Working Capital Management

A PROJECT REPORT ON WORKING CAPITAL MANAGEMENT IN SWARAJ MAZDA LIMITED (AN INDO-JAPANESE LCV’S) [pic] SUBMITTED BY: NAMRATA CHECKER ROLL NO: E066028 (MBA) CHITKARA BUSINESS SCHOOL CHANDIGARH PUNJAB TECHNICAL UNIVERSITY PREFACE Practical training is an important part of the theoretical studies. It is of an immense importance in the field of management. It offers the student to explore the valuable treasure of experience and an exposure to real work culture followed by the industries and there by helping the students to bridge gap between the theories explained in the books and their practical implementations.

Training plays an important role in future building of an individual so that he/she can better understand the real world in which he has to work in future. The theory greatly enhances our knowledge and provides opportunities to blend theoretical with the practical knowledge where trainees get familiar with certain aspects of industries. I feel proud to get myself trained at SWARAJ MAZDA that is one of the top most light commercial vehicle industries in India. I have taken up training in finance department and have studied and explained the need for working capital as well as its management and financing.

I am sure I could encash this opportunity to the best of my encompetence, zeal , perfection and academic knowledge & I am keen to make it on going journey throughout my life as I strongly believe that learning is a journey not a destination. ACKNOWLEDGEMENT The project “management of working capital” contained the culmination of six weeks of my own search, study and practice in the office of swaraj mazda limited. I present this project to all those who instructed me to write the project report during summer vacation training programmed at swaraj mazda limited(an indo-japanese joint venture LCVs) I am thankful to Mr.

Ashok Verma(chief manager-finance) who was not only my trainer but my mentor and my guide. He has given me chance to have training in this esteemed organization & for their full cooperation at every sphere to successfully accomplish my task. He not only imparted me summer training but he also cultivated seeds of discipline. He made me realized the importance of time. He not only tried in making me a good manager but also a good human being. I thank Mr. Gopal Bansal( vice-president-finance & company secretary) and his team who has given me this great opportunity to work in SML.

I also thank Mr Arun and all the members of the finance department for co-operating with me in completion of this project. Last but not the least I am thankful to all my friends and family members, particularly Mr. Sanjeev, my ideal, who always guided me on the way whenever I felt myself in trouble. This project made possible the effective presentation of ideas, and analysis which brought remarkable response from the company. SWARAJ MAZDA- AN INTRODUCTION Swaraj Mazda Limited is a joint venture of Punjab Tractors limited and Mazda Motors Limited of Japan.

The agreement between the two was signed on 5th October 1984. As has been pointed out that Swaraj Mazda is a collaboration entity between two giants in their own rights, is committed to quality and performance and is progressively showing profound concerns for the welfare & benefits of their customers, stock holders, business partners and staff. After the first indigenous tractor, manufactured by PTL in India, was successfully launched in 1974, it has been on its way to becoming a blue chip company. Besides tractors, the company also manufactures Swaraj Combine Harvesters, Agricultural Implements.

Automotive Castings, Forklifts. Over the year, PTL has won national and international acclaim and recognition for outstanding performance and contribution in many diverse fields. MOREOVER PTL WAS RATED AS THE BEST COMPANY OF THE YEAR 1989 BY FINANCIAL EXPRESS. Mazda Motors Corporation of Japan, established in 1920 is an enterprise of international repute. Mazda started manufacturing trucks as back in 1931. Today, this enterprise has the distinction of being the only company in the world producing reciprocating petrol and diesel engines as well as the revolutionary rotary engines.

Mazda is ever seeking the new areas of product excellence and innovations. It adheres audaciously to a 2000 checkpoints inspection before declaring any vehicle road worthy. The use of robots, latest technology, and world-class production facilities enables Mazda to produce vehicle of outstanding quality and performance. No wonder Mazda has won appreciation all over the world for quality products that are rolling out of its plants. The factory Swaraj Mazda Limited is located at Village Asron district Nawanshahar (Punjab) near the city of Ropar and at a distance of 45 km from the capital city of Chandigarh.

The plant has captivating site. It spreads over a quaint, sprawling 100 acres of land ringed by Shivalik Hills on three of its sides and river Satluj on the other. The desolate slit hill has been leveled for construction. Work at the plant began at a great tempo and the first vehicle rolled out of the production line in a record time of one year of laying the foundation stone. The LCV are manufactured in five attractive colours- Santos Red, Nile blue, Light Beige, White and Golden Yellow. In addition to these, any other colors can be made on demand.

Swaraj Mazda vehicles are not only strong but also fuel-efficient. Prominent among the load carriers Swaraj Mazda is also manufacturing:- 1. 4 wheel drives; 2. Extended wheel- base long- chassis Mini Buses which carry up to 44 passengers. 3. Deluxe Buses carrying to 40 passengers; 4. Ambulances 5. Mobile Reverse- Osmosis and Electro dialysis Units for the Central Salt and Mineral Chemical Research Institute. 6. CNG Buses with Safety & Eco grades. 7. Integrated Garbage collection and disposal system for urban centers; 8. Hydraulically operated dumpers; 9. Mobile fair priced vans; 10.

Sky Lift Vehicles Swaraj Mazda gives due attention to the marketing part and the employees are highly qualified and trained to fit the job. Swaraj Mazda has a vast network of 150 dealers spread throughout the country including A&N Islands. Zonal offices have been opened in Chandigarh, Lucknow, Ahmedabad, Mumbai, and Chennai. This helps substantially in sales promotion, Export promotion, especially for Hi-tech products, is also being emphasized. Discipline and its rigid enforcement without discrimination is an important Hallmark of Swaraj Mazda. It is of great significance in evolving work culture.

All the employees, irrespective of their position and status have to punch their cards when they report for duty. As a result, strict punctuality has become a way of life and work with them. To ensure Industrial peace, i. e. absence of strikes and lockouts, Swaraj Mazda believes in making a contended labour force with a very low rate of absenteeism and turnover. Reasonably fair wages and various perks like subsides uniform and transport, mess facilities go a long way in creating identification with the job. Earnestness, Sincerity and Spirit of corporation pervades the entire atmosphere of the company.

The happy absence of Industrial dispute in the enterprise speaks volume for the success of the firm and cultivation of work culture. Work culture or work ethos is given very high precedence. It id fully recognized that the objectives of the concern- higher and higher production, productivity and indigenization can be attained through commitment into commonness of ‘GOAL’ in each and every member of the Swaraj family. The entire planning is undertaken in such a way so as to inculcate the spirit of dedication in each member, whether he is skilled or semi-skilled worker or belongs to the managerial cadre.

Many effective steps are taken to bring this about. Important amongst them are: 1. Common canteen and mess for all. Same meals are served to all and in identical utensils. Everybody has to stand in a queue to get his or her meals. 2. Common uniform is there for all the members irrespective of their status. 3. No separate cabins for the members of higher hierarchy. All the members of a department or a section therefore sit and work in one hall with the Manger facing the staff. Every employee carries his or her files, thus inculcating the spirit of dignity of labour in the staff.

HISTORY OF SWARAJ MAZDA History of the SWARAJ MAZDA LIMITED (Light Commercial Vehicle) dates back to as in 1975 when the first efforts were initiated by the Punjab State Industrial development Corporation Limited (PSIDC) to obtain a letter of intent from the Government of India. The Govt. of India was interested in installing the unit and issuing the license for an LCV in order to save the fuel consumption in the economy. Therefore Govt. decided to installed indo-Jap LCV units in 3 states – Punjab, U. P. & M. P.

The contribution of PSIDC was two fold; firstly in obtaining the letter of intent in 1981 and subsequently for transferring the same in favour of the Company in 1983. These moves reflected the thinking in the Punjab Govt. and the PSIDC, that Punjab Tractors Limited (PTL) would implement this project taking full advantage of PTL’s position, experience, expertise and resources both financial and managerial. It was in this background that PTL entrusted with the responsibility for the LCV project, went ahead promotion of Swaraj Vehicles Limited in July, 1983.

Punjab Tractors Limited and its brand name “Swaraj” were well known on the Indian corporate and engineering horizon. They were proven symbols of Indian Engineering fully competitive against collaboration based technology and foreign brand names. PTL’ track record during the period of its existence is often cited as an example of dedicated and sustained corporate endeavor and organisation value system, financial performance and systematic growth, team building perception and response to changing market needs and resilience against difficulty.

The project in its concept, aims at breaking new ground not only in terms of product and production technology, but also in building a new culture and value system in the organisation, which enables it to move forward with confidence into the era of competitive markets. This guiding philosophy is dictating every facet of project implementation both in physical facilities and the human side. CORPORATE PROFILE “The best way to predict the future is to invest it. ” Alan Key CORPORATE PROFILE SWARAJ GROUP CONSTITUENTS

COMPANY DIVISION PUNJAB TRACTORS LTD. —– SWARAJ TRACTORS DIVISION —– SWARAJ COMBINE DIVISION —– SWARAJ FOUNDRY DIVISION —– SWARAJ R&D DIVISION SWARAJ MAZDA LTD. SWARAJ ENGINES LTD. SWARAJ AUTOMOBILE LTD. MILESTONES 1983 Swaraj Vehicles Ltd. (SVL) incorporated (in July) 1984 Joint Venture and Technical Assistance Agreement between Punjab Tractors Ltd. , Mazda Motor Corporation & Sumitomo Corporation concluded.

SVL renamed Swaraj Mazda Ltd. (SML) 1985 LCV Project capacity – 5,000 vehicles on single shift basis Capital Outlay – Rs. 220 Million Equity Capital – Rs. 105 Million 1985 Commencement of Trial production and test marketing of (August) Swaraj Mazda Trucks and Bus. 1986 Commencement of Commercial operations. 1987 Launch of Indigenously developed 26 seater Bus 1990 Launch of Second Truck Model – Super 1993 Launch of Third Truck Model – Premium 1996 Launch of 4-Wheel Drive Truck 1999 Bharat Stage-I Emission Norms complied

Bharat Stage-II Emission Norms complied 2001 – Launch of 4 Wheel Drive Ambulance – Launch of Economy Truck – SARTAJ – Launch of CNG Buses 2004 Launch of Cargo Truck Model – SAMRAT with Air brakes (GVW 10250 Kg) 2006 June Entry of Isuzu through swaraj mazda July Commercial production of buses (LT 134) August Commencement of construction of Buildings for vehicle expansion and new Bus Body Plant. December Signing of Second Technical Assistance Agreement with Isuzu Motors Ltd. 2007 Aggregate vehicles sales reach 1, 10,000 Vehicles (March)

In its journey of 23 years, Commercial Vehicle Industry has scaled new heights – from a level of 105000 units in 1986-87, industry volume have peaked to 518000 in fiscal 2006-07. The last 6 years in particular have witnessed spectacular growth for the commercial vehicles industry as a whole –volumes have more than tripled from 2001-02 level of 158000 to 518000 in 2006-07. Segment growth has, however, been uneven as will be evident from : | |2001-02 |2006-07 |Growth | |Up to 3. Ton GVW |36300 |175700 |(+) 139400 | |Up to 10 Ton GVW |36800 |73000 |(+) 36100 | |Plus 10 Ton GVW |85400 |269000 |(+) 183600 | |Total |158500 |517700 |(+) 358200 | In the SML range the growth has been minimal. OBJECTIVES

The main objectives of my research on “management of working capital” of swaraj mazda limited are:- 1) To study & evaluate the working capital management system of swaraj mazda limited. 2) To determine the adequate or optimum quantum of investment in working capitalof swaraj mazda limited. 3) To determine the composition or structure of current assets. 4) To maintain a proper balance between liquidity & profitability. 5) To maintain a proper the policy or means of finance for current assets. SYNOPSIS INTRODUCTION TO WORKING CAPITAL Cash is the lifeline of a company.

If this lifeline deteriorates, so does the company’s ability to fund operations, reinvest and meet capital requirements and payments. Understanding a company’s cash flow health is essential to making investment decisions. A good way to judge a company’s cash flow prospects is to look at its working capital management (WCM). WHAT IS WORKING CAPITAL? Working capital refers to the cash a business requires for day-to-day operations, or, more specifically, for financing the conversion of raw materials into finished goods, which the company sells for payment.

Among the most important items of working capital are levels of inventory, accounts receivable, and accounts payable. Analysts look at these items for signs of a company’s efficiency and financial strength. CONCEPTS OF WORKING CAPITAL There are two concepts of working capital – gross and net. • GROSS WORKING CAPITAL: It refers to the firm’s Investment in current assets which can be converted into cash within an accounting year(or operating cycle) and include cash, short-term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory) NET WORKING CAPITAL: It refers to the difference between Current Assets & Current Liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an Accounting year and include creditors (accounts payable) ,bills payable and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when Current Assets increase current liabilities. A negative net working capital will occur when Current Liabilities are in excess of Current Assets.

NATURE OF WORKING CAPITAL EXCESSIVE AND INADEQUATE WORKING CAPITAL: A business enterprise should maintain adequate working capital according to the needs of its business of its business operations. The amount of working capital should neither be excessive nor adequate. If the working capital is excess of its requirements it means idle funds adding to the cost of capital is short of its requirements, it will result in production interruptions and reduction of sales and, in turn, will affect the profitability of the business adversely.

DEFECIENCIES OF EXCESSIVE WORKING CAPITAL • EXCESSIVE INVENTORY: Excessive working capital results in unnecessary accumulation of large inventory. It increases the chances of misuse, waste, theft etc. • EXCESSIVE DEBTORS: Excessive working capital will result in liberal credit policy which, in turn, will result in higher amount tied up in debtors and higher incidence of bad debts. • ADVERSE EFFECT ON PROFITABILITY: Excessive working capital means idle funds in the business which adds to the cost of capital but earns no profits for the firm.

Hence it has a bad effect on profitability of the firm. • INEFFECIENCY OF MANAGEMENT: Management becomes careless due to excessive resources at their command. It results in laxity of control on epenses and cash resources. DEFECIENCIES OF INADEQUATE WORKING CAPITAL: • DIFFICULTY IN AVALIABILITY OF RAW-MATERIAL: Inadequacy of working capital results in non-payment of creditors on time. As a result the credit purchase of goods on favorable terms becomes increasingly difficult. Also, the firm cannot avail the cash. FULL UTILISATION OF FIXED ASSETS NOT POSSIBLE: Due to the frequent interruption in supply of raw materials and paucity of stock, the firm can’t make full utilization of its machines etc. • DIFFICULTY IN THE MAINTAINENCE OF MACHINERY: Due to the shortage of working capital, machines are not cared and maintained properly which results in the closure of production of on many occasions. • DECRAESE IN CREDIT RATING: Because of inadequacy of working capital, firm is unable to pay its short term obligations on time.

It decays the firm’s relation with its bankers and it becomes difficult for the firm to borrow in case of need. ADVANTAGES OF ADEQUATE WORKING CAPITAL: • AVAILIABILTY OF RAW MATERIAL REGULARLY: Adequacy of working capital makes it possible for a firm to pay the suppliers of raw material in time. As a result it will continue to receive regular supplies of raw materials and thus there will be no disruption in production process. • FULL UTILISATION OF FIXED ASSETS: Adequacy of working capital makes it possible for a firm to utilize its fixed assets fully and continuously. For eg. if there is inadequate stock of raw material, the machines will not be utilized in full and their productivity will be reduced. • CASH DICOUNT: A firm having the adequate working capital can avail the cash discount by purchasing the goods for cash or by making the payment before the due date. • MEETING UNSEEN CONTINGENCIES: Adequacy of working capital enables a company to meet the unseen contingencies successfully. NEED OF WORKING CAPITAL Alongwith the fixed capital almost every business requires working capital though the extent of working capital requirements differ in different businesses.

Working capital is needed for running the day-to-day business activities. When a business is started, working capital is needed for purchasing raw material. The raw material is then converted into finished goods by incurring some additional costs on it. Now goods sre sold. Sales do not convert into cash instantly because there is invariably some credit sales. Thus, there exists a time lag between sales of goods and receipt of cash. During this period, expenses are to be incurred for continuing the business operations. For this purpose working capital is needed.

Therefore, sufficient working capital is needed which shall be involved from the purchase of raw material to the realization of cash. The time period which is required to convert raw material into finished goods and then into cash is known as operating cycle or cash cycle. The need for working capital can also be explained with the help of operating cycle. Operating cycle of a manufacturing concern involves five phases: i) Conversion of cash into raw material. ii) Conversion of raw material into work-in-progress. iii) Conversion of work-in-progress into finished goods. v) Conversion of finished goods into debtors by credit sales. v) Conversion of debtors into cash by realizing cash from them. Thus,the operating cycle starts from cash and then again restarts from cash. Need for working capital depends upon period of operating cycle. Greater the period, more will be the need of working capital. Period of operating cycle in a manufacturing concern is greater than a period of operating cycle in a trading concern because in trading units cash is directly converted into finished goods. [pic] operating cycle (nature of working capital)

Because of the time involved in a operating cycle, there is a need of working capital in the form of current assets. Firms have to keep adequate stock of raw-material to avoid risk of non-avaliabilty of raw materials. Similarly, concerns must have adequate stock of finished goods to meet the demand in market on continuous basis and to avoid competition which necessitates the money tied up in debtors and bills receivables. In addition to al these, concerns have to necessarily keep cash to pay the manufacturing expenses etc. and to meet the contingencies. PERMANENT AND TEMPORARY WORKING CAPITAL:

Working capital in a business is needed because of operating cycle. But the need for working capital does not come to an end after the cycle is completed. Since the operating cycle is continuous process, there remains a need for continuous supply of working capital. However, the amount of working capital required is not constant throughout the year, but keeps fluctuating. On the basis of this concept, working capital is classified into two types: a) Permanent working capital: the need for working capital or current assets fluctuates from time to time. However, to carry on day-to-day perations of the business without any obstacles, a certain minimum level of raw materials, work-in-progress, finished goods and cash must be maintained on a continuous basis. The amount needed to maintain current assets on this minimum level is called permanent working capital or regular working capital. The amount involved as permanent working capital has to be met from long term sources of finance, eg. Capital, debentures, long term loans etc. b) Temporary working capital: any amount over and above the permanent level of working capital is called is called temporary, fluctuating or variable working capital.

Due to seasonal changes level of business activity is higher than normal during some months of the year and therefore, additional working capital will be required along with the permanent working capital it is so because during peak season demand rises and more stock is to be maintained to meet the demand. Similarly, the amount of debtors increases due to excessive sales. Additional working capital thus needed is known as temporary working capital because once the season is over; the additional demand will be no more. Need for temporary working capital should be met from short term of finance, e. . Short term loans etc. so that it can be refunded when it is not required. FACTORS AFFECTING WORKING CAPITAL OR DETERMINANTS OF WORKING CAPITAL A firm should have neither too much or too little working capital. The working capital requirements is determined by a large number of factors but, in general, the following factors influence the need of working capital needs of an enterprise: 1) NATURE OF THE BUSINESS: working capital requirements of an enterprise are largely influenced by the nature of the business. For eg. Public utilities such as railways, transport ,water and electricity etc. ave very limited need of working capital because they have to invest fairly large amount in fixed assets. Their working capital need is minimal because they get immediate payment for their services and do not have to maintain big inventories. On the other extreme are the trading and financial enterprises which have to invest less amount in fixed assets and a large amount in working capital. This is so because the nature of the business is such that they have to maintain a sufficient amount of cash, inventories and debtors.

Working capital needs of most of the manufacturing enterprise fall between these two extremes, that is between public utilities and trading concerns. 2) SIZE OF THE BUSINESS: larger the size of business enterprise, greater would be the need for working capital. The size of a business may be measured in terms of scale of its business operation. 3) GROWTH AND EXPANSION: as business enterprise grows, it is logical to expect that a larger amount of working capital will be required. Growing industries require more working capital than those that are static ) PRODUCTION CYCLE: production cycle means the time span between the purchase of raw material and its conversion into finished goods. The longer the production cycle the larger will be the need of working capital because the funds will be tied up for longer period in work in progress. 5) BUSINESS FLUCTUATIONS: business fluctuations may be in the direction of boom and depression. During boom period the firm will have to operate at full capacity to meet the increased demand which in turn, leads to increase in level of inventories and book debts. Hence, the need for working capital in boom conditions is bound to increase.

The depression phase of business fluctuations has exactly an opposite effect on the level of working capital requirement . 6) CREDIT POLICY RELATING TO SALES: if a firm adopts liberal credit policy in respect of sales, the amount tied up in debtors will also be higher. Obviously, higher book debts mean more working capital. On the other hand, if the firms follows tight credit policy, the magnitude of working capital will decrease. 7) CREDIT POLICY RELATING TO PURCHASE: if a firm purchases more goods on credit, the requirement for working capital will be less.

In other words, if liberal credit terms are available from the suppliers of goods, the requirement for working capital will be reduced and vice-versa . 8) AVAILABILITY OF RAW-MATERIAL: If the raw material required by the firm is available easily on a continuous basis, there will be no need to keep a large inventory of such materials and hence the requirement of working capital will be less. On the other hand, if the supply of raw material is irregular, the firm will be compelled to keep an excessive inventory of such material which will result in high level of working capital. ) AVAILABILITY OF CREDIT FROM BANKS: if the firm can get bank credit facility in case of need, it will operate with less working capital. On the other hand, if such facility is not available, it will have to keep large amount of working capital. 10) VOLUME OF PROFIT: The net profit is a source of working capital to the extent it has been earned in cash. Higher net profit would generate more internal funds thereby contributing the working capital pool. 11) LEVEL OF TAXES: full amount of cash profit is not available for working capital purposes. Taxes have to be paid out of profits.

Higher the amount of taxes less will be the profits available for working capital. 12) DIVIDEND POLICY: dividend policy is a significant element in determining the level of working capital in an enterprise. The payment of dividend reduces the cash and thereby, affects the working capital to that extent. On the contrary, if the company does not pay dividend but retains the profit, more would be the contribution of profits towards the working capital pool. 13)DEPRICIATION POLICY: although depreciation does not result in outflow of cash, it affects the working capital indirectly.

In the first place, since the depreciation is allowable expenditure in calculating net profits, it affects the tax-liability. In the second place, higher depreciation also means lower disposable profits and ,in turn, a lower dividend payment. Thus, outgo of cash is restricted to that extent. 14) PRICE LEVEL CHANGES: A change in price level also affects the working capital requirements. If the price level is rising, more funds will be required to maintain the existing level of production 15) EFFECIENCY OF MANAGEMENT: efficiency of management is also a significant factor to determine the level of working capital.

Management can reduce the need for working capital by the efficient utilization of resources. It can accelerate the pace of cash cycle and thereby use the same amount working capital again and again very quickly ANALYSIS OR COMPUTATION OF WORKING CAPITAL A Number of methods are used to determine the working capital needs of a business. The important among them are: 1) OPERATING CYCLE METHOD: operating cycle is the time span the firm requires in the purchase of raw material, conversion of raw material in work in progress and finished goods, conversion of finished goods into sales and in collecting cash from debtors.

Larger the time span of operating cycle, larger the investment in current assets. Hence the time period for each stage of operating cycle is computed on the basis of cost of each item. Following factors should be considered while forecasting working capital requirement on the basis of operating cycle method: i) cost of raw material, wages and overheads ii) Period during which raw material remains in store before it is issued for production purpose. iii) Period of operating cycle iv) Period during which finished goods is stored before sale. ) Period of credit allowed to debtors and period of credit allowed by suppliers. vi) Time lag in payment of wages and overheads. vii) minimum cash balance required to be maintained. A certain percentage of contingencies may also be added to the above estimates to determine the working capital requirements. On the basis of operating cycle, the working capital can be forecasted in the following way: Statement Showing Working Capital Requirements Current assets: (i)stock of raw material: cost of yearly consumption average inventory period f raw material x (weeks/months) 52weeks/12 months (ii)work in process: Cost of yearly consumption average time span of W-I-P Of raw material x (weeks/months) 52 weeks/12 months + yearly wages x 50 x (weeks/months) 100 52 weeks/12 months + yearly manufacturing and administrative overheads(ex.

Dep) average time span of W-I-P x 50 x (weeks/months) 100 52 weeks/12 months (iii)stock of finished goods: Cost of goods produced (i. e. early cost of raw materials + wages + manufacturing & administrative overheads excluding depreciation) average finished goods holding period X (weeks/months) 52 weeks/12 months (iv)debtors: Working capital tied up in debtors should be estimated on the basis of cost of sales(ex. Dep): Cost of goods produced average debt collection period (i. . raw material + wages (weeks/months) + manufacturing, admn. X 52 weeks/12months & selling overhead) (v)cash and bank balance: Apart from WC needs for financing inventories and debtors, firms also find it useful to have some minimum cash balances with them. It would be based on the motives for holding cash balances of the business firm, attitude of management towards risk, the access to the borrowing sources in times of need and past experience etc. Less: current liabilities: i)trade creditors: Credit period allowed by creditors Cost of yearly consumption (weeks/months) Of raw material x 52 weeks/12 months (ii)wages: Average time lag in payment of wages Yearly wages x (weeks/months) 52 weeks/12months If wages are paid at the end of each month, the average time lag in the payment of wages will approximate to half a month.

This is so because 1st days wages are paid on the 30th day of each month, extending credit for 29 days, the 2nd days wages are, again paid on the 30th, extending credit for 28 days, and so on. Thus, average time lag will approximate to half a month. (iii)overheads: Yearly overheads average time lag in payment of overheads (other than dep. ) x (weeks/months) 52 weeks/12months WORKING CAPITAL=CURRENT ASSETS-CURRENY LIABILITIES ADD: PROVISION FOR CONTINGENCIES ESTIMATED WORKING CAPITAL REQUIREMENTS ) FORECASTING OF CURRENT ASSETS AND CURRENT LIABILITIES METHOD: according to this method, an estimate is made of forthcoming period’s current assets and current liabilities on the basis of factors like past experience, credit policy, and payment policy of the previous year. First of all, such estimate is made for each current assets on the basis of each month and then monthly requirements are converted into yearly requirements of current assets. The estimated amount of current liabilities is deducted from this amount in order to estimate the requirement of working capital.

A certain percentage of contingencies may also be added to this amount. 3) CASH FORECASTING METHOD: under this method estimate is made of cash receipts and payments for the next period. Estimated cash receipts are added to the amount of working capital which exists at the beginning of the year and estimated cash payments are deducted from this amount. The difference will be the amount of the working capital. 4) PROJECTED BALANCE SHEET METHOD: under this method, an estimate is made of assets and liabilities for a future date and a projected balance sheet is prepared for that future date.

The difference in CA and CL shown in projected balance sheet will be the amount of working capital. MANAGEMENT OF WORKING CAPITAL Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationships between them. Its operational goal is to manage the current assets and current liabilities in such a way that a satisfactory level of working capital is maintained. The term working capital refers to the net working capital i. e. urrent assets minus current liabilities with reference to the management of working capital, net working capital represents that part of the current assets which are financed with the long term funds. The level of NWC has a bearing on the profitability as well as the risk in the sense of the inability of the firm to meet obligations as and when they become due. Therefore, the tradeoff between profitability and risk is an important element in the evaluation of the level of NWC of the firm. In general, the higher the NWC the lower the risk, as also the lower is the profitability and vice-versa.

Thus, the NWC measures the degree of risk in the management of working capital. Apart from the profitability-risk trade-off, the determination of the finance mix is the second ingredient of the theory of working capital management. The financing mix refers to the proportion of current assets to be financed by current liabilities and long term sources. One approach to determine the financing mix is hedging approach, acc. to which long term funds should be used to finance the fixed portion of the current assets and the purely temporary requirements should be met out of short term funds. This approach is high profit, high risk financing mix.

Acc. to the second approach, namely the conservative approach, the estimate requirements of the current assets should be financed from long term sources and the short term funds should be used only in emergency situation. The conservative approach is a low-profit, low risk combination. Neither of the two is suitable for efficient working capital management. A trade off between these two extremes provides a financing plan between these two approaches, and therefore, an acceptable financing strategy from the view point of the management of working capital. CASH MANAGEMENT Cash management is one of the key areas of working capital management.

There are 4 motives of holding cash i) transaction motive ii) precautionary motive iii) speculative motive iv) compensating motive the transaction motive refers to the holding of cash to meet anticipated obligations whose time is not perfectly synchronized with cash receipts. The cash balances held in reserve for random & unforeseen fluctuations in cash flows are called as precautionary balances. The speculative motives indicates the desire of a firm to take advantage of opportunities which present themselves at unexpected moments and which are typically outside the normal course of business.

The compensating motive means keeping the bank balance sufficient to earn a return equal to the cost of free service provided by the banks. The basic objectives of cash management are to reconcile two mutually contradictory and conflicting tasks: to meet the payment schedule & to minimize funds committed to cash balances. Cash budget is probably the most important tol in cash management. It is a device to help a firm to plan & control the use of cash. The cash position of a firm as it moves from one period to another period is high lighted by cash budget.

A cash budget has normally three parts, namely, cash collections, cash payments and cash balances. The major sources of cash receipts and payments are operating and financial. The operating sources are repetitive in nature while the financial sources are non-recurring. MANAGEMENT OF RECEIVABLES It deals with those transactions which deals with the billing of customers who owe money to a person, company or organization for goods & services that have been provided to the customers under receivables management, we consider the position of our debtor.

Before extending the credit to him, personal interaction with him is done & information is is collected like the refrences, bank account information etc. & if it seems that person is reliable then he could be extended credit. Then some other factors are also considered like financial position of the debtor, reputation of the Debtors in the market, credit paying capacity of the person etc. there should be proper agreement between the debtor and the company for the repayment terms. But if the debtor fails to pay the money then the help of law or muscle power can also be used but the action should be taken within 3 ears of extending credit. The management of receivables involves crucial decision in three areas: (i) credit policy (ii) credit terms (iii) collection policies. The credit policies of the firm provides the framework to determine whether to or not to extend credit to a customers and how must credit to extend. The two broad dimensions of credit policy decision of a firm are credit standards and credit analysis, the term credit standards represent the basic criterion for the extension of credit to customers.

The criterion, and therefore, standards can be tight /restrictive or liberal/non-restrictive. The credit analysis component of credit policies includes obtaining credit information from different sources and its analysis. The second decision area in receivables management is the credit terms, the credit terms specify the repayment terms, comprising credit period,cash discount, if any, and cash discount period. The third area involved in the management of receivables is collection policies. It refers to the procedure followed to collect accounts receivable when they become due.

The two relevant aspects are the degree of efforts to collect the over dues and the type of collection effort. The framework of analysis of all the three decision areas in receivable management is to secure a trade-off between the costs & benefits of the measurable effects on the sales volume, capital cost due to change in accounts receivable, collection costs, and bad debts and so on. The alterantive will be selected when the benefits exceed the costs. INVENTORY MANAGEMENT The term inventory refers to assets which will be sold in future in the normal course of business operations.

The assets which the firm stores as inventory in anticipation of need are raw materials, work-in-progress, semi-finished goods, and finished goods. The objective of inventory management consist of two counter balancing parts, namely, to minimize investments in inventory and to meet the demand for products by efficient production and sales operations. In operational terms, the goal of inventory management is to have a trade-off between costs and benefits at different levels of inventory. The costs of holding inventory are ordering cost and carrying costs.

The major benefits of holding inventory are in the areas of purchasing, production and sales. The non-mathematical inventory management techniques illustrated here are (i) ABC system (ii) EOQ (iii) re-order point (iv) safety stock ABC system (Always Better Control system) The first step in inventory control process is classification of different types of inventories to determine the type and degree of control required for each. The ABC system is a widely used classification technique to identify various items of inventory for purposes of inventory control.

This technique is based on the assumption that a firm should not exercise the same degree of control on all items of inventory. It should rather keep a more rigorous control on items that are (i) more costly (ii) slowest turning while items that are less expensive should be given less control effort. On the basis of the cost involved, the various inventory items are, according to this system, categorized into three items (1) A (2) B (3) C. the items included in group A involved the largest investment.

Therefore, inventory control should be most rigourous and intensive and the most sophisticated inventory control techniques should be applied to these items. C group consists of items of inventory, which involve relatively small investments alyhough the number of items is fairly large. These items deserve minimum attention. B group stands mid way. It deserves less attention than A but more than C. employing less sophisticated techniques can control it. The task of inventory management is to properly classify all the inventory items into one of these three groups.

The typical breakdown of inventory items is shown in following table: Group No. of Items Inventory Value (%) A 15 70 B 30 20 C 55 10 —- —- 100 Some points stand out from above table.

While group A is the least important than in terms of the no. of items, it is by far the most important in terms of investments involved. With only 15% of the number, it accounts for as much as 70% of the total value of inventory. The firm should direct most of its inventory control efforts to the items included in this group. The items comprising B group accounts for 20% of the investment in inventory. They deserve less attention than A, but, more than C, which involves only 10% of the total value although number wise its share is as high as 55%. ECONOMIC ORDER QUANTITY

After various inventory items are classified on the basis of the ABC analysis, the management becomes aware of the type of control that would be appropriate for each of the three categories of the inventory items. The A group of items wants the maximum attention and the most rigorous control. A key inventory problem particularly in respect of the group A items relates to the determination of the size or quantity in which inventory will be acquired. In other words, while purchasing raw material or finished goods, the question to be answered are : how much inventory should be bought in one lot under one order on each replenishment?

Should the quantity to be purchased be large or small? Or, should the requirement of materials during a given period of time (say, six months or one year) be acquired in a lot or should it be acquired in installments or in several small lots? Such inventory problems are called order quantity problems. The determination of the appropriate quantity to be purchased in each lot to replenish stock as a solution to the order quantity problem necessitates resolution of conflicting goals. Buying in large quantities implies a higher inventory level which will assure (1) smooth production / sale operations (2) lower ordering or set up costs.

But it involve higher carrying cost. On the other hand small orders will reduce the carrying cost of inventory by reducing the average inventory level but the ordering cost will improve as there is likelihood of interruption in the operations due to stock-outs. A firm should place neither too large nor too small orders. On the basis of trade-off between benefits derived from the avaliabilty of inventory and the cost of carrying that level of inventory, the appropriate or optimum level of the order to be placed should be determined.

The optimum level ofinventory is popularly referred as economic order quantity(EOQ). It is also known as economic lot size. The EOQ may be defined as that level of inventory order that minimizes the total cost associated with inventory management. RE-ORDER POINT The EOQ technique determines the size of an order to acquire inventory so as to minimize the carrying as well as the ordering costs. In other words, the EOQ provides an answer to the question: how much inventory should be ordered in one lot?

Another important question pertaunung to efficient inventory management is : when should the order to procure inventory be placed? This aspect of inventory management is covered under the order point problem. The reorder point is stated in terms of the level of inventory at which an order should be placed for replenishing the current stock of inventory. In other words, reorder point may be defined as that level of inventory when fresh order should be placed with the suppliers for procuring additional inventory equal to the economic order quantity.

Although some sophisticated re-order point formulae are available, it is based on following assumptions: Constant daily usage of inventory & fixed lead time. In other words, the formulae assume condition of certainty. The re-order point = lead time in days x average daily usage of inventory. The term lead-time refers to the time normally taken in receiving the delivery of inventory after placing orders with the suppliers. It covers the time span from the point when a decision to place an order for the procurement of inventory is made to the actual receipt of the inventory by the firm.

Another way of saying it is that the lead time consists of the number of days required by the suppliers to receive and process the orders as well as the number of days during which the goods will be in transit from the supplier. The lead time may also be called as the procurement time of inventory. The average usage means the quantity of inventory-consumed daily. We can, therefore, define re-order point as that inventory level, which should be equal to the consumption during the lead-time. OTHER INVENTORY CONTROL SYSTEMS:

There are also other inventory control systems, which are as follows: 1) just-in-time (JIT) 2) out sourcing 3) computerized inventory control systems JUST IN TIME SYSTEM JIT is an inventory strategy implemented to improve the return on investment of a business by reducing in process inventory & its associated costs. JIT can lead to dramatic improvements in a manufacturing organisation’s return on investments quality & efficiency. New stock is ordered when stock drops to the reorder level. This saves warehouse space & cost. So it requires space management also.

But if, the raw material is ordered so early, when it is not needed than the company has also to suffer space cost. JIT system is used by Japanese. It is not implemented in India. If JIT is not used, it can also lead to wastage bacuse raw material coukd also come befor or after it is needed, which could be of no use. Also, the inventions and innovations take place everytime. So it is better to use latest technology in the product. In short JIT system is all about having the right material at the right time at right place & in exact amount. OUTSOURCING

A few years ago there was a tendency on the parts of many companies to manufacture all components in hours. Now more and more companies are adopting the practice of out-sourcing. Out-sourcing is a system of buying parts and components from outside rather than manufacturing them internally. Many companies have developed a single source of supply, and many others help developing small and middle sized suppliers of components that they require. Tata motors has, for example, developed a number of ancilliary units around its manufacturing sites that supplies parts and components to its manufacturing plant.

With the help of tata motors, ancillaries are able to maintain the high quality of manufactured components. The car manufacturing company, maruti,, which is now controlled by Suzuki of japan, has the similar system of supply. COMPUTERISED INVENTORY CONTROL SYSTEM: More and more companies, small or large size, are adopting the computerized system of controlling inventories. A computerized inventory control system enables a company to easily track large items of inventories. It is an automatic system of counting inventories, recording withdrawals and revising the balance.

There is an in built system of placing order as the computer notices the reorder point has been reached. The computerized inventory system is inevitable for large retail stores, which carry thousands of items. The computer information systems of the buyer and suppliers are linked to each other. As soon as the suppliers computer receives an order from the buyer’s system, the supply process is activated. FINANCIAL PERFORMANCE OF SWARAJ MAZDA LIMITED Last 11 yrs Vehicles Production & Sales of SWARAJ MAZDA | | | |1996-97 |4006 |3726 | |1997-98 |2931 |3303 | |1998-99 |2877 |2975 | |1999-00 |4010 |3983 | |2000-01 |5211 |5069 | |2001-02 |6360 |6222 | | |8201 |8101 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |2002-03 | | | |2003-04 |10225 |10279 | |years |production |sales | |2004-05 |12385 |12353 | |2005-06 |11946 |11887 | |2006-07 |10915 |10841 | [pic] SML VEHICLES (%AGE) SHARE IN MARKET Vehicles | %age share | | Truck | 62% | | Bus | 34% | | AMB | 3% | | Special Applications | 1% | [pic] SML is 3rd player in LCV segment with 15% market share. Out of this 15% large market share is covered by SML trucks with 6762 units (62%) in LCV segment. Sales of bus vehicles are 3706 units with 34% market share. Ambulance vehicles have 3% market share by a sale of 297 units. Swaraj Mazda special Application has just 1% market share in LCV segment. LAST 2 YEARS SALES COMPARISON OF SWARAJ MAZDA VEHICLES Vehicles | 2005-06 | 2006-07 | |Truck | 8401 | 6702 | |Bus | 3275 | 3706 | |Spp. Appl. | 117 | 136 | |ABM | 94 | 297 | |TOTAL | 11887 | 10841 | [pic] LAST 5 YRS COMPETITORS SALES | YRS. |2002-03 |2003-04 |2004-05 |2005-06 |2006-07 | | | | | | | | |CO. | | | | | | TELCO |17007 |22680 |25928 |30936 |29331 | |EICHER |11466 |14208 |15164 |16048 |16821 | |SWARAJ |8101 |10279 |12353 |11887 |10841 | |MAHINDRA |7095 |7205 |7955 |7078 |8694 | |FORCE |4076 |5164 |4155 |5286 |4592 | |A. LEYLAND |1515 |1788 |4477 |4002 |2526 | | |49260 |61324 |70032 |75237 |72823 | |Total | | | | | | [pic] MARKET SHARE (%AGE) OF DIFFERENT COMPANIES IN 2006-2007 COMPANIES | MARKET SHARE | | |(%AGE) | |TELCO | 40% | |EICHER | 23% | |SWARAJ | 15% | |MAHINDRA | 12% | |FORCE MOTOR | 6% | |A. LEYLAND | 4% | [pic]

The above Table and Graph shows the %age of market share of different companies in LCVs segment. All these companies are competitors in 5-10 Ton GVW in LCV sector. Telco is a market leader having 40% market share. Telco has local technology. Eicher stands at 2nd place with 23% market share. Swaraj Mazda is the 3rd player with 15% market share in LCV segment. Mahindra & Mahindra holds 12% market share it stands at 4th place. Force motors have 6% & Ashok Leyland has just 4% market share in LCV segment. SHARE HOLDING PATTERN OF SWARAJ MAZDA LIMITED Sumitomo corporation 41. 03% Punjab tractors limited(ptl) 14. 04%

Mutual funds/nationalized banks 7. 83% FIIs 9. 31% Public 27. 79% [pic] EXPENDITURE OF SWARAJ MAZDA LIMITED FOR THE LAST 6 YEARS |YEARS |EXPENDITURE | |2001-02 |52 | |2002-03 |66. | |2003-04 |73. 5 | |2004-05 |71. 4 | |2005-06 |64 | |2006-07 |65. 6 | [pic] YEARS |EPS | |2001-02 |6. 4 | |2002-03 |13. 9 | |2003-04 |20 | |2004-05 |23 | |2005-06 |16 | |2006-07 |15. 3 | EARNING PER SHARE OF SWARAJ MAZDA LIMITED FOR LAST 6 YEARS [pic] DIVIDEND RATE OF SWARAJ MAZDA LIMITED FOR THE LAST 6 YEARS YEARS |DIVIDEND(%) | |2001-02 |25% | |2002-03 |45% | |2003-04 |70% | |2004-05 |75% | |2005-06 |55% | |2006-07 |55% | [pic] | | | | | | | | | | | | | | | | | |  |PLAN |Q1 | |Sales (Nos. |  |  | |Passengers Applications |7400 |1429 | |Goods Applications |5800 |1253 | | Total |13200 |2682 | |  |  |  | |Net Operating Revenue |780. 0 |153. 0 | |  |  |  | |Material Cost |651. 5 |124. 7 | |%age |83. 5% |81. 5% | |  |  |  | |Contribution Per Vehicle Rs. (97348) |(105518) | |  |  |  | |Expenditure | | | |Employees Cost |32. 0 |6. 7 | |Per Vehicle Rs. |(24242) |(24981) | |%age |4. 1% |4. 4% | |Manufacturing & Others |20. 0 |4. 1 | |Per Vehicle Rs. |(15152) |(15287) | |%age |2. 6% |2. 7% | |Selling & Distribution |28. 0 |4. 9 | |Per Vehicle Rs. (21212) |(18270) | |%age |3. 6% |3. 2% | |Royalty | – | – | |Total Expenses |80. 0 |15. 7 | |Per Vehicle Rs. |(60606) |(58538) | |%age |10. 3% |10. 3% | |  |  |  | |Operating Profit |48. 5 |12. 6 | |Margin |6. 2% |8. % | |  |  |  | |Interest |12. 0 |3. 0 | |  |  |  | |Cash Profit |36. 5 |9. 6 | |  |  |  | |Depreciation |3. 5 |0. 8 | |  |  |  | |Profit Before Tax |33. 0 |8. 8 | |Margin |4. 2% |5. % | |  |  |  | |Corporate Tax |10. 0 |2. 8 | |  |  |  | |Profit After Tax |23. 0 |6. 0 | |  |