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INTRODUCTION
The finance function mainly deals with the following three functions:
1. Investment decision
2. Finance decision
3. Dividend decision firm.
Investment decision:
Financial decision:
In this function, the finance manager has to establish carefully the total
funds required by the enterprise after taking into account both the fixed and
working capital requirement in this contest the financial manager is required to
determine the best financing mix or capital structure of the firm. Them he
must decide how to acquire funds to meet the firm’s investment needs. The
central issue before the finance manager is to determine the best financing mix
or optimum or optimum capital structure for his firm.
Dividend decision:
The finance manager must decide whether the firm should distribute all
profits or retain them. Distribute a portion and retain the balance. The finance
has to develop such a dividend policy, which divides the net earnings into
dividends and retained earnings in an optimum way to achieve the objective of
maximizing the market value of firm. In order to make these decisions rational
the management must have a clear understanding of the objectives rational the
management must have a clear understanding of the objectives, which are
sought to be achieved. Importance of finance need not be emphasized. It is
needed the key to successful business operations without proper
administration of finance, no business enterprise can be utilizing is full
potentials for growth and success. Money is a universal lubricant, which keeps
the enterprise dynamic and keeps man and machine at work and encourages
management to make progress and creates value.
Liquidity and profitability often go opposite direction so, the company has to
maintain an optimum level of current assets to sustain liquidity and
profitability: the study of working capital management is utmost important to
maintain liquidity.
Fund flow analysis is a technical device designated to the study the source
from which additional funds were derived and the use to which these sources
were put. The fund flow analysis consists of:
Database:
Primary data:
Secondary data:
The period of research study is three months and five years data is considered
for the study.
Tools of Analysis:
The data collected through secondary sources have been analyzed using
appropriate statistical measures like ratios and percentages, diagrams, tables
and charts are presented to illuminate the facts and figures.
The study is based on five years data. It is not sufficient to present clear
picture of the organization. The accuracy of results depends on the accuracy of
published reports. All the limitations of financial statements will apply to the
study more ever the research period is not sufficient to cover up all aspects.
limited to 5years.
The study is purely based on the data available the form of annual
reports...
This study is conducted within a short period. The time factor is also a
limitation.
It cannot reveal continuous changes.
It is not original statement but simply is arrangement of data given in the
financial statements.
Figures for analysis are taken from annual reports. So, all the limitations
of the financial statements will apply to the study.
Chapter Scheme:
INTRODUCTION
The summarize it may be emphasized that gross and net concept of working
capital are two important facts of the working capital management. There is no
precise way to determine the exact amount of gross and net working capital for
every firm. The data and problems of each company should be analyzed to
determine the account of working capital. There is no specific way realizable in
practice to finance current assets by short sources only.
Gross Working Capital: This concept refers to the total of current assets.
Current assets are those assets which are convertible into cash within the
ordinary course of business. It is also known as Circulating capital and current
capital. Current assets include:
Cash in Hand.
Cash at Bank
Sundry Debtors
Prepaid expenses.
Net Working Capital: This concept defined the most common definition of net
working capital. In this concept working capital is the difference between
current assets and current liabilities, which are expected to be paid in the
ordinary course of business within a year.
Bills payable
Sundry creditors
Outstanding Expenses
Dividend Payable
Bank Overdraft
Net Working Capital may be positive or negative. Net working capital will be
positive when current assets are more than the current liabilities. If current
liabilities are more than current assets then net working capital will be
negative.
1. Gross working capital: Gross working capital is the total amount of funds
invested in the various components of current assets such as cash, inventory,
marketable securities and account receivable.
2. Net Working Capital: Net working capital is the difference between current
assets and current liabilities. This type of working capital enables a firm to
determine how much amount is left for operational requirement.
Temporary working capital differs from permanent working capital in the sense
that it is required for short periods and cannot be permanently employed
gainfully in the business. Figures given below illustrate the difference between
permanent and temporary working capital. Permanent working capital is stable
or fixed over time while the temporary or variable working capital fluctuates.
Permanent working capital is also increasing with the passage of time due to
expansion of business but even then it does not fluctuate as variable working
capital which sometimes increases and sometime decreases.
5. Cash working capital: Cash working capital is calculated from the items
appearing in the profit and loss account of a business. It shows the real flow of
money at a particular time. It is the basis of the operation cycle concepts which
is assumed a great importance in financial management in recent years.
The reason is that the cash working capital indicates the adequacy of working
capital.
6. Balance sheet working capital: The working capital, which is calculated from
the balance sheet items, is known as balance sheet working capital, gross
working capital and net working capital are the example of the balance sheet
working capital.
A firm should have neither low nor high working capital. Low working capital
involves more risk and more returns, high working capital involves less risk
and less returns. Risk here refers to technical insolvency while returns refer to
increased profits/earnings. The amount of working capital is determined by a
wide variety of factors.
1. Nature of business
2. Seasonality of operations
3. Production cycle
4. Production policy
5. Credit Policy
6. Market conditions
7. Conditions of supply
If the product of the firm has a seasonal demand like refrigerators, the firms
need high working capital in the periods of summer, as the demand for the
refrigerators is more and the firm needs low working capital in the periods of
winter, as the demand for the product is low.
Production Cycle:
The term production cycle refers to the time involved in the manufacture of
goods. It covers the time span between the procurement of the raw materials
and the completion of the manufacturing process leading to the production of
goods. As funds are necessarily tied up during the production cycle, the
production cycle has a bearing on the quantum of working capital. The longer
the time span of production cycle, the larger will be the funds tied up and
therefore the larger the working capital needed and vice versa.
Production Policy:
Credit Policy:
The level of the working capital is also determined by the credit policy, as the
firm’s credit policy determines the amount of receivables. If the firm has a
liberal credit policy, then the firm needs high working capital and the firm
needs low working capital if the company’s credit policy does not allow it to
extend credit to the buyers.
Market Conditions:
Conditions of Supply:
The availability of raw materials and spares also determine the level of working
capital. If there is ready availability of raw materials and spares, a firm can
maintain minimum inventory and need less working capital. If the supply of
raw materials is unpredictable, then the firm has to acquire stocks as and
when they are available for ensuring continuous production. Thus, the firm
needs to maintain larger inventory average and needs larger requirement of
working capital.
Working capital is the life blood and the centre of a business. Adequate amount
of working capital is very much essential for the smooth running of the
business. And the most important part is the efficient management of working
capital in right time. The liquidity position of the firm is totally effected by the
management of working capital. So, a study of changes in the uses and sources
of working capital is necessary to evaluate the efficiency with which the
working capital is employed in a business. This involves the need of working
capital analysis.
1. Ratio analysis.
2. Fund flow analysis.
3. Budgeting.
1. RATIO ANALYSIS
1. Current ratio.
2. Quick ratio
3. Absolute liquid ratio
4. Inventory turnover.
5. Receivables turnover.
6. Payable turnover ratio.
7. Working capital turnover ratio.
8. Working capital leverage
9. Ratio of current liabilities to tangible net worth.
.
Introduction
The basic financial statements i.e., the balance sheet and profit and loss account
or income statement of business, reveal the net effect of various transactions on the
operational and financial position of the company. The balance sheet gives a summary of the
assets and liabilities of an undertaking at a particular point of time. It reveals the financial states
of the company. The assets side of a balance sheet incurred and the revenue realized in an
accounting period and the revenue realized in an accounting period. Both the statement
provides the essential basic information on the financial activities of a business but their
usefulness is limited for analysis and planning purposes. The balance sheet gives a static view of
the resources (liabilities) of a business and the uses (assets) to which these resources have been
put at a certain point of time. It does not disclose the causes for changes in the assets and
liabilities between two different points of time. The profit and loss account, in a general way
indicates the resources provided by operations. But there are many transactions that take place
in an undertaking and which do not operate through profit and loss account. Thus another
statement has to be prepared to show the change in the assets and liabilities from the end of
one period of time to the end of another period of time. The statement is called a statement of
changes in financial position or a funds fl
The Funds Flow Statement is a statement, which shows the movement of funds
and is a report of the financial operations of the business undertaking. It indicates various
means by which funds were obtained during a particular period and the ways in which these
funds were employed. In simple words it is a statement of sources & applications of funds.
There are many transactions that take place in an undertaking and which do not operate Profit
& Loss A/c. Thus another statement has to be prepared to show the change in Assets &
Liabilities from the end of one period of time to the end of another period of time. The
statement is called a statement of changes in financial position or a Funds Flow Statement.
The Funds Flow Statement is a statement which shown the movement of funds and is a report of
financial operations of business undertaking. In simple words it is a statement of source and
application of funds.
In any business we cannot under estimate the flow of funds from two operations. The business
runs with funds but the organization knows how to flow of funds. The Funds Flow Statement is
concerned with sources and applications of organization. Statement of changes in working
capital shows the increase or decrease in the working capital.
“Funds from Operations” statement shows how much funds from operations.
A Funds Flow Statement is a statement which reflects flow of funds. The statement is called "
Statement of Sources and Applications of Funds " or "Statement of Derivation and Disposition
of the Means of Operation " or " Where Got, Where Gone Statement " or " Movement of
Working Capital Statement " or " Movement of Funds Statement " other self explanatory names
may also be used for the statement.
The Statement Show flows of funds into (i.e. sources) and out of (i.e. applications) business.
Obviously, statement will have two aspects
2. Their Application.
Before, we know about the Sources and Application of Funds. It is better to understand the
word “Funds”
Funds:
The work “Funds should not be constructed as 'cash' only. They are understood as 'Working
capital'. That is why the items which do not affect the working capital are not reflected in the
statement. For example, conversion of debentures into shares, dividend paid through issue of
bonus shares and such other items are not included in the statement. In other words, the
statement does not contain the transfers, amortizations, and accruals i.e., internal transactions.
Thus, we may say that 'sources' consist of the transactions that increase the net working capital
and their 'Application' consists of the transaction that decreases the net working capital.
Sources of Funds:
Application of Funds:
The primary object of preparing the Funds Flow Statement is to know the sources of funds and
their application during a given period, normally one year. The statement is prepared with the
help of two balance sheets (opening and closing) and the profit and loss account for the
particular period. Many large companies prepare such statement for their shareholders as part
of the published accounts. The statement is useful to both the external and internal parties
concerned.
Usefulness to Outsiders:
1. To assess the funds available for payment of dividend and interest on the investments.
2. To assess the probable expected return on the future investments.
3. To assess the efficiency of management in application of funds.
4. To assess degree of risk involved in lending money to the concern.
Usefulness to Management:
1. Management knows the sources and application of funds and their compositions.
2. The statement, though historical in nature, may be said to be a counterpart to business
budgets. It facilitates control. Management may know whether the working capital has
been efficiently used or not. Hence the statement is very helpful in policy decisions.
The projected Funds Flow Statement enables the management to plan its future investments,
operating and financial activities such as the repayment of long-term loans and interest there
on, modernization or expansion of plant, payment of dividend etc.
The term flow means movement and includes both inflow and out flow. The
term flow of funds means transfer of economic values from one asset of equity to another flow
of funds is said to have taken place when any transaction makes changes in the amount of
funds available before happening of the transaction. If the effect of transaction results in the
increase of funds it is called a source of funds and if it results in the decrease of funds, it is
known as an application of funds. Further, in case the transaction does not change funds, it is
said to have not resulted in the flow of funds.
The term fund has been defined in a number of ways. In a narrow sense, it
means cash only and a funds flow statement. Such a statement enumerates net effects of the
various business transactions on cash and takes into account receipts and disbursements of
cash. Fund refers to all the financial resource of the company on the other extreme fund has
been understood as cash only. The most acceptance meaning of the “fund” is “working
capital”.
The concept of preparing funds from statement is not accepted, as there are many such
transactions that do not affect cash but represent the flow of fund.
The term ‘funds’, refers to money values in whatever form it may exit. Here
‘funds’ means all financial resources, used in business whether in the form of men, material
money, machinery and others.
Networking capital means differences between current assets & liabilities. A fund generally
refers to cash or cash equipment or to working capital. The term ‘funds’, means working
capital, i.e., the working capital concept of funds has emerged due to the fact that total
resources of a business are invested partly in fixed assets in the form of fixed capital and partly
kept in form of liquid or near liquid form as working capital.
Fund flow statement is a statement which shows the inflow and out flow of funds between two
dates of balance sheet. So, it is known as the statement of changes in financial position. We all
know that balance sheet shows our financial position and inflow and outflow of fund affects it.
So, in company level business, it is very necessary to prepare fund flow statement, to know
what the sources and what are the applications of a fund between two dates of a balance
sheet. Generally, it is prepare after getting two year balance sheet.
“The funds flow statement describes the source from which additional funds were derived and
the use to which these coerces were put”.
--ANTHONY.
Funds flow statement is not a substitute of an income statement, i.e., a profit &
loss account and balance sheet.
A balance sheet is a statement of financial position or status of a business on a
given date. It is prepared at the end of accounting period. The balance sheet depicts various
resources of an undertaking and his deployment of these resources in various assets on a
particular date.
Hence, funds flow statement is not competitive but complementary to financial
statements. The funds statement provides additional information as regards changes in working
capital. It is a tool of management for financial analysis and helps in making decisions.
Funds Flow Statement is different from Income Statement (Profit and Loss
Account):
A funds flow statement differs from an income statement (i.e. Profit and Loss Account) in
several respects:
1. A Funds Flow Statement deals with the financial resources required for running the business
activities. It explains how were the funds obtained and how were they used, whereas an
income statement discloses the results of the business activities, i.e., how much has been
spent.
2. A Funds Flow Statement matches the “funds raised” and " funds applied” during a particular
period. The sources and applications of funds may be of capital as well as of revenue nature. An
income statement matches the incomes of a period with the expenditures of that period which
are both of a revenue nature. For example where shares are issued for cash, it becomes a
source of funds while preparing a funds flow statement but it is not an item o income for an
Income statement.
3. Sources of funds are many besides operations such as share capital, debentures, sale of fixed
assets, etc. An income statement which discloses the results of operations cannot even
accurately tell about the funds from operations alone because of non-funds items (such as
depreciation, writing off of fictitious assets, etc.) Being included there in,
Thus, both income statement and Funds Flow Statement have different functions to perform.
Modern management needs both. One cannot be substituted for the other; rather they are
complementary to each other.
Difference between funds flow statement and income statement
1. A fund flow statement is an essential tool for the financial analysis and is of
primary importance to the financial management. The basic purpose of a funds flow statement
is to reveal the changes in the working capital on the two balance sheet dates. If also describes
the sources from which additional working capital has been financial and the uses to which
working capital has been applied. Such a statement is particularly useful in assessing the growth
of the firm. The significance or importance of funds flow statement can be well followed from
its various uses given below. It helps in the analysis of financial operations.
The financial statements reveal the net effect of various transactions on the operational and
financial position of a concern. The balance sheet gives a static view of the resources of a
business and the uses to which these resources of a business and the uses to which have been
put at a certain point of time. The funds flow statement explains causes for such changes and
also the effect of this change on the liquidity position of the company sometime a concern may
operate profitably and yet its cash position may become more and worse. The funds flow
statement gives a clear answer to such a situation explaining what has happened.
1. Why were the net current assets lesser spite of higher profits and vice versa?
2. Why more dividends could not be declared in spite of available profits?
3. How was it possible to distribute more dividends than the present earnings?
4. What happened to the proceeds of sale of fixed assets or issue of shares, debentures,
etc.?
5. What happened to the net profit? Where did they go?
6. How was the increase in working capital financed and how will it be financed in future?
Sometimes a firm has sufficient profits available for distribution as dividend but
yet it may not be advisable to distribute dividend for lack of liquid or cash resources. In such
cases, a funds flow statement helps in the formation of a realistic dividend policy.
A projected funds flow statement also acts a guide for future to the
management. The management can come to know the various problems it is going to face in
near future for want of funds. The firm’s future needs want of funds. The firm’s future needs of
funds can be projected work in advance and also the timing of these needs.
A funds flow statement helps in explaining how effectively the management has
used its working capital and also suggests ways to improve working capital position of the firm.
The financial institutions and banks such as state financial institutions Industrial
Development Corporation, industrial finance corporation of India, industrial development bank
of India, etc., all ask for funds flow statement constructed for a member of years before
granting loans to know the credit worthiness and paying capacity of the firm. Hence, a firm
seeking financial assistance from these institutions has no alternative but to prepare funds flow
statement.
FINANCIAL ANALYSIS:
A fund flow statement is a financial analysis tool that helps managers makes decisions. It
highlights the changes in the financial position of a company. Unlike other financial statements,
such as an income statement and balance sheet that provide only a static view of an
organization's financial operations, a fund flow statement is dynamic and depicts the flow of
funds and how they have been allocated between various business activities. It provides
complete information to financial managers on the effectiveness of fund allocation and reveals
an organization's fund-generating strengths and weaknesses. A fund flow statement also
throws light on the financial position of a firm at a given point in time and highlights the
financial consequences of major business operations, allowing managers to take corrective
actions if required. Funds flow statements allow financial managers to plan on how to improve
the rate of return on assets, manage the effects of insufficient funds and cash balance and plan
how to pay interest to creditors and dividends to shareholders.
A fund flow statement is a useful resource allocating tool. It helps financial managers allocate
resources efficiently. It is not uncommon for managers to design projected fund flow
statements as a forecasting tool. A fund flow statement, therefore, can be thought of as a
control device that allows managers to make effective financial planning decisions. It helps
managers plan on how to invest idle funds and secure additional capital.
Fund Transactions:
There is a plenty of business transactions which results in flow of funds or which cause changes
in working capital. For this purpose, all the business transactions classified into (a) those
transactions which increase funds i.e. sources of funds (b) those transactions which decrease
funds i.e. application of funds. Identification of transactions causing for increase or decrease in
funds is essential for funds flow statement analysis. The following transactions do not affect the
flow of funds. These are
1. Transactions between two current assets. (For ex. conversion of stock into cash)
2. Transactions between two current liabilities.
3. Transactions between current assets and current liabilities.
4. Transactions between two non-current or fixed assets.
5. Transactions between two long-term liabilities.
6. Transactions between non-current assets and long-term liabilities.
There are various elements of business that affect fund/cash flow. These include such things as
increased sales, reductions or increases in debtors, longer or shorter times in paying creditors,
repayments of loans, etc., a summary of which should be shown on separate lines of the
statement. It can start with a section listing the elements that contribute to an increase in cash,
and then the next section lists those items which have contributed to a decrease in cash.
Space (and time!) does not permit more comprehensive details of what is needed and how to
do it. You should consult a text book on Financial Accounting and look at the fund/cash flow
statement of a company similar to the one for which you wish to prepare such a statement.
ANALYSIS OF SHORT – TERM FINANCIAL POSITION OR TEST OF
LIQUIDITY
1. Liquidity ratios.
2. Current assets movements ‘ratios.
Liquidity refers to the ability of a firm to meet its current obligations as and
when these become due. The short-term obligations are met by realizing
amounts from current, floating or circulating assts. The current assets should
either be liquid or near about liquidity. These should be convertible in cash for
paying obligations of short-term nature. The sufficiency or insufficiency of
current assets should be assessed by comparing them with short-term
liabilities. If current assets can pay off the current liabilities then the liquidity
position is satisfactory. On the other hand, if the current liabilities cannot be
met out of the current assets then the liquidity position is bad. To measure the
liquidity of a firm, the following ratios can be calculated:
1. CURRENT RATIO
2. QUICK RATIO
3. ABSOLUTE LIQUID RATIO
1. CURRENT RATIO
Curreneassets
Current ratio=
Current liabilities
a) CURRENT ASSET
b) CURRENT LIABILITES
QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio
may be defined as the relationship between quick/liquid assets and current or
liquid liabilities. An asset is said to be liquid if it can be converted into cash
with a short period without loss of value. It measures the firms’ capacity to pay
off current obligations immediately.
Quick Assets
Quick Ratio=
Current liabilities
Marketable Securities
Cash in hand and Cash at bank.
Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet
its current liabilities in time and on the other hand a low quick ratio represents
that the firms’ liquidity position is not good.
Although receivables, debtors and bills receivable are generally more liquid
than inventories, yet there may be doubts regarding their realization into cash
immediately or in time. So absolute liquid ratio should be calculated together
with current ratio and acid test ratio so as to exclude even receivables from the
current assets and find out the absolute liquid assets. Absolute Liquid Assets
includes:
Funds are invested in various assets in business to make sales and earn
profits. The efficiency with which assets are managed directly affects the
volume of sales. The better the management of assets, large is the amount of
sales and profits. Current assets movement ratios measure the efficiency with
which a firm manages its resources. These ratios are called turnover ratios
because they indicate the speed with which assets are converted or turned over
into sales. Depending upon the purpose, a number of turnover ratios can be
calculated. These are :
The current ratio and quick ratio give misleading results if current assets
include high amount of debtors due to slow credit collections and moreover if
the assets include high amount of slow moving inventories. As both the ratios
ignore the movement of current assets, it is important to calculate the turnover
ratio.
Inventory turnover ratio measures the speed with which the stock is converted
into sales. Usually a high inventory ratio indicates an efficient management of
inventory because more frequently the stocks are sold; the lesser amount of
money is required to finance the inventory. Where as low inventory turnover
ratio indicates the inefficient management of inventory. A low inventory
turnover implies over investment in inventories, dull business, poor quality of
goods, stock accumulations and slow moving goods and low profits as
compared to total investment.
A concern may sell its goods on cash as well as on credit to increase its sales
and a liberal credit policy may result in tying up substantial funds of a firm in
the form of trade debtors. Trade debtors are expected to be converted into cash
within a short period and are included in current assets. So liquidity position
of a concern also depends upon the quality of trade debtors. Two types of ratio
can be calculated to evaluate the quality of debtors.
Debtor’s velocity indicates the number of times the debtors are turned over
during a year. Generally higher the value of debtor’s turnover ratio the more
efficient is the management of debtors/sales or more liquid are the debtors.
Whereas a low debtors turnover ratio indicates poor management of
debtors/sales and less liquid debtors. This ratio should be compared with
ratios of other firms doing the same business and a trend may be found to
make a better interpretation of the ratio.
Cost of sales
Working Capital Turnover Ratio =
Net working capital
INDUSTRY PROFILE
INDIAN CELL PHONE INDUSTRY
The mobile operations for general public began in mid 90s in India, though it
was a luxury of the rich only. The reasons were several. The call rate was very
high, the sets were expensive. There were fewer service providers which
operated only in big metros. Another important reason was that our country
was in a state of transition. After the post independence failure of the socialist
model, the country had just opened up its economy and its middle class, who
form the bulk of consumers in any country, were yet to rise.
By the turn of the new millennium, the change was visible. With the growth
rate shooting high, we were experiencing a new change in our lives. The
bourgeois class had finally made its present felt in the country with all sorts of
consumer goods taking a leap in sales. The sales of cell phones also started
rising as it began to make its presence felt among the new confident Indians
who entered the new century with high ambition. Since there was charge on
incoming calls, cell phones were mainly used by those who had business
related to it. Although the status symbol that it represented were diluting day
by day.
The news came that the incoming calls were made free by the government. It
was the turning point for cell phones in India as it was embraced by the
masses, whether they actually required it or not was not a question to be
asked. Since then there have been rapid development in the mobile phone
industry. With low call rates and reduction of handset prices, it became
affordable to any average man who comfortably earned his living.
The major reason for the cellular boom in India was its economic progress. We
can’t deny the power of money but it was not the sole reason. . During the
BSNL monopoly, one had to wait for long, even 8 years in some cases, to get a
connection. The author believes that whoever possesses cell phones today are
among those who don’t have the knack to wait for those many years to get a
connection.
Another major reason was the lack of connectivity in rural India. Many villages
don’t have electricity. Cell phones came as a surprise as well as a boon for
them who even don’t have access to decent roads to commute.
If economic boom has enabled people to buy cell phones, the latter have also
made people lead better lives. Many small businessman, artisans and workers
have really benefited with cell phones and there are plenty of examples all
around us.
Today, cell phones have become a way of life. From the dhobi alas to corporate
honchos, everyone uses it. Some use for their business, some to gossip, and
some just to make style statements, the truth is that cell phones have become
an intrinsic way of life. Few years down the line it would be unimaginable a life
without cell phones. Coming to facts, India has over 100 million users and
almost 8 million add every month making it the second largest cell phone
market in the world after China.
The telecom industry is one of the fastest growing industries in India. India has
nearly 200 million telephone lines making it the third largest network in the
world after China and USA. With a growth rate of 45%, Indian telecom industry
has the highest growth rate in the world.
The DoT has allowed cellular companies to buy rivals within the same
operating circle provided their combined market share did not exceed 67 per
cent. Previously, they were only allowed to buy companies outside their circle.
Today, India is one of the fastest growing telecom markets in the world with
current sub-scriber base nearing 490 mil-lion and looking positive to touch
500 million subscribers by 2010. India, the fastest growing telecom market in
world, registered a CAGR of around 34% over the last decade and has left
analysts around the world totally in awe.
Among the various segments, cellular or mobile segment has been the key
contributor and specially prepaid services, with its wide offerings of services,
has been leading the growth wave. With the upcoming 3G allotment, the sector
is likely to grow at a good rate riding on better and possibly a whole new range
of services.
The growing affluent-middle-class, low cost of handsets and call tariffs has
helped this stupendous growth .Even now the penetration rate of mobile
phones in India, in comparison to other markets like China, Japan, and
European countries is low. This presents an enormous opportunity for the
Indian mobile service operators to enhance their market share through
mindshare. The recent policy initiative of allowing new operators in a circle has
added fuel to the competition in the cellular market, bringing the call tariffs to
the lowest in the world.
Many of the world-renowned telecom giants are eying the fast-growing Indian
mobile market. With the FDI limit of 74% these MNCs are partnering with
Indian business houses to enter into India. Telenor, Datacom, Loop mobile,
NTT Docomo are among the new entrants in the Indian mobile space. Their
entry with high-end value added services and quality infrastructure is bound to
push the prices further southward. The choice set for the Indian customer is
widening with increasing number of players in each telecom circle. These global
competitors will spread their arms by adopting innovative pricing strategies
and value added services at lower costs, leveraging their technology and
financial muscle.
Mobile call tariffs in India are the lowest in the world. The tariffs dwindled from
Rs. 6.50/minute to 1paisa/second in just above seven years. Competition is
intense among the players to attract customers. Every now and then, a new
scheme with low service charges and tariff plan pops up and gets superseded
by another new scheme within no time. The mobile market is flooded with
offers and packages and in fact, the customer is overwhelmed with competing
choices. Customer retention has become a challenge for the mobile operators
with increasing competition. Some marketers target brand switchers because
brand switchers have higher market potential .Switching is encouraged by all
the players in the mobile market to enhance the customer base. Moreover, in
the prepaid GSM services, the switching costs are low that they make switching
easy. The only major impediment to switching, as of now, is the inconvenience
of changing to a new number. The Telecom Regulatory Authority of India is in
the process of finalizing the procedure for Mobile Number Portability which
allows the customer to retain the same mobile number across the operators.
This is expected to open floodgates for customer switching in both pre-paid and
post-paid segments. In the wake of the above, in order to effectively design
strategies to retain customers to enhance profitability, there is a need to
understand the factors that are prompting customers to switch operators.
Sector Overview:
15 years back, no one had thought that India will become a country with more
number of GSM subscribers than fixed line sub-scribers. According to the
Telecom Regulatory Authority of India (TRAI), the number of telecom
subscribers in the country increased to 562.21 million in December 2009, an
increase of 3.5 per cent from 543.20 million in November 2009. With this the
overall teledensity (telephones per 100 people) has touched 47.89.
As per the estimates of Stock watch the expected mobile subscriber base will
touch around 771 million by the year 2013. Telephony services i.e. (mobile and
basic) and internet services dominate the Indian Tele-com services market.
With a CAGR of 29% from 2002 to 2007 with revenues of $20 billion, it is
expected to stabilize at 16% by 2010 with revenues in the range of $43 billion.
Over the years, wire-less services has acquired almost 92% of the total
telephony market, with State owned BSNL as the leader in the landline domain
and Bharti Airtel being the leader in cellular services with other players like
Reliance, Idea Cellular and Vodafone giving it a tough competition.
Subscription in Urban Areas grew from 357.22 Million at the end of Sep-09 to
387.63 Million at the end of Dec-09, taking the urban Teledensity from 102.79
to 110.96. Rural subscription increased from 151.81 Million to 174.53 Million
leading to increase in Rural Teledensity from 18.46 to 21.16, during this
period.
About 57% of the total net additions have been in urban areas as compared to
65% in the previous quarter. These in other words imply rapid increase in rural
subscriptions during the quarter. However, this uptake in rural subscription is
in wireless segment.
The share of rural subscribers has increased to 31% in total subscription from
29.8% in Sep-09.
Growth Prospects: Telecom in India
An analysis of the Indian telecom industry under the Porter’s Diamond Model
reveals that India offers a competitive advantage for firms operating in the
country.
India is the fastest growing free market democracy in the world. It has a
mature and dynamic private sector, which accounts for 75 per cent of India’s
GDP, and a market with enormous potential due to its large size and diversity.
It is also expected to achieve the highest growth rate among the BRIC countries
(Brazil, Russia, India and China). India offers significant business
opportunities to the services, as well as the manufacturing sectors. This is
because India offers benefits such as cost advantage in product development
and back-office processing and the large-scale availability of skilled English-
speaking professionals. The middle class population is also a significant
market for any business entity. AT Kearney ranked India as the second-most
attractive democracy in its FDI confidence index. The success of MNCs is a
proof that India is an attractive investment destination. India’s huge domestic
market and buoyant economic growth have always attracted foreign investors.
A decade of reforms has opened the country to greater competition and spurred
industries to become more efficient. India is currently the fourth-largest
economy on PPP basis and is well positioned on a continuously increasing
growth curve. India’s emergence as a leading destination for foreign investment
is a result of positive indicators such as a stable 6 per cent annual growth,
rising foreign exchange reserves of over US$ 266.18 billion(July 24th 2009) and
Foreign Direct Investment (FDI) of US$ 15 billion. Goldman Sachs had earlier
predicted that India will become the third-largest economy in the world.
However, it has now revised its previous estimates and claims that by 2050,
India will even surpass the US and become the second-largest economy after
China. The country’s economic growth has become more attractive due to the
rising share of the services sector in the GDP. ed foreign investors.
3G spectrum will be the next growth wave in the industry and also the source
of additional revenues for the companies. Foreign players such as AT&T and
NTT Do Como have show great interest for the same. The spectrum allotment is
a major investment opportunity and is estimated to attract an investment of
around US$8-10 billion during 2008-11. The state owned incumbent BSNL has
successfully launched its 3G service under the proposed ‘India-Golden 50’
scheme but could not create that much of buzz though for not being aggressive
in marketing the same. WiMax on the other hand promises seamless
connectivity with speed of more than 4 Mbps in tough terrains also. With the
growing number of smart phones entering the market coupled with buzz
created by the social networking websites, one can surely expect a substantial
amount of people using their mobile phones for the internet. The telecom
ministry is planning to auction few slots in WiMax in near future. VAS on the
other hand is the constant source of revenue and a means to en-gage
subscribers. The expected revenue from VAS will be around US$ 4.0 billion by
2015. The con-current developments like M-Commerce, focus on localization,
availability of content in vernacular languages, availability of mobile TV are few
out of many growth drivers for the VAS industry. With the customer data at
their disposal, telecom companies are generating knowledge and information
by churning out this data to serve their customers better.
IPTV
COMPANY PROFILE
THE RELIANCE GROUP OF INDUSTRIES LIMITED
OUR FOUNDER
Fewer still have left behind a legacy that is more enduring and timeless. As
with all great pioneers, there is more than one unique way of describing the
the proud patriot, the leader of men, the architect of India’s capital markets,
the champion of shareholder interest. But the role Dhirubhai cherished most
was perhaps that of India’s greatest wealth creator. In one lifetime, he built,
starting from the proverbial scratch, India’s largest private sector enterprise.
When Dhirubhai embarked on his first business venture, he had a seed capital
of barely US$ 300 (around Rs 14,000). Over the next three and a half decades,
achievement which earned Reliance a place on the global Fortune 500 list, the
first ever Indian private company to do so. Dhirubhai is widely regarded as the
Limited first went public, the Indian stock market was a place patronised by a
small club of elite investors which dabbled in a handful of stocks.Undaunted,
participate in the unfolding Reliance story and put their hard-earned money in
the Reliance Textile IPO, promising them, in exchange for their trust,
stories of mutual respect and reciprocal gain in the Indian markets. Under
greatest growth stories in corporate history anywhere in the world, and went on
initial investors in the Reliance stock, and creating one of the world’s largest
shareholder families.
OUR CHAIRMAN
India, Shri Anil D Ambani, 48, is the chairman of all listed companies of
ADA group have raised nearly US$ 3 billion from global financial
Conferred ‘the CEO of the Year 2004’ in the Platts Global Energy Awards
Awarded the First Wharton Indian Alumni Award by the Wharton India
December 2001
Business and Finance' and was introduced as the only 'new hero' in
RELAINCE PHILOSOPHY:-
VISION
To build a global enterprise for all our stakeholders, and A great future
for our country, To give millions of young Indians the power to shape their
VALUES
Shareholder Interest
People Care
Consumer Focus
Excellence in Execution
Team Work
Proactive Innovation
Leadership by Empowerment
Social Responsibility
Shareholder Interest
People Care
We possess no greater asset than the quality of our human capital and no
greater priority than the retention, growth and well-being of our vast pool of
human talent
Consumer Focus
We rethink every business process, product and service from the standpoint of
Excellence in Execution
Team Work
The whole is greater than the sum of its parts; in our rapidly-changing
Proactive Innovation
Leadership by Empowerment
giving up control; about enabling and empowering people down the line to take
Social Responsibility
community for their survival and sustenance, and must repay this generosity
right. We can learn as much from the success of others as from our own
failures.
OUR STRUCTURE
ABOUT RELIANCE ENERGY
Reliance Energy Limited, incorporated in 1929, is a fully
RELIANCE CAPITAL
India.
sector financial services companies, and ranks among the top 3 private
billion), cash flows of Rs. 9,000 crore (US$ 2.2 billion), net profit of Rs.
‘Adlabs Films’
The key content initiative are across Movies, Music, Sports, Gaming,
Internet & mobile portals, leading to direct opportunities in delivery across the
emerging digital distribution platforms: digital cinema, IPTV, DTH and Mobile
TV.
Reliance ADA Group acquired Adlabs Films Limited in 2005, one of the
www.adlabscinemas.com
‘BIG92.7FM’
BIG 92.7 FM, already rolled out in several cities successfully, is on the
50,000 villages. It will reach 200 million people across the length and breadth
of the country. The company plans to promote radio not only as a medium of
element of 'Indian-ness' in its content. Keeping with the tag line ‘Suno Sunao,
Life Banao!’, it is BIG 92.7 FM’s endeavour to ensure its offerings have a
economy, the company strives to create converged services and platforms for
‘ZAPAK’
the most successful youth brand launches in the past three years. Zapak
acquired more than 1 million registered users in the first four months of its
launch; the current registered user base exceeds 3 million. The company has
already started building a pan-India gaming infrastructure with the launch of
spearhead the online gaming revolution in India with the best content and
‘BIG FLICKS’
providing movie rental and movie download services both to the domestic
market as well as the NRI community. Apart from Internet-based services, the
masses with the opening of a chain of DVD stores. The service is subscription-
poised to create the largest content library in India to provide its customers
‘BIGADDA’
centric appeal across communities, hosting video and photo sharing features,
global—audiences. With one of the largest movie slates ever mounted in the
history of the Indian film industry and partnerships forged with the best
creative talent across the country, Big Motion Pictures is poised to redefine the
class production facilities that will offer a platform for unfettered creativity and
animation for theatre, television, direct-to-home and other platforms. Its team
blending technology and creativity. AniRights aims to create content for the
entire audio-visual spectrum and keep the global audience informed and
entertained. www.anirights.com.
‘JUMP GAMES’
has leveraged its experience and expertise to create innovative gaming content
endorsed by some of the best global brands. Its commitment to quality gaming
is reflected in award-winning games like Bappi Da Disco King, which won the
Best Mobile Game in India in 2007. Distributed across the US, Europe, South
Africa, Australia, the Middle East and Asia, Jump's games can be played on
Kireedam, in June 2007. In the next three months, it rapidly made its presence
felt in the Hindi and South Indian film industries with successful musical
addition, the company has signed on the greatest names in the industry,
including Asha Bhosle, Jagjit Singh, Ghulam Ali and Shankar Mahadevan. Big
Music and Home Entertainment plans to focus on digital platforms such as the
formats. It will also make its foray into events and live entertainment through
talent management and conducting live events. An example is its tie-up with
Star Voice of India to manage the winner and other finalists with shows and
albums.
ABOUT RELIANCE COMMUNICATIONS
The Late Dhirubhai Ambani dreamt of a digital India - India Where the
sector company virtually from scratch , had stated as early as 1999 : “ Make
affordable cost . They will overcome the handicaps of illiteracy and lack of
wire line ) and convergent ( voice , data and video ) digital network . It is
LG
CLASSIC
2690 (b/w)
2530 (b/w)
2750 (b/w)
RD3000 (colour)
701 (b/w)
731 (colour)
702 (b/w)
Current Liabilities
As per the schedule of changes in working capital the current assets in 2007
Rs. 20107.04 crores and the current liabilities are Rs. 10732.14 crores and
working capital is Rs. 9374.90 crores.
In 2008, current assets amounts Rs. 18515.29 crores and current liabilities Rs.
11238.16 crores and working capital is Rs. 7277.13 crores
Current Liabilities
As per the schedule of changes in working capital the current assets in 2008,
current assets amounts Rs. 18515.29 crores and current liabilities Rs. 11238.16
crores and working capital is Rs. 7277.13 crores
In 2009, current assets amount Rs. 25543.01 crores and current liabilities Rs.
9365.46 crores and working capital is Rs. 16177.55 crores
During the year 2009, working capital is increased by Rs. 8900.42 crores.
CHANGES IN WORKING CAPITAL STATEMENT OF APOLLO HOSPITAL ENTERPRISES FOR THE
YEAR 2009 -2010 (AMOUNT Rs.IN CRORES)
Current Liabilities
INTERPRETATION:
As per the schedule of changes in working capital the current assets in 2009,
current assets amount Rs. 25543.01 crores and current liabilities Rs. 9365.46
crores and working capital is Rs. 16177.55 crores
In 2010 the current assets amounts Rs. 20005.94 crores and the current
liabilities Rs. 9223.37 crores and working capital is Rs. 524.27 crores
During the year 2010, working capital is decreased by Rs. 5394.98 crores.
Current Liabilities
INTERPRETATION:
As per the schedule of changes in working capital the current assets in 2010
the current assets amounts Rs. 20005.94 crores and the current liabilities Rs.
9223.37 crores and working capital is Rs. 10782.57 crores
In 2011, the current assets amount Rs. 19153.82 crores and the current
liabilities Rs. 10407.29 crores and working capital is Rs. 8746.53 crores
During the year 2010, working capital is decreased by Rs. 2036.04 crores.
Current Liabilities
INTERPRETATION:
As per the schedule of changes in working capital the current assets in 2011,
the current assets amount Rs. 19153.82 crores and the current liabilities Rs.
10407.29 crores and working capital is Rs. 8746.53 crores
In 2012, the current assets amount Rs. 15668.00 crores and current liabilities
Rs. 12937.00 crores and working capital is Rs. 2731.00 crores
During the year 2010, working capital is decreased by Rs. 6015.53 crores.
30517.16
Funds from operations
Increase in unsecured
Loans 8567.19 Corporate tax 28.06
Increase in working
Funds from operations 30517.16 8900.17
capital
Increase in fixed
0.25
deposits
41134.35 41134.35
Interpretation;
The above statement indicates that the fund from operations is Rs.30517.17crores. This is a
major source of fund in 2009 and funds generated from secured loans are 2050 crores.
Working capital is increased by Rs. 8900.17crires this leads to application of funds. The major
application of funds in 2009 is purchase of investments Rs. 17520.61 and payment of dividend
constitutes Rs.165.12.
CACULATION OF FUNDS FROM OPERATIONS IN THE YEAR-2010
Less ; 2896.88
Non –operating income
768.92
Decrease in working
capital 5394.98
6959.18 6959.18
Interpretation;
The major source of funds in 2010 is decrease in working capital Rs5394.98 crores followed by
sale of fixed assets 795.28 crores and funds from operation is 768.92 crores
The major application of funds is unsecured loans paid 6425.33 crores followed by purchase of
investments 533.85.
CACULATION OF FUNDS FROM OPERATIONS IN THE YEAR-2011
2957.92
603.51
Less ; -8224.14
Increase in work in progress 2957.92
Non –operating income
10578.55
Sale of asset
1771.58 Funds lost on operation 10578.55
16033.64 16033.64
Interpretation;
The major source of finance in 2011 is funds from secured loans Rs.12226.02 crores followed by
decrease in working capital is 2036.04 and sale of assets is 1771.58 crores.
The major application of funds is payment of unsecured loan Rs.5251.56 crores followed by
purchase of investments 203.53 crores.
CACULATION OF FUNDS FROM OPERATIONS IN THE YEAR-2012
11242.66
8295.19
Less ; 2338.75
Non –operating income
5956.44
Funds from operations
FUNDS FLOW STETMENT FOR THE YEAR 31-3-2012
(Rs.in crores)
Decrease in working
capital 6015.27 Equity dividend paid 52.00
23223.82 23223.82
Interpretation;
The major source of funds in 2012 is secured loans Rs.11038.98crores followed by decrease in
working capital Rs.6015.27 crore and funds from operation is Rs5956.44 crores.
The major application of funds in 2012 is payment of unsecured loan 14620.72 crores followed
by purchase of fixed assets Rs.85431.1 crores and equity dividend paid is Rs. 52 crores.
.
A) LIQUIDITY RATIOS
CURRENT RATIO
Current ratio indicates the firm’s commitment to meet short term liabilities.
The ideal ratio is 2:1. Current assets means either used or converted into cash
with in the year time at normal operating cycle. Current liabilities are those
which are payable within a year.
Curreneassets
Current ratio=
Current liabilities
3
2.5
2
1.5
1
0.5
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
The above table indicates the current ratios for different years. There are
fluctuations in the current ratios for all the years. The ratios are excellent in
2008-09 and 2009-10 because they are above 2:1 for remaining years the
rations are not satisfactory.
LIQUID RATIO
Liquid ratio is also known as quick ration or acid test ratio. The quick assets
are defined as the current assets excluding inventories and prepaid expenses.
The standard quick ration is 1:1.
Qucik assets
Quick ratio=
Current liabilities
2500
2000
1500
1000
500
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
The above table indicates the quick ratios for all the years are very good as they
are above standard 1:1. The ratio is highest in 2008-09 2.70:1 and least in
2007-08, 1.63:1
ABSOLUTE LIQUID RATIO
The absolute Liquid ratio is also known as super quick ratio. It is more
stringest test of liquidity. The standard for absolute liquid ration is 0.5:1 (1:2)
INTERPRETATION:
The absolute liquid ratios of the firm are not satisfactory for all the years
because they are below the standard 0.5:1
B) TURN OVER RATIOS
This ratio indicates how many times a firm converted its stock into sales. A
higher ratio is desirable.
Sales
Or Average stock
100
90
80
70
60
50
40
30
20
10
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
The turn over performance of the company is excellent though there are
variations in the ratios. The ratio is highest in 2007-08 that is the company
converted stock into sales 198.37 times. The ration is lest in 2010-11 :44times.
WORKING CAPITAL TURNOVER RATIO
This ratio shows the number of times working capital is turnover as sales in a
year. Higher ratio is desirable. This ratio is calculated as follows.
Net sales
Working capital turnover ratio=
Workingcapital
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
There are variations in working capital turnover ratios. In 2007-08 the working
capital turnover by the company is 2.03 times.. In 2011-12, the working capital
turn over by the company is 4.44 times which is highest. Least in 2008-09:
0.93 times.
DEBTORS TUROVER RATIO
Credit sales
Debtors turnover ratio=
Average trade debtors
Average trade
Credit sales
Year debtors Ratio
Rs in crores
Rs in crores
2007-08 14792.05 947.66 15.61
2008-09 15086.66 1287.72 11.72
2009-10 13554.60 1610.43 8.42
2010-11 13308.71 1854.44 7.18
2011-12 12135.00 1950.63 6.22
DEBTOR TURNOVER RATIO
16
14
12
10
8
6
4
2
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
In the year 2007-08 the debtor’s turnover ratio is 15.61 times, in2008-09 it is
11.72 times. In 2009-10 it is 8.42 times. In 2010-11 it is 7.18 times where as
in 2011-12 it is 6.22times.
60
50
40
30
20
10
0
2007-08 2008-09 2009-10 2010-11 2011-12
INTERPRETATION:
The debt collection period denotes the lock in period of funds. In the year
2007-08 the debt collection period 23 days in 2008-09 it is increased to 31
days. In 2009-10 the debt collection period is 13 days.
CHAPTER – 6
MAJOR FINDINGS
SUGGESTIONS
1.
2. For entire study period company has positive working capital so the
company liquidity position is good. It is advised to maintain this in future
years.
3. The company is advised not to pay loans in large amounts. Ultimately it
affects company cash stability.
4. The company is advised to maintain an optimum level of working capital.
i.e based on turnover performance and scale of operations the working
capital should be maintained.
5. The company is advised to decrease current provisions.
CONCLUSIONS
WEBILIOGRAPHY
1. http://www.rcom.co.in/
2. en.wikipedia.org/wiki/Working_capital
3. www.caalley.com/art/WorkingCapitalManagement.pdf