Working Capital-A Project Report Entitled

8/8/2019 Working Capital-A Project Report Entitled

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PROJECT REPORT

ON

WORKING CAPITAL

A Summer Training Project

Submitted in partial fulfillment of the requirements for the

Award of degree of Bachelor of Business Administration

2008-2011

Submitted by:- Project Guide:-

Charanjit Singh Omkar mam

Roll. No.80906320014

SWAMI VIVEKANAND INSTITUTE OF MANAGEMENT

AND TECHNOLOGY

BANUR, PATIALA


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DECLARATION

I, Charanjit Singh Singh, student of BBA 2008-2011, studying at University

Business School, Panjab Technical University, declare that the project work was

carried by me in the partial fulfilment of BBA program. This project was

undertaken as a part of academic curriculum according to the University rules and

norms and it has no commercial interest and motive. It is my original work. It is not

submitted to any other organization for any other purpose.

Date:

Place: -

CHARANJIT SINGH SINGH


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ACKNOWLEDGEMENT

I would take this opportunity to acknowledge a debt of deep gratitude to many

people for their valuable assistance and continuous support during the course of my

Summer Internship Program. At the outset, I would like to thank Mr. Arvind

Gemini, Whole-Time Director, ALCON, for giving me an opportunity to pursue my

Internship in the company. I am greatly indebted to my guide Mr. A.P. Verma,

General Manager (Finance) for his constant guidance, advice and help which

enabled me to finish this project report properly in time. I am also thankful to Ms.

Smita Khare for her timely help concerning various aspects of project. I would also

like to thank the entire team of finance department for the constant support and

help in the successful completion of my project.

CHARANJIT SINGH SINGH


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OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working

capital is managed effectively, monitored efficiently planed properly and reviewed

periodically at regular intervals to remove bottlenecks if any the company cannot

earn profits and increase its turnover. With this primary objective of the study, the

following further objectives are framed for a depth analysis. 1. To study the

working capital management of Alcon Rail Nirman Ltd. 2. To study the optimum

level of current assets and current liabilities of the company. 3. To study the

liquidity position through various working capital related ratios. 4. To study the

working capital components such as receivables accounts, cash management,

Inventory position 5. To study the way and means of working capital finance of the

company. 6. To study the cash cycle of the company.

6


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CHAPTER I

COMPANY PROFILE


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Products / Services :ALUMINUM CONDUCTOR XLPE INSULATED , PVC INSULATED

ARMOURED AND UNAROMOURED CABLE.

COPPER CONDUCTOR XLPE INSULATED, PVC INSULATED ARMOURED

AND UNARMOURED CBALE.

COPPER FLEXIBLE CABLE.

COPPER FLAT CABLE

Company Profile :We are manufacture of LT power and control cable and flexible cable

Establishment Year: 1959

Firm Type: Partnership

Nature of Business: Manufacturer

Level to Expand: State

Products & services

>> Other products and services

Twine, cordage, ropes and cablesTwine, man-made fibre

Cords, natural fibre

Cords, man-made fibre

Cords, silk and cotton wasteCords, paper

Cords, braided

Cords, impregnated

Cords, endless

Cords, plastic or latex coated

Cables, cords and ropes, plaited bands and stranded wire slings, metalCables, stainless steel wire


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Cables, galvanised steel wire

Cables, iron and steel, mixed cables

Cables, mixed, metal-textile fibres

Cables, multi-wire, 4 to 16 strands, non-ferrous metals

Cables, metal, covered

Cables, metal, braidedPower line cable and wire fittings

Terminals, power line cable and wire

Connectors, power line cable and wire

Clamps, power line cable and wire

Cable clips and wiring clips, electric

Cable cleats and saddles, electric

Brackets, power line cable and wire

Cable glands

Cable glands for hazardous areas

Junction boxes

Junction boxes, watertightJunction boxes, earth-cable, fused

Power line vibration dampers and spacer dampers

Cable tensioners and cable laying equipment, electric

Cable support systems

Cable suspenders, electric

Cable racks, electric

Cable trays, electric

Cable thimbles and sockets, electric

Cable end sleeves, electric

Cable joint accessories, underground distribution

Electric wires and cables, insulatedWire, mineral fibre covered, electric

Wire, ceramic covered, electric

Wire, textile covered, electric

Wires and cables for telecommunications and electronicsCables, coaxial

Cables, coaxial, microwave

Cables, miniature, electric

Local area network (LAN) equipment NESLocal area network (LAN) systems, complete

Local networks, optical fibre cable

Local networks, coaxial cableComputer cable assemblies and connectors

Computer data cable assemblies, pre-assembled

Computer serial cable assemblies

Computer parallel cable assemblies

Computer keyboard and mouse extension cable assemblies


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Contact Information :Web-site: Visit Website

Contact Person: B.K.SAGGI

Designation: PARTNER

Phones (Office) : 1762329943

Phones (Resi.) : 329943

Mobile: 9316603066

Fax: 1762232687

Address: 27-A, FOCAL POINT, RAJPURA

RAJPUA - 140401

(Punjab) India


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CHAPTER II

WORKING CAPITAL MANAGEMENT

Introduction

Need of working capital

Gross W.C. and Net W.C.

Types of working capital

Determinants of working capital


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Introduction

Working capital management is concerned with the problems arise in attempting to

manage the current assets, the current liabilities and the inter relationship that exist

between them. The term current assets refers to those assets which in ordinary

course of business can be, or, will be, turned in to cash within one year without

undergoing a diminution in value and without disrupting the operation of the firm.

The major current assets are cash, marketable securities, account receivable and

inventory. Current liabilities ware those liabilities which intended at their inception

to be paid in ordinary course of business, within a year, out of the current assets or

earnings of the concern. The basic current liabilities are account payable, bill

payable, bank over-draft, and outstanding expenses. The goal of working capital

management is to manage the firms current assets and current liabilities in such

way that the satisfactory level of working capital is mentioned. The current asset

should be large enough to cover its current liabilities in order to ensure a reasonable

margin of the safety.

Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. Asalready observed, the objective of financial decision making is to maximize the

shareholders wealth. To achieve this, it is necessary to generate sufficient profits can

be earned will naturally depend upon the magnitude of the sales among other things

but sales cannot convert into cash. There is a need for working capital in the form of

current assets to deal with the problem arising out of lack of immediate realization

of cash against goods sold. Therefore sufficient working capital is necessary to

sustain sales activity. Technically this is refers to operating or cash cycle. If the

company has certain amount of cash, it will be required for purchasing the raw

material may be available on credit basis. Then the company has to spend some

amount for labour and factory overhead to convert the raw material in work in

progress, and ultimately finished goods. These finished goods convert in to sales on

credit basis in the form of sundry debtors. Sundry debtors are converting into cash


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after expiry of credit period. Thus some amount of cash is blocked in raw materials,

WIP, finished goods, and sundry debtors and day to day cash requirements.

However some part of current assets may be financed by the current liabilities also.

The amount required to be invested in this current assets is always higher than the

funds available from current liabilities. This is the precise reason why the needs for

working capital arise.


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Gross working capital and Net working capital

There are two concepts of working capital management 1. Gross working capital

Gross working capital refers to the firms investment in current assets. Current

assets are the assets which can be convert in to cash within year includes cash, short

term securities, debtors, bills receivable and inventory. 2. Net working capital Net

working capital refers to the difference between current assets and current

liabilities. Current liabilities are those claims of outsiders which are expected to

mature for payment within an accounting year and include creditors, bills payable

and outstanding expenses. Net working capital can be positive or negative. Efficient

working capital management requires that firms should operate with some amount

of net working capital, the exact amount varying from firm to firm and depending,

among other things; on the nature of industries.net working capital is necessary

because the cash outflows and inflows do not coincide. The cash outflows resulting

from payment of current liabilities are relatively predictable. The cash inflow are

however difficult to predict. The more predictable the cash inflows are, the less net

working capital will be required.

Type of working capital

The operating cycle creates the need for current assets (working capital). However

the need does not come to an end after the cycle is completed to explain this

continuing need of current assets a destination should be drawn between permanent

and temporary working capital. 1) Permanent working capital The need for current

assets arises, as already observed, because of the cash cycle. To carry on business

certain minimum level of working capital is necessary on continues and

uninterrupted basis. For all practical purpose, this requirement will have to be met

permanent as with other fixed assets. This requirement refers to as permanent or

fixed working capital. 2) Temporary working capital Any amount over and above

the permanent level of working capital is temporary, fluctuating or variable,

working capital. This portion of the required working capital is needed to meet


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fluctuation in demand consequent upon changes in production and sales as result of

seasonal changes


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Determinants of working capital

The amount of working capital depends upon the following factors:-

1. Nature of business

Some businesses are such, due to their very nature, that their requirement of fixed

capital is more rather than working capital. These businesses sell services and not

the commodities and that too on cash basis. As such, no founds are blocked in piling

inventories and also no funds are blocked in receivables. E.g. public utility services

like railways, infrastructure oriented project etc. there requirement of working

capital is less. On the other hand, there are some businesses like trading activity,

where requirement of fixed capital is less but more money is blocked in inventories

and debtors.

2. Length of production cycle

In some business like machine tools industry, the time gap between the acquisition

of raw material till the end of final production of finished products itself is quite

high. As suchamount may be blocked either in raw material or work in progress or

finished goods or even in debtors. Naturally there need of working capital is high.

3. Size and growth of business

In very small company the working capital requirement is quit high due to highoverhead, higher buying and selling cost etc. as such medium size business

positively has edge over the small companies. But if the business start growing after

certain limit, the working capital requirements may adversely affect by the

increasing size.


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4. Business/ Trade cycle

If the company is the operating in the time of boom, the working capital

requirement may be more as the company may like to buy more raw material, may

increase the production and sales to take the benefit of favourable market, due to

increase in the sales, there may more and more amount of funds blocked in stock

and debtors etc. similarly in the case of depressions also, working capital may be

high as the sales terms of value and quantity may be reducing, there may be

unnecessary piling up of stack without getting sold, the receivable may not be

recovered in time etc.

5. Terms of purchase and sales

Some time due to competition or custom, it may be necessary for the company to

extend more and more credit to customers, as result which more and more amount

is locked up in debtors or bills receivables which increase the working capital

requirement. On the other hand, in the case of purchase, if the credit is offered by

suppliers of goods and services, a part of working capital requirement may be

financed by them, but it is necessary to purchase on cash basis, the working capital

requirement will be higher.

6. Profitability

The profitability of the business may be vary in each and every individual case,

which is in turn its depend on numerous factors, but high profitability will

positively reduce the strain on working capital requirement of the company,

because the profits to the extent that they earned in cash may be used to meet the

working capital requirement of the company.

7. Operating efficiency


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Statement of Working Capital

As per financial records of Alcon Rail Nirman Ltd up to 31st March 2009.

Particulars 2005-06 2006-07 2007-08 2008-09

(A)

Current

Assets

Rs. Rs. Rs. Rs.

Inventories 194799131 427052993 895384581 837351802

Sundry

Debtors

243587499 407657437 341241874 482447680

Cash &

Bank

Balance

76113686 504777909 256301747 294468615

Other C.A. 80003943 151038089 330596825 366076803

Loan &

advances

54583090 88478801 107711253 80783339

Total 649087349 1579005229 1931236280 2061128239

(B) Current Liabilities

Liabilities 78816022 346003954 397798913 319271072

Provisions 30004352 62270017 77884176 51215931

Total 108820374 408273971 475683089 370487003

Working

Capital

540266975 1170731258 1455553191 1690641236


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CHAPTER III WORKING CAPITAL

RATIO ANALYSIS

IntroductionRole of Ratio AnalysisLimitations of Ratio AnalysisClassification of Ratio AnalysisQuarterly Trends


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IntroductionRatio analysis is the powerful tool of financial statements analysis. A ratio is define

as the indicated quotient of two mathematical expressions and as the

relationship between two or more things. The absolute figures reported in the

financial statement do not provide meaningful understanding of the performance

and financial position of the firm. Ratio helps to summaries large quantities of

financial

Role of ratio analysisRatio analysis helps to appraise the firms in the term of their profitability and

efficiency of performance, either individually or in relation to other firms in same

industry. Ratio analysis is one of the best possible techniques available to

management to impart the basic functions like planning and control. As future is

closely related to the immediately past, ratio calculated on the basis historical

financial data may be of good assistance to predict the future. E.g. On the basis of

inventory turnover ratio or debtors turnover ratio in the past, the level of

inventory and debtors can be easily ascertained for any given amount of sales.

Similarly, the ratio analysis may be able to locate the point out the various areaswhich need the management attention in order to improve the situation. E.g.

Current ratio which shows a constant decline trend may be indicate the need for

further introduction of long term finance in order to increase the liquidity position.

As the ratio analysis is concerned with all the aspect of the firms financial analysis

liquidity, solvency, activity, profitability and overall performance, it enables the

interested persons to know the financial and operational characteristics of an

organization and take suitable decisions.

Limitations of ratio analysis1. The basic limitation of ratio analysis is that it may be difficult to find a basis for

making the comparison 2. Normally, the ratios are calculated on the basis of


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historical financial statements. An organization for the purpose of decision making

may need the hint regarding the future happiness rather than those in the past. The

external analyst has to depend upon the past which may not necessary to reflect

financial position and performance in future. 3. The technique of ratio analysis may

prove inadequate in some situation if there is differs in opinion regarding the

interpretation of certain ratio. 4. As the ratio calculates on the basis of financial

statements, the basic limitation which is applicable to the financial statement is

equally applicable. In case of technique of ratio analysis also i.e. only facts which

can be expressed in financial terms are considered by the ratio analysis. 5. The

technique of ratio analysis has certain limitations of use in the sense that it only

highlights the strong or problem areas, it does not provide any solution to rectify the

problem areas

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The following ratio may be calculated for the purpose of analyzing the working

capital of ALCON:

1. Liquidity Ratio

2. Leverage Ratio

3. Turnover Ratio

4. Profitability Ratio

1.Liquidity Ratio

Liquidity ratios measure the short term solvency, i.e., the firms ability to pay its

current dues and also indicate the efficiency with which working capital is being

used. Commercial banks and short-term creditors may be basically interested in the

ratios under this group. They comprise of following ratios:

Current RatioThis ratio measures the solvency of the company in the short term. Current assets

are those assets which can be converted into cash within a year. Current liabilities

and provisions are those liabilities that are payable within a year. The ratio is

mainly used to give an idea of the company's ability to pay back its short-term

liabilities with its short-term assets. The higher the current ratio, the more capable

the company is of paying its obligations. However, a very high ratio indicates

idleness of funds, poor investment policies of the management and poor inventory

control. A ratio under 1 suggests that the company would be unable to pay off its

obligations if they came due at that point. A lower ratio indicates lack of liquidity

and shortage of working capital. A current ratio of 2:1 indicates a highly solvent

position. A current ratio of 1.33:1 is considered by banks as the minimumacceptable level for providing working capital finance.

Current Assets

Current Ratio= Current Liability


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Year Current Assets Current Liability Ratio(CA/CL)

2005-06 649087349 108820374 5.96

2006-07 1579005229 408273971 3.86

2007-08 1931236280 475683089 4.05

2008-09 2061128239 370487003 5.56

Interpretation

As we know that ideal current ratio for any firm is 2:1. If we see the current

ratio of the company for last three years it has increased from 2006 to 2008. The

current ratio of company is more than the ideal ratio. This depicts that

companys liquidity position is sound. Its current assets are more than its

current liabilities.

Quick Ratio


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Quick ratio is used as a measure of the companys ability to meet its current

obligations. Cash is the most liquid asset. Debtors, bills receivables and marketable

securities are relatively liquid and included in quick assets. Inventories are

considered to be less liquid, hence not a quick asset. A quick ratio of 1:1 is

considered standard and ideal, since for every rupee of current liabilities, there is a

rupee of quick assets. A decline in the liquid ratio indicates overtrading, which, if

serious, may land the company in difficulties.


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Current Assets - Inventories

Quick Ratio = Current Liability

Year Liquid Assets Current Liability Ratio(CA/CL)

2005-06 454288218 108820374 4.17

2006-07 1151952236 408273971 2.82

2007-08 1035851699 475683089 2.17

2008-09 1223776437 370487003 3.30

Interpretation

A quick ratio is an indication that the firm is liquid and has the ability to meet its

current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is

more than ideal ratio. This shows company has no liquidity problem.


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Leverage RatioLeverage refers to the use of debt finance. While debt finance is a cheaper source of

finance but it is riskier also. These ratios help in assessing the risk arising from the

use of debt capital. A leverage ratio reveals the firms ability to meet its obligations

in long run. The short term creditor, like bankers and raw material suppliers, are

more concern with the firms current debt paying ability. On the other hand, long

term creditors, like debenture holders, financial institutions etc. are more concern

with the firms long term financial strength. In fact, a firm should have a strong

short as well as long term financial position.

Debt Ratio

The firm may be interested in knowing the proportion of the interest-bearing debt

in the capital structure. It may, therefore, compute debt ratio by

Total Debt

Debt Ratio = Capital Employed

Year Debt Capital Employed Ratio(D/CE)

2005-06 414635193 591103847 0.70

2006-07 540857896 1238879545 0.43

2007-08 761455005 1625514244 0.46

2008-09 822617264 1862460512 0.44


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Interpretation

The debt ratio of 0.43 means that lenders have financed 43% of ALCONs net

assets (capital employed). It obviously means that owners have provided the

remaining finances i.e. 57%. For consecutive years also, the lenders have financed

less than 50% highlighting that the firm has a strong financial position. It has very

less chances of going bankrupt.

Debt Equity Ratio

The debt-equity ratio is worked out to ascertain soundness of the long term financial

policies of the firm. This ratio expresses a relationship between debt (external

equities) and the equity (internal equities). Debt means long-term loans, i.e.,

debentures, public deposits, loans (long term) from financial institutions. Equity

means shareholders funds, i.e., preference share capital, equity share capital,

reserves less losses and fictitious assets like preliminary expenses. It indicates the

extent to which the firm depends upon outsiders for its existence. A high debt-equity

ratio may indicate that the financial stake of the creditors is more than that of the


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owners. A very high debt-equity ratio may make the proposition of investment in

the organization a risky one. While a low ratio indicates safer financial position, a

very low ratio may mean that the borrowing capacity of the organization is being

underutilized.

Debt

Debt Equity Ratio = Net worth (Equity)

Year Debt Net Worth Ratio(D/NW)

2005-06 414635193 176468654 2.34

2006-07 540857896 695616233 0.77

2007-08 761455005 858068314 0.88

2008-09 822617264 1029553358 0.79


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Interpretation

This relationship describes the lenders contribution for each rupee of the owners

contribution. It is clear that the lenders contribution is 0.77, 0.88, 0.79 times of

owners contribution. The company is conservative in financing its growth with

debt but this is beneficial as there is less chances of it going bankrupt.


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Activity or Turnover Ratio

Funds of 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

utilises its assets. These ratios are also called turnover ratios because they indicate

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

Higher turnover ratio means, better use of resources, which in turn means better

profitability ratio. The following are the important activity (turnover) ratios:

Inventory Turnover Ratio

The inventory turnover shows how rapidly the inventory is turning into receivables

through sales. Generally, a high inventory turnover is indicative of good inventory

management. A low inventory turnover implies a slow-moving or obsolete

inventory. However, a relatively high inventory turnover should be carefully

analysed. A high inventory turnover may be due to a very low level of inventory,

which results in frequent stock-outs. The turnover will also be high if the firm

replenishes its inventory in too many small lot sizes.

Net Sales

Inventory Turnover ratio = Average Inventory

Year Net Sales Average

Inventory

Ratio(NS/Avg.

Inv)

2005-06 901324171 162817698 5.53

2006-07 1881201406 310926062 6.05

2007-08 2480267871 661218787 3.75

2008-09 2814977170 866368191.5 3.24


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Interpretation

The inventory turnover shows how rapidly the inventory is turning into receivable

through sales. A high ratio indicates good inventory management. ALCON has

turned its inventory of finished goods into sales 6.05 times a year which has then

fallen to 3.75 times and then to 3.24. Though it is not low for a construction

company but it should pay more attention to maintain the stability of this ratio.

Debtor Turnover Ratio

It measures whether the amount of resources tied up in debtors is reasonable and

whether the company has been efficient in converting debtors into cash. The higher

the ratio, the better the position.

Net sales

Debtor turnover ratio = Sundry Debtor

Year Net Sales Sundry Debtor Ratio(NS/SD)

2005-06 901324171 243587499 3.7

2006-07 1881201406 407657437 4.61

2007-08 2480267871 341241874 7.26

2008-09 2814977170 482447680 5.83


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Interpretation

Generally, the higher the value of debtors turnover, the more efficient is the

management of credit. The ratio for the firm has from 4.61 to 7.26 and then fallen to

5.83. It depicts that the firm has not been following an efficient credit policy.

Average Collection Period

The average collection period ratio represents the average number of days for which

a firm has to wait before its receivables are converted into cash. It measures the

quality of debtors. Generally, shorter the average collection period the better is the

quality of debtors as a short collection period implies quick payment by debtors and

vice-versa.

360

Average Collection Period = Debtor turnover Ratio

Year No. of days Debtors

Turnover Ratio

Ratio(360/DTR)

2005-06 360 3.7 97days

2006-07 360 4.61 78 days

2007-08 360 7.26 50 days

2008-09 360 5.83 62 days


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Interpretation

The Average collection period measures the quality of debtors since it indicates the

speed of their collection. Though it has fallen from 78 days to 62 days, it still implies

a very liberal and inefficient credit and collection performance.

Working Capital Turnover Ratio

The working capital turnover ratio measures the efficiency with which the working

capital is being used by a firm. A high ratio indicates efficient utilization of working

capital and a low ratio indicates otherwise. But a very high working capital turnover

ratio may also mean lack of sufficient working capital which is not a good situation.

Net Sales

Working Capital Turnover Ratio = Working Capital

Year Net Sales Working Capital Ratio(NS/WC)

2005-06 901324171 540266975 1.66

2006-07 1881201406 1170731258 1.60

2007-08 2480267871 1455553191 1.70

2008-09 2814977170 1690641236 1.66


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Interpretation

In alcon, the management needs to utilize the working capital in a better manner so

that it can increase the income.


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Fixed Asset Turnover Ratio

The fixed-asset turnover ratio measures a company's ability to generate net sales

from fixed asset investments - specifically property, plant and equipment (PP&E) -

net of depreciation. A higher fixed-asset turnover ratio shows that the company has

been more effective in using the investment in fixed assets to generate revenues.

Net Sales

Fixed Assets Turnover Ratio = Fixed Assets

Year Net Sales Fixed Assets Ratio(NS/FA)

2005-06 901324171 55759485 16.16

2006-07 1881201406 68148287 27.6

2007-08 2480267871 166961053 14.6

2008-09 2814977170 168819276 16.67

Interpretation


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A high ratio indicates a high degree of efficiency in fixed assets utilization. The

company has been effective in using the investment in fixed assets to generate

revenues.


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Current Assets Turnover Ratio

It measures the efficiency with which the current asset employed. A high ratio

indicates a high degree of efficiency in current asset utilization and vice-versa. But

again too high ratio indicates overtrading on the basis of these ratios.

Net Sales

Current Asset Turnover Ratio = Current Assets

Year Net Sales Current Assets Ratio(NS/CA)

2005-06 901324171 649087349 1.38

2006-07 1881201406 1579005229 1.19

2007-08 2480267871 1931236280 1.28

2008-09 2814977170 2061128239 1.36

Interpretation

Alcon turns over its fixed assets faster than current assets.


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Total Asset Turnover Ratio

This ratio indicates the number of times total assets are being turned over in a year.

The higher the ratio indicates overtrading of total assets, while a relatively lower

ratio indicates idle capacity.

Net Sales

Total Assets Turnover Ratio = Total Assets

Year Net Sales Total Assets Ratio(NS/CA)

2005-06 901324171 704846834 1.27

2006-07 1881201406 1647153516 1.14

2007-08 2480267871 2101197333 1.18

2008-09 2814977170 2232947515 1.26

Interpretation

The total assets turnover has been slowly increasing implying that ALCON

generates a sale of Rs. 1.26 for one rupee investment in fixed and current assets

together.


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Interpretation

The firm is having a low net margin and is further declining which might be

difficult for the firm to survive in adverse economic condition and also in the face of

falling selling price, rising cost of production or declining demand.

Return on Equity

This ratio is an important yardstick of performance for equity shareholders since it

indicates the return on the funds employed by them. The factor which motivatesshareholders to invest in a company is the expectation of an adequate rate of return

on their funds and periodically, they want to assess the rate of return in order to

decide whether to continue with their investment.

Net Profit

Return on Equity = Net Worth

Year Net Profit Net Worth Ratio(NPx100/NW

)

2005-06 36092058 176468654 20.45%

2006-07 94415570 695616233 13.5%


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2007-08 142160782 858068314 16.56%

2008-09 104392055 1029553358 10.13%

Interpretation

The ratio reveals that the shareholders funds are being utilized efficiently though

last year the return was not satisfactory.


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Return on Capital Employed

It is used in finance as a measure of the returns that a company is realising from its

capital employed. It is commonly used as a measure for comparing the performance

between businesses and for assessing whether a business generates enough returns

to pay for its cost of capital. ROCE measures the profitability of the capital

employed in the business. A high ROCE indicates a better and profitable use of

long-term funds of owners and creditors. As such, a high ROCE will always be

preferred.

Net Profit

Return on Capital Employed = Capital employed

Year Net Profit Capital Employed Ratio(NPx100/CE)

2005-06 36092058 591103847 6.10%

2006-07 94415570 1238879545 7.62%

2007-08 142160782 1625514244 8.74%

2008-09 104392055 1862460512 5.60


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QUARTERLY TRENDS FROM 2006-2010

2006-07

QUARTER 1 QUARTER 2 QUARTER 3 QUARTER 4

(Apr-Jun

2006)

(Jul-Sep

2006)

(Oct-Dec

2006)

(Jan-Mar

2006)

Rs. Rs. Rs. Rs.

Income 19.374 cr. 37.233 cr. 49.035 cr. 82.481 cr.

Expenditure 17.089 cr. 32.727 cr. 41.988 cr. 76.47 cr.

Interest 0.7 cr. 1.008 cr. 1.113 cr. 1.827 cr.

Depreciation 0.15 cr. 0.15 cr. 0.1 cr. 0.2 cr.

Profit before

Tax

1.435 cr. 3.348 cr. 5.834 cr. 3.984 cr.

Tax 0.443 cr. 1.302 cr. 2.1 cr. 0.309 cr.

Net Profit 0.992 cr. 2.046 cr. 3.734 cr. 3.675 cr.

Equity

Capital

4.946 cr. 4.946 cr. 8.772 cr. 10.498 cr.

EPS 2 4.14 4.26 3.5


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CUMMULATIVE ANNUAL

(2006-07) (2006-07)

(Rs.) (Rs.)

Income 188.12 cr. 188.12 cr.

Expenditure 168.27 cr. 168.98 cr.

Interest 4.648 cr. 3.9 cr.

Depreciation 0.6 cr. 0.62 cr.

Profit before Tax 14.6 cr. 14.6 cr.

Tax 4.154 cr. 5.16 cr.

Net Profit 10.447 cr. 9.44 cr.

Equity Capital 10.498 cr. 10.52 cr.

EPS 9.95 8.97


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*EPS in the Annual Report was 15.31 which should have been 8.97


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2007-08


(Apr-Jun

2007)

(Jul-Sept

2007)

(Oct-Dec

2007)

(Jan-Mar

2007)

(Rs.) (Rs.) (Rs.) (Rs.)

Income 48.134 cr. 43.867 cr. 93.865 cr. 48.791 cr.




Profit before

Tax

4.384 cr. 4.277 cr. 9.013 cr. 2.825 cr.

Tax 1.49 cr. 1.368 cr. 2.796 cr. 0.7 cr.


Equity Capital 10.498 cr. 10.521 cr. 10.521 cr. 10.727 cr.

EPS 2.76 2.76 5.91 3.5


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CUMMULATIVE ANNUAL

(2007-08) (2007-08)


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(Rs.) (Rs.)

Income 234.65 cr. 248.02 cr.

Expenditure 209.05 cr. 222.82 cr.

Interest 4.05 cr. 3.16 cr.

Depreciation 0.6 cr. 0.88 cr.

Profit before Tax 20.95 cr. 21.16 cr.

Tax 6.35 cr. 6.95 cr.

Net Profit 14.6 cr. 14.21 cr.

Equity Capital 10.73 cr. 10.73 cr.

EPS 13.6 13.25


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2008-09


(Apr-Jun

2008)

(Jul-Sept

2008)

(Oct-Dec

2008)

(Jan-Mar

2009)

(Rs.) (Rs.) (Rs.) (Rs.)

Income 59.486 cr. 87.764 cr. 72.59 cr. 61.654 cr.




Profit before

Tax

5.889 cr. 5.212 cr. 4.292 cr. 1.907 cr.

Tax 1.79 cr. 2.027 cr. 1.327 cr. 0.629 cr.



EPS 3.82 2.84 2.64 1.13


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CUMMULATIVE ANNUAL

(2008-09) (2008-09)

(Crores) (Crores)


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Income 281.5 281.5

Expenditure 254.61 255.91

Interest 8.63 8.14

Depreciation 0.95 1.4

Profit before Tax 17.3 16.05

Tax 5.77 5.61

Net Profit 11.52 10.44

Equity Capital 11.22 11.22

EPS 10.27 9.3


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(Rs.) (Rs.) (Rs.) (Rs.)

Income 36.018 cr. 26.022 cr. 37.642 cr. 60.799 cr.




Profit before

Tax

2.542 cr. 0.289 cr. 0.522 cr. 5.533 cr.

Tax 0.864 cr. 0.011 cr. 0.265 cr. 1.881 cr.



EPS 1.49 0.23 0.2 2.98


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*EPS in the 3rd quarter was found 0.02 in the report which must be 0.2

CUMMULATIV

E

(2009-10)

(Rs.)

Income 160.48 cr.

Expenditure 142.45 cr.

Interest 5.83 cr.

Depreciation 3.31 cr.

Profit before Tax 8.88 cr.

Tax 3.02 cr.

Net Profit 5.86 cr.

Equity Capital 12.24 cr.

EPS 4.8


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CHAPTER IV

WORKING CAPITAL MANAGEMENT

COMPONENTS

y Receivables Managementy Cash Managementy Inventory Management


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Year 2005-06 2006-07 2007-08 2008-09

Sundry

Debtor

243587499 407657437 341241874 482447680


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Average collection period

The average collection period measures the quality of debtors since it indicate the

speed of their collection. The shorter the average collection period, the better the

quality of the debtors since a short collection period implies the prompt payment by

debtors. The average collection period should be compared against the firms credit

terms and policy judges its credit and collection efficiency. The collection period

ratio thus helps an analyst in two respects. 1. In determining the collectability of

debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firms

comparative strength and advantages related to its credit policy and performance.

The debtors turnover ratio can be transformed in to the number of days of holding

of debtors.

Average Collection Period

Year 2005-06 2006-07 2007-08 2008-09

Average

Collection

Period

97 78 50 62


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OBSERVATION

Alcon as such do not have a credit policy. As the company undertakes government

projects so there is no worry about not getting the cash for the bills receivables.

Though the average collection period has fallen over the years, still the company

needs to follow a credit policy for timely recovery of the cash for the bills

receivables.


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CASH MANAGEMENT

Cash is common purchasing power or medium of exchange. As such, it forms the

most important component of working capital. The term cash with reference to cash

management is used in two senses, in narrow sense it is used broadly to cover cash

and generally accepted equivalent of cash such as cheques, draft and demand

deposits in banks. The broader view of cash also induce hear- cash assets, such as

marketable sense as marketable securities and time deposits in banks. The main

characteristics of this deposits that they can be really sold and convert in to cash in

short term. They also provide short term investment outlet for excess and are also

useful for meeting planned outflow of funds. We employ the term cash management

in the broader sense. Irrespective of the form in which it is held, a distinguishing

feature of cash as assets is that it was no earning power. Company have to always

maintain the cash balance to fulfil the dally requirement of expenses. There are

three primary motive for maintain the cash as follows

Motive of holding cash

There are three motives for holding cash as follow 1. Transaction motive 2.

Precautionary motive 3. Speculative motive

Transaction motive

Cash balance is necessary to meet day-to-day transaction for carrying on with the

operation of firms. Ordinarily, these transactions include payment for material,

wages, expenses, dividends, taxation etc. there is a regular inflow of cash from

operating sources. But since they do not perfectly synchronize, a minimum cash

balance is necessary to uphold the operations for the firm if cash payments exceed

receipts. Always a major part of transaction balances is held in cash, a part may be

held in the form of marketable securities whose maturity conforms to the timing of

anticipated payments of certain items, such as taxation, dividend etc.

Precautionary Motive


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Cash flows are somewhat unpredictable, with the degree of predictability varying

among firms and industries. Unexpected cash needs at short notice may also be the

result of following: 1. Uncontrollable circumstances such as strike and natural

calamities. 2. Unexpected delay in collection of trade dues. 3. Cancellation of some

order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise

in wages, etc. The higher the predictability of firms cash flows, the lower will be the

necessity of holding this balance and vice versa. The need for holding the

precautionary cash balance is also influenced by the firms capacity to have short

term borrowed funds and also to convert short term marketable securities into cash.

Speculative motive:

Speculative cash balances may be defined as cash balances that are held to enable

the firm to take advantages of any bargain purchases that might arise. While the

precautionary motive is defensive in nature, the speculative motive is aggressive in

approach.

However, as with precautionary balances, firms today are more likely to rely on

reserve borrowing power and on marketable securities portfolios than on actual

cash holdings for speculative purposes.

Advantages of cash management

Cash does not enter in to the profit and loss account of an enterprise, hence cash is

neither profit nor losses but without cash, profit remains meaningless for an

enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite

losses 2. An efficient cash management through a relevant and timely cash budget

may enable a firm to obtain optimum working capital and ease the strains of cash

shortage, fascinating temporary investment of cash and providing funds normal


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TENDER NOTICES

Alcon looks out for the various tender notices published out by the government in

national newspapers. The company, upon evaluating its eligibility criteria according to

the tender, files the tender with a competitive bid. The company which fulfils the

eligibility criteria, has a good credential and has the lowest bid gets the tender for

completion of the project.

CASH

Upon successfully getting a project in its hand, the company lifts cash by borrowing from

various banks. The cash to be borrowed is entirely based on the project and varies from

project to project.

RAW MATERIALS

The company purchases the materials required for the construction and completion of the

project. The amounts of the material along with its specification/designation are provided

in the tender. Complying with those, materials are bought, stocked and put to use.

WORK in PROGRESS

This is the stage where construction is in progress. The government pays to the company

progressively in parts after a certain amount of work is completed.

FINISHED CONSTRUCTION

Finally, the construction project is finished and in case any material is left out, it is kept

in stock for future use.

DEBTORS


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Debtors mainly here are the government bodies like Railways, etc. that are yet to pay the

remaining cash for the completion of the project.

72


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INVENTORY MANAGEMENT

Inventories constitute the most significant part of current assets of a large majority of

companies in India. On an average, inventories are approximately 60 % of current assets

in public limited companies in India. Because of the large size of inventories maintained

by firms maintained by firms, a considerable amount of funds is required to be committed

to them. It is, therefore very necessary to manage inventories efficiently and effectively

in order to avoid unnecessary investments. A firm neglecting a firm the management of

inventories will be jeopardizing its long run profitability and may fail ultimately. The

purpose of inventory management is to ensure availability of materials in sufficient

quantity as and when required and also to minimize investment in inventories at

considerable degrees, without any adverse effect on production and sales, by using simple

inventory planning and control techniques.

Needs to hold inventories:-

There are three general motives for holding inventories:

y Transaction motive emphasizes the need to maintain inventories to facilitatesmooth production and sales operation.

y Precautionary motive necessities holding of inventories to guard against the riskof unpredictable changes in demand and supply forces and other factors.

y Speculative motive influences the decision to increases or reduce inventory levelsto take advantage of price fluctuations and also for saving in reordering costs and

quantity discounts etc.

Objective of Inventory Management:-

The main objectives of inventory management are operational and financial. The

operational mean that means that the materials and spares should be available in

sufficient quantity so that work is not disrupted for want of inventory. The financial


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objective means that investments in inventories should not remain ideal and minimum

working capital should be locked in it.

The following are the objectives of inventory management:

y To ensure continuous supply of materials, spares and finished goods.

y To avoid both over-stocking of inventory.

y To maintain investments in inventories at the optimum level as required by theoperational and sale activities.

y To keep material cost under control so that they contribute in reducing cost ofproduction and overall purchases.

y To eliminate duplication in ordering or replenishing stocks. This is possible withthe help of centralizing purchases.

y To ensure perpetual inventory control so that materials shown in stock ledgersshould be actually lying in the stores.

y To ensure right quality of goods at reasonable prices.

y To facilitate furnishing of data for short-term and long term planning and controlof inventory


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OBSERVATION

Alcon does not hold much inventory. It follows the Just-in-Time Systems, where in

the materials required are bought and put to use. The construction company, after

getting a project in its hand, buys and stocks the materials which will be needed for

construction. The tender itself describes the amount and the

specification/designation of the materials which are to be needed for the

construction, so accordingly the materials are purchased. Alcon also follows a First-

in-First-out (FIFO) method wherein the materials purchased first are put to use

first.


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CHAPTER V

WORKING CAPITAL FINANCE

y Introductiony Bank Finance for Working Capitaly Form of Bank Credity Security required in Bank Finance


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Introduction

Funds available for period of one year or less is called short term finance. In India

short term finance is used as working capital finance. Two most significant short

term sources of finance for working capital are trade credit and bank borrowing.

Trade credit ratio of current assets is about 40%, it is indicated by Reserve Bank of

India data that trade credit has grown faster than the growth in sales. Bank

borrowing is the next source of working capital finance. The relative importance of

this varies from time to time depending on the prevailing environment. In India the

primary source of working capital financing are trade credit and short term bank

credit. After determine the level of working capital, a firm has to consider how it

will finance.

Bank Finance for Working Capital

Banks are the main institutional sources of working capital finance in India. Bank

credit is the most important source of financing working capital requirements. A

bank considers a firms sales and production plans and the desirable levels of

current assets in determining its working capital requirements. The amount

approved by the bank for the firms working capital is called credit limit. Credit

limit is the maximum funds which a firm can obtain from the banking system. In

the case of firms with seasonal businesses, banks may fix separate limits for the peak

level credit requirement and normal, non-peak level credit requirement indicating

the periods during which the separate limits will be utilised by the borrower. In

practice, banks do not lend 100% of the credit limit; they deduct margin money.

Margin requirement is based on the principle of conservatism and is meant to

ensure security. If the margin requirement is 30%, bank will lend only upto 70% of

the value of the asset.


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Form of bank credit

Bank provides working capital finance in the following ways

Overdraft

Under the overdraft facility, the borrower is allowed to withdraw funds in excess of

the balance in his current account upto a certain limit during a stipulated period.

Though overdrawn amount is repayable on demand, they generally continue for a

long period by annual renewals of the limits. It is a very flexible arrangement from

the borrowers point of view since he can withdraw and repay funds whenever he

desires within the overall stipulations. Interest is charged on daily balances-on the

amount actually withdrawn-subject to some minimum charges. The borrower

operates the account through cheques.

Cash credit

Under the cash credit facility, a borrower is allowed to withdraw funds from the

bank upto the sanctioned credit limit. He is not required to borrow the entire

sanctioned credit once, rather, he can draw periodically to the extent of his

requirements and repay by depositing surplus funds in his cash credit account.

There is no commitment charge; therefore, interest is payable on the amount

actually utilised by the borrower. Cash credit limits are sanctioned against the

security of current assets. Though funds borrowed are repayable on demand, banks

usually do not recall such advances unless they are compelled by adverse

circumstances.

Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables the

company to get the immediate payment against the credit bills / invoice raised by the

company. The banks hold the bills as a security till the payment is made by the

customer. The entire amount of bill is not paid to the company. The company gets


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interest and any other expenses is made. In case of default, the bank may either (a)

sue the borrower for the amount due, or (b) sue for the sale of goods pledged, or (c)

after giving due notice, sell the goods.

Lien

Lien means right of the lender to retain property belonging to the borrower until he

repays credit. It can be either a particular lien or general lien. Particular lien is a

right to retain property until the claim associated with the property is fully paid.

General lien, on the other hand, is applicable till all dues of the lender are paid.

Banks usually enjoy general lien.

OBSERVATION

Alcon, being a construction company, looks out for various tender notices

opened out by the government. Upon successfully getting a project in its hand,

the firm borrows cash from various banks including State Bank of India, State

Bank of Patiala, Yes Bank, HDFC, AXIS Bank. The banks provide working

capital finance to the firm through one of the methods described above. The

companys borrowings are entirely based on the projects in hand and usually

the amount of cash to be spent on the completion of the project is 100%

borrowed.


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CONCLUSION

Working capital management is important aspect of financial management. The

study of working capital management of Alcon Rail Nirman (Engineers) Ltd. has

revealed that the company shows no liquidity problem. The study has been

conducted on working capital ratio analysis, working capital leverage, working

capital components which helped the company to manage its working capital

efficiently and effectively. 1. Working capital of the company was increasing and

showing positive working capital per year. It shows good liquidity position. 2.

Positive working capital indicates that company has the ability of payments of short

terms liabilities. 3. The study of receivables management of the company shows that

they do not have a credit policy and hence have a high average collection period. 4.

The study of cash management reveals that the company carries out the various

construction projects by borrowing 100% cash from various banks and varies from

project to project. 5. The study of inventory management reveals that the company

follows Just-in-Time Systems and FIFO method.

Over all company has good liquidity position and sufficient funds to repayment of

liabilities. Company has accepted conservative financial policy and thus maintaining

more current assets balance.


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BIBLIOGRAPHY

Books Referred

1. I. M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. -

Ninth Edition 2006 2. M.Y. Khan and P.K. Jain, Financial management Vikas

Publishing house Ltd.

Annual Reports of ALCON

y 2005-06y 2006-07 2y 007-08y 2008-09

Website Referred

y www.Alcon.nety www.wikipedia.orgy www.investopedia.comy www.google.com


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Working Capital-A Project Report Entitled

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