Working Capital Management at Sundaram Motors

Working Capital Management at TVS Sundaram Motors

A Summer Project Proposal for

Post-Graduate Programme Business Management

By

Balaji S R

Under the guidance of

Mr. V. Rajaraman Prof. Suyash Bhat,Assistant Manager - Finance, Faculty,TVS Sundaram Motors SIMSR

K J Somaiya Institute of Management Studies & Research

1st July 2010

Certificate of Approval

We approve this Summer Project Report titled "Working Capital Management at TVS

Sundaram Motors" as a certified study in management carried out and presented in a

manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-

Graduate Diploma in Business Administration/ Post Graduate Program in

International Business for which it has been submitted. It is understood that by this

approval we do not necessarily endorse or approve any statement made, opinion expressed

or conclusion drawn therein but approve the Summer Project Report only for the purpose it

is submitted.

Summer Project Report Examination Committee for evaluation of Summer Project Report

Name Signature

1. Faculty Examiner

2. PG Summer Project Co-coordinator

Certificate from Summer Project Guides

This is to certify that Mr. Balaji S R, a student of the Post-Graduate Diploma in Business

Administration, has worked under our guidance and supervision. This Summer Project

Report has the requisite standard and to the best of our knowledge no part of it has been

reproduced from any other summer project, monograph, report or book.

Faculty Guide: Prof. Suyash Bhat Organizational Guide: Mr. V. Rajaraman

Designation: Designation: Assistant Manager

Organization: Sundaram Motors

Address: 180, Anna Salai, Chennai - 6

Date Date 23rd June 2010

Acknowledgement

I am heartily thankful to my manager, Mr.V.Rajaraman, whose encouragement, guidance

and support from the initial to the final level enabled me to develop an understanding of the

project and its requirements.

Lastly, I offer my regards to all of those who supported me in any respect during the

completion of the project.

Balaji S R

Abstract

The report objective is to understand the working capital management practices

followed at TVS Sundaram motors. Working capital management is a crucial aspect of

business for any organization. The report carries the details of working capital management

processes followed by financial analysis of TVS Sundaram motors. The financial analysis

includes various tools such as ratio analysis in order to understand and arrive at conclusions

regarding the financial position of TVS Sundaram motors. These conclusions are then used

to come up with certain strategic recommendations which might help improving the

working capital position at TVS Sundaram motors.

The methodology adopted was, first to understand the overall business model of TVS

Sundaram motors - the major organizational functions are used as a base upon which we try

to fit the existing departments so as to obtain a clear picture at the macro level. Next, we go

a level deeper and take a look at the processes used by each of these departments; the

finance department in particular is our area of interest. Here we try to see how the

accounting function supports the sales and service functions of TVS Sundaram motors. The

major activities and their relevance are observed. In the third part of our research we look

at the financial numbers of TVS Sundaram motors and do a ratio analysis based on which we

arrive at certain conclusions. These conclusions lead to recommendations which would

improve upon the working capital management practices followed.

The major findings are related to the various procedures followed and working

capital position of the company. We go one step further and try to identify the reasons

behind such issues noticed and come up with certain recommendations which would

address them. Ratio analysis is the core tool used in order to understand the financials of

the company.

Table of Contents

Acknowledgement.................................................................................................................................6

Abstract.................................................................................................................................................7

1. Introduction...................................................................................................................................9

1.1. About the Group..................................................................................................................12

1.2. About the Company.............................................................................................................12

1.3. Automobile Dealership........................................................................................................12

1.4. Parts distribution.................................................................................................................13

1.5. Tools and Garage equipments division................................................................................13

1.6. Special products division.....................................................................................................13

1.7. Customer centric business - MyTVS.....................................................................................13

2. Rationale for Study......................................................................................................................14

2.1. Problem Statement..............................................................................................................14

2.2. Literature survey..................................................................................................................15

2.2.1. Working Capital...........................................................................................................15

2.2.2. The Need......................................................................................................................15

2.2.3. Fixed and Fluctuating working capital..........................................................................15

2.2.4. Components of Working Capital..................................................................................16

3. The Research Design....................................................................................................................17

3.1. Methodology of Study.........................................................................................................17

3.2. Business model of Sundaram motors..................................................................................17

3.3. Accounting practices at Sundaram motors..........................................................................18

3.4. Data Analysis........................................................................................................................19

3.4.1. Activity Ratios..............................................................................................................19

3.4.2. Liquidity Ratios.............................................................................................................25

3.4.3. Solvency Ratios............................................................................................................29

4. Results and Conclusions..............................................................................................................32

5. Recommendations.......................................................................................................................32

5.1. General................................................................................................................................32

5.2. Aspects of Working Capital Management............................................................................33

6. References...................................................................................................................................34

6.1. Links.....................................................................................................................................34

6.2. Books...................................................................................................................................34

7. Appendix......................................................................................................................................35

7.1. Current Assets, Liabilities Statement...................................................................................35

List of Figures

Figure 1 Business Model of Sundaram Motors....................................................................................17

Figure 2 Working Capital Turnover......................................................................................................20

Figure 3 Inventory Turnover Ratio.......................................................................................................22

Figure 4 Debtors Turnover Ratio.........................................................................................................23

Figure 5 Creditors Turnover Ratio........................................................................................................24

Figure 6 Current Ratio.........................................................................................................................26

Figure 7 Quick Ratio.............................................................................................................................27

Figure 8 Absolute Liquidity Ratio.........................................................................................................29

Figure 9 Debt Equity Ratio...................................................................................................................30

Figure 10 Interest Coverage Ratio.......................................................................................................31

List of Tables

Table 1 Working Capital Turnover.......................................................................................................20

Table 2 Inventory Turnover Ratio........................................................................................................21

Table 3 Debtor Turnover Ratio............................................................................................................23

Table 4 Creditors Turnover Ratio.........................................................................................................24

Table 5 Current Ratio...........................................................................................................................25

Table 6 Quick Ratio..............................................................................................................................27

Table 7 Absolute Liquidity Ratio..........................................................................................................28

Table 8 Debt Equity Ratio....................................................................................................................29

Table 9 Interest Coverage Ratio...........................................................................................................31

Abbreviations

OEM – Original Equipment Manufacturer

TVS – TV Sundaram Iyengar and Sons

WCT – Working Capital Turnover

ITR – Inventory Turnover Ratio

DTR – Debtors Turnover Ratio

CTR – Creditors Turnover Ratio

ALR – Absolute Liquidity Ratio

ICR – Interest Coverage Ratio

1. Introduction

1.1. About the Group

The TVS Group - T V Sundaram Iyengar & Sons Ltd. was established in 1911 by Shri.

TV Sundaram Iyengar. As one of India’s largest industrial entities it epitomizes Trust, Value

and Service.

Today, there are around 43 companies in the TVS Group, employing more than

25,000 people worldwide and with a turnover in excess of USD 5 billion.

With steady growth, expansion and diversification, TVS commands a strong presence

in manufacturing of two-wheelers, auto components and computer peripherals. It also has

vibrant business in the distribution of heavy commercial vehicles passenger cars, finance

and insurance.

1.2. About the Company

T V Sundaram Iyengar & Sons Ltd., established a Vehicle Dealership in Chennai for

handling Cars and Commercial Vehicles and thus ‘Sundaram Motors’ was born on August 13,

1945.

Being the trading and distribution arm of the group, the business activities of

Sundaram motors include Dealerships for Automobile vehicles, Distribution of spares for

after – market, Sales & Service support for Garage Equipment, Sales & Service of products

for special applications like construction & Material handling and providing customer centric

services for car customers under brand ‘My TVS’.

1.3. Automobile Dealership

‘Sundaram motors’ distributes commercial vehicles, Utility & Sports Utility vehicles,

Passenger Cars representing various leading automobile vehicle manufacturers such as

Ashok Leyland, Daimler Chrysler, General Motors, Honda and Mahindra & Mahindra. The

company has more than 100 outlets and sells over 30,000 vehicles and services more than

300000 vehicles per annum being the leading automobile distribution company in India.

1.4. Parts distribution

The company is the largest distributors of automobile spare parts in the country,

handling more than 80 suppliers and 35, 000 part numbers of franchised parts, agency lines

TVS branded parts and so on. It has operations in Tamil Nadu, Kerala, MP & UP and reaches

over 3000 retail outlets spread all over these territories. It has modern warehouse

supported with state of the art IT infrastructure.

1.5. Tools and Garage equipments division

The company also undertakes Sales & Service of Garage Equipments and specializes

in installing commissioning and providing complete after sales – service support for critical

imported state - of - the art automobile service equipment. All these are imported from

various countries from suppliers who are reputed brands abroad.

1.6. Special products division

The company has also diversified into Marketing (Sales & Service) products for

special application such as Construction & Material handling Equipment, Man lifts, Air

Compressors, Bus Air Conditioners etc., representing leading names from India & Overseas

in this field and has earned a niche for itself in this category of business. The company has

also launched a new avenue of service providing Fork Lift Trucks with trained operators on a

monthly lease basis under its unique Own & Operate scheme.

1.7. Customer centric business - MyTVS

My TVS is the newest initiative of TVS & Sons to offer customers a branded

alternative chain of service network for all brands of cars. Thus, TVS has given birth to a true

multi brand independent aftermarket integrated solution for car customers.

2. Rationale for Study

The purpose of this study is to get a grip on the actual accounting practices followed in

organizations, to observe in practice what has been studied in theory. By going through the

processes of working capital management at TVS Sundaram motors it is hoped to gain an

insight into the workings of the company from the context of its accounting function. The

scope of the project has been limited to the finance department and specifically within it to

areas concerning the management of working capital – i.e. cash, inventory and receivables

and their utilization. Financial statement analysis forms the core part of the study.

Analysis and interpretation of financial statement refers to such a treatment of

information containing in the balance sheet and income statement so as to afford full

diagnosis of the financial position and profitability of the business enterprises. Financial

statement analysis largely depends upon the relationship between various financial factors

in a business.

The objective is not only to understand the concepts alone, but rather to observe the

processes involved and look for potential areas of improvement. A comparison with ideal

case scenarios would help us identify such areas which can then be improved upon.

Recommendations would be made keeping in mind these specific areas. Specifically the

objectives for this study are:

2.1. Problem Statement

1. To analyze working capital management in TVS Sundaram motors limited.

2. To assess the relative significance of various source of working capital.

3. To observe the relationship between working capital and liquidity position of the

company.

4. To find out the impact of working capital on profitability and to suggest potential

areas of improvement.

2.2. Literature survey

2.2.1. Working Capital

The accounting principles board of the America Institute of certified public

accountants, USA, has defined working capital as follows:

“Working capital, sometimes called net working capital, is represented by the excess

of current assets over current liabilities and identifies the relatively liquid portion of total

enterprises capital which constitutes a margin or buffer for maturing obligation within

the ordinary operating cycle of the business.

2.2.2. The Need

Working capital is required by a company to sustain its operations in the time gap

between sales of goods to receipt of cash. This time gap always arises because sales do

not translate into cash instantaneously. There are two major considerations which affect

the way working capital is managed. Firstly, the fixed assets of the company can be put

to optimum use only when there is sufficient level of working capital. Secondly, proper

management of working capital ensures that it does not cause blockage of scarce

resources of the company. Lack of sufficient working capital can cause hindrances in

smooth operation of the company.

2.2.3. Fixed and Fluctuating working capital

Fixed working capital is the minimum level of working capital required by a company

to carry out its operations effectively. The company cannot operate below this level

irrespective of its level of production or sales. The production and sales volumes of a

company fluctuate with time sometimes increasing and sometimes decreasing, however

fixed working capital does not change with these fluctuations. It is the minimum

irreducible amount of working capital required to keep the company’s current assets in

circulation. It is also known as permanent working capital since this working capital is

permanently locked up in business.

Fluctuating working capital is the level of working capital that is needed by a

company over and above its permanent working capital. The need for fluctuating

working capital arises because of changes in the level of production and sales due to

seasonal changes, abnormal conditions or unanticipated demand. Excess working capital

is required to support such changes in demand. For example, some additional capital

might be required in order to finance a special advertising campaign designed to boost

sales in a lean season. This extra working capital needed to support changing business

activities is called fluctuating working capital.

2.2.4. Components of Working Capital

The main components working capital are cash, accounts receivable, inventory,

marketable securities, trade credits and loans from banks etc.

Cash is the most liquid and important component of working capital. It is necessary

for a business to maintain some amount of cash in hand at bank the even if the other

current assets are substantial.

Inventory is required for smooth running of the activities of a company. It acts as

buffer between various stages of production as well as between production and

distribution. Inventory is of different types and includes raw material, work-in-progress

and finished goods.

Accounts Receivable constitutes a significant part of the current assets of a company.

It represents amounts that a company is eligible to receive due to the sale of its goods

or services. The credit period – time allowed before a customer can pay for the

good/service, and discounts are decided by credit policy of the company.

Marketable securities include commercial papers that companies issue, banker’s

acceptance letters, treasury bills etc. They can be bought and sold quickly at a

reasonable price. Usually marketable securities tend to have maturity periods of less

than a year which makes them attractive as an investment option for the company.

3. The Research Design

3.1. Methodology of Study

Data collection was resorted to through secondary sources of data, financial statements

of the company, company process documents and general observation.

3.2. Business model of Sundaram motors

Figure 1 Business Model of Sundaram Motors

The flow of cash at Sundaram motors primarily comes from two sources, the showroom

and the workshop. The show room is responsible for new vehicle sales while the workshop

is responsible for spare parts sales and servicing. Both show rooms and workshops have a

purchase and sales function.

The purchase function of the showroom is further subdivided into three based on the

OEM i.e. Honda, GM and Benz. The purchases from these three manufacturers are financed

through the group company ‘Sundaram Finance’. There is an open credit line between

Sundaram motors and Sundaram finance for a period of 45 days from the date of purchase.

On the sales side vehicle delivery happens once the full settlement is made by the

customer to Sundaram motors either from the end customer or from the customer

financing company.

Sundaram motors

Showroom

Purchase Sales

WorkShop

Purchase Sales

The workshop department has a purchase function as mentioned earlier. The suppliers

to the workshop are of two types, one the OEM and the second the local supplier who

manufactures parts independently. All transactions in this case are settled automatically

with being settled upfront. Coming to the sales function we can further classify it into 5

divisions based on the type of customer. The sundry customer, credit based customer,

insurance companies, group companies and the Government. Credit based customers are

given a time period of 15 days to settle their dues, which the same in case of other buyers

except sundry customers who need to close their dealings immediately with cash.

3.3. Accounting practices at Sundaram motors

The key stakeholders in the accounting process followed at Sundaram motors are:

1. The Bank

2. The Customer

3. The Vendor – The vendor can be further subdivided into auto part suppliers and office

equipment vendors. We will look at each of these in detail. This gives us a clear picture of

the accounting department from a transactional level.

Cash management – Cash transactions happen in two cases, cash received from customer or

cash goes out to the vendor, in case of office equipment vendors it is treated as petty cash

expense. Petty cash expenses might be incurred for employees as well. E.g. couriering

parcels or travel within the city.

The Customer – The customer is the entity who purchases cars, parts from Sundaram

motors. A separate account is maintained for the customer accounts receivables. The

customer account always maintains a debit balance meaning we always receive money from

the customer. An anomaly to this rule needs to be investigated further.

The Vendor – The vendor account consists of accounts payable to the supplier and usually

maintains a credit balance. This means that Sundaram motors gets some time period before

it needs to pay the vendor or supplier. A debit balance in the vendor account is not

preferred and such occurrences need to be investigated immediately.

The Bank – The bank simply acts as a repository of cash and transactions. ‘Sundaram

motors’ has accounts with several banks mostly in the public sector. The transactions to and

from the bank are available online and reports from the bank are a vital input for

reconciliation activities.

Reconciliation – This is one of the key activities carried out by the finance department at

Sundaram motors. Reconciliation takes place at several levels. At the highest level

reconciliation occurs with the bank account i.e. the reports from bank are cross checked

with internal accounts maintained by the company. At the lower level it takes place

individually with each customer and vendor account. The main purpose of reconciliation is

to ensure that the accounts are all in order and all credit and debit balances are maintained

as required. The reports taken from the bank must tally with individual accounts of the

customer and vendor.

3.4. Data Analysis

3.4.1. Activity Ratios

Activity ratios are employed to evaluate the efficiency with which the company

manages and utilize its assets. These ratios are called turnover ratio because they

indicate the speed with which assets are being converted or turnover into sales. Activity

ratio is thus a relationship between sales and assets.

Working Capital turnover

Working capital turnover indicates how effectively the company is using its working

capital in order to generate sales. Working capital (current assets - current liabilities) is

used to fund operations and purchase inventory which is then converted into sales.

Year Sales Working Capital WCT (times)

2004-05

2005-06

2006-07

2007-08

2008-09

1683.654

2129.681

2834.490

2738.751

3392.312

279.799

379.533

955.471

1219.203

1498.042

6.017

5.611

2.966

2.246

2.264

Table 1 Working Capital Turnover

So we obtain the relationship between the money used to fund operations and the

sales generated from these operations. A higher the working capital turnover is better

because it means the company is generating more sales as compared to the funds it

uses.

2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

7

WCT

WCT

Figure 2 Working Capital Turnover

In case of Sundaram motors we find that the working capital turnover has come

down from a peak of 6 times to only 2 times in the year 2009. This means that the firm

is using more and more of its funds to generate less of sales. Though sales has increased

in this period, it has not been achieved efficiently. Instead the company has simply

pumped in more money to achieve this sales increase.

Inventory turnover ratio

A certain amount of inventory is required to meet the business requirements.

However the level of inventory should be carefully regulated, it should neither be too

high nor too low. If inventory levels are more than required, it blocks cash available to

run the business. If inventory levels are too low, the company runs the risk of stock out.

The inventory turnover ratio indicates how many times the inventory has ‘turned over’

in business. It is calculated as the ratio of cost of goods sold to average inventory. Here

average inventory refers to the average of beginning and ending inventory levels during

the financial year.

Year Cost of goods sold Average Inventory ITR (times)

2004-05

2005-06

2006-07

2007-08

2008-09

1889.123

2155.027

2243.467

2657.401

2976.604

374.437

308.144

422.069

621.006

665.147

5.045

6.993

5.315

4.279

4.475

Table 2 Inventory Turnover Ratio

Inventory turnover ratio measures the speed with which the stock is converted to

sales. Usually a high inventory turnover ratio indicates efficient management of

inventory because more frequently the stocks are sold money comes in quickly to

finance the inventory. A low inventory turnover implies higher investment in inventory.

2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

7

ITR

ITR

Figure 3 Inventory Turnover Ratio

In this case, the inventory turnover ratio has steadily decreased over time, though by

a small amount. Inventory management is an area which needs to be inspected in detail

further.

Debtor’s turnover ratio

The liquidity position of a company also depends on its accounts receivables.

Accounts receivables occur when a company sells its goods on credit. A liberal credit

policy would result in substantial amounts of accounts receivables. The debtor’s

turnover ratio is used to measure how quickly a company’s accounts receivables are

being converted to cash.

Year Sales Sundry Debtors DTR (times)

2004-05

2005-06

2006-07

1683.654

2129.681

2834.490

166.009

154.996

190.845

10.142

13.74

14.852

2007-08

2008-09

2738.751

3392.312

188.173

231.475

14.793

14.655

Table 3 Debtor Turnover Ratio

It indicates the number of times the sundry debtors (accounts receivables) are

turned over during one year. Generally, the higher the value of debtor’s turnover ratio

the more efficient is the management of debtors.

2004-05 2005-06 2006-07 2007-08 2008-0902468

10121416

DTR

DTR

Figure 4 Debtors Turnover Ratio

A low debtor’s turnover ratio indicates poor management of debtors. The debtor’s

turnover ratio has been constant and relatively high over the past three financial years

which is an indicator that the company is doing a good job of managing its accounts

receivables.

Creditor’s turnover ratio

The creditor’s turnover ratio is used to measure the length of time that is needed

for a company to repay its suppliers. The main purpose is to measure short term

liquidity. Accounts payable include both sundry creditors and bills payable.

Year Credit purchase Creditors CTR (times)

2004-05

2005-06

2006-07

2007-08

2008-09

623.412

690.452

935.875

1239.138

1332.825

167.755

178.163

220.856

242.752

254.512

3.717

3.876

4.238

5.105

5.236

Table 4 Creditors Turnover Ratio

A high creditor’s turnover ratio signifies that the creditors are being paid promptly.

Though this enhances the credit worthiness of the company, a very high ratio also

shows that the business is not taking the full advantage of the credit facilities allowed

by the creditors. Hence this value needs to be looked at in conjunction with other

ratios. The reason being, sometimes companies can keep this ratio low on purpose in

order to invest the cash it has in hand in order to get better returns. However with

better cash flows the tendency for this ratio is to go up which has been observed in case

of Sundaram motors as well. This only indicates that the company is generating cash

fast enough.

2004-05 2005-06 2006-07 2007-08 2008-090

1

2

3

4

5

6

CTR

CTR

Figure 5 Creditors Turnover Ratio

3.4.2. Liquidity Ratios

Liquidity refers to the ability of a company to meet its current obligations as and

when these become due. The short-term obligations are met by realizing amounts from

current, floating or circulating assets. The current assets should either be liquid or near

about liquidity. These should be convertible in cash for paying obligations of short-term

nature. The sufficiency or insufficiency of current assets should be assessed by

comparing them with short-term liabilities. If current assets can pay off the current

liabilities then the liquidity position is satisfactory. On the other hand, if the current

liabilities cannot be met out of the current assets then the liquidity position is bad.

Current ratio

Current Ratio is a measure of general liquidity and mostly used to make the analysis

of short-term financial position of a company. It is defined as the ratio between current

assets and current liabilities.

Current assets include cash, accounts receivable, inventory, marketable securities,

trade credits etc. Current liabilities include outstanding expenses, accounts payable,

dividends payable etc.

Year Current Assets Current Liabilities Ratio

2004-05

2005-06

2006-07

2007-08

2008-09

729.070

820.133

1433.363

1738.373

2037.862

731.411

893.262

1016.607

1242.814

1094.898

1.00

0.918

1.490

1.398

1.861

Table 5 Current Ratio

The general thumb rule for current ratio is that it should be 2:1 for currents assets to

current liabilities. When the company’s current ratio is near about this value it indicates

that the liquidity position of the company is satisfactory. A low current ratio shows that

the liquidity position of the company is not good and the company shall not be able to

pay its current liabilities as and when they are due. A relatively high current ratio is an

indication that the company is liquid and has the ability to pay its current obligations as

and when they are due.

2004-05 2005-06 2006-07 2007-08 2008-090

0.20.40.60.8

11.21.41.61.8

2

Current Ratio

Current Ratio

Figure 6 Current Ratio

In the case of Sundaram Motors, we can clearly see that the current ratio has been

on an upward trend since 2004. It has reached 1.8 in the year 2009, which is still less

than an ideal current ratio of 2:1.

Quick ratio

Quick ratio is a more stringent test of liquidity than the current ratio. Quick ratio

may be defined as the ratio between quick assets and current liabilities. It measures the

company’s ability to pay its current obligations immediately.

Year Liquid Assets Current Liabilities Ratio

2004-05

2005-06

2006-07

2007-08

2008-09

354.633

511.989

1011.294

1117.367

1372.715

731.411

893.262

1016.607

1242.814

1094.898

0.485

0.573

0.994

0.899

1.253

Table 6 Quick Ratio

To find out the quick assets of the company we need to remove inventory from the

current assets of the company. Now we calculate the value of quick assets to current

liabilities of the company to get the quick ratio. The rule of thumb for quick ratio is 1:1

for current assets to current liabilities. If the company is able to maintain a quick ratio

of 1:1 it means that the company is able to meet its obligations immediately without

dependence on its inventory sales. It has enough of cash and accounts receivables in

hand.

2004-05 2005-06 2006-07 2007-08 2008-090

0.2

0.4

0.6

0.8

1

1.2

1.4

Quick Ratio

Quick Ratio

Figure 7 Quick Ratio

In case of Sundaram motors we can clearly see that the quick ratio has been healthy

throughout the period of analysis. This can attributed to the fact that the company has

always maintained a good cash balances in hand. Especially over the 5 year period, cash

balances have increased by a substantial amount.

Absolute liquidity ratio

The accounts receivable part of current assets though more liquid than inventory, is

still subject to realization of cash. It may happen that the customer is not able to pay on

time, in which case the company cannot use it to pay off its obligations.

Year Current Assets – Inventory

– Accounts Receivable

Current Liabilities Ratio

2004-05

2005-06

2006-07

2007-08

2008-09

51.291

201.716

613.212

617.264

960.983

731.411

893.262

1016.607

1242.814

1094.898

0.0731

0.2257

0.6031

0.496

0.878

Table 7 Absolute Liquidity Ratio

Hence while calculating the absolute liquidity ratio we remove the accounts

receivable from current assets. The amount left with us in this case would be the cash

and bank balances of the company.

2004-05 2005-06 2006-07 2007-08 2008-090

0.10.20.30.40.50.60.70.80.9

ALR

ALR

Figure 8 Absolute Liquidity Ratio

3.4.3. Solvency Ratios

Debt equity ratio

The debt to equity ratio is a measure of the financial leverage of the company. It tells

us how the company is using debt to increase its returns to shareholders. A high debt to

equity ratio means that the company has aggressively financed its expansion through

debt. This is a risky proposition for any firm. The earnings of the firm would be very

volatile in this case as the interest expense will constitute a significant component.

Year Long term debt Shareholder’s Equity Debt Equity

2004-05

2005-06

2006-07

2007-08

2008-09

1297.028

868.876

576.979

429.762

418.052

529.017

503.867

1030.665

1260.141

1731.315

2.4517

1.7246

0.5598

0.3410

0.241

Table 8 Debt Equity Ratio

2004-05 2005-06 2006-07 2007-08 2008-090

0.5

1

1.5

2

2.5

D/E

D/E

Figure 9 Debt Equity Ratio

When a company opts for a higher debt load care should be taken so that returns

from using debt for expansion far exceed its costs, otherwise it is possible that the

company might getting trapped in a vicious cycle which drags it down.

It is seen that the debt to equity ratio of Sundaram motors has steadily fallen over

the years and currently stands at 0.2. This only indicates that the company is reducing

its dependence on long term debt. The company has been prudent in its usage of debt

as a tool to fund its expansion.

Interest Coverage Ratio

This ratio determines if the company is in a good position to service its debt. It is

calculated as the ratio of EBIT to interest expense incurred by the company.

The lower this ratio, the more difficult it is for the company to pay interest on its

debt. It is usually expressed in the number of times a company’s earnings can cover its

interest expense and hence the term.

Year EBIT Interest Expense ICR

2004-05

2005-06

2006-07

2007-08

2008-09

31.587

262.821

936.535

570.574

942.262

133.456

89.923

60.522

46.889

39.511

0.236

2.923

15.479

12.192

23.854

Table 9 Interest Coverage Ratio

If the company’s interest coverage ratio goes below 1.5 times, then its ability to

service its debt becomes doubtful. An interest coverage ratio of 2 times or more is

considered to be safe.

2004-05 2005-06 2006-07 2007-08 2008-090

5

10

15

20

25

ICR

ICR

Figure 10 Interest Coverage Ratio

‘Sundaram motors’ has improved its ICR over the years, from less than 0.2 to more than 23 times in 2009. This is a healthy indication for the business. This is both due to increase in earnings as well as reduction in debt load by paying off the lenders.

4. Results and Conclusions

1. Overall we can see that the company has managed to increases its sales significantly

over the five year period. It has substantially increased its cash and bank balances while

at the same time improving its financial ratios. It is seen that the company has lowered

its risk and is in a better position to meet its obligations both short term and long term

in time. This is clearly indicated by the rising trends in current and quick ratios as well as

the falling D/E ratio and increase in interest coverage ratio. Where the firm seems to be

lacking is in the area of inventory management, working capital turnover and accounts

receivables. Hence we will be focusing our recommendations on these specific areas.

2. It is interesting to note that in the initial two years of the analysis period, the cost of

goods sold exceeds the total revenues. This has happened because of subsidizing sales

to group companies, mainly in the case of spare part sales. However Sundaram motors

has since then moved on to ‘arm’s length pricing’ and is now treating group companies

as equivalent to external companies. This is a significant shift in terms of management

policy.

5. Recommendations

5.1.General

1. On observation of the practices followed in the accounts department it is seen that a

lot of activities carried out by the staff can be eliminated by do things right the first time

around. For example the “Data entry” process needs to be stringent and if proper

accounting entries are made at this level, a lot of effort can be reduced in the later

stages of the process. Reconciliation needs to be done only for verification purposes and

it should not used correct mistakes made earlier in the accounting flow.

2. An integrated solution needs to be looked into for accounting software. There are a

lot of issues arising because of different software tools being used at different stages in

the accounting process. The point of sales terminals use software supplied by the OEM,

while the accounts department uses their custom software. Therefore lot of error creep

in at this juncture where the data is being fed from the showroom to the accounts

department. A complete end to end solution would not only eliminate these errors, but

also reduce a lot of manual work in feeding data into the accounts software thus leading

to significant effort savings.

5.2.Aspects of Working Capital Management

1. A healthy level of current ratio to maintain would be at 2:1 for current assets to

current liabilities. It is seen that in case of Sundaram motors, the maximum value of

current ratio has been 1.8, reached in the year 2009. Since bankers and lenders take

keen interest in the current ratio of a company, it is important that we maintain this

ratio at a normal level.

To achieve this, we can look at collecting our receivables faster. It is to be noted that

the sundry debtors have increased significantly over the period of analysis. We need to

reduce the receivables amount under sundry debtors and covert more of this to cash or

bank balances. We can request for banker acceptance letters, credit notes or credit

lines from banks as an additional tool to ensure prompt payment.

2. As indicated in the current ratio, the level of inventory has been increasing

throughout the entire duration of analysis (2004 to 2009). The spending on inventory

needs to be reviewed to understand the requirement for maintaining such high levels.

Significant cost savings can be achieved by reducing the level of expenditure in this

area.

3. It is seen the Inventory turnover ratio has come down gradually over the period of

analysis. Inventory turnover ratio indicates the number of times inventory has been

depleted and new inventory stocked (turnover). The higher this ratio the better it is for

the company, as already noted inventory has surged over the 5 year period. Hence this

ratio is another indicator that the spending on inventory needs to be looked at again.

6. References

6.1. Links

1. http://www.aicpa.org

2. http://www.investopedia.com

3. http://www.bized.co.uk

4. http://www.accountingformanagement.com

5. http://www.netmba.com

6. http://hubpages.com/hub/

7. http://www.va-interactive.com/inbusiness/editorial/finance/ibt/ratio_analysis.html

8. http://www.siamindia.com

9. http://www.araiindia.com

10. http://www.aasindia.in

11. http://www.tvsgroup.com

12. http://www.tvsiyengar.com

13. http://www.sundarammotors.com

6.2. Books

7. Appendix

7.1.Current Assets, Liabilities Statement

2004-2005 Particulars As at 31st march 2005 % of Total

Current Assets Inventories 374.437 51.36Sundry Debtors 166.009 22.77Cash & Bank balances 51.291 7.04Interest Receivable 9.059 1.24Loan & Advances 128.274 17.59

Total current Assets 729.07 100

Current Liabilities Sundry creditors 273.068 37.34Advances received 40.795 5.58Security Deposits 31.239 4.27Interest accrued 162.454 22.21Unpaid dividends .093 0.02Unclaimed matured deposits 2.470 0.34Interest accrued on matured deposits

.688 0.09

Other liabilities 220.541 30.15Total current liabilities 731.411 100

2005-2006

Particulars As at 31st march 2006 % of TotalCurrent Assets Inventories 308.144 37.57Sundry Debtors 154.996 18.9Cash & Bank balances 201.716 24.59Interest Receivable 8.618 1.05Loan & Advances 146.659 17.88


Current Liabilities Sundry creditors 361.046 40.42Advances received 73.894 8.27Security Deposits 38.873 4.35Interest accrued 170.451 19.1Unpaid dividends .161 0.03Unclaimed matured deposits 2.404 0.27Interest accrued on matured deposits

.22 0.05

Other liabilities 246.210 27.56

Total current liabilities 893.262 1002006-2007



Current Liabilities Sundry creditors 469.587 46.19Advances received 111.545 10.97Security Deposits 44.617 4.39Interest accrued 112.250 11.04Unpaid dividends .072 0.01Unclaimed matured deposits 2.342 0.23Unclaimed matured bonds .190 0.02Interest accrued on matured deposits

.921 0.09


2007-2008



Current Liabilities Sundry creditors 598.492 46.75Advances received 132.234 10.33Security Deposits 57.245 4.47Interest accrued 55.421 7.24Unpaid dividends .970 0.06Unclaimed matured deposits .820 0.1Unclaimed matured bonds .402 0.02Interest accrued on matured deposits

.639 0.05


2008-2009



Current Liabilities Sundry creditors 516.226 47.15Advances received 128.112 11.7Security Deposits 52.253 4.77Interest accrued 40.305 3.68Unpaid dividends .874 0.08Unclaimed matured deposits .441 0.04Unclaimed matured bonds .0755 0.01Interest accrued on matured deposits

.185 0.02


Working Capital Management at Sundaram Motors

Documents

Transcript of Working Capital Management at Sundaram Motors