Working Capital Management of Ashok Leyland
134
SUMMER INTERNSHIP PROGRAM 2012 A REPORT ON “WORKING CAPITAL MANAGEMENT OF ASHOK LEYLAND LTD.” SUBMITTED TO SUBMITTED BY PROF. RANGALAL MOHAPATRA SAGAR ARORA IBS, HYDERABAD 11BSPHH011190 IBS, HYDERABAD ASHOK LEYLAND LTD.,PANTNAGAR 1
description
a good project for bbm and mba student
Transcript of Working Capital Management of Ashok Leyland
SUMMER INTERNSHIP PROGRAM
2012
A REPORT ON
“WORKING CAPITAL MANAGEMENT OF
ASHOK LEYLAND LTD.”
SUBMITTED TO SUBMITTED BY
PROF. RANGALAL MOHAPATRA SAGAR ARORA
IBS, HYDERABAD 11BSPHH011190
IBS, HYDERABAD
ASHOK LEYLAND LTD.,PANTNAGAR
1
ACKNOWLEDGEMENT
It gives me immense pleasure to present this project report on Working Capital Management carried out at Ashok Leyland Ltd. in partial fulfillment of post graduate course MBA. No work can be carried out without the help and guidance of various persons. I am happy to take this opportunity to express my gratitude to those who have been helpful to me in completing this project report. At the outset I would like to thank Mr. V.K.Joshi, Finance Manager and Company guide for giving me an opportunity and timely help concerning various aspects of project. I also thank all my staff members of accounts department for helping me to complete the summer internship program. I also want to show my utmost gratitude to Prof. Rangalal Mohapatra, Faculty guide whose enthusiasm was a source of inspiration for me. I am indebted to entire Ashok Leyland whose encouragement and suggestion were always available to me during the course of completion of the project.
Sagar Arora
2
AUTHORIZATION
The project report titled as “Working Capital Management” has been authorized by Prof. Rangalal Mohapatra, faculty guide, IBS Hyderabad as a part of the evaluation for summer internship program and is submitted as a partial fulfilment of the requirement of Masters of Business Administration (MBA) Program of Hyderabad.
Prof. Rangalal Mohapatra Mr. Dheeraj G. Hinduja
Faculty Guide Director
IBS Hyderabad
3
TABLE OF CONTENTS
S.NO. CONTENTS PAGE NO.
1 AUTHORIZATION 2
2 ACKNOWLEDGEMENT 3
LIST OF GRAPHS 5
3 INTRODUCTION 6
4 ECONOMY INDUSTRY ANALYSIS 8
5 COMPANY ANALYSIS 10
6 PROJECT SPECIFIC ANALYSIS
Working Capital Management Working Capital Analysis
29
53
7 DATA ANALYSIS AND INTERPRETATION 62
8 ACCOUNT PAYABLE PROCESS 77
9 OUTCOME AND LEARNING 81
10 RECOMMENDATIONS AND CONCLUSIONS
82
11 REFERENCE 85
12 APPENDIX 86
4
LIST OF GRAPHS
S.NO. CONTENTS PAGE NO.
1 CURRENT RATIO 65
2 LIQUID RATIO 66
3 INVENTORY PROPORTION AND TURNOVER RATIO
67
4 DEBTORS TURNOVER RATIO 68
5 CREDITORS AND RAW MATERIAL TURNOVER RATIO
69
6 WIP TURNOVER RATIO 70
7 FINISHED GOODS TURNOVER RATIO AND NET WORKING CAPITAL
71
8 WORKING CAPITAL RATIO 72
9 CURRENT ASSETS AND LIABILITIES TO TOTAL ASSETS AND LIABILITIES
73
10 GROSS PROFIT RATIO 74
11 NET PROFIT RATIO AND OPERATING RATIO
75
5
CHAPTER 1
INTRODUCTION
A project entitled “A study on working capital management in Ashok Leyland” was carried
out with an intention to analyze the utilization of working capital. The study helps to know the
level of current asset and current liability. Various analytical tools is been used to analyze and
to make inference. Findings are based on the analysis; the major finding was that the company
has a good liquidity position and profit percentage. Based on the findings various suggestions
have been given for the further improvement of the effective utilization of the working
capital.
1.1 PURPOSE OF STUDY
The main aim of any firm is to maximize the wealth of shareholders. This can be achieved
only by a steady flow of profits which in turn depends on successful sales activity? To
generate sales, investment of sufficient funds in current assets is required. The need of current
assets should be emphasized, as the sales don’t convert into cash immediately but it involved
a cycle of operations, namely operating cycle.
The capital requirement for each department in an organization is large which (depends on
the product target for that particular year) calls for an effective working capital management.
Monitoring the operation on cycle duration is an important aspect of working capital.
Managing working capital in a manufacturing firm is very difficult and risky position. It is
required to maintain the liquidity position of any firm to be good. This is the main problem
for all firms. So, components of working capital like inventory management, cash
management and receivables management should be managed well.
Thus a detailed study regarding the working capital management in Ashok Leyland is to be
done to consider the effectiveness of working capital management, identify the shortcoming
in management and to suggest for improvement in working capital management.
6
1.2 OBJECTIVE OF THE STUDY
Study of the working capital management is important because unless the Working capital is
managed effectively, monitored efficiently, planned properly and reviewed periodically at
regular intervals to remove bottlenecks if any the Company cannot earn profits and increase
its turnover. With this primary Objective of the study, the following further objectives are
framed for a depth Analysis.
To familiarize with business organization.
To study in general the working capital management procedure in Ashok Leyland.
To study the optimum level of current assets and current liabilities of the Company.
To study the liquidity position through various working capital related Ratios.
To study the working capital components such as debtor management, creditors
management, Inventory position.
To study the operating cycle of the company.
To give suggestions, if any, for better working capital management in Ashok Leyland,
Pantnagar.
1.3 RESEARCH METHODOLOGY
Research methodology is a way to systematically solve the research problem. It may be
understood as a science of studying how research is done systematically.
It is important for research to know not only the research method but also know methodology.
The procedures by which researchers go about their work of describing, explaining and
predicting phenomenon is called methodology. Methods comprise the procedures used for
generating, collecting and evaluating data. All this means that it is necessary for the
researcher to design his methodology for his problem as the same may differ from problem to
problem. Data collection is an important step in any project and success of any project will
largely depend upon how much accurate you will be able to collect and how much time,
money and effort will be required to collect that necessary data, this is also important step.
Data collection plays an important role in research work. Without proper data available for
analysis you cannot do the research work accurately.
7
TYPES OF DATA COLLECTION
There are two types of data collection methods available, primary data collection and
secondary data collection.
Primary Data:
The primary data is that data which is collected fresh or first hand, and for first time which is
original in nature. Primary data can be collected through personal interview, questionnaire etc.
to support the secondary data.
Secondary Data Collection Method:
The secondary data are those which have already collected and stored. Secondary data easily
get those secondary data from records, journals, annual reports of the company etc. It will
save the time, money and efforts to collect the data. Secondary data also made available
through trade magazines, balance sheets, books etc.
This project is based on primary data collected through personal interview of managers of
finance department and other concerned employees of finance department. But primary data
collection had limitations such as matter confidential information thus project is based on
secondary information collected through five years annual report of the company, supported
by various books and internet sides. The data collection was aimed at study of working capital
management of the company. Project t is based on
• Annual report of Ashok Leyland ltd 2006-07
• Annual report of Ashok Leyland ltd 2007-08
• Annual report of Ashok Leyland ltd 2008-09
• Annual report of Ashok Leyland ltd 2009-10
• Annual report of Ashok Leyland ltd 2010-11
The statement of changes in working capital for the past 5 years is done using the data taken
from these financial reports. Similarly the analysis of operating cycle and calculations of
ratios is done. Apart from this, the website of Ashok Leyland is referred to know the products,
product facilities, network etc. Industry analysis is done based on the information gathered
from newspapers and websites of Indian automotive & other sector related websites.
8
1.4 SCOPE OF THE STUDY
The scope of the study is identified after and during the study is conducted. The Study of
working capital is based on tools like Ratio Analysis, statement of flow of working capital,
operating cycle etc. Further the study is based on last 5 years Annual Reports of Ashok
Leyland.
1.5 LIMITATIONS OF THE STUDY
Following limitations were encountered while preparing this project:
Limited data : - This project has completed with annual reports; it just constitutes one
part of Data collection i.e. Secondary. There were limitations for primary data
Collection because of confidentiality.
Limited period : - This project is based on five year annual reports. Conclusions and
Recommendations are based on such limited data. The trend of last five year may or
may not reflect the real working capital position of the company.
Limited area: - Also it was difficult to collect the data regarding the competitors and
their financial information. Industry figures were also difficult to get.
9
CHAPTER 2
AUTOMOTIVE INDUSTRY
The automotive industry designs, develops, manufactures, markets, and sells motor vehicles,
and is one of the world's most important economic sectors by revenue. The term automotive
industry usually does not include industries dedicated to automobiles after delivery to the
customer, such as repair shops and motor fuel filling stations.
This class consists of units mainly engaged in manufacturing motor vehicles or motor vehicle
engines. The primary activities of this industry are: Motor cars manufacturing & Motor
vehicle engine manufacturing. The major products and services in this industry are: Passenger
motor vehicle manufacturing segment (Passenger Cars, Utility Vehicles & Multi Purpose
Vehicles) Commercial Vehicles (Medium & Heavy and Light Commercial Vehicles) Two
Wheelers Three Wheelers.
2.1 INDIAN AUTOMOTIVE SECTOR
The Automotive industry in India is one of the largest in the world and one of the fastest
growing globally. India manufactures over 17.5 million vehicles (including 2 wheeled and 4
wheeled) and exports about 2.33 million every year. It is the world's second largest
manufacturer of motorcycles. India's passenger car and commercial vehicle manufacturing
industry is the seventh largest in the world. In 2009, India emerged as Asia's fourth largest
exporter of passenger cars, behind Japan, South Korea, and Thailand.
As of 2010, India is home to 40 million passenger vehicles and more than 3.7 million
automotive vehicles were produced in India in 2010 (an increase of 33.9%), making the
country the second fastest growing automobile market in the world. According to the Society
of Indian Automobile Manufacturers, annual car sales are projected to increase up to 5 million
vehicles by 2015 and more than 9 million by 2020.
A chunk of India's car manufacturing industry is based in and around Chennai, also known as
the "Detroit of India" with the India operations of Ford, Hyundai, Renault and Nissan
headquartered in the city and BMW having an assembly plant on the outskirts. Chennai
accounts for 60 per cent of the country's automotive exports.
The Indian Automobile Industry is manufacturing over 11 million vehicles and exporting
about 1.5 million every year. The automotive industry of India is categorised into passenger
cars, two wheelers, commercial vehicles and three wheelers, with two wheelers dominating
10
the market. More than 75% of the vehicles sold are two wheelers. Nearly 59% of these two
wheelers sold were motorcycles and about 12% were scooters. Commercial vehicles are
categorised into heavy, medium and light. They account for about 5% of the market. Three
wheelers are categorised into passenger carriers and goods carriers. Three wheelers account
for about 4% of the market in India. About 91% of the vehicles sold are used by households
and only about 9% for commercial purposes. The industry has attained a turnover of more
than USD 35 billion and provides direct and indirect employment to over 13 million people.
Automobile industry is currently contributing about 5% of the total GDP of India. India’s
current GDP is about $ 1.4 trillion and is expected to grow to $ 3.75 trillion by 2020.
75%
16%
5%4%
TWO WHELLERSPASSANGER CARSCOMMERICAL VEHICLESTHREE WHELLERS
Figure 2.1 Manufacturing segment of automotive industry
2.2 COMPETITORS
Competition in this industry is high. Competition in this industry is increasing. Automotive
industry is a volume-driven industry, and certain critical mass is a pre-requisite for attracting
the much-needed investment in research and development and new product design and
development. Research and development investment is needed for innovations which is the
lifeline for achieving and retaining competitiveness in the industry. This competitiveness in
turn depends on the capacity and the speed of the industry to innovate and upgrade. The most
important indices of competitiveness are productivity of both labour and capital. The concept
of attaining competitiveness on the basis of low cost and abundant labour, favourable
11
exchange rates, low interest rates and concessional duty structure is becoming inadequate and
therefore, not sustainable. A greater emphasis is required on the development of the factors
like innovation which can ensure competitiveness on a long-term basis.
As per Automotive Mission Plan 2006–2016 (2008), the Indian Government recognises its
role as a catalyst and facilitator to encourage the companies to move to higher level of
competitive performance. The Indian Government wants to create a policy environment to
help companies gain competitive advantage. The government aims that with its policies its
encourage growth, promote domestic competition and stimulate innovation.
Tata Motors:- Market Share: Commercial Vehicles 63.94%, Passenger Vehicles
16.45%
Maruti Suzuki India:- Market Share: Passenger Vehicles 45.28%
Hyundai Motor India:- Market Share: Passenger Vehicles 14-15%
Mahindra & Mahindra:- Market Share: Commercial Vehicles 10.01%, Passenger
Vehicles 6.50%, Three Wheelers 1.31%
Ashok Leyland:- Market Share: Commercial Vehicles 27%
Hero Honda Motors:- Market Share: Two Wheelers 41.35%
Bajaj Auto:- Market Share: Two Wheelers 26.70%, Three Wheelers 58.60%
12
CHAPTER 3
COMPANY PROFILE
Hinduja Group was established in 1914 in Mumbai, India. Hinduja Group was Entered
Middle East in 1919 to grow trading initiatives. Hinduja Group Privately owned by the
Hinduja Family. Hinduja Group a transnational conglomerate with presence in 25 countries.
Hinduja Group Entered India for major activities in 1986.
Parmanand Deepchand Hinduja (1901-1971)
Parmanand Deepchand Hinduja was the Founder of the Hinduja Group and the Hinduja
Foundation. He believed from his early childhood that health and education were the
fundamental rights of every person.
This belief led him to establish the National Health and Education Society in 1954. Shri
Parmanand Hinduja would visit the hospital devotedly every day to meet the patients, enquire
after their needs and ensure that they were comfortable and received adequate treatment. He
would pay particular attention to the poor and the needy. His method of screening patients to
qualify for free treatment was quite simple.
He would make the patients declare before the Deities of His Guru and the Almighty that they
did not have the means to pay the bills, and provide them with free medical care. The Hinduja
Hospital continues to fulfil his dream of providing world class medical care to all sections of
the society.
Lalita Girdhar Hinduja (1932-1992)
Smt. Lalita Girdhar Hinduja was the wife of Late Girdhar Hinduja, the eldest son of, Shri
Paramand Hinduja. Widowed at an early age, she was encouraged by her father-in law to step
out of the house and offer her services to the Hospital. Following in his footsteps, Lalita
served the Hospital for thirty years. During her time, the institution grew from strength to
strength.She would spend her entire day from morning to evening in the hospital, personally
visiting and looking after the patients, inspecting the quality of medical care, administering
various aspects of hospital management and constantly devising ways to match the standards
of the hospital with those available in the West.Her affectionate disposition, attention to
detail, humane feelings for the staff and simplicity ensured that the Hinduja Hospital operated
like a family with a strong sense of belonging, among all medical and non medical personnel.
Even today, the staffs remember her with affection and respect.
13
3.1 INTRODUCTION
Ashok Leyland is a commercial vehicle manufacturing company based in Chennai, India.
Founded in 1948, the company is one of India's leading manufacturers of commercial
vehicles, such as trucks and buses, as well as emergency and military vehicles. Operating
eight plants, Ashok Leyland also makes spare parts and engines for industrial and marine
applications. It sells about 60,000 vehicles and about 7,000 engines annually. It is the second
largest commercial vehicle company in India in the medium and heavy commercial vehicle
(M&HCV) segment with a market share of 27%. With passenger transportation options
ranging from 19 seaters to 80 seaters, Ashok Leyland is a market leader in the bus segment.
The company claims to carry over 60 million passengers a day, more people than the entire
Indian rail network. In the trucks segment Ashok Leyland primarily concentrates on the 16
ton to 25 ton range of trucks. However Ashok Leyland has presence in the entire truck range
starting from 7.5 tons to 49 tons. The joint venture announced with Nissan Motors of Japan
would improve its presence in the Light Commercial Vehicle (LCV) segment (<7.5 tons).
3.2 ORGANISATION PROFILE
Type: Public
Industry: Automotive
Founded: 1948
Headquarters: Chennai, Tamil Nadu, India
Key people: R. Seshasayee, R. J. Shahaney, S. P. Hinduja, D. G. Hinduja , Vinod Dasari.
Products: Buses, Trucks, Engines, Defense & Special
Net Profit: Rs. 565.98 Crores
Turnover: Rs. 11,117.7 Crores
Employees: 1,15,812(2011)
Parent: Hinduja Group
No. of Plants: 8 in Chennai (Ennore & Ambattur) and Hosur(Unit I, Unit II, Unit IIA), Tamil
Nadu; Bhandara, Maharashtra; Alwar, Rajasthan; Pant Nagar, Uttarakhand
Subsidiaries:
Ennore foundries Limited
Automotive Coaches and Components Limited
Gulf-Ashley Motors Limited
14
Ashley Holdings Limited
Ashley Investments Limited
Ashley Design and Engineering Services (ADES)
Avia Ashok Leyland
Ashok Leyland Defence Systems (ALDS)
Ashok Leyland Project Services Limited
Lanka Ashok Leyland
3.3 HISTORY
The origin of Ashok Leyland can be traced to the urge for self-reliance, felt by independent
India. Pandit Jawaharlal Nehru, India’s first Prime Minister, persuaded Mr. Raghunandan
Saran, an industrialist, to enter automotive manufacture. The company began in 1948 as
Ashok Motors, to assemble Austin cars at the first plant, at Ennore near Chennai. In 1950
started assembly of Leyland commercial vehicles and soon local manufacturing under license
from British Leyland. With British Leyland participation in the equity capital, in 1954, the
Company was rechristened Ashok Leyland.
Early products included the Leyland Comet bus which was a passenger body built on a truck
chassis, sold in large numbers to many operators, including Hyderabad Road Transport,
Ahmedabad Municipality, Travancore State Transport, Bombay State Transport and Delhi
Road Transport Authority. By 1963, the Comet was operated by every State Transport
Undertaking in India, and over 8,000 were in service. The Comet was soon joined in
production by a version of the Leyland Tiger.
In 1968, production of the Leyland Titan ceased in Britain, but was restarted by Ashok
Leyland in India. The Ashok Leyland Titan was very successful, and continued in production
for many years.
In the journey towards global standards of quality, Ashok Leyland reached a major milestone
in 1993 when it became the first in India's automobile history to win the ISO 9002
certification. The more comprehensive ISO 9001 certification came in 1994, QS 9000 in 1998
and ISO 14001 certification for all vehicle manufacturing units in 2002. In 2006, Ashok
Leyland became the first automobile company in India to receive the TS16949Corporate
Certification. Editor’s note: This is part of a series of articles peeking into clean car industries
and car manufacturers of China, India, South Korea and Germany.
15
In fact, even before laws were placed on car emissions, Ashok Leyland was already producing
low-emission vehicles. Back in 1997, they have already released buses with quiet engines and
low pollutant emission based on the CNG technology. In 2002 it developed the first hybrid
electric vehicle. Ashok Leyland has also launched a mobile emission clinic that operates on
highways and at entry points to New Delhi. The clinic checks vehicles for emission levels,
recommends remedies and offers tips on maintenance and care. This work will help generate
valuable data and garner insight that will guide further development.
When it comes to the development of environmentally friendly technologies, Ashok Leyland
has developed Hythane engines. An Ashok Leyland-Nissan joint venture produced light
commercial vehicles (LCVs) from the former's Hosur facility near Bangalore as well as from
Renault-Nissan's car plant near Chennai
3.4 CURRENT STATUS
Ashok Leyland is the second technology leader in the commercial vehicles sector of India.
The history of the company has been punctuated by a number of technological innovations,
which have since become industry norms. It was the first to introduce multi-axled trucks, full
air brakes and a host of innovations like the rear engine and articulated buses in India. In
1997, the company launched the country’s first CNG bus and in 2002, developed the first
Hybrid Electric Vehicle.
The company has also maintained its profitable track record for 60 years. The annual turnover
of the company was Rs. 11117.7 Crore in 2010-11. Selling 54,431 medium and heavy
vehicles in 2008-09, Ashok Leyland is India's largest exporter of medium and heavy duty
trucks. It is also one of the largest private sector employers in India - with about 15,812
employees working in 8 factories and offices spread over the length and breadth of India.
The company has increased its rated capacity to 95,337 vehicles per annum. Also further
investment plans including putting up two new plants - one in Uttarakhand in North India and
a bus body building unit in middle-east Asia are fast afoot. It already has a sizable presence in
African countries like Nigeria, Ghana, Egypt and South Africa.
Ashok Leyland has also entered into some significant partnerships, seizing growth
opportunities offered by diversification and globalization – with Continental Corporation for
automotive infotronics; with Alteams in Finland for high pressure die casting and recently,
with John Deere for construction equipment.
16
Ashok Leyland is looking to expand its production operations overseas to make it a more
global company. As part of this global strategy, the company acquired Czech Republic-based
Avia's truck business. The newly acquired company has been named Avia Ashok Leyland
Motors s.r.o. This gives Ashok Leyland a foothold in the highly competitive European truck
market. The Hinduja Group also bought out IVECO's indirect stake in Ashok Leyland in
2007. The promoter shareholding now stands at 51%. The company has a joint venture with
Japanese auto giant hiss an (Renault Nissan group) which will share a common manufacturing
facility in chennai, India.
3.5 ACHIEVEMENTS OF ASHOK LEYLAND
1966:-Introduce full air brakes.
1967:- Launched double-decker bus.
1968:- Offered power steering in commercial vehicles.
1979:- Introduced multi-axle trucks.
1980:- Introduced the international concept of integral bus with air suspension.
1982:- Introduced vestibule bus.
1992:- Won self-certification status for defence supplies.
1993:- Received ISO 9002 Certification.
1997:- India's first CNG powered bus joined the BEST fleet.
2000:- Euro-I, Engines/vehicles introduced.
2001:- Received ISO 14001 certification for all manufacturing units.
2002:- Launched hybrid electric vehicle.
2003:- E-Comet launched.
2004:- 50,000 mark vehicle produced.
2006:- TS16949Corporate Certification
3.6 VISION
Be among the top Indian corporations acknowledged nationally and internationally, For,
Excellence in quality of its products
Excellence in customer focus and service.
17
3.7 MISSION
Be a leader in the business of commercial vehicles, excelling in technology, quality and value
to customer fully supported by customer service of the highest order and meeting national and
international environmental and safety standards.
3.8 VALUES
CUSTOMERS : We value our customers and will constantly endeavour to fulfil their
needs by proactivity offering them products and service appropriate to their diverse
applications.
EMPLOYEE: We consider our employee as our most valuable asset and are
committed to provide full encouragement and support to them to enhance their
potential and contribution to the company’s business.
VENDORS: Our vendors are our valued partners in our business development and we
will work with them in a spirit of mutual co-operation to meet our business objectives.
DISTRIBUTERS: Our distributers are the vital between the company and the
customers and we are committed to advice and support our distributers to continuously
upgrade their infrastructure, skills and capability to serve our customers better.
SHAREHOLDERS: We value the trust reposed in us by our shareholders and strive
unstintingly to ensure a fair and reasonable return on their investments.
SOCIETY: We are committed to add to the wealth and well-being of our society by
enhancing the quality of life and contributing to this economic development while
maintaining the highest level of environmental and safety standards.
The five Ashok Leyland CORPORATE values are:
International
Speedy
Value creator
Innovative
Ethical
18
3.9 POLICIES AND OBJECTIVES OF ASHOK LEYLAND
QUALITY POLICY
Ashok Leyland is committed to achieve customer satisfaction, by anticipating and delivering
superior value to the customers in relation to their own business, through the products and
services offered by the company and comply with statutory requirements. Towards this, the
quality policy of Ashok Leyland is to make continual improvements in the process that
constitute the quality management system, to make them more robust and to enhance their
effectiveness and efficiency in achieving stated objectives leading to:
Superior products manufactured as also services offered by the company.
Max use of employee potential to contribute to quality and environment by
progressive up gradation of their knowledge and skills as appropriate to their
functions.
Seamless involvement from vendors and dealers in the mission of the company to
address customer’s changing needs and protection of the environment.
ENVIRONMENTAL POLICY
Ashok Leyland is committed to preserve the environment through a comprehensive
environmental policy and a proactive approach in planning and executing the manufacturing
and service activities. The objective of Ashok Leyland’s environmental policy is to adhere to
all applicable environmental legislations and regulations, adopt pollution preventive
techniques in design and manufacture, conserve all resources such as power, water etc, and
optimize its usage, through scientific means, minimize waste generation by all possible ways
and Reduce, Reuse and Recycle the same through time bound action plan as well as provide a
clean working environment to employees, contractors and neighbours.
Ashok Leyland has proactively developed its engines to meet the progressive emission norms,
including the Bharat Shage II norms. The Ennore unit was recently identified as one of the
model energy – efficient units by a CII-TNEB organized energy conservation (ENCON)
mission. From August 1999 “green energy” has been powering the Hosur Plants. Even
cooking is eco-friendly here. The canteen runs on Solar Heaters and food waste becomes
fodder to cattle at a cattle farm at Mathagiri near Hosur.
19
To the best out of Ashok Leyland’s eco-friendly engine technology, round the year awareness
and action programmes are held at Operators’ meets and service campaigns. Ashok Leyland
has also launched a dedicated mobile emission clinic operating on highways and at entry
points to New Delhi. On an average 250,000 litters of recycled water is pumped into the
garden saving Rs. 1.5 million per annum. We at Ashok Leyland committed personal
environmental measures.
We follow all legal reasons.
Adopt pollution prevent technology in design and manufacturing projects.
Conserve all resources such as power, water, oil, gas, compressed air etc and optimise
their usage through scientific methods.
Provide clean working environment to employees.
Set and review objectives and targets for continually improving environment.
3.10 ORGANIZATION STRUCTURE
1) MANAGING DIRECTOR
2) EXECUTIVE DIRECTOR
3) SENIOR DIRECTOR
4) GENERAL MANAGER
5) DEPUTY GENERAL MANAGER
6) ASSISTANT GENERAL MANAGER
7) DIVISIONAL MANAGER
8) SENIOR MANAGER
9) MANAGER
10) DEPUTY MANAGER
11) ASSISTANT MANAGER
12) SENIOR OFFICER
13) OFFICER
3.11 DEPARTMENT FUNCTIONS
The major functional areas of the unit and the major departments which oversee those areas
are catalogued as follows:
1. Personnel and Administration Department
2. Purchase & Material Planning Department
3. Production Department
20
4. Finance Department
5. Systems Department
6. Research & Development.
3.12 PRODUCT OF ASHOK LEYLAND
Ashok Leyland offers a comprehensive product range with trucks from 7.5 tons to 125 tons.
From 19 to 80 seaters a host of special application vehicles and diesel engines from industrial
gensets and marine application. Main Products are:-
Buses
Trucks
Engines
Defence & Special
BUSES: - Leaders in the Indian bus market, offering unique models such as CNG, Double
Decker and Vestibule bus.
TRUCKS: - Pioneers in multi axle trucks and tractor-trailers.
21
DEFENSE & SPECIAL: - Largest provider of logistic vehicles to the Indian army.
ENGINES: - Diesel engines for Industrial, Genset and Marine applications, in collaboration
with technology leaders.
3.13 SWOT ANALYSIS
The SWOT Analysis of the company is done.
STRENGH OF THE COMPANY
1. Good Training System.
2. Good Organizational Climate.
3. High Market Share
4. Skilled Employees
5. Strong Functional Structure
6. Standard Quality Product
WEAKNESS OF THE COMPANY
1. Low margin
2. High price
3. Sales representatives are less
4. There is no proper mechanism to handle the grievance of the customers
OPPORTUNITIES FOR THE COMPANY
1. Due to liberalization, demand for heavy vehicle has stepped up all over the globe.
2. National market through good advertisement.
3. Company provides better credit facility to dealers.
22
4. Company introduces promotional programmes
THREATS FACED BY THE COMPANY
1. High completion
2. Liberal credit policy of other brand
3. Promotional programmes of other brand
4. Complicated national market
5. Good replacement facility if other brands.
3.14 ASHOK LEYLAND, PANTNAGAR
Uttarakhand has a geographical area of about 53,483 sq. km. and forest area of about 34,650
sq. km. and in Uttarakhand the employment is not good. So for employment an industrial area
is developed in 3 locations, first in Pantnagar & Haridwar and then in Sitarganj. Apart from
tax benefits being given by the Uttarakhand Government and increase in procurement and
utilisation of local resources that would translate into excise duty exemptions and VAT
rebates.
3.14.1 EXEMPTION BENEFITS AT A GLANCE IN UTTARAKHAND
1) 100% Central Excise exemption for 10 years on items other than those mentioned in
the negative list in the Concessional Industrial Package announced by the Central
Government.
2) 100% Income Tax exemption for first 5 years and 30% for next 5 years for the
Manufacturing Companies and 25% for others.
3) Capital Investment Subsidy @15% with a maximum of Rs. 30 Lakhs. (Rs. 3 million).
4) Central Transport Subsidy extended till 2007.
5) Exemption from entry tax on Plant & Machinery for setting up Industry or
undertaking substantial expansion and modernization.
6) 75% of the Total Expenditure subject to a maximum of Rs.2 Lakhs incurred in
obtaining national/internationally approved quality marks such as ISO series
certificate etc., shall be reimbursed to the entrepreneurs provided that the
reimbursement / grant availed for this from all sources should not exceed the total
expenditure on this head.
23
7) 50% of the expenses subject to a maximum of Rs.1 lakh incurred in installing
pollution control equipments shall be reimbursed to the entrepreneurs, provided that
the total reimbursement /grant availed for this from all sources should not exceed the
total expenditure on this head.
Figure 3.1 Ashok leyland , Pantnagar Plant
Uttarakhand chief minister Dr. Ramesh Pokhriyal inaugurated Hinduja’s flagship company,
Ashok Leyland’s technologically world-class automobile manufacturing facility at Pantnagar
in. The new facility will increase Ashok Leyland’s current installed capacity of 100,000
vehicles by another 75,000. With the concessions available in Uttarakhand for new industries,
the company will have a cost advantage of about Rs 40,000 – Rs 50,000 per vehicle, said a
company release. Set over 190 scenic acres, the Pantnagar plant of Ashok Leyland is also its
largest manufacturing facility. 200,000 sq.ms of built up area houses one of the most
integrated manufacturing facilities in Indian commercial vehicle industry. Best in class
industrial architecture combined with the latest manufacturing technologies has created a truly
modern facility that is also ecology sensitive as reflected in the selection of machinery and
processes.
Highly energy efficient, the plant is designed to be remarkably operator friendly. The shop
floors receive the maximum natural light and ventilation while the insulated high roof reduces
the inside temperature by up to 8oC in the summer months. Designed on lean manufacture
principles, process control for high quality of output and flexibility to manage variety with
quick changeovers are built into the machine and process selection. The factory boasts of
latest generation equipment sourced from global leaders in Japan, USA, Europe and India.
The plant is a study in layout optimization and flow, contributing to the high benchmarks in
high productivity and operating cost efficiency.
24
The facilities have been so designed as to accommodate further expansion in terms of
capacity and future models. At full capacity utilization, 75,000 vehicles will roll out of the
Pantnagar plant. A large capacity water body has been created for water harvesting, with
water treatment and recycling ensuring zero discharge. Over 75 acres, representing around
40% of the total area, is designed green cover area and over 10,000 trees have already been
planted. The plant will be supplemented by neighbourhood facilities put up by key vendors,
further boosting employment opportunities.
3.14.2 SHOPS
SHOP I (Chassis Shop) : - The chassis assembly is designed to be extremely
dexterous to produce the smallest to the largest of vehicles in Ashok Leyland’s
product range, including the U-Truck range and other cab bed vehicles.
SHOP II (Frame Side Manufacturing Shop) : - For the first time in India, CNC
flexible roll forming technology has been introduced for frame manufacture, offering
manufacturing flexibility to form the entire variety of frames and accommodating
future model requirements and design changes with no fresh tooling. The flexibility
comes with minimum model changeover time, allowing low batch quantities in the
manufacturing plan. Frame painting- Powder coating instead of conventional liquid
painting eliminates hazardous pollutants while bestowing high corrosion resistance to
withstand well over 500 hours of salt spray bath. The change of technology also
ensures zero wastage of paint.
SHOP III A (Crown Wheel and Pinion Shop) : - Even as it significantly speeds up
operations, migration to dry cutting with carbide blades has eliminated, use of cutting
oil pollution. Closed loop software connected to inspection and cutting machines
dramatically quickens the fine-tuned machine setting, in managing the complicated
three dimensional geometry of the aggregate. Clean propane instead of LPG makes for
environmental protection and low operating cost.
SHOP III B (Axle Shop) : - The integrated axle machining and assembly shop has
highly automated front axle machining lines and conveyorised front / rear assemblies,
all in one shop. Hazardous operations are performed by robots.
SHOP IV (Vehicle Testing Shop) : - The single chassis testing line can test all the
models and variants covering various tests, to generate instant test reports.
25
SHOP VI (Cab Weld Shop) : - High on automation, the shop employs robotics in
framing and rear body lines, for better quality and improved ergonomics.
Manufacture of door assemblies is performed by robotic roller hemming.
SHOP V (Cylinder and Block Head Machine Shop) :- It is a part of engine shop , as
the head of engine is rough so it is being furnished and then it is to be fit in engine.
SHOP VII (Cab Paint Shop) : - The CED coating system is led / tin free, employing
robotics and reducing paint wastage. While propane gas cuts atmospheric pollution,
the camel back type baking ovens reduces fuel consumption and heat dissipation. All
material movement is automated to enhance operational safety and output quality.
SHOP VIII (Engine Shop) : - Integrated Horizontal Machining Centres (HMC)
complex fed by Automated Guided Vehicles (AGV) bestow great flexibility to
manufacture a range of engine variants, using components rough machined in an
adjoining shop. Auto docking and in-process verification systems directly reduce
testing cycle time and optimize test cell requirements.
All the shops have real-time manufacturing monitoring systems installed which will get
hooked and integrated to a centralized computer controlled automated manufacturing
management system. This will facilitate order tracking, maximization of machine utilization,
quality trend monitoring, prediction of tool life and prompts for preventive maintenance,
among others.
3.14.3 SUPPORT SERVICES
The plant has a state-of-the-art Fire Hydrant System, backup power generators (75%), 24 kms
of rain water drains and wide concrete roads for taking care inbound / outbound logistics. The
latest generation electrical lighting reduces energy consumption significantly. The
manufacturing, canteen, office buildings have been designed on the principles of green
building.
Ashok Leyland seeks to utilize its presence in this new location to spread the benefits of
industrialization to reach the youth of the region, by creating a stepping stone for them to start
a career. Ashok Leyland will sponsor them for 3-4 year courses offered in association with a
reputed technical training institute. During the training, they will learn and earn. The
curriculum will cover contemporary management and manufacturing concepts, side by side
with an opportunity for practical hands on learning at the modern plant. This training will
give them the skills and knowledge to be effective shop floor associates and will qualify them
26
for managerial positions eventually, cueing a breakthrough practice aptly called the integrated
workforce as it seeks to break the conventional hierarchical divisions on the shop floor.
The primary considerations for Ashok Leyland in putting up the new Pantnagar plant have
been to maximize local value utilization and create employment both directly and indirectly
for the local population of Pantnagar and its immediate vicinity. The Company aims at
reaching over 50% of local procurement by the end of the year. The increase in procurement
and utilization of local resources from areas like Uttarakhand and Himachal Pradesh translate
into excise duty exemptions and VAT rebates which can be passed on to the end customer.
Several key vendor partners of the Company, accorded Preferred Supplier Status, have
accepted the invitation to set up their own facilities in Uttarakhand. For Ashok Leyland, this
translates into better supply chain management, obviates the need for stores and enables
‘produce to deliver’. The suppliers, on the other hand, enjoy the accruing tax benefits apart
from the guarantee of assured business from a captive client. Another positive is the creation
of direct and indirect employment opportunities for local talent.
3.14.4 DEPARTMENTS IN ASHOK LEYLAND, PANTNAGAR
The different departments are there in Pantnagar plant of Ashok Leyland so as to do work
smoothly. The departments are as follow:-
Material Department
Strategic Sourcing Department
Human Resource Department
Administration Department
Finance Department
Production Department
Maintenance Department
Marketing Department
Information Technology Department
3.14.5 WORKING OF FINANCE DEPARTMENT IN PANTNAGAR
27
28
DIVISIONAL MANAGER
(1)
FINANCE MANAGER (COSTING)
(1)
DEPUTY MANAGER
(2)
FINANCE MANAGER (ACCOUNTS PAYABLE,
SALE TAX, EXCISE DUTY)
(1)
ASSISTANT MANAGER
(1)
SENIOR OFFICER
(2)
EXECUTIVE OFFICER
(3)
FINANCE MANAGER (CAPAX, GENERAL
LEDGER, INCOME TAX)
(1)
DEPUTY MANAGER
(1)
SENIOR OFFICER
(2)
OFFICER
(1)
CHAPTER 4
WORKING CAPITAL MANAGEMENT
Cash is the lifeline of a company. Firms need money to pay for their day to day activities.
They have to pay salaries, bills, suppliers & so on. The funds available to do this, is known as
the firms working capital. The management of working capital assumes great importance
because shortage of working capital funds is perhaps the biggest possible cause of failure of
many business units in recent times. There it is of great importance on the part of management
to pay particular attention to the planning and control for working capital. An attempt has
been made to make critical study of the various dimensions of the working capital
management of Ashok Leyland.
4.1 INTRODUCTION
Every running business needs working capital. Even a business which is fully equipped with
all types of fixed assets required is bound to collapse without
adequate supply of raw materials for processing;
cash to pay for wages, power and other costs;
creating a stock of finished goods to feed the market demand regularly; and,
The ability to grant credit to its customers.
All these require working capital. Working capital cycle involves conversions and rotation of
various constituents Components of the working capital. Initially ‘cash’ is converted into raw
materials. Subsequently, with the usage of fixed assets resulting in value additions, the raw
materials get converted into work in process and then into finished goods. When sold on
credit, the finished goods assume the form of debtors who give the business cash on due date.
Thus ‘cash’ assumes its original form again at the end of one such working capital cycle but
in the course it passes through various other forms of current assets too. This is how various
components of current assets keep on changing their forms due to value addition. As a result,
they rotate and business operations continue. Thus, the working capital cycle involves rotation
of various constituents of the working capital.
Capital required for a business can be classified under two main categories via,
1) Fixed Capital
2) Working Capital
29
Every business needs funds for two purposes for its establishment and to carry out its day- to-
day operations. Long terms funds are required to create production facilities through purchase
of fixed assets such as plant & machinery, land, building, furniture, etc. Investments in these
assets represent that part of firm’s capital which is blocked on permanent or fixed basis and is
called fixed capital. Funds are also needed for short-term purposes for the purchase of raw
material, payment of wages and other day – to- day expenses etc.
These funds are known as working capital. In simple words, working capital refers to that part
of the firm’s capital which is required for financing short- term or current assets such as cash,
marketable securities, debtors & inventories. Funds, thus, invested in current assts keep
revolving fast and are being constantly converted in to cash and this cash flows out again in
exchange for other current assets. Hence, it is also known as revolving or circulating capital or
short term capital.
DEFINITION WORKING CAPITAL MANAGEMENT
According to Guttmann & Dougall-
“Excess of current assets over current liabilities”
According to Park & Gladson-
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories) over
current items owned to employees and others (such as salaries & wages payable, accounts
payable, taxes owned to Government)
Working capital refers to the cash a business requires for day-to-day operations, or, more
specifically, for financing the conversion of raw materials into finished goods, which the
company sells for payment. Among the most important items of working capital are levels of
inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of
a company's efficiency and financial strength.
The term working capital refers to the amount of capital which is readily available to an
organization. That is, working capital is the difference between resources in cash or readily
convertible into cash (Current Assets) and organizational commitments for which cash will
soon be required (Current Liabilities).Thus,
WORKING CAPITAL = CURRENT ASSETS - CURRENT LIABILITIES
In a department's Statement of Financial Position, these components of working capital are
reported under the following headings:
30
Current Assets: -
Current assets are those which can be converted into cash within an accounting year and.
Liquid Assets (cash and bank deposits)
Bills receivables
Sundry debtors
Short term loans and advances
Inventories of stock as:
1. Raw material,
2. Work in process
3. Stores and spares
4. Finished goods
Temporary investment of surplus funds
Prepaid expenses
Accrued incomes
Marketable securities.
Current Liabilities: -
Current liabilities are those claims of outsiders which are expected to mature for payment
within an accounting year.
Accrued or outstanding expenses
Short term loans, advances and deposits.
Dividends payable
Bank overdraft.
Provision for taxation.
Bills payable.
Sundry creditors.
31
Working capital in terms of five components:
1. Cash and equivalents: -
This most liquid form of working capital requires constant supervision. A good cash
budgeting and forecasting system provides answers to key questions such as: Is the cash level
adequate to meet current expenses as they come due? What is the timing relationship between
cash inflow and outflow? When will peak cash needs occur? When and how much bank
borrowing will be needed to meet any cash shortfalls? When will repayment be expected and
will the cash flow cover it?
2. Accounts receivable: - Many businesses extend credit to their customers. If you do, is the
amount of accounts receivable reasonable relative to sales? How rapidly are receivables being
collected? Which customers are slow to pay and what should be done about them?
3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally
it requires continual scrutiny. Is the inventory level reasonable compared with sales and the
nature of your business? What's the rate of inventory turnover compared with other
companies in your type of business?
4. Accounts payable: - Financing by suppliers is common in small business; it is one of the
major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable
relative to what you purchase? What is your firm's payment policy doing to enhance or detract
from your credit rating?
5. Accrued expenses and taxes payable: - These are obligations of your company at any
given time and represent a future outflow of cash.
32
4.2 CLASSIFICATION OF WORKING CAPITAL
Working capital may be classified in two ways:
4.2.1. ON THE BASIS OF CONCEPT :- On the basis of concept working capital can
be classified as gross working capital and net working capital.
GROSS WORKING CAPITAL: - It refers to the firm’s investment in current assets.
NET WORKING CAPITAL: - It refers to the difference between current assets and current
liabilities.
Net working capital is positive When current assets >current liabilities
Net working capital is negative When current asset<current liabilities
A firm needs to invest in Current assets to ensure Smooth and Uninterrupted Operations. How
much the firm invests will depend on its operating cycle.
The gross working capital concept is financial or going concern concept whereas net working
capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometimes preferred to the concept of working capital for the following
reasons:
It enables the enterprise to provide correct amount of working capital at correct time.
33
WORKING CAPITAL
ON THE BASIS OF CONCEPT
GROSS WORKING CAPITAL
NET WORKING CAPITAL
ON THE BASIS OF
TIME
PERMANENT WORKING CAPITAL
TEMPORARY WORKING CAPITAL
SEASONAL WORKING CAPITAL
SPECIFIC WORKING CAPITAL
Every management is more interested in total current assets with which it has to operate
then the source from where it is made available.
It take into consideration of the fact every increase in the funds of the enterprise would
increase its working capital.
This concept is also useful in determining the rate of return on investments in working
capital. The net working capital concept, however, is also important for following
reasons:
o It is qualitative concept, which indicates the firm’s ability to meet to its
operating expenses and short-term liabilities.
o It indicates the margin of protection available to the short term creditors.
o It is an indicator of the financial soundness of enterprises.
o It suggests the need of financing a part of working capital requirement out of
the permanent sources of funds.
4.2.2. ON THE BASIS OF TIME: On the basis of time, working capital may be
classified as: Permanent or fixed working capital and Temporary or variable working capital
as the amount of working capital required is not constant throughout the year, but keeps
fluctuating.
PERMANENT OR FIXED WORKING CAPITAL: Permanent or fixed working capital is
minimum amount which is required to ensure effective utilization of fixed facilities and for
maintaining the circulation of current assets. Every firm has to maintain a minimum level of
raw material, work- in-process, finished goods and cash balance. This minimum level of
current assets is called permanent or fixed working capital as this part of working is
permanently blocked in current assets. As the business grow the requirements of working
capital also increases due to increase in current assets. The amount involved as permanent
working capital has to be met from long term sources of finance, e.g. Capital, debentures,
long term loans etc.
34
Figure 4.1Permanent Working Capital
TEMPORARY OR VARIABLE WORKING CAPITAL: Any amount over and above
the permanent level of working capital is called is called temporary, fluctuating or variable
working capital. Due to seasonal changes level of business activity is higher than normal
during some months of the year and therefore, additional working capital will be required
along with the permanent working capital it is so because during peak season demand rises
and more stock is to be maintained to meet the demand. Similarly, the amount of debtors
increases due to excessive sales. Additional working capital thus needed is known as
temporary working capital because once the season is over; the additional demand will be no
more. Need for temporary working capital should be met from short term of finance, e.g.
Short term loans etc. so that it can be refunded when it is not required. Temporary working
capital differs from permanent working capital in the sense that is required for short periods
and cannot be permanently employed gainfully in the business.
35
Figure 4.2Temporary Working Capital
4.3 NATURE OF WORKING CAPITAL
Every business concern should have adequate amount of working capital to run its business
operations. It should have neither redundant or excess working capital nor inadequate nor
shortages of working capital. Both excess as well as short working capital positions are bad
for any business. However, it is the inadequate working capital which is more dangerous from
the point of view of the firm.
4.3.1. DISADVANTAGES OF EXCESSIVE WORKING CAPITAL
1. EXCESSIVE INVENTORY: Excessive working capital results in unnecessary
purchasing and accumulation of large inventories. It increases the chances of misuse,
waste, theft etc.
2. EXCESSIVE DEBTORS : Excessive working capital will result in liberal credit policy
which, in turn, will result in higher amount tied up in debtors and higher incidence of
bad debts.
3. ADVERSE EFFECT ON PROFITABILITY : Excessive working capital means idle
funds in the business which adds to the cost of capital but earns no profits for the firm
and business cannot earn the required rate of return on its investments. Hence it has a
bad effect on profitability of the firm.
36
4. INEFFECIENCY OF MANAGEMENT: Management becomes careless due to
excessive resources at their command. It results in laxity of control on expenses and
cash resources. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and other
financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
4.3.2. DISADVANTAGES OF INADEQUATE WORKING CAPITAL
Every business needs some amounts of working capital. The need for working capital arises
due to the time gap between production and realization of cash from sales. There is an
operating cycle involved in sales and realization of cash. There are time gaps in purchase of
raw material and production; production and sales; and realization of cash. Thus working
capital is needed for the following purposes:
For the purpose of raw material, components and spares.
To pay wages and salaries
To incur day-to-day expenses and overload costs such as office expenses.
To meet the selling costs as packing, advertising, etc.
To provide credit facilities to the customer.
To maintain the inventories of the raw material, work-in-progress, stores and spares and
finished stock.
For studying the need of working capital in a business, one has to study the business under
varying circumstances such as a new concern requires a lot of funds to meet its initial
requirements such as promotion and formation etc. These expenses are called preliminary
expenses and are capitalized. The amount needed for working capital depends upon the size of
the company and ambitions of its promoters. Greater the size of the business unit, generally
larger will be the requirements of the working capital.
The requirement of the working capital goes on increasing with the growth and expensing of
the business till it gains maturity. At maturity the amount of working capital required is called
normal working capital. There are others factors also influence the need of working capital in
a business.
37
1. DIFFICULTY IN AVALIABILITY OF RAW-MATERIAL : Inadequacy of the
working capital results in non-payment of creditors on time. As a result the credit
purchase of goods on favourable terms becomes increasingly difficult. Also, the firm
cannot avail the cash.
2. FULL UTILISATION OF FIXED ASSETS NOT POSSIBLE: Due to the frequent
interruption in supply of raw materials and paucity of stock, the firm can’t make full
utilization of its machines etc.
3. DIFFICULTY IN THE MAINTAINENCE OF MACHINERY : Due to the shortage
of working capital, machines are not cared and maintained properly which results in the
closure of production of on many occasions.
4. DECRAESE IN CREDIT RATING : Because of inadequacy of working capital, firm
is unable to pay its short term obligations on time. It decays the firm’s relation with its
bankers and it becomes difficult for the firm to borrow in case of need.
4.3.3. ADVANTAGE OF ADEQUATE WORKING CAPITAL
1. Solvency of the business : Adequate working capital helps in maintaining the solvency
of the business by providing uninterrupted of production.
2. Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
3. Easy loans : Adequate working capital leads to high solvency and credit standing can
arrange loans from banks and other on easy and favourable terms.
4. Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
5. Regular Supply of Raw Material: Sufficient working capital ensures regular supply of
raw material and continuous production.
6. Regular payment of salaries, wages and other day to day commitments: It leads to
the satisfaction of the employees and raises the morale of its employees, increases their
efficiency, reduces wastage and costs and enhances production and profits.
7. Exploitation of Favourable Market Conditions: If a firm is having adequate working
capital then it can exploit the favourable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for higher
prices.
8. Ability to Face Crises: A concern can face the situation during the depression.
38
9. Quick And Regular Return On Investments: Sufficient working capital enables a
concern to pay quick and regular of dividends to its investors and gains confidence of
the investors and can raise more funds in future.
10. High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
4.4 FACTORS AFFECTING WORKING CAPITAL REQUIREMENTS
A firm should have neither too much nor too little working capital. The working capital
requirements are determined by a large number of factors but, in general, the following
factors influence the need of working capital needs of an enterprise:
1. NATURE OF BUSINESS : The requirements of working is very limited in public utility
undertakings such as electricity, water supply and railways because they offer cash sale
only and supply services not products, and no funds are tied up in inventories and
receivables. Their working capital need is minimal because they get immediate payment
for their services and do not have to maintain big inventories. On the other hand the
trading and financial firms requires less investment in fixed assets but have to invest
large amt. of working capital along with fixed investments. This is so because the nature
of the business is such that they have to maintain a sufficient amount of cash,
inventories and debtors. Working capital needs of most of the manufacturing enterprise
fall between these two extremes that is between public utilities and trading concerns.
2. SIZE OF THE BUSINESS: Greater the size of the business, greater is the requirement
of working capital. The size of a business may be measured in terms of scale of its
business operation.
3. PRODUCTION POLICY: If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
4. LENGTH OF PRDUCTION CYCLE: The longer the manufacturing time the raw
material and other supplies have to be carried for a longer in the process with
progressive increment of labour and service costs before the final product is obtained.
So working capital is directly proportional to the length of the manufacturing process.
5. SEASONALS VARIATIONS: Generally, during the busy season, a firm requires larger
working capital than in slack season.
6. WORKING CAPITAL CYCLE : The speed with which the working cycle completes
one cycle determines the requirements of working capital. Longer the cycle larger is the
requirement of working capital.
39
7. RATE OF STOCK TURNOVER: There is an inverse co-relationship between the
question of working capital and the velocity or speed with which the sales are affected.
A firm having a high rate of stock turnover will needs lower amt. of working capital as
compared to a firm having a low rate of turnover.
8. CREDIT POLICY: A concern that purchases its requirements on credit and sales its
product / services on cash requires lesser amt. of working capital and vice-versa.
9. BUSINESS CYCLE: In period of boom, when the business is prosperous, there is need
for larger amt. of working capital due to rise in sales, rise in prices, optimistic expansion
of business, etc. On the contrary in time of depression, the business contracts, sales
decline, difficulties are faced in collection from debtor and the firm may have a large
amt. of working capital.
10. RATE OF GROWTH OF BUSINESS: In faster growing concern, we shall require
large amt. of working capital.
11. EARNING CAPACITY AND DIVIDEND POLICY: Some firms have more earning
capacity than other due to quality of their products, monopoly conditions, etc. Such
firms may generate cash profits from operations and contribute to their working capital.
The dividend policy also affects the requirement of working capital. A firm maintaining
a steady high rate of cash dividend irrespective of its profits needs working capital than
the firm that retains larger part of its profits and does not pay so high rate of cash
dividend.
12. PRICE LEVEL CHANGES: Changes in the price level also affect the working capital
requirements. Generally rise in prices leads to increase in working capital.
13. EFFECIENCY OF MANAGEMENT: Efficiency of management is also a significant
factor to determine the level of working capital. Management can reduce the need for
working capital by the efficient utilization of resources. It can accelerate the pace of
cash cycle and thereby use the same amount working capital again and again very
quickly.
14. DEPRICIATION POLICY: Although depreciation does not result in outflow of cash,
it affects the working capital indirectly. In the first place, since the depreciation is
allowable expenditure in calculating net profits, it affects the tax-liability. In the second
place, higher depreciation also means lower disposable profits and, in turn, a lower
dividend payment. Thus, outgo of cash is restricted to that extent.
40
4.5 MANAGEMENT OF WORKING CAPITAL
Management of working capital is concerned with the problem that arises in attempting to
manage the current assets, current liabilities. The basic goal of working capital management is
to manage the current assets and current liabilities of a firm in such a way that a satisfactory
level of working capital is maintained, i.e. it is neither adequate nor excessive as both the
situations are bad for any firm. There should be no shortage of funds and also no working
capital should be ideal. Working capital management polices of a firm has a great on its
probability, liquidity and structural health of the organization. So working capital
management is three dimensional in nature as
1. It is concerned with the formulation of policies with regard to profitability, liquidity and
risk.
2. It is concerned with the decision about the composition and level of current assets.
3. It is concerned with the decision about the composition and level of current liabilities.
This dimension aspect of his working capital has been more clearly and precisely explains by
the following diagram.
Figure 4.3 Dimension of working capital
The importance of working capital management is effected in the fact that financial manages
spend a great deal of time in managing current assets and current liabilities. Arranging short
term financing, negotiating favourable credit terms, controlling the movement of cash,
administering the accounts receivable, and monitoring the inventories consume a great deal of
41
DIMENSION I
DIMENSION II
DIMENSION III
Profitability, Risk & Liquidity
Composition & Level of Current Liabilities
Composition & Level of Current Assets
time of financial managers. The problem of working capital management is one of the “best”
utilization of a scarce resource.
Thus the job of efficient working capital management is a formidable one, since it depends
upon several variables such as character of the business, the lengths of the merchandising
cycle, rapidity of turnover, scale of operations, volume and terms of purchase & sales and
seasonal and other variations.
4.6SIGNIFICANCE OF WORKING CAPITAL
Working Capital is very important in day to day life. So, the management of working capital
assumes great importance because shortage of working capital funds is perhaps the biggest
possible cause of failure of many business units in recent times.
Figure 4.4 Significance of Working Capital
42
SIGNIFICANCE OF WORKING CAPITAL
PAYMENT TO SUPPLIERS
DIVIDEND DISTRIBUTION
INCREASE DEBT CAPACITY
INCREASE IN FIX ASSETS
INCREASE EFFECIENCY
EASY LOAN FROM BANKS
4.7 FINANCING WORKING CAPITAL
Now let us understand the means to finance the working capital. Working capital or current
assets are those assets, which unlike fixed assets change their forms rapidly. Due to this
nature, they need to be financed through short-term funds. Short-term funds are also called
current liabilities. The following are the major sources of raising short-term funds:
Supplier’s Credit : - At times, business gets raw material on credit from the suppliers.
The cost of raw material is paid after some time, i.e. upon completion of the credit
period. Thus, without having an outflow of cash the business is in a position to use raw
material and continue the activities. The credit given by the suppliers of raw materials is
for a short period and is considered current liabilities. These funds should be used for
creating current assets like stock of raw material, work in process, finished goods, etc.
Bank Loan for Working Capital: - This is a major source for raising short-term funds.
Banks extend loans to businesses to help them create necessary current assets so as to
achieve the required business level. The loans are available for creating the following
current Assets:
Stock of Raw Materials
Stock of Work in Process
Stock of Finished Goods
Debtors
Banks give short-term loans against these assets, keeping some security margin. The advances
given by banks against current assets are short-term in nature and banks have the right to ask
for immediate repayment if they consider doing so. Thus bank loans for creation of current
assets are also current liabilities.
Promoter’s Fund : - It is advisable to finance a portion of current assets from the
promoter’s funds. They are long-term funds and, therefore do not require immediate
repayment. These funds increase the liquidity of the business.
43
4.8 ISSUES IN WORKING CAPITAL MANAGEMENT
Working capital management refers to the administration of all components of working
capital.
Debtors (Receivables) Management
Creditors (Payables) Management
Inventories (Stock) Management
4.8.1 HANDLING RECEIVABLES (DEBTORS)
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know who owes them money? How much is owed? How
long it owes and for what it is owed? Late payments erode profits and can lead to bad
debts.
Slow payment has a crippling effect on business; in particular on small businesses who can
least afford it. If you don't manage debtors, they will begin to manage your business as you
will gradually lose control due to reduced cash flow and, of course, you could experience an
increased incidence of bad debt. It is very difficult for the organization to sell always on cash
basis in today’s competitive market. In almost every business, we have to sell on credit basis.
The basic objective of management of sundry debtors is to optimize the return on investment
on this asset. It is obvious that if there are large amounts tied up in sundry debtors, working
capital requirement would be high and consequently interest charges will be high. In such
cases, the bad debts and cost of collection of debts would be high. On the other hand if the
credit policy is very tight, investment in sundry debtors is low but the sale may be
restricted, since the competitors may offer more liberal credit term. We have limited resources
and therefore every resource has its own opportunity cost. Therefore the management of
sundry debtors is an important issue and requires proper policies and efficient execution of
such policies.
Debtors and cost of debtors have direct relation; cost will increase due to increase in debtors
and vice-versa. It depends on the credit sale of concern and credit period (collection period)
allowed to customer. It is interest of customer to pay as late as possible and company, who
made sales, would like to collect their debtor as early as possible. There is a conflict between
the two aspects. Debtor management is the process of finding the balance at which company
agree to receive its payment without hampering or having any adverse effect on its sales and
44
customer agree to pay at their economical buying concept. Sundry debtor level depends on
two measure issues:
Volume of Credit sales
Credit period allowed to customers.
Following factors may be considered before allowing credit period to the customer:-
1. Nature of product
2. Credit worthiness of the customer, which varies from customer to customer
3. Quantum of advance received from customers
4. Credit policy of company, say number of days allowed to customer for payment to the
customers
5. Cost of debtors
6. Manufacturing cycle time of the product etc.
Credit policy:
The term credit policy is used to refer to the combination of three decision variables:
Credit standard are criteria to decide the types of customers to whom goods could be
sold on credit. If a firm has more slow paying customers, its investment in accounts
receivable will increase. The firm will also be exposed to higher risk of default.
Credit terms specify duration of credit and terms of payment by customers. Investment
in accounts receivables will be high if customers are allowed extended time period for
making payments.
Collection efforts determine the actual collection period. The lower the collection
period, the lower the investment in accounts receivable and vice-versa.
The financial manager or the credit manager may administer the credit policy of a firm. Credit
policy has important implications for the firm’s production, marketing and finance functions.
The following measures will help manage your debtors:
1. Have the right mental attitude to the control of credit and make sure that it gets the
priority it deserves.
2. Establish clear credit practices as a matter of company policy.
3. Make sure that these practices are clearly understood by staff, suppliers and
customers.
4. Be professional when accepting new accounts, and especially larger ones.
45
5. Check out each customer thoroughly before you offer credit. Use credit agencies, bank
references, industry sources etc.
6. Establish credit limits for each customer and stick to them.
7. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
8. Keep very close to your larger customers.
9. Invoice promptly and clearly.
10. Consider charging penalties on overdue accounts.
11. Consider accepting credit /debit cards as a payment option.
12. Monitor your debtor balances and ageing schedules, and don't let any debts get too
large or too old.
Recognize that the longer someone owes you, the greater the chance you will never get paid.
If the average age of your debtors is getting longer, or is already very long, you may need to
look for the following possible defects:
1. Weak Credit Judgement
2. Poor Collection Procedures
3. Lax Enforcement of Credit Terms
4. Slow Issue of Invoices or Statements
5. Errors in Invoices or Statements
6. Customer Dissatisfaction.
Debtors due over 90 days (unless within agreed credit terms) should generally demand
immediate attention. Look for the warning signs of a future bad debt. For example, longer
credit terms taken with approval, particularly for smaller orders use of post-dated checks by
debtors who normally settle within agreed terms evidence of customers switching to
additional suppliers for the same goods new customers who are reluctant to give credit
references receiving part payments from debtors. Profits only come from paid sales.
The act of collecting money is one which most people dislike for many reasons and therefore
put on the long finger because they convince themselves there is something more urgent or
important that demands their attention now. There is nothing more important than getting paid
for your product or service. A customer who does not pay is not a customer. Here are a few
ideas that may help you in collecting money from debtors:
1. Develop appropriate procedures for handling late payments.
2. Track and pursue late payers.
46
3. Get external help if your own efforts fail.
4. Don't feel guilty asking for money, it’s yours and you are entitled to it.
5. Make that call now. And keep asking until you get some satisfaction.
6. In difficult circumstances, take what you can now and agree terms for the
remainder. It lessens the problem.
7. When asking for your money, be hard on the issue - but soft on the person. Don't
give the debtor any excuses for not paying.
8. Make it your objective is to get the money - not to score points or get even.
ASHOK LEYLAND, PANTNAGAR
The unit is engaged in the manufacturing business of chassis of truck and busses, where cycle
time of the product is 50-59 hours depending on different models and most of the contracts
take approximately 1-2 years to complete. Ashok Leyland has a large database for public
transport busses, commercial vehicles, defence and special purpose. It caters to different class
of society which includes individual buyers, industrial buyers, government buyers and
defence also. State electricity boards
Individual buyers: - Individual user includes individual or passenger transporter.
Industrial buyers: - Industrial user includes transporter, logistics companies, coal and
mining industry and other industries etc.
Government buyers: - Government user includes state and central transporter like
DTC, UPSRTC and others.
Defence: - Defence user includes Indian army trucks, tanks and transporter busses.
In most of the contracts, payments of Ashok Leyland, Pantnagar are made in following stages:
Advance from customers and at the time of dispatch of goods
Finance from Bankers
4.8.2 MANAGING PAYABLES (CREDITORS)
Creditors are the businesses or people who provide goods and services in credit terms. That is,
they allow us time to pay rather than paying in cash. There are good reasons why we allow
people to pay on credit even though literally it doesn't make sense! If we allow people time to
pay their bills, they are more likely to buy from your business than from another business that
doesn't give credit. The length of credit period allowed is also a factor that can help a potential
customer deciding whether to buy from your business or not: the longer the better, of course.
In spite of what we have just said, creditors will need to optimise their credit control policies
in exactly the same way that we did when we were assessing our debtors' turnover ratio - after
47
all, if you are my debtor I am your creditor! We give credit but we need to control how much
we give, how often and for how long. Creditors are a vital part of effective cash management
and should be managed carefully to enhance the cash position. Purchasing initiates cash
outflows and an over-zealous purchasing function can create liquidity problems. Consider the
following:
1. Who authorizes purchasing in your company - is it tightly managed or spread among a
number of (junior) people?
2. Are purchase quantities geared to demand forecasts?
3. Do you use order quantities which take account of stock-holding and purchasing
costs?
4. Do you know the cost to the company of carrying stock?
5. Do you have alternative sources of supply? If not, get quotes from major suppliers and
shop around for the best discounts, credit terms, and reduce dependence on a single
supplier.
6. How many of your suppliers have a returns policy?
7. Are you in a position to pass on cost increases quickly through price increases to your
customers?
8. If a supplier of goods or services lets you down can you charge back the cost of the
delay?
9. Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-
in-time basis?
There is an old adage in business that if you can buy well then you can sell well. Management
of your creditors and suppliers is just as important as the management of your debtors. It is
important to look after your creditors - slow payment by you may create ill-feeling and can
signal that your company is inefficient (or in trouble!).
Remember, a good supplier is someone who will work with you to enhance the future
viability and profitability of your company.
ASHOK LEYLAND, PANTNAGAR
The unit purchases raw material from all over India with around 40% of vendors are in Tamil
Nadu and around 20% in Uttarakhand and rest in other states. There are around total 485
vendors of Ashok Leyland. The major vendors of Ashok Leyland, Pantnagar are as follow :-
Surin Automotive Private Limited, Sitarganj, Uttarakhand
48
Birla Tyres Prop. Kesoram Industries Ltd, Haridwar, Uttarakhand
Tata Steel Ltd, Jamshepur
Sri Balaji Fabrication Works, Hosur
Caparo Fasteners, Alwar
Wheels India Limited, Pantnagar
In most of the contracts, payments by Ashok Leyland, Pantnagar are made in following
stages:-
General AP booking with the help of ERP software
RTGS-(Real Time Gross Settlement)
Supplementary Bill Processing is done
Hundi Payment
Vendor Financing
For the Production and Non Production both the payment is made through Standard
Chartered Bank and HDFC Bank on the due date only.
4.8.3 INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of a majority of companies in
India. Because of the large size of inventories maintained by firms, a considerable amount of
funds is required to be committed to them. It is, therefore, absolutely imperative to manage
inventories efficiently and effectively in order to avoid unnecessary investment. A firm
neglecting the management of inventories will be jeopardizing its long run profitability and
may fail ultimately. It is possible for a company to reduce its level of inventories to a
considerable degree, e.g., 10 to 20 per cent, without any adverse effect on production and
sales, by using simple inventory planning and control techniques. The reduction in excessive
inventories carries a favourable impact on company’s profitability.
Nature of Inventories
Inventories are stock of the product a company is manufacturing for sale and components that
make up the product. The various forms in which inventories exist in a manufacturing
company are:
Raw Materials: These are those basic inputs that are converted into finished product
through the manufacturing process. Raw materials inventories are those units which
have been purchased and stored for future productions.
49
Work in Process: These inventories are semi-manufactured products. They represent
products that need more work before they become finished for sale.
Finished Goods: These inventories are those completely manufactured products
which are ready for sale. Stocks of raw materials and work-in-process facilitate
production, while stock of finished goods is required for smooth marketing operations.
Thus, inventories serve as a link between the production and consumption of goods.
The levels of three kinds of inventories for a firm depend on the nature of its business. A
manufacturing firm will have substantially high levels of all three kinds of inventories. Within
manufacturing firms, there will be differences. Large heavy engineering companies produce
long production cycle products; therefore they carry large inventories. Firms also maintain a
fourth kind of inventory, supplies or stores and spares. Supplies include office and plant
cleaning materials like soap, brooms, oil, fuel, light bulbs etc. these materials do not directly
enter production, but are necessary for production process. Usually, these supplies are small
part of the total inventory and do not involve significant investment. Therefore, a
sophisticated system of inventory control may not be maintained for them.
Need To Hold Inventories
The question of managing inventories arises only when the company holds inventories.
Maintaining inventories involves tying up of the company’s funds and incurrence of storage
and handling costs. If it is expensive to maintain inventories, why do companies hold
inventories? There are three general motives for holding inventories:-
Transactions motive: It emphasizes the need to maintain inventories to facilitate
smooth production and sales operations.
Precautionary motive: It necessitates holding of inventories to guard against the risk
of unpredictable changes in demand and supply forces and other factors.
Speculative motive: It influences the decision to increase or reduce inventory levels
to take the advantage of price level fluctuations.
A company should maintain adequate stock of materials for a continuous supply to the factory
for an uninterrupted production. It is not possible for a company to procure raw materials
whenever it is needed. A time lag exists between demand for materials and its supply. Also,
there exists uncertainty in procuring raw materials in time on many occasions. The
procurement of materials may be delayed because of such factors as strike, transport
disruption or short supply. Therefore, the firm should maintain sufficient stock of raw
materials at a given time to stream line production. Other factors which may necessitate
50
purchasing and holding of raw materials inventories are quantity discounts and anticipated
price increase. The firm may purchase large quantities of raw materials than needed for the
desired production and sales levels to obtain quantity discounts of bulk purchasing. At times,
the firm would like to accumulate raw materials in anticipation of price rise.
Work in process inventory builds up because of the production cycle. Production cycle is the
time pan between introduction of raw materials into production and emergence of finished
product at the completion of production cycle. Till production cycle completes, stock of WIP
has to be maintained.
Stock of finished goods has to be held because production and sales are not instantaneous. A
firm cannot produce immediately when customers demand goods. Therefore, to supply
finished goods on a regular basis, their stock has to be maintained.
Objective of Inventory Management
In the context of inventory management, the firm is faced with the problem of meeting two
conflicting needs:
1. To maintain a large size of inventories of raw materials and WIP for efficient and
smooth production and of finished goods for uninterrupted sales operations.
2. To maintain a minimum investment in inventories to maximize profitability.
Both excessive and inadequate inventories are not desirable. These are two danger
points which the firm should avoid. The objective of inventory management should be
determine and maintain optimum level of inventory investment. The optimum level of
inventory will lie between the two danger points of excessive and inadequate inventories. The
firm should always avoid a situation of over investment or under investment in inventories.
The major dangers of over investment are:
Unnecessary tie up of the firm’s funds loss of profit
Excessive carrying costs
Risk of liquidity
The excessive level of inventories consumes funds of the firm, which cannot be used for any
other purpose, and thus, it involves an opportunity cost. The carrying costs such as the costs
of storage, handling, insurance, recording and inspection, also increases in proportion to the
volume of inventory. These costs will impair the firm’s profitability further. Excessive
inventories carried for long period increases chances of loss of liquidity. It may not be
possible to sell inventories in time and at full value. Raw materials are generally difficult to
sell as the holding period increases. Another danger of carrying excessive inventory is the
51
physical deterioration of inventories while in storage. Maintaining an inadequate level of
inventories is also dangerous. The consequences of under investment in inventories are
Production hold-ups and failure to meet delivery commitments
Inadequate raw materials and WIP inventories will result in frequent production
interruptions.
The aim of inventory management is to avoid excessive and inadequate levels of inventories
and to maintain sufficient inventory for the smooth production and sales operations. An
effective inventory management should:
Ensure a continuous supply of raw materials to facilitate uninterrupted production
Maintain sufficient stock of raw materials in periods of short supply and anticipate
price changes.
Maintain sufficient finished goods inventory for smooth sales operation and efficient
customer service and minimize the carrying cost and time
Control investment in inventories and keep it at an optimum level.
Following steps have been taken to control inventory:
An inventory monitoring cell is constituted at the corporate office.
The purchases were controlled by the materials management group reporting to the
Director of Finance.
The company provided for weekly meetings between material planning, production
control and purchase departments for better matched material availability.
Monthly review of total inventory at the level of chief executives of plants and
corporate management is introduced.
Inventory control is dovetailed with the budgeting system.
Top 100 inventory items are identified for closer scrutiny and control
ASHOK LEYLAND, PANTNAGAR
This unit produces long production cycle items against the firm orders from customers.
Because of this as well as sizeable imported raw materials and compulsory bulk purchases of
items like steel and tyres in line with availability from Tata Steels and Birla Tyres, the
company has to carry high level of inventories
CHAPTER 5
WORKING CAPITAL ANALYSIS
52
As we know working capital is the life blood and the centre of a business. Adequate amount
of working capital is very much essential for the smooth running of the business. And the
most important part is the efficient management of working capital in right time. The liquidity
position of the firm is totally effected by the management of working capital. So, a study of
changes in the uses and sources of working capital is necessary to evaluate the efficiency with
which the working capital is employed in a business. This involves the need of working
capital analysis.
5.1 STATEMENT SHOWING SCHEDULE OF CHANGES IN WORKING
CAPITAL
Statement of changes in the working capital is prepared to show the changes in the working
capital between the two balance sheet dates. This statement is prepared with the help of the
current asset and current liabilities derived from the 2 balance sheets so,
1. An increase in current asset increases working capital.
2. A decrease in current assets decreases in working capital
3. An increase in current liabilities decreases working capital.
4. A decrease in current liabilities increases working capital.
It is worth noting that schedule of changes in working capital is prepared only from current
assets and current liabilities and the other information is not of any use for preparing this
statement. The company should look in to the proper current liabilities.
5.2 RATIO ANALYSIS
Ratios should be taken as guides that are useful in evaluating a company’s financial position
and operations and making comparisons with results in previous years or with other
companies. The primary purpose of ratios is to point out areas needing further investigations.
Ratios will not carry meaningful business reasoning if there is no supporting quantitative and
financial information. A ratio is a simple arithmetical expression one number to another. The
technique of ratio analysis can be employed for measuring short-term liquidity or working
capital position of a firm. The following ratios can be calculated for these purposes: Ratios are
relationship expressed in mathematical terms between 2 individual groups of figures
connected with each other. Different ratios are calculated to analyze and study different
aspects of a firm. Ratios have been classified into the following groups: Liquidity Ratios,
Current Asset Movement Ratios, and Profitability Ratios
5.2.1 LIQUIDITY RATIO
53
Liquidity refers to the ability of a firm to meet its short-term financial obligations when and
as they fall due. The main concern of liquidity ratio is to measure the ability of the firms to
meet their short-term maturing obligations. Failure to do this will result in the total failure of
the business, as it would be forced into liquidation. Common liquidity ratios include the
current ratio, and the quick ratio.
CURRENT RATIO
The current ratio is a popular financial ratio used to test a company's liquidity (also referred to
as its current or working capital position) by deriving the proportion of current assets
available to cover current liabilities. The concept behind this ratio is to ascertain whether a
company's short-term assets (cash, cash equivalents, marketable securities, receivables and
inventory) are readily available to pay off its short-term liabilities (notes payable, current
portion of term debt, payables, accrued expenses and taxes). In theory, the higher the current
ratio, the better. Interpretation of current ratio as:
1. Relatively high ratio values mean that the business is liquid, but cash is not working.
2. If the current ratio is greater than 1.0, the business is liquid.
3. If the current ratio is less than 1.0, the business is illiquid.
CURRENT RATIO = TOTAL CURRENT ASSETSTOTAL CURRENT LIABILITIES
QUICK RATIO
The quick ratio -the quick assets ratio or the acid-test ratio -is a liquidity indicator that further
refines the current ratio by measuring the amount of the most liquid current assets there are to
cover current liabilities. The quick ratio is more conservative than the current ratio because it
excludes inventory and other current assets, which are more difficult to turn into cash.
Therefore, a higher ratio means a more liquid current position.
A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms’ liquidity
position is not good.
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if quick
assets are equal to the current liabilities then the concern may be able to meet its short-term
obligations. However, a firm having high quick ratio may not have a satisfactory liquidity
54
position if it has slow paying debtors. On the other hand, a firm having a low liquidity
position if it has fast moving inventories.
QUICK RATIO = TOTAL CURRENT ASSETS - INVENTORYTOTAL CURRENT LIABILITIES
5.2.2 CURRENT ASSETS MOVEMENT RATIOS
Funds are invested in various assets in business to make sales and earn profits. The efficiency
with which assets are managed directly affects the volume of sales. The better the
management of assets, large is the amount of sales and profits. Current assets movement
ratios measure the efficiency with which a firm manages its resources. These ratios are called
turnover ratios because they indicate the speed with which assets are converted or turned over
into sales. Depending upon the purpose, a number of turnover ratios can be calculated. These
are:
Inventory Turnover or Stock Turnover Ratio
Debtors Turnover Ratio
Creditors Turnover Ratio
Working Capital Turnover Ratio
The current ratio and quick ratio give misleading results if current assets include high amount
of debtors due to slow credit collections and moreover if the assets include high amount of
slow moving inventories. As both the ratios ignore the movement of current assets, it is
important to calculate the turnover ratio.
INVENTORY TURNOVER RATIO
Every firm has to maintain a certain amount of inventory of finished goods so as to meet the
requirements of the business. But the level of inventory should neither be too high nor too
low. Because it is harmful to hold more inventory as some amount of capital is blocked in it
and some cost is involved in it. It will therefore be advisable to dispose the inventory as soon
as possible.
INVENTORY TURNOVER RATIO = SALESINVENTORY
Inventory turnover ratio measures the speed with which the stock is converted into sales.
Usually a high inventory ratio indicates an efficient management of inventory because more
frequently the stocks are sold; the lesser amount of money is required to finance the inventory
55
whereas low inventory turnover ratio indicates the inefficient management of inventory. A
low inventory turnover implies over investment in inventories, dull business, poor quality of
goods, stock accumulations and slow moving goods and low profits as compared to total
investment.
The number of day’s inventory is also known as average inventory period and inventory
holding period. A high number of days inventory indicates that there is a lack of demand for
the product being sold. A low days inventory ratio (inventory holding period) may indicate
that the company is not keeping enough stock on hand to meet demands.
NO. OF DAYS INVENTORY = 360 DAYSINVENTORY TURNOVER RATIO
DEBTORS TURNOVER RATIO
A concern may sell its goods on cash as well as on credit to increase its sales and a liberal
credit policy may result in tying up substantial funds of a firm in the form of trade debtors.
Trade debtors are expected to be converted into cash within a short period and are included in
current assets. So liquidity position of a concern also depends upon the quality of trade
debtors.
DEBTORS TURNOVER RATIO = SALES DEBTORS
Debtor’s velocity indicates the number of times the debtors are turned over during a year.
Generally higher the value of debtor’s turnover ratio the more efficient is the management of
debtors/sales or more liquid are the debtors. Whereas a low debtors turnover ratio indicates
poor management of debtors/sales and less liquid debtors. This ratio should be compared with
ratios of other firms doing the same business and a trend may be found to make a better
interpretation of the ratio.
The average collection period ratio represents the average number of days for which a firm
has to wait before its receivables are converted into cash. It measures the quality of debtors.
Generally, shorter the average collection period the better is the quality of debtors as a short
collection period implies quick payment by debtors and vice-versa.
56
AVERAGE COLLECTION PERIOD = 360 DAYSDEBTORS TURNOVER RATIO
CREDITORS TURNOVER RATIO
Creditors are a vital part of effective cash management and should be managed carefully to
enhance the cash position. Creditor’s turnover ratio indicates the pattern of payment of
accounts payable. As accounts payable arise on account of credit purchases, it expresses
relationship between credit purchases and accounts payable. It is calculated as follows:
CREDITORS TURNOVER RATIO = PURCHASES CREDITORS
It reveals average payment period. Lower ratio means credit allowed by the supplier is for a
long period or it may reflect delayed payment to suppliers which is not a very good policy as
it may affect the reputation of the business. The average period of payment can be worked out
by days/months in a year by the turnover rate.
CREDITORS COLLECTION PERIOD = 360 DAYSCREDITORS TURNOVER RATIO
WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio indicates the velocity of utilization of net working capital. This
ratio indicates the number of times the working capital is turned over in the course of the year.
This ratio measures the efficiency with which the working capital is used by the firm. A
higher ratio indicates efficient utilization of working capital and a low ratio indicates
otherwise. But a very high working capital turnover is not a good situation for any firm.
WORKING CAPITAL TURNOVER RATIO = SALESNET WORKING CAPITAL
5.2.3 PROFITABILITY RATIO
57
Profit margin analysis uses the percentage calculation to provide a comprehensive measure of
a company's profitability on a historical basis (3-5 years) and in comparison to peer
companies and industry benchmarks.
NET PROFIT MARGIN
Often referred to simply as a company's profit margin, the so-called bottom line is the most
often mentioned when discussing a company's profitability? While undeniably an important
number, investors can easily see from a complete profit margin analysis that there are several
income and expense operating elements in an income statement that determine a net profit
margin. It behoves investors to take a comprehensive look at a company's profit margins on a
systematic basis.
NET PROFIT MARGIN = PROFIT AFTER TAXNET SALES
GROSS PROFIT MARGIN
The gross profit margin reflects the efficiency with which management produces each unit of
product. This ratio indicates the average spread between the cost of goods sold and the sales
revenue. The high gross profit margin relative to the industry average implies that the firm is
able to produce at relatively lower cost.
GROSS PROFIT MARGIN = GROSS PROFIT NET SALES
GROSS PROFIT = SALES - COST OF GOODS SOLD
5.3 OPERATING CYCLE
Operating cycle refers to the time duration required to convert sales, after the conversion of
recourses into inventories, into cash .the operating cycle of a manufacturing company like
Ashok Leyland includes:
1. Accusation of resources such as raw materials, labour, power and fuel etc.
2. Manufacture of the product which includes conversion of materials into work-in-
progress into finished goods.
58
RAW MATERIAL
WORK IN PROGRESS
FINISH GOODS
SALES
DEBTORS & BILLS
RECEIVABLES
CASH
OPERATING CYCLE
3. Sale of the product either for cash or on credit. Credit sales create account receivables
for collection.
In manufacturing concern, working capital cycle starts with the purchase of raw materials and
ends with realization of cash from the sale of finished goods. The cycle involves the purchase
of raw materials and ends with the realization of cash from the sale of finished products. The
cycle involves purchase of raw materials and stores, its conversion in to stock of finished
goods through work in progress with progressive increment of labour and service cost,
conversion of finished stock in to sales and receivables and ultimately realization of cash and
this cycle continuous again from cash to purchase of raw materials and so on.
The duration or time required to complete the sequence of events right from purchase of raw
material for cash to the realization of sales in cash is called the operating cycle or working
capital cycle. The need for working capital can also be explained with the help of operating
cycle. Operating cycle of a manufacturing concern involves five phases:
1. Conversion of cash into raw material.
2. Conversion of raw material into work-in-progress.
3. Conversion of work-in-progress into finished goods.
4. Conversion of finished goods into debtors by credit sales.
5. Conversion of debtors into cash by realizing cash from them.
59
Figure5.1 Operating Cycle
Thus, the operating cycle starts from cash and then again restarts from cash. Need for working
capital depends upon period of operating cycle. Greater the period more will be the need of
working capital. Period of operating cycle in a manufacturing concern is greater than a period
of operating cycle in a trading concern because in trading units cash is directly converted into
finished goods.
Each component of working capital (namely inventory, receivables and payables) has two
dimensions, TIME and MONEY. When it comes to manage working capital - TIME IS
MONEY. If you can get money to move faster around the cycle (e.g. collect monies due from
debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels
relative to sales), the business will generate more cash or it will need to borrow less money to
fund working capital. As a consequence, you could reduce the cost of bank interest or you'll
have additional free money available to support additional sales growth or investment.
Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an
increased credit limit; you effectively create free finance to help fund future sales
IF you….. Then……
Collect receivables (Debtors) faster You release cash from the cycle
Collect receivables (Debtors) slower Your receivables soak up cash
Get better credit (in terms of duration or amount)from
your supply
You increase your cash
resources
Shift inventory (stocks) faster You free up cash
Move inventory (stocks) slower You consume more cash
Because of the time involved in a operating cycle, there is a need of working capital in the
form of current assets. Firms have to keep adequate stock of raw-material to avoid risk of
non-availability of raw materials. Similarly, concerns must have adequate stock of finished
goods to meet the demand in market on continuous basis and to avoid competition which
necessitates the money tied up in debtors and bills receivables. In addition to all these,
concerns have to necessarily keep cash to pay the manufacturing expenses etc. and to meet the
contingencies.
5.3.1 COMPONENTS OF WORKING CAPITAL CYCLE ARE
CALCULATED AS FOLLOWS:
60
1. Raw Materials Storage Period=Average stock of raw materials/Average cost of raw
material consumption per day.
2. W-I-P Holding period=Average w-i-p in inventory/Average cost of production per
day.
3. Finished goods conversion period= Average stock of finished goods/Average cost of
goods sold per day.
4. Debtors collection period=Average book debts/Average credit sales per day.
5. Credit period availed=Average trade creditors/Average credit purchase per day.
Operating Cycle= Raw Material Holding Period +WIP Holding Period +FG Holding
Period +Debtors Collection Period -Creditors Collection Period
CHAPTER 6
DATA ANALYSIS AND INTERPRETATION
61
Data analysis is an important part in any study as it fulfils the purpose for which it is made. In
this part of study the analysis of data is done on the basis of information collected through the
annual reports of Ashok Leyland and the data collected through the managers of Ashok
Leyland in Pantnagar Plant with the help of table and graphs.
6.1 EVALUATION OF WORKING CAPITAL
Working capital is the life blood and centre of business. Adequate amount of working capital
is very much essential for the smooth running of the business. And the most important part is
the efficient management of working capital in right time. The liquidity position of the firm is
totally effected by the management of working capital. So, a study of changes in the uses and
sources of working capital is necessary to evaluate the efficiency with which the working
capital is employed in a business. This involves the need for working capital analysis.
6.1.1 STATEMENT SHOWING SCHEDULE OF CHANGES IN
WORKING CAPITAL
TABLE 6.1:- FOR THE YEAR 2006-2007(Rs. IN MILLIONS)
PARTICULARS 2006 2007 INCREASE DECREASECURRENT
ASSETSInventories 9025.61 10703.21 1677.6
Sundry debtors 4243.37 5228.75 985.38Cash and bank balances 6028.76 4349.39 1679.37
Loan & advances 3026.39 6695.79 3669.4(A) 22324.13 26977.14
CURRENT LIABILITIES
Liabilities 11468.95 16516.25 5047.3Provisions 2616.21 1042.3 1573.91
(B) 14085.16 17558.55(A-B) WORKING
CAPITAL8238.97 9418.59
Increasing in WC 1179.62 1179.62TOTAL 9418.59 9418.59 7906.29 7906.29
INTERPRETATION:
The above table shows that there has been increase in need for working capital to the extent of
1179.62 from the year 2006 to 2007.
62
TABLE 6.2:- FOR THE YEAR 2007-2008(Rs. IN MILLIONS)
PARTICULARS 2007 2008 INCREASE DECREASECURRENT
ASSETSInventories 10703.21 12239.14 1535.93
Sundry debtors 5228.75 3758.35 1470.4Cash and bank balances 4349.39 4513.7 164.31
Loan & advances 6695.79 8241.385 1545.595(A) 26977.14 28752.581
CURRENT LIABILITIES
Liabilities 16516.25 19267.084 2750.834Provisions 1042.3 3452.31 2410.01
(B) 17558.55 22719.394(A-B) WORKING
CAPITAL9418.59 6033.19
Decreasing in WC 3385.4 3385.4TOTAL 9418.59 9418.59 6631.235 6631.235
INTERPRETATION:
The above table shows that there has been decrease in need for working capital to the extent
of 3385.40 from the year 2007 to 2008.
TABLE 6.3:- FOR THE YEAR 2008-2009(Rs. IN MILLIONS)
PARTICULARS 2008 2009 INCREASE DECREASECURRENT
ASSETSInventories 12239.14 13300.144 1061
Sundry debtors 3758.35 9579.742 5821.391Cash and bank balances 4513.7 880.836 3632.865
Loan & advances 8241.385 7895.44 346.25(A) 28752.581 31656.14
CURRENT LIABILITIES
Liabilities 19267.084 18688.641 5784.43Provisions 3452.31 2680.82 771.49
(B) 22719.394 21369.461(A-B) WORKING
CAPITAL6033.19 10286.679
Increasing in WC 4253.5 4253.5TOTAL 10286.68 10286.68 8232.32 8232.32
INTERPRETATION:
63
The above table shows that there has been increase in need for working capital to the extent of
4253.50 from the year 2008 to 2009.
TABLE 6.4:- FOR THE YEAR 2009-2010 (Rs. IN MILLIONS)
PARTICULARS 2009 2010 INCREASE DECREASECURRENT
ASSETSInventories 13300.144 16382.40 3082.26
Sundry debtors 9579.742 10226.90 647.16Cash and bank balances 880.836 5189.20 4308.36
Loan & advances 7895.44 9604.60 1709.16(A) 31656.14 41403.10
CURRENT LIABILITIES
Liabilities 18688.641 25920.60 7231.96Provisions 2680.82 3686.90 1006.08
(B) 21369.461 29607.50(A-B) WORKING
CAPITAL10286.679 11795.60
Increasing in WC 1508.92 1508.92TOTAL 11795.60 11795.60 9746.94 9746.96
INTERPRETATION:
The above table shows that there has been increase in need for working capital to the extent of
1508.92 from the year 2009 to 2010.
TABLE 6.5:- FOR THE YEAR 2010-2011 (Rs. IN MILLIONS)
PARTICULARS 2010 2011 INCREASE DECREASECURRENT
ASSETSInventories 16382.40 22089.034 5706.634
Sundry debtors 10226.90 11852.133 1625.233Cash and bank balances 5189.20 1795.272 3393.928
Loan & advances 9604.60 7936.014 1668.586(A) 41403.10 43672.453
CURRENT LIABILITIES
Liabilities 25920.60 30379.477 4458.877Provisions 3686.90 4903.263 1216.363
(B) 29607.50 35282.74(A-B) WORKING
CAPITAL11795.60 8389.713
Decreasing in WC 3405.887 3405.887TOTAL 11795.60 11795.60 10737.754 10737.754
64
INTERPRETATION:
The above table shows that there has been decrease in need for working capital to the extent
of 3405.887 from the year 2010 to 2011.
6.1.2 RATIO ANALYSIS
LIQUIDITY RATIOS:
1) CURENT RATIO: (Rs. IN MILLIONS)
YEAR CURRENT ASSESTS
CURRENT LIABILITIES
CURRENT RATIO
INDUSTRY AVERAGE
2006-07 26977.14 17558.55 1.54 1.552007-08 28752.58 22719.39 1.27 1.552008-09 31656.14 21369.46 1.48 1.552009-10 41396.83 29607.56 1.40 1.552010-11 43672.45 35282.74 1.23 1.55
2006-072007-08
2008-092009-10
2010-11
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.61.54
1.27
1.481.4
1.23
1.55 1.55 1.55 1.55 1.55
CURRENT RATIO INDUSTRY AVERAGE
INTERPRETATION:
Here industry ratio is 1.55. Except in 2007-08 and 2010-11 remaining all year’s company’s
current ratio is almost near to industry average ratio. In the year 2006-07 company had power
to affect the industry.
2) LIQUID RATIO (Rs. IN MILLIONS)
YEAR QUICK ASSESTS
CURRENT LIABILITIES
CURRENT RATIO
INDUSTRY AVERAGE
2006-07 16273.93 17558.55 0.93 1.072007-08 16513.44 22719.39 0.73 1.072008-09 18356.00 21369.46 0.86 1.07
65
2009-10 25014.43 29607.56 0.84 1.072010-11 21583.42 35282.74 0.61 1.07
2006-072007-08
2008-092009-10
2010-11
0
0.2
0.4
0.6
0.8
1
1.20.93
0.730000000000001
0.860000000000001 0.840000000000
001
0.610000000000001
1.07 1.07 1.07 1.07 1.07
CURRENT RATIO INDUSTRY AVERAGE
INTERPRETATION:
Here industry ratio is 1.07. In 2006-07 it is higher and then started to decline slowly up to
2007-08. In 2008-09 it started increasing and came near to the industry average and again
decline in 2010-11.
CURRENT ASSET MOVEMENT RATIOS:
3) INVENTORY PROPORTION: (Rs. IN MILLIONS)
YEAR RAW MATERIAL
WORK-IN-PROGRESS
FINISHED GOODS
OTHERS INVENTORY
2006-07 3853.39 1095.07 5325.70 429.05 10703.212007-08 4229.28 1140.46 6255.05 614.33 12239.142008-09 5325.74 940.82 6465.16 568.41 13300.142009-10 5860.65 3465.62 6458.81 597.30 16382.402010-11 9484.14 2628.20 9051.59 925.09 22089.03
66
2006-07 2007-08 2008-09 2009-10 2010-110
5000
10000
15000
20000
25000
RAW MATERIALWORK-IN-PROGRESSFINISHED GOODSOTHERSINVENTORY
INTERPRETATION:
Raw materials consumed are increasing from year by year. WIP is almost constant for years
and in 2009-10 the WIP increased drastically. FG is in increasing condition as it is the major
part of inventory. This was a good sign to firm. Total inventory is increasing from year to
year.
4) INVENTORY TURN OVER RATIO & INVENTORY HOLDING PERIOD (Rs.
IN MILLIONS)
YEAR SALES INVENTORY DAYS ITOR IHP2006-07 71681.76 10703.21 360 6.69 542007-08 77425.80 12239.14 360 6.32 572008-09 59810.73 13300.14 360 4.49 802009-10 72447.10 16382.40 360 4.42 812010-11 111177.09 22089.03 360 5.03 72
2006-07 2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
70
80
90
6.69 6.32 4.49 4.42 5.03
54 57
80 8172
ITOR IHP
67
INTERPRETATION:
During the 2006-07 the company has very high inventory ratio of 6.69, which means more
capital is being locked up in the inventory. From the year 2006-07 the ratio was decreased
from 6.69 to 4.42 but in 2010-11 there was a slight increase in inventory. The Inventory
holding period was good but from 2008-09 to 2009-10 it was increased. But in 2010-11 it
decrease.
5) DEBTORS TURN OVER RATIO: (Rs. IN MILLIONS)
YEAR SALES DEBTORS DAYS RTR DCP2006-07 71681.76 5228.75 360 13.70 262007-08 77425.80 3758.35 360 20.60 172008-09 59810.73 9579.74 360 6.24 582009-10 72447.10 10220.61 360 7.08 512010-11 111177.09 11852.13 360 9.38 38
2006-07 2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
70
13.7
20.6
6.24 7.08 9.38
26
17
58
51
38RTRDCP
INTERPRETATION:
Receivables turnover ratio is highest in 2007-08. Receivables turnover ratio is lowest in 2008-
09 but now it shows an increasing trend, which implies that recovery position is good. From
2006-07 to 2007-08 debtors collection period was decreasing. But in the year 2008-09 the
collection period increased to more than 100% and now it declines shows that management is
effective in collecting the payments from debtors.
6) CREDITORS TURN OVER RATIO: (Rs. IN MILLIONS)
YEAR PURCHASES AVERAGE CREDITORS
DAYS CTR CCP
2006-07 55212.0 8528.47 360 6.47 562007-08 58553.9 11531.35 360 5.07 712008-09 45533.1 12013.00 360 3.79 95
68
2009-10 52823.9 13362.75 360 3.95 912010-11 82306.4 18454.71 360 4.45 81
2006-07 2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
70
80
90
100
6.47 5.07 3.79 3.95 4.45
56
71
9591
81
CTRCCP
INTERPRETATION:
2006-07 year has highest creditor turnover ratio. 2008-09 year has lowest creditor turnover
ratio. It is seen that it follows a decreasing trend which is good sign for the company. So, we
can say it enjoys a very good credit facility from the suppliers. In the year 2006-07 creditors’
collection period are low 56. In the year 2008-09 the creditor’s collection period is very high
95.
7) RAW MATERIALS TURN OVER RATIO :( Rs. IN MILLIONS)
YEAR RAW MATERIALS
AVERAGE RAW MATERIAL
DAYS RW TR RM HP
2006-07 54018.14 3290.86 360 16.43 222007-08 57480.59 4041.34 360 14.22 252008-09 43218.57 4777.52 360 9.04 402009-10 52552.32 5593.15 360 9.39 382010-11 80667.79 7672.39 360 10.51 34
2006-07 2007-08 2008-09 2009-10 2010-11
05
10152025303540
RW TR
RM HP
16.4314.22
9.04 9.39 10.51
22 25
4038
34
RW TRRM HP
69
INTERPRETATION:
In 2006-07 RM TR is highest. From 2006-07 to 2008-09 it was decreased and from 2008-09
to 2010-11 it was increasing. Raw material holding period is constant in all years. But it was
slightly increased in 2008-09.
8) WORK IN PROGRESS TURN OVER RATIO: (Rs. IN MILLIONS)
YEAR COST OF PRODUCTION
AVERAGE WIP DAYS WIP TR WIP HP
2006-07 56083.3 1266.19 360 44.29 82007-08 59581.5 1117.77 360 53.35 72008-09 46420.3 1040.65 360 44.60 82009-10 53723.7 2203.20 360 24.38 152010-11 83818.6 3046.91 360 27.51 13
2006-07 2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
44.29
53.35
44.6
24.3827.51
8 7 8
15 13
WIP TRWIP HP
INTERPRETATION:
In 2007-08 WIP TR is highest. Remaining all years it was similar. In 2009-10 it is lowest.
WIP holding period is highest in 2009-10. WIP holding period is lowest in 2007-08.
9) FINISHED GOODS TURNOVER RATIO: (Rs. IN MILLIONS)
YEAR COST OF GOODS SOLD
AVERAGE FG DAYS FG TR FGHP
2006-07 64000.16 4909.69 360 13.03 282007-08 69143.30 5790.38 360 11.94 302008-09 55807.23 6360.11 360 8.77 412009-10 64925.50 6461.98 360 10.04 362010-11 100484.79 7755.20 360 12.95 28
70
2006-07 2007-08 2008-09 2009-10 2010-110
5
10
15
20
25
30
35
40
45
FG TRFGHP
13.03 11.948.77 10.04
12.95
2830
41
36
28
FG TRFGHP
INTERPRETATION:
Finished goods turnover ratio is decreasing from 2006-07 to 2008-09. 2008-09 is the lowest
and 2006-07 is the highest. Finished goods holding period is highest in 2008-09. Finished
goods holding period is lowest in 2006-07 and in 2010-11.
TO STUDY OVERALL EFFECIENCY OF WORKING CAPITAL:
10) NET WORKING CAPITAL (Rs. IN MILLIONS)
YEAR CURRENT ASSESTS
CURRENT LIABILITIES
NET WORKING CAPITAL
2006-07 26977.14 17558.55 9418.592007-08 28752.58 22719.39 6033.192008-09 31656.14 21369.46 10286.682009-10 41396.83 29607.56 11789.272010-11 43672.45 35282.74 8389.71
2006-07 2007-08 2008-09 2009-10 2010-110
5000
10000
15000
20000
25000
30000
35000
40000
45000
CURRENT ASSESTCURRENT LIABILITIESNET WORKING CAPITAL
71
INTERPRETATION:
Net working capital of Ashok Leyland Ltd is maintained balanced in all years except in 2007-
08 and 2010-11. In 2007-08 year the net working capital is very low and in 2009-2010 the net
working capital is high and again in 2010-11 the net working capital is low.
11) WORKING CAPITAL TURN OVER RATIO (Rs. IN MILLIONS)
YEAR SALES NET.WORKING CAPITAL
TURN OVER RATIO
2006-07 71681.76 9418.59 7.612007-08 77425.80 6033.19 12.832008-09 59810.73 10286.68 5.812009-10 72447.10 11789.27 6.142010-11 111177.09 8389.71 13.25
2006-072007-08
2008-092009-10
2010-11
7.61
12.83
5.81 6.14
13.25
WORKING CAPITAL TURN OVER RATIO
INTERPRETATION:
The working capital turnover ratio of Ashok Leyland Ltd is increasing from 2006-07 to 2007-
08. But suddenly there is a dip in 2008-09. In the year 2008-09 Indian automobile industry
was slowed down due to market slowdown. In the year 2010-11, the performance of Ashok
Leyland Ltd is in peak position.
TO STUDY THE STRUCTURE OF WORKING CAPITAL
12) CURRENT ASSETS TO TOTAL ASSETS: (Rs. IN MILLIONS)
YEAR CURRENT ASSESTS TOTAL ASSESTS CA/TA RATIO2006-07 26977.14 44633.32 0.602007-08 28752.58 55399.52 0.522008-09 31656.14 78265.77 0.402009-10 41396.83 92768.65 0.45
72
2010-11 43672.45 105889.98 0.41
2006-07
2007-08
2008-09
2009-10
2010-11
0 0.1 0.2 0.3 0.4 0.5 0.6
CA/TA RATIO
INTERPRETATION:
This CA to TA ratio is of reducing tendency. In 2006-07 it is highest and in 2008-09 it is
lowest. The portion of current assets is reducing year by year.
13) CURRENT LIABILITIES TO TOTAL LIABILITIES (Rs. IN MILLIONS)
YEAR CURRENT LIABILITIES
TOTAL LIABILITIES CL/TL RATIO
2006-07 17558.55 44877.50 0.392007-08 22719.39 55622.42 0.412008-09 21369.46 78362.67 0.272009-10 29607.56 92820.45 0.322010-11 35282.74 105933.14 0.33
2006-07
2007-08
2008-09
2009-10
2010-11
0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4 0.45
CL/TL RATIO
73
INTERPRETATION:
CL to TL ratio is increasing from 2006-07 to 2007-08. There is a decrease in 2008-09. But
company is capable of recover in 2009-2010 and 2007-08 has highest ratio.
PROFITABILITY RATIOS:
14) GROSS PROFIT RATIO (Rs. IN MILLIONS)
YEAR GROSS PROFIT SALES GROSS PROFIT RATIO
2006-07 7681.6 71681.76 10.712007-08 8282.5 77425.80 10.692008-09 4003.5 59810.73 6.692009-10 7521.6 72447.10 10.382010-11 10692.3 111177.09 9.61
2006-07 2007-08 2008-09 2009-10 2010-110
2
4
6
8
10
12
10.71 10.69
6.69
10.389.61
GROSS PROFIT RATIO
INTERPRETATION:
From the table shown above gross profit of the firm is satisfactory in all the years except in
2008-09. But it was recovered very soon by next year and it is still doing well.
15) NET PROFIT RATIOS: (Rs. IN MILLIONS)
YEAR NET PROFIT SALES NET PROFIT RATIO
2006-07 4412.86 71681.76 6.162007-08 4693.10 77425.80 6.062008-09 1899.96 59810.73 3.182009-10 4236.74 72447.10 5.852010-11 6312.99 111177.09 5.67
74
2006-07 2007-08 2008-09 2009-10 2010-110
1
2
3
4
5
6
7
6.16 6.06
3.18
5.85 5.67
NET PROFIT RATIO
INTERPRETATION:
From the data given in the above table it is clear that the net profit of the company is almost
maintained constant except in the year 2008-09. Due to market slow down the net profit of the
company effected. But in 2009-10 it shot up as the company recovered very fast.
6.1.3 OPERATING CYCLE
YEAR RM HP WIP HP FG HP DCP CCP OPERATING CYCLE
2006-07 22 8 28 26 56 282007-08 25 7 30 17 71 82008-09 40 8 41 58 95 522009-10 38 15 36 51 91 492010-11 34 13 28 38 81 32
2006-07 2007-08 2008-09 2009-10 2010-110
10
20
30
40
50
60
28
8
5249
32
OPERATING CYCLE
75
INTERPRETATION:
From the table given above it is clear that, in 2007-08 it is very low that is 8. It is best one. In
2008-09 it is increased from 8 to 52. There is a rapid change in operating cycle.
76
CHAPTER 7
ACCOUNT PAYABLE PROCESS
Enterprise Resource Planning systems integrate internal and external management information across an entire organization and embrace finance, manufacturing, sales and service, customer relationship management etc. ERP system automate this activity with an integrated software application. Thr purpose is to spread the flow of information between all business functions across the boundaries of the organization and manage the connections to outside stakeholders. ERP systems can run on a variety of computer hardware and network configurations, typically employing a database as a repository for information.
This software consists of many enterprise software modules that an enterprise would purchase, based on what best meets its specific needs and technical capabilities. Each ERP module is focused on one area of business processes, such as product development or marketing. Some of the more common ERP modules include those for product planning, material purchasing, inventory control, distribution. As the ERP methodology is the need of the hour, software applications have emerged to help business managers implement ERP in other business activities and may also incorporate modules such as CRM and business intelligence and present them as a single unified package. The basic goal is to provide one central repository for all information to smooth the flow of data across the organization.
Hinduja has developed a customised ERP system for Ashok Leyland, the commercial vehicle manufacturer and is implementing the system in ALL's six manufacturing units and 60 locations across India."The system seamlessly integrates all the manufacturing units which provides a 360 degree view of the entire organisation," an HTMT press release said. The ERP system, a major part of ALL's Rs 52-crore IT initiative, involves HTMT developing customised software for various transactions (e-commerce with suppliers and dealers and CRM systems, among others), with Compaq as the hardware vendor and Oracle 8i as the basic software, it was stated.
Ashok Leyland the flagship company of The Hinduja Group of companies, is the second largest commercial vehicle manufacturer in India. Ashok Leyland Ltd. has chosen HP as its partner to provide Infrastructure, System, Integration and Management Services. Ashok Leyland is using state of the art HP Alpha Servers and Proliant Series of systems for running their in house built ERP applications.
ASHOK LEYLAND
Welcome to the HP Managed Services at Ashok Leyland. You are the 17801547 user browsing this page.
77
The following screen appears while clicking on the ERP:
Login Screen
ASHOK LEYLAND ENTERPRISE SOLUTION
User Id
Password
User Name
Database
Clear Connect Change Password Exit
Working in ERP during the training session was a wonderful experience and recently the system of the company has shifted to SAP. So I got little exposure to work in SAP also. Ashok Leyland, the unit of Pantnagar manufacturers only Trucks. As soon as the need for material is needed, the request is sent to the vendors and the material is received. Thu supplier itself generates ASN i.e, Advanced Shipping Note and on basis of this, the material is allowed to enter in the plant by checking quantity, price, freight charges etc. mentioned on the invoice. Then this procedure is followed by sending the material to the different concerned shops like chasis shop, Axle shop etc. In the shops the inspection of the material is done and if it does not match the requirement, the material is rejected and hence called Rejected Material Note.
After inspection the GRN i.e. Goods Receipt Number is created and submitted to the Finance department. At this stage the invoices are passed in ERP(Code:002,Bill Entry At Finance) by checking quantity, price, rate etc. The total amount in the system should match the amount mentioned on the invoice. Then the invoice is passed after checking all the required things. If the bill is passed properly, the payment is made to the vendor directly or through cheque. Sometimes it happens so that the amount in decimal is left and not paid to the vendor. That is said to be supplementary and are cleared separately in different programme. The invoice is not passed if the requirements are not met. Ashok Leyland deals with different parties and they have different terms of payment. Some suppliers ask for advance payment and hence called HUNDIS. Hundis are always the first priority and due care is taken for their payment. Many suppliers are made payment within 45 days and these are MS Meda parties. The rest of the suppliers are Non-Ms meda and are paid on their due date.
78
7.1 HOW THE BILL IS PASSED
1. Bill processing is of two types2. Production and non production3. GRN creation through ALMAP for production and non production module for non
production modules.4. With reference to GRN, end user has to enter GRN number in GRN tab, all relevant
data will get appear. End user has to ensure below mentioned points: To check supplier name To check supplier address in invoice. With referncce to above point, end user can ensure whether supplier is within state or
outside state. With reference to point 3, end user will ensure status of tax i.e, VAT or CST. Supplier code, invoice number and data is also to be ensured. Value of invoice to be matched with system computer value.
LIST OF HUNDI PARTIES
Auto Clutch Ferrolinks Steel Strips Madras Engineering Dighvijay Plastics Paracoat Products Ltd. Fern Equipments Bhaghya Induction Mod Forge Pvt. Ltd. RSB Transmission Ltd. Jai Suspension Kross Manufacturers Pvt. Ltd. Techno Rings Sound Casting Pvt. Ltd. Nelcast Precitech SAS Autocom Engineering India Paul Components Pvt. Ltd. Metal Forms Proxon Tools Lamina Flexible Vindhya Vasini Taurus Flexibles Pvt. Ltd. Mahle IPL Ltd. MRP Autorub Pvt Ltd.
79
Clutch Auto
OUTCOME/CONTRIBUTION
80
Statement Showing Schedule Of Changes In Working Capital
1. There is increase in need for working capital to the extent of 1179.62 from the year 2006 to 2007.
2. There has been decrease in need for working capital to the extent of 3385.40 from the
year 2007 to 2008.
3. There has been increase in need for working capital to the extent of 4253.50 from the
year 2008 to 2009.
4. There has been increase in need for working capital to the extent of 1508.92 from the
year 2009 to 2010.
5. There has been decrease in need for working capital to the extent of 3405.887 from the
year 2010 to 2011.
6. Current Ratio: Industry ratio is 1.55. Except in 2007-08 and 2010-11 remaining all
year’s company’s current ratio is almost near to industry average ratio. In the year
2006-07 company had power to affect the industry.
7. Liquidty Ratio: Industry ratio is 1.07. In 2006-07 it is higher and then started to decline
slowly up to 2007-08. In 2008-09 it started increasing and came near to the industry
average and again decline in 2010-11.
8. Net Working Capital of Ashok Leyland is maintained balanced in all years.
9. The portion of current assets in total assets is reducing year by year.
LEARNING FROM SIP
It was a wonderful experience to do training in Ashok Leyland Ltd. in Pantnagar plant. I came to know exactly the meaning of working capital and how it is managed. Liquidity position is maintained through working capital related ratios. Working capital is financed through different short and long term sources. Beside this, I was also taught how to work in ERP of Ashok Leyland. It was a good learning to do work in SAP also and especially at the time of audits. Even I was also given targets to complete and completing them was a great achievement for me. In this way, I learnt how to survive in corporate and deal with pressure.
CHAPTER 7
81
RECOMMENDATIONS AND CONCLUSION
7.1 RECOMMENDATIONS
Recommendations can be used by the firm for the betterment of firm after study and analysis
of project report on the study and analysis of working capital. I would like to recommend.
Company should raise funds through short term sources for short term requirement of
funds, which comparatively economical as compare to long term funds.
Company should utilize the fixed assets effectively to generate more revenues and to
maximize the profit in the forthcoming years.
The level of working capital should be reduced to maximize the earnings of the
company and the company has to take measures to control the level of working
capital.
Company should take control on debtor’s collection period which is major part of
current assets.
Company should reduce the inventory holding period with use of minimum inventory
concepts.
Company has a good liquidity position but it has to take necessary steps to meet the
liquidity of current liabilities as by using more efficient software than ERP like SAP.
Company should make a policy in respect of investment of excess cash, if any; in
marketable securities and overall cash policy should be introduced.
Management should develop a credit policy and proper self realization system from
customers so that efficient and effective management of accounts receivable can be
ensured. This will significantly improve the profitability and liquidity of the company.
Over all company has good liquidity position and sufficient funds to repayment of
liabilities. Company is increasing sales volume per year which supported to company to
increase the market share year by year.
7.2 CONCLUSION
82
Working capital management is important aspect of financial management. The study of
working capital management in Ashok Leyland Ltd has revealed that the current ratio was as
per the standard industrial practice but the liquidity position of the company showed an
increasing trend. The study has been conducted on working capital ratio analysis, working
capital components which helped the company to manage its working capital efficiency and
affectively.
Working capital of the company was increasing and showing positive working capital
per year. It shows good liquidity position.
Positive working capital indicates that company has the ability of payments of short
terms liabilities.
Working capital increased because of increment in the current assets is more than
increase in the current liabilities.
Company’s current assets were always more than requirement it affect on profitability
of the company.
Current assets are more than current liabilities indicate that company used long term
funds for short term requirement, where long term funds are most costly then short
term funds.
Current assets components shows sundry debtors were the major part in Current assets
it shows that the inefficient receivables collection management.
The company has a good operating cycle, liquidity position, and has sufficient funds to repay
its liabilities. It is being found that components of working capital like inventory
management, receivables management and cash management was managing effectively. It is
being found that the production target of the company has been achieved in time; thereby the
profit percentage of company is good. Ashok Leyland sales position is also very good. Its
excellent performance is attributed to reduced cost of product The objective of the company
now is to increase the scale of its business by increasing its profits and the turnover and also
by venturing into new line of business.
The company is matured one and it has contributed towards the countries growth and
development and will also continue to perform and contribute to the whole nation by
continuum of existing management policies, checking exchange rate risk, competing with
domestic and global players in terms of quality & quantity.
83
To conclude company has sound and effective management of working capital, which helps
them to control the cost and increase the profit.
REFERENCES
84
[1] Khan, M.Y. and Jain, P.K. “Management Accounting”, fifth edition, Noida Tata
Mcgraw Hill Publication, 2008.
[2] Pandey, I. M. 2008. “Finacial Management”, Vikas Publishing House Pvt Ltd., New
Delhi, 2008.
[3] http://www.business-standard.com/india/news/ashok-leyland-pantnagar-rudrapur-
plant-launch/387497/
[4] http://www.indiaprwire.com/pressrelease/auto/2010030444861.htm
[5] http://www.ashokleyland.com/aboutus.jsp
[6] http://en.wikipedia.org/wiki/Ashok_Leyland
[7] Annual report of Ashok Leyland ltd 2006-07
[8] Annual report of Ashok Leyland ltd 2007-08
[9] Annual report of Ashok Leyland ltd 2008-09
[10]Annual report of Ashok Leyland ltd 2009-10
[11]Annual report of Ashok Leyland ltd 2010-11
APPENDIX I
85
BALANCE SHEET
PARTICULARS 2006-07 2007-08 2008-09 2009-10 2010-11
SOURCE OF FUNDSShareholders FundCapital 1,323.87 1,330.34 1,330.34 1,330.34 1,330.34Reserves And Surplus 17,621.81 20,159.48 33,408.65 35,357.23 38,299.27
18,945.68 21,489.83 34,738.99 36,687.57 39,629.62 Loan FundsSecured Loans 3,602.16 1,902.40 3,044.13 7,115.66 11,822.97 Unsecured Loans 2,801.82 6,972.61 16,537.31 14,923.32 13,859.67
6,403.98 8,875.01 19,581.44 22,038.98 25,682.64 Deferred Liability - - - 765.48 899.26Deferred Tax Liability-Net 1,969.29 2,538.20 2,634.37 3,845.36 4,438.86 Foreign Currency Monetary Item Translation Difference-Net
38.41 (124.50) -
Total 27,318.95 32,903.03 56,993.21 63,212.89 70,650.40
APPLICATION OF FUNDSFixed Assets Gross Block 26,201.97 29,424.38 49,532.72 60,186.33 66,918.88 Less Depreciation 13,131.64 14,168.88 15,541.56 17,690.74 20,580.96 Net Block 1,3070.33 15,255.50 33,991.16 42,495.59 46,337.9 Capital work in progress 2,374.91 5,292.45 9,982.89 5,614.67 3,579.66
15,445.24 20,547.95 43,974.06 48,110.28 49,917.57 Investments 2,210.94 6,098.99 2,635.57 3,261.54 12,299.96 Current Assets, Loans And AdvancesInventories 10,703.21 12,239.14 13,300.14 16,382.4 22,089.03 Sundry Debtors 5,228.75 3,758.35 9,579.74 10,220.61 11,852.13 Cash And Bank Balances 4,349.39 4,513.7 880.836 5,189.2 1,795.27Loans And Advances 6,695.79 8,241.39 7,895.44 9,604.62 7,936.01
26,977.14 28,752.58 31,656.14 41,396.83 43,672.45 Less Current Liabilities And Provisions Liabilities 16,516.25 19,267.08 18,688.64 25,920.65 30,379.47 Provisions 1,042.3 3,452.31 2,680.82 3,686.91 4,903.26
17,558.55 22,719.39 21,369.46 29,607.56 35,282.74 Net Current Assets 9,418.59 6,033.187 10,286.68 11,789.27 8,389.71 Miscellaneous Expenditure 244.18 222.91 96.88 51.74 43.14 Total 27,318.95 32,903.03 56,993.21 63,212.83 70,650.40
86
