A

Summer training Project Report

On
“Working Capital Management”
At

Modi Industries Ltd

(Modi Arc Electrodes Co.)

Under Guidance of:

Dr. Amit Kr. Upadhyay

Submitted By:
Rahul Kr.Tyagi
PGDM (Gen.) 2009-11

APEEJAY INSTITUTE OF TECHNOLOGY, GREATER-NOIDA

(SCHOOL OF MANAGMENT)

1
 (Submitted in partial fulfillment of the requirement for the PGDM)

TABLE OF CONTENTS

TOPIC Page No
1. Certificates,

2. Acknowledgement

3. Declaration

PART – I

3. Organizational Profile 5-6

PART – II

4. Company’s product & clients 7-16

5. Objective of the Project :

6. Research Methodology :

7. Data Analysis :

2
8. Alternate solutions to realize the Objectives :

9. Optimization of the Solution :

:
10. Recommendations;-

a) Facts & findings

b) Suggestions & Limitations

3
 ACKOWLEDGEMENT

At the outset I would like to thank management of Modi Industries Ltd. ( Modi
Arc Electrodes Co.) for the hearted cooperation & guidance extended by them ,
which made my summer-training project possible.

I am very grateful to my project Guide Mr.D. k. Goel [Operation Manager],

Modi Arc Electrodes co.] for his support and suggestions, which led to completion
of the project.

I am indebted to my mentor, Prof. A.K. Upadhyay ,for steering me in the right

direction providing valuable inside and patiently clarifying all my doubts.

I would also like to thank Mr. Ashok Gupta [Co. H R],Miss.Shweta Singh [Exe.
H R] other staff members for their support and co-operation .

Finally a special thank to Mr. Sachin Singhal [Finance Manager Modi Arc
Electrodes Co.] for providing opportunities to carry out the project.

Rahul Kumar Tyagi

4
5
 DECLARATION
I hereby declare that the study entitled “WORKING CAPITAL
MANAGEMENT” in the context of Modi Arc electrode” being submitted by me
in the partial fulfillment of the requirement by the Apeejay Institute of
Technology, G.Noida is a record of my own work. The study was conducted at
Finance Department, Modi Arc electrodes.

Rahul Kumar Tyagi

Roll No. – 2009069
PGDM(Gen.),B

6
 PART 1. 4.

Company profile

(Modi Arc Electrode)

MODI ARC ELECTRODES CO., a unit of Modi Industries Ltd., has a turnover of
125 crores, was established in the year 1962. Presently, a wide range of electrodes
ranging from general purpose mild steel to stainless steel, cast iron to
nonferrous, hard surfacing tolow hydrogen are manufactured on the most
modern equipment. LOMELT, Low heat input electrodes for repair and
maintenance applications complete the range of stick electrodes. The Company
also manufactures MODI MAG wire for CO2/MIG welding process. We also
market stainless steel wires for GTAW (TIG) and GMAW (MIG) processes &
also market flux cored wires.
The coveted ISO: 9002 was conferred on us, by DET NORSKE
VERITAS (DNV) way back in 1995. Since then, we have upgraded our quality

7
system and obtained the coveted ISO: 9001 Certification for our Quality
Management system in 1999. We are the first and only company in electrodes
manufacturing segment, in India, having obtained ISO: 9001.Recertification of
ISO 9001-1994 was obtained in 2001.Quality management system had been further
upgraded as per ISO 9001-2000 and subsequent re-certification were obtained in
2002, 2004 and in 2007.

The regional depots and officers, supported with wide network of distributors
throughout the country facilitate smooth and quick distribution. A team of
qualified and well trained service engineers extends technical services to
consumers.

Many of the electrodes are manufactured to conform to the relevant BUREAU OF

INDIAN STANDARD (BIS) as well as the American Society of Mechanical
Engineers (ASME) Code, Section –II Part-C, Various electrodes are approved by
national and international agencies such as BIS, BHEL, BECHTEL, CIB (UP),
DESEIN, DNV, DALAL, EIL, IOC, IRS, Kvaerner Power gas, LRS, MND, NPC,
NTPC, PDIL, RDSO, TCE, TISCO, TOYO, UHDE etc.

A well equipped and staffed R & D Centre has been playing a vital role in offering
suitable electrodes to the welding industry. Continuous efforts of scientists and
technicians have kept MODI ARC in the forefront of welding technology.
Department of Scientific & Industrial Research, Ministry of Science Technology,
Govt. of India, has granted recognition to the R& D Centre of the Company.

8
We are a regular supplier to customers like L & T, Reliance, BHEL, NTPC,
METRO TRAIN.

Modi Arc Electrodes Company has upgraded their Quality Management system to standard ISO
9001-2008 and in recent audit, DNV has found our QMS conforming to requirements of the
same

9
5. Products
10
 Type of electrodes :-

 A wide range of electrodes ranging from general purpose mild steel to stainless steel
,cast iron tononferrous ,hard surfacing to low hydrogen are manufactured on most
modern equipment.

 We also manufacture wire for CO2/MIG, GTAW (TIG) and GMAW (MIG) processes &
flux core wires for carbon steel, stainless steel and low alloy steel. All our products are
manufactured to conform to the Bureau of Indian Standards (BIS) as well as the
American Society of Mechanical

Engineers (ASME) Code, Section-II Part-C.

11
 Low Hydrogen & Low Alloy Steel
Deep Penetration Electrodes Mild Steel Electrodes
Electrodes

Cast Iron & Non-Ferrous

Stainless Steel Electrodes Hard Facing Electrodes
Electrodes

Many of the electrodes are manufactured like as:-

1. Deep Penetration Electrodes.

2. Mild Steel Electrodes.

3. Low Hydrogen & Low Alloy steel electrodes.

4. Stainless Steel Electrodes.

5. Hard Facing Electrodes.

6. Cast Iron & Non-Ferrous Electrodes.

12
 & Tata Steel to name a few.

 We offer a wide range of Welding Equipment which includes Conventional,

Thyristor and Inverter based machines for MMA, MIG, TIG, SAW and Air Plasma
Cutting processes. Our new range of Inverter based machines are designed as per
advanced Inverter technology and these machines are highly energy efficient,
compact, lightweight and maintenance free.

Conventional Series Thyristor Series Inverter Series

13
 MIG Wires TIG Wires Flux Cored Wires

Many of the electrodes are manufactured like as: -

1. MIG Wires

2. TIG Wires

3. Flux Wires

14
 LOMELT, Low heat input electrodes for repair and maintenance applicationscomplete
the range of stick electrodes. A well-equipped and staffed R&D Centre hasbeen playing
a vital role in offering suitable electrodes for maintenance & repair welding.

 Our LOMELT range offers electrodes suitable for various metals i.e carbon steel,
stainless steel, dissimilar steel and copper alloys etc.

15
We are part of GroupMKM which has interests in diverse areas

including Welding,Industrial Gases, Paints, Engineering Plastics,

Information Technology, and Real Estate.

We employ cutting edge technology backed by continuous Research

and Development to make quality products that are patronized by the

most demanding clients globally. 

We derive our strength from a 550 strong committed workforce.

16
 Type of electrodes :-

 A wide range of electrodes ranging from general purpose mild steel to

stainless steel, cast iron to nonferrous ,hard surfacing to low hydrogen are

manufactured on most modern equipment.

 We also manufacture wire for CO2/MIG, GTAW (TIG) and GMAW

(MIG) processes & flux cored wires for carbon steel, stainless steel and

low alloy steel. All our products are manufactured to conform to the

Bureau of Indian Standards (BIS) as well as the American Society of

Mechanical Engineers (ASME) Code, Section-II Part-C.

17
       

     

       

18
    

     

       
       

     

       

19
 INTRODUCTION

The project undertaken is on “WORKING CAPITAL MANAGEMENT IN MODI

ARC ELECTRODES”.

It describes about how the company manages its working capital and the various
steps that are required in the management of working capital. Cash is the lifeline of
a company. If this lifeline deteriorates, so does the company's ability to fund
operations, reinvest and meet capital requirements and payments. Understanding a
company's cash flow health is essential to making investment decisions. A good
way to judge a company's cash flow prospects is to look at its working capital
management (WCM). Working capital refers to the cash a business requires for
day-to-day operations or, more specifically, for financing the conversion of raw
materials into finished goods, which the company sells for payment. Among the
most important items of working capital are levels of inventory, accounts
receivable, and accounts payable. Analysts look at these items for signs of a
company's efficiency and financial strength. This project describes how the
management of working capital takes place at MODI ARC ELECTRODES.

20
 THE PROBLEMS

In the management of working capital, the firm is faced with two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should
choose to maintain?

2. Second, given these optimal amounts, what is the most economical way to
finance these working capital investments? To produce the best possible results,
firms should keep no unproductive assets and should finance with the cheapest
available sources of funds. Why? In general, it is quite advantageous for the
firm to invest in short term assets and to finance short-term liabilities.

21
 OBJECTIVE OF STUDY
The objectives of this project were mainly to study the inventory, cash and
receivable at MODI ARC ELECTRODES Ltd., but there are some more and they
are –
The main purpose of our study is to render a better understanding the concept
“Working Capital Management”.

 To understand the planning and management of working capital at MODI

ARC ELECTRODES Ltd.
 To measure the financial soundness of the company by analyzing various
ratios.
 To suggest ways for better management and control of working capital at
the concern.

22
RESEARCH METHODOLOGY
 This project requires a detailed understanding of the concept –
“Working Capital Management”. Therefore, firstly we need to have a
clear idea of what is working capital, how it is managed in MODI
ARC ELECTRODES, what are the different ways in which the
financing of working capital is done in the company.

 The management of working capital involves managing inventories,

accounts receivable and payable and cash. Therefore one also needs to
have a sound knowledge about cash management, inventory
management and receivables management.

 Then comes the financing of working capital requirement, i.e. how the
working capital is financed, what are the various sources through
which it is done.
 And, in the end, suggestions and recommendations on ways for better
management and control of working capital are provided.

23
 SCOPE OF THE STUDY
This project is vital to me in a significant way. It does have some importance
for the company too. These are as follows –

This project will be a learning device for the finance student.

Through this project I would study the various methods of the working capital
management.
The project will be a learning of planning and financing working capital.
The project would also be an effective tool for credit policies of the
companies.
This will show different methods of holding inventory and dealing with cash
and receivables.
This will show the liquidity position of the company and also how do they
maintain a particular liquidity position.

24
 DATA SOURCES:
The following sources have been sought for the prep of this report:

Primary sources such as business magazines, current annual reports, book on

Financial Management by various authors and internet websites the imp
amongst them being : www.Modi Arc electrodes.com,
www.indiainfoline.com, www.studyfinance.com .
Secondary sources like previous years annual reports, reports on working
capital for research, analysis and comparison of the data gathered.
While doing this project, the data relating to working capital, cash
management, receivables management, inventory management and short
term financing was required.
This data was gathered through the company’s websites, its corporate
intranet, MODI ARC ELECTRODES’s annual reports of the last five years.
Also, various text books on financial management like ICFAI’s book, Khan
& Jain, Prasanna Chandra and I.M. Pandey were consulted to equip
ourselves with the topic.

25
 INTRODUCTION TO WORKING CAPITAL
“Working Capital is the Life-Blood and Controlling Nerve Center of a business”
The working capital management precisely refers to management of current assets.
A firm’s working capital consists of its investment in current assets, which include
short-term assets such as:

Cash and bank balance,

Inventories,
Receivables (including debtors and bills),
Marketable securities.
Working capital is commonly defined as the difference between current assets
and current liabilities.

Working Capital = Current Assets-Current Liabilities

There are two major concepts of working capital:
Gross working capital
Net working capital

Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets,
which can be converted into cash with in a financial year. The gross working
capital points to the need of arranging funds to finance current assets.

Net working capital:

It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital will

26
arise when current assets exceed current liabilities. And vice-versa for negative
net working capital. Net working capital is a qualitative concept. It indicates the
liquidity position of the firm and suggests the extent to which working capital
needs may be financed by permanent sources of funds. Net working capital also
covers the question of judicious mix of long-term and short-term funds for
financing current assets.

Significance Of Working Capital Management

The management of working capital is important for several reasons:
For one thing, the current assets of a typical manufacturing firm account for
half of its total assets. For a distribution company, they account for even more.

Working capital requires continuous day to day supervision. Working capital

has the effect on company's risk, return and share prices.

27
Liquidity Vs Profitability: Risk - Return trade off
Another important aspect of a working capital policy is to maintain and
provide sufficient liquidity to the firm. Like the most corporate financial
decisions, the decision on how much working capital be maintained involves a
trade off- having a large net working capital may reduce the liquidity risk
faced by a firm, but it can have a negative effect on the cash flows. Therefore,
the net effect on the value of the firm should be used to determine the optimal
amount of working capital.
Sound working capital involves two fundamental decisions for the firm. They
are the determination of:
The optimal level of investments in current assets.
The appropriate mix of short-term and long-term financing used to support
this investment in current assets, a firm should decide whether or not it
should use short-term financing. If short-term financing has to be used, the
firm must determine its portion in total financing. Short-term financing may
be preferred over long-term financing for two reasons:
The cost advantage
Flexibility
But short-term financing is more risky than long-term financing. Following
table will summarize our discussion of short-term versus long-term financing.

28
Maintaining a policy of short term financing for short term or temporary assets
needs (Box 1) and long- term financing for long term or permanent assets
needs (Box 3) would comprise a set of moderate risk –profitability strategies.
But what one gains by following alternative strategies (like by box 2 or box 4)
needs to weighed against what you give up.

29
 G
N
I
K
R
O
B
H
F
/
M
W
D
U
V
S
C
E
L
T
P
A
X
CLASSIFICATION OF WORKING CAPITAL
Working capital can be classified as follows:

N
X
On the basis of time
On the basis of concept
PE R
E
O
ED
O
SM
T
N
K
R
S
EP
W W
F O
CC
CA
A
I
E
G
W
TH
O
A
F
A
N
E
G
S
R
R
O
PN
PI
N
E
C
O
D
O
O
K
TI
I
E
R
U
I
S
O
R
EK
R
M
TA
TA
N
A
V
N
L
SL
B
K
N
I
CE
O
A
ST/
I
A
G
E
F
R
L
N
SG
N
I
L PT
L
I
G
F I
S

30
Types of Working Capital Needs
Another important aspect of working capital management is to analyze the
total working capital needs of the firm in order to find out the permanent and
temporary working capital. Working capital is required because of existence of
operating cycle. The lengthier the operating cycle, greater would be the need
for working capital. The operating cycle is a continuous process and therefore,
the working capital is needed constantly and regularly. However, the
magnitude and quantum of working capital required will not be same all the
times, rather it will fluctuate.

The need for current assets tends to shift over time. Some of these changes
reflect permanent changes in the firm as is the case when the inventory and
receivables increases as the firm grows and the sales become higher and
higher. Other changes are seasonal, as is the case with increased inventory
required for a particular festival season. Still others are random reflecting the
uncertainty associated with growth in sales due to firm's specific or general
economic factors.
The working capital needs can be bifurcated as:
Permanent working capital
Temporary working capital

Permanent working capital:

There is always a minimum level of working capital, which is continuously
required by a firm in order to maintain its activities. Every firm must have a
minimum of cash, stock and other current assets, this minimum level of current
assets, which must be maintained by any firm all the times, is known as

31
permanent working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are required.
So, it may also be called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The position of the required
working capital is needed to meet fluctuations in demand consequent upon
changes in production and sales as a result of seasonal changes.

32
The permanent level is constant while the temporary working capital is
fluctuating increasing and decreasing in accordance with seasonal demands as
shown in the figure.
In the case of an expanding firm, the permanent working capital line may not
be horizontal. This is because the demand for permanent current assets might
be increasing (or decreasing) to support a rising level of activity. In that case
line would be rising.

33
FINANCING OF WORKING CAPITAL
There are two types of working capital requirements as discussed above. They
are:
Permanent or Fixed Working Capital requirements
Temporary or Variable Working Capital requirements

Therefore, to finance either of these two working capital requirements, we

have long-term as well as short-term sources.

34
 INVENTORY MANAGEMENT
Inventories
Inventories constitute the most important part of the current assets of large
majority of companies. On an average the inventories are approximately 60% of
the current assets in public limited companies in India. Because of the large size
of inventories maintained by the firms, a considerable amount of funds is
committed to them. It is therefore, imperative to manage the inventories
efficiently and effectively in order to avoid unnecessary investment.

Nature of Inventories
Inventories are stock of the product of the company is manufacturing for sale
and components make up of the product. The various forms of the inventories in
the manufacturing companies are:
Raw Material: It is the basic input that is converted into the finished
product through the manufacturing process. Raw materials are those units
which have been purchased and stored for future production.
Work-in-progress: Inventories are semi-manufactured products. They
represent product that need more work they become finished products for
sale.
Finished Goods: Inventories are those completely manufactured products
which are ready for sale.

Inventory Management Techniques

In managing inventories, the firm’s objective should be to be in consonance
with the shareholder wealth maximization principle. To achieve this, the firm
should determine the optimum level of inventory. Efficiently controlled

35
inventories make the firm flexible. Inefficient inventory control results in
unbalanced inventory and inflexibility-the firm may sometimes run out of stock
and sometimes pile up unnecessary stocks.
Economic Order Quantity (EOQ): The major problem to be resolved is
how much the inventory should be added when inventory is replenished.
If the firm is buying raw materials, it has to decide lots in which it has to
purchase on replenishment. If the firm is planning a production run, the
issue is how much production to schedule. These problems are called
order quantity problems, and the task of the firm is to determine the
optimum or economic lot size. Determine an optimum level involves two
types of costs:-
 Ordering Costs: This term is used in case of raw material and
includes all the cost of acquiring raw material. They include the
costs incurred in the following activities:
 Requisition
 Purchase Ordering
 Transporting
 Receiving
 Inspecting
 Storing

Ordering cost increase with the number of orders placed; thus the more
frequently inventory is acquired, the higher the firm’s ordering costs. On the
other hand, if the firm maintains large inventory’s level, there will be few orders
placed and ordering costs will be relatively small. Thus, ordering costs decrease
with the increasing size of inventory.

36
Carrying Costs: Costs are incurred for maintaining a given level of inventory
are called carrying costs. These include the following activities:
 Warehousing Cost
 Handling
 Administrative cost
 Insurance
 Deterioration and obsolescence

Carrying costs are varying with inventory size. This behavior is contrary to that
of ordering costs which decline with increase in inventory size. The economic
size of inventory would thus depend on trade-off between carrying costs and
ordering cost.

Composition 2006 2005 2004

Raw Material 6349 7749 6127
Stores and Spares 3713 2987 2622
Finished Goods 13374 7245 6506
Work-in-progress 595 784 871

The increasing component of raw materials in inventory is due to the fact that
the company has gone for bulk purchases and has increased consumption due to
a fall in prices and reduced margins for the year. Another reason might be the
increasing sales, which might have induced them to purchase more in
anticipation of a further increase in demand of the product. And the low
composition of work-in-progress is understandable as because of the nature of
the business firm is involved in.

37
To the question as to whether the increasing costs in inventory are
justified by the returns from it the answer could be found in the MODI
ARC ELECTRODES retail expansion. MODI ARC ELECTRODES
caters to the need of the two separate segments:
a) Institutions for which they manufacture against orders and,
b) Retail segment of the market.
.

ABC System: ABC system of inventory keeping is followed in the

factories. Various items are categorized into three different levels in the
order of their importance. For e.g. items such as memory, high capacity
processors and royalty are placed in the ‘A’ category. Large number of
firms has to maintain several types of inventories. It is not desirable the
same degree of control all the items. The firm should pay maximum
attention to those items whose value is highest. The firm should
therefore, classify inventories to identify which items should receive the
most effort in controlling. The firm should be selective in approach to
control investment in various types of inventories. This analytical
approach is called “ABC Analysis”. The high-value items are classified
as “A items” and would be under tightest control. “C items” represent
relatively least value and would require simple control. “ B items” fall in
between the two categories and require reasonable attention of
management.

38
JIT: The relevance of JIT in MODI ARC ELECTRODES Info system can be
questioned. This is because they procure materials on the basis of projections
made at least two or three months before. Even at the time of procurement they
ensure that they procure much more than what actually is required by the firm
that is they hold significant amount of inventory as safety stock. This is done to
counter the threat involved in default and accidental breakdowns. The levels of
safety stock usually vary according to the usage.

39
Conversion Periods Raw Material

Particulars 2009 2008 2007

Raw-Material 121077 97971.31 57775.14
Consumption
Raw-Material 332 268.41 158.28
Consumption/day
Raw-Material 7072 6960.275 4364.735
Inventory
Raw-Material 21 25.93 27.57
Holding Days

The raw material conversion period or the raw material holding cost has
reduced from 26 to 21. This is despite an increase in its consumption. This
indicates that the firm is able to convert the raw material at its disposal to the
work-in-progress at a lesser time as compared to the last year. It would be to the
benefit of the firm to reduce the production process and increase the conversion
rate still as the firm is required to meet the increasing demand.

Work-in-progress

Particulars 2006 2005 2004

40
Cost of Production 191911 159651.19 113500.33
Cost of Production /day 525.78 437.4 310.95
Work in progress inventory 689.5 827.52 679.455
WIP Holding days 1.31 1.89 2.19

The work-in-progress holding time is important for a firm in the sense that it
determines the rate of time at which the production process will be complete or
the finished goods will be ready for disposal by the firm. The firm as it is in the
process of assembling should take the least possible time in conversion to
finished goods unlike a hard core manufacturing firm, as any firm would like to
have its inventory in the work-in-progress at the minimum. There would also be
less of stock out costs as due to better conversion rates the firm is able to meet
the rise in demand situations. More the time it spends lesser its efficiency would
be in the market. Here the firm has been able to bring down its WIP conversion
periods.

Finished Goods

Particulars 2006 2005 20004

41
 Cost of goods sold 228177 178438.85 124768.92
Cost of goods sold/day 625 488.87 341.832
Finished goods inventory 10310 6875.725 5026.505
Finished goods inventory Holding days 16 14.06 14.8

The time taken for the firm to realize its finished goods as sales has increased as
compared to last year. This growth in sales could be traced back to the growing
domestic IT market for the commercial as consumer segment in India. MODI
ARC ELECTRODES has around 15% of the market in desktop and it is the
market leader in this segment. So it is only natural that they are able to better
their conversion rate of finished goods to sales.

Operating Cycle

Particulars 2006 2005 2004

Inventory conversion period 38 42 45
Average collection period 70 63 66

42
Gross operating cycle 108 105 111
Average payment period 22 23 17
Operating cycle 86 82 94

The operating cycle of the firm reveals the days within which the inventory
procured gets converted to sales or revenue for the firm. This time period is of
importance to the firm as a lag here could significantly affect the profitability,
liquidity, credit terms, and the policies of the firm. All the firms would like to
reduce it to such extend that their cash inflows are timely enough to meet their
obligations and support the operations. That the firm has been able to reduce the
ratio is in itself an achievement as they were having huge stocks of inventory.
But the reduction in the cycle could also be attributed to the boom in the market
and the growth it is expected to reach. This boom automatically ensures the
demand for the finished goods and thus helping in it to garner sales for the firm.

Raw Material Consumption

Particulars 2006 2005 2004

Imported 92007 70784.2 42129.63
7
Indigenous 29070 27187.0 15645.51
4
% Imports 75.99 72.25 72.92

43
A major chunk of the imports come from Korea and Taiwan and is purchased in
US$. The value of imported and indigenous raw material consumed give a clear
picture that if there is a change in the EXIM policy of the government it is
bound to affect the company adversely as more than 70% of their consumption
is from imports. But this is the scenario witnessed in the industry as a whole and
though MODI ARC ELECTRODES is into expanding its operation to
Uttaranchal it in the present state is would be affected by a change in the import
duty structure.
A major chunk of their current assets are in the form of inventory and the
change in technology will invariably be a threat faced by the firm. The question
of technology applying here like says a certain device going say out of fashion
or outdated. For e.g. TFT monitors being in demand more than CRT.

44
 CASH MANAGEMENT

Sources of Cash:
Sources of additional working capital include the following:
Existing cash reserves
Profits (when you secure it as cash!)
Payables (credit from suppliers)
New equity or loans from shareholders
Bank overdrafts or lines of credit.
Long-term loans
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:
Pressure on existing cash
Exceptional cash generating activities e.g. offering high discounts for
early cash payment
Bank overdraft exceeds authorized limit.
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies

Management pre-occupation with surviving rather than managing

45
 CASH MANAGEMENT IN MODI ARC ELECTRODES :
The cash management system followed by the MODI ARC
ELECTRODES is mainly lock box system.
Cash Management System involves the following steps:
1. The branch offices of the company at various locations hold the
collection of cheques of the customers.
2. Those cheques are either handed over to the CMS agencies or bank of the
particular location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing house to
make them realized. These cheques can be local or outstation.
4. The CMS agencies or bank send information to the central hub of the
company regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per the
agreed agreements.
6. The CMS agencies or concerned bank provides the necessary MIS to the
company as per requirement.

In cash management the collect float taken for the cheques to be realized into
cash is irrelevant and non-interfering because banks such as Standard Chartered,
HDFC and CitiBank who give credit on the basis of these cheques after
charging a very small amount. These credits are given to immediately and the
maximum time taken might be just a day. The amount they charge is very low
and this might cover the threat of the cheque sent in by two or three customers

46
bouncing. Even otherwise the time taken for the cheques to be processed is
instantaneous. Their Cash Management System is quite efficient.

Cash-Current Liability

Particulars 2006 2005 2004

Absolute Liquid Ratio 0.24:1 0.31:1 0.11:1

The absolute liquid ratio is the best for three years and the cash balances as to
the current liability has improved for the firm. Firm has large resources in cash
and bank balances. While large resources in cash and bank balances may seem
to affect the revenue the firm could have earned by investing it elsewhere as
maintenance of current assets as cash and in near cash assets and marketable
securities may increase the liquidity position but not the revenue or profit
earning capacity of the firm.

Dividend Policy-Cash
Particulars 2004 2005 2006
Dividend Policy% 210 310 400
Shift in Sales 154295 199886 238136
Cash Balance 4463.43 14582.65 14529.29
Cash in Hand 118.33 128.97 128.97

47
 Dividend Policy %
450

400

350

300

250

200
Dividend Policy %

150

100

50

0
2007 2008 2009

CASH BALANCE
16000

14000

12000

10000

8000 Cash
Balnce
Cash in
6000 hand

4000

2000

0
2007 2008 2009

48
 Shift in Sales
300000

250000

200000

150000 Shift
in
Sales
100000

50000

0
2007 2008 2009

The other notable feature in MODI ARC ELECTRODES statements has been
the growing dividend policy of the firm. The payment of dividend means a cash
outflow. Thus cash position is an important criterion at the time of paying
dividends. There is a theory that greater the cash position and ability to pay
dividends. The firm has adopted a policy of disbursing the revenue earned as
profits to the shareholders as dividends as could be seen from the increasing %
of dividends declared.

Particulars 2006 2005 2004

PBIDT 14284 15634 14523
Equity Dividend% 400 310 210

This could mean two things for the firm the amount of cash retained in the
business for capital expenditure purposes are minimal or nil. But rather than
investing more in plant and machine which they can at any point in time by

49
adding on a additional line if need they would like to optimize their utilization
in fixed assets at present. This also means that the percentage of cash in hand
maintained by the firm as a source of liquidity could be reduced, i.e. the amount
of idle cash in the business could be made to a level which the firm feels
optimum.
The firm feels that they should retain cash and it would be in the interest of the
firm as well as the shareholders. This would automatically mean as decrease in
Earning/share (EPS)(Basic EPS declined from 8 in 2008 to 6.74 in 2009).

Cash Flows

Cash Flows 2006 2005 2004

Net Cash from Operating activities 6924 2675.57 13706.34
Net Cash from Investing activities -3515 15661.29 -2169.16
Net Cash from Financing activities -3512 -8217.68 -11412.1

The firm has disposed of investments worth around 655 Crores to meet its
growing needs. The other notable feature is decline is the firm’s inflows from
operations primarily due to the reason that the cash generated from the
operations is the lowest in three years. And the firm’s growing dividend policy
has contributed to the outflows in financing activities.

Cash Flow in Operating Activities

50
Working Capital Changes

Working Capital Changes 2006 2005 2004

Trade and other receivables -14166 -14510.69 -7106.68
Inventories -5221 -2683.92 -7221.11
Trade Payables and other Liabilities 13026 6419.13 14311.5

The cash from the operation has been subject to considerable change due to the
changes that could be adjusted towards trade receivables and trade payables.
The outflows in inventory have become as low as 37% of what it was last year
despite an increase in the inventory consumption by 16.64%. The resulting
reduction in the cash outflows might be because of the inventories being
procured more on credit. That the cash from operations has declined has
affected the current liability index of the firm.

Cash Flow in Investing Activities

51
Investments in Mutual Funds 2006 2005 2004
Investments (year end) 13539 12277.44 28059.88
Purchase of Investment -65992 -53075.99 -59249.81
Disposal/Redemption of Investment 65312 65489.84 52087.36

The investments have reduced from the last year due to the redemption of
investments taken place to meet various needs such as increasing demand in
stock or inventory and to ensure better credit and receivables policy. We can see
that the firm has in these three years increased their cash inflow from the
investing activities by way of disposal of investments when in need. That is the
firm has redeemed to realize cash as to meet its expanding operations, fund the
inventory procurement and meet the obligations.
The investments in mutual funds are beneficial to the firm in the context that
they contain interest bearing securities which add up as a source of revenue for
the firm unlike cash which remains idle and unproductive when not in use. This
reduction of dividend could be attributed to disposal of investments in mutual
funds and subsidiary. This disposal creates a fund, which can be used by the
company as and when the need arises.

Cash vs. Marketable Securities

52
The investment in marketable securities rather than having large cash balances
in something that has been given thought for by the firm. This is because while
a firm gets revenue in the form of interests by investments, it actually has to
pays certain amount money to the banks for maintaining current accounts and
fixed deposits usually have a longer maturity period. That is, the problem with
high investments is that the opportunity to earn is lost, thus a firm has to
maintain an optimal cash balance. But the investment in mutual funds or other
marketable securities might create a problem of investment, as they might not
be readily realizable as say liquid cash or the amount deposited in the current
account. The investments in say fixed assets say may earn a fixed rate of
interest but they have a maturity period attached to them.
In MODI ARC ELECTRODES, Standard Chartered is the concentration bank
in which all the inflows from the deposit banks are concentrated and passed on
to the disbursement banks for further disbursement.

Liquid Cash Balance

The liquid cash maintained in the business is only that much as is required to
satisfy the daily requirements of the firm and not more. The rest of the cash is
invested into mutual funds and also held in fixed deposits and current accounts.

Instruments Used
The instrument used here are primarily cheques comprising of around 97% of
what is used in. The rest 2-3% comprise of the letters of credit.
Thus working capital is the lifeline for every business. The main advantages of
sufficient working capital are:

 It helps in prompt payment

53
 Ensures high solvency in the company and good credit standing.
 Regular supply of material and continuous production.
 Ensures regular payment of salaries and wages and day to day
commitments.

54
 RECEIVABLES MANAGEMENT

Cash flow can be significantly enhanced if the amounts owing to a business

are collected faster. Every business needs to know.... who owes them money....
how much is owed.... how long it is owing.... for what it is owed.
Late payments erode profits and can lead to bad debts.
Slow payment has a crippling effect on business; in particular on small
businesses whom can least afford it. If you don't manage debtors, they will
begin to manage your business as you will gradually lose control due to
reduced cash flow and, of course, you could experience an increased incidence
of bad debt.
The following measures will help manage your debtors:
1.Have the right mental attitude to the control of credit and make sure that it
gets the priority it deserves.
2.Establish clear credit practices as a matter of company policy.
3.Make sure that these practices are clearly understood by staff, suppliers and
customers.
4.Be professional when accepting new accounts, and especially larger ones.
5.Check out each customer thoroughly before you offer credit. Use credit
agencies, bank references, industry sources etc.
6.Establish credit limits for each customer and stick to them.

Recognize that the longer someone owes you, the greater the chance you will
never get paid. If the average age of your debtors is getting longer, or is
already very long, you may need to look for the following possible defects.

55
 Poor collection procedures.
 Lax enforcement of credit terms.
 Slow issue of invoices or statements.
 Errors in invoices or statements.
 Customer dissatisfaction.
 Weak credit judgement.

Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention. Look for the warning signs of a future bad debt.
For example…..
1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed
terms.
3. Evidence of customers switching to additional suppliers for the same
goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many
reasons and therefore put on the long finger because they convince themselves
that there is something more urgent or important that demand their attention
now. There is nothing more important than getting paid for your product or
service. A customer who does not pay is not a customer.

56
 Here are few ways in collecting money from debtors: -
 Develop appropriate procedures for handling late payments.
 Track and pursue late payers
 Get external help if you own efforts fail.
 Don’t feel guilty asking for money .. its yours and you are entitled to it.
 Make that call now. And keep asking until you get some satisfaction.
 In difficult circumstances, take what you can now and agree terms for the
remainder, it lessens the problem.
 When asking for your money, be hard on the issue – but soft on the person.
Don’t give the debtor any excuses for not paying.
 Make that your objective is to get the money, not to score points or get
even.

RECEIVABLES MANAGEMENT IN MODI ARC ELECTRODES:

PARTICULARS 2006 2005 2004 2003

DEBTORS TURNOVER 5.21 5.80 5.53 6.62
RATIO
AVERAGE 70 63 66 55
COLLECTION PERIOD

A better turnover ratio implies for the firm, more efficiency in converting the
accounts receivable to cash. A firm with very high turnover ratio can take the
freedom of holding very little balances in cash, as their debtors are easily

57
realizable. In case of MODI ARC ELECTRODES, the collection period for the
firm is 70 days.

PARTICULARS 2006 2005 2004

PROVISION FOR DOUBTFUL DEBTS(CASH 3 49.85 25
FLOW)
DEBTS DOUBTFUL(EXCEEDING 6 MONTHS) 47 134.09 69.8

The debts doubtful have doubled but their percentage on the debts has almost
become half. This implies a sales and collection policy that get along with the
receivables management of the firm.

COLLECTION POLICIES:
It refers to the collection procedures such as letters, phone calls and other follow
up mechanism to recover the amount due from the customers. It is obvious that
costs are incurred towards the collection efforts, but bad debts as well as
average collection period would decrease. Further, a strict collection policy of
the firm is expensive for the firm because of the high cost is required to be
incurred by the firm and it may also result in loss of goodwill. But at the same
time it minimizes the loss on account of bad debts. Therefore, a firm has to
strike a balance between the cost and benefits associated with collection
policies.

58
 The steps usually followed in collection efforts are:

Sending repeated letters and reminders to the customers

Personal visits
Using agencies involved in collection process
Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)

Real Time Gross Settlement as such is a concept new in nature and though the
firm uses the system with all the members of the consortium, it is still in its
primal stage and will take time before all of the clients of the firm are willing to
accept it. The firm has made a proposal to the consortium of the banks during
appraisal for faster implementation of internet based banking facility by all the
banks and adoption of RTGS payment system through net.
The debtor’s turnover ratio is completely dependent upon the credit policy
followed by the firm. The credit policy followed by the firm should be such that
the threat of bad debts and the default rate involved should be terminated.

PARTICULARS 2006 2005 2004 2003

CREDITORS 16.44 15.68 21.29 21.14
TURNOVER RATIO
PAYMENT PERIOD 22 23 17 16

That the creditors turnover ratio has declined and payment period has increased
indicate that the company has got a leeway in making the payment to the
creditors by way of increased time.

59
With creditors they are having pre-agreements and have undertaken
arrangements with them, which they believe to be the best in the business and
these are fixed.
(NOTE: Acceptances are not included in the computation of creditor’s turnover)

MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be

managed carefully to enhance the cash position.
Purchasing initiates cash outflows and an over-zealous purchasing function
can create liquidity problems.
Consider the following: -
 Who authorizes purchasing in your company - is it tightly managed or
spread among a number of (junior) people?
 Are purchase quantities geared to demand forecasts?
 Do you use order quantities, which take account of stock holding and
purchasing costs?
 Do you know the cost to the company of carrying stock?
 Do you have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms as it reduces
dependence on a single supplier.
 How many of your suppliers have a return policy?
 Are you in a position to pass on cost increases quickly through price
increases to your customers?

60
 If a supplier of goods or services lets you down can you charge back the
cost of the delay?
 Can you arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?
There is an old adage in business that "if you can buy well then you can sell
well". Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors- slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).
Remember that a good supplier is someone who will work with you to enhance
the future viability and profitability of your company.

61
 Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to
make investment in current assets.

Long term financing:

It includes ordinary share capital, preference share capital, debentures, long
term borrowings from financial institutions and reserves and surplus.

Short term financing:

It is for a period less than one year and includes working capital funds from
banks, public deposits, commercial paper etc.

Spontaneous financing:
It refers to automatic sources of short-term funds arising in normal course of
business. There is no explicit cost associated with it. For example, Trade
Credit and Outstanding Expenses etc.

Depending on the mix of short and long term financing, the company can
follow any of the following approaches.

Matching Approach
In this, the firm follows a financial plan, which matches the expected life of
assets with the expected life of source of funds raised to finance assets. When
the firm follows this approach, long term financing will be used to finance
fixed assets and permanent current assets and short term financing to finance
temporary or variable current assets.

62
Conservative Approach
In this, the firm finances its permanent assets and also a part of temporary
current assets with long term financing. In the periods when the firm has no
need for temporary current assets, the long-term funds can be invested in
tradable securities to conserve liquidity. In this the firm has less risk of facing
the problem of shortage of funds.

Aggressive Approach
In this, the firm uses more short term financing than warranted by the
matching plan. Under an aggressive plan, the firm finances a part of its current
assets with short term financing.
Relatively more use of short term financing makes the firm more risky.
Current asset to fixed asset ratio:
The financial manager should determine the optimum level of current assets so
that the wealth of shareholders is maximized. A firm needs fixed and current
assets to support a particular level of output.

The level of current assets can be measured by relating current assets. Dividing
current assets by fixed assets gives CA/FA ratio. Assuming a constant level of
fixed assets, a higher CA/FA ratio indicates a conservative current assets
policy and a lower CA/FA ratio means an aggressive current assets policy

63
assuming other factors to be constant. A conservative policy i.e. higher CA/FA
ratio implies greater liquidity and lower risk; while an aggressive policy i.e.
lower CA/FA ratio indicates higher risk and poor liquidity. The current assets
policy of the most firms may fall between these two extreme policies. The
alternative current assets policies may be shown with the help of the following
figure. In this figure the most conservative policy is indicated by alternative A,
where as CA/FA ratio is greatest at every level of output. Alternative C is the
most aggressive policy, as CA/FA ratio is lowest at all levels of output.
Alternative B lies between the conservative and aggressive policies and is an
average policy

64
 WORKING CAPITAL & SHORT-TERM FINANCING
CONSORTIUM BASED FINANCING
Current Working Capital Limits
NAME OF THE BANK FUND BASED NON-FUND
BASED
STATE BANK OF INDIA 3600 46000
ICICI BANK 1282 19000
HDFC BANK 1200 10000
STANDARD 1200 19000
CHARTERED BANK

STATE BANK OF 715 7500

SAURASHTRA
STATE BANK OF 1300 7700
PATIALA
CANARA BANK 1203 6000
SOCIETE GENERALE 1000 4000
HSBC BANK 1000 18300
TOTAL 12500 137500

In order to finance the working capital needs of the firm in the form of Working
Capital Demand Loan, there is a consortium of nine banks. The consortium if
banks provide a fund based limit of 125 Crores which comprises of cash credit
and working capital demand loans and non-fund based limits which has bank
gurantee and letter of credit subject to a limit of 1375 Crores. The Lead Bank

in this consortium of banks is State Bank of India and the second lead bank is
ICICI. It is SBI, which fixes the limit on the basis of consortium. They, in

65
consultation of the company decide the allocation of limit to various member
banks. The allocation cannot be higher than the limits fixed by it. SBI is the
biggest contributor in the consortium for both fund and non-fund based limits
with about
31.30 in funds and 34.02 in non-fund limits. The ratio of both limits for the
year 2009 is 0.23:0.77. It is on the basis of the accounts receivable that the
banks come to an agreement with regards to the limits imposed. Though it is the
fund based limits that finance the working capital requirements, the non-fund
based limits are important for the management of the working capital as there
might be clients who are not willing to sell on open credit and might be
demanding letters of credit before any advances.

RENEWAL OF LIMITS
LIMITS 2009 2008 2007
FUND BASED 11500 11500 11500
NON FUND 48500 38500 28500
BASED
TOTAL 60000 50000 40000

All banks sanction the limits for a period of one year. Thereafter it is to be
renewed every year. SBI appraises the limit on the basis of consortium. The
individual banks appraise for their own individual limit. The non fund based
limits of the firm in consortium financing has been subjected to change for the
past two years as per the requirements of the firm and the consent of the lead

bank to its proposal. It was around 385 Crores in 2008 and had been risen to
around 485 Crores in 2009.

66
A proposal has been made by the firm to further appraise the limits by 100
Crores to 585 Crores in view of the growing operations of the firm with full
interchangeability between letter of credit and bank guarantee limits for
operational flexibility. Allocation of the fund based and non based limits among
the banks based on operational convenience rather than allocating the fund
based and non fund based on the same ratio is also among the proposals made
by the firm.
The company needs to provide the following information to bank for appraisals:

 Credit Monitoring Appraisal

 Write Up on company
 Share holding pattern
 List of the directors

CONSORTIUM MEETING :
All the members of the consortium are required to meet to discuss various
issues relating to the working facilities. As per RBI guidelines, the lead bank,
i.e., SBI should ensure that one consortium meeting is held every quarter snd
this meeting has to be arranged by MODI ARC ELECTRODES.

DOCUMENTATION and JOINT DOCUMENTATION:

There are various documents that need to be signed at the time of renewal or
inducting any bank to the consortium. The various documents are as follows:

 Loan agreement
 Hypothecation agreement for movable machinery

 Hypothecation agreement for movables and book debts

67
  Counter Indemnity

The above are the standard agreements asked for by the banks. The common
seal has to be witnessed by the company secretary and one of the directors of
the company.
As of 2008, no additions or deletions were made to the consortium of the banks.
But over the years the number of banks in the consortium has been reduced.
Indian Banks and State Bank of Hyderabad are the two banks which were
earlier a part of the consortium.
Joint Documentation is executed between the company and the consortium of
banks for the working capital facilities extended by the consortium to the
company. The joint documentation is valid for three years. The documents
comprising joint documentation are:

 Working Capital consortium agreement

 Joint deed of documentation
 Inter se agreement between bankers
 Letter of authority to lead bank by other consortium banks
 Letter of authority to second lead bank by other consortium banks
 Undertaking to create charge on the assets of the company.

ALLOCATION OF LIMIT BY LEAD BANK

68
SBI appraises the limit on behalf of the consortium. It in consultation with the
company decided the allocation of the limit to various member banks. The
allocation of any member bank cannot be higher than the limit sanctioned by it.
The drawing power for it fund based limits out of the consortium are
determined on the basis of the stock statement submitted by the company.
MODI ARC ELECTRODES is required to submit the stock statement to all
member banks in consortium for every month.

FINANCIAL FOLLOW UP REPORTS ( FFRI & FFRII):

Every quarterly and half quarterly interval, the firm submits Financial Follow
Up Reports I and II. FFR I is an extract of the balance sheet. In this report, the
company is required to submit the details of sales, current assets and current
liabilities for the quarter and the estimates for the current year. FFR II – the
company is required to prepare P&L, B/S and Cash Flow in a different format.
The information is to be provided for the last year (actual), current year half
yearly results (actual) and the estimates for the next year.

69
SHORT TERM FINANCING
Other than the investment in current assets, the firm also has to be concerned
with short-term to long-term debt as this plays a very important role in
determining the amount of risk undertaken by the firm. That is , the firm not
only has to be concerned about current assets but also the sources through
which they are financed. A firm before financing in either of the two, has to
take into consideration various aspects. While short term might seem the ideal
way to finance your assets than the long term due to shorter maturity period and
also less of costs are involved, there is an inherent risk in short term financing
due to fluctuating interest rates and due to the reason that the firm might be
unable to reay the amount in a shorter span of time.

SECURED 2009 2008 2007 2006

LOANS
SHORT TERM 3849 4991.28 6903.7 4987.52
LONG TERM 0 530.07 0 3461.36
TOTAL 3849 5521.35 6903.7 8448.88
%SHORT 100 90.4 100 59.03
TERM

Under secured loan cash credit, along with non fund based facilities, foreign
currency term loan from banks are secured by way of hypothecation of stock-in-
trade, book debts as first charge and by way of second change on all the
immovable and movable assets of the parent company. Term loan in Indian
rupees from a bank is subject to a prior charge in favour of company’s bankers
on book debts and stock in trade for working capital facilities.

70
UNSECURED 2009 2008 2007 2006
LOANS
SHORT TERM 15104 2593.39 63.94 76.84
LONG TERM 11 17 169.51 3261.42
TOTAL 15115 2610.39 233.45 3338.26
% SHORT TERM 99.93 99.348 27.38 2.3

Here MODI ARC ELECTRODES has a major portion of their financing done
through short term financing than long term financing. The preference of short
term financing to long term as such is not the part of any policy employed by
the firm but it was due to the reason that the interest rates in short term were
more investor friendly and the cost involved in them were also low. At present,
we can see that the firm is moving more towards long term financing as the
interest terms in the long term has reduced compared to the short term.

71
Data Analysis

72
ANALYSIS

CURRENT RATIO

2.30%

2.25%

2.20%

2.15%

2.10% 2.26%
2.21%
2.05%

2.00%
2.03%
1.95%

1.90%
2005-06 2005-06 2006-07

PERCENTAGE

Inferences
The above diagram shows that in the year 2005-06 is
2.26%, in year 2006-07 is 2.21and in year 2007-08 is 2.03, These ratios
of liquidity indicate the over capitalization of current assets.

73
 QUICK RATIO

1.8

1.6

1.4

1.2

1
PERCENTAGEOF RATIO 1.68
0.8 1.44 1.36
0.6

0.4

0.2

0
2005-06 2006-07 2006-07

YEARS

Inference:
The above data shows the quick ratio of the company in
year 2005-06, 2006-07 and 2007-08 is 1.68%, 1.44% and 1.36%
respectfully. The ratios show the company enjoys the high liquidity
position; it is good however too much liquidity is not beneficial for the
company

74
 CASH RATIO

0.4
0.35

0.3
0.25
OF RATIO 0.36
PERCENTAGE0.2 0.36

0.15 0.27

0.1
0.05

0
1 2 3
YEARS

Inference:
In the above data it shows that the cash ratio of company is in
2002, 2003 and 2004 is 0.36, 0.27 and 0.36 respectfully .It is below the
standard and it is not good for company.

75
 WORKING CAPITAL RATIO

0.8

0.8

0.8

0.79
0.8 0.8
PERCENTAGE0.79
OF RATIO

0.79

0.79 0.79

0.79

0.78
1 2 3

YEARS

Inference:
In the above data it shows that the Working capital ratio of
company is in 2002, 2003 and 2004 is 0.80, 0.79 and 0.80 respectfully.
Ratio shows the liquidity position of the company is good.

76
 TOTAL CAPITAL TURNOVER

2.61

4.77

3.89

2001-02 2002-03 2003-04

Inferences:

In the above graph it shows that the Gross Profit ratio of

company is in 2002, 2003 and 2004 is 2.61, 3.89 and 4.77 times
respectfully .It shows that the performance of business is better and all
the available resources are well utilized.

77
 WORKING CAPITAL TURNOVER

3.26

5.96

4.92

2001-02 2002-03 2003-04

Inferences:

In the above graph it shows that the working capital

turnover of company is in 2002, 2003 and 2004 is 3.26, 4.92 and 5.96
respectfully .It shows the better utilization of the working capital
incurred in the operation.

78
 FIXED ASSETS TURNOVER

25

20

15
TIMES 23.88
18.55
10 16.76

0
2001-02 2002-03 2003-04
YEAR

Inferences:

In the above graph it shows that the Fixed Assets turnover

of company is in 2002, 2003 and 2004 is 16.76, 18.55 and 23.88 times
respectfully .It shows the better utilization of the Fixed Assets, which
incurred in the operation.

79
 DEBTORS TURNOVER

7 6.39

6 5.22

5
4.18

4
TIMES
3

0
2001-02 2002-03 2003-04

YEAR

Inferences:

In the above graph it shows that the Debtors Turnover of

company is in 2002, 2003 and 2004 is 4.18, 5.22 and 6.39 times
respectfully. It shows that the collection policy of the company is too
liberal.

80
 GROSS PROFIT RATIO

40

72

39

2001-02 2002 - 03 2003 - 04

Interfaces:

In the above graph it shows that the Gross Profit ratio of

company is in 2002, 2003 and 2004 is 40%, 39% and 72% respectfully.
It shows good sign, which is 72%. This indicates the efficiency in stock
control and an adequacy of the selling price.

81
 CREDITORS TURNOVER

4
3.5
3
2.5
TIMES 2 3.6
3.2
2.79
1.5
1
0.5
0
2001-02 2002-03 2003-04
YEAR

Inferences:

In the above graph it shows that the Gross Profit ratio of

company is in 2002, 2003 and 2004 is 2.79, 3.20 and 3.60 respectfully.
It shows good sign, which is in increasing trend, which shows that the
company enjoys good credit in market.

82
 NET PROFIT RATIO

2001-02
27%
2003 - 04
45% 2001-02
2002 - 03 2002 - 03
27% 2003 - 04

Inferences:

In the above graph it shows that the Gross Profit ratio of

company is in 2002, 2003 and 2004 is 27%, 27% and 46%
respectfully .It is the increasing in trend the operation expenses, is in
desired parameters.

83
Inferences:

In the above graph it shows that the Gross Profit ratio of company
is in 2002, 2003 and 2004 is 3%, 3% and 5% respectfully .It is the increasing
in trend, which is not good for the company future.

Inferences:

In the above graph it shows that the administration

expenses ratio of company is in 2002, 2003 and 2004 is 7%, 6% and 5%
respectfully .It is the decreasing in trend, which is beneficial for the
company, and ratio indicates in under controlled.

ADMINISTRATION EXPENESE RATIO

5
7

2001-02 2002 - 03 2003

84 - 04
 FACTORY EXPENSES RATIO

9 9

2001-02 2002 - 03 2003 - 04

Inferences:

In the above graph it shows that the Gross Profit ratio of company
is in 2002, 2003 and 2004 is 9%, 9% and 9% respectfully .It is the constant in
all the year, it shows that all the factory expenses is in the control and there is
no additional factory expenses bear in any of the year by the company
irrespective of their change in production.

85
 OPERATING EXPENSES

98

285 81

2001-02 2002 - 03 2003 - 04

Inferences:

In the above graph it shows that the operating expenses ratio of

company is in 2002, 2003 and 2004 is 98%, 81% and 285% respectfully .It is
the increasing in trend that shows heavy expenses is incurred in the operation
which is in uncontrolled manner and it is not good for the company future if it
is continuously increases like this.

86
 SELLING AND DISTRIBUTION RATIO

13 14

14

2001-02 2002 - 03 2003 - 04

Inferences:

In the above graph it shows that the selling and distribution

expenses of company is in 2002, 2003 and 2004 is 14%, 14% and 13%
respectfully .It shows the decreasing in trend, ratio indicates in under
controlled.

87
 RETURN ON INVESTMENT

10
23

2001-02 2002 - 03 2003 - 04

Inferences:
In the above graph it shows that the Return on investment of
company is in 2002, 2003 and 2004 is 6%, 10% and 23% respectfully .It is the
increasing in trend that shows better performance of the company.

LIMITATION

88
 The study is limited to three years only.
 Price level changes are not considered.
 Time is short for deep research.
 Separate records of the all units are not available.
 No comparison made with other firm’s ratio while during the study
period and making conclusion time.
 The readjusted and regroup figure slightly affects the ratio figures.
 Study is limited with the one unit of Modi Industries limited.
 The data is used in the project have been taken from annual report
only. Hence, grouping and sub grouping and annuliasation of data
may slightly affect the results.

S UG G E S T I O N

89
Although MODI ARC ELECTRODE LIMITED, MODI NAGAR has
satisfied the ratios. The following are the suggestion being made out by
me as observed during study of the performance through ratio analysis:

 Company should increase

its sales of all the production units with increase in the sales of the
company that can be able to increase its financial position.

 Company should decrease

the operating expenses to increase its operating profit.
 Maximize the production
capacity.

 Maintain the amount of

current sales level and try to increase it.

 Maximize the utilization

of fixed assets and working capital.
 All other management,
personal and administrative suggestion to be incorporated.
 To follow the strict credit
collection policy.

 Reduce the current assets

and quick assets ratio to maintain the standard ratio.
 Cash ratio performance is
poor. So make policies to improve it.

90
 Return on investment is
in satisfactory position and they try to maintain it in future.

 Try to start those

companies, which are closed due to non-availability of funds.
 Try to best utilization of
the available resources.
 Try to maintain the
standard ratio in the financial ratios.

91
 CONCLUSION
If these ratios are properly followed the capital investment in the current
assets is above the standard ratio and the cash position of the company
would substantially improve.

The Turnover Ratio give good sign of the success but in the debtor’s
turnover ratio shows that company provided more credit period of
payment to its customer, which is not beneficial for it.

The Profitability Ratio all indicates good sign but increase in the
operating and financial expenses of the company, which is not good sign
for the company future.

Return on Investment ratio is satisfactory, it indicate the overall

performance of the company is good and they enjoy a good position of
profitability.

92
 BIBLOGRAPHY

M.Y.KHAN AND P.K. FINANCIAL MANAGEMENT

(Tata McGraw- Hill Publishing Company Limited, NEW DELHI)

 L.K. NARANG AND S.P. JAIN FINANCIAL MANAGEMENT

(KALYANI PUBLISHERS, NEW DELHI),2000.

ANNUAL REPORTS OF THE Modi Arc Electrodes.

93