Working Capital Management Project
Working Capital Management Project
Working Capital Management Project
REPORT
ON
WORKING CAPITAL
MANAGEMENT
AND PROFITABILITY AT ATUL
AUTO LTD
Shapar (Veraval)
SUBMITTED TO
SAURASHTRA UNIVERSITY
IN PARTIAL FULFILLMENT FOR THE AWARD OF THE
MBA DEGREE
SUBMITTED BY
Jayesh S. Dobariya & Ankit Raichura
SEMESTER IV
AFFILIATED TO SAURASHTRA UNIVERSITY,
RAJKOT
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No work can be carried out without the help and guidance of various persons. I
am happy to take this opportunity to express my gratitude to those who have been
helpful to me in completing this project report.
I would like to thank Mr. Hitesh Popat sir to help me in granting permission in
this organization. I am especially thankful to Mr. J.V. Adhiya sir (Vice President
of Finance) for their valuable advice and guidance during my project completion.
I am also thankful to Mr. Hiren Nayak sir (HR Depart.) for granting me
permission for this project.
Lastly I would like to thank my parents, friends and well wishers who
encouraged me to do this research work and all those who contributed directly or
indirectly in completing this project to whom I am obligated to.
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Date : -
Place :-Rajkot
____________________
Jayesh S. Dobariya
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SR Page
Particulars
No. No.
1. Executive Summary 01
2. COMPANY INFORMATION 02
1.1 Introduction 04
1.2 Brief History 05
1.3 Managing Team 06
1.4 Group of Companies 07
1.5 Forms of organization and Size of Unit 08
1.6 Organization Structure 10
1.7 Contribution of Unit 11
3. WORKING CAPITAL MANAGEMENT 12
2.1 Introduction 13
2.2 Need of Working Capital 14
2.3 Concept of W.C. Management 15
2.4 Types of Working Capital 16
2.5 Importance of W.C. Management 19
2.6 Determination of Working Capital 20
2.7 Sources of working capital 22
2.8 Working Capital Components 23
4. RESEARCH METHODOLOGY 35
3.1 Introduction 36
3.2 Objective of the Study 37
3.3 Scope and Limitation of the Study 38
3.4 Linear Correlation Co-Efficient 39
3.5Types of data collection 41
3.6 Data Analysis 42
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Atul Auto Ltd. is India’s reputed and leading manufacturer of Light Vehicle
Transport. Atul group also in other businesses like Auto Finance, two wheeler
and 4 wheeler distributors. Dealing in Petroleum Fuels and Products,
Telecommunication and also in Real Estate.
Atul Auto Ltd. have a very good market share with product differentiation like
goods carries, passenger carries, special carries. Atul Auto Ltd. covers the good
market share in Gujarat, Uttaranchal, Rajasthan, Orissa and Uttar Pradesh. Atul
Auto Ltd. exports their product in Nigeria, Egypt, Kenya, Tanzania, and plenty of
African country.
Working capital is life blood of any business organization. This study shows the
working capital management of Atul Atuo Ltd. It includes, working capital size
and level analysis, working capital ratio analysis and comparison with
profitability ratio (ROI).
In this study working capital ratios compare with profitability ratio (ROI). With
the help of karl pearson’s correlation co-efficient statistical tools and found the
relationship between those ratios. Through this we could found working capital
impact on profitability of the Atul Auto Ltd.
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Company
Information
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At present the company is running under the name “ATUL AUTO LIMITED”.
Basically company is producing diesel engine vehicles. It produces 3-wheelers
like chhakera, pick-up van, delivery van and passenger van.
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Today, when you see or travel by the convenient 'Chhakada' you rarely realize
who invented this amazing people-friendly transportation vehicle. Well, we take
pride in mentioning our founder’s name – the Late Mr. Jagjivanbhai
Karsanbhai Chandra. He was a man of vision. A Dreamer. An Inventor. A
Strategist. And an ingenious master-mind who loved challenges.
Back in the 1970’s, when transportation was a crucial problem especially in rural
areas, he decided to blaze a new trail. He was thinking of an affordable mode of
transportation which can benefit rural folks of Saurashtra. The road conditions
were not good but the need for transportation was increasing day in and day out.
After thorough research and planning, he came up with a vehicle which was
skillfully engineered from a motorcycle. And this is how the first 'chhakada' was
developed which later became a way of life for the people of Saurashtra.
On 1st may, 1992 the company has started plant at Shapar (Veraval) in Rajkot
district to increase its sales and cover entire national market.
In the year 1996 “ATUL AUTO PRIVATE LIMITED” was converted in a Public
Limited Company due to extra need of finance. Because as per the situation and
demand of market they entered to launch some new products.
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Board of Directors
Auditors
Charted Accounts
Jamnagar.
Bankers
1. State Bank Of India
2. Citizens Co-Operative Bank
3. Laxmi Vilas Co-Operative Bank
4. State Bank Of Saurashtra
Functional Managers
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3. Atul International
(Export- Import House)
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Form or organization can be divided mainly in four categories. There are two
other forms also.
Basic Forms
Other Forms
There are many features of public limited company some of there are given
below,
Characteristics:
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Size of unit can measured from in total capital divested in business. On the basis
of capital investment, there are main two types of industry. But there are there
other types also.
Other
1. Tiny Industry
2. Cottage Industry
3. Ancillary Industry
The total investment in large-scale industry; must be more than 20 corers and up
to 100 corers. Total investment of “ATUL AUTO LIMITED” is more than 20
corers. That’s why it is large-scale industry.
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From above given all type of organization “ATUL AUTO LIMITED” had
adopted “LINE ORGANIZATION”.
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Contribution of unit to the industry refers to the share of proportion the company
holds in entire industry.
In Saurashtra Region Company has captured near about 50% market. But in
Gujarat region and in other state their contribution is less than that.
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Working
Capital
Management
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The goal of working capital management is to manage the firm’s current assets
and current liabilities in such way that the satisfactory level of working capital is
mentioned. The current should be large enough to cover its current liabilities in
order to ensure a reasonable margin of the safety.
A managerial accounting strategy focusing on maintaining efficient levels of both
components of working capital, current assets and current liabilities, in respect to
each other. Working capital management ensures a company has sufficient cash
flow in order to meet its short-term debt obligations and operating expenses.
Definition :
According to Guttmann & Dougall-
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The need for working capital gross or current assets cannot be over emphasized.
As already observed, the objective of financial decision making is to maximize
the shareholders wealth. To achieve this, it is necessary to generate sufficient
profits can be earned will naturally depend upon the magnitude of the sales
among other things but sales can not convert into cash. There is a need for
working capital in the form of current assets to deal with the problem arising out
of lack of immediate realization of cash against goods sold. Therefore sufficient
working capital is necessary to sustain sales activity. Technically this is refers to
operating or cash cycle. If the company has certain amount of cash, it will be
required for purchasing the raw material may be available on credit basis. Then
the company has to spend some amount for labour and factory overhead to
convert the raw material in work in progress, and ultimately finished goods.
These finished goods convert in to sales on credit basis in the form of sundry
debtors. Sundry debtors are converting into cash after expiry of credit period.
Thus, some amount of cash is blocked in raw materials, WIP, finished goods, and
sundry debtors and day to day cash requirements. However some part of current
assets may be financed by the current liabilities also. The amount required to be
invested in this current assets is always higher than the funds available from
current liabilities. This is the precise reason why the needs for working capital
arise.
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According to this concept, the total assets are termed as the gross working
capital. It is also known as quantitative or circulating capital. Total current assets
include, cash, marketable securities, account receivables, inventory, prepaid
expense, advance payment of tax, etc. To quote Weston and Brigham, “Gross
working capital refers to firm’s investment in short term assets such as cash,
short term securities, accounts receivable and inventories.” This concept helps in
making optimum investment in current assets and their financing. According to
Walker, “Use of this concept is helpful in providing for the current amount of
working capital at the right time so that the firms are able to realize the greatest
return on investment.
Net working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable
and outstanding expenses. Net working capital can be positive or negative
Efficient working capital management requires that firms should operate with
some amount of net working capital, the exact amount varying from firm to firm
and depending, among other things; on the nature of industries.net working
capital is necessary because the cash outflows and inflows do not coincide. The
cash outflows resulting from payment of current liabilities are relatively
predictable. The cash inflow are however difficult to predict. The more
predictable the cash inflows are, the less net working capital will be required. The
concept of working capital was, first evolved by Karl Marx. Marx used the term
‘variable capital’ means outlays for payrolls advanced to workers before the
completion of work. He compared this with ‘constant capital’ which according to
him is nothing but ‘dead labour’. This ‘variable capital’ is nothing wage fund
which remains blocked in terms of financial management, in work-in- process
along with other operating expenses until it is released through sale of finished
goods. Although Marx did not mentioned that workers also gave credit to the
firm by accepting periodical payment of wages which funded a portioned of
W.I.P, the concept of working capital, as we understand today was embedded in
his ‘variable capital’.
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The operating cycle creates the need for current assets (working capital).
However the need does not come to an end after the cycle is completed to explain
this continuing need of current assets a destination should be drawn between
permanent and temporary working capital.
Working
Capital
The permanent working capital refers to that part of the working capital which is
necessary for maintaining stock of raw material and finished goods at their
normal level and for paying wages and salaries regularly. It is minimum amount
of current assets which is needed for the smooth running of business. In other
words, permanent working capital is that which is permanently locked up in
current assets. Permanent working capital is off two kinds: A. Initial working
capital and B. Regular working capital
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Temporary W.C.
W.C
.
Permanent W.C.
Time
It is the part of the working capital which is needed to meet the seasonal demands
and special needs. This is called variable working capital because its amount
varies according to the extent of extra demand. Variable working capital is of two
types A. Seasonal working capital and B. Special working capital.
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1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed
capital is more rather than working capital. These businesses sell services and not
the commodities and that too on cash basis. As such, no founds are blocked in
piling inventories and also no funds are blocked in receivables. E.g. public utility
services like railways, infrastructure oriented project etc. there requirement of
working capital is less. On the other hand, there are some businesses like trading
activity, where requirement of fixed capital is less but more money is blocked in
inventories and debtors.
In some business like machine tools industry, the time gap between the
acquisition of raw material till the end of final production of finished products
itself is quit high. As such amount may be blocked either in raw material or work
in progress or finished goods or even in debtors. Naturally there need of working
capital is high.
In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing
after certain limit, the working capital requirements may adversely affect by the
increasing size.
If the company is the operating in the time of boom, the working capital
requirement may be more as the company may like to buy more raw material,
may increase the production and sales to take the benefit of favorable market, due
to increase in the sales, there may more and more amount of funds blocked in
stock and debtors etc. similarly in the case of depressions also, working capital
may be high as the sales terms of value and quantity may be reducing, there may
be unnecessary piling up of stack without getting sold, the receivable may not be
recovered in time etc.
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Some time due to competition or custom, it may be necessary for the company to
extend more and more credit to customers, as result which more and more
amount is locked up in debtors or bills receivables which increase the working
capital requirement. On the other hand, in the case of purchase, if the credit is
offered by suppliers of goods and services, a part of working capital requirement
may be financed by them, but it is necessary to purchase on cash basis, the
working capital requirement will be higher.
6. Stock Turnover
By turnover is meant the ratio of sales to average stock held in business. The
greater the turnover, the larger the volume of business that can be conducted with
a given working capital. In other words, if the turnover is rapid, burden of
working capital is not heavy.
7. Profitability
The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will
positively reduce the strain on working capital requirement of the company,
because the profits to the extend that they earned in cash may be used to meet the
working capital requirement of the company.
8. Attitude of Management
If the attitude of the management is aggressive and they are primarily risk-takers,
the need for working capital is reduced.
9. Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may
reduce the strain on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.
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1. Receivables Management
2. Inventory Management
3. Cash Management
Above three has equal importance to manage or handle working capital of any
firm. Now we discuss detail of above three components.
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The term receivable is defined as “debt owed to the firm by customers arising
from sales of goods or services in the ordinary course of business.”
Receivables or debtors are the one of the most important parts of the current
assets which is created if the company sells the finished goods to the customer
but not receive the cash for the same immediately. Trade credit arises when firm
sells its products and services on credit and dose not receive cash immediately. It
is essential marketing tool, acting as bridge for the movement of goods through
production and distribution stages to customers. Trade credit creates receivables
or book debts which the firm is expected to collect in the near future. The
receivables include three characteristics
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Receivables Indices
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The term ‘inventory’ is used to designate the aggregate of those items of tangible
assets which are
In financial view, inventory defined as the sum of the value of raw material and
supplies, including spares, semi-processed material or work in progress and
finished goods. The nature of inventory is largely depending upon the type of
operation carried on. For instance, in the case of a manufacturing concern, the
inventory will generally comprise all three groups mentioned above while in the
case of a trading concern, it will simply be by stock- in- trade or finished goods.
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Components of
Inventory
Stores
Raw Work-in- Finished
and
Materials progress Product
Spares
1. Raw Materials
Raw materials are those inputs that are converted into finished goods through
manufacturing process. A major input for manufacturing a product. In other
words, they are very much needed for uninterrupted production.
2. Work-in-Progress
Work-in-progress is that stage of stocks that are between raw materials and
finished goods. Work-in-progress inventories are semi-finished products. They
represent products that need to under go some other process to become finished
goods.
3. Finished Products
Finished products are those products, which are ready for sale. The stock of
finished goods provides a buffer between production and market.
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1. Transaction Motive
Transaction motive includes production of goods and sale of goods. It facilitates
uninterrupted production and delivery of order at a given time (right time).
2. Precautionary Motive
This motive necessitates the holding of inventories for unexpected changes in
demand and supply factors.
3. Speculative Motive
This compels to hold some inventories to take the advantage of changes in price
and getting quantity discount.
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Inventory Indices
Inventory components
The firm’s inventory consist following components
1. Raw material
2. Work- in-progress
3. Finished goods
To analyze the level of raw material inventory and work in progress inventory
held by the firm on an average it is necessary to examine the efficiency with
which the firm converts raw material inventory and work in progress into
finished goods.
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The broader view of cash also induce hear- cash assets, such as marketable sense
as marketable securities and time deposits in banks. The main characteristics of
this deposits that they can be really sold and convert in to cash in short term.
They also provide short term investment outlet for excess and are also useful for
meeting planned outflow of funds. We employ the term cash management in the
broader sense. Irrespective of the form in which it is held, a distinguishing feature
of cash as assets is that it was no earning power. Company have to always
maintain the cash balance to fulfill the dally requirement of expenses.
1. Transaction Motive
Cash balance is necessary to meet day-to-day transaction for carrying on with the
operation of firms. Ordinarily, these transactions include payment for material,
wages, expenses, dividends, taxation etc. there is a regular inflow of cash from
operating sources, thus in case of JISL there will be two-way flow of cash-
receipts and payments. But since they do not perfectly synchronize, a minimum
cash balance is necessary to uphold the operations for the firm if cash payments
exceed receipts.
Always a major part of transaction balances is held in cash, a part may be held
in the form of marketable securities whose maturity conforms to the timing of
anticipated payments of certain items, such as taxation, dividend etc.
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The higher the predictability of firm’s cash flows, the lower will be the necessity
of holding this balance and vice versa. The need for holding the precautionary
cash balance is also influenced by the firm’s capacity to have short term
borrowed funds and also to convert short term marketable securities into cash.
3. Speculative motive
Speculative cash balances may be defined as cash balances that are held to enable
the firm to take advantages of any bargain purchases that might arise. While the
precautionary motive is defensive in nature, the speculative motive is aggressive
in approach. However, as with precautionary balances, firms today are more
likely to rely on reserve borrowing power and on marketable securities portfolios
than on actual cash holdings for speculative purposes.
4. Compensating Motive
According to I.M. Pandey, the amount of cash to be held for the first two
motives, which are two most important motives, the following factors must be
taken into account:
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Cash does not enter in to the profit and loss account of an enterprise, hence cash
is neither profit nor losses but without cash, profit remains meaningless for an
enterprise owner.
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One of the distinguishing features of the fund employed as working capital is that
constantly changes its form to drive ‘business wheel’. It is also known as
‘circulating capital’ which means current assets of the company, which are
changed in ordinary course of business from one form to another, as for example,
from cash to inventories, inventories to receivables and receivables to cash.
Basically cash management strategies are essentially related to the cash cycle
together with the cash turnover. The cash cycle refers to the process by which
cash is used to purchase the row material from which are produced goods, which
are then send to the customer, who later pay bills. The cash turnover means the
number of time firms cash is used during each year.
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Research
Methodology
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It is important for research to know not only the research method but also know
methodology. ”The procedures by which researcher go about their work of
describing, explaining and predicting phenomenon are called methodology.”
Methods comprise the procedures used for generating, collecting and evaluating
data. All this means that it is necessary for the researcher to design his
methodology for his problem as the same may differ from problem to problem.
Data collection is important step in any project and success of any project will Be
largely depend upon now much accurate you will be able to collect and how
much time, money and effort will be required to collect that necessary data, this
is also important step.
Data collection plays an important role in research work. Without proper data
Available for analysis you cannot do the research work accurately.
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The scope of the study is identified after and during the study is conducted. The
study of working capital is based on tools like trend Analysis, Ratio Analysis,
working capital leverage, operating cycle etc. Further the study is based on last 5
years Annual Reports of Jain Irrigation Systems Ltd. And even factors like
competitor’s analysis, industry analysis were not considered while preparing this
project.
1. Limited data
This project has completed with annual reports; it just constitutes one part of data
collection i.e. secondary. There were limitations for primary data collection
because of confidentiality.
2. Limited period
3. Limited Area
Also it was difficult to collect the data regarding the competitors and their
financial information. Industry figures were also difficult to get.
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The number representing the measure (or degree) of linear correlation between
two variables is called the coefficient of correlation. It is represented by r. the
value of r is greater than or equal to -1 and smaller than or equal to 1.
Definition
The relationship between two variables such that a change in one is accompanied
by a positive or a negative change in the other and also a greater change in one is
accompanied by a corresponding greater change in the other, is called correlation.
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That the sample was randomly drawn from the population, and That X and Y are
normally distributed in the population. This assumption is less important as the
sample size increases.
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Primary data is that data which is collected fresh or first hand, and for first time
which is original in nature. Primary data can collect through personal interview,
questionnaire etc. to support the secondary data.
The secondary data are those which have already collected and stored. Secondary
data easily get those secondary data from records, journals, annual reports of the
company etc. It will save the time, money and efforts to collect the data.
Secondary data also made available through trade magazines, balance sheets,
books etc.
Project is based on
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After collection of the data the second step is analyze the data. In this report we
use the Profitability Ratio (Return on Investment) and working capital Ratio. We
compare both ratios with the Karl Pearson’s correlation co-efficient statistical
tool.
With the help of primary data and mainly secondary data we could found the
below results.
Return on Investments
Working Capital Size and Level Analysis
Working Capital Ratios Analysis
Comparison between Working capital ratios and Return on Investment.
To compare Working capital ratios and Return on Investment we have used Karl
Pearson’s correlation co-efficient statistical tool. Because it is very effective
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Net Profit
Return on Investment = X 100
Total Assets
Return on Investment
Observation
From year 2004-05 the return on investment were reduced continuously. Net
sales in Rs. was increase but the no. of unit is reduced because raw material price
and product prices hike. It’s happened due to the competition and competitors. In
the year 2008-09 the return on investment reduces by 92% as compare to the year
2004-05. Its shows the inefficient utilization of the available resources.
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The consideration of the level investment in current assets should avoid two
danger points excessive and inadequate investment in current assets. Investment
in current assets should be just adequate, not more or less, to the need of the
business firms. Excessive investment in current assets should be avoided because
it impairs the firm’s profitability, as idle investment earns nothing. On the other
hand inadequate amount of working capital can be threatened solvency of the
firms because of its inability to meet it’s current obligation. It should be realized
that the working capital need of the firms may be fluctuating with changing
business activity. This may cause excess or shortage of working capital
frequently. The management should be prompt to initiate an action and correct
imbalance.
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“The term trend is very commonly used in day-today conversion trend, also
called secular or long term need is the basic tendency of population, sales,
income, current assets, and current liabilities to grow or decline over a period of
time”
Further, any one trend by it self is not very informative and therefore comparison
with Illustrated their ideas in these words, “An upwards trends coupled with
downward trend or sells, accompanied by marked increase in plant investment.
Especially if the increase in planning investment by fixed interest obligation”
(Amnt. In Rs.)
Years 2004-05 2005-06 2006-07 2007-08 2008-09
Net W.C (A-B) 147,766,758 142,536,699 246,785,954 231,351,865 195,623,613
W.C. Indices 100 96.46 167.01 156.56 132.39
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Observations
It was observe that in the year 2006-07 indices is very high because of mismatch
of current assets and current liabilities. Current Assets increase by 19% and
Current Liabilities decrease by 30%. After year 2006-07 company’s decreased its
working capital continuously. By reducing working capital company might be
increased its profitability in next years. The fall in working capital is a clear
indication that the company is utilizing its short term resources with efficiency.
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(Amnt. In Rs.)
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The balance of current assets is maintained in the years 2004-05 and 2005-06. As
per my view in year 2006-07 is ideal because in this year Inventory was increase
and Sundry Debtors, Cash & Bank Balance and Loan & Advances were decrease
compare to last two financial years. In the year 2007-08 again Inventory was
increase and Sundry Debtors and Cash & Bank were decrease but Loans &
Advances increased. But it was not bed situation for the company.
In the year 2008-09 the Inventory was down by 7.19% compare to last year and
Cash & Bank Balance and Loans & Advances were decrease. But Sundry
Debtors was decrease by 9.64% compare to last year.
With the help of Composition of Current Assets company try to maintain and
increase the inventory level and it’s profitable for the company. In last five years
company reduces Sundry Debtors continuously, so we can say that company has
no more risk regarding Bed Debts.
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Observation
Current Liabilities graph not shown continuous growth. In the year 2008-09
current liabilities in increase compare to 2006-07 and 2007-08 years. It means
company creates the credit in the market by good transaction. To get maximum
credit from supplier which is profitable to the company it reduces the need of
working capital of firm.
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The second major case of changes in the level of working capital is because of
policy changes initiated by management. The term current assets policy may be
defined as the relationship between current assets and sales volume. The third
major point if changes in working capital are changes in technology because
change sin technology to install that technology in our business more working
capital is required. A change in operating expanses rise or full will have similar
effects on the levels of working following working capital statement is prepared
on the base of balance sheet of last two year.
Observation
As per the table data current assets decreased and current liabilities increased so
the working capital decreased as compare to the previous year. Inventory
decreased by 9% and current liabilities increased by 41% as compare to previous
year.
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% Changes in ROCE
Working capital Leverage =
% changes in Current Assets
EBIT
Return on Capital Employed =
Total Assets
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Observation
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Ratio analysis helps to appraise the firms in the term of there profitability and
efficiency of performance, either individually or in relation to other firms in same
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. As future is
closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis of
inventory turnover ratio or debtor’s turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate the point out the various arias
which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity
position. As the ratio analysis is concerned with all the aspect of the firm’s
financial analysis liquidity, solvency, activity, profitability and overall
performance, it enables the interested persons to know the financial and
operational characteristics of an organization and take suitable decisions.
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The technique of ratio analysis has certain limitations of use in the sense
that it only highlights the strong or problem arias, it dose not provide any
solution to rectify the problem arias.
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Sales
Working Capital Turnover Ratio =
Net Working Capital
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Observation:
From the above figure we can say that the Working Capital Turnover was
fluctuated year by year. The highest ratio in 2005-06 and low in 2007-08 year. It
means that company fails to use of working capital efficiently in the 2007-08.
But in the year 2008-09 company increase the ratio by 72%. Company decreased
inventory, cash & bank balance and sundry debtors as compare to previous year
and increased current liabilities as compare to previous year. Correlation between
working capital turnover and return on investment is 0.66 it means relation
between them is partial positive. Working capital turnover ratio leads towards
profitability so, we can say that effective utilization of working capital resources
is very essential for maintain and improve profitability of the business.
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Inventory turnover ratio indicates the efficiency of the firm in producing and
selling its product. This ratio indicates the effectiveness and efficiency of the
inventory management. The ratio shows how speedily the inventory is turn into
cash or receivables through sales. It is calculated by dividing the cost of good
sold by average inventory.
Inventory Turnover
Years 2004-05 2005-06 2006-07 2007-08 2008-09
Cost of Goods
944,744,377 1,225,196,366 1,169,161,821 784,863,874 1,162,235,516
Sold
Average Inventory 58,360,743 86,361,010 153,995,270 200,589,406 185,181,788
Inventory TOR 16.19 14.19 7.59 3.91 6.28
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Inventory
Year ROI
TOR
2004-05 16.19 7.73
2005-06 14.19 7.13 Correlation (r) =
2006-07 7.59 4.55 0.92
2007-08 3.91 1.73
2008-09 6.28 0.59
Observation
It was observed that Inventory turnover ratio indicates maximum sales achieved
with the minimum investment in the inventory. As such, the general rule high
inventory turnover is desirable but high inventory turnover ratio may not
necessary indicates the profitable situation. An organization, in order to achieve
a large sales volume may sometime sacrifice on profit, inventory ratio may not
result into high amount of profit. Company’s inventory level is high as compare
to the sales. So the turnover ratio may be decline and profitability also decreases.
Inventory turnover ratio and Return on investment have strong correlation. So it
means that Inventory strongly affects the profitability of Atul Auto Ltd.
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Sales
Receivable Turnover Ratio =
Average A/C. Receivables
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Receivable
Year ROI
TOR
2004-05 17.36 7.73 Correlation (r) = -
2005-06 17.17 7.13
0.46
2006-07 14.41 4.55
2007-08 13.26 1.73
2008-09 31.22 0.59
Observation
From 2004-05 to 2007-08 there were no huge difference in Receivable turnover
ratio. But in 2008-09 this ratio increase by 80% as compare to 2004-05 it was
highest changes in last 5 years period of time. Company decreases average
debtors so the collection turnover ratio increment possible. Company increased
the receivable turnover ratio but it was not affected to the positive profitability
indices. Here inverse correlation between receivable turnover ratio and return on
investment. It indicates that receivables failed to give positive impact in
profitability of the Atul Auto Ltd.
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Sales
Current Assets Turnover Ratio =
Average A/C. Receivables
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C.A.
Year ROI
TOR
2004-05 4.87 7.73 Correlation (r) =
2005-06 4.33 7.13 0.74
2006-07 3.43 4.55
2007-08 2.57 1.73
2008-09 3.79 0.59
Observation
Current Assets turnover ratio decreased every year compare to 2004-05. In 2004
-05 ratio was highest and in 2007-08 the ratio of current assets is very low
because of high inventory. In year 2008-09 this ratio increased by 47%. But it has
not given any positive impact on the profitability. Current assets ratio not
indicates any particular trend over the period of time. Here strong correlation
between current assets turnover and return on investment. Its indicate that
company use the current assets effectively. Effective utilization of current assets
helps to create healthy profit.
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Current Assets
Current Ratio =
Current Liabilities
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Current
Year ROI
Ratio
2004-05 3.68 7.73
2005-06 1.92 7.13 Correlation (r) = -
2006-07 3.28 4.55 0.19
2007-08 3.83 1.73
2008-09 2.74 0.59
Observation
The current ratio indicates the availability of funds to payment of current
liabilities in the form of current assets. A higher ratio indicates that there were
sufficient assets available with the organization which can be converted in cash,
without any reduction in the value. As ideal current ratio is 2:1, where current
ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the
current assets. Ratio is higher in the 2007-08 because current liability decreased
by 24%. Correlation between current ratio and return on investment is negative.
To improve the profitability company must decrease the current ratio because
some unnecessary investment in current assets blocked the money.
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Quick Ratio
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Liquid C. A. 130,521,793 197,567,139 147,093,530 119,372,802 131,106,627
Current Liabilities 55,061,055 155,446,441 107,882,116 81,625,209 112,242,318
Quick Ratio 2.37 1.27 1.36 1.46 1.17
Quick Ratio
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Quick
Year ROI
Ratio
2004-05 2.37 7.73 Correlation (r) =
2005-06 1.27 7.13 0.59
2006-07 1.36 4.55
2007-08 1.46 1.73
2008-09 1.17 0.59
Observation
Quick ratio indicates that the company has sufficient liquid balance for the
payment of current liabilities. The standard liquid ratio is 1:1 but here liquid ratio
is more than 1:1 over the period of 5 years, it indicates that the firm maintains the
over liquid assets than actual requirement of such assets. Here, correlation
between quick ratio and return on investment is moderate. Such a policy is called
conservative policy of finance affects on the cost of the fund and return on the
funds.
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Absolute
Year Quick ROI
Ratio
2004-05 0.208 7.73 Correlation (r) =
2005-06 0.104 7.13 0.26
2006-07 0.022 4.55
2007-08 0.046 1.73
2008-09 0.166 0.59
Observation
Absolute liquid ratio indicates the availability of cash with company is sufficient
because company also has other current assets to support current liabilities of the
company. In the year 2004-05 the ratio high. Because cash was law as compare
to current liabilities. Correlation between Absolute Liquid Ratio and Return on
investment is low. But its not any drastic impact on profitability.
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Findings,
conclusion and
Recommendati
on
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Working capital size of Atul Auto Ltd. not indicate any specific trend and
fluctuate every year. Company decrease the working capital size in year
2008-09 as compare to previous year. Here lack of combination between
current assets and current liabilities so the profitability was reduced.
Current assets are more than current liabilities indicates that company use
long term funds for short term requirements, where long term funds are
most costly than short term funds.
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Current ratio of the company in last years above the ideal current ratio. It
indicates company’s good liquidity position and also indicates unnecessary
investment in current assets. Correlation with return on investment is –
0.19 and it is negative. It means that our funds have blocked in
unnecessary current assets.
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Atul Auto Ltd. working capital shows the good liquidity position. Positive
working capital indicates that company has the ability of the payments of short
terms liabilities. Working capital of Atul Auto Ltd. not indicates any trend for
particular period of time. All over working capital management of the company
is average and its impact on profitability is average.
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Books Referred
Websites References
1. www.atulauto.co.in
2. www.google.co.in
Annual Reports
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