swaraj-wcapital

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Working Capital Management Page1

INTRODUCTION


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WORKING CAPITAL:Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's

ability to fund operations, reinvest and meet capital requirements and payments.

Understanding a company's cash flow health is essential to making investment

decisions. A good way to judge a company's cash flow prospects is to look at its

working capital management (WCM).

WHAT IS WORKING CAPITAL?Working capital refers to the cash a business requires for day-to-day operations, or,

more specifically, for financing the conversion of raw materials into finished goods,

which the company sells for payment. Among the most important items of working

capital are levels of inventory, accounts receivable, and accounts payable. Analysts

look at these items for signs of a company's efficiency and financial strength.

CONCEPTS OF WORKING CAPITAL:There are two concepts of working capitalgross and net.

GROSS WORKING CAPITAL: It refers to the firms Investment in current assets

which can be converted into cash within an accounting year(or operating cycle) and

include cash, short-term securities, debtors, (accounts receivable or book debts) bills

receivable and stock (inventory)

NET WORKING CAPITAL: It refers to the difference between Current Assets &

Current Liabilities. Current liabilities are those claims of outsiders which are expected

to mature for payment within an Accounting year and include creditors (accounts

payable) ,bills payable and outstanding expenses. Net working capital can be

positive or negative. A positive net working capital will arise when Current Assets


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increase current liabilities. A negative net working capital will occur when Current

Liabilities are in excess of Current Assets.

NATURE OF WORKING CAPITALEXCESSIVE AND INADEQUATE WORKING CAPITAL:A business enterprise should maintain adequate working capital according to the

needs of its business of its business operations. The amount of working capital

should neither be excessive nor adequate. If the working capital is excess of its

requirements it means idle funds adding to the cost of capital is short of itsrequirements, it will result in production interruptions and reduction of sales and, in

turn, will affect the profitability of the business adversely.

DEFECIENCIES OF EXCESSIVE WORKING CAPITAL

EXCESSIVE INVENTORY: Excessive working capital results in unnecessaryaccumulation of large inventory. It increases the chances of misuse, waste, theft etc.

EXCESSIVE DEBTORS: Excessive working capital will result in liberal creditpolicy which, in turn, will result in higher amount tied up in debtors and higher

incidence of bad debts.

ADVERSE EFFECT ON PROFITABILITY: Excessive working capital meansidle funds in the business which adds to the cost of capital but earns no profits for

the firm. Hence it has a bad effect on profitability of the firm.

INEFFECIENCY OF MANAGEMENT: Management becomes careless due toexcessive resources at their command. It results in laxity of control on expenses and

cash resources.


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DEFECIENCIES OF INADEQUATE WORKING CAPITAL:DIFFICULTY IN AVALIABILITY OF RAW-MATERIAL: Inadequacy of working

capital results in non-payment of creditors on time. As a result the credit purchase of

goods onfavourable terms becomes increasingly difficult. Also, the firm cannot avail

the cash.

FULL UTILISATION OF FIXED ASSETS NOT POSSIBLE: Due to the frequentinterruption in supply of raw materials and paucity of stock, the firm cant make full

utilization of its machines etc.

DIFFICULTY IN THE MAINTAINENCE OF MACHINERY: Due to the shortageof working capital, machines are not cared and maintained properly which results in

the closure of production of on many occasions.

DECRAESE IN CREDIT RATING: Because of inadequacy of working capital,firm is unable to pay its short term obligations on time. It decays the firms relation

with its bankers and it becomes difficult for the firm to borrow in case of need.

ADVANTAGES OF ADEQUATE WORKING CAPITAL:

AVAILIABILTY OF RAW MATERIAL REGULARLY: Adequacy of workingcapital makes it possible for a firm to pay the suppliers of raw material in

time. As a result it will continue to receive regular supplies of raw

materials and thus there will be no disruption in production process.

FULL UTILISATION OF FIXED ASSETS: Adequacy of working capital makes itpossible for a firm to utilize its fixed assets fully and continuously. For

eg. , if there is inadequate stock of raw material, the machines will not be

utilized in full and their productivity will be reduced.

CASH DICOUNT: A firm having the adequate working capital can avail thecash discount by purchasing the goods for cash or by making the

payment before the due date.


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MEETING UNSEEN CONTINGENCIES: Adequacy of working capital enablesa company to meet the unseen contingencies successfully.

NEED OF WORKING CAPITALAlong with the fixed capital almost every business requires working capital though

the extent of working capital requirements differ in different businesses. Working

capital is needed for running the day-to-day business activities. When a business is

started, working capital is needed for purchasing raw material. The raw material is

then converted into finished goods by incurring some additional costs on it. Now

goods sure sold. Sales do not convert into cash instantly because there is invariably

some credit sales. Thus, there exists a time lag between sales of goods and receipt

of cash. During this period, expenses are to be incurred for continuing the business

operations. For this purpose working capital is needed. Therefore, sufficient working

capital is needed which shall be involved from the purchase of raw material to the

realization of cash. The time period which is required to convert raw material into

finished goods and then into cash is known as operating cycle or cash cycle. The

need for working capital can also be explained with the help of operating cycle.

Operating cycle of a manufacturing concern involves five phases:

(i) Conversion of cash into raw material.

(ii) Conversion of raw material into work-in-progress.

(iii) Conversion of work-in-progress into finished goods.

(iv) Conversion of finished goods into debtors by credit sales.

(v) Conversion of debtors into cash by realizing cash from them.

Thus, the operating cycle starts from cash and then again restarts from cash. Need

for working capital depends upon period of operating cycle. Greater the period more

will be the need of working capital. Period of operating cycle in a manufacturing

concern is greater than a period of operating cycle in a trading concern because in

trading units cash is directly converted into finished goods.


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CASH

RAW MATERIAL

WORK-IN-PROGRESSFINISHED GOODS

DEBTORS & BILLS RECEIVABLES

Operating cycle (nature of working capital)

Because of the time involved in a operating cycle, there is a need of working capital

in the form of current assets. Firms have to keep adequate stock of raw-material to

avoid risk of non-availability of raw materials. Similarly, concerns must have

adequate stock of finished goods to meet the demand in market on continuous basis

and to avoid competition which necessitates the money tied up in debtors and bills

receivables. In addition to all these, concerns have to necessarily keep cash to pay

the manufacturing expenses etc. and to meet the contingencies.

PERMANENT AND TEMPORARY WORKING CAPITAL:Working capital in a business is needed because of operating cycle. But the need for

working capital does not come to an end after the cycle is completed. Since the

operating cycle is continuous process, there remains a need for continuous supply of

working capital. However, the amount of working capital required is not constant

throughout the year, but keeps fluctuating. On the basis of this concept, working

capital is classified into two types:

(a) Permanent working capital: the need for working capital or current assets

fluctuates from time to time. However, to carry on day-to-day operations of the

business without any obstacles, a certain minimum level of raw materials, work-in-

progress, finished goods and cash must be maintained on a continuous basis. The

amount needed to maintain current assets on this minimum level is called permanent

working capital or regular working capital. The amount involved as permanent

working capital has to be met from long term sources of finance, eg. Capital,

debentures, long term loans etc.


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(b) Temporary working capital: any amount over and above the permanent level of

working capital is called is called temporary, fluctuating or variable working capital.

Due to seasonal changes level of business activity is higher than normal during

some months of the year and therefore, additional working capital will be required

along with the permanent working capital it is so because during peak season

demand rises and more stock is to be maintained to meet the demand. Similarly, the

amount of debtors increases due to excessive sales. Additional working capital thus

needed is known as temporary working capital because once the season is over; the

additional demand will be no more. Need for temporary working capital should be

met from short term of finance, e.g. Short term loans etc. so that it can be refunded

when it is not required.

FACTORS AFFECTING WORKING CAPITALORDETERMINANTS OF WORKING CAPITAL

A firm should have neither too much or too little working capital. The working capitalrequirements is determined by a large number of factors but, in general, the following

factors influence the need of working capital needs of an enterprise:

1) NATURE OF THE BUSINESS:Working capital requirements of an enterprise are largely influenced by the

nature of the business. For eg. Public utilities such as railways, transport

,water and electricity etc. have very limited need of working capital because

they have to invest fairly large amount in fixed assets. Their working capital

need is minimal because they get immediate payment for their services and

do not have to maintain big inventories. On the other extreme are the trading

and financialenterprises which have to invest less amount in fixed assetsand a large amount in working capital. This is so because the nature of the

business is such that they have to maintain a sufficient amount of cash,

inventories and debtors. Working capital needs of most of the manufacturing


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enterprise fall between these two extremes, that is between public utilities

and trading concerns.

2) SIZE OF THE BUSINESS:Larger the size of business enterprise, greater would be the need for

working capital. The size of a business may be measured in terms of scale of

its business operation.

3) GROWTH AND EXPANSION:As business enterprise grows, it is logical to expect that a larger amount of

working capital will be required. Growing industries require more working

capital than those that are static

4) PRODUCTION CYCLE:Production cycle means the time span between the purchase of raw material

and its conversion into finished goods. The longer the production cycle the

larger will be the need of working capital because the funds will be tied up for

longer period in work in progress.

5) BUSINESS FLUCTUATIONS:Business fluctuations may be in the direction of boom and depression. During

boom period the firm will have to operate at full capacity to meet the

increased demand which in turn, leads to increase in level of inventories and

book debts. Hence, the need for working capital in boom conditions is bound

to increase. The depression phase of business fluctuations has exactly an

opposite effect on the level of working capital requirement

.

6) CREDIT POLICY RELATING TO SALES:If a firm adopts liberal credit policy in respect of sales, the amount tied up in

debtors will also be higher. Obviously, higher book debts mean more working

capital. On the other hand, if the firm follows tight credit policy, the magnitude

of working capital will decrease.


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7) CREDIT POLICY RELATING TO PURCHASE:If a firm purchases more goods on credit, the requirement for working capital

will be less. In other words, if liberal credit terms are available from the

suppliers of goods, the requirement for working capital will be reduced and

vice-versa

8) AVAILABILITY OF RAW-MATERIAL:If the raw material required by the firm is available easily on a continuous

basis, there will be no need to keep a large inventory of such materials and

hence the requirement of working capital will be less. On the other hand, if

the supply of raw material is irregular, the firm will be compelled to keep an

excessive inventory of such material which will result in high level of working

capital.

9) AVAILABILITY OF CREDIT FROM BANKS:If the firm can get bank credit facility in case of need, it will operate with less

working capital. On the other hand, if such facility is not available, it will have

to keep large amount of working capital.

10)VOLUME OF PROFIT:The net profit is a source of working capital to the extent it has been earned in

cash. Higher net profit would generate more internal funds thereby

contributing the working capital pool.

11)LEVEL OF TAXES:Full amount of cash profit is not available for working capital purposes. Taxes

have to be paid out of profits. Higher the amount of taxes less will be the

profits available for working capital.


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12)DIVIDEND POLICY:Dividend policy is a significant element in determining the level of working

capital in an enterprise. The payment of dividend reduces the cash and

thereby, affects the working capital to that extent. On the contrary, if the

company does not pay dividend but retains the profit, more would be the

contribution of profits towards the working capital pool.

13)DEPRICIATION POLICY:Although depreciation does not result in outflow of cash, it affects the working

capital indirectly. In the first place, since the depreciation is allowable expenditure

in calculating net profits, it affects the tax-liability. In the second place, higher

depreciation also means lower disposable profits and ,in turn, a lower dividend

payment. Thus, outgo of cash is restricted to that extent.

14)PRICE LEVEL CHANGES:A change in price level also affects the working capital requirements. If the

price level is rising, more funds will be required to maintain the existing level

of production

15)EFFECIENCY OF MANAGEMENT:efficiency of management is also a significant factor to determine the level of

working capital. Management can reduce the need for working capital by the

efficient utilization of resources. It can accelerate the pace of cash cycle and

thereby use the same amount working capital again and again very quickly

ANALYSIS OR COMPUTATION OF WORKING CAPITAL:A Number of methods are used to determine the working capital needs of a

business. The important among them are:


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1) OPERATING CYCLE METHOD: operating cycle is the time span the firmrequires in the purchase of raw material, conversion of raw material in work

in progress and finished goods, conversion of finished goods into sales and

in collecting cash from debtors. Larger the time span of operating cycle,

larger the investment in current assets. Hence the time period for each stage

of operating cycle is computed on the basis of cost of each item. Following

factors should be considered while forecasting working capital requirement

on the basis of operating cycle method:

(i) cost of raw material, wages and overheads

(ii) Period during which raw material remains in store before it is issued for

production purpose.

(iii) Period of operating cycle

(iv) Period during which finished goods is stored before sale.

(v) Period of credit allowed to debtors and period of credit allowed by

suppliers.

(vi) Time lag in payment of wages and overheads.

(vii) minimum cash balance required to be maintained.

A certain percentage of contingencies may also be added to the above estimates to

determine the working capital requirements.

On the basis of operating cycle, the working capital can be forecasted in the

following way:

StatementShowing Working Capital RequirementsCurrent assets:

(i)stock of raw material:Cost of yearly consumption average inventory period

of raw material x (weeks/months)

52weeks/12 months

(ii) Work in process:


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Cost of yearly consumption average time span of W-I-P

Of raw material x (weeks/months)

52 weeks/12 months

+ yearly wages x 50 x (weeks/months)

100 52 weeks/12 months

+ yearly manufacturing and administrative overheads(ex. Dep)

Average time span of W-I-P

x 50 x (weeks/months)

100 52 weeks/12 months

(iii)stock of finished goods:Cost of goods produced (i.e. nearly cost of raw materials + wages

+ Manufacturing & administrative overheads excluding depreciation)

Average finished goods holding period

X (weeks/months)

52 weeks/12 months

(iv) debtors:Working capital tied up in debtors should be estimated on the basis of cost of

sales(ex. Dep):

Cost of goods produced average debt collection period

(i.e. raw material + wages (weeks/months)

+ manufacturing, admn. X 52 weeks/12months

& selling overhead)


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(v) cash and bank balance:Apart from WC needs for financing inventories and debtors, firms also find it useful to

have some minimumcash balances with them. It would be based on the motives forholding cash balances of the businessfirm, attitude of management towards risk,the access to the borrowing sources in times of need and past experience etc.

Less: current liabilities:(i) trade creditors:

Credit period allowed by

creditors

Cost of yearly consumption (weeks/months)

Of raw material x 52 weeks/12 months

(ii) wages:Average time lag in payment of wages

Yearly wages x (weeks/months)52 weeks/12months

If wages are paid at the end of each month, the average time lag in the payment of

wages will approximate to half a month. This is so because 1st days wages are paid

on the 30th day of each month, extending credit for 29 days, the 2nd days wages are,

again paid on the 30th, extending credit for 28 days, and so on. Thus, average time

lag will approximate to half a month.

(iii) overheads:Yearly overheads average time lag in payment of overheads

(other than dep.) x (weeks/months)

52 weeks/12months

WORKING CAPITAL=CURRENT ASSETS-CURRENY LIABILITIES


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ADD: PROVISION FOR CONTINGENCIESESTIMATED WORKING CAPITAL

REQUIREMENTS

2) FORECASTING OF CURRENT ASSETS AND CURRENT LIABILITIESMETHOD:

According to this method, an estimate is made of forthcoming periods current

assets and current liabilities on the basis of factors like past experience,

credit policy, and payment policy of the previous year. First of all, such

estimate is made for each current asset on the basis of each month and then

monthly requirements are converted into yearly requirements of current

assets. The estimated amount of current liabilities is deducted from this

amount in order to estimate the requirement of working capital. A certain

percentage of contingencies may also be added to this amount.

3) CASH FORECASTING METHOD:Under this method estimate is made of cash receipts and payments for the

next period. Estimated cash receipts are added to the amount of working

capital which exists at the beginning of the year and estimated cash

payments are deducted from this amount. The difference will be the amount

of the working capital.

4) PROJECTED BALANCE SHEET METHOD:

Under this method, an estimate is made of assets and liabilities for a future

date and a projected balance sheet is prepared for that future date. The

difference in CA and CL shown in projected balance sheet will be the amount

of working capital.

MANAGEMENT OF WORKING CAPITAL


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

to manage the current assets, current liabilities and the inter relationships between

them. Its operational goal is to manage the current assets and current liabilities in

such a way that a satisfactory level of working capital is maintained. The term

working capital refers to the net working capital i.e. current assets minus current

liabilities with reference to the management of working capital, net working capital

represents that part of the current assets which are financed with the long term funds

The level of NWC has a bearing on the profitability as well as the risk in the sense of

the inability of the firm to meet obligations as and when they become due. Therefore,

the trade off between profitability and risk is an important element in the evaluation of

the level of NWC of the firm. In general, the higher the NWC the lower the risk, as

also the lower is the profitability and vice-versa. Thus, the NWC measures the

degree of risk in the management of working capital.

Apart from the profitability-risk trade-off, the determination of the finance mix is the

second ingredient of the theory of working capital management. The financing mix

refers to the proportion of current assets to be financed by current liabilities and long

term sources. One approach to determine the financing mix is hedging approach,

acc. to which long term funds should be used to finance the fixed portion of the

current assets and the purely temporary requirements should be met out of short

term funds. This approach is high profit, high risk financing mix. Acc. to the second

approach, namely the conservative approach, the estimate requirements of the

current assets should be financed from long term sources and the short term funds

should be used only in emergency situation.

The conservative approach is a low-profit, low risk combination. Neither of the two is

suitable for efficient working capital management. A trade off between these two

extremes provides a financing plan between these two approaches, and therefore,

an acceptable financing strategy from the view point of the management of working

capital.


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CASH MANAGEMENTCash management is one of the key areas of working capital management. There

are 4 motives of holding cash

(i) transaction motive(ii) precautionary motive

(iii) speculative motive

(iv) compensating motive

the transaction motive refers to the holding of cash to meet anticipated

obligations whose time is not perfectly synchronized with cash receipts.

The cash balances held in reserve for random & unforeseen fluctuations in cash

flows are called as precautionary balances.

The speculative motives indicates the desire of a firm to take advantage

of opportunities which present themselves at unexpected moments and which are

typically outside the normal course of business. The compensating motive means

keeping the bank balance sufficient to earn a return equal to the cost of free service

provided by the banks.

The basic objectives of cash management are to reconcile two mutually

contradictory and conflicting tasks: to meet the payment schedule & to minimize

funds committed to cash balances.

Cash budget is probably the most important tool in cash management. It is a device

to help a firm to plan & control the use of cash. The cash position of a firm as it

moves from one period to another period is high lighted by cash budget. A cash

budget has normally three parts, namely, cash collections, cash payments and cash

balances. The major sources of cash receipts and payments are operating and

financial. The operating sources are repetitive in nature while the financial sources

are non-recurring.


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MANAGEMENT OF RECEIVABLESIt deals with those transactions which deals with the billing of customers who owe

money to a person, company or organization for goods & services that have been

provided to the customers under receivables management, we consider the position

of our debtor. Before extending the credit to him, personal interaction with him is

done & information is is collected like the references, bank account information etc.

& if it seems that person is reliable then he could be extended credit. Then some

other factors are also considered like financial position of the debtor, reputation of

the

Debtors in the market, credit paying capacity of the person etc. there should be

proper agreement between the debtor and the company for the repayment terms.

But if the debtor fails to pay the money then the help of law or muscle power can

also be used but the action should be taken within 3 years of extending credit.

The management of receivables involves crucial decision in three areas: (i) credit

policy (ii) credit terms (iii) collection policies. The credit policies of the firm provides

the framework to determine whether to or not to extend credit to a customers and

how must credit to extend. The two broad dimensions of credit policy decision of a

firm are credit standards and credit analysis, the term credit standards represent the

basic criterion for the extension of credit to customers. The criterion, and therefore,

standards can be tight /restrictive or liberal/non-restrictive. The credit analysis

component of credit policies includes obtaining credit information from different

sources and its analysis.

The second decision area in receivables management is the credit terms, the credit

terms specify the repayment terms, comprising credit period, cash discount, if any,

and cash discount period.


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The third area involved in the management of receivables is collection policies. It

refers to the procedure followed to collect accounts receivable when they become

due. The two relevant aspects are the degree of efforts to collect the over dues and

the type of collection effort.

The framework of analysis of all the three decision areas in receivable management

is to secure a trade-off between the costs & benefits of the measurable effects on the

sales volume, capital cost due to change in accounts receivable, collection costs,

and bad debts and so on. The alternative will be selected when the benefits exceed

the costs.

INVENTORY MANAGEMENTThe term inventory refers to assets which will be sold in future in the normal course

of business operations. The assets which the firm stores as inventory in anticipation

of need are raw materials, work-in-progress, semi-finished goods, and finished

goods.

The objective of inventory management consist of two counter balancing parts,

namely, to minimize investments in inventory and to meet the demand for products

by efficient production and sales operations. In operational terms, the goal of

inventory management is to have a trade-off between costs and benefits at different

levels of inventory.

The costs of holding inventory are ordering cost and carrying costs. The major

benefits of holding inventory are in the areas of purchasing, production and sales.

The non-mathematical inventory management techniques illustrated here are (i) ABC

system

(ii) EOQ

(iii) re-order point

(iv) safety stock

ABC system (Always Better Control system)


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The first step in inventory control process is classification of different types of

inventories to determine the type and degree of control required for each. The ABC

system is a widely used classification technique to identify various items of inventory

for purposes of inventory control. This technique is based on the assumption that a

firm should not exercise the same degree of control on all items of inventory. It

should rather keep a more rigorous control on items that are (i) more costly (ii)

slowest turning while items that are less expensive should be given less control

effort.

On the basis of the cost involved, the various inventory items are, according to this

system, categorized into three items (1) A (2) B (3) C. the items included in group A

involved the largest investment. Therefore, inventory control should be most rigorous

and intensive and the most sophisticated inventory control techniques should be

applied to these items. C group consists of items of inventory, which involve

relatively small investments although the number of items is fairly large. These items

deserve minimum attention. B group stands mid way. It deserves less attention than

A but more than C. employing less sophisticated techniques can control it.

The task of inventory management is to properly classify all the inventory items into

one of these three groups. The typical breakdown of inventory items is shown in

following table:

Group No. of Items Inventory Value

(%)

A 15 70

B 30 20

C 55 10

---- ----

100


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Some points stand out from above table. While group A is the least important

than in terms of the no. of items, it is by far the most important in terms of

investments involved. With only 15% of the number, it accounts for as much as 70%

of the total value of inventory. The firm should direct most of i ts inventory control

efforts to the items included in this group. The items comprising B group accounts for

20% of the investment in inventory. They deserve less attention than A, but, more

than C, which involves only 10% of the total value although number wise its share is

as high as 55%.

ECONOMIC ORDER QUANTITYAfter various inventory items are classified on the basis of the ABC analysis, the

management becomes aware of the type of control that would be appropriate for

each of the three categories of the inventory items. The A group of items wants the

maximum attention and the most rigorous control. A key inventory problem

particularly in respect of the group A items relates to the determination of the size or

quantity in which inventory will be acquired. In other words, while purchasing raw

material or finished goods, the question to be answered are: how much inventory

should be bought in one lot under one order on each replenishment? Should the

quantity to be purchased be large or small? Or, should the requirement of materials

during a given period of time (say, six months or one year) be acquired in a lot or

should it be acquired in instalments or in several small lots? Such inventory

problems are called order quantity problems.

The determination of the appropriate quantity to be purchased in each lot to

replenish stock as a solution to the order quantity problem necessitates resolution of

conflicting goals. Buying in large quantities implies a higher inventory level which will

assure (1) smooth production / sale operations (2) lower ordering or set up costs. But

it involves higher carrying cost. On the other hand small orders will reduce the

carrying cost of inventory by reducing the average inventory level but the ordering

cost will improve as there is likelihood of interruption in the operations due to stock-


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outs. A firm should place neither too large nor too small orders. On the basis of

trade-off between benefits derived from the availability of inventory and the cost of

carrying that level of inventory, the appropriate or optimum level of the order to be

placed should be determined. The optimum level of inventory is popularly referred as

economic order quantity (EOQ). It is also known as economic lot size. The EOQ may

be defined as that level of inventory order that minimizes the total cost associated

with inventory management.

RE-ORDER POINTThe EOQ technique determines the size of an order to acquire inventory so as to

minimize the carrying as well as the ordering costs. In other words, the EOQ

provides an answer to the question: how much inventory should be ordered in one

lot? Another important question pertaining to efficient inventory management is :

when should the order to procure inventory be placed? This aspect of inventory

management is covered under the order point problem.

The reorder point is stated in terms of the level of inventory at which an order should

be placed for replenishing the current stock of inventory. In other words, reorder

point may be defined as that level of inventory when fresh order should be placed

with the suppliers for procuring additional inventory equal to the economic order

quantity. Although some sophisticated re-order point formulae are available, it is

based on following assumptions:

Constant daily usage of inventory & fixed lead time.

In other words, the formulae assume condition of certainty. The re-order point = lead

time in days x average daily usage of inventory.

The term lead-time refers to the time normally taken in receiving the delivery of

inventory after placing orders with the suppliers. It covers the time span from the

point when a decision to place an order for the procurement of inventory is made to

the actual receipt of the inventory by the firm. Another way of saying it is that the

lead time consists of the number of days required by the suppliers to receive and

process the orders as well as the number of days during which the goods will be in


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transit from the supplier. The lead time may also be called as the procurement time

of inventory.

The average usage means the quantity of inventory-consumed daily. We can,

therefore, define re-order point as that inventory level, which should be equal to the

consumption during the lead-time.

OTHER INVENTORY CONTROL SYSTEMS:There are also other inventory control systems, which are as follows:

1) just-in-time (JIT)

2) out sourcing3) computerized inventory control systems

JUST IN TIME SYSTEM:JIT is an inventory strategy implemented to improve the return on investment of a

business by reducing in process inventory & its associated costs. JIT can lead to

dramatic improvements in a manufacturing organisations return on investments

quality & efficiency. New stock is ordered when stock drops to the reorder level. Thissaves warehouse space & cost. So it requires space management also. But if, the

raw material is ordered so early, when it is not needed than the company has also to

suffer space cost. JIT system is used by Japanese. It is not implemented in India. If

JIT is not used, it can also lead to wastage because raw material could also come

before or after it is needed, which could be of no use. Also, the inventions and

innovations take place every time. So it is better to use latest technology in the

product. In short JIT system is all about having the right material at the right time atright place & in exact amount.

OUTSOURCINGA few years ago there was a tendency on the parts of many companies to

manufacture all components in hours. Now more and more companies are adopting

the practice of out-sourcing. Out-sourcing is a system of buying parts and

components from outside rather than manufacturing them internally. Many


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companies have developed a single source of supply, and many others help

developing small and middle sized suppliers of components that they require. Tata

motors has, for example, developed a number of ancillary units around its

manufacturing sites that supplies parts and components to its manufacturing plant.

With the help of tata motors, ancillaries are able to maintain the high quality of

manufactured components. The car manufacturing company, maruti,, which is now

controlled by Suzuki of japan, has the similar system of supply.

COMPUTERISED INVENTORY CONTROL SYSTEM:More and more companies, small or large size, are adopting the computerized

system of controlling inventories. A computerized inventory control system enables a

company to easily track large items of inventories. It is an automatic system

of counting inventories, recording withdrawals and revising the balance. There is an

in built system of placing order as the computer notices the reorder point has been

reached. The computerized inventory system is inevitable for large retail stores,

which carry thousands of items. The computer information systems of the buyer and

suppliers are linked to each other. As soon as the suppliers computer receives an

order from the buyers system, the supply process is activated.


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COMPANY PROFILE &INDUSTRY PROFILE

SWARAJ MAZDA- AN INTRODUCTION:Swaraj Mazda Limited is a joint venture of Punjab Tractors limited and Mazda Motors

Limited of Japan. The agreement between the two was signed on 5th October 1984.

As has been pointed out that Swaraj Mazda is a collaboration entity between two

giants in their own rights, is committed to quality and performance and is

progressively showing profound concerns for the welfare & benefits of their

customers, stock holders, business partners and staff.


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After the first indigenous tractor, manufactured by PTL in India, was successfully

launched in 1974, it has been on its way tobecoming a blue chip company. Besides

tractors, thecompany also manufactures Swaraj Combine Harvesters, Agricultural

Implements. Automotive Castings, Forklifts. Over the year, PTL has won national

and international acclaim and recognition for outstanding performance and

contribution in many diverse fields. MOREOVER PTL WAS RATED AS THE BEST

COMPANY OF THE YEAR 1989 BY FINANCIAL EXPRESS.

Mazda Motors Corporation of Japan, established in 1920 is an enterprise of

international repute. Mazda started manufacturing trucks as back in 1931. Today,

this enterprise has the distinction of being the only company in the world producing

reciprocating petrol and diesel engines as well as the revolutionary rotary engines.

Mazda is ever seeking the new areas of product excellence and innovations. It

adheres audaciously to a 2000 checkpoints inspection before declaring any vehicle

road worthy. The use of robots, latest technology, and world-class production

facilities enables Mazda to produce vehicle of outstanding quality and performance.

No wonder Mazda has won

Appreciation all over the world for quality products that are rolling out of its plants.

The factory Swaraj Mazda Limited is located at Village Asron district Nawanshahar

(Punjab) near the city of Ropar and at a distance of 45 km from the capital city of

Chandigarh. The plant has captivating site. It spreads over a quaint, sprawling 100

acres of land ringed by Shivalik Hills on three of its sides and river Satluj on the

other. The desolate slit hill has been leveled for construction. Work at the plant

began at a great tempo and the first vehicle rolled out of the production line in a

record time of one year of laying the foundation stone.


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The LCV are manufactured in five attractive colours- Santos Red, Nile blue, Light

Beige, White and Golden Yellow. In addition to these, any other colours can be

made on demand. Swaraj Mazda vehicles are not only strong but also fuel-efficient.

Prominent among the load carriers Swaraj Mazda is also manufacturing:-

1. 4 wheel drives;

2. Extended wheel- base long- chassis Mini Buses which carry up to 44 passengers.

3. Deluxe Buses carrying to 40 passengers;

4. Ambulances

5. Mobile Reverse- Osmosis and Electro dialysis Units for the Central Salt and

Mineral Chemical Research Institute.

6. CNG Buses with Safety & Eco grades.

7. Integrated Garbage collection and disposal system for urban centers;

8. Hydraulically operated dumpers;

9. Mobile fair priced vans;

10. Sky Lift Vehicles

Swaraj Mazda gives due attention to the marketing part and the employees are

highly qualified and trained to fit the job. Swaraj Mazda has a vast

Network of 150 dealers spread throughout the country including A&N Islands. Zonal

offices have been opened in Chandigarh, Lucknow, Ahmedabad, Mumbai, and

Chennai. This helps substantially in sales promotion, Export promotion, especially for

Hi-tech products, is also being emphasized.


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Discipline and its rigid enforcement without discrimination is an important Hallmark of

Swaraj Mazda. It is of great significance in evolving work culture. All the employees,

irrespective of their position and status have to punch their cards when they report

for duty. As a result, strict punctuality has become a way of life and work with them.

To ensure Industrial peace, i.e. absence of strikes and lockouts, Swaraj Mazda

believes in making a contended labour force with a very low rate of absenteeism and

turnover. Reasonably fair wages and various perks like subsides uniform and

transport, mess facilities go a long way in creating identification with the job.

Earnestness, Sincerity and Spirit of corporation pervades the entire atmosphere of

the company. The happy absence of Industrial dispute in the enterprise speaks

volume for the success of the firm and cultivation of work culture.

Work culture or work ethos is given very high precedence. It is fully recognized that

the objectives of the concern- higher and higher production, productivity and

indigenization can be attained through commitment into commonness of GOAL in

each and every member of the Swaraj family. The entire planning is undertaken in

such a way so as to inculcate the spirit of dedication in each member, whether he is

skilled or semi-skilled worker or belongs to the managerial cadre. Many effective

steps are taken to bring this about. Important amongst them are:

1. Common canteen and mess for all. Same meals are served to all and in identical

utensils. Everybody has to stand in a queue to get his or her meals.

2. Common uniform is there for all the members irrespective of their status.

3. No separate cabins for the members of higher hierarchy. All the members of a

department or a section therefore sit and work in one hall with the Manger facing the

staff. Every employee carries his or her files, thus inculcating the spirit of dignity of

labour in the staff.


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HISTORY OF SWARAJ MAZDA

History of the SWARAJ MAZDA LIMITED (Light Commercial Vehicle) dates

back to as in 1975 when the first efforts were initiated by the Punjab State Industrial

development Corporation Limited (PSIDC) to obtain a letter of intent from the

Government of India. The Govt. of India was interested in installing the unit and

issuing the license for an LCV in order to save the fuel consumption in the economy.

Therefore Govt. decided to installed indo-Jap LCV units in 3 statesPunjab, U.P. &

M.P.

The contribution of PSIDC was twofold; firstly in obtaining the letter of intent in 1981

and subsequently for transferring the same in favour of the Company in 1983. These

moves reflected the thinking in the Punjab Govt. and the PSIDC, that Punjab

Tractors Limited (PTL) would implement this project taking full advantage of PTLs

position, experience, expertise and resources both financial and managerial.

It was in this background that PTL entrusted with the responsibility for the LCV

project, went ahead promotion of Swaraj Vehicles Limited in July, 1983.

Punjab Tractors Limited and its brand name Swaraj were well known on the Indian

corporate and engineering horizon. They were proven symbols of Indian Engineering

fully competitive against collaboration based technology and foreign brand names.

PTL track record during the period of its existence is often cited as an example of

dedicated and sustained corporate endeavour and organisation value system,

financial performance and systematic growth, team building perception and response

to changing market needs and resilience against difficulty

The project in its concept, aims at breaking new ground not only in terms of product

and production technology, but also in building a new culture and value system in the

organisation, which enables it to move forward with confidence into the era of


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competitive markets. This guiding philosophy is dictating every facet of project

implementation both in physical facilities and the human side.

Swaraj Mazda Company BackgroundIncorporation Year 1983

Chairman S K Tuteja

Company Secretary Gopal Bansal

Registered Office Asron Village, , , , , Nawanshahar - 144533, Punjab

URL http://www.swarajenterprise.com

Auditors Price Waterhouse , Avtar Singh & Company

Listing BSE , NSE

BSE Code 505192

NSE Symbol SWARAJMAZD

BSE Group B

Index Constituent of BSE Small Cap

Face Value (Unit Rs. INR) 10.00

Market Lot 1

ISIN INE294B01019

Registrar Details MCS Ltd, F - 65, 1st Floor, Okhala Industrial Area,Phase - I, New Delhi - 110020, New Delhi

Swaraj Mazda Board Of DirectorDirector Name DesignationS K Tuteja Chairman


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Yash paul Mahajan Managing Director

Y Watanabe Whole-time Director

R P Sehgal Whole-time Director

E Seto Director

Harkirat Singh Director

T Hashimoto Director

H Yamaguchi Director

M Tabuchi Director

P K Nandy Director

A K Thakur Director

Pankaj Bajaj Director

Steven Enderby Director

Gopal BansalCompany Secretary

REPORT OF THE DIRECTORSThe Directors present their Twenty Sixth Annual Report together with Audited

Accounts for the financial

Year ended 31st March, 2010.

PERFORMANCE REVIEW

As anticipated in last years Report, the fiscal year 2009-10 saw steady improvement

in the operations of

the Company, particularly from October, 2009, in common with the positive changes

in the overall

commercial vehicle industry in the country. Happily, the improvement in the money


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supply situation was

even better than expected giving a boost to demand for commercial vehicles (CV).

While CV sales in the

first half at 2,38,000 were low, the second half saw accelerated demand and sales

achieved were at a

robust level of 3,38,400. Consequently, total industry sales for the year at 5,76,000

(4,27,000) were an all

time high. The Companys performance reflected that growth with sales rising to

10,133 vehicles from

8,020 in 2008-09, giving operating revenue of Rs. 722.23 crores (Rs. 546.95 crores).

Demand for the Companys ultra luxury buses saw only marginal improvement from

last year: market penetration

has proven difficult even though new productstwo air-conditioned buses on Isuzu

platform and one on

Mazda chassis - were well received. Having regard to the slack demand for new

products, capital spending in

the year on the Expansion Project was restricted to bare minimum, at Rs. 2.87

crores. The Directors continue

to believe that these products will achieve the sale volumes forecast in that Project.


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A noteworthy feature of the Years performance was highly successful efforts on

collection of receivables,

at Rs 878 crores, the highest in recent years, thereby achieving the stringent

targeted levels of dealer dues.

Operating Profit at Rs 57.93 crores (Rs 28.06 crores) was gained from the increase

in volume of sales,

enhanced by a planned judicious product-mix, timely restructuring of vehicle prices

and close vigil on expenditure.

It is in the above background that the Directors report the following summary of

results for the year 2009-10.


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DATANALYSIS&

INTERPRETATION


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FINANCIAL PERFORMANCE OF SWARAJ MAZDA LIMITED

Last 11 yrs Vehicles Production & Sales ofSWARAJ MAZDA

1999-00 4006 3726

2000-01 2931 3303

2001-02 2877 2975

2002-03 4010 3983

2003-04 5211 5069

2004-05 6360 6222

2005-06 8201 8101


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2006-07 10225 10279

Years production sales2007-08 12385 12353

2008-09 11946 11887

2009-10 10915 10841

SML VEHICLES (%AGE) SHARE IN MARKET

Vehicles %age share

Truck 62%

Bus 34%

AMB 3%

Special Applications 1%

Truck

Bus

Spp. Appl.

ABM

SML is 3rd player in LCV segment with 15% market share. Out of this 15% large

market share is covered by SML trucks with 6762 units (62%) in LCV segment.

Sales of bus vehicles are 3706 units with 34% market share. Ambulance vehicles


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have 3% market share by a sale of 297 units. Swaraj Mazda special Application has

just 1% market share in LCV segment.

LAST 2 YEARS SALES COMPARISON OFSWARAJ MAZDA VEHICLE

Vehicles 2008-09 2009-10Truck 8401 6702

Bus 3275 3706

Spp. Appl. 117 136

ABM 94 297

TOTAL 11887 10841

LAST 5 YRS COMPETITORS SALES

YRS.

CO.

2005-06 2006-07 2007-08 2008-09 2009-10

TELCO 17007 22680 25928 30936 29331

EICHER 11466 14208 15164 16048 16821


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SWARAJ 8101 10279 12353 11887 10841

MAHINDRA 7095 7205 7955 7078 8694

FORCE 4076 5164 4155 5286 4592

A.LEYLAND 1515 1788 4477 4002 2526

Total

49260 61324 70032 75237 72823

MARKET SHARE (%AGE) OF DIFFERENT

COMPANIES IN 2009-2010

COMPANIES MARKET SHARE(%AGE)

TELCO 40%

EICHER 23%

SWARAJ 15%

MAHINDRA 12%

FORCE

MOTOR 6%

A.LEYLAND 4%


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The above Table and Graph shows the %age of market share of different companies

in LCVs segment. All these companies are competitors in 5-10 Ton GVW in LCV

sector. Telco is a market leader having 40% market share. Telco has local

technology. Eicher stands at 2nd place with 23% market share. Swaraj Mazda is the

3rd player with 15% market share in LCV segment. Mahindra & Mahindra holds 12%

market share it stands at 4th place. Force motors have 6% & Ashok Leyland has just

4% market share in LCV segment.

SHARE HOLDING PATTERN OF SWARAJ MAZDA LIMITEDSumitomo corporation 41.03%

Punjab tractors limited(ptl) 14.04%

Mutual funds/nationalized banks 7.83%

FIIs 9.31%

Public 27.79%

EXPENDITURE OF SWARAJ MAZDA LIMITED FOR THE LAST 6YEARSYEARS EXPENDITURE

2004-05 52

2005-06 66.6

2006-07 73.5

2007-08 71.4

2008-09 64

2009-10 65.6


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EARNING PER SHARE OF SWARAJ MAZDA LIMITED FOR LAST 6YEARS

YEARS EPS

2004-05 6.4

2005-06 13.9

2006-07 20

2007-08 23

2008-09 16

2009-10 15.3

DIVIDEND RATE OF SWARAJ MAZDA LIMITED FOR THE LAST 6YEARS

YEARS DIVIDEND(%)

2004-05 25%

2005-06 45%

2006-07 70%

2007-08 75%

2008-09 55%

2009-10 55%


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SWARAJ MAZDA LIMITED - FINANCIALS

LAST '6' YEARS (Rs. Crore)

PARTICULARS 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

ACTUALSSales (Nos.)Passengers Applications 2104 2512 3715 4516 5475 5714

Goods Applications 4118 5589 6564 7837 6412 5127

Total 6222 8101 10279 12353 11887 10841

Net Operating Revenue 297.8 372.3 477.7 589.9 613.1 605.5

Material Cost 228.0 278.0 368.1 474.2 513.8 504.5

%age 76.6% 74.7% 77.1% 80.4% 83.8% 83.3%

Contribution Per Vehicle Rs. (112183) (116405) (106625) (93661) (83537) (93165)

ExpenditureEmployees Cost 14.4 18.3 19.2 20.4 22.3 26.7

Per Vehicle Rs. (23144) (22590) (18679) (16514) (18760) (24629)

%age 4.8% 4.9% 4.0% 3.5% 3.6% 4.4%

Manufacturing & Others 10.4 11.4 12.7 13.6 15.3 16.9

Per Vehicle Rs. (16715) (14072) (12355) (11009) (12871) (15589)

%age 3.5% 3.1% 2.7% 2.3% 2.5% 2.8%

Selling & Distribution 24.9 33.7 37.2 34.6 26.4 22.0

Per Vehicle Rs. (40019) (41600) (36190) (28009) (22209) (20293)

%age 8.4% 9.1% 7.8% 5.9% 4.3% 3.6%


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Royalty 2.3 3.2 4.4 2.8 - -

Total Expenses 52.0 66.6 73.5 71.4 64.0 65.6

Per Vehicle Rs. (83574) (82212) (71505) (57800) (53840) (60511)

%age 17.5% 17.9% 15.4% 12.1% 10.4% 10.8%

Operating Profit 17.8 27.7 36.1 44.3 35.3 35.4Margin 6.0% 7.4% 7.6% 7.5% 5.8% 5.8%

Interest 5.8 3.1 1.6 4.0 7.3 9.3

Cash Profit 12.0 24.6 34.5 40.3 28.0 26.1

Depreciation 1.6 2.1 2.1 2.5 2.7 2.9

Profit Before Tax 10.4 22.5 32.4 37.8 25.3 23.2Margin 3.5% 6.0% 6.8% 6.4% 4.1% 3.8%

Corporate Tax 3.7 7.9 11.4 13.6 8.5 7.1

Profit After Tax 6.7 14.6 21.0 24.2 16.8 16.1

Paid-up Equity Capital 10.5 10.5 10.5 10.5 10.5 10.5

EPS (Rs) 6.4 13.9 20.0 23.0 16.0 15.3

Book Value 17.9 26.8 38.9 53.4 63.2 72.1

Dividend (%age) 25% 45% 70% 75% 55% 55%


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FINANCIAL PARTICULARS OF SWARAJ MAZDA LIMITED FOR THEYEAR 2009-10

PARTICULARS 2009-10PLAN Q1

Sales (Nos.)Passengers Applications 7400 1429

Goods Applications 5800 1253

Total 13200 2682

Net Operating Revenue 780.0 153.0

Material Cost 651.5 124.7

%age 83.5% 81.5%

Contribution Per Vehicle Rs. (97348) (105518)

ExpenditureEmployees Cost 32.0 6.7

Per Vehicle Rs. (24242) (24981)

%age 4.1% 4.4%

Manufacturing & Others 20.0 4.1

Per Vehicle Rs. (15152) (15287)

%age 2.6% 2.7%

Selling & Distribution 28.0 4.9

Per Vehicle Rs. (21212) (18270)

%age 3.6% 3.2%

Royalty - -

Total Expenses 80.0 15.7

Per Vehicle Rs. (60606) (58538)


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%age 10.3% 10.3%

Operating Profit 48.5 12.6Margin 6.2% 8.2%

Interest 12.0 3.0

Cash Profit 36.5 9.6

Depreciation 3.5 0.8

Profit Before Tax 33.0 8.8Margin 4.2% 5.8%

Corporate Tax 10.0 2.8

Profit After Tax 23.0 6.0

Paid-up Equity Capital 10.5 10.5

EPS (Rs) 21.9 5.7

Book Value - -

Dividend (%age) - -

SWARAJ MAZDA LIMITED

CKD STOCK


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AS AT 31st MARCH30th

June

PARTICULARS 2006 2007 2008 2009 2010 2010OPENING STOCK

FACTORY 647 1146 1361 3496 7350 4895

PORT 1000 1000 1040 6000 2260 1340

SHIPMENT 8700 10480 19480 12060 7540 1620

10347 12626 21881 21556 17150 7855

CONS-PRODUCTION 8201 10225 12385 11946 10915 2653

CLOSING STOCK 2146 2401 9496 9610 6235 5202

KITS STOCK LOCATION

FACTORY 1146 1361 3496 7350 4895 4782

PORT 1000 1040 6000 2260 1340 420

KIT STOCK TOTAL 2146 2401 9496 9610 6235 5202

SWARAJ MAZDA LIMITEDVEHICLE STOCK

AS AT 31st MARCH 30th


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CASH FLOW STATEMENT OF SWARAJ MAZDA LIMITEDFOR THE LAST 5 YEARS

June

PARTICULARS 2005 2006 2007 2008 2009 2010

OPENING STOCK 506 605 548 578 636 708

PRODUCTION 8201 10225 12385 11946 10915 2653

8707 10830 12933 12524 11551 3361

SALES INCLUDES :

GOODS APPLICATIONS 5589 6564 7837 6412 5127 1253

PASSANGER

APPLICATIONS 2512 3715 4516 5475 5714 1429

8101 10279 12353 11887 10841 2682

INS. CLAIM RECD./CAPITAL. 1 3 2 1 2 2

VEH. STOCK LOCATION

-BONDED / SAC 77 52 118 30 88 123

-BODY BUILDER 105 107 89 57 30 113

-MKTG. 423 389 371 549 590 441

-TOTAL 605 548 578 636 708 677

AVERAGE PER MONTH :

-PRODUCTION 683 852 1032 996 910 884

-SALE 675 857 1029 991 903 894

particulars 2005-06 2006-07 2007-08 2008-09 2009-10


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KEY PERFORMANCE INDICATORS FOR THE LAST 11 YEARS1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Sales(Nos.) 4231 3726 3303 2975 3983 5069 6222 8101

10279

12353

11887

NetRevenue 1654 1622 1510 1372 1855 2360 2978 3723 4777 5899 6126OperatingProfit 97 125 125 91 90 137 178 277 361 443 353

cash flow from

operating

activities (A)

net cash from

operating

activities

857.96 3947.45 760 523 6599.06

Cash flow from

Investing activities

Net cash from

investing activities

327.91 314.05 195.42 342.69 587.76

Cash flow from

Financing

Activities

Net cash used in

financing activities

519.18 4342.09 595.50 1077.11 7516.32


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Margin5.9% 7.7% 8.3% 6.6% 4.9% 5.8% 6.0% 7.4% 5.8% 7.5% 5.8%Interest 40 65 45 47 39 57 58 31 16 40 73Cash Profit 57 60 80 44 51 80 120 246 280 403 280

Margin3.4% 3.7% 5.3% 3.2% 2.7% 3.4% 4.0% 6.6% 4.6% 6.8% 4.6%Depreciation 11 11 11 13 14 15 16 21 21 25 27ProfitBefore Tax(PBT)

46 49 69 31 37 65 104 225 253 378 253

Margin2.8% 3.0% 4.6% 2.3% 2.0% 2.8% 3.5% 6.0% 4.1% 6.4% 4.1%ExtraOrdinaryItem

29 -- 6 -- -- -- -- -- -- -- --

IncomeTax -- -- 8 5 9 25 36 79 114 136 85Profit AfterTax (PAT) 75 49 67 26 28 40 68 146 168 242 168Dividend- Rate -- -- -- -- 10% 15% 25% 45% 70% 75% 55%- Outflow -- -- -- -- 13 17 26 53 83 90 66- PayoutRatio -- -- -- -- 46% 43% 38% 36% 40% 37% 39%EquityShareCapital

105 105 105 105 105 105 105 105 105 105 105

Net Worth (5) 44 111 136 152 174 188 281 408 561 663Earnings 7.2 4.7 6.4 2.4 2.7 3.8 6.5 13.9 20.0 23.1 16.0


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Per Share(Rs.)Book ValuePer Share(Rs.)

-- 4.2 10.6 13.0 14.5 16.6 17.9 26.8 38.9 53.5 63.2

Return onAvg. NetWorth

-- -- -- 20.8%19.8%

24.4%

37.3%

62.2%

60.9%

50.0%

27.5%

Swaraj Mazda Balance Sheet

Particular 201003 200903 200803 200703 200603Source of FundsShare Capital 14.48 10.49 10.49 10.49 10.49

Reserves & Surplus 175.25 86.03 83.09 65.17 55.82

Shareholders Funds 189.73 96.53 93.58 75.66 66.32Secured Loans 4.63 151.29 13.57 29.50 68.36

Unsecured Loans 80.00 69.00 129.00 80.29 45.12

Total Debt 84.63 220.29 142.57 109.79 113.48Total Liabilities 274.36 316.81 236.15 185.45 179.80Application of FundsFixed AssetsGross Block 162.96 134.99 48.64 45.91 41.52

Less : Accumulated Depreciation 43.86 35.54 29.91 26.62 24.17


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Provision for impairment of Assets 0.00 0.00 0.00 0.00 0.00

Net Fixed Assets 119.10 99.46 18.73 19.28 17.36Capital Work In Progress 5.98 28.40 80.94 26.33 5.25

Total Fixed Assets 125.08 127.85 99.67 45.62 22.60Investments 0.00 0.00 0.00 0.00 0.00

Current AssetsInventories 160.00 149.29 123.50 87.33 91.14

Sundry Debtors 136.56 146.33 185.60 191.55 253.42

Cash & Bank Balances 32.05 7.01 9.14 22.73 19.03

Loans & Advances 43.80 46.49 175.45 92.95 84.53

Total Current Assets 372.41 349.12 493.69 394.55 448.13Current Liabilities & ProvisionsCurrent Liabilities 199.53 144.96 195.61 181.62 226.71

Provisions 23.60 15.20 161.60 73.10 64.22

Total Current Liabilities & Provision 223.13 160.16 357.20 254.72 290.93Net Current Assets 149.28 188.96 136.48 139.83 157.19Miscellaneous Expenditure written off 0.00 0.00 0.00 0.00 0.00

Total Assets 274.36 316.81 236.15 185.45 179.80

Swaraj Mazda Profit And Loss Statement

Particular 201003 200903 200803 200703 200603IncomeSales 775.24 599.84 758.83 687.38 700.42

Other Income 5.74 7.03 6.38 4.99 3.19

Increase/Decrease in stocks 5.84 17.18 14.12 2.31 6.22

Total Income 786.82 624.05 779.33 694.68 709.84ExpenditureTotal Expenditure 728.62 595.06 725.37 659.14 674.48


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Operating Profit 58.20 28.99 53.96 35.53 35.36Interest 19.13 19.02 11.96 9.42 7.36

Gross Profit 39.07 9.98 42.00 26.11 28.00Depreciation 8.64 5.84 3.30 2.89 2.71

Profit Before Tax 30.43 4.14 38.70 23.22 25.28Provision for Tax 0.00 0.00 13.80 7.34 8.60

Deferred Tax 8.97 -1.15 -0.90 -0.72 -0.80

Fringe Benefit Tax 0.00 0.50 0.60 0.51 0.70

Net Profit 21.46 4.79 25.20 16.09 16.78Adjustments Below Net Profit 0.00 0.00 0.00 0.00 0.00

Statutory Appropriations 0.00 0.00 0.00 0.00 0.00

Profit & Loss Brought Forward 17.28 14.58 13.13 11.29 9.58Appropriations 8.92 2.09 23.75 14.25 15.08

Profit & Loss Carried Forward 29.82 17.28 14.58 13.13 11.29EPS (in Rs) 14.82 4.56 24.02 14.39 16.00

Book Value (in Rs) 131.04 91.99 89.18 72.10 63.20

Preference Dividend (in Rs) 0.00 0.00 0.00 0.00 0.00

Equity Dividend in % 40.00 15.00 55.00 55.00 55.00

Equity Dividend in (Rs.) 5.79 1.57 5.77 5.77 5.77

Corporate Dividend Tax 0.98 0.27 0.98 0.98 0.81

Contingent Liability 64.77 34.63 32.53 1.03 15.30

Extra-Ordinary Items 0.06 0.00 0.00 0.00 0.78

TECHNICAL AND FINANCIAL AGREEMENTS OF SWARAJ MAZDALIMITEDSwaraj mazda entered into three technical and financial agreements which are:

1) Technical assistance agreement

2) Joint venture agreement


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3) CKD agreement

TECHNICAL ASSISTANCE AGREEMENTTechnical assistance agreement provides:

Right to manufacture and sell T-3500 diesel seriesmodels WT-48, WT-49 & WT-

50.

Right to use the well knows mazda trademark and patents.

To provide complete drawings, technical information and know-how for manufacture,

sale & service

Modifications in product and components to suit Indian operating conditions.

Provide guidance on selection of plant and equipment.

Provide guidelines on plant layout, services and facilities.

Provide support on development of vendors.

Provide continued information on development and improvements.

Train adequate number of SML personnel at their facilities.

Depute adequate number of swaraj mazda corporations experts to SML for training

of counter-part personnel, establish manufacturing processes, vendor development

etc.

ROYALTY AGREEMENT:Royalty agreement made on 5th day of October, 1984 between mazda motor

corporation ( formerly called Tokyo kogyo company limited), accompany organized

and existing under the laws of japan (called licensor) and swaraj vehicles limited, a

company organized and existing under the laws of republic of India and having its

registered office at phase iv, S.A.S nagar, district ropar, Punjab, the republic of India

(called licensee). Licensee shall pay licensor the royalty listed in addendum (B),

which shall be in the net amount of the deduction of all the taxes and duties, if levied

in territory, for each unit of CKD vehicles assembled and/or manufactured and


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shipped out of licensees plant for sale or its own use , provided that the royalty

including Indian taxes per/each unit of CKD vehicle shall not exceed 1.5% of the net

ex-factory selling price of the vehicle minus landed cost of imported CKD part used

therein and the cost of standard bought out components namely tyres, tubes, wheel

rims, batteries and shock absorbers.

Initially royalty provided for here in above was payable for a maximum period of 10

years which was ended in September 1994. later the agreement had again been

extended two times for 5 years on the same terms and condition

JOINT VENTURE AGREEMENTMazda motor corporation (MC) and their long term trading partner, the internationally

well known sumitomo corporation (SC), jointly agreed to participate in SMLs equity.

Promoters share in the equity, capital of SML is:

PTL - 29%

Mazda motor corporation - 15.6%

Sumitomo corporation - 10.4%

-------------

55%

Remaining 45% was raised by SML from public and Indian financial institutions in the

usual manner.

MC and SC agreed to nominate their directors on the board of SML. The joint

venture agreement provided for the right of up to 3 directors. MC and SC agreed to

subscribe to their entire equity at the earliest stage of the project even before the

public issue signifying their commitment to the project.


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CKD AGREEMENTIn case of CKD agreement, MC will send the CKD agreement through SC against

the letter of credit in five products WT_48,

WT-49, and WT-50, WV-26,ZT-54.

PRODUCT MIX

The product selected by the Swaraj Mazda for introduction in India in 1985 was the

latest, state of art technology of Japan, which had been introduced there in March1984. The company started with a 30% of local content. Starting with one standard

product i.e. truck, Swaraj Mazda has over the years, on the strength of their own

R&D, have developed various variants of the same.

The company is manufacturing Light Commercial Vehicles in four-wheel base i.e.

2515MM, 2815MM, 3335MM. All the version and the models are being fabricated on

these wheelbases. Swaraj Mazda T3500 vehicles have been tested by Vehicles

Research and Development Establishment (VERD), a designated authority by

Government of India under Ministry of Defence. VERD tests the companys vehicles

at frequent intervals and issue certificates confirming it the Indian road standards laid

down by Government of India from time to time. Vehicles are fuel efficient and meet

emission norms.

The range of products now includes Buses, Ambulances, Police Vans, Dumpers,

Sky Lifts, Dumper placer, Delivery vans, Bottle Carriers, Mobile Ration Shops, Fire

Tenders, CNG Buses & Trucks etc. as a result of such wide range of products the

companys products are very popular with both private and government customers.

In addition to the above SML is adding up 4 wheel drive & CNG vehicles as with the

changes which take places in the market CNG has more powerful engine more

torque at low rpm thus higher pick up, Grade ability & fuel efficient.

PRODUCTS FEATURES:-(a) Quality Control: -


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There exists a detailed & elaborate system of Quality Assurance on every

product, covering the manufacturing activity in plant & at the vendors end. The

Quality Control development manned by highly qualified & trained manpower is fully

involved in development of local components in addition to the routine activity of

incoming material inspection, in house inspection & pre delivery inspection

(b) Localisation:-At the time of inception, production stated with 30% local content

keeping in view the govt. of India guidelines, Swaraj has now achieved a local

content 75% & such critical parts as starter motor, crankshafts, connecting rods,

transmission gears are all in thelocal list now.

(c) Manufacturing Methods:-All vehicles of Swaraj Mazda are based on the modern

chassis manufacturing method using a welded box construction. The chassis is

much stronger despite of its being.

(d) Efficiency:-The vehicle is powered by a Fuel Efficient, Direct Injection Engine of

86.5HP running at a comparatively low RPM of 3000 thereby giving a long engine

life.

(e)Better Manoeuvrability in SML vehicles due to shorter wheel basemakes it also suitable for narrow hilly roads.

(f)Average consumption of diesel of Swaraj Mazda Super Truck is 8 kmsper liter in consumption to its competitors TATA 709 is 5.5 kms per liter,

Eicher 10.90 is 6 kms per liter & Ashok Leyland Cargo 909 is 5.5 kms

per liter.


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(g) Fuel consumption per month of Swaraj Mazda Super Truck is 312 litrein comparison to TATA 709 is 455 litre, Eicher 10.90 is 416.67 litres & Ashok

Leyland cargo 909 is 45.45 litres.

(h) Swaraj Mazda vehicle has more Lugging power & allows easy handling of thehilly terrain.

(i) In addition to sedimentor which removes water from fuel, Swaraj Mazda has twodiesel filters causing more filtration & thus more F.I pump life.

(j) Its oil by pass filter increases the sup capacity resulting on oil temperature, betteroil filtration & increases oil change period, hence lower down time & maintenance

cost.


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CONCLUSION


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It should always be borne in mind that the success or failure of a Company depends

upon the amount of shareholders' value that a Company generates. Financial

Control is a measure that reflects the absolute amount of shareholders' value

created or destroyed during each year. Control has no steering failures like Return

On Investment 1(ROI) and Earning per Share (BPS). In the case of ROI and EPS,

maximizing these measures might not lead to optimal outcome or maximum

shareholder value.

Thus, I strongly believe that the implementation of Financial Control helps the

Company in the following ways:

Reduction in cost of capital and increase in the net operating profit after tax bybetter working capital management and by keeping optimum balance of debt and

equity in the capital structure.

Cost control and cost reduction in the area of controllable expenses. Reduction in capital employed with specific targeted reductions in book debts,

inventories etc.

Effective utilization of fixed assets to derive the promised return fromInvestments.

To maximize shareholders> value.


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To improve capital efficiency and over-all business performance. To encourage greater be-owner and entrepreneurial behaviours among

employees.

To guide in decision making.


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SUGGESTIONS

The implementation of Financial Control and performance in this Organization

follows the suggested steps given below:

1)The adoption of a fully articulated Financial Control and performance program - a

measurement program, a management system plus an incentive compensation plan

together with a through going training operation is often critical to a corporation's

success.

2) Organizational architecture before Financial Control and performance can boost

performance.

3) An Financial Control and performance incentive plan is essential and it should

reach as far down in the organization as possible. The best incentive plans are

uncapped; limiting awards limits potential exertion and thus potential achievements.

4) A comprehensive training program is essential. It should not be limited to top

executives but should infiltrate all managerial levels and ideally reach down to the

working level.


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5) Financial Control and performance program must have full and fervent backing of

the CEO. The CEO must not only identify value creation as the mission of the

company but also seize every opportunity - the annual budget meeting, a monthly

operations review or the annual shareholder's meeting - to preach the benefits of

Financial Control and performance The Head- Finance should be especially

committed. Because they have to deal simultaneously with standard accounting

practices, these specialists may have even greater problem focusing on value

creation than CEO newly introduced to Financial Control and performance


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REFERENCES

BOOKS, JOURNALS AND MAGAZINES:

1. HARVARD BUSINESS REVIEW, JANUARY/FEBRUARY, 1999

2. JOURNAL OF ECONOMICS AND BUSINESS, MAY/JUNE, 1997

3. BUSINESS TODAY, FEBRUARY, 2000

4. FINANCIAL ANALYSTS JOURNAL, MAY/JUNE, 1997

5. BUSINESS AND ECONOMIC REVIEW, JUL-SEP, 1996

6. THE JOURNAL OF PORTFOLIO MANAGEMENT, 1996

7. HARVARD BUSINESS REVIEW, MAY/JUNE, 1990

8. THE JOURNAL OF FINANCE, 1993

9. JOURNAL OF APPLIED CORPORATE FINANCE, 1993

10. FINANCIAL MANAGEMENT BY I.M. PANDEY

11. FUNDAMENTALS OF FINANCIAL MANGEMENT BY C.VAN HPRNE AND

JOHN M.WACHOWICZ, JR.


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