Working Capital Management at Sundaram Motors

Working Capital Management at TVS Sundaram Motors
A Summer Project Proposal for
Post-Graduate Programme Business Management
By
Balaji S R
Under the guidance of
Mr. V. Rajaraman Prof. Suyash Bhat,

Assistant Manager - Finance, Faculty,
TVS Sundaram Motors SIMSR
K J Somaiya Institute of Management Studies & Research

1st July 2010
By
Balaji S R


1st July 2010
By
Balaji S R


1st July 2010
Certificate of Approval
We approve this Summer Project Report titled "Working Capital Management at TVS
Sundaram Motors" as a certified study in management carried out and presented in a
manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-
Graduate Diploma in Business Administration/ Post Graduate Program in
International Business for which it has been submitted. It is understood that by this
approval we do not necessarily endorse or approve any statement made, opinion expressed
or conclusion drawn therein but approve the Summer Project Report only for the purpose it
is submitted.
Summer Project Report Examination Committee for evaluation of Summer Project Report
Name Signature
1. Faculty Examiner
2. PG Summer Project Co-coordinator

Certificate from Summer Project Guides
This is to certify that Mr. Balaji S R, a student of the Post-Graduate Diploma in Business
Administration, has worked under our guidance and supervision. This Summer Project
Report has the requisite standard and to the best of our knowledge no part of it has been
reproduced from any other summer project, monograph, report or book.
Faculty Guide: Prof. Suyash Bhat Organizational Guide: Mr. V. Rajaraman

Designation: Designation: Assistant Manager
Organization: Sundaram Motors
Address: 180, Anna Salai, Chennai - 6
Date Date 23rd June 2010
Acknowledgement

I am heartily thankful to my manager, Mr.V.Rajaraman, whose encouragement, guidance
and support from the initial to the final level enabled me to develop an understanding of the
project and its requirements.
Lastly, I offer my regards to all of those who supported me in any respect during the
completion of the project.
Balaji S R
Abstract
The report objective is to understand the working capital management practices
followed at TVS Sundaram motors. Working capital management is a crucial aspect of
business for any organization. The report carries the details of working capital management
processes followed by financial analysis of TVS Sundaram motors. The financial analysis
includes various tools such as ratio analysis in order to understand and arrive at conclusions
regarding the financial position of TVS Sundaram motors. These conclusions are then used
to come up with certain strategic recommendations which might help improving the
working capital position at TVS Sundaram motors.
The methodology adopted was, first to understand the overall business model of TVS
Sundaram motors - the major organizational functions are used as a base upon which we try
to fit the existing departments so as to obtain a clear picture at the macro level. Next, we go
a level deeper and take a look at the processes used by each of these departments; the
finance department in particular is our area of interest. Here we try to see how the
accounting function supports the sales and service functions of TVS Sundaram motors. The
major activities and their relevance are observed. In the third part of our research we look
at the financial numbers of TVS Sundaram motors and do a ratio analysis based on which we
arrive at certain conclusions. These conclusions lead to recommendations which would
improve upon the working capital management practices followed.
The major findings are related to the various procedures followed and working
capital position of the company. We go one step further and try to identify the reasons
behind such issues noticed and come up with certain recommendations which would
address them. Ratio analysis is the core tool used in order to understand the financials of
the company.
Table of Contents
Acknowledgement.................................................................................................................................6
Abstract.................................................................................................................................................7
1. Introduction...................................................................................................................................9
1.1. About the Group..................................................................................................................12
1.2. About the Company.............................................................................................................12
1.3. Automobile Dealership........................................................................................................12
1.4. Parts distribution.................................................................................................................13
1.5. Tools and Garage equipments division................................................................................13
1.6. Special products division.....................................................................................................13
1.7. Customer centric business - MyTVS.....................................................................................13
2. Rationale for Study......................................................................................................................14
2.1. Problem Statement..............................................................................................................14
2.2. Literature survey..................................................................................................................15
2.2.1. Working Capital...........................................................................................................15
2.2.2. The Need......................................................................................................................15
2.2.3. Fixed and Fluctuating working capital..........................................................................15
2.2.4. Components of Working Capital..................................................................................16
3. The Research Design....................................................................................................................17
3.1. Methodology of Study.........................................................................................................17
3.2. Business model of Sundaram motors..................................................................................17
3.3. Accounting practices at Sundaram motors..........................................................................18
3.4. Data Analysis........................................................................................................................19
3.4.1. Activity Ratios..............................................................................................................19
3.4.2. Liquidity Ratios.............................................................................................................25
3.4.3. Solvency Ratios............................................................................................................29
4. Results and Conclusions..............................................................................................................32
5. Recommendations.......................................................................................................................32
5.1. General................................................................................................................................32
5.2. Aspects of Working Capital Management............................................................................33
6. References...................................................................................................................................34
6.1. Links.....................................................................................................................................34
6.2. Books...................................................................................................................................34
7. Appendix......................................................................................................................................35
7.1. Current Assets, Liabilities Statement...................................................................................35
List of Figures
Figure 1 Business Model of Sundaram Motors....................................................................................17

Figure 2 Working Capital Turnover......................................................................................................20
Figure 3 Inventory Turnover Ratio.......................................................................................................22
Figure 4 Debtors Turnover Ratio.........................................................................................................23
Figure 5 Creditors Turnover Ratio........................................................................................................24
Figure 6 Current Ratio.........................................................................................................................26
Figure 7 Quick Ratio.............................................................................................................................27
Figure 8 Absolute Liquidity Ratio.........................................................................................................29
Figure 9 Debt Equity Ratio...................................................................................................................30
Figure 10 Interest Coverage Ratio.......................................................................................................31
List of Tables
Table 1 Working Capital Turnover.......................................................................................................20

Table 2 Inventory Turnover Ratio........................................................................................................21
Table 3 Debtor Turnover Ratio............................................................................................................23
Table 4 Creditors Turnover Ratio.........................................................................................................24
Table 5 Current Ratio...........................................................................................................................25
Table 6 Quick Ratio..............................................................................................................................27
Table 7 Absolute Liquidity Ratio..........................................................................................................28
Table 8 Debt Equity Ratio....................................................................................................................29
Table 9 Interest Coverage Ratio...........................................................................................................31
Abbreviations
OEM – Original Equipment Manufacturer
TVS – TV Sundaram Iyengar and Sons
WCT – Working Capital Turnover
ITR – Inventory Turnover Ratio
DTR – Debtors Turnover Ratio
CTR – Creditors Turnover Ratio
ALR – Absolute Liquidity Ratio
ICR – Interest Coverage Ratio

1. Introduction
1.1. About the Group
The TVS Group - T V Sundaram Iyengar & Sons Ltd. was established in 1911 by Shri.
TV Sundaram Iyengar. As one of India’s largest industrial entities it epitomizes Trust, Value
and Service.
Today, there are around 43 companies in the TVS Group, employing more than
25,000 people worldwide and with a turnover in excess of USD 5 billion.
With steady growth, expansion and diversification, TVS commands a strong presence
in manufacturing of two-wheelers, auto components and computer peripherals. It also has
vibrant business in the distribution of heavy commercial vehicles passenger cars, finance
and insurance.
1.2. About the Company

T V Sundaram Iyengar & Sons Ltd., established a Vehicle Dealership in Chennai for
handling Cars and Commercial Vehicles and thus ‘Sundaram Motors’ was born on August 13,
1945.
Being the trading and distribution arm of the group, the business activities of
Sundaram motors include Dealerships for Automobile vehicles, Distribution of spares for
after – market, Sales & Service support for Garage Equipment, Sales & Service of products
for special applications like construction & Material handling and providing customer centric
services for car customers under brand ‘My TVS’.
1.3. Automobile Dealership

‘Sundaram motors’ distributes commercial vehicles, Utility & Sports Utility vehicles,
Passenger Cars representing various leading automobile vehicle manufacturers such as
Ashok Leyland, Daimler Chrysler, General Motors, Honda and Mahindra & Mahindra. The
company has more than 100 outlets and sells over 30,000 vehicles and services more than
300000 vehicles per annum being the leading automobile distribution company in India.
1.4. Parts distribution
The company is the largest distributors of automobile spare parts in the country,
handling more than 80 suppliers and 35, 000 part numbers of franchised parts, agency lines
TVS branded parts and so on. It has operations in Tamil Nadu, Kerala, MP & UP and reaches
over 3000 retail outlets spread all over these territories. It has modern warehouse
supported with state of the art IT infrastructure.
1.5. Tools and Garage equipments division

The company also undertakes Sales & Service of Garage Equipments and specializes
in installing commissioning and providing complete after sales – service support for critical
imported state - of - the art automobile service equipment. All these are imported from
various countries from suppliers who are reputed brands abroad.
1.6. Special products division

The company has also diversified into Marketing (Sales & Service) products for
special application such as Construction & Material handling Equipment, Man lifts, Air
Compressors, Bus Air Conditioners etc., representing leading names from India & Overseas
in this field and has earned a niche for itself in this category of business. The company has
also launched a new avenue of service providing Fork Lift Trucks with trained operators on a
monthly lease basis under its unique Own & Operate scheme.
1.7. Customer centric business - MyTVS

My TVS is the newest initiative of TVS & Sons to offer customers a branded
alternative chain of service network for all brands of cars. Thus, TVS has given birth to a true
multi brand independent aftermarket integrated solution for car customers.
2. Rationale for Study
The purpose of this study is to get a grip on the actual accounting practices followed in
organizations, to observe in practice what has been studied in theory. By going through the
processes of working capital management at TVS Sundaram motors it is hoped to gain an
insight into the workings of the company from the context of its accounting function. The
scope of the project has been limited to the finance department and specifically within it to
areas concerning the management of working capital – i.e. cash, inventory and receivables
and their utilization. Financial statement analysis forms the core part of the study.
Analysis and interpretation of financial statement refers to such a treatment of

information containing in the balance sheet and income statement so as to afford full
diagnosis of the financial position and profitability of the business enterprises. Financial
statement analysis largely depends upon the relationship between various financial factors
in a business.
The objective is not only to understand the concepts alone, but rather to observe the
processes involved and look for potential areas of improvement. A comparison with ideal
case scenarios would help us identify such areas which can then be improved upon.
Recommendations would be made keeping in mind these specific areas. Specifically the
objectives for this study are:
2.1. Problem Statement

1. To analyze working capital management in TVS Sundaram motors limited.
2. To assess the relative significance of various source of working capital.
3. To observe the relationship between working capital and liquidity position of the
company.
4. To find out the impact of working capital on profitability and to suggest potential
areas of improvement.
2.2. Literature survey
2.2.1. Working Capital

The accounting principles board of the America Institute of certified public
accountants, USA, has defined working capital as follows:
“Working capital, sometimes called net working capital, is represented by the excess
of current assets over current liabilities and identifies the relatively liquid portion of total
enterprises capital which constitutes a margin or buffer for maturing obligation within
the ordinary operating cycle of the business.
2.2.2. The Need

Working capital is required by a company to sustain its operations in the time gap
between sales of goods to receipt of cash. This time gap always arises because sales do
not translate into cash instantaneously. There are two major considerations which affect
the way working capital is managed. Firstly, the fixed assets of the company can be put
to optimum use only when there is sufficient level of working capital. Secondly, proper
management of working capital ensures that it does not cause blockage of scarce
resources of the company. Lack of sufficient working capital can cause hindrances in
smooth operation of the company.
2.2.3. Fixed and Fluctuating working capital

Fixed working capital is the minimum level of working capital required by a company
to carry out its operations effectively. The company cannot operate below this level
irrespective of its level of production or sales. The production and sales volumes of a
company fluctuate with time sometimes increasing and sometimes decreasing, however
fixed working capital does not change with these fluctuations. It is the minimum
irreducible amount of working capital required to keep the company’s current assets in
circulation. It is also known as permanent working capital since this working capital is
permanently locked up in business.
Fluctuating working capital is the level of working capital that is needed by a
company over and above its permanent working capital. The need for fluctuating
working capital arises because of changes in the level of production and sales due to
seasonal changes, abnormal conditions or unanticipated demand. Excess working capital
is required to support such changes in demand. For example, some additional capital
might be required in order to finance a special advertising campaign designed to boost
sales in a lean season. This extra working capital needed to support changing business
activities is called fluctuating working capital.
2.2.4. Components of Working Capital

The main components working capital are cash, accounts receivable, inventory,
marketable securities, trade credits and loans from banks etc.
Cash is the most liquid and important component of working capital. It is necessary
for a business to maintain some amount of cash in hand at bank the even if the other
current assets are substantial.
Inventory is required for smooth running of the activities of a company. It acts as

buffer between various stages of production as well as between production and
distribution. Inventory is of different types and includes raw material, work-in-progress
and finished goods.
Accounts Receivable constitutes a significant part of the current assets of a company.

It represents amounts that a company is eligible to receive due to the sale of its goods
or services. The credit period – time allowed before a customer can pay for the
good/service, and discounts are decided by credit policy of the company.
Marketable securities include commercial papers that companies issue, banker’s

acceptance letters, treasury bills etc. They can be bought and sold quickly at a
reasonable price. Usually marketable securities tend to have maturity periods of less
than a year which makes them attractive as an investment option for the company.
3. The Research Design
3.1. Methodology of Study
Data collection was resorted to through secondary sources of data, financial statements
of the company, company process documents and general observation.
3.2. Business model of Sundaram motors
Sundaram
motors
Showroom WorkShop
Purchase Sales Purchase Sales
Figure 1 Business Model of Sundaram Motors
The flow of cash at Sundaram motors primarily comes from two sources, the showroom
and the workshop. The show room is responsible for new vehicle sales while the workshop
is responsible for spare parts sales and servicing. Both show rooms and workshops have a
purchase and sales function.
The purchase function of the showroom is further subdivided into three based on the
OEM i.e. Honda, GM and Benz. The purchases from these three manufacturers are financed
through the group company ‘Sundaram Finance’. There is an open credit line between
Sundaram motors and Sundaram finance for a period of 45 days from the date of purchase.
On the sales side vehicle delivery happens once the full settlement is made by the
customer to Sundaram motors either from the end customer or from the customer
financing company.
The workshop department has a purchase function as mentioned earlier. The suppliers
to the workshop are of two types, one the OEM and the second the local supplier who
manufactures parts independently. All transactions in this case are settled automatically
with being settled upfront. Coming to the sales function we can further classify it into 5
divisions based on the type of customer. The sundry customer, credit based customer,
insurance companies, group companies and the Government. Credit based customers are
given a time period of 15 days to settle their dues, which the same in case of other buyers
except sundry customers who need to close their dealings immediately with cash.
3.3. Accounting practices at Sundaram motors

The key stakeholders in the accounting process followed at Sundaram motors are:
1. The Bank
2. The Customer
3. The Vendor – The vendor can be further subdivided into auto part suppliers and office
equipment vendors. We will look at each of these in detail. This gives us a clear picture of
the accounting department from a transactional level.
Cash management – Cash transactions happen in two cases, cash received from customer or
cash goes out to the vendor, in case of office equipment vendors it is treated as petty cash
expense. Petty cash expenses might be incurred for employees as well. E.g. couriering
parcels or travel within the city.
The Customer – The customer is the entity who purchases cars, parts from Sundaram
motors. A separate account is maintained for the customer accounts receivables. The
customer account always maintains a debit balance meaning we always receive money from
the customer. An anomaly to this rule needs to be investigated further.
The Vendor – The vendor account consists of accounts payable to the supplier and usually
maintains a credit balance. This means that Sundaram motors gets some time period before
it needs to pay the vendor or supplier. A debit balance in the vendor account is not
preferred and such occurrences need to be investigated immediately.
The Bank – The bank simply acts as a repository of cash and transactions. ‘Sundaram
motors’ has accounts with several banks mostly in the public sector. The transactions to and
from the bank are available online and reports from the bank are a vital input for
reconciliation activities.
Reconciliation – This is one of the key activities carried out by the finance department at
Sundaram motors. Reconciliation takes place at several levels. At the highest level
reconciliation occurs with the bank account i.e. the reports from bank are cross checked
with internal accounts maintained by the company. At the lower level it takes place
individually with each customer and vendor account. The main purpose of reconciliation is
to ensure that the accounts are all in order and all credit and debit balances are maintained
as required. The reports taken from the bank must tally with individual accounts of the
customer and vendor.
3.4. Data Analysis
3.4.1. Activity Ratios

Activity ratios are employed to evaluate the efficiency with which the company
manages and utilize its assets. These ratios are called turnover ratio because they
indicate the speed with which assets are being converted or turnover into sales. Activity
ratio is thus a relationship between sales and assets.
Working Capital turnover

Working capital turnover indicates how effectively the company is using its working
capital in order to generate sales. Working capital (current assets - current liabilities) is
used to fund operations and purchase inventory which is then converted into sales.
Year Sales Working Capital WCT (times)
2004-05 1683.654 279.799 6.017
2005-06 2129.681 379.533 5.611
2006-07 2834.490 955.471 2.966
2007-08 2738.751 1219.203 2.246
2008-09 3392.312 1498.042 2.264

Table 1 Working Capital Turnover
So we obtain the relationship between the money used to fund operations and the
sales generated from these operations. A higher the working capital turnover is better
because it means the company is generating more sales as compared to the funds it
uses.
WCT
7
6
5
4
3
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09
WCT
Figure 2 Working Capital Turnover
In case of Sundaram motors we find that the working capital turnover has come
down from a peak of 6 times to only 2 times in the year 2009. This means that the firm
is using more and more of its funds to generate less of sales. Though sales has increased
in this period, it has not been achieved efficiently. Instead the company has simply
pumped in more money to achieve this sales increase.
Inventory turnover ratio
A certain amount of inventory is required to meet the business requirements.
However the level of inventory should be carefully regulated, it should neither be too
high nor too low. If inventory levels are more than required, it blocks cash available to
run the business. If inventory levels are too low, the company runs the risk of stock out.
The inventory turnover ratio indicates how many times the inventory has ‘turned over’
in business. It is calculated as the ratio of cost of goods sold to average inventory. Here
average inventory refers to the average of beginning and ending inventory levels during
the financial year.
Year Cost of goods sold Average Inventory ITR (times)
2004-05 1889.123 374.437 5.045
2005-06 2155.027 308.144 6.993
2006-07 2243.467 422.069 5.315
2007-08 2657.401 621.006 4.279
2008-09 2976.604 665.147 4.475

Table 2 Inventory Turnover Ratio
Inventory turnover ratio measures the speed with which the stock is converted to
sales. Usually a high inventory turnover ratio indicates efficient management of
inventory because more frequently the stocks are sold money comes in quickly to
finance the inventory. A low inventory turnover implies higher investment in inventory.
ITR
7
6
5
4
3
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09
ITR
Figure 3 Inventory Turnover Ratio
In this case, the inventory turnover ratio has steadily decreased over time, though by
a small amount. Inventory management is an area which needs to be inspected in detail
further.
Debtor’s turnover ratio

The liquidity position of a company also depends on its accounts receivables.
Accounts receivables occur when a company sells its goods on credit. A liberal credit
policy would result in substantial amounts of accounts receivables. The debtor’s
turnover ratio is used to measure how quickly a company’s accounts receivables are
being converted to cash.
Year Sales Sundry Debtors DTR (times)
2004-05 1683.654 166.009 10.142
2005-06 2129.681 154.996 13.74
2006-07 2834.490 190.845 14.852
2007-08 2738.751 188.173 14.793

2008-09 3392.312 231.475 14.655
Table 3 Debtor Turnover Ratio
It indicates the number of times the sundry debtors (accounts receivables) are
turned over during one year. Generally, the higher the value of debtor’s turnover ratio
the more efficient is the management of debtors.
DTR
16
14
12
10
8
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
DTR
Figure 4 Debtors Turnover Ratio
A low debtor’s turnover ratio indicates poor management of debtors. The debtor’s
turnover ratio has been constant and relatively high over the past three financial years
which is an indicator that the company is doing a good job of managing its accounts
receivables.
Creditor’s turnover ratio

The creditor’s turnover ratio is used to measure the length of time that is needed
for a company to repay its suppliers. The main purpose is to measure short term
liquidity. Accounts payable include both sundry creditors and bills payable.
Year Credit purchase Creditors CTR (times)

2004-05 623.412 167.755 3.717
2005-06 690.452 178.163 3.876
2006-07 935.875 220.856 4.238
2007-08 1239.138 242.752 5.105
2008-09 1332.825 254.512 5.236

Table 4 Creditors Turnover Ratio
A high creditor’s turnover ratio signifies that the creditors are being paid promptly.
Though this enhances the credit worthiness of the company, a very high ratio also
shows that the business is not taking the full advantage of the credit facilities allowed
by the creditors. Hence this value needs to be looked at in conjunction with other
ratios. The reason being, sometimes companies can keep this ratio low on purpose in
order to invest the cash it has in hand in order to get better returns. However with
better cash flows the tendency for this ratio is to go up which has been observed in case
of Sundaram motors as well. This only indicates that the company is generating cash
fast enough.
CTR
6
5
4
3
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09
CTR
Figure 5 Creditors Turnover Ratio
3.4.2. Liquidity Ratios

Liquidity refers to the ability of a company to meet its current obligations as and
when these become due. The short-term obligations are met by realizing amounts from
current, floating or circulating assets. The current assets should either be liquid or near
about liquidity. These should be convertible in cash for paying obligations of short-term
nature. The sufficiency or insufficiency of current assets should be assessed by
comparing them with short-term liabilities. If current assets can pay off the current
liabilities then the liquidity position is satisfactory. On the other hand, if the current
liabilities cannot be met out of the current assets then the liquidity position is bad.
Current ratio
Current Ratio is a measure of general liquidity and mostly used to make the analysis
of short-term financial position of a company. It is defined as the ratio between current
assets and current liabilities.
Current assets include cash, accounts receivable, inventory, marketable securities,

trade credits etc. Current liabilities include outstanding expenses, accounts payable,
dividends payable etc.
Year Current Assets Current Liabilities Ratio
2004-05 729.070 731.411 1.00
2005-06 820.133 893.262 0.918
2006-07 1433.363 1016.607 1.490
2007-08 1738.373 1242.814 1.398
2008-09 2037.862 1094.898 1.861

Table 5 Current Ratio
The general thumb rule for current ratio is that it should be 2:1 for currents assets to
current liabilities. When the company’s current ratio is near about this value it indicates
that the liquidity position of the company is satisfactory. A low current ratio shows that
the liquidity position of the company is not good and the company shall not be able to
pay its current liabilities as and when they are due. A relatively high current ratio is an
indication that the company is liquid and has the ability to pay its current obligations as
and when they are due.
Current Ratio
2
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Current Ratio
Figure 6 Current Ratio
In the case of Sundaram Motors, we can clearly see that the current ratio has been
on an upward trend since 2004. It has reached 1.8 in the year 2009, which is still less
than an ideal current ratio of 2:1.
Quick ratio
Quick ratio is a more stringent test of liquidity than the current ratio. Quick ratio
may be defined as the ratio between quick assets and current liabilities. It measures the
company’s ability to pay its current obligations immediately.
Year Liquid Assets Current Liabilities Ratio
2004-05 354.633 731.411 0.485
2005-06 511.989 893.262 0.573
2006-07 1011.294 1016.607 0.994
2007-08 1117.367 1242.814 0.899
2008-09 1372.715 1094.898 1.253

Table 6 Quick Ratio
To find out the quick assets of the company we need to remove inventory from the
current assets of the company. Now we calculate the value of quick assets to current
liabilities of the company to get the quick ratio. The rule of thumb for quick ratio is 1:1
for current assets to current liabilities. If the company is able to maintain a quick ratio
of 1:1 it means that the company is able to meet its obligations immediately without
dependence on its inventory sales. It has enough of cash and accounts receivables in
hand.
Quick Ratio
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Quick Ratio
Figure 7 Quick Ratio

In case of Sundaram motors we can clearly see that the quick ratio has been healthy
throughout the period of analysis. This can attributed to the fact that the company has
always maintained a good cash balances in hand. Especially over the 5 year period, cash
balances have increased by a substantial amount.
Absolute liquidity ratio

The accounts receivable part of current assets though more liquid than inventory, is
still subject to realization of cash. It may happen that the customer is not able to pay on
time, in which case the company cannot use it to pay off its obligations.
Year Current Assets – Inventory Current Liabilities Ratio

– Accounts Receivable
2004-05 51.291 731.411 0.0731
2005-06 201.716 893.262 0.2257
2006-07 613.212 1016.607 0.6031
2007-08 617.264 1242.814 0.496
2008-09 960.983 1094.898 0.878

Table 7 Absolute Liquidity Ratio
Hence while calculating the absolute liquidity ratio we remove the accounts
receivable from current assets. The amount left with us in this case would be the cash
and bank balances of the company.
ALR
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
2004-05 2005-06 2006-07 2007-08 2008-09
ALR
Figure 8 Absolute Liquidity Ratio
3.4.3. Solvency Ratios

Debt equity ratio
The debt to equity ratio is a measure of the financial leverage of the company. It tells
us how the company is using debt to increase its returns to shareholders. A high debt to
equity ratio means that the company has aggressively financed its expansion through
debt. This is a risky proposition for any firm. The earnings of the firm would be very
volatile in this case as the interest expense will constitute a significant component.
Year Long term debt Shareholder’s Equity Debt Equity
2004-05 1297.028 529.017 2.4517
2005-06 868.876 503.867 1.7246
2006-07 576.979 1030.665 0.5598
2007-08 429.762 1260.141 0.3410
2008-09 418.052 1731.315 0.241

Table 8 Debt Equity Ratio
D/E
2.5
1.5
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
D/E
Figure 9 Debt Equity Ratio
When a company opts for a higher debt load care should be taken so that returns
from using debt for expansion far exceed its costs, otherwise it is possible that the
company might getting trapped in a vicious cycle which drags it down.
It is seen that the debt to equity ratio of Sundaram motors has steadily fallen over
the years and currently stands at 0.2. This only indicates that the company is reducing
its dependence on long term debt. The company has been prudent in its usage of debt
as a tool to fund its expansion.
Interest Coverage Ratio

This ratio determines if the company is in a good position to service its debt. It is
calculated as the ratio of EBIT to interest expense incurred by the company.
The lower this ratio, the more difficult it is for the company to pay interest on its
debt. It is usually expressed in the number of times a company’s earnings can cover its
interest expense and hence the term.
Year EBIT Interest Expense ICR

2004-05 31.587 133.456 0.236
2005-06 262.821 89.923 2.923
2006-07 936.535 60.522 15.479
2007-08 570.574 46.889 12.192
2008-09 942.262 39.511 23.854

Table 9 Interest Coverage Ratio
If the company’s interest coverage ratio goes below 1.5 times, then its ability to
service its debt becomes doubtful. An interest coverage ratio of 2 times or more is
considered to be safe.
ICR
25
20
15
10
0
2004-05 2005-06 2006-07 2007-08 2008-09
ICR
Figure 10 Interest Coverage Ratio
‘Sundaram motors’ has improved its ICR over the years, from less than 0.2 to more
than 23 times in 2009. This is a healthy indication for the business. This is both due to
increase in earnings as well as reduction in debt load by paying off the lenders.
4. Results and Conclusions
1. Overall we can see that the company has managed to increases its sales significantly
over the five year period. It has substantially increased its cash and bank balances while
at the same time improving its financial ratios. It is seen that the company has lowered
its risk and is in a better position to meet its obligations both short term and long term
in time. This is clearly indicated by the rising trends in current and quick ratios as well as
the falling D/E ratio and increase in interest coverage ratio. Where the firm seems to be
lacking is in the area of inventory management, working capital turnover and accounts
receivables. Hence we will be focusing our recommendations on these specific areas.
2. It is interesting to note that in the initial two years of the analysis period, the cost of
goods sold exceeds the total revenues. This has happened because of subsidizing sales
to group companies, mainly in the case of spare part sales. However Sundaram motors
has since then moved on to ‘arm’s length pricing’ and is now treating group companies
as equivalent to external companies. This is a significant shift in terms of management
policy.
5. Recommendations
5.1.General
1. On observation of the practices followed in the accounts department it is seen that a
lot of activities carried out by the staff can be eliminated by do things right the first time
around. For example the “Data entry” process needs to be stringent and if proper
accounting entries are made at this level, a lot of effort can be reduced in the later
stages of the process. Reconciliation needs to be done only for verification purposes and
it should not used correct mistakes made earlier in the accounting flow.
2. An integrated solution needs to be looked into for accounting software. There are a
lot of issues arising because of different software tools being used at different stages in
the accounting process. The point of sales terminals use software supplied by the OEM,
while the accounts department uses their custom software. Therefore lot of error creep
in at this juncture where the data is being fed from the showroom to the accounts
department. A complete end to end solution would not only eliminate these errors, but
also reduce a lot of manual work in feeding data into the accounts software thus leading
to significant effort savings.
5.2.Aspects of Working Capital Management

1. A healthy level of current ratio to maintain would be at 2:1 for current assets to
current liabilities. It is seen that in case of Sundaram motors, the maximum value of
current ratio has been 1.8, reached in the year 2009. Since bankers and lenders take
keen interest in the current ratio of a company, it is important that we maintain this
ratio at a normal level.
To achieve this, we can look at collecting our receivables faster. It is to be noted that
the sundry debtors have increased significantly over the period of analysis. We need to
reduce the receivables amount under sundry debtors and covert more of this to cash or
bank balances. We can request for banker acceptance letters, credit notes or credit
lines from banks as an additional tool to ensure prompt payment.
2. As indicated in the current ratio, the level of inventory has been increasing
throughout the entire duration of analysis (2004 to 2009). The spending on inventory
needs to be reviewed to understand the requirement for maintaining such high levels.
Significant cost savings can be achieved by reducing the level of expenditure in this
area.
3. It is seen the Inventory turnover ratio has come down gradually over the period of
analysis. Inventory turnover ratio indicates the number of times inventory has been
depleted and new inventory stocked (turnover). The higher this ratio the better it is for
the company, as already noted inventory has surged over the 5 year period. Hence this
ratio is another indicator that the spending on inventory needs to be looked at again.
6. References
6.1. Links
1. http://www.aicpa.org
2. http://www.investopedia.com
3. http://www.bized.co.uk
4. http://www.accountingformanagement.com
5. http://www.netmba.com
6. http://hubpages.com/hub/
7. http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html
8. http://www.siamindia.com
9. http://www.araiindia.com
10. http://www.aasindia.in
11. http://www.tvsgroup.com
12. http://www.tvsiyengar.com
13. http://www.sundarammotors.com
6.2. Books
7. Appendix
7.1.Current Assets, Liabilities Statement
2004-2005
Particulars As at 31st march 2005 % of Total
Current Assets
Inventories 374.437 51.36
Sundry Debtors 166.009 22.77
Cash & Bank balances 51.291 7.04
Interest Receivable 9.059 1.24
Loan & Advances 128.274 17.59
Total current Assets 729.07 100
Current Liabilities
Sundry creditors 273.068 37.34
Advances received 40.795 5.58
Security Deposits 31.239 4.27
Interest accrued 162.454 22.21
Unpaid dividends .093 0.02
Unclaimed matured deposits 2.470 0.34
Interest accrued on matured .688 0.09
deposits
Other liabilities 220.541 30.15
Total current liabilities 731.411 100
2005-2006
st
Particulars As at 31 march 2006 % of Total
Current Assets
Current Liabilities
deposits
2006-2007
Particulars As at 31st march 2007 % of Total
Current Assets
Current Liabilities
Unclaimed matured bonds .190 0.02
deposits
2007-2008
st
Current Assets
Current Liabilities
Unclaimed matured deposits .820 0.1
deposits
2008-2009
st
Current Assets
Current Liabilities
Unclaimed matured deposits .441 0.04
deposits

Working Capital Management at Sundaram Motors

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Working Capital Management at Sundaram Motors

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Working Capital Management at TVS Sundaram Motors

A Summer Project Proposal for

Post-Graduate Programme Business Management

Under the guidance of

Mr. V. Rajaraman Prof. Suyash Bhat,

K J Somaiya Institute of Management Studies & Research

A Summer Project Proposal for

Post-Graduate Programme Business Management

Under the guidance of

Mr. V. Rajaraman Prof. Suyash Bhat,

K J Somaiya Institute of Management Studies & Research

A Summer Project Proposal for

Post-Graduate Programme Business Management

Under the guidance of

Mr. V. Rajaraman Prof. Suyash Bhat,

K J Somaiya Institute of Management Studies & Research

2. PG Summer Project Co-coordinator

Faculty Guide: Prof. Suyash Bhat Organizational Guide: Mr. V. Rajaraman

Figure 1 Business Model of Sundaram Motors....................................................................................17

Table 1 Working Capital Turnover.......................................................................................................20

OEM – Original Equipment Manufacturer

TVS – TV Sundaram Iyengar and Sons

WCT – Working Capital Turnover

ITR – Inventory Turnover Ratio

DTR – Debtors Turnover Ratio

CTR – Creditors Turnover Ratio

ALR – Absolute Liquidity Ratio

ICR – Interest Coverage Ratio

1.2. About the Company

1.3. Automobile Dealership

1.5. Tools and Garage equipments division

1.6. Special products division

1.7. Customer centric business - MyTVS

Analysis and interpretation of financial statement refers to such a treatment of

2.1. Problem Statement

2.2.1. Working Capital

2.2.2. The Need

2.2.3. Fixed and Fluctuating working capital

2.2.4. Components of Working Capital

Inventory is required for smooth running of the activities of a company. It acts as

Accounts Receivable constitutes a significant part of the current assets of a company.

Marketable securities include commercial papers that companies issue, banker’s

3.2. Business model of Sundaram motors

Purchase Sales Purchase Sales

Figure 1 Business Model of Sundaram Motors

3.3. Accounting practices at Sundaram motors

3.4. Data Analysis

3.4.1. Activity Ratios

Working Capital turnover

2004-05 1683.654 279.799 6.017

2005-06 2129.681 379.533 5.611

2006-07 2834.490 955.471 2.966

2007-08 2738.751 1219.203 2.246

2008-09 3392.312 1498.042 2.264

Figure 2 Working Capital Turnover

Year Cost of goods sold Average Inventory ITR (times)

2004-05 1889.123 374.437 5.045

2005-06 2155.027 308.144 6.993

2006-07 2243.467 422.069 5.315

2007-08 2657.401 621.006 4.279

2008-09 2976.604 665.147 4.475

Figure 3 Inventory Turnover Ratio

Debtor’s turnover ratio