MBA - Madras Cement Project

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CONTENTS Chapters Particulars Sl . No . Chapte r Subject Page No. 1 I INTRODUCTION 3 – 10 a. Introduction b. Need for the Study c. Objectives d. Methodology e. Limitations 2 II ORGANIZATION & COMPANY PROFILE 12 – 26 3 III THERITICAL FRAME WORK 28 - 50 4 IV DATA ANALASIS & INTERPETATION 52 - 67 5 V FINDINGS AND SUGGESTIONS 68 - 69 1 | Page

Transcript of MBA - Madras Cement Project

Page 1: MBA - Madras Cement Project

CONTENTS Chapters Particulars 

Sl.No.

Chapter Subject Page

No.

1 I INTRODUCTION 3 – 10

a. Introduction

b. Need for the Study

c.Objectives

d. Methodology

e. Limitations

2 IIORGANIZATION & COMPANY PROFILE

12 – 26

3 III THERITICAL FRAME WORK 28 - 50

4 IV DATA ANALASIS & INTERPETATION 52 - 67

5 V FINDINGS AND SUGGESTIONS 68 - 69

6 BIBLIOGRAPHY 71 - 76

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INTRODUCTION

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DEFINITION OF WORKING CAPITAL:-

In the words of Prof.S.C.Kuchhal, “Working capital has to be, regarded as

one of the conditioning factors in the long run operations of a firm which is

often inclined to treat it as an issue of short run analysis and decision-

making”.

In the words of Shubin, “Working capital is the amount of funds necessary

to cover the cost of operating the enterprise”.

In the words of Genestenbug, “Circulating capital means current assets of

a company that are changed in the ordinary course of business from one

form to another as for example from cash to inventories, inventories to

receivables, receivables into cash.

CONCEPTS OF WORKING CAPITAL:-

There are two concepts of working capital:

1. Gross working capital

2. Net working capital.

In the broad sense, the term working capital refers to the gross working

capital and represents the amount of funds invested in current assets.

Current assets are those assets, which in the ordinary course of business

can be converted into cash within a short period of normally one

accounting year.

In a narrow sense, the term working capital refers to the net working

capital. Net working capital is the excess of current assets over current

liabilities.

Working capital = Current assets – Current liabilities.

Net working capital may be positive or negative. When the current assets

exceed the current liabilities the working capital is positive and the

negative working capital results when the current liabilities are more than

the current assets. Current liabilities are those liabilities which are intended to

be paid in the ordinary course of business within a short period or normally

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one accounting year out of the current assets or the income of the

business.

The gross working capital concept is financial or going concern whereas

net working capital is an accounting of working capital. These two

concepts of working capital are not exclusive; rather both have their own

merits.

Gross concept is very suitable to the company form of organization where

there is divorce between ownership, management and control. The net

concept of working capital may be suitable only for proprietary form of

organizations such as sole-trader or partnership firms. However, it may be

made clear that as per the general practice net working capital is referred

to simply as working capital.

NEED FOR WORKING CAPITAL

The need for working capital to run the day-to-day business activities

cannot be overemphasized. We will hardly find a business firm which does

not require any amount of working capital. Indeed, firms differ in their

requirements of the working capital.

We know that a firm should aim at maximizing the wealth of its

shareholders. In its endeavor to do, a firm should earn sufficiently return

from its operations. Earning a steady amount of profit requires successful

sales activity. The firm has to invest enough funds in current assets for

generating sales. Current assets are needed because sales do not convert

into cash instantaneously. There is always an operating cycle involved in

the conversion of sales into cash.

TYPES OF WORKING CAPITAL

On Working capital may be classified in two ways:

a. The basis of concept.

b. On the basis of time.

On the basis of concept, working capital can be further classified into:

a. Gross working capital.

b. Net working capital.

On the basis of time, working capital can be further classified

a. Permanent or Fixed working capital.

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b. Temporary or variable working capital.

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Gross working capital

Gross working capital is represented by the total sum of all current assets

of an organization. The gross working capital is also known as current

capital or circulating capital.

Net Working capital

Net working capital is the difference between the current liabilities. The

concept of net working capital helps the management to look forward the

permanent sources for financing the working capital. The working capital

management has to examine the proportion of the current assets, which

has to be financed by permanent capital or long term, borrowings.

Permanent working capital

Permanent working capital is that part of capital, which is permanently,

locked up in the circulation of current assets and in keeping it’s moving. It

can be classified into:

i. Regular working capital and

ii. Reserve margin working capital.

Regular working capital

It is the minimum amount of liquid capital needed to keep up the

circulation of from cash to inventories to receivables and back again into

cash.

Reserve margin working capital

It is the excess over the need for regular working capital that should be

provided for contingencies such as raising prices, business depressions,

and strikes, fibers, unexpected severe competition and special operations

such as experiments with products or with the method of distribution and

the like which can be undertaken only if sufficient funds are available.

Variable working capital

The variable working capital refers and denotes that the amount of funds

over and above the fixed working capital to take care of seasonal shifts

etc. this variable working capital also referred to as fluctuating or

temporary working capital and should be financed by short-term sources

of funds.

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The variable working capital changes with the volume of business. It may

be sub-divided into:

i. Seasonal.

ii. Special working capital.

The capital required to meet the seasonal needs of industry is termed as

seasonal working capital. On the other hand the special working capital is

that part of the variable working capital which is required for financing

operations such as inauguration of extensive marketing campaigns and

carrying out special jobs and similar other operations that are outside the

usual business of buying, fabricating and selling.

Excess Working Capital

There are problems associated with excess working capital. Firstly, more

funds would make the management complacent and it may invest this

money in unnecessary accumulation of inventory resulting in locking of

investment.

There is another possibility that the firm may think of speculation

inventory items in quantities more than needed and these gains may not

be realized due to price fluctuations. The excess working capital also

known as surfeit of working capital, which promotes accumulation of

inventories, permissive, credit policies and slack collection procedures.

Due to excess working capital, complacency develops and management

efficiency deteriorates

Inadequate Working Capital

If working capital is not adequate, the organization will come across

certain problems. The adverse effects of inadequate working capital are

business failures, reduction in profitability and consequent decline in

return on investment (ROI).

The company will not be able to take advantage of full capacity utilization

and the growth that is desired cannot be achieved when enough funds are

not available at the right point of time. All the operating plans cannot be

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successfully implemented when funds are in short supply. In adequate

working capital can also lead to temporary insolvency of a firm.

FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS

The working capital requirements of a concern depend upon a large

number of factors such as nature and size of business, the character of

their operations, the length of production cycles, the rate of stock

turnover and the state of economic situation.

1. Nature or character of business

The working capital requirements of a firm basically depend upon the

nature of its business. Public utility undertakings like electricity, water

supply and railways need very limited working capital because they offer

cash sales only and supply services, not products and as such no funds

are tied up in inventories and receivables

2. Size of business/scale of operations

The working capital requirements of a concern are directly influenced by

the size of its business which may be measured in terms of scale of

operations. Greater the size of a business unit, generally large will be the

requirements of working capital.

3. Production policy

In certain industries the demand is subject to wide fluctuations due to

seasonal variations. The requirements of working capital, in such cases,

demand upon the production could be kept either steady by accumulating

inventories during slack periods with a view to meet high demand during

the peak season or the production could be curtailed during the slack

season and increased during the peak season.

4. Manufacturing process/length of production cycle

Longer the process period of manufacture, larger is the amount of working

capital required. The longer the manufacturing time, the raw materials

and other supplies have to be carried for a longer period in the process

with progressive increment of labor and service costs before the finished

product is finally obtained.

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5. Seasonal variations

In certain industries raw material is not available throughout the year.

They have to buy raw materials in bulk during the season to ensure an

uninterrupted flow and process them during the entire year.

6. Credit policy

The credit policy of a concern in its dealings with debtors and creditors

influence considerably the requirements of working capital .a concern that

purchases its requirements on credit and sells its products/services on

cash requires lesser amount of working capital.

7. Business cycle

Business cycle refers to alternate expansion and contraction in general

an activity .In a period of i.e. when the business is prosperous there is a

need for larger amount of working capital due to increase in sales, rise in

prices, optimistic expansion of business, etc.

8. Working capital cycle

The working capital cycle starts with the purchase of raw materials and

ends with the realization of cash from the sale of finished products. This

cycle involves purchase of raw materials and stores. Its conversion into

stocks of finished goods through work -in-progress with progressive

increment of labor and service costs, conversions of finished stock into

sales, debtors and receivables and ultimately realization of cash and this

cycle continues again from cash to purchase of raw material and so on.

9. Price level changes

Changes in the price level also affect the working capital requirements.

Generally the rising prices will require the firm to maintain larger amount

of working capital, as more funds will be required to maintain the same

current assets. The effect of rising prices may be different for different

firms.

10. Other factors

Certain other factors such as operating efficiency, management ability,

irregularities of supply, import policy, asset structure, importance of labor,

banking facilities, etc, also influence the requirements of working capital.

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OBJECTIVES:

o To promote the growth of the cement interest

o To promote the customer interest

o To identify newer application of cement usage

OBJECTIVES OF THE STUDY

1. To Study working capital management in MADRAS CEMENTS Ltd.

2. To Examine an overview of working capital management.

3. To Analyze at the possible remedial measures to improve

company’s working capital performance in the near future.

4. To Evaluate the efficiency of the company in utilizing its Current

Assets.

SCOPE OF THE STUDY

The scope of the study is limited only to MADRAS CEMNTS and is confined

to 4 years i.e. 2005-06 to 2008-09 annual reports.

DESIGN OF THE STUDY

1.5.1. METHODOLOGY

The present study is mainly about the working capital management of

MADRAS CEMENTS ltd. On the basis of the objectives of the study it was

decided to use ratio analysis and analysis of individual components

of working capital as these are universally accepted techniques for

analyzing the short term liquidity position of the firm.

For the purpose of the analysis the following ratios have been used:

1 WORKING CAPITAL MANAGEMENT RATIOS

1. Working capital ratio/Current ratio.

2. Quick ratio/Acid test ratio.

3. Working capital turnover ratio.

I. Working capital performance ratio.

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4. Current asset turnover ratio.

I. CASH MANAGEMENT

1. Cash turnover ratio.

II. INVENTORY MANAGEMENT

1. Raw materials turnover ratio.

2. Work in process turnover ratio.

3. Finished goods turnover ratio

DEBTORS MANGEMENT

1. Debtor’s turnover ratio.

SOURCES:

The study is based on the analysis of data from the annual reports of

MADRAS CEMENTS Ltd. The data used in the present study are mainly of

two types’ primary data and secondary data.

1. The primary data is collected through the discussions made with the

officials of MADRAS CEMENTS Ltd.

2. The secondary data is collected through the annual reports

published by the company and company website.

LIMITATIONS:

The present study limits itself to the study of working capital

management. In the present study the analysis is mainly based on

secondary data given in the annual reports published by MADRAS

CEMENTS Ltd. The limitations prevailing in the secondary sources are self

evident in the study. Despite their weakness, they continue to be the only

source for comparison of the results of the analysis. The present study is

carried taking this into consideration.

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COMPANY PROFILE

Madras Cements Ltd (MCL) is the flag ship company of Ramco

Group, a well-known business group of South India. It is based at Chennai.

The main product of the company is Portland cement manufactured

through the four advanced production facilities spread over South India.

The manufacturing products are:

Ordinary Portland Cement

Portland Pozzolana Cement

The company is the sixth largest cement producer in the country

and the second largest in South India. Ramco Super grade is the most

popular cement brand in South India. The company also produces Ready

Mix Concrete and Dry Mortar products. In addition, the company also

operates one of the largest wind farms in the country. They are: Pioneer in

Cement technology, Sixth largest Cement Producer in India, Single largest

Cement Brand in South and Sophisticated R&D Centre in Chennai.

It has been known for its penchant for technology that has kept the

company ahead of competition. MCL was the first to switch from the

energy-guzzling wet process to the dry process for manufacture of

cement. With energy costs continuously shooting up, it derived handsome

savings and also was the beneficiary of software developed by the group

extensively for the entire gamut of operations - from mining to the

production of clinker and cement.

MCL is the first company to implement a full-fledged ERP system in

the cement industry and one of the early adaptors among corporation in

India. MCL is equipped with a modern computer based quality control

system.

Madras Cements Ltd is managed by a board of directors comprising

of eminent personalities as its members. The chairman of the board is Shri

P.R. Ramasubrahmaneya Rajha, under whose dynamic leadership the

company has grown into a massive organization.

The company board brings together a team of business,

administrative, financial and cement technology professionals who

provide guidance and direction to the company's operations in

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a competitive business environment. Madras Cements Ltd has been a

pioneer in adopting its corporate governance practices comparable to the

best in the country.

Factories location

MCL operates four ultra modern production factories with a total

capacity of 6 million tons per annum (MTPA) and they are

(i) R R Nagar, Tamil Nadu (1.2 MTPA)

(ii) Jayanthipuram, Andhrapradesh (1.6 MTPA)

(iii) Alathiyur, Tamil Nadu (3.0 MTPA)

(iv)Mathod, Karnataka (0.2 MTPA)

MISSION

To continuously improve productivity through quality, technology

renewal and customer focused operations.

To position ourselves in the cement business as a pace setter and

grow in the same and related business.

To seek green field locations for growth on the basis of developed

synergies of the existing operations.

To continuously seek quality enhancement in product, processes

and responses to various stakeholders.

To update management practices on a continuous basis and

maintain a culture of professional management.

To conserve, protect and enhance quality of life for our employees

and community.

To preserve the credence in our motto "our real resources are the

human assets". 

CORE VALUES AND BENEFITS:

Customers continued satisfaction and the sensitivity to their needs

is our source of strength and security. If there is no customer, there

is no business

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We do not look at productivity as a game in numbers. We try to

learn from others, be committed to quality and always stay ahead in

terms of technology

RAMCO GROUP COMPANIES:

Madras cements limited

Ramco industries limited

Raja palayam mills limited Rajapalam, Tamilnadu

Sri Ramco spinning mills limited Rajapalam, Tamilnadu

Sundaram spinning mills limited Rajapalam, Tamilnadu

Sri Vishnu sankar limited Rajapalam, Tamilnadu

Ramaraju surgical cotton mills limited

Ramco systems limited

Ramco lanka (pvt) limited

Harini textiles

Some corporate responsibilities of Ramco group

Raja charity trust C. Rama Swamy Raja education charity trust P.A.C Rama Swamy Raja Poly technique P.A Chinnaih Raja memorial higher secondary school P.A.C.R Ammani animal’s higher secondary school Chinnaih vidyalaya P.A.C.R Raju matriculation higher secondary

school S.S.R vidhya mandir

Plans are on to build a hospital in Rajapalam equipped with the most

advanced medical facilities. The primary aim of this hospital would be to

provide free medical to workers scheme society. In order to have impetus

to ecology development a senior horticulturist is being appointed his

services will be extended to the farmers of nearby villages to help them in

going various fruit and vegetation using hybrid varieties. We are going

ahead shortly for massive a forestation of ISO acres of our land located at

the entrance of our factory premises.

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COMPANY HISTORY

In 1950's, investment in Cement Industry was not attractive due to price

controls and the massive investments required. Only those entrepreneurs

who were not  profit minded but cared for country's development came

forward in investing in Cement Industry.

When Shri. Manubai Shah, Central Minister for Industries in late fifties

came to Madras to meet the Industrialists, he called upon Shri P A C

Ramasamy Raja and requested him to start a cement factory in TN . This

was readily accepted by Shri PACR and this marked the birth of "Madras

Cements Ltd" in 1961.

On the night of September 3, 1962, while the whole city slept, PACR lay on

his bed in the Madras General Hospital, seriously ill. As all his near and

dear watched with tears in their eyes, PACR summoned his son

Ramasubrahmaneya Rajha, to his bedside. "There is no more hope", he

whispered :

"You should take care of everything from now". My main concern is for

Madras Cements. I have taken a lot of money as shares from well wishers

I have not paid them back any dividends as yet. This has to be taken care

of immediately ...." 

PACR's last wish was dutifully fulfilled by the present chairman

Shri.P.R.Ramasubrahmaneya Rajah. 

Today Madras Cements Ltd is not only one of the most respected cement

companies in the country but also leads in giving the best return for the

investors. With a cement capacity of 6 millions tons per annum, the

company is the sixth largest producer of cement in India. It is also one of

the largest wind energy producer in the country with a capacity of 45 MW.

The first plant of MCL at Ramasamy Raja Nagar, near Virudhunagar in

Tamil Nadu commenced its production in 1962 with a capacity of 200

tonnes, using wet process. In 70's, the plant switched over to more

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efficient dry process. A second kiln was also added to bring the total

capacity to 12 lakh ton per annum. The second venture of MCL is its

Jayanthipuram plant near Vijayawada in A.P set up in 1987 . The 16 lakh

ton per annum plant employs the latest state of art technology.

The third venture of MCL is at Alathiyur in TN set up in 1997 and

expanded by addition of another line in 2001. The 30 lac ton per annum

plant is the most modern plant in the country.

In 2000 , MCL acquired Gokul Cements situated in Mathod in Karnataka

whose capacity is 600 TPD. Being a eco-friendly company, MCL set up the

Ramco Winfarm in 1993 at Muppandal  TN. This was followed by wind

farms in Poolavadi near Coimbatore in 1995 and Oothumalai in 2005.  The

combined capacity of these two put together is about 45 MW.

In the year 1999, MCL commissioned the most sophisticated Ready Mix

Concrete Plant in Medavakkam in South Chennai. In 2002, a state-of-art

Dry Mortar plant was commissioned near Sriperumpudur, Tamilnadu

which manufactures dry mortar, cement based putty and tile fix

compound.

Birth of the first Ramco Venture

His visited Britain and other European countries to see firsthand working

of the mills. There he had the chance to meet many business magnates.

He returned to India full of ideas. 

After returning to Rajapalayam, he put his plans into action. To start the

yarn mill, he found that he needed Rs.5 lakhs, which in 1936 was a huge

sum. It was considered a Herculean task to raise such a big capital. 

But the determined Raja was not deterred. He decided to make the people

"Shareholders".

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Rajapalayam Mills Ltd.,Thanks to his illustrious background and his own reputation, he got the

required capital ready, in next to no time. On September 05, 1938, the

then State Minister forlabour, V.V. Giri inaugurated the mill and

Rajapalayam Mills Ltd commenced operations. 

There was no looking back for Ramasamy Raja after this. The Mill was a

grand success. 

He followed up this with other successful ventures. He started Rama Raju

Surgical Cotton Mills along with his son-in-law Rama Raju.

Madras Cements LtdAt that time, Cement was not considered as a favorable venture due to

price controls. Shri.Manubai Shah, Central Minister for Industries called

upon Ramasamy Raja and appealed to him to start a cement factory. This

was how Madras Cements Ltd came into being in 1961.

Ramasamy Raja needed one crore as capital. The State Government for

the first time in the history of India, invested Rs.10 lakhs An indication of

the total trust and implicit faith the Government had in him.

Concern for Shareholders and WorkersRamasamy Raja had the well being of the people upper-most in his mind.

He was very particular that the funds of his share holders be utilized

usefully. He showed high concern for his workers. The famous trade

unionist G Ramanujam once said :

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"In the case of Ramasamy Raja's companies, the workers are always

thinking of the growth of the company, the Raja always has the well being

of the workers and their families uppermost in his mind"

AWARDS

4 Leaves AwardCentre for Science and Environment

National Award for Energy Conservation Confederation of Indian industry

Best Energy Efficient Unit

National Council for Cement and Building Materials Corporate Performance Award

Economic Times Best Improvement in Energy Performance

International Congress on Chemistry of Cement The Analyst Award

The Institute of Chartered Financial Analysts of India Best allround Industrial performance 

Federation of AP Chambers of Commerce & Industries Visvesvariah Industrial Award

All India Manufacturers Organisation Business Excellence Award

Industrial Economist Export Performance Award

CAPEXIL State Safety Awards

Tamil Nadu & AP Governments Good Industrial Relations Award

Tamil Nadu & AP Governments

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Technology Overview

Madras Cements Ltd is a trend-setter in adopting

state-of-the-art technology for the manufacture of

Cement, Ready Mix Concrete and Dry Mortar

Products. MCL is the first to bring the following

technologies in South India's cement industry.

The FUZZY Logic Software System for process

Controls

Pre-calciner technology

Most Modern Programmable Logic Controllers

(PLC)

Surface Mining Technology

Vertical Mills for Cement Grinding 

Latest and highly effective ESPs and Bag

filters

Advanced X-Ray technology for Quality

Control

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JAYANTHIPURAM UNITIn 1986 the company ventured into the second unit Jayanthipuram

in Andhrapradesh 75 kilometers from Vijayawada towards Hyderabad with

a investment of Rs 100 corers per manufacture of Rs 7.50 lakhs tones of

cement per annum. This plant was commissioned in 1986 six months

ahead of schedule plans

Madras cements is a ramco group of most ambitious diversification

had. It is a profitable company today. Two were process plans were setup

in 1987with a capacity of 600 tones to produce Portland cements. In the

1970’s totals with over was made to the dry process of manufacture. The

single largest dry kiln in India at the time of establishment with a capacity

of 1200 tones was installed at ramaswamy rajanagar in Tamilnadu, for the

first time in India, over the years the plant has modified and updated with

preclaciner technology. This has increased the capacity by 115% in 1993.

Ramco group has setup its second and India’s most technological

advances cement unit which started its production in 1987 Jayanthipuram

Krishna district and Andhra Pradesh with 1.1 million tons per annum.

This is the first factory in India to be totally computerized. It is one

of the most sophisticate plants in India with full computer controlled

special software of F.L smiths and fuzzy logical system from Denmark for

kiln control. This flagship company of Ramco producer of market cements

with brand Ramco.

The kiln was gradually upgraded from 2300 TPD in 1986, 1994 and to

3200 TPD in1995. During this period raw material and coal mill were also

upgraded from 220 to 240 TPH and 26 to 30 TPH respectively. Horizontal

impact crusher (HIC), was installed in 1995 in cement mill circuit to

increase the output from 125 TPH to 180 TPH and the cement mill was

optimized in 1996.with this the capacity has been increased to 11lack

tones per annum.

The plant has electrostatic precipitators (ESP) and deducting bag

houses to ensure clean and pollution free environment. MCL has an

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uncompromising attitude towards the prevention of anti-environmental

pollution.

The above up gradation of kiln and other mills was carried out with

and investment of Rs 25 crores. 2004-2005 in this period they build one

power grid. It carried out with an investment of Rs 10 crores.

EXPANSION

Slag grinding unit

Madras cements have always stayed in the forefront of the industry.

Special task forces within the company keep track of the latest

international development in cement technology and promote action to

adopt the state of art technology.

India generates about 70 million tones of Fly ash and 10 millions of

slag annually. Disposal of Fly and slag problem to the environment.

Concern for the environment and ecology is percolating very fast into

customer awareness globally and there by a check on eco-hostile products

is becoming an imperative exercise. Both the central and state

governments are strongly propagating to use these products in cement

manufacture.

A working group has been constituted by the government of

Andhrapradesh to study the generation and disposal of Fly ash and BD

slag. Based on the recommendations of the working group the

government of Andhrapradesh issued a GO instructing all government

departments for utilization of 100% Pozzolana/slag cement, with in a

period of 5 years.

In line with the policies of the government and our philosophy of

using otherwise no usable materials like Fly ash and slag to produce value

added blended cement and there by conserve limestone and other

materials like coal etc, and also to save energy apart from being eco-

friendly and creating clean atmosphere by reducing carbon dioxide

emission proud of serving our nation by preserving minerals and

maintaining clean atmosphere for our future generations.

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MCL is the first to bring the following technologies in South India's cement industry.

1. The FUZZY Logic Software System for process Controls

2. Pre-calciner technology

3. Most Modern Programmable Logic Controllers (PLC)

4. Surface Mining Technology

5. Vertical Mills for Cement Grinding 

6. Latest and highly effective ESPs and Bag filters

7. Advanced X-Ray technology for Quality Control

ISO certification

Madras cements limited, Jayanthipuram unit also got ISO 9002

certification in may, 1998.

SILENT FEATURES OF MADRAS CEMENTS LIMITED

JAYANTHIPURAM

For the first time in India the very latest computerized control system are

introduced in the Jayanthipuram unit for efficient operation on energy

conservation. The silent features of Jayanthipuram plant is furnished

below

A stacker re-claimer for pre blending and continuous flow silo for

below

Vertical roller mills for grinding raw material and coal

Five stage per heater for their mail efficiency per calcinatory for

efficiency use of low grade coal

A scanner connected to a computer for refractory monitoring

X ray analyzer for quality control on line process computerized

control for consistent quality

Fuzzy logical software for kiln control

Electro static precipitator at 5 strategic points for pollution control

Belt bucket elevators for energy conservations

2.4 DEPARTMENTS IN MCL

The following are the departments in Madras Cements Ltd.

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1. Personnel department

2. Accounts department

3. Mines

4. IT

5. Stores and Material department

6. Quality control lab

7. Process department

8. Engineering departments

- Electrical and Mechanical department

- Civil and Power plant

- Instrumentation

9. Cement dispatch section

10. Security liaison

DETAILS OF EMPLOYEES

The total workforce of MCL at Jayanthipuram is 600 out of which

permanent employees are 346 and remaining 254 are contract labours.

The following illustrates the details of the employees in MCL

S.No. Category No. of employees1 Officers 532 Officer prob-with grade 33 Officer trainee 74 Staff 705 Staff worker 26 Staff prob-with grade 77 Staff trainee 18 Voucher staff 19 Voucher worker 410 Workers 198

INDUSTRY PROFILE

CEMENT INDUSTRY IN INDIA

The Cement industry in India has come a long way since 1914, when

the first cement plant was commissioned with a production level of 1000

tons/ annum. The first true Portland cement was manufactured in Calcutta

presently called as Kolkata. India is the second largest cement producer in

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the world. As cement is a basic construction material with virtually no

substitute, it is used worldwide for all construction work. Thus the growth

in the construction industry has a direct relation with the production and

consumption of cement.

India is the second largest cement producer in the world with a

production level of about 99 million tons (about 5% of world production ~

2000 million tons). The installed capacity is about 119 million tones and at

an expected 10 % growth rate the production is likely to grow to about

158.5 million tons at the end of 2006-2007.

Over the years, the growth of the industry has been uneven.  With

traditionally cement deficit regions covering the most of the major growth

centers of the country.

Cement industry in India has made tremendous strides in technological up

gradation and assimilation of latest technology. At present ninety three

per cent of the total capacity in the industry is based on modern and

environment-friendly dry process technology and only seven per cent of

the capacity is based on old wet and semi-dry process technology. The

major players of Indian cement industry are Madras cements, ACC, India

cements, Gujarat Ambuja, Ultratech, Grasim, JK group, Jaypee group,

Century textiles, Birla Corporation, Lafarge.

There is tremendous scope for waste heat recovery in cement plants

and thereby reduction in emission level. Cement plants in the country

have mostly changed from the wet process to the energy efficient dry

process. In India, the cement factories are localized in the states of Tamil

Nadu, Madhya Pradesh, Gujarat, Bihar, Rajasthan, Karnataka and Andhra

Pradesh.

CEMENT INDUSTRY IN ANDHRA PREADESH

Cement industry is the most important the largest expending

industry in Andhra Pradesh. It plays a vital role in development of state.

Andhra Pradesh is having all the necessary natural resources required to

produce cement large quantities. The state stands first in the country so

far as limestone deposits are concerned. Out of approximate 90000 about

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30000 million tones are available in Andhra Pradesh which account for

34% in the total limestone deposits.

Andhra Pradesh cement industry started in year 1939. There were

two cement plants opened one was at Vijayawada and another was

associated cement company in Tadepally, Guntur district in 1939. As on

31st march2005, there are 8 large scale cement units with and installed

capacity of 16 million tones and 24 mini cements and grinding units with

an installed capacity of three million tones producing various types of

cement in Andhra Pradesh. In these 18 large cement plants, only two

cement units under public sector corporation I.e., cement corporation of

India plants situated in Adilabad and Tandur in Rangareddy district. The

entire Andhra Pradesh cement industry concentrated in the districts of

Adilabad, Nalgonda, and Cuddappah which are having total lime stones

reserves. Andhra Pradesh is having two lime stones deposits cluster viz.,

Yerraguntla and Nalgonda. 10 are major and 11 mini cement plants

situated in Nalgonda district.

As on 31st march, 1998 the Andhra Pradesh total major cement units

installed capacity was only 12.60 million tones and this increased to

16million tones at the end of this year because two cement major units

L&T, Visakha cement plants started their operations with installed

capacities of 2 million tones and 1 million tones and the existent market

leader Raasi cement limited. Expanding their capacity with another 20

million tones.

The mini cement plant sector also having an installed capacity of

2.5 million tones. By the end of this year the total Andhra Pradesh cement

industry installed capacity has reached to 18.5 million tones. The total

production of entire Andhra Pradesh cement industry is approximate 12

million tones. In this the major cement plants contribution was 10.5

million tones where as the mini cement plants only producing the

approximate 1.58 million tones. The cement consumption of Andhra

Pradesh is only 6 million tones. In 1997-98 and this figure has increased to

7 million tons by the end of 1998 because of various development

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program taken up by the state government and the industry’s dynamic

promotional activities.

The cement configuration in the state has been observing steady

growth. In 1996-97 the cement the consumption was only 4.87 million

tons and the further consumption increased to 5.87 million tons. As far as

production and consumption is concurrent, Andhra Pradesh cement

industry performance increased its 5.29% and 8% respectively in the year

1996-97. This percentage increase is very low when compared to national

average i.e. 8.5% because in this no production activity from the newly

erected plants as well as the existing plants which are increased their

installed capacity. One more reason for this type if low growth rate was

number of new plants and the existing plants which were increasing their

capacities started their production in various parts of our country the

cement exports in the year 1992-93, 36,200 tons exported to Bangladesh

and some other countries and this export figure increased to 1, 35,000

tons in 1993-94, there is only 10,000 tons of cement exported to Burma

from Vishakhapatnam. The following are the major contributors of cement

industry in Andhra Pradesh.

1. Madras Cements Limited

2. India Cements Limited

3. Zuari cements limited

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WORKING CAPITAL MANAGEMENT:-

Working Capital is the firm’s holdings of current assets such as cash,

receivables, inventory & marketable securities. Every firm requires

working capital for its day to day transactions such as purchasing raw

material, for meeting salaries, wages, rents, rates, advertising etc.

Significance of Working Capital:-

The world in which real firms function is not perfect. It is

characterized by the firms’ considerable uncertainty regarding the

demand, market price, quality & availability of its own products and those

suppliers. While the firm has many strategies available to address these

circumstances, strategies that utilize investment or financing with working

capital accounts often offer a substantial advantage over the techniques.

The importance of working capital management is reflected in the fact

that financial managers spend a great deal of time in managing current

assets and current liabilities like-

Arranging short term financing.

Negotiating favorable credit terms.

Controlling the movement of cash.

Administrating accounts receivables.

Monitoring investment in receivables.

Decisions concerning the above areas play a vital role in

maximizing the overall value of the firm. Once decisions concerning these

areas are reached, the level of working capital is also determined in active

decision sense, but falls out as residual from the decision just made.

The management of working capital plays an important role in

maintaining the financial health during the normal course of business. This

critical role can be enunciated by examining the flow of resources through

the firm. By far the major flow is the working capital cycle.

This is the loop (previous page) which starts at the cash and the

marketable securities account, goes through the current account as direct

labor and materials which are purchased and use to produce inventory,

which in turn is sold and generates accounts receivables, which are finally

collected to replenish cash. The major point to notice about this cycle is

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that the turnover or velocity of resources through this is very high related

to the other inflows and outflows of the cash account. There are two

concepts of working capital namely; Gross Working Capital and Net

Working Capital.

Gross Working Capital, simply called as working capital refers to the

firm’s investment in current assets. Current assets are the assets, which

in ordinary course o business can be converted into cash within an

accounting year. Current assets include cash and bank balances, short

term loans and advances bills receivables, sundry debtors, inventory,

prepaid expenses, accrued incomes, money receivable ( within 12

months).

The following are the few advantages of adequate working capital in

the business: Cash Discount: Adequate working capital enables a firm to

avail cash discount facilities offered to it by the suppliers. The amount of

cash discount reduces the cost of purchase.

Goodwill: Adequate working capital enables a firm to make prompt

payment. Making prompt payment is a base to create and maintain

goodwill.

Ability to face crisis: The provision of adequate working capital

facilities to meet situations of crisis and emergencies. It enables a

business to with stand periods of depression smoothly.

Credit-Worthiness: It enables a firm to operate its business more

efficiently because there is not delay in getting loans from banks and

other on easy and favorable terms.

Regular supply of raw materials: It permits the carrying of

inventories at a level that would enable a business to serve satisfactory

the needs of its customers. That is it ensures regular supply of raw

materials and continuous production.

Expansion of markets: A firm which has adequate working capital

can create favorable market condition i.e. purchasing its requirements in

bulk when prices are lower and holding its inventories for higher. Thus

profits are increased.

Increased productivity.

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Research programs.

High morale.

Problems of inadequate working capital:-

Firm may not be able to take advantage of profitable business

opportunities.

Production facilities cannot be utilized fully.

Short-term liabilities cannot be paid because of non-availability of

funds. Its low liquidity may lead to low profitability. In the same way, low

profitability results in low liquidity.

It may not be able to take advantages of cash discounts.

Credit worthiness of the firm may be damaged because of lack of

liquidity. Thus it may be lose its reputation; thereafter a firm may not be

able get credit facilities.

Working capital policy:

Working capital management policies have a great effect on firm’s

profitability, liquidity and its structural health. A finance manager should

therefore, chalk out appropriate working capital policies in respect of each

competent of working capital so as to ensure high profitability, proper

liquidity and sound structural health of the organization.

In order to achieve this objective the financial manager has to

perform basically following two functions:

Estimating the amount of working capital.

Sources from which these funds have to be raised.

Operating Cycle:

Working capital is required because of the time gap between the

sales and their actual realization in cash. This time gap is technically

terms as operating cycle of the business.

In case manufacturing company, the operating cycle of time

necessary to complete the following cycle of event.

Conversion of cash into raw materials.

Conversion of raw materials into work in progress.

Conversion of work in progress into finished goods.

Conversion of finished goods into accounts receivables.

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Conversion of accounts receivables into cash.

This cycle is continuous phenomena. In case of “Trading Firm” the

operating cycle will include the length of time required to:

Cash into inventories.

Inventories into accounts receivables.

Accounts receivables into cash.

In case of “Financing Firm” the operating cycle includes the length

of time taken for 1 year.

Conversion of cash debtors, and

Conversion of debtors into cash.

IMPORTANT OR ADVANTAGES OF ADEQUATE WORKING CAPITAL:

1. Solvency of the business: Adequate working capital helps in maintaining

solvency of the business by providing uninterrupted flow of production.

2. Goodwill: Sufficient working capital enables a business concern to make

prompt payments and helps in creating and maintaining goodwill.

3. Easy loans: A concern having adequate working capital, high solvency and

good credit standing can arrange from banks and other an easy and favorable

terms.

4. Cash discount: Adequate we also enable a concern to avail cash discount on

the purchases and hence it reduces costs.

5. Regular supply of raw material: Sufficient working capital ensures regular

supply or raw material and continuous production.

6. Regular payment of salaries and wages and other day-to-day commitments:

A company which has ample working capital can make regular payment of

salaries, wages and other day-to-day commitments which raises the moral of its

employees increase their efficiency, reduces wastage’s and costs and enhance

production and profits.

7. Exploitation of favorable market condition: Only concern with adequate we

can exploit favorable market conditions such as purchasing its requirement in

bulk when the prices are lower and by holding its inventories for higher

prices.

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8. Ability to face crisis: Adequate working capital enables a concern to face

business crisis in emergency such as depression because during such periods,

generally, there is much pressure on working capital.

9. Quick and regular return on investment: Every investor wants a quick and

regular return his investment sufficiency of working capital enables a concern

to pay quick and regular dividends to its investors as there may not be much

pressure to plough back profits. This gains the confidence to raise additional

funds in the future.

10. High morale: Adequacy of working capital creates an environment of

security, confidence, high morale and creates overall efficiency in a business.

EXCESS OR INADEQUATE WORKING CAPITAL

Every business concern should have adequate working capital run its

business operation. It should have neither redundant or excess working capital

nor inadequate nor shortage or working capital. Both excess as well as short

working capital positions are bad for any business. However, out of the two, it

is the inadequacy of working capital, which is more dangerous from the point

of view of the firm.

DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL

Excessive working capital means idle funds which earn no profits for

the business and hence the business cannot earn a proper rate of return on its

investments.

When there is a redundant working capital, it may lead to unnecessary

purchasing and accumulation of inventories causing more chances of theft,

waste and loses. Excessive working capital implies excessive debtors and

defective credit policy which may cause higher incidence of bad debts. It may

results into overall inefficiency in the organization.

When there is excessive working capital, relation with banks and other

financial institution may not be maintained.

Due to low rate of return on investment, the value of share may also

fall. The redundant working capital gives rise to speculative transactions.

DISADVANTAGES OR DANGERS OF INADEQUATE WORKING CAPITAL

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A concern, which has inadequate working capital, cannot pay its short-

term liabilities in time. Thus it will lose its reputation and shall not be

able to get good credit facilities.

It cannot buy its requirements in bulk and cannot avail of discount, etc.

It becomes difficult for the firm to exploit favorable market condition

and undertake profitable projects due to lack of working capital.

The firm cannot pay day-to-day expenses of its operations and its

creates inefficiencies, increases costs and reduces the profits of the

business.

It becomes impossible to utilize efficiently the fixed asset due to non-

availability of liquid funds .The rate of return on investment also falls

with the shortage of working capital.

CHARACTERISTICS OF CURRENT ASSETS:

In the management of working capital, there are two characteristics of

working capital (1) short life span (2) swift transformation into other asset

forms.

Current assets have a short life span. Cash balances may be held idle

for a week or two, accounts receivable may have a life span of 30 to 120 days,

and inventories may be held for 30 to 100 days. The life span of current assets

depends upon the time required in the activities of procurement, production,

sales, and collection and the degree of synchronization among them.

Each current asset is swiftly transformed into other asset forms cash is

used for acquiring raw materials ; raw materials are transformed into finished

goods (this transformation may involve several stages of work-in-progress);

finished goods, generally sold on credit are converted into sundry debtors, on

realization, generate cash. Below diagram shows the cycle of transformation.

CASH Cycle

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The short life span of working capital components and their swift

transformation from one form into another has certain implications Decisions

relating to working capital management are repetitive and frequent.

The difference between profit and present value is insignificant. The

close interaction among working capital components implies that efficient

management of one component cannot be undertaken without simultaneous

consideration of other components.

The investment in working capital is influenced by four key events in the

production and sales cycle of the firm:

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Finished goods

Work in progressAccounts receivable

Wages, Salaries,

Factory overheads Raw materials

SuppliersCash

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Purchase of raw materials

Payment of raw materials

Sale of finished goods

Collection of cash for sales

Above diagram depicts these events on the cash flow line. The firm begins with

the purchase of raw materials which are paid for after a delay which represents

the accounts payable period.

The length of operating cycle of a manufacturing firm takes into account.

Inventor Conversion period (ICP)

Debtor Conversion period (DCP)

Payment Deferred Period (PDP)

The Inventory Conversion Period is the total time needed for producing and

selling the product .The firm converts the raw material in to finished goods and

then sells the same. The time lag between the purchase of raw materials and

the sale of finished goods is the inventory period.

. Typically, it includes:

Raw Material Conversion Period (RMPC)

Work-in-Progress Conversion Period (WIPCP)

Finished Goods Conversion Period (FGCP)

The Debtor Conversion Period is the time required to collect

Outstanding amount from customers. Customers pay their bills sometimes

after the sales. The period that elapses between the date of sales and the date

of collection of receivables is the accounts payable period or debtor’s period.

The total of inventory conversion period and debtor collection period is referred

to as Gross Operating Cycle (GOC).

The Payments Deferred Period is the length of time the firm is able to defer

payment on various resource purchases. The difference between the gross

operating cycle and payment-deferred period is Net Operating Cycle (NOC).

Symbolically,

ICP = RMCP + WIPCP + FGCP

GOC = ICP + DCP

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NOC = GOC – PDP

The duration of the cycle with reference to working capital is:

Longer the cycle ----- Higher the working capital

Shorter the cycle ----- Lower the working capital.

It is helpful to monitor the behavior of overall operating cycle and its

individual components. For this purpose, time-series analysis and cross-section

analysis may be done. In time-series analysis, the duration of the operating

cycle and its individual components is compared over a period of time for the

same firm. In cross-section analysis, the duration of the operating cycle and its

individual components is compared with that of other firms of a comparable

nature

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Review of Literature

1) Sushma Vishnani and Bhupesh Kr. Shah have done a study in the area

of “Working Capital Management” in comparison with various

companies; the findings in the study indicate clearly that a company’s

inventory management policy, debtors’ management policy and

creditors’ management policy play an important role in its profitability

performance. It recommends that the concerned managers should give

due attention towards policy formulation in this regard as well as

implementation of such working capital policies. Relying on the findings

of the study, they can see for themselves the practices followed by

their peers in the area of working capital management. Corporate

value is enhanced when return on capital employed (ROCE), a function

of working capital management, exceeds cost of capital, a function of

capital investment decisions. And, it is quiet obvious that return can be

enhanced by limiting the investment in working capital to the adequate

level. Though working capital management is of equal importance for

big as well as small companies, but it is of special importance to

managers of small sized companies because it is they who strive for

finances and the opportunity cost of finances for them is usually on the

higher side. Although, in this study, we have not drawn any line of

demarcation between small and big sized companies, but yes definitely

a study in that direction would help the budding managers of small

companies. Also use of information technology in working capital

management would help in improving operational efficiency. (Impact of

Working Capital Management Policies on Corporate Performance An

Empirical Study by Sushma Vishnani and Bhupesh Kr. Shah, Global

Business Review 2007; 8; 267)

2) An underlying theme of this study is that high growth certainly does

not ensure high operating performance. Consistent with prior research

(Peterson and Rajan, 1997) this study provides further evidence that

good working capital management is positively associated with better

operating performance. Higher levels of accounts receivable are

associated with higher operating performance, in all three of the

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growth rate categories. The study also finds that maintaining control

over levels of cash, securities, inventory, fixed assets, and accounts

payables is associated with higher operating performance. The study

also indicates that firms which are experiencing very high growth will

hold higher levels of cash, securities, inventory, fixed assets, and

accounts payable to support the high growth. The study suggests that

these firms are sacrificing operating performance (accepting lower

operating returns) to support the high growth. This, in turn, increases

financial and operating risk for these firms. Perhaps IPO firms should

stay more focused on their operating performance, while maintaining

more moderate growth levels.

The underlying phenomena in the case is perhaps that many firms

which are in a high growth phase tend to have an increased need for

cash, securities, inventory, fixed assets, and accounts payable.

Increasing the levels of these balance sheet items can place financial

stress on the firm, as it is required to provide funding to support the

increased levels. As a result of the higher level of assets, operating

performance may decrease. It should be noted, as always, high growth

does not necessarily equate with high performance. A combination of

high growth and negative operating performance can result in

disastrous results. The findings of this study suggest that perhaps IPO

firms should stay more focused on their operating performance than on

maintaining high growth levels. (Working Capital Management, Growth

and Performance of New Public Companies, Credit & Financial

Management Review,  Third Quarter 2008  by Beneda, Nancy,

Zhang,Yilei)

3) A questionnaire survey by Smith and Sell [ “Working Capital

Management in Practices” published in 1978] indicate that 68% of the

respondent firm used either cost balancing models or computerized

inventory control. The survey evidence reports that the basic models of

inventory management are widely used.

Abstract

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The current study contributes to the literature by examining impact of

working capital management on the operating performance and

growth of new public companies. The study also sheds light on the

relationship of working capital with debt level, firm risk, and industry.

Using a sample of initial public offerings (IPO's), the study finds a

significant positive association between higher levels of accounts

receivable and operating performance. The study further finds that

maintaining control (i.e. lower amounts) over levels of cash and

securities, inventory, fixed assets, and accounts payables appears to

be associated with higher operating performance, as well. We find that

IPO firms which are experiencing unusually high growth tend not to

perform as well as those with low to moderate growth. Further firms

which are experiencing high growth tend to hold higher levels of cash

and securities, inventory, fixed assets, and accounts payables. These

findings tend to suggest that firms are willing to sacrifice performance

(accept low or negative operating returns) to increase their growth

levels. The higher level of growth is also associated with higher

operating and financial risk. The findings of this study suggest that

perhaps IPO firms should stay more focused on their operating

performance than on maintaining high growth levels.

Introduction and Literature Review

Working capital policy refers to the firm's policies regarding 1) target

levels for each category of current operating assets and liabilities, and

2) how current assets will be financed. Generally good working capital

policy (i.e. under conditions of certainty) is considered to be one in

which holdings of cash, securities, inventories, fixed assets, and

accounts payables are minimized. The level of accounts receivables

should be used as a means of stimulating sales and other income.

Previous literature on working capital management has found a

negative association, overall, between level of working capital and

operating performance as measured by operating returns and

operating margins (Peterson and Rajan, 1997). Under conditions of

certainty (i.e. sales, costs, lead times, payment periods, and so on, are

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known), firms have little reason to hold more working capital than a

minimum level. Larger amounts would increase the level of operating

assets, increase the need for external funding, resulting in lower return

on assets and a lower return on equity, without any increase in profit.

However the picture changes when uncertainty (i.e. uncertain

growth) is introduced (Brigham and Houston, 2000). Larger amounts of

cash, securities, accounts receivables, marketable securities,

inventories, and fixed assets will be needed to support increased sales

Required levels will be based on expected sales levels and expected

order lead times. Additional holdings may be needed to enable the firm

to deal with departures from the expected values. Further, firms will

also attempt to increase their accounts payable balances as a means

of financing increased levels of current operating assets. Firms which

are in high growth stages will face the challenge of maintaining the

necessary level of operating assets to support subsequent growth,

while at the same time attempting to maintain adequate performance

indicators.

This study focuses on understanding how IPO companies manage their

working capital and other balance sheet items to support subsequent

growth. This study supports the existing literature on working capital

and contributes to the existing literature by examining a sample of

firms (i.e. recent IPO firms) which have a wider range of growth levels

than non-IPO firms. Our study examines the impact of working capital

management on the operating performance and growth of new public

companies. The study also examines these relationships under three

categories of growth (i.e. negative growth, moderate growth, and high

growth). The study also examines other selected firm characteristics in

light of working capital management: firm operating and financial risk,

amount of debt, firm size, and industry.

An underlying theme of this study is that high growth certainly does

not ensure high operating performance. Consistent with prior research

(Peterson and Rajan, 1997) this study provides further evidence that

good working capital management is positively associated with better

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operating performance. Higher levels of accounts receivable are

associated with higher operating performance, in all three of the

growth rate categories. The study also finds that maintaining control

over levels of cash, securities, inventory, fixed assets, and accounts

payables is associated with higher operating performance. We find that

firms which are experiencing very high growth will hold higher levels of

cash, securities, inventory, fixed assets, and accounts payable to

support the high growth. The study suggests that these firms are

sacrificing operating performance (accepting lower operating returns)

to support the high growth. This, in turn, increases financial and

operating risk for these firms. Perhaps IPO firms should stay more

focused on their operating performance, while maintaining more

moderate growth levels.

Another aspect of this study is that it fills a void in the initial public

offerings literature. Recent literature finds that new public companies

underperform the market after going public. Ritter in his 1991 paper

reports substantially lower stock returns for IPO firms between 1975

and 1984 than for a size-and-industry-matched sample of seasoned

firms. Since then there is a growing literature explaining IPO

underperformance as related to agency cost (Smith, 1990),

institutional holdings (Field, 1995), venture capital (Jain and Gompers,

1997; Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and

earnings management (Teho et al., 1998; Ahmad-zaluki et al., 2008).

However, there is no study linking the working capital management

and post-IPO performance. Our paper tries to fill the void. The findings

of this study would be interesting to investors and creditors of new

public companies.

Data and Descriptive Statistics

The data set starts with initial public offerings (IPOs) reported in the

"Corporate Market Data" section of the Investment Dealer's Digest over

the period January 1995 to December 1998 and Hoovers.com for the

period January 1999 to December 2004. The IPOs are required to have

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stock return data from CRSP and financial statement data from

Compustat to be included in the sample. The resulting number of IPO

firms in the sample consists of 2,210 IPO firms. The sample of IPO firm

years is then constructed using this IPO data and four post trading

years of accounting and return data. Once a firm becomes distressed

(loses 90% of its market value) it is removed from subsequent sample

years. All observations with negative equity were deleted from the

sample, as well. This resulted in 7,373 IPO observations. All indicators

are computed as of the beginning of each fiscal year, except growth in

sales, operating return on assets, and return on equity, which occur

during the first year subsequent to the computed indicators.

Univariate analysis of the working capital components

From Table 1, Panel A, IPO firms are characterized by large levels of

cash and securities (the average ratio to sales is 6.94). Interestingly,

when cash and securities are excluded from the computation of

working capital, the resulting average ratio of working capital to sales

is actually negative (i.e. -0.520). Upon further observation, on average,

for the entire study sample, accounts receivable is 23% of sales,

inventory is 18% of sales, and accounts payables are 93% of sales. The

larger level of average accounts payable present in this sample causes

working capital to be negative since accounts payable is subtracted in

the computation of working capital. The large amount of accounts

payable suggests that mese firms are probably funding growth in part

with large levels of accounts payable and negative working capital

(excluding cash and securities).

Sample Descriptives

The data set starts with initial public offerings (IPO's) reported in the

"Corporate Market Data" section of the Investment Dealer's Digest over

the period January 1995 to December 1998 and Hoovers.com for the

period January 1999 to December 2004. The IPO's are required to have

stock return data from CRSP and financial statement data from

Compustat to be included in the sample. The resulting number of IPO

firms in the sample consists of 2,210 IPO firms. The sample of IPO firm

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years is then constructed using this IPO data and four post trading

years of accounting and return data. Once a firm becomes distressed

(loses 90% of its market value) it is removed from subsequent sample

years. AU observations with negative equity were deleted from the

sample, as well. This resulted in 7,373 IPO firm years. AU indicators are

computed as of the beginning of each fiscal year, except Growth in

sales. Operating return on assets, and return on equity, which occur

during the year after the indicators are computed. Firm size is

computed as the total assets for each firm. Debt ratio is computed as

debt divided by (debt equity). Operating margin is computed as

earnings before interest and taxes divided by Sales. Growth in sales is

computed as (Salest i - Sales,) divided by Salest. Operating return on

assets is computed as earnings before interest and taxes divided by

(beginning total assets minus current liabilities). Return on equity is

computed as net income divided by beginning equity. Market-to-book

ratio is calculated as (shares outstanding ? stock price) total assets -

BV equity) / total assets. NASDAQ index adjusted returns are calculated

by subtracting the NASDAQ index returns from the post-IPO annual

returns for the first, second, third and fourth years after going public.

Idiosyncratic return variance is calculated as the variance of the

residuals from a regression of daily returns on the NASDAQ index

market returns. The variances are computed over the first 120 days

after going public, and over the first, second, third, fourth, years to

compute prior year return variances. Technology firms include those

firms in the following industries: computer hardware, semiconductors,

storage devices, and peripherals (SIC codes 3559, 3570, 3572, 3577,

and 3674); computer networking, software, and services (SIC codes

7370, 7372, 7374, and 7389); and communications equipment (SIC

codes 3576 and 3663).

Also apparent from Table 1, Panel A is that operating profit is negative

on average. Operating margin, computed as operating profit divided by

sales is - 1 .07 and operating return on assets is 17.4% on average. It

should also be observed that technology firms have lower debt ratios,

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lower growth rates, and lower operating returns. The returns on equity

for the technology firms are not as low as those for non-technology

firms which is as expected since technology firms have lower debt

levels, (i.e. when firms exhibit negative operating performance, higher

leverage from debt results in lower returns on equity.)

From Table 1, Panel B, most notable is the decrease in cash and

securities, inventory, fixed assets, and accounts payables for firms in

the first two years after going public to the third and fourth years. This

is consistent with lower average growth in the third and fourth years.

Interestingly, net accounts receivables increases. These findings may

indicate that firms are in a better position to improve their working

capital management in years 3 and 4 because of lower growth rates.

Also, operating margins increase, and operating returns and returns on

equity decrease from the first two years to the third and fourth years.

One of the attributes of using IPO companies to examine working

capital management is the wide range of growth and performance

characteristic of these firms. In Panel C of Table 1, the averages for the

selected indicators are reported according to three categories of sales

growth. It is apparent from examination of the reported results in Panel

C that the sample firms in this study, on average, manage working

capital differently for different levels of growth. Further it appears that,

overall, high growth firms sacrifice operating performance and report

lower operating returns and margins to support growth. First, a

negative association between growth and performance for these new

public companies is observed. IPO firms with moderate growth rates

exhibit an average operating return of 3.5%, whereas firms in the high

growth category have a negative average operating return of -14.4%

and negative growth firms have an average operating return of -61.1%.

Related to this observation is that the average accounts receivable-

tosales ratio is positive (0.72) only in the moderate sales growth

category. The average of this ratio is negative in the negative growth

category and zero in the high growth category.

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Second, the ratios to sales for cash and securities, inventory, fixed

assets, and accounts payables are reportedly higher in the high growth

category. These indicators are quite normal for the moderate sales

growth category. The indicators are mixed for the negative sales

growth category. Third, the reported averages for return variance,

beta, and market-to-book ratio are all at their lowest levels in the

moderate growth category, indicating lower operating and financial risk

for these firms.

The results of the univariate analyses, overall support the contention

that firms which are experiencing high growth tend to hold higher

levels of cash and securities, inventory, fixed assets, and accounts

payables. These findings tend to suggest that firms are willing to

sacrifice performance (accept low or negative operating returns) to

increase their growth levels. The higher level of growth is also

associated with higher operating and financial risk. The findings of this

study suggest that perhaps IPO firms should stay more focused on their

operating performance than on maintaining high growth levels.

A. Working capital management and sales growth

The result is reported in Table 2. The independent variable WC

Management is working capital in model (1), working capital less cash

and securities in model (2), cash and securities in model (3), net

accounts receivable in model (4), inventory in model (5), accounts

payable in model (6); and in model (7) net fixed assets is used to

determine the effect of other balance sheet items. In model (8) all

working capital structure variables and net fixed assets are included as

independent variables to examine the implications of overall firm

management for growth. Control variables include beta, stock return

variance, debt ratio, operating return, technology dummy, market-

tobook ratio and firm size (computed as the log of total assets).

Relationship between working capital structure and sales growth

This table reports the results of the regressions where the dependent

variable is Sales Growth defined as (salest - salest-i) divided by total

assetst-i for each IPO. The independent variables are Working Capital

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(Model 1), Working Capital less Cash and securities (Model 2), Cash and

securities (Model 3), Net Accounts Receivable (Model 4), Inventory

(Model 5), Accounts Payable (Model 6), and Net Fixed Assets (Model 7),

each computed by dividing the beginning of year balance by the total

sales for the year. The control variables are as follows: 1) Beta

calculated by regressing each IPO's daily returns on the NASDAQ Index

daily returns which occur during the first year after the firm goes

public; 2) Return Variance defined as the current year's return variance

calculated as the variance of the residuals from a regression of daily

returns on the NASDAQ index market returns; 3) Debt Ratio computed

as the firm's beginning of year total debt divided by the sum of the

firm's total debt and stockholders' equity; 4) Operating return defined

as EBIT divided by the beginning of year operating assets (we compute

operating assets as total assets minus accounts payable); 5)

Technology Dummy equal to one if the firm is a technology firm as

defined in Table 1 ; 6) Market-to-book ratio defined as each IPO firm's

beginning of year stock price times the number of common equity

shares outstanding divided by beginning year's stockholder equity; 7)

Firm size calculated as the logarithm of the firm's total assets at the

beginning of the year. Year After Dummy and Year of IPO are included

(not reported). T-statistics are reported in parentheses. ***, ** and *

denote significance level at the 1%, 5% and 10% levels, respectively.

The results show that there are significant associations between sales

growth and the independent variables. Interestingly sales growth is

positively associated with working capital and negatively associated

with working capital less cash and securities the level of cash and

securities appears to be a dominant factor in the working capital/sales

growth puzzle. The results show that cash and securities, inventory,

accounts payable, and fixed assets are all associated with higher sales

growth. Accounts receivable is not significant in the isolated regression

model (4); but model (8) shows it is also positively related to growth

when examining overall firm management for growth. In sum, our

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results point to the evidence that firm's growth is increasing with the

relative amounts of most all of their balance sheet items.

B. Working capital management and performance

High growth, though important to the IPO firms, does not necessarily

mean good performance. Therefore we further investigate the

relationship between working capital management and performance.

We use the following specification and report the results in table 3.

EBIT divided by the beginning of year operating assets is used to proxy

the firm's performance. We use the same independent and control

variables as in equation 1 ; only that we also include sales growth as a

control variable. So the regression shows the additional explanatory

power of working capital management on performance controlling for

the growth.

Relationship between working capital structure and performance

This table reports the results of the regressions where the dependent

variable is Operating return defined as EBIT divided by the beginning of

year operating assets. The independent variables are Working Capital

(Model 1), Working Capital less Cash and securities (Model 2), Cash and

securities (Model 3), Net Accounts Receivable (Model 4), Inventory

(Model 5), Accounts Payable (Model 6), and Net Fixed Assets (Model 7),

each computed by dividing the beginning of year balance by the total

sales for the year. The control variables are as follows: 1) Beta

calculated by regressing each IPO's daily returns on the NASDAQ Index

daily returns which occur during the first year after the firm goes

public; 2) Return Variance defined as the current year's return variance

calculated as the variance of the residuals from a regression of daily

returns on the NASDAQ index market returns; 3) Debt Ratio computed

as the firm's beginning of year total debt divided by the sum of the

firm's total debt and stockholders' equity; 4) Sales Growth defined as

(sales^sub t^ - sales^sub t-1^) divided by total assets^sub t-1^; 5)

Technology Dummy equal to one if the firm is a technology firm as

defined in Table 1 ; 6) Market-to-book ratio defined as each IPO firm's

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beginning of year stock price times the number of common equity

shares outstanding divided by beginning year's stockholder equity; 7)

Firm size calculated as the logarithm of the firm's total assets at the

beginning of the year. Year After Dummy and Year of IPO are included

(not reported). T-statistics are reported in parentheses. ***, ** and *

denote significance level at the 1%, 5% and 10% levels, respectively.

Although working capital shows no association with performance,

working capital less cash is positively related to performance. These

results are inconsistent and not particularly consistent with regard to

prior research, that maintaining moderate levels of working capital

tends to support a higher level of firm performance. Further, the

individual components of working capital show different but significant

effects on firm performance. Specifically, cash and securities,

inventory, and accounts payable are negatively related to

performance; while accounts receivable is positively related to

performance. It is of practical implication to document that the working

capital components, though they all support growth, influence

performance differently.

C. The relationship of the life cycle of post IPO years

With regard to the inconsistent results observed in Tables 2 and 3,

above, and the significant differences noted with regard to managing

working capital for different growth levels (see Table 1, Panel C above),

in this section three growth categories of sample firms are examined.

One of the attributes of using IPO companies to examine working

capital management is the wide range of growth and performance

characteristic of these firms. The results reported in this section tend to

provide further evidence that, overall, high growth firms sacrifice

operating performance and report lower operating returns and margins

to support growth.

Reports the results for the regressions according to three categories of

sales growth: negative growth, moderate growth, and high growth. It is

apparent the sample firms in this study, on average, manage working

capital differently for different levels of growth. Further it appears that,

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overall, high growth firms sacrifice operating performance and report

lower operating returns and margins to support growth. To conserve

space we do not report the coefficients on control variables.

Working capital management on sales growth and operating

performance by growth category subsamples

The table reports the sales growth and performance regressions on

subsamples of negative growth, moderate growth and high growth

subsamples. Sales growth regression specification and variables are

the same as in table 2. Performance regression specification and

variables are the same as in table 3. Only working capital variables are

reported to conserve space. T-statistics are reported in parentheses

and denote significance level at the 1%, 5% and 10% levels,

respectively.

In Panel A and B, the independent variables are working capital and

working capital less cash and securities. The level variables maintain

the same effect throughout post-IPO years. However, it is interesting to

see that the effects of working capital structure have both similarities

and differences over years.

From Panel C, for the moderate sales growth firms, sales growth is

positively associated with accounts receivable and fixed assets.

Further, cash and securities, accounts payables, and fixed assets have

the highest positive and most significant association with sales growth

in the high sales growth category.

Also interesting is that in all three sales growth categories, inventory,

accounts payable, and fixed assets are negatively associated and

accounts receivable is positively associated with firm performance.

These associations are more pronounced in the moderate sales growth

category.

Conclusion

The purpose of this paper is to examine the effects of working capital

management on firm performance for different levels of growth. The

study provides evidence that good working capital management is

positively associated with better operating performance. The study

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further indicates that, overall, high growth firms tend to sacrifice

operating performance and report lower operating returns and margins

to support growth. High growth firms also exhibit higher levels of risk.

The underlying phenomena is perhaps that many firms which are in a

high growth phase tend to have an increased need for cash, securities,

inventory, fixed assets, and accounts payable. Increasing the levels of

these balance sheet items can place financial stress on the firm, as it is

required to provide funding to support the increased levels. As a result

of the higher level of assets, operating performance may decrease. It

should be noted, as always, high growth does not necessarily equate

with high performance. A combination of high growth and negative

operating performance can result in disastrous results. The findings of

this study suggest that perhaps IPO firms should stay more focused on

their operating performance than on maintaining high growth levels.

References

Ahmad-zaluki, N. A., K. Campell, and A. Goodcre, 2008, "Earnings

management in IPOs: determinants and postIPO performance,"

Working paper.

Benninga, S., Helmantel, M., and Sarig, O., 2005, "The timing of

initial public offerings," Journal of Financial Economics 75, 115-132.

Brav, S.A., and K. C. Chan, 1997, "Myth or reality? The long-run

underperformance of initial public offerings: evidence from venture

capital and nonventure capital-backed companies," Journal of

Finance 52, 1791-1821.

Brigham, E. F. and J. F. Houston, 2000, Fundamentals of Financial

Management, Dryden.

Field, L., 1995, "Is institutional investment in initial public offerings

related to long-run performance of these firms?" Working paper,

University of California, Los Angeles.

Griffin, J. M., and M.L. Lemmon, 2002, "Book-to-market equity,

distress risk, and stock returns," Journal of Finance 57, 2317-2336.

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Jain, B., Kini, O., 2000. Does the presence of venture capitalists

improve the survival profile of IPO firms? Journal of Business,

Finance & Accounting 27, 1139-1176.

Petersen M. A. and R. G. Rajan (1997), "Trade Credit: Theory and

Evidence," Review of Financial Studies 10, 661-691.

Ritter, J., 1991, "The long-run performance of initial public offerings,"

Journal of Finance 46, 3-27.

Smith, A., 1990, "Corporate ownership structure and performance:

The case of management buyouts," Journal of Financial Economics

27, 143-164.

Teho, S. H., I. Welch, and TJ. Wong, 1998, "Earnings management

and the long-run market performance of initial public offerings,"

Journal of Finance 53, 1935-1974.

By: Nancy Beneda, Ph.D., C.P.A. & Yilei Zhang Ph.D.

Nancy Beneda, Ph.D., C.P.A. is the Robert Page Professor and

Associate Professor of Finance at University of North Dakota. Dr.

Beneda's teaching and research interests include risk management,

corporate valuation, and valuation of initial public offerings (IPO's).

She also serves as the Chairperson of the Finance Department.

Dr. Beneda obtained her Ph.D. in finance from St. Louis University

on August 6, 1999 and became a Certified Public Accountant in

1989. Previous to her service at UND she served as audit supervisor

at the accounting firm, Price Waterhouse.

Yilei Zhang, Ph.D., is an Assistant Professor at the Department of

Finance at the University of North Dakota. Her research interest is in

mergers and acquisitions, IPO and SEO, and corporate governance.

She may be reached via email at yilei.

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DATA ANALYSIS

&

INTERPRETATIONS

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SHORT TERM LIQUIDITY MANAGEMENT

CURRENT RATIO:-

The current ratio is a measure of a firm’s short-term solvency. It indicates

the availability of current assets in rupee for every one rupee of current

liabilities. A ratio of greater than one means that firm has more current

assents than current claims against them. A high ratio indicates high

liquidity; while a low ratio indicates a low liquidity. For manufacturing

CURRENT RATIO =

Table 1.1

CURRENT RATIO in Rs.

YEAER CURRENT ASSETS

CURRENT

LIABILITIES RATIO

2006-07 3149756052 1656267950 1.9

2007-08 3270733711 2286973441 1.43

2008-09 6147532582 3945088370 1.56

2009-10 7792358719 4015124569 1.94

Interpretation:-

The Current Ratio during the period of the study was higher than the

standard. This in turn indicates that the company is maintaining sufficient

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liquidity in their organization. For a manufacturing undertaking, a ratio of

2:1 is traditionally considered a benchmark of adequate liquidity.

QUICK RATIO :

Quick Ratio indicates the immediate liquidity of current assets.

Recognizing that inventory might not be very liquid, this ratio takes into

account quickly realizable assets and measures them against current

liabilities. This is more accurate measure of estimating the unit’s liquidity.

Generally a quick ratio of 1:1 is considered to be a more satisfactory

measure of liquidity position of a concern

QUICK RATIO =

Table 1.2

QUICK RATIO in Rs

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YEAR QUICK ASSETS

CURRENT

LIABILITIES RATIO

2006-07 1792815683 1656267950 1.08

2007-08 2252011403 2286973441 0.98

2008-09 4848409659 3945088370 1.22

2009-10 5356761021 4015124569 1.33

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InterpretationThe table reveals that the overall quick ratio is around 1.5. This is

according to the standard, which indicates that the company has

maintained sufficient current assets to meet the current of liquid assets

are locked in current assets (which if effectively used can increase the

productivity).

WORKING CAPITAL TURNOVER RATIO:-

Working capital turnover ratio establishes a relationship between net

sales and working capital. This ratio provides information as to how

effectively a company is using its working capital to generate sales. A

higher ratio indicates the management’s efficient utilization of the assets

while low turnover ratio indicates the underutilization of available

resources and presence of idle capacity.

WORKING CAPITAL TURNOVER RATIO=

*Net Working Capital = Current Assets – Current

Liabilities

Table 1.3

WORKING CAPITAL TURNOVER RATIO

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YEAR NET SALESNET WORKING

CAPITALRATIO

2006-07 7145429942 1493488102 4.78

2007-08 9863449724 983760270 10.02

2008-09 15301309179 2202444212 6.94

2009-10 19246718554 3777284150 5.09

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Interpretation:

The working capital turnover ratio was 4.78 in the year 2006-07,

increased to 10.02 in the year 2007-08 and again decreased to 6.94 in

the year 2008-09 And again decreased 5.09 in the year 2009-10 Thus, the

ratio during the period of the study is showing a fluctuating trend. But the

average ratio during the period was high, which is an indication that the

firm has been utilizing the assets efficiently.

WORKING CAPITAL PERFORMANCE RATIO:

This ratio indicates the mode of financing of debtors. It is used more to

control the working capital of an enterprise. Often a minimum and

maximum value of the ratio is known to lessen the dependence of

financing from other sources. A ratio of 1:1 is considered to be a more

satisfactory measure of performance of working capital of a firm.

Working capital performance ratio =

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Table 1.4Working Capital Performance Ratio

Interpretation:

The working capital performance ratio was 0.42 during the year 2006-07 it

decreased to0.41 in the year 2007-08 and it decreased to 0.23 in the year

2008-09 and it again decrease much higher than the standard ratio; this

indicates that the company has been financing the debtors very well.

CURRENT ASSETS TURNOVER RATIO: -

It explains the relationship between sales and current assets. This ratio

indicates the sales generating capacity of current assets. The lower the

ratio more is the amount of current assets required per unit of sales

Current Assets turnover ratio =

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YEAR

TRADE

DEBTORS

TRADECREDITORS+ADVANCE

PAYMENTS RATIO

2006-07 452734619 1069142870 0.42

2007-08 493474854 1198528794 0.41

2008-09 653448795 23834113029 0.23

2009-10 616072465 4504830991 0.13

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Table 1.5 Current Assets turnover ratio

YEAR NET SALES CURRENT ASSETS RATIO

2006-07 7145429942 3149756052 2.26

2007-08 9863449724 3270733711 3.01

2008-09 15301309179 6147532582 2.48

2009-10 19246718554 7792358719 2.46

Interpretation:

The current assets turnover ratio was 2.26 in the year 2006-2007, it

increased to 3.01 in the year 2007-2008 and decreased to 2.48 in the year

2008-2009 and again decreased 2.46 in the year 2009-2010The current

asset turnover ratio during the period under the study had a fluctuating

trend. But when we refer 2006-2007 to 2007-2008, 2008-2009 and 2009-

2010 we can see that there is an increase which indicates that the

company has been using the current assets properly to generate sales.

CASH MANAGEMENT

Cash Turnover Ratio: This ratio focuses on the cash holding policy of the

firm. A decline in this ratio indicates high levels of idle cash. A high ratio is

more preferable.

Cash Turnover ratio =

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Table 1.6Cash Turnover Ratio

Interpretation:

The Cash turnover ratio was 14.58 in the year 2006-07 which increased to

16.86 in 2007-08 and increased to 18.17 in the year2008-09.again

increased 57.53 in the year2009-10. The ratio has been above 14 .58

during the period of study, which indicates that the cash holding policy of

the firm is good.

I NVENTORY MANAGEMENT

Activity Ratios:-

Funds of various creditors and owners are invested in various assets to

generate sales and profits. The better the management of assets, the

larger the amount of sales. Activity ratios are employed to evaluate the

efficiency with which the firm manages and utilizes its assets. These ratios

are also known as Turnover ratios because they indicate the speed with

which the assets are being converted or turned over into sales. Activity

ratios, thus involve a relationship between sales and assets. A proper

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YEARCASH OPERATING EXPENSES

CASH AND BANK BALANCES RATIO

2006-07 6330921229 434118131 14.582007-08 8313160381 493065688 16.862008-09 1028447999 565713869 18.132009-10 13200044657 229435639 57.53

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balance between sales and assets generally reflect that assets are

managed well.

Inventory Turnover Ratio:-

Inventory Turnover Ratio indicates the efficiency of the firm in producing

and selling its product. It is calculated by dividing cost of goods sold by

the average inventory.

Inventory Turnover Ratio=

Table 1.7 Inventory Turnover Ratio

Interpretation:

The inventory turnover ratio indicates the number of times a rupee

generates turn over with respect to inventory investment. A high ratio

indicates a better conversion of inventory. The inventory turnover ratio in

the year 2006-07 was 32.47 which decreased to 12.03 in 2007-08 and

which further increase to 19.72 in 2008-09 and again increased 28.02 in

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YEARS COST OF GOODS SOLD AVERAGE INVENTORY RATIO

2006-07 3820898207 117667878 32.47

2007-08 4367281138 362768945 12.03

2008-09 5788755562 293487301 19.72

2009-10 7840396793 279747059 28.02

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the year 2009-10which shows an upward trend which is a very good sign

for the company.

RAW MATERIAL INVENTORY TURNOVER:-

This ratio shows the efficiency of the firm in converting raw material into

finished goods. Raw material turnover and holding period shows the

number of times raw material is rotated during the period. It shows the

number of times raw material is converted into work-in-progress. It also

shows the number of days it takes to convert raw material into finished

goods.

Raw material Inventory Turnover =

Table 1.8

RAW MATERIAL INVENTORY TURNOVER

Work in

Progress Inventory Turnover =

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YEAR MATERIAL CONSUMED

AVERAGE RAW MATERIAL

INVENTORY RATIO

2006-07 1177843411 67226226 17.52

2007-08 1520714101 8877554 17.16

2008-09 2011500769 128567141 15.64

2009-10 2564131071 227080390 11.29

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Interpretation:

The raw material turnover ratio in the year 2006-07 was 17 .52which

decreased to 17.16 in 2007-08 and which further decreased to 15.64 in

2008-09 and again decreased 11.29 in the year 2009-10The raw material

turnover ratio is showing a downward trend which is not a good sign. A

decrease in ratio is showing increase in raw material inventory levels or

slow-moving inventory. A high level of raw material inventory indicates

unnecessary tie-up of funds, reduced profit and increased cost

Work-in-progress Inventory Turnover:

Work-in-progress turnover helps in examining the efficiency with which

the firm converts work-in-progress into finished goods. The ratio helps in

knowing the number of times work-in-progress is converted into finished

goods.

Table 1.9Work in Progress Inventory Turnover

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YEAR Cost of goods sold Average Work-in-Progress Ratio

2006-07 3820898207 20135147 189.76

2007-08 4367281138 250658932 17.42

2008-09 5788755562 197407203 29.32

2009-10 7840396793 1476644491 53.1

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Interpretation:

The Work-in-progress inventory was189.76 in 2006-07, it decreased to

17.42 in 2007-08 and it further increased to 29.32 in 2008-09. And it

again increased53.10in the year2009-10 It is showing a fluctuating trend,

which is good for the organization. A high ratio indicates fast conversion of

goods into finished goods.

FINISHED GOODS INVENTORY TURNOVER RATIO:-

Finished goods turnover indicates the efficiency of the management in

managing the finished goods. A high level of inventory is an indication of

inefficient management of finished goods inventory.

FINISHED GOODS TURNOVER RATIO =

Table 1.10Finished Goods Inventory Turnover Ratio

Year Cost of goods sold Average Finished Goods Inventory Ratio

2006-07 3820898207 101513919 37.63

2007-08 4367281138 11211003 38.95

2008-09 5788755562 112110013 51.63

2009-10 7840396793 132102568 59.35

Interpretation: The finished goods turnover ratio was 37.63 in 2006-07, it

increased to 38.95 in 2007-08 and it further increased to 51.63 in 2008-09

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and again increased to 59.35in the year (2009-10) the conversion of

finished goods into sales is getting quicker year-by-year.

DEBTORS MANAGEMENT

Debtors Turnover Ratio:-

Debtors turnover indicates the number of times debtors turnover each

year. Generally the higher the value of debtor’s turnover, the more

efficient is the management of credit.

Debtors Turnover Ratio =

Table 1.11Debtors Turnover Ratio

Year Net Sales Average Debtors Ratio

2006-07 7145429942 43,97,11,321 16.25

2007-08 9863449724 47,31,04,737 20.84

2008-09 15301309179 57,34,61,825 26.68

2009-10 19246718554 63,47,60,630 30.32

Interpretation:

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The Debtors turnover ratio was 16.25 in 2006-07. It increased to 20.84 in

2007-08 which increased to 26.68in 2008-09and again increased 30.32 in

the year 2009-10 this continues increase in ratio in the year is a good sign

because the higher the debtors turnover ratio, the more.

COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS

FOR THE YEAR ENDING DECEMBER 31st 2006 – 2007

PARTICULARS

Year ending 31st December

Increase Decrease 2006 2007

AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories

Total AssetsLiabilities and CapitalCurrent LiabilitiesProvisions

Total Liabilities

52,38,60,37896,37,39,88542,66,88,02252,73,64,629

43,41,18,13195,15,54,25742,27,34,619131,13,49,045 78,39,84,416

8,97,42,2471,21,85,628 39,53,403

244,16,52,914 314,97,56,052

135,50,17,102 12,19,49,253

150,54,85,367 15,07,82,583

15,04,68,265 2,88,33,330

147,69,66,355 165,62,67,950Net working capital 96,46,86,559 146,34,88,102

Increase in working capital 49,88,01,543 49,88,01,543

Total 146,34,88,102 146,34,88,102 78,39,84,41678,39,84,416

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COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS

FOR THE YEAR ENDING DECEMBER 31st 2007– 2008

PARTICULARSYear ending 31st December

Increase Decrease 2007 2008

AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories

Total Assets

Liabilities and CapitalCurrent LiabilitiesProvisions

Total Liabilities

43,41,18,13195,15,54,25742,27,34,619131,13,49,045

49,30,65,688127,47,15,770 49,34,74,854100,94,77,399

5,89,47,55732,31,61,513 70,740,235

30,18,71,646

311,97,56,052 327,07,33,711

135,50,17,102 12,19,49,253

184,14,55,504 44,55,17,937

48,64,38,40232,35,68,684

147,69,66,355 228,69,73,441

Net working capital 146,34,88,102 98,37,60,270

Decrease in working capital 47,97,27,832 47,97,27,832

Total 146,34,88,102 146,34,88,102 111,18,78,732 111,18,78,732

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COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS LTD

THE YEAR ENDING DECEMBER 31st 2008 – 2009.

PARTICULARSYear ending 31st December

Increase Decrease 2008 2009

AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories

Total Assets

Liabilities and Capital

Current LiabilitiesProvisions

Total Liabilities

49,30,65,688127,47,15,770 49,34,74,854100,94,77,399

56,57,13,869364,59,98,94065,34,48,795128,23,70,978

7,26,48,181237,12,83,17015,99,73,94127,28,93,579

327,07,33,711 614,75,32,582

184,14,55,504 44,55,17,937

243,79,37,215150,71,51,155

59,64,81,711106,16,33,218

228,69,73,441 394,50,88,370

Net working capital 98,37,60,270 220,24,44,212

Decrease in working capital 121,86,83,942 121,86,83,942

Total 220,24,44,212 220,24,44,212 165,81,14,929 165,81,14,929

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COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS LTD

FOR THE YEAR ENDING DECEMBER 31st 2009 – 2010.

PARTICULARSYear ending 31st December

Increase Decrease 2009 2010

AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories

Total AssetsLiabilities and Capital

Current LiabilitiesProvisions

Total Liabilities

56,57,13,869364,59,98,94065,34,48,795128,23,70,978

22,94,35,639451,98,15,381 61,60,72,465242,70,35,234

87,38,16,441

114,46,64,256

33,62,78,230

37,376,330

614,75,32,582 779,23,58,719

243,79,37,215150,71,51,155

290,76,23,187110,75,01,382 39,96,49,773

46,96,85,972

394,50,88,370 401,51,24,569

Net working capital 220,24,44,212 377,72,34,150

Decrease in working capital

157,47,89,938 157,47,89,938

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FINDINGS

&

SUGGESTIONS

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FINDINGS

1. The inventory turnover ratio of the form gradually increased 10.02 in

year 2007-2008and in the year 2009-2010 5.09 decreased.

2. The proportion of current liabilities is very high.

3. During the overall study period the quick ratio of the from is not

satisfactory

4. The networking capital of the company has largely increased during

the year from 149, 34,88,102 to 377,72,34,150 the study of period in

the working capital turnover ratio is satisfactory.

5. The current ratio of the firm is satisfactory and it is maintaining. It is

ideal ratio.

6. Debtors turnover ratio of company is decreased during the current due

to increased in closing debtor’s level. The debtor’s turnover ratio of the

firm is not satisfactory.

7. Materials department and bin cards system maintain in MCL to control

the WORKING CAPITAL.

8. The company implements the SAP (system application program)

planning by June 2008.

Suggestions:

The company should maintain adequate cash & bank balances in

order to meet the obligations of the suppliers timely.

The company should use a just-in-time approach in managing raw-

material, which makes cash available for other operations.

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BIBLIOGRAPHY

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Page 74: MBA - Madras Cement Project

Bibliography:

I.M Pandey ,Financical Management, Vikas Publishing house PVT ltd,

New Delhi

S.P Jain & K.L Advance Accountancy Kalyani Publications

P.Mohana Rao Alok K.Pramanik, working Capital Management &

Deep Publishing Pvt Ltd, New Delhi

M.Y Khan, P.K Jain, Financial Management ,Tata McGraw Hill

Publishing Company Limited, New Delhi

James C.Van House, Financial Management Pearson Education

Websites:

www.madras cements.com

www.naukrihub.com/india/cement industry/overview

Annexure:

Calculations:

Current Assets:-

Particulars 2006-07 2007-08 2008-09 2009-10

Inventories 131,13,49,045 100,94,77,399 128,23,70,978 242,70,35,234

Sundry debtors 45,27,34,619 49,34,74,854 65,34,48,795 61,60,72,465

Cash &bank

balances43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639

Loans&advances 95,15,54,257 127,47,15,770 364,59,98,940 451,98,15,381

Total 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719

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Current Liabilities:-

Particulars 2006-07 2007-08 2008-09 2009-10

Current liabilities

150,54,85,367 184,14,55,504 243,79,37,215 290,76,23,187

Provisions 15,07,82,583 44,55,17,937 150,71,51,155 110,75,01,382

Total 165,62,67,950 228,69,73,441 394,50,88,370 401,51,24,569

Quick Assets:- Quick assets = current assets – prepaid expenses –Inventory

Particulars 2006-07 2007-08 2008-09 2009-10

Current assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719

Inventories 131,13,49,045 100,94,77,399 128,23,70,978 242,70,35,234

Prepaid expenses 4,55,91,324 92,44,909 1,67,51,945 85,62,464

Quick Assets 179,28,15,683 225,20,11,403 484,84,09,659 535,67,61,021

Net Working Capital:-

Net working capital = Current Assets – current Liabilities

Particulars 2006-07 2007-08 2008-09 2009-10

Current assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719

Current Libilities

165,62,67,950 228,69,73,441 394,50,88,370 401,51,24,569

Net working Capital

149,34,88,102 98,37,60,270 220,24,44,212 377,72,34,150

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Trade creditors + Advances Payments:-

Particulars 2006-07 2007-08 2008-09 2009-10

Trade creitors 30,78,52,017 35,88,65,333 71,17,56,017 108,55,75,288

Advances

Pataments76,12,90,853 83,96,63,461 212,23,57,012 314,92,45,708

Total 1069142870 1198528794 23834113029 4504830991

Current Assets Turnover:-

Particulars 2006-07 2007-08 2008-09 2009-10

Net sales 714,54,29,942 986,34,49,724 1,530,13,09,179 1,924,67,18,554

Current Assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719

Cash Operating Expenses:-

Particulars 2006-07 2007-08 2008-09 2009-10

Raw materials consumed

117,78,43,411 152,07,14,101 201,15,00,369 256,41,31,071

Power &fuel 213,09,90,165 253,77,39,394 309,96,30,439 407,91,09,987

Stores consumed

17,65,89,866 27,30,51,716 39,18,96,722 51,83,87,209

Repairs & maintenance

10,20,11,133 13,62,11,942 16,69,12,337 20,93,37,523

Salaries ,wages,& others

40,50,21,168 46,18,38,018 56,51,83,734 81,02,19,938

Administrative expenses

18,84,79,404 20,69,29,688 23,57,84,081 22,40,93,039

Rates & taxes 12,43,47,388 11,47,25,995 3,52,73,732 5,74,66,340

Managing directors

1,91,32,8256 6,16,75,173 24,78,52,296 32,40,44,976

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remuneration

Packing charges

50,17,99,705 63,29,86,822 81,28,22,757 82,37,50,450

Interest & finance charges

35,88,92,443 34,35,16,151 22,82,94,830 51,69,75,617

Transportation & handling expenses

90,53,10550 169,86,74,224 221,42,08,346 285,85,53,827

Advertisements & other sales promotion expenses

22,91,27,610 31,18,74,555 26,01,20,007 19,69,26,956

Donations 1,13,75,561 1,32,22,602 1,09,96,686 1,72,07,803

Current Operating Expenses

633,09,21,229 831,31,60,381 1028,82,44,7999 1320,00,44,657

Cash and Bank Balances:-

Particulars 2006-07 2007-08 2008-09 2009-10

Cash& bank balance

43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639

Cash& bank balances

43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639

Cost of goods sold:-

COGS=Opening Stock + Purchases + Manufacturing/Direct Expenses – Closing Stock

Particulars 2006-07 2007-08 2008-09 2009-10

Opening Stock 23,53,35,756 37,03,95,007 35,51,42,883 23,18,31,768

Purchases 94,09,54,038 65,43,34,516 105,05,39,210 209,93,72,884

Manufacturing/Direct Expenses*

301,50,03,420 369,76,94,498 461,49,05,237 583,68,54,491

Closing Stock 37,03,95,007 35,51,42,883 23,18,31,768 32,76,62,350

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COGS 382,08,98,207 436,72,81,138 578,87,55,562 784,03,96,793

Average Inventory:-

Average Inventory =

Particulars 2006-07 2007-08 2008-09 2009-10

Opening Stock 23,53,35,756 37,03,95,007 35,51,42,883 23,18,31,768

Closing Stock 37,03,95,007 35,51,42,883 23,18,31,768 32,76,62,350

Average Inventory 11,76,67,878 36,27,68,945 29,34,87,301 27,97,47,059

Average Raw Material:-

Average raw Material =

Particulars 2006-07 2007-08 2008-09 2009-10

Opening Raw

Material6,33,17,601 7,11,34,851 10,60,20,257 15,11,14,024

Closing Raw

Material7,11,34,851 10,60,20,257 15,11,14,024 30,30,46,756

Average Raw

Material6,72,26,226 8,85,77,554 12,85,67,141 22,70,80,290

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Average work-in-progress:-

Average work-in-progress=

Particulars 2006-07 2007-08 2008-09 2009-10

Opening work-in-progress

16,77,35,679 23,49,67,246 26,63,50,618 12,84,63,788

Closing work-in-progress

23,49,67,246 26,63,50,618 12,84,63,788 16,65,25,194

Average Work-in-progress

20,13,51,463 25,06,58,932 19,74,07,203 19,76,44,491

Average Finished Goods:-

Average Finished Goods=

Particulars 2006-07 2007-08 2008-09 2009-10

Opening Finished Goods

6,76,00,077 13,54,27,761 8,87,92,265 10,33,67,980

Closing Finished Goods

13,54,27,761 8,87,92,265 10,33,67,980 16,08,37,156

Average Finished Goods Inventory

10,15,13,919 11,21,10,013 9,60,80,123 13,21,02,568

Average Debtors:-

Average Debtors=

Particulars 2006-07 2007-08 2008-09 2009-10

Opening Debtors 42,66,88,022 45,27,34,619 49,34,74,854 65,34,48,795

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Closing Debtors 45,27,34,619 49,34,74,854 65,34,48,795 61,60,72,465

Average Debtors 43,97,11,321 47,31,04,737 57,34,61,825 63,47,60,630

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