38672967 Working Capital a Project Report Entitled

8/2/2019 38672967 Working Capital a Project Report Entitled

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PROJECT REPORT

ON

WORKING CAPITAL

A Summer Training Project

Submitted in partial fulfillment of the requirements for the

Award of degree of Bachelor of Business Administration

2008-2011

INDEX

Sr. No. Contents Page No.

1. Objectives of the

Study

6

2. Company Profile 7

3. Working Capital

Management

30

4. Working Capital

Ratio Analysis

36

5. Working Capital

Management

Components

65

6. Working Capital

Finance

75

7. Conclusion 79

8. Bibliography 80


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OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working

capital is managed effectively, monitored efficiently planed properly and reviewed

periodically at regular intervals to remove bottlenecks 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. 1. To study the working

capital management of Alcon Rail Nirman Ltd. 2. To study the optimum level of

current assets and current liabilities of the company. 3. To study the liquidity position

through various working capital related ratios. 4. To study the working capital

components such as receivables accounts, cash management, Inventory position 5. To

study the way and means of working capital finance of the company. 6. To study the

cash cycle of the company.

6


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CHAPTER I

COMPANY PROFILE


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Products / Services :ALUMINUM CONDUCTOR XLPE INSULATED , PVC INSULATED ARMOURED

AND UNAROMOURED CABLE.

COPPER CONDUCTOR XLPE INSULATED, PVC INSULATED ARMOURED

AND UNARMOURED CBALE.

COPPER FLEXIBLE CABLE.

COPPER FLAT CABLE

Company Profile :We are manufacture of LT power and control cable and flexible cable

Establishment Year: 1959

Firm Type: Partnership

Nature of Business: Manufacturer

Level to Expand: State

Products & services

>> Other products and services

Twine, cordage, ropes and cablesTwine, man-made fibre

Cords, natural fibre

Cords, man-made fibre

Cords, silk and cotton waste

Cords, paper

Cords, braided

Cords, impregnated

Cords, endless

Cords, plastic or latex coated

Cables, cords and ropes, plaited bands and stranded wire slings, metalCables, stainless steel wire
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Cables, galvanised steel wire

Cables, iron and steel, mixed cables

Cables, mixed, metal-textile fibres

Cables, multi-wire, 4 to 16 strands, non-ferrous metals

Cables, metal, covered

Cables, metal, braidedPower line cable and wire fittings

Terminals, power line cable and wire

Connectors, power line cable and wire

Clamps, power line cable and wire

Cable clips and wiring clips, electric

Cable cleats and saddles, electric

Brackets, power line cable and wire

Cable glands

Cable glands for hazardous areas

Junction boxes

Junction boxes, watertightJunction boxes, earth-cable, fused

Power line vibration dampers and spacer dampers

Cable tensioners and cable laying equipment, electric

Cable support systems

Cable suspenders, electric

Cable racks, electric

Cable trays, electric

Cable thimbles and sockets, electric

Cable end sleeves, electric

Cable joint accessories, underground distribution

Electric wires and cables, insulatedWire, mineral fibre covered, electric

Wire, ceramic covered, electric

Wire, textile covered, electric

Wires and cables for telecommunications and electronicsCables, coaxial

Cables, coaxial, microwave

Cables, miniature, electric

Local area network (LAN) equipment NESLocal area network (LAN) systems, complete

Local networks, optical fibre cable

Local networks, coaxial cableComputer cable assemblies and connectors

Computer data cable assemblies, pre-assembled

Computer serial cable assemblies

Computer parallel cable assemblies

Computer keyboard and mouse extension cable assemblies
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Contact Information :Web-site: Visit Website

Contact Person: B.K.SAGGI

Designation: PARTNER

Phones (Office) : 1762329943

Phones (Resi.) : 329943

Mobile: 9316603066

Fax: 1762232687

Address: 27-A, FOCAL POINT, RAJPURA

RAJPUA - 140401

(Punjab) India
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CHAPTER II

WORKING CAPITAL MANAGEMENT

Introduction

Need of working capital

Gross W.C. and Net W.C.

Types of working capital

Determinants of working capital


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Introduction

Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary course

of business can be, or, will be, turned in to cash within one year without undergoing a

diminution in value and without disrupting the operation of the firm. The major

current assets are cash, marketable securities, account receivable and inventory.

Current liabilities ware those liabilities which intended at their inception to be paid in

ordinary course of business, within a year, out of the current assets or earnings of the

concern. The basic current liabilities are account payable, bill payable, bank over-

draft, and outstanding expenses. The goal of working capital management is to

manage the firms current assets and current liabilities in such way that the

satisfactory level of working capital is mentioned. The current asset should be large

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

safety.

Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As

already observed, the objective of financial decision making is to maximize the

shareholders wealth. To achieve this, it is necessary to generate sufficient profits can

be earned will naturally depend upon the magnitude of the sales among other things

but sales cannot convert into cash. There is a need for working capital in the form of

current assets to deal with the problem arising out of lack of immediate realization of

cash against goods sold. Therefore sufficient working capital is necessary to sustain

sales activity. Technically this is refers to operating or cash cycle. If the company has

certain amount of cash, it will be required for purchasing the raw material may be

available on credit basis. Then the company has to spend some amount for labour and

factory overhead to convert the raw material in work in progress, and ultimately

finished goods. These finished goods convert in to sales on credit basis in the form of

sundry debtors. Sundry debtors are converting into cash after expiry of credit period.


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Thus some amount of cash is blocked in raw materials, WIP, finished goods, and

sundry debtors and day to day cash requirements. However some part of current

assets may be financed by the current liabilities also. The amount required to be

invested in this current assets is always higher than the funds available from current

liabilities. This is the precise reason why the needs for working capital arise.


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Gross working capital and Net working capital

There are two concepts of working capital management 1. Gross working capital

Gross working capital refers to the firm s investment in current assets. Current

assets are the assets which can be convert in to cash within year includes cash, short

term securities, debtors, bills receivable and inventory. 2. Net working capital Net

working capital refers to the difference between current assets and current liabilities.

Current liabilities are those claims of outsiders which are expected to mature for

payment within an accounting year and include creditors, bills payable and

outstanding expenses. Net working capital can be positive or negative. Efficient

working capital management requires that firms should operate with some amount of

net working capital, the exact amount varying from firm to firm and depending,

among other things; on the nature of industries.net working capital is necessary

because the cash outflows and inflows do not coincide. The cash outflows resulting

from payment of current liabilities are relatively predictable. The cash inflow are

however difficult to predict. The more predictable the cash inflows are, the less net

working capital will be required.

Type of working capital

The operating cycle creates the need for current assets (working capital). However the

need does not come to an end after the cycle is completed to explain this continuing

need of current assets a destination should be drawn between permanent and

temporary working capital. 1) Permanent working capital The need for current assets

arises, as already observed, because of the cash cycle. To carry on business certain

minimum level of working capital is necessary on continues and uninterrupted basis.

For all practical purpose, this requirement will have to be met permanent as with

other fixed assets. This requirement refers to as permanent or fixed working capital.

2) Temporary working capital Any amount over and above the permanent level of

working capital is temporary, fluctuating or variable, working capital. This portion of

the required working capital is needed to meet fluctuation in demand consequent

upon changes in production and sales as result of seasonal changes


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Determinants of working capital

The amount of working capital depends upon the following factors:-

1. Nature of business

Some businesses are such, due to their very nature, that their requirement of fixed

capital is more rather than working capital. These businesses sell services and not the

commodities and that too on cash basis. As such, no founds are blocked in piling

inventories and also no funds are blocked in receivables. E.g. public utility services

like railways, infrastructure oriented project etc. there requirement of working

capital is less. On the other hand, there are some businesses like trading activity,

where requirement of fixed capital is less but more money is blocked in inventories

and debtors.

2. Length of production cycle

In some business like machine tools industry, the time gap between the acquisition of

raw material till the end of final production of finished products itself is quite high. As

suchamount may be blocked either in raw material or work in progress or finished

goods or even in debtors. Naturally there need of working capital is high.

3. Size and growth of business

In very small company the working capital requirement is quit high due to highoverhead, higher buying and selling cost etc. as such medium size business positively

has edge over the small companies. But if the business start growing after certain

limit, the working capital requirements may adversely affect by the increasing size.

4. Business/ Trade cycle


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If the company is the operating in the time of boom, the working capital requirement

may be more as the company may like to buy more raw material, may increase the

production and sales to take the benefit of favourable market, due to increase in the

sales, there may more and more amount of funds blocked in stock and debtors etc.

similarly in the case of depressions also, working capital may be high as the sales

terms of value and quantity may be reducing, there may be unnecessary piling up of

stack without getting sold, the receivable may not be recovered in time etc.

5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to

extend more and more credit to customers, as result which more and more amount is

locked up in debtors or bills receivables which increase the working capital

requirement. On the other hand, in the case of purchase, if the credit is offered by

suppliers of goods and services, a part of working capital requirement may be

financed by them, but it is necessary to purchase on cash basis, the working capital

requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and every individual case, which

is in turn its depend on numerous factors, but high profitability will positively reduce

the strain on working capital requirement of the company, because the profits to the

extent that they earned in cash may be used to meet the working capital requirement

of the company.

7. Operating efficiency


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If the business is carried on more efficiently, it can operate in profits which may

reduce the strain on working capital; it may ensure proper utilization of existing

resources by eliminating the waste and improved coordination etc.


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Statement of Working Capital

As per financial records of Alcon Rail Nirman Ltd up to 31st March 2009.

Particulars 2005-06 2006-07 2007-08 2008-09

(A)

Current

Assets

Rs. Rs. Rs. Rs.

Inventories 194799131 427052993 895384581 837351802

Sundry

Debtors

243587499 407657437 341241874 482447680

Cash &

Bank

Balance

76113686 504777909 256301747 294468615

Other C.A. 80003943 151038089 330596825 366076803

Loan &

advances

54583090 88478801 107711253 80783339

Total 649087349 1579005229 1931236280 2061128239

(B) Current Liabilities

Liabilities 78816022 346003954 397798913 319271072

Provisions 30004352 62270017 77884176 51215931

Total 108820374 408273971 475683089 370487003Working

Capital

540266975 1170731258 1455553191 1690641236


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CHAPTER III WORKING CAPITAL

RATIO ANALYSIS

Introduction

Role of Ratio Analysis

Limitations of Ratio Analysis

Classification of Ratio Analysis

Quarterly Trends


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Introduction

Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as

the indicated quotient of two mathematical expressions and as the relationship

between two or more things. The absolute figures reported in the financial statement

do not provide meaningful understanding of the performance and financial position of

the firm. Ratio helps to summaries large quantities of financial

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of their profitability and

efficiency of performance, either individually or in relation to other firms in same

industry. Ratio analysis is one of the best possible techniques available to management

to impart the basic functions like planning and control. As future is closely related to

the immediately past, ratio calculated on the basis historical financial data may be of

good assistance to predict the future. E.g. On the basis of inventory turnover ratio or

debtors turnover ratio in the past, the level of inventory and debtors can be easily

ascertained for any given amount of sales. Similarly, the ratio analysis may be able to

locate the point out the various areas which need the management attention in order

to improve the situation. E.g. Current ratio which shows a constant decline trend may

be indicate the need for further introduction of long term finance in order to increase

the liquidity position. As the ratio analysis is concerned with all the aspect of the

firms financial analysis liquidity, solvency, activity, profitability and overall

performance, it enables the interested persons to know the financial and operational

characteristics of an organization and take suitable decisions.

Limitations of ratio analysis1. The basic limitation of ratio analysis is that it may be difficult to find a basis for

making the comparison 2. Normally, the ratios are calculated on the basis of historical

financial statements. An organization for the purpose of decision making may need

the hint regarding the future happiness rather than those in the past. The external


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analyst has to depend upon the past which may not necessary to reflect financial

position and performance in future. 3. The technique of ratio analysis may prove

inadequate in some situation if there is differs in opinion regarding the interpretation

of certain ratio. 4. As the ratio calculates on the basis of financial statements, the basic

limitation which is applicable to the financial statement is equally applicable. In case

of technique of ratio analysis also i.e. only facts which can be expressed in financial

terms are considered by the ratio analysis. 5. The technique of ratio analysis has

certain limitations of use in the sense that it only highlights the strong or problem

areas, it does not provide any solution to rectify the problem areas

37


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The following ratio may be calculated for the purpose of analyzing the working

capital of ALCON:

1. Liquidity Ratio

2. Leverage Ratio

3. Turnover Ratio

4. Profitability Ratio

1.Liquidity Ratio

Liquidity ratios measure the short term solvency, i.e., the firms ability to pay its

current dues and also indicate the efficiency with which working capital is being used.

Commercial banks and short-term creditors may be basically interested in the ratios

under this group. They comprise of following ratios:

Current Ratio

This ratio measures the solvency of the company in the short term. Current assets are

those assets which can be converted into cash within a year. Current liabilities and

provisions are those liabilities that are payable within a year. The ratio is mainly used

to give an idea of the company's ability to pay back its short-term liabilities with its

short-term assets. The higher the current ratio, the more capable the company is of

paying its obligations. However, a very high ratio indicates idleness of funds, poor

investment policies of the management and poor inventory control. A ratio under 1

suggests that the company would be unable to pay off its obligations if they came due

at that point. A lower ratio indicates lack of liquidity and shortage of working capital.

A current ratio of 2:1 indicates a highly solvent position. A current ratio of 1.33:1 is

considered by banks as the minimum acceptable level for providing working capital

finance.

Current Assets

Current Ratio= Current Liability


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Year Current Assets Current Liability Ratio(CA/CL)2005-06 649087349 108820374 5.96

2006-07 1579005229 408273971 3.86

2007-08 1931236280 475683089 4.05

2008-09 2061128239 370487003 5.56

Interpretation

As we know that ideal current ratio for any firm is 2:1. If we see the current ratio

of the company for last three years it has increased from 2006 to 2008. The current

ratio of company is more than the ideal ratio. This depicts that companys

liquidity position is sound. Its current assets are more than its current liabilities.

Quick Ratio

Quick ratio is used as a measure of the companys ability to meet its current

obligations. Cash is the most liquid asset. Debtors, bills receivables and marketable


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securities are relatively liquid and included in quick assets. Inventories are considered

to be less liquid, hence not a quick asset. A quick ratio of 1:1 is considered standard

and ideal, since for every rupee of current liabilities, there is a rupee of quick assets. A

decline in the liquid ratio indicates overtrading, which, if serious, may land the

company in difficulties.


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Current Assets - Inventories

Quick Ratio = Current Liability

Year Liquid Assets Current Liability Ratio(CA/CL)

2005-06 454288218 108820374 4.17

2006-07 1151952236 408273971 2.82

2007-08 1035851699 475683089 2.17

2008-09 1223776437 370487003 3.30

Interpretation

A quick ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time. The ideal quick ratio is 1:1. Company

s quick ratio is more

than ideal ratio. This shows company has no liquidity problem.


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Leverage Ratio

Leverage refers to the use of debt finance. While debt finance is a cheaper source of

finance but it is riskier also. These ratios help in assessing the risk arising from the use

of debt capital. A leverage ratio reveals the firms ability to meet its obligations in

long run. The short term creditor, like bankers and raw material suppliers, are more

concern with the firms current debt paying ability. On the other hand, long term

creditors, like debenture holders, financial institutions etc. are more concern with the

firms long term financial strength. In fact, a firm should have a strong short as well

as long term financial position.

Debt RatioThe firm may be interested in knowing the proportion of the interest-bearing debt in

the capital structure. It may, therefore, compute debt ratio by

Total Debt

Debt Ratio = Capital Employed

Year Debt Capital Employed Ratio(D/CE)

2005-06 414635193 591103847 0.70

2006-07 540857896 1238879545 0.43

2007-08 761455005 1625514244 0.46

2008-09 822617264 1862460512 0.44


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Interpretation

The debt ratio of 0.43 means that lenders have financed 43% of ALCONs net assets

(capital employed). It obviously means that owners have provided the remaining

finances i.e. 57%. For consecutive years also, the lenders have financed less than 50%

highlighting that the firm has a strong financial position. It has very less chances of

going bankrupt.

Debt Equity Ratio

The debt-equity ratio is worked out to ascertain soundness of the long term financial

policies of the firm. This ratio expresses a relationship between debt (external

equities) and the equity (internal equities). Debt means long-term loans, i.e.,

debentures, public deposits, loans (long term) from financial institutions. Equity

means shareholders funds, i.e., preference share capital, equity share capital,

reserves less losses and fictitious assets like preliminary expenses. It indicates the

extent to which the firm depends upon outsiders for its existence. A high debt-equity

ratio may indicate that the financial stake of the creditors is more than that of the


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owners. A very high debt-equity ratio may make the proposition of investment in the

organization a risky one. While a low ratio indicates safer financial position, a very

low ratio may mean that the borrowing capacity of the organization is being

underutilized.

Debt

Debt Equity Ratio = Net worth (Equity)

Year Debt Net Worth Ratio(D/NW)2005-06 414635193 176468654 2.34

2006-07 540857896 695616233 0.77

2007-08 761455005 858068314 0.88

2008-09 822617264 1029553358 0.79


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Interpretation

This relationship describes the lenders

contribution for each rupee of the owners

contribution. It is clear that the lenders contribution is 0.77, 0.88, 0.79 times of

owners contribution. The company is conservative in financing its growth with debt

but this is beneficial as there is less chances of it going bankrupt.


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Activity or Turnover Ratio

Funds of creditors and owners are invested in various assets to generate sales and

profits. The better the management of assets, the larger the amount of sales. Activity

ratios are employed to evaluate the efficiency with which the firm manages and

utilises its assets. These ratios are also called turnover ratios because they indicate the

speed with which the assets are being converted or turned over into sales. Higher

turnover ratio means, better use of resources, which in turn means better profitability

ratio. The following are the important activity (turnover) ratios:

Inventory Turnover Ratio

The inventory turnover shows how rapidly the inventory is turning into receivables

through sales. Generally, a high inventory turnover is indicative of good inventory

management. A low inventory turnover implies a slow-moving or obsolete inventory.

However, a relatively high inventory turnover should be carefully analysed. A high

inventory turnover may be due to a very low level of inventory, which results in

frequent stock-outs. The turnover will also be high if the firm replenishes its inventory

in too many small lot sizes.

Net Sales

Inventory Turnover ratio = Average Inventory

Year Net Sales Average

Inventory

Ratio(NS/Avg.

Inv)

2005-06 901324171 162817698 5.532006-07 1881201406 310926062 6.05

2007-08 2480267871 661218787 3.75

2008-09 2814977170 866368191.5 3.24


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Interpretation

The inventory turnover shows how rapidly the inventory is turning into receivable

through sales. A high ratio indicates good inventory management. ALCON has turned

its inventory of finished goods into sales 6.05 times a year which has then fallen to 3.75

times and then to 3.24. Though it is not low for a construction company but it should

pay more attention to maintain the stability of this ratio.

Debtor Turnover Ratio

It measures whether the amount of resources tied up in debtors is reasonable and

whether the company has been efficient in converting debtors into cash. The higher

the ratio, the better the position.

Net sales

Debtor turnover ratio = Sundry Debtor

Year Net Sales Sundry Debtor Ratio(NS/SD)2005-06 901324171 243587499 3.7

2006-07 1881201406 407657437 4.61

2007-08 2480267871 341241874 7.26

2008-09 2814977170 482447680 5.83


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Interpretation

Generally, the higher the value of debtors turnover, the more efficient is the

management of credit. The ratio for the firm has from 4.61 to 7.26 and then fallen to

5.83. It depicts that the firm has not been following an efficient credit policy.

Average Collection Period

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.

360

Average Collection Period = Debtor turnover Ratio

Year No. of days Debtors Turnover

Ratio

Ratio(360/DTR)

2005-06 360 3.7 97days

2006-07 360 4.61 78 days

2007-08 360 7.26 50 days

2008-09 360 5.83 62 days


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Interpretation

The Average collection period measures the quality of debtors since it indicates the

speed of their collection. Though it has fallen from 78 days to 62 days, it still implies a

very liberal and inefficient credit and collection performance.

Working Capital Turnover Ratio

The working capital turnover ratio measures 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.

Net Sales

Working Capital Turnover Ratio = Working Capital

Year Net Sales Working Capital Ratio(NS/WC)2005-06 901324171 540266975 1.66

2006-07 1881201406 1170731258 1.60

2007-08 2480267871 1455553191 1.70

2008-09 2814977170 1690641236 1.66


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Interpretation

In alcon, the management needs to utilize the working capital in a better manner so

that it can increase the income.


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Fixed Asset Turnover Ratio

The fixed-asset turnover ratio measures a company's ability to generate net sales from

fixed asset investments - specifically property, plant and equipment (PP&E) - net of

depreciation. A higher fixed-asset turnover ratio shows that the company has been

more effective in using the investment in fixed assets to generate revenues.

Net Sales

Fixed Assets Turnover Ratio = Fixed Assets

Year Net Sales Fixed Assets Ratio(NS/FA)2005-06 901324171 55759485 16.16

2006-07 1881201406 68148287 27.6

2007-08 2480267871 166961053 14.6

2008-09 2814977170 168819276 16.67

Interpretation


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A high ratio indicates a high degree of efficiency in fixed assets utilization. The

company has been effective in using the investment in fixed assets to generate

revenues.


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Current Assets Turnover Ratio

It measures the efficiency with which the current asset employed. A high ratio

indicates a high degree of efficiency in current asset utilization and vice-versa. But

again too high ratio indicates overtrading on the basis of these ratios.

Net Sales

Current Asset Turnover Ratio = Current Assets

Year Net Sales Current Assets Ratio(NS/CA)

2005-06 901324171 649087349 1.38

2006-07 1881201406 1579005229 1.192007-08 2480267871 1931236280 1.28

2008-09 2814977170 2061128239 1.36

InterpretationAlcon turns over its fixed assets faster than current assets.


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Total Asset Turnover Ratio

This ratio indicates the number of times total assets are being turned over in a year.

The higher the ratio indicates overtrading of total assets, while a relatively lower ratio

indicates idle capacity.

Net Sales

Total Assets Turnover Ratio = Total Assets

Year Net Sales Total Assets Ratio(NS/CA)2005-06 901324171 704846834 1.27

2006-07 1881201406 1647153516 1.142007-08 2480267871 2101197333 1.18

2008-09 2814977170 2232947515 1.26

Interpretation

The total assets turnover has been slowly increasing implying that ALCON generates

a sale of Rs. 1.26 for one rupee investment in fixed and current assets together.


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Profitability Ratio

The purpose of study and analysis of profitability ratios are to help assessing the

adequacy of profit earned by the company and also to discover whether profitability is

increasing or declining. The profitability ratio shows the combined effects of liquidity,

asset management and debt management on operating results. Profitability ratio are

measured with reference to sale, capital employed, total asset employed, shareholders

fund etc.

Net Profit Margin

A measure of how well a company controls its costs. It is calculated by dividing a

company's profit by its revenues and expressing the result as a percentage. The higher

the net profit margin is, the better the company is thought to control costs. Investors

use the net profit margin to compare companies in the same industry and well as

between industries to determine what are the most profitable.

Net Profit

Net profit Ratio = Net Sales

Year Net Profit Net Sales Ratio(NPx100/NS)

2005-06 36092058 901324171 4%

2006-07 94415570 1881201406 5%

2007-08 142160782 2480267871 5.73%

2008-09 104392055 2814977170 3.7%


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Interpretation

The firm is having a low net margin and is further declining which might be difficult

for the firm to survive in adverse economic condition and also in the face of falling

selling price, rising cost of production or declining demand.

Return on Equity

This ratio is an important yardstick of performance for equity shareholders since it

indicates the return on the funds employed by them. The factor which motivatesshareholders to invest in a company is the expectation of an adequate rate of return

on their funds and periodically, they want to assess the rate of return in order to

decide whether to continue with their investment.

Net Profit

Return on Equity = Net Worth

Year Net Profit Net Worth Ratio(NPx100/NW

)

2005-06 36092058 176468654 20.45%

2006-07 94415570 695616233 13.5%2007-08 142160782 858068314 16.56%

2008-09 104392055 1029553358 10.13%


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Interpretation

The ratio reveals that the shareholders funds are being utilized efficiently though

last year the return was not satisfactory.


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Return on Capital Employed

It is used in finance as a measure of the returns that a company is realising from its

capital employed. It is commonly used as a measure for comparing the performance

between businesses and for assessing whether a business generates enough returns to

pay for its cost of capital. ROCE measures the profitability of the capital employed in

the business. A high ROCE indicates a better and profitable use of long-term funds of

owners and creditors. As such, a high ROCE will always be preferred.

Net Profit

Return on Capital Employed = Capital employed

Year Net Profit Capital Employed Ratio(NPx100/CE)

2005-06 36092058 591103847 6.10%

2006-07 94415570 1238879545 7.62%

2007-08 142160782 1625514244 8.74%2008-09 104392055 1862460512 5.60


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Interpretation

The ROCE is on the lower side depicting that the company has a low earning power.


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QUARTERLY TRENDS FROM 2006-2010

2006-07

QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4

(Apr-Jun

2006)

(Jul-Sep

2006)

(Oct-Dec

2006)

(Jan-Mar

2006)

Rs. Rs. Rs. Rs.

Income 19.374 cr. 37.233 cr. 49.035 cr. 82.481 cr.

Expenditure 17.089 cr. 32.727 cr. 41.988 cr. 76.47 cr.

Interest 0.7 cr. 1.008 cr. 1.113 cr. 1.827 cr.

Depreciation 0.15 cr. 0.15 cr. 0.1 cr. 0.2 cr.

Profit before

Tax

1.435 cr. 3.348 cr. 5.834 cr. 3.984 cr.

Tax 0.443 cr. 1.302 cr. 2.1 cr. 0.309 cr.

Net Profit 0.992 cr. 2.046 cr. 3.734 cr. 3.675 cr.

Equity

Capital

4.946 cr. 4.946 cr. 8.772 cr. 10.498 cr.

EPS 2 4.14 4.26 3.5


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CUMMULATIVE ANNUAL

(2006-07) (2006-07)

(Rs.) (Rs.)

Income 188.12 cr. 188.12 cr.

Expenditure 168.27 cr. 168.98 cr.

Interest 4.648 cr. 3.9 cr.Depreciation 0.6 cr. 0.62 cr.

Profit before Tax 14.6 cr. 14.6 cr.

Tax 4.154 cr. 5.16 cr.

Net Profit 10.447 cr. 9.44 cr.

Equity Capital 10.498 cr. 10.52 cr.EPS 9.95 8.97


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*EPS in the Annual Report was 15.31 which should have been 8.97


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2007-08


(Apr-Jun

2007)

(Jul-Sept

2007)

(Oct-Dec

2007)

(Jan-Mar

2007)

(Rs.) (Rs.) (Rs.) (Rs.)

Income 48.134 cr. 43.867 cr. 93.865 cr. 48.791 cr.

Expenditure 42.571 cr. 38.332 cr. 83.131 cr. 45.023 cr.



Profit before

Tax

4.384 cr. 4.277 cr. 9.013 cr. 2.825 cr.

Tax 1.49 cr. 1.368 cr. 2.796 cr. 0.7 cr.


Equity Capital 10.498 cr. 10.521 cr. 10.521 cr. 10.727 cr.EPS 2.76 2.76 5.91 3.5


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CUMMULATIVE ANNUAL

(2007-08) (2007-08)

(Rs.) (Rs.)


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Income 234.65 cr. 248.02 cr.

Expenditure 209.05 cr. 222.82 cr.Interest 4.05 cr. 3.16 cr.

Depreciation 0.6 cr. 0.88 cr.

Profit before Tax 20.95 cr. 21.16 cr.

Tax 6.35 cr. 6.95 cr.Net Profit 14.6 cr. 14.21 cr.

Equity Capital 10.73 cr. 10.73 cr.EPS 13.6 13.25


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2008-09


(Apr-Jun

2008)

(Jul-Sept

2008)

(Oct-Dec

2008)

(Jan-Mar

2009)

(Rs.) (Rs.) (Rs.) (Rs.)

Income 59.486 cr. 87.764 cr. 72.59 cr. 61.654 cr.Expenditure 51.54 cr. 80.105 cr. 65.754 cr. 57.211 cr.



Profit before

Tax

5.889 cr. 5.212 cr. 4.292 cr. 1.907 cr.

Tax 1.79 cr. 2.027 cr. 1.327 cr. 0.629 cr.


Equity Capital 10.72 cr. 11.22 cr. 11.22 cr. 11.22 cr.

EPS 3.82 2.84 2.64 1.13


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CUMMULATIVE ANNUAL

(2008-09) (2008-09)

(Crores) (Crores)

Income 281.5 281.5

Expenditure 254.61 255.91


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Interest 8.63 8.14Depreciation 0.95 1.4

Profit before Tax 17.3 16.05

Tax 5.77 5.61

Net Profit 11.52 10.44

Equity Capital 11.22 11.22

EPS 10.27 9.3


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2009-10


(Apr-Jun

2009)

(Jul-Sept

2009)

(Oct-Dec

2009)

(Jan-Mar

2010)

(Rs.) (Rs.) (Rs.) (Rs.)


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Income 36.018 cr. 26.022 cr. 37.642 cr. 60.799 cr.

Expenditure 30.918 cr. 23.553 cr. 34.587 cr. 53.392 cr.Interest 2.199 cr. 1.806 cr. 0.36 cr. 1.467 cr.


Profit before

Tax

2.542 cr. 0.289 cr. 0.522 cr. 5.533 cr.

Tax 0.864 cr. 0.011 cr. 0.265 cr. 1.881 cr.


Equity Capital 11.22 cr. 12.24 cr. 12.24 cr. 12.24 cr.

EPS 1.49 0.23 0.2 2.98


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*EPS in the 3rd quarter was found 0.02 in the report which must be 0.2

CUMMULATIVE

(2009-10)

(Rs.)

Income 160.48 cr.

Expenditure 142.45 cr.

Interest 5.83 cr.

Depreciation 3.31 cr.Profit before Tax 8.88 cr.

Tax 3.02 cr.

Net Profit 5.86 cr.

Equity Capital 12.24 cr.

EPS 4.8

CHAPTER IV


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WORKING CAPITAL MANAGEMENT

COMPONENTS

Receivables Management

Cash Management

Inventory Management


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Working Capital management Components

RECEIVABLES MANAGEMENT

Receivables or debtors are the one of the most important parts of the current assets

which is created if the company sells the finished goods to the customer but not

receive the cash for the same immediately. Trade credit arises when firm sells its

products and services on credit and does not receive cash immediately. It is essential

marketing tool, acting as bridge for the movement of goods through production and

distribution stages to customers. Trade credit creates receivables or book debts which

the firm is expected to collect in the near future. The receivables include three

characteristics 1) It involve element of risk which should be carefully analysis. 2) It is

based on economic value. To the buyer, the economic value in goods or services passes

immediately at the time of sale, while seller expects an equivalent value to be received

later on 3) It implies futurity. The cash payment for goods or serves received by the

buyer will be made by him in a future period.

Objective of receivable management

The sales of goods on credit basis are an essential part of the modern competitive

economic system. The credit sales are generally made up on account in the sense that

there are formal acknowledgements of debt obligation through a financial instrument.

As a marketing tool, they are intended to promote sales and there by profit. However

extension of credit involves risk and cost, management should weigh the benefit as

well as cost to determine the goal of receivable management. Thus the objective of

receivable management is to promote sales and profit until that point is reached

where the return on investment in further funding of receivables is less .than the cost

of funds raised to finance that additional credit.

Size of receivables


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Year 2005-06 2006-07 2007-08 2008-09

Sundry

Debtor

243587499 407657437 341241874 482447680


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Average collection period

The average collection period measures the quality of debtors since it indicate the

speed of their collection. The shorter the average collection period, the better the

quality of the debtors since a short collection period implies the prompt payment by

debtors. The average collection period should be compared against the firms credit

terms and policy judges its credit and collection efficiency. The collection period ratio

thus helps an analyst in two respects. 1. In determining the collectability of debtors

and thus, the efficiency of collection efforts. 2. In ascertaining the firms comparative

strength and advantages related to its credit policy and performance. The debtors

turnover ratio can be transformed in to the number of days of holding of debtors .

Average Collection Period

Year 2005-06 2006-07 2007-08 2008-09

Average

Collection

Period

97 78 50 62


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OBSERVATION

Alcon as such do not have a credit policy. As the company undertakes government

projects so there is no worry about not getting the cash for the bills receivables.

Though the average collection period has fallen over the years, still the company

needs to follow a credit policy for timely recovery of the cash for the bills receivables.


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CASH MANAGEMENT

Cash is common purchasing power or medium of exchange. As such, it forms the most

important component of working capital. The term cash with reference to cash

management is used in two senses, in narrow sense it is used broadly to cover cash and

generally accepted equivalent of cash such as cheques, draft and demand deposits in

banks. The broader view of cash also induce hear- cash assets, such as marketable

sense as marketable securities and time deposits in banks. The main characteristics of

this deposits that they can be really sold and convert in to cash in short term. They

also provide short term investment outlet for excess and are also useful for meeting

planned outflow of funds. We employ the term cash management in the broader sense.

Irrespective of the form in which it is held, a distinguishing feature of cash as assets is

that it was no earning power. Company have to always maintain the cash balance to

fulfil the dally requirement of expenses. There are three primary motive for maintain

the cash as follows

Motive of holding cash

There are three motives for holding cash as follow 1. Transaction motive 2.

Precautionary motive 3. Speculative motive

Transaction motive

Cash balance is necessary to meet day-to-day transaction for carrying on with the

operation of firms. Ordinarily, these transactions include payment for material,

wages, expenses, dividends, taxation etc. there is a regular inflow of cash from

operating sources. But since they do not perfectly synchronize, a minimum cash

balance is necessary to uphold the operations for the firm if cash payments exceed

receipts. Always a major part of transaction balances is held in cash, a part may be

held in the form of marketable securities whose maturity conforms to the timing of

anticipated payments of certain items, such as taxation, dividend etc.

Precautionary Motive


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Cash flows are somewhat unpredictable, with the degree of predictability varying

among firms and industries. Unexpected cash needs at short notice may also be the

result of following: 1. Uncontrollable circumstances such as strike and natural

calamities. 2. Unexpected delay in collection of trade dues. 3. Cancellation of some

order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise in

wages, etc. The higher the predictability of firms cash flows, the lower will be the

necessity of holding this balance and vice versa. The need for holding the

precautionary cash balance is also influenced by the firms capacity to have short

term borrowed funds and also to convert short term marketable securities into cash.

Speculative motive:

Speculative cash balances may be defined as cash balances that are held to enable the

firm to take advantages of any bargain purchases that might arise. While the

precautionary motive is defensive in nature, the speculative motive is aggressive in

approach.

However, as with precautionary balances, firms today are more likely to rely on

reserve borrowing power and on marketable securities portfolios than on actual cash

holdings for speculative purposes.

Advantages of cash management

Cash does not enter in to the profit and loss account of an enterprise, hence cash is

neither profit nor losses but without cash, profit remains meaningless for an

enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite

losses 2. An efficient cash management through a relevant and timely cash budget

may enable a firm to obtain optimum working capital and ease the strains of cash

shortage, fascinating temporary investment of cash and providing funds normal


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growth. 3. Cash management involves balance sheet changes and other cash flow that

do not appear in the profit and loss account such as capital expenditure.

OBSERVATIONAlcon has a relatively small amount of cash in hand which is usually employed in

administrative expenses and payment to employees. The company carries out the

various construction projects by borrowing 100% cash from various banks. The cash

to be borrowed is entirely based on the project and varies from project to project.


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CASH CYCLE

One of the distinguishing features of the fund employed as working capital is that

constantly changes its form to drive business wheel. It is also known as circulating

capital which means current assets of the company, which are changed in ordinary

course of business from one form to another, as for example, from cash to inventories,

inventories to receivables and receivables to cash. Basically cash management

strategies are essentially related to the cash cycle together with the cash turnover. The

cash cycle refers to the process by which cash is used to purchase the raw material

from which are produced goods, which are then send to the customer, who later pay

bills.

TENDER NOTICES

CASH

RAW MATERIALS (for construction)

DEBTORS

FINISHED CONSTRUCTION

Work in Progress

The cash cycle for the construction company is entirely different from manufacturing

companies. The various stages in the cycle are described below:

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TENDER NOTICES

Alcon looks out for the various tender notices published out by the government in national

newspapers. The company, upon evaluating its eligibility criteria according to the tender,

files the tender with a competitive bid. The company which fulfils the eligibility criteria,

has a good credential and has the lowest bid gets the tender for completion of the project.

CASH

Upon successfully getting a project in its hand, the company lifts cash by borrowing from

various banks. The cash to be borrowed is entirely based on the project and varies from

project to project.

RAW MATERIALS

The company purchases the materials required for the construction and completion of the

project. The amounts of the material along with its specification/designation are provided in

the tender. Complying with those, materials are bought, stocked and put to use.

WORK in PROGRESS

This is the stage where construction is in progress. The government pays to the company

progressively in parts after a certain amount of work is completed.

FINISHED CONSTRUCTION

Finally, the construction project is finished and in case any material is left out, it is kept in

stock for future use.

DEBTORS

Debtors mainly here are the government bodies like Railways, etc. that are yet to pay the

remaining cash for the completion of the project.


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INVENTORY MANAGEMENT

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.

Needs to hold inventories:-

There are three general motives for holding 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 reordering 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


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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 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


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OBSERVATION

Alcon does not hold much inventory. It follows the Just-in-Time Systems, where in the

materials required are bought and put to use. The construction company, after getting

a project in its hand, buys and stocks the materials which will be needed for

construction. The tender itself describes the amount and the specification/designation

of the materials which are to be needed for the construction, so accordingly the

materials are purchased. Alcon also follows a First-in-First-out (FIFO) method

wherein the materials purchased first are put to use first.


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Introduction

Funds available for period of one year or less is called short term finance. In India

short term finance is used as working capital finance. Two most significant short term

sources of finance for working capital are trade credit and bank borrowing. Trade

credit ratio of current assets is about 40%, it is indicated by Reserve Bank of India

data that trade credit has grown faster than the growth in sales. Bank borrowing is

the next source of working capital finance. The relative importance of this varies from

time to time depending on the prevailing environment. In India the primary source of

working capital financing are trade credit and short term bank credit. After

determine the level of working capital, a firm has to consider how it will finance.

Bank Finance for Working Capital

Banks are the main institutional sources of working capital finance in India. Bank

credit is the most important source of financing working capital requirements. A bank

considers a firms sales and production plans and the desirable levels of current

assets in determining its working capital requirements. The amount approved by the

bank for the firms working capital is called credit limit. Credit limit is the maximum

funds which a firm can obtain from the banking system. In the case of firms with

seasonal businesses, banks may fix separate limits for the peak level credit

requirement and normal, non-peak level credit requirement indicating the periods

during which the separate limits will be utilised by the borrower. In practice, banks

do not lend 100% of the credit limit; they deduct margin money. Margin requirement

is based on the principle of conservatism and is meant to ensure security. If the

margin requirement is 30%, bank will lend only upto 70% of the value of the asset.


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Form of bank credit

Bank provides working capital finance in the following ways

Overdraft

Under the overdraft facility, the borrower is allowed to withdraw funds in excess of

the balance in his current account upto a certain limit during a stipulated period.

Though overdrawn amount is repayable on demand, they generally continue for a

long period by annual renewals of the limits. It is a very flexible arrangement from

the borrowers point of view since he can withdraw and repay funds whenever he

desires within the overall stipulations. Interest is charged on daily balances-on the

amount actually withdrawn-subject to some minimum charges. The borrower

operates the account through cheques.

Cash credit

Under the cash credit facility, a borrower is allowed to withdraw funds from the bank

upto the sanctioned credit limit. He is not required to borrow the entire sanctioned

credit once, rather, he can draw periodically to the extent of his requirements and

repay by depositing surplus funds in his cash credit account. There is no commitmentcharge; therefore, interest is payable on the amount actually utilised by the borrower.

Cash credit limits are sanctioned against the security of current assets. Though funds

borrowed are repayable on demand, banks usually do not recall such advances unless

they are compelled by adverse circumstances.

Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables the

company to get the immediate payment against the credit bills / invoice raised by the

company. The banks hold the bills as a security till the payment is made by the

customer. The entire amount of bill is not paid to the company. The company gets


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only the present worth of amount of bill from of discount charges. On maturity, bank

collects the full amount of bill from the customer.

Letter of credit

Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that

his bank will make the payment if he fails to honour its obligation. This is ensured

through a letter of credit (L/C) arrangement. A bank opens an L/C in favour of a

customer to facilitate his purchase of goods. If the customer does not pay to the

supplier within the credit period, the bank makes the payment under the L/C

arrangement. This arrangement passes the risk of the supplier to the bank. Bank

charges the customer for opening the L/C. It will extend such facility to financially

sound customers.

Security Required in Bank Finance

Banks generally do not provide working capital finance without adequate security.

The following are the modes of security which a bank may require.

Hypothecation

Under this, the borrower is provided with working capital finance by the bank against

the security of movable property, generally inventories. The borrower does not

transfer the property to the bank; he remains in the possession of property made

available as security for the debt. Banks generally grant credit hypothecation only to

first class customers with highest integrity.

Pledge

Under this arrangement, the borrower is required to transfer the physical possession

of the property offered as a security to the bank to obtain credit. The bank can retain

possession of the goods pledged unless payment of the principal, interest and any


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other expenses is made. In case of default, the bank may either (a) sue the borrower

for the amount due, or (b) sue for the sale of goods pledged, or (c) after giving due

notice, sell the goods.

Lien

Lien means right of the lender to retain property belonging to the borrower until he

repays credit. It can be either a particular lien or general lien. Particular lien is a

right to retain property until the claim associated with the property is fully paid.

General lien, on the other hand, is applicable till all dues of the lender are paid. Banks

usually enjoy general lien.

OBSERVATION

Alcon, being a construction company, looks out for various tender notices opened

out by the government. Upon successfully getting a project in its hand, the firm

borrows cash from various banks including State Bank of India, State Bank of

Patiala, Yes Bank, HDFC, AXIS Bank. The banks provide working capital finance

to the firm through one of the methods described above. The companys

borrowings are entirely based on the projects in hand and usually the amount of

cash to be spent on the completion of the project is 100% borrowed.


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CONCLUSION

Working capital management is important aspect of financial management. The study

of working capital management of Alcon Rail Nirman (Engineers) Ltd. has revealed

that the company shows no liquidity problem. The study has been conducted on

working capital ratio analysis, working capital leverage, working capital components

which helped the company to manage its working capital efficiently and effectively. 1.

Working capital of the company was increasing and showing positive working capital

per year. It shows good liquidity position. 2. Positive working capital indicates that

company has the ability of payments of short terms liabilities. 3. The study of

receivables management of the company shows that they do not have a credit policy

and hence have a high average collection period. 4. The study of cash management

reveals that the company carries out the various construction projects by borrowing

100% cash from various banks and varies from project to project. 5. The study of

inventory management reveals that the company follows Just-in-Time Systems and

FIFO method.

Over all company has good liquidity position and sufficient funds to repayment of

liabilities. Company has accepted conservative financial policy and thus maintaining

more current assets balance.


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BIBLIOGRAPHY

Books Referred

1. I. M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. -

Ninth Edition 2006 2. M.Y. Khan and P.K. Jain, Financial management Vikas

Publishing house Ltd.

Annual Reports of ALCON

2005-06

2006-07 2

007-08

2008-09

Website Referred

www.Alcon.net

www.wikipedia.org

www.investopedia.com

www.google.com
http://www.alcon.net/http://www.alcon.net/http://www.wikipedia.org/http://www.wikipedia.org/http://www.investopedia.com/http://www.alcon.net/http://www.wikipedia.org/http://www.investopedia.com/


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Documents

38672967 Working Capital a Project Report Entitled