CREDIT MANAGEMENT OF ROOTS INDUSTRIES LIMITED

EXECUTIVE SUMMARY

Working capital management plays an important role in day to day operations of the business; hence the performance of the company mainly depends on it. The management of working capital involves managing inventories, accounts receivable and payable, and cash. The project aims to study the Working Capital Management that is undertaken by the concern, to determine the Operating Cycle and Cash Cycle. This study also includes the analysis of the projected working capital requirements of the company and provides certain suggestions to improve the performance of the company.

The Project highlights the investment options of the company, the methods used to control the accounts receivables, Monitoring and controlling of inventories. The Project is undertaken to determine the various sources of finance that are used to support the current assets of the company. The Project analyses Working Capital leverage and Working Capital Components. Here, the Working capital management takes place on two levels:

1) Ratio analysis that can be used to monitor overall trends in working capital and to identify areas requiring closer management.

2) The individual components of working capital can be effectively managed by using various techniques and strategies like credit, inventory, cash and liquidity management.

Both Primary and Secondary data are used for the project. Primary data are collected from the organization through interactions with the financial executives Secondary data that are used here are the projected annual report, various details including monthly sales, monthly receivables.

CONTENTS

DescriptionPage. No

AcknowledgementI

Executive SummaryII

ContentsIII

List of tablesIV

List of chartsV

1 Introduction

1.1 Topic1

1.2 Company Profile6

1.3 Need for the study7

1.4 Objective of the study8

1.5 Scope of the study9

1.6 Limitations of the study10

2 Literature Review11

3 Research Methodology18

4 Data Analysis and Interpretation19

5 Findings51

6 Suggestions57

7 Conclusion60

Bibliography61

LIST OF TABLESTable No.TITLEPage No.

1Inventory Period For The Year 2003-200721

2Accounts Receivable Period For The Year 2003-200721

3Operating Cycle For The Year 2003-200722

4Monthly Sales And Receivables Of The Year 200724

5DSO Of The Year 200724

6Collection Procedure Of The Year 200725

7Ageing Schedule26

8Current Assets Of The Year 200732

9Current Liabilities Of The Year 200732

10Inventory Turnover Ratio36

11Debtors Turnover Ratio37

12Average Collection Period39

13Current Ratio40

14Quick Ratio42

15Components Of Working Capital43

16Working Capital Turnover Ratio44

17Net Working Capital45

18Sales46

19Current Assets47

20Current Liabilities48

21Expenses 49

LIST OF CHARTS

CHART NO.CHART NAMEPAGE NO.

1Operating Cycle For The Year 2003-200722

2DSO For Each Quarter For The Year 200725

3Inventory Turnover Ratio37

4Debtors Turnover Ratio38

5Average Collection Period39

6Current Ratio41

7Quick Ratio42

8Working Capital Turnover Ratio44

9Projections On Net Working Capital46

10Projections On Sales47

11Projections On Current Assets48

12Projections On Current Liabilities49

13Projections On Expenses50

LIST OF FIGURES

FIGURE NO.FIGURE NAMEPAGE NO.

1Operating Cycle And Cash Cycle19

1. INTRODUCTION

1.1Topic

Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Working Capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher the profit margin, the lower is likely to be the level of Working Capital tied up in creating and selling titles. The faster that we create and sell the books the higher is likely to be the return on investment. Thus:

WORKING CAPITAL = CURRENT ASSETS CURRENT LIABILITIES

In a department's Statement of Financial Position, these components of working capital are reported under the following headings:

Current Assets

Liquid Assets (cash and bank deposits)

Inventory

Debtors and Receivables

Current Liabilities

Bank Overdraft

Creditors and Payables

Other Short Term Liabilities

Approaches to Working Capital Management

Working capital management takes place on two levels:

1) Ratio analysis can be used to monitor overall trends in working capital and to identify areas requiring closer management.

2) The individual components of working capital can be effectively managed by using various techniques and strategies.

1) Ratio analysis:

Key working Capital Ratios:

a)Stock Turnover Ratio

Formula: Average Stock * 365 / Cost of goods sold

Result = x days

b)Receivables Ratio (in days)

Formula: Debtors * 365/ Sales

Result = x days

c)Payables Ratio (in days)

Formula: Creditors * 365/Cost of Sales (or Purchases)

Result = x days

d)Current Ratio

Formula: Total Current Assets/ Total Current Liabilities

Result = x times

e)Quick Ratio

Formula: (Total Current Assets - Inventory)/Total Current Liabilities

Result = x times

f)Working Capital Ratio

Formula: (Inventory + Receivables - Payables)/Sales

Result = As % Sales

2) Specific Strategies

a)Inventory Management

Inventories are lists of stocks-raw materials, work in progress or finished goods-waiting to be consumed in production or to be sold. A department also needs a system of internal controls to efficiently manage stocks and to ensure that stock records provide reliable information.

The total balance of inventory is the sum of the value of each individual stock line. Stock records are needed to provide an account of activity within each stock line; as evidence to support the balances used in financial reports.

Inventory management is an important aspect of working capital management because inventories themselves do not earn any revenue. Holding either too little or too much inventory incurs costs.

The best ordering strategy requires balancing the various cost factors to ensure the department incurs minimum inventory costs.

b)Debtor Management

Debtors (Accounts Receivable) are customers who have not yet made payment for goods or services which the department has provided. Cash flow can be significantly enhanced if the amounts owing to a business are collected faster. Every business needs to know.... who owes them money.... how much is owed.... how long it is owing.... for what it is owed.

The objective of debtor management is to minimize the time-lapse between completion of sales and receipt of payment. The costs of having debtors are:

Opportunity costs (cash is not available for other purposes);

Bad debts.

Debtor management includes both pre-sale and debt collection strategies. Slow payment has a crippling effect on business; in particular on small businesses who can least afford it. If you don't manage debtors, they will begin to manage your business as you will gradually lose control due to reduced cash flow and, of course, you could experience an increased incidence of bad debt.c)Creditor Management

Creditors (Accounts Payable) are suppliers whose invoices for goods or services have been processed but who have not yet been paid. Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position.

Organizations often regard the amount owing to creditors as a source of free credit. However, creditor administration systems are expensive and time-consuming to run. The over-riding concern in this area should be to minimize costs with simple procedures.

While it is unnecessary to pay accounts before they fall due, it is usually not worthwhile to delay all payments until the latest possible date., Regular weekly or fortnightly payment of all due accounts is the simplest technique for creditor management.

d)Cash Management

Good cash management can have a major impact on overall working capital management. Cash Management identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.The key elements of cash management are:

Cash forecasting;

Balance management;

Administration;

Internal control.

e) Other components

Working capital, defined as the difference between current assets and current liabilities, may also include the following factors:

Prepayments to creditors;

Current portions of long-term liabilities;

Revenue received before it has been earned;

Provisions.

1.2 Company Profile

ACC Limited is Indias foremost manufacturer of cement and ready mix concrete with a countrywide network of factories and marketing offices. Established in 1936, ACC has been a pioneer and trend-setter in cement and concrete technology. ACCs brand name is synonymous with cement and enjoys a high level of equity in the Indian market. Among the first companies in India to include commitment to environment protection as a corporate objective, ACC has won several prizes and accolades for environment friendly measures taken at its plants and mines. The company has also been felicitated for its acts of good corporate citizenship.

ACC has a unique track record of innovative research, product development and specialized consultancy services. It is an important benchmark for the cement industry in respect of its production, marketing and personnel management processes. ACC is the only cement producer in India with its own in-house research and development facility. This unit, recognized by the Department of Scientific & Industrial Research (DSIR) in the Ministry of Science and Technology, is engaged in research and development activities related to cement and concrete areas. The R & D programme addresses a spectrum of activities that cover technical services for quality and technology up-gradation and development of products and processes in the companys core business. Given the inherent variability in the mineral resources used in cement manufacture, considerable attention has been devoted to continuously optimizing process conditions including raw materials proportioning to ensure the highest quality.

Sustainable development is recognized by us as a process of development that "meets the needs of the present without compromising the ability of future generations to meet their own needs". We believe this constitutes balancing the Triple Bottom Line - defined as the achievement of three interdependent and mutually reinforcing goals of economic development, social development, and environmental protection.

1.3 Need for the study

Working capital Management is referred as short term Financial Management which is in the terms of the timing of cash. The need of working capital management is to:

Ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses.

Maintain the optimum balance of each of the working capital components. Increase the Profitability of the company.

Highlight the necessity of managing current assets and current liabilities

1.4 Objectives of the study

PRIMARY OBJECTIVE:

1) Determine Operating Cycle and Cash Cycle.

2) Evaluation of Cash requirements for working capital.

3) Analyzing and controlling of accounts receivables.

4) Monitoring and Controlling of Inventories.

5) Analysis of Working Capital Leverage.

SECONDARY OBJECTIVE:

1) Analyze the ratios which affect the Working capital Requirements of the company and estimate the projections for the year 2007.

2) Analysis of working capital components.

1.5 Scope of the study

In the project, we take into consideration

The Annual report of various years.

The Profit and Loss Statement of various years.

Detailed description and data regarding cash discounts, collection effort, terms of payment of customers, credit policy variables, interest rates, credit risk, average collection period, credit period.

Information about the raw materials, their annual usage and the price of each raw material. Information about the sources of finance and their Investment options.1.6 Limitations of the study

Profit Criterion for Working Capital is not analyzed due to lack of data regarding the initial investment. Primary data that are collected by interacting with the financial executives may not be accurate. Details regarding the inventories such as the price of the raw materials are not revealed by the organization. Few assumptions are made in calculating the aging schedule. Credit Management is done for the ACC cement works Company, Madukkarai only whereas the rest of the project is done for the whole ACC Company.2. LITERATURE REVIEW

Working Capital Management: Difficult, but rewarding1

The article focuses on the importance of management of the working capital in a business enterprise. From the perspective of the chief financial officer (CFO), the concept of working capital management is relatively straightforward: to ensure that the organization is able to fund the difference between short-term assets and short-term liabilities. In practice, though, working capital management has become the Achilles' heel of scores of finance organizations, with many CFOs struggling to identify core working capital drivers and the appropriate level of working capital. By understanding the role and drivers of working capital management and acting to reach the "right" levels of working capital, companies can minimize risk, prepare for uncertainty and improve overall performance. The most effective programs for both improving working capital performance and forecasting are those that look beyond the local organization and consider the broader corporate environment. While working capital forecasting is critical to a company's ability to make informed strategic business decisions, many CFOs struggle with the process.

As a result, companies can be limited in their ability to weather unforeseen or adverse events and ensure that cash is readily available where it is needed, regardless of the circumstances. By understanding the role and drivers of working capital management taking steps to reach the "right" levels of working capital, companies can minimize risk, effectively prepare for uncertainty and improve overall performance.

For most CFOs, the greatest challenge with respect to working capital management is the need to understand and influence factors that are out of their direct control, in order to obtain a complete picture of the company's needs. The CFO's span of control can be limited in terms of functional silos, though corporate finance may well have some powers of influence over operating units. While organizations generally concentrate on the right processes, such as cash, payables and their supply chain, they are less likely to take into account various internal and external constraints that can

dictate how effectively those processes are executed. For example, the legal and business environments can have a significant impact on performance. Similarly, internal considerations such as organizational structure, shared systems, autonomous business units, multinational operations and even information technology can impact working capital, creating barriers that can hinder a CFO's ability to truly understand, and therefore manage, the company's needs. The human factor is another important consideration. If management is focused purely on top-line growth, insufficient attention may be applied to cash flow management and forecasting.

A hard-line focus on year-end or quarter-end results can produce a flattering, but inaccurate, picture of working capital performance and lead to counter-productive behavior. Consider the impact on working capital of a year-end sales push where production has been building up inventory (which may not be the appropriate inventory) to meet this artificial demand and the quality of receivables deteriorates during the yearly part of the following year. While there is no magical solution for effecting robust working capital management, there are a number of prerequisites for gaining control of the complex process.

Efficiency of Working Capital Management and Corporate Profitability2

Efficient working capital management is an integral part of the overall corporate strategy to create shareholder value. We investigate the relation between the firm's net-trade cycle and its profitability. This relationship is examined using correlation and regression analysis, by industry and working capital intensity. Using a Compustat sample of 58,985 firm years covering the period 1975-1994, we find, in all cases, a strong negative relation between the length of the firm's net-trade cycle and its profitability. In addition, shorter net-trade cycles are associated with higher risk-adjusted stock returns.

Efficient working capital management is an integral component of the overall corporate strategy to create shareholder value. Working capital is the result of the time lag between the expenditure for the purchase of raw materials and the collection for the sale of the finished product. The continuing flow of cash from suppliers to inventory to accounts receivable and back into cash is usually referred to as the cash conversion cycle. The way in which working capital is managed can have a significant impact on both the liquidity and profitability of the company. Smith (1980) first signaled the importance of the trade-offs between the dual goals of working capital management, i.e., liquidity and profitability. In other words, decisions that tend to maximize profitability tend not to maximize the chances of adequate liquidity. Conversely, focusing almost entirely on liquidity will tend to reduce the potential profitability of the company.

This paper empirically investigates the relationship between the firm's efficiency of working capital management and its profitability. It is an empirical question whether a short cash conversion cycle is beneficial for the company's profitability; A firm can have larger sales with a generous credit policy, which extends the cash cycle. In this case, the longer cash conversion cycle may result in higher profitability. However, the traditional view of the relationship between the cash conversion cycle and corporate profitability is that, ceteris paribus, a longer cash conversion cycle hurts the profitability of a firm. For

Example, America's leading retailing giants, Wal-Mart and Kmart, reported very different returns over 1994, notwithstanding a similar capital structure, i.e., about 31% debt financing. The return on sales, assets, and equity were respectively 0.87%, 1, 74%, and 4, 91 % for Kmart while they were 3.25%, 10,1% and 24,9% for Wal-Mart. The difference in profitability can be partly explained by the different cash conversion cycle, i.e. 61 days for Kmart and only 40 days for Wal-Mart,' A 21 -day shorter cash cycle applied to Kmart's 1994 sales of $34 billion, assuming a 10% cost of capital results in savings of $198.3 million a year.

Measuring associations between Working Capital and Return on Investment3

Investigates the associations between traditional and alternative working capital measures and return of investment (ROI) of industrial firms listed on the Johannesburg Stock Exchange. Importance of working capital management in decision making; Measurement based on profitability and liquidity concepts; Large influence of traditional working capital leverage ratio on ROI.

The two conflicting goals of working capital management are profitability and liquidity. This article looks at return on investment as a measure of profitability and some traditional and more recently developed working capital concepts as liquidity measures. Associations were measured between profitability and the liquidity concepts by using chi-square analysis and stepwise forward regression. The statistical test results showed that a traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the greatest associations with return on investment. Well-known liquidity concepts such as the current and quick ratios registered insignificant associations whilst only one of the newer working capital concepts, the comprehensive liquidity index, indicated significant associations with return on investment.

Promoters of working capital theory share the axiom that profitability and liquidity comprise the salient (albeit frequently conflicting) goals of working capital management. The conflict arises because the maximization of the firm's returns could seriously threaten the liquidity, and, on the other hand, the pursuit of liquidity has a tendency to dilute returns. Over the years analysts have employed traditional ratio analysis as a primary instrument in the measurement of corporate liquidity. Many well-established liquidity ratios, for example the current ratio, are simple to apply and have some theoretical merit: increases in, say, accounts receivable will increase the current ratio (current assets/current liabilities), suggesting improved liquidity. However, the ability to match short-term obligations has only improved from a liquidation perspective (providing current assets may be liquidated at current market value), and not from a going-concern approach (Shulman & Dambolena, 1986: 35). Liquidity for the on-going firm is not reliant on the liquidation value of its assets, but rather on the operating cash flow generated by those assets (Soenen, 1993: 53).

In recent literature some alternative working capital concepts have been advocated as likely (and possibly improved) measures of liquidity. Four such measures are the cash conversion cycle, the net trade cycle, the comprehensive liquidity index and the net liquid balance. The purpose of this article is to report on some results of research undertaken to measure associations between traditional and alternative working capital measures and return on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange (JSE).

The article proceeds with an assertion of the problem to be investigated, followed by a short description of the traditional and alternative working capital measures included in the study. It then advances to the method of research and a brief discussion on the data set, variables used and the statistical tests applied.

Working Capital Measure Examined3

Traditional working capital ratios may be classified according to whether they measure working capital position, working capital activity or leverage (Emery, 1984: 26; Lovemore & Brummer, 1993: 83). Working capital position ratios, typically the current and quick ratios, measure the degree to which the firm's currently maturing obligations are covered by currently maturing assets. The current ratio is regarded as a broad measure of liquidity and is expressed as current assets divided by current liabilities. The quick ratio is considered to be a narrow measure of liquidity and is expressed as current assets minus inventory divided by current liabilities.

Working capital activity ratios attempt to measure the relative efficiency of the firm's resources by relating the level of investment in different current assets to the level of operations (Gallinger & Healey, 1991: 73). Frequently cited activity measures are inventory turnover, accounts receivable turnover, accounts payable turnover and sales to net working capital. Inventory turnover is defined as the cost of sales over average inventory. Accounts receivable turnover measures the speed of converting accounts receivable into cash, and is calculated as credit sales divided by accounts receivable. Accounts payable turnover reveals the effectiveness of the management of a firm's short-term financing, and is represented by credit purchases divided by accounts payable. Sales to net working capital centres on the proficiency of the utilization of working capital, and the higher the ratio, the greater the proficiency will be.

Leverage measures provide evidence of cash obligations attributable to the firm's long-term financing, demonstrating the existence of debt capacity that could be used to provide additional liquidity (Emery, 1984: 26). Frequently used leverage measures include long-term loan capital divided by net working capital, accounts receivable divided by accounts payable, and total current liabilities divided by gross funds flow. Long-term loan capital divided by net working capital provides evidence of the magnitude of the long-term loan capital financing of working capital. Accounts receivable divided by accounts payable reflects the degree to which credit extended by the firm is financed by the credit supplied by creditors. Total current liabilities divided by gross funds flow, expressed in years, reflects the ability of the firm to repay the various short-term funds received from its gross funds flow, the latter being defined as the income after taxation plus the net nonfunds flow items of the firm (BFA, 1989: 39-40).

Alternative working capital measures developed over the years (in an effort to surmount the imperfections of conventional ratio analysis) include the cash conversion cycle, the comprehensive liquidity index, the net liquid balance and the net trade cycle. The cash conversion cycle, developed by Richards & Laughlin (1980: 33-34), may be computed as follows: the average collection period of accounts receivable is added to the average age of the inventory; the sum of the two statistics represents the firm's operating cycle, from which the average payment period is subtracted. In this way, the working capital cycle is quantified to portray the residual time interval for which nonspontaneous financing needs to be negotiated to compensate for the unsynchronized nature of the firm's working capital investment flows.

The net trade cycle, similar to the cash conversion cycle, measures liquidity on a flow basis. Where the measure differs from the cash conversion cycle, instead of computing number of days of cost of goods sold in inventory and number of days of purchases in accounts payable, the net trade cycle calculates days of sales in both (Kamath, 1989:26).

The comprehensive liquidity index developed by Melnyk & Berati (Scherr, 1989: 357-372), is a liquidity-weighted version of the current ratio, where each current asset and liability is weighted based on its nearness to cash. The weighting is done by multiplying the monetary value of each current asset or liability by one minus the inverse of the asset or liability's turnover ratio. Where more than two turnovers are required to generate cash from the asset, the inverse of each of these ratios is deducted, and the results added for all the current assets and liabilities. The added totals depict liquidity-adjusted measures of total current assets and liabilities. In this way the current ratio can be computed, based on the adjusted values for current assets and liabilities.

The net liquid balance approach, applied by Shulman & Dambolena (1986: 35-38), differentiates operational assets from liquid assets in an attempt to measure the true liquid balance of financial assets after operational needs have been met. The net liquid balance may be defined as cash plus marketable securities less all liquid financial obligations including notes payable and the current portion of long-term debt (Kamath, 1989: 28). A positive net liquid balance would indicate the true liquid surplus of a firm, while a negative net liquid balance would indicate a dependence on short-term external funding. The net liquid balance divided by total assets could be regarded as a relative measure of liquidity.

Gross Margin Return on Working Capital: A Project Management Technique4

Presents the Gross Margin Return on Working Capital for project management technique. Improvement of return of assets criteria for product management; Significance of graphic presentations in implementing the technique; Relevance of the technique to gross margin percent and inventory turnover.

1. Harris, Andrew, Working Capital Management: Difficult, but rewarding, P 52-53.

2. Hyun-han Shin, Soenen, Luc, Efficiency of Working Capital Management and Corporate Profitability, P37-45.

3. Smith, M. Beaumont, Begemann, E., Measuring Working Capital and Return on Investment, P1-5.

4. Metcalf, Jerry, Gross Margin Return on Working Capital: A Project Management Technique, P 27.

3. RESEARCH METHODOLOGY

RESEARCH DESIGN:

Descriptive Research

SOURCE OF DATA:

Both primary and secondary sources of data have been used in the project.

PRIMARY DATA:

Primary data have been collected from the organization. These data were obtained from the interactions with the financial executives in the company. These are in the form of verbal reports, computer reports, etc.

SECONDARY DATA:

Secondary data are drawn from annual reports, records, sales report, Purchase order and Inventory Report.

TOOLS USED FOR ANALYSIS:

Financial Ratio Analysis

Trend Analysis

Time Series Analysis

4. DATA ANALYSIS AND INTERPRETATION

WORKING CAPITAL MANAGEMENT

4.1 To Determine Operating Cycle and Cash Cycle

The time that elapses between the purchase of raw materials and the collection of cash for sales is referred to as the Operating Cycle, whereas the time length between the payment of raw material purchases and the collection of cash for sales is referred to as the Cash Cycle.

Figure 1CASH CYCLE AND OPERATING CYCLE

The Operating Cycle is the sum of the inventory period and the accounts receivable period, whereas the Cash Cycle is equal to the Operating Cycle less the accounts payable period.

From the financial statement of the firm, we can estimate the inventory period, the accounts receivable period, and the accounts payable period. All the data is given in Rs. Crore)

Average Inventory

Inventory Period =

(Annual Cost of goods Sold / 365)

(600.95 + 542.38) / 2

= = 73.8 days

(2,823.9 / 365)

Average Accounts Receivable

Accounts Receivable Period =

Annual sales / 365

(199.17 + 190.54) / 2

= = 22.2 days

(3,203.41 / 365)

Average Accounts Payable

Accounts Payable Period =

Annual Cost of goods sold / 365

(103.78 + 105.65) / 2

= = 13.53 days

(2,823.9 / 365)

Operating Cycle = Inventory Period + Accounts Receivable Period

= 73.8 days + 22.20 days

= 96 days

Cash Cycle = Operating Cycle - Accounts Payable Period

= 96 days - 13.53 days

= 82.47 days

Thus, ACC limited takes about 82.47 days to collect payment form its customers from the time it pays for its inventory purchases.

4.2 TIME SERIES ANALYSIS

TABLE 4.2.1: INVENTORY PERIOD FOR THE YEAR 2003-2007

YearAverage Inventory (in Rs. Crore)Annual Cost of goods Sold (in Rs. Crore)Inventory Period (in days)

2003357.101,670.5678.02

2004416.531,890.1180.43

2005472.662,010.1085.83

2006644.002,800.9883.92

2007571.672,823.9073.80

TABLE 4.2.2: ACCOUNTS RECEIVABLE PERIOD FOR THE YEAR 2003-2007

YearAverage Accounts Receivable (in Rs. Crore)Annual Sales(in Rs. Crore)Accounts Receivable Period (in days)

2003202.073,384.4321.79

2004178.953,657.0117.86

2005207.053,560.4421.23

2006208.594,227.2218.01

2007194.863,203.4122.20

TABLE 4.2.3: OPERATING CYCLE FOR THE YEAR 2003-2007

YearInventory Period(in days)Accounts Receivable Period (in days)Operating Cycle (in days)

200378.0221.7999.81

200480.4317.8698.29

200585.8321.23107.06

200683.9218.01101.93

200773.822.2096.00

CHART 4.2.1: OPERATING CYCLE FOR THE YEAR 2003-2007

4.3 CREDIT MANAGEMENT

4.3.1 Control of Account Receivables

The customers of ACC limited are of two types. One is the direct customers and the other one is the dealers. Dealers maintain the security deposits with the company and the company will provide two times of the value of the security deposits as credit. In case of direct customers, these customers have to pay 60% of the amount as advance payment. Cash discount of 2 percent is allocated to all the customers. The remaining credit amount is paid by the customers in installments. For example, if the sale is made between 1 and 7th of the month, then the first installment should be made on 14th of the same month. So, the average credit period is only about 10 days. If the customers are not paying their installments properly, no cash discount is allowed to them. The organization verifies the bank statement of their customers before providing credit ti their customers.

DAYS SALES OUTSTANDING The days sales outstanding(DSO) at a given time t may be defined as the ratio of accounts receivable outstanding at that time to average daily sales figure during the preceding 30 days, 90 days, or some other relevant period.

Accounts receivables at time t

DSO t = _____________________________ __________ Eq 8

Average daily sales

The figure can be interpreted as either the average time lag between a credit sale and payment for the sale or as the average days worth of credit sales tied up in account receivables. Since the collection period measures account receivables per unit sales, a change in the collection period is a rough measure of changing collection experience.

However, a major weakness of the ratio for this purpose is that it is quite sensitive to seasonal variation in sales. Consequently, unless sales are quite stable overtime, the collection period can mask fundamental changes in collection experience.

To illustrate the calculation of this measure, consider the monthly sales and receivable for ACC Limited for the year 2007.

TABLE 4.3.1.1: MONTHLY SALES AND RECEIVABLES OF THE YEAR 2007

MonthSales(rupees in lakhs)Accounts Received (rupees in lakhs)Outstanding Receivables( rupees in lakhs )

January856770.490.8

February795801.180.1

March784785.179.0

April1,0561,484106.0

May1,0021,007.4100.0

June44249845.9

July564551.855.6

August462472.245.3

September768737.475.4

October890877.890.5

November873874.785.6

December774783.977.2

TABLE 4.3.1.2: DSO OF THE YEAR 2007

QuarterCalculationDays Sales Outstanding

First785.1/ [( 856 + 795 + 784)/90] 29.00

Second498/ [ (1056+1002+442) / 90 ]17.93

Third737.4 / [ (564+ 462+768)/ 90 ]36.99

Fourth783.9 / [(890 + 873 + 774) /90]27.81

CHART 4.3.1.1: DSO FOR EACH QUARTER FOR THE YEAR 2007

INTERPRETATION

The table above shows that the Days Sales Outstanding for each quarter of the year 2007. For the first quarter the DSO was 29 days, for the second quarter it was 17.93 days, for the third quarter it was 36.99 days and for the fourth quarter it was 27.81days. It decreased in the second quarter, increased in the third quarter but decreased in the third quarter and again increased in the fourth quarter.

4.3.2 COLLECTION PROCEDURE

TABLE 4.3.2.1: COLLECTION PROCEDURE OF THE YEAR 2007

Percentage of receivables collected during theJanuary SalesFebruary SalesMarch SalesApril SalesMay SalesJune Sales

At the time of sales 606060606060

First following week101010101010

Second following week101010101010

Third following week101010101010

Fourth following week101010101010

INTERPRETATION

The Collection Procedure for the first six months of the year 2007 has been estimated. The credit sales during the month of January are collected as follows: 60 percent is paid as the advance payment in the month in which sale is made. 10 percent in the first following week, 10 percent in the second following week, 10 percent in the third following week, 10 percent in the fourth following week. From the collection pattern it seems that the collection is stable and they have a formalized procedure for collecting the amount from their customers.

4.3.3 AGEING SCHEDULE

The ageing Schedule given below classifies outstanding accounts receivables at a given point of time into different age brackets.

TABLE 4.3.3.1: AGEING SCHEDULE

Age Group (in days)Percent of receivables receivedPercent of receivables outstanding

0 10 days60%40%

11 20 days70%30%

21 30 days80%20%

31 40 days90%10%

41 50 days100%

INTERPRETATION

From the ageing schedule table, it is clear that ACC Limited collects 60% as its advance payments and the customers pay their remaining amount in four instalments. The first instalment 10 percent is received within 20 days from the day of sale, the second instalment 10 percent is received within 30 days from the day of sale, the third instalment 10 percent is received within 40 days from the day of sale and the last instalment is received within 50 days from the day of sale. All its debt is collected within 50 days.

4.4 INVENTORY MANAGEMENT

4.4.1 MONITORING AND CONTROL OF INVENTORIES

ABC Analysis

In most inventories a small proportion of items accounts for a very substantial usage (in terms of the monetary value of annual consumption) and a large proportion of items accounts for a very small usage (in terms of the monetary value of annual consumption). ABC analysis, based on this empirical reality, advocates in essence a selective approach to inventory control which calls for a greater concentration of effort on inventory items accounting for the bulk of usage value. This approach calls for classifying inventories into three broad categories, A, B, and C. Category A, representing the most important items, generally consists of 15 to 25 percent of inventory items and accounts for 60 to 75 percent of annual usage value. Category B, representing items of moderate importance, generally consists of 20 to 30 percent of inventory items and accounts for 20 to 30 percent of annual usage value. Category C, representing items of least importance, generally consists of 40 to 60 percent of inventory items and accounts for 10 to 15 percent of annual usage value.

In ACC Limited, the raw materials used for consumption are Limestone, Gypsum and fly ash. Category A represents the item Gypsum which consists of 15 to 25 percent of inventory items and accounts for 60 to 75 percent of annual usage value. Category B represents the item fly ash which consists of 20 to 30 percent of inventory items and accounts for 20 to 30 percent of annual usage value. Category C, representing Limestone which consists of 40 to 60 percent of inventory items and accounts for 10 to 15 percent of annual usage value.

Measures of Effectiveness

For purposes of monitoring the effectiveness of inventory management it is helpful to look into the following ratios and indexes:

Cost of goods sold

Overall inventory turnover ratio =

Average total inventories at cost

2,823.9

= = 4.94 days

571.67

Average consumption of raw material

Raw Material inventory turnover ratio =

Average raw material inventory

175.19

= = 0.49 days

359.57

Cost of Manufacture

Work- in- process inventory turnover ratio =

Average Work in Progress inventory at cost

2,685.03

= = 16.03 days

167.47

Cost of goods sold

Finished goods inventory turnover ratio =

Average inventory of finished goods at cost

2,823.9

= = 39.54 days

71.424.5 ESTIMATION OF WORKING CAPITAL NEEDS

The most appropriate method for calculating the working capital needs of a firm is the concept of operating cycle. Three approaches used to estimate the working capital requirements are:

Current assets holding period: To estimate working capital requirements on the basis of average holding period of current assets and relating them to costs based on the companys experience in the previous years. This method is essentially based on the operating cycle concept.

Ratio of sales: To estimate the working capital requirements as a ratio of sales on the assumptions that the current assets change with sales.

Ratio of fixed investment: To estimate working capital requirements as a percentage of fixed investment.

The calculations are based on the following assumptions regarding each of the three methods:

METHOD 1:

Inventory: One months supply of each of raw material, semi-finished goods and finished materials.

Debtors: one months sales.

Operating cash: one months total cost.

METHOD 2: 25-35% of annual sales

METHOD 3: 10-20% of fixed capital investment

Calculations:

METHOD 1:

Raw material: one months supply: 362.06 / 12 = Rs 30.17 Crore.

Semi-finished material: One months supplies (based on raw material plus assume one-half of normal conversion cost):

(30.17+ (184.84+31.23+299.52+3.32+99.43+60.14)/2)/12 = Rs 42.22 Crore.

Finished material: one months supply: 71.42/12 = Rs 5.95 Crore.

The total inventory needs = 30.17 + 42.22 + 5.95 = Rs 78.34 Crore.

After determining the inventory requirements, projection for debtors and operating cash should be made:

Debtors: One months sales:3,203.41 / 12 = Rs 266.95 Crore.

Operating cash: One months total cost: 2,595/12 = Rs 216.25 Crore

Thus the total working capital required is: 78.34 + 266.95+216.25 = Rs 561.54 Crore

METHOD 2:

The average ratio is 30 percent. Therefore, 30 percent of annual sales, Rs 3203.41 is Rs 961.023 crore.

METHOD 3:

The ratio of current assets to fixed investment ranges between 10 to 20 percent. The average ratio is 15 percent. The 15 percent of the fixed investment Rs 293.75 Crore is Rs 44.06 crore.

The accuracy of these methods depends on various factors. The production factor and credit and collection policy of the firm would have an impact on working capital requirements. Therefore, they should be given weightage in projecting working capital requirements.

4.6 WORKING CAPITAL LEVERAGE

Working Capital Leverage reflects the sensitivity of return on Investment (earning Power) to changes in the level of current assets. To express the formula for working capital leverage the following symbols are used:

CA = value of current assets (gross working capital)

CA = change in the level of current assets

FA = value of net fixed assets

TA = value of total assets (TA = CA +FA)

EBIT = Earnings before Interest and Taxes

ROI = Return on Investment defined as EBIT/ TA

Calculations:

Current assets = 1,421.16

Change in the level of current asset = 207. 45

Fixed asset = 3,122.03

Total asset = current asset + fixed asset = 1,421.16 + 3,122.03 = 4,543.19

EBIT = 2,976.92

ROI = EBIT/ TA

= 2,976.92/4,543.19 = 0.655

CA

Working Capital Leverage =

TA + CA

1,421.16

=

4,543.19 + 0.17*(1,421.16)

= 0.297

4.7 WORKING CAPITAL FINANCING

Maximum Permissible Bank Finance

Three methods are there to determine the maximum permissible bank finance.

CA = Currents Assets as per the norms laid down

CL = non-bank current liabilities like trade credit and provisions

CCA= Core Current Assets (this represents the permanent component of working capital).

The methods for determining the MPBF are described below:

Method 1: MPBF = 0.75 (CA CL)

Method 2: MPBF = 0.75 (CA) CL

Method 3: MPBF = 0.75 (CA CCA) - CL

TABLE 4.7.1: CURRENT ASSETS OF THE YEAR 2007

Current Assetsin Rs. Crore

Inventories600.95

Sundry Debtors199.17

Cash and Bank Balances102.79

Other Current Assets31.79

Loans and Advances486.76

Total 1,421.16

TABLE 4.7.2: CURRENT LIABILITIES OF THE YEAR 2007

Current LiabilitiesIn Rs. Crore

Sundry Liabilities913.28

Provisions316.77

Total1,230.05

Calculations:

Method 1:

MPBF = 0.75 (CA CL)

= 0.75(1,421.16 1230.05)

= Rs 143.33 Crore

Method 2:

MPBF = 0.75 (CA) CL

= 0.75(1,421.16) - 1,230.05

= - 164.18

Method 3:MPBF= 0.75 (CA CCA) - CL

= 0.75(1,421.16-391.06) 1,230.05

= -457.43

Interpretation:

The first method can be adopted. The current liabilities including MPBF are Rs1,373.38 Crore. Therefore, the current ratio is 1.03.

4.8 ANALYSIS OF WORKING CAPITAL COMPONENTS

In order to understand the length of time for which resources are committed to various components of working capital, operating cycle analysis can be done. An extension of this analysis which may be referred as the weighted operating cycle analysis may be done to reflect the magnitudes of resources commitments.

Operating Cycle Analysis

The operating cycle of a firm begins with the acquisition of raw materials and ends with the collection of receivables. There are four aspects of the operating cycle which involve commitment of resources: raw material stage; work- in- progress stage; finished goods stage; and accounts receivable stage. There is one aspect of the operating cycle which provides resources; accounts payable stage (this is the period for which credit is provided by the suppliers of the raw materials).

The duration of the Operating Cycle may be defined as

Doc = DRM + Dwip + Dfg + Dar - Dap

WhereDoc = duration of the Operating Cycle

DRM = duration of the raw materials and stores stage

Dwip = duration of work-in-progress stage

Dfg = duration of finished goods stage

Dar = duration of accounts receivable stage

Dap = duration of the accounts payable stage

Duration of the Raw materials and Stores Stage: This represents the number of days for which raw materials and stores remain in inventory before they are issued for production. It may be calculated as:

Average stock of raw materials and stores

DRM =

Average raw materials and stores consumed per day

145.19

= = 16.71 days

8.69

Duration of Work-in-Process stage: This represents the number of days required in the work-in-process stage. It may be measured as:

Average work-in-process inventory

Dwip =

Average work-in-process value of raw materials committed per day

167.47

= = 26.58 days

6.3

Duration of the Finished Goods Stage: This reflects the number of days for which finished goods remain in inventory before they are sold. It may be calculated as:

Average finished goods inventory

Dfg =

Average cost of goods sold per day

71.42

= = 9.23 days

7.74

Duration of the Accounts receivable Stage: This denotes the number of days required to collect the accounts receivable. It may be measured as:

Average accounts receivable

DRM =

Average sales per day

194.86

= = 22.19 days

8.78

Duration of the Accounts Payable stage: This represents the number of days for which

the suppliers of raw materials offer credit. It may be calculated as:

Average accounts Payable

DRM =

Average credit purchases per day

104.72

= = 8.38 days

12.50

The duration of the Operating Cycle may be defined as

Doc = DRM + Dwip + Dfg + Dar - Dap

= 16.71 + 26.58 + 9.23 + 22.19 - 8.38

= 66.33 days

4.9 RATIO ANALYSIS

Key Working Capital Ratios

4.9.1 Inventory Turnover Ratio

Inventory turnover ratio is the number of times the inventory is turned over in the business during a particular period and it measures the relationship between sales and average inventory. This ratio measures how quickly inventory is sold and indicates whether investment in inventory is within proper limits or not, signifying the liquidity of the inventory. Higher the ratio more the sales and minimum level of inventory is held and hence possessing good inventory management.

TABLE 4.9.1: INVENTORY TURNOVER RATIO

YearSalesAverage InventoryRatio

2003 20043,348.43357.109.37

2004 20053,657.01416.538.77

2005 20063,560.44472.667.53

2006 20074,227.22644.006.56

20073,363.46629.135.34

INTERPRETATION

During the year 2003-04 the inventory turnover ratio was 9.37. It shows a decreasing trend thereafter. The lowest ratio was during 2007 and was 5.34 because of decrease in sales and maximum level of inventory held on stock.

CHART 4.9.1: INVENTORY TURNOVER RATIO

4.9.2 DEBTORS TURNOVER RATIO

Debtors turnover ratio is the relationship between net credit sales and average debtors. This ratio shows how quickly receivables or debtors are converted to cash. It is also called accounts receivable. Sound credit and collection period results in efficient receivables management. Net credit sales include sale of products, recoveries, excise duty adjustment and products consumed internally. The higher the ratio, the better debts are being collected more promptly.

TABLE 4.9.2: DEBTORS TURNOVER RATIO

YearNet Credit SalesAverage DebtorsRatio

2003 20043,348.43165.4120.24

2004 20053,657.01173.2221.11

2005 20063,560.44195.3818.22

2006 20074,227.22212.1119.92

20073,363.46242.6213.86

INTERPRETATION

The debtors turnover ratio of ACC during 2003-04 was 20.24 and reduced to 13.86 in 2007. The ratio shows a declining trend. This was due to delay in collection of debts. This shows inefficient credit management of the company. So it is to be concluded that debtors turnover ratio shows unsatisfactory position of ACC because of decreasing trend in the ratio.

CHART 4.9.2: DEBTORS TURNOVER RATIO

4.9.3 AVERAGE COLLECTION PERIOD

Average collection period measures the liquidity of the firm and it is the time taken for collection of debts. It is calculated by dividing days in a year by debtors turnover ratio. Shorter collection of debts and quick payments by debtors increase the liquidity of the firm. The longer collection period shows delayed payment by debtors and hence declining liquidity position.

TABLE 4.9.3: AVERAGE COLLECTION PERIOD

YearDays in a yearDebtors Turnover RatioDays

2003 200436020.2418

2004 200536021.1117

2005 200636018.2220

2006 200736019.9218

200736013.8626

CHART 4.9.3: AVERAGE COLLECTION PERIOD

INTERPRETATION

Average collection period of ACC during 2003-04 was 18 days; it has decreased to 17 days in 2004-05 again to 20 and 18 days in 2005-06 and 2006-07 and finally increased to 26 days. This increase was due to the inefficiency in managing debtors by company.

4.9.4 CURRENT RATIO

Current ratio may be defined as the relationship between current asset and current liabilities. This ratio is known as working capital ratio and is a measure of general

Liquidity. Desirable current ratio is 2:1. Current ratio of a firm represents the assets which

Can be converted into cash within a short period of time, not exceeding one year. Current Liabilities include liabilities and provisions which are short term maturing obligations to be net within a year. The higher the current ratio, the more the firms ability to meet current obligations and greater the safety of funds of short term creditors.

TABLE 4.9.4: CURRENT RATIO

YearCurrent AssetsCurrent Liabilities Ratio

2003 2004951.53631.041.50

2004 2005949.05720.251.31

2005 20061,199.72905.081.32

2006 20071,371.291,057.411.29

20071,420.881,250.411.13

INTERPRETATION

The current ratio has decreased from the year 2003 to 2007. The current assets are greater than current liabilities in all these years. This shows that the company is always maintaining the current assets more than the current liability.

CHART 4.9.4: CURRENT RATIO

4.9.5 QUICK RATIO

Quick ratio can be defined as the relationship between quick assets and current liabilities. Quick assets are cash like assets representing all current assets other than inventory. It is also called Acid test ratio. It is more severe and stringent test of a firms ability to meet current obligations assessing how liquid the firm would be if the business operations come to an abrupt halt. A quick ratio of 1:1 is considered as a fair indication of the good financial condition of a business concern.

TABLE 4.9.5: QUICK RATIO

YearQuick AssetsCurrent Liabilities Ratio

2003 2004594.43631.040.94

2004 2005532.52720.250.73

2005 2006727.06905.080.80

2006 2007727.291,057.410.68

2007791.751,250.410.63

INTERPRETATION

The quick ratio during the year 2003-2004 was 0.94 which was very close to the standard ratio and indicated a good financial condition of the business. Then there was a constant decrease over the years. This is because of the increase in the current liabilities.

CHART 4.9.5: QUICK RATIO

4.9.6 WORKING CAPITAL TURN OVER RATIO

Net working capital ratio is the measure of the efficiency of the employment of the working capital. It finds out the relationship between the cost of sales and the working capital. It helps in determining the liquidity of a firm in as much as it gives the rate at which the inventories are converted to sales and then to cash. Working Capital Turnover ratio is calculated in order to analyze how working capital has been effectively utilized in making sales. The higher the ratio the lower the investment in working capital and greater the profit.

TABLE 4.9.6.1: COMPONENTS OF WORKING CAPITAL

Components2003 20042004 20052005 20062006 20072007

Current Assets

Investories357.10416.53472.66644.00629.13

Debtors202.07178.95207.05208.59217.87

Cash & Bank balances37.7845.66113.9387.29106.44

Other current assets6.043.153.564.6531.50

Loans & Advances348.54304.76402.52426.76435.94

Total951.53949.051,199.721,371.291,420.88

Current Liabilities

Sundry Liabilities555.54639.90773.44844.34931.93

Provisions75.5080.35131.64213.67318.48

Total631.04720.24905.081,057.411,250.41

Net Current Assets320.49228.80294.64313.88170.47

TABLE 4.9.6.2: WORKING CAPITAL TURNOVER RATIO

YearNet salesNet working capitalRatio

2003 20043,348.43320.4910.44

2004 20053,657.01228.8015.98

2005 20063,560.44294.6412.08

2006 20074,227.22313.8813.46

20073,363.46170.4719.73

INTERPRETATION

The working capital ratio of ACC during the year 2003-2004 was 10.44 which have increased during the next few years. The highest net sales were in the year 20062007 and lowest working capital was in the year 2007. This shows that there was lowest investment and greater profit.

CHART 4.9.6: WORKING CAPITAL TURNOVER RATIO

4.10 TREND ANALYSIS

A trend means a basic tendency of a series to grow or decline over a period of time. The concept of trend doesnt include short range oscillation, but rather a steady movement over a long time. The tendency of a particular data to grow over a period of time is known as growth factor. On the other hand the tendency of economic data to fall over a period of time is declining factor. The trend has either growth factor or declining factor. It may have either upward or downward movement.

4.10.1 PROJECTIONS FOR THE YEARS 2006 AND 2007

The Method of Least Squares has been used for making projections for net working capital, sales, current assets, current liabilities and expenses. By the method of least squares a straight line trend can be fitted to a given time series of data. It is mathematical as well as analytical data. The trend line is called the line of best fit. The actual figures and the trend values have been plotted in a graph. The following items have been projected.

TABLE 4.10.1: Net Working Capital

YearNet Working Capital (y)Deviation (x)x2xyTrend

2003320.49(2)4(640.98)297.28

2004228.80(1)1(228.80)287.15

2005294.64000.00 277.02

2006313.8811313.88 266.89

2007227.2924454.59 256.76

20083246.63

20094236.50

CHART 4.10.1: PROJECTIONS ON NET WORKING CAPITAL

INFERENCE

The trend for Net Working Capital is a decreasing trend. It decreases from Rs 298 Crore to Rs 236 Crore in the period of seven years.

TABLE 4.10.2: Sales

YearSales (y)Deviation (x)x2xyTrend

20033,348.43(2)4(6,696.86)3,287.03

20043,657.01(1)1(3,657.01)3,571.29

20053,560.44000.00 3,855.54

20064,227.22114,227.22 4,139.80

20074,484.61248,969.23 4,424.06

200834,708.32

200944,992.57

Chart 4.10.2: Projection on Sales

INFERENCE

The trend for Sales is an increasing trend. It is expected to increases from Rs3,287 Crore to Rs 4,992 Crore in the period of seven years.

TABLE 4.10.3: Current Assets

YearCurrent Assets (y)Deviation (x)x2xyTrend

2003951.53(2)4(1,903.06)811.58

2004949.05(1)1(949.05)1,042.40

20051,199.72000.00 1,273.22

20061,371.29111,371.29 1,504.04

20071,894.51243,789.01 1,734.86

200831,965.68

200942,196.50

CHART 4.10.3: Projection on Current Assets

INFERENCE

The trend for current asset is an increasing trend. It is expected to increases to Rs 2,196 Crore for the year 2007.

TABLE 4.10.4: Current Liabilities

YearCurrent Liabilities (y)Deviation (x)x2xyTrend

2003631.04(2)4(1,262.08)514.30

2004720.25(1)1(720.25)755.25

2005905.08000.00 996.20

20061,057.41111,057.41 1,237.15

20071,667.21243,334.43 1,478.10

200831,719.05

200941,960.00

CHART 4.10.4: Projection on Current Liabilities

INFERENCE

The trend for current liabilities is an increasing trend. It is expected to increases to Rs 1,960 Crore for the year 2007.

TABLE 4.10.5: Expenses

YearCurrent Assets (y)Deviation (x)x 2xyTrend

20032,840.69(2)4(5681.38)2,973.54

20043,203.72(1)1(3203.72)3,129.19

20053,518.23000.003,284.85

20063,281.55113281.553,440.50

20073,580.04247160.083,596.15

200833,751.81

200943,907.46

CHART 4.10.5: Projections on Expenses

Inference

The trend for Expense is an increasing trend. It is expected to increases to Rs3,907 Crore for the year 2007.

5. FINDINGS

5.1 DETERMINATION OF OPERATING CYCLE AND CASH CYCLE

The inventory period for ACC Limited is 73.8 days, the accounts receivable period is 22.2 days and the accounts payable period is 13.53 days. So, the operating cycle is 96 days and the cash cycle is 82.47 days. The firm has higher operating and cash cycle. Thus, ACC limited takes about 82.47 days to collect payment from its customers from the time it pays for its inventory purchases.5.2 TIME SERIES ANALYSIS

5.2.1 Inventory Period

Inventory period for the year 2003 2007 are 78, 80, 86, 84 and 74 days. The inventory period has been increasing from the year 2003 2006 and it has decreased in the year 2007.

5.2.2 Accounts Receivable Period

Accounts receivable period for the year 2003 2007 are 22 days, 18 days, 21 days, 18 days, 22 days. The accounts receivable period has decreased from 22 days to 18 days in the year 2006 but it has again increased to 22 days in the year 2007.

5.2.3 Operating Cycle

Operating Cycle for the year 2003 2007 are 100 days, 98 days, 107 days, 102 days, 96 days. The operating Cycle has increased to 107 days in the year 2005 and it has been decreased to 96 days in the year 2007.

5.3 Credit Management

5.3.1 Control of Accounts Receivables

Days Sales Outstanding

For the first quarter the DSO was 29 days, for the second quarter it was 17.93 days, for the third quarter it was 36.99 days and for the fourth quarter it was 27.81days. It decreased in the second quarter, increased in the third quarter but decreased in the third quarter and again increased in the fourth quarter.

COLLECTION PROCEDURE

The Collection Procedure for the first six months of the year 2007 has been estimated. The credit sales during the month of January are collected as follows: 60 percent is paid as the advance payment in the month in which sale is made. 10 percent in the first following week, 10 percent in the second following week, 10 percent in the third following week, 10 percent in the fourth following week. From the collection pattern it seems that the collection is stable and they have a formalized procedure for collecting the amount from their customers.

AGEING SCHEDULE

From the ageing schedule table, it is clear that ACC Limited collects 60% as its advance payments and the customers pay their remaining amount in four installments. The first installment 10 percent is received within 20 days from the day of sale, the second installment 10 percent is received within 30 days from the day of sale, the third installment 10 percent is received within 40 days from the day of sale and the last installment is received within 50 days from the day of sale. All its debt is collected within 50 days.

5.4 INVENTORY MANAGEMENT

5.4.1 MONITORING AND CONTROL OF INVENTORIES

In ACC Limited, the raw materials used for consumption are Limestone, Gypsum and fly ash. Category A represents the item Gypsum which consists of 15 to 25 percent of inventory items and accounts for 60 to 75 percent of annual usage value. Category B represents the item fly ash which consists of 20 to 30 percent of inventory items and accounts for 20 to 30 percent of annual usage value. Category C, representing Limestone which consists of 40 to 60 percent of inventory items and accounts for 10 to 15 percent of annual usage value.

5.4.2 MEASURE OF EFFECTIVENESS

The overall inventory turnover ratio is 5 days; the raw material turnover ratio is 0.5 days, work-in-progress inventory turnover ratio is 16.03 days and finished goods inventory turnover ratio is 40 days. The ratio is higher due to more sales and minimum level of inventory is held and hence possessing good inventory management.

5.5 ESTIMATION OF WORKING CAPITAL NEEDS

Three methods are used for calculating the cash requirements for working capital. The working capital requirements calculated by the three methods are Rs 562 Crore, Rs 961 Crore and Rs 44 Crore. The accuracy of these methods depends on various factors. The production factor and credit and collection policy of the firm would have an impact on working capital requirements. Therefore, they should be given weightage in projecting working capital requirements.

5.6 WORKING CAPITAL LEVERAGE

Working Capital Leverage reflects the sensitivity of return on Investment (earning Power) to changes in the level of current assets. The working capital leverage thus calculated is 0.3. It means that the percentage change in ROI is 0.3 times the percentage change in Current Assets.

5.7 WORKING CAPITAL FINANCING

Three methods are used for determining the Maximum Permissible Bank Finance (MPBF). The MPBF is calculated as Rs143.33 Crore. Thus, the current ratio is 1.16.

5.8 ANALYSIS OF WORKING CAPITAL COMPONENTS

The duration of the raw materials and stores stage is 16.71 days, duration of work-in-progress stage is 26.58 days, duration of finished goods stage is 9.23days, duration of accounts receivable stage is 22.19 days and duration of the accounts payable stage is 8.38 days. Therefore, the duration of Operating Cycle is 66.33 days.

5.9 RATIO ANALYSIS

5.9.1KEY WORKING CAPITAL RATIO

5.9.1.1 INVENTORY TURNOVER RATIO

During the year 2003-04 the inventory turnover ratio was 9.37. It shows a decreasing trend thereafter. The lowest ratio was during 2007 and was 5.34 because of decrease in sales and maximum level of inventory held on stock. The increasing trend in the year 2007 after the amalgamation of ACC with Holcim, the multinational cement manufacturing company, has shown the increase in sales and the profit and thereby the substantial increase in the performance of the company.

5.9.1.2 DEBTORS TURNOVER RATIO

The debtors turnover ratio of ACC during 2003-04 was 20.24 and reduced to 13.86 in 2007. The ratio shows a declining trend. This was due to delay in collection of debts. This shows inefficient credit management of the company. So it is to be concluded that debtors turnover ratio shows unsatisfactory position of ACC because of decreasing trend in the ratio. The study reveals that the debtors turnover is increased and thereby an increase in the average debt collection period indicates an unsatisfactory position of trade receivables position. This was mainly due to increase in the price of the product due to the unavailability of the raw materials like fly ash and coal.

5.9.1.3 AVERAGE COLLECTION PERIOD

Average collection period of ACC during 2003-04 was 18 days; it has decreased to 17 days in 2004-05 again to 20 and 18 in 2005-06 and 2006-07 and finally increased to 26 days. This increase was due to the inefficiency in managing debtors by company.

5.9.1.4 CURRENT RATIO

The current ratio has decreased from the year 2003 to 2007. The current assets are greater than current liabilities in all these years. This shows that the company is always maintaining the current assets more than the current liability.

5.9.1.5 QUICK RATIO

The quick ratio during the year 2003-2004 was 0.94 which was very close to the standard ratio and indicated a good financial condition of the business. Then there was a constant decrease over the years. This is because of the increase in the current liabilities.

5.9.1.6 WORKING CAPITAL TURNOVER RATIO

The working capital ratio of ACC during the year 2003-2004 was 10.44 which have increased during the next few years. The highest net sales were in the year 20062007 and lowest working capital was in the year 2007.This shows that there was lowest investment and greater profit.

5.9.2 Trend Analysis

5.9.2.1 Net Working Capital

As from the projections on net working capital, it is clear that the net working capital has decreasing trend. It was found that it would decrease from Rs297 Crore to Rs236 Crore. This is due to the decrease in the current liabilities. The firm is reducing its current liabilities by paying back to its creditors from its profit.

5.9.2.2 SALES

As from the projections on sales, it is clear that the sales have an increasing trend. It was found that it would increase from Rs 3,287 Crore to Rs 4,992 Crore. The increase in the sales is due to the availability of raw materials and reduction in the price of the cement.

5.9.2.3 CURRENT ASSETS

As from the projections on current assets, it is clear that the current assets have an increasing trend. It was found it would increase from Rs 811 Crore to Rs 2,196 Crore. The increase in the current assets is due to increase in the inventories, cash and bank balances, loans and advances. The inventories have increased from Rs 357 Crore in the year 2003 to Rs 630 Crore in the year 2007, the cash and bank balances have increased from Rs 37 Crore in the year 2003 to 106 in the year 2007. The loan and advances have increased from Rs 348 Crore to Rs 435 Crore.

5.9.2.4 CURRENT LIABILITIES

As from the projections on current liabilities, it is clear that the current liabilities have increasing trend. It has been increased from Rs 514 Crore to Rs1960 Crore. The increase in the current liabilities is due to increase in the Sundry liabilities and provisions. The Sundry Liabilities have increased from Rs 555 Crore in the year 2003 to Rs 932Crore in the year 2007; the provisions have increased from Rs 75 Crore in the year 2003 to Rs 318 Crore in the year 2007.

5.9.2.5 EXPENSES

As from the projections on Expenses, it is clear that the expenses shows increasing trend. It was found that it would increase from Rs 2,973Crore to Rs3,907Crore. The increase in the expense is due to increase in the price of the raw materials.

6. SUGGESTIONS

6.1 DETERMINATION OF OPERATING CYCLE AND CASH CYCLE

The Operating Cycle is high for ACC Ltd because the inventory period is high as it manufactures Cement which needs its raw material, work in progress and finished goods to be stocked for longer period and more time is taken to manufacture Cement which cannot be avoided. But due to effective planning, the demand can be estimated in advance and the raw materials can be purchased at the required time thus reducing raw material inventory and the Cement can be manufactured on demand.

The accounts receivable period is less which is satisfactory. The organization follows a standard procedure to collect from its debtors. So, the firm can follow the same procedure.

6.2 CREDIT MANAGEMENT

The Control of accounts receivables is done through DSO and Collection Procedure. From DSO, it is clear that the firm has improved their collection effort. The firm should strictly follow the same collection procedure to decrease the DSO further.

From the Ageing Schedule, it is clear that the firm collects all its debt within 40 days which is better but to further improve it should collect its debt within 25 days.

6.3 INVENTORY MANAGEMENT

The Overall inventory turnover period is very high which means that the inventory is sold quickly. This ratio is also used to check that the investment in inventory is within the proper limits, signifying the liquidity of the inventory. The firm can increase the inventory turnover ratio by increasing the sales by decreasing the price of the cement. Higher the ratio more the sales and minimum level of inventory is held and hence possesses good inventory management.

6.4 ESTIMATION OF WORKING CAPITAL NEEDS

The analysis of the projected working capital requirement has given way to certain measures that can be incorporated so that the operating profit of the company can be increased.

6.5 WORKING CAPITAL LEVERAGE

Working Capital Leverage is used to find out the sensitivity of return on Investment (earning Power) to changes in the level of current assets. So, the firm should increase the current assets further to increase the return on investments.

6.6 RATIO ANALYSIS

INVENTORY TURNOVER RATIO

The inventory turnover ratio is high indicates good inventory management. The firm can further increase the inventory turnover if the firm replenishes its inventory in too many small lot sizes but it would be costly. Thus, this high inventory turnover ratio should be investigated further.

DEBTORS TURNOVER RATIO

The Debtors turnover ratio is high which indicates the number of times debtors turnover each year. Higher the value of debtors turnover, more efficient is the management of credit. This ratio has been decreasing, so proper method should be followed to increase the debtor turnover.

AVERAGE COLLECTION PERIOD

The average collection period indicates the quality of debtors. It has been increased which shows the decrease in the quality of debtor. The firm should not relax its credit and collection policy in order to decrease the average collection period.

CURRENT RATIO

The current ratio should be 2 to 1. But the current ratio has been decreasing. Even though the ratio is less than 2, the company is doing well. So, too much reliance should not be made on the current ratio.

QUICK RATIO

The quick should be 1 to 1.But, the quick ratio is less than 1.Eventhough the ratio is less than 1, and the firm is prospering and paying its current obligations in time. Anyway the firm should concentrate to increase the quick assets because the quick ratio remains as an important index of the firms liability.

WORKING CAPITAL TURNOVER RATIO

The working capital turnover ratio is very high due to the increase in sales. The firm should maintain this ratio high by increasing the sales further by decreasing the price of the cement.

7. CONCLUSION

The project revealed that the Working capital has a direct impact on cash flow in a business. Since cash flow is the name of the game for all business owners, a good understanding of working capital is imperative to make any business enterprise successful. Companies must seek granular detail to identify the underlying drivers of working capital. By understanding the role and drivers of working capital management and taking steps to reach the "right" levels of working capital, companies can minimize risk, effectively prepare for uncertainty and improve overall performance. Successfully improving working capital management requires a different approach. The better a company manages its working capital, the less the company needs to borrow.

The financial performance of The Associated Cement Companies is in a good and acceptable position. The study reveals that the firm has increased sales which results in the increased profitability. From the analysis it is obvious that the company has an upward trend. The company is maintaining a good liquidity position to meet all its current obligations. Though there were slight deviation in the financial year 2002-03, still the overall profitability was high, which shows that the company has a good growth trend. Thus the company ensures the shareholders wealth maximization which is the major objective of the company.BIBLIOGRAPHY

1) V.K.Bhalla (2002), Financial Management and Policy: Text and Cases, Third Edition, Anmol Publication Pvt. Ltd, New Delhi

2) James C. Van Horne, John M. Wachowicz, Jr. (1995), Fundamentals Of Financial Management, Ninth Edition, Prentice Hall Of India Pvt. Ltd, New Delhi3) Haim Levy (1998), Principles of Corporate Finance, First Edition, South Western College (An International Thomson Publisher), USA

4) I M Pandey (1978), Financial Management, Ninth Edition, Vikas Publishing House Pvt Ltd, New Delhi

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6) George E.Pinches (1990), Financial Management, Third Edition, Harper Collins Publishers, NewYork

7) Bhabatosh Banerjee (1984), Financial Policy and Management Accounting, Seventh Edition, Prentice-Hall of India Pvt Ltd, New Delhi

8) Cooper, The Credit Management essential guide 2006, Credit Management, Pg 28.

9) Richard seadon, DSO Benchmarking, Risk Management Innovation, Pg 36-37.

10) Matthew Waes, Liam Reddy, Effective Collections, Credit Management, Pg3839.

11) http:www.acc.com

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