Divyesh Report

A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF AUSTIN ENGENEERING COMPANY
Submitted to
Dr.J.K.PATEL INSTITUTE OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION Under Gujarat Technological University UNDER THE GUIDANCE OF Faculty Guide Prof. Amita Garg Submitted by: Divyesh C. Mungara Enrollment No: 107920592056 M.B.A I Sem- 3rd DR.J.K.PATEL INSTITUTE OF MNGT.VADODARA M.B.A PROGRAMME Affiliated To Gujarat Technology University Ahmedabad July-2010-2012 Company Guide Amit joshi
Dr.J.K.Patel Institute of Mngt.
PREFACE
There is an ancient proverb practice makes a man perfect. It indicates practice makes the person more practical and provide a training and knowledge .Practical knowledge is must for any field to have the practical knowledge and have proposed my project work on Austin Engineering Co. Industrial training makes perfect in term how, when and where the theorical knowledge is useful to save the business problem. This report is a reflection of what I observed & come to know during my training to this industry
ACKNOWLEDGEMENT
The successful and timely completion of this training would not have been possible without the kind co-operation and support of the various department heads of the AUSTIN ENGINERING COMPANY LIMITED, who co-operatively provided the honest information . Let me begin my acknowledgement by thinking the whole staff of AUSTIN ENGINERING COMPANY LIMITED, for the co operation and the support during our summer project. Mr.AMIT JOSHI I am very grateful to all the faculties of my college because they also give the right guidance. They have always been a source of inspiration and I would like to thank them for all their support and care in their efforts towards the summer internship and the project which was our part of summer training.
Thanking You, Date: 15th July 2010 Place: Junagadh Yours Faithfully, (Divyeshmungara)
DECLARATION
I, Divyesh C mungara, here by declare that the report for Summer Training Project entitled AUSTIN ENGINERING COMPANY LIMITED is a result of my own work and my indebtedness and other work publication reference, if any, have been duly acknowledged.s
Place: Date:
sign:
INDEX
S.NO
PARTICULARS
PAGE NO 6 7 8 23 28 29 30 33 46 76 77 78 79
1 2 3 4 5 6 7 8 9 10 11 12 13
EXECUTIVE SUMMARY LITERATURE REVIEW INTRODUCTION TO COMPANY. FINANCIAL INFORMATION STATEMENT OF PROBLEM / NEED FOR STUDY OBJECTIVE OF STUDY RESEARCH METHODOLOGY CONTENTS DATA ANALYSIS AND INTERPRETATION LIMITATION OF STUDY FINDINGS RECOMMENDATIONS BIBLIOGRAPHY
EXECUTIVE SUMMARY
Working Capital refers to that part of the firms capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Funds, thus invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Corporate executives devote a considerable amount of attention to the management of working capital. Working capital is the life blood of any business, without which the fixed assets are inoperative. To study how the company manage its current assets to maintain better financial position. To know the reasons of deviations in the working capital position of the company. To study the liquidity management of the company To study the inventory management of the company To study the receivables management of the company
LITERATURE REVIEW
BASIC CASH FLOW MANAGEMENT Managing cash must take an equal stature with Net Income. In financial management, "cash is king" is a frequent motto. So your first step in managing cash is to elevate the importance of cash. The basic process for managing cash is straightforward. Try to maintain an adequate level of cash to meet current obligations and invest idle cash into earning assets. Earning assets must have high liquidity; i.e. you must be able to convert investments back into cash quickly. Additionally, you want to protect your cash balance by paying obligations only as they come due. Managing cash also involves aggressive conversion of current assets into cash. Inventory levels must be converted into accounts receivables and accounts receivables must be converted into cash. Ratios should be used to monitor the conversion of cash, such as number of days in inventory and number of days in receivables. Cash balances are the end result from a combination of cycles: inventory, purchasing, receivables, payables, etc. The key is to properly manage these cycles for conversion into cash. Once conversion cycles are identified, cash forecasts can be prepared for managing cash. Weekly cash reports are used to monitor balances. Since everything ultimately passes through your cash account, a strong internal control system is required. This involves the separation of duties in handling cash, reconciling cash accounts, adequate support for cash disbursements, and other control procedures. The overall objective is to protect cash just like any other asset through a system of internal controls. Matt H. Evans
INTRODUCTION TO COMPANY
7 Dr.J.K.Patel Institute of Mngt.
INDEX
Sr. No. 1. 2. 3. 4. 5. 6 7. 8. 9. 10. 11.
PARTICULARS COMPANY PROFILE BOARD OF DIRECTOR VISION AND MISSION MILE STONE SIZE AND FORM OF ORGENIZATION MANPOWER ORGENIZATION STRUCTURE FUTURE PLAN AND ACHIVEMENT PRODUCT RANGE SUPPLIER AND CUSTOMER QUALITY CONTROL
Page No. 10 12 13 14 16
17 18 19 20 22
COMPANY PROFILE
Name of the unit
:-
Austin Engineering Company Ltd.
Year of the Establishment :1973
Form of Organization :Medium Scale
Registered Office
:-
Austin Engineering Co. Ltd. Dist. : Junagadh Tal. : Bhesan Patala 362 030
Address of Junagadh Office :101, G.I.D.C. Estate, Vadal Road, Junagadh 362 003.
Phone Numbers
:- (91-285) 2660144, 2660069
Fax Numbers
:-
(91-285) 2661505
E-mail Address
:- info@aecbearings.com
Auditors
:-
Dhirubhai Dand & Co. Chartered Accountants
10
Gokul Chamber, Junagadh 362 001.
Cost Auditors
:- S.B. Parikh & Co. Cost Accountants, Vadodara.
Bankers Registrar & Transfer Agent
:- Bank of Baroda, Junagadh.
:-
Sharepro Services, Satam Estate, 3rd floor, Above Bank of Baroda, Cardinal Gracious Road, Andheri (E) Mumbai 400 099
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BOARD OF DIRECTORS
Mr. N.C.Vadgama
Chairman & Executive Director
Mr. S.M.Thanki
Managing Director
Mr. R.N.Bambhania :
Joint Managing Director
Mr. J.R.Bhogayta
Executive Director
Mr. S.V.Vaishnav
Non Executive Director
Mr. B.R.Sureja
Mr. K.J.Mehta
Mr. D.B.Nakum
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VISION
Always improve continuously Utilize resources in most efficient way Be versatile to adopt changes Serve society in most efficient manner
MISSION
To implement the ISO/ TS 16949 quality system To increase the marketing capability up to 2100 mm diameter
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MILE STONE 1973 Partnership firm formed by five technocrats. Started manufacturing needle roller cage assemblies with the manpower of 10 and the capital investment of 3500 US Dollars. 1974 Started manufacturing cylindrical roller bearings and deep groove ball bearings up to 50mm diameter. 1975 Started manufacturing single row spherical roller bearings. 1978 Partnership firm converted into Private Limited Company. Started manufacturing tapered Roller Bearing up to 100mm diameter. 1980 Manufacturing capacity of all aforesaid bearings increased up to 150mm diameter. 1982 Started supplying bearings for gear box application to Premier Automobiles Limited (FIAT-Italy Collaboration) for passenger cars. 1984 Started supplying case carburized specially heat treated ground components (exclusive supplier) and King-pin bearings to TELCO for light and heavy commercial vehicles. 1985 Converted into Public Limited Company and offered shares to public. 1986 Started New Plant (Unit II) with installation of machinery and testing/measuring equipment imported from Germany. Started exporting bearings to developed countries such as UK, USA, and Italy. 1987 Started manufacturing import substitute bearings for military tanks and armed vehicles of Indian Defense Department. 1990 Increased manufacturing capacity to 600mm diameter. Started manufacturing double row tapered and spherical roller bearings.
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1991 Awarded indefinite rate contract with All India State Road Transport Undertakings (ASRTU) for 78 sizes of bearings for their passengers vehicles. 1993 Started manufacturing flexible roller bearings. 1995 Manufacturing capacity increased to 800mm diameter. 1997 Started manufacturing flush ground single row angular contact ball bearings for US and European Markets.
1998 Started production of four row tapered roller and mutli-row cylindrical roller bearings for roll-neck application in steel plants. 1999 Awarded ISO 9001 Certification for design and manufacturing of all type of rolling bearings from TUV Rheinland. 2000 Established AEC Europe S.R.L in Milan, Italy. 2002 Developed stainless steel (Grade 440C) bearings (for Atomic Energy Plant). 2003 Developed and supplied Screw Down bearing (equivalent to Torrington 202 TTSX 942 EE2000). 2004 Developed Slim bearings (Constant Section Bearings) up to 18 inch. Established Accurate Engineering Inc. (WOS of AEC Ltd.) in USA. 2006 Awarded ISO/TS 16949:2002 Certification for design and manufacturing of all type of rolling bearings from TUV Rheinland. 2008 Developed crossed cylindrical and tapered roller bearings.
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SIZE AND FORM OF THE ORGANIZATION On the basis of size, there are mainly three size of organization. 1. Large Scale Organization 2. Medium Scale Organization. 3. Small Scale Organization AEC is a Medium Scale unit as it has 7 caroreS of equity equipment and machinery .And it has employed 655 workers.threfpre we can say that AEC is a LARGE scale unit. The form of organisation can be classified as under: FORM OF OWNERSHIP
Sole proprietorship Partnership Co-operative society Company Pvt. Ltd Public Ltd. Government
As far as the Austin Engineering Company Limited is a public limited company because it has element of public limited company. It is an incorporated association which is an artificial person created by law having a common seal, different capital ,transferable share, limited liability, wide distribution of risk and large membership etc.
MANPOWER Sr. No. 01. 02. 03. 04. 05. 06. Description OFFICE AND ADMINISTRATION QUALITY ASSURANCE DIRECT MANUFACTURING INDIRECT MANUFACTURING ENGINEERS SUPERVISORS TOTAL Employees 131 070 200 199 035 02 655
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ORGANIZATION STRUCTURE An organization is group of people working together towards to achieve one or more targeted Goals. A good organization structure is the basis of any successful organization for an effective system There are mainly following type of organization structure.
Types of Organization Structure
LINE ORGANIZATION
STAFF ORGANIZATION
LINE & STAFF ORG. ORGANIZA TION
FUNCTIONAL ORGANIZATION
DIVISIONAL ORGANIZATION
As far as AEC Co. Ltd. Is concern it has adopted Line & Staff organization Structure. In this type of structure line of authority & responsibility moves downward. Here individual & a group of specialists advise the line officer for the special aspects. It would be clear by following organization
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FUTURE PLANS Due to nature of confidentiality, it is obvious that an organization may not find it appropriate. Certain key plant, however the management of AEC ltd shared the following information. Development slewing rim bearings for heavy earth moving & construction equipment Increase adherence to the training calendar Reduce new development cycle time, machine idealness, electrical & mechanical breakdowns Etc.
ACHIVEMENT Back up roller bearings for sendzimei cold strip mills Multi raw cylindrical roller bearings & for two tapered roller bearings for roll neck, application in rolling mills. Flush ground single row angular contact ball bearings. Precision class cylindrical roller bearings for machine tools spindle application. Flexible roller bearings Thin series ball bearings Large diameter, spherical roller thrust bearing Moreover, the co is having 9001: 2000 certificate
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PRODUCT RANGE There are varieties of bearings that are right now in existence. They can be classified according to the size and use of it. In the world market, 20,000 types of bearings are traded and used. Specifically AEC ltd. produces around 4,500 different types of bearings, which can be classified into two main categories. Ball Bearing, Roller Bearing. Roller bearing can be classified into four types. Spherical roller bearing (SRB) Taper roller bearing (TRB) Cylindrical roller bearing (CRB) Needle roller bearing (NRB) Flexible roller bearing (FRB)
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SUPLLIERS 1) 2) 3) 4) 5) Mahindra & Mahindra Ltd-steel bars Indian Seamless Metal type ltd steel pipe Social steel ltd-Roller Material Needumeelbra Industries ltd.-steel rolls Sanjay udhyog-Brass Cages CUSTOMERS MAJOR CUSTOMERS BHARAT HEAVY ELECTRICALS LTD. BHARAT HEAVY ELECTRICALS LTD. BHILAI STEEL PLANT BOKARO STEEL PLANT C.V.R.D.E. EICHER TRACTORS LTD. FAIRFIELD ATLAS LTD. INDIAN AIRLINES LTD. INDIAN RAILWAYS L & T KOMATSU LTD. OIL & NATURAL GAS COMMISSION ROURKELA STEEL PLANT VOLTAS LIMITED VOLTAS LIMITED BHOPAL TRICHI BHILAI BOKARO STEEL CITY CHENNAI FARIDABAD BELGAUM CHENNAI PATIALA BANGLORE KARAIKAL ROURKELA THANE CHINCKPOKALI
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LIST OF MAJOR EXPORT CUSTOMERS AEC-EUROPE S.R.L. ASSOCIATED DYNAMIC LTD. BEARINGS LIMITED FAIRFIELD MANUFACTURING CO. GULF UNITED INC. PARKER HANNIFIN CORP. R & M ENERGY SYSTEMS TVS AUTO PARTS DOUGLAS & SONS ITALY U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. U.S.A. SRILANKA SRILANKA
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QUALITY CONTROL Moreover the Company is an ISO 9001-2000 Company. It is also good at the social responsibility. The general statement of Austin is as under: We are committed to satisfy customer needs and expectations continuously by Developing and providing quality products. Measuring, Monitoring and improving process performance. Continuously improve work culture by providing adequate training & develop good interpersonal relation.
Here, Austin Engineering Company Ltd. has given special attention on the quality of the product. It is also an ISO 9001:2000 awarded company because of its quality. Moreover, they have developed a QUALITY POLICY for better quality control. The company is also having certain testing instruments for testing the product at different levels. The product process includes five inspection stages which show the companys efforts to maintain its quality. Different instruments are necessary for measuring accuracy of the product, which are given below Testing instruments:-
Spectrometer Magna field crack detection Surface roughness tester Roundness tester Electronic comparator Air gauge comparator
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FINANCIAL INFORMATION
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INTRODUCTION
Financial management is the managerial activity, which is concerned with planning and controlling of firms financial resources. As we know that this discipline is on resent origin, financial management consist of two words mainly finance and management. Finance may be defined as firm that important resources which are required at all the stage of different activity on the other hand management is process of planning, organizing, directing and controlling. IT is worth to note down that managerial functions are applied to the finance. It means planning & controlling activities of finance is major activity under the financial management. According to Hogard, Financial management is the application of planning & controlling functions to the finance functions. From above definition it is quite clear that effective utilization of funds is major concerned from financial manager. Needless to mention that finance plays every vital role in any organization.
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ORGANIZATION OF FINANCIAL MANAGEMENT
Organization of finance department means that division Tand classification of various functions that are to be performing by the financial department. Because of importance of financial department it is necessary to setup sound & effective organization chart depends generally subject to change. Internal factor such, as size and nature of the business and external are tax policy etc FINANCE DEPARTMENT Chairman & Director General Manager Finance Manager Accountant Excise Clerk Financial Officer Accountant Clerk
Organization of finance department means that division and classification of various functions that are to be perform by the financial department. Because of importance of financial department it is necessary to setup sound & effective organization chart depends generally subject to change. Internal factor such, as size and nature of the business and external are tax policy etc.
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FINANCIAL PLANNING
Planning always plays an important role for arranging different activity of the organization. As planning determine future course of action in present. Financial planning relates with financial activities of the organization. More clearly Financial planning means deciding in advance, the financial activities to be carried on to achieve the basic objectives of the firm. Financial planning is the most affecting factor to financial resources and position of the company. So Financial manager should formulate financial plan after considering running condition and position of the firm. Financial planning is highly related with disbursement of income and creation of income. The success of business is highly on financial planning.
The process of estimating the funds requirements of a firm and determining the sources of funds is called financial planning. ( I.M.pandey) Above definition simplifies that financial planning relates with determining the future course of action related with financial department. Financial planning or plan can be formulated for different period of as following. Long Term Planning Medium Term Planning Short Term Planning Austin Engineering Co. Ltd. has good financial planning. Bank of Baroda provides finance to the company. In long term planning this company think about expansion of business & modernization of company. CAPITAL STRUCTURE Capital structure is completely different from Capitalization capital structure refers to the make up of its Capitalization. Capital structure is the permanent financing of firm represented by long term debt, preferred stock and net worth. Capital structure is used to represent the proportionate relationship between debt & equity. Capital structure also includes loans, bonds, share issued, reserves etc. Capital structure of Austin Engineering Co. Ltd. is perfectly maintained. No shortage of capital is aroused because of enough capital. The company has enough capital resources whenever it is required. So, company has no problem about capital structure.
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Particular Authorized capital 34,77,800 equality shares (Rs. 10) Reserve & surplus Loan Fund: Secured loan
Amt
34,778,000 367,104,781
93,064,494
7% 19%
Authorized capital Reserve & surplus Secured loan
74%
FIXED ASSETS MANAGEMENT Capital is invested in firm of company in two ways: Fixed Assets Current Assets To run the business working capital is must but at the time of starting of business fixed assets are also must. Fixed assets in long-term capital, which affects in more than one year. Once the capital is invested in fixed assets the company cannot convert it into cash in one year or we can say that during the life time of business fixed assets cant be converted into cash. Fixed assets mean the assets, which are fixed and permanent in nature, which remaining the organization for a long time period. Generally fixed assets is that type of assets which have long duration like heavy machinery land, building, furniture, goodwill, vehicles, computers etc. Fixed assets 160465800 I. II.
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current assets
534102425
FIXED ASEESTS MANAGEMENT
23%
Fixed assets current assets
77%
STATEMENT OF PROBLEM / NEED FOR STUDY.
It is useful for the management. It gives information to the company about the cash management
With the help of working capital management, current assets and current liability can be managed. To know about the investment in current assets or fixed asset To help the balanced working capital It gives information about the debtor and creditor conversation period so it helps to balanced them. To manage inventory efficiently and effectively in order to avoid unnecessary investment.
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OBJECTIVES OF THE STUDY
Study of the working capital management is important. Because unless the working capital is managed effectively, monitored efficiently, planed properly and reviewed periodically at regular intervals to remove bottlenecks. To study the working capital management of Austin Engineering Company Ltd. To study the liquidity position through various working capital related ratios. To study the operating and cash cycle of the company. To study of components of various working capital management.
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RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. It may be understood as a science of studying now research is done systematically. In that various steps, those are generally adopted by a researcher in studying his problem along with the logic behind them. It is important for research to know not only the research method but also know methodology. The procedures by which researcher go about their work of describing, explaining and predicting phenomenon are called methodology. Methods comprise the procedures used for generating, collecting and evaluating data. All this means that it is necessary for the researcher to design his methodology for his problem as the same may differ from problem to problem. To recognize the various type of information which are necessary for the study of working capital management. Collection of data from various department of AEC to analyze the working capital management of AEC For understanding the various reports, personal interviews are conducted. With the help of various techniques like: Operating Cycle analysis Ratio Analysis Common size statement The overall position of AEC is studied and analyzed Suggestions are given on the basis of findings for better understanding of working capital management.
Data collection is important step in any project and success of any project will be largely depend upon now much accurate you will be able to collect and how much time, money and effort will be required to collect that necessary data, this is also important step. Data collection plays an important role in research work. Without proper data available for analysis you cannot do the research work accurately.
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TYPES OF DATA COLLECTION There are two types of data collection methods available. 1. Primary data collection 2. Secondary data collection
1) Primary data The primary data is that data which is collected fresh or first hand, and for first time which is original in nature. Primary data can collect through personal interview, to support the secondary data.
2) Secondary data collection method (literature review) The secondary data are those which have already collected and stored. Secondary data easily get those secondary data from records, journals, annual reports of the company etc. It will save the time, money and efforts to collect the data. Secondary data also made available through trade magazines, balance sheets, books etc. This project is based on primary data collected through personal interview of head of account department, head of department and other concerned staff member of finance department. But primary data collection had limitations such as matter confidential information thus project is based on secondary information collected through four years annual report of the company, supported by various books and internet sides. The data collection was aimed at study of working capital management of the company.
Project is based on 1) 2) 3) 4) 30 Annual report of AEC 31 Annual report of AEC 32 Annual report of AEC 33 Annual report of AEC
SCHEDULE The complete project will be for duration of 6 weeks. The project has been divided into 2 stages with approximate time period allotted to each stage. Both the stages along with their approximate timelines are as follows: STAGE 1 (APPROX 3 WEEKS) The study of companys current assets and current liability by analysis of last 4 years annual report of the company.
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STAGE 2 (APPROX 3 WEEKS) The study of the overall working capital of the company and comparison with last year and analysis the data and give conclusion.
SCOPE OF THE STUDY Studying the working capital of Austin Engineering Company ltd and comparing it with previous years working capital. It become quite difficult rather impossible to make judgment about the working capital management of company by way of analyzing the financial statements of one year. To get a view about the business happiness, the past data of some year relating to the problem are studied and trend is determined. The present study covers a period of years from 2007 2011. A large period may prove inconvenient while a short period would not give desired results. A period of four to six years is to be considered to be the optimum one. The present study has been undertaken to analyze the working caital is being managed in the company and how far it contributes to the overall objective of optimum use of organizations wealth.
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CONTENTS Working capital management Working capital management is concerned with the problems arise in attempting to manage the current assets, the current liabilities and the inter relationship that exist between them. The term current assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within one year without undergoing a diminution in value and without disrupting the operation of the firm. The major current assets are cash, marketable securities, account receivable and inventory. Current liabilities ware those liabilities which intended at there inception to be paid in ordinary course of business, within a year, out of the current assets or earnings of the concern. The basic current liabilities are account payable, bill payable, bank over-draft, and outstanding expenses. goal of working capital management is to manage the firms current assets and current liabilities in such way that the satisfactory level of working capital is mentioned. The current should be large enough to cover its current liabilities in order to ensure a reasonable margin of the safety.
Meaning:Working capital refers to the cash a business requires for day-to-day operations or more specifically, for financing the conversion of raw material into finish goods, which the company sells for payment. The better the company manage its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure that those surpluses are invested in ways that will generate suitable return for investors.
Objectives:The basic objectives of working capital management are: Optimist the level of investment in C.A. and reduction in C.L. It should maintain the marginal ratio in C.A and should note is not more then the cost of capital employed to finance the C.A.
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Definition: -
The management of short term asset and short run resource is said to be working capital management or current asset management
Need of working capital management
Mainly the working capital is needed for day-to-day activities of a firm. Every firm aims at maximizing the worth of its shareholders. In its strive to do so, a firm should earn sufficient return from its operation. The firm has to invest enough fund in current assets for generating sales. Current assets are needed because sales do not get converted into cash instantaneously.
CONCEPTS OF WORKING CAPITAL
Working capital is often defined as the excess of current assets over current liabilities. There are two concepts of working capital. 1. Gross working capital 2. Net working capital Gross working capital Gross working capital refers to the firms investment in the current assets. Current assets are the assets which can be converted into cash within an accounting year and include cash short term securities, bills receivables, debtors, and stock.
Net working capital
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Refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors, bills payable, and outstanding expenses.
Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities.
A negative net working capital occurs when the current liabilities are in excess of current assets.
TYPE OF WORKING CAPITAL The operating cycle creates the need for current assets (working capital). However the need does not come to an end after the cycle is completed to explain this continuing need of current assets a destination should be drawn between permanent and temporary working capital.
TYPES OF WORKING CAPITAL: 1. Permanent Working Capital: As the operating cycle is a continuous process so the need for working capital also arises continuously. But the magnitude of current assets needed is not always same; it increases and decreases over time. However there is always a minimum level of current assets. This level is known as permanent or fixed working capital. 2. Temporary Working Capital: The extra working capital needed to support the changing production and sales activities, is called variable or functioning or temporary working capital. This can be shown in the following diagram:-
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Amount Temporary capital Permanent Capital
of
Working
Capital
Time
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DETERMINANTS OF WORKING CAPITAL
Nature of business Length of production cycle Size and growth of business Business/ Trade cycle Terms of purchase and sales Profitability Operating efficiency
COMPONENTS OF WORKING CAPITAL
Inventories Sundry debtors Cash and bank balance Loan and advance Liability Provision
OPERATING AND CASH CONVERSION CYCLE
A firm should aim at maximizing the wealth of its shareholders, so the firm should earn sufficient returns from its operations. Earning a steady amount of profit requires successful sales activity. The firm has to invest enough funds in current assets for generating sales. Current assets are needed because sales do not convert into cash instantaneously. There is always an Operating cycle involved in the conversion of sales into cash.
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There is difference between current and fixed assets in terms of their liquidity. A firm requires many years to recover the initial investment in fixed assets such as plant and machinery or land and building. On the contrary, investment in current assets is turned over many times in a year. Investment in current assets such as inventories and debtors (accounts receivable) is realized during the firms operating cycle that is usually less than a year.
OPERATING CYCLE is the time duration required to convert sales, after the conversion of resources into inventories, into cash. The operating cycle of manufacturing company involves three phases:
Acquisition of resources such as raw material, labor power and fuel etc. Manufacture of the product which includes conversion of raw materials into work-in-progress into finished goods. Sale of the product either for cash or on credit. Credit sales create account receivable for collection.
These phases affect cash flows, which most of the time, are neither synchronized nor certain. They are not synchronized because cash flows usually occur before cash inflows.
Cash inflows are uncertain because sales and collections which give rise to cash inflows are difficult to forecast accurately, on the other hand, are relatively certain. The firm is, therefore, required to invest in current assets for a smooth, uninterrupted functioning. It needs to maintain liquidity to purchase raw materials and pay expenses such as wages and salaries, other manufacturing, administrative and selling expenses and taxes as there is hardly a matching between cash inflows and outflows. Cash is also held to meet any future exigencies. Stocks of raw materials and work-in-progress are kept to ensure smooth production and to guard against non-availability of raw material and other components. The firm holds stock of finished goods to meet the demand of customers on continuous basis and sudden demand from some customers. Debtors are created because goods are sold on credit for marketing and competitive reasons. Thus, a firm makes adequate investment in inventories, and debtors, for smooth, uninterrupted production and sale.
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Length of Operating Cycle The length of the operating cycle can be calculated in two ways: a) Gross Operating Cycle b) Net Operating Cycle
a) Gross Operating Cycle The grass operating cycle of a manufacturing concern is the sum of Inventory Conversion Period and debtors (receivable) conversion period. Thus, Gross Operating Cycle is gives as follows. Inventory conversion Period + Debtors Conversion Period Inventory Conversion Period: The inventory conversion period is the total time needed for producing and selling the product. It is the sum of (1) raw material conversion period, (2) work-in-progress conversion period, and (3) finished goods conversion period. Raw material conversion period
The raw material conversion period is the average time period taken to convert material into work-in-progress. Raw material conversion period depends on: (a) Raw material consumption per day, and (b) Raw material inventory. Raw material consumption par day is given by the total raw material consumption divided by the number of days in the year (say 365). The raw material conversion period is obtained when raw material inventory is divided by raw material consumption per day.
Raw material conversion period
Raw material inventory X 365 [Raw material consumption]
Work-in-progress conversion period
Work-in-progress conversion period is the average time taken to complete the semi-finished or work-in-progress. It is given by the following formula:
Work-in-progress conversion period =
work-in-progress inventory X 365

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[Cost of production] Institute of Mngt. Dr.J.K.Patel
Work-in-progress conversion period =
work-in-progress inventory X 365 [Cost of production]
Finished goods conversion period
Finished goods conversion period is the average time taken to sell the finished goods. It can be calculated as followsFinished goods conversion period = Finished goods inventory X 365 Finished goods conversion period = Finished goods inventory X 365 [Cost of goods sold] [Cost of goods sold]
Debtors conversion period: Debtors conversion period is the average time taken to convert debtors into cash. It represents the average collection period. It is calculated as follows:
Debtors conversion period= Debtors conversion period=
Debtors X 365 Debtors X 365 [Credit sales] [Credit sales]
b) cash conversion or Net operating cycle Net operating cycle is the difference between Gross operating cycle and creditors (payables) Deferral period.
Creditors deferral period:
Creditors deferral period is the average time taken by the firm in paying its suppliers. It is calculated as follows:
Creditors deferral period= Creditors X 365

[Credit purchases]
Creditors deferral period=
Creditors X 365 [Credit purchases]
In practice, a firm may acquire resources (such as raw materials) on credit and temporarily postpone payment of certain expenses. Payables, which a firm can defer, are spontaneous sources of capital to finance investment in current assets. The creditors deferral period is the length of time the firm is able to defer payments on various resource purchases.
Net operating cycle is also referred to as cash conversion cycle. It is the net time interval between cash collections from sale of the product and cash payments for resources acquired by the firm. It also represents the time interval over which additional funds, called working capital, should be obtained in order to carry out the firms operations. The firm has to negotiate working capital from sources such as commercial banks. The negotiated sources of working capital financing are called non-spontaneous sources. If net operating cycle of a firm increases, it means further need for negotiated working capital. There are two ways of calculations of cash conversion cycle. One is that depreciation and profit should be excluded in the computation of cash conversion cycle since the firms concern is with cash flows associated with conversion at cost; depreciation is a non-cash item and profits are not costs.
A contrary view air that a firm has to ultimately recover total costs and make profits; therefore the calculation of operating cycle should include depreciation, and even the profits.
The above operating cycle concept relates to a manufacturing firm. Non-manufacturing firms such as wholesalers and retailers will not have the manufacturing phase. They will acquire stock of finished goods and convert them into debtors and debtors into cash. Further, service and financial enterprises will not have inventory of goods (cash will be their inventory). Their operating cycles will be the shortest. They need to acquire cash, then lend (create debtors) and again convert lending into cash.
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BALANCED WORKING CAPITAL POSITION
The firm should maintain a sound working capital position. It should have adequate working capital to run its business operations. Both excessive as well as inadequate working capital positions are dangerous from the firms point of view. Excessive working capital means holding costs and idle funds, which earn no profits for the firm. The dangers of excessive working capital are as follows:
It results in unnecessary accumulation of inventories. Thus, chances of inventory mishandling, waste, theft and losses increase. It is an indication of defective credit policy and slack collection period. Consequently, higher incidence of bad debts results, which adversely affects profits. Excessive working capital makes management complacent which degenerates into managerial inefficiency. Tendencies of accumulating inventories tend to make speculative profits grow. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits.
Inadequate working capital is also bad as it not only impairs the firms profitability but also results in production interrupts and in efficiencies and sales disruptions. Inadequate working has the following dangers:
It stagnates growth. It becomes difficult for the firm to undertake profitable projects for non-availability of working capital funds. It becomes difficult to implement operating plans and achieve the firms profit target. Operating inefficiencies creep in when it becomes difficult even to meet day-to-day commitments. Fixed assets are not efficiently utilized for the lack of working capital funds Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc.
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The firm looses its reputation when it is not in a position to honor its shortterm obligations. As a result, the firm faces tight credit terms.
An enlightened management should, therefore maintain the right amount of working capital on a continuous basis. A firms net working capital position is not only important as an index of liquidity but it is also used as a measure of the firms risk. Risk in this regard means chances of the firms being unable to meet its obligation on due date. The lenders consider a positive net working capital as a measure of safety. All other things being equal, the more the net working capital a firm has, the less likely that it will default in meeting it current financial obligations.
OPERATING CYCLE
The operating cycle is also known as cast to cash cycle, is duration required to convert sales after the conversion of resources into inventories, into cash. The various phases of operating cycle can be depicted as given bellow.
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Cash
Collection
Purchases
Accounts Receivabl e
Raw material Inventory
Sales
Work in progress Inventory Finished goods Inventory
Sound financial management of a company involves matching the sources and uses of cash so that the obligations come due as assets and mature into cash.
44
Net Operating Cycle
Gross Operating Cycle(I )
Payable Deferral Period (II)
Inventory Consumption Period (1)
Debtor Consumption Period (2)
Raw material Consumption Period (A)
Work in Progress Consumption Period (B)
Finish Good Consumption Period (C)
45
46
CALCULATION OF OPERATING CYCLE OF AUSTIN ENGINEERING COMPANY LIMITED
1) Inventory consumption period :A) Raw material consumption period :Raw material consumption = Raw material inventory X 365 Raw material consumption = Raw material inventory X 365 Period Raw material consumed Period Raw material consumed 2010-11 Raw material inventory - Rs. 47015654 Raw material consumed - Rs. 167206137 Raw material consumption = Raw material inventory X 365 Period Raw material consumed = 47015654 X 365 167206137 = 103 days
2009-10 Raw material inventory - Rs. 51383518 Raw material consumed - Rs. 254740308 Raw material consumption = Raw material inventory X 365 Period Raw material consumed = 51383518 X 365 254740308 = 74 days
2008-09 Raw material inventory - Rs.52780916
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Raw material consumed - Rs. 280859547 Raw material consumption = Raw material inventory X 365 Period Raw material consumed = 52780916 X 365 280859547 = 69 days
2007-08 Raw material inventory - Rs.34875306 Raw material consumed - Rs. 224264481 Raw material consumption = Raw material inventory X 365 Period Raw material consumed = 34875306 X 365 224264481 = 57 days
B) Work in Progress Conversion Period :-
Work in Progress Conversion = Work in progress inventory X 365 Work in Progress Conversion = Work in progress inventory X365 cost of production Period Period
2010-11 Work in progress inventory - Rs. 132199542 Cost of production - Rs. 447166018
Work in Progress Conversion = Work in progress inventory X 365
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Period
cost of production = 132199542 X 365 447166018 = 108 days
Work in Progress Conversion = Work in progress inventory X 365 Period cost of production = 168911388 X 365 525738685 = 117 days
Work in Progress Conversion = Work in progress inventory X 365 Period cost of production = 172052829 X 365 464692523 = 135 days 2007-08 Work in progress inventory - Rs. 109771931 Cost of production - Rs. 404089452
Work in Progress Conversion = Work in progress inventory X 365 Period cost of production = 109771931 X 365 404089452
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= 99 days C) Finish goods consumption period :Finish goods consumption = Finish goods inventory X 365 Finish goods consumption = Finish goods inventory X 365 Period Cost of goods sold Period Cost of goods sold 2010-11 Finish goods inventory - Rs. 64098318 Cost of goods sold - Rs. 433156377
Finish goods consumption = Finish goods inventory X 365 Period Cost of goods sold = 64098318 X 365 433156377 = 54 days 2009-10 Finish goods inventory - Rs. 50088677 Cost of goods sold - Rs. 520433711
Finish goods consumption = Finish goods inventory X 365 Period Cost of goods sold = 50088677 X 365 520433711 = 35 days 2008-09 Finish goods inventory - Rs. 44783703 Cost of goods sold - Rs. 463296547
Finish goods consumption = Finish goods inventory X 365 Period Cost of goods sold = 44783703 X 365 463296547 = 35 days
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2007-08 Finish goods inventory - Rs. 43387727 Cost of goods sold - Rs. 400008998
Finish goods consumption = Finish goods inventory X 365 Period Cost of goods sold = 43387727 X 365 400008998 = 40 days
1) Inventory consumption period = Raw material consumption period + Work in Progress Conversion Period + Finish goods consumption period
Inventory consumption period = RM + WIP + FG
2010-11 Inventory consumption period = A + B + C = 103 + 107 + 54 = 264 Days
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2008-09 Inventory consumption period = A + B + C = 69+ 135+ 35 = 239 Days
Particular Raw material Work in progress Finished goods Total
2010-11 103 107 54 264
2009-10 74 117 35 226
2008-09 69 135 35 239
2007-08 57 99 40 196
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INVENTORY HOLDING
160 140 120 100 80 60 40 20 0 2010-11 Raw material 2009-10 2008-09 2007-08 Work in progress Finished goods 54 35 35 74 69 57 40 117 103 107 99 135
2) Debtors conversion period :-
Debtors conversion period = Debtors X 365 Credit sales 2010-11 Debtors - Rs. 151569700
Credit sales - Rs. 688623368 Debtors conversion period = Debtors X 365 Credit sales
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= 151569700 X 365 688623368 = 80 Days (Approximate)
2009-10 Debtors - Rs. 164825535
Credit sales - Rs. 843295105 Debtors conversion period = Debtors X 365 Credit sales = 164825535 X 365 843295105 = 71 Days (Approximate)
2008-09 Debtors - Rs. 179198533
Credit sales - Rs. 772355659
Debtors conversion period = Debtors X 365 Credit sales = 179198533X 365 772355659 = 85 Days (Approximate)
2007-08 Debtors - Rs.187721269
Credit sales - Rs. 691409903

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Debtors conversion period = Debtors X 365 Credit sales = 187721269 X 365 691409903 = 99 Days (Approximate)
i) Gross operating cycle = Inventory conversion period + Debtors conversion period Gross operating cycle = ICP + DCP Gross operating cycle = ICP + DCP 2010-11 Gross operating cycle = Inventory conversion period + Debtors conversion period = 264 + 80 = 344 days
2009-10 Gross operating cycle = Inventory conversion period + Debtors conversion period = 226 + 71 = 297 days
2008-09
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Gross operating cycle = Inventory conversion period + Debtors conversion period = 239+ 85 = 324 days
2007-08 Gross operating cycle = Inventory conversion period + Debtors conversion period = 196 + 99 = 295 days ii) Payable Deferral Period: Payable Deferral Period = = Creditors X 365 Payable Deferral Period Creditors X 365 Credit purchase Credit purchase 2010-11 Creditors = 101401996 Credit purchase = 166001474 Payable Deferral Period = Creditors X 365 Credit purchase = 101401996 X 365 166001474 = 223 days 2009-10 Creditors = 109221663 Credit purchase = 256420436 Payable Deferral Period = Creditors X 365 Credit purchase = 109221663 X 365 256420436 = 155 days 2008-09 Creditors = 127268939 Credit purchase= 302048126 Payable Deferral Period = Creditors X 365 Credit purchase = 127268939 X 365 302048126
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= 154 days 2007-08 Creditors =114797145 Credit purchase= 230830480 Payable Deferral Period = Creditors X 365 Credit purchase = 114797145 X 365 230830480 = 182 days Net Operating cycle Net Operating cycle= Gross Operating Cycle - Payable Deferral Period Net Operating cycle= Gross Operating Cycle - Payable Deferral Period
2010-11 Gross operating cycle = 344 Payable Deferral Period = 223 Net Operating cycle = Gross Operating Cycle - Payable Deferral Period = 344 - 223 = 121 days
2009-10 Gross operating cycle= 297 Payable Deferral Period= 155 Net Operating cycle= Gross Operating Cycle - Payable Deferral Period = 297-155 = 142 days 2008-09 Gross operating cycle= 324 Payable Deferral Period= 154 Net Operating cycle= Gross Operating Cycle - Payable Deferral Period = 324-154 = 170 days 2007-08 Gross operating cycle= 295
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Payable Deferral Period= 182 Net Operating cycle= Gross Operating Cycle--Payable Deferral Period = 295-182 = 113 days
Years
Inventory conversion period 264 226 239 196
Debtors conversion period 80 71 85 99
Creditors conversion period 223 155 154 182
Days
2010-11 2009-10 2008-09 2007-08
121 142 170 113
Net operating cycle

180 160 140 120 121 142 113 170
Days
100 80 60 40 20 0 2010-11 2009-10 2008-09 2007-08 Days
Years
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Interpretation
From the above calculation we conclude that in current year there is improvement in net operating cycle it shows that good position as compare to previous two years. Still there is need to improvement in net operating cycle. From the table we can see that creditors allows more days credit. But inventory conversion period is increasing year by year so there is need to reduce the inventory conversion period.
Calculation of Net Working Capital of AUSTIN ENGINEERING COMPANY LIMITED
Sources of Funds Current Asset Inventories Sundry Debtors Cash & Bank Balance Loan &advances (A) Total Current Asset
2010-11
2009-10
2008-09
2007-08
254321914 285516305 284664968 202923402 151569700 164825535 179198533 187721269 64391467 54261808 19178538 64582047 17833875 63106942 7297136 53471291
524544889 543102425 544804318 451413098
Current Liability
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Liabilities Provisions (B) Total Current Liability
132349343 169730997 160455232 148318214 43789818 45724425 48556136 28050606
176139161 215455422 209011368 176368820
Net Working Capital(A-B)
348405728 327647003 335792950 275044278
WORKING CAPITAL RATIO ANALYSIS Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as the indicated quotient of two mathematical expressions and as the relationship between two or more things. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firms financial performance. 1. Efficiency ratio The ratios compounded under this group indicate the efficiency of the organization to use the various kinds of assets by converting them the form of sale. This ratio also called as activity ratio or assets management ratio. As the assets basically categorized as fixed assets and current assets and the current assets further classified according to individual components of current assets viz. investment and receivables or debtors or as net current assets, the important of efficiency ratio as follow 1. Working capital turnover ratio 2. Inventory turnover ratio 3. Receivable turnover ratio 4. Current assets turnover ratio 2. Liquidity ratio
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The ratios compounded under this group indicate the short term position of the organization and also indicate the efficiency with which the working capital is being used. The most important ratio under this group is follows 1. Current ratio 2. Quick ratio 3. Absolute liquid ratio Working capital turnover ratio: Working capital turnover ratio = Working capital turnover ratio = Sales Sales Net working Net working capital 2008-09 729950074 335792950 2.2 2007-08 648628921 275044278 2.35
Particular Sales Net working capital W.C TOR
2010-11 669249673 348405728 1.92
2009-10 816685475 327647003 2.5
Working capitals turn over ratio

3 2.5 2.5 2.2 1.92 2 1.5 1 0.5 0 2010-11 2009-10 2008-09 2007-08 2.35
Times
Years Interpretation High working capital ratio indicates the capability of the organization to achieve maximum sales with the minimum investment in working capital. Companys working capital ratio shows mostly more than two, except for the year
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2010-11 because of excess of cash balance in current assets which occurred due to encashment of deposits. In the year 2009-10 the ratio was around 3, it indicates that the capability of the company to achieve maximum sales with the minimum investment in working capital. Inventory turnover ratio: Inventory TOR = Inventory TOR = Cost of goods sold Cost of goods sold Average inventory Average inventory
Particular COGS Average Inventory Inventory TOR
2010-11 433156377 269919109 1.60
2009-10 520433711 285090636 1.83
2008-09 463296547 243794185 1.90
2007-08 400008998 192118715 2.08
Inventory turnover ratio

2.5 2.08 2 1.6 1.83 1.9
Times
1.5 1 0.5 0 2010-11 2009-10 2008-09 2007-08
Years
Interpretation Inventory turnover ratio indicates the efficiency of the firm in producing and selling its products. It was observed that Inventory turnover ratio indicates maximum sales achieved with the minimum investment in the inventory. As such, the general rule high inventory turnover is desirable but high inventory turnover ratio may not necessary indicates the profitable situation. An organization, in order to achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not result into high amount of profit.
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Receivable turnover ratio Receivable turnover ratio = Receivable turnover ratio = Gross sales Gross sales
Average account receivables Average account receivables
Particular Gross Sales Sundry Debtors Receivable TOR
2010-11 688623368 151569700 4.54
2009-10 843295105 164825535 5.12
2008-09 772355659 179198533 4.31
2007-08 691409903 187721269 3.68
Receivable turnover ratio

6 5 4.54 5.12 4.31 3.68
Times
4 3 2 1 0 2010-11 2009-10 2008-09
2007-08
Years
Interpretation Receivable turnover ratios that receivables turned around the sales were greater than 4 times. The actual collection period are more than normal collection period allowed to customer. It shows that as compare to previous year the debtors are decrease but it lead to decrease in gross sales also. The company allows less credit sales but it may be affect adversely on the total sales of the company. Current assets turnover ratio Current assets TOR= Sales Current assets TOR= Sales Current asset Current assets
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Particular Sales Current Assets C.A. TOR
2010-11 669249673 524544889 1.28
2009-10 816685475 543102425 1.50
2008-09 729950074 544804318 1.34
2007-08 648628921 451413098 1.44
Current Assets Turnover Ratio

1.55 1.5 1.45 1.44 1.34 1.28 1.4 1.35 1.3 1.25 1.2 1.15 2010-11 2009-10 2008-09 2007-08 1.5
Times
Years Interpretation Current assets turnover ratio is calculate to know the firms efficiency of utilizing the current assets .current assets includes the assets like inventories, sundry debtors, bills receivable, cash in hand or bank, marketable securities, prepaid expenses and short term loans and advances. This ratio includes the efficiency with which current assets turn into sales. A higher ratio implies a more efficient use of funds thus high turnover ratio indicate to reduced the lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm. It was observed that current assets turnover ratio does not indicate any trend over the period of time. Turnover ratio was 1.28 in the year 2010-11 and increase to 1.5 in the year 2009-10 , but it decreased in the year 2008-09, because of high cash balance. Cash did not help to increase in sales volume, as cash is non earning asset. Liquidity ratio Current ratio Current Ratio = current assets Current liability
Particular Current Assets Current liabilities Current Ratio
2009-10 524544889 176139161 2.98
2008-09 543102425 215455422 2.52
2007-08 544804318 209011368 2.61
2006-07 451413098 176368820 2.55
Current Ratio
3.1 3 2.9 2.8 2.7 2.6 2.5 2.4 2.3 2.2 2.98
Times
2.61 2.52
2.55
2010-11
2009-10
2008-09
2007-08
Years
Interpretation Current assets include cash and those assets which can be converted into cash within a year, such marketable securities, debtors and inventories. All obligations within a year are include in current liabilities. Current liabilities include creditors, bills payable accrued expenses, short term bank loan income tax liabilities and long term debt maturing in the current year. Current ratio indicates the availability of current assets in rupees for every rupee of current liability. The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value. As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the current assets in the form of debtor and cash balance. Ratio is higher in the year
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2010-11 where cash balance is more than requirement which came through encashment of deposits of funds.
Quick ratio
Quick ratio = = Current assets Inventory Quick ratio Current assets Inventory Current liabilities Current liabilities
Particular C.A Inventories Current liabilities Quick Ratio
2010-11 270222975 176139161 1.53
2009-10 257586120 215455422 1.20
2008-09 260139350 209011368 1.24
2007-08 248489696 176368820 1.40
Quick Ratio
1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1.53 1.2 1.24 1.4
Times
2010-11
2009-10
2008-09
2007-08
Years Interpretation Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset .other assets which are consider to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into
66
cash. Their value also be tendency to fluctuate. The quick ratio is found out by dividing quick assets by current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time, it indicates that the firm maintains the over liquid assets than actual requirement of such assets.
Absolute liquid ratio
Absolute liquid ratio =
Absolute liquid assets Current liabilities
Particular Cash & Bank Balance Current liabilities Absolute liquid ratio
2010-11 64391467 176139161 0.36
2009-10 19178538 215455422 0.089
2008-09 17833875 209011368 0.085
2007-08 7297136 176368820 0.041
Absolute liquid ratio

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2010-11 2009-10 2008-09 2007-08 0.089 0.085 0.041 0.36
Times
Years Interpretation Even though debtors and bills receivables are considered as more liquid then inventories, it cannot be converted into cash immediately or in time. Therefore while calculation of absolute liquid ratio only the absolute liquid assets as like cash in hand cash at bank, short term marketable securities are taken in
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to consideration to measure the ability of the company in meeting short term financial obligation. Absolute liquid ratio indicates the availability of cash with company is sufficient because company also has other current assets to support current liabilities of the company. In the year 2010-11 absolute liquid ratio increased because of company carry more cash balance, as a cash balance is ideal assets company has to take control on such availability of funds which is affect on cost of the funds.
INVENTORY MANAGEMENT
Inventory constitutes the most important part of current asset. On an average, inventory are 60% of current asset in Public limited companies in India. Because of the large size of the inventory maintained by the firms, a considerable amount of fund is required to be committed to them. It is therefore absolutely imperative to manage inventory efficiently and effectively in order to avoid unnecessary investment.
The term inventory refers to the stock pile of products as firm is offering for sales and the component that make up the products . Raw Material Work in progress Finished goods The Raw material inventories contain the items that are purchased by the firm from others and are converted into finished goods through manufacturing process. The work in progress inventory consists of items that are purchased by the firm from others and are converted into finished goods through manufacturing process. Work in progress inventories consist of items currently being used in production process. They are normally semi-finished goods that are at various stage of production in multi stage production process. Finish goods represent final of completed products available for sole. The inventory of such goods consists items that have been produced but are yet to be sold.
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OBJECTIVES OF INVENTORY MANAGEMENT The basic responsibility of the financial manager is to make sure that the firms cash flows are managed efficiently. Efficient management of inventory should ultimately result in the maximization of the owners wealth. The objectives of inventory management consist of two counterbalancing parts: 1. To minimize investments in inventory 2. To meet the demand of the product by efficiently organizing the production and sales operation. SIGNIFICANCE OF INVENTORY Inventory constitutes in every business concern the most significant pert of working capital current asset. Inventory in Indian industries constitute more than 60% of current assets. About 40% to 60% of the cost of product contains material cost. NEED TO HOLDING INVENTORY The managing inventory arises only when the company hold inventories. Managing inventories involve tying up of the companys funds and incurrence of storage and handling coat. 1. Transaction motives:It emphasizes the need to maintain inventories to facilitate smooth production and sales operation. 2. Precautionary motive:It necessitates holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and others. 3. Speculative Motive:It influences the decision to increase or reduce inventory level to take advantage of price fluctuation. FACTORS DETERMINING LEVEL OF INVENTRY 1. Type and nature of business 2. Anticipated sales volume 3. Price level variation / availability of funds 4. Demand of finish goods 5. Production process
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SIZE OF INVENTORIES
Particular
2010-11
2009-10
2008-09
2007-08
Raw material
47015654
51383518
52780916
34875306
Work in progress
132199542 168911388 172052829 109771931
Finished goods
64098318
50088677
44783703
43387727
Others
11008400
15132722
15047520
14888438
Total
254321914 285516305 284664968 202923402
Indices
125.33
140.70
140.28
100
70
Size Of Inventories
160 140 120 125.33 100 140.7 140.28
Indices
100 80 60 40 20 0 2010-11 2009-10 2008-09 2007-08
Years
Interpretation From the above we can say that as compare to base year the size of the inventories are increasing in 2008-09 and 2009-10 by 40.28% and 40.70% respectively. But it is decreasing in 2010-11. It shows good position in the current year but still there is need to improvement. The reason of decreasing in size of inventory is decreasing in raw material and work in progress inventories.
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RECEIVABLE MANAGEMENT
The term receivable is defined as Debt owned to the firm by customer arising from sales of goods or service in the ordinary course of business When a firm makes an ordinary sale of goods on services and does not receive payment, the firm grants trade credit and creates account receivable, which could be collected in the future. Receivable management is also trade credit management. Firm now days also enjoy the benefit of Negative Working capital. Here they enjoy the benefit of gating various Products, Raw material and other things on credit for manufacturing of final product. Here this benefit received by the firm is on the basis of good will and bargaining strength of the company. Negative Working capital adds to a larger benefit then expected by the creditor. For these reason now days companies have started to raise the payment period to it creditor.
Objective of receivable management The sales of goods on credit basis are an essential part of the modern competitive economic system. The credit sales are generally made up on account in the sense that there are formal acknowledgements of debt obligation through a financial instrument. As a marketing tool, they are intended to promote sales and there by profit. However extension of credit involves risk and cost, management should weigh the benefit as well as cost to determine the goal of receivable management. Thus the objective of receivable management is to promote sales and profit until that point is reached where the return on investment in further funding of receivables is less .than the cost of funds raised to finance that additional credit.
Particular Sundry Debtors Indices
2010-11 151569700 80.74
2009-10 164825535 87.80
2008-09 179198533 95.46
2007-08 187721269 100
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Size Of Receivable
120 100 80.74 80 95.46 87.8 100
Indices
60 40 20 0 2010-11 2009-10 2008-09 2007-08
Years
Interpretation
From the above calculation we can see that as compare to base year the debtors are decreasing every year so it indicates that company allows less credit sales every year, but it may be effect adversely in total sales of the company.
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Working capital finance
Bank finance for working capital Banks are the main institutional source of working capital finance in India. After trade credit, bank credit is the most important source of financing working capital requirements of the firm in India. A bank considers a firms sales and production plans and the desired level of current assets in determining its working capital requirement.
Forms of bank finance 1. Overdraft Under the overdraft facility, the borrower is allowed to withdraw funds in excess of balance in his current account up to certain specified limit during the specified period. Though the overdrawn is repayable on demand, they generally continue for a longer period by annual renewal of the limits.
2. Cash credit Cash credit facility is similar to the overdraft management. The barrower is allowed to withdraw funds up to certain sanctioned credit limit. He does not require the entire amount at once. He can periodically withdraw to the extent of his requirement and repay by depositing surplus funds in his cash credit account. Interest is payable on the amount actually utilized by the borrower.
3. Bills Purchasing or Discounting Under the purchase or discounting of bills, a borrower can obtain credit from bank against its bills. The bank purchase or discount the borrower bills, bank holds bills as security for credit. When bill is discounted, the borrower is paid the discount amount bill i.e The full amount of the bill minus the discount charged by the bank. The bank collects the full amount on maturity.
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4. Working capital loan A borrower may sometime require temporary working capital in excess of sanctioned credit limit to meet unforeseen expenses. Banks provide such accommodation through demand lone account. The borrower is required to pay higher rate of interest about the normal rate of interest on such additional credit.
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SCOPE & LIMITATIONS OF THE STUDY Scope of the study The scope of the study is identified after and during the study is conducted. The study of working capital is based on operating cycle, cash management, inventory management. Limitations of the study Following limitations were encountered while preparing this project: 1) Limited data:This project has completed with annual reports; it just constitutes one part of data collection i.e. secondary. There were limitations for primary data collection because of confidentiality. 2) Limited period:This project is based on five year annual reports. Conclusions and recommendations are based on such limited data. The trend of last five year may or may not reflect the real working capital position of the company 3) Limited area:Also it was difficult to collect the data regarding the competitors and their financial information. Industry figures were also difficult to get.
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FINDINGS Working capital management is important aspect of financial management. The study has been conducted on working capital ratio analysis, working capital components which helped the company to manage its working capital efficiency and affectively. Working capital of the company was increasing and showing positive working capital every year. It shows good liquidity position. Positive working capital indicates that company has the ability of payments of short terms liabilities. Working capital increased because of increment in the current assets is more than increase in the current liabilities. The company has more cash and bank balance in current year it shows that inefficient management. The inventory conversion period of the company has increasing every year so it shows that there is more days to convert the raw material into finished products. Debtors of the company are decreasing every year it shows that company allows less credit sales
Problem Identification

Current assets are more than current liabilities indicate that company used long term funds for short term requirement, where long term funds are most costly then short term funds. Current assets components shows sundry debtors were decreased in every year it shows good position but the collection period are increased in current year so it shows that inefficient management.
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RECOMMENDATIONS Net operating cycle Net operating cycle days decreasing as compare to previous years but there is need to improvement. Improvement can be done by If we see the debtors are decreasing year by year but the collection period are increasing in current year so by improving the collection period we can improve the net operating cycle. The inventory conversion period is high as compare to previous years so by reducing the inventory conversion period we can improve the net operating cycle. The inventory conversion period include the raw material conversion period, work in progress conversion period and finished good conversion period. Here the work in progress and raw material conversion period is very high so by reducing that period we can improve net operating cycle.
Cash and bank The cash and bank of the company is very high it shows inefficient cash management so as the company has to improve cash management. High cash balance shows rosy picture in all liquidity ratio such as current, quick and absolute liquid ratios. but it leads to inefficient utilization of funds. current assets turn over ratio is also showing poor result although sales is high which is due to more cash balance with organization which play major role in formation of current assets.
Credit Policy The company is decreasing the sundry debtors but there is no need to decreasing the debtors it affects the sales of the company so, there is need to improving the cash collection period rather than less credit sales. Finished goods inventory is high in current year because in current year sales is decreasing as compare to previous year. So there is need to proper forecasting of sales.
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BIBLIOGRAPHY
Khan and Jain, Financial Management Prasanna Chandra, Financial Management I. M. Pandey, Financial Management www. Aec-bearings.com Companys Annual Report Prospectus of Austin Engineering Company Ltd. Marketing Management by (Philip Kotler)
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A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF AUSTIN ENGENEERING COMPANY

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Sr. No. 1. 2. 3. 4. 5. 6 7. 8. 9. 10. 11.

Dr.J.K.Patel Institute of Mngt.

Name of the unit

Austin Engineering Company Ltd.

Year of the Establishment :1973

Form of Organization :Medium Scale

:- (91-285) 2660144, 2660069

Dhirubhai Dand & Co. Chartered Accountants

Dr.J.K.Patel Institute of Mngt.

Gokul Chamber, Junagadh 362 001.

:- S.B. Parikh & Co. Cost Accountants, Vadodara.

Bankers Registrar & Transfer Agent

:- Bank of Baroda, Junagadh.

Dr.J.K.Patel Institute of Mngt.

Chairman & Executive Director

Joint Managing Director

Non Executive Director

Non Executive Director

Non Executive Director

Non Executive Director

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Types of Organization Structure

LINE & STAFF ORG. ORGANIZA TION

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

ORGANIZATION OF FINANCIAL MANAGEMENT

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Authorized capital Reserve & surplus Secured loan

Dr.J.K.Patel Institute of Mngt.

FIXED ASEESTS MANAGEMENT

Fixed assets current assets

STATEMENT OF PROBLEM / NEED FOR STUDY.

Dr.J.K.Patel Institute of Mngt.

OBJECTIVES OF THE STUDY

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Need of working capital management

CONCEPTS OF WORKING CAPITAL

Net working capital

Dr.J.K.Patel Institute of Mngt.

Dr.J.K.Patel Institute of Mngt.

Amount Temporary capital Permanent Capital

Dr.J.K.Patel Institute of Mngt.