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ON
ANAYLSIS OF WORKING CAPITAL
OF
EASTMAN CAST & FORGE LTD.
COMPANY PROFILE:
We
established since 1989. Our manufacturing is based on Taiwanese & Indian Technology to get
optimum quality and cost effectiveness. We basically deal with manufacturing all types of
handtools, agricultural tools, construction tools, automotive tools, and plumbing tools etc. We
believe in research, design, engineering, quality testing, packing and then merchandising. We are
committed to assure our customers with quality tool and it is our endeavor to offer our vital
services to our esteemed customers with the superiority at very rational and competitive prices.
Our products by our valued customers in the country and abroad are gladly appreciated which
builds the pillars of encouragement to us. Our produce of goods confirms to the international
standards and we export them to more than 40 countries of the world like Russia, South America,
Central America, Europe, South East, Asian Countries, Middle East, and Africa etc.
We have an outstanding workmanship including a dedicated team of engineers and marketing
professionals, firm quality control, first-rate quality produce in accordance with international
standards(DIN, JIS, ANSI), competitive pricing, timely deliveries, customized packing and
branding.
Hand tools are basically the types of non-powered tools, hence the tools which do not require
power to run but a torque produced by an easy manual force. Handtools are designed for a
particular job used by experts and are applicable in Do-It-Yourself (DIY) projects, like, home
repairs, general maintenance, building mechanics, woodworking, and gardening. Handtools
provide mechanical advantage in accomplishing a physical job. Our produce of handtools have
high hardness even at elevated temperatures, toughness so that the tool does not chip or fracture,
machined to extremely stringent tolerances which makes it stiff and ensuring straight and
accurate working without bending and twisting, high wear and tear resistance so as to have
tolerable tool life before the requiring it to be changed, strong coated with deep chrome finish
that increases its durability and life. Handtools are widely applicable in repair works,
construction works, automotive works etc. Every hand tool is further categorized as quite a long
list as they are available according to the numerable range of typical application, design shape,
size etc.
BOARD OF DIRECTORS
The management team of the
worked with the vision of taking the
believed in delivering the best quality products at or before the scheduled time. Our management
team has been constantly achieving its objective of maintaining leadership in the target markets.
Each member of the team is dedicated to increase the financial performance of the organization.
Headed by our MD Mr. Shri J.R. Singal, the management team comprises of following persons:
Industrial and the back born of our organization. He believes in strong leadership movement with
expert guidance in the field of Industry. Under his leadership
Awards during last 30 years. This is an yearly award and 20 companies are honoured at national
level. The company was also awarded with the special Latin American Countries Focus award
for outstanding export performance by the Govt. of India.
Group
to become a reliable group of companies for its customers all over the globe.
With a graduation Degree in Commerce, Mrs. Vandana Aggarwal is an active Director in Ozone
Overseas Ltd. and is also working as a Managing Partner in Jaycee Overseas Ltd.
Our handtools are generally categorized as Spanners, Plumbing tools, Pliers, Automotive tools,
Carpentry tools, Masonry Tools , Hack Saws, Vices, String tools, Lubricating Tools, Punches,
Allen keys, Screw Drivers, Socket Spanners, Impact Drivers, Bolt Cutters, Leather Tool Aprons,
Misc Tools, Non Sparkling Tools.
5S AT ECFL
This enables the plant to have better working conditions and also increase work efficiency. A
copy of it also displayed at each shop and depth to motivate the employee towards healthy work
environment.
Meaning and benefits of 5S system are as follows
1. SEIRI:
2.
3.
2.
3. SIIESO:
2.
Maintain a high standard of house keeping and work place organizational at all times
Benefits:
1.
2.
Self Discipline
2.
3.
Safe Working
cast
and forge limited manufactures carbon steel and chrome vanadium hand tools & power tools
which are being exported to more than 24 countries besides as an OEM of Ashok Leyland, TATA
Motors, Mahindra & Mahindra, John Deere, New Holland, TAFE, L&T, Hero Honda Motors,
Eicher etc.
Industrial Company
2002:-
Auto and Power limited come into existence with manufacturing and distribution
facilities of automotive batteries in India and neighboring countries under "ADDO" brand. The
brand "ADDO" is highly successful and high selling battery in Indian
ECFL VISION
"To create an enabline platform whereby Effective Leaders and Competent Managers Emerge on
the Stage to build an Organization and Move Further"
Our Mission
Sales Turnover of
OUR STRENGTHS
OUR STRONG ROOTS HELP US ACHIEVE THE MOST DIFFICULT OF MILESTONES WITH
EASE
A BRIEF OVERVIEW OF OUR ACHIEVEMENTS OVER THE YEARS:
TIMELINE
Mr. J. R. Singal, our Chairman sets up a bicycle brake shoe manufacturing
1970
plant in Ludhiana, Panjab.
1974
1978
1982
1986
Major product and market expansion initiated. EASTMAN products are available in all
1990
major markets of South America and introduced in Mediterranean regions of Europe. E.C.F.L
adds garden and agriculture tools to its range.
E.I.L wins the Latin America Focus award as per the Foreign Trade Policy decided by
1994
1998
Both E.I.L and E.C.F.L certified ISO 9002 & ISO 9001 respectively.
1999
E.I.L wins Focus LAC Award for outstanding Export performance in 1999-2000.
2000
2002
2005
2006
2007
2008
2009
2010
E.C.F.L wins the Energy Conservation-2008 award as per Punjab Energy development
Agency.
E.C.F.L wins the Energy Conservation Award under the aegis of power ministry.
E.A.P.L certified ISO 9001:2008 \ E.C.F.L awarded The Corporate Citizen of the year Award
2010 by PHDCCI
2012
ECFL wins Best Focus Product Award at DnB Indian Exporters Excellence Awards .
2013
EAPL enters Solar battery manufacturing. Automotive battery approval from ASRTU
(Association of State Transport Undertakings)
Gets MNRE certification for its Solar range of batteries
GEOGRAPHICAL OVERVIEW
Group Structure
EASTMAN GROUP
Eastman Indus
Eastman Cast & Forge Ltd., Ludhiana
Gurg
PRODUCT PROFILE
The main products of the company are:
Adjustable Wrench
Alien Keys
Oil Can
Automotive Spanners
Pincer
Automotive Tools
Bi-Hexagonal Spanners
Pipe Wrench
Carpenter Tools
Punches
Combination Spanners
Ratchet
Deo Spanners
Saw
Hammer
Socket
Jumbo Spanners
Socket Bits
Leather Aprons
Tap Wrench
Mason Tools
Vice
Measurement Instrument
Products
Adjustable
Wrench
Adjustable
Adjustable Wrench
Wrench
Automotive
Allen Keys
Automotive Spanners
Automotive
Spanners
Automotive
Spanners
Automotive
Automotive Spanners
Bi-Hexagonal Spanners
Tools
Carpenter
Tools
Tools
Carpenter
Carpenter
Tools
Combination
Spanners
Carpenter Tools
Doe Spanners
Tools
Hammer
Jumbo Spanners
Hammer
Leather Aprons
Measurement
Mason Tools
Mason Tools
Instrument
Non Sparking
Tools
Oil Can
Oil Can
Pincer
Pincer
Pincer
Pipe Cutting
Tools
Pipe Wrench
Pipe Wrench
Pipe Wrench
Pipe Wrench
Punches
Ratchet
Saw
Saw
Socket
Socket Bits
Tap Wrench
Tap Wrench
Vice
Water Pump
Vice
MANUFACTURING PROCESS
Plier
Quality Control
The fully equipped in house Laboratory is designed to control the Quality Process and give on
line test results as production goes on for Material testing / Hardness testing / Torque Testing /
Crack detector. Our laboratory is equipped with following Machines.only to name a few
TORQUE TESTING MACHINE (COMPUTERISED) -- For torque load capacity of
spanners
MAGNETIC CRACK DECTECTOR -- For detecting very fine flaws & cracks
SALT SPRAY MACHINE -- Testing the Quality of Chrome plating
DIGITAL HARDNESS TESTER -- For ensuring specified surface hardness
ABRASIVE CUTER FOR MAKING TEST PIECE -- Machines for making test
pieces
PLATING THICKNESS TESTER -- Chrome plating thickness
CHEMICAL LABORATORY -- Chemical composition of Products
The Quality/inspection program is designed to check and recheck the production quality at each
strategic stage of the production process i.e. quality program functions from the Raw material to
Finished products.
The Quality Testing program is listed as below ..also refer the Flow chart diagram.
RAW MATERIAL - Incoming raw material is Lab tested at entry level to the plant
BLANKING - The Quality of Blanks are checked for primary conformity
FORGING - The forging Die is Inspected for good forging out put
TRIMMING - Good finished products are selected after Trimming stage
PUNCHING - Inspection at punching stage rejects poorly finished goods
BROACHING - After broaching all spanners are checked for Jaw accuracy
HEAT TREATMENT - Heat treated products are is inspected for proper internal
structural formation and Hardness of the Product
GAUGING - All Products are checked with gauges for operational fitment.
SHOT BALLAST - Inspection at Shot Ballasting checks for finishing output.
ELECTRO PLATING - Final inspection is carried after electroplating stage. This is the
final and detailed inspection carried out manually
DEPARTMENTS
Procurement
Excise
Audit
HR
IT
Marketing
Documentation
Nine
Showroom
Delhi &
Gurgaon Off.
China Off.
Tractor parts
Production
SWOT ANALYSIS
SWOT analysis provides the information that is helpful in matching the firms resources and
capabilities to the competitive environment in which it operates. Environmental factors internal
to the firm can be classified as Strengths (S) and Weaknesses (W) and those external to the firm
are classified as Opportunities (O) and Threats (T). Such an analysis of strategic environment is
called SWOT ANALYSIS.
SWOT ANALYSIS OF EASTMAN CAST & FORGE LTD, LUDHIANA IS AS
FOLLOWS:
STRENGTHS:The firms strengths are its resources and capabilities that can be used as competitive advantage.
The main strengths of Eastman Cast & Forge Ltd. are:
OPPORTUNITIES:External environment analysis may reveal certain new opportunities for profit and growth and
the opportunities before ECFL are:
Changes in external environment may also poses threats to the firm Major threats to ECFL are:
High inflation has offset the rise in household incomes as the disposable income of
people has declined vis--vis previous years.
Competition from other MNCs like Snap on company, Kraft Tool Company, Hands 2 You-US
Company.
INTRODUCTION TO
WORKING CAPITAL
Fixed capital
Working capital
Every business needs funds for two purposes, for its establishment and to carry on its day-to-day
operations. Long term is required to create production facilities through purchase of fixed assets
such as Plant, machinery, and building, furniture etc. Investment in these assets represent that
part of firms capital, which is blocked on a permanent or fixed basis, is called fixed capital.
Funds are also needed for short-term purposes i.e. for the purchase of raw material, payment of
wages and carry on day-to-day operations of business etc. These funds are known as working
capital.
The management of fixed and current assets however, differs in three important ways: -
1.
In managing fixed assets, time is a very important factor consequently discounting and
compounding techniques play a significant role in capital budgeting and a minor one in the
management of current assets.
2.
Large holding of current assets, especially cash, strengthens firms liquidity position
but it also reduces the overall profitability.
3.
Levels of fixed as well as current assets depend upon expected sales, but it is not only
current assets which can be adjusted with sales fluctuating in short run.
In simple words working capital refers to that part of firms capital, which is required, be
financing short term and current assets such as cash, marketable securities, debtors and
inventories.
For a growing business the permanent working capital will be rising, for a declining business it
will be decreasing and for a stable business it will almost remain the same with few variations.
So, permanent working capital is perennially needed one though not fixed in volume. This part of
the working capital being a permanent investment needs to be financed through long-term funds.
The permanent working capital can be further divided into two parts:
Both permanent and temporary working capitals are necessary to facilitate the sales and
production process through operating cycle.
Activity
Decision
How much to order
Whether to borrow or pay
cash
Choice of technology
Whether to extend credit or to
sell on cash
How to collect
These activities entail cash inflows and cash outflows; but the cash flows are both
unsynchronized and uncertain. They are unsynchronized because the payment of cash for raw
materials does not take place at the same time as the receipt of cash from sales of the finished
product. They are uncertain because future sales and costs cannot be precisely predicted. These
give rise to what is called as operating cycles and cash cycle.
Operating cycle:
The entire cycle, from the time the firm acquires inventory to the time it collects the cash, takes
100 days. This is called the operating cycle. The operating cycle is the length of time it takes to
acquire inventory, sell it, and collect for it. This cycle has two distinct parts- the time it takes to
acquire and sell the inventory; a 60 day span in our case, is called the inventory conversion
period; and the time it takes to collect cash for the sales, 40 days in our case; called as accounts
receivable (debtors) conversion period. Thus, operating cycle is just the sum of the inventory
conversion period and accounts receivable conversion periods:
Operating
Cycle
100 days =
60 days
40 days
What the operating cycle describes is how a product moves through the current asset
accounts. The product begins life as inventory; it is converted to a receivable when it is sold, and
it is finally converted to cash when we collect for the sales.
For a typical manufacturing company, the inventory conversion period is the total time needed
for producing and selling the product and includes:
Raw material conversion period.
Work in process conversion period.
Finished goods conversion period.
Cash cycle
There are number of days that pass before the firm collects cash for sales, measured
from it actually pays for the inventory. Thus, cash cycle is the difference between the operating
cycle and the accounts payment period.
For example, the firm does not pay cash for inventory until 30 days after acquiring it. The
intervening 30 days period is called the accounts payable (creditors) period. Next, though the
firm spends cash on 30th day, it does not collect cash till 100 th day. Somehow, the firm must
arrange to finance the Rs 1000 for 100-30 = 70 days. This period is called the cash cycle or net
operating cycle.
Cash cycle =
=
=
operating
accounts payable
Cycle
period
100 days 30 days
70 days
Finished Goods
Work In
Progress
Wages &
Salaries
Sundry
Debtors (a/c
receivables
Raw material
component
Cash
Sundry
creditors (a/c
payable)
Selling + distribution
general Administration
In diagram, the short term operating activities and cash flows for a typical manufacturing firm by
way of a cash flow time line. As shown, the need for short term financial management arises
from gap between the cash inflows and the cash outflows, which is related to the lengths of the
operating cycle and the accounts payable period.
This gap can be filled either by borrowing or by holding a liquidity reserve in the form of cash or
marketable securities. Alternatively, the gap can be shortened by changing the inventory,
receivable, and payable periods- all of which comprise the areas of working capital management.
CURRENT ASSETS
CURRENT LIABILITIES
Bills payable
Bills receivables
Sundry creditors
Sundry debtors
Accrued loans
Raw material
Dividend payable
Work in progress
Bank overdraft
Finished goods
Simply called working capital it is total of current assets, it refers to the firms investment in
current assets. Current assets refer to those assets, which in the ordinary course of business can
be continued into cash within an accounting year.
Debtors
(Receivables
)
Cash
Raw Materials
Finished Goods
Work-in-Progress
Drawings, these are cash outflows and, like water flowing downs a plughole, they remove
liquidity from the business. More businesses fail for lack of cash than for want of profit.
It is this importance of cash that, cash management is one of the key areas of working capital
management. Apart from the fact that it is the most liquid asset, cash is the common denominator
to which all the current assets can be reduced because the other major liquid assets, that is,
receivables and inventory eventually get converted into cash. This underlines the significance of
cash management.
The term cash with reference to cash management is used in two senses. In a narrow sense it is
used to cover currency and generally accepted equivalents of cash, such as cheques, drafts and
demand deposits in banks. The broad view of cash also includes, near cash assets such as
marketable securities and time deposits in banks.
A firm is well advised to hold adequate cash balances but should avoid excessive balances. The
firm has, therefore, to assess its need for cash properly. Cash budget is a device that helps affirm
to plan and control the use of cash. It is statement showing the estimated cash inflows and
outflows over the planning horizon. In other words, the net cash position (surplus and deficiency)
of a firm as it moves from one budgeting sub period to other is highlighted by cash budget.
2.
3.
To incur day-to-day expenses and overhead costs such as fuel, power and office
expenses.
4.
5.
6.
To maintain the inventories of raw material, work-in-progress, stores and spares and
finished stock.
7.
8.
Current ratio
Quick ratio
CURRENT RATIO:
The current ratio is very popular financial ratio, which is used to measure the ability of a firm to
meet its current liabilities. Current assets are converted into cash for the payment of current
liabilities. Apparently higher is the current ratio; greater is the short-term solvency.
Current Assets
Current ratio is given by the formula:
Current Liabilities
Activity ratios are also called as turnover ratios or performance ratios. These ratios are employed
to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios
usually indicate the frequency of sales with respect to its assets.
Sales
Average Inventory
throws light on the collection and credit policies of the firm. The debtors turnover ratio is
calculated as follows:
Sales
Average Accounts Receivable
Moreover, not only the existence of working capital is a must for the industry, but it must be
adequate also. Adequacy of the working capital is the lifeblood and controlling nerve center of a
business. Inadequate as well as redundant working capital is dangerous for the health of industry.
It is said, Inadequate working capital is disastrous; whereas redundant working capital is a
criminal waste. Both situations are not warranted in a sound organization.
The advantages of working capital or adequate working capital may be enumerated as below: 1.
Cash Discount:
If a proper cash balance is maintained, the business can avail the advantage of cash discount by
paying cash for the purchase of raw materials and merchandise. It will result in reducing the cost
of production.
2.
3.
4.
from the market, purchase goods on credit and borrow short-term funds from bank, etc. If the
investor and borrowers are confident that they will get their due interest and payment of principal
in time.
5.
6.
Distribution of Dividend:
If company is short of working capital, it cannot distribute the good dividend to its shareholders
inspite of sufficient profits. Profits are to be retained in the business to make up the deficiency of
working capital. On the other contrary, if working capital is sufficient, ample dividend can be
declared and distributed. It increases the market value of shares.
7.
8.
9.
High Morale:
The provision of adequate working capital improves the morale of the executive because they
have an environment of certainty, security and confidence, which is a great psychological, factor
in improving the overall efficiency of the business and of the person who is at the hell of fairs in
the company.
10.
One of the ways to address the problem of fixed set-up cost may be to hold
inventory.
1.
2.
Size of business
3.
Production policies
4.
Production cycle
5.
Credit policy
6.
Rapidity of turnover
7.
Seasonal fluctuation
8.
9.
Others factors
1.
2.
Size of Business
Size of business is another influencing factor. As size increases, the working capital requirement
is also more and vice versa.
3.
Production policies:
The production policies pursued by the management have a significant effect on the
requirement of working capital of the business. The decision about the management regarding
automation, etc. will also have its effect on working capital. On case of labor intensive
industries
the
working
Production cycle
The time lapse between feeding of raw material into the machine and obtaining the finished
goods out from the machine is what is described as the length of manufacturing process. It is
otherwise known as conversion time. Longer this time period, higher is the volume and value of
work-in-progress and hence higher the requirement of working capital and vice versa.
5.
Credit policy:
A company which allows liberal credit to its customers may have higher sales but will need
more working capital. A concern that purchases its requirements on credit and sells its
products/services on cash requires less amount of working capital.
6.
Rapidity of turnover:
A company having high rate of turnover will need lower amount of working capital as
compared to a company which has a lower turnover.
7.
Seasonal fluctuations:
In case of seasonal industries like sugar and woolen textiles, their working capital required
during the particular season will be higher than other periods.
8.
9.
Other factors:
Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, etc. also
influences the requirements of working capital.
Due to low rate of return on investments, the market value of shares may fall
The rate of return on investments also falls with the shortage of working capital.
The need for working capital cannot be over emphasized. Every business needs some amount of
working capital. The need for working capital arises due to the gap between production and
realization of cash from sales. There is an operating cycle involved in the sales and realization of
cash. There are time gaps in purchase of raw materials and production; and sales and realization
of cash. Thus, working capital is needed for the following purpose:
6. To maintain the inventories of raw material, work in progress, stores and spares and finished
stock.
Management of working capital is concerned with the problems that arise in attempting to
manage the current assets, the current liabilities and the inter-relationship that exists between
them. In other words, it refers to all aspects of administration of CA and CL. management will
use a combination of policies and techniques for the management of working capital. The
policies aim at managing the current assets (generally cash and cash equivalents, inventories
and debtors) and the short term financing, such that cash flows and returns are acceptable.
Cash management. Identify the cash balance which allows for the business to meet day
to day expenses, but reduces cash holding costs.
Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes reordering costs - and
hence increases cash flow. Besides this, the lead times in production should be lowered to reduce
Work in Process (WIP) and similarly, the Finished Goods should be kept on as low level as
possible to avoid over production - see Supply chain management; Just In Time (JIT);
Economic order quantity (EOQ); Economic quantity.
Debtors management. Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be offset
by increased revenue and hence Return on Capital (or vice versa); see Discounts and
allowances.
Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it
may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through
"factoring"
Working Capital Management Policies of a firm have a great effect on its profitability, liquidity
and structural health of the organization. In this context, working capital management is three
dimensioned in nature:
Dim
D
C
Coom
mpiomeennssiion
possiti on IIII
itioonn
II
&
ooffCCL& LLeevve
L
ell
I.
Dimension first is concerned with the formulation of policies with regard to profitability, risk and
liquidity.
II.
Dimension second is concerned with the decision about the composition and level of current
assets.
III.
Dimension third is concerned with the decision about the composition and level of current
liabilities.
1.
The goal of working capital management is to manage the firms current assets and
current liabilities in such a way that a satisfactory level of working capital is maintained, to meet
the short-term obligations as and when they arise.
2.
3.
The main theme of working capital management is the interaction between the current
assets and the current liabilities and arrives at the optimum level of both. The optimum level thus
arrived must have provision for contingencies.
4.
Trade-off between Profitability and Risk: The level of a firms Net working capital has a
bearing on its profitability as well as risk. The term profitability used in this context is measured
by profits after expenses. The term risk is defined as the probability that a firm will become
technically insolvent so that it will not be able to meet its obligations when they become due for
payment. The risk of becoming technically insolvent is measured using Net Working Capital.
The greater the net working capital, the more liquid the firm is and therefore the less likelihood
of it becoming technically insolvent. The relationship between liquidity, net working capital and
risk is such that if either net working capital or liquidity increases, the firm's risk decreases.
5.
Trade-off: If a firm wants to increase its profits, it must also increase its risk. Inversely, if
it decreases risk, its profitability too tends to decrease. The trade-off between these variables is
that regardless of how the firm increases its profitability through the manipulation of working
capital, the consequence is a corresponding increase in risk as measured by the level of Net
working capital.
6.
Apart from the profitability risk trade-off, another important ingredient of the theory
of working capital management is determining the financing mix. Financing mix refers to the
proportion of current assets that would be financed by current liabilities and by long-term
resources.
1. Principle of risk variation:Risk here refers to the inability of a firm to meet its obligation as and
when they become due payment. Larger investment in current assets with less dependence on
short term borrowings increase liquidity, reduces dependence on short term borrowings increases
liquidity, reduces risk and thereby decrease the opportunity for gain or loss. On the other hand
less investment in current assets with dependence on short term borrowings, reduce liquidity and
increase profitability.
In other words, there is a definite inverse relationship between the degree of risk and
profitability. A conservative management prefers to minimize risk by maintaining a higher level
of current assets or working capital while a liberal management assumes greater risk by reducing
working capital. However, the goal of the management should be to establish a suitable tradeoff
between profitability and risk.
The various sources of raising working capital finance have different cost of capital and degree
of risk involved. Generally, higher the risk lower is the cost and lower the risk higher is the cost.
A sound working capital management should always try to achieve a proper balance between
these two.
3. Principle of Equity position:This principle is concerned with planning the total investment in current assets. According to this
principle, the amount of working capital invested in each component should be adequately
justified by a firms equity position. Every rupee invested in current 4assets should contribute to
net worth of the firm. The level of current assets may be measured with the help of two ratios:
I.
II.
maturities of payment to its flow of internally generated funds. Maturity pattern of various
current obligations is an important factor in risk assumptions and risk assessments. Generally,
shorter the maturity schedule of current liabilities in relation to expected cash inflows, the greater
inability to meet its obligations in time.
Working capital is the life blood and controlling nerve centre of a business. No business can be
successfully run without an adequate amount of working capital. To avoid the shortage of
working capital at once, an estimate of working capital requirements should be made in advance
so that arrangement can be made to procure adequate working capital.
The following methods are usually followed in forecasting working capital requirements of a
firm:
A growing firm can be thought of as having a total assets requirement consisting of the current
assets and long term assets and long term assets for its efficient operations. The total assets
requirement may exhibit change over time for many reasons, such as general growth trend,
seasonal variations around the trend, and unpredictable day to day and month to month
fluctuations. These fluctuations are depicted in diagram. It seldom happens that net working
capital goes to zero. As discussed earlier, companies have some permanent working capital,
which is the net working capital on hand at the low point of the business cycle. Then, as sales
increase, net working capital must be increased, and this addition is the temporary part of net
working capital. The manner in which the permanent and temporary portions of net working
capital are financed is called as working capital financing policies. Broadly speaking, a company
can follow three approaches namely, maturity matching approach, aggressive approach, and
conservative approach. We briefly discuss each of these as follows:
Seasonal Variation
Rupees
Total assets
Requirement
General growth in
Long term assets &
Permanent ¤t assets
Time
Maturity matching means to match asset and liability maturities. As shown in panel a of figure
the maturity matching approach focuses on matching maturity of assets and liability. This
strategy minimizes the risk that the firm will be unable to pay off its maturing obligations. To
illustrate, suppose a company arises a one year loan to and uses the funds obtained to build and
equip a plant. Obviously, cash flow from the plant (that is profits and depreciation) would not be
enough to pay off the loan at the end of only one year, therefore the firm would be force to renew
the loan. However, if the lender refuses to renew the loan, the company would be in trouble.
However, if the plant had been financed with long term debt, the required loan payments would
have been better matched with cash flows from the plant, and the renewal would not be needed.
As a limiting case, the company could try to match exactly the maturity of all of its assets and
liabilities. For example, inventory expected to be sold in 30 days could be financed with a 30
days bank loan; and a 20 year building could be financed with a 20 year mortgage and so on. In
simple words, the source of finance use has same maturity as the life of the assets for which the
financing has been done. The policy looks quite useful as it minimizes the wastage of funds.
However, the risk that this policy entails is that if the cash from the assets do not take place on
time, the firm would not be able to pay back and forced into renewal situation. The cost of funds
for the renewal case could be unattractive, and might it the profit of the company.
2. Aggressive Approach:Here, as shown in panel b of figure, a relatively aggressive company finances all of its long
term assets and a part of permanent net working capital with long term assets and rest permanent
working capital with short term debt. The term relatively has been used because there can be
different degrees of aggressiveness. For example, the dashed line in panel b could have been
drawn below the line showing long term assets, indicating that all of the permanent net working
capital even some part of long term assets have been financed with short term debt; this would be
a highly aggressive position, and the firm would be very much exposed to dangers from rising
interest rates as well as to loan renewal problems. However, because short term debt is generally
cheaper than long term debt, some companies are ready to sacrifice safety for the chance of
better profit.
3. Conservative Approach:-
As shown in panel c of figure the dashed line is above the line showing permanent net working
capital, meaning that long term sources have been employed to finance all permanent assets and
also to meet some of the temporary requirements. The peak requirements could be met out of
small amount of short term debt; but it also finances a part of the seasonal needs by putting the
money in marketable securities. The humps above the dashed line represent short term financing,
while the troughs below the dashed line represent investing in marketable securities. This
approach, as the name suggests, is a very safe, conservative working capital financing policy as
there is no risk of going out of liquidity. However, since long term debt is normally costlier,
investments in cash and marketable securities are zero net present value investments at best, the
safety comes at the cost of lower profits.
Policy B
OBJECTIVES OF STUDY
To analyze the whole data of ECFL and find various opportunities to improve the working
capital of the company.
To measure the Future-plans, current plans and past performance of working capital at
(2007- 2008 to 2011-2012)
ECFL
RESEARCH
METHODOLOGY
SCOPE OF STUDY
The above project was conducted keeping in mind the components of Working capital
mentioned above i.e. inventory, receivables, and payables and further, credit terms with
suppliers; project Working Capital took its shape. The project Working Capital was started at
LUDHIANA plant of ECFL Ltd. early this year with an idea of standardization of credit period
across sites, scrutinizing the inventory holding period of raw materials, packaging materials and
finished goods and estimating the working capital thus released through these initiatives.
Data collected from a source that has already been published in any form is called as secondary
data. The review of literature in nay research is based on secondary data. MNostly from books,
journals and periodicals.
Due to constraints of time & resources the present study is likely to suffer from certain
limitations some of these are mentioned below, so that study can be understood in a proper way:
From my part
ANALYSIS
&
INTERPRETATION
RATIO ANALYSIS
CURRENT RATIO:
Current Assets
Current Liabilities
Particulars
Current Assets
Current
2012
3433.66
3301.63
Liabilities
CURRENT
2011
3076.95
3050.42
2010
2822.29
2970.84
2009
2604.70
2894.11
2008
2687.46
3089.03
1.01
0.95
0.90
0.87
1.04
RATIO
1.05
1
0.95
0.9
Series 3
0.85
0.8
0.75
2012
2011
2010
2009
2008
INTERPRETATION:
Current ratio is 0.87 in 2008, 0.90 in 2009, 0.95 in 2010, 1.01 in 2011 and 1.04 in 2012.
It is good and giving healthy signs.
2012
5183.55
3301.63
1.57
2011
3782.52
3050.42
2010
4159.17
2970.84
2009
3820.22
2894.11
2008
3984.84
3089.03
1.24
1.40
1.32
1.29
1.6
1.4
1.2
1
0.8
Series 3
0.6
0.4
0.2
0
2012
2011
2010
2009
2008
INTERPRETATION:
Quick ratio is 1.29 in 2008, 1.32 in 2009 1.40 in 2010, 1.24 in 2011 and 1.57 in 2012. The
liquidity position of the company is better in comparisons with five years.
2012
132.06
2011
152.52
2010
118.83
2009
86.82
2008
92.64
3301.63
3050.42
2970.84
2894.11
3089.03
0.04
0.05
0.04
0.03
0.03
LIQUID
RATIO
0.05
0.05
0.04
0.04
0.03
0.03
Column2
0.02
0.02
0.01
0.01
0
2012
2011
2010
2009
2008
INTERPRETATION:
Super quick ratio is 2008 is 0.03,in 2009 is 0.03, in 2010 is 0.04 ,in 2011 is 0.05 ,in 2012 is 0.04
so it is good and maintained w.r.t to last five years.
Particulars
Cost of Good
2012
4697.17
2011
6982.95
2010
3455.14
2009
2969.36
2008
3950.57
Sold
Current Assets
TURNOVER
3433.66
1.36
3076.95
2.26
2822.29
1.22
2604.70
1.14
2687.46
1.47
RATIO
2.5
1.5
Column2
1
0.5
0
2012
2011
2010
2009
2008
INTERPRETATION:
Current asset turnover ratio is 1.36 in 2012, 2.26 in 2011, 1.22 in 2010, 1.14 in 2009.and 1.47 in
2008.
2012
9253.93
132.03
2011
7987.41
26.53
2010
6289.35
-148.55
2009
5934.76
-71.82
2008
4591.03
-401.57
70.08
301.07
42.33
82.83
11.43
350
300
250
200
Series 3
150
100
50
0
2012
2011
2010
2009
2008
INTERPRETATION:
Working capital turnover ratio is less in 2012 in comparison to 2011 as it is 11.43 in 2008,82.83
in 2009, 42.33 in 2010,301.07 in 2011, 70.08 in 2012
2012
4697.17
2011
6982.95
2010
3455.14
1146.25
1094.03
1143.94
4.09
6.38
3.02
2009
2969.36
1027.46
2.89
2008
3950.57
1161.93
3.40
RATIO
7
6
5
4
Series 3
3
2
1
0
2012
2011
2010
2009
2008
INTERPRETATION:
By Comparing the stock turnover ratio of current year with the previous year, the management
can assess whether stock has been more efficiently used or not. Inventory turnover ratio is 4.09
in 2012, 6.38 in 2011, 3.02 in 2010, 2.89 in 2009, 3.40 in 2008.
DEBTORS TURNOVER RATIO:
Net Credit Sales
Average Accounts Receivable
Particulars
Net Credit Sales
Average Account
Receivable
DEBTOR
TURNOVER
2012
9253.93
2079.21
2011
7987.41
1776.33
2010
6289.35
1577.12
2009
5934.76
1617.10
2008
4591.03
1374.55
4.45
4.50
3.98
3.67
3.34
RATIO
4.5
4
3.5
3
2.5
Series 3
2
1.5
1
0.5
0
2012
2011
2010
2009
2008
INTERPRETATION:
Lower debtor turnover ratio indicate the inefficient credit sale policy of the management. It
means that credit sale have been made to customer who do not deserve much credit. Debtor
turnover ratio is 4.45 in 2012, 4.50 in 2011, 3.98 in 2010, 3.67 in 2009, 3.34 in 2008.
WORKING CAPITAL ANALYSIS
Particulars
(a) Current
2012
3433.66
2011
3076.95
2010
2822.29
2009
2604.70
2008
2687.46
Assets
(b) Current
3301.63
3050.42
2970.84
2894.11
3089.03
liabilities
Net WC (a-b)
132.03
26.53
-148.55
-71.82
-401.57
200
100
0
2012
2011
2010
2009
2008
-100
Series 3
-200
-300
-400
-500
INTERPRETATION:
In 2012, Working capital of the company is good as it has increased to the extent, It was 26.53
last year in comparison in 2012 it was in good state of 132.03 and following years in 2010 it was
-148.55,in 2009 it was -71.82, in 2008 it was -401.57.
2012
2011
2010
2009
2008
Net Profit
455.12
212.96
124.45
109.8
74.35
Net Sale
9253.93
7987.41
6289.35
5934.76
4591.03
4.92
2.67
1.93
1.85
1.62
Net Profit
Turnover Ratio
5
4.5
4
3.5
3
2.5
Series 3
2
1.5
1
0.5
0
2012
2011
2010
2009
2008
INTERPRETATION:
Net Profit Ratio is 4.92 in 2012, 2.67 in 2011 and 1.93 in 2010, 1.85 in 2009,1.62 in 2008.
It is increasing in 2012 in comparison of 2011.
2012
2011
2010
2009
2008
Gross Profit
2640.50
2277.74
1900.35
1866.48
1267.12
Net Sales
9253.93
7987.41
6289.35
5934.76
4591.03
28.53
27.89
30.21
31.45
27.6
Gross Profit
Turnover Ratio
Se
rie
2012 s
3
INTERPRETATION:
Gross Profit Ratio is 28.53 in 2012, 27.89 in 2011 and 30.21 in 2010,31.45 in 2009, 27.6 in 2008
It is Increasing in 2012 in comparison of 2011.
OPERATING CYCLE
There is a difference between current assets and fixed assets in terms of their liquidity. A firm
requires many years to recover the initial investment in fixed assets such as Plant & Machinery.
On the contrary, investment in current assets is turned over many times in a year.
Operating cycle is the time duration required to convert sales (after conversion of resources into
inventories and inventories into finished goods) into cash.
The operating cycle of a manufacturing Company involves three phases: 1.
Acquisition of resources such as raw material labor, power and fuel etc.
2.
Manufacture of the product which includes conversion of raw material into work-inprogress into finished goods.
3.
Sale of the product either for cash or on credit. Credit sales create book debts for
collection.
The length of the operating cycle of a manufacturing firm is the sum of:
1.
2.
3.
The book debts conversion period is the time required collecting outstanding amount from
customer. The total of inventory conversion period and book debts conversion period is the
maximum time required to collect outstanding amount from customers and sometimes it referred
to as gross operating cycle. Generally, a firm acquires resources on credit and temporarily
postpones payment of certain expenses. The difference between operating cycle and payables
deferral period is net operating cycle. The length of
Operating cycle can be determined as: GOC =ICP+BDCP
NOC=ICP+BDCP-PDP
ICP=RMCP+WIPCP+FGCP
Where, GOC=Gross Operating Cycle; NOC=Net Operating Cycle;
ICP=Inventory Conversion Period; BDCP= Book Debts Conversion Period;
PDP= Payable Deferral Period; RMCP= Raw Material Conversion Period;
FGCP= Finished Good Conversion Period.
OPERATING CYCLE ANALYSIS
In order to understand the length of time taken to convert sales (after conversion of resources
into inventories and inventories into finished goods) into cash, operating cycle analysis has been
done. The operating cycle of a firm begins with the acquisition of raw material and ends with the
collection of receivables. There are four aspects of operating cycle, which involves commitment
of resources, a material stage, accounts finished stage and account payable stage. The operating
cycle is calculated as the sum of first three stages minus accounts payable stage.
FINDINGS
&
CONCLUSION
MAJOR FINDINGS
(1) Current ratio of 2012 is satisfactory as compared to 2011. It is 1.04 in 2012 and 1.01 in
2011.
(2) Liquidity position ratio is not satisfactory in 2012 as compared to 2011. It is 0.04 in 2010
and 0.04 in 2012.
(3) Gross profitability ratio is also satisfactory in 2012 as compared to 2011. It is 28.53 in
2012 and 27.89 in 2011.
(4) Net profit ratio is good in 2012 as compared to 2011. It is 4.92 in 2012 and 2.67 in 2011.
(5) Fixed assets turnover ratio is also good. It is 4.13 in 2011 and 5.06 in 2012.
(6) Working capital turnover ratio is not Satisfactory in 2012 as compare to 2011. It is 78.08
in 2012 and 301.07 in 2011.
(7) Debtor turnover ratio is satisfactory. It is 4.50 in 2011 and 4.45 in 2012.
(8) Creditor turnover ratio is also good. It is 5.61 in 2011 and 5.67 in 2012.
(9) Working Capital is more essential factors in ECFL.
Company is getting funds from SBI Bank only.
CONCLUSION
Working capital management is concerned with the problems that arise in attempting to manage
the current assets, the current liabilities and the interrelationship that exists between them. The
major current assets are cash, marketable securities, accounts receivable and inventory.
Current liabilities are those liabilities, which are intended, at their inception, to be paid in the
ordinary course of business, within a year, out of the current assets or earnings of the concern.
The basic current liabilities are accounts payable, bills payable, bank overdraft, and outstanding
expenses.
The goal of working capital management is to manage the firms current assets and liabilities in
such a way that a satisfactory level of working capital is maintained.
The majority of Indian companies maintain relatively lower cash/bank balances.
Marketable securities are yet to emerge as a popular means of cash management.
The excess cash is deployed to retire short-term debt/ in short-term bank deposits.
Though there is a notable decline over the years but yet inventory constitutes an important part of
total current assets.
Debtors/ receivables also constitute an important part of current assets. The collections are
required to be as quick as possible and thus corporate offer cash discounts for the purpose.
Accounts payables and short-term loan/ advances are major components of current liabilities.
The project Working Capital cardinally focuses on inventory and credit terms for the creditors
and debtors.
The approach followed in the project is to reduce the inventory so as to adhere to the standard
norms of the inventory holding thereby releasing the working capital out of it.
Secondly to revise the credit terms in such a way so as to make them uniform across all the sites.
Thus releasing the working capital at the sites where the credit terms were proposed to be
revised.
RECOMMENDATION
Recommendations
The result of the live project done at ECFL is presented in the form of following
recommendations:
Working capital can be improved by:
1.
CREDIT
PERIOD
CREDIT
PERIOD
Pertaining to the above three major prerequisites of the project following key focus areas have
been suggested.
4. Eastman Cast & Forge Ltd is getting finance from SBI bank,
It should raise its sources of finance.
BIBLIOGRAPHY
BOOKS:1)
2)
MAGAZINE:1)
Business world
2)
Business time
NEWSPAPER:1)
Economic times.
SEARCH ENGINE:1)
www.Wikipedia.org
2)
www.Investopedia.com
3)
www.Planware.org
4)
www.Study finance.com
5)
www.Google.com