2974-analysis of working capital
TRANSCRIPT
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A STUDY ON WORKING CAPITAL
WITH REFERENCE TO
LARSEN &TOUBRO- CHENNAI
BY
V.AARTHI
(Reg No: 35104001)PROJECT REPORT SUBMITTED
In Partial fulfilment of the requirements
For the award of the degree
OF
MASTER OF BUSINESS ADMINISTRATION
SRM SCHOOL OF MANAGEMENT
SRM ENGINEERING COLLEGE
SRM INSTITUTE OF SCIENCE AND TECHNOLOGY
(DEEMED UNIVERSITY)
KATTANKULATHUR.
MAY 2006
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DECLARATION
I, V.Aarthi, student of S.R.M School of Management, S.R.M Institute of Science& Technology, Kattankulathur, and here by declare that this project report titled A
STUDY ON WORKING CAPITAL MANAGEMENT IN LARSEN &TOUBRO is
an original work done by me and submitted to the S.R.M Deemed University, for the
award of Master Degree in Business Administration. I further declare that any part this
project itself has not been submitted elsewhere for award of any degree.
PLACE: KATTANKULATHUR
DATE:
V.AARTHI
(35104001)
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BONAFIDE
CERTIFICATE
Certified that this project report titled A STUDY ON WORKING CAPITAL
MANAGEMENT IN LARSEN & TOUBRO is an original work done by Miss.
V.AARTHI (Reg.No 35104001) of Fourth Semester, SRM School of Management, SRM
Institute of Science and Technology, (Deemed University) Kattankulathur during the
academic year 2006, who carried out the research under my supervision. Certified
further, that to the best of my knowledge the work reported herein does not form part of
any other project report or dissertation on the basis of which a degree or award was
conferred on an earlier occasion on this or any other certificate.
Faculty Guide HOD/Dean
Internal Examiner External Examiner
PLACE: KATTANKULATHUR
DATE:
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ABSTRACT
L & T
Larsen & Toubro Limited - an engineering and construction major - is among the
largest and most reputed companies in India's private sector.
ECC
ECC - The Construction division of Larsen & Toubro Limited - is India's largest
construction organization. Many of the country's prized landmarks - its exquisite
buildings, tallest structures, largest industrial projects, longest flyover, and highest
viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of
construction: civil, mechanical, electrical and instrumentation.
As a division of L&T, ECC has the resources to execute projects of large magnitude and
technological complexity in any part of the world.
The business of ECC Division is organized in four business sectors which
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will primarily be responsible for Technology Development, Business Development,
International Tendering and work as Investment Centres.
Business Sector
Buildings and Factories Sector
Transportation Infrastructure Sector
Industrial Projects & Utilities Sector
Hydrocarbon & Power Sector
Electrical & Instrumentation Sector
Hydel & Nuclear Sector
To give support and enhance business both in domestic and focused international
markets, the Global Operations will be operating through four Zones for seamless flow of
resources across the Division.
The four Zones are:
West Zone consisting of Mumbai Region, Middle East and Africa
North Zone consisting of Ahmedabad Region, Delhi, Afghanistan, Central Asia,
Uzbekistan, Kazakhstan and Russian Federation
East Zone consisting of Kolkata Region, Nepal, Bhutan, Bangladesh, Myanmar,
Laos, Cambodia and Philippines
South Zone consisting of Chennai Region, Hyderabad Region, Bangalore
Region, Sri Lanka, Male, Malaysia and Indonesia
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Locations - ECC Division
ECC Division's head quarters in Chennai, India. In India, the Division has 4 Zonal
Offices, 7 Regional Offices and over 250 project sites. In Overseas the division has
offices in 11 countries.
Awards for outstanding construction projects
ICI-Mc Bauchemie award for Most Outstanding Concrete Structure for ECC's
center (EDRC building) from Indian Concrete Institute
Most Outstanding Bridge National award for a Chennai Flyover from Indian
Institution of Bridge Engineers
ACCE-Billimoria award for excellence in construction of High rise buildings for
Corporate HQ building of ICICI from Association of Consulting Engineers
Export Award for the year 1995-1996 in recognition of second best performance
in the category of maximum turnover in overseas construction projects from
Overseas Construction Council of India.
"Federation Internationale de la Precontrainte (FIP), UK Award for outstanding
structure-1994" for the Administrative Office Building of ECC at Chennai and
special mention of the multi-purpose auditorium at Hyderabad, both constructed
by ECC. This was presented during the 12th Quadrennial congress of FIP at
Washington DC USA on June 2, 1994
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ICI-MC Bauchemie Award for the "Most Outstanding Concrete Structure" for the
year 1995-96 for the Sree Kanteerava Indoor Stadium, Bangalore from the Indian
Concrete Institute.
The Panvel Nadi viaduct near Ratnagiri in Maharashtra and the Jawaharlal Nehru
Stadium at Chennai constructed by ECC has been adjudged the "Most
Outstanding Concrete Structures in India for 1994".
The open sea ethylene jetty at Ratnagiri and Sri Sathya Sai Institute of Higher
Medical Sciences at Puttaparthi won "Certificates of Merit".
A study on this topic in L&T Ltd is necessary and it is very important in Working
Capital Ratios which helps in knowing liquidity, profitability and turnover position of the
company. Analysis of composition of current assets and current liabilities helps in
framing control measures of items under it.
A study is confirmed to the detailed study about the organization and identifies the
companys position in the industry and to suggest means or improvement in existing
system.
To study this various tools of analysis have been used on last five years,
1. The position of working capital has been analyzed through various working
capital ratios.
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2. Analysis of various items of current asset and current liabilities for the past
five years.
3. Funds Flow Statement analysis has been analyzed
4. Finally, with the help of analysis, Future trends were calculated & free
hand/graphic method was used to show the measured trend.
From this analysis if found that working capital ratios are better as a whole. Liquidity
position is satisfactory as there are sufficient creditors it pay its liability. Operating profit
shows the decreasing trends even through the sales have been increasing. Due to increase
in expenses and in consistent utilization of assets invested.
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ACKNOWLEDGEMENT
First of all, I thankAlmighty for his enlightening presence throughout my projectwork and helping me to complete my project successfully.
I express my gratitude to my beloved Dean Dr. Jayashree Suresh for her
invaluable support .I also wish my gratitude to her contribution towards successful
completion of the project.
I am extremely thankful to Prof.T.P.NAGESH Senior Professor and my Internal
Faculty, for being the source of encouragement through out the project. I extend my
profound gratitude and heartfelt thanks for his valuable guidance, timely help, wonderful
suggestions and constructive criticism offered to me for the project. I am indebted to him
for his contribution in helping me with the information for accomplishing my task. I also
express my sincere gratitude to him for his valuable guidance and advices in all stages of
the project work.
I extend my gratitude to Mr.T.S.Venkatesh Joint General Manager (Finance&
Accounts ) & my external guide Mr.S.Sridhar(Accounts Manager) and Mrs.
M.Lakshmi without them this project would have been just a dream .I sincerely thank
them for their valuable advises throughout the course of the project work.
I express my heartfelt thanks to my wonderful Parents for their moral support
and wholehearted encouragement. My sincere thanks to all those friends and well
wishers who had helped me during the course of the project work.
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CONTENTS
CHAPTER DESCRIPTION PAGE: NO
LIST OF TABLES
LIST OF FIGURES
1. INTRODUTION OF THE STUDY
1.1 INTRODUCTION 2
1.2 STATEMENT OF THE OBJECTIVE 4
1.3 SCOPE OF THE STUDY 51.4 LIMITATION OF THE STUDY 6
2. INDUSTRY PROFILE 8
3. COMPANY PROFILE
3.1 COMPANY PROFILE 16
3.2 VISION 173.3 CORPORATE 18
3.4 PRODUCTS/ SERVICES 20
3.5 HISTORY 21
3.6 RESOURCE PLANNING 30
4. RESEARCH METHODOLOGY
4.1 NATURE OF STUDY 324.2 PERIOD OF STUDY 32
4.3 METHODOLOGY 33
4.4 TOOLS APPLIED 34
5. DATA ANALYSIS AND INTERPRETATION 45
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6 FINDINGS 69
7. SUGGESTIONS 72
8. CONCLUSION 76
APPENDIX 78
EXCEL PROFIT& LOSS ACCOUNT
& BALANCE SHEET.
BIBLIOGRAPHY 80
BOOKS
LIST OF TABLES
Table No Particulars Page no
Table 5.1 Current Ratio 45
Table 5.2 Quick ratio 47
Table 5.3 Absolute Liquid Ratio 49
Table 5.4 Interest Coverage Ratio 51
Table 5.5 Asset Turnover Ratio 53
Table 5.6 Inventory Turnover Ratio 55
Table 5.7 Working Capital Turnover Ratio 57
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Table 5.8 Changes in Working Capital for the year 2001-02 59
Table 5.9 Funds Flow Statement for the year 2001-02 60
Table 5.10 Changes in Working Capital for the year 2002-03 61
Table 5.11 Funds Flow Statement for the year 2002-03 62
Table 5.12 Changes in Working Capital for the year 2003-04 63
Table 5.13 Funds Flow Statement for the year 2003-04 64
Table 5.14 Changes in Working Capital for the year 2004-05 65
Table 1.15 Funds Flow Statement for the year 2004-05 66
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LIST OF FIGURES
Chart No Particulars Page No
Fig 5.1 Current ratio 46
Fig 5.2 Quick Ratio 48
Fig 5.3 Absolute Liquid Ratio 50
Fig 5.4 Interest Coverage Ratio 52
Fig 5.5 Asset Turnover Ratio 54
Fig 5.6 Inventory Turnover Ratio 56
Fig 5.7 Working Capital Turnover Ratio 58
Fig 5.16b Trend Analysis 67
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Chapter I
Introduction of the Study
CHAPTER - I
1.1 Introduction
General
ECC
ECC - The Construction division of Larsen & Toubro Limited - is India's largest
construction organization. Many of the country's prized landmarks - its exquisite
buildings, tallest structures, largest industrial projects, longest flyover, and highest
viaducts - have been built by ECC. Leading-edge capabilities cover every discipline of
construction: civil, mechanical, electrical and instrumentation.
As a division of L&T, ECC has the resources to execute projects of large magnitude and
technological complexity in any part of the world.
The business of ECC Division is organized in four business sectors which will primarily
be responsible for Technology Development, Business Development, International
Tendering and work as Investment Centers.
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Working Capital management research is made at L&T Ltd for International Services at
ECC division for detailed analysis of the short term funds. This is done to check whether
the company is below standard or above standard. This study also helps to find their
operating efficiency and credit management of the company.
This research Working Capital management helps to understand the utilization of
the stock, work in progress (wip), finished goods. It also gives check on receivables and
inventory management. If company utilizes the working capital efficiently and effectively
it would become marked leader in the world.
1.2 STATEMENT OF OBJECTIVE
Objective of the study is to analyze Working Capital and Ratio analysis of the
Company for the year 2001 to 2005. This is being attempted to through the detail study
following tools of analysis.
Comparison of various Working Capital ratios for the past five years 2001 to
2005.
Analysis of Current Asset and Current Liabilities
To estimate Working Capital requirements
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1.3 SCOPE OF THE STUDY
The scope of the study is confined to the detailed study, about the organization and
identifies the companys position in the industry and to suggest means of improvements
in the existing system.
1.4 LIMITATIONS OF THE STUDY
This analysis is based on secondary data like published annual reports and
companys income statement and Balance Sheet. This scope of the study is
limited to that extent.
Chapter II
Industry Profile
CHAPTER II
INDUSTRY PROFILE
The Rupees 2, 40,000 crore construction industry could well see a faster growth driven
by the buoyancy in the economy and increased investments in major infrastructure
projects, including roads, ports and other sectors.
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Indian construction industry was worth about $70 billion (Rs. 2, 40,000 crore) and by
the year 2005-2006, this could grow considerably driven by major projects across the
country. It was estimated that about three crores of people were engaged in the
construction market caught up.
The demand for domestic housing was yet to be tapped and as per projections, there
was a shortage of about 40 million homes. According to experts We need to look at
these areas and bring in new technologies that would help to speed up projects due to new
technologies and equipment.
The country was the second largest producer of cement having an estimated 140
million tones (mt) of cement manufacturing capability and this, would go up significantly
over the next few years. This expectation stem from the fact that India and China are
amongst the two major nations where the construction activity is poised for much rapid
growth when compared to the developed world. The need for cement production capacity
would be about 300 mt by 2006 and possibly 800 mt by the year 20010. Out of the Rs.2,
40,000 crore construction industry, the infrastructure component
Accounts for about 50 percent. With major projects such as the Golden Quadrilateral, and
other corridors, this could go up much more, according to experts.
A company in the construction industry 2003 has been an encouraging year. Their
stock prices rose sharply and out performed the broad market indices comfortably; a
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portfolio of five key stock from this sector saw a 100 per cent jump in value this year
against an increase of a 46.8 per cent in the S&P CNX.
INTERNATIONAL SERVICES
MANAGEMENTS DISCUSSION & ANALYSIS
L&T is globalizing its operations with increasing focus on international business
opportunities. Today, the activities of construction division extend beyond the
subcontinent.
TEAM International presents the analysis of performance of the International
Services (IS) for the year 2004-05 and the outlook for the future
IS manages the accounting, financial and administrative functions of the
following areas:
A. Project exports representing turnkey construction activities in the Middle East
region, Mauritius, Africa, South America and SAARC nations.
B. Physical exports representing supply of materials, equipments, etc
C. Overseas branch offices like Kazakhstan, Abu Dhabi, and Dubai & Dhaka
set-up for business promotion & liaisons for the on-going projects in that region.
PERFORMANCE HIGHLIGHTS
The steady commitment to the pursuit of growth and progress enabled the company
to deliver a realistic performance for yet another year.
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The following are the highlights of significant achievements, as also the forward-looking
measures taken by our team during the year:
Gross Assets of the IS rose to Rs.633.38 croress from Rs.450.55 crores in the
previous year
Turnover rose to Rs.694.50 crores from Rs.485.48 crores in the previous year.
Working Capital
Financing for the execution of projects abroad is governed by the guidelines of Project
Export Manual (PEM) of Reserve Bank of India which restricts the borrowings to the
maximum of 25% of Contract value. The approval for financing of each project is
obtained at the time of award of the contract from the concerned approving authorities as
applicable.
ONGOING PROJECTS AND EXPANSION AND DIVERSIFICATION
The International Services operates as two zones for operational convenience
namely North West and South East Zone. North West Zone operates from L&T -
Mumbai (Powai) and South East Zone operates through ECC Headquarters,
Chennai.
Major Jobs undertaken in the above mentioned countries:-
Qatar - Construction of two outdoor multi sports stadium.
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UAE -
Engineering, design, procurement, manufacture, construction,
testing and commissioning of double circuit 400 kV Overhead
Transmission line from Fujairah Water and Power plant to Dhaid
Main 132/33 kV substation (69 Kms) and two bay extensions at
132/33 kV GIS Dhaid Main substation.
Turnkey construction of 220 kV Overhead transmissline from Liwa
Grid Station to 220/33 kV Mobile substation to be located at Liwa.
Construction of middle trunk bridge at Palm Jumeirah, UA
Expansion of 220/33 kV Network in Musaffah Dhabiya Area (74
Kms) for interconnection with ADCO 220 kV Overhead lines.
4 nos 33/11 KV primary substation-Alain, UAE.
Turnkey construction of 220 kV double circuit transmission line
between Sahama sub-station and Samha sub-station Construction of
'Al Murooj Complex' - a multi-storied residential complex at Dubai.
Power supply to Sweihan pumping station via 33KVOHL
33KV submarine cable (2 Runs x 9.8Kmtrs) with integrated fibre optic
cable and 3 Route kmtrs of 33KV UG cable from Jebel Dhana to Sir
Baniyas Island located West of Abu Dhabi.
Kuwait -Construction of Administration, Training blocks and associated
facilities for Electricity & Water training Institute in New University Campus,
Shuwaikh, Kuwait.
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Nepal -Construction of headrace tunnel, penstock, surge tank, powerhouse and
transformer cavern, tail race tunnel for Chilime hydro electric project.
Mauritius - Ebene Cybercity Project - construction of 70 m high, 12 storied
Cyber Tower, utility buildings and site development works for Business Parks
of Mauritius Limited
Suriname - Construction of 161kV / 33kV / 11kV gas insulated substation and
stringing of 27km long 161kV transmission line towers with Optical Ground
Wire (OPGW) for N.V. Energies Bedrijven Suriname in the North East tip of
the South American continent.
Bangladesh - Engineering, Procurement and Construction of 1.2 mtpa cement
plant for Lafarge Surma Cement Limited
Saudi Arabia - Construction of three 100 bed hospital project Rafha, Domat
and Khafji
Chapter III
Company Profile
Chapter III
3.1 COMPANY PROFILE
Larsen & Toubro Limited (L&T) is a technology-driven engineering and
construction organization, and one of the largest companies in India's private sector. It
has additional interests in manufacturing, services and Information Technology.
A strong, customer-focused approach and the constant quest for top-class quality
have enabled the Company to attain and sustain leadership in its major lines of business
across seven decades.
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L&T has an international presence, with a global spread of offices. A thrust on
international business over the last few years has seen overseas earnings growing to 18
per cent of total revenue. With factories and offices located around the country, further
supplemented by a wide marketing and distribution network, L&T's image and equity
extends to virtually every district of India.
L&T believes that progress must necessarily be achieved in harmony with the
environment. A commitment to community welfare and environmental protection
constitute an integral part of the corporate vision.
3.2 Vision
L&T shall be a professionally-managed Indian multinational, committed to total
customer satisfaction and enhancing shareholder value
L&T-ites shall be an innovative, entrepreneurial and empowered team
constantly creating value and attaining global benchmarks.
L&T shall foster a culture of caring, trust and continuous learning while meeting
expectations of employees, stakeholders and society.
3.3 Corporate
Larsen & Toubro Limited is one of Asia's largest vertically integrated, technology-driven
Engineering & Construction conglomerate with additional interests in manufacturing,
services and Information Technology. Its reputation is based on a strong customer
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orientation, the technological sophistication that characterizes its products and projects
and an impressive record of achievements across seven decades.
The Engineering core comprises Engineering & Construction Projects, Construction,
Heavy Engineering, and Electrical & Electronics. In IT, L&T has a fully-owned
subsidiary - Larsen & Toubro InfoTech Limited.
The company undertook the following major initiatives to enhance its value proposition:
Business Restructuring - The cement business of the Company was demerged into
UltraTech CemCo Limited with effect from April 1, 2003.
Thrust on Exports - Export revenues account for 14% of the Company's total
revenues. Further initiatives were taken to enhance international focus.
Talent Retention & Acquisition
Value creation by alliances with technology partners, quality improvement,
portfolio review of businesses and thrust on engineering & design services
through e-Engineering Solutions
Strengthening the organizational structure
Management review and clearances for developing business in select markets.
Recruitment of people including foreign nationals with international experience in
specific domains.
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Proactive certifications from international customers, EPC contractors and
process licensors
Increased speed in introduction of new products with contemporary features.
3.4 PRODUCTS / SERVICES
L&T products/services catalogue
Aerospace Equipment
Bulk Material Handling
Cement & Allied Machinery Chemical Plants
Cogeneration and Captive Power
Construction Equipment
Construction Services
Control & Automation Systems
Cutting Tools
Defense
Fertilizer Projects
Fertilizer, Petrochemical & Heat Transfer Equipment
Hydrocarbon & Related Projects
Hydraulic Equipment
Industrial Valves & Allied Products
Information Technology
Iron & Steel Castings
Medical Equipment
Minerals & Metals
Nuclear Power Plant Equipment
Oil & Gas & Special Projects
Petrol Pumps
Plastics Processing Machinery
Power Rubber Processing Machinery
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3.5 HISTORY
The evolution of L&T into the country's largest engineering and construction
organizations is among the more remarkable success stories in Indian industry. The
company was founded in Bombay (Mumbai) in 1938 by two Danish engineers, Henning
Holck-Larsen and Soren Kristian Toubro - both of whom were strongly committed to
developing India's engineering talent and enabling it to meet the demands of industry.
Beginning with the import of machinery from Europe, L&T rapidly took on engineering
and construction assignments of increasing sophistication. Today, the company sets
engineering benchmarks in terms of scale and complexity.
Record of Achievements
L&T's signature of excellence is evident on:
India's first indigenous hydro cracker reactor
Oil and gas platform projects executed to global benchmarks
The world's largest continuous catalyst regeneration reactor
The simultaneous execution of clean fuel projects at eight refineries around India
The world's biggest fluid catalytic cracking regenerator
The world's longest product splitter
Asia's highest viaduct - built for the Konkan Railway
The world's longest LPG pipeline
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The world's longest cross country conveyor Building an international class
football stadium in 260 days
Engineering & Construction Projects
L&T's engineering & construction track record consists of successful implementation
of turnkey projects in major core and infrastructure sectors of Indian industry. L&T has
integrated its strengths in process technology, basic and detailed engineering, equipment
fabrication, procurement, project management, erection, construction and commissioning,
to offer single-point responsibility against stringent delivery schedules. Strategic alliances
with world leaders enable L&T to access technical know-how and execute process-
intensive large-scale turnkey projects to maintain its leadership position.
L&T's core competencies in engineering include highly qualified and experienced
personnel from various disciplines, state-of-the-art 2-D and 3-D CAD facilities with
sophisticated plant design systems and basic engineering capabilities. L&T is the only
Indian EPC company pre-qualified for executing large, process-intensive projects for oil
& gas, refinery, petrochemical and fertilizer sectors.
Heavy Engineering
L&T is acknowledged as one of the top five fabrication companies in the world, with
engineering and manufacturing capabilities that are among the most sought after in
industry. Operating at the high end of the technological spectrum, L&T has led Indian
industry in introducing new processes, products and materials in manufacturing. L&T
also has the logistics capabilities of fabricating and supplying over-dimensional
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equipment to tight delivery schedules. L&T's globally-benchmarked workshops are
located in Mumbai, Hazira, Baroda and Kansbahal.
Construction
ECC - the Engineering Construction & Contracts Division of L&T is India's largest
construction organization. Many of the country's prized landmarks - its exquisite
buildings, tallest structures, largest industrial projects, longest flyovers, highest viaducts,
longest pipelines have all been built by L&T. L&T's leading edge capabilities cover
every discipline of construction - civil, mechanical, electrical and instrumentation.
L&T has also expanded its focus to the Middle East, South East Asia, Russia, CIS,
Mauritius, African and SAARC countries. L&T is also developing markets for its
construction services in the Indian Ocean rim countries, Africa and Latin America.
Electrical & Electronics
L&T is a major international manufacturer of a wide range of electrical and electronic
products and systems. In the electrical segment, the Company is India's largest
manufacturer of low tension switchgear, and is rapidly establishing itself in international
markets.
Its products are widely sold in markets in Europe and Australia. Recently, L&T set
up a new manufacturing base for high-end air circuit breakers in China. L&T also
manufactures custom-engineered switchboards for industrial sectors like power,
refineries, petrochemical, cement, etc. In the electronic segment, L&T offers a wide
range of meters and provides complete control and automation systems for diverse
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industries. Medical equipment and systems manufactured by L&T include advanced
ultrasound scanners and patient monitoring systems.
Information Technology
Larsen & Toubro Infotech Limited, a 100 per cent subsidiary of L&T, offers
comprehensive, end to end software solutions and services with a focus on
Manufacturing, BFSI and Communications & Embedded Systems. It provides a cost
cutting partnership in the realm of offshore outsourcing, application integration and
package implementation.
Leveraging the heritage and domain expertise of the parent company, its services
encompass a broad technology spectrum, catering to leading international companies
across the globe. It leverages the L&T parentage to also provide services in the embedded
intelligence and e-Engineering
space.
Machinery & Industrial Products
L&T manufactures markets and provides service support for critical construction and
mining machinery - surface miners, hydraulic excavators, aggregate crushers, loader
backhoes and vibratory compactors.
Corporate Social Responsibility
Beyond the corporate objectives of achieving growth and profitability, L&T is
conscious of its larger social obligations. The Company's efforts have been widely
recognized.
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Safety, Health and Environment
At ECC, safety is given the highest priority. The Occupational Safety, Health
and Environment Policy enunciated by the Corporate Management lays emphasis on
Safety, Health and Environment through a structured approach and a well defined
organization. Systems and procedures have been established for implementing the
requisites of safety at all stages of construction and in respect of plants, machinery and
materials. The Head of the Safety Engineering Department operates from the
Headquarters. He is assisted by the Regional Safety coordinators who in turn monitor
implementation of Safety, Health & Environment measures through Safety coordinators
located at job sites.
Besides the enforcement of engineering measures and management controls, Personal
Protective Equipment (PPE), as per needs of the operations, are provided to the
employees free of cost. PPE conforming to relevant Indian Standards / International
Standards are procured to ensure the quality of the appliances. Inspection and safety
audits are conducted periodically. Awareness among employees is sustained through
regular training programmes
Quality Assurance
The E&C Division of L&T has integrated the requirements of timely delivery
within-cost completion and supply of plant and equipment to the highest standards of
quality in line with contractual requirements by implementing Quality Assurance (QA).
The QA system is based on ISO 9000 international standards. The Strategic Business
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Units (SBUs) and Service Units (SUs) of E&C Division have been certified to ISO 9001
standards. The division has also secured ISO 14001 certification.
A major part of the activities of E&C Division is carried out at project sites where
plant and equipment is fabricated, constructed, erected and finally commissioned under
meticulous quality control standards. These are carried out in line with OHSAS 18001,
the global occupational health and safety management benchmark.
The QA system has been modeled on the CII-EFQM Model for Business
Excellence - a model jointly developed by the Confederation of Indian Industries and the
European Foundation for Quality Management. L&T's corporate policy is a reflection of
an Integrated Management System for Quality, Environment, Occupational Health &
Safety, IT Security and Personnel & Human Resources, whilst implementing globally
recognized standards such as ISO 9001, ISO 14001, OHSAS 18001 and BS 7799.
3.6 Resource Planning
Centralized Resources dept at HQ takes care of allocation, distribution and movement
of Staff and Plant & Machinery to meet the requirements for deployment in various
regions and overseas across the company. Resources dept in the Regional Offices takes
care of this function within the regions and also acts as a resource centre with data on
subcontractors available for various types of works. Resources department as a focal
point helps the Operational Units to optimize the productivity by maintaining a balance
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between the availability and the requirement of resources (Staff and Plant & Machinery).
It also facilitates the process of decision and deployment of equipment from external
agencies as needed. This department plays the vital role in effective distribution and
deployment of resources in co-ordination with all Sectors, BUs, Zones, and Regions etc.
Chapter IV
Research Methodology
Chapter IV
RESEARCH METHODOLOGY
4.1 Nature of the study
A study in this topic in L&T is necessary and it is very important in Working Capital
ratios of the company which helps in knowing liquidity, solvency, profitability and
turnover position of the company.
It also helps in studying the composition of various items of Current Asset and
Current Liability. This helps in framing control measures of items of Current Asset and
Current Liability.
4.2 Period of Study
The period of study was limited to three months during February to May of 2006.
During this period all the required data was collected through secondary sources and
analyzed with the help of financial tools of analysis.
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4.3 Methodology
The objective of the study is to analyze the Working Capital position of the
company for the past five years 2001 to 2005.
The major sources of data were secondary data (i.e.) published annual reports and
financial reports etc. Discussion with the officials of the company.
Firstly, the position of the Working Capital has been analyzed through various
Working Capital ratios with the help of data available in the financial statement of
the past five years.
Secondly, an analysis of the various items of Current Asset and Current
Liabilities for past five years has been done.
Thirdly, the funds flow statement is prepared for the past five years of the
company,
Finally, the future trend analysis of the companies working capital is done.
4.4 Tools applied in the study
The various tools applied in the study to analyze the Working Capital position of the
company are as follows:
Ratio Analysis
Funds Flow Statement
Trend Analysis
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LITERATURE REVIEW
ANALYSIS OF WORKING CAPITAL RATIOS
Working Capital in simple terms is the amount funds, which a company must have to
carry out its day-to-day operations. It can also be regarded as that proportion of a
companys total capital, which is employed in short-term operations. Working Capital
can take the form of cash and near-cash assets or even a little further from cash but yet in
the process. Such items are stocks of raw materials and supplies needed for manufacture,
stocks of finished goods awaiting sale, semi-processed items or components that will
soon emerge as final-products, sundry debtors representing pending collections against
credit sales and short-term investments if any. Working Capital is required because of the
time gap between the sales and their actual realizing in cash. This time gap is technically
termed as operating cycle of the business.
Importance of Working Capital Management
Business activity is dynamic in character and subject to wide fluctuations. The
movement from working capital to income and profits and back to working capital is one
of the most vital characteristics of business administration. This operation is concerned
with the expenditure of funds with the hope that they will return with an additional
amount called profit. If the operations of an enterprise are to run smoothly, a proper
relationship between fixed capital and current capital must be maintained. Sufficient
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liquidity must be achieved and maintained to provide the funds to pay off obligations as
they arise or mature. The adequacy of cash and other current assets together with their
efficient handling virtually determine the survival or diminish of the enterprise.
Working capital management policies have a great effect on firms profitability,
liquidity and its structural health. The maintenance of a sound working capital position is
a constant problem for the finance manager. It involves control of the everyday ebb and
flow of financial resources circulating in the enterprise in one of the other, which
represents a substantial portion of total investment.
Working Capital Ratios
Ratios are relationships expressed in mathematical terms between figures, which are
connected with each other in some manner. Obviously, no purpose will be served by
comparing two sets of figures, which are not at all connected with each other. Moreover,
absolute figures are also unfit for comparison.
Current Ratio
This ratio is an indicator of the firms commitment to meet its short-term liabilities.
Current ratio = Current Assets / Current Liabilities
Current Assets means that will wither be used up or converted into cash within a years
time or normal operating cycle of the business, whichever is longer.
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Current Liabilities mean liabilities payable within a year or during operating cycle of the
business, whichever is longer. Out of the existing current assets or by creation of other
current liabilities.
Quick Ratio
This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is ascertained
by comparing the liquid assets to current liabilities. Prepaid expenses and stock are not
taken as liquidity assets.
Quick Ratio = Liquid Assets / Current Liabilities
Absolute Liquid Ratio
This ratio is calculated when liquidity is highly restricted in terms of cash and cash
equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash &
cash equivalents. this ratio measures liquidity in terms of cash and near cash items &
short-term current liabilities.
Absolute Liquid Ratio = Cash & Bank balances + Marketable
Securities / Current Liabilities
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Interest Coverage Ratio
This ratio measures the margin of safety the firm enjoys with respect to its interest
burden. A high interest coverage ratio means that the firm can easily meet its interest
burden even if earnings before interest and taxes suffer a considerable decline. A low
interest coverage ratio may result in financial embarrassment when earning before
interest and taxes decline.
Interest Coverage Ratio = EBIT/ Interest
Assets Turnover Ratio
This ratio measures how efficiently assets are employed. It is a kind to the output
capital ratio used in economic analysis.
Assets Turnover Ratio = Net Sales / Total Assets
Inventory Turnover Ratio
This ratio is calculated to ascertain the efficiency of inventory management in terms
of capital investment. It shows the relationship between the cost of goods sold/cost of
sales and the amount of average inventory. This ratio helpful in evaluating and review of
inventory policy.
Inventory Turnover Ratio = Net Sales / Average Inventory
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Importance or uses or Benefits of Funds Flow Statement.
Funds flow statement is an important tool in the armory of the finance manager. It
helps in the planning, deployment and controlling of funds year after year. The following
benefits or uses of funds flow statement:
It provides a detailed analysis and understanding of changes in the distribution
of financial resources between two balance sheet data.
It shows how the funds were obtained and used during a period.
The sources from which funds were obtained are useful in computation of cost
of capital of the business.
A detailed analysis of sources of funds in the past acts as a guide for obtaining
funds for future requirements.
A study of the applications of the funds provides an understanding about the
utilization of resources in the past. It can form the basis for selection of
investment proposals or future capital expenditure decisions.
It gives indications of any weakness or strength in the general financial of a
firm.
It throws light on the financial consequences of business operations.
It can be compared with the relevant budgets to assess the usage of funds as
per plans.
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Re arrangement of capital structure, formulating long term financial plans, and
policies, etc; are facilitated by funds flow analysis.
Working capital and the causes for changes in working capital are highlighted.
This can help in the formulation of sound policy for liquidity and short term
solvency of the firm.
Chapter V
Data Analysis &
Interpretation
CHAPTER V
DATA ANALYSIS
Ratios Analysis5.1 Current Ratio
Current Assets means that will wither be used up or converted into cash within a
years time or normal operating cycle of the business, whichever is longer.
Current Liabilities mean liabilities payable within a year or during operating cycle
of the business, whichever is longer. Out of the existing current assets or by creation of
other current liabilities
Current Ratio = Current Assets / Current Liabilities
Table 5.1
Current Ratio for the Period 2001-2005
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Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Current Asset 5544.37 6278.05 6799.72 8838.23
CurrentLiabilities
3059.67 3977.64 4615.42 5599.39
Ratio 1.81 1.58 1.47 1.58
*Source: Secondary data
Fig 5.1
Current ratio
1.81
1.581.47
1.58
0
0.5
1
1.5
2
Ratio
1 2 3 4
Years
Current Ratio
*Base: Table 5.1
Inference
The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1
it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05. There is a
sudden hike in price of raw material. There is a slow of moving stock of goods.
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5.2 Quick Ratio
This ratio is also termed as a acid test ratio or liquidity ratio. This ratio is
ascertained by comparing the liquid assets to current liabilities. Prepaid expenses and
stock are not taken as liquidity assets.
Quick ratio = Liquid Asset / Current Liabilities
Table 5.2
Quick Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Liquid Asset 2943.99 4762.23 4987.42 6527.39
Current
Liabilities
3059.67 3977.64 4615.42 5599.39
Ratio 0.96 1.2 1.08 1.17
: *Source: Secondary data
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Fig 5.2
Quick Ratio
0.96
1.201.08
1.17
0
0.2
0.4
0.6
0.8
1
1.2
Ratio
1 2 3 4
Years
Quick Ratio
*Base: Table 5.2
Inference
The ideal ratio is 1:1. During the year 2002-03 the companys overall
performance and production is high by this the share price will get increased. Hence the
ratio for that year is high compared to the next consecutive years.
5.3 Absolute Liquid Ratio
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This ratio is calculated when liquidity is highly restricted in terms of cash and cash
equivalents. This ratio is calculated when liquidity is highly restricted in terms of cash &
cash equivalents. This ratio measures liquidity in terms of cash and near cash items &
short-term current liabilities.
Absolute Liquid Ratio = Cash & Bank balances + Marketable
Securities / Current Liabilities
Table 5.3
Absolute Liquid Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Cash & Bank
balances
237.14 320.53 375.27 828.02
Current
Liabilities
3059.67 3977.64 4615.42 5599.39
Ratio 0.08 0.08 0.08 0.15
*Source: Secondary data
Fig 5.3
Absolute Liquid Ratio
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0.08 0.08 0.08
0.15
0
0.02
0.04
0.06
0.08
0.10.12
0.14
0.16
Ratio
1 2 3 4
Year
Abso lute liquid ratio
*Base: Table 5.3
Inference
By this the absolute liquid ratio is high during the year 2004-05. This is due to
the delay in getting payments from its clients so by this the liability is high.
5.4 Interest Coverage Ratio
This ratio measures the margin of safety the firm enjoys with respect to its interest
burden. A high interest coverage ratio means that the firm can easily meet its interest
burden even if earnings before interest and taxes suffer a considerable decline. A low
interest coverage ratio may result in financial embarrassment when earning before
interest and taxes decline.
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Interest Coverage Ratio = EBIT / Interest
Table 5.4
Interest Coverage Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
EBIT 8137.58 9614.46 9959.35 13788.32
Interest 7738.67 9129 9232.11 12522.82
Ratio 1.05 1.05 1.08 1.1
*Source: Secondary data
Fig 5.4
Interest Coverage Ratio
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1.05 1.05
1.08
1.10
1.02
1.04
1.06
1.08
1.1
1.12
Ratio
1 2 3 4
Year
Interest coverage ratio
*Base: Table 5.4
Inference
The interest coverage ratio is high during the year 2004-05 .This is due to the
depreciation made in the asset of the company. The company gains income from the
same asset.
5.5 Asset Turnover Ratio
This ratio measures how efficiently assets are employed. It is a kind to the output
capital ratio used in economic analysis.
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Asset Turnover Ratio = Net Sales / Total Assets
Table 5.5
Asset Turnover Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Net Sales 7917.90 9360.12 9561.33 13091.82
Total Assets 10,735.3 11,377.84 8,732.37 10,859.1
Ratio 0.74 0.82 1.09 1.21
*Source: Secondary data
Fig 5.5
Asset Turnover Ratio
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0.74
0.82
1.09
1.21
0 0.2 0.4 0.6 0.8 1 1.2 1.4
Ratio
1
2
3
4
Years
Asset turnover ratio
*Base: Table 5.5
Inference
The asset turnover ratio is of increasing in trend. During the year 2004-05 the
ratio is high by this the fixed assets remains the same. The company generates income
from the sale of fixed asset hence the ratios are of increasing in trend.
5.6 Inventory Turnover Ratio
This ratio is calculated to ascertain the efficiency of inventory management in
terms of capital investment. It shows the relationship between the cost of goods sold/cost
of sales and the amount of average inventory. This ratio helpful in evaluating and review
of inventory policy.
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Inventory Turnover Ratio = Net Sales / Average Inventory
Table 5.6
Inventory Turnover Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Net Sales 7917.90 9360.12 9561.33 13091.82
Average
Inventory
2513.8 3358.29 2421.97 2967.7
Ratio 3.15 2.79 3.95 4.41
*Source: Secondary data
Fig 5.6
Inventory Turnover Ratio
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3.15
2.79
3.95
4.41
0 1 2 3 4 5
Ratio
1
2
3
4
Years
Inventory turnover ratio
*Base: Table 5.6
Inference
This ratio is of increasing in trend. It is high during the year 2004-05. In the
manufacturing company the inventory of finished goods is also to convert into inventory
turnover ratio. The inventory is being properly utilised by which the company gains
income out of inventory which is used for production.
5.7 Working Capital Turnover Ratio
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This ratio measures the effective utilization of working capital. It also measures
the smooth running of business. The ratio establishes the relationship between cost of
sales and working capital.
Working Capital Turnover Ratio = Net Sales / Net Working Capital
Table 5.7
Working Capital Turnover Ratio for the Period 2001-2005
Particulars 2001-2002 2002-2003 2003-2004 2004-2005
Net Sales 7917.90 9360.12 9561.33 13091.82
Net Working
Capital
8358.85 9869.83 9806.76 13268.66
Ratio 0.95 0.95 0.97 0.99
*Source: Secondary data
Fig 5.7
Working Capital Turnover Ratio
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0.95
0.95
0.97
0.99
0.92 0.93 0.94 0.95 0.96 0.97 0.98 0.99
Ratio
1
2
3
4
Years
Working capital ratio
*Base: Table 5.7
Inference
The working capital turnover ratio is of increasing in trend. This is being
increased during the year 2004-05. This is due to the company maintaining current asset
and current liability properly. But this helps in avoiding Bank borrowing and long term
source of funds.
Funds Flow Statement
Changes in Working Capital for the year 2001-02
Table 5.8
Particulars Year(Rs)2001 Year(Rs)2002 Increase Decrease
Current Assets
Cash 138.90 237.14 173.03
Stock 2427.35 2600.38 173.03
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Debtors 1374.99 1442.31 67.32
Total (A) 3941.24 4279.45
Current Liabilities
Provisions 271.22 287.55 16.33
Total (B) 271.22 287.55
W.C (A-B) 3670.03 3991.9
Increase in W.C 322.66 322.66
Total 3991.9 3991.9 338.59 338.59
*Source: Secondary data
Funds Flow Statement for the year 2001-02
Table 5.9
Sources of funds Application of funds
Issue of shares 363.91 Repayment of loan 919.82
Sale of investment 71.65 Purchase of fixed assets 338.44
Sale of fixed assets 124.11 Increase in workingcapital
322.66
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Funds from operations 1021.25
Total 1580.92 1580.92
*Source: Secondary data
Changes in Working Capital for the year 2002-03
Table 5.10
Particulars Year(Rs)2001 Year(Rs)2002 Increase Decrease
Current Assets
Cash 237.14 320.53 83.39
Debtors 1442.31 3042.65 1600.34
Stock 2600.38 1515.82 1084.56
Total (A) 4,279.83 4,879
Current Liabilities
Provisions 287.55 424.75 137.2
Total (B) 287.55 424.75
W.C (A-B) 3992.28 4454.25
Increase in W.C 461.97 461.97
Total 4454.25 4454.25 1683.73 1683.73
*Source: Secondary data
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Funds Flow Statement for the year 2002-03
Table 5.11
Sources of funds Application of funds
Issue of shares 378.6 Repayment of loan 367.87
Sale of investment 275.05 Purchase of fixed assets 1600.34
Sale of fixed assets 1513.61 Increase in workingcapital
461.97
Funds from operations 1188.86 Tax paid 925.94
Total 3356.12 3356.12
*Source: Secondary data
Changes in Working Capital for the year 2003-04
Table 5.12
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Particulars Year(Rs)2001 Year(Rs)2002 Increase Decrease
Current Assets
Cash 320.53 375.27 54.74
Stock 1515.82 1812.30 296.58
Debtors 3042.65 3314.58 271.93
Total (A) 4879 5502.15
Current Liabilities
Provisions 424.75 660.99 236.24
Total (B) 424.75 660.99
W.C (A-B) 4454.25 4841.16
Increase in W.C 386.91 386.91
Total 4841.16 4841.16 623.25 623.25
*Source: Secondary data
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Funds Flow Statement for the year 2003-04
Table - 5.13
Sources of funds Application of funds
Issue of shares 223.79 Repayment of loan 1851.65
Sale of investment 308.85 Purchase of fixed assets 2940.97
Sale of fixed assets 3087.01 Increase in workingcapital
386.91
Funds from operations 2248.53 Tax paid 688.65
Total 5868.18 5868.18
*Source: Secondary data
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Changes in Working Capital for the year 2004-05
Table 5.14
Particulars Year(Rs)2001 Year(Rs)2002 Increase Decrease
Current Assets
Cash 375.27 828.02 452.75
Stock 1812.30 2310.84 498.54
Debtors 3314.58 3963.60 649.02
Total (A) 5502.15 7102.46
Current Liabilities
Provisions 660.99 794.64 133.65
Total (B) 660.99 794.64
W.C (A-B) 4841.16 6307.82
Increase in W.C 1466.66 1466.66
Total 6307.82 6307.82 1600.31 1600.31
*Source: Secondary data
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Funds Flow Statement for the year 2004-05
Table 5.15
Sources of funds Application of funds
Issue of shares 1325.45 Repayment of loan 1391.95
Sale of investment 1173.11 Purchase of fixed assets 1725.09
Sale of fixed assets 1182.01 Increase in workingcapital
1466.66
Funds from operations 3680.63 Tax paid 1470.04
Total 6053.74 6053.74
*Source: Primary data
5.16b TREND ANALYSES
Working Capital for the year 2001 - 2005
Years Working Capital
2001- 2002 322.66
2002- 2003 461.97
2003- 2004 386.91
2004- 2005 1466.66
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Fig 5.16 b
TREND
Inference
Here in the above figure it shows that the trend lines of the actual trend shows a
increase and decrease in working capital, but during the 2004- 05 it shows that the
working capital has been increased tremendously this is due to the increase in sales for
the year. During the year 2003- 04 the working capital has decreased due to the
economical changes which affected the sales of the company.
During the year 2004-05 the company had planned to increase profit during the year
through production. The company management planned during the year 2003 -04 to
purchase machines out of the previous year profit.
The interest coverage ratio is high during the year 2004-05 .This is due to the
depreciation made in the asset of the company. The company gains income from the
same asset.
0
200
400
600
800
1000
1200
1400
1600
2001-
02
2002-
03
2003-
04
2004-
05
actual line
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Chapter VI
Findings
CHAPTER VI
FINDINGS
The current ratio of L&T satisfies the conventional rule of current ratio that is 2:1
it test the quantity and not quality from 2001-02, 2002-03,2003 -04,2004-05.
There is a sudden hike in price of raw material. There is a slow of moving stock
of goods.
The ideal ratio is 1:1. During the year 2002-03 the companys overall
performance and production is high by this the share price will get increased.
Hence the ratio for that year is high compared to the next consecutive years.
By this the absolute liquid ratio is high during the year 2004-05. This is due tothe delay in getting payments from its clients so by this the liability is high.
By this the absolute liquid ratio is high during the year 2004-05. This is due to
the delay in getting payments from its clients so by this the liability is high.
The interest coverage ratio is high during the year 2004-05 .This is due to the
depreciation made in the asset of the company. The company gains income fromthe same asset.
This ratio is of increasing in trend. It is high during the year 2004-05. In the
manufacturing company the inventory of finished goods is also to convert into
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inventory turnover ratio. The inventory is being properly utilised by which the
company gains income out of inventory which is used for production.
The working capital turnover ratio is of increasing in trend. This is being
increased during the year 2004-05. This is due to the company maintaining
current asset and current liability properly. But this helps in avoiding Bank
borrowing and long term source of funds.
Chapter VII
Suggestions &
Recommendations
CHAPTER VII
SUGGESTIONS
During the year 2001-02 ,2002 -03 , 2003 -04 there was sudden hike in price of
raw materials the company cannot do anything against the economical changes .
This is due to the companys commitment to its clients with the minimum use of
the raw materials the company should work with it.
The company should keep an eye on to maximise the production so that the share
value of the company will be increased so that the company will get more
business.
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The company should able to verify that the due payments they have get at proper
time so that there will not be delay in getting payment.
The company should follow the method of getting income over the fixed asset.
The company can maintain its interest coverage ratio.
The company should not disturb its fixed asset frequently that will affect the turn
over ratio.
The company should maximise stock and it should not be dead stock this will lead
to loss of money and place.
So the company should utilise its inventory according to the production.
The working capital of the company that is the current asset and the current
liability should be maintained properly by this it helps in avoiding Bank
borrowing and long term source of funds.
Chapter VIII
Conclusion
CHAPTER VIII
CONCLUSION
Based on study being carried out at L&T ECC division, it can inferred that the
companys working capital position is good further the company has shown good growth
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this can read by their projects made around the world. The company is growing into
immense size this can understand by recent contribution to built nuclear reactor project
completion at Tarapus. The company has utilized the investment proposals and all the
ratios have mostly satisfied the standard norm in the past five years.
Over all we management & inventory and receivables of the company is found to be
better and it promises to improve in fast pace with controlled manner.
Appendix
APPENDIX
LARSEN & TOUBRO LIMITED ECC CONSTRUCTION
DIVISION
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31ST
March2002
project excel.xls
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References
BIBLIOGRAPHY
Management Accounting - T.S.Reddy & Y.Hari
Prasad Reddy
Management Accounting - S.N.Maheshwari
Working Capital Management - R.K.Sharma
Business Statistics & OperationResearch - Dr.S.P.Gupta
Project Export Memorandum (PEM) by Reserve Bank of India
Internet