shikha mba,final project report

8/2/2019 Shikha MBA,Final Project Report

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PROJECT REPORTFOR THE PARTIAL FULLFILLMENT OF THE

REQUIREMENT FOR

MASTER OF BUSINESS ADMINISTRATION

ON

WORKING CAPITAL MANAGEMENT

IN

SWARAJ ENGINES LTD. (SEL)


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Submitted to: Submitted by:

Shikha

( MBA )

(Amity Global Business School)

Batch - 2009-2011

TABLE OF CONTENTS

Preface -------------------------------------------------------

Acknowledgement -----------------------------------------

Executive Summary ----------------------------------------

Introduction to the Study ----------------------------------

Objective of study ------------------------------------Place of study -----------------------------------------

Research Methodology and scope of study -------

Limitations of study ----------------------------------


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Overview of Indian Tractor Industry ---------------------

Introduction of the Company ------------------------------

Mission and Vission Statements --------------------------

Introduction to Working Capital Management ----------

Ratios ----------------------------------------------------------

PREFACE

To start any business, First of all we need finance and the success ofthat business entirely depends on the proper management of day-to-day finance and the management of this short-term capital or financeof the business is called Working capital Management.

Working Capital is the money used to pay for theeveryday trading activities carried out by the business - stationeryneeds, staff salaries and wages, rent, energy bills, payments forsupplies and so on.


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I have tried to put my best effort to complete this

task on the basis of skill that I have achieved during the last one yearstudy in the institute. I have tried to put my maximum effort to get the

accurate statistical data. However I would appreciate if any mistakesare brought to me by the reader.

ACKNOWLEDGEMENT

It is difficult to acknowledge precious a debt as that of learning as it isthe only debt that is difficult to repay except through gratitude.It is my profound privilege to express my sincere thanks to Mr. Rajnathwho gave me an opportunity to carry out this project and had been aconstant inspiration.I would like to thank him for his constant support and guidancethrough out the tenure of this project without his cooperation it wouldhave been a difficult task to accomplish this project.I am also thankful to my faculty guide Prof. Shivali Dhingra, AmityGlobal Business School, who has provided her valuable time andeffort for guiding me for the completion of this report.

Shikha

EXECUTIVE SUMMARY

The major objective of the study is to understand the working capitalof SEL and to suggest measures to overcome the shortfalls if any.

Funds needed for short term needs for the purpose likeraw materials, payment of wages and other day to day expenses areknown as working capital. Decisions relating to working capital(Current assets-Current liabilities) and short term financing are knownas working capital management. It involves the relationship between afirms short-term assets and its short term liabilities. By definition,


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working capital management entails short-term definitions, generallyrelating to the next one year period.

The goal of working capital management is to ensure that the firm isable to continue its operation and that it has sufficient cash flow tosatisfy both maturing short term debt and upcoming operationalexpenses.

Working capital is primarily concerned with inventoriesmanagement, Receivable management, cash management & Payablemanagement.

Inventories management at SEL:SEL is a manufacturing company involved in production of engines.Therefore, it has to maintain large quantity of inventories at productionunits for its smooth running and functioning.

Cash management at SEL:SEL has been accumulating huge cash surpluses over last severalyears, which enables the organization to maintain adequate cash

reserves and to generate required amount of cash.

Introduction

Working Capital:-The life blood of business, as is evident, signified funds required forday-to-day operations of the firm. The management of working capital


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assumes great importance because shortage of working capital fundsis perhaps the biggest possible cause of failure of many businessunits in recent times. There it is of great importance on the part ofmanagement to pay particular attention to the planning and control for

working capital. An attempt has been made to make critical study ofthe various dimensions of the working capital management of SEL.Decisions relating to working capital and short term financing arereferred to as working capital management. These involvemanaging the relationship between a firm's short-term assets and itsshort-term liabilities. The goal of Working capital management is toensure that the firm is able to continue its operations and that it hassufficient money flow to satisfy both maturing short term debt andupcoming operational expenses.

Objective of the study:-The following are the main objective which has been undertaken in thepresent study:1. To determine the amount of working capital requirement and tocalculate various ratios relating to working capital.2. To analyze the Indian Tractor Industry.3. To evaluate the financial performance of SEL using financial tools.4. To suggest the steps to be taken to increase the efficiency in

management of working capital.

Place of study:-The project study is carried out at the Finance Department of SELoffice situated at Mohali. The study is undertaken as a partof the PGPM curriculum for two months in the form of summerinternship.

Study design and methodology:-Two types of data are collected, one is primary data and second oneis secondary data. The primary data were collected from theDepartment of finance, SEL. The secondary data were collected fromthe Annual Report of SEL and SEL website.


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Scope: - The study has got a wide & fast scope. It tries to find out theplayers in the industry & focuses on the upcoming trends. It also tries

to show the financial performance of one of the player of the industryi.e. SEL.

Limitations:-There may be limitations to this study because the study duration(summer training) is very short and its not possible to observe everyaspect of working capital management practices. The data collectedwere mostly secondary in nature.

Industry Overview

India is mainly an agricultural country. Agriculture accounts for mainly25% of Indias GDP. Agriculture in India is the means of livelihood ofalmost two-thirds of the workforce in the country and employs nearly

62% of population. It accounts for 13% of Indias exports.About 42%of Indias geographical area is used for agricultural activity. It istherefore considered to be the most vital sector of Indian economy.

The Indian Tractor industry is the largest in the world,accounting for one-third of global production.Volume growth in thetractor industry in past four decades shows a compound annualgrowth rate (CAGR) of 10%, despite seasonal variations that causechanges in tractor demand and subsequently impacting industryvolumes.

The Beginning:

Indian Tractor Industry took birth in 1959-60 when the first tractor

manufacturing unit was established. However, this industry found a firm


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footing only after the turbulent period of 1968-74, during which the

acceleration which should have emerged from the upsurge in demand

generated by the Green Revolution was navigated by large-scale imports

of fully built tractors and screw-driver assembly of CKD (Completely

Knocked Down) kit by a number of operators who entered with de-

licensing in 1968 for making a quick buck. By 1973-74 when imports were

banned, 22 manufacturers remained.

It is in an environment of intense competition between 19

manufacturers that our tractor industry has grown during the last 30 years.

During this period, it has become not only a major segment of our

engineering industry but with a population of 1,30,000 tractors in 1990,

our country became the second largest tractor producer in the world.

There could be no better index of the intensity of competition than the

fact that all makes of tractors have been available off-the-shelf for the last

2 decades and market share of no single manufacturer exceeds 30%

The development of tractors industry from the very beginning i.e. 1959-60

till date can be divided into the following four phases:

1. First phase of development (1959-68)

Demand for tractors was low till late sixties. There was a sudden

upsurge in the demand of tractors after 1967 and it started multiplying at

an annual rate of nearly 50%. A natural consequence of this sharp upsurge

and upsurge and consequent shortage was heavy price of premium ontractors. Five tractors manufacturing units came up in this decade:

Eicher Tractors Ltd. (1959)

Tractors and Builders Ltd. (1964)

International Tractors Ltd. (1965)


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Government policies in respect of the development of tractor industry in

the first phase were dictated by their anxiety to promote mechanization of

agriculture encouraging local manufacturer of tractors along with the

import of tractors from Eastern Europe. At, the same time, government

protected the interests of the farmers by making tractors available to themat reasonable prices.

2. Second phase of development:

The government decision to freely invite new entrepreneurs to

tractor manufacture in 1968 backed by Green Revolution, led to the

establishment of six more units in this industry. They were:

Escorts Tractors Ltd. (1971)

Hindustan Machine Tools Ltd. (1971)

Kirloskar Tractors Ltd. (1974)

Punjab Tractors Ltd. (1974)

Pittie tractors Ltd. (1974)

Harsha Tractors. Ltd. (1975)

The combined output of 11 units has risen to 32,000 by 1975. In the

Second phase of development of tractor industry, emphasis was on

indigenization of tractors, so government deli censed the tractor industry

in 1968 and then banned import of fully built tractors in 1974. There was

expansion in rural branches of banks and rural lending increased. The pace

of irrigation facilities also increased and government extended full support

to old and new manufacturers to speedily establish them.

3. Third phase of development.

The boom in the tractor industry in the late seventies led to the

setting up of two more units for the manufacture of tractors. These were:

Auto Tractors Ltd. (A.U.P. Government enterprise) (1981)


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Partap Steel Rolling Mills Ltd. (Tractor Division) (1983)

Banning of imports and increased competition due to increase in number

of tractor manufacturers led to the growth in local production. The tractor

industry saw a rapid growth of 6% from 1982-87.

4. Fourth Phase of development.

After 1987 the tractor industry further picked up because of the

priority given by the Government to agriculture. The excise was exempted

on tractors below 1800cc and financing norms were also relaxed in 1986.

The minimum land holding was also reduced from 10 acres to 8 acres and

repayment period was increased from 7 to 9 years. After this, average

growth of 15% was experienced fro 1988-92 which was due to green

revolution. After six years of rapid growth demand for tractors showed a

decline of 4% in 1992-93 and 3.8% in 1994-95. Sales dropped from 1.51 lacs

in 1991-92 to 1.38 lacs in 1993-94. The decline was due to the following

factors:-

Land development bank, an important source of finance, collapsed. Depression in market due to credit squeeze.

Decrease in production of cash crops.

Political uncertainty.

But after that tractor industry again started growing and tractor sales went

to 1.64 lakhs in 1994-95 and further to 1996-97.


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CRITICAL PARAMETERS FOR GROWTH OF TRACTOR

INDUSTRY

AGRICULTURAL CREDIT

Nearly 90-95% tractors are purchased with the help of bank credit. Itplays an important role in determining the demand for tractors.

PRICING OF TRACTORS.

The financial inability of the Indian farmers makes the pricing a criticalparameter. Companies that managed to keep their costs low are theones that managed to survive during the reversionary period.

MONSOONS AND CROP PRICES.

The farmers have to pay say 15% of the total price of the tractor, incash, at the booking stage; Consequently, if the farmer is faced with

bad monsoons and low crop prices, he will not be able to make theinitial down payments.

GOVERNMENT POLICIES

To enable a farmer to purchase a tractor against these odds, thegovernment introduced subsidies in this sector. During the union

budget of 1994-95 the government exempted excise on small HPtractor I. e. below 1800 cc. In the budget of 2004 all the tractors wereexempted from excise duty.


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IMPORTS

The industry has managed to reduce its dependence on imports, asmany players have indegenised their inputs, which were earlier

Imported.

PRIORITY TO RESEARDCH & DEVELOPMENT

Even though all tractor-manufacturing units, except the Swaraj, wereinitially set up with foreign collaboration, tractor industry has been onits own for the last decade. Al tractors have been nearly 100%indigenous and almost all product improvement and new productshave come through indigenous Research and Development (R&D).Capital R & D investment by industry today exceeds Rs. 22 crores andthe recurring annual expenditure is at the level of Rs. 7 crores.Emphasis on R & D is in the steady increase in the number and pricerange of competing models available to customers to choose from.Reflection of emphasis on R & .D in the line with national priorities isthe steady improvement in the Fuel efficiency ensured on the basis of

the average of fuel efficiency figures of tractors in different powerranges during mandatory tests at Government of Indias TestingStation at Bundi in Madhya Pradesh.

WIDENING RANGE FOR CUSTOMER CHOICE

Intense competition in tractor industry all through the last 44 years,

has naturally led to a steady increase in the variety of models forfarmers to choose from. Industry today offers 43 models, and specialvariants to suit regional needs and special usage are often available inmany models. Tractors offered cover a horsepower range from 15-60and prices cover the entire spectrum from Rs. 1,00,000 to Rs. 4.5 lacsper tractors.


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EMERGING MARKETS

In the total mature markets, which include Punjab, Haryana and U.P.,

sales proportion has fallen from 55.4% in FY 93 to 37.8% in FY 97.With sales in these markets plateauing, tractor manufacturers are nowzeroing in on the central andSouthern markets in the country. These are the areas with enormouspotential and are called emerging markets. The share of theseemerging markets like Madhya Pradesh, Maharashtra, Gujarat, TamilNadu, Karnataka, Andhra Pradesh and Rajasthan has increased from41% in 1992-93 to 55.9% in 1996-97. Among these markets, stateslike Madhya Pradesh, Andhra Pradesh and Maharashtra have the

highest growth. Some of the tractor manufacturers have entered theexports area; M & M has increased exports from 132 tractors in 1993-94 to 1853 in 2002-03. Emerging export markets potential areAmerica, Nepal, Sri Lanka, Malaysia and Bangladesh.In order to be competitive, the players in Indian Tractor Industry willhave to reset to manufacturing after cutting out many of the frills intheir lower HP tractors.


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TRACTOR MARKET A CYCLICAL TREND

Contours of the crash in the farm income due to unprecedentedstretch of poor monsoons have slowed down the sales of domestictractor industry. As a result, our tractor industry after its milestone of273,000 tractors in FINANCIAL YEAR 1999-2000 nose-dived below1,60,000 in 2002-03. Capping a down cycle that began in July-Sept.1999, last years fall of 60,000 tractors even from the 2001-2002shrunken base of 2,18,000 shows the steepest annual fall in thetractor industrys chequered 40 years history

Signaling the widespread nature of the draught and reflecting thebroad spectrum of depressed market environment, demand slowdown was noticed in all states including the bigger markets of U.P.,M.P., Punjab, Haryana, Rajasthan, and Gujarat, accounting for morethan 80% of the fall in tractor sales. In direct pointer towards reducedbuying power, + 40 HP segment of the tractors market witnessed amuch grater drop. For PTL, because of its stronger position in both thelarger states and in the higher HP segments, the impact was all themore severe. In the event, PTLs tractor volumes for the year 2002-03sided down to 24200 fro 40100 in 2001-02. Not withstanding thisslowdown, several industry players maintained production to matchthe large growth of the recent past. This raised inventory in the systemto high levels further compounding the problem. Monsoon in 2002-03had been timely, well spread and also adequate in quantum. This hadraised the expectation of a bumper kharif crop resulting in a significantrebound in far income. Industry observers believe that these arehopeful signs for the Tractor industry.

Indian Tractor industry today comprises of 14 players, 3 ofwhom are multinational corporations. Given the size of farm holdingsand geo-climatic conditions, 31 to 40 HP segment is the largest one,accounting for around 49% oftotal sales while below 30 HP segmentrepresents some 19% of total sales. Balance 32% comes from the+40 HP range. While the demand pattern during the 1970s and 1980swas heavily skewed in favour of northern states (principally Punjab,


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Haryana and western parts of Uttar Pradesh), since late 1990s thepattern has shifted towards Central, Southern, Western and Easternstates.

Demand Drivers for Tractor Sales.

It has observed that there are three important determinants of tractors

sales:

Infrastructure creation in agricultural sector.

Availability of credit to the agricultural sector.

Crop price


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Introduction of the Company

BOARD OF DIRECTORSG.P.GUPTA(Chairman)

ANJANIKUMAR CHOUDHARI

Dr. T.N. KAPOOR

D.R.SWAR

S.C.BHARGAVA

HARDEEP SINGH

A.M.SAWHNEY

V.S.PARTHASARATHY

R.R.DESHPANDE

VIJAY VARMA

BISHWAMBHAR MISHRA(Vice Chairman)

G.S.RIHAL(Managing Director)


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Senior Vice President FinanceM.N. KAUSHAL

Company Secretary

M.S. GREWAL

AuditorsM/S DAVINDER S. JAAJ & CO.Chartered Accountants

BankersCANARA BANK

Registered OfficePhase-IV, Industrial AreaS.A.S. Nagar (Mohali)Punjab 160 055

WorksPlot No. 2, Industrial Phase IXS.A.S. Nagar (Mohali)Punjab 160 059


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VISSION & MISSION

The Company's principal activity is to manufacture and supply of engines

and hi-tech engine components for tractors and other commercial

vehicles. The products include internal combustion dieselengines, diesel engine components and spare parts. It supplies engines to

Punjab Tractors Ltd and engine components to Swaraj Mazda Ltd. The

Company is the Joint venture between Punjab Tractors Ltd, which has

since been merged with Mahindra & Mahindra Ltd and Kirloskar Oil

Engines Ltd. The Group operates only in India.

Swaraj Engines started business in manufacturing engines on Jan. 01, 1989.

Swaraj Engines supplies five types of engines from 20 HP range to 50 HP

range to Punjab Tractors and high-tech engine components to Swaraj

Mazda. The company`s plant is located in Mohali-Ropar, Punjab.

The company was promoted in 1986 in technical and financialcollaboration with Kirloskar Oil Engines Ltd. (KOEL) for manufacture
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of Diesel Engines.Its a rare example of supplier/customer jointventure. It had declared maiden dividend in the very first full year ofoperations has been exceptional performance.

An Introduction To Working Capital Management

Working capital means the part of the total assets of the business that

change from one form to another form in the ordinary course of business

operations.

Concept of working capital:-

The word working capital is made of two words1.Working and2. Capital

The word working means day to day operation of the business,whereas the word capital means monetary value of all assets of thebusiness.Working capital : -

Working capital may be regarded as the life blood of business.Working capital is of major importance to internal and externalanalysis because of its close relationship with the current day-to-dayoperations of a business. Every business needs funds for twopurposes.

Long term funds are required to create production facilitiesthrough purchase of fixed assets such as plants, machineries,lands, buildings & etc

Short term funds are required for the purchase of raw materials,payment of wages, and other day-to-day expenses.

It is other wise known as revolving or circulating capitalIt is nothing but the difference between current assets and currentliabilities. i.e.Working Capital = Current Asset Current Liability.


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Businesses use capital for construction, renovation, furniture,software, equipment, or machinery. It is also commonly used topurchase inventory, or to make payroll. Capital is also used often bybusinesses to put a down payment down on a piece of commercial

real estate. Working capital is essential for any business to succeed. Itis becoming increasingly important to have access tomore working capital when we need it.

Concept of working capitalGross Working Capital = Total of Current Asset

Net Working Capital = Excess of Current Asset over CurrentLiability.

Current Assets Current LiabilitiesCash in hand / at bank Bill Payable

Bills Receivable Sundry Creditors

Sundry Debtors Outstanding Expenses

Short term loans Accrued Expenses

Investors/ stock Bank Overdraft

Temporary investment

Prepaid expenses

Accrued incomes

Working capital in terms of five components:

1. Cash and equivalents: - This most liquid form of working capitalrequires constant supervision. A good cash budgeting and forecastingsystem provides answers to key questions such as: Is the cash leveladequate to meet current expenses as they come due? What is thetiming relationship between cash inflow and outflow? When will peakcash needs occur? When and how much bank borrowing will beneeded to meet any cash shortfalls? When will repayment beexpected and will the cash flow cover it?2. Accounts receivable: - Many businesses extend credit to theircustomers. If we do, is the amount of accounts receivable reasonable


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relative to sales? How rapidly are receivables being collected? Whichcustomers are slow to pay and what should be done about them?3. Inventory: - Inventory is often as much as 50 percent of a firm'scurrent assets, so naturally it requires continual scrutiny. Is the

inventory level reasonable compared with sales and the nature ofour business? What's the rate of inventory turnover compared withother companies in our type of business?4. Accounts payable: - Financing by suppliers is common in smallbusiness; it is one of the major sources of funds for entrepreneurs. Isthe amount of money owed suppliers reasonable relative to what wepurchase? What is our firm's payment policy doing to enhance ordetract from our credit rating?5. Accrued expenses and taxes payable: - These are obligations of

ourcompany at any given time and represent a future outflow of cash.

Two different concepts of working capital are:-Balance sheet or Traditional concept

Operating cycle concept.

Balance sheet or Traditional concept:- It shows the position of thefirm at certain point of time. It is calculated in the basis of balancesheet prepared at a specific date. In this method there are two type ofworking capital:-

Gross working capital

Net working capital

Gross working capital:- It refers to the firms investment in currentassets. The sum of the current assets is the working capital of thebusiness. The sum of the current assets is a quantitative aspect of

working capital. Which emphasizes more on quantity than its quality,but it fails to reveal the true financial position of the firm because everyincrease in current liabilities will decrease the gross working capital.

Net working capital:- It is the difference between current assets andcurrent liabilities or the excess of total current assets over total currentliabilities.


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Working capital= current assets - current liabilities.Net working capital: - It is also can defined as that part of a firmscurrent assets which is financed with long term funds. It may be either

positive or negative. When the current assets exceed the currentliability, the working capital is positive and vice versa.

Operating cycle concept: - The duration or time required to completethe sequence of events right from purchase of raw material for cash tothe realization of sales in cash is called the operating cycle or workingcapital cycle.


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TYPES OF WORKING CAPITAL


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SIGNIFICANCE OF WORKING CAPTAL


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Factors requiring consideration while estimatingworking capital:The average credit period expected to be allowed by suppliers.

Total costs incurred on material, wages.

The length of time for which raw material are to remain in storesbefore they are issued for production.

The length of the production cycle (or) work in process.

The length of sales cycle during which finished goods are to bekept waiting for sales.

The average period of credit allowed to customers

The amount of cash required to make advance payment.


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Importance of Working Capital Ratios:Ratio analysis can be used by financial executives to check uponthe efficiency with which working capital is being used in the

enterprise. The following are the important ratios to measure theefficiency of working capital. The following, easily calculated,ratios are important measures of working capital utilization.

KEY WORKING CAPITAL RATIOS

The following, easily calculated, ratios are important measures ofworking capital utilization.


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Note:- Once ratios have been established for our business, it isimportant to track them over time and to compare them with ratios forother comparable businesses or industry sectors.

The working capital needs of a business are influenced by

numerous factors. The important ones are discussed in brief asgiven below:

Nature of Enterprise:-The nature and the working capitalrequirements of an enterprise are interlinked. While a manufacturingindustry has a long cycle of operation of the working capital, the samewould be short in an enterprise involved in providing services. Theamount required also varies as per the nature; an enterprise involvedin production would require more working capital than a service sectorenterprise.

Manufacturing/Production Policy:-Each enterprise in themanufacturing sector has its own production policy, some follow thepolicy of uniform production even if the demand varies from time totime, and others may follow the principle of 'demand-basedproduction' in which production is based on the demand during thatparticular phase of time. Accordingly, the working capital requirementsvary for both of them.

Working Capital Cycle :-In manufacturing concern, working capitalcycle starts with the purchase of raw materials and ends withrealization of cash from the sale of finished goods. The cycle involvesthe purchase of raw materials and ends with the realization of cashfrom the sale of finished products. The cycle involves purchase of raw


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materials and stores, its conversion in to stock of finished goodsthrough work in progress with progressive increment of labor andservice cost, conversion of finished stick in to sales and receivablesand ultimately realization of cash and this cycle continuous again from

cash to purchase of raw materials and so on.

Operations:-The requirement of working capital fluctuates forseasonal business. The working capital needs of such businessesmay increase considerably during the busy season and decreaseduring the slack season. Ice creams and cold drinks have a greatdemand during summers, while in winters the sales are negligible.

Market Condition:-If there is high competition in the chosen

product category, then one shall need to offer sops like credit,immediate delivery of goods etc. for which the working capitalrequirement will be high. Otherwise, if there is no competition or lesscompetition in the market then the working capital requirements will below.

Credit Policy:-The credit policy is concerned in its dealings withdebtors and creditors influence considerably the requirements of theworking capital. A concern that purchases its requirements on credit

and sells its products/services on cash requires lesser amount ofworking capital. On the other hand a concern buying its requirementsfor cash and allowing credit to its customers, shall need larger amountof funds are bound to be tied up in debtors or bills receivables.

Business Cycle:-Business Cycle refers to alternate expansion andcontraction in general business activities. In a period of born i.e. whenthe business is prosperous there is a need for larger amount ofworking capital due to increase in sales, rise in prices, optimistic

expansion of business etc. On the country at he time of depression i.e.when there is a down swing of the cycle, business contracts, salesdecline, difficulties are faced in collections from debtors and firms mayhave a large amount of working capital lying ideal


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Availability of Raw Material:-If raw material is readily availablethen one need not maintain a large stock of the same, therebyreducing the working capital investment in raw material stock. On theother hand, if raw material is not readily available then a large

inventory/stock needs to be maintained, thereby calling for substantialinvestment in the same.

Growth and Expansion:-Growth and expansion in the volume ofbusiness results in enhancement of the working capital requirement.As business grows and expands, it needs a larger amount of workingcapital. Normally, the need for increased working capital fundsprecedes growth in business activities.

Earning Capacity and Dividend policy:-Some firms have moreearning capacity than others due to the quality of their products,monopoly conditions etc. Such firms with high earning capacity maygenerate cash profits from operations and contribute to their capital.The dividend policy of a concern also influences the requirements ofthe working capital. A firm that maintains steady high rate of cashdividend irrespective of its generation of profits needs more capitalthan the firm retains larger part of its profits and does not pay high rateof cash dividend.

Price Level Changes:-Generally, rising price level requires ahigher investment in the working capital. With increasing prices, thesame level of current assets needs enhanced investment.

Manufacturing Cycle:-The manufacturing cycle starts with thepurchase of raw material and is completed with the production offinished goods. If the manufacturing cycle involves a longer period, theneed for working capital would be more. At times, business needs to

estimate the requirement of working capital in advance for propercontrol and management. The factors discussed above influence thequantum of working capital in the business. The assessment ofworking capital requirement is made keeping these factors in view.Each constituent of working capital retains its form for a certain periodand that holding period is determined by the factors discussed above.


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So for correct assessment of the working capital requirement, theduration at various stages of the working capital cycle is estimated.Thereafter, proper value is assigned to the respective current assets,depending on its level of completion.

Other Factors:-Certain other factors such as operating efficiency,management ability, irregularities a supply, import policy, assetstructure, importance of labor, banking facilities etc. also influencesthe requirement of working capital.

Component of Working Capital Basis of Valuation:-Stock of raw material Purchase cost of raw materials

Stock of work in process At cost or market value, whichever is lowerStock of finished goods Cost of productionDebtors Cost of sales or sales valueCash Working expenses:-

WORKING CAPITAL MANAGEMENTWorking Capital Management refers to management of current assetsand current liabilities. The major thrust of course is on themanagement of current assets .This is understandable becausecurrent liabilities arise in the context of current assets. Working CapitalManagement is a significant fact of financial management. Itsimportance stems from two reasons:-

Investment in current assets represents a substantial portion oftotal investment.

Investment in current assets and the level of current liabilities haveto be geared quickly to change in sales. To be sure, fixed asset

investment and long term financing are responsive to variation insales. However, this relationship is not as close and direct as it is inthe case of working capital components.


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The importance of working capital management is effected in the factthat financial manages spend a great deal of time in managing currentassets and current liabilities. Arranging short term financing,negotiating favorable credit terms, controlling the movement of cash,

administering the accounts receivable, and monitoring the inventoriesconsume a great deal of time of financial managers.The problem of working capital management is one of the bestutilization of a scarce resource. Thus the job of efficient workingcapital management is a formidable one, since it depends uponseveral variables such as character of the business, the lengths ofthe merchandising cycle, rapidity of turnover, scale of operations,volume and terms of purchase & sales and seasonal and othervariations.

CONSEQUENCES OF UNDER ASSESSMENT OFWORKING CAPITAL:o Growth may be stunted. It may become difficult for the enterprise toundertake profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult andconsequently the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not be achieveddue to non availability of the working capital.

o The business may fail to honor its commitment in time, therebyadversely affecting its credibility. This situation may lead to businessclosure.

o The business may be compelled to buy raw materials on credit andsell finished goods on cash. In the process it may end up withincreasing cost of purchases and reducing selling prices by offeringdiscounts. Both these situations would affect profitability adversely.


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o Non-availability of stocks due to non-availability of funds may resultin production stoppage.

CONSEQUENCES OF OVER ASSESSMENT OFWORKING CAPITAL:o Excess of working capital may result in unnecessary accumulationof inventories.

o It may lead to offer too liberal credit terms to buyers and very poorrecovery system and cash management.

o It may make management complacent leading to its inefficiency.

o Over-investment in working capital makes capital less productiveand may reduce return on investment. Working capital is veryessential for success of a business and, therefore, needs efficientmanagement and control. Each of the components of the workingcapital needs proper management to optimize profit.

Financing Working CapitalWorking capital or current assets are those assets, which unlike fixedassets change their forms rapidly. Due to this nature, they need to befinanced through short-term funds. Short-term funds are also calledcurrent liabilities. The following are the major sources of raising short-term funds:

I. Suppliers CreditAt times, business gets raw material on credit from the suppliers. The

cost of raw material is paid after some time, i.e. upon completion ofthe credit period. Thus, without having an outflow of cash the businessis in a position to use raw material and continue the activities. Thecredit given by the suppliers of raw materials is for a short period andis considered current liabilities.These funds should be used for


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creating current assets like stock of raw material, work inprocess,finished goods, etc.

ii. Bank Loan for Working Capital

This is a major source for raising short-term funds. Banks extendloans to businesses to help them create necessary current assets soas to achieve the Required business level. The loans are available forcreating the following current Assets:

Stock of Raw Materials

Stock of Work in Process

Stock of Finished Goods

DebtorsBanks give short-term loans against these assets, keeping some

security margin. The advances given by banks against current assetsare short-term in nature and banks have the right to ask for immediaterepayment if they consider doing so. Thus bank loans for creation ofcurrent assets are also current liabilities.

iii. Promoters FundIt is advisable to finance a portion of current assets from thepromoters funds. They are long-term funds and, therefore do notrequire immediate repayment. These funds increase the liquidity of thebusiness.

Management of Inventory

Inventories constitute the most significant part of current assets of alarge majority of companies in India. On an average, inventories areapproximately 60 % of current assets in public limited companies inIndia. Because of the large size of inventories maintained by firms

maintained by firms, a considerable amount of funds is required to becommitted to them. It is, therefore very necessary to manageinventories efficiently and effectively in order to avoid unnecessaryinvestments. A firm neglecting a firm the management of inventorieswill be jeopardizing its long run profitability and may fail ultimately. Thepurpose of inventory management is to ensure availability of materials


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in sufficient quantity as and when required and also to minimizeinvestment in inventories at considerable degrees, without anyadverse effect on production and sales, by using simple inventoryplanning and control techniques.

Need to hold inventories:-Transaction motive emphasizes the need to maintain inventories

to facilitate smooth production and sales operation.

Precautionary motive necessities holding of inventories to guardagainst the risk of unpredictable changes in demand and supplyforces and other factors.

Speculative motive influences the decision to increases or reduceinventory levels to take advantage of price fluctuations and also forsaving in re-ordering costs and quantity discounts etc.

Objective of Inventory Management:-The main objectives of inventory management are operational andfinancial. The operational mean that means that the materials andspares should be available in sufficient quantity so that work is notdisrupted for want of inventory. The financial objective means thatinvestments in inventories should not remain ideal and minimumworking capital should be locked in it. The following are theobjectives of inventory management:-

To ensure continuous supply of materials, spares and finishedgoods.

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 ispossible with the help of centralizing purchases.


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To minimize losses through deterioration, pilferage, wastages anddamages.

To design proper organization for inventory control so thatmanagement. Clear cut account ability should be fixed at various

levels of the organization.

To ensure perpetual inventory control so that materials shown instock 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 planningand control of inventory

Management of cash

Cash is the important current asset for the operation of the business.Cash is the basic input needed to keep the business running in thecontinuous basis, it is also the ultimate output expected to be realizedby selling or product manufactured by the firm.The firm should keep sufficient cash neither more nor less. Cashshortage will disrupt the firms manufacturing operations whileexcessive cash will simply remain ideal without contributing anythingtowards the firms profitability. Thus a major function of the financialmanager is to maintain a sound cash position.Cash is the money, which a firm can disburse immediately without anyrestriction. The term cash includes coins, currency and cheques heldby the firm and balances in its bank account. Sometimes near cashitems such as marketing securities or bank term deposits are also

included in cash. Generally when a firm has excess cash, it invests itis marketable securities. This kind of investment contributes someprofit to the firm.


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Management of Receivables

A sound managerial control requires proper management of liquidassets and inventory. These assets are a part of working capital of the

business. An efficient use of financial resources is necessary to avoidfinancial distress. Receivables result from credit sales.A concern is required to allow credit sales in order to expand its salesvolume. It is not always possible to sell goods on cash basis only.Sometimes other concern in that line might have established apractice of selling goods on credit basis. Under these circumstances, itis not possible to avoid credit sales without adversely affecting sales.

The increase in sales is also essential to increases profitability. After acertain level of sales the increase in sales will not proportionatelyincrease production costs. The increase in sales will bring in moreprofits. Thus, receivables constitute a significant portion of currentassets of a firm. But for investment in receivables, a firm has to insurecertain costs. Further, there is a risk of bad debts also. It is therefore,very necessary to have a proper control and management ofreceivables.

Needs to hold cash:Receivables management is the process of making decisions relatingto investment in trade debtors. Certain investments in receivables arenecessary to increase the sales and the profits of a firm. But at thesame time investment in this asset involves cost consideration also.Further, there is always a risk of bad debts too.

Thus, the objective of receivable management is to takea sound decision as regards investments in debtors. In the words of

Bolton, S.E., the need of receivables management is to promotesales and profits untilthat point is reached where the return ofinvestment in further funding ofreceivables is less than the costof funds raised to finance that additionalcredit.


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Working Capital CycleCash flows in a cycle into, around and out of a business. It is thebusiness's life blood and every manager's primary task is to help keepit flowing and to use the cash flow to generate profits. If a business is

operating profitably, then it should, in theory, generate cash surpluses.If it doesn't generate surpluses, the business will eventually run out ofcash and expire. The faster a business expands the more cash it willneed for working capital and investment. The cheapest and bestsources of cash exist as working capital right within business. Goodmanagement of working capital will generate cash will help improveprofits and reduce risks. Bear in mind that the cost of providing creditto customers and holding stocks can represent a substantialproportion of a firm's total profits.

There are two elements in the business cycle that absorbcash - Inventory (stocks and work-in-progress) and Receivables(debtors owing our money). The main sources of cash are Payables(our creditors) and Equity and Loans.


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Each component of working capital (namely inventory, receivablesand payables) has two dimensions ........TIME ......... and MONEY.When it comes to managing working capital - TIME IS MONEY. If wecan get money to move faster around the cycle (e.g. collect monies

due from debtors more quickly) or reduce the amount of money tiedup (e.g. reduce inventory levels relative to sales), the business willgenerate more cash or it will need to borrow less money to fundworking capital. As a consequence, we could reduce the cost of bankinterest or we'll have additional freemoney available to supportadditional sales growth or investment. Similarly, if we can negotiateimproved terms with suppliers e.g. get longer credit or an increasedcredit limit; we effectively create freefinance to help fund future sales.


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It can be tempting to pay cash, if available, for fixed assets e.g.computers, plant, vehicles etc. If we do pay cash, remember that thisis now longer available for working capital. Therefore, if cash is tight,we should consider other ways of financing capital investment - loans,

equity, leasing etc. Similarly, if we pay dividends or increase drawings,these are cash outflows and, like water flowing downs a plug hole,they remove liquidity from the business.

Sources of Additional Working Capital:-Existing cash reserves

Profits (when we secure it as cash!)

Payables (credit from suppliers)

New equity or loans from shareholders

Bank overdrafts or lines of credit

Long-term loans

If we have insufficient working capital and we try to increase sales, wecan easily over-stretch the financial resources of the business. This iscalled overtrading.Early warning signs include:

Pressure on existing cashExceptional cash generating activities e.g. offering high discounts

for early cash paymentBank overdraft exceeds authorized limitSeeking greater overdrafts or lines of credit

Part-paying suppliers or other creditorsPaying bills in cash to secure additional suppliesManagement pre-occupation with survivingrather than managing

Frequent short-term emergency requests to the bank (to help paywages, pending receipt of a cheque).


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Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to abusiness are collected faster. Every business needs to know.... who

owes them money.... how much is owed.... how long it is owing.... forwhat it is owed.

If we don't manage debtors, they will begin to manage our

business as we will gradually lose control due to reduced cash flowand, of course, we could experience an increased incidence of baddebt.

The following measures will help manage our debtors:

1. Have the right mental attitude to the control of credit and make surethat it gets the priority it deserves.2. Establish clear credit practices as a matter of company policy.

3. Make sure that these practices are clearly understood by staff,suppliers and customers.4. Be professional when accepting new accounts, and especiallylarger ones.5. Check out each customer thoroughly before we offer credit. Usecredit agencies, bank references, industry sources etc.6. Establish credit limits for each customer... and stick to them.7. Continuously review these limits when we suspect tough times arecoming or if operating in a volatile sector.

8. Keep very close to our larger customers.9. Invoice promptly and clearly.10.Consider charging penalties on overdue accounts.11.Consider accepting credit /debit cards as a payment option.12. Monitor our debtor balances and ageing schedules, and don't letany debts get too large or too old.


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Recognize that the longer someone owes we, the greater the chancewe will never get paid. If the average age of our debtors is gettinglonger, or is already very long, we may need to look for the followingpossible defects:

weak credit judgmentpoor collection procedureslax enforcement of credit termsslow issue of invoices or statementserrors in invoices or statementsCustomer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms) shouldgenerally demand immediate attention.

The act of collecting money is one which most people dislike for manyreasons and therefore put on the long finger because they convincethemselves there is something more urgent or important that demandstheir attention now. There isnothing more important than gettingpaid for our product or service. Acustomer who does not pay is

not a customer.

Managing Payables (Creditors)Creditors are a vital part of effective cash management and should bemanaged carefully to enhance the cash position. Purchasing initiatescash outflows and an over-zealous purchasing function can createliquidity problems. Consider the following:

Who authorizes purchasing in our company - is it tightly managed orspread among a number of (junior) people?

Are purchase quantities geared to demand forecasts?Do we use order quantities which take account of stock-holding and

purchasing costs?Do we know the cost to the company of carrying stock?


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Do we have alternative sources of supply? If not, get quotes frommajor suppliers and shop around for the best discounts, credit terms,and reduce dependence on a single supplier.

How many of our suppliers have a returns policy?

Are we in a position to pass on cost increases quickly through priceincreases to our customers?

If a supplier of goods or services lets we down can we charge backthe cost of the delay?

Can we arrange (with confidence!) to have delivery of suppliesstaggered or on a just-in-time basis?There is an old adage in business that if we can buy well then wecan sell well. Management of our creditors and suppliers is just asimportant as themanagement of our debtors. It is important to look

after our creditors slowpayment by we may create ill-feeling andcan signal that our company isinefficient (or in trouble!).Remember, a good supplier is someone who will work with us toenhance the future viability and profitability of our company.

FINANCING OF WORKING CAPITAL

Permanent working capital should be financed in such

a manner that the enterprise may have its uninterrupted use for asufficiently long period. Important sources are:

1. Shares: Issue of shares is the most important source for raising

the long term capital. Raising of permanent capital through the issue

of shares has certain advantages like there is no fixed burden on the

resources of the company and, moreover, no charge is created on the

assets of the company.

2. Debentures: A debenture is an instrument issued by the company

acknowledging its debt to its holder. Debentures carry a fixed rate of

interest which is a legal charge against revenue of the company. The


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debentures are generally given floating charge on the assets of the

company.

The firm issuing debentures also enjoy a number of benefits such as

trading on equity, retention of control, tax benefit, etc.

3. Public deposits: Public deposits are the fixed deposits accepted

by a business enterprise directly from the public. This source of raising

finance became popular because of the imperfect development of

banking system in the country. This mode of financing has a large

number of advantages such as very simple and convenient source of

finance, taxation benefits, trading on equity, and inexpensive source offinance.

4. Retained Earnings:It refers to reinvestment by a concern of its

surplus earnings in its business. It is an internal source of finance and

it often referred to as self financing or ploughing back of profits. It is

most suitable for an established firm for its expansion, modernization,

replacement, etc. But excessive resort to ploughing back of profits

may lead to monopolies, misuse of funds, over capitalization,

5 . Loans from Financial institutions:Financial institutions such as

Commercial Banks, Life Insurance Corporation, State Financial

Corporation of India, Industrial Development Bankof India, etc. also

provide short term, medium term and long term loans.


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To comment upon the working capital management inSEL, the technique of ratio analysis is adopted.

The following ratios have been calculated for the said purpose.

1. Current ratio.

2. Comparative debtors analysis.

3. Working capital turnover ratio.

4. Inventory Turnover analysis.

Current Ratio:The current ratio is an indicator of a firms short term solvency. A firm,to survive on a continuing basis, should maintain sufficient liquidity. Asa rule of thumb, 2:1 is considered to be an ideal current ratio. The ideaof having double the current assets as to current liabilities is to providea cushion against possible losses and to ensure a smooth day to dayfunctioning of the firm. There is, however, nothing very sacrosanctabout the 2:1 ratio. What is more important is the quality of current

assets, how fast and to what extent can they be converted into cash.

5 Yearly Trend of Current Ratio of SEL

Year Current Assets CurrentLiabilities

Current Ratio

2005 5996.50 3008.54 1.99:1 times2006 5773.50 2550.47 2.26:1 times2007 6326.04 1433.21 4.41:1 times2008 6075.49 1944.27 3.12:1 times2009 7873.17 2474.40 3.18:1 times


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A relatively high current ratio is an indication that the firm is liquid and

has the ability to pay its current obligations in time and when they

become due. On the other hand, a low current ratio represents that

the liquidity position of the firm is not good and the firm shall not be

able to pay its current liabilities in time. The above table indicates that

there are also fluctuations in the current ratio of SEL.

In FY 2005 it was 1.99:1 times then increases to 4.41:1 times in FY

2007 and then further decreases to 3.18:1 times in FY 2009.The

reason of increment in the current ratio because decrease in current

liabilities and increase in current assets in the FY 2007.

Debtors/Receivables Turnover Ratio:

Debtors turnover ratio indicates the velocity of debt collection of firm.

In simple words, it indicates the number of times the average debtors

are turned over during a year.

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

2005 2006 2007 2008 2009

Current Assets

Current Liabilities


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Debtors Turnover Ratio = Total salesDebtors

Avg. collection period = No. of MonthsD.T.R

5 Yearly Trend of Debtor Turnover Ratio of SEL:(Amount in Crores) (Amount in lacs)

Year Sales Debtors D.T.R

2005 123.52 4639.51 2.662006 128.18 4047.82 3.172007 129.32 3624.58 3.572008 125.54 1688.53 7.432009 208.34 521.90 39.92

Accounts receivable turnover ratio or debtors turnover ratio indicatesthe number of times the debtors are turned over a year. The higherthe value of debtors turnover the more efficient is the management ofdebtors or more liquid the debtors are. Similarly, low debtors turnoverratio implies inefficient management of debtors or less liquid debtors.It is the reliable measure of the time of cash flow from credit sales.There is no rule of thumb which may be used as a norm to interpretthe ratio as it may be different from firm to firm.

Working capital turnover RatioThe amount of working capital is sometimes used as a measure of afirms liquidity. It is considered that between the two firms, the onehaving the larger amount of working capital has the greater ability tomeet its current obligations. Working capital turnover analysis is,therefore, used to measure the efficiency with which the firms areusing their working capital. For this purpose, working capital turnover


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ratio, which indicates the velocity of the utilization of net workingcapital, is worked out. A higher ratio indicates efficient utilization ofworking capital. In the following lines a comparative statement ofworking capital turnover ratio of SEL is produced.

Net Working Capital of SEL

Year Current Assets CurrentLiabilities

Net Working Capital

2005 5996.50 3008.54 2987.962006 5773.50 2550.47 3223.032007 6326.04 1433.21 4892.83

2008 6075.49 1944.27 4131.222009 7873.17 2474.40 5398.77

0

1000

2000

3000

4000

5000

6000

2005 2006 2007 2008 2009

Net Working Capital

Net Working Capital


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Working Capital turnover ratio of SEL

(Amount in Crores) (Amount in lacs)Year Sales Net W.C W.C Turnover

Ratio2005 123.52 2987.96 4.13 times2006 128.18 3223.03 3.98 times2007 129.32 4892.83 2.64 times2008 125.54 4131.22 3.04 times2009 208.34 5398.77 3.86 times

The working capital turnover ratio measure the efficiency with whichthe working capital is being used by a firm. A high ratio indicatesefficient utilization of working capital and a low ratio indicatesotherwise. But a very high working capital turnover ratio may alsomean lack of sufficient working capital which is not a good situation.

Working capital Turnover Ratio:

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2005 2006 2007 2008 2009

Working Capital Turnover Ratio

Working Capital Turnover Ratio


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Inventory Turnover Analysis:

Every firm has to maintain a certain level of inventory of finishedproducts so as to be able to meet the requirements of the business

and ensure an uninterrupted production. This analysis is done bycalculating inventory turnover ratio. Inventory turnover ratio which iscalculated by dividing sales by average inventory indicates thenumber of times the stock has been turned over during the year. Italso evaluates the efficiency with which a firm is able to manage itsinventory. A lower inventory turnover is an indicator of higherefficiency in managing the inventory.

Inventory Turnover of SEL in 5 years

Particulars 2005 2006 2007 2008 2009

Sales (incrores)

123.52 128.18 129.32 125.54 208.34

Inventory (inLacs)

984.50 938.01 1006.44 848.82 1276.71

InventoryTurnover Ratio

12.25 13.33 13.30 13.53 19.60


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RECOMMENDATIONS

SEL should increase its capacity utilization. It should work at fullcapacity to minimize its cost of production. With this increase incapacity utilization, the total cost will spread over more units therebydecreasing the per unit cost.

SEL should increase the credit facilities provided to its consumers.Earlier, it was selling its main product i.e. tractor either againstadvance payments or cash payments. This sales policy, no doubt,

shows the high preference for Swaraj engine on the part of thecustomers, but in the wake of neck-to-neck competition due toemergence of new players in the industry, it has changed this policy tomaintain and improve its market share. It should extend more creditfacilities to attract more and more buyers.

SEL must move into higher HP segment to capture more market.SELs highest share is in the 35 HP segment (Approximately 19%) Itscontribution to higher HP segment is almost negligible because of

which It can not export its tractors to Africa and Middle East, wherethere is demand for 70 HP engine. It is therefore, suggested that inorder to be competitive in the international market also, SEL shouldreset to manufacturing after cutting out many of the frills in its lowerHP engine.

SEL should make efforts to capture emerging markets in South.Swaraj engines are, no doubt, very popular with the farmers of theNorthern market (Punjab, Haryana and U.P.) but with the plateauing of

sales in these markets, there is strong need for zeroing in on thecentral and southern markets.

SEL should undertake such activities that can add value to Society.SEL, as a good corporate citizen, should sponsor programmes related


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to environment protection, rural upliftment and welfare or generalpublic. It should spend a crunch of its profits on the social activities,which will further improve its image in the society.

SEL should take advantage of Indias second position in low andmedium HP engine segment, in which PTL is a leader, by exporting itsproduct to Asian, African and to some extend Latin American Markets.

shikha mba,final project report

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