Research Report Project: Analysis of Working Capital Management of Shriram Pistons & Rings LTD"
Research Report Project: Analysis of Working Capital Management of Shriram Pistons & Rings LTD"
Research Report Project: Analysis of Working Capital Management of Shriram Pistons & Rings LTD"
On
“ANALYSIS OF WORKING CAPITAL MANAGEMENT OF
SHRIRAM PISTONS & RINGS LTD”
Faculty Guide:
Dr. SK Matta
Submitted by:
DARPAN KUMAR
MBA 2019-20
1
Candidates Declaration/Certificate
I hereby declare that the Work which is being presented in this report
authentic record of my work carried out under the supervision of Dr. S.K.
Matta
The matter embodied in this report has not been submitted by me for the
This is certifying that the above statements made by the candidate are correct
Date:
Dr. S.K. Matta
2
PREFACE
During Master in Business Administration program, Students comes direct
contact with the real corporate world through the industrial training. MBA
program provides its students with an in-depth study of various managerial
activities that are performed in any organization.
A detailed research/analysis of managerial activities conducted in various
departments like finance, marketing, human resources, production department
etc. gives the student the conceptual idea of what they are expected to manage
and how to manage and how to obtain the maximum output through minimum
inputs of resources available and how to minimize the wastage of resources.
As MBA students, I have taken my summer internship training in SHRIRAM
PISTONS AND RINGS LTD.
3
TABLE OF CONTENT
EXECUTIVE SUMMERY----------------------------------------------------------5
INTRODUCTION---------------------------------------------------------------------6
OBJECTIVEOF STUDY------------------------------------------------------------14
COMPANYPROFILE---------------------------------------------------------------15
RESEARCHMETHODOLOGY----------------------------------------------------20
MANAGEMENT OFCURRENTASSET-----------------------------------------51
ANALYSIS OFASSETPERCENTAGE------------------------------------------67
ESTIMATINGWORKING CAPITAL--------------------------------------------73
CURRENTASSETFINANCING---------------------------------------------------83
FINDINGAND SUGGESTIONS---------------------------------------------------84
LIMITATIONS-----------------------------------------------------------------------86
REFERENCES-----------------------------------------------------------------------87
GLOSSARY-------------------------------------------------------------------------88
4
EXECUTIVE SUMMARY
The management had to depend upon certain relevant information for taking
various strategic decisions. The information is made useful by its analysis and
interpretation. My project is related to “Analysis of Working Capital
Management“. It was found that the operating cycle of the company is bit
disturbed and is continuously increasing due to which company is having the
decreasing working capital position. By adopting various calculation and
analysis and then making interpretation with the solution of specific problem I
put my efforts in giving appropriate suggestion to the company. To this
context I adopted various methods and techniques like Trend analysis by
using statistical tool, a work towards the optimal level of working capital,
estimation of working capital, analyzing of operating cycle and use of various
ratio to put an exact picture of company.
The report also consists of qualitative and quantitative analysis of Working
Capital Management of SHRIRAM PISTONS AND RINGS LIMITED,
Ghaziabad .In the course of study, I found that the organization faces the
problem of liquidity.
5
INTRODUCTION
Working Capital:
Working capital in simple terms means the amount of funds that a company
requires for financing its day -to- day operations. Working Capital includes the
current assets and current liabilities areas of the balance sheet.
7
On the basis of concept working capital can be classified as gross working capital
and net working capital. On the basis of time, working capital may be
classified as:
Permanent or Fixed working capital.
Temporary or variable working capital.
10
DISADVANTAGES OF EXCESSIVE WORKING CAPITAL
1. Excessive working capital means ideal funds which earn no profit for the
firm and business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and
accumulation of inventories.
3. Excessive working capital implies excessive debtors and defective credit
policy which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks
and other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
11
FACTORS DETERMINING THE WORKING CAPITAL REQUIRMENTS
2. SIZE OF THE BUSINESS: - Greater the size of the business, greater is the
requirement of working capital.
6. WORKING CAPITAL CYCLE: - The speed with which the working cycle
completes one cycle determines the requirements of working capital. Longer
12
the cycle larger is the requirement of working capital.
2. It is concerned with the decision about the composition and level of current assets.
12. It is concerned with the decision about the composition and level of
current liabilities
14
OBJECTIVE OF STUDY
This project was undertaken to analyze the working capital policies, working
capital management of the company and to reduce down their problems and to
find the solutions with respect to the working capital management of the
company.
The objective of the study is to provide the solutions for reducing down the
duration of the operating cycle, to analyze the working capital position of the
company and the liquidity position, finding out the problems that the company
is facing in managing the working capital and showing trend of particular
ratios in future and at the same suggesting them to solve their problems. There
are Two types of Objectives in this study:-
To compare the performance of working capital for a particular year with previous years.
15
COMPANY PROFILE
Shriram Pistons and Rings Ltd. is one of the largest and the most sophisticated
manufacturers of Precision Automobile Components i.e. pistons, piston rings,
pistons ,pins and engine valves in India, the products are sold under brand
name ‘USHA/SPR’ IN THE markets.
SPRL manufacturing unit is located at Meerut Road in Ghaziabad (25 km from
New Delhi). SPR employs 6000+ skilled employees, has an annual turnover of
approx. US$176 million and has recently set up a second, most modern new
Plant at Pathredi, next to Bhiwadi Industrial Area (Rajasthan), about 60 kms
from Delhi, to expand capacity and to offer the latest technological products to
all customers in India and abroad.
The plant has been recognized as one of the most modern and sophisticated
plants in North India in the field of automobile the production capacity of
plant is as under:
Piston: 15.14million per year
Pin : 13.0 million per year
Rings : 70.5 million per year
Engine valves:29.5 million per year
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“Total Customer Satisfaction through Quality Management and
Continuous Improvement.”
QUALITY OBJECTIVES:
1. Organization which is sensitive and interactive to the needs of customer.
2. Continuous upgrading of quality and process to meet changing needs of customer.
3. Optimization of return on investment by:
Continuous improvement
Technology development
Effective use of all resources
Harmonious and safe working conditions
The world producing Pistons with diameter range up to 620 mm. Their
products are exported to over 120 countries around the world.
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Riken Corporation, established in 1927, is the undisputed world leader in steel
Piston Rings. It also holds more than 50% market share of overall Piston Ring
market within Japan. Piston Rings are produced within diameter range of 20
mm to 3100 mm.
Besides Piston Rings, they also manufacture Cam Shafts, Knuckles, Valve
Seats, Piston Inserts, Pre-combustion Chambers, Rocker Arms, and
Tappets etc.
Fuji Oozx is the largest Engine Valve manufacturer in Japan. They have
multiple production facilities including fully automatic state-of-the-art plant.
They have joint ventures in Thailand, South Korea, Taiwan and the Peoples' Republic of
China.
20
RESEARCH METHODOLOGY:-
Methodology:
A. Type of Study:
The study carried out here is basically analytical in nature. This type of
study relies on data which is already available.
B. Type of Data used:
The methodology involved for data collection was mainly through
secondary data and was obtained from the company’s financial
statements and the company’s website. The Balance Sheets and the Profit
& Loss Accounts for the last 3 years was the source
basedonwhichforecastingwasdonewhichwasfromthecompany’sarchives.Extre
me care was taken in collecting the data from the financial statements
and only
Relevant data was taken for the analysis based on.
C. Sources of Data:
The source of data has been company’s Balance Sheet and Profit and
Loss Accounts over a period of past 3 years.
D. Tools used for Data Collection:
The data has been collected mainly from the company’s Balance Sheet
and Profit & Loss Account for the past 3 years. Interview schedule was
taken to understand how the Finance Department is working and what are the
various policies followed in the Organization.
E. Tools and techniques used for analysis:
Various tools and techniques have been used to fulfill the aforesaid
objectives. A thorough study of the organization has been along with in
21
depth study of the functioning of Finance and Accounts Department of
SRPL. Further for the analysis
22
23
FINANCIAL RATIO ANALYSIS FOR WORKING
CAPITALMANAGEMENT
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2016-17 2017-18 2018-19
Note: Current Liabilities = Working Capital borrowings from Banks + Current Liabilities
+ Proposed Dividend + Provision for Tax.
Current Assets = Inventories + Debtors + Cash & Bank balance + Current
Investments + Advance Income Tax + Advance recoverable in Cash
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Analysis:
There has been a decline in ROWC between the two years – it reduces 20%
during 2009-10. This situation arises because of increase in current liabilities in
past years as company is having proposal of lots of investment due to which
company is financing its project and there is less tendency of free cash flow.
LIQUIDITY RATIOS:
Snapshot of Liquidity Ratios:
Table 3: Liquidity ratios
Basic Ratios
2016-17 2017-18 2018-19
Current ratio 2.60 2.17 2.43
Acid test ratio 1.66 1.28 1.57
Cash ratio 0.05 0.01 0.30
Current Ratio:
The current ratio is also known as the working capital ratio and is normally
presented as a real ratio.
25
Current ratio:-
2.7
2.6
2.5
2.4
2.3
2.2
2.1
1.9
2016-17 2017-18 2018-19
Analysis:
The current ratio is the measure of whether a company has enough short-term
assets to cover its short-term debt and is index of strength of working capital.
Anything below 1 indicates negative W/C (working capital). While anything
over 2 means that the company is not investing excess assets. A ratio of greater
than one means that the firm has more current assets then current claims.
Current ratio of the company has increased from 2.17 in Year 2010-11 to 2.43
in Year 2009-10. Current Ratio of the company depicts that for every Re.1
worth of current liability there are assets worth Rs.2.43. The company has
sufficient liquidity as the ratio is increasing. This year there is an increase in
ratio due to almost double inventory level in current year in comparison with
previous year.
26
Suggestions:
Firstly the company should try to increase their inventory levels as money
gets blocked.
0
2016-17 2017-18 2018-19
27
Analysis:
Acid test ratio is a more rigorous test of liquidity than the current ratio and
when used in conjunction with it, gives a better picture of the firm s ability to
meet its short-term debts out of short-term assets. This ratio is used to
determine risk that is not detected by the Working Capital ratio. A quick or
liquid ratio of 1:1 is considered as satisfactory as the firm can easily or readily
meets all of its current liabilities. Here Shriram Pistons have its last year
ratings of which is constant from last three years, which indicates company is
not having satisfactory financial position and not able to pay its current
liabilities and should be looked at with extreme care and also implies that
current assets are highly dependent on inventory.
Cash Ratio:
Table 7: Cash ratio for SHRIRAM PISTONS
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
2016-17 2017-18 2018-19
29
Analysis:
As cash is being the most liquid asset, quoted investment has been taken as
marketable securities. In our case the company is showing an increasing trend
but still it is not a favorable cash ratio. From the above calculation it is clear
that company’s cash ratio had remained very low. It is the notable point for the
company as its current liabilities are much higher than the cash in hand. It can
create problems in the future payments of current liabilities. Major portion of
company’s current assets goes to inventory and debtors, which only increase
the carrying cost. Company need to reduce these assets to their optimum level
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Working capital to Gross Sale 0.23 times 0.17 times 0.20 times
Working Capital to Cost of Sale 0.28 times 0.28 times 0.25 times
Stock/Debtors/Creditors
Conversion Period (In Days) 59.11 days 56.51 days 54.29 days
Current Asset to Total Assets Ratio 0.38 times 0.33 times 0.38 times
Cash to Current Asset Ratio 0.020 times 0.008 times 0.12 times
Inventory to Current Asset Ratio 0.36 times 0.40 times 0.35 times
Finished goods to Inventory Ratio 0.400 times 0.403 times 0.340 times
Raw Material to Inventory Ratio 1.69 times 1.62 times 1.81 times
Loan & Advances to CA ratio 0.10 times 0.10 times 1.00 times
31
Working Capital Management I: Asset Usage
Current Asset Turnover:
Turnover
Current Asset Turnover =
Current Assets
3.1
2.9
2.8
2.7
2.6
2.5
2.4
2016-17 2017-18 2018-19
32
Analysis
High current assets turnover ratio is more judicious and shows efficiency of
Management and proper utilization of the assets. The graph shows the company has
Managed to higher the ratio during the previous year however this year due to
Non-proportionate change in current assets and turnover the ratio declines to 2.92
. Due to more inventories this ratio falls.
0
2016-17 2017-18 2018-19
Analysis
What this ratio tries to highlight is how effectively working capital is being
33
used in terms of the turnover it can help to generate: no ideal values here but
the higher the better, surely. The declining working capital turnover ratio in
SHRIRAM PISTONS indicates that working capital is not being utilized
properly over the period of time. Management may think of increasing the
sales in the market or it is going for certain expansion plans.
Working Capital Management II: Efficiency
Working Capital to Gross Sale:
Working Capital
Working Capital to Gross Sale =
Gross Sale
Table 11: Working capital to gross sale
Working Capital to Gross Sale for the Shriram
Pistons
Figure 9: Working Capital to Gross
2016-17 1393.58/6038 0.23
Sale for the Shriram Pistons
2017-18 1133.27/6400 0.17
2018-19 1560.83/7739 0.20
0.25
0.2
0.15
0.1
0.05
0
2016-17 2017-18 2018-19
Analysis:
The Company was showing decline in the year 2011 but now as the ratio
increased to 0.17 from 0.20 there is a matter of concern but here also
SHRIRAM PISTONS is far better than the industry’s average. In previous year
34
company’s working capital was very low but now they are trying to improve it
for liquidity purposes.
Working Capital to Cost of Sale =
Working Capita
Cost of sale
Table 12: Working capital to cost of sale
0.3
0.25
0.2
0.15
0.1
0.05
0
2016-17 2017-18 2018-19
Analysis:
The Company was showing decline in the year 2011 but now as the ratio
increased to 0.25 from 0.20 there is a matter of concern but here also
35
SHRIRAM PISTONS is far better than the industry’s average. In previous year
company’s working capital was very low but now they are trying to improve it
for liquidity purposes.
Working Capital Management III: Stock/Debtors/Creditors
Debtor’s
Sales
Turnover: Debtor’s Turnover =
Debtor
0
2016-17 2017-18 2018-19
Analysis:
Firstly, the ratio seems to have change by going from 5.17 to 6.35 times in the
36
two years; and it means that, on average, the company’s debtors are taking
fewer days to pay their accounts. Soundness of this ratio is more dependent on
the business policy and the terms with the clients. On the other side turnover is
increasing over the years, which implies higher the turnover, shorter the time
between sales and collecting cash. It shows the company’s debt-collecting
machinery has improved through years.
Average Collection Period:
360
Avg. Collection Period=
Debtor Turnover
80
70
60
50
40
30
20
10
0
2016-17 2017-18 2018-19
Analysis:
37
The average collection period measures the quality of debtors since it indicates
the speed of their collection. The shorter the average collection period, the
better the quality of debtors, as a short collection period implies the prompt
payment by debtors. The trend of SHRIRAM PISTON is showing that the
company was a success in decreasing the average collection period, which
represent sound collection policy of the company. Previous year it was 56.69
being debtors were less but now it is on the previous trend.
Creditor’s Turnover:
Purchases
Creditor’s Turnover =
Creditors
Table 15: Creditor’s turnover ratio for Shriram Pistons
3.5
2.5
1.5
0.5
0
2016-17 2017-18 2018-19
38
Analysis:
In 2010 creditors turnover ratio increased from 2.65 to 3.36 times that shows
company was having improved credit paying ability through proper working
capital management while in 2011 the ratio decreased which implies terms of
credit allowed by the suppliers are liberal and creditors are not paid promptly.
This shows company keeps its obligation for long time.
Credit Payment Period:
360
=
Credit Payment Period Payable turnover ratio
Table 16: Credit payment period for Shriram Pistons
140
120
100
80
60
40
20
0
2016-17 2017-18 2018-19
39
Analysis:
Since in 2010 and 2010 the average payment period of the company was less
compared to 2011 i.e. 135.84 days which implies that 2011 company was less
prompt in making payment to suppliers compared to other years. As again it
improved its criteria and kept fewer obligations in the year 2010. The same
shows that reduction in the payment period is responsible for the
creditworthiness of the company
6.6
6.5
6.4
6.3
6.2
6.1
5.9
5.8
2016-17 2017-18 2018-19
40
Analysis:
It measures approximately the number of times an entity is able to acquire the
inventories and convert them into sales. The Shriram Pistons shows higher
turnover ratio which is good for the company while a low turnover is usually a
bad sign because products tend to deteriorate as they sit in a warehouse, but
several aspects of inventory holding policy have to be balanced like lead time,
seasonal fluctuations in orders, alternative use of warehouse space.
41
60
59
58
57
56
55
54
53
52
51
2016-17 2017-18 2018-19
Analysis:
Here, the company shows a decreasing trend in which there inventory holding
ratio falls down, which is good for the company as it avoids the unnecessary
locking up of working capital in the inventory and it shows efficiency of the
management.
Table 19: Current asset to total asset ratio for Shriram Pistons
Figure 17: Current Asset to Total Asset Ratio for the Shriram Pistons
42
0.39
0.38
0.37
0.36
0.35
0.34
0.33
0.32
0.31
0.3
2016-17 2017-18 2018-19
Analysis:
If we analyze the structural health of working capital for SHRIRAM
PISTONS, the proportion of current assets to total assets has been showing
almost constant trend continuously over the years, which shows that the
company is having certain problems with its current asset management. But as
this picture is showing less declining so it’s very clear that this can be due to
some investment for long-term return
43
Cash to Current Asset Ratio for the Shriram
Pistons
2016-17 46.32/2260.58 0.020
2017-18 17.59/2099.75 0.008
2018-19 334.66/2650.04 0.120
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2016-17 2017-18 2018-19
0
Analysis:
The company shows an increasing trend in 2010 & again it decrease in 2011
but as this recovered again the increasing trend of cash in the current assets
was observed. However in the year 2011 it decreased drastically. We can say
that it will effect liquidity position of the firm but on the other hand it is
observed that they do not keep any ideal cash with them, which is a positive
44
sign for the company.
Inventory to Current Asset Ratio:
Inventory
Inventory to Current Asset =
Current asset
0.4
0.39
0.38
0.37
0.36
0.35
0.34
0.33
0.32
2016-17 2017-18 2018-19
Analysis:
Here, the company shows an unfavorable trend of increase in the proportion of
the inventory to current assets in 2010-11, which represents that the company
is locking up the working capital unnecessarily in the inventory. Fortunately,
45
the ratio rises in the year 2010 which is a good sig
Table 22: Current liabilities to total liabilities ratio for Shriram Pistons
0.8
0.8
0.79
0.79
0.78
0.78
0.77
2016-17 2017-18 2018-19
Analysis:
The company shows a decreasing trend in the proportion of the current
liabilities in the total liabilities, this means company is taking fewer loans to
meet its liability and project investments are there, hence this shows a less
burden on the management of SHRIRAM PISTON. This ratio is not the only
46
means of reviewing a company's debt structure.
Loan & Advances to Current Asset Ratio:
Loan & Advances
Loan & Advances to Current Asset=
Current Asset
Table 23: Loan & Advances to Current assets ratio for Shriram Pistons
0.8
0.6
0.4
0.2
0
2016-17 2017-18 2018-19
Analysis:
The increase in this ratio in the year 2010 shows the efficiency of the
management. However this much increases in the ratio is not suggestible.
INTERPRETATION (RATIO ANALYSIS):
The utilization rate of net working capital as depicted by working capital
47
turnover ratio is fluctuating during the period. It shows that working capital
has not been effectively used over the period of years except in the
year2010.
As shown by current assets turnover ratio, the utilization of current assets in
terms of sales has shown an increasing trend which shows that current
assets has been effectively used to achieve sales.
Again if we look at the efficiency with which individual elements of
working capital have been utilized, the picture of inventory turnover is
bright.
As we look at the extent of liquidity of working capital, we notice that the
ratio shows a decreasing trend. This indicates, problem on the liquidity
front.
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MANAGEMENT OF CURRENT ASSET
Alternative Current Asset Investment policies
Three alternative policies are there regarding the total amount of current assets.
Essentially, these policies differ with regard to the amount of current assets
carried to support any given level of sales, hence in the turnover of those
assets. The line with the steepest slope represents a relaxed current asset
investment (also known as “fat cat”) Policy, where relatively large amounts of
cash, marketable securities, and inventories are carried, and where sales are
stimulated by the use of a credit policy that provides liberal financing to
customers and a corresponding high level of receivables. Conversely, with the
restricted current asset investment (also known as “lean and mean”) policy, the
holdings of cash, securities, inventories and receivables are minimized. Under
the restricted, current assets are turned over more frequently, so each dollar of
current assets is forced to “work harder”. The moderate current asset
investment policy is between the two extremes.
Under the conditions of certainty, all firms would hold only minimal levels of
current assets. Any larger amounts would increase the need for external
funding without a corresponding increase in profits, while any smaller holdings
would involve late payments to suppliers along with lost sales due to inventory
shortages and an overly restrictive credit policy.
When uncertainty is introduced the firm requires some minimum amount of
cash and inventories. A restricted lean and mean current asset investment
policy often provides the highest expected return on this investment, but it
entails the greatest risk, while the reverse is true under a relaxed policy.
49
Figure 23: Alternate current assets investment policies
Current
Assets
50 SHRIRAMPISTONS
Relaxed
40
30 Moderate
20
Restricted
10
Relaxed 30 3.3
Modified 23 4.3
Restricted 16 6.3
SHRIRAM 32.57 3.07
PISTONS
50
Note: - The Sales/current assets relationship is shown here as being linear,
but the relationship is often curvilinear
MANAGING THE COMPONENTS OF WORKING CAPITAL
OFSHRIRAM PISTONS
51
function is controlled in unit itself. All the need related to inventory is met
through corporate office as well as individual efforts of unit.
Fund Allocation:
Fund Utilization
Company operates an annual ‘Cash Budget’ and a rolling ‘Cash Plan’ drawn
up every month. Although specific forecasting technique is used, funds are
deployed to different departments as per their requirements. Daily reports on
cash transaction are prepared by Procurement department to keep a track of all
payments made in the days work. Every month cash transaction report is sent
to Finance department in the corporate office showing all the transaction of
cash, (inflow and outflows) actual utilization of cash and allocation of fund is
compared. If the utilization of cash is more than the allocation of fund, then the
plant has to justify its more utilization.
To meet the requirement of cash, company approach to bank and present the
required detailed by the bank. SHRIRAM PISTONS kept less cash in hand, to
meet the entire cash requirement it depends on financing process.
Evaluation of cash management performances:
To assess the cash management performance this phase is divided as follows:
a) Size of Cash
b)Liquidity and Adequacy of cash:
This is depicted by the current ratio and acid test ratio, as calculated in part
ratio analysis for working capital management and respective position is
52
shown in graph.
c) Control of cash
One of the major objectives of cash management from the stand point of
increasing return on investment is to economize on the cash holding without
impairing the overall liquidity requirements of the firms. This is possible by
effecting tighter controls over cash flows. The following ratios have been
applied to assess the efficiency of cash control:
Efficiency of cash
control 2016-17 2017-18 2018-19
Cash to Current Asset 46.32/225 17.59/209 334.66/2650.
Ratio 8 9 04
=0.020 =0.008 =0.12 times
Cash to Current liability 46.32/867. 17.59/965. 334.66/1089.
Ratio 00 73 21
=0.05 =0.01 =0.30 times
times times
Average: 0.049
Average: 0.12
Summary:
It can be inferred from the above table that cash to current assets ratio is
increasing which shows improving position of liquidity but it again starting
decline from 2011, which ultimately affect the operational efficiency of the
53
firm. Cash to current liability ratio shows the cash balance maintained by
company at a certain point of time for meeting its current liabilities. The cash
to current liability ratio is nearly on decreasing trend shows the efficiency of
operations, but this year it increases which is not a good sign.
Payable Management in SHRIRAMPISTONS:
Mostly the creditor comprises of the bank that is financing the working capital
needs and the suppliers to whom payments are to be given. This is basically
done as per terms and condition with the respective parties. The company is
not able to make proper payment to its creditors as year on year company’s
creditors are increasing.
Evaluation of Payables Management:
The evaluation for payable management is done with the help of ratios:
Creditor’s turnover ratio
Average Payment Period
Payable Management
2016-17 2017-18 2018-19
54
Average: 117.02 days
Summary:
The analysis shows that the minimum average creditor period is 107 days and
maximum is 135 days. By analysis reveals the increasing and decreasing trend
in average payment period, which shows company is provided with liberal and
strict credit payment period over the year and according to the market situation
Inventory Management:
Here the inventory is categorized in to:
(1) A B Canalysis
(2) X Y Zanalysis
1) ABC Analysis: - Items which constitutes to 70% of total consumption (of
stores and spares) value when arranged in descending order of consumption
value will be termed as ‘A’ class items. Next 20% of total consumption value
will be termed as ‘B’ class items and the rest 10% as the ‘C’ class items.
2) XYZ Analysis: - Items which constitute top 70% of total stock of stores and
spares holding value when arranged in descending order of stock holding will
be termed a ‘X’ class items next 20% of total stock holding value is ‘Y’ class
items and the rest 10% as the ‘Z’ class.
Higher than necessary stock levels tie up cash and cost more in insurance,
accommodation costs and interest charges.
Four basic levels will need to be established for each line/category of stock. There are the:
a) Maximum level – achieved at the point a new order of stock is physically received;
b) Minimum level – the level at point just prior to delivery of a new order
(sometimes called buffer stocks – those held for short term emergencies);
c) Reorder level – point at which a new order should be placed so that stocks
55
will not fall below the minimum level before delivery is received.
Average: 6.36
Summary:
Inventory turnover ratio establishes a relationship between the total sales
56
during a period and average inventory hold to meet that quantum at 6.63 times
in 2010 and on average it is 6.36 times, that signifies the average moving of
inventory. In other words, the stock held during 2010 is for 59.11 days as
comparison of average at 56.52 days.
Receivable Management:
At a plant level mostly the finished goods are sold on credit to increase
upon the market share and retain the customers but the major portion of
debtors are dealt by Marketing Unit of the Commercial Department and the
Finance Department. It is consideration as an essential marketing tool.
Control of the debtors’ element (the amount owed the business in the short
term) involves a fundamental trade-off between the cost of providing credit to
customers (which includes financing bad debts and administration), and the
additional net revenue that can be earned by doing so. The former can be kept
to a minimum with effective credit control policies, which will require:
Setting and enforcing credit terms;
Vetting customers prior to allowing them credit;
Setting and reviewing individual credit limits;
Efficient invoicing and statement generation;
Prompt query resolution;
Continuous review of debtors position (generating ‘aged debtors ‘report);
Effective chasing and collection procedures; and
Limits beyond which legal action will be pursued.
Before allowing credit to a new customer trade and bank references should be
sought. Accounts can be asked for and analyzed and a report including any
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county court judgments against the business and a credit score asked for from
a credit rating business. Salesmen’s views can also be canvassed and the
premises of the potential customer visited.
The extent to which all means are called upon will depend on the amount of
the credit sought, the period, past experiences with this customer or trade
sector, and the importance of the business that is involved. But this is not a
one-off requirement. One classic fraud is to start off with small amounts of
credit, with invoices being settled promptly, eventually building up to a huge
order and a disappearing customer.
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policies are pursued. Likewise stock will eventually become cash, but in the
meantime represents working capital tied up in the business. Keeping levels to
the minimum required for efficient operations will keep costs down. This
means controlling buying, handling, and storing, issuing, and recording stock.
Inherent in any system of inventory control is the concept of appropriate stock
levels – normally expressed in physical units sometimes in monetary terms.
The objective of establishing control levels is to ensure that excessive stocks
are never carried (and working capital thereby sacrificed) but that they never
fall below the level at which they can be replenished before they run out.
Receivables Management in SHRIRAMPISTONS:
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DETERMINATION OF OPERATING CYCLE OF
SHRIRAMPISTONS:
The determination of length of the operating cycle of a manufacturing firm is the sum of:
The broad range of project management and financial advisory services include:
inventory conversion period (ICP), &
debtors conversion period(DCP)
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DCP
C)Payable Deferral period:
This is very common to get gross operating cycle but in practice, a firm may
acquire resources (such as raw materials) on credit and temporarily postpone
payment of certain expenses. Payables, which the firm can defer, are
spontaneous sources of capital to finance investment in current assets. The
payables deferral period (PDP) is the length of time the firm is able to defer
payments on various resource purchases.
Net Operating Cycle = Gross Operating Cycle – Payable
Deferral period
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a) Raw Material Conversion Period:
Years
2016-17 2017-18 2018-19
Raw material
consumed Avg. Raw 1378.63 1390.10 1685
material inventory
1378.63/701.2
2 1390.10/722.7 1685/893.41
=1.96 times 5 =1.88 times
=1.92 times
Years
2016-17 2017-18 2018-19
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Sales 6038 6400 7739
Closing debtors
1170.14 1007.38 1120.41
B)Debtors Conversion:
Years
2016-17 2017-18 2018-19
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Purchases 1378.63 1390.10 1685
Closing creditors
413.69 523.95 500.88
D)Operating Cycle:
Gross Operating Cycle (GOC):
Years
2016-17 2017-18 2018-19
RCMP+WIPCP+FGCP+DCP 299.48 days 282.36 days 301.40 days
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Analysis:
The operating cycle of the firm is disturbed, as it is continuously increasing
which is not good for the company.
The company policy had a significant change for the year with regard to
inventory as it had increased continuously but this policy has a cost to the
company in the presence of a significant decrease in payables deferral
period, will have to negotiate higher working capital funds.
Company has tighten its steps towards the credit policy which signifies that
in the current year company is proving itself more efficient but other side it
as well shows a decline in the market share of the company.
The company had reduced down its payables deferral period significantly
which strengthens its creditworthiness in the market and helps the company
in getting the loans on liberal terms. This represents the efficiency of the
management.
One can have a vastly different working capital outlay while performing the
same activity. Having a large amount invested in stocks and debtors does not
necessarily mean large profits, but it can mean a drop in the prime calculation
that every businessman is interested in the return on investment. The object of
working capital management is to trim down on stocks and debtors and get the
cash coming faster within the comfort zone of the business. In the normal
periods of business activity, cash that had completed the working capital cycle
would be reinvested in stock and the whole process would begin again.
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Analysis of Asset Percentage:
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2016-17 2017-18 2018-19
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Analysis: From the above calculation it can be analyzed that company is
following an adequate policy of working capital from last 2 years. When we
give a thought to the current ratio of last three years we can very easily depict
that its current ratio is more than the standard one i.e. of 2:1. This type of
approach also gives the adverse impact on the liquidity of the company.
Analysis of Change in Working Capital:
1200
1000
800
600
400
200
0
2016-17 2017-18 2018-19
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Analysis:
As we can see from the above table and graph that company’s Net Working
Capital has been showing variation in its trend as from last two years
working capital is showing positive trend in increasing order.
The above situation shows that company management is efficient in
management of working capital.
Making the comparison of current assets and current liabilities in 2010 &
2011current liabilities are less than current assets which leads the
working capital in positive range which is good for the company.
Analysis:
Composition of all parts seems to be distributing but almost each
component is showing increasing trend which has both kind of influence for
the financial performance of the company so company need to manage
these components very carefully.
Inventory is showing an increasing trend that is the signal of danger for
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company’s profitability and these are not giving any return by locking up
working capita.
Suggestions
First and foremost suggestion for the company is that, it should look into
the idle funds, which are engaged in inventory. Company should withdraw
money from this locked up working capital and invest it in some other
assets.
Analysis of Current Liabilities:
Particulars
2016-17 2017-18 2018-19
Sundry Creditors 413.69 523.95 500.83
Advances from customers 14.76 10.27 16.12
Other provisions 208.57 249.56 292.93
Other Current liabilities 415.01 415.50 542.03
Total 1052.03 1199.2 1351.9
8 1
Analysis:
As we can see from the graph and table that major portion of current
liabilities are with sundry creditors and every year it keeps on increasing.
As the company obligations are increased so company need to put certain
measure to control current liabilities.
By looking the three years position of company in current assets and current
liabilities it can be seen that current liabilities are increasing over current
assets so within the time company need to manage its liability portion and
need to make safer decisions.
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Suggestions:
Due to the huge amount of current liabilities company has to lock up its
funds in current assets. Therefore, it should reduce its current liabilities by
paying them off so that regular cash outflow of cash get restricted and
outflow gets converted into inflow to increase in profitability of the firm.
One suggestion that could be made to the company is that, it should pay off
its creditors by withdrawing some cash from its debtors, which is idle at this
point of time and some amount from its inventory.
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This table shows the changes in net working capital of SHRIRAM PISTONS.
A wise financial policy of a firm requires that long-term funds be used to
finance Fixed Assets and short term funds are used to finance Current Assets.
The statement of changes in working capital shows that there was a
tremendous continuous increase in current liabilities. It is clear that our debtors
are increasing in the previous year so it implies that company is losing the
interest on the working capital locked into it. There is a decrease in working
capital mainly because of the locking of working capital funds in inventories
and receivables and due to the increase in the liabilities.
The most appropriate method of calculating the working capital needs of a firm
is the concept of operating cycle. However, a number of other methods may be
used to determine working capital needs in practice. We shall illustrate here
three approaches, which have been successfully applied in practice:
Current assets holding period: To estimate working capital requirements
on the basis of average holding period of current assets and relating them to
costs based on the company’s experience in the previous years. This method
is essentially based on the operating cycle concept.
Ratio of sales: To estimate working capital requirements as a ratio of sales
on the assumption that current assets change with sales.
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Estimating Optimal Need of Working Capital
a) Raw material consumed per month:
= 1685/12 =140.40 Mn/Rs.
b)Work in progress:
c) Finished Goods:
Total cost per month=321.33= 26.77 Mn/Rs.
12
d)Total Inventory Needs:
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The first method gives details of the working capital items.
A number of factors will govern the choice of methods of estimating working capital. Factors
such as seasonal variations in operations, accuracy of sales forecasts, investment cost and
variability in sales price would generally be considered. The production cycle and credit and
collection policy of the firm would have an impact on working capital requirements. Therefore,
they should be given due weighted in projecting working capital requirements
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Projection of Ratios through Trend Analysis
2.7
2.6 2.6
2.5
2.43
2.4
2.3
2.2
2.17
2.1
1.9
2016-17 2017-18 2018-19
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0.35
0.3 0.3
0.25
0.2
0.15
0.1
0.05 0.05
0.01
0
2016-17 2017-18 2018-19
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Figure 28: Total Asset Turnover Trend
0.39
0.37
0.36
0.35
0.34
0.33 0.33
0.32
0.31
0.3
2016-17 2017-18 2018-19
3.1
3.04
3
2.92
2.9
2.8
2.7
2.67
2.6
2.5
2.4
2016-17 2017-18 2018-19
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Figure 30: Working Capital Turnover Trend
6
5.65
5 4.95
4.33
4
0
2016-17 2017-18 2018-19
7 6.9
6.35
6
5 5.17
0
2016-17 2017-18 2018-19
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Figure 32: Creditor Turnover Trend
3.5
3.33 3.36
3
2.65
2.5
1.5
0.5
0
2016-17 2017-18 2018-19
6.7
6.63
6.6
6.5
6.4
6.37
6.3
6.2
6.1 6.09
5.9
5.8
2016-17 2017-18 2018-19
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Analysis on the basis of Trend:
Trend of current ratio put a picture of company that company is not having
short term fund in hand to meet short term debt hence it put a threat in
meeting current obligations.
Cash Ratio trend shows that company is having high amount of cash for
paying current liability which can influence the financial position of
company in upcoming period.
Total asset turnover implies the asset base of company and this projection is
in favor of the company that shows efficacy of company in handling asset.
Current asset turnover trend of company is decreasing which shows
inefficiency in handing assets.
Working capital is decreasing over the period that can lead company to face
liquidity crunch & shows inefficiency in use of working capital. It needs to
analyze the root cause of the same to take required corrective action.
Debtor’s turnover trend is showing an increase in future that signifies that
there is shorter time period in sales and collecting cash.
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CURRENT ASSET FINANCING
Process of working capital financing:
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FINDING & SUGGESTIONS
Findings:
The study conducted on working capital management of SHRIRAM PISTONS
AND RINGS LTD shows the evaluation of management performance in this
context. Major findings and suggestions thereon are narrated asunder:
2. High current assets turnover ratio is more judicious and shows efficiency
of management and proper utilization of the assets.
4. Current ratio (2.43:1) and quick ratio (1.57:1) of the year 2011-12 are
little bit more than that of the ideal figures i.e. ideal current ratio is 2:1
while quick ratio is1:1.
5. Inventory turnover ratio depicts the increasing trend which indicates the
faster sale of inventory which is good for the company.
Suggestions: Keeping in view of detailed analysis for the 3 years of study and
findings mentioned in above paragraphs, the following suggestions shall be
helpful in increasing the efficiency in working capital management.
LIMITATIONS
1. Availability of the financial data was very limited which is not disclosed
due to sensitive nature for the company.
2. The main component of working capital is cost of capital, which is not
described in the project because of confidential nature.
3. External environment influence was not considered while doing the
theoretical standard rather than the industrial standard because of
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unavailability of any such specific standard.
4. The scope of the study was limited to SHRIRAM PISTONS AND RINGSLTD.
REFERENCES
GLOSSARY
ABC Analysis: An approach of inventory management, which classifies
inventories according to their monetary values. Inventory items are thus
categorized as (I) A- items: high value items for which careful management
is needed; (ii) B-items: moderate value items for which rules of thumb such
as past inventory turnover are adequate management techniques, and (iii)
C-items: low value items which can be maintained ate flat minimum
amount.
Accrued Liability: - Also known as outstanding liabilities or expenses.
For example, accrued wages, accrued rent, accrued taxes and accrued
interest and so on. They typically represent obligations for certain
services for which payments are yet to be made and are indirect sources
of financing.
Ageing Schedule: It is a tabular classification of receivables which
showing the length of time which the account has been outstanding.
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An Aggressive Policy: It resorts to short-term liabilities to finance
temporary and also part or the entire permanent current assets
requirement.
Average Collection Period: Accounts receivables / (annual credit
sales/360). A ratio that express how rapidly the firm is collecting its
credit accounts.
Balanced Policy: This policy is that balances the trade-off between risk
and profitability in a manner consistent with its attitude towards bearing
risk.
Bills Payable: Bills Payable is a current liability and arises when the
bills written by creditors are accepted by the firm.
Capital Cost: The cost of the use of additional capital to support credit
sales, which alternatively could be profitably employed elsewhere is,
therefore a part of the cost of extending credit or receivables and are
called capital costs.
Carrying Costs: These costs arise due to the storing of inventory and
expenses made in raising funds to finance the acquisition of inventory.
Cash Budget: It is statement of the expected cash flows for a firm
over a specified period of time.
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Cash Cycle: This is length of the time between the purchases of raw
material sand collection of receivables in the sale of the final product.
Cash Discount: A percent reduction in sales or purchase price allowed
for early payment of invoices. It is an incentive for credit customers to
pay invoices in timely fashion.
Collection Cost: These costs are administrative costs or legal costs
incurred in collecting the receivables from the customers to whom
credit sales have been made.
Conservative Policy: A conservative policy ignores the distinction
between temporary and permanent current assets, by financing almost all
assets investments with long term capital.
Consumer Credit: Credit granted to an individual is referred to as consumer credit.
Credit Period: It is total length of time period over which credit is
extended to a customer to pay bill.
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