FINANCIAL STATEMENT ANALYSISkesoram cement.docx

8/15/2019 FINANCIAL STATEMENT ANALYSISkesoram cement.docx

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INTRODUCTION

INTRODUCTION ABOUT FINANCE:

In our present day economy, “FINANCE” is defined as the provision of money at the time

when it is required. Every enterprise, whether big, medium of small, needs finance to carry

on its operations and to achieve its targets. Finance is so indispensable today that it is the

lifeblood of an enterprise. Without adequate finance, no enterprise can possibly accomplish

its objectives.

“Finance is the life blood and nerve system of any business organi!ation. "ust as circulation

of blood, is necessary in the human body to maintain life. Finance is necessary in the business

org. for smooth running of the business.

Financial management involves managerial activities concerned with the procurement and

utili!ation of funds for business purpose the finance function does with procurement of

money ta#ing in to consideration of today$s as well as future need and its effective utili!ation.

%ince finance is required to purchase of machinery and raw materials, to pay salaries and

wages also for day&to&day e'penses.

Financial management entails planning for the future of a person or a business enterprise to

ensure a positive cash flow. It includes the administration and maintenance of financial

assets. (esides, financial management covers the process of identifying and managing ris#s.

)he primary concern of financial management is the assessment rather than the techniques of

financial quantification. * financial manager loo#s at the available data to judge the

performance of enterprises. +anagerial finance is an interdisciplinary approach that borrows

from both managerial accounting and corporate finance.

%ome e'perts refer to financial management as the science of money management. )he

primary usage of this term is in the world of financing business activities. owever, financial

management is important at all levels of human e'istence because every entity needs to loo#

after its finances.

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Financial +anagement /evels

(roadly spea#ing, the process of financial management ta#es place at two levels. *t the

individual level, financial management involves tailoring e'penses according to the financial

resources of an individual. Individuals with surplus cash or access to funding invest their

money to ma#e up for the impact of ta'ation and inflation. Else, they spend it on

discretionary items. )hey need to be able to ta#e the financial decisions that are intended to

benefit them in the long run and help them achieve their financial goals.

From an organi!ational point of view, the process of financial management is associated with

financial planning and financial control. Financial planning see#s to quantify various

financial resources available and plan the si!e and timing of e'penditures. Financial controlrefers to monitoring cash flow. Inflow is the amount of money coming into a particular

company, while outflow is a record of the e'penditure being made by the company.

+anaging this movement of funds in relation to the budget is essential for a business.

*t the corporate level, the main aim of the process of managing finances

Is to achieve the various goals a company sets at a given point of time. (usinesses also see#

to generate substantial amounts of profits, following a particular set of financial processes.

Financial managers aim to boost the levels of resources at their disposal. (esides, they

control the functioning on money put in by e'ternal investors. 0roviding investors with

sufficient amount of returns on their investments is one of the goals that every company tries

to achieve. Efficient financial management ensures that this becomes possible.

NEED FOR STUDY:

1eed of financial management study to diagnose the information contain in financial

statement. %o as to judge the profitability and financial position of the firm.

Financial analyst analyses the financial statements with various tools of analysis

before commanding upon the financial health of the firm.

Essential to bring out the history.

%ignificance and meaning of the financial statements.

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Objectives:

-. )o chec# the financial position of the organi!ation by analy!ing the financial statements.

2. Improve the allocation of wor#ing capital within business operations.3. 4eview and fine tune financial budgeting, and revenue and cost forecasting

5. 4eview the financial health of the company or business unit using ratio analysis, such as

the gearing ratio, profit per employee and weighted cost of capital

RESEARCH METHODOLOGY :

RESEARCH DESIGN:

)his is a systematic way to solve the research problem and it is important component for the

study without which researches may not be able to obtain the format. * research design is the

arrangement of conditions for collection and analysis of data in a manager that aims to

combine for collection and analysis of data relevance to the research purpose with economy

in procedure.

MEANING OF RESEARCH DESIGN:

)he formidable problem that follows the tas# of defining the research problem is the

preparation of design of the research project, popularly #nown as the research design,

decision regarding what, where, when, how much, by what means concerning an inquiry of a

research study constitute a research design. * research design is the arrangement of

conditions for collection and analysis of data in a manager that aims to combine for collection

and analysis of data relevance to the research purpose with economy in procedure.

SOURCES OF DATA:

6ata we collected based on two sources.

0rimary data.

%econdary data.

Pi!"# $"t":

)he 0rimary data are those information$s, which are collected afresh and for the first time,

and thus happen to be original in character.

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Sec%&$"# D"t":

)he %econdary data are those which have already been collected by some other agency and

which have already been processed. )he sources of %econdary data are *nnual 4eports, browsing Internet, through maga!ines.

-. It includes data gathered from the annual reports of 7esoram.

2. *rticles are collected from official website of 7esoram.

METHODOLOGY USED:

'( TYPES OF FINANCIAL STATEMENTS ADOPTED:

Following two types of financial statements are adopted in analy!ing the firm

financial position

a. (*/*18E %EE).

b. I189+E %)*)E+E1)%.

)( TOOLS OF FINANCIAL STATEMENT ANALYSIS USED:

)he following financial analysis tools are used in order to interpret the financial

position of the firm.

LIMITATIONS OF FINANCIAL STATEMENT:

'( ONLY INTERIM REPORTS:

9nly interim statements don$t give a final picture of the concern. )he data given in these

statements is only appro'imate. )he actual position can only be determined when the

business is sold or liquidated.

)( DON*T GI+E E,TRA POSITION:

)he financial statements are e'pressed in monetary values, so they appear to give final and

accurate position. )he values of fi'ed assets in the balance sheet neither represent the value

for which fi'ed assets can be sold nor the amount which will be required to replace these

assets.

-( HISTORICAL COSTS:

)he financial statements are prepared on the basis of historical costs or original costs. )he

value of assets decreases with the passage of time current price changes are not ta#en into

account. )he statements are not prepared #eeping in view the present economic conditions.

)he balance sheet loses the significance of being an inde' of current economic realitie.

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.( ACT OF NON MONITORY FACTORS IGNORED:

)here are certain factors which have a bearing on the financial position and operating results

of the business but they don$t become a part of these statements because they can$t be

measured in monetary terms. %uch factors may include in the reputation of the management.

NO PRECISION:

)he precision of financial statement data is not possible because the statements deal with

matters which can$t be precisely stated. )he data are recorded by conventional procedures

followed over the years. :arious conventions, postulates, personal judgments etc.

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INDUSTRY PROFILE

In the most general sense of the word, cement is a binder, a substance which sets and hardens

independently, and can bind other materials together. )he word


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In (ritain particularly, good quality building stone became ever more e'pensive during a

period of rapid growth, and it became a common practice to construct prestige buildings from

the new industrial bric#s, and to finish them with a stucco to imitate stone. ydraulic limes

were favored for this, but the need for a fast set time encouraged the development of new

cements. +ost famous was 0ar#ers


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claimed precedence in this invention, but recent analysis of both his concrete and raw cement

have shown that William *spdins product made at 1orthfleet, 7ent was a true alite&based

cement. owever, *spdins methods were


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increases and heat evolution diminishes. >sed as an economic alternative to 0ortland sulfate&

resisting and low&heat cements.

P%t1"&$ 31#"s/ ce!e&t contains up to 3CJ fly ash. )he fly ash is po!!olanic, so that

ultimate strength is maintained. (ecause fly ash addition allows a lower concrete water

content, early strength can also be maintained. Where good quality cheap fly ash is available,

this can be an economic alternative to ordinary 0ortland cement.

P%t1"&$ 4%55%1"& ce!e&t includes fly ash cement, since fly ash is a po!!olan, but also

includes cements made from other natural or artificial po!!olans. In countries where volcanic

ashes are available @e.g. Italy, 8hile, +e'ico, the 0hilippinesA these cements are often the

most common form in use.

P%t1"&$ si1ic" 30!e ce!e&t. *ddition of silica fume can yield e'ceptionally high strengths,

and cements containing ;&2CJ silica fume are occasionally produced. owever, silica fume

is more usually added to 0ortland cement at the concrete mi'er.

M"s%&# ce!e&ts are used for preparing bric#laying mortars and stuccos, and must not be

used in concrete. )hey are usually comple' proprietary formulations containing 0ortland

clin#er and a number of other ingredients that may include limestone, hydrated lime, air

entrainers, retarders, waterproofers and coloring agents. )hey are formulated to yield

wor#able mortars that allow rapid and consistent masonry wor#. %ubtle variations of

+asonry cement in the >% are 0lastic 8ements and %tucco 8ements. )hese are designed to

produce controlled bond with masonry bloc#s.

E64"&sive ce!e&ts contain, in addition to 0ortland clin#er, e'pansive clin#ers @usually

sulfoaluminate clin#ersA, and are designed to offset the effects of drying shrin#age that is

normally encountered with hydraulic cements. )his allows large floor slabs @up to DC m

squareA to be prepared without contraction joints.

7/ite b1e&$e$ ce!e&ts may be made using white clin#er and white supplementary

materials such as high&purity meta#aolin.

C%1%e$ ce!e&ts are used for decorative purposes. In some standards, the addition of

pigments to produce


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particularly due to their increased surface area for the chemical reaction. Even with intensive

grinding they can use up to ;CJ less energy to fabricate than ordinary 0ortland cements.

1on&0ortland hydraulic cements

P%55%1"&21i!e ce!e&ts( +i'tures of ground po!!olan and lime are the cements used by the

4omans, and are to be found in 4oman structures still standing @e.g. the 0antheon in 4omeA.

)hey develop strength slowly, but their ultimate strength can be very high. )he hydration

products that produce strength are essentially the same as those produced by 0ortland cement.

S1"821i!e ce!e&ts( Kround granulated blast furnace slag is not hydraulic on its own, but is


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the limestone @around 3C&3;JA is such that large amounts of belite @the low&early strength,

high&late strength mineral in 0ortland cementA are formed without the formation of e'cessive

amounts of free lime. *s with any natural material, such cements have highly variable

properties.

Ge%4%1#!e ce!e&ts are made from mi'tures of water&soluble al#ali metal silicates and

aluminosilicate mineral powders such as fly ash and meta#aolin.

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89+0*1M 049FI/E

COMPANY PROFILEHISTORY OF INDIAN CEMENT INDUSTRY

(y stating productions in -G-5 the story of Indian 8ement is a stage of continuous growth.

8ement is derived from the /atin word “8ementam.

Egyptians and 4omans found the process of manufacturing cement. In England during the

first century the hydraulic cement has become more versatile building material. /ater on,

0ortland cement was invented and the invention was usually attributed to "oseph *spdin of

Enland.

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India is the world$s 5 th largest cement produced after 8hina, "apan and >.%.*. )he %outh

Industries have produced cement for the first time in -GC5. )he company was setup in

8hennai with the installed capacity of 3C tonnes per day. %ince then the cement industry has

progressing leaps and bounds and evolved into the most basic and progressive industry. )ill

-G;C H -G;-, the capacity of production was only 3.3 million tones. %o far annual production

and demand have been growing a pace at roughly B million tones with an installed capacity

of B million tones.

In the remaining two years of Bth plan an additional capacity of 23 million tones will actually

come up.

India is well endowed with cement grade limestone @GC billion tones A and coal @-GC billion

tonesA. 6uring the nineties it had a particularly impressive e'pansion with growth rate of -C

percent.

)he strength and vitality of Indian 8ement Industry can be gauged by the interest shown and

support give by World (an#, considering the e'cellent performance of the industry in

utili!ing the loans and achieving the objectives and target. )he World (an# is e'amining the

feasibility of providing a third line of credit for further upgrading the industry in varying

areas, which will ma#e it global. With liberali!ation policies of Indian Kovernment. )he

industry is posed for a high growth rates in nineties and the installed capacity is e'pected to

cross -CC million tones and production GC million tones by 2CC3 *.6.

)he industry has fabulous scope for e'porting its product to countries li#e the >.%.*., >.7.,

(angladesh, 1epal and other several countries. (ut there are not enough wagons to transport

cement for shipment.

Ce!e&t T/e P%$0ct:

)he natural cement is obtained by burning and crushing the stones containing clayey,

carbonate of lime and some amount of carbonate of magnesia. )he natural cement is brown in

color and its best variety is #nown as “49+*1 8E+E1). It sets very quic#ly after

addition of water.

It was in the eighteenth century that the most important advances in the development of

cement were which finally led to the invention of 0ortland cement.

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In -;D, "ohn %ematon showed that hydraulic lime which can resist the action of water can be

obtained not only from hard lime stone but from a limestone which contain substantial

proportion of clayey.

In -GD, "oseph 0ar#er found that modules of argillaceous limestone made e'cellent

hydraulic cement when burned in the usual manner. *fter burning the product was reduced to

a powder. )his started the natural cement industry.

)he artificial cement is obtained by burning at a very high temperature a mi'ture of

calcareous and argillaceous material. )he mi'ture of ingredients should be intimate and they

should be in correct proportion. )he calcined product is #nown as clin#er. * small quantity of

gypsum is added to clin#er and it is then pulveri!ed into very fine powder, which is #nown as

cement.

)he common variety of artificial cement is #nown as normal setting cement or ordinary

cement. * mason "oseph *spdn of /eeds of England invented this cement in -B25. e too#

out a patent for this cement called it “094)/*16 8E+E1) because it had resemblance in

its color after setting to a variety of sandstone, which is found a abundance in 0ortland

England.

)he manufacture of 0ortland cement was started in England around -B2;. (elgium and

Kermany started the same -B;;. *merica started the same in -B2 and India started in -GC5.

)he first cement factory installed in )amilnadu in -GC5 by %outh India limited and then

onwards a number of factories manufacturing cement were started. *t present there are more

than -;C factories producing different types of cements.

C%!4%siti%& %3 Ce!e&t:

)he ordinary cement contains two basic ingredients, namely, argillaceous and calcareous. In

argillaceous materials the clayey predominates and in calcareous materials the calcium

carbonate predominates.

* good chemical analysis of ordinary cement along with desired range of ingredients.

Ingredients 0ercent 4ange

/ime @8a9A D2 D2 H D

%ilica @%i92A 22 - H 2;

*lumina @*l293A ; 3 H B

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8alcium %ulphate @8a%95A 5 3 H 5

Iron 9'ide @Fe293A 3 3 H 5

+agnesia @+g9A 2 - H 3

%ulphur @%A - - H 3

*l#alies - C.2 H -

I&$0st# St0ct0e "&$ Deve1%4!e&t:

With a capacity of --; million tones of large cement plants, Indian cement industry is the

fourth largest in the world. owever per capita consumption in our country is still at only -CC

7gs against 3CC 7gs of developed countries and offers significant potential for growth of

cement consumption as well as addition to cement capacity. )he recent economic policy

announcement by the government in respect of housing, roads, power etc., will increase

cement consumption.

9pportunities and )hreats

In view of low per capita consumption in India, there is a considerable scope for growth in

cement consumption and creation of new capacities in coming years.

)he cement industry does not appear to have adequately e'ploited cement consumption in

rural segment where damaged where damaged growth is possible.

/anded cost of cement @with import dutyA continues to be higher than home mar#et prices but

with reduced import duty, increasing imports, may pose a serious threat to the domestic

cement industry.

9utloo#

)he recent change in the budget 2CC- H 2CC2 relating to fiscal incentives for individual

housing and reduction in borrowing cost for this purpose and with the government

reaffirmation to accelerate the reform process, infrastructure development should logically

get priority leading to increase in demand of cement in coming years. )he addition capacity

of cement in the pipeline is limited and therefore the demand and supply situations is

e'pected to be more favorable and cement prices are li#ely to firm up.

Ris;s "&$ c%&ce&s:

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%low down of Indian economy or drop in growth rate of agriculture may adversely affect the

consumption. )he recent increase in railway freight coupled with diesel ? petrol price li#e will

increase the cost of production and distribution, as being dul#y, cement is freight intensive

increase in /imestone royalty also adds to the cost of production, which is considerably

higher than corresponding costs of many other developing countries.

In our country there is a need to under ta#e a massive programme of house construction

activity into the rural and urban areas. It is impossible to construct a house without cement

and steel, in other words, cement is one of the basic construction materials and therefore it is

one of the vital elements for the economic development of the nation.

India inspite of being the 5 th biggest produces of cement in the world has still a very low per

capital consumption of cement.

8ement 8ompanies ;- 1os

8ement 0lants GG 1os

Installed 8apacity D5.B mt

)otal Investment @appro'A 4s. -C,CCC 8rores

)otal +anpower 9ver -.2; /a#hs

+anagement *ward of the Kovernment of *ndhra 0radesh. 7esoram is also conscious of its

social responsibilities. Its rural and community development programmes include adoption of

two nearby villages, running an *gricultural 6emonstration Farm, a +odel 6airy Farm etc.,

Impressed by these activities, F*088I chose 7esoram to confer the *ward for “(est efforts

of an Industrial >nit in the %tate to 6evelop 4ural Economy twice, in the year -GG5 as well

as in -GGB. 7esoram also has to its credit the 1ational *ward @%hri. %.4. 4angta *ward for

%ocial *warenessA for the year -GG; H -GGD, for the (est 4ural 6evelopment Efforts made by

the 8ompany. In the same year 7esoram got the First 0ri!e for +ine Environment and

0ollution 8ontrol for year -GGG too, for the 3 rd year in succession in "uly, 2CC- 7esoram

anne'ed the “:ana +ithra *ward from the Kovernment of *ndhra 0radesh.

Nuality conscious and progressive in its outloo#, 7esoram 8ement is an 9%*% CBCC-

8ompany and also joined the select brand of I%9GCC-&2CCC 8ompanies.

Hist%#:

)he first unit was installed at (asanthnagar with a capacity of 2.; lac# )0* @tones per

annumA incorporating humble supervision, preheated system, during the year -GDG.

)he second unit followed suit with added a capacity of 2 lac# )0* in -G-.

-D


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)he plant was further e'panded to G lac# by adding 2.; lac# tones in *ugust, -GB, -.-3 lac#

tones in "anuary, -GB- and C.B lac# tones in %eptember, -GB-.

P%


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and IndustryA *ward for the (est Family planning effort in the %tate. For the year -GB H BB,

7esoram also got the F*008I *ward for (est Industrial 0romotion ? E'pansion effort in the

state. In the year -GG- 7esoram also got the +ay 6ay *ward of the Kovernment of *ndhra

0radesh for “(est +anagement and “0andit "awaharlal 1ehru %ilver 4olling )rophy for the

(est 0roductivity effort in the %tate, sponsored by F*088I, for -GG3 7esoram got the (est.

Pe3%!"&ce:

)he performance of 7esoram 8ement industry had been outstanding achieving over cent per

cent capacity utili!ation although despite many odds li#e power cuts and which most 5CJ

was waste due to wagon shortage etc.

)he 8ompany being a continuous process industry wor#s round the cloc# and has an

e'cellent record of performance achieving over -CCJ capacity utili!ation.7esoram has always combined technical progress with industrial performance. )he company

had a glorious trac# record for the last 2 years in the industry.

Tec/&%1%8#:

7esoram 8ement uses most modern technology and the computeri!ed control in the plant. *

team of dedicated and well H e'perienced e'perts manages the plant. )he quality is

maintained much above the bureau of Indian %tandards.

)he raw materials used for manufacturing cement are

/ime stone

(au'ite

ematite

Kypsum

E&vi%&!e&t"1 "&$ S%ci"1 Ob1i8"ti%&s:

For environmental promotion and to #eep H up the ecological balance, this section has

underta#en various social welfare programs by adopting ten nearly villages, organi!ing

family welfare camps, surgical camps, children immuni!ation camps, animal health camps,

blood donation camps, distribution of fruit bearing trees and seeds, training for farmers etc.,

were arranged.

7e13"e "&$ Rece"ti%& F"ci1ities:

For the purpose of recreation facility 2 auditoriums were provided for playing indoor games,

cultural function and activities li#e drama, music and dance etc.

-B


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)he industry has provided libraries and reading rooms. *bout -CCC boo#s are available in the

library. *ll #inds of newspaper, maga!ines are made available.

8anteen is provided to cater to the needs to the employees for supply snac#s, tea, coffee and

meals etc.

9ne English medium and one )elugu medium school are provided to meet the educational

requirements.

)he company has provided a dispensary with a qualified medical office and paramedical staff

for the benefit of the employees. )he employees covered under E%I scheme have to avail the

medical facilities from the E%I hospital.

8ompetitions in sports and games are conducted every year for *ugust -;, Independence day

and "anuary 2D, 4epublic 6ay among the employees.

E1ecticit#:

)he power consumption per ton for cement has come down to -CB units against --3 units last

year, due to implementation of various energy saving measures. )he performance of captive

power plant of this section continues to be satisfactory. )otal power generation during the

years was B5 million units last year. )his captive power plant is playing a major role in

#eeping power costs with in economic levels.

)he management has introduced various 46 programs for training and development and

has ta#en various other measures for the betterment of employee$s efficiency ? performance.

)he section has installed adequate air polluting control systems and equipment and is I%9

-5CC- such as Environment +anagement %ystem is under implementation.

A


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THEORETICAL

FRAME7RO=

Financial +anagement is the process of managing the financial resources, including

accounting and financial reporting, budgeting, collecting accounts receivable, ris#

management, and insurance for a business.

)he financial management system for a small business includes both how you are financing it

as well as how you manage the money in the business.

In setting up a financial management system your first decision is whether you will manageyour financial records yourself or whether you will have someone else do it for you. )here

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are a number of alternative ways you can handle this. Mou can manage everything yourselfP

hire an employee who manages it for youP #eep your records in&house, but have an

accountant prepare speciali!ed reporting such as ta' returnsP or have an e'ternal boo##eeping

service that manages financial transactions and an accountant that handles formal reporting

functions. %ome accounting firms also handle boo##eeping functions. %oftware pac#ages are

also available for handling boo##eeping and accounting.

(oo##eeping refers to the daily operation of an accounting system, recording routine

transactions within the appropriate accounts. *n accounting system defines the process of

identifying, measuring, recording and communicating financial information about the

business. %o, in a sense, the boo##eeping function is a subset of the accounting system. *

boo##eeper compiles the information that goes into the system. *n accountant ta#es the data

and analy!es it in ways that give you useful information about your business. )hey can advise

you on the systems needed for your particular business and prepare accurate reports certified

by their credentials. While software pac#ages are readily available to meet almost any

accounting need, having an accountant at least review your records can lend credibility to

your business, especially when dealing with lending institutions and government agencies.

%etting up an accounting system, collecting bills, paying employees, suppliers, and ta'es

correctly and on time are all part of running a small business. *nd, unless accounting is your

small business, it is often the bane of the small business owner. %etting up a system that does

what you need with the minimum of maintenance can ma#e running a small business not only

more pleasant, but it can save you from problems down the road.

)he basis for every accounting system is a good (oo##eeping system. What is the difference

between that and an accounting systemQ )hin# of accounting as the big picture of how your

business runs && income, e'penses, assets, liabilities && an organi!ed system for #eeping trac#

of how the money flows through your business, #eeping trac# that it goes where it is

supposed to go. * good boo##eeping system #eeps trac# of the nuts and bolts && the actual

transactions that ta#e place. )he boo##eeping system provides the numbers for the

accounting system. (oth accounting and boo##eeping can be contracted out to e'ternal firms

if you are not comfortable with managing them yourself.

Even if you outsource the accounting functions, however, you will need some type of

4ecord#eeping %ystems to manage the day&to&day operations of your business & in addition to

2-

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a financial plan and a budget to ma#e certain you have thought through where you are headed

in your business finances. *nd, your accounting system should be producing Financial

%tatements. /earning to read them is an important s#ill to acquire.

*nother area that your financial management system needs to address is ris#. *ny good

system should minimi!e the ris#s in your business. 8onsider implementing some of these ris#

management strategies in your business. 8ertainly, insurance needs to be considered not only

for your property, office, equipment, and employees, but also for loss of critical employees.

Even in businesses that have a well set up system, cash flow can be a problem. )here are

some tried and true methods for +anaging 8ash %hortages that can help prevent cash flow

problems and deal with them if they come up. In the worst case you may have difficulties

meeting all you debt obligations. )a#e a loo# at Financial 6ifficulties to learn more about

ways to manage situations in which you have more debt than income.

It is possible you may even be at the a point where you want to sell the business or simply

close it and liquidate assets. )here are financial issues involved for these circumstances too.

%o, be certain that you #now what steps you need to ta#e in order to protect yourself

financially in the the long run.

8learly, financial management encompasses a number of crucial areas of your business. )a#e

time to set them up right. It will ma#e a significant difference in your stress levels and in the

bottom line for your business.

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Fi&"&ci"1 P1"&&i&8

Financial planning is often thought of as a way to manage debt, but a good financial

plan really is a way to ma#e certain that you have financial security throughout your

life. +any small business owners consider their business as their investment in their

future, but that is a huge ris# to ta#e. *s any economist will tell you, diversification is

the only sure way to create security in the long run. Mour business is one stream of

income. 0utting together a financial plan that allows for multiple streams of income is

what provides you security in the longer term.

23

EFFECTIVE

FINANCIAL

MANAGEMENT


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)he essential components of a good financial plan are investing, retirement planning,

insurance, borrowing and using credit, ta' planning, having a will, and ensuring the

right people receive your assets. Financial planning is the process of meeting your life

goals through the proper management of your finances. /ife goals can include buying a

home, saving for your childs education or planning for retirement.

)he financial planning process involves gathering relevant financial information,

setting life goals, e'amining your current financial status and coming up with a plan for

how you can meet your goals given your current situation and future plans.

)here are personal finance software pac#ages, maga!ines and self&help boo#s to help

you do your own financial planning. owever, you may decide to see# help from a

professional financial planner if

• you need e'pertise you dont possess in certain areas of your finances. For

e'ample, a planner can help you evaluate the level of ris# in your investment

portfolio or adjust your retirement plan due to changing family circumstances.

•

you want to get a professional opinion about the financial plan you developedfor yourself.

• you dont feel you have the time to spare to do your own financial planning.

• you have an immediate need or une'pected life event such as a birth, inheritance

or major illness.

• you feel that a professional adviser could help you improve on how you are

currently managing your finances.

• you #now that you need to improve your current financial situation but dont

#now where to start.

* financial planner is someone who uses the financial planning process to help you

figure out how to meet your life goals. )he planner can ta#e a


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investments, insurance and retirement planning. 9r, the planner may wor# with you on

a single financial issue but within the conte't of your overall situation. )his big picture

approach to your financial goals may set the planner apart from other financial advisers,

who may have been trained to focus on a particular area of your financial life.

In addition to providing you with general financial planning services, many financial

planners are also registered as investment advisers or hold insurance or securities

licenses that allow them to buy or sell products. 9ther planners may have you use more

speciali!ed financial advisers to help you implement their recommendations. With the

right education and e'perience, each of the following advisers could ta#e you through

the financial planning process. Ethical financial planners will refer you to one of these professionals for services that they cannot provide and disclose any referral fees they

may receive in the process. %imilarly, these advisers should refer you to a planner if

they cannot meet your financial planning needs.

Acc%0&t"&t

*ccountants provide you with advice on ta' matters and help you prepare and submit

your ta' returns to the Internal 4evenue %ervice. *ll accountants who practice as

8ertified 0ublic *ccountants @80*sA must be licensed by the state@sA in which they

practice.

Est"te P1"&&e

Estate planners provide you with advice on estate ta'es or other estate planning issues

and put together a strategy to manage your assets at the time of your death. While

attorneys, accountants, financial planners, insurance agents or trust ban#ers may all

provide estate planning services, you should see# an attorney to prepare legaldocuments such as wills, trusts and powers of attorney. +any estate planners hold the

*ccredited Estate 0lanner @*E0A designation.

Fi&"&ci"1 P1"&&e

+any financial planners have earned the 8ertified Financial 0lanners certification, or

the 8hartered Financial 8onsultant @8hF8A or 0ersonal Financial %pecialist @80*?0F%A

designations. Financial planners can ta#e you through the financial planning process.

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I&s0"&ce A8e&t

Insurance agents are licensed by the state@sA in which they practice to sell life, health,

property and casualty or other insurance products. +any insurance agents hold the

8hartered /ife >nderwriter @8/>A designation. Financial planners may identify and

advise you on your insurance needs, but can only sell you insurance products if they are

also licensed as insurance agents.

I&vest!e&t A$vise

*nybody who is paid to provide securities advice must register as an investment

adviser with the %ecurities and E'change 8ommission or relevant state securities

agencies, depending on the amount of money he or she manages. (ecause financial planners often advise people on securities&based investments, many are registered as

investment advisers. Investment advisers cannot sell securities products without a

securities license. For that, you must use a licensed securities representative such as a

stoc#bro#er.

St%c;b%;e

*lso called registered representatives, stoc#bro#ers are licensed by the state@sA in which

they practice to buy and sell securities products such as stoc#s, bonds and mutual funds.

)hey generally earn commissions on all of their transactions. %toc#bro#ers must be

registered with a company that is a member of the 1ational *ssociation of %ecurities

6ealers @1*%6A and pass 1*%6&administered securities e'ams.

)he government does not regulate financial planners as financial plannersP instead, it

regulates planners by the services they provide. For e'ample, a planner who also

provides securities transactions or advice is regulated as a stoc#bro#er or investmentadviser. *s a result, the term


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provided to you and define both his and your responsibilities. )he planner

should e'plain fully how he will be paid and by whom. Mou and the planner

should agree on how long the professional relationship should last and on how

decisions will be made.

2. G"t/ei&8 c1ie&t $"t"> i&c10$i&8 8%"1s(

)he financial planner should as# for information about your financial situation.

Mou and the planner should mutually define your personal and financial goals,

understand your time frame for results and discuss, if relevant, how you feel

about ris#. )he financial planner should gather all the necessary documents

before giving you the advice you need.

3. A&"1#5i&8 "&$ ev"10"ti&8 #%0 3i&"&ci"1 st"t0s(

)he financial planner should analy!e your information to assess your current

situation and determine what you must do to meet your goals. 6epending on

what services you have as#ed for, this could include analy!ing your assets,

liabilities and cash flow, current insurance coverage, investments or ta'

strategies.

5. Deve1%4i&8 "&$ 4ese&ti&8 3i&"&ci"1 41"&&i&8 ec%!!e&$"ti%&s "&$?%

"1te&"tives(

)he financial planner should offer financial planning recommendations that

address your goals, based on the information you provide. )he planner should

go over the recommendations with you to help you understand them so that you

can ma#e informed decisions. )he planner should also listen to your concerns

and revise the recommendations as appropriate.

;. I!41e!e&ti&8 t/e 3i&"&ci"1 41"&&i&8 ec%!!e&$"ti%&s(

Mou and the planner should agree on how the recommendations will be carried

out. )he planner may carry out the recommendations or serve as your


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Mou and the planner should agree on who will monitor your progress towards

your goals. If the planner is in charge of the process, she should report to you

periodically to review your situation and adjust the recommendations, if needed,

as your life changes.

Best P"ctices 7/e& A44%"c/i&8 Fi&"&ci"1 P1"&&i&8

• %et measurable goals.

• >nderstand the effect your financial decisions have on other financial issues.

• 4e&evaluate your financial plan periodically.

• %tart now & dont assume financial planning is for when you get older.

• %tart with what youve got & dont assume financial planning is only for the

wealthy.

• )a#e charge & you are in control of the financial planning engagement.

• /oo# at the big picture & financial planning is more than just retirement planning

or ta' planning.

• 6ont confuse financial planning with investing.

• 6ont e'pect unrealistic returns on investments.

• 6ont wait until a money crisis to begin financial planning.

Mou are the focus of the financial planning process. *s such, the results you get from

wor#ing with a financial planner are as much your responsibility as they are those of

the planner.

)o achieve the best results from your financial planning engagement, you will need to

be prepared to avoid some of the common mista#es by considering the following

advice

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• Set !e"s0"b1e 3i&"&ci"1 8%"1s(

%et specific targets of what you want to achieve and when you want to achieve

results. For e'ample, instead of saying you want to be


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in the stoc# mar#et or interest rates will affect your financial planning results.

• Re"1i5e t/"t #%0 "e i& c/"8e(

If youre wor#ing with a financial planner, be sure you understand the financial

planning process and what the planner should be doing. 0rovide the planner

with all of the relevant information on your financial situation. *s# questions

about the recommendations offered to you and play an active role in decision&

ma#ing.

Fi&"&ci"1 A&"1#sis:

I&t%$0cti%&:2 )he term Rfinancial analysis also #nown as analysis and interpretation of

financial statements$ , refers to the process of determining financial strength and wea#nesses

of the firm by establishing strategic relationship between the items of the balance sheet ,

profit and loss account and other operative data “*naly!ing financial statements by

Metc"13 "&$ Tit"$ “ Financial analysis is a process of evaluating the relationship between

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component parts of a financial statement to obtain a better understanding of a firms position

and performance by M#es )he purpose of financial analysis is to diagnose the

information contained in financial statements so as to "ude the profitability and financial

soundness of the firm. "ust li#e a doctor e'amines his patient by recording his body

temperature, blood pressure , ect. (efore ma#ing his conclusion regarding the illness and

before giving his treatment, a financial analyst analysis the financial statements with various

tools of analysis before commenting upon the finanacial health or wea#nesses of an

enterprise . )he analysis and interpretation of financial statements is essential to bring out the

mystery behind the figures in financial statements. Financial statements analysis is an attempt

to determine the significance and meaning of the financial statement data so that forecast

may be made of the future earnings, ability to pay interest and debt maturities @both current

and long termA and profitability of a sound divided policy.

T#4es %3 3i&"&ci"1 "&"1#sis:2

Financial analysis into different categories depending upon

@-A )he material used and

@2A )he method of operation followed in the analysis or the modus operandi of

analysis

)ypes of financial analysis

9n the basis of material used on the basis of modus operandi

E'ternal Internal ori!ontal :ertical

*nalysis *nalysis *nalysis *nalysis

-.9n the basis of material used & *ccording to material used, financial analysis can be of two

types

E'ternal analysis

Internal analysis

E'ternal analysis & )his analysis is done by outsiders who do not have access to the

detailed internal outsiders include investors,potential investors , 8reditors, 0otential

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8reditors, Kovernment *gencies , 8redit Kgencies and Keneral 0ublic.for financial analysis,

these e'ternal parties to the firm depend almost entirely on the published financial statements.

Internal analysis& )he analysis conducted by persons who have access to the internal

accounting records of a business firm is #nown as internal analysis .

2 9n the basis of modus operandi & *ccording to the modus operandi financial analysis

can also be of two types

a.ori!ontal analysis

b.:ertical analysis

a.ori!ontal analysis& ori!ontal analysis refers to the comparison of financial data of a

company for several years. )he figures for this type of analysis are presented hori!ontally

over a number of columns. )he figures of the various years are compared with standard or

base year . a base year is year chosen as beginning point. )his type of analysis is also called

Rdynamic analysis$ as it is based on the data form year to year rather than on data of any one

year . )he hori!ontal analysis ma#es it possible to focus attention on items that have changed

significantly during the period under view

b. :ertical analysis& :ertical analysis refers to the study of relationship of the various items

in the financial statements of one accounting period . in this types of analysis the figures from

financial statement of a year are compared with a base selected from the same years

statement

+ethods of financial analysis&)he following methods of analysis are generally used&

-. 8omparative %tatements.

2. )rend *nalysis.

3. 8ommon&%i!e %tatements.

5. Funds flow *nalysis.

;. 8ash *nalysis

D. 4atio *nalysis

. 8ost&volume&0rofit *nalysis

8omparative statements&

)he comparative financial statements are statements of the financial position at different

periods of time .the elements of financial position are show in a

8omparative %tatement provides an idea of financial position at two or more periods.

Kenerally two financial statements @balance sheet and income statementA are prepared in

comparative form for financial analysis.

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)E 89+0*4*)I:E %)*)E+E1) +*M %9W&

-. *bsolute figures@rupee amountsA

2. 8hanges in absolute figures i.e. increase or decrease in absolute figures.

3. *bsolute data in terms of percentages.

5. Increase or decrease in terms of percentages.

)E )W9 89+0*4*)I:E %)*)E+E1)% *4E&

-. 8omparative balance sheet, and

2. Income statement.

@-A 8omparative balance sheet& )he comparative balance sheet analysis is the study of the

trend of the same items, group of items and computed items in two or more balance sheets of

the same business enterprise on different dates. )he change in periodic balance sheet items

reflect the conduct of a business the change can be observed by comparison of the balance

sheet at the beginning and at the end of a period and these changes can help in forming an

opinion about the progress of an enterprise.

K>I6E /I1E% F94 I1)E404E)*)I91 9F 89+0*4*)I:E (*/*18E

%EE)&

While interpreting comparative balance sheet the interpreter is e'pected to study the

following aspects&

-. 8urrent financial position and liquidity position

2. /ong&term financial position

3. 0rofitability of the concern.

89++91 %ISE %)*)E+E1)&

)he common&si!e statements, balance sheet and income statement are show in analytical

percentages. )he figures are shown as percentages of total assets, total liabilities and total

sales. )he total assets are ta#en as -CC and different assets are e'pressed as a percentage of

the total similarly, various liabilities are ta#en as a part of total liabilities.

89++91 %ISE (*/*18E %EE)&

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* statement in which balance sheet items are e'pressed as the ratio of each asset to total

assets and the ratio of each liability is e'pressed as a ratio of total liabilities is called common

si!e balance. )he common si!e balance sheet can be used to compare companies of differing

si!e. )he comparison of figures in different periods is not useful because total figures may be

affected by a number of factors. It is not possible to establish standard norms for various

assets. )he trends of figures from year to year may not be studied and even they may not give

proper results.

)4E16 *1*/M%I% 9F (*/*18E %EE)&

)rend analysis is :ery important tool of hori!ontal financial analysis.

)his analysis enables to #nown the change in the financial function and operating efficiency

in between the time period chosen.

(y studding the trend analysis of each item we can #now the direction of changes and based

upon the direction of changes, the options can be changed.

)rend T*bsolute :alue of item in the statement understudy U-CC

*bsolute :alue of same item in the base statement

8*% +*1*KE+E1)

Kood cash management can have a major impact on overall wor#ing capital management.

)he #ey elements of cash management are

• 8ash forecastingP

• (alance managementP

• *dministrationP

• Internal control.

C"s/ F%ec"sti&8. Kood cash management requires regular forecasts. In order for these to

be materially accurate, they must be based on information provided by those managers

responsible for the amounts and timing of e'penditure. 8apital e'penditure and operating

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e'penditure must be ta#en into account. It is also necessary to collect information about

impending cash transactions from other financial systems, such as creditors and payroll.

B"1"&ce M"&"8e!e&t )hose responsible for balance management must ma#e decisions

about how much cash should at any time be on call in the 6epartmental (an# *ccount and

how much should be on term deposit at the various terms available.

)here are various types of mathematical model that can be used. 9ne type is analogous to the

E4N inventory model. /inear programming models have been developed for cash

management, subject to certain constraints. )here are also more sophisticated techniques.

A$!i&ist"ti%&. 8ash receipts should be processed and ban#ed as quic#ly as possible

because

• )hey cannot earn interest or reduce overdraft until they are ban#edP

• Information about the e'istence and amounts of cash receipts is usually not available

until they are processed.

Where possible, cash floats @mainly petty cash and advancesA should be avoided. If, on

review, the only reason that can be put forward for their e'istence is that


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Cash management is not cost control

o 8ost control is a reactive measure using crude tools e.g. J cuts

o 8ost control often depletes value @e.g. by using people as accounting chipsA

CREDITORS MANAGEMENT

• 8reditors are the businesses or people who provide goods and services in credit terms.

)hat is, they allow us time to pay rather than paying in cash.

• )here are good reasons why we allow people to pay on credit even though literally it

doesnt ma#e senseV If we allow people time to pay their bills, they are more li#ely to

buy from your business than from another business that doesnt give credit. )he length

of credit period allowed is also a factor that can help a potential customer deciding

whether to buy from a company or not the longer the better.

• 8reditors will need to optimi!e their credit control policies in e'actly the same way as

the debtors turnover ratio.

DEBTORS MANAGEMENT

)he objective of debtor management is to minimi!e the time&lapse between completion of

sales and receipt of payment. )he costs of having debtors are

• 9pportunity costs @cash is not available for other purposesAP

• (ad debts.

6ebtor management includes both pre&sale and debt collection strategies.

Pe2s"1e st"te8ies i&c10$e:

• 9ffering cash discounts for early payment and?or imposing penalties for late paymentP

• *greeing payment terms in advanceP

• 4equiring cash before deliveryP

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• %etting credit limitsP

• %etting criteria for obtaining creditP

• (illing as early as possibleP

• 4equiring deposits and?or progress payments.

P%st2s"1e st"te8ies i&c10$e:

• 0lacing the responsibility for collecting the debt upon the center that made the saleP

• Identifying long overdue balances and doubtful debts by regular analytical reviewsP

• aving an established procedure for late collections, such as

& a reminderP

& a letterP

& cancellation of further creditP

& telephone callsP

& use of a collection agencyP& legal action.

Objectives %3 Receiv"b1es !"&"8e!e&t:

• )o maintain an optimum level of investment in receivables.

• )o maintain optimum volume of sales.

• )o control the cost of credit allowed O to #eep it at the minimum possible level.

• )o #eep down the average collection period.

• )o obtain benefit from the investment in debtors at optimum level.

Debt C%&t%1 "&$ Debt C%11ecti%& Pei%$

6ebt control is an important part of business activity because although a debt is an asset, it is

not as liquid an asset as cash in the ban#. Firms have to ensure they collect their debts asefficiently as possible within the terms they have set for the debt.

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)he only way we can consider how efficient the firms debt control has been is to use a ratio.

)his ratio is #nown as the $ebt c%11ecti%& 4ei%$.

)he figure measures @in number of daysA how long on average it has ta#en the firm to collect

its debts. )he higher the figure the longer it has ta#en. owever, the normal period for

collecting debts will differ between industries. For e'ample, a figure of -C days may sound

very impressive, but if this was the figure for a chain of supermar#ets it would be high.

)herefore no debt is incurred and retail firms will tend to have very few debtors and a low

debt collection period. Firms who do a lot of business on credit though will have much higher

debt collection periods.

Debt%s@ T0&%ve

6ebtors control is a vital aspect of wor#ing capital management. +any businesses need to

sell their goods on credit, otherwise they might find it difficult to survive if their competitors

provide such credit facilitiesP this could mean losing customers to the opposition

7OR=ING CAPITAL MANAGEMENT

Introduction

Wor#ing capital management means management of current assets of the firm.

Wor#ing capital can be defined in simple terms as e'cess of current assets over currentliabilities. In short it is the difference between inflow and outflow of funds. Wor#ing capital

includes stoc# of raw material, semi&finished goods including wor# in progress, cash in hand

and ban# and debtors after deducting current liabilities i.e. %unday creditors for institutions

and other financial institutions within -2 months and creditors for purchase of 4aw +aterial

and any short terms advances towards sale of goods.

)he goal of wor#ing capital management is to manage the firms current assets and current

liabilities in such a way that a satisfactory level of wor#ing capital is maintain. )his is

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because if the firm cannot maintain the satisfactory level of wor#ing capital, it is li#ely to

become insolvent and may even force into ban#ruptcy. )he current assets should be large

enough to cover its current liabilities in order to ensure a reasonable margin of safety.

Wor#ing capital is a circulating capital, means those assets which are changed to one form to

other form.

In managing the current assets effectively the following points to be considered

8918E0) 9F W947I1K 8*0I)*/

)here are three types of wor#ing capital, Kross wor#ing capital, 1et wor#ing capital

and fi'ed wor#ing capital.

'( G%ss 7%;i&8 C"4it"1: It refers to the firm$s investment in current assets i.e. mainly

stoc#, debtors, bills receivables and cash. )his is also #nown as R8urrent capital concept$ or

8irculating capital concept$. It is represented by the sum total of the current assets of the

enterprise. It is #nown as 8irculating capital$ because current assets of a company are

changed from one form to another, for e.g. from cash to inventories, inventories to receivable

to cash.

)he Kross capital concept focuses attention on two aspects of current assets management

aA 9ptimum investment in current assets and

Financing of current assets.

2. Net


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8ash brought in the business is used for purchase of raw material or payment of wages and

other e'penses incurred for converting raw material into finished goods. Koods once

manufactured are sold and cash is reali!ed from customers. %o the wor#ing capital includes

the current assets li#e cash and ban#, inventory, receivables etc. it is presented in the

following operations circle with the cash, raw material, finished goods and receivables

showing various lin#ages.

1EE6% 9F W947I1K 8*0I)*/

Every firm differs in the requirement of wor#ing capital. )he firm$s aim is how

effectively utili!ed wor#ing capital to ma'imi!e the wealth and sufficient returns from its

operations. It depends upon the steady growth of profits and successful sales activity. For

this we have to invest enough funds in the current assets for the achievement of the sales

activity. Investment in current assets is needed, as sales do not convert in to cash

intentionally, operating cycle involve, in conversion of sales in to cash. 9perating cycle is

the duration of, time required to convey sales after conversion of resources in to inventory

and cash.

)he wor#ing capital needs of a firm are influenced by numerous factors. )he important ones

are

1ature of (usiness

%easonality of operations

0roduction policy

+ar#et condition

8onditions of supply

%everal strategies are available to a firm for financing its capital requirement. *n important

one is based on the matching principle. *ccording to this principle, the maturity of the

sources of finance should match the maturity of the assets being financed. )his means the

fi'ed assets and permanent current assets should be supported by long term sources of

finance whereas fluctuating current assets must be supported by short& term sources of

finance.

)M0E% 9F W947I1K 8*0I)*/

6epending upon the nature of the funds bloc#ed, wor#ing capital can be of two types

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0E4+*1E1) 94 4EK>/*4 W947I1K 8*0I)*/

:*4I*(/E W947I1K 8*0I)*/

0E4+*1E1) 94 4EK>/*4 W947I1K 8*0I)*/

)he magnitude of the current assets depends upon the firms operating cycle. )he

operating cycle is a continuous process and the need for current assets is also continuously.

(ut the level of current assets needed is not always same. It increase or decreases overtime.

owever there is always minimum level of current assets which is continues required by a

firm to carry out its business operations. )he minimum level of current assets which is

continues required by a firm to carry out its business operations. )he minimum level of

current assets is called permanent or fi'ed wor#ing capital. It represents the minimum

amount of investment in current assets that is seemed necessary to carry on operations at

time. It is also #nown as Rhard core$. It is of two #inds

aA I1I)I*/ W947I1K 8*0I)*/

*t its inception and during the formation period of its operations, a company must

have enough cash funds to meet its obligations. In the initial year it as revenues may not be

regular and adequate credit arrangements may not be available from ban#s, financial

institutions, etc., till it has established its credit standing, credit may have to be granted on

sales to attract the customers.

bA 4EK>/*4 W947I1K 8*0I)*/

It is the amount of wor#ing capital needed for the continuous operations of the

business of the company. It refers to the e'cess of current assets over the current liabilities so

that the process of conversion of cash into stoc#, stoc# into sales, receivables and collections

is maintained without any brea#s.

VARIABLE WORKING CAPITAL

)his wor#ing capital required over and above the permanent wor#ing capital depends

upon changes in production and sales are called fluctuating or variable wor#ing capital or

temporary wor#ing capital. )here may be changes either increase or decrease in wor#ing

capital. +any the variable wor#ing capital required in season dependent. It represents

additional assets required at different times during the operating year to cover any change or

variability from the normal operations. It can be of two parts

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A( Se"s%&"1


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B. *dvance payment of ta'

G. *dvance for purchase of raw materials, components and consumable stores

-C. 0repaid E'penses

--. 6eposits #ept with public bodies for the business operations

C0e&t Li"bi1ities:

8urrent /iabilities are those, which are e'pected to fall due or mature for payment in

a short period not e'ceeding a year and represent short term sources of funds.

List %3 C0e&t Li"bi1ities:

-. %hort term (orrowings @including bills purchased and discountedA from

a. (an#s and b. 9thers

2. >nsecured /oans

3. 0ublic deposits maturing in one year

5. %undry creditors for raw materials and consumable stores and spares

;. Interest and other charges accrued but not due for payment

D. 6eposits from 6ealers, %ellers agents, etc

. Installments of tern /oans, 6eferred payments, 8redits, 6ebentures, 4edeemable preference shares and long term deposits, payable within one year

B. %tatutory /iabilities

a. 0 F dues

b. 0rovision for ta'ation

c. %ales ta' and e'cise ta'

d. 9bligations towards wor#ers considered statutory

e. 9thers

G. +iscellaneous 8urrent /iabilities

a. 6ividends

b. /iabilities for e'penses

c. Kratuity payable within one year

d. 9ther provisions

e. *ny other payment due within one year

FACTORS DETERMINNING 7OR=ING CAPITAL

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N"t0e % c/""cte %3 b0si&ess

)he wor#ing capital requirements of a firm basically depend upon the nature of its

business. 0ublic utility underta#ings li#e electricity, water and railway need very limited

wor#ing capital because they offer cash sales only and supply services.

Si5e %3 b0si&ess % Sc"1e %3 %4e"ti%&s

)he wor#ing capital requirements of a concern are directly influenced by the si!e of

its business which may be measured in terms if scale of operations. Kreater the si!e of

business unit, generally larger will be the requirement of wor#ing capital.

P%$0cti%& 4%1ic#

In certain industries the wide fluctuations may be due to seasonal variations. )he

requirements of wor#ing capital in such as a case depend upon the production policy.

Se"s%&"1 +"i"ti%&s:

In certain industries the raw material may not be available throughout the year. )hey have to

buy raw materials in bul# during the season to ensure an uninterrupted flow of production.

7%;i&8 C"4it"1 c#c1e:

In a manufacturing concern the wor#ing capital starts with the purchase of raw

materials and ends with reali!ation of cash from the sale of finished products. )he speed with

which the wor#ing capital completes one cycle determines the requirements of wor#ing

capital. /onger the period of cycle larger is the requirement of wor#ing capital.

Ce$it P%1ic#:

)he credit policy of a concern in its dealings with debtors and creditors considerably

influence the requirements of wor#ing capital. * concern that purchases its requirements on

credit and sells its products on cash requires less amount of wor#ing capital.

B0si&ess c#c1e:

(usiness cycles refer to alternative e'pansion and contraction in general business

activity. In a period of boom i.e., when the business is prosperous, there is a need for larger

amount of wor#ing capital due to the increase in sales, rise in prices, optimistic e'pansion of

business, etc. 9n the contrary in the times of depression i.e., when there is down swing of the

cycle, the business contracts, sales decline, difficulties are faces in collections from debtors

and firms may have a large amount of wor#ing capital lying idle.

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)he wor#ing capital requirement of a concern increase with the growth and e'pansion

of its business activities. *lthough, it is difficult to determine the relationship between the

growth in the volume of business and wor#ing capital of a business, yet it may be concluded

that for normal rate of e'pansion in the volume of business, we may have retained profits to

provide for more wor#ing capital but in fast growing concerns, we shall require large

wor#ing capital.

Pice 1eve1 c/"&8es:

8hanges in the price level also affect the wor#ing capital requirements. Kenerally, the

rising prices will require the maintain large amount of wor#ing capital as more funds will be

required to maintain the same current assets. )he effect of rising prices may be different for

different firms. %ome firms may be affected much while some others may not be affected at

all by the rise in prices.

Ot/es 3"ct%s:

8ertain other factors such as operating efficiency, management ability, irregularities

of supply, import policy, asset structure, importance of labor, ban#ing facilities, etc., also

influence the requirements of wor#ing capital.

FUNDS FLO7 ANALYSIS

Funds Flow statement is a method by which we study changes in the financial

position of a business enterprise between beginning and ending financial statements dates.

ence, the funds flow statement is prepared by comparing two balance sheets and worth the

help of such other information derived from the accounts as may be needed.

(roadly spea#ing, the preparation of funds flow statement consists of two parts

-. %tatement of %chedule of 8hanges in Wor#ing 8apital

2. %tatement of sources and *pplication of Funds

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'( STATEMENT OF CHANGES IN 7OR=ING CAPITAL:

Wor#ing 8apital means the e'cess of current assets over current liabilities.

%tatement of 8hanges in Wor#ing 8apital Is prepared to show the changes in the

wor#ing capital between the two balance sheet dates. )his statement is prepared with

the help of 8urrent *ssets and /iabilities derived with the help of 8urrent *ssets and

8urrent /iabilities derived from the two balance sheets as

7%;i&8 C"4it"1 C0e&t Assets C0e&t Li"bi1ities(

-. *n increase in 8urrent *ssets increase Wor#ing 8apital

2. * decrease in 8urrent *ssets decrease Wor#ing 8apital

3. *n increase in 8urrent /iabilities decrease Wor#ing 8apital

5. * decrease in current /iabilities increase Wor#ing 8apital

)he changes in all current assets and liabilities are merged into one figure only H

either an increase or decrease in wor#ing capital over the period for which funds statements

has been prepared. If the wor#ing capital at the end of the period is more than the wor#ing

capital at the beginning thereof, the difference is e'pressed as RIncrease in wor#ing capital$.

9n the other hand, if the wor#ing capital at the end of the period is less than that at the

commencement, the difference is called R6ecrease in Wor#ing 8apital$

Working Capital Cycl

)he way wor#ing capital moves around the business is modeled by the


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)he cycle starts with buying of raw materials on credit from the suppliers. )hese suppliers

become the creditors of the company. )he raw materials undergo through different value

addition stages and are converted into finished goods. )he finished goods are sold to the

customers on credit who become the debtors of the company. *t the end of the credit period

the company gets the cash from the debtors whom they pay to the creditors and the cycle

goes on.

It is must for any company to have an ideal wor#ing capital cycle. It should neither be too

long nor too short. If the cycle is too long the funds get stuc# up with the debtors and prompt

payment to the creditors cannot be made.

* simple wor#ing capital cycle may loo# something li#e

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CAS C!E"IT#!S

!A$ MATE!IALS

$%I%&FINISE" G##"S

"E'T#!S

Su((ly

&ro)uction

Value a))e) con*ersion

Sales

Collection

F94+% 9F (*17 FI1*18E.

* firm can draw funds from its ban#s within the ma'imum credit limit sanctioned. It can

draw funds in the following forms.

9verdrafts

8ash credit

(ills purchasing or discounting

Wor#ing capital loan

/etter of credit

5B

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TANDON COMMITTEE

/i#e many other activities of the ban#s, method and quantum of short&term

finance that can be granted to a corporate was mandated by the 4eserve (an# of

India till -GG5. )his control was e'ercised on the lines suggested by the

recommendations of a study group headed by %hri 0ra#ash )andon.

)he study group headed by %hri 0ra#ash )andon, the then 8hairman of 0unjab

1ational (an#, was constituted by the 4(I in "uly -G5 with eminent

personalities drawn from leading ban#s, financial institutions and a wide cross&

section of the Industry with a view to study the entire gamut of (an#s finance

for wor#ing capital and suggest ways for optimum utili!ation of (an# credit.

)his was the first elaborate attempt by the central ban# to organi!e the (an#

credit. )he report of this group is widely #nown as T"&$%& C%!!ittee report(

+ost ban#s in India even today continue to loo# at the needs of the corporates

in the light of methodology recommended by the Kroup.

*s per the recommendations of )andon 8ommittee, the corporates should be

discouraged from accumulating too much of stoc#s of current assets and should

move towards very lean inventories and receivable levels. )he committee even

suggested the ma'imum levels of 4aw +aterial, %toc#&in&process and Finished

Koods which a corporate operating in an industry should be allowed to

accumulate these levels were termed as inventory and receivable norms.

6epending on the si!e of credit required, the funding of these current assets

@wor#ing capital needsA of the corporates could be met by one of the followingmethods

Fist Met/%$ %3 Le&$i&8:

(an#s can wor# out the wor#ing capital gap, i.e. total current assets less current

liabilities other than ban# borrowings @called +a'imum 0ermissible (an# Finance or

+0(FA and finance a ma'imum of ; per cent of the gapP the balance to come out of

long&term funds, i.e., owned funds and term borrowings. )his approach was

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considered suitable only for very small borrowers i.e. where the requirements of credit

were less than 4s.-C lacs. )his method will give a minimum current ratio of --

Sec%&$ Met/%$ %3 Le&$i&8:

>nder this method, it was thought that the borrower should provide for a

minimum of 2;J of total current assets out of long&term funds i.e., owned funds plus

term borrowings. * certain level of credit for purchases and other current liabilities

will be available to fund the buildup of current assets and the ban# will provide the

balance @+0(FA. 8onsequently, total current liabilities inclusive of ban# borrowings

could not e'ceed ;J of current assets. 4(I stipulated that the wor#ing capital needs

of all borrowers enjoying fund based credit facilities of more than 4s. -C lacs should

be appraised @calculatedA under this method this method will give a current ratio of

-.3-.

7%;i&8 C"4it"1 "ssess!e&t %& t/e 3%!01" 4escibe$ b# t/e T"&$%& C%!!ittee(

Wor#ing 8apital 4equirement @W84A T X8urrent assets i.e. 8* @as per industry normsA H

8urrent /iabilities i.e. 8/Y

0ermissible (an# Financing X0(FZ T W84 H 0romoter$s +argin +oney i.e. 0++ @to be

brought in by the promoterA

As 4e F%!01" ' 0++ T 2;J of X8* H 8/Y and thereby 0(F T ;J of X8* H 8/Y

As 4e F%!01" ) 0++ T 2;J of 8* and thereby 0(F T ;JX8*Y H 8/

*s is apparent Formula 2 requires a higher level of 0++ as compared to Formula -. Formula

2 is generally adopted in case of ban# financing. In cases of sic# units where the promoter is

unable to bring in 0++ to the e'tent required under Formula 2, the difference in 0++

between Formulae - and 2 may be provided as a Wor#ing 8apital )erm /oan repayable ininstallments over a period of time.

+E)96% F94 6E)E4+I1I1K 0E4+I%%I(/E (*17 (9449WI1K%

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T/e !"i& 3"ct%s 0se$ i& t/e esti!"ti%& %3


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determining the limit for the first time or in the initial few years of the business.

(an#s often adopt industry standard norms for capacity utili!ation in the initial years.

Ste4s i&v%1ve$ i& "ivi&8 "t t/e 1eve1 %3


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problems raising cash. In these companies, products are delivered and sold to the customer

before the company ever pays for them.

* negative wor#ing capital is a sign of managerial efficiency in a business with low inventory

and accounts receivable @which means they operate on an almost strictly cash basisA. In any

other situation, it is a sign a company may be facing ban#ruptcy or serious financial trouble

2. FUNDS FLO7 STATEMENT

Funds flow statement is a final statement. It shows the amount used in a particular

period of time i.e., “*pplication of Funds and the how much amount comes into the

organi!ation in a particular period. Finally those application and sources are balanced.

FUNDS FLO7 ANALYSIS

%ignificant technique of financial analysis is FUNDS FLO7 ANALYSIS*. It is

designed to highlight changes in the financial condition of a business concern between

concern between two points of time which generally conform to beginning and ending

financial statement dates.

*lthough financial statements supply useful information to the management anddescribe the nature of changes in ownership as a result of the periods productive and

commercial activities, these statements fail mirror the funds changes that have ta#en place

over a given time span. )hey do not spell out the movement of funds.

It is more important to describe the sources from which additional funds were derived

and the uses to which these funds were put, because the ultimate success of a business

enterprise depends on where got and where gone situations. )he Funds Flow %tatement is,

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therefore, prepared to uncover the information which the financial statements fail to describe

clearly.

)hus, Funds Flow %tatement is a report which summari!es the events ta#ing between

the two accounting periods. It spells out the sources from which funds were derived and the

uses to which these funds were put. )his statement is essentially derived from an analysis of

which these have occurred in assets and liabilities items between two balance sheet dates. In

this statement, only the net changes are shown so that the outcome of a transaction upon the

financial condition of a business enterprise reflected more sharply.

MEANING AND CONCEPT OF FUNDSFUND:

*ccording to the dictionary meaning the term “funds implies an accumulation or

deposit of resources from which supplies are may be drawn a more or less permanent store or

supply. It is also defined available pecuniary resources but these two meanings are broad in

nature and apt to macro level planning and control. * number of definitions of the term Rfund$

have been given some people call Rfund$ as Rcash$. (ut it is seen in practice that the current

assets are constantly circulating through cash account in business operations and many

transactions affect flow of cash at least later or sooner. For e'ample, the sale of goods on

credit increases in accounts later or sooner. For e'ample, the sale of goods on credit increases

in accounts payable rather than resulting in an immediate cash flow. %imilarly, certain

e'penses may result in a current liability since they might not have been paid immediately. In

other words, it may be said that any current assets and current liability has its impact on

wor#ing capital @ as wor#ing capital is the difference of current assets and current liabilitiesA

rather than cash. )herefore there is another view about meaning of Rfund$ that it means

Rwor#ing capital$.

)he term funds have been defined in a number of ways.

IN A NARRO7 SENSE:

It means cash only and a funds flow statement prepared on this is called a cash flow

statement. %uch a statement enumerates net effects of the various business transactions on

cash and ta#es into account receipts and disbursements of cash.

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)he term Funds refers to money values in whatever from it may e'ist here Funds means

all means all financial resources used in business whatever in the firm of men, material,

money, machinery and others.

IN A POPULAR SENSE:

)he term Funds means wor#ing capital i.e., the e'cess of current assets over current

liabilities. )he wor#ing capital concept of funds has emerged due to fact that total resource of

a business are invested partly in fi'ed assets in the form of fi'ed capital and partly #ept in

firm of liquid of near liquid form as wor#ing capital.

MEANING AN

FINANCIAL STATEMENT ANALYSISkesoram cement.docx

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