Working Capital Management Project

COMPREHENSIVE PROJECT STUDY REPORT ON

WORKING CAPITAL MANAGEMENT AND PROFITABILITY AT ATUL AUTO LTD Shapar (Veraval) SUBMITTED TO SAURASHTRA UNIVERSITY IN PARTIAL FULFILLMENT FOR THE AWARD OF THE MBA DEGREE

SUBMITTED BY

Jayesh S. Dobariya & Ankit Raichura SEMESTER IV

AFFILIATED TO SAURASHTRA UNIVERSITY, RAJKOT

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PREFACE Today in the era of globalization where in emerging of varied types of trends of technological advancement is taking place to give the end user a product which is better than the best with the changes & development in the field of business economics & corporate world & emergence of various companies in the Indian market user had the cutting edge to invest into various fields in order to get the maximum benefit out of the existing schemes in the regulatory environment. The objective of this report is to understand the Working Capital Management and Profitability of Atul Auto Ltd. through various analyses.

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ACKNOWLEDGEMENT It gives me immense pleasure to present this project report on Working Capital Management and Profitability carried out at ATUL AUTO LTD. In partial fulfillment of post-graduate course M.B.A. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report. I would like to thank Mr. Hitesh Popat sir to help me in granting permission in this organization. I am especially thankful to Mr. J.V. Adhiya sir (Vice President of Finance) for their valuable advice and guidance during my project completion. I am also thankful to Mr. Hiren Nayak sir (HR Depart.) for granting me permission for this project. I would be failing in my duty if I do not express my deep sense of gratitude to Dr. Dharmesh S. Raval sir without his guidance it wouldn’t have been possible for me to complete this project work. Lastly I would like to thank my parents, friends and well wishers who encouraged me to do this research work and all those who contributed directly or indirectly in completing this project to whom I am obligated to.

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DECLARATION We, Ankit J. Raichura Students of MBA IV (Finance) 2008-2010 studying at M.H.Gardi School of Management, Anandpar, declare that the project work entitled “Working Capital Management and Profitability of Atul Auto Ltd.,Rajkot” Was carried by us in the partial fulfillment of MBA program under the Saurashtra University, Rajkot. This project was undertaken as a part of academic curriculum according to the university rules and norms and it has not commercial interest and motive. It is my original work. It is not submitted to any other organization for any other purpose.

Date : Place :-Rajkot ____________________ Jayesh S. Dobariya

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TABLE OF CONTENT

SR No.

Particulars

Page No.

1.

Executive Summary

01

2.

COMPANY INFORMATION

02

3.

1.1 Introduction 1.2 Brief History 1.3 Managing Team 1.4 Group of Companies 1.5 Forms of organization and Size of Unit 1.6 Organization Structure 1.7 Contribution of Unit WORKING CAPITAL MANAGEMENT

04 05 06 07 08 10 11 12

4.

2.1 Introduction 2.2 Need of Working Capital 2.3 Concept of W.C. Management 2.4 Types of Working Capital 2.5 Importance of W.C. Management 2.6 Determination of Working Capital 2.7 Sources of working capital 2.8 Working Capital Components RESEARCH METHODOLOGY

13 14 15 16 19 20 22 23 35

3.1 Introduction 3.2 Objective of the Study 3.3 Scope and Limitation of the Study 3.4 Linear Correlation Co-Efficient 3.5Types of data collection 3.6 Data Analysis

36 37 38 39 41 42

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 Return on Investments  Working Capital Size & Level Analysis  Working Capital Ratio Analysis and Comparison with Return on Investments.

43 45 57

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EXECUTIVE SUMMARY Atul Auto Ltd. is India’s reputed and leading manufacturer of Light Vehicle Transport. Atul group also in other businesses like Auto Finance, two wheeler and 4 wheeler distributors. Dealing in Petroleum Fuels and Products, Telecommunication and also in Real Estate. Atul Auto Ltd. have a very good market share with product differentiation like goods carries, passenger carries, special carries. Atul Auto Ltd. covers the good market share in Gujarat, Uttaranchal, Rajasthan, Orissa and Uttar Pradesh. Atul Auto Ltd. exports their product in Nigeria, Egypt, Kenya, Tanzania, and plenty of African country. Working capital is life blood of any business organization. This study shows the working capital management of Atul Atuo Ltd. It includes, working capital size and level analysis, working capital ratio analysis and comparison with profitability ratio (ROI). In this study working capital ratios compare with profitability ratio (ROI). With the help of karl pearson’s correlation co-efficient statistical tools and found the relationship between those ratios. Through this we could found working capital impact on profitability of the Atul Auto Ltd.

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Chap. 1 Company Information

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PROJECT AT A GLANCE Name of the unit

:-

ATUL AUTO LTD.

Plant ®istered office

:-

Survey No. 86, Plant No.1-4, Near Microwave Tower, National Highway 8-B, Shapar (veraval), Rajkot – 360 002.Gujarat.

Telephone & Fax No.

:-

+91 02827 2652996 / 98 / 99

Fax

:-

+91 2827 – 52254

Website

:-

www.atulautoltd.co.in

Established year

:-

1983

Size of the organization

:-

Large Scale Industry

Form of organization

:-

Public Limited Company

Founder

:-

Jentibhai Chandra

Bankers

:-

State Bank of India State Bank of Saurashtra Citizens Co-op. Bank ltd. Laxmi Vilas Bank Ltd. HDFC Bank

Auditors

:-

Weekly off

:-

Maharishi & Co. Chartered Accountant. Wednesday

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1.1 INTRODUCTION 20 years ago Jentibhai Chandra has started the business as a manufacturer of automobile- “Chhakara”. The business was started at Jamnagar on Small base. After some years diversification was made and they have started manufacturing of “DIESEL 3-WHEELERS” along with chhakara. With the aim to cover national market they have started emptier plant at Shapar (Veraval) because of better transportation services and many other things. At present the company is running under the name “ATUL AUTO LIMITED”. Basically company is producing diesel engine vehicles. It produces 3-wheelers like chhakera, pick-up van, delivery van and passenger van. Now a day’s company is selling its products mainly in Andhra Pradesh, Karnataka, Gujarat, Rajasthan, MP and Maharashtra. “ATUL AUTO LIMITED” is leading company as a manufacturer of diesel 3-wheelers.

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1.2 BRIEF HISTORY Today, when you see or travel by the convenient 'Chhakada' you rarely realize who invented this amazing people-friendly transportation vehicle. Well, we take pride in mentioning our founder’s name – the Late Mr. Jagjivanbhai Karsanbhai Chandra. He was a man of vision. A Dreamer. An Inventor. A Strategist. And an ingenious master-mind who loved challenges. Back in the 1970’s, when transportation was a crucial problem especially in rural areas, he decided to blaze a new trail. He was thinking of an affordable mode of transportation which can benefit rural folks of Saurashtra. The road conditions were not good but the need for transportation was increasing day in and day out. After thorough research and planning, he came up with a vehicle which was skillfully engineered from a motorcycle. And this is how the first 'chhakada' was developed which later became a way of life for the people of Saurashtra. The improvements in technologies were done from time to time to make it a sturdy and comfortable vehicle. And like father like son, Mr. Jayantibhai Chandra also joined this mission. He took his illustrious father’s vision further. He introduced diesel ‘chhakada’ with many new features, and soon 150,000 'chhakadas' were rolling all over Saurashtra making it easy for passengers. On 1st may, 1992 the company has started plant at Shapar (Veraval) in Rajkot district to increase its sales and cover entire national market. In the year 1996 “ATUL AUTO PRIVATE LIMITED” was converted in a Public Limited Company due to extra need of finance. Because as per the situation and demand of market they entered to launch some new products. At present the company “ATUL AUTO LIMITED” has plant at Jamnagar, Rajkot, Haridwara and in Rajasthan also.

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1.3 MANAGEMENT TEAM Board of Directors Mr. Jentibhai J. Chandra

Chairman & Managing Director

Mr. Shriharsh S. Jogalekar

Vice Chairman

Mr. Mahendra J. Patel

Executive Director

Mr. Bharat J. Chandra

Director

Mr. Rajesh S. Dhruv

Director

Mr. Rajendra H. Kukerja

Director

Auditors M/S Purohit Company & Company Charted Accounts Jamnagar. Bankers 1. 2. 3. 4.

State Bank Of India Citizens Co-Operative Bank Laxmi Vilas Co-Operative Bank State Bank Of Saurashtra

Functional Managers 1. Finance Manager : Mr. J. H. Adhiya 2. Personal Manager : Mr. M.H. Desai 3. Marketing Manager : Mr. K. M. Cheriyan 4. Production Manager : Mr. P. J. Raval Registered & Transfer Agent Sharex India Private Ltd.

1.4 GROUP COMPANY’S 84 Working Capital Management & Profitability

1. Atul Auto Industries (Manufacturers of Diesel 3-Wheelers) 2. Atul Engines Ltd. (Manufacturers of I.C. Engine) 3. Atul International (Export- Import House) 4. Atul Motor Pvt. Ltd. (Marketing Of Maruti Range of Cars& 4- Wheelers) 5. Atul Buildcon Pvt. Ltd. (Real Estate Developers & Builders) 6. Khushbu Auto Pvt. Ltd. (Auto Finance Company) 7. Khushbu Auto Finance Ltd. (Auto Finance Company) 8. New Chandra Motorcycle House (Distributors of L.M.L., Vespa Scooter, Royal Enfield Motorcycles Auto Parts)

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1.5 FORM OF ORGANIZATION AND SIZE OF UNIT Form or organization can be divided mainly in four categories. There are two other forms also.

Basic Forms 1. 2. 3. 4.

Sole Proprietor ship Partnership Private Limited Company Public Limited Company

Other Forms 1. 2.

Public sector unit Co-operative society

From above given all forms of organization “ATUL AUTO LIMITED” is a public limited company. There are many features of public limited company some of there are given below,

Characteristics: Free transfer of shares. Large No. of Membership. Artificial Legal Personality. Limited liability.

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1. 2. 3. 4.

Working Capital Management & Profitability

Size of Unit Size of unit can measured from in total capital divested in business. On the basis of capital investment, there are main two types of industry. But there are there other types also. 1. 2.

Small Scale Industry Large Scale Industry

Other 1. Tiny Industry 2. Cottage Industry 3. Ancillary Industry The total investment in large-scale industry; must be more than 20 corers and up to 100 corers. Total investment of “ATUL AUTO LIMITED” is more than 20 corers. That’s why it is large-scale industry.

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1.6 ORGANIZATION STRUCTURE Authority and responsibility are the essential element on which type of organization depends. But there other element also like function, communication etc. Organization can be divided in below given six types, 1) 2) 3) 4) 5) 6)

LINE ORGANIZATION LINE & STAFF ORGANIZATION MATRIX ORGANIZATION FUNCTIONAL ORGANIZATION PROJECT ORGANIZATION COMMITTEE ORGANIZATION

From above given all type of organization “ATUL AUTO LIMITED” had adopted “LINE ORGANIZATION”.

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1.7 CONTRIBUTION OF UNIT Contribution of unit to the industry refers to the share of proportion the company holds in entire industry. “ATUL AUTO LIMITED” is manufacturer of 3-wheelers so its contribution is towards 3-wheelers automobile segment. In 3-wheeler passenger van and load carrier they have captured near about 18% to 20% of market. But if you take diesel 3-wheeler as a separate part they are a leading company. In Saurashtra Region Company has captured near about 50% market. But in Gujarat region and in other state their contribution is less than that.

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Chap. 2

Working Capital Management

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2.1 INTRODUCTION Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. The goal of working capital management is to manage the firm’s current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety. A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Definition : According to Guttmann & Dougall“Excess of current assets over current liabilities”. According to Park & Gladson“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over current items owned to employees and others (such as salaries & wages payable, accounts payable, taxes owned to government)”.

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2.2 NEED OF WORKING CAPITAL MANAGEMENT The need for working capital gross or current assets cannot be over emphasized. As already observed, the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales among other things but sales can not convert into cash. There is a need for working capital in the form of current assets to deal with the problem arising out of lack of immediate realization of cash against goods sold. Therefore sufficient working capital is necessary to sustain sales activity. Technically this is refers to operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the raw material may be available on credit basis. Then the company has to spend some amount for labour and factory overhead to convert the raw material in work in progress, and ultimately finished goods. These finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are converting into cash after expiry of credit period. Thus, some amount of cash is blocked in raw materials, WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current assets may be financed by the current liabilities also. The amount required to be invested in this current assets is always higher than the funds available from current liabilities. This is the precise reason why the needs for working capital arise.

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2.3 CONCEPT OF WORKING CAPITAL MANAGEMENT There are two concepts of working capital management 1. Gross working capital According to this concept, the total assets are termed as the gross working capital. It is also known as quantitative or circulating capital. Total current assets include, cash, marketable securities, account receivables, inventory, prepaid expense, advance payment of tax, etc. To quote Weston and Brigham, “Gross working capital refers to firm’s investment in short term assets such as cash, short term securities, accounts receivable and inventories.” This concept helps in making optimum investment in current assets and their financing. According to Walker, “Use of this concept is helpful in providing for the current amount of working capital at the right time so that the firms are able to realize the greatest return on investment. 2. Net working capital Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable and outstanding expenses. Net working capital can be positive or negative Efficient working capital management requires that firms should operate with some amount of net working capital, the exact amount varying from firm to firm and depending, among other things; on the nature of industries.net working capital is necessary because the cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash inflows are, the less net working capital will be required. The concept of working capital was, first evolved by Karl Marx. Marx used the term ‘variable capital’ means outlays for payrolls advanced to workers before the completion of work. He compared this with ‘constant capital’ which according to him is nothing but ‘dead labour’. This ‘variable capital’ is nothing wage fund which remains blocked in terms of financial management, in work-in- process along with other operating expenses until it is released through sale of finished goods. Although Marx did not mentioned that workers also gave credit to the firm by accepting periodical payment of wages which funded a portioned of W.I.P, the concept of working capital, as we understand today was embedded in his ‘variable capital’. 84 Working Capital Management & Profitability

2.4 TYPES OF WORKING CAPITAL

The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.

Working Capital

Permanent Working Capital

Initial W.C.

Regular W.C.

Variable Working Capital

Seasonal W.C.

Special W.C.

1. Permanent working capital The permanent working capital refers to that part of the working capital which is necessary for maintaining stock of raw material and finished goods at their normal level and for paying wages and salaries regularly. It is minimum amount of current assets which is needed for the smooth running of business. In other words, permanent working capital is that which is permanently locked up in current assets. Permanent working capital is off two kinds: A. Initial working capital and B. Regular working capital A. Initial working capital In the initial period of its operation, a company must have enough money to pay certain expenses. This amount will have to be supplied the owners themselves, because in the initial years, credit facilities may not be available from creditors, bank do not grant loans or overdrafts and credit-sales will have to be made.

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B. Regular working capital It is the working capital required to continue the regular business operations. It is required for maintaining regular stock of finished goods to meet the customers demands, to pay regular business expenses etc. Regular working capital is the excess of current assets over current liabilities. This part of the working capital needed for smooth operations of the business. Temporary W.C.

W.C . Permanent W.C.

Time

2. Temporary working capital It is the part of the working capital which is needed to meet the seasonal demands and special needs. This is called variable working capital because its amount varies according to the extent of extra demand. Variable working capital is of two types A. Seasonal working capital and B. Special working capital. A. Seasonal working capital Some business enterprises require a larger amount of current assets during a particular season. For instance sugar mills have to purchase sugarcane and employ more people to process it during a particular season.

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B. Special working capital In any business enterprise some unforeseen events take place when extra funds are needed to meet with the situation. E.g. during depression prices and sales decline considerably which necessitates extra working funds. During inflationary conditions, prices of raw material and finished goods up, hence extra money is needed to maintain the same level of stock. Unforeseen contingencies like strikes and lockouts fire and looting, etc. also force the management to provide for extra funds.

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2.5 IMPORTANCE OF WORKING CAPITAL MANAGEMENT Working capital is considered as central nervous system of a firm. The importance of working capital management is reflected in the time most spent by financial managers in managing current assets and current liabilities. Maintenance of adequate working capital is necessary in order to discharge day to day liabilities and protect the business from adverse effects in times of emergencies. It aims at protecting the purchasing power of assets and maximizes the return on investment. The goal of working capital management is to minimize the cost of working capital while maximizing a firm’s profit. The working capital management is concerned with determination of relevant levels of current assets and their efficient use as well as the choice of financial mix. The efficiency of a firm to earn profits depends largely on its ability to manage working capital. In other words, working capital management policies have a crucial effect on firm’s liquidity and profitability. Hence, working capital has to be effectively planned, systematically controlled and optimally utilized.

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2.6 DETERMINATION OF WORKING CAPITAL 1. Nature of business Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather than working capital. These businesses sell services and not the commodities and that too on cash basis. As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g. public utility services like railways, infrastructure oriented project etc. there requirement of working capital is less. On the other hand, there are some businesses like trading activity, where requirement of fixed capital is less but more money is blocked in inventories and debtors. 2. Length of production cycle In some business like machine tools industry, the time gap between the acquisition of raw material till the end of final production of finished products itself is quit high. As such amount may be blocked either in raw material or work in progress or finished goods or even in debtors. Naturally there need of working capital is high. 3. Size and growth of business In very small company the working capital requirement is quit high due to high overhead, higher buying and selling cost etc. as such medium size business positively has edge over the small companies. But if the business start growing after certain limit, the working capital requirements may adversely affect by the increasing size. 4. Business/ Trade cycle If the company is the operating in the time of boom, the working capital requirement may be more as the company may like to buy more raw material, may increase the production and sales to take the benefit of favorable market, due to increase in the sales, there may more and more amount of funds blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up of stack without getting sold, the receivable may not be recovered in time etc.

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5. Terms of purchase and sales Some time due to competition or custom, it may be necessary for the company to extend more and more credit to customers, as result which more and more amount is locked up in debtors or bills receivables which increase the working capital requirement. On the other hand, in the case of purchase, if the credit is offered by suppliers of goods and services, a part of working capital requirement may be financed by them, but it is necessary to purchase on cash basis, the working capital requirement will be higher. 6. Stock Turnover By turnover is meant the ratio of sales to average stock held in business. The greater the turnover, the larger the volume of business that can be conducted with a given working capital. In other words, if the turnover is rapid, burden of working capital is not heavy. 7. Profitability The profitability of the business may be vary in each and every individual case, which is in turn its depend on numerous factors, but high profitability will positively reduce the strain on working capital requirement of the company, because the profits to the extend that they earned in cash may be used to meet the working capital requirement of the company. 8. Attitude of Management If the attitude of the management is aggressive and they are primarily risk-takers, the need for working capital is reduced. 9. Operating efficiency If the business is carried on more efficiently, it can operate in profits which may reduce the strain on working capital; it may ensure proper utilization of existing resources by eliminating the waste and improved coordination etc.

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2.7 SOURCES OF WORKING CAPITAL The main sources of working capital are as under: 1. Shares and Debentures 2. Retained Earnings 3. Commercial Banks a. Loans b. Bank Overdraft c. Cash Credit 4. Commercial Paper 5. Certificate of Deposit 6. Commercial Bills Market 7. Factoring 8. Trade Creditor or Trade Creditors 9. Public Deposits 10.Indigenous Bankers and Money Lenders

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2.8 WORKING CAPITAL COMPONENTS Mainly three components of working capital management 1. Receivables Management 2. Inventory Management 3. Cash Management Above three has equal importance to manage or handle working capital of any firm. Now we discuss detail of above three components.

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1. RECEIVABLES MANAGEMENT The term receivable is defined as “debt owed to the firm by customers arising from sales of goods or services in the ordinary course of business.” Receivables or debtors are the one of the most important parts of the current assets which is created if the company sells the finished goods to the customer but not receive the cash for the same immediately. Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately. It is essential marketing tool, acting as bridge for the movement of goods through production and distribution stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in the near future. The receivables include three characteristics 1. It involve element of risk which should be carefully analysis. 2. It is based on economic value. To the buyer, the economic value in goods or services passes immediately at the time of sale, while seller expects an equivalent value to be received later on. 3. It implies futurity. The cash payment for goods or serves received by the buyer will be made by him in a future period.

Objective of Receivable Management Maximizing the value of the firm: The basic objective of debtor’s management is to maximize the value of the firm by achieving a trade off between liquidity (risk) and return. The main purpose of receivables management is to minimize the risk of bad debts and not maximization of order. Efficient management of receivables expands sales by retaining old customers and attracting new customers. Optimum Investment in Sundry Debtors: allowing credit, expands sales, but they involve block of funds, that have an opportunity cost, which can be reduced by optimum investment in receivables. Providing liberal credit increases sales consequently profits will increase, but increases investment in receivables result in increased costs.

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Control and managing the cost of trade of credit: when there are no credit sales, there will not be any trade credit cost. But credit sales increases profits, it is possible only when the firm is able to keep the costs at minimum. Size of Receivable in Atul Auto Ltd. Particulars Sundry Debtors Indices

2004-05

2005-06

2006-07

2007-08

2008-09

62,934,110 100

87,395,034 138.87

81,660,540 129.75

39,619,066 62.95

35,213,006 55.95

Receivables Indices

Average Collection Period The average collection period measures the quality of debtors since it indicate the speed of there collection. The shorter the average collection period, the better the quality of the debtors since a short collection period implies the prompt payment by debtors. The average collection period should be compared against the firm’s credit terms and policy judges its credit and collection efficiency. The collection period ratio thus helps an analyst in two respects.

2.

In determining the collectability of debtors and thus, the efficiency of collection efforts. In ascertaining the firm’s comparative strength and advantages related to its credit policy and performance. 84

1.

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2. INVENTORY MANAGEMENT The term ‘inventory’ is used to designate the aggregate of those items of tangible assets which are 1. Finished goods (‘saleable’) 2. Work-in-progress (‘convertible’) 3. Material and supplies (‘consumable’) In financial view, inventory defined as the sum of the value of raw material and supplies, including spares, semi-processed material or work in progress and finished goods. The nature of inventory is largely depending upon the type of operation carried on. For instance, in the case of a manufacturing concern, the inventory will generally comprise all three groups mentioned above while in the case of a trading concern, it will simply be by stock- in- trade or finished goods.

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Components of Inventory Components of Inventory

Raw Materials

Work-inprogress

Finished Product

Stores and Spares

1. Raw Materials Raw materials are those inputs that are converted into finished goods through manufacturing process. A major input for manufacturing a product. In other words, they are very much needed for uninterrupted production. 2. Work-in-Progress Work-in-progress is that stage of stocks that are between raw materials and finished goods. Work-in-progress inventories are semi-finished products. They represent products that need to under go some other process to become finished goods. 3. Finished Products Finished products are those products, which are ready for sale. The stock of finished goods provides a buffer between production and market. 4. Store and Spares Stores and spares inventory (include office and plant cleaning materials like, soap, brooms, oil, fuel, light, bulbs etc.) are those purchased and stored for the purpose of maintenance of machinery.

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Inventory Management Motives Managing inventories involves block of funds and inventory holding costs. Maintenance of inventory is expensive, then why to firm hold inventories? There are three general motives of holding inventories. 1. Transaction Motive Transaction motive includes production of goods and sale of goods. It facilitates uninterrupted production and delivery of order at a given time (right time). 2. Precautionary Motive This motive necessitates the holding of inventories for unexpected changes in demand and supply factors. 3. Speculative Motive This compels to hold some inventories to take the advantage of changes in price and getting quantity discount.

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Objectives of Inventory Management In company there should be an optimum level of investment for any asset, whether it is plant, cash or inventories. Again inadequate disrupts production and causes losses in sales. Efficient management of inventory should ultimately result in wealth maximization of owner’s wealth. It implies that while the management should try to pursue financial objective of turning inventory as quickly as possible, it should at the same time ensure sufficient inventories to satisfy production and sales demand. The objectives of inventory management consist of two counterbalancing parts: 1. To minimize the firms investment in inventory 2. To meet a demand for the product by efficiently organizing the firms production and sales operation. This two conflicting objective of inventory management can also be expressed in term of cost and benefits associated with inventory. That the firm should minimize the investment in inventory implies that maintaining an inventory cost, such that smaller the inventory, the better the view point .obviously, the financial manager should aim at a level of inventory which will reconcile these conflicting elements. Some objective as follow 1. To have stock available as and when they are required. 2. To utilize available storage space but prevents stock levels from exceeding space available. 3. To maintain adequate accountability of inventories assets. 4. To provide, on item – by- item basis, for re-order point and order such quantity as would ensure that the aggregate result confirm with the constraint and objective of inventory control. To keep low investment in inventories carrying cost an obsolesce losses to the minimum.

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Size of Inventory Particulars Raw Materials W.I.P. Finished Goods Total Indices

2004-05 2005-06 2006-07 2007-08 2008-09 44,769,200 67,035,755 125,346,150 111,552,584 145,870252 26,221,991 28,418,545 64,199,726 71,465,522 24,723,408 1,314,829 4,961,700 18,028,663 10,586,166 6,165,644 72,306,020 100,416,000 207,574,539 193,604,272 176,759,304 100 138.88 287.08 267.76 244.46 Inventory Indices

Inventory components The firm’s inventory consist following components 1. Raw material 2. Work- in-progress 3. Finished goods To analyze the level of raw material inventory and work in progress inventory held by the firm on an average it is necessary to examine the efficiency with which the firm converts raw material inventory and work in progress into finished goods.

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3. CASH MANAGEMENT Cash is common purchasing power or medium of exchange. As such, it forms the most important component of working capital. The term cash with reference to cash management is used in two senses, in narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft and demand deposits in banks. The broader view of cash also induce hear- cash assets, such as marketable sense as marketable securities and time deposits in banks. The main characteristics of this deposits that they can be really sold and convert in to cash in short term. They also provide short term investment outlet for excess and are also useful for meeting planned outflow of funds. We employ the term cash management in the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that it was no earning power. Company have to always maintain the cash balance to fulfill the dally requirement of expenses.

Motives for Holding Cash 1. Transaction Motive Cash balance is necessary to meet day-to-day transaction for carrying on with the operation of firms. Ordinarily, these transactions include payment for material, wages, expenses, dividends, taxation etc. there is a regular inflow of cash from operating sources, thus in case of JISL there will be two-way flow of cashreceipts and payments. But since they do not perfectly synchronize, a minimum cash balance is necessary to uphold the operations for the firm if cash payments exceed receipts. Always a major part of transaction balances is held in cash, a part may be held in the form of marketable securities whose maturity conforms to the timing of anticipated payments of certain items, such as taxation, dividend etc.

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2. Precautionary Motive Cash flows are somewhat unpredictable, with the degree of predictability varying among firms and industries. Unexpected cash needs at short notice may also be the result of following: 1. Uncontrollable circumstances such as strike and natural calamities. 2. Unexpected delay in collection of trade dues. 3. Cancellation of some order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise in wages, etc. The higher the predictability of firm’s cash flows, the lower will be the necessity of holding this balance and vice versa. The need for holding the precautionary cash balance is also influenced by the firm’s capacity to have short term borrowed funds and also to convert short term marketable securities into cash. 3. Speculative motive Speculative cash balances may be defined as cash balances that are held to enable the firm to take advantages of any bargain purchases that might arise. While the precautionary motive is defensive in nature, the speculative motive is aggressive in approach. However, as with precautionary balances, firms today are more likely to rely on reserve borrowing power and on marketable securities portfolios than on actual cash holdings for speculative purposes. 4. Compensating Motive According to I.M. Pandey, the amount of cash to be held for the first two motives, which are two most important motives, the following factors must be taken into account: The expected cash inflows and outflows based on cash budget. The degree of deviation between expected and actual net cash flows. The maturity structure of the firm’s liabilities. The firm’s ability to borrow at short notice in the event of any emergency. The philosophy of management regarding liquidity and risk of insolvency.

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1. 2. 3. 4. 5.

Working Capital Management & Profitability

Advantage of Cash Management Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses but without cash, profit remains meaningless for an enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite losses

2. An efficient cash management through a relevant and timely cash budget may enable a firm to obtain optimum working capital and ease the strains of cash shortage, fascinating temporary investment of cash and providing funds normal growth. 3. Cash management involves balance sheet changes and other cash flow that do not appear in the profit and loss account such as capital expenditure.

Size and Indices of cash in Atul Auto 2004-05 2005-06 11,441,798 16,113,868 100 141.15

2006-07 2,387,963 20.92

2007-08 3,752,117 32.86

2008-09 18,628,235 163.18

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Particulars Cash & Bank C.A. Indices

Working Capital Management & Profitability

Cash cycle One of the distinguishing features of the fund employed as working capital is that constantly changes its form to drive ‘business wheel’. It is also known as ‘circulating capital’ which means current assets of the company, which are changed in ordinary course of business from one form to another, as for example, from cash to inventories, inventories to receivables and receivables to cash.

Basically cash management strategies are essentially related to the cash cycle together with the cash turnover. The cash cycle refers to the process by which cash is used to purchase the row material from which are produced goods, which are then send to the customer, who later pay bills. The cash turnover means the number of time firms cash is used during each year.

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Chap. 3

Research Methodology

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3.1 INTRODUCTION Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. ”The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology.” Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. Data collection is important step in any project and success of any project will Be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data Available for analysis you cannot do the research work accurately.

84 Working Capital Management & Profitability

3.2 OBJECTIVE OF THE STUDY Study of the working capital management is important because unless the working capital is managed effectively, monitored efficiently planed properly and reviewed periodically at regular intervals to remove bottlenecks if any the company can not earn profits and increase its turnover. With this primary objective of the study, the following further objectives are framed for a depth analysis. To study the working capital management of Atul Auto Ltd. 2. To study the optimum level of current assets and current liabilities of the company. 3. To study the liquidity position through various working capitals relate ratios. 4. To study the working capital components such as receivables accounts, cash management, Inventory position. 5. To study the way and means of working capital finance of the Atul Auto Ltd. 6. Compare the working capital ratios with the profitability ratio (ROI). 1.

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3.3 SCOPE & LIMITATIONS OF THE STUDY Scope of the Study The scope of the study is identified after and during the study is conducted. The study of working capital is based on tools like trend Analysis, Ratio Analysis, working capital leverage, operating cycle etc. Further the study is based on last 5 years Annual Reports of Jain Irrigation Systems Ltd. And even factors like competitor’s analysis, industry analysis were not considered while preparing this project.

Limitations of the Study Following limitations were encountered while preparing this project: 1. Limited data This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2. Limited period This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company. 3. Limited Area Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.

84 Working Capital Management & Profitability

3.4 Linear Correlation Co-efficient Meaning Correlation is a measure of finding out the degree of relationship between two or more variables. It means the tendency of the variables to move together. Therefore, it means the movement of two or more variables in sympathy with another. This movement may be in the same or reverse direction. The number representing the measure (or degree) of linear correlation between two variables is called the coefficient of correlation. It is represented by r. the value of r is greater than or equal to -1 and smaller than or equal to 1.

Definition The relationship between two variables such that a change in one is accompanied by a positive or a negative change in the other and also a greater change in one is accompanied by a corresponding greater change in the other, is called correlation.

Properties of Coefficient of correlation:(1) The coefficient of correlation is an absolute relation measure. (2) The value of coefficient of correlation r is invariant under change in units of measurement of variable X and Y. (3) The

coefficient of correlation between X and Y is equal to the coefficient

of correlation between Y and X I, e.; r(x, y) = r(y, x). (4) The value of coefficient of correlation r is always greater than or equal to -1 and less than or equal to 1. That is -1 ≤ r ≤ 1. (5) The

coefficient of correlation is invariant under the change of origin and

scale. That is r(x, y) = r (u, v).

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Pearson product-moment correlation coefficient In statistics, the Pearson product-moment correlation coefficient (sometimes referred to as the PMCC, and typically denoted by r) is a measure of the correlation (linear dependence) between two variables X and Y, giving a value between +1 and −1 inclusive. It is widely used in the sciences as a measure of the strength of linear dependence between two variables. It was developed by Karl Pearson from a similar but slightly different idea introduced by Francis Galton in the 1880s. The correlation coefficient is sometimes called "Pearson's r." Pearson's correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations:

Pearson Correlation Assumptions  That the relationship between X and Y can be Represented by a straight line, i.e. it is linear.  That X and Y are metric variables, measured on an interval or ratio scale of measurement.  In using a t distribution to test the significance of the correlation coefficient That the sample was randomly drawn from the population, and That X and Y are normally distributed in the population. This assumption is less important as the sample size increases.

.

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3.5 TYPES OF DATA COLLECTION There are two types of data collection methods available. 1. Primary data collection 2. Secondary data collection 1. Primary data collection method Primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, questionnaire etc. to support the secondary data. 2. Secondary data collection The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc. This project is based on primary data collected through personal interview of head of account department, head of production department and other concerned staff member of finance department. But primary data collection had limitations such has matter confidential information thus project is based on secondary information collected through five years annual report of the company. The data collection was aimed at study of working capital management of the company. Project is based on 1. Annual report of Atul Auto Ltd. 2004-05 2. Annual report of Atul Auto Ltd. 2005-06 3. Annual report of Atul Auto Ltd. 2006-07 4. Annual report of Atul Auto Ltd. 2007-08 5. Annual report of Atul Auto Ltd. 2008-09

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3.6 DATA ANALYSIS After collection of the data the second step is analyze the data. In this report we use the Profitability Ratio (Return on Investment) and working capital Ratio. We compare both ratios with the Karl Pearson’s correlation co-efficient statistical tool. With the help of primary data and mainly secondary data we could found the below results.  Return on Investments  Working Capital Size and Level Analysis  Working Capital Ratios Analysis  Comparison between Working capital ratios and Return on Investment. To compare Working capital ratios and Return on Investment we have used Karl Pearson’s correlation co-efficient statistical tool. Because it is very effective

84 Working Capital Management & Profitability

Return on Investmen t

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Return on Investment The profitability of the firm is measured by establishing relation of net profit with the total assets of the company. The ratio indicates the efficiency of utilization of assets in generating revenue. Net Profit Return on Investment = Year Net Profit Total Assets

2004-05 30,155,499 390,094,141

ROI

7.73 %

2005-06 41,980,321 583,793,97 4 7.19%

Total Assets 2006-07 31,438,941 690,831,93 8 4.55%

X 100 2007-08 2008-09 12,669,841 4,596,564 733,998,35 778,616,638 5 1.73% 0.59%

Return on Investment

Observation From year 2004-05 the return on investment were reduced continuously. Net sales in Rs. was increase but the no. of unit is reduced because raw material price and product prices hike. It’s happened due to the competition and competitors. In the year 2008-09 the return on investment reduces by 92% as compare to the year 2004-05. Its shows the inefficient utilization of the available resources.

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84 Working Capital Management & Profitability

Working Capital Size & Level Analysis

84 Working Capital Management & Profitability

WORKING CAPITAL LEVEL The consideration of the level investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Investment in current assets should be just adequate, not more or less, to the need of the business firms. Excessive investment in current assets should be avoided because it impairs the firm’s profitability, as idle investment earns nothing. On the other hand inadequate amount of working capital can be threatened solvency of the firms because of its inability to meet it’s current obligation. It should be realized that the working capital need of the firms may be fluctuating with changing business activity. This may cause excess or shortage of working capital frequently. The management should be prompt to initiate an action and correct imbalance.

Size of Working Capital 2004-05

2005-06

2006-07

2007-08

2008-09

72,306,020 62,934,110 11,441,798 56,145,885

100,416,000 87,395,034 16,113,867 94,058,239

207,574,539 81,660,540 2,387,963 63,045,027

193,604,272 39,619,066 3,752,117 76,001,619

176,759,304 35,213,006 18,628,235 77,265,386

202,827,813

297,983,140

354,668,069

312,977,074

307,865,931

53,374,115 1,686,940 55,061,055 147,766,758

139,779,195 15,667,246 155,446,441 142,536,699

92,499,837 15,382,278 107,882,115 246,785,954

71,621,898 10,003,311 81,625,209 231,351,865

100,822,850 11,419,468 112,242,318 195,623,613

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Particulars A. Current Assets Inventories Sundry Debtors Cash & Bank Loans & Advances Total of A (Gross W.C.) B. Current Liabilities Current Liabilities Provision Total of B Net W.C. (A-B)

(Amnt. In Rs.)

Working Capital Management & Profitability

WORKING CAPITAL TREND ANALYSIS In working capital analysis the direction at changes over a period of time is of crucial importance. Working capital is one of the important fields of management. It is therefore very essential for an annalist to make a study about the trend and direction of working capital over a period of time. Such analysis enables as to study the upward and downward trend in current assets and current liabilities and it’s effect on the working capital position. “The term trend is very commonly used in day-today conversion trend, also called secular or long term need is the basic tendency of population, sales, income, current assets, and current liabilities to grow or decline over a period of time” “The trend is defined as smooth irreversible movement in the series. It can be increasing or decreasing.” Emphasizing the importance of working capital trends, “analysis of working capital trends provide as base to judge whether the practice and privilege policy of the management with regard to working capital is good enough or an important is to be made in managing the working capital funds. Further, any one trend by it self is not very informative and therefore comparison with Illustrated their ideas in these words, “An upwards trends coupled with downward trend or sells, accompanied by marked increase in plant investment. Especially if the increase in planning investment by fixed interest obligation” Working Capital Size trend (Amnt. In Rs.) 2004-05 147,766,758 100

2005-06 142,536,699 96.46

2006-07 246,785,954 167.01

2007-08 231,351,865 156.56

2008-09 195,623,613 132.39

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Years Net W.C (A-B) W.C. Indices

Working Capital Management & Profitability

Working Capital Indices

Observations It was observe that in the year 2006-07 indices is very high because of mismatch of current assets and current liabilities. Current Assets increase by 19% and Current Liabilities decrease by 30%. After year 2006-07 company’s decreased its working capital continuously. By reducing working capital company might be increased its profitability in next years. The fall in working capital is a clear indication that the company is utilizing its short term resources with efficiency.

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Current Assets Total assets are basically classified in two parts as fixed assets and current assets. Fixed assets are in the nature of long term or life time for the organization. Current assets convert in the cash in the period of one year. It means that current assets are liquid assets or assets which can convert in to cash within a year. Current Assets Size (Amnt. In Rs.)

C.A. Indices

2004-05 72,306,020 62,934,110 11,441,798 56,145,885

2005-06 100,416,000 87,395,034 16,113,867 94,058,239

2006-07 207,574,539 81,660,540 2,387,963 63,045,027

2007-08 193,604,272 39,619,066 3,752,117 76,001,619

2008-09 176,759,304 35,213,006 18,628,235 77,265,386

202,827,813

297,983,140

354,668,069

312,977,074

307,865,931

100

146.91

174.86

154.31

151.79

Current Assets Indices

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Particulars Inventories Sundry Debtors Cash & Bank Loans & Advances Other Assets Total of C.A.

Working Capital Management & Profitability

Composition of current assets Analysis of current assets components enable one to examine in which components the working capital fund has locked. A large tie up of funds in inventories affects the profitability of the business or the major portion of current assets is made up cash alone, the profitability will be decreased because cash is non earning assets. Composition of Current Assets Particulars Inventories Sundry Debtors Cash & Bank Loans & Advances

2008-09 57.41 11.44 06.05 25.10 No. in % 100

Current Assets Components

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Total of C.A.

2004-05 2005-06 2006-07 2007-08 35.65 33.70 58.33 61.86 31.03 29.33 23.02 12.66 05.64 05.41 00.67 01.2 27.68 31.56 17.78 24.28 100 100 100 100

(No. in %)

Working Capital Management & Profitability

Observation It was observed that the size of current assets is increasing with increases in the sales. The excess of current assets is showing positive liquidity position of the firm but it is not always good because excess current assets then required, it may adversely affects on profitability. Current assets include some funds investments for which company pay interest. The balance of current assets is maintained in the years 2004-05 and 2005-06. As per my view in year 2006-07 is ideal because in this year Inventory was increase and Sundry Debtors, Cash & Bank Balance and Loan & Advances were decrease compare to last two financial years. In the year 2007-08 again Inventory was increase and Sundry Debtors and Cash & Bank were decrease but Loans & Advances increased. But it was not bed situation for the company. In the year 2008-09 the Inventory was down by 7.19% compare to last year and Cash & Bank Balance and Loans & Advances were decrease. But Sundry Debtors was decrease by 9.64% compare to last year. With the help of Composition of Current Assets company try to maintain and increase the inventory level and it’s profitable for the company. In last five years company reduces Sundry Debtors continuously, so we can say that company has no more risk regarding Bed Debts.

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Current liabilities Current liabilities mean the liabilities which have to pay in current year. It includes sundry creditor’s means supplier whose payment is due but not paid yet, thus creditors called as current liabilities. Current liabilities also include short term loan and provision as tax provision. Current liabilities also includes bank overdraft. For some current assets like bank overdrafts and short term loan, company has to pay interest thus the management of current liabilities has importance.

Current Liabilities Size Particulars Current Liabilities Provision Total of B Indices

2004-05 53,374,115 1,686,940 55,061,055 100

2005-06 139,779,195 15,667,246 155,446,441

2006-07 92,499,837 15,382,278 107,882,115

282.32

195.93

2007-08 71,621,898 10,003,311 81,625,209 148.24

(Amnt In Rs.) 2008-09 100,822,850 11,419,468 112,242,318 203.85

Current Liabilities Indices

Observation Current Liabilities graph not shown continuous growth. In the year 2008-09 current liabilities in increase compare to 2006-07 and 2007-08 years. It means company creates the credit in the market by good transaction. To get maximum credit from supplier which is profitable to the company it reduces the need of working capital of firm.

84 Working Capital Management & Profitability

CHANGES IN WORKING CAPITAL There may be long run trend of change e.g. The price of row material say oil may constantly raise necessity the holding of large inventory. Cyclical changes in economy dealing to ups and downs in business activity will influence the level of working capital both permanent and temporary. Changes in seasonality in sales activities. The second major case of changes in the level of working capital is because of policy changes initiated by management. The term current assets policy may be defined as the relationship between current assets and sales volume. The third major point if changes in working capital are changes in technology because change sin technology to install that technology in our business more working capital is required. A change in operating expanses rise or full will have similar effects on the levels of working following working capital statement is prepared on the base of balance sheet of last two year.

Statement of changes in Working Capital (Amnt In Rs.) Particulars A. Current Assets Inventories Sundry Debtors Cash & Bank Loans & Advances Other Assets Total of A B. Current Liabilities Current Liabilities Provision Total of B Net W.C. (A-B) Net Decrease in W.C. Total

Changes in W.C. Increase Decrease

2007-08

2008-09

193,604,272 39,619,066 3,752,117 76,001,619

176,759,304 35,213,006 18,628,235 77,265,386

312,977,074

307,865,931

5,111,143

71,621,898 10,003,311 81,625,209 231,351,865

100,822,850 11,419,468 112,242,318 195,623,613 35,728,252

29,200,952 1,416,157 30,617,109

16,844,968 4,406,060 14,876,118 1,263,767

35,728,252 51,868,137

51,868,137

Observation As per the table data current assets decreased and current liabilities increased so the working capital decreased as compare to the previous year. Inventory decreased by 9% and current liabilities increased by 41% as compare to previous year.

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WORKING CAPITAL LEVERAGE One of the important objectives of working capital management is by maintaining the optimum level of investment in current assets and by reducing the level of investment in current assets and by reducing the level of current liabilities the company can minimize the investment in the working capital thereby improvement in return on capital employed is achieved. The term working capital leverage refers to the impact of level of working capital on company’s profitability. The working capital management should improve the productivity of investment in current assets and ultimately it will increase the return on capital employed. Higher level of investment in current assets than is actually required means increase in the cost of Interest charges on short term loans and working capital finance raised from banks etc. and will result in lower return on capital employed and vice versa. Working capital leverage measures the responsiveness of ROCE (Return on Capital Employed) for changes in current assets. It is measures by applying the following formula,

% Changes in ROCE Working capital Leverage =

% changes in Current Assets EBIT

Return on Capital Employed =

Total Assets

The working capital leverage reflects the sensitivity of return on capital employed to changes in level of current assets. Working capital leverage would be less in the case of capital intensive capital employed is same working capital leverage expresses the relation of efficiency of working capital management with the profitability of the company.

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Calculation of working capital leverages

Particulars ROCE % % Change in ROCE % Change in C.A. W. C. Leverages

2004-05 2005-06 2006-07 2007-08 2008-09 11.38 11.15 7.03 2.60 0.76 0.611 -2.021 -36.950 -63.016 -70.769 19.913 46.914 19.023 -11.755 -1.633 0.031 -0.043 -1.942 5.361 43.337

Working Capital Leverage

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Working Capital Leverage Components

Observation Working capital leverage increase in 2008-09 as compare to 2004-05 its shows the efficient use of current assets and current liabilities. In year 2006-07 lowest working capital leverages. Company reduces its current assets and tries to increasing in profitability.

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Working Capital Ratio Analysis & Comparison with ROI

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INTRODUCTION Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things”. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firm’s financial performance.

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ROLE OF RATIO ANALYSIS Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry. Ratio analysis is one of the best possible techniques available to management to impart the basic functions like planning and control. As future is closely related to the immediately past, ratio calculated on the basis historical financial data may be of good assistance to predict the future. E.g. On the basis of inventory turnover ratio or debtor’s turnover ratio in the past, the level of inventory and debtors can be easily ascertained for any given amount of sales. Similarly, the ratio analysis may be able to locate the point out the various arias which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position. As the ratio analysis is concerned with all the aspect of the firm’s financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

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LIMITATION OF RATIO ANALYSIS 

The basic limitation of ratio analysis is that it may be difficult to find a basis for making the comparison



Normally, the ratios are calculated on the basis of historical financial statements. An organization for the purpose of decision making may need the hint regarding the future happiness rather than those in the past. The external analyst has to depend upon the past which may not necessary to reflect financial position and performance in future.



The technique of ratio analysis may prove inadequate in some situations if there is differs in opinion regarding the interpretation of certain ratio.



As the ratio calculates on the basis of financial statements, the basic limitation which is applicable to the financial statement is equally applicable In case of technique of ratio analysis also i.e. only facts which can be expressed in financial terms are considered by the ratio analysis.



The technique of ratio analysis has certain limitations of use in the sense that it only highlights the strong or problem arias, it dose not provide any solution to rectify the problem arias.

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EFFICIENCY RATIO 1. Working capital turnover ratio It signifies that for an amount of sales, a relative amount of working capital is needed. If any increase in sales contemplated working capital should be adequate and thus this ratio helps management to maintain the adequate level of working capital. The ratio measures the efficiency with which the working capital is being used by a firm. It may thus compute net working capital turnover by dividing sales by net working capital.

Sales Working Capital Turnover Ratio =

Sales Net W.C W.C. TOR

2004-05 989,129,942 147,766,758 6.69

2005-06 1,290,284,137 142,536,699 9.05

2006-07 1,217,733,969 246,785,954 4.93

2007-08 803,977,774 231,351,865 3.48

2008-09 1,168,174,548 195,623,613 5.97

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Years

Net Working Capital

Working Capital Management & Profitability

Relation between Working Capital Turnover and ROI

Year

W.C. TOR

ROI

2004-05 2005-06 2006-07 2007-08 2008-09

6.69 9.05 4.93 3.47 5.96

7.73 7.13 4.55 1.73 0.59

Co-relation (r) = 0.66

Observation: From the above figure we can say that the Working Capital Turnover was fluctuated year by year. The highest ratio in 2005-06 and low in 2007-08 year. It means that company fails to use of working capital efficiently in the 2007-08. But in the year 2008-09 company increase the ratio by 72%. Company decreased inventory, cash & bank balance and sundry debtors as compare to previous year and increased current liabilities as compare to previous year. Correlation between working capital turnover and return on investment is 0.66 it means relation between them is partial positive. Working capital turnover ratio leads towards profitability so, we can say that effective utilization of working capital resources is very essential for maintain and improve profitability of the business.

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2. Inventory turnover ratio Inventory turnover ratio indicates the efficiency of the firm in producing and selling its product. This ratio indicates the effectiveness and efficiency of the inventory management. The ratio shows how speedily the inventory is turn into cash or receivables through sales. It is calculated by dividing the cost of good sold by average inventory.

Cost of Goods Sold Inventory Turnover Ratio =

Average Inventory

Inventory Turnover

Inventory TOR

2004-05

2005-06

2006-07

2007-08

2008-09

944,744,377

1,225,196,366

1,169,161,821

784,863,874

1,162,235,516

58,360,743

86,361,010

153,995,270

200,589,406

185,181,788

16.19

14.19

7.59

3.91

6.28

Inventory Turnover Ratio

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Years Cost of Goods Sold Average Inventory

Working Capital Management & Profitability

Relation between Inventory Turnover and ROI

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Inventory TOR 16.19 14.19 7.59 3.91 6.28

ROI 7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.92

Observation It was observed that Inventory turnover ratio indicates maximum sales achieved with the minimum investment in the inventory. As such, the general rule high inventory turnover is desirable but high inventory turnover ratio may not necessary indicates the profitable situation. An organization, in order to achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not result into high amount of profit. Company’s inventory level is high as compare to the sales. So the turnover ratio may be decline and profitability also decreases. Inventory turnover ratio and Return on investment have strong correlation. So it means that Inventory strongly affects the profitability of Atul Auto Ltd.

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3. Receivable Turnover Ratio Receivable turnover ratio provides relationship between credit sales and receivables of a firm. It indicates how quickly receivables are converted into sales. Sales Receivable Turnover Ratio =

Average A/C. Receivables

Receivable Turnover Ratio 2004-05 989,129,942 56,950,707 17.36

2005-06 1,290,284,137 75,164,572 17.17

2006-07 1,217,733,969 84,527,787 14.41

2007-08 803,977,740 60,639,803 13.26

2008-09 1,168,174,548 37,416,036 31.22

Receivable Turnover Ratio

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Particulars Sales Avg. Debtors Rec. TOR

Working Capital Management & Profitability

Relation between Receivable Turnover and ROI

Year

Receivable TOR

ROI

2004-05 2005-06 2006-07 2007-08 2008-09

17.36 17.17 14.41 13.26 31.22

7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.46

Observation From 2004-05 to 2007-08 there were no huge difference in Receivable turnover ratio. But in 2008-09 this ratio increase by 80% as compare to 2004-05 it was highest changes in last 5 years period of time. Company decreases average debtors so the collection turnover ratio increment possible. Company increased the receivable turnover ratio but it was not affected to the positive profitability indices. Here inverse correlation between receivable turnover ratio and return on investment. It indicates that receivables failed to give positive impact in profitability of the Atul Auto Ltd.

84 Working Capital Management & Profitability

4. Current Assets Turnover Ratio Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash in hand or bank, marketable securities, prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm.

Sales Current Assets Turnover Ratio =

Average A/C. Receivables

Current Assets Turnover Ratio 2004-05 2005-06 989,129,942 1,290,284,137 202,827,813 297,983,139 4.87 4.33

2006-07 1,217,733,969 354,668,069 3.43

2007-08 2008-09 803,977,740 1,168,174,548 312,977,074 307,865,931 2.57 3.79

Current Assets Turnover Ratio

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Particulars Sales Current Assets. C. A. TOR

Working Capital Management & Profitability

Relation between Current Assets Turnover and ROI

Year 2004-05 2005-06 2006-07 2007-08 2008-09

C.A. TOR 4.87 4.33 3.43 2.57 3.79

ROI 7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.74

Observation Current Assets turnover ratio decreased every year compare to 2004-05. In 2004 -05 ratio was highest and in 2007-08 the ratio of current assets is very low because of high inventory. In year 2008-09 this ratio increased by 47%. But it has not given any positive impact on the profitability. Current assets ratio not indicates any particular trend over the period of time. Here strong correlation between current assets turnover and return on investment. Its indicate that company use the current assets effectively. Effective utilization of current assets helps to create healthy profit.

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5.5 LIQUIDITY RATIO 1. Current Ratio Current assets include cash and those assets which can be converted in to cash within a year, such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan income tax liabilities and long term debt maturing in the current year. Current ratio indicates the availability of current assets in rupees for every rupee of current liability.

Current Assets

Particulars Current Assets. Current Liabilities Current Ratio

Current Liabilities 2004-05 202,827,813 55,061,055 3.68

2005-06 297,983,139 155,446,441 1.92

2006-07 354,668,069 107,882,116 3.28

2007-08 312,977,074 81,625,209 3.83

2008-09 307,865,931 112,242,318 2.74

84

Current Ratio =

Working Capital Management & Profitability

Relation between Current Ratio and ROI

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Current Ratio 3.68 1.92 3.28 3.83 2.74

ROI 7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.19

Observation The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value. As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the current assets. Ratio is higher in the 2007-08 because current liability decreased by 24%. Correlation between current ratio and return on investment is negative. To improve the profitability company must decrease the current ratio because some unnecessary investment in current assets blocked the money.

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2. Quick Ratio Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset .other assets which are consider to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also be tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities

Current Assets - Inventory Quick Ratio =

Current Liabilities Quick Ratio 2004-05 130,521,793 55,061,055 2.37

2005-06 197,567,139 155,446,441 1.27

2006-07 147,093,530 107,882,116 1.36

2007-08 119,372,802 81,625,209 1.46

2008-09 131,106,627 112,242,318 1.17

Quick Ratio

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Particulars Liquid C. A. Current Liabilities Quick Ratio

Working Capital Management & Profitability

Relation between Quick Ratio and ROI

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Quick Ratio 2.37 1.27 1.36 1.46 1.17

ROI 7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.59

Observation Quick ratio indicates that the company has sufficient liquid balance for the payment of current liabilities. The standard liquid ratio is 1:1 but here liquid ratio is more than 1:1 over the period of 5 years, it indicates that the firm maintains the over liquid assets than actual requirement of such assets. Here, correlation between quick ratio and return on investment is moderate. Such a policy is called conservative policy of finance affects on the cost of the fund and return on the funds.

84 Working Capital Management & Profitability

3. Absolute Liquid Ratio Even though debtors and bills receivables are considered as more liquid then inventories, it can not be converted in to cash immediately or in time. Therefore while calculation of absolute liquid ratio only the absolute liquid assets as like cash in hand cash at bank, short term marketable securities are taken in to consideration to measure the ability of the company in meeting short term financial obligation. It calculates by absolute assets dividing by current liabilities. Absolute Liquid Assets Absolute Liquid Ratio

=

Current Liabilities Absolute Liquid Ratio

Current Liabilities Absolute Liquid Ratio

2004-05

2005-06

2006-07

2007-08

2008-09

11,441,798

16,113,867

2,387,963

3,752,117

18,628,235

55,061,055

155,446,441

107,882,116

81,625,209

112,242,318

0.104

0.022

0.208

0.046

0.166

Absolute Liquid Ratio

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Particulars Absolute Liquid Ratio

Working Capital Management & Profitability

Relation between Absolute Liquid Ratio and ROI

Year 2004-05 2005-06 2006-07 2007-08 2008-09

Absolute Quick Ratio 0.208 0.104 0.022 0.046 0.166

ROI 7.73 7.13 4.55 1.73 0.59

Correlation (r) = 0.26

Observation Absolute liquid ratio indicates the availability of cash with company is sufficient because company also has other current assets to support current liabilities of the company. In the year 2004-05 the ratio high. Because cash was law as compare to current liabilities. Correlation between Absolute Liquid Ratio and Return on investment is low. But its not any drastic impact on profitability.

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Chap. 4

Findings, conclusion and Recommendati on

84 Working Capital Management & Profitability

Findings, Conclusion and Suggestion

Working capital management is important aspects of financial management. The study of working capital of Atul Auto Ltd. Has reviled that the efficiency and liquidity ratios were as per the standard industrial practices but liquidity position of the company showed an increasing trend. The study has been conducted on working capital ratios analysis, working capital leverage, working capital size a level analysis and comparison with profitability ratio (Return on Investment) which helped the company to manage its working capital efficiency and affectively.



Return on investment of the company reduced year by year. So the profitability of the firm automatically down. Compare to year 2004-05 with 2008-09 return on investment down by 92%.

 Working capital size of Atul Auto Ltd. not indicate any specific trend and fluctuate every year. Company decrease the working capital size in year 2008-09 as compare to previous year. Here lack of combination between current assets and current liabilities so the profitability was reduced.

 Current assets are more than current liabilities indicates that company use long term funds for short term requirements, where long term funds are most costly than short term funds.

 Company has a more inventories in total current assets. It is very good because inventory is essential for the smooth business operation. Company increases the current liabilities size and tries to maintain liquidity ratios as per standard industrial practices.

84 Working Capital Management & Profitability

 Atul Auto Ltd. Increase the working capital leverage but it’s failed to increased profitability.

84 Working Capital Management & Profitability

 Working capital turnover ratio leads towards profitability. Working capital turnover ratio and ROI have a positive correlation (0.66). It means that changes in working capital turnover directly effect on profitability of the business. Thus, working capital turnover is very important for the business.

 Correlation between inventory turnover ratio and return on investment near to perfect. If there is a positive change in inventory turnover ratio it gives positive sign in profitability of the company and vice versa. So company should keep the inventory as per the sales. Raw material is major part of the inventory. Company required reducing the raw material size and holding period so, company need less funds for working capital and increase the profitability.

 There is a negative correlation between receivable turnover ratio and return on investment. It is due to the strict credit policy of the Atul Auto Ltd. It has given negative impact on the sales of the company. Company should develop liberal credit policy so, it will help in increasing sales and also the profitability of the firm.

 Positive correlation of current assets turnover ratio and return on investment. It means that current assets plays vital role in profitability. Company’s current assets were always more than requirement it affect on profitability of the company. The higher current assets turnover ratio implies more efficient use of the funds.

 Current ratio of the company in last years above the ideal current ratio. It indicates company’s good liquidity position and also indicates unnecessary investment in current assets. Correlation with return on investment is – 0.19 and it is negative. It means that our funds have blocked in unnecessary current assets.

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 Quick ratio of Atul Auto Ltd. also above the ideal ratio. We found moderate correlation between quick ratio and return on investment. Here company require to reduce some investment in current assets so the cost of fund reduce and profitability increase.

 Correlation between absolute liquid ratio and return on investment is weak. This ratio did not match with ideal ratio and it was below as compare to ideal ratio. Its not big impact on profitability of the Atul Auto Ltd. as per our view it is good because cash is less performing assets in working capital.

Atul Auto Ltd. working capital shows the good liquidity position. Positive working capital indicates that company has the ability of the payments of short terms liabilities. Working capital of Atul Auto Ltd. not indicates any trend for particular period of time. All over working capital management of the company is average and its impact on profitability is average.

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BIBLIOGRAPHY Books Referred 1. 2.

I.M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. - Ninth Edition 2006 Ravi M. Kishore – Financial Management - Taxman Allied Services Pvt. Ltd., New Delhi. 7th Edition 2008

3.

G. Sudarsana Reddy – Financial Management - Himalaya Publication House Pvt. Lt. Mumbai 1st Edition 2008.

4.

Dr. R.S. Khandelwal – Quantitative Analysis For Management-Ajmera Book Company-2nd Edition 2008

Websites References 1.

www.atulauto.co.in

2.

www.google.co.in

Annual Reports 1. Annual report of Atul Auto Ltd. 2004-05 2.

Annual report of Atul Auto Ltd. 2005-06

3.

Annual report of Atul Auto Ltd. 2006-07

4.

Annual report of Atul Auto Ltd. 2007-08

5.

Annual report of Atul Auto Ltd. 2008-09

84 Working Capital Management & Profitability