SUMMER TRAINING REPORT ON “CASH MANAGEMENT” IN

SUBMITTED TO SUBMITTED BY

DEPT. OF BUSINESS SHALU VERMAADMINISTRATION M.B.A –3RD Sem. ROLL NO. 46

CH. DEVI LAL UNIVERSITY,SIRSA

ACKNOWLEDGEMENT

At the outset I would like to thank the Management of ESCORTS

AGRI MACHINERY GROUP for the wholehearted co-operation and

guidance extended by them, which made my summer training project

possible.

I would like to thank Mr. Bharat Madan (Chief Financial Officer),

Mr. S.K Aggarwal (Head Employees Relations), and Mrs. Kiran

Chopra ( Chief Secretary & System Manager) for providing me this

opportunity to carry out the project.

I am very grateful to my project guide Mr.pulak sinha (finance

Manager; Finance Department) Escorts Limited (AMG PLANT-1) for his

support and suggestions, which led to the completion of this project.

I would also like to thank Mr. B.B khanna , Mr. M.M. Halder , Mr.

Nitin Aggarwal , Mr. Vijay Nehra , Mr. Rajeev Khandelwal , Mr. Sunil

Bhatia, Mr. R.N katyal, Mr.Ajay Wadhawan , Mrs Saroj and Mr. R.K.

Kukreja and other staff members for their support and cooperation.

2

STUDENT DECLARATION

I, student of “Masters in Business Administration” CH. DEVI LAL

UNIVERSITY, SIRSA hereby declare that the dissertation/thesis entitle

‘Study of Cash Management’ of the Escort Agri Machinery Group

(AMG) submitted in fulfillment of the training; is my original work and

is not submitted for the award for any other degree, fellowship or similar

title or prize.

SHALU VERMA

3

EXECUTIVE SUMMARY

If the development capital is what establishes a business, cash flow is

what keeps it going. One of the most common downfalls of business is

unexpectedly high running cost. What is important is not just the size of

operating costs, but the cash flow-that is when money has to be paid out

in relation to the stream of income arriving in. Thus cash flow

management is of prime importance.

Escorts Ltd. is the holding company of the Escorts Group. Post

restructuring, agri - machinery or tractors have become the focus area of

operations. Other business i.e. two- wheelers, IT, Telecom, construction

equipment, are controlled through subsidiaries and joint venture. Post

hive off of its pistons business to a joint venture with a foreign

collaborator, Escorts is focusing on its ‘core competence’ of tractors.

Escorts have strong hands in house engineering skills, a wide

distribution/service network and brand franchise.

The project is small attempt to study the cash management in

Escorts Agri - Machinery group. Added to this fact that mechanization

level in India is currently very low as compared to the world standards.

To analyze the performance, published balance sheets of Escorts

Limited, CASH FLOW STATEMENTS are been used. This project

report is based on financial data up to 2007-08 only. The financial year

for escorts is from 01/10/20XX to 31/09/20XX. Escorts is maintaining

the following records which is indicative of its professional approach:

4

Maintaining proper set of accounting records.

Maintaining an accurate cash book with bank statement

Daily cash inflow & cash outflow.

Marking regular forecast of cash requirement based upon planed

sales volume.

Ageing of debts/credits with comparisons to previous month

5

TABLE OF CONTENTS

OBJECTIVE OF THE TRAINING

ABOUT TRACTOR INDUSTRY

INTRODUCTION

FUTURE OF TRACTOR INDUSTRY

MARKET SHARE OF THE TRACTOR INDUSTRY

TRACTOR INDUSTRY PERFORMANCE

COMPANY’S PROFILE

ESCORTS SYMBOL

MISSION

QUALITY POLICY

BACKGROUND OF THE BUSINESS

BOARD OF DIRECTORS

OUTLINE OF ESCORTS

SUBSIDERIES

BANKERS

AGRI MACHINERY GROUP

INTRODUCTION

AGRI MACHINERY GROUP CONTRIBUTION

MODERNIZATION OF AGRI- MACHINERY GROUP

PRODUCTS

COMPANY’S FUTURE6

CASH MANAGEMENT

INTRODUCTION

CASH FLOW MANAGEMENT

CASH MANAGEMENT SYSTEM

IMPORTANCE OF CASH MANAGEMENT

CASH MANAGEMENT STRATEGIES

CASH OUTFLOW

CASH INFLOW

CASH FLOW STATEMENT

IMPORTANCE

DAILY CASH FLOW REPORT

CASH BUDGET

BANK RECONCILIATION

CASH RATIOS

RECEIVABLES MANAGEMENT

PAYABLE MANAGEMENT

RECOMMENDATIONS

LIMITATIONS

BIBLIOGRAPHY

ANNEXURES

7

OBJECTIVES OF THE TRAINING

It is well known fact that we remember 20% of what we hear, we

remember 40% of what we see but we remember 75% of what we do.

Undergoing M.B.A is the first step to prepare myself as a manager and

visualize the ever-dynamic business world and my main objective while

taking up the training was to familiarize myself with the working of the

finance department of Escort Agri Machinery Group (AMG)

To present study in Escort Agri machinery group mainly focus on the

following :

Resources of cash inflow of the company.

Cash flow factors which have effect of cash inflow.

Cash flow statement in the company.

Cash flow management in the company

8

ABOUT

THE

TRACTOR

INDUSTRY

9

INTRODUCTION

India’s long-term economic prospects, even today, depend to a large

extend on the agricultural sector, which contributes a quarter to the gross

domestic project and provides livelihood to 2/3 of the population. A

gradual and perceptible shift from subsistence farming to enterprise

farming is harbinger of modernization of the agriculture economy and

this will increase the contribution of the sector to the overall GDP in the

time to come. The central government as well as several state

governments is giving due priority to agriculture and rural developments.

A tractor is a product, which has maximum utility in the

agricultural sector. The tractor industry is segmented on the basis of the

power of the tractor engine measured in terms of horsepower (HP). The

maximum consumption is for 30-40 HP tractors. With the increase in the

availability of low cost finance for longer tenures, the sale of the tractors

is expected to go up. The new trend observed in this sector is the shift in

consumption from majority in the northern states to other parts of the

country, too. The soil in the northern states is alluvial in nature and thus

requires a low powered tractor for tilling it. However, states located in

the western and southern parts of the country where the soil being laterite

or black etc. is harder and needs high-powered tractors.

Tractor industry in India has passed through various hazes before

reaching where it is today. During 1945 to 1960 demand was met entirely

through import. There were 37,000 tractors by 1960. Production began in

1861 with five manufactures producing a total of 880 units per year. By

10

1965 it increased to over 5,000 units per year and by 1970 annual

production rose to more than 20,000 units. Six new manufacturing were

established during 1971-1980. In 1971 Escorts also started local

manufacturing of Ford Tractors in collaboration with Ford, UK. During,

1990 annual production rose to 1, 40,000 units making India an exporter

to countries, mainly to Africa. After De-licensing of tractor industry,

production exceeded 2, 55,000 units in 1997.

The growth of the industry over the last three decades resulted in

the entry of several new entrants including all the major multinational

companies. The industry now consists of 14 manufactures with an

aggregate installed capacity of approximately 4.50 lack tractors. In the

tractor industry, following are the key manufacturers:

Mahindra& Mahindra Limited (M&M),

Gujarat Tractors Limited,

Tractors and Farm Equipment Limited,

Hindustan Machine Tools Limited,

Bajaj Tempo Limited

In 1999-2000. Since then, however the industry declined to

a level of 1.72 lack tractors in the year 2002-2003, a decline of 33.3%

over three years.

Despite the step decline in the industry, Escorts consciously

decided to aggressively reduce channel inventory further by

approximately 3,500 units reduces in the previous year. This has not only

impacted their revenue and profit adversely but has also enabled the

company to balance the cash flow of company effectively.

11

Tractors form an integral part of farm mechanization and have a

crucial role to play in increasing agriculture productivity. In India, 90%

of the tractors are financed by banks- credit at concessional rates.

Availability of credit therefore is the most crucial factor, impacting

tractor demand. Increased use of irrigation facilities, shift towards multi-

cropping, consolidation of lands holdings, promotion of cooperatives and

higher investment in agriculture also contributes to higher tractor

demand.

12

Future of Tractor industry

The tractor industry in India has been on a growth trajectory since

the second half of 2003-04, after going through a minimum variation for

consecutive years. The key factors driving this growth are increasing

farm incomes, aggressive financing resulting in easy availability of low-

cost credit, sharp inventory correction and strong export growth.

The demand in tractor industry is expected to grow mainly due to

the agricultural sector, with the expected increase in agricultural

production. Also, the shift in trend for demand towards higher HP

tractors is expected to continue. This will be further strengthened by the

launch of several new models. In the next 2-3 year, demand for tractors is

expected to increase significantly in the eastern states, where

traditionally, tractor usage has been low. Exports are expected to increase

significantly as several Indian players are targeting the “hobby farming”

segment in the U.S, which is considerably large. Also, tractors of most

Indian manufacturers comply with the emission standards accepted in the

U.S. Most exports are likely to be through overseas partnerships or joint

ventures. McKinley has also forecasted tractor population requirements

of 75 lacs over the next 18 years vs. current population of 26 lacs. The

extension of the 150 per cent deduction on R&D expenditure up to march

31, 2009, in the Budget 2008-09 will also benefit the industry in terms of

new product development besides increase in the area under irrigation

under the Bahrat Nirman Project and the micro irrigation scheme.

13

MARKET SHARE OF TRACTOR

INDUSTRY

For the year 2007-08

14

TRACTOR INDUSTRY PERFORMANCE

COMPANY 2005-06 2006-07 2007-08

ESCORT

FARMTRAC

11138

18287

23200

32800

20950

26900

TOTAL(ESCORT +

FARMTRAC)

29425 56000 47850

MAHINDRA &

MAHINDRA

PTL

TAFE

EICHER

HMT

SONALIKA

BTL(FML)

L & T

FORD NEW HOLLAND

85028

31396

7900

32017

4464

19951

13214

8450

102500

30010

52400

27700

6500

36200

5050

19720

19400

7195

98700

28040

53400

25450

4770

30920

4820

28530

23250

4520

TOTAL INDUSTRY 302435 362675 350300

15

COMPANY’S

PROFILE

16

ESCORTS SYMBOL

The Escorts symbol means more than a seen by eye. It has been prepared

with certain objective in mind and is symbol in more than one way.

The philosophy behind Escorts and the ‘e’ in the Escorts is “enterprise”.

The hexagon is a symbol of productivity. Precision when interposed as a

nut. It symbolizes a craft man ship and mending productivity. The sprains

super imposed on the hexagon represent the workers and the people of

Escorts. This forms the letter ‘E’ the first of Escorts a company even of

more changing unveiling the future

17

MISSION

For an Enterprise business mission embodies of its endeavor, which

acts as a guiding light for continuous development & growth.

Mission of ESCORTS is:

Engineering Changes through core competency for greater synergy

reinforcing bonds with customers & establishing powerful symbiotic

relationship with international allies, preparing global market. The

company wants to make a lasting difference to its shareholders, its

customers, its business associates, its employee and the country as a

whole. The company also gives better quality and better technology to

customer and treats every customer as “special” to build respect for, and

loyalty to, Escorts.

18

QUALITY POLICY

We shall strive to continuously improve to meet the ever – rising

expectation of our customers at the lower cost. Each one of us must fulfill

the need of our customer, both internal and external with the highest

degree of commitment thereby creating a quality organization geared to

ensure total customer satisfaction and the sustained health and prosperity

of our business.

Customer Orientation: To fulfill the requirement of our internal and

external customer.

Process Orientation: To optimize and harmonize interrelated process

rather than individual function.

Preventive Behavior: To prevent the mistake to happen.

19

BACKGROUND AND BUSINESS

The Escorts Group, with Escorts Limited as its flagship company, is

among India’s leading corporations operating in the diverse field of agri

machinery, construction & material handling equipment, automotive &

railway ancillaries information technology and financial services. The

group has 15 modern manufacturing facilities & an extensive marketing

network spread across the country. The genesis of Escorts goes back to

1944 when two brothers, Mr. H.P. Nanda and Mr. Yudi Nanda, launched

a small agency house, Escorts Agents Ltd., in Lahore. The company’s

principal activities were trading and representing leading overseas

manufacturers for the sale of their products in India. One of its

dealerships was for the “Massey Ferguson” brand of tractors.

In December 1959, Escorts agents ltd. was converted into a public

limited company and was renamed as Escorts Limited (EL). In January

1960, EL decided to set up manufacturing facilities for making tractors in

India under the “Escorts” brand name in the 25-40 Horsepower

categories. EL promoted Escorts Tractors Limited in 1969 as joint

venture with Ford Motor Company of USA for the manufacturing of

‘Ford’ series of tractors. The tractors manufactured were in the 45-50 HP

range and ETL became the market leader in this segment with a share of

above 50%. Consequent to FMC’s disposal of tractors operations to Ford

New Holland, USA, Ford new holland acquired the shares of FMC in

ETL. Following an agreement in 1995 to end the joint venture

association, EL acquired the entire stake of ford new holland in August

1995, making escorts tractors ltd. a subsidiary of Escorts Ltd.

20

Over the years, Escorts has sured ahead and evolved into one of

India’s largest conglomerates. Till 1993-94, all these activities were

being carried out in various divisions of EL. EL undertook a major

restructuring exercise between 94-98 spinning off the divisions into

separate companies.

The restructuring exercise-comprised consolidation of the agri-

machinery business by merger of ETL with EL and having off various

divisions into separate companies. Biwheeler division was spun off to

Escorts Yamaha Motors Ltd., construction equipment division to Escorts

construction equipment Ltd., telecommunication equipment division to

Escorts communication Ltd., EL booked gains of Rs. 2091 million over

the four year period 1994-95 to 1997-98 though the sale of these the sale

of these divisions.

The main products of Escorts group currently comprise of agri-

machinery, information technology, health care, financial services,

railway components, auto components, construction and material

handling equipment.

21

BOARD OF DIRECTORS

Managing Director &Chairman Mr. Rajan Nanda

Joint Managing Directors Mr. Nikhil Nanda

Directors Dr. M.G.K. Menon

Dr. S.A. Dave

Dr. P.S. Pritam

Mr. S.C. Bhargava

Sr.Vice President-

Law & Company Secretary Mr. G.B. Mathur

Exec. Vice President &

Group Chief Financial Officer Mr. R.K.Budhiraja

22

OUTLINE ORANISATION – ESCORTS GROUP

Chairman & Managing Director – Sh. Rajan Nanda

Secretariat

Flagship Operating Division

Escorts Limited Faridabad

Agri Machinery Engineering International Business

Corporate Center Faridabad Escorts Research Institute of Farm Center, Faridabad Mechanization,

Bangalore

Personnel Finance Project Escorts Heart Research Escorts Medical Institute, New Delhi Center, Faridabad

Administration and Law Export andSecurity Communication

Associates Companies Subsidiary Companies

Escorts Employees Welfare Trust Faridabad

23

OUTLINE ORANISATION – ESCORTS LIMITED

Chairman & Managing Director – Sh. Rajan Nanda

Secretriat

Corporate Office Registered Office Corporate Center, Faridabad New Delhi

Personnel Finance

Project Law

Administration Export and and Security Communication

Agri Machinery Automotive AncillariesMarketing Division and Railway Equipment Division

Farmtrac Division Escorts Tractor Division

Corporate Office Functional Units Corporate Office Functional Units(Line Duties) (Production & Operation) (Line Duties) Production & Operation)

24

SUBSIDERIES

Escorts Asset Management Ltd.

Escorts Automotive Ltd.

Escorts Class Ltd.

Escorts Construction Equipment Ltd.

Escorts Heart Institute and Research Centre Ltd

Escorts Hospital and Research Centre Ltd.

Escorts Securities Ltd.

Escorts Telecommunication Ltd.

Esconet Services ltd.

Cellnext Solutions Pvt. Ltd.

I Serv India Solutions Pvt. Ltd.

Escosoft Technologies Ltd.

Escosoft Technologies (USA) Ltd.

Escosoft Technologies (UK) Pvt. Ltd.

Escosoft Singapore Pvt. Ltd.

E-Soft (Mauritius) Holdings Ltd.

Escotel Mobile Communication Ltd.

Escotel Telecommunication Ltd.

Escorts Agrimachiner

25

BANKERS

IDBI BANK.

ABN AMRO BANK N.V.

BANK OF BARODA.

CITIBANK, N.A.

DEUTSCHE BANK AG.

HONGKONG & SHANGHAI BANKING CORPORATION LIMITED.

HDFC BANK LIMITED.

PUNJAB NATIONAL BANK.

STATE BANK OF INDIA.

STATE BANK OF TRAVANCORE.

26

AGRI

MACHINERY

GROUP

27

INTRODUCTION

Having pioneered farm mechanization in the country, Escorts has

played a pivotal role in the agricultural growth of India for over five

decades. One of the leading tractor manufacturers of the country, Escorts

produces tractors in the 27-75 HP range and has already sold over 6 lakh

tractors. Escorts AGRI MACHINERY GROUP (AMG) was set up in

1960 and they rolled out their batch of tractors in 1965 under the brand

name of Escorts. Today its tractors are marketed under three brand

names, viz. Escort, Powertrac and Farmtrac.

Escorts Brand of tractors is symbolic of reliability and enjoys the

confidence of the farming community for the last 40 years.

Powertrac Brand of tractors is the most fuel-efficient tractor in their

respective categories that offer excellent value for money and have

helped the farmer improve their quality of life.

Farmtrac Brand is the most powerful premium range of tractors that

give maximum productivity to the farmers.

Spanning these three brands, the company has a full range of

tractors to cater to the domestic as well as overseas markets. The

company is developing state-of-the-art highly fuel efficient engines with

the assistance of AVL of Australia and have also entered into a Joint

venture with CARRARO SPA of Italy for the manufacturing of

transmission and axles.

28

To sustain the present momentum and to realize the future goals,

Escorts has invested Rs. 60 crore towards strengthening new product.

Development programs and enhancement of R&D capabilities.

Additionally, Rs.400 crore has been invested towards modernization of

its manufacturing facilities bringing them to international standards. The

company has one of the most comprehensive distribution networks

comprising of over 500 dealership / outlets and 30 area offices spread

across the country. It has a manufacturing capacity of 75000 tractors per

annum. Escorts Agri Machinery Group is looking at forward and

backward integration through genetic engineering.

In line to their vision for becoming a major player in sub 100 HP

segment by 2011 in the global markets, they have increased their reach

from a major regional player to major global markets, which stretch from

North America to Australia covering all the continents. Despite the strict

competition by other major tractor manufactures they have been able to

gain constant volumes in the global market. Their target for this year is to

export 25% volumes of their total production volumes.

To consolidate its presence in the overseas markets, the company

has ventures in the USA and Europe (Poland). It has recently acquired a

majority stake in Long Agribusiness LLC, a tractor distributing company

in USA and Poland Escort Spolka Z.O.O., Poland. Besides the USA and

Poland, Escorts has strong presence in Turkey, Australia, Bangladesh, Sri

Lanka, Nepal, Kenya, Tanzania and South Africa etc. though its dealers

network in these countries. Escorts have very ambitious plans to expand

the network in other potential countries in the coming year. By the end of

next year, the company hopes to be largest exporter of tractors in the

Indian tractor industry.

29

AGRI MACHINERY GROUP

CONTRIBUTION

AMG contribution is Almost Half of the Total Revenues of Escort

Group.

30

MODERNIZATION OF

AGRI MACHINERY GROUP

Escorts Agri Machinery Group (AMG) has invested over US

$7.5 million in state of the Art & Research and Development Center.

Virtual prototypes of components and aggregate assemblies are made and

assembled on computer workstations using 3D technology. Their

performance is checked on computers using simulation techniques thus

saving a lot of time for the end-user as well as lowering development

costs. The R&D center uses advanced 3D modeling, analysis and

simulation software for engines, transmission and vehicles. Physical

prototypes are then extensively tested for performance, durability and

reliability. Facilities include a high –technology engine laboratory

featuring fully computerized test-beds with on line control, data

collection, and analysis.

31

PRODUCTS

Escorts Farmtrac

E-325 Josh F T –30

E-335 F T –35

E-335P F T –45

E-430 F T –45Live PT

E-430XL F T –50DB

E-435 F T –50

E-440(6+2 & 8+2)PT F T –60

E-440(6+2 & 8+2)XL F T –60DB

E-450 F T –60Deluxe

E-450(8+2)PT F T –60Live PT

E-450(8+2)XL F T –70

32

COMPANY’S FUTURE

The growing domestic demand for food gains and agri products

promises a very good future for company’s business. With exemption of

excise duty on tractors and growing importance of agriculture sector in

the growth of Indian economy India can become a major exporter of agri

products and increased demand both domestic and export will call for

increased yields. Tractors population today is concentrated in 10% of

villages and even today 70% of the villages do not have tractor .Crisil

infa has estimated an annual demand 3.0 lacks to 3.20 lakhs of tractors

by 2007-08 vs. 2.4 lakhs in 2006-07. All these show great potential for

growth in the industry and thus in the company

33

CASH

MANAGEMENT

34

INTRODUCTION

Cash is the important current asset for the operation of the business.

Cash is a medium of exchange to purchase the goods and services and to

discharge the liabilities. Cash is the basic input needed to keep the

business running on a continuous basis; it is also the ultimate output

expected to be realized by selling the service or product manufactured by

the firm. The firm should keep sufficient cash, neither more nor less.

Cash shortage will disrupt the firm’s manufacturing operations while

excessive cash will simply remain idle, without contributing anything

towards the firm’s profitability. Thus a major function of the financial

manager is to maintain a sound cash position.

Cash is the money which a firm can disburse immediately without

any restriction. The term cash includes coins, currency and cheques held

by the firm, and balances in its bank accounts. Sometimes near cash

terms, such as marketable securities or bank time deposits, are also

included in cash. The basic characteristic of near cash asset is that they

can readily be converted into cash. Generally, when a firm has excess

cash, it invests it in marketable securities. This kind of investment

contributes some profit to the firm.

35

CASH FLOW MANAGEMENT

Cash flow management is a process of monitoring, analyzing, and

adjusting one’s business cash flows. The most important aspect of cash

flow management is avoiding extended cash shortages, caused by having

too great a gap between cash inflows and outflows. Therefore, one

needs to perform a cash flow analysis on a regular basis, and use cash

flow forecasting so that one can take the steps necessary to head off cash

flow problems.

Cash management involves the efficient collection, disbursement and

temporary investment of cash. The treasurer department of a company is

usually responsible for the firm’s cash management system. A cash

budget, instrumental in the process, tell us how much cash we likely to

have it, and for how long.

In cash flow management I studied many statements like as

follows:

Cash flow Statement

Cash Budget

36

CASH MANAGEMENT SYSTEM

With timely information reporting a firm can generate significant

income by properly managing collections, disbursement cash balance and

cash equivalents investment,

37

Collection Disbursement

Cash

Cash Equivalents

Control Through Information Report

IMPORTANCE OF CASH

MANAGEMENT

Cash management assumes more important than other current assets

because cash is the most significant and the least productive asset that a

firm holds. It is significant because it is used to pay the firms obligations.

However cash is unproductive. Unlike fixed assets or inventories, it does

not produce goods for sale. Therefore, the aim of cash management is to

maintain adequate control over cash position to keep the firm sufficiently

liquid and to excess cash in some profitable way.

Cash management is also important because it is difficult to predict

cash flow accurately, particularly the inflows and there is no perfect

coincidence between the inflows or outflows of cash. During some

periods, cash outflows will exceed cash inflows, because payments for

taxes, dividends, or seasonal inventory build up. At other times, cash

inflows will be more than cash payments because there will be large cash

sales and debtors may be realized in large sums promptly.

Cash management is significant because cash constitutes the

smallest portion of the total current assets, yet management’s

considerable time is devoted in managing it.

38

CASH MANAGEMENT STRATEGIES

The firm should develop appropriate strategies for cash management.

The firm should evolve strategies regarding the following four facets of

cash management:

Cash planning cash inflow and outflow should be planned to project

cash surplus or deficit for each period for each period of the planning

period. Cash budget should be prepared for this purpose.

Managing the cash flows the flow of cash should be properly managed.

The cash inflows should be accelerated while, as far as possible, the cash

outflows should be decelerated.

Optimum cash level the firms should decide about the appropriate

level of cash balances. The cost of excess cash and danger of cash

deficiency should be matched to determine the optimum level of cash

balances.

Investing surplus cash the surplus cash balances should be properly

invested to earn profits. The firm should decide about the division of

such cash balance between short-term investment opportunities such as

bank deposits, marketable securities, or inter- corporate lending.

39

CASH OUTFLOW

For cash management, the control of cash outflows, which is

directly related to organizational arrangements for budget execution, can

pose more difficulties than the control of cash inflows. However, issues

related to cash management should not be confused with issues related to

the distribution of responsibilities for accounting control and

administration of the payment system. The major purpose of controlling

cash outflows is to ensure that there will be enough cash until the date

payments are due and to minimize the costs of transactions, while

keeping cash outflows compatible with cash inflows and fiscal

constraints. The first condition for ensuring that cash outflows fit fiscal

constraints is good budget preparation and budget implementation

covering both cash and obligations. However, during budget

implementation, cash outflows must also be regulated through cash plans

to smooth cash outflows.

40

CASH INFLOW

It is necessary to minimize the interval between the time when cash

is received and the time it is available for carrying out expenditure

programs. Collected revenues need to be processed promptly and made

available for use. When tax collection is done by the tax administration

offices (or by Treasury offices) the administrative organization of these

offices may have to be reviewed and their equipment modernized.

Commercial banks by virtue of the banking sector infrastructure are often

able to collect revenues more efficiently than tax offices, which should

therefore focus instead on tracking taxpayers. When revenues are

collected by commercial banks, arrangements must be defined to foster

competition and ensure prompt transfer of collected revenues to

government accounts. Systems of bank remuneration through float,

which consists of authorizing the banks to keep the revenues collected for

a few days, present inconveniences. Stringent rules to ensure prompt

transfers must be established. Moreover, bank remuneration through fees

is more transparent and promotes competitive bidding. An appropriate

system of penalties for taxpayers is also an important element in avoiding

delays in revenue collection.

41

CASH FLOW STATEMENT

Meaning:

IT IS a summary of firm’s cash receipts and cash payments during

period of time.

The purpose of cash flow statement is to report a firm’s cash inflow

and outflows, during a period of time, segregated in to three categories:

operating, investing and financing activities.

The statement of cash flow explains changes in cash and cash

equivalent such as treasure bill and the activities that increase and

decrease cash. The cash flow statement may be presented using either a

“direct method” (Which is encouraged by financial accounting standards

board) or an “Indirect Method” (which is likely to be the method

followed by good majority of firms). The only difference between the

direct and indirect method of presentation concern the reporting of

operating activities; the investing and financing activities section would

be identical under either method. Under the direct method, operating cash

flow reported directly by major classes of operating cash receipts (from

customers) and payment (to suppliers and employees). A separate

indirect reconciliation of Net income to net cash flow from operating

activities must be provided. The reconciliation starts with reported net

income and adjusts this figure for non-cash income statement items and

related changes in balance sheet items to determine cash provides by

operating activities.

42

Cash flow statement has three activities like as follow:

Operating Activities:- Shows impact of transactions not defined as

investigation or financing activities. These cash flows are generally the

cash effects or transaction that enter into the determination of net income.

Thus, we see items that not all statement users might think of as

‘operating’ flows-items such as dividends and interest received, as well

as interest paid.

Investing Activities:- Shows impact of buying and selling fixed assets

or equity securities of other entities.

Financing Activities:- Shows impact of all cash transactions with

shareholders and the borrowing and repaying transactions with lenders.

43

IMPORTANCE

The effects of cash and non-cash investing and financing

transaction.

A manager can assess the reason for differences between net

income and net cash flow from operating activities.

It is also helpful for a company to generate future net cash inflows

from operations to pay debts, interest and dividends.

It gives indication to a company’s need for external financing.

A cash flow statement is straightforward and easy to

Understand.

It gives a strong indication of how viable the company will be over

time.

The extent of success or failure of cash planning can be known by

comparing the actual cash statement with the budgeted cash flow

statement and remedial measures can be taken.

It discloses the volume and the speed at which cash flows in

different segments of the business

44

DAILY CASH FLOW REPORT

The Daily Cash Flow report is prepared with an objective to keep

incessant check on the cash flows of the firm, which includes both inflow

and outflow cash. The cash flows are planned to project cash surplus or

deficit for each period i.e daily, monthly, quarterly, semi-annual &

annual basis. The framework of report highlights all the effects, which

lead to cash surplus or deficit. It is a measure, which calculates the details

of daily transaction in terms of sale and purchase, which further includes

the means through which they take place.

At Escorts-AMG, the daily cash flow report is designed in a format

suiting their requirements .The sales of tractors is their primary goal

which includes exports as well. The bills are presented for desired

collection from various channels i.e dealers, stockiest, distributors

through which the tractors are supplied in the market. Besides tractors

they also deal in engines, backend, implements which are included in the

category of other receipts. The receipts are other than collections as they

aren’t generated through sales. Next come the payments, which are made

in discharge of financial obligation towards various suppliers, bank

payments, excise duty, salary & wages etc.

Through the various collections, receipts and payment, we are now

in a position to derive the surplus or deficit which is the result of above

transactions. The surplus balance shows that the collections & receipts

are more than payments and vice-a-versa in case of deficit. Though

surplus is an indicator of sound financial position and deficits the other

45

way round, but excess surplus is also not considered healthy which has

reasons to it like inventory pile up and so on.

The last component of the cash flow report is the outstanding

debtors, which is calculated by subtracting billing & collection from

opening o/s of debtors in domestic, export and other categories. This way

the day to day cash transactions are maintained through the cash flow

report which leads to proper functioning of an organization’s resources

both men & material.

COMPONENTS

The annual cash flow statement at Escort- AMG is prepared for the fiscal

period commencing from 01/10/20XX to 31/09/20XX. They are also

maintaining the daily cash flow report with a purpose of keeping constant

check on the daily flow of cash i.e cash inflow and cash outflow, for

different products categories, their parts and other miscellaneous.

The main products at ESCORTS – AMG are “ TRACTORS “ which are

available in three major categories:

Farmtrac

Powertrac

Escorts

46

These products are sold into the market through intermediaries like

dealers, stockists and distributors , these parties charge a commission for

the services provided by them.

Among these parties dealers are given priority over the stockists &

distributors for the delivering the product to the end customer and the

commission also varies in the same manner.

The following are the transactions that take place in the daily cash flow

report under the following main heads:

Particulars,

Year to date i.e the very first day of the financial year till the

previuos months end (in which the daily report is being made),

The previous month,

Plan for the ongoing month,

The particular day for which the report is being made,

Month to date (from the beginning of the current month till the day

for which report is being made).

SALES – This includes the number of tractors sold in the domestic

boundaries as well as overseas.

BILLING – It is the process of sending accounts to customers for goods

or services. The document used is called an invoice, the invoice may be

47

attached to the goods or forwarded separately. The average sale value of

each tractor is calculated as a follows :

Total sales of tractors

Number of tractors sold

COLLECTION – The collections is recovered from all those parties to

whom the products is being sold. The parties involved are :

Tractors ( Direct ) – This includes the sale made through dealers to the

end customer, for which a predetermined amount is given as commission

to the opposite party. If the dealer fails to make the sale till the due date

than he has to pay interest on it thereon.

Tractors ( Stockists ) – This includes the sale made through stockists,

who doesn’t sell the product by themselves but sells them through

dealers. The credit period allowed to stockists by the company is less in

comparison than that of dealers, which yields to faster generation of

income .

Tractors ( Channel financing ) – This system is adopted to improve the

working capital of the company by avoiding inventory pile up and

earning speedy collections. Furthermore, Channel Financing is an

innovative option for extending working capital finance to dealers who

have business relationships with large companies. Channel Financing is

48

the mechanism through which a Bank / Financial Institution meets the

various

Channel Financing could cover : -

Discounting of trade bills drawn by a company & accepted by its

dealers/ distributors/ channel partners.

Providing overdraft facility to the dealers/ distributors who have

business dealings with large corporate.

OTHER RECEIPTS : An acknowledgment (usually tangible) that

payment has been made. The below mentioned are the transactions

included in it :

Bill discounting : it is a major activity with some of the smaller banks.

Under this type of lending, bank takes the bill drawn by borrower or his

(borrower’s) customer and pay him immediately deducting some amount

as discount / commission. The bank then present the bill to the

borrower’s customer on the due date of the bill and collect the total

amount. If the bill is delayed, the borrower or his customer pays the bank

a predetermined interest depending upon the terms of the transaction.

The following entries could be passed in the co.’s books:

49

Sales bill discounting : Following entries are passed during the

sales

Made by the company:

Party a/c dr. ..........

To sales a/c ...........

(Being sale made on credit)

Bank a/c dr. ..........

Bank charges a/c dr. …….

To party a/c ……..

( being payment recived)

Purchase bill discounting : Following entries are passed in the books

purchases made by the company :-

Purchase a/c dr. ……

To party a/c ……

( being purchases made)

50

Party a/c dr. ……

To bill discounting supplier a/c ……

( being paid to party through bank )

Bill discounting supplier a/c dr. …….

To bank a/c ……

( being payment made to bank)

Letter of credit : The LC can also be the source of payment for a

transaction, meaning that redeeming the letter of credit will pay an

exporter. Letters of credit are used primarily in international trade

transactions of significant value, for deals between a supplier in one

country and a customer in another. The parties to a letter of credit are

usually a beneficiary who is to receive the money, the issuing bank of

whom the applicant is a client, and the advising bank of whom the

beneficiary is a client. Almost all letters of credit are irrevocable, i.e.,

cannot be amended or canceled without prior agreement of the

beneficiary, the issuing bank and the confirming bank. In this 100 %

payment is not given to the supplier by the bank due to loss in

transition , rejection & shortage . in if loss doesn’t occur than 100 % is

given to the supplier on the due date.

Packing credit : when we receive an export order from countries , than

we can avail loan from bank at nominal interest as packing credit loan. It

51

provides the exporters with working capital between the time of the

receipt of order and the time of shipment to arrange for production or

procurement of goods. Pre-shipment finance is of particular importance

to small scale manufacturers and exporters who do not possess sufficient

financial resources to meet the expenditure involved in the production of

goods for export.

Pre shipment finance is normally provided by the commercial

banks. As in the case of many other advances the bank takes into

consideration a number of factors before making the necessary other

advances to exporters viz., (1) honesty, integrity and capital of the

borrower, (2) exporter’s experience in the line, (3) security offered, (4)

the margin of interest (5) the bank’s experience about the exporter to

ensure that his name does not appear on the caution list of the Reserve

Bank.

Pre- shipment : when the company receives order

Post shipment : when assignment is dispatched from the company.

The following entries to be passed in the books for packing credit loan :

Party a/c dr. ……

To export a/c ……

( being export order received)

Bank a/c dr. ……

Bank charges a/c dr. …….

To packing credit loan ……

52

( being loan granted by bank )

Bank a/c dr. ……

To party a/c …….

( being payment made to bank)

Pcl a/c dr. ……

To bank a/c ……

( being payment of loan made to bank)

Credit note : This note is presented to the other party for the payment to

be made by the opposite party. Whereas debit note is given to the

company by the other party in case of payment is to be made by the

company.

PAYMENTS : It is the transfer of wealth from one party (such as a

person or company) to another. A payment is usually made in exchange

for the provision of goods, services or both, or to fulfill a legal obligation.

The payments at Escorts – AMG includes – Direct (hundis, LC ), bank

payment , excise duty which is lieved on the parts of the tractors, ladt 53

( local area development tax), sales tax , salary and wages, vrs, spare

parts, implements, electricity, overhead, finance charges, capex is the

capital expenditure made to purchase the fixed assets or adding value to

the existing fixed asset, credit note, corporate loan, loan rapyments,

interest, wcdl payment, packing credit & bill discounting.

OUTSTANDING : Outstanding debtors are calculated by the following

formula –

Closing O/S = Opening O/S + Billing - Collection

In this, values are calculated for debtors outstanding in different

point of time in domestic and overseas sales of tractors & its part.

54

CASH BUDGET

MEANING

A forecast of estimated cash receipts and disbursements for a

specified period of time.

A cash budget is arrived at through a projection of future cash

receipts and cash disbursements of the firm over interval of time, it

reveals the timing and amount of expected cash inflows and outflows

over the period. With this, the firm will be able to determine its future

cash needs, and exercise control over the cash and liquidity of the firm.

Though the cash budget may be prepared almost any interval of time, its

monthly projection are most common.

In short, we can say that cash budget is a forecast of a firms future

cash flows arising from collection and disbursement, usually on a

monthly basis..

The key to the accuracy of most cash budgets is the sales forecast.

This forecast can be either internal or external analysis, in internal

approach, sales representatives are asked to project sales for the

forthcoming period, We can then consolidate these sales estimates for the

product line. The estimates for the various product lines are then

combined in to an overall sales estimate for the firm. The basic problem

with an internal approach is that it can be too myopic, often significant

trends in the economy and in the industry are overlooked.

Many companies use an external analysis as well, in external

approach economic analysts make forecast of the economy and of

industry sales for several years to come. They may use regression

55

analysis to estimate the association between industry sales and the

economy in general. After these basic predictions of business conditions

and the industry are made. The next step is to estimate the market share

by individual products, price that are likely to prevail and the expected

reception of new product. By this way we can prepare an external

forecast.

For Effective Cash Budget

A firm may be able to delay its capital expenditure or its payment

for purchase,

Purpose of cash budget should be to determine the timing and

magnitude of prospecting financing needs so that the most

appropriate method of financing can be arranged,

A decision to obtain long term financing should be based on long-

range funds requirement.

On the basis of cash budget the manager should be able to plan to

invest excess funds in cash equivalents.

56

BANK RECONCILIATION

Bank reconciliation involves comparing the company’s record of

transactions and balances to the bank’s record of transactions and

balances. The company should go through every transaction in their

account and make sure the company and the bank agree on the

transaction.

It’s important to go through the process of bank reconciliation. If the

company doesn’t, than it is taking few risks. Without bank reconciliation,

the company may not have a clear idea of how much cash is available in

their accounts. They might bounce Cheques and incur overdraft charges.

Without bank reconciliation, the company also expose yourself to

risk. People may be stealing from the company’s account. If they never

look through each transaction, they’ll never know about it. If they don’t

notify the bank quickly enough, they may be out of luck. The same goes

for bank mistakes. With regular bank reconciliation the company can find

problems quickly and make them go away.

Bank reconciliation can be done manually, in excel & there’s

electronic bank reconciliation as well.

Though the manual way for handling company’s large bank

accounts is not appropiate, it is helpful when there are less transactions.

But still it important for any manager to learn it as it is the basic form of

doing it.

For reconciling the company’s record of transaction with the bank

balances , there are three essential requirements :

57

Bank book

Bank statement

Bank reconciliation statement of preceding month

Than the above transactions needs to be tally & unmatched have to be

reconciled accordingly. Below is an example of how is it done

manually:-

BANK RECOCILIATION STATEMENTAS ON 31.05.09

A/C NO 000381400000156 GL CODE

DESCRIPTIONBal as per bank book AS ON 31.05.09Opening bal 83382.91 DR.LESS: MAY2009 BALANCE 2726955 CR. -2643572 CR.ADD : Amount cr. By us but not dr. by bank 3634103 DR. 3634103

LESS : Amount dr. by us but not cr. by bank 3722549 CR. 3722549

ADD : Amount cr. By bank but not dr. by us 2832114 DR. 2832114

LESS : Amount dr. by bank but not cr. By us 41989.68 41989.68

Balance as per bank statement 58106.87

58

CASH RATIOS59

MEANING

Cash ratios are also important tool of cash control. There are

various ratios which explain the efficiency of cash management or vice-

versa. They are the acids test ratio, cash ratio, receivables turnover ratio,

inventory turnover ratio, cash turnover ratio etc.

These are calculated as –

LIQUIDITY RATIOS –

Liquidity ratio measures the ability of the firm to meet its current

obligations. It is necessary to strike a proper balance between high

liquidity and lack of liquidity. A high degree of liquidity means that a

firm’s fund will be unnecessarily tied up in current assets. Whereas lack

of liquidity, implies failure of a company to meet its obligations due to

lack of sufficient liquidity.

The ratios, which are used for the analysis of Escorts liquidity

position in this report, are:

Current Ratio

Quick Ratio

CURRENT RATIO

Current ratio is calculated by dividing current assets by current liabilities:

60

Current ratio = Current Assets

Current Liabilities

2006-07 2007-08

Current Ratio 1.12 1.16

From the above table it can be interpreted that Escorts liquidity position

is not constant. As a conventional rule a current ratio of 2:1 or more is

considered satisfactory because in a worse situation, even if the value of

current assets become half, the firm will be able to meet its obligations.

Current ratio refers to a margin of safety for creditors therefore higher the

current ratio, the greater the margin of safety.

QUICK RATIO

Quick ratio establishes a relationship between quick or liquid assets and

current liabilities. An asset is liquid if it can be converted into cash

immediately or reasonably soon without a loss of value. Inventories are

considered to be less liquid therefore calculating quick ratio they are

deducted from current assets.

Quick Ratio = Current Assets – inventory

61

Current liabilities

2006-07 2007-08

Quick Ratio 0.90 0.99

Escorts quick ratio in the current year has decreased in comparison to

previous year, yet it can be considered to be satisfactory, as it is 1:1 times

of current liabilities. Although quick ratio is more penetrating test of

liquidity than current ratio. Yet it should be used cautiously, as all

debtors may not be liquid and cash may be immediately needed to pay

operating expenses.

The value of quick ratio is decreasing every year. The satisfactory level

of the quick ratio is 1:1. This shows the worse situation of the company.

The current liabilities are more than the quick assets.

ACTIVITY RATIOS –

Activity Ratios are used to evaluate the efficiency with which the firm

manages and utilizes its assets. The ratios are called Turnover Ratios as

they indicate the speed with which the firm manages and utilizes its

assets.

Activity ratios, which are used to analyze Escorts effectiveness in Asset

utilization, are 62

Inventory Turnover Ratio

Fixed Assets Turnover Ratio

Working Capital Turnover Ratio

Debtors Turnover Ratio

Creditors Turnover Ratio

INVENTORY TURNOVER RATIO

It indicates the efficiency of the firm in producing and selling its product.

It is calculated by dividing sales by avg. inventory. In a manufacturing

company inventory of finished goods is used to calculate inventory

turnover.

Inventory Turnover = Cost of goods sold

Avg. Inventory

2006-07 2007-08

Inventory turnover 14.42 15.10

If the company is comfortably meeting the customer needs with 9.73

days inventory of finished goods, all India basis.

It is a good achievement for the Escorts Limited.

63

FIXED ASSETS TURNOVER RATIO

A firm’s ability to produce a large volume of sales for a given amount of

net assets is the most important aspect of its operating performance.

Unutilized or underutilized assets increase the firm’s need for costly

financing as well as expenses for maintenance and upkeep. Fixed assets

turnover is calculated by dividing net sale by net fixed assets.

Fixed Assets Turnover = Sales

Fixed Assets

2006-07 2007-08

F.A.T 2.29 2.35

Escorts fixed asset turnover have increased in 2003-04. The fixed asset

turnover of 2.78 implies that it is producing Rs.2.78 of sales for one

rupee of capital employed.

The higher the ratio, more it is satisfactory…

It should be interpreted very cautiously because the denominator of the

ratio includes fixed asset net of depreciation. Thus old assets with lower

book value may create a misleading impression of high turnover without

any improvement in sales

64

DEBTORS TURNOVER RATIO

Debtor’s turnover indicates the number of times debtors’ turnover each

year. Higher the value of Debtors turnover, the more efficient is the

management of credit. The liquidity position of the firm depends on the

quality of the debtors to a great extent.

Debtors Turnover = Credit Sales

Avg. Debtors

2006-07 2007-08

Debtors Turnover 4.44 4.29

Escorts debtors turnover is quite lower. The debtor’s turnover ratio is

high at 2003-04 . The ratio is decreasing. Also the debt collection period

has its own importance. The debt collection period of Escorts was 76

days in 2003-04 but it has increased to 95 days . This does not show the

satisfactory level. The shorter the collection period, the better the quality

of debtors, since a short collection period implies prompt payment by

debtors.

A too low collection period is also not necessarily favorable as it may

indicate a very restrictive collection and credit policy. Because of the fear

65

of bad debt loses the firm may be selling to those only whose financial

conditions are sound and who are very prompt in making the payments.

CREDITOR TURNOVER RATIO

Creditors Turnover = Total Purchases

Creditors

2006-07 2007-08

Creditors Turnover 3.55 3.45

Though the days are very high and apparently appears to substitute right

collection, this extended credit has its own drawback like:

High interest inbuilt in cost system.

Sub-quality creditors may be accepted.

Quality of material may be accepted.

The payment period of Escorts Limited is 90 days in 2007-08, which is

more reasonable than previous years. This helps to make good quality

product and also better relationship with suppliers.

66

WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio has its own significance in the business

organizations. It shows the efficiency of the firm. How much sale that the

company get with the utilization of the limited working capital.

Working Capital Turnover = Net Sales

Net Working Capital

2006-07 2007-08

Working.Cap.Turn. 113.45 28.30

In the case of working capital turnover ratio Escorts is significantly going

very downward. This is a very dangerous point of the firm. The company

should try to improve it earlier. It shows that the company requires more

money to generate sales.

RECEIVABLE MANAGEMENT

67

The term receivable is defined as “debt owed to the firm by

customers arising from sales of goods in the ordinary course of business”.

The sale of goods on credit is an essential part of modern day business.

The credit sales are generally made on open account in the sense that

there are no formal obligations through a financial instrument. However

extension of credit involves risks and cost. Management should weigh

the benefits as well as the cost to determine the goal of receivable

management. The benefits from receivables are the increased sales and

profits anticipated because of more liberal policy. When firm extend

trade credit, i.e. invest in receivables, they intend on increase the sales

level. The motive of liberal credit policy can be either growth oriented or

sales retention. The extension of credit has a major impact on sales, costs

and profitability. Other things being equal, a relatively liberal policy and

therefore higher investments in receivables will produce larger sales.

However the cost will be higher with liberal policies then with more

stringent measures. Therefore account receivable management should

aim at a trade- of between profit and risk.

The costs associated with the extension of credit and account receivables

are

collection cost

capital cost

delinquency cost

default cost

DECISION AREAS

68

CREDIT POLICIES

The credit policy of a firm provides the framework to

determine whether or not to extend credit to a customer and also how

much credit to extend. It has two broad dimensions, the first is credit

standard and second is the credit analysis. Credit standards represent the

basic criteria for the extension of credit to customers. The trade- off with

reference to credit standards covers collection costs, average collection

period, level of bad debts losses and level of sales. With a relaxed credit

standard the collection costs, bad debts expenses and sales goes up and in

reverse case vice-versa happens. The second aspect of credit policy is

credit analysis. It begins with obtaining credit information of the

customers and ends up with the analysis of the obtained credit

information. Information can be collected either internally or externally.

Internal source of credit information is derived from the records of the

firm. The analysis of credit information should cover both qualitative as

well as quantitative aspects. The quantitative aspect is based on the

available financial statements whereas qualitative aspects cover the

quality of management.

CREDIT TERMS

The second decision area in accounts receivable management is

the credit terms. After the credit standard have been establish and the

credit worthiness of the customers is assessed, the management of a firm

must determine the terms and conditions on which trade credit will be

made available. Credit terms have three components : credit period, cash

discount and cash discount period. Credit period is the duration of time

for which trade credit is extended whereas cash discount is the amount by

69

which the over the due amount will be reduced thus benefiting the

customer. The credit terms like the credit standard affect the profitability

as well as the cost of the firm therefore a firm should determine the

credit terms on the basis of cost-benefit trade-off.

COLLECTION POLICIES

The collection policies refer to the procedures followed to

collect account receivable when after expiry of the credit period they

become due. This policy covers two aspects : first is the degree of effort

to collect the over due and second is the type of collection efforts.

Escort Limited has a zero debt credit policy. However it is giving the

following facilities to its dealers to promote the sales, as liberal credit

policy has a direct impact on sales.

CHANNEL FINANCE FACILITIES

The company arranges these facilities with various

bankers for the company dealers to support their cash needs. The goods

are sold on credit against hundis. Hundis can be drawn for 50 or 75 or 90

days subject to qualifying criteria of bank.

CREDIT FACILITIES

70

Escort provides thirty days interest free credit to the dealers. For this in

respect of all hundis the company bears 30 days interest and the

remaining cost of interest, delayed payment charges are borne by the

dealers.

PENALTY ON BOUNCING OF HUNDIES / CHEQUES

Bouncing of hundis/ cheques drawn in favor of the

company is viewed very strongly and usually following actions are taken.

Tractor supplies are suspended and restored only after all dues are

cleared.

All charges debited by the bank such as collection charges, penal

interest are debited to the dealer.

The bank extending channel financing policy have clearly stated

that if a dealer has two or more bouncing he will be black listed

and his limit will be withdrawn with immediate effect. Company

also makes sales to such dealers only against letter of credit or

demand draft.

CASH DISCOUNT ON EARLY PAYMENT

Cash discount of 1% is payable on tractors dispatched against

funds available in the form of letter of credit or demand draft. Interest is

charged/ paid at 12% per annum on outstanding/ credit balance early

payment incentive.

PAYABLE MANAGEMENT

71

Creditors are a vital part of effective cash management and should

be managed carefully to enhance the cash position. Purchasing initiates

cash outflows and an over-zealous purchasing function can create

liquidity problems. A better strategy is to shrink the vendor base

radically, then use one’s clout to negotiable longer terms with the

vendors. Vendor rationalization is a process that can pay off in a big way.

Apart from the question that who should authorize purchasing in the

company – should it be tightly managed or spea among a number of

(junior) people? The following comes under good payable management.

Purchase quantities should be geared to demand forecasts.

Order quantities should be used which takes account of stock

holding and purchasing costs.

The cost to the company of carrying stock should be clearly

defined.

A Company should have alternative sources of supply. It should

get quotes from Major suppliers and shop around for the best

discounts, credit terms and reduce dependence on a single supplier.

72

RECOMMENDATIONS

73

LOANS AND ADVANCES

Special efforts should be made to analyze loans & advances, which

are between 35% to 56% of current assets. This can be classified between

production / operation relation related and non-production / operation

related. No production related cases might be financed from other

sources like debenture etc. and treated separately.

INVENTORY

Inventory should be reviewed constantly to identify show / dead /

obsolete item and then disposed . Optimum level should be revised

periodically, keeping in view, distance of suppliers, production lead time

of supplier, transport problem if any and reliability of suppliers. This will

help to avoid obsolesce and dead inventory.

DEBTORS

A study may be conducted if required by experts to pinpoint

reason behind Escorts high correction period of 95 days in 2007-08

against 50 days of Mahindra & Mahindra. It is due to quality of products,

quality of customer, the segment of customers marketing effort,

distribution pattern or other reasons.

CREDITORS74

Though high payout days may be appartenly beneficial for the company.

It has it very heavy long term cost like high interest cost, bad credit

ratings and shyness of good quality / standard suppliers.

RATIOS

The company should try to improve its current situation. The ratios,

which are taken in this research to evaluate the company’s position, are

Current ratio, Quick ratio and Activity ratio. These ratios show the actual

position of the company. The Quick ratio is declining since 2001-02 till

now. There is a drastic declining in the working capital turnover ratio.

This ratio goes to –ve position in current year compared to previous. The

Debts collection period is 359 days for Exporters. This shows the poor

collection policy. The current ratio is 1.12 in 2006-07, which is not upto

the ideal ratio. This shows that the current assets are equal to the current

liabilities. Not satisfactory.

OTHERS –

More attention must be given to market forecasts can be made and

the surplus of inventory is reduced to minimum

Company should not follow the competitors only. New products

should be produced for the farmers having low income and small

holdings.

Proper market survey should be carried out. The company should

explore the export market to study the present and prospective

demand.

75

Proper inventory plans should be made in order to reduce the

carrying cost.

New market strategies should be devised from time to time. This is

because, even if the tractor is of good quality, the competitors may

produce the same product with additional features and at lower

prices.

Marketing network should be enhanced. Company should also

produce more tractors of higher H.P. But new developments

should be made continuously in order to survive in this competitive

world.

76

LIMITATIONS

77

Although every effort has been in to collect the relevant

information through the sources available, still some relevant information

could not be gathered.

Busy Schedule of Concerned Executives: The concerned executives

were having very busy schedule because of which they were reluctant to

give appointment.

Time: The time duration could not provide ample opportunity to study

every detail of working capital management of the company.

Unawareness: Executives were unaware of many terms related to

working capital study while asking to them.

Confidential Information: As the company on account of confidential

report has not disclosed some figures. Moreover, in some cases separate

accounts of division are not separately maintained thereby, leading to

restrictions in study.

78

BIBLIOGRAPHY

BOOKS

Financial Management- S.K Gupta

Management Accountancy-D k Gole

Cost and Management Accountancy, S.N.Maheshwari

Financial Management And Policy, James C.Van Horne

WORLD WIDE WEB

www.escortsagri.com

www.economictimes.com

www.planware.com

www.icraindia.com

Other than Web

M.I.S of the company

Annual Reports

79

ANNEXURES

  1SToct 2007- 30th September 2008 1st oct 2006 – 30th sept 2007Operating income  2,012.00 2,092.04Material consumed  1,470.66 1,540.01

80

Manufacturing expenses  47.68 50.79Personnel expenses 202.63 204.02Selling expenses 114.57 118.63Adminstrative expenses 69.12 57.45Expenses capitalised - -Cost of sales 1,904.66 1,970.90Operating profit 107.34 121.14Other recurring income 0.04 20.85Adjusted PBDIT 107.38 141.99Financial expenses 55.93 89.78Depreciation  42.87 44.97Other write offs - 3.32Adjusted PBT 8.58 3.92Tax charges  47.13 -10.89Adjusted PAT   -38.55   14.81Non recurring items 17.56 -21.25Other non cash adjustments 32.86 -Reported net profit 11.87 -6.44Earnigs before appropriation -133.59 -145.46Equity dividend - -Preference dividend - -Dividend tax - -Retained earnings -133.59 -145.46

PROFIT AND LOSS ACCOUNT

BALANCE SHEET AS ON…..  1ST OCT 2007- 30th SEPT 2008 1st OCT 2006 – 30TH SEPT 2007 Equity share capital 90.71 83.69Share application money - -

81

Preference share capital - -Reserves & surplus 645.49 563.38Secured loans 422.63 414.04Unsecured loans 14.44 31.10Total 1,173.27 1,092.21Gross block 1,415.93 1,436.96Less : revaluation reserve 466.46 471.90Less : accumulated depreciation 593.41 583.24Net block 356.06 381.82Capital work-in-progress 14.43 13.40Investments 425.79 425.13Current assets, loans & advances 1,131.98 1,325.61Less : current liabilities & provisions 776.14 1,069.68Total net current assets 355.84 255.93Miscellaneous expenses not written 11.00 15.93Total 1,163.12 1,092.21Book value of unquoted investments 494.53 493.87Market value of quoted investments 1.98 3.31Contingent liabilities 168.40 318.74Number of equity sharesoutstanding (Lacs) 907.09 836.94

CASH FLOW STATEMENT

82

PARTICULAR MARCH (2008)

MARCH (2007)

CASH FLOW FROM OPERATING ACTIVITIES    N.P BEFORE TAX 26.14 -17.33

Adjustment for:    provision for doubtful debts , obsolescence inventory &

advances16.36 1.89

Gain on sale of long term investment   -1.22 Gain on sale of asset -4.8 -0.13

Depreciation 42.87 44..97Assets w/off 11.64 8.08

Interest expense 62.2 72.22Dividend income 0.04 -0.02

Interest income 12.93 -20.82Operating profit before change in w.capital 141.52 87.64

Adjustment for:    Trade & receivable -65.36 -168.61

Money in escrow account 20.09  Inventory -43.68 13.79

Trade payable 58.02 67.05Misc.expenditure -3.21 -7.5

Op.profit after change in w.capital -34.14 -95.27Cash generated from operating activities 107.38 -7.63

Less-Direct taxes/refunds -6.25 -17.85NET CASH FLOW FROM OPERATING ACTIVITIES 101.13 -25.48

CASH FLOW FROM INVESTING ACTIVITIES    Purchase of fixed assets -7.5 0.86

Proceeds from sale of fixed. Assets 14.26 -30.95 Loss on sale of investment -30.64  

Movement in loan & advances -3.9 -16.27Sale of investment -0.66 32.33

Short term deposits with schedule banks 8.58 -2.31Interest received 3.21 20.7

Dividend received -0.04 0.02NET CASH FLOW FROM INVESTING ACTIVITIES 16.69 4.38

CASH FLOW FROM FINANCING ACTIVITIES    Proceeds from share capital & securities premium 40.32 114.44Proceeds/repayment from long- term borrowings 234.09 80.6

Less:repayment of long term borrowing -41.68 -0.54Proceed/repayment from short-term borrowing -46.83 -146.82

Interest paid -66.27 -77.4NET CASH USED IN FINANCING ACTIVITIES -114.46 -23.72Net increase / decrease in cash & cash equivalents (30.03 -44.82

83

OPENING CASH BALANCE 60.83 105.65CLOSING CASH BALANCE 30.8 60.83

84