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PREFACE

Finance is an important to business as blood is to the human body. It is adequate flow of finance with which business is started and run smoothly in an efficient way. Proper management of financial resources is of prime importance in any business and financial analysis leads towards this direction. The present project report shows financial health of JCT Ltd. (JAGATJIT COTTON TEXTILE). The picture of financial position in the company is shown. However, the work is subject to time constraints but still it is the analysis of annual report of company and can supplement the interpretation in having crucial decision in regard to financial management. As in todays competitive world, it is essential to have a sound financial position to make a firm capable of facing tough and competitive business environment.

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EXECUTIVE SUMMARY

Companies strive from day to day to make their business publicly strong, financially strong, and appeasing and profitable for its shareholders. Shareholders as well as the company's management use several tools to determine a company's health and direction. These tools are better known as ratio analysis. Ratios are among the more widely used tools of financial analysis because they provide clues to and symptoms of underlying conditions. Ratios help measure a company's liquidity, activity, profitability and leverage. These four measured sections show how ratio analysis is used in decision-making, how a firm can measure its financial situation and financial performance, and the strengths and weaknesses of the company. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Research aims to evaluation of ratio analysis in investment decision making, and to know the financial position of the company. The report aims to provide appropriate information about the industries and financial position with its ratios analyses technique. In literature review part where the extract materials from various books, magazines, news papers and internet resources. Research also consist the research methodology and data analyses and interpretation.

Figures were obtained from comparative balance sheets and profit and loss statements from the relevant years as well as additional information that were forwarded by the board. This information enabled the development of percentage and ratio analysis which was then used to create the report. The investigation revealed that the company had not improved its position compared to previous years. The profitability of the company was significantly not better whilst the liquidity had remained reasonably steady. The solvency of the company had declined however, which affected the long-term obligations of the business. Overall, the company is in a not much sounder position.

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There are some suggestions Company is following very conservative credit policy for its Debtors and there is need to increase the credit period for its debtors in order to increase its Sales and Profits. The companys fixed assets are continuously declining. There is a need to increase the fixed assets by raising low cost Outsiders Funds. The company is paying large amount on Non Operating Expenses due to which the companys overall profitability position is not good. The company should have to control its interest and financial charges in order to bring down the Non Operating Expenses.

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CHAPTER-1 AN INTRODUCTION TO THE THAPAR GROUP


Where growth is not only an obsession

So long as we have confidence in the value of the goal and excitement at the prospect of setting forth into unfamiliar territory and the will to do new things, I have no doubt that the future of India and the future of Indian enterprise are both safe and glorious. Lala Karam Chand Thapar (1900 1962) Founder of the Thapar Group

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A visionary who wanted to lay the foundation of an enterprise that would help India through her formative years, founded the Thapar Group in the early 1920s. As pioneers they are the fourth largest industrial conglomerate in the country, with over 54 different companies and 80 manufacturing plants. Assets have accumulated over Rs. 24000 million with an annual turnover of about $2 billion. The group grows annually at the rate of over 19%. The group has diversified industrial interests that include paper, Chemicals, Textiles, Manmade Fibers, Glass, Electronics, Heavy Engineering, Diesel Engines, Power Equipment, Motor and Pump sets, Gensets, transmission and Distribution Equipments etc. Beyond this, the Thapar Group manufactures equipment for industries related to Aviation, Mining, Marine, Metallurgy, Oil exploration, Shipping, and Mechanical handling. Industrial products like Electronic Process Instrumentation Boilers and Furnaces, Steam and Energy Control Equipment are also the part of Thapar Groups activities. Software Growth is another area that Thapar Group has explored. Flagship that represents the Thapar Group:

Ballarpur Industries Ltd. JCT Ltd. Compton Greaves Ltd. Greaves Cotton and Company Ltd.

The companies have gone beyond their initial industrial interest and pioneered a wide range of products and services through their subsidiaries. The Thapar Groups spectacular growth in a span of over 80 years is a result of two factors: A clear philosophy that governs the mission of business across all levels of hierarchy and the openness of mind to share global technologies with those who are willing and brave. The Thapar Groups manufacturing values ensure associations only with the worlds best and most capable corporations.

The group owes its success to a well known attitude of doing business globally and nationally, an attitude that involves lighting changes, both in terms of technology,
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infrastructure, and ability to adopt the changing scenario at home and abroad, and a warm management philosophy that always puts people first.

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JCT LIMITED AN OVERVIEW


In the field of cotton and blended fabric, JCT has always been a trendsetter. It is one of the leading manufacturers and exports of cotton textiles in the country. JCT limited Phagwara; a composite unit having spinning, weaving, and processing facilities is a blue chip company of the Thapar Group and was incorporated on 28th October, 1946 under the name of M/S Jagatjit Cotton Textile by the government of India under the post war development plan. It was decided to locate the mill in the north India and after much discussion; Kapurthala was selected as a site for textile venture. It was M/S karamchand Bros. Ltd. who entered into a final contract with the government of India to set a mill at Phagwara (Punjab). The disadvantage of unfavorable weather was offset by other factors such as cheap labor, availability of raw material, and governments aid. Thus, the company came into existence in 1946. In the initial years, the business was on a small scale and the company was manufacturing only cotton fabrics. That is why it is called JAGATJIT COTTON TEXTILE Ltd. Afterwards the company also started manufacturing cotton yarn, and nylon t filament yarn. JCT has made a big dent in synthetic markets by producing plain and fancy suiting; both piece dyed and fiber dyed and dyed yarn shirting in innumerable designs and weaves to cater the different segments of the market. The policy of management to reinvest its profits year after led the mill to grow rapidly into one of the leading textiles mill in the country. In 1995, Rs. 300 Crores was invested for the modernization of the Phagwara unit. This unit is now one of the most modern units with the state of art technology. The management for over three decades has implemented the concept of participative management. The workers/employees and their representatives are fully involved in the management and running the affairs of the company. This policy of management has generated tremendous goodwill for the company amongst its employees and the result is that the company has a committed workforce of about 5000 workers and 530 employees and the most cordial employee-employer relationship. As this is the era of cutthroat competition, JCT believes in quality, which results in leadership, and as result, this has led them to tremendous growth. JCT fabrics have captured profitable sections in the market. There has been a

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constant growth in the man-made fiber with a wide variety of nylon and polyester filament yarn.

LOCATION OF JCT
The mill is situated in Phagwara town on G.T. Road, the national highway number -1. It is 40 Kilometers from Ludhiana towards Amritsar. The location of the mill is of great advantage as transportation of goods is cheaper, easier and quick.

JCT PHAGWARA COMPLEX


The complex consists of a mill and the Thapar colony. In the mill, there is a main production unit, administration offices, go downs, stores, canteen, dispensary and the turbines for the generation of electricity. The residential complex known as Thapar Colony is for the officers and other employees. It includes gymnasium club and a lake for boating. The whole complex thus, is like a small town in itself.

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J.C.T. FACTUALS
Established in Operation of production In 1950s Installed Capacity Spindle Looms : 390 : 17856 : 1946 : 1951

Present Installed Capacity Spindles Open End Rotors Looms : 63244 : 1488 : 450 Conventional 171 Sulzer 28 Air-Jet

Annual Turnover (in Rs. Corers) : Exceeding Rs.300 Manpower : Workers 4500(app.) (Engagement) Staff 550 (app.)

Regd.Office

: Village Chohal District. Hoshiarpur 46001 (Punjab)

Corporate Office

: Thapar House 124, Janpath New Delhi-110001

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BOARD OF DIRECTORS

MR. SAMIR THAPAR

MR.APAR SINGH DUGGAL

MR.MAHESH SAHAI

MR. GORDHAN KATHURIA

MR.SATYA PAL NARANG

MR.VIPUL SINGLE

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OBJECTIVES OF THE GROUP


To consolidate and develop core business areas mainly: synthetic and textiles. To attain the position amongst the leading composite textiles mills in India and to retain its position among the top companies in the synthetic fiber industry. To expand and diversify into allied product areas and simultaneously increase global presence & develop international together with domestic market to achieve rapid growth. To evolve into a quality conscious, customer oriented and fast expanding organization.

CORPORATE PHILOSOPHY
JCT believes in dignity of human beings. JCT believes that there exists a psychological contract between the organization and the employees and growth of both is interlinked. JCT strive to attract, develop and retain the best talent available. JCT doesnt believe in any discrimination on the basis of caste, creed, religion, gender. JCT believes in the concept of right person at the right job. JCT values merit and recognizes ability. JCT encourages teamwork and believes that this enhances problem solving capabilities. JCT actively promotes sports and other cultural activities for cohesiveness and harmony. JCT knows that is the part of the changing environment and that it has to be proactive to such changes. JCT continuously strives to be a better corporate citizen.

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HISTORY OF THE JCT

Year Events 1946 The Company was incorporated on 28th October in Kapurthala. The main object of the company is to manufacture cotton textile goods. The products manufactured are sheetings, shirting, cambric, dhotis, sarees, coating, mazril, mulls, etc. Counts ranging from 12s to 60s are spun and the cloth width varies from 27 inches to 66 inches. 1950 430 preference & 30,910 Number of equity shares allotted. 1815 prefence & 36135 shares forfeited. 1962 The Company acquired Benares Cotton and Silk Mills.- 4,16,364 number of rights of equity shares issued (prem. Rs 5, prop. of 1:1) 1963 Preference shares entitled to gross dividend of 6.5% P.A 1967 4,16,275 No. of equity shares issued in prop. 1:2 1973 The Company entered in to a collaboration agreement with Thonburi Textile Mills, ltd., Bangkok whereby the Company was to render technical Knowhow for modernizing the existing weaving and processing facility besides its expansion by 21,600 spindles. This agreement was slightly revised during 1978-79. 1975 25,000 11% pref. shares issued. 1978 Shree Sadul textile, ltd. was merged with the Company on 28th October and the merger was effected from 1st February 1977. -Taplon Synthetics Ltd. was amalgamated with the company with effect from 1st Feb. 1979. As per the scheme of amalgamation, 2, 02,535.Number of Equity Shares of the company were allotted to the members of Taplon synthetics Ltd. after Cancelling 28,200 No. of equity shares held by the company as investment in Taplon Synthetics Ltd. -2,38,108 No. of Equity Shares and 24,839 pref. shares allotted to members of Shree Sadul Textiles Ltd. upon its merger with the company. 1979 With effect from 1st February, Taplon synthetics Ltd was merged with the Company -7, 64,117 bonus Equity shares issued in proportion of 1:2 2,760 bonus equity remained to be allotted to non-resident shareholder. shares

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1980- 2277026 rights equity shares issued at par in prop. 1:1, 319 bonus shares allotted to non residents (244) bonus shares remain to be allotted. 202535 No. of Equity Shares issued to members of Taplon Synthetics upon its merger. 1981 - The Company received a letter of intent from the Punjab State Industrial Development Corporation to participate in a 15,000 tonnes per annum, polyester staple fibre project to be set up at Hoshiarpur in the Company's nylon plant premises. -A technical collaboration agreement was entered into with E.I. Dupont, De Nemours of USA. A new Company under the name and style of Punjab Polyfibres, Ltd. was incorporated to implement this project. -A letter of intent was received to increase the capacity from 15,000 tonnes to 30,000 tonnes per annum. -The Company entered into a management & Technical Know-how Assistance Agreement with Chempaka Negri Lakshmi Textile SND, BHD at Malaysia 1983- 100000 13.5% pref. shares were issued. Rate of dividend on these pref. shares was increases to15% from 16th may 1984.These pref. shares are redeemable during 30th April1996-99 1986 - To improve the profitability of the Hoshiarpur unit, the Company took steps to convert a substantial part of its production capacity for the manufacture of polyester filament yarn. -A letter of intent was received for the manufacture of 15,000 TPA of polyester filament yarn. -At Sriganganagar unit operations were adversely affected due to workers strike for 3 months during October to December.

1987 - The Company offered 7,58,334-12.5% partly convertible secured redeemable debentures (E-Series) of Rs.120 each for cash at par on rights basis in the ratio of 1 debentures were allotted to retain over-subscription.

1988 - The Company took up implementations of the PFY project in stages. It was planned to add one spinning line to produce specialty yarn, in the first stage. - A dyeing plant was installed at Hoshiarpur, to increase the production of dyed yarn. In addition, a waste recycling plant was installed to increase the recovery of caprolactum from waste. In April, the name of the Company was changed from `Jagatjit Cotton Textile Mills, Ltd.' to JCT, Ltd.

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1990 - With effect from 1st April the undertakings of Kidarnath Kishanchand Pvt. Ltd., (KKPL) and Sterling Steels & Wires, Ltd. (SSWL) were amalgamated with the Company. As per the scheme of amalgamation the following shares were allotted without payment in cash. 1991 - The profitability was adversely affected by various factors such as increase in interest rates, devaluation, and partial convertibility of Rupee etc. -The performance of the nylon and polyester filament yarn division was affected due to steep increase in excise duty, poor off take of textile material, increase in the cost of the basic raw material viz., caprolactum and import curbs. -Also the textile division was affected by the general recession in the textile market and unprecedented rise in cotton prices.

1992- The Company offered 9723759 No. of equity shares of Rs. 10 each at a premium of Rs.40 per Shares. -During October-November the Company offered 36637091. No. of equity shares of Rs.10 each for cash at premium of Rs.40 per shares on rights basis in the prop. 1:1 (all were taken up).

1993 - With a view to consolidating its position in the synthetic fiber industry, the Company undertook to set up a grass-root polyester simplex with facilities to manufacture polyester staple fiber, textile grade chips, PET resins up to 11,000 TPA all in the first phase. -With the rise in prices of cotton, it was proposed to shift production towards polyester blended fabrics. New varieties of cloth with high value addition were introduced. -The Textile division embarked upon a plan of modernization wherein older equipments were to be replaced with modern and efficient equipment. -Both 20000-5% and 24869-5% (income tax free) cumulative preference shares were redeemed. 1994 - The steel division entered into a tie up with a Korean Company for manufacture of wire ropes. -JCT Fibers Ltd., was merged with the Company. It was proposed to increase the polymer capacity to 65,000 TPA from 33,000 TPA. The said additional polymer was to be processed partly on polyester filament yarn and partly on polyester staple fibers. -The Company also undertook to invest in downstream equipment to manufacture additional polyester filament yarn and additional polyester staple fiber.
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-Under a modernization/replacement programmer, the Company proposed to install 48 high speed sophisticated looms and open end spinning machines at Phagwara. 2001 - The Company has decided hive-of its synthetic fiber division in Punjab and has also proposed to restructure its equity capital by reducing the face value of its shares from Rs 10 to Rs.2.50 -MM Thapar group flagship JCT has decided to induct three new professionals on the board. The new inductees are Raj Mohan Singh, head of the company's Phagwara unit, finance head; T N Subramanian and; S P Narang, secretary, The Institute of Company Secretaries of India . 2003 -JCT Members approve delisting from 3 exchanges (Ludhiana, Delhi and Kolkata) 2004- JCT buys Senegal mill. JCT Limited, a pioneer in textiles in north India, is all set to spread its operations overseas. Through its subsidiary, CNLT Malaysia, JCT has acquired a composite textile mill in Senegal on a long-term lease 2005- JCT gets UN nod for carbon trading. Textile major JCT's rice husk-based power project at its plant in Phagwara, Punjab, has been registered with the UN panel for clean development mechanism (CDM) projects. CDM projects are those that qualify to trade carbon credits. 2007- JCT signs MOU with Dakshidin Corporation to produce water pumping & power generation Wind Mills, Dakshidin Signs MOU With Indian Conglomerate, JCT Limited, Enters Multi-Billion Dollar Indian Market.

CORPORATE PROFILE OF JCT LTD.

JCT Limited, the flagship company of the Thapar Group, has been a fore-runner in the field of Textiles ever since its inception in 1951. The Group has combined turnover of US $2 Billion in the year 2004-05. The groups constant endeavor has been to upgrade manufacturing processes and capacity to world standards, which has resulted in collaborations with some of biggest multinational corporations like TEIJIN SEKIE from Japan, NOY-VALLESINA, Zimmer AG, Hitachi Ltd., Corning, Mitsubishi Corporation, General Electrical, Westing house and David Brown. JCT Limited, under the leadership of Mr. M Thapar (Chairman) and Mr. Samir Thapar (Vice Chairman) is premier Indian Cotton Textiles and Nylon Filament Yarn manufacturer having manufacturing facilities in Northern India. JCT Limited is well renowned brand name in
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Cotton Textiles and Synthetic yarn communities in India and abroad. For their regular and consistent exports Govt. of India has awarded Export house status to the company for past 10years on regular basis. JCT belongs to THAPAR GROUP, one of the most reputed business groups in India. The Thapar group of companies was founded in early 1920s by Late Lala Karam Chand Thapar, which grew in size and scale to become the fourth largest conglomerate in the country during early 1990s with over 40 companies and 75 manufacturing plants. JCT Limited is an Indiabased company. The Company operates in two business segments: Textiles and Filament. JCT is a leading name in the domestic and overseas textile markets with operations in two distinct business viz. cotton/blended textiles and nylon filament yarn. It ploughs on proudly as a multi-market company that is driven and fueled by culture and values that demand a high standard of performance and work ethics to establish itself as makers of finest products in the country. JCT Limited follows a balanced model for growth corporate responsibility and contribution towards social causes such as literacy and environment, sports and sportspersons development areas important as innovations in production techniques.

Domestic Market: The Company is a leader in Domestic segment and derives premium
on its products. We are the first one to introduce Micro Denier Products in collaboration with Val Lesina- Italy. The group owes its success to a well known attitude of doing business, globally and nationally. An attitude that involves effecting lightning changes, both in terms of technologies and infrastructure and the ability to adapt to changing scenarios at home and abroad. Company has strong hold and efficient distribution across India and abroad.

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International Market: The courage to look beyond national fences has today made
filament division as leading exporter of value added product Nylon Filament Yarns from India. Today JCT has many Global Customers, satisfied with their product and service, few of their regular international markets are:

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SWOT ANALYSIS OF JCT Ltd.

Strengths
Expertise in design & colours of woven clothes. Cheap labour. Easy availability of raw material. Good name in the market. At present JCT is market leader in cotton clothes. JCT is continuously trying for diversification. Good network and extensive use of computers. There are no major strikes and problem since 1969. Workers and managers are cost conscious.

Weaknesses
Not competitive on quality. Outdated machinery. Inadequate market information to both employee and employer. Large number of uneducated and unmotivated employees. No separate training department is there. Unaccustomed to produce high fashion and considerable volumes. Working system lacks network. Till the last year JCT did not have any customers service department. Overheads are very high.

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Opportunities
Good on basis to have the best quality in India Market. Trying to discover the new markets. The market is open for export and JCT should focus on it. The company should make an attempt to improve the distributors chain, increase number of dealers and retail shops in urban areas. The company should go to the users through exclusive showrooms. Techniques being used in the modern firm for better utilizations of present resource. Step into readymade market for its growth.

Threats
Competition with volume markets like China, Indonesia, and Bangladesh etc. Labour advantage lost as developed nations introduce new technology. Growth of discount and range market case for price competitiveness and volumes. New bloods/ competent are not ready to join the company.

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PRODUCT OVERVIEW

JCT ltd has product range of material including 100% cotton, 100% polyester, 100% nylon as well as various blends like cotton/polyester, cotton/nylon and polyester/viscose, single and piled yarns (both with counts and ranging from 6s to 100s) as well as cotton lycra and P/C lycra stretch material (which is dupont USA approved). Depending upon the requirement, even bamboo and linen fibers are used to create special effects. The company pioneered the manufacture of organic cotton, a special eco-friendly type of fabric that is available in up to 160cm of sheet width. This organic cotton is grown on land free of any harmful chemicals, insecticides etc.and is regularly exported to USA. JCT ltd is certified with ISO 9001, Oeko-tex 100 class 2 and GOTS/skal certificates for fabrics of this nature, namely wide width sheeting, dyed bottom-weight twills, dyed shirting twills, natural twills, canvas and flannels. The companys strength lies is in the bottom weights and piece dyed shirting for both fashion and work wear in all age groups. They use a variety of weaves like twills, plains, dobbies, ripstops, cords, satins, oxfords, ducks, drills, tussores, ottomans etc. End product includes fashion wear, sportswear, outerwear, active wear for defence purposes and school uniform. The organic cotton fabric meanwhile is used for everything from infants wear to technical segments like medical wear.

Material: 100% Cotton, 100% Polyester, 100% Nylon Various blends of Cotton/Polyester and Cotton/NylonBlends of Polyester/ Viscose, Cotton with Lycra, Poly Cotton with Lycra. 100% Bamboo, Bamboo Cotton blends, Cotton Linen blends. Yarns: Count ranging from 6s to 100s, in single as well as plied yarns, Core Spun Lycra and slub yarns Weaves: Variety of weaves like Twills, Plains, Dobbies, Ripstops, Cords, Satins, Oxfords, Ducks, Drills, Tussores, Ottomans etc. Weight: Cotton and Polycotton Polyester and Nylon: 60 GSM to 250 GSM 90 GSM to 450GSM

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Finishes And Coating: Micro sanding, soft finish, peach finish, Calendaring. Water and oil repellant, Teflon, Nano, Wrinkle free/ easy care Fire retardant, Inspect repellant, UV resistant, Anti microbial. Stiff finish, Highly breathable, Moisture Management, Rot proof, etc. PU coating, acrylic coating, Water repellent, fire retardant, breathable coating, Silver and Gold coating, PVC Coating & various other effects.

Prints And Yarn Dyes: Variety of designer prints for body fabrics and linings (Camouflages,floral, blotches, etc.) Designer yarn Dyes for Bottom weights and shirting. Organic Cotton: JCT is pioneer in manufacturing organic cotton fabrics in India - specially designed eco-friendly fabrics.

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RESOURCES
Plant Overview
JCT Limited commenced its textile operations in 1946. The Phagwara unit of JCT Limited is a composite textile unit having Spinning, Weaving Processing facilities. Today JCT Limited is an ISO 9001:2000 certified company and has secured GOTS Certificate for Organic Processing. It is also one of the few globally recognized OEKO TEX-100 certified companies of Class-II category.

The company produces fine and superfine cotton fabrics. The synthetic fabric range includes plain superfine suiting, shirting and dress materials in myriad designs and weaves. In addition, JCT also markets a delightfully warm range of up-market shirting and uniforms material in various textures, hues and designs. The fashion climate in the world is changing constantly. A company in the business of manufacturing fashion fabric needs to react with lightening speed to effect process changes. JCT Limiteds flamboyant innovativeness in styling and design satisfies the hunger of the fashion conscious. The company has a dedicated R&D setup that keeps looking for significant improvements in spinning, weaving and processing techniques - an exercise crucial to design breakthroughs. Elaborate computerized testing facilities are in place to monitor quality right from the fibre stage; HVI fibre testing along with various other equipment monitor physical and chemical characteristics of textiles. Uster classimat, Evenness Tester from `Uster of Switzerland and Computerized Colour Matching Machines further ensure 100% quality assurance to buyers around the World.

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Machine and Plant Capacity The main features of the processing section are 3 Continuous Dyeing Ranges from Monforts, Germany and Benninger, Switzerland, 2 Continuous Bleaching Ranges and Mercersing machines from Benninger. The present capacity of the plant is 130000 mtrs per day, which includes 10000 mtrs of yarn dyed fabrics. All the fabrics can be dyed and finished in various kinds like peach finish, Anti crease or wrinkle free, water repellent, Fire Retardant and various coatings to add value to the finished product. The unit has full-fledged laboratory to perform tests, computerized and modern colour matching facilities to ensure that fabric complies international standards. Printing machine from Stovec is another feature of processing section.

Weaving section has 283 looms in mix of Sulzer Projectile, Airjet , rapier looms. It has capability to produce 100% cotton, and poly cotton blended fabrics in large variety of weights, weaves and counts. These machines are Sulzer and Picanol and well supported with preparatory machines from Benninger, Switzerland. The unit is having 3 spinning sections - Open End Spinning, Cotton Ring Spinning and Blended Ring Spinning. All machines equipped with new technology from the companies, like Zinser, Trutzschler, Trumac, LMW, Erfangi, Crossrol & Vouk. Company has about 54000 Ring Spindles and 1488 Rotors in its spinning section. JCT has captive power plants of 5.5 MW and 8MW, which is based on biomass fuels like, rice husk. These plants are well equipped with state of the art pollution control devices.

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JCT New Plant Going ahead, JCT has set up a new plant to produce Nylon/Polyester Filament based Performance Fabrics. JCTs new plant has production capacity of 50000 mtr per day in special performance synthetic fabrics. There is a huge market for this kind of fabric in various segments. Various International Brands, with their source basis in India, import over 100 million meters of this kind of fabric from Far east Countries to convert into various types of garments for Sportswear, Workwear, Outerwear and Defence purposes.

The JCTs new plant is the first of its type in whole of South Asia. The production from this plant fills in the gap in the supply chain. With most brands strengthening their sourcing base for garmenting out of India, procurement of this fabric from Far East was a nightmare in logistics. With increasing demand on shortening the supply chain, the availability of such fabrics in India will save 20 to 25 days for sourcing such garments out of India. The plant has capabilities to produce different functional finishes and special coating effects.

The plant is equipped with state-of-the-art technology with water jet weaving machines from Tsudakoma, Japan. Processing machinery from Il Sung and other suppliers from Korea & Taiwan.

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Bankers

ALLAHABAD BANK STATE BANK OF TRAVANCOR E BANKERS OF JCT STATE BANK OF PATIYALA STATE BANK OF INDIA PUNJAB NATIONAL BANK

PUNJAB & SIND BANK

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MAJOR DEPARTMENT OF JCT LIMITED


In todays competitive world, the process of production is very important but the stand of the company becomes strong and sound if it moves towards productivity. This increase in productivity has to be achieved without sacrificing the quality of the end product. To meet the required objectives, the mill is divided into three main functions contributing equally to the effective and efficient working of the mill. These three major function are subdivided into departments and further into sections these three functions are as follows: A) Production Function B) Non Production Function C) Service Function

A) Production Function comprises of the following departments: 1) Spinning


A) B) C) D) E) Cotton Spinning Synthetic Spinning Spinning Auto-Coro/ Open End Spinning Spinning Maintenance Post Spinning

2) Weaving
A) B) C) D) Weaving Property Conventional Weaving Conventional Weaving Preparatory Sulzer Weaving Sulzer

3) Processing
A) B) C) D) Synthetic Processing Cotton Processing Finishing Printing

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B) Non Production Function comprise of the following departments: 1) Warehouse


A) B) C) D) E) Mending Grey Folding Cotton Warehouse Synthetic Warehouse Exports Warehouse

2) Marketing
A) Domestic Marketing B) RMG Marketing C) Exports 3) 4) 5) 6) 7) Raw Material Department Fabric Development Department Production Planning Department Research and Development ISO Department

C) Service Function comprises of the following Department:


A) B) C) D) E) F) G) Human Resource Department Finance and Accounts Department Information Technology Department Administration Department Purchase Department Engineering Department Labour & Industrial Relation Department

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PRODUCTION DEPARTMENT
A) Spinning
1. Cotton Spinning Synthetic Spinning This department also produces yarn but uses the blend of Polyester and Cotton (PC) or Polyester and Viscose (PV). The process of synthetic spinning differs as per the PC and PV blends.

2. Spinning Autoconer/ Open end spinning The spinning autocoro section works under the open end technology. The section gives many advantages over the conventional spinning process.

3. Spinning Maintenance This department is responsible for the preventive maintenance of all the three spinning sections. This section deals with many cases like replacement of broken machinery parts and cleaning of the machines. This section plays a major role in the working of the spinning machinery.

4. Post Spinning This section comes after the final spinning in the ring frame section. The main objectives of the section are: To make bigger packages of yarn so that the efficiency of the winding machine can be increased. To clear the yarn from the thin and thick places (correcting the faults). It is essential to impact proper tension to the yarn so as to reduce snarls and hence breakages in the future process. Different machines used in the process are: Cone winding Cheese winding Ring doubling machine TFO Autoconer

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B) WEAVING
1. Weaving Preparatory The main objectives of this section are: To prepare the sheet of warp yarns (warping) as per the designs and the percentage of colors threads used. To prepare the packages for weft yarn. To seize the yarn so that the thread can withstand strains in the weaving process (sizing). Drawing in / Tying in.

2. Weaving Conventional

This section provides gray fabric based on weaving machines used for fabric manufacturing.

3. Weaving Sulzer As the mass of the shutte (weft carrying package in conventional weaving) is very high, so the acceleration or the acceleration of the shuttle is very less. So we can increase the production by using lightweight weft carrier. Sulzer technique is based upon this principle and is widely used in JCT.

4. Weaving Air jet

C) PROCESSING
Process house The department comes into action when fabric from the weaving section is obtained in the grey stage. Different chemical treatments are given to the fabric so as to improve its appearance and properties. This section is divided in three main units: Benninger Plant Cotton Processing Synthetic Processing

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NON PRODUCTION DEPARTMENTS


Non Production Departments comprises of the following:

A) Warehouse It is a department where the final product is brought and is prepared for dispatch. Grey cloths come to Ware House direct from loom. Following Process / Activity is being operated in this section: 1. Mending 2. Inspection 3. Planting 4. Grading : : : : This process is used to find defects in the cloth under lights. An inspection machine is used to check the fault. Planting machine is used to measure the cloth. Processed cloth is graded on the basis of quality.

There are certain faults and damages, which are left in the cloth even if the cloth is processed carefully. Following are the types of damages possible: Crack Patties Double picks Lashing Floats Shuttle floats Designing cuts Swai Phutki Draw picks Missing ends Reed marks Stain Salvage Torn Packing is done on the basis of following standards: Suiting:1. Plain Suiting 2. Fancy Suiting 3. Matty Shirting:1. Plain Suiting 2. Fancy Suiting 3. Rubia 200 meters one bale 200 meters one bale 400-500 meters one bale
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200 meters one bale 120 meters one bale 150-160 meters one bale

That part of the cloth which is not included in the bales or the rejected parts of cloth are future divided into chindies, fents and rags depending on their lengths

Warehouse Cotton Warehouse Synthetic Warehouse Grey Export B) MARKETING DEPARTMENT


After the manufacturing process is over, it is the duty of the marketing department to sell these manufactured goods to the retailers and wholesalers at profitable rates. The marketing department has three sections:

Domestic Marketing JCT is largest supplier of fabrics for ministry of defense and has been a reliable supplier for past 25 years. JCT has a strong presence in school uniforms and institutional suiting and shirting. JCT has the largest dealer and distribution network.

RMG Marketing Fabric supply to garment exporters in India. Most of the business is nominated and is routed through buying houses. Major buying houses are Gap, Triburg, Impulse, Nike, etc which India Offices are for retail chains across the world. Buying House acts as a monitor. It approves the quality, finalises the delivery schedule with mills and assigns the garmenting responsibility to a garmenter which ships the garments to the respective destinations.

Exports Directly sending the fabric to overseas markets. 1/3th of the production is exported to Europe, USA, S.Africa, Middle-East, Far-East, Australia and Latin America. Different market has different dynamics. Some markets like Nepal, Srilanka, Bangladesh, etc are thriving purely because of Quotas. JCT works with overseas agents on commission basis. Catering to following countries- USA, Italy, Spain, Holland, Czech Republic, Greece, Portugal, Germany, France, Singapore, Mauritius, South Africa, Kenya, Bangladesh, Nepal, Australia, Madagascar, Egypt, UAE, Turkey, Kuwait, Baharain etc.

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Type of buyers-Buying houses, readymade garment manufacturer, Stockiest, Traders etc. Exports turn over-1 million meters per month. Type of fabric-dyed, bladched, grege, now more orientation towards dyed. Whole world distributed in five zones. Total 8 per son in marketing. 6 per son in pre & post shipping. 80% business through L/c, balance on advance payment or on CAD basis.

C) RAW MATERIAL DEPARTMENT


The major function of this department is to check the desire amount of raw material in the stores and to meet the demands of the production department. In JCT the following raw material is purchased: i). Cotton Bales ii). Organic Cotton iii). Polyester Fiber iv). Viscose v). Cotton Yarn vi). Polyester Viscose Yarn vii). Polyester Filament Yarn viii). Grey Fabric List of the sources of raw material: Cotton bales are purchased from Madhya Pradesh, Maharashtra, Gujarat, Rajasthan and Punjab. DCH-32 Type cotton is purchased from Madhya Pradesh. LRA super, NHH-44, MECH-1, DHY are purchased from Maharashtra. V-797, J-34 are purchased from Rajasthan.

D) FABRIC DEVELOPMENT
To grow effectively in the industry, development is very necessary. Changes in the ongoing processes are made to create an improvement in the design and the quality of the fabric. Fabric development department is working in this direction. It is directly related with the marketing department and also to the whole mill directly or indirectly. As per the requirement of the marketing department, the desired design and the quality of the fabric is developed. The whole process is carried on with the help of computers.

E) PRODUCTION PLANNING
This department acts as a conduct between the marketing department and the production department. The main objectives of the planning department are:

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Checking the feasibility of the order and the specifications placed by the customer. To plan the entire production process to meet a particular order in the set time limit. To give data specification to the fabric development department. To ensure that the fabric so produced confirms the specifications of the order and the marketing department. Coordinating all the departments to ensure smooth functioning. All changes in the production are made with the consent of the planning department.

Thus, this department focuses on the utilization of the full capacity of all the production units. It works for the proper management.

F) RESEARCH AND DEPARTMENT


The main objective of this department is inspecting and testing. It insures quality from input to finished product. Following are the machines which are used in this department. a) Shirley Trash Analyzers: This machine is used to test raw material and to compare with norms. b) Projection Microscope: This machine is used to identify manmade fibers as well as cotton fibers. c) Uster Evenness Test: This is used to check mass per units length of silver. d) Black Model: This is an old method of testing uster evenness. e) Fiber Bundle Strength Tester: This is meant for testing the strength of fibers. f) Comp sorter Balance: This machine is used to measure counts. g) Winding Machine: This machine is used to sense the faults. h) Fabric Yarn tester: This is used to test the strength of fabric. i) Conditioning Chamber: This chamber helps to condition the material.

G) ISO CELL
This is the cell for the International Standards Organization. The scope of this department is Department; Production & Marketing of Cotton & Blended Yarns & Fabric for apparel uses. This is basically a quality management system. The British standards Institution

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(BSI) gives the ISO standards and certification. JCT at present is an ISO- 9001:2000 certified company. This certification relates to the following: Development Production Servicing

The BSI gives the certification after a through audit and followed by half yearly sevilience Audit. An internal audit is carried at an interval of 6 months. The external audit includes the following: Observation Non conformity Suggestion for further improvement The internal audit is done by a team of 16 members (one from each department). JCT limited it yet to go for the ISO-14001 & 18001 Certification.

SERVICE DEPARTMENTS
A) Engineering Department
The main purpose of this department is to repair the damaged machine parts and to manufacture the new parts so that the time can be saved, rather than getting it repaired from the outside sources. This department has six sections: Workshop Utility Power House Electronics & Electrical Civil & Constructions Effluents Treatment Plant

B) Human Resource Department


It is that branch of management that deals efficiently with the proper utilization of human resources and to get the maximum output. The major focus areas include Man Power Planning Recruitment and Training TQM-Quality Circle, Kaizen & Cross Functional Teams Employee Performance Employee Welfare Personal Records

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It also takes care of discipline matters, personnel information system etc. It also provides strategic and logistic support to the industrial relation matters of the company.

C) Information Technology Department


This is one of the services Department of the Company. It Interacts with all the other departments of the company and is responsible for the smooth flow of the information from various department to management helping them in prompt & appropriate decision. The main objectives of this department are: To develop software for various reports as per the need of different departments. To maintain the efficient working of the various modules of Ramco Applications & in house Developed Software. To maintain the security of data and different reports in the company. To provide online information to different departments for they are efficient working. To develop new software and reports for various departments for the smooth flow of information. To provide & maintain the network as well as the Computer hardwares of the company.

D) Finance and Accounts Department


Finance department is one of the important sections of the company. The main idea behind maintaining the records is to judge the accurate position of the company regarding the profits made or the losses incurred by the company. The objectives of the finance department are: To ascertain the results of the business activities carried on during the year. To show the financial position of the business as on a particular date. To meet the requirements of the taxation authorities, investors, management and owners. This department is divided into following section: 1) Raw Material Section 2) Store Section Stores Accounting Insurance C Form and D Form 3) Establishment Section Salary Wages LTA
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4)

5) 6)

7)

8)

9)

Medical Allowances Bonus General Account Furniture Maintenance Other Expenses Refreshment Expenses Bank (Finance) Debtors Account Direct Through Banks Assets and Depreciation Accounts Original Cost Depreciation WDV Costing Pre-Production Costing Routine Costing Productions Returns Budgeting Budgets are prepared monthly, quarterly and yearly as per the requirement.

E) Purchase Department
All the purchases made by the mill are made through this department (except the raw materials). This department manages the purchase of the following items: New Machinery Dyes and Chemicals Packing Materials Capital Goods Spare parts for all machines

F) Administration Department The administration department ensures Office Establishment, Dispatch, Transportation, Records Leave & Insurance of the company. The main objectives of this department are: Office Establishment Transportation Records Leave Insurance

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G) Factory Department
The factory department ensures safety, security and welfare of the workers of the company. The main objectives of this department are: To ensure safety and security of the staff and workers. Disciplinary actions in regard to workers. Recruitments of workers and allotment of departments. To keep the record of the attendance of the staff members and the workers. To prepare the statement of the salary and wages of the staff and the workers. This department is also called the personnel department. It ensures the safety, security and welfare of the staff and workers. It takes care of disciplinary actions and sports. This department is further divided into following sections:-

1. Time Office: This section deals with recording of time of workers, staff members and trainees with the help of numbered cards. 2. Safety Department: There are three safety officers in JCT. If an accident occurs inside the plant then proper enquiry is done so that this could be avoided in the future. 3. Security Department: This department makes all arrangements of security in the factory. 4. Establishment: This department makes the records of wages and salaries of staff and workers. Employees Staff Insurance Corporation provides the staff members free medical services.

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CHAPTER-2 OBJECTIVES OF THE STUDY


1. 2. 3. 4. 5. To demonstrate the size of the market opportunity. To explain the business model. To show the path to profitability. To quantify the investment requirement. To facilitate valuation of the business

RESEARCH METHODOLOGY
Research design stands for the framework of research. The research design utilized in this study is descriptive. Data Collection Data refers to information or facts. It is not only refers numerical figures but also includes descriptive facts. While deciding about the method of data collection to be used for the study, The researcher should keep in mind about two types of data, such as primary data and secondary data. Primary Data I have collected the primary data through some face-to-face formal interviews with staff. Secondary Data Secondary data means data that are already available in the organization. The researcher has to look into sources for the data from where he can obtain data. The secondary data may either be published or unpublished. Published data will be available in Magazines Journals, books Reports by management, scholars, economist etc The secondary data for conducting the study has been taken from Financial Statement that is Income Statement, Balance Sheet Statement, Annual Reports of Company and some other financial records.

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CHAPTER-3 COUSRE OVERVIEW


'Project Finance Modeling' is designed to help middle and senior managers deal with financial models from disparate sources, enabling them to be compared and analyzed on a consistent and focused basis. The principal aim of the course is to teach participants to create, use and analyses a project finance model .These skills can be used to support credit approvals and reviews by lenders and to support organizations which run or sponsor projects. This will be done by reviewing best practice in model structures and logic, and using tools to highlight areas of risk, particularly in sensitivity analysis.

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FINANCIAL MODEL
A financial model is anything that is used to calculate, forecast or estimate financial numbers. Models can therefore range from simple formulae to complex computer programs that may take hours to run. At the simple end a valuation ratio, such as the price earnings ratio (PE), is a simple valuation model. Although the term model is rarely used for something quite as simple as a straightforward, commonly used ratio, it is commonly used for slightly more complex formulae of a similar nature. Specific methods of calculating numbers are often called models: for example, application of a discounted cash flow (DCF) to dividends to value a share would be called a dividend discount model. Spreadsheets used for budgeting and for forecasting profit and cash flow are also financial models. More specialist computer software is used for more complex models, especially those that require a more complex application of statistics and financial mathematics. In areas such as risk management and economic forecasting, the models used are extremely complex. Models such as value at risk are implemented using specially written computer programs. Investment banks employ quantitative analysts and computer programmers who specialize in devising and implementing financial models.

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FINANCIAL MODEL DEFINITION


Mathematical representation of key financial and operational relationships. Comprising of one or several sets of equations, it is used in analyzing how a business will react to different economic situations or events, and in estimating the outcome of financial decisions before committing any funds. A financial model generally includes cash flow projections, depreciation schedules, debt service, inventory levels, rate of inflation, etc. It may also quantify the financial impact of the firm's policies, and of restrictions or covenants imposed by investors and/or lenders. A cash budget (whether computed by hand or with a spreadsheet program) is a basic financial model.

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DEFINITION OF MODEL AND MODELING


A model is a program which has been develops to copy the way a system work in real life. It uses mathematical formulas and calculations to predict what is likely to happen based on data recording about what actually did happen in the past. The reason people use modeling and financial modeling in particular is that they want to predict the future. This is done by carefully setting up a model that they think will do this. I say think because sometimes setting up a complicated financial model is as much an art as science.

WHO DOES FINANCIAL MODELING?


Anybody dealing with any decision related to money (wish there was somebody who did not require that!). If you are involved in financial decision making/ planning related to large corporate, then you would definitely need financial modeling day in and day out. Financial modeling is a mandatory activity for investment bankers, bankers, project finance persons, equity research folks, PE & VCs.

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IMPORTANCE OF FINANCIAL MODELING


Financial modeling acts as a useful tool which enables business options and risks to be estimated in a cost-effective way against various assumptions, recognize optimal solutions in estimating financial returns and understand the effect of resource constraints thus leading to more effective business decisions. Financial modeling can be referred as an art and like any other art form, it requires constant practice and commitment to develop expertise in this area. In the present day world, many companies are becoming globally integrated with the international economy through the way of acquiring/establishing international operations. This calls for the requirement of strong financial models which can assist in performing the evaluation of every countrys operations, reflect on multiple currencies in their model, estimate varying capacity utilizations to estimate the optimal capacity under changeable industry demand-supply scenarios and similar more cases. In the financial services industry, the use and perceived importance of financial modeling is increasing considerably across multiple fields. Investment bankers for example are now employing financial modeling and valuation analysis to help guide them through mergers and acquisitions as well as public offerings to make sure they can increase their customers investments. Commercial corporate bankers meanwhile are using the very same techniques to analyze companies abilities to service debt. Private equity funds model a chosen business financial statements to calculate the effectiveness of that investment; pension funds even and insurance companies use modelling and valuation to identify assets for their portfolios. Such widespread use demonstrates the effectiveness of financial modeling which is becoming an integral determining factor in many companies success. Financial and valuation skills are becoming more important all the time for company owners and executives in multiple fields as a way to asses aspects of strategic planning and analyze uncertainty. With financial modelling companies can engage in calculated risks that will minimize the danger of failure while maximizing the potential rewards. By learning these skills then you will be able to create comprehensive models of companies, prepare valuation of a business, project or scenario and accelerate your career and your company as a result.

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FINANCIAL MODEL TYPES


Financial models are often developed over the course of months and years, and many financial analysts get caught up the grind of building, auditing and maintaining existing financial models on a daily basis, losing the big picture of understanding best practice modeling solutions used in business and economic decision analysis. It is therefore useful for a good financial analyst to take a step back, examine the broad categories of financial models that are commonly used, and determine the optimal approach for the financial and business modeling of different scenarios and situations. Let us first re-visit the basics, and look at how financial models can be related to its usage in modeling an economy, industry or company. Types of financial model:

Macroeconomic Financial Models Industry Financial Models Corporate Financial Models

Macroeconomic Financial Models


The models are usually econometric analysis based, built by government departments, universities or economic consulting firms, and used to forecast the economy of a country. Macroeconomic models are used to analyze the like effect of government policy decisions on variables such as foreign exchange rates, interest rates, disposable income and the gross national product (GNP).

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Industry Financial Models


Industry models are usually econometric based models of specific industries or economic sectors. Industry models are often similar to macroeconomic models, and typically used by industry associations or industry research analysts to forecast key performance indicators within the industry in question.

Corporate Financial Models


Corporate financial models are built to model the total operations of a company, and often perceived to be critical in the strategic planning of business operations in large corporations and startup companies alike. Almost all corporate financial models are built in Excel, although specialized financial modeling software are increasingly being used especially in large corporations to ensure standardization and accuracy of multiple financial models, or to comply with spreadsheet management requirements imposed by the Sarbanes Oxley financial reporting act.

Now that weve looked at the context of financial models from an economic and financial analysis perspective, let us now examine financial models specifically from a financial modeling build perspective. Financial models can generally be classified into 3 categories:

Deterministic Financial Models

Simulation Based Financial Models

Specialized Financial Models

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Deterministic Financial Models


In a deterministic model, a financial analyst enters a set of input data into a spreadsheet, programs the spreadsheet to perform a series of mathematical calculations, and displays an output result. Most deterministic financial models are built by performing an analysis on historical data to derive the relationship between key forecast variables. In a corporate context, historical accounting relationships are often used to forecast key revenue and cost variables. Most deterministic models use one or two dimensional sensitivity analysis tables built into the model to analyze the question of risk and uncertainty in the models output results. Each sensitivity analysis table allows a financial analyst to perform a what if analysis on 1 or 2 variables at a time. The advantage of sensitivity tables are its simplicity and ease of integration into existing deterministic financial models that have already been built. Multiple sensitivity analysis tables can be combined in a scenario manager. The scenario manager is useful when there are interdependencies between the changing variables, as financial analysts can configure and change multiple variables in each scenario. In certain scenarios, multiple regression analysis is used to determine the mathematical relationship between multiple variables in a deterministic financial model, and such analysis is termed econometric analysis. The deterministic model is probably the most common type of financial model used in business and finance today. Most financial forecasting models used for revenue management, cost management and project financing are primarily deterministic based financial models.

Simulation Based Financial Models


While a deterministic financial model is normally structured in such a way that a single point estimate is used for each input variable, simulation based financial models work by entering the likely distribution of key inputs defined by the mean, variance and type of distribution. Simulation models use these range of inputs to recalculate the defined mathematical equation in the financial model through a few hundred iterations, normally 500 or more. The results of the analysis will produce the likely distribution of the result, therefore providing an indication of the expected range of results instead of a single point estimate. Where risk is a dominant factor in the financial modeling scenario being analyzed, a reliable estimation of the likely range of results is often more useful than a single point estimate. Simulation based financial models therefore allows a financial analyst to model the question of risk and uncertainty using a higher level of granularity.

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Specialized Financial Models


Specialized financial models are narrower in scope and essentially sophisticated calculators built to address a specific business problem or financial computation. Cost management models, marginal contribution analysis models and option pricing models are examples of specialized financial models. The examples have been grouped into the following categories: 1.Financial Statements Models o Income Statement o Balance Sheet o DCF Valuations o Whole-Of-Business
o

2.Business Planning Models o Forecast Business Planning Models o Historical & Forecast Business Planning Models

3. Dashboard Outputs

4. Powerful Charts

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ADVANTAGES OF FINANCIAL MODELING

1. Models try and minimize financial risk, as u know if u do this then this is likely to happen 2. Models provide quick answer to things that may take month to actually happen. Automatic recalculation means that if a change is made in the model then all related formulae and value change. 3. As long the person is familiar with the model and a good set of rules to follow than it is easy to run the model. 4. They provide consistent result the same input will always produce the same answer so a decision to make that loan to a customer by a finance employee does not depend on how that person is feeling that day. 5. What if.. Statements can be asked without rebuilding a model from scratch each time the test is executed. 6. Graphs can be shared between different people in different locations.

DISADVANTAGES OF FINANCIAL MODELING

1. Some model might be too simple to be of any use. 2. Many variables need to be considered and it is easy to miss things out. This may lead to misleading results. 3. Producing an effective model may be time consuming. 4. Some situations will need expensive, bespoke software. 5. You cannot account for every possible variable in a financial model. Banks might model how much money they think people will save or borrow. But they cannot know the effect that the current financial crisis will actually have on real life behavior.

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FINANCIAL MODEL GUIDELINES


The model comprises the following sheets: 1. Parameters sheet: - contains parameters with pre-set amounts; 2. Assumptions sheet: provides input categories for capital expenditure or large scale periodical expenditure, income, operating expenditure and key operational statistics; 3. Statement of Cash Flows: contains capital expenditure, income and operational cost by line item categories; 4. Results sheet: provides a summary of the key results; 5. Supplementary data worksheets: to allow more detailed calculations to be performed and cross reference to the Assumption sheet; and 6. Example sheet: provides the calculation of revenue, coal and carbon dioxide omissions.

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5 THINGS TO KNOW ABOUT CREATING A FINANCIAL MODEL FOR OUR BUSINESS


When pitching your business to venture investors, sharing a well designed financial model is very important! Why? Because how a financial model is designed helps investors learn some things about you and your business: it provides insights into how you think about your business, helps clarify what are the main assumptions that drive it and also implicitly sends messages about how you are approaching the business. Is this obvious? Not if you look at the inconsistent quality of financial models we see every day. For some entrepreneurs, it is almost like an afterthought. So I thought about creating a list of things that entrepreneurs and managers need to keep in mind as they design a model for their business. This advice applies to young startups as well as established or even public companies.

1. Keep it simple.: This is most important. You are into all the details of your business.
You really like to be on top of everything. And might be tempted to create a model that covers every eventuality and every variable. Dont. The purpose of a financial model to be shared with investors is to get them excited about your business. You may have budget spreadsheets that go into a lot of detail. But the place for that complexity is in your back office, not the model you share with investors. Think of the model as a way to tell the story of your business. It should be easy for someone to follow and understand. This requires effort and time and you need to put in the effort. Examples?: make sure you use a format that is easy to follow, dont have too many unnecessary sheets in your file, clearly state and label the assumptions vs. the calculations, dont create too many assumptions/variables if they are not consequential to the business; emphasize the appropriate time period for your business (monthly, quarterly, yearly). 2. Build bottoms-up/ validate top-down. This is especially important for startups or early stage businesses. I have seen projections that start with a huge market and then a revenue plan that is driven by an assumption of market share: The market for this service will be $2BN in 2011 and if we get 2% of that market, which I think we can, we will be a $40MM business. That is an instant loss of credibility. You need to build a revenue and
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cost plan based on actionable assumptions that you control and can demonstrate. That is what I mean by bottoms-up. You then need to revisit it and ask yourself whether the numbers, esp. the later year numbers make sense top-down, i.e. Is the market penetration by number of customers believable?

3. Altitude is important. This is closely related to the 1st point. Make sure you can see
the forest and not just the trees. You need to know what level of detail is important to your audience. Understanding how much ink toner you are going to use is not relevant unless you are in the publishing industry. The level of detail has to be relevant to what your investor is trying to understand. Most likely whether the business has potential, can it grow fast, be profitable or require too much capital; not whether you can predict the travel budget of your salesperson in year 5. You model also needs to be relevant to the stage of your business. At the stage of an idea, you should only have general assumptions around key items. Not things you cant predict that are irrelevant. Creating too much detail not only makes it hard to understand your business; it also says you are not in touch with reality, so make sure you fly at the right level.

4. Find the key drivers Our financial model is not a crystal ball into the future. And
investors are not asking you to predict the future. What they want to understand is what drives your business. What will accelerate or slow down your business, what will make it more profitable or less capital intensive? In every business there are a few numbers that business performance is most sensitive to. The most important thing you can do with your model is help identify those things that drive your business: the key drivers. Is it sales conversion, number of customer calls per sales person, cost per widget by volume, growth in demand, etc? Understanding and clearly explaining what those are has a double bonus: it helps investors understand your business and also sends the message that you are on top of your business. Both build trust and confidence in investing.

5. Well spaced bread crumbs We need to help investors understand the story of your
business. We need to guide them so that they stay engaged and interested. You need to make it easy. Here is a practical example: create a power point presentation to explain our business model. One of the companies we looked at recently came prepared with a presentation that highlighted all their main assumptions, compared those key assumptions to other competitors and highlighted why they thought they were conservative and reasonable in their projections. That made it a lot easier to follow and significantly shortened the amount of time we would have to spend on due diligence.

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STEPS IN CREATING A MODEL


Whether you are creating a financial model using Excel or VBA, you must take a Systematic approach. A systematic approach always involves planning ahead and this takes some time. Most people do not like to plan and think they can save Time by starting to build a model right away without spending time on planning. However, for all but the simplest models, not taking the time upfront to do some Planning and not taking a systematic approach ends up being both frustrating And a waste of time. Here are the key steps you should follow in creating both Excel and VBA models. The details vary somewhat depending on whether you are working with Excel or VBA, and I will discuss them in later chapters. You should keep two other things in mind. First, in practice, you do not have to follow the steps strictly in this order, nor do you have to finish one completely before going onto the next one. Most of the time you will have to go back and forth to some extent. It will depend on the circumstances. Second, over time, you should try to create your own variation on this basic approach and learn to adapt it to different situations. Excel and VBA are flexible tools and you can usually make changes almost at any stage without a great deal of difficulty. But this still will take more time. than if you do it right the first time, and making changes later increases the chances of missing some of the other changes that have to go with them.

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Define and Structure the Problem

Define the Input and Output Variables of the Model Decide Who Will Use the Model and How Often Understand the Financial and Mathematical Aspects of the Model Design the Model

Create the Spreadsheets or Write the VBA Codes Test the model

Protect the model

Document the model

Update the Model as Necessary

Update the Model as Necessary

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Step1: Define and Structure the Problem In real life, problems rarely come neatly defined and structured. Unless you take the time upfront to define and structure the problem and agree on them with the user (your boss, for example), you may end up having to extensively change the model you first create. When your boss asks you a question whose answer requires developing a model, she often has only a vague idea of what she is really seeking. As a finance person and a modeler, you are responsible for putting it all in more concrete terms before proceeding. Start by discussing and defining why the model is needed and what decisions, if any, will be made based on its outputthat is, what questions the model is supposed to answer. Then establish how accurate or realistic the outputs need to be. As we discussed, all models have to capture the relationships among their variables, and discovering and quantifying these can take a lot of time. How much effort you put into doing this should depend on how important the project is and how accurate or realistic the outputs need to be.

Step 2: Define the Input and Output Variables of the Model Make a list of all the inputs the model will need and decide who will provide them or where they will come from. This is crucial. For example, if you are creating a model to do the business plan for your company, the inputs must come from the business managers. You cannot just guess what sales growth rates they will be able to achieve, how much they will have to spend on plants and equipment to support those sales growths, and so forth. You may not need the actual numbers upfront, but the list of inputs should be established based on your discussions with the business managers so that you can make them independent variables in your model. Otherwise you may have go back later on and change a lot of things in the model. Make a list of the tabular, graphical, and other outputs the model needs to create. To some extent, these should be driven by the decisions that will be made based on them. One advantage of Excel is that a lot of the output can be just printouts of your spreadsheets, provided the spreadsheets have been laid out properly. If you plan ahead and lay out your spreadsheets with the outputs in mind, you will save yourself a lot of time later on. Step 3: Decide Who Will Use the Model and How Often Who will use the model and how often it will be used make a lot of difference. In this book, I am assuming that you are developing the models either for your own use or for use by others who are familiar with Excel and understand the model, at least to some extent. When you create models for others use, it involves much more work. You have to make sure that th ese people cannot enter data that do not make sense, they cannot accidentally damage parts of the model, and they can get the necessary outputs automatically and so forth. These are collectively called the user interface, and the more elegant, more easy to use, and more robust you want to make a model, the more work it is. You also have to plan for many of these features ahead of time. How frequently a model will be used is another important issue. If a model is going to be used only once in a while, then it does not matter if it takes a long time to run or if it takes some extra work every time to create the outputs. A model that will be used frequently, however, should be designed differently.

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Step 4: Understand the Financial and Mathematical Aspects of the Model It is important to remember that the computer cannot do any thinking; you have to tell it exactly how all the calculations in the model will have to be done. In most situations, if you do not know how you would do the calculations by hand, you are not going to be able to write the necessary formulas or instructions for the computer to do it. It does not pay to start building the model until you are sure you could solve the problem by hand. It usually takes beginners a lot of time to create a model and they often think that it is their Excel or VBA skills that are slowing things down. This may be partly true, but at least as often the problem is in their understanding of the finance and mathematics of the model they are trying to create. You will save lot of time if you do not even sit down in front of the computer to create a model until you are sure that you know how to solve the problem.

Step 5: Design the Model There are two aspects to designing a model. One is to sketch the steps that Excel or VBA will have to follow to solve the problem. For simple models, you may want to write down only the broad steps or perhaps even do it in your head. For more complex problems, however, you should work on paper and use a degree of detail that suits your level of experience and the complexity of the problem. The less experience you have, the more detailed the sketch should be. Once again, remember that this may seem like a waste of time, but ultimately it will save you time compared to plunging into your spreadsheet or VBA program without such a sketch of the model. The other aspect of design is planning how the model will be laid out in Excel or VBA. Are you going to do the entire model in one spreadsheet (or VBA module) or split it into several spreadsheets (or VBA modules or procedures)? Editing an Excel or VBA model is easy. So you do not have to decide every detail ahead of time, but you need to have an overall design in mind or on paper depending on the complexity of the problem and your level of experience. As I discussed before, you also need to think about the kind of user interface you want to create and the reports you want the model to produce. Step 6: Create the Spreadsheets or Write the VBA Codes For most models, this is the big step. Most of this book covers the details of this Step, so there is no need to get into them here. Step7: Test the Model Almost no model works correctly the first time it is used; you have to find the problems (bugs) and fix them. The bugs that prevent the model from working at all or produce obviously wrong answers are generally easier to find and fix. However, models often include hidden bugs that create problems only for certain values or certain combinations of values for the input variables. To find them, you have to test a model extensively with a wide range of input variables. You have to take somewhat different approaches to testing and debugging a model depending on whether you are working with Excel or VBA. Both Excel and VBA provide some special tools for this purpose; I will discuss these tools and provide suggestions on how to debug models in Excel and VBA in later chapters.

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Here are a few helpful hints that apply to both: There is no standard approach to testing and debugging a model. You almost always have to use your ingenuity to figure out what will be the best way to test and debug a particular model. Your ability to do so will improve with experience. The better you understand a problem and a model, the easier it will be to Debug it. If you understand how changes in certain independent variables affect the values of certain dependent variables, then you can change the values of the independent variables to see if the dependent variables are changing in the right direction and by the right orders of magnitude. This is one of the best tools, especially for debugging large models, and you should do a lot of testing using this approach. You can also use this approach to hunt down the sources of the problems: Starting from a value that looks wrong, backtrack through the values of the intermediate dependent variables to see where the problem may be originating. This approach may sound somewhat vague and abstract, but with experience you will find that you can locate and fix most bugs rapidly using this approach. checking a models output against hand-calculated answers is a common and effective approach to debugging. In some situations, doing hand calculations may not be practical, but you may be able to use Excel itself to do some side calculations to test individual parts of the model. Step8: Protect the Model Once you have completed a model, and especially if you are going to give it to others to use, you should consider protecting it against accidental or unauthorized changes. In addition, you may also want to hide parts of the model so that others cannot see certain formulas, data, and so on. Excel provides several flexible tools that you can use to hide and protect parts or all of your model. A good strategy is to cluster and color code all the inputs cells of a model and protect and hide everything else in the workbook. There is less need to protect VBA modules because most users do not even know how to open them. Nonetheless, if you think it is necessary, you can protect parts of your VBA models as well. Step 9: Document the Model Documenting a model means putting in writing, diagrams, flowcharts, and so on, the information that someone else (or you yourself in the future) will need to figure out what it does, how it is structured, and what assumptions are built into it. One can then efficiently and effectively make changes to (update) the model if necessary. For large systems (for example, the reservation systems for airlines), the amount of necessary documentation can be enormous; it is often put on CDs for Easy access and use. Professional system development organizations have elaborate standards for documentation, because different pieces of large systems are developed by different peoplemany of whom may not be around for very long. Also, it is almost certain that the systems will have to be constantly updated. Over time, anyone who creates models develops his own system of documentation. As long as you keep in mind the objectives I mentioned before, you have a lot of leeway to come up with your own system as well. Both Excel and VBA offer a number of features that let you easily do a lot of the documentation as you work on your model. You should take full advantage of them and do as much of your documentation as possible while creating the model.
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This is important for two reasons. First, if you write your documentation when things are fresh in your mind, it will save you time later and you will be less likely to forget to document important things. Second, everyone hates (or learns to hate) documentation. It is no fun at all, especially if you try to do it all at once at the end of the project. If you do not work on the documentation until the end, chances are you will never do it. Then, if you have to use the model again a few months later or have to update it, you will end up spending hours or even days trying to figure out what you did. Do your documentation as you go along and finish it immediately after your model is done. You have to take somewhat different approaches to when you document Excel and VBA models. I will discuss how in the appropriate later chapters. Step10: Update the Model as Necessary This is not a part of the initial model development, but almost all models require updating at some point, either because some things have changed or because you want to adapt it to do something else. This is where the documentation becomes useful. Depending on how much updating is involved, you may want to go through all of the above steps again. You should also thoroughly update the documentation and include in it the information on who updated it, when and why, and what changes were made.

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