cash management updated

7/30/2019 Cash Management Updated

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Creditors Turnover Ratio

INVENTORY TURNOVER RATIO

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

calculated by dividing sales by avg. inventory. In a manufacturing company

inventory of finished goods is used to calculate inventory turnover.

Inventory Turnover = Co st of goods sold

Avg. Inventory

2010-11 2011-12

Inventory turnover 14.42 15.10

If the company is comfortably meeting the customer needs with 9.73

days inventory of finished goods, all India basis.

It is a good achievement for the KIRLOSKAR Limited.

FIXED ASSETS TURNOVER RATIO

A firms ability to produce a large volume of sales for a given amount of net

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


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or underutilized assets increase the firms need for costly financing as well

as expenses for maintenance and upkeep. Fixed assets turnover is calculated

by dividing net sale by net fixed assets.

Fixed Assets Turnover = Sales

Fixed Assets

2010-11 2011-12

F.A.T 2.29 2.35

KIRLOSKAR fixed asset turnover have increased in 2010-11. The fixed

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

rupee of capital employed.

The higher the ratio, more it is satisfactory

It should be interpreted very cautiously because the denominator of the ratio

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

value may create a misleading impression of high turnover without any

improvement in sales

DEBTORS TURNOVER RATIO

Debtors turnover indicates the number of times debtors turnover each

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


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

quality of the debtors to a great extent.

Debtors Turnover = Credit Sales

Avg. Debtors

2010-11 2011-12

Debtors Turnover 4.44 4.29

KIRLOSKAR debtors turnover is quite lower. The debtors turnover ratio is

high at 2010-11 . The ratio is decreasing. Also the debt collection period has

its own importance. The debt collection period of KIRLOSKAR was 76 days

in 2010-11 but it has increased to 95 days. This does not show the

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

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

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

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

loses the firm may be selling to those only whose financial conditions are

sound and who are very prompt in making the payments.

CREDITOR TURNOVER RATIO

Creditors Turnover = Total Purchas es

Creditors


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2010-11 2011-12

Creditors Turnover 3.55 3.45

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

collection, this extended credit has its own drawback like:

High interest inbuilt in cost system.

Sub-quality creditors may be accepted.

Quality of material may be accepted.

The payment period of KIRLOSKAR Limited is 90 days in 2010-11, whichis more reasonable than previous years. This helps to make good quality

product and also better relationship with suppliers.


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WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio has its own significance in the business

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

company get with the utilization of the limited working capital.

Working Capital Turnover = Net Sales

Net Working Capital

2010-11 2011-12

Working.Cap.Turn. 113.45 28.30

In the case of working capital turnover ratio KIRLOSKAR is significantly

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

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

more money to generate sales.


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RECEIVABLE MANAGEMENT

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

arising from sales of goods in the ordinary course of business. The sale of

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

are generally made on open account in the sense that there are no formal

obligations through a financial instrument. However extension of credit

involves risks and cost. Management should weigh the benefits as well as the

cost to determine the goal of receivable management. The benefits from

receivables are the increased sales and profits anticipated because of moreliberal policy. When firm extend trade credit, i.e. invest in receivables, they

intend on increase the sales level. The motive of liberal credit policy can be

either growth oriented or sales retention. The extension of credit has a major

impact on sales, costs and profitability. Other things being equal, a relatively

liberal policy and therefore higher investments in receivables will produce

larger sales. However the cost will be higher with liberal policies then with

more stringent measures. Therefore account receivable management should

aim at a trade- of between profit and risk.

The costs associated with the extension of credit and account receivables are

collection cost

capital cost

delinquency cost

default cost


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DECISION AREAS

CREDIT POLICIES

The credit policy of a firm provides the framework to determine

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

extend. It has two broad dimensions, the first is credit standard and second is

the credit analysis. Credit standards represent the basic criteria for the

extension of credit to customers. The trade- off with reference to credit

standards covers collection costs, average collection period, level of bad debts

losses and level of sales. With a relaxed credit standard the collection costs,

bad debts expenses and sales goes up and in reverse case vice-versa happens.

The second aspect of credit policy is credit analysis. It begins with obtaining

credit information of the customers and ends up with the analysis of the

obtained credit information. Information can be collected either internally or

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

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

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

financial statements whereas qualitative aspects cover the quality of

management.

CREDIT TERMS

The second decision area in accounts receivable management is the

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

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

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


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

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

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

over the due amount will be reduced thus benefiting the customer. The creditterms like the credit standard affect the profitability as well as the cost of the

firm therefore a firm should determine the credit terms on the basis of cost-

benefit trade-off.

COLLECTION POLICIES

The collection policies refer to the procedures followed to

collect account receivable when after expiry of the credit period they become

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

over due and second is the type of collection efforts.

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

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

policy has a direct impact on sales.

CHANNEL FINANCE FACILITIES

The company arranges these facilities with various bankers

for the company dealers to support their cash needs. The goods are sold on

credit against hundis. Hundis can be drawn for 50 or 75 or 90 days subject to

qualifying criteria of bank.


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CREDIT FACILITIES

KIRLOSKAR provides thirty days interest free credit to the dealers. For

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

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

dealers.

PENALTY ON BOUNCING OF HUNDIES / CHEQUES

Bouncing of hundis/ cheques drawn in favor of the

company is viewed very strongly and usually following actions are taken. Tractor supplies are suspended and restored only after all dues are

cleared.

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

interest are debited to the dealer.

The bank extending channel financing policy have clearly stated that

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

limit will be withdrawn with immediate effect. Company also makes

sales to such dealers only against letter of credit or demand draft.

CASH DISCOUNT ON EARLY PAYMENT

Cash discount of 1% is payable on tractors dispatched against funds

available in the form of letter of credit or demand draft. Interest is charged/ paid at 12% per annum on outstanding/ credit balance early payment

incentive.

PAYABLE MANAGEMENT


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Creditors are a vital part of effective cash management and should be

managed carefully to enhance the cash position. Purchasing initiates cash

outflows and an over-zealous purchasing function can create

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

then use ones clout to negotiable longer terms with the vendors. Vendor

rationalization is a process that can pay off in a big way. Apart from the

question that who should authorize purchasing in the company should it be

tightly managed or spea among a number of (junior) people? The following

comes under good payable management. Purchase quantities should be geared to demand forecasts.

Order quantities should be used which takes account of stock

holding and purchasing costs.

The cost to the company of carrying stock should be clearly

defined.

A Company should have alternative sources of supply. It should get

quotes from Major suppliers and shop around for the best discounts,

credit terms and reduce dependence on a single supplier.


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CHAPTER-V

RECOMMENDATIONS

LOANS AND ADVANCES

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


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

production / operation relation related and non-production / operation related.

No production related cases might be financed from other

sources like debenture etc. and treated separately.

INVENTORY

Inventory should be reviewed constantly to identify show / dead / obsolete

item and then disposed . Optimum level should be revised periodically,

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

transport problem if any and reliability of suppliers. This will help to avoid

obsolesce and dead inventory.

DEBTORS

A study may be conducted if required by experts to pinpoint reason

behind KIRLOSKAR high correction period of 95 days in 2010-11

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

products, quality of customer, the segment of customers marketing

effort, distribution pattern or other reasons.

CREDITORS

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


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

shyness of good quality / standard suppliers.

RATIOS

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

which are taken in this research to evaluate the companys position, are

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

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

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

goes to ve position in current year compared to previous. The Debts

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

policy. The current ratio is 1.12 in 2009-010, which is not upto the ideal ratio.

This shows that the current assets are equal to the current liabilities. Not

satisfactory.

OTHERS

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

surplus of inventory is reduced to minimum

Company should not follow the competitors only. New products

should be produced for the farmers having low income and small

holdings.

Proper market survey should be carried out. The company should

explore the export market to study the present and prospective

demand.


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Proper inventory plans should be made in order to reduce the

carrying cost.

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

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

produce the same product with additional features and at lower prices.

Marketing network should be enhanced. Company should also produce

more TRANSFORMERS of higher PERFORMANCE. But new

developments should be made continuously in order to survive in this

competitive world.


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CHAPTER-VI

LIMITATIONS

Although every effort has been in to collect the relevant

information through the sources available, still some relevant information

could not be gathered.

Busy Schedule of Concerned Executives: The concerned executives were


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

appointment.

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

every detail of working capital management of the company.

Unawareness: Executives were unaware of many terms related to

working capital study while asking to them.

Confidential Information: As the company on account of confidential

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

accounts of division are not separately maintained thereby, leading to

restrictions in study.


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CHAPTER -VII

CONCLUSION

CONCLUSION

To conclude with the project the company performs very well with

the aspect of cash management , all the aspects techniques and concepts

are being satisfactory.

The company s major aspect is upon concentrated focus on zero credit


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basis.is really appreciable.

Overall the cash management concept is excellent in kirloskar

electricals ltd.


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BIBLIOGRAPHY

BIBLIOGRAPHY

BOOKS


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Financial Management- S.K Gupta

Management Accountancy-D k Gole

Cost and Management Accountancy, S.N.Maheshwari

Financial Management And Policy, James C.Van Horne

WORLD WIDE WEB

ww w .econ o m ict i m e s .c o m

ww w .planware.c o m

ww w .icraindia.c o m

Other than Web

M.I.S of the company

Annual Reports
http://www.economictimes.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.planware.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.icraindia.com/http://www.economictimes.com/http://www.planware.com/http://www.planware.com/http://www.icraindia.com/http://www.icraindia.com/


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ANNEXURES

Rs(in lakhs) Rs(in lakhs)PROFIT AND LOSS ACCOUNT 1/10/2010-31/09/2011 1/10/2011-31/09/2012

Operating income 2,012.00 2,092.04Material consumed 1,470.66 1,540.01Manufacturing expenses 47.68 50.79Personnel expenses 202.63 204.02Selling expenses 114.57 118.63

Adminstrative expenses 69.12 57.45Expenses capitalised -

- Cost of sales1,904.66 1,970.90

Operating profit 107.34 121.14Other recurring income 0.04 20.85

Adjusted PBDIT 107.38 141.99


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Financial expenses 55.93 89.78Depreciation 42.87 44.97Other write offs - 3.32

Adjusted PBT 8.58 3.92Tax charges 47.13 -10.89

Adjusted PAT -38.55 14.81Non recurring items 17.56 -21.25Other non cash adjustments 32.86

- Reported net profit 11.87-6.44

Earnigs before appropriation -133.59 -145.46Equity dividend- Preference dividend - -Dividend tax - -Retained earnings -133.59 -145.46

BALANCE SHEET AS ON..

1ST OCT 2010- 30 th SEPT 2011Rs lakhs

1 st OCT 2011 30 TH SEPT 2012Rs lakhs

Equity share capital 90.71 83.69

Share application money - -


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Preference share capital - -

Reserves & surplus 645.49 563.38

Secured loans 422.63 414.04

Unsecured loans 14.44 31.10

Total 1,173.27 1,092.21

Gross block 1,415.93 1,436.96

Less : revaluation reserve 466.46 471.90

Less : accumulated depreciation 593.41 583.24

Net block 356.06 381.82

Capital work-in-progress 14.43 13.40

Investments 425.79 425.13

Current assets, loans & advances 1,131.98 1,325.61

Less : current liabilities & provisions776.14 1,069.68

Total net current assets 355.84 255.93

Miscellaneous expenses not written 11.00 15.93

Total 1,163.12 1,092.21

Book value of unquoted 494.53 493.87

Market value of quoted investments1.98 3.31

Contingent liabilities 168.40 318.74

Number of equity sharesoutstanding(Lacs) 907.09836.94

CASH FLOW STATEMENTRs(in lakhs)

PARTICULAR MARCH(2011)

MARCH(2012)

CASH FLOW FROM OPERATING ACTIVITIES N.P BEFORE TAXAdjustment for:

26.14 -17.33


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provision for doubtful debts , obsolescence inventory &advances

Gain on sale of long term investmentGain on sale of asset

16.36

-4.8

1.89

-1.22-0.13

Depreciation 42.87 44..97

Assets w/off 11.64 8.08Interest expense 62.2 72.22Dividend income

Interest income0.04

12.93-0.02

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

Adjustment for:Trade & receivable -65.36 -168.61

Money in escrow account 20.09Inventory -43.68 13.79

Trade payableMisc.expenditure

58.02-3.21

67.05-7.5

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

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

CASH FLOW FROM INVESTING ACTIVITIESPurchase of fixed assets -7.5 0.86

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

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

Short term deposits with schedule banks 8.58 -2.31Interest received 3.21 20.7Dividend received -0.04 0.02

NET CASH FLOW FROM INVESTING ACTIVITIES 16.69 4.38

CASH FLOW FROM FINANCING ACTIVITIESP roceeds from share capital & securities premiumProceeds/repayment from long- term borrowingsLess :repayment of long term borrowingProceed/repayment from short-term borrowing

40.32234.09-41.68-46.83

114.4480.6-0.54

-146.82Interest paid -66.27 -77.4

cash management updated

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