Financial Planning and Forecasting

SUMMER PROJECT REPORT ON “FINANCIAL PLANNING AND FORECASTING”

Submitted in the partial fulfillment of the requirements for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION AMRITA SCHOOL OF BUSINESS By

Vignesh S (BL.BU.P2MBA09059)

Under the guidance of Industry Guide

V. Karthikeyan Manager - Finance Royal Classic Group Tirupur

Faculty Guide

Prof. Usha Nandhini PGP Chair Amrita School of Business Bangalore

DECLARATION

I, Vignesh S, a second year MBA student of Amrita School of Business, Amrita Vishwa Vidyapeetham hereby declare that project titled “Financial Planning and Forecasting” was done by me under guidance of Dr. Usha Nandhini, (PGP Chair-MBA Program), Amrita School of Business and Mr. V. Karthikeyan, Manager – Finance, Royal Classic Group Tirupur during April – June 2010. I also declare that this project is not submitted by me for award of any degree, diploma, literature or recognition earlier.

Vignesh S 18th June, 2009 Bangalore

ACKNOWLEDGEMENT I am grateful to thank Royal Classic Group for giving me this great opportunity to do my Summer Internship Project with them. I take the privilege to sincerely thank Mr.R.Sivaraman, Executive Director, Royal Classic Group, in creating the opportunity for a summer project in the finance department. I would like to thank D. Joshua Chithambaram Vice President-Finance, my Industry Guide Mr. V. Karthikeyan Manager -Finance, Royal Classic Group for his guidance and support during the entire course of the project. I am also thankful to Mr. Kirthivasan, (Industry coordinator for summer internship) Brand Executive, Royal Classic Group, for making everything possible for me during the entire course of the project. I am thankful to the Core Finance Team, of the company for their guidance, support and encouragement to give my best during the Internship Program. I specially thank all the Managers, Officers and the Staff members with whom I interacted during the course of my project for their support and cooperation. I also take great pleasure in thanking my faculty guide, Dr. Usha Nandhini Chairperson MBA program, Amrita School of Business, Bangalore, for giving me the moral support and inspiration to perform well and make the Summer Internship Project successful. I then take the opportunity to thank Ms. Chitra Harshan, Placement Coordinator, without whose help, I wouldn’t have got such a wonderful corporate exposure at Royal Classic Group, Tirupur. I would like to heart fully extend my thanks and gratitude to my family for supporting and instilling confidence in me in all ways. Above all, I thank the Almighty for His presence within me and without whose grace the endeavor of mine would not have been successful.

Executive Summary The internship project on “Financial Planning and Forecasting” has been a very good experience. Every manufacturing company has to forecast its financial position for better decision – making. An organization risks can be reduced and the efficiency can be increased through efficient planning. At the same time company needs to plan about its future investment to increase the productivity and profitability. In a manufacturing company, the inventories and debtors occupy large amount which are major components of current assets. The efficient management of these components would increase the profitability and flexibility of the firm. This project is a sincere effort to plan, forecast and analyze the financial position of Royal Classic Group for the future period. The project is executed in an efficient manner. The preparation of forecasted financial statements has undergone a various hard-hitting processes to arrive at the amount of each item of financial statements. The study on effectiveness of management of debtors was made to suggest some areas of improvements to the company. For the study of the debtors, I reviewed the credit policy document of the company, credit assessment methodology that the company follows to find out the credit worthiness of its customers, the financing method adopted by the company to finance its debtors, the collection method and then finally classification of debtors according to the segment to which they belong to. The financial statements analysis like Ratio analysis, Breakeven Analysis, Operating cycle & cash cycle and Growth rate has been carried out to know the financial position of the company in the future period. The internship is a viaduct between the organization and the institute. This made me to engage in a project that helped me to learn management of finance practically. And in the process I could contribute substantially to the organization’s growth. The experience that I gathered over the period of my internship has certainly provided the management knowledge which I trust will help me in future.

Contents

Sl. No.

Contents

1.

Industry Profile

2.

Company Profile Financial Planning and Forecasting –

3.

Introduction

4.

Objective

5.

Forecasted Financial Statements

6.

Assumptions

7.

Analysis of Forecasted P&L A/c

8.

Analysis of Balance Sheet

9.

Debtors Management

10.

Ratio Analysis – Forecasted

11.

Breakeven Analysis

12.

Operating Cycle & Cash Cycle

13.

Growth Rate

14.

Recommendations

15.

Conclusion

16.

Bibliography

Page No.

Industry Profile Textile Industry – Holistic Approach A Textile company the purpose of restructuring scheme is defined as

“whose

business includes yarn spun on spinning systems, weaving, knitting, processing, texture made-up, readymade garmenting and composite milling operations in the organized sector”. US and European markets dominate the global textile trade, accounting for 64% of clothing and 39% of the textile market. With the dismantling of quotas, global textile trade is expected to grow to US$ 670 billion by 2011. The history of development in World Textile Industry was started in Britain as the spinning and weaving machines were invented in that country. The World Trade Organization (WTO) has taken so many steps for uplifting this sector. In the year 1995, WTO had renewed its Multi Fiber Arrangement (MFA) and adopted Agreement on Textiles and Clothing (ATC), which states that all quotas on textile and clothing will be removed among WTO member countries. However the level of exports in textiles from developing countries is increasing even if in the presence of high tariffs and quantitative restrictions by economically developed countries. Moreover the role of multifunctional textiles, eco-textiles, e-textiles and customized textiles are considered as the future of textile industry. It is worth noting that China, Hong Kong, South Korea and Taiwan have registered their presence significantly in the world textile market through conscious efforts while they continued to globalize their textile economy. The Indian textile industry has witnessed significant growth during the last decade in terms of installed spindleage, production of yarn (both spun - filament), output of cloth and its per capita availability as also exports. The Textile Industry is one of the booming industry, of that Asian Countries plays a vital role in Global Textile Market. US and European countries dominates global textile market as they import higher.

Indian Textile Industry Indian Textile Industry is one of the leading textile industries in the world. Though was predominantly unorganized industry even a few years back, but the scenario started changing after the economic liberalization of Indian economy in 1991. The opening up of economy gave the much-needed thrust to the Indian textile industry, which has now successfully become one of the largest in the world. India textile industry largely depends upon the textile manufacturing and export. It also plays a major role in the economy of the country. India earns about 27% of its total foreign exchange through textile exports. Further, the textile industry of India also contributes nearly 14% of the total industrial production of the country. It also contributes around 3% to the GDP of the country. Textile Industry in India is the second largest employment generator after agriculture. It holds significant status in India as it provides one of the most fundamental necessities of the people. Textile industry was one of the earliest industries to come into existence in India and it accounts for more than 30% of the total exports. In fact Indian textile industry is the second largest in the world, next to China. Textile Industry is unique in the terms that it is an independent industry, from the basic requirement of raw materials to the final products, with huge value-addition at every stage of processing. Indian textile industry is constituted of the following segments: Readymade Garments, Cotton Textiles including Handlooms, Man-made Textiles, Silk Textiles, Woollen Textiles, Handicrafts, Coir, and Jute. Current Facts of Indian Textile Industry      

India holds position as world’s second highest cotton producer. Acreage under cotton reduced about 1% during 2008-09. The productivity of cotton which was growing up over the years has decreased in 2008-09. Substantial increase of Minimum Support Prices (MSPs). Cotton exports couldn't pick up owing to disparity in domestic and international cotton prices. Imports of cotton were limited to shortage in supply of Extra Long staple cottons.

Tamil Nadu Tirupur known by various names such as knits city, Cotton city is famously called the Textile city of India. Tirupur has the largest and fastest growing urban agglomerations in Tamil Nadu. The knitwear industry which is the soul of Tirupur has created millions of jobs for all class of people. There are nearly about 3000 sewing units, 450 knitting units, hundreds of dyeing units and other ancillary units which are un-countable. The annual for-ex business for the past year 2008 stands at Rs. 8,000cr. Due to the climate and availability of raw material and work force Tirupur has had made a large contribution to the export of knitwear garments. It is called the Knits Capital of India as it caters to famous brands retailers from all over the world. Nearly every international knitwear brand in the world has a strong production share from Tirupur. It has a wide range of factories which export all types of Knits fabrics and supply garments for Kids, Ladies, Men's garments - both underwear and tops. The city is known for its hosiery exports and provides employment for about 300,000 people. Tirupur Exporters Association – popularly known as TEA - was established in the year 1990. This is an Association exclusively for exporters of cotton knitwear who has production facilities in Tirupur. From the modest beginning TEA has grown into a strong body of knitwear exporters. Today, TEA has a membership of 672 Life members and 155 Associate Members. The members of the Association, from the beginning, have resolved to develop their organization focusing on: 1. Multilateral growth of knitwear industry and exports 2. Development of infrastructural needs for Tirupur. 3. Implementation of schemes for the benefit of the society and public. 4. Promotion of constructive co-operation with workers with fair division of rewards. 5. General up-liftment of quality of life in Tirupur. For foreign buyer TEA: 1. Offers conferencing and secretarial services. 2. Helps in locating suitable suppliers. 3. Helps in resolving disputes.

Company Profile

The Royal Classic Group was founded by three brothers: Mr.R.Gopalakrishnan Chairman, A first Generation Entrepreneur, 29 Years of Experience in the industry. Mr.R.Shanmugam Managing Director, A Diploma Holder in Electrical Engineering 27 Years of rich experience in the industry In-Charge of export marketing, Innovation of new projects and banking Mr.R.Sivaram Executive Director, A Diploma Holder Civil Engineering, 21years of experience in the industry In-Charge of all domestic activities & IT System Administration

Vision: Most Preferred global men’s wear fashion brand in the mid-premium segment. Classic Polo aims to be and remain the leading retailer of world-class men’s wear in India and become a compulsory part of men’s wardrobe solution by 2011. Mission: To grow horizontally and vertically in all formats (MBO, EBO, Chain Stores) through continuous innovation by offering unparallel value to create customer delight.

The Royal Classic Group (RCG) began in 1991 as an exporter and gradually grew into an Rs.425cr textile giant with brands under it wings through its 100% vertical integration state-of-the-art in-house production.

In February 2001, the company

launches its maiden T-Shirt brand Classic Polo, making its foray into the domestic market. Within a short time, this brand figured among the top casual T-Shirt brands in India. RCG acquired Smash, another T-Shirt brand, in September 2004 and launched its exclusive premium men’s intimate wear under the brand name smash in April 2005. Classic Polo was awarded as the brand for the year 2005-06 for men’s casual. Although, Classic Polo is primarily a T-Shirt brand, the range also offers a complete lifestyle/wardrobe like exclusive T-Shirts, Shirts, Trousers, Denims, Sweaters, Jackets, Loungewear etc., Royal Classic Group has production capacity of 15000 T-Shirts, 4000 Shirts and 4000 Trousers per day with consistent quality 0.01% defective percentage. Hand picked cotton is used for production. RCG jointly has covered about 5000 acres of wet land on contract farming. By providing the best seeds and timely manure, RCG is getting an average productivity of 10Quintals/hectare, which is much higher from conventional Cotton Farming.

Infrastructure Innovations in manufacturing programs of garment occur in our production facilities very often. Our specialization reflects in the quality of the goods delivered, as the workers, executives and machinery are trained and tuned for that purpose.        

Cotton farming Ginning and Pressing Spinning Yarn Knitting Dyeing and finishing Garmenting Captive Power Plant

Cotton Farming:RCG has jointly covered about 5000 acres of wet land on contract farming. By providing the best seeds and timely manure, RCG is getting an average productivity of 10 Quintals/Hectare which is much higher from conventional cotton farming

RCG is ensuring about minimum guaranteed price for the farmers and hence apart from its finest quality produce harvested, RCG enjoys a corporate social responsibility by enlightening about 2000 families involved in cotton /farming. Constant workshops and seminars are conducted at fields to educate and safe transportation methods. The present area is planned to go up to 70000 acres in next 3 years.

Modern Ginning and pressing:From kappa’s cotton, this unit segregates the cotton seeds and good quality cotton (lint) and this operation is done with least number of workers and totally under a pneumatic drive system ensuring least human contacts. Ginning has capacity of 200 bales per day with an average weight of 170 Kgs/bale and as the cultivation improves can reach up to 400 bales per day.

Spinning:The ginned cotton is covered into spun yarn in this unit with the following state-ofthe-art machineries.

Yarn:The company deals in 100% cotton yarn, 100% polyester yarn, all types blended yarns, 100% gassed mercerized yarn, twisted yarn, various mélange yarn, etc… Our spacious stock yard stores every type of yarn for supply to the regional factories, apart from our own knitwear factories. Advanced yarn testing facility is an added advantage. Yarn can be tested both at the source point of the spinning mill and locally, which ensures best quality of yarn.

Knitting:Knitting dept has an array of latest computer controlled knitting machines from reputed international brands. The in-house facility, which includes a knitting design studio, is one of the best in the knitting industry. There are 46 circular knitting machines that can knit jacquards, interlocks, ribs, and jerseys, in any pattern or structure as needed. The capacity is 10 tons per day. There are 9 flat knitting machines and that knit jacquards, plain, strips, and self designs with a capacity of 8500 pieces per day. Our circular machinery includes: (All Brand new MAYER and CIE machines)

Dyeing and finishing:Our modern soft flow dyeing plant with Effluent Treatment Plant (ETP) has a processing capacity of 10 tons per day. The soft flow dyeing plant has 7 vessels imported from Taiwan. Supported by computerized color prediction, measurement and matching systems from Data Color International, USA (Spectra Flash SF 600) the plant can deliver evenly color fabrics, streaks free. Dyed Fabrics are processed through balloon paddler from stretch plus, Switzerland to remove the moisture neat and to give the fabric a better feeling and finish. Fabrics are further processed through relax imported from Calator Ruckh, Germany.

Garmenting:The completely integrated facilities is topped by our garmenting division with skilled pattern masters, cutting masters, tailors, and supporting workmen who are well trained. The product specialization gives an excellent finish to the garment s they make. The entire production wing is housed under one roof with scientific work systems and quality control systems,

Captive Power Plant:Presently they have installed 4 windmills of total 3.0 MW capacities which are currently taking care of the entire requirements of the group. The company is planning to add couple of more machines to take care of the future needs.

Solar Panel The new solar heating Plant has been deployed at our dyeing division as the replacement of exiting Fire Wood with the capacity of 10000 Liters per Day at 90D and 20000 liters at 80. It has replaced the usage of 10 tons of Firewood/Day. In turn we are saving almost 1000 trees a day.

Deployment of STP (sewage treatment Plant) With the help of STP, RCG is purifying 1 Lac Liter of sewage water every day and it is used for agriculture purposes.

Objective: The main objective of the study is to understand the financial position of the company, refers to the development of long-term strategic financial plans that guide the preparation of short-term operating plans and budgets, which focus on analyzing the pro forma statements and preparing the cash budget.

Financial Planning and Forecasting

Financial Planning and Forecasting is the estimation of value of a variable or set of variables at some future point. A Forecasting exercise is usually carried out in order to provide an aid to decision – making and planning in the future. Business Forecasting is an estimate or prediction of future developments in business such as Sales, Expenditures and profits. Given the wide swings in economic activity and the drastic effects these fluctuations can have on profit margins, business forecasting has emerged as one of the most important aspects of corporate planning. Forecasting has become an invaluable tool for business to anticipate economic trends and prepare themselves either to benefit from or to counteract them. Good business forecasts can help business owners and managers adapt to a changing economy. Financial planning and forecasting represents a blueprint of what a firm proposes to do in the future. So, naturally planning over such horizon tends to be fairly in aggregative terms. While there are considerable variations in the scope, degree of formality and level of sophistication in financial planning across firms, we need to focus on common elements which include Economic assumptions, Sales forecast, Pro forma statements, Asset requirements and the mode of financing the investments. In general usage, a financial plan can be a budget, a plan for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan can also be an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.

While a financial plan refers to estimating future income, expenses and assets, a financing plan or finance plan usually refers to the means by which cash will be acquired to cover future expenses, for instance through earning, borrowing or using saved cash. Corporations use forecasting to do financial planning, which includes an assessment of their future financial needs. Forecasting is also used by outsiders to value companies and their securities. This is the aggregative perspective of the whole firm, rather than looking at individual projects. Growth is a key theme behind financial forecasting, so growth should not be the underlying goal of corporation – creating shareholder value is enabled through corporate growth. The benefits of financial planning for the organization are  Identifies advance actions to be taken in various areas.  Seeks to develop number of options in various areas that can be exercised under different conditions.  Facilitates a systematic exploration of interaction between investment and financing decisions.  Clarifies the links between present and future decisions.  Forecasts what is likely to happen in future and hence helps in avoiding surprises.  Ensures that the strategic plan of the firm is financially viable.  Provides benchmarks against which future performance may be measured. There are three commonly used methods for preparing the pro forma financial statements. They are: 1. Percent of Sales Method 2. Budgeted Expense Method. 3. Variation Method. 4. Combination Method.

Percent of Sales Method The percent of sales method for preparing pro forma financial statement are fairly simple. Basically this method assumes that the future relationship between various elements of costs to sales will be similar to their historical relationship. When using this method, a decision has to be taken about which historical cost ratios to be used. Budgeted Expense Method The percent of sales method, though simple, is too rigid and mechanistic. For deriving the pro forma financial statements, we assume that all elements of costs and expenses bore a strictly proportional relationship to sales. The budgeted expense method, on the other hand calls for estimating the value of each item on the basis of expected developments in the future period for which the pro forma financial statements are prepared. This method requires greater effort on the part of management because it calls for defining likely developments. Variation Method Variation method on the other hand, calls for estimating the items on the basis of percentage increase or decrease of comparing with the same item of base year. It is quite flexible throughout the future period. This method is not like budgeted method, the value estimating for an item under this method is entirely dependent on the historical data. Combination Method It appears that a combination of above explained three methods works best. For certain items, which have a fairly stable relationship with sales, the percent of sales method is quite adequate. For other items, where future is likely to be very different from the past, the budgeted expense method or variation method is eminently suitable. A combination method of this kind is neither overly simplistic as the percent of sales method nor unduly onerous as the budgeted expense method or variation method.

Assumptions

The method used for this study is combination method which eminently works best for an organization. The assumptions made for forecasting are as follows: 1. The sales are expected to increase by 20% every year. 2. All expenses are estimated under percentage of sales method. 3. Tax is estimated on the basis of profit. 4. Proposed Dividend to be increased by Rs. 5,000,000 every year. 5. Dividend tax is payable on the basis of proposed dividend. 6. Secured and unsecured loans to be decreased by 5% every year. 7. Tax liability on percentage of sales method. 8. Fixed assets are expected to increase by 2% every year. 9. Work-in-progress of capital is expected to decrease by 10% every year. 10. Investments are expected to increase by 5%. 11. Current assets like inventories and sundry debtors are expected to increase by 2% every year. 12. Cash and it equivalents on the basis of percentage of sales method. 13. Loans and advances are estimated to increase by 5% every year. 14. Current liabilities are expected to increase by 5% every year. 15. Provisions are expected to increase by 10% every year.

Analysis of Profit & Loss Account

Income Sales The firm has sales as Exports as well as Domestic. The total sales include 59.8% of Export sales, 39.7% of Domestic sales and 0.4% of second sales. The sales are forecasted to increase by 20%p.a in the coming three years taking 2008-09 as base year. This shows that company is more Export oriented than the Domestic Sales. Expenditure Raw Materials Consumed Raw materials on which company spend most of its working capital consists of 39.3% of Total Sales Value. This shows that there is a heavy expenditure on raw materials. It is forecasted to increase by 20% in the coming three years. The company should try to optimize the expense on raw material, as in the inflationary economy capital blocked with raw material will lose its value in the subsequent year which can be utilized in other profitable investments. Cost of Human Resources The cost of Human Resources for the firm is 11.1% of the Total Sales Value which is quite satisfactory. This is expected to increase by 20% which means that company is expected to give an increment in wages as well as recruit more employees. Other Manufacturing Expenses Other

Manufacturing

Expenses

include

Electricity

Charges,

Processing

Charges,

Consumables and Repair & Maintenance which constitutes 20.1% of Total Sales Value. It is expected to increase by 20% in coming three years. The other manufacturing expenses of the company are quite high which is needed to be controlled.

Administrative Overheads This includes Rent, Repairs and Maintenance, Insurance Charges, Legal and Consultancy Fees and Audit Fees.

Administrative Overheads constitutes about 5.5% which is quite

satisfactory. It is also expected to increase by 20% in the coming three years. Selling and Distribution Overheads The Selling and Distribution overheads include Advertisement Charges, Salary for sales executives, Carriage Outwards, Commission, Discount and Incentives. These expenses constitute 7.5% of Total Sales Value. Out of the total selling and distribution expenses, the expense on commission discount and carriage is quite high which should be minimized and the same amount can be used for Advertisement to promote brands of the company. Finance Charges Finance charges which mainly includes interest on loans from Banking and Non-Banking Corporations. It constitutes 11.2% of Total Sales Value which is quite high, which shows that, company has high value of debt in comparison to its equity. Dividend The trend for the dividend shows that it is increasing by Rs50 Lakhs Every Year which means company is able to attract its investor by announcing dividend timely. This also shows that the company has a reasonable operating profit. This is good indication for the company.

Analysis of Balance Sheet Sources of Funds Share Capital A share is the unit into which the capital of the company is divided. The promoters take futuristic look and decide on the maximum capital i.e. Authorized Capital which is about Rs7.5Cr for the firm. The amount actually paid by the shareholders is called paid-up-capital of the company which is Rs5 Cr for the firm. The company has issued 2062650 Equity shares and 2937350 Preference shares. Reserves and Surplus The Net Profit is increasing by 20% for the forecasted three years out of which the retained amount after paying dividend is carried to Balance sheet under Reserves and Surplus head. In ultimate analysis reserves belong to shareholders. Therefore, the total amount due to the shareholders constitutes the capital and reserves. The presence of sizeable reserves in a balance sheet is an advantage as it adds to the financial strength of the company. Secured Loans Secured Loans represent borrowings by the company against charging of its specific assets. It is expected to decrease by 5% in coming three years. This shows the firm is expected to utilize its Reserves and Surplus for its operations and its dependence on secured loans has decreased. Unsecured Loans These include borrowings of the company without creation of any charge on its assets. It is expected to decrease by 5% in coming three years. This shows that the firm is expected to finance its short term needs by utilizing own funds for its operations. Deferred Tax Liability According to the data, the company seems to postpone a huge amount of taxes to the future years and the company is utilizing the same amount as a source of fund for itself. As the Net Profit is increasing by 20% every year it is also expected to increase by 20% in the future years.

Current Liabilities and Provisions Current Liabilities include short-term liabilities of the company and the provisions. The shortterm liabilities include sundry creditors for Trade, Expenses, and Capital Goods. It is expected to increase by 5% as the operations of the company are growing but at the same time company is able to pay its liabilities on time. The company is making the provisions appropriate to the taxing policy of the company.

Application of Funds Fixed Assets As the company is expanding its business, the fixed assets like Land and Buildings, plant and machinery of the company is expected to increase by 2%. The company has their own power plant which includes four windmills. The company has separate production plants for yarn, knitting, compacting, stitching and packaging. They have their own logistics for domestic distribution. Investment The company is investing its surplus amount from retained earnings in shares of Corporation Bank and South Indian Bank Ltd. The company has 200 Equity shares of Corporation Bank and 360 Equity shares of South Indian Bank Ltd. The company has also invested in Tirupur Infrastructure Bonds and Win Win Enterprises Pvt Ltd. The company is expected to increase its investment by 5% p.a. for the coming three years. Current Assets Inventories Inventories constitute more than 50% of the total current assets. As the Textile Industries has longer production cycles the firm needs to maintain inventories but the management of inventories should be efficiently carried out so that this investment does not become too large as it result in blocked capital which could be put to productive use elsewhere. This is of greatest significance in the inflationary economy because of the depreciation in the value of money. The inventories of the company are expected to increase by 2% p.a. which is satisfactory with respect to sales.

Sundry Debtors Investment in receivables involves both benefits and costs. The extension of trade credit has a major impact on sales, cost and profitability. Liberal policy leads to larger debtors at the same time increase in sales. So the company needs to have a standard credit policy to maintain a balance between receivables and sales. The sundry debtors are expected to increase by 2% which is quite satisfactory with respect to sales which are increasing by 20%. Cash and Bank Balances According to the data, the cash and bank balances has increased by 20%, which is a good indication in aspect of liquidity of the company. This is a good sign for the creditors as it means company is able to meet its current obligations. Loans and Advances According to the data, the cash and bank has increased by 20%, which means company’s liquidity position is good enough and it is able to give loans and advances to its subsidiary company for carrying its operations.

DEBTORS MANAGEMENT Royal Classic Group has a large proportion of the sales in cash and a small amount of sales on credit. Although there is credit sales the credit policies are very aggressive in nature and the company follows restrictive measures. The sales of the firm are both domestic sales and international sales. The total debtors are classified into 4 main segments:  Exporters  MBO-Distributors  Urban Retail Division  Others

There are 132 debtors for the financial year ending 31 st march 2010, which includes both MBO & EBO. There are 26 debtors with an outstanding amount of Rs 4.047cr for classic fashion division (MBO Distributors). The total debtors are classified into 4 main regions:  East  North  South  West

Analysis: East: East region has second highest sales which amount to Rs 6.777 cr but at the same time debtors turnover is low i.e. 2.91 times in a year with a collection period of 125.4 days which is just twice of the credit period given by the firm. There is a need of some aggressive policy at the same time maintaining high sales. North: Here the firm has started the business recently, so it is too early to know the exact debtors turnover and the firm will have flexible policy. The firm should aim at a trade-off between profit (benefit) and risk (cost).

South: This is the region with highest sales, debtors turnover is also very good i.e.10 times in a year with the collection period of 36.4 days which is less than the credit period given by the company. West: This region also has high debtor’s turnover of 7.57 times in year, with collection period of 48 days which is less than the credit period given by the firm. The company should go for flexible credit policy aiming at higher sale.

Credit Policy Discounting (or) Receivable purchase: The customers to whom the goods are sold on credit, many of those receivables are discounted with the banks. In other words the banks agree to purchase the company receivables and later on the due date the company collects the amounts from the debtors and pay them to the bank. This facilitates the company with the earlier realization of funds and no default risk. Partly Credit policies: Under some circumstances the company also sells goods on credit to its cash customers. It is purely a business call and this happens rarely .It happens in the case of second sale. Under the following circumstances the goods are offered on credit:  To clear period ending stocks which require the customer some period to sell  To sell old goods which are 180 days or more older  Sometimes in case an old customer is in some temporary financial trouble, then the relation with customer forces to sell goods on credit.

Ratio Analysis Ratio analysis is a widely-used tool of financial analysis. It is the process of the determining of the items and group of items in the statements. It can be used to compare the risk and return relationships of firm of different sizes. Ratio can assists management in its basics function of forecasting, planning, coordination, control and communication. Benefits of ratio analysis: Helpful in analysis of financial statements.  Helpful in comparative study.  Helpful in locating the weak spots.  Helpful in forecasting.  Estimate about the trend of the business.  Fixation of ideal standards.  Effective control.  Study of financial soundness.

Types of ratios Ratios can be classified into four broad groups.  Liquidity Ratios  Leverage ratios  Profitability Ratios  Activity Ratios Liquidity Ratios They indicate the firm’s ability to meet its current obligation out of current resources and reflect the short - term financial strengths/solvency of a firm. Liquidity implies from the viewpoint of utilization of the funds of the firm that funds are idle or they earn very little. The proper balance between the two contradictory requirements that is liquidity and profitability is required for efficient financial management. The ratios which indicate the liquidity of the firms are  Current Ratio  Quick Ratio/ Acid test Ratio

Current Ratio The current ratio of the firm measures its short – term solvency that is its availability to meet short – term obligations. As a measure of short – term or current term financial liquidity, it indicates the rupees of current assets available for each rupee of current liabilities obligation payable. The higher the current ratio the larger is the amount of rupees available per rupee of current liability, the more is the firm’s ability to meet current obligations and greater is the safety of funds of short – term creditors. Thus, current ratio is a measure of margin of safety to the creditors.

Year

Total Current

Total Current

Current

Assets

Liabilities

Ratio

2010-11

1616102521

1254990145

1.29

2011-12

1669271632

1217053762

1.37

2012-13

1726349950

1181591804

1.46

1.46

1.50 1.45

1.37

1.40 1.35

1.29

1.30 1.25 1.20 2010-11

2011-12

2012-13

Current Ratio The industrial standard norms for current ratio are 1.33:1. The expected current ratio for the year 2010-11 is 1.29, for 2011-12 is 1.37, for 2012-13 is 1.46. The company is expected to meet the standard norms from the financial year 2011-12 onwards. It shows that the liquidity position of the company is expected to improve in the coming years. In the year 2010-11 it is expected to have Rs.1.29 for each rupee of current liabilities. It is expected to increase 1.37 and 1.46 for every rupee of current liabilities in the year 201011 and 2011-12 respectively.

Quick Ratio The quick ratio is a measure of firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities. It refers to the amount which is readily available with the company to meet its current liabilities. The quick ratio is the ratio between quick current assets and current liabilities. The quick current assets do not include stock and prepaid expenses. But, now a day’s majority of the companies assume that prepaid expenses are also quick assets by considering it is recoverable.

Year

Total Quick

Total Current

Assets

Liabilities

Quick Ratio

2010-11

762888147

1254990145

0.61

2011-12

798826193

1217053762

0.66

2012-13

838320485

1181591804

0.71

0.71 0.72 0.70 0.68 0.66 0.64 0.62 0.60 0.58 0.56 0.54

0.66 0.61

2010-11

2011-12

2012-13

Quick Ratio The industrial standard norms for quick ratio are 1:1. The expected quick ratio for the year 2010-10, 2011-12 and 2012-13 is 0.61, 0.66 and 0.71 respectively. Of these, the quick ratio is expected to increase by 0.05 every year. It is expected that in the financial year 2012-13 (0.71) is satisfactory. It means most of the current assets are blocked with unsalable inventories. This needs to be managed aggressively.

Leverage Ratios Leverage Ratios measures the financial strength of the company. The long – term solvency of a firm can be examined by using leverage ratios. The leverage ratio may be defined as financial ratios which throw light on the long – term solvency of a firm as reflected in its ability to assure the long – term lenders with regard to periodic payment of interest during the period of the loan and repayment of principal on maturity

or in predetermined

installments at due dates. These ratios are based on relationship between borrowed funds and owners capital. These ratios computed from balance sheet. The ratios which indicate the leverage position of the firm are  Debt – Equity Ratio  Debt – Assets Ratio

Debt – Equity Ratio The relationship between borrowed funds and owner’s capital is a measure of the long – term financial solvency of a firm. This ratio reflects the relative claims of creditors and shareholders against the assets of the firm. Alternatively, this ratio indicates the relative proportions of debt and equity in financing the assets of a firm.

Year

Total Debt

Equity

Debt - Equity Ratio

2010-11

1183019942

860746887

1.37

2011-12

1171920382

943142093

1.24

2012-13

1141029961

1040846391

1.10

1.37 1.24

1.40

1.10

1.20 1.00 0.80 0.60 0.40 0.20 0.00 2010-11

2011-12

2012-13

Debt-Equity Ratio The industry standard norms for debt – equity ratio are less than 1.65. The firm is expected to have 1.37, 1.24 and 1.10 for the year 2010-11, 2011-12 and 2012-13 respectively. It shows that the firm is expected to utilize its own funds more for investments. This also shows that the firm is quite confident about the returns on its investment and it is also going to attract creditors as they have less risk.

Debt – Assets Ratio Debt – assets ratio is the relationship between creditors’ funds and total assets of the company. Here, the outside liabilities are related to the total capitalization of the firm and not merely to the shareholder equity. This ratio indicates the total assets financed by outsiders of the company.

Year

Total Debt

Total Assets

Debt - Assets Ratio

2010-11

2082161858

3151042611

0.66

2011-12

1978053765

3203129538

0.62

2012-13

1879151077

3258926145

0.58

0.66 0.68 0.66 0.64 0.62 0.60 0.58 0.56 0.54 0.52

0.62 0.58

2010-11

2011-12

2012-13

Debt-Assets Ratio The industry standard norms for debt – assets ratio are 0.50-1.00. It is expected to have debt – assets ratio of 0.66, 0.62 and 0.58 for the 2010-11, 2011-12 and 2012-13 respectively. This shows that the company is expected to utilize its own funds for future investments. The firm is taking its own risk by being confident about the returns on its investment. This also shows that the company is trying to reduce its borrowings to finance the assets.

Turnover Ratios Turnover ratios determine how quickly certain current assets are converted into cash. It measured in times. The three relevant turnover ratios are  Debtors Turnover  Creditors Turnover  Inventory Turnover  Fixed Assets Turnover

Debtors Turnover Ratio The debtor’s turnover ratio supplements the information regarding the liquidity of one item of current assets of the firm. The ratio measures hoe rapidly receivables are collected. A high ratio is an indicative of shorter time – lag between credit sales and cash collection. A low ratio shows that debts are not being collected rapidly. Debtors Year

Net Sales

Avg Debtors

Turnover

2010-11

3514686561

403526275

8.71

2011-12

4217623874

411596800

10.25

2012-13

5061148649

419828736

12.06

12.06 14.00 12.00

10.25

8.71

10.00 8.00 6.00 4.00 2.00

0.00 2010-11

2011-12

2012-13

Debtors Turnover Ratio

The industry standard norms for debtors turnover ratio is 6times. The expected debtor turnover ratio for the year 2010-11, 2011-12 and 2012-13 is 8.71, 10.25 and 12.06 respectively. It is expected to increase every year rapidly. It shows that the company is quite prompt over its collection and the credit policy of the firm quite aggressive. Creditors Turnover Ratio The creditor’s turnover ratio is an important tool of analysis as a firm can reduce its requirement of current assets by relying on supplier’s credit. The extent to which trade creditors are willing to wait for payment can be approximated by creditor’s turnover ratio. A low turnover ratio reflects liberal credit terms granted by suppliers, while a high ratio shows that accounts are settled rapidly. Net Credit Year

Purchase

Creditors Avg Creditors

Turnover

2010-11

2392973673

371676164.7

6.44

2011-12

2868576684

390259972.9

7.35

2012-13

3439240462

409772971.6

8.39

8.39

10.00 7.35

8.00

6.44

6.00 4.00 2.00 0.00 2010-11

2011-12

2012-13

Creditors Turnover Ratio The industrial standard norms for creditors turnover ratio is 6 times. The expected creditor’s turnover ratio for the year 2010-11, 2011-12 and 2012-13 are 6.44, 7.35 and 8.39 respectively. It is expected to increase by every year rapidly. It shows that the company is quite prompt over its payments and policy adopted by the company seems to be aggressive.

Inventory Turnover Ratio Inventory turnover ratio indicates how fast inventory is sold. A high ratio is good from the viewpoint of liquidity and vice versa. A low ratio would signify that inventory does not sell fast and stays on the shelf or in the warehouse for a long time. Inventory Turnover Year

Net Sales

Closing Stock

Ratio

2010-11

3514686561

847655111

4.15

2011-12

4217623874

864608214

4.88

2012-13

5061148649

881900378

5.74

7.00 5.74

6.00 5.00

4.88

4.15

4.00 3.00 2.00

1.00 0.00 2010-11

2011-12

2012-13

Inventory Turnover Ratio

The industry standard norms for inventory turnover ratio are 6 times. The expected inventory turnover ratios for 2010-11, 2011-12 and 2012-13 are 4.15, 4.88, and 5.74 respectively. This shows that the inventories will stored in shelf and sales will not happen fast. As it increasing rapidly it may be able to turnover the inventories more in the upcoming years.

Fixed Assets Turnover Ratio Fixed assets turnover ratio indicates the efficiency with which firm uses its fixed assets to generate sales. It is the relationship between costs of goods sold and fixed assets. The higher the turnover ratio, the more efficient is the management and utilization of the assets while lower turnover ratios are indicative of underutilization of available resources and presence of idle capacity. Fixed Assets Turnover Year

Net Sales

Net Fixed Assets

Ratio

2010-11

3514686561

1956741440

1.80

2011-12

4217623874

1995876269

2.11

2012-13

5061148649

2035793794

2.49

2.49 2.11

2.50

1.80

2.00 1.50 1.00 0.50 0.00 2010-11

2011-12

2012-13

Fixed Assets Turnover Ratio

The fixed assets turnover ratios are expected to increase rapidly in the upcoming years. It shows that the firm is trying to utilize maximum of available resources as the value of fixed assets are also increasing.

Return on Assets The return on assets measures the profitability of the total funds or investments of a firm. It is relationship between Profit after Tax before Interest and Average Total Assets. Return on Year

PBIT

Total Assets

Assets

2010-11

535977572

3151042611

0.17

2011-12

643173086

3203129538

0.20

2012-13

771807703

3258926145

0.24

0.24

0.25 0.20

0.20 0.17

0.15 0.10 0.05 0.00 2010-11

2011-12

2012-13

Return on Assets

The industry standard norms for return on assets are 14%. It is expected return on assets for the year 2010-11, 2011-12 and 2012-13 are 17%, 20% and 24% respectively. It shows that the company is expected to get good returns on assets. It also shows that the operating efficiency is good.

Return on Capital Employed The return on capital employed provides a test of profitability related to sources of long – term funds. It also provides sufficient insight into how efficiently the long – term funds of owners and lenders are being used. The higher the ratio, the more efficient is the use of capital employed.

Year

PBIT

Total Capital

Return on Capital

Employed

Employed

2010-11

535977572

2718308097

0.20

2011-12

643173086

2748758299

0.23

2012-13

771807703

2781836344

0.28

0.28 0.23

0.30 0.25

0.20

0.20 0.15 0.10 0.05 0.00

2010-11

2011-12

2012-13

Return Capital Employed

The industry standard norms for Return on capital employed are 14%. The expected return on capital employed for the year 2010-11, 2011-12 and 2012-13 are 20%, 23% and 28% respectively. It shows that the firm will able to use its capital fund efficiently on its operations.

Return on Investment The purpose of this ratio is to ascertain how much percentage of income is generated by the use of capital. It measures the overall effectiveness of management in generating profits with its available assets.

Year

PBIT

Net Fixed Assets& Working

Return on

Capital

investment

2010-11

535977572

3046143391

0.18

2011-12

643173086

3107691963

0.21

2012-13

771807703

3171952635

0.24

0.24 0.25

0.21 0.18

0.20 0.15 0.10 0.05 0.00 2010-11

2011-12

2012-13

Return on Investment

The industry standard norms for return in investment are 14%. The expected return on investment for the year 2010-11, 2011-12 and 2012-13 are 0.18, 0.21 and 0.24 respectively. It shows that the firm earns good returns on their investment and it is expected to increase rapidly.

Ratio Analysis Breakeven The break even analysis of ratios is calculated by considering the industrial standard norms for Ratios. This is an analysis which helps the management to know current financial position of the company. This is used to find the appropriate amount of financial items needed to satisfy the Industrial standard norms for ratios. Current Ratio

Year

Total Current Assets

Total Current Liabilities

Current Ratio

2010-11

1616102521

1254990145

1.29

2011-12

1669271632

1217053762

1.37

2012-13

1726349950

1181591804

1.46

Std Norms

1.33

BE Current Assets

BE Current Liabilities

1669136892

1215114677

1618681503

1255091452

1571517099

1298007481

The industry standard norms for current ratio are 1.33:1. The expected value of break even current assets is high and break even current liabilities are low in the year 2010-11. This shows that the current ratio for the year 2010-11 is not up to the mark, it is back by 0.04. So, the company has to adopt some necessary policies to increase the current assets or to reduce the current liabilities. The firm can take decisions to reduce the current liabilities rather than increasing the current assets because for increasing the current assets either the company has to reduce their investments on fixed assets or to convert inventories into debtors or cash. The conversion of inventories to debtors or cash depends on sales, which depends on market position. So, the firm can have a control on current assets like Sundry Creditors. As the firm is expected to have the current ratio better in comparison with industry standard norms for the year 2011-12 and 2012-13 it shows that the routine is expected to increase by 0.04 and 0.13 for the year 2011-12 and 2012-13 respectively.

Quick Ratio

Year

Total Quick Assets

Total Current Liabilities

Quick Ratio

2010-11

762888147

1254990145

0.61

2011-12

798826193

1217053762

0.66

2012-13

838320485

1181591804

0.71

Std Norms

0.8 - 1

BE Quick Assets

BE Current Liabilities

1003992116

953610184

973643009

998532741

945273443

1047900606

The industry standard norms for quick ratio is 0.8 – 1. The expected break even quick assets are high and break current liabilities are low. The data shows that the firm is not expected to meet its industry standard norms till the year 2012-13. It is back by 0.19, 0.14 and 0.09 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt necessary policies to make the quick ratio as a standard one as it represents the ready cash available to its liabilities. The current ratio is expected to meet its standards by the year 2011-12 whereas in case of quick assets it is not so. It shows that the majority of its current assets are held by inventories. So the firm has to convert its inventories to either cash or sundry debtors. At the same time the firm has to reduce its current liabilities like sundry creditors to meet its standard norms. As per the above breakeven analysis, there are two different breakeven current liabilities figure which has very high difference. This is because of value of current assets and quick assets in which inventories hold larger amount.

Debt – Equity Ratio

Equity

Debt - Equity Ratio

Year

Total Debt

2010-11

1183019942

860746887

1.37

2011-12

1171920382

943142093

1.24

2012-13

1141029961

1040846391

1.10

Std Norms

< 1.65

BE Debt

BE Equity

1420232364

716981783

1556184454

710254777

1717396545

691533310

The industry standard for debt – equity ratio is less than 1.65. The expected breakeven debt is high and break even equity is low. The data shows that the firm is expected to have good ratio between debt and equity which is back by 0.28, 0.41 and 0.55 for the year 2010-11, 2011-12 and 2012-13 respectively. From the data two observations can be made, (i) Firm is expected to utilize its own funds for its investments or (ii) Firm is expected to reduce its investments. If the firm is expected to utilize its funds for investments, it is quite confident about its returns on its investment and it also attracts the creditors as they have less risk. If the firm is expected to reduce its investments either the firm has got enough investments or the firm may not be confident about their returns on investments. Debt – Assets Ratio

Year

Total Debt

Total Assets

Debt - Assets Ratio

2010-11

2082161858

3151042611

0.66

2011-12

1978053765

3203129538

0.62

2012-13

1879151077

3258926145

0.58

Std Norms

0.5 - 1

BE Debt

BE Assets

1575521305

4164323716

1601564769

3956107530

1629463073

3758302153

The industry standard norms for debt to assets ratio is 0.5 – 1. The expected breakeven debt is low and breakeven asset is high which shows that the firm satisfies the standard norms in upcoming years. The firm is expected to have good ratio between debt – assets which is back by 0.34, 0.38 and 0.42 for the year 201010, 2011-12 and 2012-2013 respectively when compared with maximum value.

It also shows that the firm is expected to utilize its own funds for financing its own assets as the debt decreases correspondingly assets increases. As per the above breakeven analysis, there are two different breakeven debt values with slight difference. From this analysis it is better to consider the breakeven debt of debt to assets figure because the firm goes for borrowings to finance its assets and not maintain the standard for debt to equity ratio. Anyway it also satisfies the standards of debt – equity too.

Inventory Turnover Ratio

Closing Stock

Inventory Turnover Ratio

3514686561

847655111

4.15

2011-12

4217623874

864608214

4.88

2012-13

5061148649

881900378

5.74

Year

Net Sales

2010-11

Std Norms

6

BE Sales

BE Closing Stock

5085930669

585781094

5187649282

702937312

5291402268

843524775

The industry standard norms for inventory turnover ratio are 6 times. The expected breakeven sales are high and breakeven closing stock is low. The data shows that the firm does not meet its standards till the year 2012-13. It is back by 1.85, 1.12 and 0.26 for the year 2010-11, 2011-12 and 2012-13 respectively. The firm has to adopt necessary policies to increase the sales or to decrease its inventories. There is also possibility that the firm may adopt conservative policy on its raw materials like cotton as the price of cotton fiber is increasing. At the same time, the firm has to increase its sales by adopting better marketing policies and promotion strategies or to reduce the inventories by having a control its production and raw materials.

Debtors Turnover Ratio Debtors Turnover

Year

Net Sales

Avg Debtors

Std Norms

2010-11

3514686561

403526275

8.71

2011-12

4217623874

411596800

10.25

2012-13

5061148649

419828736

12.06

6

BE Sales

BE Debtors

2421157648

585781094

2469580801

702937312

2518972417

843524775

The industry standard norms for debtors turnover ratio is 6 times. The expected breakeven sales are low and breakeven debtors are high. The data shows that the company has very good debtor’s turnover which shows that the firm is able to collect its receivables from its debtors, which is up by 2.71, 4.25 and 6.06 for the year 201011, 2011-12 and 2012-13 respectively. As per the above breakeven analysis, there are two different breakeven sales figure with very high differences. From this analysis it is better to consider the debtors turnover ratio because it is impossible to increase the sales by 200% approximately as per the inventory turnover data. This shows that the firm holds very huge amount of inventory which can also be derived from quick ratio. So the firm has to take necessary steps to control its inventory. Creditors Turnover Ratio Net Credit Purchase

Avg Creditors

2010-11

2392973673

371676165

6.44

2011-12

2868576684

390259973

7.35

2012-13

3439240462

409772972

8.39

Year

Creditors Turnover

Std Norms

6

BE Purchase

BE Creditors

2230056988

398828945

2341559838

478096114

2458637829

573206744

The industry standard norms for creditors turnover ratio is 6 times. The expected breakeven purchase is low and breakeven creditors are high. The data shows that the company is expected to have good creditor’s turnover ratio which means that they are payables are compensated on fine time interval. It is up by 0.44, 1.35 and 2.39 for the year 2010-11, 2011-12 and 2012-13 respectively. This policy attracts the creditors to have business with this company.

Return on Assets

Year

PBIT

Total Assets

Return on Assets

2010-11

535977572

3151042611

0.17

2011-12

643173086

3203129538

0.20

2012-13

771807703

3258926145

0.24

Std Norms

0.14

BE PBIT

BE Assets

441145966

3828411226

448438135

4594093471

456249660

5512912165

The industry standard norms for return on assets are 0.14 (14%). The expected breakeven PBIT is low and breakeven Assets are high. The data shows that the company meets its standard norms in upcoming years and it is also expected to have better returns when compared standard norms. It is up by 0.03, 0.06 and 0.10 for the year 2010-11, 2011-12 and 2012-13 respectively. This shows that the assets are used efficiently and the operating efficiency is also good. Return on Capital Employed Total Capital Employed

Return on Capital Employed

Year

PBIT

2010-11

535977572

2718308097

0.20

2011-12

643173086

2748758299

0.23

2012-13

771807703

2781836344

0.28

Std Norms

0.14

BE PBIT

BE Capital Employed

380563134

3828411226

384826162

4594093471

389457088

5512912165

The industry standard norms for Return on Capital Employed (ROCE) are 14%. The expected breakeven PBIT is low and breakeven Capital Employed is high. The data indicates that the firm meets its standards in upcoming years. It is up by 0.06, 0.09 and 0.14 for the year 2010-11, 2011-12, 2012-13 respectively. It indicates that the firm has enhanced returns when compared with standard norms. As per the above breakeven analysis, there are two different breakeven PBIT figures. From these it is better to consider the breakeven PBIT from Return on Assets (ROA) because Capital employed does not include Current Liabilities. So the firm expects return on the basis of total assets employed for the business as it is the efficient one.

Operating Cycle & Cash Cycle

Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management.

Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term. Operating cycle takes into consideration the following elements: accounts payable, cash, accounts receivable, and inventory replacement.

The following formula is used for calculating operating cycle:

Operating cycle = age of inventory + collection period

Cash cycle is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle. Cash cycle is implemented in the financial assessment of a commercial enterprise. The more the figure is increased, the higher is the period for which the cash of a commercial entity is engaged in commercial activities and is inaccessible for other functions, for instance investments. The cash cycle is interpreted as the number of days between the payment for inputs and getting

cash

by

sales

of

commodities

manufactured

from

that

input.

The fundamental formula that is applied for the calculation of cash conversion cycle is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing Period) - (Average Payables Processing Period).

Year

Inventory Period

Receivable Period

Payable Period

Operating Cycle

Cash Cycle

2010-11

88.03

41.91

56.69

129.94

73.24

2011-12

74.82

35.62

49.66

110.44

60.79

2012-13

63.60

30.28

43.49

93.88

50.39

140.00

129.94 110.44

120.00

93.88

100.00 80.00

73.24 Operating Cycle

60.79 50.39

60.00

Cash Cycle

40.00 20.00 0.00 2010-11

2011-12

2012-13

Analysis: A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments. As per the standard norm it should be less than 120 days for a textile industry. The forecasted data shows that the efficiency of accessibility of cash for other instances is good as it is low when compared with standard norms.

Growth Rates Firms generally state corporate goals in terms of growth rates. Growth is often the central theme of corporate planning. It is year – over – year change expressed in percentage. The emphasis on maximizing shareholder value as the principal goal of the firm, the exertion of planners with growth seems like riddling. While firms are interested in growth, they may be reluctant to raise external equity. There are two growth rates to overcome this reluctance in the context of long – term financial planning. They are, 1. Internal Growth Rate. 2. Sustainable Growth Rate. Internal Growth Rate The internal growth rate is the maximum growth rate that can be achieved with no external financing. This is the growth rate that can be sustained with retained earnings, which represent internal financing. The formula used to calculate internal growth rate is

Year

Return on Assets

Plough back Ratio

Internal Growth Rate

2010-11

0.17

0.83

16%

2011-12

0.20

0.81

19%

2012-13

0.24

0.80

23%

Internal Growth Rate 23% 25% 20%

19% 16%

15% 10% 5% 0% 2010-11

2011-12

2012-13

The data shows the internal growth rate for the forecasted year. It seems that the firm will have fine internal growth rate in the upcoming years. The firm is expected to have 16%, 19% and 23% for the year 2010-11, 2011-12 and 2012-13 respectively with no external financing requirements.

Sustainable Growth Rate The sustainable growth rate is the maximum growth rates that can a firm can achieve without resorting to external equity finance. This is the growth rate that can be sustained with the help of retained earnings matched with debt financing, in line with debt – equity policy of the firm. This is an important growth rate because firms are reluctant to raise external equity finance for the following reasons: 1. The dilution of control, consequent to the external equity issue, may not be acceptable to the existing controlling interest. 2. There may be a significant degree of under pricing when external equity is raised. 3. The cost of issue tends to be high.

The formula used to calculate sustainable growth rate is

Year

Return on Equity

Plough back Ratio

Sustainable growth rate

2010-11

0.11

0.83

9.7%

2011-12

0.12

0.81

10.5%

2012-13

0.13

0.80

11.5%

Sustainable Growth Rate 11.5% 11.5% 10.5%

11.0%

10.5%

9.7%

10.0% 9.5% 9.0% 8.5% 2010-11

2011-12

2012-13

The data shows the sustainable growth rate of the firm for forecasted year. It seems that the firm will have fine sustainable growth rate in the upcoming years. The firm is expected to have 9.7%, 10.5% and 11.5% for the year 2010-11, 2011-12 and 201213 respectively without resorting to external equity requirements.

Recommendations  Conversion of open credit customers to bank financed customers: The Company has a policy of discounting or receivable purchase with the bank, which can be converted to discounting without recourse or receivable purchase backed by Insurance scheme. In case of non- payment of such bills, the sufferer will be the factor (bank) or insurance company, firm will bear almost no risk.  Credit sales to retailers: The Company should use other parameters also to determine the credit scoring of a debtor. The parameters often used for credit rating are customer’s profile, its market share, technology standards, capital investment, credit history and ability to pay debts on time.  Securitization from open credit customers:

Though the company tries to

finance all its customers through bank, it becomes necessary under some circumstances for the company to sell its goods to customers who are not under the bank finance scheme. Thus converting such customers under the financing scheme may not also be possible. So, the company can make provisions for circumstances for the securitization of such customers. Collection of post dated cheque may also be a good instrument.  The indirect expenses for the company are high which as a result leads to low net profit margin (4.06%) for the company. It may be due to inefficiency of the marketing department and production department leading uncontrolled promotional and other expenses on processing the fabrics and materials, inefficient utilization of resources which should be controlled.  As per the data, majority of the current assets are blocked with slow moving inventories because of which company is facing liquidity problem which is expected to have 4.15, 4.88, and 5.74 for the upcoming years where the standard norm is 6. The quick ratio is not up to the mark because of the value of inventory. The firm has to control its capacity on over production or the firm has to adopt proper promotional strategies to move the goods. So, the firm should work towards the efficient management of inventories.

 The debt – equity ratio is good from the creditors point of view but not from the company’s point of view. The firm is expected to have 1.37, 1.24 and 1.10 for the upcoming years because it is expected to use the available reserves and surplus for further investments. The company should go for long term loans to broaden their investment as well as tax shield on its profit.  As fixed assets turnover ratio is less than the standard it shows that the company’s operating efficiency is not up to the mark. As, the textile industry is facing the economic problem like exchange rate against US dollar for export trade and the cost major raw material i.e. cotton has been increasing rapidly, they have restricted their usage of fixed assets like plant and machinery. The company should try to improve its operating performance by efficient use of fixed assets for the future.  Though the company tries to finance all its customers through bank, it becomes necessary under circumstances for the company to sell its goods to customers who are not under the bank finance scheme. Thus converting such customers under the bank financing scheme may not also be possible. So, the company can make provisions for circumstances under which such sale will take place and review it regularly.

Conclusion The project is executed by considering the financial 2009 – 10 as a base year because the whole economy was experiencing recession in the previous years. The company is expected to have good financial position in future as it is expected to have good turnovers of sales, debtors, creditors and its assets. The firm is also expected to have ratios between debt, equity and its assets which show the firm uses its own funds for further investments which are a raising flag for its investors. As, the firm is facing the difficulty on indirect expenses and its inventories however, the above mentioned are some of the recommendations that could improve the financial position of the company if implemented. Note: The recommendations are brought to the notice of the company after the effective study on economic conditions and proper analysis of financial statements during the period of my study. I would like to thank the company, Royal Classic Group for giving me this great opportunity of doing this project. I would then like to give a great thanks to my mentor Mr. D.Joshua Chithambaram (Vice President Finance) & Mr. V. Karthikeyan (Manager-Finance) for their continuous and unending support during my project study. Finally, I would also like to thank all other senior managers and officials who were able to spend their valuable time with me in discussion of the subject area of my project and others for providing me the financial data any other requirements for my study and successful completion of my project, and thus contributed a great value to my project.

Bibliography  Financial Management – Prasanna Chandra  Management Accounting – M.Y. Khan and P.K. Jain  Advanced Accountancy – S.M. Shukla  Financial Statements – Royal Classic Group  www.wikipedia.org  www.rcg.in  www.mapsofindia.com