mba - madras cement project
TRANSCRIPT
CONTENTS Chapters Particulars
Sl.No.
Chapter Subject Page
No.
1 I INTRODUCTION 3 – 10
a. Introduction
b. Need for the Study
c.Objectives
d. Methodology
e. Limitations
2 IIORGANIZATION & COMPANY PROFILE
12 – 26
3 III THERITICAL FRAME WORK 28 - 50
4 IV DATA ANALASIS & INTERPETATION 52 - 67
5 V FINDINGS AND SUGGESTIONS 68 - 69
6 BIBLIOGRAPHY 71 - 76
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INTRODUCTION
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DEFINITION OF WORKING CAPITAL:-
In the words of Prof.S.C.Kuchhal, “Working capital has to be, regarded as
one of the conditioning factors in the long run operations of a firm which is
often inclined to treat it as an issue of short run analysis and decision-
making”.
In the words of Shubin, “Working capital is the amount of funds necessary
to cover the cost of operating the enterprise”.
In the words of Genestenbug, “Circulating capital means current assets of
a company that are changed in the ordinary course of business from one
form to another as for example from cash to inventories, inventories to
receivables, receivables into cash.
CONCEPTS OF WORKING CAPITAL:-
There are two concepts of working capital:
1. Gross working capital
2. Net working capital.
In the broad sense, the term working capital refers to the gross working
capital and represents the amount of funds invested in current assets.
Current assets are those assets, which in the ordinary course of business
can be converted into cash within a short period of normally one
accounting year.
In a narrow sense, the term working capital refers to the net working
capital. Net working capital is the excess of current assets over current
liabilities.
Working capital = Current assets – Current liabilities.
Net working capital may be positive or negative. When the current assets
exceed the current liabilities the working capital is positive and the
negative working capital results when the current liabilities are more than
the current assets. Current liabilities are those liabilities which are intended to
be paid in the ordinary course of business within a short period or normally
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one accounting year out of the current assets or the income of the
business.
The gross working capital concept is financial or going concern whereas
net working capital is an accounting of working capital. These two
concepts of working capital are not exclusive; rather both have their own
merits.
Gross concept is very suitable to the company form of organization where
there is divorce between ownership, management and control. The net
concept of working capital may be suitable only for proprietary form of
organizations such as sole-trader or partnership firms. However, it may be
made clear that as per the general practice net working capital is referred
to simply as working capital.
NEED FOR WORKING CAPITAL
The need for working capital to run the day-to-day business activities
cannot be overemphasized. We will hardly find a business firm which does
not require any amount of working capital. Indeed, firms differ in their
requirements of the working capital.
We know that a firm should aim at maximizing the wealth of its
shareholders. In its endeavor to do, a firm should earn sufficiently return
from its operations. Earning a steady amount of profit requires successful
sales activity. The firm has to invest enough funds in current assets for
generating sales. Current assets are needed because sales do not convert
into cash instantaneously. There is always an operating cycle involved in
the conversion of sales into cash.
TYPES OF WORKING CAPITAL
On Working capital may be classified in two ways:
a. The basis of concept.
b. On the basis of time.
On the basis of concept, working capital can be further classified into:
a. Gross working capital.
b. Net working capital.
On the basis of time, working capital can be further classified
a. Permanent or Fixed working capital.
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b. Temporary or variable working capital.
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Gross working capital
Gross working capital is represented by the total sum of all current assets
of an organization. The gross working capital is also known as current
capital or circulating capital.
Net Working capital
Net working capital is the difference between the current liabilities. The
concept of net working capital helps the management to look forward the
permanent sources for financing the working capital. The working capital
management has to examine the proportion of the current assets, which
has to be financed by permanent capital or long term, borrowings.
Permanent working capital
Permanent working capital is that part of capital, which is permanently,
locked up in the circulation of current assets and in keeping it’s moving. It
can be classified into:
i. Regular working capital and
ii. Reserve margin working capital.
Regular working capital
It is the minimum amount of liquid capital needed to keep up the
circulation of from cash to inventories to receivables and back again into
cash.
Reserve margin working capital
It is the excess over the need for regular working capital that should be
provided for contingencies such as raising prices, business depressions,
and strikes, fibers, unexpected severe competition and special operations
such as experiments with products or with the method of distribution and
the like which can be undertaken only if sufficient funds are available.
Variable working capital
The variable working capital refers and denotes that the amount of funds
over and above the fixed working capital to take care of seasonal shifts
etc. this variable working capital also referred to as fluctuating or
temporary working capital and should be financed by short-term sources
of funds.
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The variable working capital changes with the volume of business. It may
be sub-divided into:
i. Seasonal.
ii. Special working capital.
The capital required to meet the seasonal needs of industry is termed as
seasonal working capital. On the other hand the special working capital is
that part of the variable working capital which is required for financing
operations such as inauguration of extensive marketing campaigns and
carrying out special jobs and similar other operations that are outside the
usual business of buying, fabricating and selling.
Excess Working Capital
There are problems associated with excess working capital. Firstly, more
funds would make the management complacent and it may invest this
money in unnecessary accumulation of inventory resulting in locking of
investment.
There is another possibility that the firm may think of speculation
inventory items in quantities more than needed and these gains may not
be realized due to price fluctuations. The excess working capital also
known as surfeit of working capital, which promotes accumulation of
inventories, permissive, credit policies and slack collection procedures.
Due to excess working capital, complacency develops and management
efficiency deteriorates
Inadequate Working Capital
If working capital is not adequate, the organization will come across
certain problems. The adverse effects of inadequate working capital are
business failures, reduction in profitability and consequent decline in
return on investment (ROI).
The company will not be able to take advantage of full capacity utilization
and the growth that is desired cannot be achieved when enough funds are
not available at the right point of time. All the operating plans cannot be
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successfully implemented when funds are in short supply. In adequate
working capital can also lead to temporary insolvency of a firm.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENTS
The working capital requirements of a concern depend upon a large
number of factors such as nature and size of business, the character of
their operations, the length of production cycles, the rate of stock
turnover and the state of economic situation.
1. Nature or character of business
The working capital requirements of a firm basically depend upon the
nature of its business. Public utility undertakings like electricity, water
supply and railways need very limited working capital because they offer
cash sales only and supply services, not products and as such no funds
are tied up in inventories and receivables
2. Size of business/scale of operations
The working capital requirements of a concern are directly influenced by
the size of its business which may be measured in terms of scale of
operations. Greater the size of a business unit, generally large will be the
requirements of working capital.
3. Production policy
In certain industries the demand is subject to wide fluctuations due to
seasonal variations. The requirements of working capital, in such cases,
demand upon the production could be kept either steady by accumulating
inventories during slack periods with a view to meet high demand during
the peak season or the production could be curtailed during the slack
season and increased during the peak season.
4. Manufacturing process/length of production cycle
Longer the process period of manufacture, larger is the amount of working
capital required. The longer the manufacturing time, the raw materials
and other supplies have to be carried for a longer period in the process
with progressive increment of labor and service costs before the finished
product is finally obtained.
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5. Seasonal variations
In certain industries raw material is not available throughout the year.
They have to buy raw materials in bulk during the season to ensure an
uninterrupted flow and process them during the entire year.
6. Credit policy
The credit policy of a concern in its dealings with debtors and creditors
influence considerably the requirements of working capital .a concern that
purchases its requirements on credit and sells its products/services on
cash requires lesser amount of working capital.
7. Business cycle
Business cycle refers to alternate expansion and contraction in general
an activity .In a period of i.e. when the business is prosperous there is a
need for larger amount of working capital due to increase in sales, rise in
prices, optimistic expansion of business, etc.
8. Working capital cycle
The working capital cycle starts with the purchase of raw materials and
ends with the realization of cash from the sale of finished products. This
cycle involves purchase of raw materials and stores. Its conversion into
stocks of finished goods through work -in-progress with progressive
increment of labor and service costs, conversions of finished stock into
sales, debtors and receivables and ultimately realization of cash and this
cycle continues again from cash to purchase of raw material and so on.
9. Price level changes
Changes in the price level also affect the working capital requirements.
Generally the rising prices will require the firm to maintain larger amount
of working capital, as more funds will be required to maintain the same
current assets. The effect of rising prices may be different for different
firms.
10. Other factors
Certain other factors such as operating efficiency, management ability,
irregularities of supply, import policy, asset structure, importance of labor,
banking facilities, etc, also influence the requirements of working capital.
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OBJECTIVES:
o To promote the growth of the cement interest
o To promote the customer interest
o To identify newer application of cement usage
OBJECTIVES OF THE STUDY
1. To Study working capital management in MADRAS CEMENTS Ltd.
2. To Examine an overview of working capital management.
3. To Analyze at the possible remedial measures to improve
company’s working capital performance in the near future.
4. To Evaluate the efficiency of the company in utilizing its Current
Assets.
SCOPE OF THE STUDY
The scope of the study is limited only to MADRAS CEMNTS and is confined
to 4 years i.e. 2005-06 to 2008-09 annual reports.
DESIGN OF THE STUDY
1.5.1. METHODOLOGY
The present study is mainly about the working capital management of
MADRAS CEMENTS ltd. On the basis of the objectives of the study it was
decided to use ratio analysis and analysis of individual components
of working capital as these are universally accepted techniques for
analyzing the short term liquidity position of the firm.
For the purpose of the analysis the following ratios have been used:
1 WORKING CAPITAL MANAGEMENT RATIOS
1. Working capital ratio/Current ratio.
2. Quick ratio/Acid test ratio.
3. Working capital turnover ratio.
I. Working capital performance ratio.
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4. Current asset turnover ratio.
I. CASH MANAGEMENT
1. Cash turnover ratio.
II. INVENTORY MANAGEMENT
1. Raw materials turnover ratio.
2. Work in process turnover ratio.
3. Finished goods turnover ratio
DEBTORS MANGEMENT
1. Debtor’s turnover ratio.
SOURCES:
The study is based on the analysis of data from the annual reports of
MADRAS CEMENTS Ltd. The data used in the present study are mainly of
two types’ primary data and secondary data.
1. The primary data is collected through the discussions made with the
officials of MADRAS CEMENTS Ltd.
2. The secondary data is collected through the annual reports
published by the company and company website.
LIMITATIONS:
The present study limits itself to the study of working capital
management. In the present study the analysis is mainly based on
secondary data given in the annual reports published by MADRAS
CEMENTS Ltd. The limitations prevailing in the secondary sources are self
evident in the study. Despite their weakness, they continue to be the only
source for comparison of the results of the analysis. The present study is
carried taking this into consideration.
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COMPANY PROFILE
Madras Cements Ltd (MCL) is the flag ship company of Ramco
Group, a well-known business group of South India. It is based at Chennai.
The main product of the company is Portland cement manufactured
through the four advanced production facilities spread over South India.
The manufacturing products are:
Ordinary Portland Cement
Portland Pozzolana Cement
The company is the sixth largest cement producer in the country
and the second largest in South India. Ramco Super grade is the most
popular cement brand in South India. The company also produces Ready
Mix Concrete and Dry Mortar products. In addition, the company also
operates one of the largest wind farms in the country. They are: Pioneer in
Cement technology, Sixth largest Cement Producer in India, Single largest
Cement Brand in South and Sophisticated R&D Centre in Chennai.
It has been known for its penchant for technology that has kept the
company ahead of competition. MCL was the first to switch from the
energy-guzzling wet process to the dry process for manufacture of
cement. With energy costs continuously shooting up, it derived handsome
savings and also was the beneficiary of software developed by the group
extensively for the entire gamut of operations - from mining to the
production of clinker and cement.
MCL is the first company to implement a full-fledged ERP system in
the cement industry and one of the early adaptors among corporation in
India. MCL is equipped with a modern computer based quality control
system.
Madras Cements Ltd is managed by a board of directors comprising
of eminent personalities as its members. The chairman of the board is Shri
P.R. Ramasubrahmaneya Rajha, under whose dynamic leadership the
company has grown into a massive organization.
The company board brings together a team of business,
administrative, financial and cement technology professionals who
provide guidance and direction to the company's operations in
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a competitive business environment. Madras Cements Ltd has been a
pioneer in adopting its corporate governance practices comparable to the
best in the country.
Factories location
MCL operates four ultra modern production factories with a total
capacity of 6 million tons per annum (MTPA) and they are
(i) R R Nagar, Tamil Nadu (1.2 MTPA)
(ii) Jayanthipuram, Andhrapradesh (1.6 MTPA)
(iii) Alathiyur, Tamil Nadu (3.0 MTPA)
(iv)Mathod, Karnataka (0.2 MTPA)
MISSION
To continuously improve productivity through quality, technology
renewal and customer focused operations.
To position ourselves in the cement business as a pace setter and
grow in the same and related business.
To seek green field locations for growth on the basis of developed
synergies of the existing operations.
To continuously seek quality enhancement in product, processes
and responses to various stakeholders.
To update management practices on a continuous basis and
maintain a culture of professional management.
To conserve, protect and enhance quality of life for our employees
and community.
To preserve the credence in our motto "our real resources are the
human assets".
CORE VALUES AND BENEFITS:
Customers continued satisfaction and the sensitivity to their needs
is our source of strength and security. If there is no customer, there
is no business
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We do not look at productivity as a game in numbers. We try to
learn from others, be committed to quality and always stay ahead in
terms of technology
RAMCO GROUP COMPANIES:
Madras cements limited
Ramco industries limited
Raja palayam mills limited Rajapalam, Tamilnadu
Sri Ramco spinning mills limited Rajapalam, Tamilnadu
Sundaram spinning mills limited Rajapalam, Tamilnadu
Sri Vishnu sankar limited Rajapalam, Tamilnadu
Ramaraju surgical cotton mills limited
Ramco systems limited
Ramco lanka (pvt) limited
Harini textiles
Some corporate responsibilities of Ramco group
Raja charity trust C. Rama Swamy Raja education charity trust P.A.C Rama Swamy Raja Poly technique P.A Chinnaih Raja memorial higher secondary school P.A.C.R Ammani animal’s higher secondary school Chinnaih vidyalaya P.A.C.R Raju matriculation higher secondary
school S.S.R vidhya mandir
Plans are on to build a hospital in Rajapalam equipped with the most
advanced medical facilities. The primary aim of this hospital would be to
provide free medical to workers scheme society. In order to have impetus
to ecology development a senior horticulturist is being appointed his
services will be extended to the farmers of nearby villages to help them in
going various fruit and vegetation using hybrid varieties. We are going
ahead shortly for massive a forestation of ISO acres of our land located at
the entrance of our factory premises.
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COMPANY HISTORY
In 1950's, investment in Cement Industry was not attractive due to price
controls and the massive investments required. Only those entrepreneurs
who were not profit minded but cared for country's development came
forward in investing in Cement Industry.
When Shri. Manubai Shah, Central Minister for Industries in late fifties
came to Madras to meet the Industrialists, he called upon Shri P A C
Ramasamy Raja and requested him to start a cement factory in TN . This
was readily accepted by Shri PACR and this marked the birth of "Madras
Cements Ltd" in 1961.
On the night of September 3, 1962, while the whole city slept, PACR lay on
his bed in the Madras General Hospital, seriously ill. As all his near and
dear watched with tears in their eyes, PACR summoned his son
Ramasubrahmaneya Rajha, to his bedside. "There is no more hope", he
whispered :
"You should take care of everything from now". My main concern is for
Madras Cements. I have taken a lot of money as shares from well wishers
I have not paid them back any dividends as yet. This has to be taken care
of immediately ...."
PACR's last wish was dutifully fulfilled by the present chairman
Shri.P.R.Ramasubrahmaneya Rajah.
Today Madras Cements Ltd is not only one of the most respected cement
companies in the country but also leads in giving the best return for the
investors. With a cement capacity of 6 millions tons per annum, the
company is the sixth largest producer of cement in India. It is also one of
the largest wind energy producer in the country with a capacity of 45 MW.
The first plant of MCL at Ramasamy Raja Nagar, near Virudhunagar in
Tamil Nadu commenced its production in 1962 with a capacity of 200
tonnes, using wet process. In 70's, the plant switched over to more
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efficient dry process. A second kiln was also added to bring the total
capacity to 12 lakh ton per annum. The second venture of MCL is its
Jayanthipuram plant near Vijayawada in A.P set up in 1987 . The 16 lakh
ton per annum plant employs the latest state of art technology.
The third venture of MCL is at Alathiyur in TN set up in 1997 and
expanded by addition of another line in 2001. The 30 lac ton per annum
plant is the most modern plant in the country.
In 2000 , MCL acquired Gokul Cements situated in Mathod in Karnataka
whose capacity is 600 TPD. Being a eco-friendly company, MCL set up the
Ramco Winfarm in 1993 at Muppandal TN. This was followed by wind
farms in Poolavadi near Coimbatore in 1995 and Oothumalai in 2005. The
combined capacity of these two put together is about 45 MW.
In the year 1999, MCL commissioned the most sophisticated Ready Mix
Concrete Plant in Medavakkam in South Chennai. In 2002, a state-of-art
Dry Mortar plant was commissioned near Sriperumpudur, Tamilnadu
which manufactures dry mortar, cement based putty and tile fix
compound.
Birth of the first Ramco Venture
His visited Britain and other European countries to see firsthand working
of the mills. There he had the chance to meet many business magnates.
He returned to India full of ideas.
After returning to Rajapalayam, he put his plans into action. To start the
yarn mill, he found that he needed Rs.5 lakhs, which in 1936 was a huge
sum. It was considered a Herculean task to raise such a big capital.
But the determined Raja was not deterred. He decided to make the people
"Shareholders".
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Rajapalayam Mills Ltd.,Thanks to his illustrious background and his own reputation, he got the
required capital ready, in next to no time. On September 05, 1938, the
then State Minister forlabour, V.V. Giri inaugurated the mill and
Rajapalayam Mills Ltd commenced operations.
There was no looking back for Ramasamy Raja after this. The Mill was a
grand success.
He followed up this with other successful ventures. He started Rama Raju
Surgical Cotton Mills along with his son-in-law Rama Raju.
Madras Cements LtdAt that time, Cement was not considered as a favorable venture due to
price controls. Shri.Manubai Shah, Central Minister for Industries called
upon Ramasamy Raja and appealed to him to start a cement factory. This
was how Madras Cements Ltd came into being in 1961.
Ramasamy Raja needed one crore as capital. The State Government for
the first time in the history of India, invested Rs.10 lakhs An indication of
the total trust and implicit faith the Government had in him.
Concern for Shareholders and WorkersRamasamy Raja had the well being of the people upper-most in his mind.
He was very particular that the funds of his share holders be utilized
usefully. He showed high concern for his workers. The famous trade
unionist G Ramanujam once said :
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"In the case of Ramasamy Raja's companies, the workers are always
thinking of the growth of the company, the Raja always has the well being
of the workers and their families uppermost in his mind"
AWARDS
4 Leaves AwardCentre for Science and Environment
National Award for Energy Conservation Confederation of Indian industry
Best Energy Efficient Unit
National Council for Cement and Building Materials Corporate Performance Award
Economic Times Best Improvement in Energy Performance
International Congress on Chemistry of Cement The Analyst Award
The Institute of Chartered Financial Analysts of India Best allround Industrial performance
Federation of AP Chambers of Commerce & Industries Visvesvariah Industrial Award
All India Manufacturers Organisation Business Excellence Award
Industrial Economist Export Performance Award
CAPEXIL State Safety Awards
Tamil Nadu & AP Governments Good Industrial Relations Award
Tamil Nadu & AP Governments
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Technology Overview
Madras Cements Ltd is a trend-setter in adopting
state-of-the-art technology for the manufacture of
Cement, Ready Mix Concrete and Dry Mortar
Products. MCL is the first to bring the following
technologies in South India's cement industry.
The FUZZY Logic Software System for process
Controls
Pre-calciner technology
Most Modern Programmable Logic Controllers
(PLC)
Surface Mining Technology
Vertical Mills for Cement Grinding
Latest and highly effective ESPs and Bag
filters
Advanced X-Ray technology for Quality
Control
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JAYANTHIPURAM UNITIn 1986 the company ventured into the second unit Jayanthipuram
in Andhrapradesh 75 kilometers from Vijayawada towards Hyderabad with
a investment of Rs 100 corers per manufacture of Rs 7.50 lakhs tones of
cement per annum. This plant was commissioned in 1986 six months
ahead of schedule plans
Madras cements is a ramco group of most ambitious diversification
had. It is a profitable company today. Two were process plans were setup
in 1987with a capacity of 600 tones to produce Portland cements. In the
1970’s totals with over was made to the dry process of manufacture. The
single largest dry kiln in India at the time of establishment with a capacity
of 1200 tones was installed at ramaswamy rajanagar in Tamilnadu, for the
first time in India, over the years the plant has modified and updated with
preclaciner technology. This has increased the capacity by 115% in 1993.
Ramco group has setup its second and India’s most technological
advances cement unit which started its production in 1987 Jayanthipuram
Krishna district and Andhra Pradesh with 1.1 million tons per annum.
This is the first factory in India to be totally computerized. It is one
of the most sophisticate plants in India with full computer controlled
special software of F.L smiths and fuzzy logical system from Denmark for
kiln control. This flagship company of Ramco producer of market cements
with brand Ramco.
The kiln was gradually upgraded from 2300 TPD in 1986, 1994 and to
3200 TPD in1995. During this period raw material and coal mill were also
upgraded from 220 to 240 TPH and 26 to 30 TPH respectively. Horizontal
impact crusher (HIC), was installed in 1995 in cement mill circuit to
increase the output from 125 TPH to 180 TPH and the cement mill was
optimized in 1996.with this the capacity has been increased to 11lack
tones per annum.
The plant has electrostatic precipitators (ESP) and deducting bag
houses to ensure clean and pollution free environment. MCL has an
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uncompromising attitude towards the prevention of anti-environmental
pollution.
The above up gradation of kiln and other mills was carried out with
and investment of Rs 25 crores. 2004-2005 in this period they build one
power grid. It carried out with an investment of Rs 10 crores.
EXPANSION
Slag grinding unit
Madras cements have always stayed in the forefront of the industry.
Special task forces within the company keep track of the latest
international development in cement technology and promote action to
adopt the state of art technology.
India generates about 70 million tones of Fly ash and 10 millions of
slag annually. Disposal of Fly and slag problem to the environment.
Concern for the environment and ecology is percolating very fast into
customer awareness globally and there by a check on eco-hostile products
is becoming an imperative exercise. Both the central and state
governments are strongly propagating to use these products in cement
manufacture.
A working group has been constituted by the government of
Andhrapradesh to study the generation and disposal of Fly ash and BD
slag. Based on the recommendations of the working group the
government of Andhrapradesh issued a GO instructing all government
departments for utilization of 100% Pozzolana/slag cement, with in a
period of 5 years.
In line with the policies of the government and our philosophy of
using otherwise no usable materials like Fly ash and slag to produce value
added blended cement and there by conserve limestone and other
materials like coal etc, and also to save energy apart from being eco-
friendly and creating clean atmosphere by reducing carbon dioxide
emission proud of serving our nation by preserving minerals and
maintaining clean atmosphere for our future generations.
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MCL is the first to bring the following technologies in South India's cement industry.
1. The FUZZY Logic Software System for process Controls
2. Pre-calciner technology
3. Most Modern Programmable Logic Controllers (PLC)
4. Surface Mining Technology
5. Vertical Mills for Cement Grinding
6. Latest and highly effective ESPs and Bag filters
7. Advanced X-Ray technology for Quality Control
ISO certification
Madras cements limited, Jayanthipuram unit also got ISO 9002
certification in may, 1998.
SILENT FEATURES OF MADRAS CEMENTS LIMITED
JAYANTHIPURAM
For the first time in India the very latest computerized control system are
introduced in the Jayanthipuram unit for efficient operation on energy
conservation. The silent features of Jayanthipuram plant is furnished
below
A stacker re-claimer for pre blending and continuous flow silo for
below
Vertical roller mills for grinding raw material and coal
Five stage per heater for their mail efficiency per calcinatory for
efficiency use of low grade coal
A scanner connected to a computer for refractory monitoring
X ray analyzer for quality control on line process computerized
control for consistent quality
Fuzzy logical software for kiln control
Electro static precipitator at 5 strategic points for pollution control
Belt bucket elevators for energy conservations
2.4 DEPARTMENTS IN MCL
The following are the departments in Madras Cements Ltd.
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1. Personnel department
2. Accounts department
3. Mines
4. IT
5. Stores and Material department
6. Quality control lab
7. Process department
8. Engineering departments
- Electrical and Mechanical department
- Civil and Power plant
- Instrumentation
9. Cement dispatch section
10. Security liaison
DETAILS OF EMPLOYEES
The total workforce of MCL at Jayanthipuram is 600 out of which
permanent employees are 346 and remaining 254 are contract labours.
The following illustrates the details of the employees in MCL
S.No. Category No. of employees1 Officers 532 Officer prob-with grade 33 Officer trainee 74 Staff 705 Staff worker 26 Staff prob-with grade 77 Staff trainee 18 Voucher staff 19 Voucher worker 410 Workers 198
INDUSTRY PROFILE
CEMENT INDUSTRY IN INDIA
The Cement industry in India has come a long way since 1914, when
the first cement plant was commissioned with a production level of 1000
tons/ annum. The first true Portland cement was manufactured in Calcutta
presently called as Kolkata. India is the second largest cement producer in
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the world. As cement is a basic construction material with virtually no
substitute, it is used worldwide for all construction work. Thus the growth
in the construction industry has a direct relation with the production and
consumption of cement.
India is the second largest cement producer in the world with a
production level of about 99 million tons (about 5% of world production ~
2000 million tons). The installed capacity is about 119 million tones and at
an expected 10 % growth rate the production is likely to grow to about
158.5 million tons at the end of 2006-2007.
Over the years, the growth of the industry has been uneven. With
traditionally cement deficit regions covering the most of the major growth
centers of the country.
Cement industry in India has made tremendous strides in technological up
gradation and assimilation of latest technology. At present ninety three
per cent of the total capacity in the industry is based on modern and
environment-friendly dry process technology and only seven per cent of
the capacity is based on old wet and semi-dry process technology. The
major players of Indian cement industry are Madras cements, ACC, India
cements, Gujarat Ambuja, Ultratech, Grasim, JK group, Jaypee group,
Century textiles, Birla Corporation, Lafarge.
There is tremendous scope for waste heat recovery in cement plants
and thereby reduction in emission level. Cement plants in the country
have mostly changed from the wet process to the energy efficient dry
process. In India, the cement factories are localized in the states of Tamil
Nadu, Madhya Pradesh, Gujarat, Bihar, Rajasthan, Karnataka and Andhra
Pradesh.
CEMENT INDUSTRY IN ANDHRA PREADESH
Cement industry is the most important the largest expending
industry in Andhra Pradesh. It plays a vital role in development of state.
Andhra Pradesh is having all the necessary natural resources required to
produce cement large quantities. The state stands first in the country so
far as limestone deposits are concerned. Out of approximate 90000 about
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30000 million tones are available in Andhra Pradesh which account for
34% in the total limestone deposits.
Andhra Pradesh cement industry started in year 1939. There were
two cement plants opened one was at Vijayawada and another was
associated cement company in Tadepally, Guntur district in 1939. As on
31st march2005, there are 8 large scale cement units with and installed
capacity of 16 million tones and 24 mini cements and grinding units with
an installed capacity of three million tones producing various types of
cement in Andhra Pradesh. In these 18 large cement plants, only two
cement units under public sector corporation I.e., cement corporation of
India plants situated in Adilabad and Tandur in Rangareddy district. The
entire Andhra Pradesh cement industry concentrated in the districts of
Adilabad, Nalgonda, and Cuddappah which are having total lime stones
reserves. Andhra Pradesh is having two lime stones deposits cluster viz.,
Yerraguntla and Nalgonda. 10 are major and 11 mini cement plants
situated in Nalgonda district.
As on 31st march, 1998 the Andhra Pradesh total major cement units
installed capacity was only 12.60 million tones and this increased to
16million tones at the end of this year because two cement major units
L&T, Visakha cement plants started their operations with installed
capacities of 2 million tones and 1 million tones and the existent market
leader Raasi cement limited. Expanding their capacity with another 20
million tones.
The mini cement plant sector also having an installed capacity of
2.5 million tones. By the end of this year the total Andhra Pradesh cement
industry installed capacity has reached to 18.5 million tones. The total
production of entire Andhra Pradesh cement industry is approximate 12
million tones. In this the major cement plants contribution was 10.5
million tones where as the mini cement plants only producing the
approximate 1.58 million tones. The cement consumption of Andhra
Pradesh is only 6 million tones. In 1997-98 and this figure has increased to
7 million tons by the end of 1998 because of various development
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program taken up by the state government and the industry’s dynamic
promotional activities.
The cement configuration in the state has been observing steady
growth. In 1996-97 the cement the consumption was only 4.87 million
tons and the further consumption increased to 5.87 million tons. As far as
production and consumption is concurrent, Andhra Pradesh cement
industry performance increased its 5.29% and 8% respectively in the year
1996-97. This percentage increase is very low when compared to national
average i.e. 8.5% because in this no production activity from the newly
erected plants as well as the existing plants which are increased their
installed capacity. One more reason for this type if low growth rate was
number of new plants and the existing plants which were increasing their
capacities started their production in various parts of our country the
cement exports in the year 1992-93, 36,200 tons exported to Bangladesh
and some other countries and this export figure increased to 1, 35,000
tons in 1993-94, there is only 10,000 tons of cement exported to Burma
from Vishakhapatnam. The following are the major contributors of cement
industry in Andhra Pradesh.
1. Madras Cements Limited
2. India Cements Limited
3. Zuari cements limited
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WORKING CAPITAL MANAGEMENT:-
Working Capital is the firm’s holdings of current assets such as cash,
receivables, inventory & marketable securities. Every firm requires
working capital for its day to day transactions such as purchasing raw
material, for meeting salaries, wages, rents, rates, advertising etc.
Significance of Working Capital:-
The world in which real firms function is not perfect. It is
characterized by the firms’ considerable uncertainty regarding the
demand, market price, quality & availability of its own products and those
suppliers. While the firm has many strategies available to address these
circumstances, strategies that utilize investment or financing with working
capital accounts often offer a substantial advantage over the techniques.
The importance of working capital management is reflected in the fact
that financial managers spend a great deal of time in managing current
assets and current liabilities like-
Arranging short term financing.
Negotiating favorable credit terms.
Controlling the movement of cash.
Administrating accounts receivables.
Monitoring investment in receivables.
Decisions concerning the above areas play a vital role in
maximizing the overall value of the firm. Once decisions concerning these
areas are reached, the level of working capital is also determined in active
decision sense, but falls out as residual from the decision just made.
The management of working capital plays an important role in
maintaining the financial health during the normal course of business. This
critical role can be enunciated by examining the flow of resources through
the firm. By far the major flow is the working capital cycle.
This is the loop (previous page) which starts at the cash and the
marketable securities account, goes through the current account as direct
labor and materials which are purchased and use to produce inventory,
which in turn is sold and generates accounts receivables, which are finally
collected to replenish cash. The major point to notice about this cycle is
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that the turnover or velocity of resources through this is very high related
to the other inflows and outflows of the cash account. There are two
concepts of working capital namely; Gross Working Capital and Net
Working Capital.
Gross Working Capital, simply called as working capital refers to the
firm’s investment in current assets. Current assets are the assets, which
in ordinary course o business can be converted into cash within an
accounting year. Current assets include cash and bank balances, short
term loans and advances bills receivables, sundry debtors, inventory,
prepaid expenses, accrued incomes, money receivable ( within 12
months).
The following are the few advantages of adequate working capital in
the business: Cash Discount: Adequate working capital enables a firm to
avail cash discount facilities offered to it by the suppliers. The amount of
cash discount reduces the cost of purchase.
Goodwill: Adequate working capital enables a firm to make prompt
payment. Making prompt payment is a base to create and maintain
goodwill.
Ability to face crisis: The provision of adequate working capital
facilities to meet situations of crisis and emergencies. It enables a
business to with stand periods of depression smoothly.
Credit-Worthiness: It enables a firm to operate its business more
efficiently because there is not delay in getting loans from banks and
other on easy and favorable terms.
Regular supply of raw materials: It permits the carrying of
inventories at a level that would enable a business to serve satisfactory
the needs of its customers. That is it ensures regular supply of raw
materials and continuous production.
Expansion of markets: A firm which has adequate working capital
can create favorable market condition i.e. purchasing its requirements in
bulk when prices are lower and holding its inventories for higher. Thus
profits are increased.
Increased productivity.
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Research programs.
High morale.
Problems of inadequate working capital:-
Firm may not be able to take advantage of profitable business
opportunities.
Production facilities cannot be utilized fully.
Short-term liabilities cannot be paid because of non-availability of
funds. Its low liquidity may lead to low profitability. In the same way, low
profitability results in low liquidity.
It may not be able to take advantages of cash discounts.
Credit worthiness of the firm may be damaged because of lack of
liquidity. Thus it may be lose its reputation; thereafter a firm may not be
able get credit facilities.
Working capital policy:
Working capital management policies have a great effect on firm’s
profitability, liquidity and its structural health. A finance manager should
therefore, chalk out appropriate working capital policies in respect of each
competent of working capital so as to ensure high profitability, proper
liquidity and sound structural health of the organization.
In order to achieve this objective the financial manager has to
perform basically following two functions:
Estimating the amount of working capital.
Sources from which these funds have to be raised.
Operating Cycle:
Working capital is required because of the time gap between the
sales and their actual realization in cash. This time gap is technically
terms as operating cycle of the business.
In case manufacturing company, the operating cycle of time
necessary to complete the following cycle of event.
Conversion of cash into raw materials.
Conversion of raw materials into work in progress.
Conversion of work in progress into finished goods.
Conversion of finished goods into accounts receivables.
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Conversion of accounts receivables into cash.
This cycle is continuous phenomena. In case of “Trading Firm” the
operating cycle will include the length of time required to:
Cash into inventories.
Inventories into accounts receivables.
Accounts receivables into cash.
In case of “Financing Firm” the operating cycle includes the length
of time taken for 1 year.
Conversion of cash debtors, and
Conversion of debtors into cash.
IMPORTANT OR ADVANTAGES OF ADEQUATE WORKING CAPITAL:
1. Solvency of the business: Adequate working capital helps in maintaining
solvency of the business by providing uninterrupted flow of production.
2. Goodwill: Sufficient working capital enables a business concern to make
prompt payments and helps in creating and maintaining goodwill.
3. Easy loans: A concern having adequate working capital, high solvency and
good credit standing can arrange from banks and other an easy and favorable
terms.
4. Cash discount: Adequate we also enable a concern to avail cash discount on
the purchases and hence it reduces costs.
5. Regular supply of raw material: Sufficient working capital ensures regular
supply or raw material and continuous production.
6. Regular payment of salaries and wages and other day-to-day commitments:
A company which has ample working capital can make regular payment of
salaries, wages and other day-to-day commitments which raises the moral of its
employees increase their efficiency, reduces wastage’s and costs and enhance
production and profits.
7. Exploitation of favorable market condition: Only concern with adequate we
can exploit favorable market conditions such as purchasing its requirement in
bulk when the prices are lower and by holding its inventories for higher
prices.
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8. Ability to face crisis: Adequate working capital enables a concern to face
business crisis in emergency such as depression because during such periods,
generally, there is much pressure on working capital.
9. Quick and regular return on investment: Every investor wants a quick and
regular return his investment sufficiency of working capital enables a concern
to pay quick and regular dividends to its investors as there may not be much
pressure to plough back profits. This gains the confidence to raise additional
funds in the future.
10. High morale: Adequacy of working capital creates an environment of
security, confidence, high morale and creates overall efficiency in a business.
EXCESS OR INADEQUATE WORKING CAPITAL
Every business concern should have adequate working capital run its
business operation. It should have neither redundant or excess working capital
nor inadequate nor shortage or working capital. Both excess as well as short
working capital positions are bad for any business. However, out of the two, it
is the inadequacy of working capital, which is more dangerous from the point
of view of the firm.
DISADVANTAGES OF REDUNDANT OR EXCESSIVE WORKING CAPITAL
Excessive working capital means idle funds which earn no profits for
the business and hence the business cannot earn a proper rate of return on its
investments.
When there is a redundant working capital, it may lead to unnecessary
purchasing and accumulation of inventories causing more chances of theft,
waste and loses. Excessive working capital implies excessive debtors and
defective credit policy which may cause higher incidence of bad debts. It may
results into overall inefficiency in the organization.
When there is excessive working capital, relation with banks and other
financial institution may not be maintained.
Due to low rate of return on investment, the value of share may also
fall. The redundant working capital gives rise to speculative transactions.
DISADVANTAGES OR DANGERS OF INADEQUATE WORKING CAPITAL
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A concern, which has inadequate working capital, cannot pay its short-
term liabilities in time. Thus it will lose its reputation and shall not be
able to get good credit facilities.
It cannot buy its requirements in bulk and cannot avail of discount, etc.
It becomes difficult for the firm to exploit favorable market condition
and undertake profitable projects due to lack of working capital.
The firm cannot pay day-to-day expenses of its operations and its
creates inefficiencies, increases costs and reduces the profits of the
business.
It becomes impossible to utilize efficiently the fixed asset due to non-
availability of liquid funds .The rate of return on investment also falls
with the shortage of working capital.
CHARACTERISTICS OF CURRENT ASSETS:
In the management of working capital, there are two characteristics of
working capital (1) short life span (2) swift transformation into other asset
forms.
Current assets have a short life span. Cash balances may be held idle
for a week or two, accounts receivable may have a life span of 30 to 120 days,
and inventories may be held for 30 to 100 days. The life span of current assets
depends upon the time required in the activities of procurement, production,
sales, and collection and the degree of synchronization among them.
Each current asset is swiftly transformed into other asset forms cash is
used for acquiring raw materials ; raw materials are transformed into finished
goods (this transformation may involve several stages of work-in-progress);
finished goods, generally sold on credit are converted into sundry debtors, on
realization, generate cash. Below diagram shows the cycle of transformation.
CASH Cycle
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The short life span of working capital components and their swift
transformation from one form into another has certain implications Decisions
relating to working capital management are repetitive and frequent.
The difference between profit and present value is insignificant. The
close interaction among working capital components implies that efficient
management of one component cannot be undertaken without simultaneous
consideration of other components.
The investment in working capital is influenced by four key events in the
production and sales cycle of the firm:
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Finished goods
Work in progressAccounts receivable
Wages, Salaries,
Factory overheads Raw materials
SuppliersCash
Purchase of raw materials
Payment of raw materials
Sale of finished goods
Collection of cash for sales
Above diagram depicts these events on the cash flow line. The firm begins with
the purchase of raw materials which are paid for after a delay which represents
the accounts payable period.
The length of operating cycle of a manufacturing firm takes into account.
Inventor Conversion period (ICP)
Debtor Conversion period (DCP)
Payment Deferred Period (PDP)
The Inventory Conversion Period is the total time needed for producing and
selling the product .The firm converts the raw material in to finished goods and
then sells the same. The time lag between the purchase of raw materials and
the sale of finished goods is the inventory period.
. Typically, it includes:
Raw Material Conversion Period (RMPC)
Work-in-Progress Conversion Period (WIPCP)
Finished Goods Conversion Period (FGCP)
The Debtor Conversion Period is the time required to collect
Outstanding amount from customers. Customers pay their bills sometimes
after the sales. The period that elapses between the date of sales and the date
of collection of receivables is the accounts payable period or debtor’s period.
The total of inventory conversion period and debtor collection period is referred
to as Gross Operating Cycle (GOC).
The Payments Deferred Period is the length of time the firm is able to defer
payment on various resource purchases. The difference between the gross
operating cycle and payment-deferred period is Net Operating Cycle (NOC).
Symbolically,
ICP = RMCP + WIPCP + FGCP
GOC = ICP + DCP
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NOC = GOC – PDP
The duration of the cycle with reference to working capital is:
Longer the cycle ----- Higher the working capital
Shorter the cycle ----- Lower the working capital.
It is helpful to monitor the behavior of overall operating cycle and its
individual components. For this purpose, time-series analysis and cross-section
analysis may be done. In time-series analysis, the duration of the operating
cycle and its individual components is compared over a period of time for the
same firm. In cross-section analysis, the duration of the operating cycle and its
individual components is compared with that of other firms of a comparable
nature
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Review of Literature
1) Sushma Vishnani and Bhupesh Kr. Shah have done a study in the area
of “Working Capital Management” in comparison with various
companies; the findings in the study indicate clearly that a company’s
inventory management policy, debtors’ management policy and
creditors’ management policy play an important role in its profitability
performance. It recommends that the concerned managers should give
due attention towards policy formulation in this regard as well as
implementation of such working capital policies. Relying on the findings
of the study, they can see for themselves the practices followed by
their peers in the area of working capital management. Corporate
value is enhanced when return on capital employed (ROCE), a function
of working capital management, exceeds cost of capital, a function of
capital investment decisions. And, it is quiet obvious that return can be
enhanced by limiting the investment in working capital to the adequate
level. Though working capital management is of equal importance for
big as well as small companies, but it is of special importance to
managers of small sized companies because it is they who strive for
finances and the opportunity cost of finances for them is usually on the
higher side. Although, in this study, we have not drawn any line of
demarcation between small and big sized companies, but yes definitely
a study in that direction would help the budding managers of small
companies. Also use of information technology in working capital
management would help in improving operational efficiency. (Impact of
Working Capital Management Policies on Corporate Performance An
Empirical Study by Sushma Vishnani and Bhupesh Kr. Shah, Global
Business Review 2007; 8; 267)
2) An underlying theme of this study is that high growth certainly does
not ensure high operating performance. Consistent with prior research
(Peterson and Rajan, 1997) this study provides further evidence that
good working capital management is positively associated with better
operating performance. Higher levels of accounts receivable are
associated with higher operating performance, in all three of the
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growth rate categories. The study also finds that maintaining control
over levels of cash, securities, inventory, fixed assets, and accounts
payables is associated with higher operating performance. The study
also indicates that firms which are experiencing very high growth will
hold higher levels of cash, securities, inventory, fixed assets, and
accounts payable to support the high growth. The study suggests that
these firms are sacrificing operating performance (accepting lower
operating returns) to support the high growth. This, in turn, increases
financial and operating risk for these firms. Perhaps IPO firms should
stay more focused on their operating performance, while maintaining
more moderate growth levels.
The underlying phenomena in the case is perhaps that many firms
which are in a high growth phase tend to have an increased need for
cash, securities, inventory, fixed assets, and accounts payable.
Increasing the levels of these balance sheet items can place financial
stress on the firm, as it is required to provide funding to support the
increased levels. As a result of the higher level of assets, operating
performance may decrease. It should be noted, as always, high growth
does not necessarily equate with high performance. A combination of
high growth and negative operating performance can result in
disastrous results. The findings of this study suggest that perhaps IPO
firms should stay more focused on their operating performance than on
maintaining high growth levels. (Working Capital Management, Growth
and Performance of New Public Companies, Credit & Financial
Management Review, Third Quarter 2008 by Beneda, Nancy,
Zhang,Yilei)
3) A questionnaire survey by Smith and Sell [ “Working Capital
Management in Practices” published in 1978] indicate that 68% of the
respondent firm used either cost balancing models or computerized
inventory control. The survey evidence reports that the basic models of
inventory management are widely used.
Abstract
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The current study contributes to the literature by examining impact of
working capital management on the operating performance and
growth of new public companies. The study also sheds light on the
relationship of working capital with debt level, firm risk, and industry.
Using a sample of initial public offerings (IPO's), the study finds a
significant positive association between higher levels of accounts
receivable and operating performance. The study further finds that
maintaining control (i.e. lower amounts) over levels of cash and
securities, inventory, fixed assets, and accounts payables appears to
be associated with higher operating performance, as well. We find that
IPO firms which are experiencing unusually high growth tend not to
perform as well as those with low to moderate growth. Further firms
which are experiencing high growth tend to hold higher levels of cash
and securities, inventory, fixed assets, and accounts payables. These
findings tend to suggest that firms are willing to sacrifice performance
(accept low or negative operating returns) to increase their growth
levels. The higher level of growth is also associated with higher
operating and financial risk. The findings of this study suggest that
perhaps IPO firms should stay more focused on their operating
performance than on maintaining high growth levels.
Introduction and Literature Review
Working capital policy refers to the firm's policies regarding 1) target
levels for each category of current operating assets and liabilities, and
2) how current assets will be financed. Generally good working capital
policy (i.e. under conditions of certainty) is considered to be one in
which holdings of cash, securities, inventories, fixed assets, and
accounts payables are minimized. The level of accounts receivables
should be used as a means of stimulating sales and other income.
Previous literature on working capital management has found a
negative association, overall, between level of working capital and
operating performance as measured by operating returns and
operating margins (Peterson and Rajan, 1997). Under conditions of
certainty (i.e. sales, costs, lead times, payment periods, and so on, are
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known), firms have little reason to hold more working capital than a
minimum level. Larger amounts would increase the level of operating
assets, increase the need for external funding, resulting in lower return
on assets and a lower return on equity, without any increase in profit.
However the picture changes when uncertainty (i.e. uncertain
growth) is introduced (Brigham and Houston, 2000). Larger amounts of
cash, securities, accounts receivables, marketable securities,
inventories, and fixed assets will be needed to support increased sales
Required levels will be based on expected sales levels and expected
order lead times. Additional holdings may be needed to enable the firm
to deal with departures from the expected values. Further, firms will
also attempt to increase their accounts payable balances as a means
of financing increased levels of current operating assets. Firms which
are in high growth stages will face the challenge of maintaining the
necessary level of operating assets to support subsequent growth,
while at the same time attempting to maintain adequate performance
indicators.
This study focuses on understanding how IPO companies manage their
working capital and other balance sheet items to support subsequent
growth. This study supports the existing literature on working capital
and contributes to the existing literature by examining a sample of
firms (i.e. recent IPO firms) which have a wider range of growth levels
than non-IPO firms. Our study examines the impact of working capital
management on the operating performance and growth of new public
companies. The study also examines these relationships under three
categories of growth (i.e. negative growth, moderate growth, and high
growth). The study also examines other selected firm characteristics in
light of working capital management: firm operating and financial risk,
amount of debt, firm size, and industry.
An underlying theme of this study is that high growth certainly does
not ensure high operating performance. Consistent with prior research
(Peterson and Rajan, 1997) this study provides further evidence that
good working capital management is positively associated with better
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operating performance. Higher levels of accounts receivable are
associated with higher operating performance, in all three of the
growth rate categories. The study also finds that maintaining control
over levels of cash, securities, inventory, fixed assets, and accounts
payables is associated with higher operating performance. We find that
firms which are experiencing very high growth will hold higher levels of
cash, securities, inventory, fixed assets, and accounts payable to
support the high growth. The study suggests that these firms are
sacrificing operating performance (accepting lower operating returns)
to support the high growth. This, in turn, increases financial and
operating risk for these firms. Perhaps IPO firms should stay more
focused on their operating performance, while maintaining more
moderate growth levels.
Another aspect of this study is that it fills a void in the initial public
offerings literature. Recent literature finds that new public companies
underperform the market after going public. Ritter in his 1991 paper
reports substantially lower stock returns for IPO firms between 1975
and 1984 than for a size-and-industry-matched sample of seasoned
firms. Since then there is a growing literature explaining IPO
underperformance as related to agency cost (Smith, 1990),
institutional holdings (Field, 1995), venture capital (Jain and Gompers,
1997; Jain and Kini, 2000), market timing of IPO (Benninga, 2004), and
earnings management (Teho et al., 1998; Ahmad-zaluki et al., 2008).
However, there is no study linking the working capital management
and post-IPO performance. Our paper tries to fill the void. The findings
of this study would be interesting to investors and creditors of new
public companies.
Data and Descriptive Statistics
The data set starts with initial public offerings (IPOs) reported in the
"Corporate Market Data" section of the Investment Dealer's Digest over
the period January 1995 to December 1998 and Hoovers.com for the
period January 1999 to December 2004. The IPOs are required to have
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stock return data from CRSP and financial statement data from
Compustat to be included in the sample. The resulting number of IPO
firms in the sample consists of 2,210 IPO firms. The sample of IPO firm
years is then constructed using this IPO data and four post trading
years of accounting and return data. Once a firm becomes distressed
(loses 90% of its market value) it is removed from subsequent sample
years. All observations with negative equity were deleted from the
sample, as well. This resulted in 7,373 IPO observations. All indicators
are computed as of the beginning of each fiscal year, except growth in
sales, operating return on assets, and return on equity, which occur
during the first year subsequent to the computed indicators.
Univariate analysis of the working capital components
From Table 1, Panel A, IPO firms are characterized by large levels of
cash and securities (the average ratio to sales is 6.94). Interestingly,
when cash and securities are excluded from the computation of
working capital, the resulting average ratio of working capital to sales
is actually negative (i.e. -0.520). Upon further observation, on average,
for the entire study sample, accounts receivable is 23% of sales,
inventory is 18% of sales, and accounts payables are 93% of sales. The
larger level of average accounts payable present in this sample causes
working capital to be negative since accounts payable is subtracted in
the computation of working capital. The large amount of accounts
payable suggests that mese firms are probably funding growth in part
with large levels of accounts payable and negative working capital
(excluding cash and securities).
Sample Descriptives
The data set starts with initial public offerings (IPO's) reported in the
"Corporate Market Data" section of the Investment Dealer's Digest over
the period January 1995 to December 1998 and Hoovers.com for the
period January 1999 to December 2004. The IPO's are required to have
stock return data from CRSP and financial statement data from
Compustat to be included in the sample. The resulting number of IPO
firms in the sample consists of 2,210 IPO firms. The sample of IPO firm
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years is then constructed using this IPO data and four post trading
years of accounting and return data. Once a firm becomes distressed
(loses 90% of its market value) it is removed from subsequent sample
years. AU observations with negative equity were deleted from the
sample, as well. This resulted in 7,373 IPO firm years. AU indicators are
computed as of the beginning of each fiscal year, except Growth in
sales. Operating return on assets, and return on equity, which occur
during the year after the indicators are computed. Firm size is
computed as the total assets for each firm. Debt ratio is computed as
debt divided by (debt equity). Operating margin is computed as
earnings before interest and taxes divided by Sales. Growth in sales is
computed as (Salest i - Sales,) divided by Salest. Operating return on
assets is computed as earnings before interest and taxes divided by
(beginning total assets minus current liabilities). Return on equity is
computed as net income divided by beginning equity. Market-to-book
ratio is calculated as (shares outstanding ? stock price) total assets -
BV equity) / total assets. NASDAQ index adjusted returns are calculated
by subtracting the NASDAQ index returns from the post-IPO annual
returns for the first, second, third and fourth years after going public.
Idiosyncratic return variance is calculated as the variance of the
residuals from a regression of daily returns on the NASDAQ index
market returns. The variances are computed over the first 120 days
after going public, and over the first, second, third, fourth, years to
compute prior year return variances. Technology firms include those
firms in the following industries: computer hardware, semiconductors,
storage devices, and peripherals (SIC codes 3559, 3570, 3572, 3577,
and 3674); computer networking, software, and services (SIC codes
7370, 7372, 7374, and 7389); and communications equipment (SIC
codes 3576 and 3663).
Also apparent from Table 1, Panel A is that operating profit is negative
on average. Operating margin, computed as operating profit divided by
sales is - 1 .07 and operating return on assets is 17.4% on average. It
should also be observed that technology firms have lower debt ratios,
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lower growth rates, and lower operating returns. The returns on equity
for the technology firms are not as low as those for non-technology
firms which is as expected since technology firms have lower debt
levels, (i.e. when firms exhibit negative operating performance, higher
leverage from debt results in lower returns on equity.)
From Table 1, Panel B, most notable is the decrease in cash and
securities, inventory, fixed assets, and accounts payables for firms in
the first two years after going public to the third and fourth years. This
is consistent with lower average growth in the third and fourth years.
Interestingly, net accounts receivables increases. These findings may
indicate that firms are in a better position to improve their working
capital management in years 3 and 4 because of lower growth rates.
Also, operating margins increase, and operating returns and returns on
equity decrease from the first two years to the third and fourth years.
One of the attributes of using IPO companies to examine working
capital management is the wide range of growth and performance
characteristic of these firms. In Panel C of Table 1, the averages for the
selected indicators are reported according to three categories of sales
growth. It is apparent from examination of the reported results in Panel
C that the sample firms in this study, on average, manage working
capital differently for different levels of growth. Further it appears that,
overall, high growth firms sacrifice operating performance and report
lower operating returns and margins to support growth. First, a
negative association between growth and performance for these new
public companies is observed. IPO firms with moderate growth rates
exhibit an average operating return of 3.5%, whereas firms in the high
growth category have a negative average operating return of -14.4%
and negative growth firms have an average operating return of -61.1%.
Related to this observation is that the average accounts receivable-
tosales ratio is positive (0.72) only in the moderate sales growth
category. The average of this ratio is negative in the negative growth
category and zero in the high growth category.
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Second, the ratios to sales for cash and securities, inventory, fixed
assets, and accounts payables are reportedly higher in the high growth
category. These indicators are quite normal for the moderate sales
growth category. The indicators are mixed for the negative sales
growth category. Third, the reported averages for return variance,
beta, and market-to-book ratio are all at their lowest levels in the
moderate growth category, indicating lower operating and financial risk
for these firms.
The results of the univariate analyses, overall support the contention
that firms which are experiencing high growth tend to hold higher
levels of cash and securities, inventory, fixed assets, and accounts
payables. These findings tend to suggest that firms are willing to
sacrifice performance (accept low or negative operating returns) to
increase their growth levels. The higher level of growth is also
associated with higher operating and financial risk. The findings of this
study suggest that perhaps IPO firms should stay more focused on their
operating performance than on maintaining high growth levels.
A. Working capital management and sales growth
The result is reported in Table 2. The independent variable WC
Management is working capital in model (1), working capital less cash
and securities in model (2), cash and securities in model (3), net
accounts receivable in model (4), inventory in model (5), accounts
payable in model (6); and in model (7) net fixed assets is used to
determine the effect of other balance sheet items. In model (8) all
working capital structure variables and net fixed assets are included as
independent variables to examine the implications of overall firm
management for growth. Control variables include beta, stock return
variance, debt ratio, operating return, technology dummy, market-
tobook ratio and firm size (computed as the log of total assets).
Relationship between working capital structure and sales growth
This table reports the results of the regressions where the dependent
variable is Sales Growth defined as (salest - salest-i) divided by total
assetst-i for each IPO. The independent variables are Working Capital
46 | P a g e
(Model 1), Working Capital less Cash and securities (Model 2), Cash and
securities (Model 3), Net Accounts Receivable (Model 4), Inventory
(Model 5), Accounts Payable (Model 6), and Net Fixed Assets (Model 7),
each computed by dividing the beginning of year balance by the total
sales for the year. The control variables are as follows: 1) Beta
calculated by regressing each IPO's daily returns on the NASDAQ Index
daily returns which occur during the first year after the firm goes
public; 2) Return Variance defined as the current year's return variance
calculated as the variance of the residuals from a regression of daily
returns on the NASDAQ index market returns; 3) Debt Ratio computed
as the firm's beginning of year total debt divided by the sum of the
firm's total debt and stockholders' equity; 4) Operating return defined
as EBIT divided by the beginning of year operating assets (we compute
operating assets as total assets minus accounts payable); 5)
Technology Dummy equal to one if the firm is a technology firm as
defined in Table 1 ; 6) Market-to-book ratio defined as each IPO firm's
beginning of year stock price times the number of common equity
shares outstanding divided by beginning year's stockholder equity; 7)
Firm size calculated as the logarithm of the firm's total assets at the
beginning of the year. Year After Dummy and Year of IPO are included
(not reported). T-statistics are reported in parentheses. ***, ** and *
denote significance level at the 1%, 5% and 10% levels, respectively.
The results show that there are significant associations between sales
growth and the independent variables. Interestingly sales growth is
positively associated with working capital and negatively associated
with working capital less cash and securities the level of cash and
securities appears to be a dominant factor in the working capital/sales
growth puzzle. The results show that cash and securities, inventory,
accounts payable, and fixed assets are all associated with higher sales
growth. Accounts receivable is not significant in the isolated regression
model (4); but model (8) shows it is also positively related to growth
when examining overall firm management for growth. In sum, our
47 | P a g e
results point to the evidence that firm's growth is increasing with the
relative amounts of most all of their balance sheet items.
B. Working capital management and performance
High growth, though important to the IPO firms, does not necessarily
mean good performance. Therefore we further investigate the
relationship between working capital management and performance.
We use the following specification and report the results in table 3.
EBIT divided by the beginning of year operating assets is used to proxy
the firm's performance. We use the same independent and control
variables as in equation 1 ; only that we also include sales growth as a
control variable. So the regression shows the additional explanatory
power of working capital management on performance controlling for
the growth.
Relationship between working capital structure and performance
This table reports the results of the regressions where the dependent
variable is Operating return defined as EBIT divided by the beginning of
year operating assets. The independent variables are Working Capital
(Model 1), Working Capital less Cash and securities (Model 2), Cash and
securities (Model 3), Net Accounts Receivable (Model 4), Inventory
(Model 5), Accounts Payable (Model 6), and Net Fixed Assets (Model 7),
each computed by dividing the beginning of year balance by the total
sales for the year. The control variables are as follows: 1) Beta
calculated by regressing each IPO's daily returns on the NASDAQ Index
daily returns which occur during the first year after the firm goes
public; 2) Return Variance defined as the current year's return variance
calculated as the variance of the residuals from a regression of daily
returns on the NASDAQ index market returns; 3) Debt Ratio computed
as the firm's beginning of year total debt divided by the sum of the
firm's total debt and stockholders' equity; 4) Sales Growth defined as
(sales^sub t^ - sales^sub t-1^) divided by total assets^sub t-1^; 5)
Technology Dummy equal to one if the firm is a technology firm as
defined in Table 1 ; 6) Market-to-book ratio defined as each IPO firm's
48 | P a g e
beginning of year stock price times the number of common equity
shares outstanding divided by beginning year's stockholder equity; 7)
Firm size calculated as the logarithm of the firm's total assets at the
beginning of the year. Year After Dummy and Year of IPO are included
(not reported). T-statistics are reported in parentheses. ***, ** and *
denote significance level at the 1%, 5% and 10% levels, respectively.
Although working capital shows no association with performance,
working capital less cash is positively related to performance. These
results are inconsistent and not particularly consistent with regard to
prior research, that maintaining moderate levels of working capital
tends to support a higher level of firm performance. Further, the
individual components of working capital show different but significant
effects on firm performance. Specifically, cash and securities,
inventory, and accounts payable are negatively related to
performance; while accounts receivable is positively related to
performance. It is of practical implication to document that the working
capital components, though they all support growth, influence
performance differently.
C. The relationship of the life cycle of post IPO years
With regard to the inconsistent results observed in Tables 2 and 3,
above, and the significant differences noted with regard to managing
working capital for different growth levels (see Table 1, Panel C above),
in this section three growth categories of sample firms are examined.
One of the attributes of using IPO companies to examine working
capital management is the wide range of growth and performance
characteristic of these firms. The results reported in this section tend to
provide further evidence that, overall, high growth firms sacrifice
operating performance and report lower operating returns and margins
to support growth.
Reports the results for the regressions according to three categories of
sales growth: negative growth, moderate growth, and high growth. It is
apparent the sample firms in this study, on average, manage working
capital differently for different levels of growth. Further it appears that,
49 | P a g e
overall, high growth firms sacrifice operating performance and report
lower operating returns and margins to support growth. To conserve
space we do not report the coefficients on control variables.
Working capital management on sales growth and operating
performance by growth category subsamples
The table reports the sales growth and performance regressions on
subsamples of negative growth, moderate growth and high growth
subsamples. Sales growth regression specification and variables are
the same as in table 2. Performance regression specification and
variables are the same as in table 3. Only working capital variables are
reported to conserve space. T-statistics are reported in parentheses
and denote significance level at the 1%, 5% and 10% levels,
respectively.
In Panel A and B, the independent variables are working capital and
working capital less cash and securities. The level variables maintain
the same effect throughout post-IPO years. However, it is interesting to
see that the effects of working capital structure have both similarities
and differences over years.
From Panel C, for the moderate sales growth firms, sales growth is
positively associated with accounts receivable and fixed assets.
Further, cash and securities, accounts payables, and fixed assets have
the highest positive and most significant association with sales growth
in the high sales growth category.
Also interesting is that in all three sales growth categories, inventory,
accounts payable, and fixed assets are negatively associated and
accounts receivable is positively associated with firm performance.
These associations are more pronounced in the moderate sales growth
category.
Conclusion
The purpose of this paper is to examine the effects of working capital
management on firm performance for different levels of growth. The
study provides evidence that good working capital management is
positively associated with better operating performance. The study
50 | P a g e
further indicates that, overall, high growth firms tend to sacrifice
operating performance and report lower operating returns and margins
to support growth. High growth firms also exhibit higher levels of risk.
The underlying phenomena is perhaps that many firms which are in a
high growth phase tend to have an increased need for cash, securities,
inventory, fixed assets, and accounts payable. Increasing the levels of
these balance sheet items can place financial stress on the firm, as it is
required to provide funding to support the increased levels. As a result
of the higher level of assets, operating performance may decrease. It
should be noted, as always, high growth does not necessarily equate
with high performance. A combination of high growth and negative
operating performance can result in disastrous results. The findings of
this study suggest that perhaps IPO firms should stay more focused on
their operating performance than on maintaining high growth levels.
References
Ahmad-zaluki, N. A., K. Campell, and A. Goodcre, 2008, "Earnings
management in IPOs: determinants and postIPO performance,"
Working paper.
Benninga, S., Helmantel, M., and Sarig, O., 2005, "The timing of
initial public offerings," Journal of Financial Economics 75, 115-132.
Brav, S.A., and K. C. Chan, 1997, "Myth or reality? The long-run
underperformance of initial public offerings: evidence from venture
capital and nonventure capital-backed companies," Journal of
Finance 52, 1791-1821.
Brigham, E. F. and J. F. Houston, 2000, Fundamentals of Financial
Management, Dryden.
Field, L., 1995, "Is institutional investment in initial public offerings
related to long-run performance of these firms?" Working paper,
University of California, Los Angeles.
Griffin, J. M., and M.L. Lemmon, 2002, "Book-to-market equity,
distress risk, and stock returns," Journal of Finance 57, 2317-2336.
51 | P a g e
Jain, B., Kini, O., 2000. Does the presence of venture capitalists
improve the survival profile of IPO firms? Journal of Business,
Finance & Accounting 27, 1139-1176.
Petersen M. A. and R. G. Rajan (1997), "Trade Credit: Theory and
Evidence," Review of Financial Studies 10, 661-691.
Ritter, J., 1991, "The long-run performance of initial public offerings,"
Journal of Finance 46, 3-27.
Smith, A., 1990, "Corporate ownership structure and performance:
The case of management buyouts," Journal of Financial Economics
27, 143-164.
Teho, S. H., I. Welch, and TJ. Wong, 1998, "Earnings management
and the long-run market performance of initial public offerings,"
Journal of Finance 53, 1935-1974.
By: Nancy Beneda, Ph.D., C.P.A. & Yilei Zhang Ph.D.
Nancy Beneda, Ph.D., C.P.A. is the Robert Page Professor and
Associate Professor of Finance at University of North Dakota. Dr.
Beneda's teaching and research interests include risk management,
corporate valuation, and valuation of initial public offerings (IPO's).
She also serves as the Chairperson of the Finance Department.
Dr. Beneda obtained her Ph.D. in finance from St. Louis University
on August 6, 1999 and became a Certified Public Accountant in
1989. Previous to her service at UND she served as audit supervisor
at the accounting firm, Price Waterhouse.
Yilei Zhang, Ph.D., is an Assistant Professor at the Department of
Finance at the University of North Dakota. Her research interest is in
mergers and acquisitions, IPO and SEO, and corporate governance.
She may be reached via email at yilei.
52 | P a g e
DATA ANALYSIS
&
INTERPRETATIONS
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SHORT TERM LIQUIDITY MANAGEMENT
CURRENT RATIO:-
The current ratio is a measure of a firm’s short-term solvency. It indicates
the availability of current assets in rupee for every one rupee of current
liabilities. A ratio of greater than one means that firm has more current
assents than current claims against them. A high ratio indicates high
liquidity; while a low ratio indicates a low liquidity. For manufacturing
CURRENT RATIO =
Table 1.1
CURRENT RATIO in Rs.
YEAER CURRENT ASSETS
CURRENT
LIABILITIES RATIO
2006-07 3149756052 1656267950 1.9
2007-08 3270733711 2286973441 1.43
2008-09 6147532582 3945088370 1.56
2009-10 7792358719 4015124569 1.94
Interpretation:-
The Current Ratio during the period of the study was higher than the
standard. This in turn indicates that the company is maintaining sufficient
54 | P a g e
liquidity in their organization. For a manufacturing undertaking, a ratio of
2:1 is traditionally considered a benchmark of adequate liquidity.
QUICK RATIO :
Quick Ratio indicates the immediate liquidity of current assets.
Recognizing that inventory might not be very liquid, this ratio takes into
account quickly realizable assets and measures them against current
liabilities. This is more accurate measure of estimating the unit’s liquidity.
Generally a quick ratio of 1:1 is considered to be a more satisfactory
measure of liquidity position of a concern
QUICK RATIO =
Table 1.2
QUICK RATIO in Rs
55 | P a g e
YEAR QUICK ASSETS
CURRENT
LIABILITIES RATIO
2006-07 1792815683 1656267950 1.08
2007-08 2252011403 2286973441 0.98
2008-09 4848409659 3945088370 1.22
2009-10 5356761021 4015124569 1.33
InterpretationThe table reveals that the overall quick ratio is around 1.5. This is
according to the standard, which indicates that the company has
maintained sufficient current assets to meet the current of liquid assets
are locked in current assets (which if effectively used can increase the
productivity).
WORKING CAPITAL TURNOVER RATIO:-
Working capital turnover ratio establishes a relationship between net
sales and working capital. This ratio provides information as to how
effectively a company is using its working capital to generate sales. A
higher ratio indicates the management’s efficient utilization of the assets
while low turnover ratio indicates the underutilization of available
resources and presence of idle capacity.
WORKING CAPITAL TURNOVER RATIO=
*Net Working Capital = Current Assets – Current
Liabilities
Table 1.3
WORKING CAPITAL TURNOVER RATIO
56 | P a g e
YEAR NET SALESNET WORKING
CAPITALRATIO
2006-07 7145429942 1493488102 4.78
2007-08 9863449724 983760270 10.02
2008-09 15301309179 2202444212 6.94
2009-10 19246718554 3777284150 5.09
Interpretation:
The working capital turnover ratio was 4.78 in the year 2006-07,
increased to 10.02 in the year 2007-08 and again decreased to 6.94 in
the year 2008-09 And again decreased 5.09 in the year 2009-10 Thus, the
ratio during the period of the study is showing a fluctuating trend. But the
average ratio during the period was high, which is an indication that the
firm has been utilizing the assets efficiently.
WORKING CAPITAL PERFORMANCE RATIO:
This ratio indicates the mode of financing of debtors. It is used more to
control the working capital of an enterprise. Often a minimum and
maximum value of the ratio is known to lessen the dependence of
financing from other sources. A ratio of 1:1 is considered to be a more
satisfactory measure of performance of working capital of a firm.
Working capital performance ratio =
57 | P a g e
Table 1.4Working Capital Performance Ratio
Interpretation:
The working capital performance ratio was 0.42 during the year 2006-07 it
decreased to0.41 in the year 2007-08 and it decreased to 0.23 in the year
2008-09 and it again decrease much higher than the standard ratio; this
indicates that the company has been financing the debtors very well.
CURRENT ASSETS TURNOVER RATIO: -
It explains the relationship between sales and current assets. This ratio
indicates the sales generating capacity of current assets. The lower the
ratio more is the amount of current assets required per unit of sales
Current Assets turnover ratio =
58 | P a g e
YEAR
TRADE
DEBTORS
TRADECREDITORS+ADVANCE
PAYMENTS RATIO
2006-07 452734619 1069142870 0.42
2007-08 493474854 1198528794 0.41
2008-09 653448795 23834113029 0.23
2009-10 616072465 4504830991 0.13
Table 1.5 Current Assets turnover ratio
YEAR NET SALES CURRENT ASSETS RATIO
2006-07 7145429942 3149756052 2.26
2007-08 9863449724 3270733711 3.01
2008-09 15301309179 6147532582 2.48
2009-10 19246718554 7792358719 2.46
Interpretation:
The current assets turnover ratio was 2.26 in the year 2006-2007, it
increased to 3.01 in the year 2007-2008 and decreased to 2.48 in the year
2008-2009 and again decreased 2.46 in the year 2009-2010The current
asset turnover ratio during the period under the study had a fluctuating
trend. But when we refer 2006-2007 to 2007-2008, 2008-2009 and 2009-
2010 we can see that there is an increase which indicates that the
company has been using the current assets properly to generate sales.
CASH MANAGEMENT
Cash Turnover Ratio: This ratio focuses on the cash holding policy of the
firm. A decline in this ratio indicates high levels of idle cash. A high ratio is
more preferable.
Cash Turnover ratio =
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Table 1.6Cash Turnover Ratio
Interpretation:
The Cash turnover ratio was 14.58 in the year 2006-07 which increased to
16.86 in 2007-08 and increased to 18.17 in the year2008-09.again
increased 57.53 in the year2009-10. The ratio has been above 14 .58
during the period of study, which indicates that the cash holding policy of
the firm is good.
I NVENTORY MANAGEMENT
Activity Ratios:-
Funds of various creditors and owners are invested in various assets to
generate sales and profits. The better the management of assets, the
larger the amount of sales. Activity ratios are employed to evaluate the
efficiency with which the firm manages and utilizes its assets. These ratios
are also known as Turnover ratios because they indicate the speed with
which the assets are being converted or turned over into sales. Activity
ratios, thus involve a relationship between sales and assets. A proper
60 | P a g e
YEARCASH OPERATING EXPENSES
CASH AND BANK BALANCES RATIO
2006-07 6330921229 434118131 14.582007-08 8313160381 493065688 16.862008-09 1028447999 565713869 18.132009-10 13200044657 229435639 57.53
balance between sales and assets generally reflect that assets are
managed well.
Inventory Turnover Ratio:-
Inventory Turnover Ratio indicates the efficiency of the firm in producing
and selling its product. It is calculated by dividing cost of goods sold by
the average inventory.
Inventory Turnover Ratio=
Table 1.7 Inventory Turnover Ratio
Interpretation:
The inventory turnover ratio indicates the number of times a rupee
generates turn over with respect to inventory investment. A high ratio
indicates a better conversion of inventory. The inventory turnover ratio in
the year 2006-07 was 32.47 which decreased to 12.03 in 2007-08 and
which further increase to 19.72 in 2008-09 and again increased 28.02 in
61 | P a g e
YEARS COST OF GOODS SOLD AVERAGE INVENTORY RATIO
2006-07 3820898207 117667878 32.47
2007-08 4367281138 362768945 12.03
2008-09 5788755562 293487301 19.72
2009-10 7840396793 279747059 28.02
the year 2009-10which shows an upward trend which is a very good sign
for the company.
RAW MATERIAL INVENTORY TURNOVER:-
This ratio shows the efficiency of the firm in converting raw material into
finished goods. Raw material turnover and holding period shows the
number of times raw material is rotated during the period. It shows the
number of times raw material is converted into work-in-progress. It also
shows the number of days it takes to convert raw material into finished
goods.
Raw material Inventory Turnover =
Table 1.8
RAW MATERIAL INVENTORY TURNOVER
Work in
Progress Inventory Turnover =
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YEAR MATERIAL CONSUMED
AVERAGE RAW MATERIAL
INVENTORY RATIO
2006-07 1177843411 67226226 17.52
2007-08 1520714101 8877554 17.16
2008-09 2011500769 128567141 15.64
2009-10 2564131071 227080390 11.29
Interpretation:
The raw material turnover ratio in the year 2006-07 was 17 .52which
decreased to 17.16 in 2007-08 and which further decreased to 15.64 in
2008-09 and again decreased 11.29 in the year 2009-10The raw material
turnover ratio is showing a downward trend which is not a good sign. A
decrease in ratio is showing increase in raw material inventory levels or
slow-moving inventory. A high level of raw material inventory indicates
unnecessary tie-up of funds, reduced profit and increased cost
Work-in-progress Inventory Turnover:
Work-in-progress turnover helps in examining the efficiency with which
the firm converts work-in-progress into finished goods. The ratio helps in
knowing the number of times work-in-progress is converted into finished
goods.
Table 1.9Work in Progress Inventory Turnover
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YEAR Cost of goods sold Average Work-in-Progress Ratio
2006-07 3820898207 20135147 189.76
2007-08 4367281138 250658932 17.42
2008-09 5788755562 197407203 29.32
2009-10 7840396793 1476644491 53.1
Interpretation:
The Work-in-progress inventory was189.76 in 2006-07, it decreased to
17.42 in 2007-08 and it further increased to 29.32 in 2008-09. And it
again increased53.10in the year2009-10 It is showing a fluctuating trend,
which is good for the organization. A high ratio indicates fast conversion of
goods into finished goods.
FINISHED GOODS INVENTORY TURNOVER RATIO:-
Finished goods turnover indicates the efficiency of the management in
managing the finished goods. A high level of inventory is an indication of
inefficient management of finished goods inventory.
FINISHED GOODS TURNOVER RATIO =
Table 1.10Finished Goods Inventory Turnover Ratio
Year Cost of goods sold Average Finished Goods Inventory Ratio
2006-07 3820898207 101513919 37.63
2007-08 4367281138 11211003 38.95
2008-09 5788755562 112110013 51.63
2009-10 7840396793 132102568 59.35
Interpretation: The finished goods turnover ratio was 37.63 in 2006-07, it
increased to 38.95 in 2007-08 and it further increased to 51.63 in 2008-09
64 | P a g e
and again increased to 59.35in the year (2009-10) the conversion of
finished goods into sales is getting quicker year-by-year.
DEBTORS MANAGEMENT
Debtors Turnover Ratio:-
Debtors turnover indicates the number of times debtors turnover each
year. Generally the higher the value of debtor’s turnover, the more
efficient is the management of credit.
Debtors Turnover Ratio =
Table 1.11Debtors Turnover Ratio
Year Net Sales Average Debtors Ratio
2006-07 7145429942 43,97,11,321 16.25
2007-08 9863449724 47,31,04,737 20.84
2008-09 15301309179 57,34,61,825 26.68
2009-10 19246718554 63,47,60,630 30.32
Interpretation:
65 | P a g e
The Debtors turnover ratio was 16.25 in 2006-07. It increased to 20.84 in
2007-08 which increased to 26.68in 2008-09and again increased 30.32 in
the year 2009-10 this continues increase in ratio in the year is a good sign
because the higher the debtors turnover ratio, the more.
COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS
FOR THE YEAR ENDING DECEMBER 31st 2006 – 2007
PARTICULARS
Year ending 31st December
Increase Decrease 2006 2007
AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories
Total AssetsLiabilities and CapitalCurrent LiabilitiesProvisions
Total Liabilities
52,38,60,37896,37,39,88542,66,88,02252,73,64,629
43,41,18,13195,15,54,25742,27,34,619131,13,49,045 78,39,84,416
8,97,42,2471,21,85,628 39,53,403
244,16,52,914 314,97,56,052
135,50,17,102 12,19,49,253
150,54,85,367 15,07,82,583
15,04,68,265 2,88,33,330
147,69,66,355 165,62,67,950Net working capital 96,46,86,559 146,34,88,102
Increase in working capital 49,88,01,543 49,88,01,543
Total 146,34,88,102 146,34,88,102 78,39,84,41678,39,84,416
66 | P a g e
67 | P a g e
COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS
FOR THE YEAR ENDING DECEMBER 31st 2007– 2008
PARTICULARSYear ending 31st December
Increase Decrease 2007 2008
AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories
Total Assets
Liabilities and CapitalCurrent LiabilitiesProvisions
Total Liabilities
43,41,18,13195,15,54,25742,27,34,619131,13,49,045
49,30,65,688127,47,15,770 49,34,74,854100,94,77,399
5,89,47,55732,31,61,513 70,740,235
30,18,71,646
311,97,56,052 327,07,33,711
135,50,17,102 12,19,49,253
184,14,55,504 44,55,17,937
48,64,38,40232,35,68,684
147,69,66,355 228,69,73,441
Net working capital 146,34,88,102 98,37,60,270
Decrease in working capital 47,97,27,832 47,97,27,832
Total 146,34,88,102 146,34,88,102 111,18,78,732 111,18,78,732
68 | P a g e
COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS LTD
THE YEAR ENDING DECEMBER 31st 2008 – 2009.
PARTICULARSYear ending 31st December
Increase Decrease 2008 2009
AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories
Total Assets
Liabilities and Capital
Current LiabilitiesProvisions
Total Liabilities
49,30,65,688127,47,15,770 49,34,74,854100,94,77,399
56,57,13,869364,59,98,94065,34,48,795128,23,70,978
7,26,48,181237,12,83,17015,99,73,94127,28,93,579
327,07,33,711 614,75,32,582
184,14,55,504 44,55,17,937
243,79,37,215150,71,51,155
59,64,81,711106,16,33,218
228,69,73,441 394,50,88,370
Net working capital 98,37,60,270 220,24,44,212
Decrease in working capital 121,86,83,942 121,86,83,942
Total 220,24,44,212 220,24,44,212 165,81,14,929 165,81,14,929
69 | P a g e
COMPARITIVE BALANCE SHEET OF MADRAS CEMENTS LTD
FOR THE YEAR ENDING DECEMBER 31st 2009 – 2010.
PARTICULARSYear ending 31st December
Increase Decrease 2009 2010
AssetsCurrent AssetsCash & Bank BalancesLoans & AdvancesSundry DebtorsInventories
Total AssetsLiabilities and Capital
Current LiabilitiesProvisions
Total Liabilities
56,57,13,869364,59,98,94065,34,48,795128,23,70,978
22,94,35,639451,98,15,381 61,60,72,465242,70,35,234
87,38,16,441
114,46,64,256
33,62,78,230
37,376,330
614,75,32,582 779,23,58,719
243,79,37,215150,71,51,155
290,76,23,187110,75,01,382 39,96,49,773
46,96,85,972
394,50,88,370 401,51,24,569
Net working capital 220,24,44,212 377,72,34,150
Decrease in working capital
157,47,89,938 157,47,89,938
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FINDINGS
&
SUGGESTIONS
71 | P a g e
FINDINGS
1. The inventory turnover ratio of the form gradually increased 10.02 in
year 2007-2008and in the year 2009-2010 5.09 decreased.
2. The proportion of current liabilities is very high.
3. During the overall study period the quick ratio of the from is not
satisfactory
4. The networking capital of the company has largely increased during
the year from 149, 34,88,102 to 377,72,34,150 the study of period in
the working capital turnover ratio is satisfactory.
5. The current ratio of the firm is satisfactory and it is maintaining. It is
ideal ratio.
6. Debtors turnover ratio of company is decreased during the current due
to increased in closing debtor’s level. The debtor’s turnover ratio of the
firm is not satisfactory.
7. Materials department and bin cards system maintain in MCL to control
the WORKING CAPITAL.
8. The company implements the SAP (system application program)
planning by June 2008.
Suggestions:
The company should maintain adequate cash & bank balances in
order to meet the obligations of the suppliers timely.
The company should use a just-in-time approach in managing raw-
material, which makes cash available for other operations.
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BIBLIOGRAPHY
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Bibliography:
I.M Pandey ,Financical Management, Vikas Publishing house PVT ltd,
New Delhi
S.P Jain & K.L Advance Accountancy Kalyani Publications
P.Mohana Rao Alok K.Pramanik, working Capital Management &
Deep Publishing Pvt Ltd, New Delhi
M.Y Khan, P.K Jain, Financial Management ,Tata McGraw Hill
Publishing Company Limited, New Delhi
James C.Van House, Financial Management Pearson Education
Websites:
www.madras cements.com
www.naukrihub.com/india/cement industry/overview
Annexure:
Calculations:
Current Assets:-
Particulars 2006-07 2007-08 2008-09 2009-10
Inventories 131,13,49,045 100,94,77,399 128,23,70,978 242,70,35,234
Sundry debtors 45,27,34,619 49,34,74,854 65,34,48,795 61,60,72,465
Cash &bank
balances43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639
Loans&advances 95,15,54,257 127,47,15,770 364,59,98,940 451,98,15,381
Total 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719
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Current Liabilities:-
Particulars 2006-07 2007-08 2008-09 2009-10
Current liabilities
150,54,85,367 184,14,55,504 243,79,37,215 290,76,23,187
Provisions 15,07,82,583 44,55,17,937 150,71,51,155 110,75,01,382
Total 165,62,67,950 228,69,73,441 394,50,88,370 401,51,24,569
Quick Assets:- Quick assets = current assets – prepaid expenses –Inventory
Particulars 2006-07 2007-08 2008-09 2009-10
Current assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719
Inventories 131,13,49,045 100,94,77,399 128,23,70,978 242,70,35,234
Prepaid expenses 4,55,91,324 92,44,909 1,67,51,945 85,62,464
Quick Assets 179,28,15,683 225,20,11,403 484,84,09,659 535,67,61,021
Net Working Capital:-
Net working capital = Current Assets – current Liabilities
Particulars 2006-07 2007-08 2008-09 2009-10
Current assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719
Current Libilities
165,62,67,950 228,69,73,441 394,50,88,370 401,51,24,569
Net working Capital
149,34,88,102 98,37,60,270 220,24,44,212 377,72,34,150
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Trade creditors + Advances Payments:-
Particulars 2006-07 2007-08 2008-09 2009-10
Trade creitors 30,78,52,017 35,88,65,333 71,17,56,017 108,55,75,288
Advances
Pataments76,12,90,853 83,96,63,461 212,23,57,012 314,92,45,708
Total 1069142870 1198528794 23834113029 4504830991
Current Assets Turnover:-
Particulars 2006-07 2007-08 2008-09 2009-10
Net sales 714,54,29,942 986,34,49,724 1,530,13,09,179 1,924,67,18,554
Current Assets 314,97,56,052 327,07,33,711 614,75,32,582 779,23,58,719
Cash Operating Expenses:-
Particulars 2006-07 2007-08 2008-09 2009-10
Raw materials consumed
117,78,43,411 152,07,14,101 201,15,00,369 256,41,31,071
Power &fuel 213,09,90,165 253,77,39,394 309,96,30,439 407,91,09,987
Stores consumed
17,65,89,866 27,30,51,716 39,18,96,722 51,83,87,209
Repairs & maintenance
10,20,11,133 13,62,11,942 16,69,12,337 20,93,37,523
Salaries ,wages,& others
40,50,21,168 46,18,38,018 56,51,83,734 81,02,19,938
Administrative expenses
18,84,79,404 20,69,29,688 23,57,84,081 22,40,93,039
Rates & taxes 12,43,47,388 11,47,25,995 3,52,73,732 5,74,66,340
Managing directors
1,91,32,8256 6,16,75,173 24,78,52,296 32,40,44,976
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remuneration
Packing charges
50,17,99,705 63,29,86,822 81,28,22,757 82,37,50,450
Interest & finance charges
35,88,92,443 34,35,16,151 22,82,94,830 51,69,75,617
Transportation & handling expenses
90,53,10550 169,86,74,224 221,42,08,346 285,85,53,827
Advertisements & other sales promotion expenses
22,91,27,610 31,18,74,555 26,01,20,007 19,69,26,956
Donations 1,13,75,561 1,32,22,602 1,09,96,686 1,72,07,803
Current Operating Expenses
633,09,21,229 831,31,60,381 1028,82,44,7999 1320,00,44,657
Cash and Bank Balances:-
Particulars 2006-07 2007-08 2008-09 2009-10
Cash& bank balance
43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639
Cash& bank balances
43,41,18,131 49,30,65,688 56,57,13,869 22,94,35,639
Cost of goods sold:-
COGS=Opening Stock + Purchases + Manufacturing/Direct Expenses – Closing Stock
Particulars 2006-07 2007-08 2008-09 2009-10
Opening Stock 23,53,35,756 37,03,95,007 35,51,42,883 23,18,31,768
Purchases 94,09,54,038 65,43,34,516 105,05,39,210 209,93,72,884
Manufacturing/Direct Expenses*
301,50,03,420 369,76,94,498 461,49,05,237 583,68,54,491
Closing Stock 37,03,95,007 35,51,42,883 23,18,31,768 32,76,62,350
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COGS 382,08,98,207 436,72,81,138 578,87,55,562 784,03,96,793
Average Inventory:-
Average Inventory =
Particulars 2006-07 2007-08 2008-09 2009-10
Opening Stock 23,53,35,756 37,03,95,007 35,51,42,883 23,18,31,768
Closing Stock 37,03,95,007 35,51,42,883 23,18,31,768 32,76,62,350
Average Inventory 11,76,67,878 36,27,68,945 29,34,87,301 27,97,47,059
Average Raw Material:-
Average raw Material =
Particulars 2006-07 2007-08 2008-09 2009-10
Opening Raw
Material6,33,17,601 7,11,34,851 10,60,20,257 15,11,14,024
Closing Raw
Material7,11,34,851 10,60,20,257 15,11,14,024 30,30,46,756
Average Raw
Material6,72,26,226 8,85,77,554 12,85,67,141 22,70,80,290
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Average work-in-progress:-
Average work-in-progress=
Particulars 2006-07 2007-08 2008-09 2009-10
Opening work-in-progress
16,77,35,679 23,49,67,246 26,63,50,618 12,84,63,788
Closing work-in-progress
23,49,67,246 26,63,50,618 12,84,63,788 16,65,25,194
Average Work-in-progress
20,13,51,463 25,06,58,932 19,74,07,203 19,76,44,491
Average Finished Goods:-
Average Finished Goods=
Particulars 2006-07 2007-08 2008-09 2009-10
Opening Finished Goods
6,76,00,077 13,54,27,761 8,87,92,265 10,33,67,980
Closing Finished Goods
13,54,27,761 8,87,92,265 10,33,67,980 16,08,37,156
Average Finished Goods Inventory
10,15,13,919 11,21,10,013 9,60,80,123 13,21,02,568
Average Debtors:-
Average Debtors=
Particulars 2006-07 2007-08 2008-09 2009-10
Opening Debtors 42,66,88,022 45,27,34,619 49,34,74,854 65,34,48,795
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Closing Debtors 45,27,34,619 49,34,74,854 65,34,48,795 61,60,72,465
Average Debtors 43,97,11,321 47,31,04,737 57,34,61,825 63,47,60,630
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