NET PROFITS OF…

MAHINDRA & MAHINDRA

RELIANCE INDUSTRIES
MARUTI

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BALANCE SHEET

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BALANCE SHEET  FINANCIAL POSITION

•CAPITAL + LIABILITIES = ASSETS

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BALANCE SHEET OF ‘Z LTD’ AS ON 31.3.16
LIABILITIES AMOUNT ASSETS AMOUNT
CAPITAL XX NON CURRENT ASSETS: XX
NETWORTH
RESERVES & SURPLUS XX BUILDINGS XX
LONG TERM LOANS: MACHINES XX
SECURED LOANS XX COMPUTERS XX
UNSECURED LOANS XX CURRENT ASSETS:
CURRENT LIABILITIES: XX DEBTORS/RECEIVABLES XX
CREDITORS/PAYABLES XX STOCK XX
BANK OVERDRAFT XX CASH XX
OUTSTANDINGS XX BANK XX
ADVANCE FROM CUSTOMERS XX SHORT TERM INVESTMENTS XX
XXX XXX

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WORKING CAPITAL….

Buys on cash Today Sale on the Same Day

for Cash

Working Capital …No

WORKING CAPITAL DAYS….

SUPP Buys on Credit Sale on same day CUSTO

LIER of 45 Days Credit for 60
Days MER

Working Capital …? Required for 15 Days

and interest for 15 Days
WORKING CAPITAL DAYS….

RECEIV
ABLES
PAY Store
ABLE goods
(SUP Buys on Credit Sale on Credit
for 10 (CUSTO
PLIE of 45 Days for 60 Days
Days
R) MER)

Working Capital …? Required for 25

Days
ABILITY TO MAKE AND COLLECT SALES
• NET SALES/ RECEIVABLES
• 25.13 TIMES …..HIGHER TURNOVER INDICATES BETTER MANAGEMENT
• COLLECTION DAYS = 360/DEBTORS TURNOVER
• 360/25.13 = 14.33 DAYS
• ONCE IN 14 DAYS COLLECTION FROM DEBTORS

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 DEBTORS TURNOVER - AN EXAMPLE…
PARTICULARS
LIABILITIES
31-03-2015 • DEBTORS TURNOVER
 
Current Liabilities   = NET SALES / DEBTORS
Creditors/Payables 35,035 = 31,25,000/65,065
Bank Overdraft 16,465
= 48.03 TIMES
Outstanding 7,550
Total Current Liabilities ( C ) 59,050 • DEBTORS COLLECTION PERIOD
ASSETS  
= 360 DAYS/48.03 TIMES
Current Assets  
Debtors/Receivables 65,065 = 7.50 DAYS
Inventory 27,270
Cash 22,850
Total Current Assests ( E ) 1,15,185
Net Sales ( From Income Statement) 31,25,000

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QUICK QUESTION…?

•SHREE COMPANY HAS AN AVERGAE DEBT COLLECTION PERIOD OF

35 DAYS, AND LAKSHMI COMPANY 45 DAYS. BOTH COMPANIES
ARE IN THE RETAIL DISTRIBUTION BUSINESS. WHICH COMPANY’S
QUALITY OF DEBTORS IS BETTER?

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ABILITY TO SELL ITS INVENTORY
(INVENTORY TURNOVER)

• NET SALES/ INVENTORY

• 7.38 TIMES… HIGHER TURNOVER INDICATES BETTER SALES
• INVENTORY HOLDING PERIOD
• 360/7.38 = 48.78 DAY (OR) 49 DAYS
• INVENTORY HOLDING PERIOD IS 49 DAYS

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 INVENTORY TURNOVER - AN EXAMPLE…
PARTICULARS
LIABILITIES
31-03-2015 • INVENTORY TURNOVER
 
Current Liabilities   = NET SALES / AVERAGE INVENTORY
Creditors/Payables 35,035 = 31,25,000/27,270
Bank Overdraft 16,465
= 114.59 TIMES
Outstanding 7,550
Total Current Liabilities ( C ) 59,050 • INVENTORY HOLDING PERIOD
ASSETS  
= 360 DAYS/114.59 TIMES
Current Assets  
Debtors/Receivables 65,065 = 3.14 DAYS
Inventory 27,270
Cash 22,850
Total Current Assests ( E ) 1,15,185
Net Sales ( From Income Statement) 31,25,000

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OPERATING CYCLE

•TIME TAKEN TO CONVERT INVENTORY INTO CASH

•INVENTORY TO DEBTORS
•DEBTORS TO CASH
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OPERATING CYCLE CONT…
• AVERAGE INVENTORY HOLDING PERIOD = 48.78 DAYS
• AVERAGE DEBT COLLECTION PERIOD = 14.33 DAYS
• OPERATING CYCLE = 48.78 + 14.33 = 63.11 DAYS
• COMPANY’S FUNDS ARE HELD UP IN RECEIVABLES AND INVENTORIES FOR A PERIOD
OF 63.11 DAYS
• EFFORTS TO REDUCE IT
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 OPERATING CYCLE - AN EXAMPLE…
PARTICULARS
LIABILITIES
31-03-2015 • DEBTORS COLLECTION PERIOD
 
Current Liabilities   = 7.50 DAYS
Creditors/Payables 35,035 • INVENTORY HOLDING PERIOD
Bank Overdraft 16,465
= 3.14 DAYS
Outstanding 7,550
Total Current Liabilities ( C ) 59,050 • OPERATING CYCLE
ASSETS  
= DEBTORS COLLECTION PERIOD + INVENTORY
Current Assets  
HOLDING PERIOD
Debtors/Receivables 65,065
Inventory 27,270 = 7.50 DAYS + 3.14 DAYS
Cash 22,850
= 10.64 DAYS
Total Current Assests ( E ) 1,15,185
Net Sales ( From Income Statement) 31,25,000

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QUICK QUESTION…?

•RAJESH COMPANY HAS AN INVENTORY TURNOVER OF 4

AND A DEBTOR TURNOVER OF 8. WHAT IS PERIOD OF
OPERATING CYCLE?

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QUICK ANSWER..

• INVENTORY HOLDING PERIOD = 360/4 = 90 DAYS

• DEBTORS COLLECTION PERIOD = 360/8 = 45 DAYS
• OPERATING CYCLE = 90 DAYS + 45 DAYS = 135 DAYS

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REPAYING CREDITORS
• NET PURCHASES/ CREDITORS
• 18.81 TIMES …..HIGHER TURNOVER INDICATES BETTER MANAGEMENT
• PAYMENT DAYS = 360/CREDITORS TURNOVER
• 360/18.81 = 19.13 DAYS
• ONCE IN 19 DAYS PAYING CREDITORS

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 CREDITORS TURNOVER - AN EXAMPLE…
PARTICULARS
LIABILITIES
31-03-2015 • NET PURCHASES / AVERAGE CREDITORS
 
Current Liabilities   = 10,63,875 / 35,035
Creditors/Payables 35,035 = 30.36 TIMES
Bank Overdraft 16,465
Outstanding 7,550 • PAYMENT PERIOD
Total Current Liabilities ( C ) 59,050 = 360 / 30.36
ASSETS  
= 11.86 DAYS
Current Assets  
Debtors/Receivables 65,065
Inventory 27,270
Cash 22,850
Total Current Assests ( E ) 1,15,185
Net Purchases ( From Income Statement) 10,63,875

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CASH CYCLE

• AVERAGE INVENTORY HOLDING PERIOD = 48.78 DAYS

• AVERAGE DEBT COLLECTION PERIOD = 14.33 DAYS
• AVERAGE PAYMENT PERIOD = 19.13 DAYS
• CASH CYCLE = 48.78 + 14.33 – 19.13 = 43.98 DAYS

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CASH CYCLE FROM EXAMPLES

• AVERAGE INVENTORY HOLDING PERIOD = 3.14 DAYS

• AVERAGE DEBT COLLECTION PERIOD = 7.50 DAYS
• AVERAGE PAYMENT PERIOD = 11.86 DAYS
• CASH CYCLE = 3.14 + 7.50 – 11.86 = - 1.22 DAYS

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PARTICULARS 31-03-2016 TRY IT YOURSELF
LIABILITIES  
Current Liabilities  
Creditors/Payables 75,500
Bank Overdraft 12,250
Outstanding 13,755
Total Current Liabilities ( C ) 1,01,505
• DEBTORS COLLECTION PERIOD
ASSETS   • INVENTORY HOLDING PERIOD
Current Assets  
Debtors/Receivables 50,000
• OPERATING CYCLE
Inventory 25,650 • CREDITORS PAYMENT PERIOD
Cash 15,000
Total Current Assests ( E ) 90,650
Net Sales ( From Income Statement) 25,00,000
Net Purchases ( From Income Statement) 8,33,500

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PARTICULARS 31-03-2016 TRY IT YOURSELF
LIABILITIES  
Current Liabilities  
Creditors/Payables 75,500
Bank Overdraft 12,250
Outstanding 13,755
Total Current Liabilities ( C ) 1,01,505
• COLLECTION PERIOD = 7.2 DAYS
ASSETS   • HOLDING PERIOD = 3.69 DAYS
Current Assets  
Debtors/Receivables 50,000
• OPERATING CYCLE = 10.89 DAYS
Inventory 25,650 • PAYMENT PERIOD = 32 DAYS #
Cash 15,000
Total Current Assests ( E ) 90,650
Net Sales ( From Income Statement) 25,00,000
Net Purchases ( From Income Statement) 8,33,500

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