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TABLE OF CONTENTS
Preface ------------------------------------------------------Acknowledgement ----------------------------------------Executive Summary ---------------------------------------Introduction to the Study --------------------------------- Objective of study ----------------------------------- Place of study ---------------------------------------- Research Methodology and scope of study ------ Limitations of study ----------------------------------
Overview of Indian Tractor Industry --------------------Introduction of the Company -----------------------------Mission and Vission Statements -------------------------Introduction to Working Capital Management ---------Ratios ----------------------------------------------------------
PREFACE
To start any business, First of all we need finance and the success of that business entirely depends on the proper management of day-today finance and the management of this short-term capital or finance of the business is called Working capital Management. Working Capital is the money used to pay for the everyday trading activities carried out by the business - stationery needs, staff salaries and wages, rent, energy bills, payments for supplies and so on.
I have tried to put my best effort to complete this task on the basis of skill that I have achieved during the last one year study in the institute. I have tried to put my maximum effort to get the accurate statistical data. However I would appreciate if any mistakes are brought to me by the reader.
ACKNOWLEDGEMENT
It is difficult to acknowledge precious a debt as that of learning as it is the only debt that is difficult to repay except through gratitude. It is my profound privilege to express my sincere thanks to Mr. Rajnath who gave me an opportunity to carry out this project and had been a constant inspiration. I would like to thank him for his constant support and guidance through out the tenure of this project without his cooperation it would have been a difficult task to accomplish this project. I am also thankful to my faculty guide Prof. Shivali Dhingra, Amity Global Business School, who has provided her valuable time and effort for guiding me for the completion of this report. Shikha
EXECUTIVE SUMMARY
The major objective of the study is to understand the working capital of SEL and to suggest measures to overcome the shortfalls if any. Funds needed for short term needs for the purpose like raw materials, payment of wages and other day to day expenses are known as working capital. Decisions relating to working capital (Current assets-Current liabilities) and short term financing are known as working capital management. It involves the relationship between a firms short-term assets and its short term liabilities. By definition,
working capital management entails short-term definitions, generally relating to the next one year period.
The goal of working capital management is to ensure that the firm is able to continue its operation and that it has sufficient cash flow to satisfy both maturing short term debt and upcoming operational expenses. Working capital is primarily concerned with inventories management, Receivable management, cash management & Payable management.
Inventories management at SEL: SEL is a manufacturing company involved in production of engines. Therefore, it has to maintain large quantity of inventories at production units for its smooth running and functioning.
Cash management at SEL: SEL has been accumulating huge cash surpluses over last several years, which enables the organization to maintain adequate cash reserves and to generate required amount of cash.
Introduction
Working Capital:The life blood of business, as is evident, signified funds required for day-to-day operations of the firm. 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 SEL. Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient money flow to satisfy both maturing short term debt and upcoming operational expenses. Objective of the study:The following are the main objective which has been undertaken in the present study: 1. To determine the amount of working capital requirement and to calculate various ratios relating to working capital. 2. To analyze the Indian Tractor Industry. 3. To evaluate the financial performance of SEL using financial tools. 4. To suggest the steps to be taken to increase the efficiency in management of working capital.
Place of study:The project study is carried out at the Finance Department of SEL office situated at Mohali. The study is undertaken as a part of the PGPM curriculum for two months in the form of summer internship.
Study design and methodology:Two types of data are collected, one is primary data and second one is secondary data. The primary data were collected from the Department of finance, SEL. The secondary data were collected from the Annual Report of SEL and SEL website.
Scope: - The study has got a wide & fast scope. It tries to find out the players in the industry & focuses on the upcoming trends. It also tries to show the financial performance of one of the player of the industry i.e. SEL.
Limitations:There may be limitations to this study because the study duration (summer training) is very short and its not possible to observe every aspect of working capital management practices. The data collected were mostly secondary in nature.
Industry Overview
India is mainly an agricultural country. Agriculture accounts for mainly 25% of Indias GDP. Agriculture in India is the means of livelihood of almost two-thirds of the workforce in the country and employs nearly 62% of population. It accounts for 13% of Indias exports.About 42% of Indias geographical area is used for agricultural activity. It is therefore considered to be the most vital sector of Indian economy. The Indian Tractor industry is the largest in the world, accounting for one-third of global production.Volume growth in the tractor industry in past four decades shows a compound annual growth rate (CAGR) of 10%, despite seasonal variations that cause changes in tractor demand and subsequently impacting industry volumes.
The Beginning:
Indian Tractor Industry took birth in 1959-60 when the first tractor manufacturing unit was established. However, this industry found a firm
footing only after the turbulent period of 1968-74, during which the acceleration which should have emerged from the upsurge in demand generated by the Green Revolution was navigated by large-scale imports of fully built tractors and screw-driver assembly of CKD (Completely Knocked Down) kit by a number of operators who entered with delicensing in 1968 for making a quick buck. By 1973-74 when imports were banned, 22 manufacturers remained. It is in an environment of intense competition between 19 manufacturers that our tractor industry has grown during the last 30 years. During this period, it has become not only a major segment of our engineering industry but with a population of 1,30,000 tractors in 1990, our country became the second largest tractor producer in the world. There could be no better index of the intensity of competition than the fact that all makes of tractors have been available off-the-shelf for the last 2 decades and market share of no single manufacturer exceeds 30%
The development of tractors industry from the very beginning i.e. 1959-60 till date can be divided into the following four phases:
1.
Demand for tractors was low till late sixties. There was a sudden upsurge in the demand of tractors after 1967 and it started multiplying at an annual rate of nearly 50%. A natural consequence of this sharp upsurge and upsurge and consequent shortage was heavy price of premium on tractors. Five tractors manufacturing units came up in this decade: Eicher Tractors Ltd. (1959) Tractors and Builders Ltd. (1964) International Tractors Ltd. (1965)
Government policies in respect of the development of tractor industry in the first phase were dictated by their anxiety to promote mechanization of agriculture encouraging local manufacturer of tractors along with the import of tractors from Eastern Europe. At, the same time, government protected the interests of the farmers by making tractors available to them at reasonable prices.
Partap Steel Rolling Mills Ltd. (Tractor Division) (1983) Banning of imports and increased competition due to increase in number of tractor manufacturers led to the growth in local production. The tractor industry saw a rapid growth of 6% from 1982-87.
4.
After 1987 the tractor industry further picked up because of the priority given by the Government to agriculture. The excise was exempted on tractors below 1800cc and financing norms were also relaxed in 1986. The minimum land holding was also reduced from 10 acres to 8 acres and repayment period was increased from 7 to 9 years. After this, average growth of 15% was experienced fro 1988-92 which was due to green revolution. After six years of rapid growth demand for tractors showed a decline of 4% in 1992-93 and 3.8% in 1994-95. Sales dropped from 1.51 lacs in 1991-92 to 1.38 lacs in 1993-94. The decline was due to the following factors: Land development bank, an important source of finance, collapsed. Depression in market due to credit squeeze. Decrease in production of cash crops. Political uncertainty. But after that tractor industry again started growing and tractor sales went to 1.64 lakhs in 1994-95 and further to 1996-97.
PRICING OF TRACTORS.
The financial inability of the Indian farmers makes the pricing a critical parameter. Companies that managed to keep their costs low are the ones that managed to survive during the reversionary period.
GOVERNMENT POLICIES
To enable a farmer to purchase a tractor against these odds, the government introduced subsidies in this sector. During the union budget of 1994-95 the government exempted excise on small HP tractor I. e. below 1800 cc. In the budget of 2004 all the tractors were exempted from excise duty.
IMPORTS
The industry has managed to reduce its dependence on imports, as many players have indegenised their inputs, which were earlier Imported.
PRIORITY TO RESEARDCH & DEVELOPMENT Even though all tractor-manufacturing units, except the Swaraj, were initially set up with foreign collaboration, tractor industry has been on its own for the last decade. Al tractors have been nearly 100% indigenous and almost all product improvement and new products have come through indigenous Research and Development (R&D). Capital R & D investment by industry today exceeds Rs. 22 crores and the recurring annual expenditure is at the level of Rs. 7 crores. Emphasis on R & D is in the steady increase in the number and price range of competing models available to customers to choose from. Reflection of emphasis on R & .D in the line with national priorities is the steady improvement in the Fuel efficiency ensured on the basis of the average of fuel efficiency figures of tractors in different power ranges during mandatory tests at Government of Indias Testing Station at Bundi in Madhya Pradesh.
EMERGING MARKETS
In the total mature markets, which include Punjab, Haryana and U.P., sales proportion has fallen from 55.4% in FY 93 to 37.8% in FY 97. With sales in these markets plateauing, tractor manufacturers are now zeroing in on the central and Southern markets in the country. These are the areas with enormous potential and are called emerging markets. The share of these emerging markets like Madhya Pradesh, Maharashtra, Gujarat, Tamil Nadu, Karnataka, Andhra Pradesh and Rajasthan has increased from 41% in 1992-93 to 55.9% in 1996-97. Among these markets, states like Madhya Pradesh, Andhra Pradesh and Maharashtra have the highest growth. Some of the tractor manufacturers have entered the exports area; M & M has increased exports from 132 tractors in 199394 to 1853 in 2002-03. Emerging export markets potential are America, Nepal, Sri Lanka, Malaysia and Bangladesh. In order to be competitive, the players in Indian Tractor Industry will have to reset to manufacturing after cutting out many of the frills in their lower HP tractors.
Haryana and western parts of Uttar Pradesh), since late 1990s the pattern has shifted towards Central, Southern, Western and Eastern states.
BOARD OF DIRECTORS G.P.GUPTA (Chairman) ANJANIKUMAR CHOUDHARI Dr. T.N. KAPOOR D.R.SWAR S.C.BHARGAVA HARDEEP SINGH A.M.SAWHNEY V.S.PARTHASARATHY R.R.DESHPANDE VIJAY VARMA BISHWAMBHAR MISHRA (Vice Chairman) G.S.RIHAL (Managing Director)
Senior Vice President Finance M.N. KAUSHAL Company Secretary M.S. GREWAL Auditors M/S DAVINDER S. JAAJ & CO. Chartered Accountants Bankers CANARA BANK Registered Office Phase-IV, Industrial Area S.A.S. Nagar (Mohali) Punjab 160 055 Works Plot No. 2, Industrial Phase IX S.A.S. Nagar (Mohali) Punjab 160 059
The Company's principal activity is to manufacture and supply of engines and hi-tech engine components for tractors and other commercial vehicles. The products include internal combustion diesel engines, diesel engine components and spare parts. It supplies engines to Punjab Tractors Ltd and engine components to Swaraj Mazda Ltd. The Company is the Joint venture between Punjab Tractors Ltd, which has since been merged with Mahindra & Mahindra Ltd and Kirloskar Oil Engines Ltd. The Group operates only in India. Swaraj Engines started business in manufacturing engines on Jan. 01, 1989. Swaraj Engines supplies five types of engines from 20 HP range to 50 HP range to Punjab Tractors and high-tech engine components to Swaraj Mazda. The company`s plant is located in Mohali-Ropar, Punjab. The company was promoted in 1986 in technical and financial collaboration with Kirloskar Oil Engines Ltd. (KOEL) for manufacture
of Diesel Engines.Its a rare example of supplier/customer joint venture. It had declared maiden dividend in the very first full year of operations has been exceptional performance.
Concept of working capital:The word working capital is made of two words 1.Working and 2. Capital The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business. Working capital : Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes. Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. It is other wise known as revolving or circulating capital It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset Current Liability.
Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it.
Current Assets
Cash in hand / at bank
Current Liabilities
Bill Payable Sundry Creditors Outstanding Expenses Accrued Expenses Bank Overdraft
Bills Receivable Sundry Debtors Short term loans Investors/ stock Temporary investment Prepaid expenses Accrued incomes
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 our business? What's the rate of inventory turnover compared with other companies in our 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 we purchase? What is our firm's payment policy doing to enhance or detract from our credit rating? 5. Accrued expenses and taxes payable: - These are obligations of our company at any given time and represent a future outflow of cash.
Two different concepts of working capital are:Balance sheet or Traditional concept Operating cycle concept. Balance sheet or Traditional concept:- It shows the position of the firm at certain point of time. It is calculated in the basis of balance sheet prepared at a specific date. In this method there are two type of working capital:Gross working capital Net working capital Gross working capital:- It refers to the firms investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current assets is a quantitative aspect of working capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position of the firm because every increase in current liabilities will decrease the gross working capital. Net working capital:- It is the difference between current assets and current liabilities or the excess of total current assets over total current liabilities.
Working capital= current assets - current liabilities. Net working capital: - It is also can defined as that part of a firms current assets which is financed with long term funds. It may be either positive or negative. When the current assets exceed the current liability, the working capital is positive and vice versa. Operating cycle concept: - 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.
Note:- Once ratios have been established for our business, it is important to track them over time and to compare them with ratios for other comparable businesses or industry sectors.
The working capital needs of a business are influenced by numerous factors. The important ones are discussed in brief as given below: Nature of Enterprise:-The nature and the working capital requirements of an enterprise are interlinked. While a manufacturing industry has a long cycle of operation of the working capital, the same would be short in an enterprise involved in providing services. The amount required also varies as per the nature; an enterprise involved in production would require more working capital than a service sector enterprise. Manufacturing/Production Policy:-Each enterprise in the manufacturing sector has its own production policy, some follow the policy of uniform production even if the demand varies from time to time, and others may follow the principle of 'demand-based production' in which production is based on the demand during that particular phase of time. Accordingly, the working capital requirements vary for both of them. Working Capital Cycle :-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 labor and service cost, conversion of finished stick 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. Operations:-The requirement of working capital fluctuates for seasonal business. The working capital needs of such businesses may increase considerably during the busy season and decrease during the slack season. Ice creams and cold drinks have a great demand during summers, while in winters the sales are negligible. Market Condition:-If there is high competition in the chosen product category, then one shall need to offer sops like credit, immediate delivery of goods etc. for which the working capital requirement will be high. Otherwise, if there is no competition or less competition in the market then the working capital requirements will be low. Credit Policy:-The credit policy is concerned in its dealings with debtors and creditors influence considerably the requirements of the working capital. A concern that purchases its requirements on credit and sells its products/services on cash requires lesser amount of working capital. On the other hand a concern buying its requirements for cash and allowing credit to its customers, shall need larger amount of funds are bound to be tied up in debtors or bills receivables. Business Cycle:-Business Cycle refers to alternate expansion and contraction in general business activities. In a period of born i.e. when the business is prosperous there is a need for larger amount of working capital due to increase in sales, rise in prices, optimistic expansion of business etc. On the country at he time of depression i.e. when there is a down swing of the cycle, business contracts, sales decline, difficulties are faced in collections from debtors and firms may have a large amount of working capital lying ideal
Availability of Raw Material:-If raw material is readily available then one need not maintain a large stock of the same, thereby reducing the working capital investment in raw material stock. On the other hand, if raw material is not readily available then a large inventory/stock needs to be maintained, thereby calling for substantial investment in the same. Growth and Expansion:-Growth and expansion in the volume of business results in enhancement of the working capital requirement. As business grows and expands, it needs a larger amount of working capital. Normally, the need for increased working capital funds precedes growth in business activities. Earning Capacity and Dividend policy:-Some firms have more earning capacity than others due to the quality of their products, monopoly conditions etc. Such firms with high earning capacity may generate cash profits from operations and contribute to their capital. The dividend policy of a concern also influences the requirements of the working capital. A firm that maintains steady high rate of cash dividend irrespective of its generation of profits needs more capital than the firm retains larger part of its profits and does not pay high rate of cash dividend. Price Level Changes:-Generally, rising price level requires a higher investment in the working capital. With increasing prices, the same level of current assets needs enhanced investment. Manufacturing Cycle:-The manufacturing cycle starts with the purchase of raw material and is completed with the production of finished goods. If the manufacturing cycle involves a longer period, the need for working capital would be more. At times, business needs to estimate the requirement of working capital in advance for proper control and management. The factors discussed above influence the quantum of working capital in the business. The assessment of working capital requirement is made keeping these factors in view. Each constituent of working capital retains its form for a certain period and that holding period is determined by the factors discussed above.
So for correct assessment of the working capital requirement, the duration at various stages of the working capital cycle is estimated. Thereafter, proper value is assigned to the respective current assets, depending on its level of completion. Other Factors:-Certain other factors such as operating efficiency, management ability, irregularities a supply, import policy, asset structure, importance of labor, banking facilities etc. also influences the requirement of working capital.
Component of Working Capital Basis of Valuation:Stock of raw material Purchase cost of raw materials Stock of work in process At cost or market value, whichever is lower Stock of finished goods Cost of production Debtors Cost of sales or sales value Cash Working expenses:-
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 favorable credit terms, controlling the movement of cash, administering the accounts receivable, and monitoring the inventories consume a great deal of 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.
creating current assets like stock of raw material, work in process,finished goods, etc. ii. 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. iii. Promoters Fund It is advisable to finance a portion of current assets from the promoters funds. They are long-term funds and, therefore do not require immediate repayment. These funds increase the liquidity of the business.
Management of Inventory
Inventories constitute the most significant part of current assets of a large majority of companies in India. On an average, inventories are approximately 60 % of current assets in public limited companies in India. Because of the large size of inventories maintained by firms maintained by firms, a considerable amount of funds is required to be committed to them. It is, therefore very necessary to manage inventories efficiently and effectively in order to avoid unnecessary investments. A firm neglecting a firm the management of inventories will be jeopardizing its long run profitability and may fail ultimately. The purpose of inventory management is to ensure availability of materials
in sufficient quantity as and when required and also to minimize investment in inventories at considerable degrees, without any adverse effect on production and sales, by using simple inventory planning and control techniques. Need to hold inventories:Transaction motive emphasizes the need to maintain inventories to facilitate smooth production and sales operation . Precautionary motive necessities holding of inventories to guard against the risk of unpredictable changes in demand and supply forces and other factors. Speculative motive influences the decision to increases or reduce inventory levels to take advantage of price fluctuations and also for saving in re-ordering costs and quantity discounts etc.
Objective of Inventory Management:The main objectives of inventory management are operational and financial. The operational mean that means that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain ideal and minimum working capital should be locked in it. The following are the objectives of inventory management:To ensure continuous supply of materials, spares and finished goods. To avoid both over-stocking of inventory. To maintain investments in inventories at the optimum level as required by the operational and sale activities. To keep material cost under control so that they contribute in reducing cost of production and overall purchases. To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchases.
To minimize losses through deterioration, pilferage, wastages and damages. To design proper organization for inventory control so that management. Clear cut account ability should be fixed at various levels of the organization. To ensure perpetual inventory control so that materials shown in stock ledgers should be actually lying in the stores. To ensure right quality of goods at reasonable prices. To facilitate furnishing of data for short-term and long term planning and control of inventory
Management of cash
Cash is the important current asset for the operation of the business. Cash is the basic input needed to keep the business running in the continuous basis, it is also the ultimate output expected to be realized by selling or product manufactured by the firm. The firm should keep sufficient cash neither more nor less. Cash shortage will disrupt the firms manufacturing operations while excessive cash will simply remain ideal without contributing anything towards the firms profitability. Thus a major function of the financial manager is to maintain a sound cash position. Cash is the money, which a firm can disburse immediately without any restriction. The term cash includes coins, currency and cheques held by the firm and balances in its bank account. Sometimes near cash items such as marketing securities or bank term deposits are also included in cash. Generally when a firm has excess cash, it invests it is marketable securities. This kind of investment contributes some profit to the firm.
Management of Receivables
A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. Receivables result from credit sales. A concern is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes other concern in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales without adversely affecting sales. The increase in sales is also essential to increases profitability. After a certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to insure certain costs. Further, there is a risk of bad debts also. It is therefore, very necessary to have a proper control and management of receivables.
Each component of working capital (namely inventory, receivables and payables) has two dimensions ........TIME ......... and MONEY. When it comes to managing working capital - TIME IS MONEY. If we 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, we could reduce the cost of bank interest or we'll have additional free money available to support additional sales growth or investment. Similarly, if we can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit; we effectively create free finance to help fund future sales.
It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If we do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, we should consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if we pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plug hole, they remove liquidity from the business.
Sources of Additional Working Capital:Existing cash reserves Profits (when we secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans If we have insufficient working capital and we try to increase sales, we can easily over-stretch the financial resources of the business. This is called overtrading. Early warning signs include: Pressure on existing cash Exceptional cash generating activities e.g. offering high discounts for early cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part-paying suppliers or other creditors Paying bills in cash to secure additional supplies Management pre-occupation with surviving rather than managing Frequent short-term emergency requests to the bank (to help pay wages, pending receipt of a cheque).
If we don't manage debtors, they will begin to manage our business as we will gradually lose control due to reduced cash flow and, of course, we could experience an increased incidence of bad debt. The following measures will help manage our 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. 5. Check out each customer thoroughly before we 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 we suspect tough times are coming or if operating in a volatile sector. 8. Keep very close to our 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 our debtor balances and ageing schedules, and don't let any debts get too large or too old.
Recognize that the longer someone owes we, the greater the chance we will never get paid. If the average age of our debtors is getting longer, or is already very long, we may need to look for the following possible defects: weak credit judgment poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction. Debtors due over 90 days (unless within agreed credit terms) should generally demand immediate attention.
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 our product or service. A customer who does not pay is not a customer.
Do we 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. How many of our suppliers have a returns policy? Are we in a position to pass on cost increases quickly through price increases to our customers? If a supplier of goods or services lets we down can we charge back the cost of the delay? Can we 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 we can buy well then we can sell well. Management of our creditors and suppliers is just as important as the management of our debtors. It is important to look after our creditors slow payment by we may create ill-feeling and can signal that our company is inefficient (or in trouble!). Remember, a good supplier is someone who will work with us to enhance the future viability and profitability of our company.
2. Debentures: A debenture is an instrument issued by the company acknowledging its debt to its holder. Debentures carry a fixed rate of interest which is a legal charge against revenue of the company. The
debentures are generally given floating charge on the assets of the company. The firm issuing debentures also enjoy a number of benefits such as trading on equity, retention of control, tax benefit, etc.
3. Public deposits: Public deposits are the fixed deposits accepted by a business enterprise directly from the public. This source of raising finance became popular because of the imperfect development of banking system in the country. This mode of financing has a large number of advantages such as very simple and convenient source of finance, taxation benefits, trading on equity, and inexpensive source of finance.
4. Retained Earnings: It refers to reinvestment by a concern of its surplus earnings in its business. It is an internal source of finance and it often referred to as self financing or ploughing back of profits. It is most suitable for an established firm for its expansion, modernization, replacement, etc. But excessive resort to ploughing back of profits may lead to monopolies, misuse of funds, over capitalization, 5 . Loans from Financial institutions: Financial institutions such as Commercial Banks, Life Insurance Corporation, State Financial Corporation of India, Industrial Development Bank of India, etc. also provide short term, medium term and long term loans.
To comment upon the working capital management in SEL, the technique of ratio analysis is adopted.
The following ratios have been calculated for the said purpose. 1. Current ratio. 2. Comparative debtors analysis. 3. Working capital turnover ratio. 4. Inventory Turnover analysis.
Current Ratio:
The current ratio is an indicator of a firms short term solvency. A firm, to survive on a continuing basis, should maintain sufficient liquidity. As a rule of thumb, 2:1 is considered to be an ideal current ratio. The idea of having double the current assets as to current liabilities is to provide a cushion against possible losses and to ensure a smooth day to day functioning of the firm. There is, however, nothing very sacrosanct about the 2:1 ratio. What is more important is the quality of current assets, how fast and to what extent can they be converted into cash. 5 Yearly Trend of Current Ratio of SEL
Current Assets Current Liabilities 5996.50 3008.54 5773.50 2550.47 6326.04 1433.21 6075.49 1944.27 7873.17 2474.40
Current Ratio 1.99:1 times 2.26:1 times 4.41:1 times 3.12:1 times 3.18:1 times
A relatively high current ratio is an indication that the firm is liquid and has the ability to pay its current obligations in time and when they become due. On the other hand, a low current ratio represents that the liquidity position of the firm is not good and the firm shall not be able to pay its current liabilities in time. The above table indicates that there are also fluctuations in the current ratio of SEL. In FY 2005 it was 1.99:1 times then increases to 4.41:1 times in FY 2007 and then further decreases to 3.18:1 times in FY 2009. The reason of increment in the current ratio because decrease in current liabilities and increase in current assets in the FY 2007.
9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 Current Assets Current Liabilities
Debtors Turnover Ratio = Total sales Debtors Avg. collection period = No. of Months D.T.R 5 Yearly Trend of Debtor Turnover Ratio of SEL: (Amount in Crores) (Amount in lacs) Year Sales Debtors D.T.R 2005 2006 2007 2008 2009 123.52 128.18 129.32 125.54 208.34 4639.51 4047.82 3624.58 1688.53 521.90 2.66 3.17 3.57 7.43 39.92
Accounts receivable turnover ratio or debtors turnover ratio indicates the number of times the debtors are turned over a year. The higher the value of debtors turnover the more efficient is the management of debtors or more liquid the debtors are. Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used as a norm to interpret the ratio as it may be different from firm to firm.
ratio, which indicates the velocity of the utilization of net working capital, is worked out. A higher ratio indicates efficient utilization of working capital. In the following lines a comparative statement of working capital turnover ratio of SEL is produced.
Net Working Capital of SEL Year 2005 2006 2007 2008 2009 Current Assets 5996.50 5773.50 6326.04 6075.49 7873.17 Current Liabilities 3008.54 2550.47 1433.21 1944.27 2474.40 Net Working Capital 2987.96 3223.03 4892.83 4131.22 5398.77
Working Capital turnover ratio of SEL (Amount in Crores) (Amount in lacs) Sales Net W.C W.C Turnover Ratio 2987.96 4.13 times 123.52 3223.03 3.98 times 128.18 4892.83 2.64 times 129.32 4131.22 3.04 times 125.54 5398.77 3.86 times 208.34
The working capital turnover ratio measure the efficiency with which the working capital is being used by a firm. A high ratio indicates efficient utilization of working capital and a low ratio indicates otherwise. But a very high working capital turnover ratio may also mean lack of sufficient working capital which is not a good situation. Working capital Turnover Ratio:
Inventory Turnover Analysis: Every firm has to maintain a certain level of inventory of finished products so as to be able to meet the requirements of the business and ensure an uninterrupted production. This analysis is done by calculating inventory turnover ratio. Inventory turnover ratio which is calculated by dividing sales by average inventory indicates the number of times the stock has been turned over during the year. It also evaluates the efficiency with which a firm is able to manage its inventory. A lower inventory turnover is an indicator of higher efficiency in managing the inventory. Inventory Turnover of SEL in 5 years Particulars 2005 2006 128.18 938.01 13.33 2007 129.32 1006.44 13.30 2008 125.54 848.82 13.53 2009 208.34 1276.71 19.60
Sales (in 123.52 crores) Inventory (in 984.50 Lacs) Inventory 12.25 Turnover Ratio
RECOMMENDATIONS
SEL should increase its capacity utilization. It should work at full capacity to minimize its cost of production. With this increase in capacity utilization, the total cost will spread over more units thereby decreasing the per unit cost. SEL should increase the credit facilities provided to its consumers. Earlier, it was selling its main product i.e. tractor either against advance payments or cash payments. This sales policy, no doubt, shows the high preference for Swaraj engine on the part of the customers, but in the wake of neck-to-neck competition due to emergence of new players in the industry, it has changed this policy to maintain and improve its market share. It should extend more credit facilities to attract more and more buyers. SEL must move into higher HP segment to capture more market. SELs highest share is in the 35 HP segment (Approximately 19%) Its contribution to higher HP segment is almost negligible because of which It can not export its tractors to Africa and Middle East, where there is demand for 70 HP engine. It is therefore, suggested that in order to be competitive in the international market also, SEL should reset to manufacturing after cutting out many of the frills in its lower HP engine. SEL should make efforts to capture emerging markets in South. Swaraj engines are, no doubt, very popular with the farmers of the Northern market (Punjab, Haryana and U.P.) but with the plateauing of sales in these markets, there is strong need for zeroing in on the central and southern markets.
SEL should undertake such activities that can add value to Society. SEL, as a good corporate citizen, should sponsor programmes related
to environment protection, rural upliftment and welfare or general public. It should spend a crunch of its profits on the social activities, which will further improve its image in the society. SEL should take advantage of Indias second position in low and medium HP engine segment, in which PTL is a leader, by exporting its product to Asian, African and to some extend Latin American Markets.