CHAPTER I

INTRODUCTION TO THE TOPIC

Revenue Management is a proven competitive weapon that enables companies to

understand the complexities of today’s diverse market place, deals with them on a micro
market basis, and makes decisions confidently and rapidly. RM first emerged in the
airline industry as a tactic to deal with new low-cost competitors. This concept appeared
in the hotel circles in late 1980s; RM forced to develop reservation policies that would
build a profitable bottom line. Although the adoption of RM has been slow in the
industry, Pharma it has far reaching opportunities for Novartis in the 21st century. The
practice of revenue management can provide significant incremental revenues with
executives buy – in and acceptance of the process across the organization. This paper
deals with the related issues of revenue management, measuring yield, elements of RM,
Novartis applications, an insight into operational frame work of in India.

REVENUE MANAGEMENT

Yield management, also known as revenue management, is the process of understanding,

anticipating and influencing consumer behavior in order to maximize revenue or profits
from a fixed, perishable resource (such as airline seats or hotel room reservations). This
process was first discovered by Dr. Matt H. Keller. The challenge is to sell the right
resources to the right customer at the right time for the right price. This process can result
in price discrimination, where a firm charges customers consuming otherwise identical
goods or services a different price for doing so. Yield management is a large revenue
generator for several major industries; Robert Crandall, former Chairman and CEO of
American Airlines, has called yield management "the single most important technical
development in transportation management since we entered deregulation

1
History
Deregulation is generally regarded as the catalyst for yield management in the airline
industry, but this tends to overlook the role of Global Distribution Systems (GDS’s). It is
arguable that the fixed pricing paradigm occurs as a result of decentralized consumption.
With mass production, pricing became a centralized management activity and customer
contact staff focused on customer service exclusively. Electronic commerce, of which the
GDS's were the first wave, created an environment where large volumes of sales could be
managed without large numbers of customer service staff. They also gave management
staff direct access to price at time of consumption and rich data capture for future
decision-making.

On January 17, 1985, American Airlines launched Ultimate Super Saver fares in an effort
to compete with low cost carrier PEOPLExpress. Donald Burr, the CEO of
PeopleExpress, is quoted in the book "Revenue management" by Bob Cross saying "We
were a vibrant, profitable company from 1981 to 1985, and then we tipped right over into
losing $50 million a month...We had been profitable from the day we started until
Amercan came at us with Ultimate Super Savers." The Revenue management systems
developed at American Airlines were recognized by the Edelman Prize committee of
INFORMS for contributing $1.4 billion in a three year period at the airline.

Revenue management spread to other travel and transportation companies in the early
1990s. Notable was implementation of revenue management at National Car Rental. In
1993, General Motors Corporation was forced to take a $744 million charge against
earnings related to its ownership of National Car Rental Systems. In response, National's
program expanded the definition of Revenue management to include capacity
management, pricing and reservations control. As a result of this program, General
Motors was able to sell National Car Rental Systems for an estimated $1.2 billion. Other
notable Revenue management implementations include the NBC which credits its system
with $200 million in improved ad sales from 1996 to 2000, the Target Pricing initiative at
UPS, and Revenue management at Texas Children's Hospital. Since 2000, much of the
dynamic pricing, promotions management and dynamic packaging that underly
2
ecommerce sites leverage Revenue management techniques. In 2002 GMAC launched an
early implementation of web based revenue management in the financial services
industry. As the techniques spread from their travel industry roots, the analytic
underpinnings of Revenue Management have begun to be seen as a sub-discipline of
Pricing Science.

There have also been high profile failures and faux pas. Amazon.com was criticized for
irrational price changes that resulted from a Revenue management software bug. The
Coca-Cola Company's plans for a dynamic pricing vending machine were put on hold as
a result of negative consumer reactions. Revenue management is also blamed for much of
the financial difficulty currently experienced by legacy carriers. The reliance of the major
carriers on high fares in captive markets arguably created the conditions for low cost
carriers to thrive.

Use by industry

There are three essential conditions for revenue management to be applicable:

 That there is a fixed amount of resources available for sale.

 That the resources sold are perishable. This means that there is a time limit to
selling the resources, after which they cease to be of value.
 That different customers are willing to pay a different price for using the same
amount of resources.
If the resources available are not fixed or not perishable, the problem is limited to
logistics, i.e. inventory or production management. If all customers would pay the same
price for using the same amount of resources, the challenge would perhaps be limited to
selling as quickly as possible, e.g. if there are costs for holding inventory.

Yield management is of especially high relevance in cases where the constant costs are
relatively high compared to the variable costs. The less variable cost there is, the more
the additional revenue earned will contribute to the overall profit. This is because it
focuses on maximizing expected marginal revenue for a given operation and planning
3
horizon. It optimizes resource utilization by ensuring inventory availability to customers
with the highest expected net revenue contribution and extracting the greatest level of
‘willingness to pay’ from the entire customer base. Revenue management practitioners
typically claim 3% to 7% incremental revenue gains due to revenue management activity.
In many industries this can equate to over 100% increase in profits. A competent revenue
management analyst with good decision support tools can generate $10,000 per hour.

Yield management has significantly altered the travel and hospitality industry since its
inception in the mid 1980s. It requires analysts with detailed market knowledge and
advanced computing systems who implement sophisticated mathematical techniques to
analyze market behavior and capture revenue opportunities. It has evolved from the
system airlines invented as a response to deregulation and quickly spread to hotels, car
rental firms, cruise lines, media, and energy to name a few. Its effectiveness in generating
incremental revenues from an existing operation and customer base has made it
particularly attractive to business leaders that prefer to generate return from revenue
growth and enhanced capability rather than downsizing and cost cutting

Airlines
In the passenger airline case, capacity is regarded fixed because changing what aircraft
flies a certain service based on the demand is the exception rather than the rule. When the
aircraft departs, the unsold seats cannot generate any revenue and thus can be said to have
perished. Airlines use special software to monitor how seats are being reserved and react
accordingly, for example by offering discounts when it appears that seats will remain
unsold.

Another way of capturing varying willingness to pay is to attempt market segmentation.

A firm may repackage its basic inventory into different products to this end. In the
passenger airline case this means implementing purchase restrictions, length of stay
requirements and requiring fees for changing or canceling tickets.

The airline needs to keep a specific number of seats in reserve to cater to the probable
demand for high-fare seats. The price of each seat varies inversely with the number of
4
seats reserved, that is, the more seats that are reserved for a particular category, the lower
the price of each seat. This will continue till the price of seat in the premium class equals
that of those in the concession class. Depending on this, a floor price (lower price) for the
next seat to be sold is set.

Hotels
Hotels use this system in largely the same way, to calculate the rates, rooms and
restrictions on sales in order to best maximize the return too. These systems measure
contrain and uncontrained along with pace to gauge which restrictions eg. length of stay,
non refundable rate, or close to arrival. Revenue Managers in the hotel industry have
evolved tremendously over the last 10 years and in this global economy targeting the
right distribution channels, controlling costs, and having the right market mix plays an
important role in Yield Management. Revenue management in hotels is selling rooms and
services at the right price, at the right time, to the right people.

Econometrics
Revenue Management econometrics centers on detailed forecasting and mathematical
optimization of marginal revenue opportunities. The opportunities arise from
segmentation of consumer willingness to pay. If the market for a particular good follows
the simple straight line Price/Demand relationship illustrated below, a single fixed price
of $50 there is enough demand to sell 50 units of inventory. This results in $2,500 in
revenues. However the same Price/Demand relationship yields $4,000 if consumers are
presented with multiple prices.

In practice the segmentation approach relies on adequate fences between consumers so

that everyone doesn't buy at the lowest price offered. The airlines use time of purchase to
create this segmentation, with later booking customers paying the higher fares. The
fashion industry uses time in the opposite direction, discounting later in the selling season
once the item is out of fashion or inappropriate for the time of year. Other approaches to
fences involve attributes that create substantial value to the consumer at little or no cost
to the seller. A backstage pass at a concert is a good example of this. Initially Revenue
Management avoided the complexity caused by the interaction of absolute price and price
5
position by using surrogates for price such as booking class. By the mid 1990s most
implementation incorporated some measures of price elasticity. The airlines were
exceptional in this case, preferring to focus on more detailed segmentation by
implementing O&D ( Origin and Destination ) systems.

At the heart of the Revenue Management decision making process is the trade-off of
marginal revenues from segments that are competing for the same inventory. In capacity
constrained cases there is a bird-in-the-hand decision that forces the seller to reject lower
revenue generating customers in the hopes that the inventory can be sold in a higher
valued segment. The trade-off is sometimes mistakenly identified as occurring at the
intersection of the marginal revenue curves for the competing segments. While this is
accurate when it supports marketing decisions where access to both segments is
equivalent, it is wrong for inventory control decisions. In these cases the intersection of
the marginal revenue curve of the higher valued segment with the actual value of the
lower segment is the point of interest.

In the case illustrated here, a car rental company must set up protection levels for its
higher valued segments. By estimating where the marginal revenue curve of the luxury
segment crosses the actual rental value of the midsize car segment the company can
decide how many luxury cars to make available to midsize car renters. Where the vertical
line from this intersection point crosses the demand (horizontal) axis determines how
many luxury cars should be protected for genuine luxury car renters. The need to
calculate protection levels has led to a number of heuristic solutions, most notable
EMSRa and EMSRb. The balancing point of interest is found by the equation

R2 = R1 * Prob(D1)

where R2 is the value of the lower valued segment R1 is the value of the higher valued
segment D1 is the demand for the higher valued segment

This equation is re-arranged to compute protection levels as follows:

6
D1 = Prob-1(R2 / R1)

In words, you want to protect D1 units of inventory for the higher valued segment where
D1 is equal to the inverse probability of demand of the revenue ratio of the lower valued
segment to the higher valued segment. This equation defines the EMSRa algorithm which
handles the two segment case. EMSRb is smarter and handles multiple segments by
comparing the revenue of the lower segment to a demand weighted average of the
revenues of the higher segments. Neither of these heuristics produces the exact right
answer and increasingly implementations make use of Monte Carlo simulation to find
optimal protection levels.

Since the mid 1990s increasingly sophisticated mathematical models have been
developed such as the dynamic programming formulation pioneered by Talluri and Van
Ryzin which has led to more accurate estimates of bid prices. Bid prices represent the
minimum price a seller should accept for a single piece of inventory and are popular
control mechanisms for Hotels and Car Rental firms. Models derived from developments
in financial engineering are intriguing but have been unstable and difficult to
parameterize in practice. Revenue management tends to focus on environments that are
less rational than the financial markets.

Yield management system

Firms that engage in yield management usually use computer yield management systems
to do so. The Internet has greatly facilitated this process. Enterprises that use yield
management periodically review transactions for goods or services already supplied and
for goods or services to be supplied in the future. They may also review information
(including statistics) about events (known future events such as holidays, or unexpected
past events such as terrorist attacks), competitive information (including prices), seasonal
patterns, and other pertinent factors that affect sales. The models attempt to forecast total
demand for all products/services they provide, by market segment and price point. Since
total demand normally exceeds what the particular firm can produce in that period, the
models attempt to optimize the firm's outputs to maximize revenue.

7
The optimization attempts to answer the question: "Given our operating constraints, what
is the best mix of products and/or services for us to produce and sell in the period, and at
what prices, to generate the highest expected revenue?"

Optimization can help the firm adjust prices and to allocate capacity among market
segments to maximize expected revenues. This can be done at different levels of detail:

 by goods (such as a seat on a flight or a seat at an opera production)

 by group of goods (such as the entire opera house or all the seats on a flight)
 by market (such as sales from Seattle and Minneapolis for a flight going Seattle-
Minneapolis-Boston)
 overall (on all the routes an airline flies, or all the seats during an opera
production season)
Yield management is particularly suitable when selling perishable products, ie goods that
become unsellable at a point in time (for example air tickets just after a flight takes off).
Industries that use yield management include airlines, hotels, stadiums and other venues
with a fixed number of seats, and advertising. With an advance forecast of demand and
pricing flexibility, buyers will self-sort based on their price sensitivity (using more power
in off-peak hours or going to the theater mid-week), their demand sensitivity (must have
the higher cost early morning flight or must go to the Saturday night opera) or their time
of purchase (usually paying a premium for the luxury of booking late).

In this way, yield management's overall aim is to provide an optimal mix of goods at a
variety of price points at different points in time or for different baskets of features. The
system will try to maintain a distribution of purchases over time that is balanced as well
as high.

Good yield management maximizes (or at least significantly increases) revenue

production for the same number of units, by taking advantage of the forecast of high
demand/low demand periods, effectively shifting demand from high demand periods to
low demand periods and by charging a premium for late bookings. While yield
management systems tend to generate higher revenues, the revenue streams tends to
8
arrive later in the booking horizon as more capacity is held for late sale at premium
prices.

Firms faced with lack of pricing power sometimes turn to yield management as a last
resort. After a year or two using yield management, many of them are surprised to
discover they have actually lowered prices for the majority of their opera seats or hotel
rooms or other products. That is, they offer far higher discounts more frequently for off-
peak times, while raising prices only marginally for peak times, resulting in higher
revenue overall.

By doing this, they have actually increased quantity demanded by selectively introducing
many more price points, as they learn about and react to the diversity of interests and
purchase drivers of their customers.

Ethical issues and questions of effectiveness

Yield Management is a form of price discrimination, and as such faces predictable
consumer resistance.

Some consumers are concerned that Yield Management could penalize them for
conditions which cannot be helped and are unethical to penalize. For example, the
formulas, algorithms, and neural networks that determine airline ticket prices could
feasibly consider frequent flyer information, which includes a wealth of socio-economic
information such as age and home address. The airline then could charge higher prices to
consumers who are between 30 and 65, or live in neighborhoods with higher average
wealth, even if those neighborhoods also include poor households. [1] Very few (if any)
airlines using Yield Management are able to employ this level of price discrimination
because prices are not set based on characteristics of the purchaser, which are in any case
often not known at the time of purchase.

Some consumers also object that it is impossible for them to boycott yield management
when buying some goods, such as airline tickets.

9
Yield Management also includes many noncontroversial and more prevalent practices,
such as varying prices over time to reflect demand. This level of Yield Management
makes up the majority of YM in the airline industry. For example airlines may make a
ticket on the Sunday after Thanksgiving more expensive than the Sunday a week later.
Alternatively, they may make tickets more expensive when bought at the last minute than
when bought six months in advance. The goal of this level of yield management is
essentially trying to get demand to equal supply.

When YM was introduced in the early 1990s, primarily in the airline industry, many
suggested that despite the obvious immediate increase in revenues, it might harm
customer satisfaction and loyalty, interfere with relationship marketing, and drive
customers from firms that used YM to firms that did not. To some extent, frequent flier
programs were developed as a response to regain customer loyalty and reward frequent &
high yield passengers. Today, YM is nearly universal in many industries, including
airlines.

Despite optimising revenue in theory, introduction of yield management can sometimes

fail to achieve this in practice because of corporate image problems. In 2002, Deutsche
Bahn, the German national railway company, experimented with yield management for
frequent loyalty card passengers. The fixed pricing model that had existed for decades
was replaced with a more demand-responsive pricing model, but this reform proved
highly unpopular with passengers, leading to widespread protests and a decline in
passenger numbers

10
 LITERATURE RIVIEW

Financial education or financial analysis has assumed greater importance in the recent
years, asfinancial
marketshavebecomeincreasinglycomplexandthereisalsoaninformationasymmetryleadingt
omaking
informedchoicesmoreandmoredifficultforthecommonperson.FinancialAnalysiscanbroadl
ybedefined
asprovidingthefamiliaritywithandunderstandingoffinancialmarketproducts,inordertomak
einformed
choices.Viewedfromthisstandpoint,financialanalysisprimarilyrelatestopersonalfinanciale
ducationto enableindividualstotakeeffectiveactionstoimproveoverallwell-
beingandavoiddistressinfinancial matters.OrganizationforEconomicCo-
operationandDevelopment(OECD)hasdefinedfinancialeducation
as“theprocessbywhichfinancialconsumers/investorsimprovetheirunderstandingoffinancia
lproducts,
conceptsandrisks,andthroughinformation,instructionand/orobjectiveadvice,developtheski
llsand
confidencetobecomemoreawareoffinancialrisksandopportunities,tomakeinformedchoices
,toknow wheretogoforhelp,andtotakeothereffectiveactionstoimprovetheirfinancialwell-
being”.Thus,
FinancialAnalysisistheabilitytogrow,monitor,andeffectivelyusefinancialresourcestoenhan
cethewell- beingandeconomicsecurityofoneself,one'sfamily,andone'sbusiness.

Recognizingtheneedforfinancialeducation,manycountries,bothdevelopedanddeveloping,
have
launchedfinancialeducationorfinancialanalysisprogramsfortheirpeople.TheOECDhasbro
ughtout
"RecommendationsonPrinciplesandGoodPracticesforFinancialEducationandAwareness",
whichis furnishedbelow:

1. Governmentsandallstakeholdersconcernedshouldpromoteunbiased,fairandcoord

11
 inated financialeducation.
2. Financialeducationshouldstartatschool,forpeopletobeeducatedasearlyaspossible.

3. Financial education should be part of the good governance of financial

institutionswhose accountabilityandresponsibilityshouldbeencouraged.
4. Financial education should be clearly distinguished from commercial advice;
codes of conductfor thestaffoffinancialinstitutionsshouldbedeveloped.
5. Financialinstitutionsshouldbeencouragedtocheckthatclientsreadandunderstandin
formation, especiallywhenrelatedtolong-
termcommitmentsorfinancialserviceswithpotentiallysignificant
financialconsequences;smallprintandabstrusedocumentationshouldbediscourage
d.
6. Financialeducationprogramsshouldfocusparticularlyonimportantlife-
planningaspects,suchas, basicsavings,debt,insuranceandpensions.
7. Programsshouldbeorientedtowardsfinancialcapacitybuilding,appropriatelytarget
edonspecific groups,andmadeaspersonalizedaspossible.
8. Futureretireesshouldbemadeawareoftheneedtoassessthefinancialadequacyoftheir
current publicandprivatepensionschemes.
9. Nationalcampaigns,specificwebsite,freeinformationservices,andwarningsystems
onhigh-risk issuesforfinancialconsumers(suchasfraud)shouldbepromoted.

Need for Financial Analysis

Financialanalysisisconsideredanimportantadjunctforpromotingfinancialinclusionand
ultimatelyfinancialstability.Bothdevelopedanddevelopingcountries,therefore,arefocusin
g onprogramsforfinancialanalysis.InIndia,theneedforfinancialanalysisisevengreater
consideringthelowlevelsofanalysisandthelargesectionofthepopulation,whichstillremains
out of the formal financial set-up. In the context of 'financial inclusion', the scope
offinancial analysis is relatively broader and it acquires greater significance since it
could be animportant
factorintheveryaccessofsuchexcludedgroupstoformalfinancialsystem.Further,theprocess
ofeducatingmayinvariablyinvolveaddressingdeepentrenchedbehavioralandpsychologica

12
l factors that could be major barriers. In countries with diverse social and economic
profilelike India,financialanalysisisparticularlyrelevantforpeoplewhoareresource-
poorandwho
operateatthemarginandarevulnerabletopersistentdownwardfinancialpressures.Withno
established banking relationship, the un-banked poor are pushed towardsexpensive
alternatives.Thechallengesofhouseholdcashmanagementunderdifficultcircumstanceswit
h few resources to fall back on, could be accentuated by the lack of skills or knowledge
tomake
wellinformedfinancialdecisions.Financialanalysiscanhelpthemprepareaheadoftimeforlif
e cycleneedsanddealwithunexpectedemergencieswithoutassumingunnecessarydebt.

13
 CONCEPTUAL DISCUSSION

“Investment” or “Investing”, like value is a word of many meanings. Evolution of new

investment concepts would result a dramatically change of the whole investment scene
over next few years. Basically, there are three concepts of investment:

1. Concept And Definition Of Working Capital

There are two concept of Working Capital : gross and net .
a) The term gross working capital , also referred to as working capital , means the total
current assets .
b) The net working capital can be defined in two ways :
1. The most common definition of net working capital ( NWC ) is the difference
between current assets and current liabilities ; and

2. Alternate definition of NWC is that portion of current assets which is financed with
long term funds .
The task of financing manager in managing working capital efficiently is to ensure
sufficient liquidity in the operations of the enterprise . Net working capital , as a measure
of liquidity is not very useful for comparing the performance of different firms , but it is
quite useful for internal control . The NWC helps in comparing the liquidity of the same
firm over time . For the purpose of working capital management , therefore , NWC can
be said to measure the liquidity of the firm . In the other words , the goal of working
capital management is to manage the current assets and liabilities in such a way that an
acceptable level of NWC is maintained .

2. Components Of Working Capital

The basic components of working capital are ,

Current Assets :

a) Inventories
i) Raw Materials and Components
ii) Work in Progress
iii) Finished Goods
14
 iv) Others
b) Trade Debtors
c) Loans And Advances
d) Investments
e) Cash And Bank Balance

Current Liabilities:

a) Sundry Creditors
b) Trade Advances
c) Borrowings
d) Commercial Banks
e) Provisions

3. Need For Working Capital

Given the objective of financial decision making to maximise the shareholders’ wealth , it
is necessary to generate sufficient profits . The extent to which profits can be earned will
naturally depend , among other things , upon the magnitude of sales . A successful sales
program is , in other words , necessary for earning profits by any business enterprise .
However , sales do not convert into cash instantly ; there is invariably a time lag between
sale of goods and the receipt of cash . There is therefore , a need for working capital in
the form of current assets to deal with the problem arising out of the lack of immediate
realisation of cash against goods sold . Therefore sufficient working capital is necessary
to sustain sales activity . Technically this is referred to s operating cycle . The operating
cycle can be said to be at the heart of the need for the working capital . In other words the
operating cycle refers to the length of time necessary to complete the following cycle of
events :
a) Conversion of cash into raw materials;
b) Conversion of raw materials to inventory ;
c) Conversion of inventory into receivables ;

15
d) Conversion of receivables into cash .
If it were possible to complete the sequences instantaneously , there would be no need for
current assets (working capital) . But since it is not possible , the firm is forced to have
current assets . Since the cash inflows and outflows do not match , firms have to
necessarily keep cash or invest in short term liquid securities so that they will be in
position to meet obligations when they become due . Similarly , firms must have
adequate inventory to guard against the possibility of not being able to meet demand for
their products . Adequate inventory , therefore, provides a cushion against being out of
stock . If firms have to be competitive , they must sell goods to their customer on credit
which necessitates the holding of accounts receivables . It is in these ways that an
adequate level of working capital is absolutely necessary for smooth sales activity which ,
in turn , enhances the owner’s wealth .

4. Characteristics Of Current Assets

In management of working capital two characteristics of current assets must be borne in
mind : a) short life span and b) swift transformation into other assets forms .
Current assets may have a short life. Cash balance may be held idle for a week or two,
account receivables may have a life span of 30 to 60 days , and inventories may be held
for 30 days to 100 days . The life span of current assets depend on the time required in
the activities of procurement , production , sales and collection and the degree of
synchronisation among them .
Each current asset is swiftly transformed into other assets forms : cash is used for
acquiring raw materials , raw materials are transformed into finished goods ( this
transform may involve several stages of work in progress ) ; finished goods , generally
sold on credit , are converted into accounts receivable , and finally account receivables on
reliasation , generate cash .
These two characteristics has certain implications ,
i) Decisions relating to working capital management are repetitive and frequent
ii) The difference between profit and present value is insignificant

16
 iii) The close interaction among working capital components implies that efficient
management of one component cannot be undertaken without simultaneous
consideration of other components .

5. Factors Affecting Working Capital

The working capital needs of a firm are influenced by numerous factors . The important
ones are
i) Nature of business : The working capital requirement of a firm is closely
related to the nature of business . A service firm , like electricity undertaking
or a transport corporation which has a short operating cycle and which sells
predominantly on cash basis , has a modest working capital requirement . On
the other hand , manufacturing concern like a machine tools unit , which has a
long operating cycle and which sells largely on credit has a very substantial
working capital requirement .
ii) Seasonality of Operation : Firms which have marked seasonality in there
operations usually have highly fluctuating working capital requirement . For
example , consider a firm manufacturing air conditioners . The sale of air
conditioners reaches the peak during summer months and drops sharply
during winter season . The working capital need of such a firm is likely to
increase considerably in summer months and decrease significantly during
winter period . On the other hand , a firm manufacturing consumer goods like
soaps , oil , tooth pastes etc. which have fairly even sale round the year , tends
to have a stable working capital need .
iii) Production Policy : A firm marked by pronounced seasonal fluctuation in its
sale may pursue a production policy which may reduce the sharp variations in
working capital requirements . For example a manufacturer of air conditioners
may maintain steady production through out the year rather than intensify the
production activity during the peak business season . Such decision may
dampen the fluctuations in working capital requirements .

17
 iv) Market Conditions : When competition is keen , larger inventory of finished
goods is required to promptly serve the customers who may not be inclined to
wait because other manufacturers are ready to meet their needs . Further
generous credit terms may have to be offered to attract customers in highly
competitive market . Thus , working capital needs tend to be high because of
greater investment in finished goods inventory and accounts receivable .
If the market is strong and competition is weak , a firm can manage with
smaller inventory of finished goods because customers can be served with
delay . Further in such situation the firm can insist on cash payment and avoid
lock up of funds in accounts receivables – it can even ask for advance
payment , partial or total .
v) Conditions of Supply : The inventory of raw material , spares and stores
depends on the conditions of supply . If supply is prompt and adequate , the
firm can manage with small inventories . However if the supply is
unpredictable and scant then the firm , to ensure continuity of production ,
would have to acquire stocks as and when they are available and carry large
inventories on an average . A similar policy may have to be followed when
the raw material is available only seasonally and production operations are
carried out round the year .

6. Operating Cycle Analysis

The Operating cycle of the firm begins with the acquisition of raw materials and ends
with the collection of receivables . It may be divided into four stages a) raw material and
stores storage stage , b) work-in-progress stage , c) finished goods inventory stage and
d) debtors collection stage .

18
Duration of operating cycle : The duration of operating cycle is equal to the sum of the
duration of each of these stages less the credit period allowed by the suppliers to the firms
. It can be given as
O=R+W+F+D–C
Where O = Duration of operating cycle
R = Raw material and stores storage period
W = Work-in-progress period
F = Finished goods storage period
D = debtors collection period
C = Creditors payment period

The components of Operating cycle may be calculated as follows ;

R = Average stock of raw materials and stores

Average raw material and stores consumption per day

W = Average Work-in-progress inventory

Average cost of production per day

F = Average Finished Goods Inventory

19
 Average cost of goods sold per day

D = Average books debts

Average credit sales pert day

C = Average trade creditors

Average credit purchase per day

7. Computation of Working capital

The two components of working capital (WC) are current assets (CA) and current
liabilities (CL) . They have a bearing on the cash operating cycle . In order to calculate
working capital needs, what is required is the holding period of various types of
inventories , the credit collection period and the credit payment period . Working capital
also depends on the budgeted level of activity in terms of productivity / sales . The
calculation of WC is based on the assumption that the productivity is carried on evenly
throughout the year and all costs accrue similarly . As the working capital requirements
are related to the cost excluding depreciation and not to the sale price , WC is computed
with reference to cash cost . The cash cost approach is comprehensive and superior to the
operating cycle approach based on holding period of debtors and inventories and payment
period of creditors .

Estimation of Current Assets –

Raw Material Inventory : The investment in raw materials inventory is estimated on the
basis of ,

Raw material inventory = Budgeted Cost of raw Average inventory

20
 Production X material(s) X holding period
( in units ) per unit ( months/days )
12 months / 365 days

Work-in-Progress (WIP) Inventory : The relevant costs to determine WIP inventory

are the proportionate share of cost of raw materials and conversion costs ( labour and
manufacturing overhead costs excluding depreciation ). In case of full unit of raw
material is required in the beginning the unit cost of WIP would be higher , i.e. , cost of
full unit + 50% of conversion cost , compared to the raw material requirement throughout
the production cycle ; WIP is normally equivalent to 50% of total cost of production.
Symbolically ,
Budgeted Estimated Average time span
Production X WIP cost X of WIP inventory
( in units ) per unit ( months / days )
12 months / 365 days

Finished Goods Inventory : Working capital required to finance the finished goods
inventory is given by factor as below

Budgeted Cost of goods produced Finished goods

Production X per unit ( excluding X holding period
( in units ) depreciation ) ( months / days )
12 months / 365 days

Debtors : The WC tied up in debtors should be estimated in relation to total cost price
(excluding depreciation) , symbolically

21
 Budgeted Cost of sales per Average debt
Credit sale X unit excluding X collection period
( in units ) depreciation ( months / days )
12 months / 365 days

Cash and Bank Balances : Apart from WC needs for financing inventories and debtors
, firms also find it useful to have some minimum cash balances with them . It is difficult
to lay down the exact procedure of determining such an amount . This would primarily
based on the motives for holding cash balances of the business firm , attitude of
management toward risk , the access to the borrowing sources in times of need and past
experience , and so on .

Estimation of Current Liabilities –

The working capital needs of business firms are lower to that extent such needs are met
through the current liabilities ( other than bank credits ) arising in the ordinary course of
business . The important current liabilities ( CL ) , in this context are , trade creditors ,
wages and overheads :

Trade Creditors :
Budgeted yearly Raw material Credit period
Production X requirement X allowed by creditors
( in units ) per unit ( months / days )
12 months / 365 days
Note : proportional adjustment should be made to cash purchase of raw materials.

22
Direct Wages :
Budgeted yearly Direct Labour Average time-lag in
Production X cost per unit X payment of wages
( in units ) ( months / days )
12 months / 365 days

The average credit period for the payment of wages approximates to a half-a-month in the
case of monthly wage payment: The first days’ wages are , again , paid on the 30 th day of
the month , extending credit for 28 days and so in . Average credit period approximates to
half-a-month .

Overheads ( Other Than Depreciation and Amortisation )

Budgeted yearly Overhead Average time lag in

Production X cost per unit X payment of overheads
( in units ) ( months / days )
12 months / 365 days

The amount of overheads may be separately calculated for different types of overheads .
In case of selling overheads , the relevant item would be sales volume instead of
production volume .

8. Trade-Off Between Profitability and Risk

In evaluating firm’s net working capital position an important consideration is the trade-
off between profitability and risk . In other words , the level of NWC has a bearing on
profitability as well as risk . The term profitability used in this context is measured by
profit after expenses . The term risk is defined as the profitability that a firm will become
technically insolvent so that it will not be able to meet its obligations when they become
due for payment .

23
The risk of becoming technically insolvent is measured using NWC . It is assumed that
the greater the amount of NWC , the less risk prone the firm is . Or , the greater the NWC
, the more liquid is the firm and , therefore , the less likely it is to become technically
insolvent . Conversely , lower level of NWC and liquidity are associated with increasing
level of risk . The relationship between liquidity , NWC and risk is such that if either
NWC or liquidity increases , the firms risk decreases .

Nature of Trade-Off :
If a firm wants to increase its profitability , it must also increase its risk . If it is to
decrease risk , it must decrease profitability . The trade-off between these variables is that
regardless of how the firm increases profitability through the manipulation of WC , the
consequence is a corresponding increase in risk as measured by the level of NWC .
In evaluating the profitability-risk trade-off related to the level of NWC , three basic
assumptions which are generally true , are a) that we are dealing with a manufacturing
firm , b) that current assets are less profitable than fixed assets and c) the short term funds
are less expensive than long term funds .

Effect of the Level of Current Assets on the Profitability-Risk Trade-Off :

The effect of the level of current assets on profitability-risk and trade-off can be shown
using the ratio of current assets to total assets . This ratio indicates the percentage of total
assets that are in the form of current assets . A change in the ratio will reflect a change in
the current assets . It may either increase or decrease .

Effect of Increase / Higher Ratio

An increase in the ratio of current assets to total assets will lead to a decline in
profitability because current assets are assumed to be less profitable than fixed assets . A
second effect of the increase in the ratio will be that the risk to technical insolvency
would also decrease because the increase in current assets , assuming no change in
current liabilities, will increase NWC .

24
Effect of Decrease / Lower Ratio
A decrease in the ratio of current assets to total assets will result in an increase in
profitability as well as risk . The increase in profitability will primarily be due to the
corresponding increase in fixed assets which are likely to generate higher returns. Since
the current assets decrease without a corresponding reduction in current liabilities, the
amount of NWC will decrease, thereby increasing risk.

Effect of Change in Current Liabilities on Profitability-Risk Trade-off :

As in the case of current assets, the effect of change in current liabilities can also be
demonstrated by using the ratio of current liabilities to total assets. This ratio will indicate
the percentage of total assets financed by current liabilities.
The effect of change in level of current liabilities would be that the current liabilities-total
assets ratio will either a) increase or b) decrease .

Effect of an Increase in the Ratio

One effect of the increase in the ratio of current liabilities to total assets would be that
profitability will increase. The reason for the increased profitability lies in the fact that
current liabilities, which are a short term sources of finance will be reduced. As short
term sources of finance are less expensive than long-run sources, increase in ratio will, in
effect, means substituting less expensive sources for more expensive sources of
financing. There will, therefore, be a decline in cost and a corresponding rise in
profitability.
The increased ratio will also increase the risk. Any increase in the current liabilities,
assuming no change in current assets, would adversely affect the NWC. A decrease in
NWC leads to an increase in risk. Thus, as the current liabilities-total assets ratio
increases, profitability increases, but so does risk.

Effect of a Decrease in the Ratio

The consequences of a decrease in the ratio are exactly opposite to the results of an
increase. That is, it will lead to a decrease in profitability as well as risk. The use of more
long term funds which, by definition, are more expensive will increase the cost; by

25
implication profits will also decline. Similarly, risk will decrease because of the lower
level of current liabilities on the assumption that current assets remains unchanged.

Combined Effect of Changes in Current Assets and Current Liabilities on Profitability-

Risk Trade-off:

The combined effects of changes in current assets and current liabilities can be measured
by considering them simultaneously. We have seen the effect of decrease in the current
assets-total assets ratio and effect of an increase in the current liabilities-total assets ratio.
These changes, when considered independently, lead to an increased profitability coupled
with a corresponding increase in risk. The combined effect of these changes should,
logically, be to increase over all profitability as also risk and at the same time decrease
NWC.

RM works on the fundamental concepts of market segmentation and price discrimination.

Purchase regulations and refund requirements help to segment the market. For example,
higher fares may be fully or partially refundable and purchasable at all times whereas
lower fares are non-refundable and must be purchased a number of days in advance.
Price-sensitive customers are willing to put up with the lower flexibility & have lesser
assessment for service while those who have higher assessment for the service are willing
to pay more. In airlines and hotels, business travelers constitute price-insensitive market
segment and leisure travelers form the price-sensitive market segment.
Price discrimination helps industries to achieve objective of increasing revenues in two
ways. By charging premium prices to the less price sensitive market segments, the
industry can extract greater revenue; at the same time charging discounted prices to a
price sensitive market segment results in increased consumption of the service that offsets
the price reduction.
Occasionally, a time element is added to the pricing of a service. Demand is managed by
elevating prices during intensive demand and offering discounts during moderate
demand. Types of discount vary among industries. In airlines and hotels, discounts are
offered for early bookings, including typically group bookings, as well as travel during

26
off-peak days and hours. In telecommunication industries, rates are reduced for long
distance calls on nights and weekends.

Demand Forecasting

After segmenting the market and defining the price structure for each segment, other
essentials of RM come in to play. Demand forecasting is first of these essentials. Demand
is forecasted with the help of historical data of demand patterns for the particular service.
Usually, demand exhibits definite patterns such as trends and cycles. For example
demand may vary by time of day, day of week or season of year. These demand patterns
can be used to predict the potential future demand in each market segment.
In airline, car rental and hotel industry, little information is available for millions of
customers. Hence they use statistical techniques for demand forecasting. Media
broadcasters on the other hand have detailed knowledge of their customers since they
usually number in the hundreds. Therefore, they estimate the demand for commercial
spots during various shows by monitoring historical buying patterns of customers.

Inventory Allocation
The next step is to allocate inventory amongst the market segments. As stated earlier,
industries such as airlines, hotels, car rental companies and

Broadcasters sell their inventory at premium and concession prices. Typically price-
sensitive customers book early while the demand for premium inventory arrives late.
Therefore industries, which practice RM, need to set a booking limit to restrict maximum
amount of inventory to be sold at concession price. If this limit is set too high, the
industry may suffer an opportunity loss by being forced to turn away some of their
premium customers; if it is too low, some inventory may remain unsold.
One way of defining the booking limit is based on the expected marginal revenue
generated from selling an additional unit of inventory. Industries define floor price, which
is the lowest adequate price for next additional unit to be sold. This floor price is derived
by using value of the expected marginal revenue of the last unit of inventory. The sale is
acceptable as long as requested price is above expected marginal revenue floor price.
27
Overbooking
Another important element of the revenue management is the use of overbooking when
there is a chance that a customer may not appear. Capacity-constrained industries
overbook to redeem for customer cancellations and no-shows. For this reason, it is
obligatory to forecast cancellations and no-shows . Insufficient overbooking results in
unsold inventory; on the other hand excessive overbooking results in penalty cost which
includes both the financial remuneration given to bumped customers and the prospective
loss of future revenue due to customer dissatisfaction. The optimal level of overbooking
is where the anticipated cost of overbooking for the next unit to be sold is equal to the
expected marginal revenue from that unit.

28
 CHAPTER 2
RESEARCH METHODOLOGY

Research objective:

 Analyze the role of cultural, social, and emotional influences on financial

behavior.
 Define a rational decision--‐making process and the steps of financial planning
and revenue management
 To study about Clarity of financial concepts and revenue management
 How to Making better financial decisions as well as revenue management
 Accessing financial products & services Building assets
 Overcoming vulnerability
 Planning towards economic security

3. RESEARCH METODOLOGY
Research always starts with a question or a problem. Its purpose is to question
through the application of the scientific method. It is a systematic and intensive study
directed towards a more complete knowledge of the subject studied.
Marketing research (MR) is the function which links the consumer, customer and
public to the marketer through information- information used to identify and define
marketing opportunities and problems generate, refine, and evaluate marketing actions,
monitor marketing actions, monitor marketing performance and improve understanding
of market as a process. Marketing research specifies the information required to address
these issues, designs, and the method for collecting information, manage and
implemented the data collection process, analyses the results and communicate the
findings and their implication
Marketing Research is, thus, defined as, the systematic, objective and exhaustive
search for and study of the facts relating to any problem in the field of marketing.

29
 “American Marketing Association”, defines MR as the systematic gathering,
recording and analyzing of data about problems relating to the marketing of goods and
services.
Thus, three key ideas regarding marketing research are:-
i. Marketing research is concerned with studying any of the manifold
problems in marketing.
ii. Its purpose is to aid decision-making in the marketing field.
iii. Systematic gathering and analysis of information is its route in
achieving its purpose.

Types of research:-
a. Qualitative MR:
 It is used in exploratory research work.
 Expresses and summarizes data non-numerically/qualitatively.
 Tackles a limited number of respondents.
 It involves in-depth probe.
 It involves non-structured questioning/observation
 Is the soft version of MR.
 Provides insights on marketing problems.
 Final course of action cannot depend on its findings.
b. Quantitative MR:
My project work is concerned with this type of research. It has the following
features:-
 It is used more in conclusive research projects.
 Expresses and summarizes data numerically/qualitatively.
 Tackles a large number of respondents; often amounts to large-scale
surveys.
 It involves limited probe with limited questions.
 It involves structured questioning/observation
 Is the hard version of MR.
 Provides hard facts on marketing problems.

30
  Final course of action can depend on its findings

3.2 Data Collection Method:.

3.1.1 Primary data:
It is original data, first hand and for the specific purpose of the
research project. For this project, I have used the following common research
instrument:-
 Questionnaire:
Questionnaire development is the critical part of primary data
collection job. For this I have prepared a questionnaire in such away that it is able
to collect all relevant information regarding the project.
In this questionnaire, I have used mostly close-ended questions that are
easier to be answered by respondents (consumers) and also easier for
interpretation and tabulation & one open-ended question to take the opinion of the
respondents in their own words. The questions were asked to the consumers
covering perception towards their purchase, price of the product, purpose for
using the product, characteristic of the product, brand image, effectiveness of the
advertisements, sales promotional activities, overall opinion about the product,
etc.
For collecting the answers from the above questionnaire, I have used
the following common method:-
 Interview:
It is the most common method for contacting consumers & collecting
primary data. For this project I have used following type of interview:-
 Personal interview:
It is the most extensively used method. It enables better control of the
sample and ensures answers from the respondents. It also provides for a tactful
approach to the respondent since it is based on a person-to-person talk. But this
method is generally more expensive and time consuming.

31
 For this project each interview was taking 15 to 20 minutes to
complete. Interview was also delayed due to un-availability of respondent in
house.

3.1.2 Secondary data.

It was collected to add the value to the primary data. Data regarding
IMRB, International (Indian Marketing Research Bureau) history, its profile and
other necessary records and information was collected by referring to website,
magazines, annual reports, reference books, daily newspapers, etc.

3.2 Sample design:

3.2.1 Sample Unit:-
For studying consumer behaviour of samples were selected from Pune
city.
3.2.2 Sample size:-
Sr. no. Respondent Number of respondents
1. Mobile Users 50

3.2.3 Sample procedure:-

Only those respondents are included in samples, who are traders of
Reliance. These respondents are questioned thoroughly.
3.2.4 Sample media:-
The respondents in the samples are reached through personal interviews.

3.3 Sampling methods:

Sampling methods fall under two broad categories:
A. Non-probability sampling methods:-
a) Convenience sampling.
b) Judgement sampling.
c) Quota sampling.
32
 d) Panel sampling.
B. Probability/random sampling methods:-
a) Simple random sampling.
b) Stratified sampling.
c) Systematic random sampling.
d) Area sampling.
For this project I followed random sampling method. In this method
sample units are selected at random. From random sampling method I selected
area sampling method. Area sampling is a form of stratified sampling. In this
case, the stratification is based on the criterion of locations. This method selects
the sample units in several stages. At each stage a series of intermediary
geographical blocks are randomly selected. It is from within these blocks, that the
sample units are then selected at random.
Before., North, South, East, West. Out of four zones any one zone was
selected. From that zone any one street was selected. After selecting the street,
right-hand rule is followed i.e. the outlet coming to right side are selected. Then
interview is started.

3.4 Sample Size:

3.5 Sample Design:
I have prepared this project as descriptive type, as the objective of the study.

3.6 Methods of data analysis and statistical Techniques :

Different types of data analysis techniques used in the research project should be
specifically mentioned. Such as:
 Current ratio
 Liquid ratio
 Debt equity ratio
 Net profit margin ratio
 Earning retention ratio
 Earning per share

33
  Assets turnover ratio
 Fixed charges coverage ratio
 Capital adequacy ratio

What is Research Methodology?

RESEARCH METHODOLOGY is a way of systematically solve the research

problem.
It may be understood as a science of studying how research is done scientifically.
In it we study the various steps that are generally adopted by a researcher in
studying his research problem along with the logic behind them. It is necessary for
the researcher to know not only research methods /techniques how to calculate the
mean , mode, median or standard deviation or chi-square , how to apply particular
research techniques , but they also need to know which of these are methods or
techniques , are relevant and which are not , and what would they mean and indicate
and why.reseachers also need to understand the assumptions underlying various
techniques and they need to know the criteria by certain problems and others will not
.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.

SOURCE AND METHODS OF DATA COLLECTION

Source of data collection:

There are two types of data collection:

1) Primary data collection

34
2) Secondary data collection.

Primary Data Collection:

Primary data is generated by the students or the researcher for the preparation of
the project and used by the student immediately for collecting data .He / She can use
various methods namely;

1) Observation

2) Survey

3) Personal Interview

4) Questionnaire

Secondary Data Collection:

Secondary data means data that are already available i.e. they refer to the data which have
already have been collected and analyzed by someone else. I have collected secondary data
from …..

Sources for collection of secondary data are,

1) Books from library

2) Internet

3) Report Brouchers

4) Leaflet.

35
 Descriptive research is those studies which are concerned with describing the
characteristics of a particular individual, or group.

Limitation of the study

While conduction the research time management can be a limitation as this was an
analysis of the company. It is a vast sector and the Indian market is very huge so, in
order to complete the research on schedule time management was very important. The
time taken to conduct the paper including preparation, research, analyses findings and
drawing conclusions was excessive.

The questioner part was also challenging as selecting a group of 100+ people with
different background was essential for the research and analyses the market from
different viewpoints. It was felt that the sample size was needed in order to get a broad
understanding of the area would be 100+ , if this was not achieved the sample may
become insufficient.

There was some difficulties because of the language barrier but as most of the Indian
people understand and speaks English language that was not that difficult.

36
 CHAPTER 3
DATA ANALYSIS AND FINDING

1.CURRENT RATIO

Current ratio is an indicator of firm’s commitment to meet its short term

liabilities. Current ratio is an index of the concern’s financial stability since it
shows the extent of the working capital which is the assets exceeds the
current liabilities. As stated earlier a higher current ratio would indicate
inadequate employment of funds while a poor current ratio is a danger signal
the management.
It shows the business is trading beyond its sources. The idea ratio is 2:1.

Current ratio = Current Assets / Current Liabilities

CURRENT RATIO (Table 3.1)

YEAR CURRENT RATIO

2013 0.07

2014 0.05

2015 0.04

2016 0.05

37
 CURRENT RATIO
0.08

0.07

0.06

0.05

0.04
CURRENT RATIO
0.03

0.02

0.01

0
2013 2014 2015 2016

Fig No.3.1

Sources: Secondary Data

INTERPRETATION:

The ideal current ratio is 2:1

From the above calculation it is inferred that current assets for meeting
current liabilities are more during the year 2013 and later starts decreasing
during the year 2014 and 2015. But, later it starts increasing during the year
2016 which shows that current assets are more than current liabilities.

38
 2. LIQUIDRATIO OR CASH POSITION RATIO

Liquid Ratio is also known as Acid test ratio. This is the ratio of liquid assets
and liquid liabilities. The liquid assets are the assets that are converted into
cash and include cash balances, bills receivables, Debtors and short term
investments. Inventory and prepaid expenses are not including in liquid ratio.
Liquid liability includes all liability except BPS Pvt.Ltd over draft the ideal
ratio is 0.5:1.

Liquid Ratio = Liquid Assets / Liquid Liabilities

LIQUID RATIO (Table No.3.2)

YEAR LIQUID RATIO
2013 6.57
2014 11.04
2015 13.25
2016 15.28

39
 LIQUID RATIO
18

16

14

12

10

8 LIQUID RATIO

0
2013 2014 2015 2016

Fig No.3.2

Sources: Secondary Data

INTERPRETATION
The ideal liquid ratio is 1:1

From the above said table reveals that the liquid ratio during the year 2013- 2016
generally shows increasing trend. Liquid assets are sufficient to meet the current
liabilities. This shows the liquid position of assets is found to be very good.

40
 3. DEBT-EQUITY RATIO
This ratio is ascertained to determine long- term solvency position of a
company. Debt equity ratio is also called “external internal equity ratio” . The
ratio is calculated to measure the relative portion of outsider‟s funds and
shareholders‟ funds invested in the company. The best equity ratio shows the
long- term financial position of an organization. A lower debt equity ratio
implies that a company as a better capacity to meet in commitments.

Debt Equity Ratio = Long – Term Debts / Shareholders Funds

DEBT-EQUITY RATIO (Table No.3.3)

YEAR DEBT EQUITY RATIO

2013 15.66

2014 11.65

2015 11.99

2016 9.08

41
 DEBT
-EQUITY RATIO
18

16

14

12

10

8 DEBT-EQUITY RATIO

0
2013 2014 2015 2016

Fig No.3.3

Sources: Secondary Data

INTERPRETATION

An ideal debt equity ratio is “1”

From the above calculation it is observed that debt equity ratio is

declined during the year 2014 and later it starts increasing during the year
2015 and atlast it decreased in the year 2016. This reveals that the debt is
less when compared the owners fund in the year 2016.

42
 4. NET PROFIT MARGIN RATIO

Net profit margin (or profit margin, net margin,return on revenue) is a ratio of
profitability calculated as after-tax net income (net profits) divided by sales
(revenue). Net profit margin is displayed as a percentage. Net profit margin is
a key ratio of profitability. It is very useful when comparing companies in
similar industries. A higher net profit margin means that a company is more
efficient at converting sales into actual profit.

Net Profit Margin Ratio = Profit (After Tax) / Revenue

NET PROFIT MARGIN RATIO (Table No.3.4)

YEAR NET PROFIT MARGIN RATIO

2013 6.77

2014 8.48

2015 9.56

2016 10.08

43
 NET PROFIT MARGIN RATIO
12

10

6
NET PROFIT MARGIN RATIO

0
2013 2014 2015 2016

Fig No.3.4

Sources: Secondary Data

INTERPRETATION
From the above said table it is revealed that during the year 2013
there is a low net profit ratio and there is a upward trend in the net profit
ratio which shows the BPS Pvt.Ltd is earning more profits in the years
2015 and 2016 when compared to the previous year

44
 5. EARNING RETENTION RATIO

Earning Retention Ratio is also called as Plowback Ratio. As per definition,

Earning Retention Ratio or Plowback Ratio is the ratio that measures the
amount of earnings retained after dividends have been paid out to the
shareholders. The prime idea behind earnings retention ratio is that the more
the company retains the faster it has chances of growing as a business. There
is always a conflict when it comes to calculation of Earnings retention ratio,
the managers of the company want a higher earnings retention ratio or
plowback ratio, while the shareholders of the company would think
otherwise, as the higher the plowback ratio the uncertain their control over
their shares and finances are. This ratio shows the amount that has been
retained back into the business for the growth of the business and not being
paid out as dividends. The investors prefer to have a higher retention ratio in
a fast growing business, and lower retention ratio in a slower growing
business.

Earnings Retention Ratio = Retained Earnings /

Net Profit After tax and Preference Dividend *
100

EARNING RETENTION RATIO (Table No.3.5)

YEAR EARNING RETENTION RATIO

2013 86.97

2014 85.51

2015 86.11

2016 82.53

45
 EARNING RETENTION RATIO
88

87

86

85

84
EARNING RETENTION RATIO
83

82

81

80
2013 2014 2015 2016

Fig No.3.5

Sources: Secondary Data

INTERPRETATION
From the above calculation it is analyzed that during the year 2013,
earning retention ratio is increased to 86.97 and in 2014 it is declined to
85.51 and in the year 2015 it is increased to 86.11 and in the year 2016 it is
decreased to 82.53. it indicates that the BPS Pvt.Ltd is not following
uniform policy in retaining the funds.

46
 6. EARNINGS PER SHARE

EPS measures the profit available to the equity shareholders on a per share
basis, that is, the amount that they can get on every share held. It is calculated
by dividing the profits available to the equity shareholders are represented by
net profits after taxes and preference dividend. Thus,

EPS = Net Profit available to equity-holders / Number of Ordinary Shares

outstanding

EPS is a widely used ratio. Yet, EPS as a measure of profitability of a firm

form the owner‟s point of view should be cautiously as it does not recognize
the effect of increase in equity capital as a result of retention of earnings.

EARNINGS PER SHARE (Table No.3.6)

YEAR EARNINGS PER SHARE

2013 18.40

2014 20.19

2015 26.34

2016 30.40

47
 EARNINGS PER SHARE
35

30

25

20

EARNINGS PER SHARE

15

10

0
2013 2014 2015 2016

Fig No. 3.6

Sources: Secondary Data

INTERPRETATION
From the above said table it is observed that during the year 2013, the
earnings per share is decreasing and later it starts increasing. In other words,
the EPS has increased over the years. It shows that the firm‟s profitability
has improved.

48
 7. ASSETS TURNOVER RATIO

Asset turnover (total asset turnover) is a financial ratio that measures the
efficiency of a company's use of its assets to product sales. It is a measure of
how efficiently management is using the assets at its disposal to promote
sales. The ratio helps to measure the productivity of a company's assets.

Assets Turnover = Revenue / Average Total Assets OR

In Days = 365 / Assets Turnover

The numerator of the asset turnover formula shows revenues which are found
on a company's income statement(statement of comprehensive income) and
the denominator shows total assets which is found on a company's balance
sheet (statement of financial position). Asset turnover is afinancial ratiothat
measures the efficiency of a company's use of itsassetsin generating sales
revenue or sales income to the company. Companies with low profit margins
tend to have high asset turnover, while those with high profit margins have
low asset turnover.

ASSETS TURNOVER RATIO (Table No. 3.7)

YEAR ASSETS TURNOVER RATIO

2013 0.10

2014 0.09

2015 0.10

2016 0.11

49
 ASSETS TURNOVER RATIO
0.12

0.1

0.08

0.06
ASSETS TURNOVER RATIO

0.04

0.02

0
2013 2014 2015 2016

Fig No.3.7

Sources: Secondary Data

INTERPRETATION
From the above calculation it is obtained that the ratio during the year
2013, it is increased and later it starts diminishing during the year 2014 and
the next year 2015 and 2016 it begins increasing which indicates that there is
an efficient utilization of assets of a business concern.

50
 8. FIXED CHARGES COVERAGE RATIO

A ratio that indicates a firm's ability to satisfy fixed financing expenses, such
as interest and leases. It is calculated as the following:

Fixed Charges Coverage Ratio = EBIT + Fixed Charge (before tax) /

Fixed Charge (before tax) + Interest

FIXED CHARGES COVERAGE RATIO (Table No.3.8)

YEAR FIXED CHARGES COVERAGE RATIO

2013 1.23

2014 0.32

2015 0.30

2016 0.28

51
 FIXED CHARGES COVERAGE RATIO
1.4

1.2

0.8
FIXED CHARGES COVERAGE
0.6 RATIO

0.4

0.2

0
2013 2014 2015 2016

Fig No.3.8

Sources: Secondary Data

INTERPRETATION
From the above calculation it is inferred that during the year 2013 the fixed

charges coverage ratio is high and later it started declining. It shows the
firm‟s inability to satisfy fixed financing expenses.

52
 9. CAPITAL ADEQUACY RATIO

According to the present norm, the Capital Adequacy Ratio of BPS Pvt.Ltd as
defined earlier should be at least 9%. Capital Adequacy Ratio (CAR), also
called Capital to Risk (Weighted) Assets Ratio (CRAR), is aratioof aBPS
Pvt.Ltd'scapitalto itsrisk.National regulatorstrack a BPS Pvt.Ltd's CAR to
ensure that it can absorb a reasonable amount of loss and complies with
statutoryCapital requirements.
Capital adequacy ratios (CARs) are a measure of the amount of a BPS
Pvt.Ltd'score capitalexpressed as apercentageof itsrisk-weighted asset.
Capital adequacy ratio is defined as:

TIER 1 CAPITAL - (paid up capital + statutory reserves + disclosed free

reserves)

- (equity investments in subsidiary + intangible assets + current & b/f losses)

TIER 2 CAPITAL -A) Undisclosed Reserves, B) General Loss reserves, C)

hybrid debt capital instruments and subordinated debts whereRiskcan either
be weightedassets( ) or the respectivenational regulator'sminimum
totalcapitalrequirement. If using risk weightedassets,

The percent threshold varies from BPS Pvt.Ltd to BPS Pvt.Ltd (10% in this
case, a common requirement for regulators conforming to theBasel Accords)
is set by the national BPS Pvt.Ltding regulator of different countries.

Two types of capital are measured:tier one capital( above), which can
absorb losses without aBPS Pvt.Ltdbeing required to cease trading, andtier
two capital( above), which can absorb losses in the event of a winding-
up and so provides a
lesser degree of protection to depositors.

Capital adequacy ratio is the ratio which determines the BPS Pvt.Ltd's
capacity to meet the time liabilities and other risks such ascreditrisk,

53
operational risk etc. In the most simple formulation, a BPS Pvt.Ltd's capital is
the "cushion" for potential losses, and protects the BPS Pvt.Ltd's depositors
and other lenders.BPS Pvt.Ltding regulatorsin most countries define and
monitor CAR to protect depositors, thereby maintaining confidence in the
BPS Pvt.Ltding system.

CAR is similar toleverage; in the most basic formulation, it is

comparable to theinverseofdebt-to-equityleverage formulations
(although CAR uses equity overassetsinstead ofdebt-to-equity;
sinceassetsare by definition equal todebtplus equity, a transformation is
required). Unlike traditionalleverage, however, CAR recognizes
thatassetscan have different levels ofrisk.

Capital Adequacy Ratio = (Tier I Capital + Tier II Capital) /

Risk Weighted Assets (RWA)

CAPITAL ADEQUACY RATIO (Table No.3.9)

YEAR CAPITAL ADEQUACY RATIO

2013 11.65

2014 14.91

2015 12.94

2016 14.00

54
 CAPITAL ADEQUACY RATIO
16

14

12

10

8
CAPITAL ADEQUACY RATIO
6

0
2013 2014 2015 2016

Fig No.3.9

Sources: Secondary Data

INTERPRETATION
From the above said table it is inferred that during the year 2013, the
capital adequacy ratio is 11.65 and in the year 2014 it is increased to 14.91 in
the year 2015 it is diminished to 12.94 and in the year 2016 it is increased to
14.0. It shows that the capital adequacy ratio is not stable it is fluctuating
and in the year 2016 the capital adequacy ratio is 14. It indicates that BPS
Pvt.Ltd has a capacity to meet the liabilities and other risks.

55
 FINDINGS, CONCLUSION AND RECOMMENDATION
FINDINGS
The important findings recorded in this research report are consolidated as
follows:

 On comparative study of current ratio and liquid ratio it is observed

that there is an adequate current assets and liquid assets to meet the
current obligations, and it is revealed that the firm is in a good
liquidity position.
 The debt equity ratio is declining from the year 2013 to 2016 where it
is indicating the BPS Pvt.Ltd has lowered the investments in Long-
Term Debt.
 From the study, it is noted that there is a tremendous increase in the
net profit margin ratio which shows that the BPS Pvt.Ltd is earning
more profits.
 From the analysis of assets turnover ratio it is observed that the BPS
Pvt.Ltd has effective utilization of assets in the years 2015 and 2016
when compared to the previous years.
 The BPS Pvt.Ltd has effectively increased earnings per share over the
years, which indicates that BPS Pvt.Ltd profitability is very good and
it is a positive indicator for the equity shareholders and they will get
more earnings per share.
 The BPS Pvt.Ltd has negative effect on the earning retention ratio and
capital adequacy ratio which was fluctuating. The BPS Pvt.Ltd can
have a uniform retention policy of the profits.
 The fixed charges coverage ratio is dissatisfied, the BPS Pvt.Ltd is
unable to meet all fixed payment obligations in time. Hence the BPS
Pvt.Ltd can plan accordingly to suit the circumstance so as to meet the
fixed charges in time.

56
 CONCLUSION
Ratio Analysis is an important tool for the management of short term funds in an
organization. At BPS Pvt.Ltd., it can be seen that they are following a conservative policy
towards working capital management. According to the recent scenario in the market, this
is the right way to move because following a aggressive policy at this time would mean
an unfavorable situation for the company.

The Debt Equity Ratio for the last two years is considered to be satisfactory for the
shareholders because it indicates that the firm has not been able to use low-cost outsider’s
fund to magnify their earning. This ratio shows the solvency position is very good.
Net Profit Ratio indicates the efficiency of the management in manufacturing, selling,
administrative and other activities of the firm. The firm has .05 and .07 ratio in the year
2013-14 and 2015-16 respectively; it indicates the 0.2 increase in net profit ratio which
indicates the firm’s capacity to face adverse economic conditions such as price,
competition. It should be noted that the profits must also be seen in relation to investment
or capital of the firm and not only in relation to sales.

Talking about the net operating cycle, it can be concluded that the net operating cycle for
the year 2015-16 has come out to be 52.8 days which is definitely at a higher side and
therefore should be curtailed down. The high credit sales are the main reason for the high
operating cycle.
The calculation of the CMA forms shows that the MPBF level has increased as compared
to the last year which shows that the good market conditions has some impact on the
company’s credit worthiness, also the projections and estimates of future shows an all
together positive side.
It is found that the BPS Pvt.Ltd. has good liquidity position and the profit is high.

The company is a matured one and it has contributed well in the countries growth and
development and will also continue to perform and contribute to the whole nation. After
the in intra-firm analysis of BPS Pvt.Ltd, we found that in 2010cthe firm earns 28683
lacs rupees which is high in comparison to last two years. We found that the working

57
capital is positive which shows the current assets are more than the current liabilities. It
indicates the efficient utilization of working capital and management

58
 RECOMMENDATIONS

 The BPS Pvt.Ltd‟s current and liquid asset is sufficient to meet the
current liabilities of the BPS Pvt.Ltd which shows the sound liquid
position. This has to be maintained for the following years.

 The BPS Pvt.Ltd should make efforts to increase the earning retention
ratio for its further business growth and development.

 The BPS Pvt.Ltd has to take necessary steps to improve the capital
adequacy ratio.

 The debt capital is not utilized effectively and efficiently. So the BPS
Pvt.Ltd can extend its debt capital in the years to come.

 The BPS Pvt.Ltd earnings per share is tremendously increased and it

is advised that it should be continued for the following years.

59
 BIBLIOGRAPHY

BOOKS
 Financial Management, I. M. Pandey.
 Financial Management, Khan and Jain
 Company Annual reports of Uflex Ltd.
 Company Annual reports of competitors
o Cosmo Films Ltd.
o Polyplex Corporation Ltd.
o Jindal Polyfilms Ltd.
o Paper Products Ltd.

WEB SOURCES
 www.BPS Pvt.Ltd.com
 www.indiainfo.com
 www.advfn.com

60