company collects its own debts. 'Confidential invoice
discounting' ensures that customers do not know you are using invoice
discounting as the client company sends out invoices and statements as
usual. The invoice discounter makes a proportion of the invoice available to
you once it receives a copy of an invoice sent.
Once the client receives payment, it must deposit the funds in a bank
account controlled by the invoice discounter. The invoice discounter will
then pay the remainder of the invoice, less any charges.
The requirements are more stringent than for factoring. Different
invoice discounters will impose different requirements.
OVERDRAFT FACILITIES
Many companies have the need for external finance but not necessarily on
a long-term basis. A company might have small cash flow problems from
39
time to time but such problems don't call for the need for a formal long-term
loan. Under these circumstances, a company will often go to its bank and
arrange an overdraft. Bank overdrafts are given on current accounts and
the good point is that the interest payable on them is calculated on a daily
basis. So if the company borrows only a small amount, it only pays a little
bit of interest. Contrast the effects of an overdraft with the effects of a loan.
TRADE CREDIT
This source of finance really belongs under the heading of working capital
management since it refers to short-term credit. By a 'line of credit' they
mean that a creditor, such as a supplier of raw materials, will allow us to
buy goods now and pay for them later. Why do they include lines of credit
as a source of finance? They ll, if they manage their creditors carefully they
can use the line of credit they provide for us to finance other parts of their
business.
Take a look at any company's balance sheet and see how much they have
under the heading of Creditors falling due within one year' - let's imagine it
is Rs. 25,000 for a company. If that company is allowed an average of 30
days to pay its creditors then they can see that effectively it has a short
term loan of Rs. 25,000 for 30 days and it can do whatever it likes with that
money as long as it pays the creditor on time.
40
CASH MANAGEMENT
41
CASH MANAGEMENT:
Cash management is one of the key areas of WCM. Apart from the fact
that it is the most liquid asset, cash is the common denominator to which all
current assets, that is, receivables & inventory get eventually converted into
cash.
Cash is oil of lubricate the ever-turning wheels of business: without it the
process grinds to a shop.
42
B. Precautionary motive:
A firm has to pay cash for the purposes which can not be predicted or
anticipated. The unexpected cash needs at the short notice may be due to:
Floods, strikes & failure of customer
Slow down in collection of current receivables
Increase in cost of raw material
Collection of some order of goods as customer is not satisfied
The cash balance held in reserves for such random and unforeseen
fluctuations in cash flows are called as precautionary balance. Thus,
precautionary cash provides a cushion to meet unexpected contingencies.
The more unpredictable are the cash flows, the larger is the need for such
balance.
C. Speculative motive:
It refers to the desire of the firm to take advantage of opportunities which
present themselves at unexpected moment & which are typically outside
the normal course of business. If the precautionary motive is defensive in
nature, in that firms must make provisions to tide over unexpected
contingencies, the speculative motive represents a positive and aggressive
approach. The speculative motive helps to take advantages of:
An opportunity to purchase raw material at reduced price on payment
of immediate cash.
A chance to speculate on interest rate movements by buying securities
when interest rates are expected to decline.
Make purchases at favorable price.
Delay purchase of raw material on the anticipation of decline in prices.
43
44
45
46
47
float . When the cheques are deposited with bank the firm
increases the balance in its books. The balance in the bank s
book however is cleared. The amount of cheques deposited
by the firm in the bank but not cleared is referred to as
collection float . Difference between payment float and
collection float is called as net float . When the net float is
positive the balance in the books of bank is higher than the
balance in the books of firm. When the firm enjoys the positive
float (net) it may issue cheques even if it have an overdrawn
bank account in its books. Such an action is referred to as
playing the float It is considered risky.
Accruals: accruals can be defined as current liabilities that
represent a service or goods received by a firm but not yet
paid for. For example remuneration to employee s that render
services in advance and receive payment later. In a way, they
extend credit to the firm for a period at the end of which they
are paid. Weekly is more important as compared to monthly.
Other examples, rent to lessors, taxes to government.
48
the one end they are invested in term deposit in bank and on other end are
invested in equity shares. They can be invested in several options like
Units of the unit 1964 scheme: This is the most important mutual fund
scheme in India. It has the following featuresIt is a open ended scheme as it accepts funds from investors & also permits
to withdraw their investments.
The units have face value of Rs. 10.00/- The sale & purchase price of units
are not squarely based on the net asset per unit, as should be the case for
a truly open ended scheme.
49
DEBTORS MANAGEMENT.
50
51
52
information.
Credit terms granted to customers
Although sales representatives work under the premise that all sales
are good (particularly, one may add, where commission is involved!),
the credit manager must take a more dispassionate view. They must
balance the sales representative's desire to extend generous credit
terms, please customers and boost sales, with a cost/benefit
analysis of the impact of such sales, incorporating the likelihood of
payment on time and the possibility of bad debts. Where a customer
does survive the credit checking process, the specific credit terms
offered to them will depend upon a range of factors. These include:
Order size and frequency: companies placing large and/or frequent
orders will be in a better position to negotiate terms than firms
ordering on a one-off basis.
Market position: the relative market strengths of the customer and
supplier can be influential. For example, a supplier with a strong
market share may be able to impose strict credit terms on a weak,
fragmented customer base.
Profitability: the size of the profit margin on the goods sold will
influence the generosity of credit facilities offered by the supplier. If
margins are tight, credit advanced will be on a much stricter basis
than where margins are wider.
Financial resources of the respective businesses: from the
supplier's perspective, it must have sufficient resources to be able to
offer credit and ensure that the level of credit granted represents an
efficient use of funds. For the customer, trade credit may represent
an important source of finance, particularly where finance is
constrained. If credit is not made available, the customer may switch
to an alternative, more understanding supplier.
Industry norms: unless a company can differentiate itself in some
manner (e.g., unrivalled after sales service), its credit policy will
53
54
Factoring an evaluation
Key elements:
55
Recourse factoring, on the other hand, is where the business takes the
bad debt risk. With 80% of the value of debtors paid up front (usually
electronically into the clients bank account, by the next working day), the
remaining 20% is paid over when either the debtors pay the factor (in the
case of recourse factoring), or, when the debt becomes due (non-recourse
factoring). Factors usually charge for their services in two ways:
administration fees and finance charges. Service fees typically range from
0.5 - 3% of annual turnover. For the finance made available, factors levy a
separate charge, similar to that of a bank overdraft.
Advantages
provides faster and more predictable cash flows;
finance provided is linked to sales, in contrast to overdraft limits,
which tend to be determined by historical balance sheets;
growth can be financed through sales, rather than having to resort to
external funds;
the business can pay its suppliers promptly (perhaps benefiting from
discounts) and because they have sufficient cash to pay for stocks,
the firm can maintain optimal stock levels;
management can concentrate on managing, rather than chasing
debts;
the cost of running a sales ledger department is saved and the
company benefits from the expertise (and economies of scale) of the
factor in credit control
.
56
Disadvantages
the interest charge usually costs more than other forms of short-term
debt;
the administration fee can be quite high depending on the number of
debtors, the volume of business and the complexity of the accounts;
By paying the factor directly, customers will lose some contact with
the supplier. Moreover, where disputes over an invoice arise, having
the factor in the middle can lead to a confused three-way
communication system, which hinders the debt collection process;
Traditionally the involvement of a factor was perceived in a negative
light (indicating that a company was in financial difficulties), though
attitudes are rapidly changing.
Conclusion:
Working capital management is of critical importance to all companies.
Ensuring that sufficient liquid resources are available to the company is a
pre-requisite for corporate survival. Companies must strike a balance
between minimizing the risk of insolvency (by having sufficient working
capital) with the need to maximize the return on assets, which demands a
far less conservative outlook.
57
CREDITORS MANAGEMENT
58
59
INVENTORY MANAGEMENT
60
INVENTORY MANAGEMENT
Managing inventory is a juggling act. Excessive stocks can place a heavy
burden on the cash resources of a business. Insufficient stocks can result in
lost sales, delays for customers etc.
The key is to know how quickly your overall stock is moving or, put another
way, how long each item of stock sit on shelves before being sold.
Obviously, average stock-holding periods will be influenced by the nature of
the business. For example, a fresh vegetable shop might turn over its entire
stock every few days while a motor factor would be much slower as it may
carry a wide range of rarely-used spare parts in case somebody needs
them.
The key issue for a business is to identify the fast and slow stock movers
with the objectives of establishing optimum stock levels for each category
and, thereby, minimize the cash tied up in stocks.
61
62
RESEARCH METHODOLOGY
Primary Data:
The information is collected through the primary sources like:
Talking with the employees of the department.
Getting information by observations e.g. in manufacturing processes.
Discussion with the head of the department.
Secondary Data:
The data is collected through the secondary sources like:
Annual Reports of the company.
Office manuals of the departmen.
Magazines, Reports in the company.
Policy documents of various departments.
63
64
RATIO ANALYSIS
QUICK ASSETS
Acid Test Ratio = ------------------------------QUICK LIABILITIES
Particulars
2001-02
2002-03
2003-04
2004-05
200506
Q.A.
12,136.80
12051.57
10880.77
10423.08
10996.5
Q.L.
8385.47
7917.32
8431.19
8605.39
9336.43
A.T.R.
1.45
1.52
1.29
1.21
1.17
1.6
1.4
1.2
1
0.8
AR
0.6
0.4
0.2
0
2001-02 2002-03 2003-04 2004-05 2005-06
65
liabilities is greater than the decreased rate of quick ratios, so quick ratio
increased from 1.45 to 1.52. In 2003-04 and 04-05 there was a decrease in
quick assets and increase in current liabilities, so quick ratio decreased
from 1.52 to 1.29 and 1.29 to 1.21 in 2003-04 and 04-05 respectively. And It
has further decreased to 1.17 in 2005-06.
66
12 MONTHS
Inventory Holding Period = ---------------------------------------------INVENTORY TURNOVER RATIO
Particula
2001
2002
2003
2004
2005
rs
-02
-03
-04
-05
-06
I.T.R Rs.
6.26
5.30
4.94
5.26
3.31
Period in
12.0
12.0
12.0
12.0
12.0
Month Rs.
1.92
2.26
2.43
2.28
3.63
(in Lacs)
(In Lacs)
I.H.P
4
3.5
3
2.5
2
I.H.P
1.5
1
0.5
0
2001-02 2002-03 2003-04 2004-05 2005-06
67
Interpretation: In the year 2002-03 there was a decrease in inventory turnover ratio. This
shows an increase in inventory holding period. In 2003-04 there was an
increase in holding period and in 2004-05 it was 2.28 that suggests that
there was an increase in sales and decrease in inventory turnover ratio. In
the year 2005-06 it is 3.63.
68
12 MONTHS
Debtors collection period = ------------------------------------------DEBTORS TURNOVER RATIO
Particula
2001
2002
2003
2004
2005
rs
-02
-03
-04
-05
-06
Period in
12
12
12
12
12
DT ratio
1.8
2.15
2.4
D.C.P in
6.59
5.58
4.04
month
month
6.59
5.58
5
4.04
4
D.C.P in month
3
2
1
0
2001-02
2002-03
2003-04
2004-05
2005-06
69
Interpretation: There is an increase in both debtors and sales, so avg. collection period is
decreasing year by year. That shows that recovery from debtors is
improving.
70
12 MONTHS
Creditors payment period = ------------------------------------------CREDITOR TURNOVER RATI
Particula
2001
2002
2003
2004
2005
rs
-02
-03
-04
-05
-06
Period in
12
12
12
12
12
C.T.R
1.10
1.49
2.24
2.95
3.43
C.P.P
10.9
8.05
5.35
4.07
3.50
months
12
10.9
10
8.05
8
6
5.35
4.07
cpp
3.5
2
0
2001-02
2002-03
2003-04
2004-05
2005-06
EBIT
Interest coverage ratio = --------------------------INTEREST
Particul
2001-
2002
2003
2004
2005-
ars
02
-03
-04
-05
06
INTERE
1458.
852.
587.
521.
488.4
ST
92
91
35
07
EBT
55.0
96.0
155.
1222.
916.5
81
41
542.3
907.
683.
676.
1710.
98
35
88
83
0.37
1.06
1.16
1.30
3.50
7
EBIT
I.C.R
4
3.5
3
2.5
2
I.C.R
1.5
1
0.5
0
2001-02
2002-03
2003-04
2004-05
2005-06
72
Interpretation: In case of KPCL, in the year 2002-03 there was a decrease in interest and
increase in EBIT so ratio increased from 0.37 to 1.16, in the year 2003-04.
There was a decrease in interest as well as EBIT but the decrease rate is
higher than the decrease rate of EBIT, so the ratio increased from 1.06 to
1.16 and in the year 2004-05 there was decrease in interest and increase in
EBIT so the ratio increased from 1.16 to 1.30 and further it is increasing
from 1.30 to 3.50 in 2005-06 because EBIT has increased with a
substantial amount.
73
TOTAL DEBTS
Debt to Equity Ratio = -----------------------------------------EQUITY (SH. CAP. + R & S)
Particul
2001
2002
2003
2004
2005
ars
-02
-03
-04
-05
-06
Equity
3323
3360
3446
3586
4636
.58
.63
.27
.83
.39
Total
7696
7377
6599
5421
4003
Debt
.52
.36
.12
.08
.93
D.T.E.
2.32
2.20
1.91
1.51
0.86
R.
2.5
2
1.5
D.T.E.R.
1
0.5
0
2001-02
2002-03 2003-04
2004-05
2005-06
Interpretation: The D/E ratio is 1:1; it implies that for every rupee of outside liability. In
case of our organization there is an improvement in the D/E ratio year by
74
75
GROSS PROFITS
Gross Profit Margin = --------------------------- x 100
SALES
Partic
2001
2002
2003
2004
2005
ulars
-02
-03
-04
-05
-06
G/P
265.7
339.7
376.5
386.6
1489.
78
SALE
1726
1939
2164
2617
3036
7.61
6.94
6.75
3.86
5.16
G/P
1.54
1.75
1.74
1.48
4.90
Margi
n
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
G/P Margin
76
Interpretation: In the year 2002-03 there was an increase in sales as well as increase in
gross profit so ratio of GP increased from 1.54 to 1.75, in the year 2003-04
there was decrease in sales and in gross profit, (percentage of increase in
gross profit is lower than the percentage of increase in sales), so the ratio of
GP and sales has slightly decreased from 1.75 to 1.74 and in the year
2004-05 similar to 2002-03 there was an increase in sales and a decrease
in gross profit, so ratio of GP has decreased from 1.74 to 1.48 and in the
year 2005-06 it has shot up to 4.90.
77
2001
2002
2003
2004
2005
ulars
-02
-03
-04
-05
-06
PAT
(918.
48.99
95.31
152.7
1066.
20
77)
Sales
1726
1939
2164
2641
3036
7.61
6.94
6.75
4.22
5.16
N.
(5.32
0.250
0.440
0.578
3.500
profit
(loss)
margi
n
4
3
2
1
0
-1
-2
-3
-4
-5
-6
2001- 2002- 200302
03
04
2004- 200505
06
78
Interpretation: Net profit ratio is increasing year after year, except for 2001-02, where there
was a loss. After that there is a continuous increase in PAT as well as in
sales from 2002-03 to 2005-06. Therefore, it shows a continuous increase
NET SALES
Total Assets Turnover ratio: ---------------------------------------AVERAGE TOTAL ASSETS
Partic
(200
(200
(200
(200
(200
ulars
1-02)
2-03)
3-04)
4-05)
5-06)
L F.A
3036.
4295.
3895.
3821.
4486.
(OP+C
27
38
62
93
98
AGE
1518.
2147.
1947.
1910.
2243.
F.A
14
693
81
97
49
L C.A
2257
3022
3017
2979
2927
(OP+C
4.65
3.54
0.04
0.71
7.35
AVG
1128
1511
1508
1489
1463
CURR
7.33
1.77
5.02
5.36
8.67
TOTA
L)
AVER
(A)
TOTA
L)
79
ENT
ASSET
S (B)
AVG.
TOTA
1280
5.46
1725
1703
1680
8441.
9.46
2.83
6.32
08
1726
1939
2164
2617
3036
7.61
6.94
6.75
3.86
5.16
1.35
1.12
1.27
1.56
3.59
ASSET
S
SALES
T.A.T.
R
(2001-02)
(2005-06)
(2002-03)
(2003-04)
(2004-05)
Interpretation: There is a continuous increase in sales. In the year 2002-03 there was an
increase in average total assets, so the ratio decreased from 1.35 to 1.12,
in 2003-04 and 2004-05 there is a change in average assets and decrease
80
in average total assets, so ratio increased from 1.12 to 1.27 and from 1.27
to 1.55 respectively. For the year 2005-06 ratio is 3.59.
81
Partic
(2001
(2002
(2003
(2004
(2005
ulars
-02)
-03)
-04)
-05)
-06)
3036.
4295.
3895.
3821.
4486.
27
38
62
93
98
1518.
2147.
1947.
1910.
2243.
14
69
81
97
49
SALE
1726
1939
2164
2617
3036
7.61
6.94
6.75
3.86
5.16
F.A.T.
11.37
9.03
11.11
13.70
13.53
TOTA
L OF
FA
(OP+
CL)
AVG.
FIXE
D
ASSE
TS
82
13.7
14
11.37
13.53
11.11
12
9.03
10
(2001-02)
(2002-03)
(2003-04)
(2004-05)
(2005-06)
4
2
0
(2001-02) (2002-03) (2003-04) (2004-05) (2005-06)
Interpretation: Here we have seen there has been a continuous increase in sales. In the
year 2002-03, there was an increase in average fixed assets as well as in
sales but the growth rate of average fixed assets was higher, so ratio
decreased from 11.37 to 9.03. In the year 2003-04 and 2004-05 there was
a decrease in average fixed assets and an increase in sales, so ratio
increased from 9.03 to 11.11 and from 11.11 to 13.70 respectively. But it is
slightly decreasing in 2005-06.
83
SALES
Current assets turnover ratio: -
Partic
(200
(200
(200
(200
(200
ulars
1-
2-
3-
4-
5-
02)
03)
04)
05)
06)
SALE
172
193
216
261
303
67.6
96.9
46.7
73.8
65.1
225
302
301
297
292
74.6
23.5
70.0
90.7
77.3
CUR
112
151
150
148
146
RENT
87.3
11.7
85.0
95.3
38.6
ASSE
1.53
1.28
1.43
1.76
2.07
CUR
RENT
ASSE
TS
AVG.
TS
C.A.T
.R
84
2.5
2.07
2
1.5
1.76
1.53
1.28
1.43
C.A.T.R
1
0.5
0
Interpretation:A better current assets turnover ratio is always good for a firm and in case
of our organization, the turnover ratio is moving positively during the past 4
years. Current assets had decreased in 2002-03 and 2004-05 and
increased in 2003-04, but as the growth rate of sales is higher when
compared to decreased rate of current assets so the ratio has decreased
from 1.53 to 1.28 in 2001-02 to 2002-03. Further it has increased to 1.43 in
2003-04 and to 2.07 in 2005-06.
85
NET SALES
Working Capital turnover ratio =
Partic
2001
2002
2003
2004
2005
ulars
-02
-03
-04
-05
-06
Sales
17,26
19,39
21,64
26,17
3036
7.61
6.94
6.75
3.86
5.16
WOR
6846.
7074.
6746.
6007.
5328
KING
03
72
81
32
.20
2.52
2.74
3.21
4.36
5.7
CAPIT
AL
W.C.T
.R.
5.7
4.36
4
3
2.52
2.74
3.21
W.C.T.R.
2
1
0
2001-02 2002-03
2003-04
2004-05
2005-06
Interpretation:86
87
Amount
(Rs.lacs)
2001-02
17058.47
Amount
(Rs.lacs)
2002-03
Amount
(Rs.lacs)
2003-04
Amount
(Rs.lacs)
2004-05
Amount Amount
(Rs.lacs) (Rs.lacs)
2005-06 2006-07
19360.52 21624.68
26414.22
30365.16 33693.00
2633.59
683.91
835.02
19691.06
20044.43
22459.72
8870.04
10866.21
12412.56
15817.46 17573.95
505.99
593.58
688.84
895.23
1116.39
223.94
192.63
-380.95
-120.27
-188.12
9599.97
11652.42
12720.45
Manufacturing
Expenses:
1636.51
1424.12
1443.96
1913.07
3250.81
2526.97
Employee's
Emoluments:
3597.64
3115.99
3336.03
3681.32
3598.01
4007.77
1458.91
852.9
587.35
521.05
488.42
346.37
Sundry Expenses:
4037.1
2722.47
4060.27
3946.17
4718.76
5084.25
Depreciation:
277.49
223.68
214.74
225.8
249.37
260
20607.62
19991.58
22362.8
-916.56
52.85
96.92
155.84
294.16
1809.49
2.2
6.08
1.75
3.03
82
597.13
-918.76
46.77
95.17
152.81
212.16
1212.36
Total Income
621.45
736.58
557.65
(B) EXPENDITURE
Total Expenditure
Net Profit before Tax
(A-B)
Provision for Tax
Net Profit After Tax
16592.42 18502.22
20215.8
88
BALANCE SHEET
SOURCES OF
FUNDS:
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
a) Capital
128422345
128443380
128443380
128443380
128443380 128443380
b) Reserve &
Surplus
203935113
207620112
216184117
230239120
335195910 457620000
a) Secured
loans
663645876
640463151
581576924
514380917
380016497 391862000
b) Unsecured
loans
106008244
97272888
78335147
27727313
900790730
864032781 991210380
Shareholders
1 funds:
2 Loan Funds:
TOTAL
20376994
13285000
APPLICATION
OF FUNDS:
1 Fixed asset:
a) Gross Block
749985197
745342117
717930907
718557289
777226949 777226949
b) LessDepreciation
529139497
542178336
537061079
524722052
533470985 575222000
Net block
220845700
203163781
180869828
193835237
243755964 202004949
2764184
2764184
2764184
4723646
223609884
205927965
183634012
198558883
9816315
30106210
27037298
23968386
20799000
61043727
55600632
42967882
36106881
36106881
Capital WIP
exp. To date
Total
Technical
Know-how
3 Investment
72534904
6384589
NIL
250140553 202004949
Current Asset,
Loans &
4 Advances
Contd
89
1) Inventories
309469261
294045465
429724069
418963322
366814500 401247000
2) Sundry
Debtors
849477102
875751450
884099843
897711768
904486832 938053000
22043337
26143472
8159330
5590022
342161013
303263771
195816844
139006705
120658554 123800000
1) Liabilities
820733336
774132429
842943606
860236799
918023088 725400000
2) Provisions
17812993
17600025
175000
303000
Net Current
Assets
684604384
707471704
674681480
600732018
118562406
89539820
60517234
31494649
20996415
10498181
2700000
NIL
NIL
NIL
NIL
NIL
900790730
3) Cash &
Bank balance
4) Loans &
advances
74504328
801369
Less - Current
Liabilities &
provisions
15620580
16700000
532820546 721801369
Miscellaneous
Expenditure
5 (To the extent
not written off
or adjusted)
Deferred
revenue
expenditure in
respect of VRS
Pension
scheme
TOTAL
864032781 991210380
90
2002-03
2003-04
3094.70
8494.77
220.43
3421.61
2940.45
8757.51
261.43
3032.66
15231.50
14992.03
8207.33
178.12
7741.32
176.00
8385.46
7917.32
6846.04
7074.71
Increase
154.25
262.74
41.00
388.95
466.01
2.12
771.87
Decrease
543.20
228.67
91
2002-03
2003-04
2940.45
8757.51
261.43
3032.64
4297.24
8841
81.59
1958.17
14992.03
15178.00
7741.32
176.00
8429.44
1.75
7917.32
8431.19
6560.94
6746.81
Increase
Decrease
1356.79
83.49
179.84
1074.47
688.12
174.25
1614.53
1942.43
327.9
Interpretation:
This statement shows the decrease in Working Capital in the year 2003- 04 by
decrease in cash & bank balance & loans & advances.
92
2003-04
2004-05
4297.24
8841
81.59
1958.17
4189.63
8977.12
55.9
1390.07
15178.00
14612.72
8429.44
1.75
8602.37
3.03
8431.19
8605.4
6746.81
6007.32
Increase
107.61
136.12
25.69
568.1
172.93
1.28
136.12
Decrease in working capital
739.49
Decrease
875.61
739.49
Interpretation:
The statement shows the decrease in Working Capital in the year 2004-05 by
decrease in cash & Bank balance, inventories, loans & advances.
93
2004-05
2005-06 Increase
4189.63
8977.12
55.9
1390.07
3668.14
9044.86
745.04
1206.58
14612.72
14664.64
8602.37
3.03
9180.23
156.20
8605.4
9336.43
6007.32
5328.20
521.49
67.74
689.14
183.49
577.86
153.17
756.88
Decrease in working capital
679.12
Decrease
1436.01
679.12
Interpretation:
This statement shows the increase in Working Capital in the year 2005-06 by
increase in cash & bank balance, inventories & debtors. In the final analyses
94
2005-06
2006-07
3668.14
9044.86
745.04
1206.58
4012.47
9280.53
108.02
1238.00
14664.64
14639.01
9180.23
156.20
7254.00
167.00
9336.43
7421.00
5328.21
7218.01
Increase
344.33
235.67
637.02
31.42
1926.23
10.80
2537.65
Increase in working capital
1889.81
Decrease
647.82
1889.81
95
A] C. Assets
a) Inventories
b) S. Debtors
c) Cash & bank
balance.
d) Loans &
Advances
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
3094.70
8494.77
2940.45
8757.51
4297.24
8841
4189.63
8977.12
3668.14
9044.86
4012.47
9280.53
220.43
261.43
81.59
55.9
745.04
108.01
3421.61
3032.64
1958.17
1390.07
1206.58
1238.00
Total Amt.
15231.50 14992.03
B] C. Liabilities
a) Creditors
b) Provisions
8207.33
178.12
7741.32
176
8429.44
1.75
8602.37
3.03
9180.23
156.20
7254.00
167.00
8385.46
8431.19
8431.19
8605.4
9336.43
7241.00
6846.04
6606.57
6746.81 6007.32
5328.20
7398.01
Total Amt.
Net Current
liabilities [A-B]
Interpretation:
This table shows the Working Capital position for the last 5 years & the projected
Working Capital for 2006-07.
96
FINDINGS
1) Defence sales order of Rs. 9 cr was not there for the first quarter of
2005-06, so the sales has decreased.
2) Standard current ratio is 2:1 and for industry it is 1.33:1. KPCL s ratios
satisfactory.
3) Acid test ratio is more than one but it does not mean that company has
excessive liquidity.
4) Debtors of the company were high; they were increasing year by year,
so more funds were blocked in debtors. But now recovery is becoming
faster.
97
SUGGESTIONS
1) It can be said that overall financial position of the company is normal
but it is required to be improved from the point of view of profitability.
98
BIBLIOGRAPHY
1)
2)
3)
4)
5)
99