Apollo Tyres Ltd. - Project Report on Working Capital Management.

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EXECUTIVE SUMMARY Working Capital Management is significant in financial management due to the fact that it plays a vital role in keeping the wheel of the business running. Every business requires capital, without which it cannot be promoted. It holds exceptional importance in the case of of a manufacturing company. company. It also covers covers various concepts concepts like inventory inventory manage management, ment, cash cash managemen management, t, credit policy policy etc. This study study is undertaken to find out the efficiency and effectiveness of the working capital management management in the company and to provide useful feedbacks. Apollo Apollo Tyre Tyres s Ltd is is one one of the larges largestt tyre tyre manuf manufact acturi uring ng com compan panies ies acro across ss the the world world.. The The comp compan any y star starte ted d its its prod produc uctio tion n of of tyre tyres s way way back back in in the the year year 1977 1977.. It holds 2nd position in India and 14th position in the world. The company currently has 9 plants plants in India, India, South South Africa Africa and and Zimbab Zimbabwe. we. Apollo Apollo Tyres Tyres export exports s its produc products ts to Africa, the Middle East, South America, Asia-Pacific Asia-Pacific and Europe. STUDY ON WORKING WORKING CAPITAL CAPITAL MANAG MANAGEMEN EMENT T AT APOLLO APOLLO This This proj projec ectt title titled d ‘A STUDY TYRE TYRES S LTD’ LTD’ is a deliberate deliberate and system systematic atic endeav endeavour our to study study the working working capital capital

management management system in the Indian tyre giant. Under this study analysis has has been done for the last five years years from 2003-2004 to 2007-2008. Various secondary sources like annual report of the company, journals, theoretica theoreticall texts, publicatio publications ns in the web, financial financial inputs from from the managemen managementt staff  etc. were utilised to undertake undertake the study. The study is mostly made from the financial analysis tools like ratio analysis, cash conversion cycle, schedule of changes in working capital position etc. etc. The limitation of these tools tools may reflect in the results of  this study also. The study tries to compare the working capital management in the company and other competitors in Indian market to know the efficiency and shortcomings of the system. Analysis has been done by comparing the industrial ratios with the ratios

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recorded by the company. This project also tries to study about the components in the current asset to know the level of consistency consistency over the years. From the study it is found that the overall working capital management system is very efficient paring few drawbacks. drawbacks. The company showed high consistency consistency in most most of the areas of working capital and also met the industrial average and even surpassed them in some cases. It is found that the company’s performance in some areas is commendable and a few areas require more attention. It is suggested that the company should reinforce some aspects like cash management to consolidate its liquidity position. Minor adjustments in the inventory management system are needed for the more efficient utilisation of the inventory. The company’s company’s Debtors management management is found to be highly efficient. efficient. This can be understood by seeing the average collection period which is twice faster than the industrial average. The company should rectify the shortcomings in its working capital management system system with utmost utmost care to achieve achieve global global standards standards and thereby thereby becoming becoming Benchmark Company in this particular sector. sector.

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recorded by the company. This project also tries to study about the components in the current asset to know the level of consistency consistency over the years. From the study it is found that the overall working capital management system is very efficient paring few drawbacks. drawbacks. The company showed high consistency consistency in most most of the areas of working capital and also met the industrial average and even surpassed them in some cases. It is found that the company’s performance in some areas is commendable and a few areas require more attention. It is suggested that the company should reinforce some aspects like cash management to consolidate its liquidity position. Minor adjustments in the inventory management system are needed for the more efficient utilisation of the inventory. The company’s company’s Debtors management management is found to be highly efficient. efficient. This can be understood by seeing the average collection period which is twice faster than the industrial average. The company should rectify the shortcomings in its working capital management system system with utmost utmost care to achieve achieve global global standards standards and thereby thereby becoming becoming Benchmark Company in this particular sector. sector.

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COMPANY PROFILE

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INDUSTRY PROFILE The origin of tyre industry in India dated back to 1926 when Dunlop Rubber Ltd set up the first tyre factory in West Bengal. MRF followed the suit in 1946. 1946. Since then the Indian tyre industry has grown rapidly. Transportation industry and tyre industry go hand in hand as the two are inter-dependent. Transportation industry has experienced 10% growth rate year after year with an absolute level of 870 billion tonne freight with an extensive extensive road accounts for over 85% of all freight movement in India. Tyre industry consumes over 60% of the total rubber production with respect to Indian economy. But in actuality only just around 52% of the tyre is natural rubber. Remaining Remaining 48% consis consistt of synthe synthetic tic rubber, rubber, carbon, carbon, chemic chemicals, als, etc. The Indian Tyre Industry produced 736 lakh units of tyres (11 lakh tonnes) garnering Rs. 19,000 crores in FY 07. MRF Ltd. was the market leader (22% market share) followed closely by Apollo Tyres Ltd. (21%). The other major players players were JK Tyre Tyre & Industries Ltd (18%) and Ceat Ltd. (13%). The industry tonnage production registered a 5 year CAGR of 9.69% between FY 02-07 . The tyre industry in India is classified under 4 categories based on the year of  commencement commencement of production namely 1. 1st Generation Companies:-which included Dunlop and FireStone. 2. 2nd Generation Companies:-which included MRF, CEAT, GoodYear, and Premier. 3. 3rd Generation Companies:-which included Apollo, Vibrant, Modi Rubber, and J.K.Tyres. 4. 4th Generation Companies:-includes Companies:-includes the companies companies started after 1970 and also which are yet to start production.

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RANKING OF TYRE COMPANIES (In India) RANK

COMPANIES

1

MRF TYRES LTD

2

APOLLO TYRES LT

3

J.K. TYRES LTD

4

CEAT TYRES LTD

5

MODI RUBBERS LTD

6

BIRLA TYRES LTD

7

GOODYEAR INDIA TD

8

VIKRANT TYRES L D

MARKET SHARE OF VA IOUS COMPANIES COMPANY

TRUCK C R FARM LCV

APOLLO

28

1

21

19

MRF

16

2

24

20

JK

17

1

15

19

CEAT

12

1

8

15

VIKRANT

11

1

7

2

1

23

2

2

2

23

GOODYEAR 5 OTHERS

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Market Share MRF

10% 22%

5%

Apollo JK Tyres

11%

CEAT 13%

21%

Goodyear Vikrant

18

Others

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COMPANY PROFILE Corporate Overview Apollo Tyres Limited (Apollo Tyres) is a tyre manufacturing company, incorporated in 1975. In 1977, the first pl nt was commissioned at Perambra, T rissur, Kerala. In 2006, it acquired Dunlo

Tyres International, South Africa a d Zimbabwe. It

manufactures tyres, tubes and flaps for commercial and passenge r vehicles. Apollo tyres Ltd is the first India multinational tyre corporation. It is India’s largest and ranked 17th*in the world. It is the first Indian tyre company to cross the US$ 1 billion revenue mark in 2006-07. Three decades of manufacturing expertise and marketing innovation. It is the market leader in heavy commercial and light commercial tyres in India and fastest growing in passenger vehicle tyres. Apollo tyres ltd is the biggest exporter of passenger vehi le tyres from India.

Vision “A significant player in the global tyre industry and a brand of choice, providing customer delight and continuously enhancing stakeholder value”

Values 

C –Care For Customers

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R – Respect For A sociates

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E – Excellence Thr ough Teamwork

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A – Always Learn

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T – Trust Mutually

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E – Ethical Practic s

Corporate Objectives 

Employee Satisfac ion



Customer Delight



Revenue Growth



Operating Margin I provements

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1.2 Key Facts 

Apollo Tyres Ltd has been pioneer in the implementation of ‘Six Sigma’ among all the tyre companies in India

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7th fastest growing tyre manufacturing company in the world

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1st tyre company to obtain ISO 9001 Certification for all its operations

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Apollo Tyres Ltd is in the list of top 15 tyre manufacturing companies in the world in terms of revenue(14th rank)

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Has about 2400 exclusive dealers

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The R&D centre is functioning at Baroda plant in Gujarat

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Tube manufacturing is done on the Pune plant, Maharastra. Tubes for the entire requirement of all plants are produced here and balance requirement is met from outside. Flaps are also purchased from outside.

1.3 Corporate Timeline 

1975 Inception

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1976 Registered as a company

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1977 First plant commissioned in Perambra (Cochin, Kerala)

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1991 Second plant commissioned in Limda (Baroda, Gujarat )

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1995 Acquired Premier Tyres in Kalamassery (Cochin, Kerala)

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1996 Exclusive tubes plant commissioned in Ranjangaon (Pune, Maharashtra)

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2000 Exclusive radial capacity established in Limda

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2000 Established Apollo Tyres Health Care Clinic for HIV-AIDS awareness and prevention in Sanjay Gandhi Transport Nagar, Delhi

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2003 Expansion of passenger car radial capacity to 6,600 tyres/day

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2004 Production of India 's first H-speed rated tubeless passenger car radial tyres

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2004 Support in setting up India 's first Emergency Medical Service in Baroda, Gujarat

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2005 Apollo Tyres Health Care Clinics in Udaipur in Rajasthan and Kanpur in Uttar Pradesh

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2006 Expansion of passenger car radial capacity to 10,000 tyres/day

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2006 Expansion of passenger car range to include 4x4 and all-terrain tyres

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2006 Acquired Dunlop Tyres International in South Africa and Zimbabwe

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2006 Opening of Apollo Tyres Health Care Clinic in Ukkadam, Tamil Nadu

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2006 Launch of DuraTread, treading material and solutions

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2006 Launch of India's first range of ultra-high performance V and W -speed rated tyres

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2007 Launch of Regal truck and bus radial tyres

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2007 Launch of DuraTyre, retreaded tyres from Apollo

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2007 Launch of the Apollo Tennis Initiative and Mission 2018

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2009 Apollo Tyres completes 100 per cent acquisition of Vredestein Banden BV

Business Focus Major Segments: The Group's principal activities are to manufacture and sell automobiles tyres .Apollo Tyres product range includes truck and bus tyres; light truck tyres; farm tyres; passenger car tyres, off-the-road, earthmover and industrial radials. The company has five manufacturing plants in India, two in Kerala, one in Gujarat, one in Haryana and one in Tamil Nadu. It also has two manufacturing facilities in South Africa and two in Zimbabwe. The Group exports its products to South America, Pakistan, South-East Asia, Middle East Countries and Africa. Products and Services: 

Key product brands of the company include Apollo, Dunlop, India Tyres, Kaizen, Regal Tyres, Novex, Master Steel, Milestone, Tyfoon, Velocity etc.

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The company has a strong R&D centre at Vadodara that develops and promotes the evolution of new technologies.

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In FY07, the company launched some new products, including the Acelere Sportz and Aspire brands.

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In FY07, Apollo Tyres passenger car radial tyre manufacturing capacity increased from 210,000 tyres per month to 300,000 tyres per month.

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The company has a network of over 4,000 dealerships in India, of which over  2,500 are exclusive outlets. In South Africa, it has over 900 dealerships, of  which 190 are Dunlop Zones.

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Apollo Tyres exports to Africa, the Middle East, South America, Asia-Pacific, and Europe.

Competitors Sl No.

COMPANIES

1

MRF TYRES LTD

2

J.K. TYRES LTD

3

CEAT TYRES LTD

4

MODI RUBBERS LTD

5

BIRLA TYRES LTD

6

GOODYEAR INDIA LTD

7

VIKRANT TYRES LTD

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Capital Structure Period

Instrument

Authorised

Issued

Paid Up

Capital

Capital

Share

Face

Rs. Crs

Rs. Crs

Nos.

value

Capital

2007-2008

Equity Share

73

48.84

488444770

1

48.84

2006-2007

Equity Share

73

46.40

46402477

10

46.40

2005-2006

Equity Share

48

38.34

38337977

10

38.34

2004-2005

Equity Share

48

38.34

38337977

10

38.34

2003-2004

Equity Share

48

38.34

38337977

10

38.34

During the year 2007- 2008, the company has allotted 24.42 million equity shares of  Re.1/- each at a premium of Rs.28.30 to Promoters on conversion of 2.442 million warrants. The Company's share capital as on 31st March, 2008 has increased from Rs.464.02 million to Rs.488.44 million after the said allotment. Subsequently, promoters have exercised last tranch of their option for conversion of 1.558 million warrants into 15.58 million shares on 18th April, 2008, thereby, increasing share capital to Rs.504.02 million.

The face value of equity shares of the Company has been split from 1 equity share of Rs.10/- each into 10 equity shares of Re.1/- each w.e.f. 27th August, 2007, in pursuance of the resolution passed in the Annual General Meeting held on 26 July, 2007.

Ownership Structure Stake holding Pattern

Percentage

Promoters

39.35%

Public

26.38%

FII/ NRI/Foreign Body Corporate

14.76%

Government of Kerala/Travancore/Titanium Products Ltd. Financial Institutions/Banks/Mutual Funds

1.98% 17.53%

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Financial Performance Rs. Crores

2007-2008

2006-2007

2005-2006

2004-2005

2003-2004

4,256.21

3,777.31

3003.30

2,676.62

2319.87

Net Profit

219.30

113.42

78.17

67.63

70.42

Dividend

25.20

20.88

17.25

17.25

17.25

Sales & other Income

Manufacturing Facilities Plants in India Sl.No.

LOCATION

PRODUCTS & FACILITIES

1

APOLLO TYRES LTD, PERAMBRA, KERALA

BIAS

2

APOLLO TYRES LTD, KALAMASSERY, KERALA

BIAS

3

APOLLO TYRES LTD, BARODA, GUJARAT

RADIALS & BIAS, R & D

4

APOLLO TYRES LTD, KUNDLI, HARYANA

RETREADING

5

APOLLO TYRES LTD, CHENNAI, TAMIL NADU

RADIALS

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Plants Abroad Sl No.

LOCATION

PRODUCTS & FACILITIES

1

APOLLO TYRES, LADYSMITH,SOUTH AFRICA

RADIAL CAR

2

APOLLO TYRES, DURBAN,SOUTH AFRICA

RADIAL S &BIAS

3

APOLLO TYRES, BULAWAYO,ZIMBABWE

RADIALS & BIAS

4

APOLLO TYRES, HARARE,ZIMBABWE

RETREADING

Subsidiaries SL No.

Subsidiaries

1

Apollo (Mauritius) Holding Pvt. Ltd. (AMHPL)

2

Apollo (South Africa) Holding Pty. Ltd. (ASHPL)(Subsidiary through AMHPL)

3

Dunlop Tyres International Pty. Ltd. (DTIPL)(Subsidiary through AMHPL)

4

Dunlop Africa Marketing (UK) Ltd.(DAMUK)(Subsidiary through DTIPL)

5

Dunlop Zimbabwe Ltd. (DZL)(Subsidiary through DAMUK)

6

Radun Investment (Pvt.) Ltd.(Subsidiary through DAMUK)

7

AFS Mining (Pvt.) Ltd.(Subsidiary through DZL)

8

Apollo Tyres AG, Switzerland (AT AG)

9

Apollo Tyres GmbH , Germany (AT GmbH)(Subsidiary through AT AG)

10

Apollo Tyres Kft., Hungary (AT Kft)(Subsidiary through AT AG)

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Apollo Tyres Pte Ltd, Singapore ( AT PL)(Subsidiary through AMHPL)

Research, Design & Development 

Global R&D centre in Limda [Baroda]

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Dedicated FEA [Finite Element Analysis] cell

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Tie-ups with premier institutes in India [IIT Mumbai and IIT Kharagpur] and leading international universities in Germany [Leipzig and Leibniz].

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Panel o f international tyre technologists working on compounding and tyre design.

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Partners in the best raw material sources from across the world –Lanxess, Bekaert, Degussa to name a few –have development agreements with each

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Rigorous testing of UHP & 4x4 passenger vehicle tyres in world-class testing facilities.

Key Partnerships 

Apollo tyres relationship with the automakers have both expanded as well as improved over the year. It added General Motors India to the list of customers.



All the major automakers in India now actively look at Apollo Tyres Ltd. as a partner in their journeys. The last financial year has been a watershed year in ATL's march towards being a significant global player.

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Apollo Tyres strategic acquisition of Dunlop South Africa made it the first Indian tyre company to have a transnational footprint.

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A very important milestone was the initiation of direct exports by Apollo tyres to its International customers across Europe.

Distribution Network

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Aiming to make the most of ongoing growth in the promising world tyre market, Apollo Tyres is expanding its operations by fortifying local production capacity, product line ups and depth into the market.

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With over 120 sales & service stock points, 5 zonal offices, 18 state offices and 11 redistribution centres, Apollo Tyres is poised to penetrate its presence to the farthest corners of the country.

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A 4,032 strong dealership network along with 2138 Apollo Tyre Worlds, 194 Apollo Radial Worlds and 61 Apollo Pragati Kendras, ensures that Apollo Tyres is never very far from its consumers.

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The over 3000 exclusive Apollo Tyre World and Apollo Tyre Radial outlets have initiated a quick response mechanism by enabling prompt product delivery and after sales service to customers throughout the country.

SWOT Analysis Strengths 

Apollo Tyres has continued to maintain its lead in the market within the dominant segment of truck and bus tyres within the Indian tyre industry.



The Company has established a state-of-the-art plant in Baroda.

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Quick response to changes in market conditions and product profiles has resulted in superior product innovation and technical expertise.

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The Company's marketing initiatives have resulted in a strong brand recall, even in the price sensitive tyre market. Aiding these efforts is an extensive distribution network.

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The sourcing of raw materials to a global presence through the acquisition of  Dunlop Tyres International (Pty) Ltd in South Africa.

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Economies of transportation cost are a constant benefit to the company on account of proximity to the natural rubber growing belt.

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With a move into the international arena, Apollo Tyres can also follow and maintain global quality standards and international process and system certifications.

Weakness 

Apollo Tyres has no presence in the two and three wheeler segments.

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The capital intensive nature of the business in this segment also has its drawbacks.

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Opportunities 

The national thrust in road infrastructure and construction of expressways and national highways presents a range of opportunities for the tyre industry.

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Creation of road infrastructure has given, and will increasingly give, a tremendous fillip to surface transportation in the coming years.

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The tyre industry will continue to play an important role in this dynamic and evolving situation.

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Apollo's leadership position in the commercial vehicle segment will enable the company to leverage new and related business opportunities.

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The company have already started leveraging these opportunities to its benefit with its new product segments like Truck/Bus Radial (TBR), Off-TheRoad (OTR) tyres, retreading and allied automotive services.

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Growth within India also supports the Company's aim to be a leader in the global industry and partake in overseas markets like Europe.

Threats 

There is a need to prepare for imports from neighbouring countries at competitive prices, which have been rising in the recent past.

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The ever present challenge of raw material price volatility

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ORGANISATION PROFILE Apollo Tyres Ltd., Perambra, Thrissur  Organisational Details Name

APOLLO TYRES LTD

Place

Perambra, Thrissur District (50km north of Kochi, Kerala)

Year of Inception

1976

Land Area

97 acres

Building Area

69500 Sq. Mt

Head Office

New Delhi

Registered Office

Kochi, Kerala

Present Capacity

309 MT per day

Product Range

TRUCK, LCV, REAR TRACTORS, FARM RADIALS, PASSENGER & ADV TYRES

No of Staffs

2790

Employee Pattern Management Staffs

270

Permanent Staffs

1819

Workmen Trainees

248

Contract Workmen

453

Total

2790

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Milestones of Apollo tyres, Perambra YEAR

DESCRIPTIONS

1972

Company licence was obtained by Mr. Mathew T. Marattakalam, Jacob Thomas and Associates

1974

Company was taken over by Dr. Raunaq Singh and his associates

1975

April 13th ,foundation stone of Perambra plant was laid

1976

Apollo tyres was registered with registered office at Kochi

1977

Plant was commissioned with 49 tons per day capacity

1982

Started manufacturing of passenger car radial tyres

2005

The plant completed 30 years on April 13

Highlights 

Single largest truck tyre plant in India

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Fastest growing plant in Apollo family

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Known as the mother plant

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Continuous expansion

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Total employee involvement

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DESIGN OF THE STUDY

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Design of the study Objectives of the study: Primary Objectives To analyse the firm’s working capital management and to gauge its effect on cash flow and value Secondary Objectives 

Ascertain the liquidity of Apollo Tyres Ltd

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Ascertain the efficiency of Apollo Tyres Ltd

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Ascertain the creditworthiness of Apollo Tyres Ltd

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Ascertain the profitability of Apollo Tyres Ltd

Scope of the study This study assess the working capital investments, evaluates working capital investments and working capital components of Apollo Tyres Ltd. Methodology This research assesses the overall working capital management of the company taking into account the financial data for the accounting period of last 5 years. Ratio analysis, Cash Conversion Cycle, Schedule of Changes in working capital is used for  this purpose. Formulation of research problem The research problem in this project is to study the investment of the firm in the working capital, whether they are reasonable, in other words, is the firm over or  underinvested in working capital. Period of study The period covered for the completion of the project is 8 weeks.

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Source of data 1. Primary Data: It has been obtained through interviews with the officials of the company. 2. Secondary Data Secondary data which is used in this study are: o

Annual Report.

o

Published documents.

o

Various Journals.

o

Websites.

Research design Research design used for the study was descriptive analysis type and it involves observation of ideas from the standard texts and journals, websites and other related materials to get a hold on the theories. Tools of data analysis The tools used for the study are Ratio analysis, Cash Conversion Cycle, and Schedule of changes in working capital. Limitations of the study The study is based on secondary data drawn from the secondary sources connected to the topic.

So errors are possible.

And the study only covers the accounting

period of last five years and current year was excluded on account of non availability of data. So the current position of the firm was not taken into consideration.

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FINANCIAL ANALYSIS

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Working capital management Introduction In a perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of  production would not vary with the quantity produced. Borrowing and lending rates shall be same. Capital, labour, and product market shall be perfectly competitive and would reflect all available information, thus in such an environment, there would be no advantage for investing in short term assets. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed. There are spreads between the borrowings and lending rates for investments and financings of equal risks. Similarly each organization is faced with its own limits on the production capacity and technology. It can employ there are fixed as well as variable costs associated with production goods. In other words, the markets in which real firm operated are not perfectly competitive. These real world circumstances introduce problem’s which require the necessity of  maintaining working capital. For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial imputes in future at reasonable price. This may necessitate the holding of inventory, current assets. Similarly an organization may be faced with an uncertainty regarding the level of its future cash flows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of reserve of short term marketable securities, again a short term capital asset. In corporate financial management, the term Working capital management” (net) represents the excess of current assets over current liabilities.

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Working Capital In simple words working capital is the excess of current Assets over current liabilities. Working capital has ordinarily been defined as t he excess of current assets over current liabilities. Working capital is the heart of the business. If it is weak business cannot proper and survives. It is therefore said the fate of large scale investment in fixed assets is often determined by a relatively small amount of current assets. As the working capital is important to the company is important to keep adequate working capital with the company. Cash is the lifeline of company. If this lifeline deteriorates so the company’s ability to fund operation, reinvest do meet capital requirements and payment. Understanding Company’s cash flow health is essential to making investment decision. A good way to judge a company’s cash flow prospects is to look at its working capital management. The company must have adequate working capital as much as needed by the company. It should neither be excessive or nor inadequate. Excessive working capital cuisses for idle funds laying with the firm without earning any profit, where as inadequate working capital shows the company doesn’t have sufficient funds for financing its daily needs working capital management involves study of the relationship between firm’s current assets and current liabilities. The goal of working capital management is to ensure that a firm is able to continue its operation. And that is has sufficient ability to satisfy both maturing short term debt and upcoming operational expenses. The better a company managers its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable returns for investors. The primary objective of working capital management is to ensure that sufficient cash is available to: 

Meet day to day cash flow needs.



Pay wages and salaries when they fall due

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Pay creditors to ensure continued supplies of goods and services.



Pay government taxation and provider of capital – dividends and



Ensure the long term survival of the business entity

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Need for working capital The prime objective of the company is to obtain maximum profit thought the business. The amount of profit largely depends upon the magnitude of sales. However the sale does not convert into cash instantaneously. There is always a time gap between sale of goods and receipt of cash. The time gap between the sales and their actual realization in cash is technically termed as operating cycle. Additional capital required to have uninterrupted business operations, and the amount will be locked up in the current assets. Regular availability of adequate working capital is inevitable for sustained business operations. If the proper fund is not provided for the purpose, the business operations will be effected and hence this part of finance to be managed well.

Working Capital Cycle (Graph)

Equity & loan

CASH PAYABLES

OVERHEADS

receivables INVENTORY

SALES

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Each component of working capital (namely inventory, receivables and payables) has two dimensions Time and Money. When they come to managing working capital, Time is Money. If you can get money to move faster around the cycle (collect monies due from debtors more quickly) or reduce the amount of money tied up (i.e., reduce inventory level relative to sales). The business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you will have additional free money available to support addition sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limits, you festively create freed finance to help fund future sales A perusal of operational cycle reveals that the cash invested in operations are recycled back in to cash. However it takes time to reconvert the cash. Cash flows in cycle into around and out of a business it the business’s lifeblood and every manager’s primary task to help keep it flowing and to use the cash flow to generate profits. The shorter the period of operating cycle, the larger will be the turnover of the funds invested in various purposes.

Determinants of working capital Working capital requirements of a concern depends on a number of factors, each of  which should be considered carefully for determining the proper amount of working capital. It may be however be added that these factors affect differently to the different units and these keeps varying from time to time. In general, the determinants of working capital which re common to all organization’s can be summarized as under: Nature of business Need for working capital is highly depends on what type of business, the firm in. there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like railways, electricity, etc., need much less inventories and cash. Manufacturing concerns stands in between these two extends. Working capital requirement for manufacturing concerns depends on various factor like the products, technologies, marketing policies.

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Production policies Production policy of the organization effects the working capital requirements very much. Seasonal industries, which produces only in specific season requires more working capital. Some industries which produces round the year but sale mainly done in some special seasons are also need to keep more working capital.

Size of business Size of business is another factor to determines the need for working capital

Length of operating cycle Operating cycle of the firm also influence the working capital . longer the orating cycle, the higher will be the working capital requirement of the organization.

Credit policy Companies; follows liberal credit policy needs to keep more working capital with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit availability form suppliers also effects the company’s working capital requirements. A company doesn’t enjoy a liberal credit from its suppliers will have to keep more working capital

Business fluctuation Cyclical changes in the economy also influence the level of working capital. During boom period, the tendency of management is to pile up inventories of raw materials and finished goods to avail the advantage of rising prices. This creates demand for  more capital. Similarly, during depression when the prices and demand for 

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manufactured goods. Constantly reduce the industrial and trading activities show a downward termed. Hence the demand for working capital is low. Current Asset Policies The quantum of working capital of a company is significantly determined by its current assets policies. A company with conservative assets policy may operate with relatively high level of working capital than its sales volume. A company pursuing an aggressive amount assets policy operates with a relatively lower level of working capital.

Fluctuations of supply and seasonal variations Some companies need to keep large amount of working capital due to their irregular  sales and intermittent supply. Similarly companies using bulky materials also maintain large reserves of raw material inventories, this increase the need for  working capital. Some companies manufacture and sell goods only during certain seasons. Working capital requirements of such industries will be higher during certain season of such industries period.

Other factors Effective co ordination between production and distribution can reduce the need for  working capital. Development in transportation and communication means helps to reduce the working capital requirement.

Working Capital Concepts There are two thoughts that currently accepted about working capital. They are Gross working capital concept & Net working capital concept.

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Gross working capital concept This thought says that total investment in current assets is the working capital of the company. company. This concept concept does not consider consider current current liabilities liabilities at all. Reasons Reasons given for  for  this concept: 1) When we conside considerr fixed capital capital as the amount amount invested invested in fixed assets. assets. Then Then the amount invested in current assets should be considered as working capital.

2) Current Current asset whatev whatever er may be the sources sources of of acquisition, acquisition, are used used in activities related to day to day operations and their forms keep on changing. Therefore they should be considered as working capital.

Net working capital It is narrow concept of working capital and according to this, current assets minus current liabilities forms working capital. The excess of current assets over current liabilities is called as working working capital. capital. This concept lays emphasis on qualitative aspect which indicates the liquidity position position of the concern/enterprise. concern/enterprise. The reasons for the net working capital method are:

1) The material material thing thing in the long long fun is is the surplu surplus s of current current assets assets over over current current liability 2) Financial Financial health health can easily easily be judged judged by with with this concept concept particularl particularly y from the view point of creditors and investors. 3) Excess Excess of current assets assets over current current liabilities liabilities represen represents’ ts’ the amount amount which is not liable to be returned and which can be relied upon to meet any contingency. 4) Inter-comp Inter-company any comparis comparison on of financial financial position position may be correctly correctly done done particularly when both the companies have the same amount of current assets.

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If the current assets are higher than current liability it is considered the financial position of the company is sound. If both current assets and liabilities are equal, the company has resorted to short term funds for financing the working capital and long term sources of funds have been used to finance the acquisition of fixed assets. It does not indicate the financial soundness soundness for the company. company. If the current current assets are are lesser lesser than current current liabilities liabilities there there is negative negative working working capital capital which indicate indicates s financial crisis. Net working capital concept is more reasonable than the gross working capital concepts. The balance sheet of the company includes group of liabilities such as bank overdraft, creditors, bills payables, outstanding expenses etc. if it is not deduct from current assets , the concern may consider itself quite secured: while the reality is may be that the concern concern has very little working capital or has no working capital. capital. Therefore it is reasonable to define working capital as the excess of current assets over current liabilities.

Kinds of working capital Working capital can be put in two categories: 1) fixed fixed or perma permanen nentt working working capit capital al 2) fluctuating fluctuating or tempor temporary ary working working capital capital

Fixed or permanent working capital The volume of investment in current assets an change over a period of time. But always there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operating cycle. It is the investment in current assets. This is permanently locked up in the business and therefore known as permanent working capital.

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Variable/temporary working capital It is the volume of working working capital capital which is needed needed over over and above the the fixed working working capital in order to meet the unforced market changes and contingencies. In other  words any amount over and about the permanent level of working capital is variable or fluctuating working capital. This type of working capital is generally financed from shorter source of finance such as bank credit because this amount is not permanently required and is usually paid back during off season or after the contingency.

Sources of working capital The company can choose to finance its current assets by 1. Long ong term term sourc ources es 2. Shor Shortt term term sour source ces s 3. A comb combin inat atio ion n of the the two two

Long term sources Long term sources of permanent working capital include equity and preference shares, retained earnings, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of financing. Financing through long term means provides stability, reduces risk or payment and increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow

Issue of shares It is the primary and most important sources of regular or permanent working capital. Issuing equity shares as it does not create and burden on the income of the concern. Nor the concern concern is obliged obliged to refund capital capital should should preferably preferably raise raise permanent permanent working capital.

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Retained earnings Retain earning accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises.

Issue of debentures It creates creates a fixed fixed charge charge on future earnin earnings gs of the the company company and the company company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures.

Long term debt Company can raise fund from accepting public deposits, debts from financial institution like banks, corporations etc. the cost is higher than the other financial tools. Other sources consist of the sale of idle fixed assets, securities received from employees and customers are examples of other sources of finance.

Short term sources of temporary working capital Temporary working capital is required to meet the day to day business expenditures. The variable working working capital would finance from short short term sources of funds funds and only for the period needed. It has the benefits of low cost and establishes closer  relationships with banker.

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Some sources of temporary working capital: Commercial bank A commercial bank constitutes a significant source for short term or temporary working capital. This will be in the f orm of short term loans, cash credit, and overdraft and though discounting the bills of exchanges.

Public deposits Most of the companies in recent years depend on these sources to meet their short term working capital requirements ranging from six month to three years.

Various credits Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of  exchanges, promissory notes, etc helps to raise temporary working capital

Reserves and other funds Various funds of the company like depreciation fund. Provision for tax and other  provisions kept with the company can be used as temporary working capital.

The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from short term sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the

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lowest, and the funds are available on time and for the period they are really required.

Sources of Additional Working Capital Sources of additional working capital include the following: 1. Existing cash reserves 2. Profits(when you secure it as cash) 3. Payables(credit from suppliers) 4. New equity or loans from shareholder  5. Bank overdrafts line of credit 6. Long term loans

If the firm have insufficient working capital and try to increase sales, it can easily over stretch the financial resources of the business. This is called overtrading. Early warning signs include 1. Pressure on existing cash 2. Exceptional cash generating activities. offering high discounts for clear  cash payment 3. Bank overdraft exceeds authorized limit 4. Seeking greater overdrafts or lines of credit 5. Partly paying suppliers or other creditor  6. Management pre occupying with surviving rather than managing.

Adequate Working Capital As stated about keeping adequate working capital is the mantas towards the success of financial management. The term adequate working capital refuters to the amount of working capital to be kept with the organization to met its daily operations. Large investment in fixed assets is not sufficient to run a business successfully. But

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adequate working capital is equally important. Without working capital fixed assets are like a gun, which cannot shoot, as there are no cartridges.

It is said that “Inadequate working capital is a disastrous: where as redundant working capital is a criminal waste.” It is clear that the company can’t invest all its funds in current assets to increase working capital and at the same time it requires to keep sufficient funds with it. So a proper leverage between both ends is needed to assure proper running of the business. It needs to keep adequate working capital with it, neither less nor more than needed.

(a) advantages of adequate working capital Adequate working capital provides certain benefits to the company they are:

Increase in debt capacity and goodwill Adequate working capital represents the financial soundness of the company. If one company is financially sound it would be able to pay its creditors timely and properly. It will increase company’s goodwill. It crests confidence among investors and creditors. Thus a firm with adequate working capital can raise requisite funds from market, borrow short term credit form banks, and purchases inventories of raw material etc., for the smooth operations of its business.

Increase in production inefficiency With adequate working capital the firm can smoothly carryout research and development actives and thus adds to its production efficiency.

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Exploitation of favourable opportunities In the presence of adequate working capital, a company can avail the benefits of  favourable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production, thus adds to its profit.

Meeting contingencies adverse changes A company can easily face certain business and economic crises a company having adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc.,

Available cash discount Maintenance of adequate working capital enables a company to avail the advantage of cash discount by making cash payment for to the suppliers of raw materials and merchandise. Obviously it will reduce the cost of production and increase the profit of  the company.

Solvency and efficiency fixed assets. It helps to maintain the solvency of the company. So that payments could be made in time as and when they fall due. Likewise, adequate working capital also increases the efficiency for fixed assets insofar as their proper maintenance depends upon the availability of funds.

Attractive dividend to shareholders It enables the company to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them. It also increases the market values of its shares.

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(b) Dangers of Inadequate Working Capital Having inadequate working capital les to so many of dangers as it doesn’t fulfil its purpose. Some are given below:

Loss of goodwill and creditworthiness As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness among its creditors. Consequently, the firm finds it difficult to procure the requisite funds for its business operations on easy terms, which ultimately results in reduced profitability as well as production interruption.

Firm can’t make use of favourable opportunities The firm fails to undertake the profitable projects, which not only prevent the firm from availing the benefits of favourable opportunities but also stagnate it’s growth.

Adverse effects of credit opportunities The firm also fails to avail the attractive credit opportunities but also stagnate its growth

Operational inefficiencies It leads the company to operating inefficiencies, as day to day commitments cannot be met.

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Effects on financial capacity Inadequacy of working capital also weakness the shock absorbing capacity of the firm because it cannot meet the contingencies arising from business oscillations, financial losses, due to shortage of working capital.

Non achievement of profit target The firm cannot implement operational plans due to unavailability of fund which will lead to non achievement of profit margin.

Dangers of redundant working capital As the inadequate working capital is dangerous to the firm, redundant working capital also brings hazardous condition in to the company. Let us discuss the dangers of redundant working capital to the company.

Low rate of return on capital Excessive or redundant working capital implies the presence of idle funds that earn no profit to the firm. So it cannot earn a proper rate of return on its total investments, whereas profits are distributed on its total investment, whereas profits are distributed on the whole of its capital.

Decline in capital and efficiency Since the rate of return on capital is low the company tempts to make some adjustment to inflate profit to increase the dividend. Sometimes this unearned dividend paid out of the company’s capital to keep up the show of prosperity by window dressing of accounts. Certain provision, such as provision for depreciation, repairs and renewals are into made. This leads to decline in operating efficiency of  the firm.

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Loss of goodwill and confidence Lower rate of return leads to lower dividend available to share holder. This leads to down fall in market value of the company’s share and markets the shareholder lose their confident in company.

Evils of over capitalization Excessive working capital is often responsible for giving birth to the situation of  overcapitalization in the company with all its evils. Over capitalizations is not only disastrous to the smooth survival of the company but also interests of those associated with the company.

Destruction of turnover ratio It destructs the control over turnover ratio which is commonly used in the conduct of  an efficient business.

It is evident from the foregoing discussion that a company must have adequate working capital pursuant to its requirements. It should neither be excessive not inadequate. Both situations are dangerous. While inadequate working capital adversely affects the business operations and profitability, excessive working capital remains idle and earns no profits for the company. So company must assure its working capital is adequate for its operations.

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Blueprint for a good working capital management policy

General Action Set the planning standards for stock days, debtor days and creditor days. Having set planning standards and keep to them. Impress on staff that these targets are just important operating budgets and standards cost. Instil an understanding amongst the staff that working capital management produces profits.

Action on Stocks Keep stock levels as low as possible, consistent with not running out of stock and not ordering stock in uneconomically small quantities. “Just In Time” stock management is fine, as long as it is “Just In Time” and never fails to deliver on time. Consider  keeping stock in supplier’s warehouses drawing on its as needed and saving warehousing cost.

Action on Debtors /customers Assess all significant new customers for their ability to pay. Take references, examine accounts and ask around. Try not to take on new customers who would be poor payers. Re assess all significant customers periodically. Stop supplying existing customers who are poor payers, you may lose sales, but you are after quality of  business rather than quantity of business. Sometimes poor paying customers suddenly (and magically!!) find cash to settle invoices if their supplies are being cut off. If customers can’t pay/won’t pay let your competitor have them and give the competitor a few more problems.

Consider factoring sales invoices the extra cost may be worth it in terms of quick payment of sales revenue, less debtor administration and more time to carry out your  business (rather than spend time chasing debts).

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Consider offering discounts for prompt settlement of invoices, but only if the discounts are lower than the costs of borrowing the money owed from other sources.

Action on creditors Do not pay invoices too early take advantage of credit offered by suppliers, it’s free!! Only pay early if the supplier is offering a discount. Even then, consider this to be an investment. Establish a register of creditors to ensure that creditors are paid on the correct date not earlier and not later.

THE CONCEPT OF ZERO WORKING CAPITAL In today’s world of intense global competition, working capital management is receiving increasing attention from managers striving for peak efficiency the goal of  many leading companies today, is zero working capital. Proponent of the zero working capital concept claims that a movement toward this goal not only generates cash but also speeds up production and helps business make more timely deliveries and operate more efficiently. The concept has its own definition of working capital: inventories+ receivables- payables. The rational here is (I) that inventories and receivables are the keys to making sales, but (II) that inventories can be financed by suppliers through account payables. Companies use about 20% of working capital for each sales. So, on average, working capital is turned over five times per year. Reducing working capital and thus increasing turnover has two major financial benefits. First, money freed up by reducing inventories or receivables, by increasing payables, results in a onetime contribution to cash flow. Second, a movement toward zero working capital permanently raises a company’s earnings.

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The most important factor in moving toward zero working capital is increased speed. If the production process is fast enough, companies can produce items as they are ordered rather than having to forecast demand and build up large inventories that are managed by bureaucracies. The best companies delivery requirements. This system is known as demand flow or demand based management. And it builds on the just in time method of inventory control. Clearly it is not possible for most firms to achieve zero working capital and infinitely efficient production. Still, a focus on minimizing receivables and inventories while maximizing payables will help a firm lower its investment in working capital and achieve financial and production economies.

Estimation of Working Capital As discussed above a number of factors are responsible for determining the amount of working capital required by affirm let us know discuss the various methods/ technique used in assessment of firm’s working capital requirements. These methods are.

Estimation of components of working capital method This method is based on the basic definition of working capitalizes, excess of current assets over the current liabilities, in other worked the amount of different constituent of the working capital such as debtors, cash inventories , creditors etc are estimated separately and the total amount of working capital requirement is worked out accordingly.

Percent sales method This is the most simple and widely used method in combination with other scientific methods. According to this method a ratio is determined for estimating the future working capital requirement this is the generally based on the past experience of  management as the ratio varies from industry to industry. For example if the past

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experience shows that the amount of working capital has been 20% of sales and projected amount of sales for the next year is Rs. 10 Lakhs, the required amount of  working capital shall be Rs. Two Lakhs. As seen from above the above method is merely an estimation based on past experience. Their fore a lot depends on the efficiency of decision maker, which may not be correct in all circumstances. Moreover the basic assumptions regarding linear  relationship between sales and the working capital may not h old well in all the cases. Therefore this method is not dependable and not universally acceptable. At best, this method gives a rough idea about the working capital.

Operating Cycle Approach The need of working capital arises mainly because of them gap between the production of goods and their actual realization after sales. This gap is technically referred as the “operating cycle” or the “cash cycle” of the business. If it were possible to complete the entire job instantaneously, there would be no need for  current asset (working capital). But since it is not possible, every business organization is forced to have current asset and hence operating cycle. It may be divided into four stages. 1. Raw materials and stores storage space. 2. Work in process stage. 3. Finished goods inventory stage. 4. Debtor’s collection stage.

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Purchase of

Sale of Goods

Collection of 

Raw Materials

on credit

Accounting

On Credit

Receivables

Average Age of

Accounts Receivables

Inventory (AAI)

Period (ARP)

Accounts Payable Period (APP)

Receipt of

Payments to

Invoice

Suppliers Operating Cycle (OC) Cash Conversion cycle (CCC)

Operating Cycle and Cash Cycle

There is an invisible time lag between the sale of goods and receipt of cash. There is, therefore, a need for working capital. In other words, sufficient working capital is necessary to sustain sales activity. The operating cycle concept penetrates to the heart of working capital management in a more dynamic form. The time that elapses to convert raw materials into cash is known as operating cycle. In other words the time that elapses between the purchase of raw materials and the collection of cash for sale is referred to as the operating cycle. The operating cycle involves the following procedure: a) Conversion cash into raw materials b) Conversion of raw materials into work-in-process c) Conversion of work-in-process into finished goods d) Conversion of finished goods into sales(Debtors and Cash)

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e) Conversion of debtors into cash Cash Conversion Cycle The amounts of time a firm’s resources are tied up calculate by subtracting the average payment period from the operating cycle. CCC = OC – APP OC = Operating Cycle APP= Accounts Payable Period OC = AAI + ARP AAI = Average Age of Inventory ARP = Average Collection Period AAI =

Average Inventory Cost of Goods Sold / 365

ARP=

Average Accounts Receivables Annual Sales/ 365

APP =

Average Accounts Payable Cost of Goods Sold / 365

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ANALYSIS OF DATA

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Operating Cycle In days

PERIOD

AAI

ARP

OC

2007-2008

46.57

15.39

61.96

2006-2007

45.89

18.29

64.18

2005-2006

49.22

20.16

69.38

2004-2005

43.41

19.02

62.43

2003-2004

40.63

15.36

55.99

The time that elapsed to convert raw materials into cash is known as operating cycle. Operating Cycle (OC) = AAI + ARP During the year 2005-2006, the operating cycle period increased by a great extend to 69.38 days from the previous year’s figure of 62.43 days. But now the operating cycle period has decreased in the last two years which is a good sign for the company. This means that the time elapsed to convert raw materials into cash becoming lesser. Both the Average Age of Inventory and the Average Collection period should be reduced to improve the Operating cycle period.

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60.00

AVERAGE AGE OF INVENTORY

50.00 40.00 30.00 DAYS 20.00 10.00 0.00 2007-2008

25.00

2006-2007

2005-2006

2004-2005 2003-2004

AVE AGE RECEIVABLES PERIOD

20.00

15.00 DAYS

10.00

5.00

0.00 2007-2008

50.00 45.00

2006-2007

2005-2006

2004-2005 2003-2004

AC OUNTS PAYABLE PERIOD

40.00 35.00 30.00 25.00 DAYS

20.00 15.00 10.00 5.00 0.00 2007-2008

2006-2007

2005-2006 2004-2005

2003-2004

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Cash Conversion Cycle In days

PERIOD 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004

AAI 46.57 45.89 49.22 43.41 40.63

ARP 15.39 18.29 20.16 19.02 15.36

APP 42.92 37.72 42.12 46.08 43.58

CCC 19.04 26.46 27.26 16.35 12.40

Cash Conversion Cycle (CCC) is the time length between the payment for suppliers of the raw materials and collection of cash for sales. CCC = AAI + ARP – APP As the operating cycle period increased by a great extend to 69.38 days from the previous year’s figure of 62.43 days during the year 2005-2006, likewise the CCC increased from 16.35 days to 27.26 days during that year. But now the Operating Cycle period as well as CCC has shown a decreasing trend in the last two years which is a good sign for the company. Both the Average Age of Inventory and the Average Collection Period should be reduced to improve the CCC period. Average Collection Period should be minimised by implementing attractive credit policy that allows prompt payment by the debtors. Also the Accounts Payable Period should be maximised by utilising the credit period allowed by creditors to the maximum extend.

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Statement of Working Capital Particulars

200 -04

2004-05

2005-06

2006-07

2007-08

Current Assets

Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances Total

262.66 120.41 106.35

330.12 156.52 110.43

419.42 175.14 231.36

451.95 203.06 172.00

513.29 155.13 265.85

0.05 157.89 6 7.36

0.02 146.46 743.55

0.21 184.39 1,010.53

13.914 193.71 1,034.63

12.84 178.68 1125.80

310.59 28.32 338.91 308.45

380.14 28.83 408.97 334.58

388.63 52.05 440.67 569.86

542.20 55.38 597.58 437.05

565.83 93.09 658.91 466.89

Current Liabilities

Current Liabilities Provisions Total Working Capital(A-B)

WORKING CAPITAL 600 500 400 300 200 100 0 2003 -2004

2004 -2005

2005 -2006

2006 -2007

200 -2008

The graph mainly shows a increasing trend in the amount of working capital, expect for the year 2006-2007 wh n it fell sharply by 132.81 crores.

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COMPONENTS OF TOTAL CURRENT ASSETS

Interpretation: Important facts can be drawn about the company’s current asset from the above figure: 

The current assets consists of 42-44% of inventory in almost all years under  study



There has been a steep decrease in the debtors to 14% during the year 20072008, which was otherwise hovering around 18-20% in the past years.



Cash and Bank balances showed high fluctuations during the years, lowest being 15% and the highest being 24%



Other current assets are less than 1% in almost all the years



There has been a steady decrease in the loans and advances which was 24% in the 2003- 2004 now down to 16%

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RATIO ANALYSIS INDUSTRIAL AVERAGE OF SOME IMPORTANT RATIOS* RATIOS

Yearly Average 2003 -2004

2004 -2005

2005 -2006

5 Years Average 2006 -2007

2007 -2008

CURRENT RATIO

1.91

1.86

1.68

1.59

1.61

1.73

QUICK RATIO

1.25

1.19

1.03

0.93

0.86

1.05

47.47

46.19

43.73

38.05

36.17

42.32

41.89

40.69

39.77

39.14

46.05

41.51

6.54

8.75

8.03

9.89

9.70

8.58

AVG COLLECT PERIOD INV HOLDING PERIOD WC TURNOVER RATIO

*source: zen money

*The ratios of 4 major players namely MRF Tyres, Apollo Tyres, Ceat and JK tyres are taken for calculating the industrial average. These companies altogether holds around 74% share of Indian Market.

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CURRENT RATIO CURRENT RATIO  YEAR 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

2.50

C RRENT ASSETS 647.36 743.55 1010.51 1,034.63 1,125.80

CURRENT LIABS 338.91 408.97 440.67 597.58 658.91

RATIO 1.91 1.82 2.29 1.73 1.71

CURRENT RATIO

2.00

1.50 RATIO

1.00

0.50

0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

This ratio measures the solvency of the company in the short-term. Current assets are those assets which can be converted into cash within a year. C rrent liabilities and provisions are those li bilities that are payable within a year. Cu rent Assets, Loans and Advances urrent Liabilities and Provisions A current ratio 2:1 indicat s a highly solvent position. A current ratio of 1.33:1 is considered by banks as th e minimum acceptable level for providing working capital finance. The constituents of the current assets are as important as the current assets themselves for evaluation f a company’s solvency position. A very high current ratio will have adverse impact on the profitability of the organisation. A high current ratio

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may be due to the piling up of inventory, inefficiency in the collection of debtors, high balances in cash and bank accounts without proper investment etc. Interpretation: The current ratio in the year 2005-2006 is more than 2:1 which may not be favourable due to various reasons like 1) there may be slow moving stocks or the 2) cash lying idle because of insufficient investment. Even though the Company is now maintaining a healthy current ratio average it is showing a decreasing trend except for the year 2005 -2006. This indicates that there has been deterioration in the liquidity position of the firm. Industry Comparison: Apollo tyres maintain a healthy current ratio when compared to the industrial average ratio which is 1.91, 1.86, 1.68, 1.59, 1.61 for the respective years. Some years it is almost the same and in one year the ratio is better than the industrial average ratio.

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QUICK RATIO QUICK RATIO YEAR

QUICK ASSETS

QUICK LIABS

RATIO

2003 -2004

384.70

338.91

1.14

2004 -2005

413.43

408.97

1.01

2005 -2006

591.10

440.67

1.34

2006 -2007

582.68

597.58

0.98

2007 -2008

612.51

658.91

0.93

1.60

QUICK RATIO

1.40 1.20 1.00 0.80 RATIO 0.60 0.40 0.20 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

This ratio is used as the measure of the company’s ability to meet its current obligation since bank over  raft is secured by the inventories, the ot er current assets must be sufficient to meet ther current liabilities. Current Assets, Loans and Advances - Inventories Current Liabilities and Provisions – Bank overdraft A quick ratio of 1:1 indicates a highly solvent position. The ratio ser  es as supplement to the current r atio in analysing liquidity.

Interpretation:

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The Quick ratio in the year 2005-2006 is 1.34:1 which is very higher than the standard quick ratio which is 1:1. Even though the company is now maintaining a healthy quick ratio average, it is showing a decreasing trend except for the year 2005 -2006. The company must take necessary steps to step up the ratio to 1:1 which indicates highly solvent position. The quick ratio of the company in the last year  2007-08 is 0.93:1, this indicates that the concern may be able to meet its short-term obligations. Industry Comparison: The quick ratio of the company, when compared to industrial average ratio which is 1.25, 1.19, 1.03, 0.93, 0.86 for the respective years, shows that, in last three years the company have surpassed the industrial average ratio. This is a highly commendable performance.

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A SOLUTE LIQUIDITY RATIO ABSOLUTE LIQUIDITY RATIO YEAR

CASH

CURRENT LIABS

RATIO

2003 -2004

106.35

338.91

0.31

2004 -2005

110.43

408.97

0.27

2005 -2006

231.36

440.67

0.53

2006 -2007

172.00

597.58

0.29

2007 -2008

265.85

658.91

0.40

0.60

ABSOLUTE LIQUIDITY RATIO

0.50 0.40 0.30 RATIO 0.20 0.10 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

This is the ratio of absolut liquid assets to quick liabilities. However, for calculation purposes, it is taken as ra io of absolute liquid assets to current li bilities. Absolute liquid assets include cas

in hand, cash at bank and short-term or temporary

investments. Absolute Liquid Assets Current Liabilities The acceptable norm for this ratio is 50% or 0.5:1 or 1:2. i.e. Re. 1 orth absolute liquid assets are considere adequate to pay Rs.2 worth current lia ilities.

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Interpretation: The absolute liquidity ratio in the year 2005-2006 is very healthy .53:1 which is higher than the standard. But the years 2003-04, 2004-2005, 2006-07 shows a very poor ratios of

.31,.27,.29 respectively. The absolute liquidity ratio of 2007-2008

shows an increasing trend in the absolute liquidity ratio which is a good sign. The company should improve its absolute liquidity ratio.

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D BTORS TURNOVER RATIO DEBTORS TURNOVER RATIO YEAR

SALES

AVG. ACC REC

TIMES

2003 -2004

2,314.31

81.07

28.55

2004 -2005

2,656.81

138.46

19.19

2005 -2006

3,002.12

165.83

18.10

2006 -2007

3,774.34

189.10

19.96

2007 -2008

4,246.98

179.09

23.71

30.00

DEBTORS TURNOVER RATIO

25.00 20.00 15.00 TIMES 10.00 5.00 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

Debtors turnover which

easures whether the amount or resources tied up in

debtors is reasonable an

whether the company has been efficient in converting

debtors into cash. The higher the ratio, the better the position Credit Sales Average Debtors Debtors velocity indicates he number of times the debtors are tur  ed over during a year. Generally the highe the value of debtors turnover the mo e efficient is the management of debtors / sales or more liquid are the debtors. Similarly, low debtors turnover implies inefficient management of debtors or sales and less liquid debtors. But a precaution is need d while interpreting a very high debt rs turnover ratio

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because a very high ratio may imply a firm’s inability due to lack of resources to sell on credit there by losing sales and profits. Interpretation: Even though the company could not repeat the debtors turnover ratio of the year  2003-2004 which is 28.55 times, it is showing an increasing trend in the debtors turnover ratio from the year 2005 -2006 to 2007- 2008. Which is 18.10, 9.96, 23.71 respectively. This indicates that management of debtors is becoming more and more efficient / more liquid are the debtors.

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AVERAGE COLLECTION PERIOD AVG COLLECTION PERIOD

25.00

YEAR

DAYS

DTR

DAYS

2003 -2004

365

28.55

12.78

2004 -2005

365

19.19

19.02

2005 -2006

365

18.10

20.17

2006 -2007

365

19.96

18.29

2007 -2008

365

23.71

15.39

AVE AGE COLLECTION PERIOD

20.00

15.00 DAYS

10.00

5.00

0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

Average Collection Period

easures how long it will take to collect mounts from the

debtors. No of Working days Debtors Turnover Ratio The actual collection peri d can be compared with the stated cr edit terms of the company. If it is longer than those terms, then this indicates inefficiency in collecting debts. The average collection period ratio represents the average number  of days for which a firm has to wait before its receivables are converted into cash. It measures the

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quality of debtors. Generally, the shorter the average collection period the better is the quality of debtors as a short collection period implies quick payment by debtors. Similarly, a higher collection period implies as inefficient collection performance which in turn adversely affect the liquidity or short term paying capacity of a firm out of its current liabilities. Moreover, longer the average collection period the larger are the chances of bad debt. Interpretation: Even though the company could not repeat the average collection period of the year  2003-2004 which is 12.78 days, it is showing an decreasing trend in the average collection period from the year 2005 -2006 to 2007- 2008. Which is 20.17, 18.29, 15.39 days respectively. This indicates that the credit policies of the company is good or prompt payment from the side of debtors. Industry Comparison: One important fact found when compared with the industrial average period which is 47.47, 46.19, 43.73, 38.05, 36.17 days for the respective years, is that the company’s average collection period is lesser than 50% of industrial average in almost all years. Even though lesser time taken for collection of debt is a desirable because the company get quick payments from its debtors, the company should reassess its credit policy because it may lose its customers owing to the attractive credit period offered by its competitors.

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INVENTORY TURNOVER RATIO INVENTORY TURNOVER RATIO YEAR

SALES

AVG. INVENTORY

2003 -2004

2,314.31

239.57

9.66

2004 -2005

2,656.81

296.39

8.96

2005 -2006

3,002.12

374.77

8.01

2006 -2007

3,774.34

435.68

8.66

2007 -2008

4,246.98

482.63

8.80

12.00

IMES

INV NTORY TURNOVER RATIO

10.00 8.00 6.00 TIMES 4.00 2.00 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

A considerable amount of  company’s capital may be tied up in th financing of raw materials, work in progress and finished goods. It is important to en ure that the level of stocks is kept as low as possible, consistent with the need to fulfil customer orders in time. Sales Average Inventory Average Inventory = (opening stock + closing stock) / 2

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The inventory turnover ratio measures how many times a company’s inventory has been sold during the year. If the inventory turnover ratio has decreased from past it means that either inventory is growing or sales are dropping. In addition to that, if a firm has a turnover that is slower than for its industry, then there may be obsolete goods on hand, or inventory stocks may be high. Low inventory turnover has impact on the liquidity of the business. Interpretation: The company is maintaining a consistent inventory turnover ratio in almost all the years under study. This indicates efficient management of inventory because more frequently the stocks are sold and the lesser amount of money is required to finance the inventory.

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IN ENTORY HOLDING RATIO INVENTORY HOLDING RATIO YEAR

DAYS

AVG. INVENTORY

DAYS

2003 -2004

365

9.66

37.78

2004 -2005

365

8.96

40.74

2005 -2006

365

8.01

45.57

2006 -2007

365

8.66

42.15

2007 -2008

365

8.80

41.48

50.00 45.00

IN ENTORY HOLDING RATIO

40.00 35.00 30.00 25.00 DAYS

20.00 15.00 10.00 5.00 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

It is the average time taken for clearing the stocks. This period is calculated by dividing the number of day by inventory turnover. Days in a year  Inventory Turnover Ratio Interpretation:

The company is maintaining a consistent inventory holding ratio in almost all the years under study, which is averaging around 42.5 days. This indicates efficient management of inventory ecause more frequently stocks are disp sed off or sold.

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Industry Comparison: From the comparison with industrial average period which is 41.89, 40.69, 39.77, 39.14, 46.05 days for the respective years, it is found that the company is having higher inventory holding period in some years. But in the last year the bettered its inventory holding period and was lesser than the industrial average.

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INVENTORY RATIO INVENTORY RATIO YEAR

A G. INVENTORY

CURRENT ASSETS

RATIO

2003 -2004

239.57

647.36

0.37

2004 -2005

296.39

743.55

0.40

2005 -2006

374.77

1010.51

0.37

2006 -2007

435.68

1,034.63

0.42

2007 -2008

482.63

1,125.80

0.43

0.44 0.43

INVENTORY RATIO

0.42 0.41 0.40 0.39 RATIO

0.38 0.37 0.36 0.35 0.34 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

The level of inventory in a company may be assessed by the use of inventory ratio, which measures how muc has been tied up in inventory. This ratio shows the ratio of inventory to the current sset. Inventory

x 100

Current Assets Interpretation:

The company is maintaini g a consistent inventory ratio under almost all the period under study. This indicates that the company’s wealth is not unnec ssarily tied up in the inventory.

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WORKI G CAPITAL TURNOVER RATIO ORKING CAPITAL TURNOVER RATIO YEAR

SALES

NET W C

TIMES

2003 -2004

2,314.31

308.45

7. 0

2004 -2005

2,656.81

334.58

7. 4

2005 -2006

3,002.12

569.85

5. 7

2006 -2007

3,774.34

437.05

8. 4

2007 -2008

4,246.98

466.89

9. 0

10.00 9.00

WO KING CAPITAL TURNOVER

8.00 7.00 6.00 5.00 TIMES

4.00 3.00 2.00 1.00 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

Working capital turnover r  tio indicates the velocity of the utilisati n of net working capital. This ratio indicates the number of times the working capital is turned over in the course of a year. This ratio measures the efficiency with which the working capital is being used by a irm. A higher ratio indicates efficient utilisation of working capital. And a low ratio indicates otherwise. But a very high working capital turnover  ratio is not a good situation for any firm and hence care mus be taken while interpreting the ratio. This ratio can at best be used by making of  comparative and trend analysis for different firms in the same industry and for vari us periods. This ratio can be calculated as:

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Sales Net Working Capital Interpretation: The graph shows an increasing trend in the working capital turnover ratio except for  the year 2005- 2006 where it recorded the lowest of 5.27. It indicates the efficient utilisation of working capital by the firm. Industry Comparison: The comparison of industrial average which is 6.54, 8.75, 8.03, 9.89, 9.70 times for  the respective years, shows that the industrial average showed a steep increase in the ratio during the year 2004-2005, but the company showed a steady ratio during this year. In the year 2005-2006 the company’s working capital turnover ratio was below par. And in the last two years both the industry as well as the company improved their performance.

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CREDITORS TURNOVER RATIO CREDITORS TURNOVER RATIO YEAR

CRE IT PURCHASES

AVG. ACC PAYABLE

RATIO

2003 -2004

1,193.16

257.00

4.64

2004 -2005

1,425.37

314.61

4.53

2005 -2006

1,844.16

320.73

5.75

2006 -2007

2,258.03

358.12

6.31

2007 -2008

2,384.96

444.79

5.36

7.00

CREDITORS TURNOVER RATIO

6.00 5.00 4.00 TIMES

3.00 2.00 1.00 0.00 2003 -2004 2004 -2005 2005 -2006 2006 -2007 2007 -2008

Creditors’ turnover ratio in icates the number of times the accounts payable rotate in a year. It signifies the cr edit period enjoyed by the firm in pa ing its creditors. Accounts payable include trade creditors and bills payable. This ratio shows the relationship between net cr edit purchases for the whole year and accounts payable. Net Credit Purchase Average Trade Creditors

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Interpretation: The Creditors turnover ratio indicates the promptness in making payment of credit purchases. The ratio signifies that the creditors are being paid promptly, thus enhancing the credit worthiness of the company. The creditors turnover ratio of cycle of the company shows that company utilises the credit period given by the suppliers to the maximum extend.

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SCHEDULE OF CHANGES IN WORKING CAPITAL POSITION It is prepared in order to measure the increase / decrease in the working capital over  a period of time. It is necessary to prepare this schedule. This schedule is prepared with the help of only current assets and current liabilities. Compare each current asset in previous year, with that in current year. Similarly, compare each current liability in the previous year with that in the current year. The difference is recorded for each individual current asset and current liability. This process will be repeated till all accounts relating to all current assets and current liabilities in two Balance Sheets are gone through and differences are properly recorded. The two columns showing the changes in current assets and current liabilities are balanced. The balancing figure represents either an increase or  decrease in working capital. It must be remembered that schedule of changes in working capital is prepared only from accounts appearing in the Balance Sheet.

Increase in Current Assets and Decrease in Current Liabilities: The acquisition of current assets and repayment of current liabilities will result in funds out flow. The funds may be applied to finance an increase in stock, debtors etc. or to reduce trade creditors, bank over draft, bills payable etc.

Decrease in Current Assets and Increase in Current Liabilities: The reduction in current assets e.g. stock or debtors balance will result in release of  funds to be applied elsewhere. Short term funds raised during the period by any increase in the current liabilities like trade creditors, bank over draft and tax dues, means that these sources have more at the end of the year than at the beginning.

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Schedule of changes in working capital position(02-03 to 03-04) Particulars

2002-03

2003-04

Increase (+)

Decrease (-)

Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances

216.48 74.37 97.61

262.66 120.41 106.35

0.75 117.76

0.05 157.89

Total

506.97

647.36

Current Liabilities Current Liabilities Provisions Total

221.44 20.78 242.22

310.59 28.32 338.91

(A-B) Increase/ Decrease

264.75 43.70

308.45

141.09

97.39 43.70

308.45

308.45

141.09

141.09

46.18 46.04 8.74 0.70 40.13

89.15 7.54

The statement shows that there is a net increase in working capital in the year 20032004 of Rs.43.70 Crores.

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Schedule of changes in working capital position (03-04 to 04-05) Particulars

2003-04

2004-05

Increase (+)

Decrease (-)

Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances

262.66 120.41 106.35

330.12 156.52 110.43

0.05 157.89

0.02 146.46

Total

647.36

743.55

Current Liabilities Current Liabilities Provisions Total

310.59 28.32 338.91

380.14 28.83 408.97

(A-B) Increase/ Decrease

308.45 26.13

334.58

107.65

81.52 26.13

334.58

334.58

107.65

107.65

67.46 36.11 4.08 0.03 11.43

69.55 0.51

The statement shows that there is a net increase in working capital in the year 20042005 of Rs.26.13 Crores.

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Schedule of changes in working capital position (04-05 to 05-06) Particulars

2004-05

2005-06

Increase (+)

Decrease (-)

Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances

330.12 156.52 110.43

419.42 175.14 231.36

89.30 18.62 120.93

0.02 146.46

0.21 184.39

0.19 37.93

Total

743.55

1,010.53

Current Liabilities Current Liabilities Provisions Total

380.14 28.83 408.97

388.63 52.05 440.67

(A-B) Increase/ Decrease

334.58 235.28

569.86

266.98

31.70 235.28

569.86

569.86

266.98

266.98

8.49 23.22

The statement shows that there is a net increase in working capital in the year 20052006 of Rs.235.28 Crores.

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Schedule of changes in working capital position (05-06 to 06-07) Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances Total Current Liabilities Current Liabilities Provisions Total (A-B) Increase/ Decrease

2005-06

2006-07

Increase (+)

Decrease (-)

419.42 175.14 231.36

451.95 203.06 172.00

32.53 27.91

0.21 184.39

13.914 193.71

13.70 9.32

1,010.53

1,034.63

388.63 52.05 440.67

542.20 55.38 597.58

569.86

437.05 132.80

83.46 132.80

216.26

569.86

569.86

216.26

216.26

59.36

153.58 3.33

The statement shows that there is a net decrease in working capital in the year  2006-2007 of Rs.132.80 Crores. This year showed a rare case of net decrease in the working capital.

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Schedule of changes in working capital position (06-07 to 07-08) Particulars Current Assets Inventories Sundry Debtors Cash and Bank Balances Other Current Assets Loans and Advances

2006-07

2007-08

Increase (+)

Decrease (-)

451.95 203.06 172.00

513.29 155.13 265.85

13.91 193.71

12.84 178.68

1,034.63

1125.80

Current Liabilities Current Liabilities Provisions Total

542.20 55.38 597.58

565.83 93.09 658.91

(A-B) Increase/ Decrease

437.05 29.84

466.89

155.19

125.36 29.84

466.89

466.89

155.19

155.19

Total

61.34 47.92 93.85 1.08 15.03

23.62 37.71

The statement shows that there is a net increase in working capital in the year 20072008 of Rs.29.70 Crores.

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FINDINGS, SUGGESTIONS AND CONCLUSIONS

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FINDINGS

1. In the last two years the Operating Cycle period as well as Cash Conversion Cycle has shown a decreasing trend, which is a good sign for the company. It indicates that the time taken for the conversion of cash is becoming less and less.

2. When compared with the various industrial average ratios, the company is showing a very healthy trend over the last five years. Also the quick ratio of  the company showed an admirable consistency and was higher than the industrial average over the last three years.

3. Company is maintaining a healthy current ratio which is at par with industrial ratio. But it is showing a decreasing trend except for the year 2005 -2006. This indicates that there has been deterioration in the overall liquidity position of the firm.

4. The quick ratio in the year 2005-2006 was much higher than the standard quick ratio which is 1:1. The quick ratio of the company in the last year 200708 is 0.93:1, this indicates that the concern may be able to meet its short-term obligations.

5. The absolute liquidity ratio in the year 2005-2006 was very healthy and higher  than the standard ratio. But during other years it recorded very poor ratios. The absolute liquidity ratio of 2007-2008 shows an increasing trend, which is a good sign. 6. It is found that the cash and bank balances of the company are fluctuating highly over the period of study. The company should improve its cash management to avoid these fluctuations.

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7. The company could not repeat the Debtors turnover ratio of the year 20032004 which is 28.55 times. But it is showing an increasing trend during the last three years. This indicates that management of debtors is becoming more and more efficient / more liquid are the debtors.

8. The company’s the average collection period is much lower when compared to the industrial average, which is below 50% of the industrial average. This indicates that the credit policies of the company is good or prompt paymentfrom the side of debtors.

9. The company is maintaining a consistent inventory turnover ratio, inventory holding ratio and inventory ratio in almost all the years under study. This indicates efficient management of inventory because more frequently the stocks are sold and the lesser amount of money is required to finance the inventory.

10.The working capital turnover ratio shows an increasing trend in the last two years. It also meets the industrial average. The overall trend indicates the efficient utilisation of working capital by the firm.

11.The statement shows that there is a net increase in working capital in almost all years except 2006-2007, where it recorded a net decrease. This year  showed a rare case of net decrease in the working capital. 12.From the overall analysis of working capital for the last five years, it is found that, even though the company has failed to attain the standard ratios in some years, it is managing its working capital effectively.

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SUGGESTIONS 1. The Average Age of Inventory of the company should be reduced to improve the CCC period. Average Age Inventory can be minimised by using various inventory management techniques like ‘Just In Time’ method.

2. The Accounts Payable Period can be maximised by utilising the credit period allowed by creditors to the maximum extend.

3. The company must take necessary steps to step up the quick ratio to 1:1 which indicates highly solvent position.

4. The company should give more emphasis on the cash management as the absolute liquidity ratios of almost all years are below standards. Cash budgets are very useful for cash management.

5. Set the planning standards for stock days, debtor days and creditor days. Having set planning standards, keep to them.

6. Impress on staff that these targets are just important operating budgets and standards cost. Instil an understanding amongst the staff that working capital management produces profits.

7. Keep stock levels as low as possible, consistent with not running out of stock and not ordering stock in uneconomically small quantities. 8. “Just in Time” stock management is good, as long as it is “Just in Time” and never fails to deliver on time. Consider keeping stock in supplier’s warehouses drawing on its as needed and saving warehousing cost. 9. Assess all significant new customers for their ability to pay. Take references, examine accounts. Try not to take on new customers who would be poor  payers. Re assess all significant customers periodically.

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10. Stop supplying existing customers who are poor payers, the company may lose sales, but after all it is the quality of business rather than quantity of  business that matters. 11.Consider offering discounts for prompt settlement of invoices, but only if the discounts are lower than the costs of borrowing the money owed from other  sources. 12.Take advantage of credit offered by suppliers and do not pay invoices too early. Only pay early if the supplier is offering a discount.

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CONCLUSION Apollo tyres ltd is one of the major players in tyre manufacturing sector in India. It has captured almost 21% of share in the Indian market behind the market leader  who holds 22% of market share. From the overall analysis, it can be seen that the company’s working capital management is highly efficient and has met the industrial average and the standard ratios. The comparison with the industrial average helped in understanding the efficiency of the working capital management. It also helped to know the shortcomings of the company in some areas. The company should take necessary actions to overcome these drawbacks and should further strengthen the working capital management. The company should aim at creating a ‘benchmark’ in the working capital management along with other aspects under the financial management to attain higher position.