STUDY ON WORKING CAPITAL MANAGEMENT OF

ASHOK LEYLAND

Submitted to the

SRM SCHOOL OF MANAGEMENT

In partial fulfillment of the requirement for the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

BY

A.Seetha Raman Reg.No:35106170

Under the guidance of

Prof.T.P.NAGESH

SRM Institute of Science and Technology

SRM University

SRM Nagar

Kattankulathur-603203

May 2008

Bonafide Certificate

This is to certify that the project report titled “Study on working capital

management of Ashok Leyland” is a bonafide record done by A.Seetha Raman

(Reg.No:35106170) in partial fulfillment for the award of the degree of Master of

Business Administration of the SRM University during the period from Feb to May

2008 under my guidance.

Signature of Internal Guide:

(Prof.T.P.Nagesh)

Signature of External Examiner: Signature of HOD:

(Dr.Jayshree Suresh)

Declaration

I, A.Seetha Raman, student of the department of Management Studies, SRM

School of Management, hereby declare that the project work here presented title

“Study on working capital management of Ashok Leyland” is an original work

done by me during the period of Feb to May under the guidance of Prof.T.P.Nagesh,

and submitted to SRM University for the award of Master Degree in Business

Administration. I further declare that, any part of this project itself has not been

submitted elsewhere for award of any other degree.

A.Seetha Raman

(Reg.No:35106170)

Acknowledgement

I am grateful to the Almighty, for the blessing that he showed on me in

completing this project work.

I offer my heartfelt thanks to our respected Chairman, Honorable

Thiru.T.R.Pachamuthu for providing me an opportunity to carry out this project.

I am extremely thankful to Mr.K.M.Balaji, Divisional Manager and

Mr.V.Arun Deputy.Manager, Ashok Leyland, Rajaji Salai, Chennai, for permitting

me to undertake the project in the organization and for all the help and moral support

given to me for successful completion of the project.

It gives me immense pleasure to express my gratitude to our respected

Dr.Jayashree Suresh the Head of the Department and the staff of the Management

studies Department for giving me valuable suggestions in carrying out this project.

I wish to convey my thanks to my project guide Prof.T.P.Nagesh, and all

other faculty members who helped me in various aspects to complete this project

work.

Finally, I would like to thank my friends who motivated me to carry out the

project in a successful manner.

A.Seetha Raman

Table of Contents

Chapter Title Page No.

I Introduction Statement of problem Objective of study Need for study Scope of study Limitation of study

1

2 3 4 5 6

II Review of literature 7

III Company profile 22

IV Data analysis and interpretation Ratio analysis Working capital analysis Fund flow statement

26

40

48 V Findings 56

VI Suggestions and Conclusion 57

Bibliography 59

List of Tables

Table No. Title Page No.

1 Current ratio 26

2 Quick ratio 28

3 Stock turnover ratio 30

4 Stock turnover period 32

5 Debtor’s turnover ratio 34

6 Debtor’s turnover period 36

7 Working capital turnover ratio 38

8 Working capital analysis for the year

ended 2003-04

40

9 Working capital analysis for the year

ended 2004-05

42

10 Working capital analysis for the year

ended 2005-06

44

11 Working capital analysis for the year

ended 2006-07

46

12 Fund flow statement for the year ended

2003-04

49

13 Fund flow statement for the year ended

2004-05

51

14 Fund flow statement for the year ended

2005-06

53

15 Fund flow statement for the year ended

2006-07

55

Chapter I

Introduction

Working capital management is a significant facet of financial management

due to the fact that it plays a pivotal role in keeping the wheels of a business

enterprise running. The requirements of working capital for day-to-day business

activities cannot be overemphasized. It cannot be denied that a firm invests a part of

its permanent capital in fixed assets and keeps a part of it for working capital i.e. for

meeting the day-to-day requirements. We will hardly find a firm which does not

require any amount of working capital for its normal operation. The requirement of

working capital varies from firm to firm depending upon the nature of business,

production policy, market conditions, seasonality of operations, conditions of supply

etc.

It is known to us that the aim of a business concern is to maximize the

proprietor’s wealth. To fulfill this objective the firm should earn sufficient and steady

return from its operations. It depends upon the successful sales activity. It will only be

possible when a firm invests sufficient amount of fund in current assets for the

production as well as sales activity. Considering the importance of working capital in

any type of business an analysis of working capital of Ashok Leyland was made.

Statement of problem

Working capital is required for every business and it helps in the management

of the day to day activities. The analysis of working capital should be done very

carefully as it is the decisive factor to plan the day to day activities. In order to plan

the working capital for the future the requirement of future funds should be done

carefully. There are various tools of working capital that can be used for analyzing for

the future.

Each firm must analyze the working capital for future operations in order to

avoid the shortage of funds to cater the future needs. The working capital of Ashok

Leyland has been increasing during the period of study. The company must take

efforts to maintain this current trend of working capital in future also.

Objectives of study

ℵ To understand the structure of working capital.

ℵ To study the working capital management with references to liquidity and

solvency of the company.

ℵ To analyze the financial efficiency of the company through ratio analysis.

ℵ To study various sources and application of working capital of the company.

ℵ To suggest the management on effective working capital management.

Need for the study Working capital analysis is helpful to know the financial position of the

company. Cheapest source of funds can be identified and analyzed and prioritize the

utilization of funds for the working capital requirement. The credit period of the

company can be easily known through this analysis. To give suggestion to the

company to improve its financial position, if any.

Scope of the study

The scope of the study is confined to the detailed study about the organization

and to identify the company’s position in the market and to suggest the means of

improvement in the existing system.

Limitation of study

ℵ Past details are not necessarily true indicators of the future.

ℵ The study is based on the result of limited period i.e. 5 years.

ℵ The analysis and interpretation are based on secondary data taken from

financial reports.

ℵ Ratio will not completely show the companies good or bad financial position.

ℵ The figures from the financial statement for analysis were historical in nature

and the time value of money is not considered.

ℵ All the data available are year end figures. So, analysis of financial position

holds good only for the year end.

ℵ The ideal ratios & recommendations are not industry specific.

ℵ In academics certain assumptions are made to ease learning, whereas practical

difficulties exist in the real world.

Chapter II

Review of literature

Capital classification: Capital is one of the essentials for the running of the business. It is well known

that finance is the lifeblood of any business and to carry out any business activity,

capital is necessary. Capital requirement for the business can be classified under two

main categories viz.,

ℵ Fixed capital

ℵ Working capital

Every business needs funds for two purposes-for its establishment and to carry

out its day-to-day operations. Long term funds are required to create production

facilities through purchase of fixed assets such as plant and machinery, land and

building, furniture etc. investments in these assets represent that part of firm’s capital

which is blocked on a permanent or fixed basis and is called fixed assets.

Funds are also required for short term use i.e. for the day to day operations of

the business (eg) Purchase of raw material, payment of wages and other day to day

expenses etc. These funds are known as working capital. In simple words, working

capital refers to the part of the firm’s capital which is required for financing short-

term activities. Funds, thus, invested in current assets keep revolving fast and are

being constantly converted into cash flows out again in exchange for other current

assets. Hence, it is also known as revolving or circulating capital or short-term

capital.

The Institute of Chartered Accounts of India defines working capital as under

“Working capital means the funds available for day-to-day operations of an

enterprise”.

Shubin defines working capital as “Capital required for purchase of raw

materials and for meeting day-to-day expenditure on salaries, wages, rents and

advertising, etc,”

NEED FOR WORKING CAPITAL:

The need for working capital cannot be over emphasized. Every business

needs some amount of working capital. The need arise due to the time gap between

production and realization of cash from sales. There is an operating cycle involved in

the sales and realization of cash. There are time gaps between sales; and sales and

realization of cash. The working capital is needed for the following purposes.

ℵ For the purchase of raw material, components and spares.

ℵ To pay wages and salaries.

ℵ To incur day to day expenses and overhead cost such as fuel, power and office

expenses etc.

ℵ To meet the selling costs as packing, advertising, etc.

ℵ To provide credit facilities to customers.

ℵ To maintain the raw material inventories, work-in-progress, stores and spares

and finished stock.

Types of working capital: Working capital is the amount of funds necessary to cover the cost of

operating the enterprises. Although it can be classified into a number of types, on the

basis of time we classify working capital as follows:

Working capital

Fixed working capital Floating working capital

Regular Reserve Seasonal Special

Fixed working capital:

While regular working capital is the minimum amount of working capital

required to ensure circulation of current asset from cash to inventories from

inventories to receivables and from receivable from cash and so on. Reserve working

capital is the excess amount over the requirements for regular working capital that

may be provided for contingencies that may arise at unstated periods such as strikes,

rise in prices, depression, etc.

Floating working capital:

Floating or temporary working capital is the amount of working capital that is

required to meet the seasonal demands and some special exigencies. It is further

classified into seasonal and special working capital.

The capital required to the seasonal needs of the enterprise is called seasonal

working capital. Special working capital is that part of working capital which is

required to meet special exigencies such as launching of extensive marketing

campaigns for conducting research, etc. operating Cycle is involved from purchase of

raw materials to sale of the product. The following stages are usually involved in

operating cycle of a manufacturing firm:

ℵ Conversion of cash to raw material

ℵ Conversion of raw material to work in progress

ℵ Conversion of work in progress to finished goods

ℵ Conversion of finished goods to debtors through sales

ℵ Conversion of debtors into cash

Factor determining working capital requirement: While studying the need of working capital in a business, one has to study the

business under varying circumstances such as a new concern, as a growing concern

and as one that has attaining maturity. A concern requires a lot of liquid funds to meet

initial expenses like promotion, formation, etc. these expenses are called preliminary

expenses and are capitalized. The amount needed as working capital in a new concern

depends primarily upon its size and ambitions of its promoters. Greater the size of the

business until generally, larger will be the requirements of working capital. The

amount of working capital needed goes on increasing with the growth and expansion

of business till it attains maturity. At maturity the amount of working capital needed is

called normal working capital. There are may other factors which influence the need

of working capital in business. They are discussed here.

Nature 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

require very limited working capital because they only offer cash sales and as such no

funds are tied up in inventories and receivables. On the other hand, trading and

financial firms require less investment in fixed assets but have to invest large amount

in the current assets like inventories, receivables and cash. Thus they require more

amount of working capital.

Size of business:

The working capital requirements of a concern are directly influenced by the

size of its business that may be measured in terms of scale of operations. Greater the

size of business unit, larger will be the requirements of working capital, however

small organizations may also need higher working capital due to large overhead

charges, inefficient use of available resources and other economic disadvantages of

small size.

Production policy:

In certain industries the demand is subject to wide fluctuations due to seasonal

variations. The requirements of working capital in such cases depend upon the

production policy. The production could be kept either steady by accumulating

inventory during slack period 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. If the policy is to keep the production steady by accumulating

inventories, it will require higher working capital.

Length of production cycle:

In manufacturing business, the working capital increase in direct proportion to

the length of manufacturing process. Longer the process period of manufacturing,

higher the working capital cycle.

Seasonal variation: In certain industries, raw material is not available throughout the year. Raw

materials have to be bought in bulk during the season to ensure uninterrupted flow

and process them during the entire year. A huge amount is thus blocked in the form of

raw material during such season which gives rise to more working capital

requirements.

Working capital cycle:

In a manufacturing concern the working capital cycle starts with the purchase

of raw material and ends with the realization of cash from the sales of finished

products. This cycle involves purchase of raw materials and stores, its conversion into

stock of finished goods through work in progress with progressive increment of labor

and service cost, conversion of finished stock into sales, debtors and receivable and

ultimately realization of cash and this cycle continues again from cash to purchase of

raw materials and so on. The speed with which the working capital completes the

cycle determines the requirements of working capital-longer the period of the cycle;

larger is the requirement of working capital. A pictorial representation of concepts

involved in the working capital cycle is shown here.

Cash sales

Accounts Receivable

Finished goods

Work in progress Raw materials

Credit sales

Fig: Working capital cycle

Concept of working capital: There are two concept of working capital:

ℵ Gross working capital

ℵ Net working capital

In the board sense, the term working capital refers to the gross working capital

and represents the amount of funds invested in current assets. Thus, the gross working

capital is the capital invested in the ordinary course of business can be converted into

cash within a short period, normally within one year. In the narrow sense, the term

working capital refers to the net working capital. Net working capital is the excess of

current assets over current liabilities, or say:

Net working capital= current assets – current liabilities

Financing of working capital: It is to be remembered that more business fail because of lack of cash than

want of profit. Thus maintaining cash is very crucial for the success or failure of a

business. Working capital also comes under the same frame. Although there are

various sources, as discussed already, the working capital requirements of a concern

can be classified as:

ℵ Fixed working capital

ℵ Variable working capital

In any concern, some operations stay permanent such as investments fixed

assets. This can be easily maintained by fixed working capital, which is permanently

blocked in current assets. Similarly, the amount of capital required to meet seasonal

demands or rise in prices, strikes, etc. highlight the need for variable working capital,

which cannot be permanently employed gainfully in the business.

The fixed portion of working capital should be generally financed from the

fixed capital sources while the variable working capital requirements of a concern

may be met from the short-term sources of capital. While these are the broad

categories, they can be further broken down and discussed in detail as explained

below. The various sources of financing for working capital are as follows:

Financing for working capital

-Public deposits -Commercial

paper

-Plough back of profit -Indigenous

bankers

-Loans from financial institution -Trade credits

-Advances

-

Installment credit

-Accounts

receivable- credit

Financing of fixed working capital:

Loan from financial institution:

Financial institution like commercial banks, state financial corporation, etc.

provide shot term, medium term and long term funds for the working capital

requirements.

Financing of variable working capital:

Commercial banks:

The major portion of working capital is provided by commercial banks

through different form such as:

Loans:

A short term loan for a maximum period of one year is obtained from the

banks for meeting working capital requirements. These are obtained lump sum for

which interest is paid quarterly by the company and the repayments at stipulated

intervals.

Cash credit: An arrangement with the bank whereby the bank allows the company to

borrow money up to a certain limits against tangible securities for which interest is

paid on the daily balance. This is a usual practice employed by the company for

meeting working capital requirements.

Overdraft:

An agreement with the bank whereby, a current account holder is allowed to

withdraw more than the balance to their credit limit. While overdrafts are obtained for

shorter periods provide temporary accommodation, cash credits are obtained to suit

requirements longer periods.

Purchasing and discounting of bills

When the seller deposits genuine commercial bills and obtains financial

accommodations from a bank or financial institution, it is known as “bill

discounting”. The option of discounting will be advantageous because the seller is

able to readily encash, which can be used for meeting immediate business obligations.

However, in the process, the seller may lose a little by way of discount charged by the

discounting banker. Purchasing of bills is, the bank can collect the payment

immediately by presenting the bill to the buyer for payment. The charges are less

while compared with bill discounting.

Trade credits:

In present day world, the trade credit arrangements by a concern with its

suppliers are important to the company while purchasing. The main advantages of this

source are: it is a very convenient method of finance, it is flexible and it may be

possible to obtain favorable terms.

Advances:

Most business get advances from their customers and agents against orders

and this sources is the short term finance for the company. It is a very cheap source of

finance. In order to minimize the working capital, some firms having long production

cycle prefer to take advances from their customers.

Ratio analysis: Analysis and interpretation of financial statements with the help of ‘ratios’ is

termed as ‘Ratio analysis’. Ratio analysis involves the process of computing,

determining and presenting the relationship of items or groups of items of financial

statements.

A ‘Ratio’ is a mathematical relationship between two items expressed in a

quantitative form. Ratios can be defined as “Relationships expressed in quantitative

terms, between figures which have cause and effect relationships of or which are

connected with each other in some, manner or the other.

The essence of ratio is putting together of two figures to study their

relationship. The study is in the form of analysis, interpretation and expression of all

the ramifications of the relationship.

It helps in understanding of financial strengths and weakness of the firm. With

the use of ratio analysis one can measure the financial conditions of a firm and can

point out whether it is strong, good, questionable or poor. The conclusion can also be

drawn as to whether the performance of the firm is improving or deteriorating.

Importance of ratio analysis: Ratio analysis is relevant in assessing the performance of a firm in respect of

the following aspects;

ℵ To know the liquidity position

ℵ To check the long term solvency

ℵ To find out he operating efficiency

ℵ To analyze the overall profitability

ℵ To compare two firms

ℵ To analyze the trend of the company

Current ratio:

This also known as working capital ratio. Also called as short- term solvency

ratio. This establishes the relationship between the current assets and current

liabilities. It indicates the ability of the business to meet its current maturing

obligations.

Current asset

Current ratio = -------------------

Current liability

Where, current assets include cash in hand, cash at bank, sundry debtors,

inventory, bills receivables and items which are easily convertible into cash. Current

liabilities include raw materials, sundry creditors, bills payable, outstanding expenses,

bank overdraft, short term loans and the like.

Quick ratio:

This ratio is also known as liquid ratio or acid ratio test ratio. This establishes

the relationship between quick assets and current liabilities. Quick assets include all

the current assets except stock and prepaid expenses.

Quick asset

Quick ratio = ---------------------

Current liability

This ratio is significant for the short-term lenders and also as also how quickly

they can be paid off. The standard liquid ratio is 1:1. If the quick assets of a business

are equal to its current liabilities, it indicates the good solvency of the business.

Stock turnover ratio:

This ratio is also called stock velocity ratio. It is calculated to ascertain the

efficiency of inventory management in terms of capital investment. It shows the

relationship between the cost of goods sold and the amount of average inventory. This

ratio is helpful in evaluating and review of inventory policy.

It indicates the number of times the inventory is turned over during a

particular accounting period. Stock turnover ratio indicates whether the investment is

optimum. The quantity of stock should be enough to meet the requirements of the

business but it should not be excessive so that money doesn’t get locked up.

Cost of goods sold

Stock turnover ratio = --------------------------

Average stock

Debtors’ turnover ratio:

It is also called ‘Receivables turnover ratio’. Debtors’ turnover ratio measures

the number of times the receivables are rotated in a year in terms of sales. This ratio

also indicates the efficiency of credit collection and efficiency of credit policy. The

ratio is helpful in determining the operational efficiency of a business concern and the

effectiveness of its credit policy. It is important to maintain a reasonable quantitative

relationship between receivables and sales.

Net sales

Debtor’s turnover ratio = -----------------

Receivables

Working capital turnover ratio:

This is also known as working capital leverage ratio. This ratio indicates

whether or not working capital has been effectively utilized in making sales. In case a

company can achieve higher volume of sales with relatively small amount of working

capital, it is an indication of the operating efficiency of the company. A higher ratio is

the indication of lower investment of working capital and more profit.

Net sales

Working capital turnover ratio = ------------------------

Net working capital

Fund Flow Statement

This statement reveals resources from which funds were obtain by the firm

and the specific uses to which such funds were applied. The effectiveness of financial

management in procuring funds from various sources & using them effectively for

generating income without sacrificing the financial position of the firm is reflected in

fund flow statement.

In the words of Foulke, R.A., “a statement of source and application of fund is

a technical device designs to analysis the changes in the financial condition of

business enterprises between two dates”.

According to: Almond Coleman, “The fund flow statement summarizing the

significant financial changes which were occurred between the beginning & the end

of a company’s accounting periods”.

This fund flow statement has two parts:

ℵ Sources of fund

ℵ Application of fund

The difference between these two parts that is sources & uses of funds

represents net changes in working capital.

The excess of sources of funds over uses of fund is the net increase in working

capital & excess of uses over sources of fund is net decrease in working capital.

The amount of net increase or decrease as shown in fund flow statement

should be equal to the amount shown by schedule of working capital changes.

Chapter III

Company profile

Soon after the independence, there was a need for self reliance. Pandit

Jawaharlal Nehru persuaded Mr. Raghunandan Saran, an industrialist to enter into the

automobile industry. The company was established in 1948 as Ashok Motors, with

an aim to assemble Austin cars. Manufacturing of commercial vehicles was started in

1955 with equity contribution from Leyland Motors. Today the Company is the

flagship of the Hinduja Group, an England-based transnational conglomerate.

In 1948, Ashok Motors was set up in what was then Madras (now Chennai),

for the assembly of Austin Cars. The Company's destiny and name changed soon with

equity participation by British Leyland and Ashok Leyland commenced manufacture

of commercial vehicles in 1955. Early products included the Leyland Comet bus

chassis, which sold in large numbers to many operators, including Hyderabad Road

Transport, Ahmedabad Municipality, Travancore State Transport, Bombay State

Transport and Delhi Road Transport Authority. By 1963 the Comet was operated by

every State Transport undertaking in India, and over 8,000 were in service. The

Comet was soon joined in production by a version of the Leyland Tiger.

In 1968 production of the Leyland Titan ceased in Britain, but was restarted by

Ashok Leyland in India. The Titan PD3 chassis was modified, and a five speed heavy

duty constant-mesh gearbox utilized, together with the Ashok Leyland version of the

O.680 engine. The Ashok Leyland Titan was very successful, and continued in

production for many years.

Ashok Leyland vehicles have built a reputation for reliability and ruggedness.

The 500,000 vehicles being put on the roads have considerably eased the additional

pressure placed on road transportation in independent India.

In the populous Indian metros, four out of the five State Transport

Undertaking (STU) buses come from Ashok Leyland. Some of them like the double-

decker and vestibule buses are unique models from Ashok Leyland, tailor-made for

high-density routes.

In the journey towards global standards of quality, Ashok Leyland reached a

major milestone in 1993 when it became the first in India's automobile history to win

the ISO 9002 certification. The more comprehensive ISO 9001 certification came in

1994, QS 9000 in 1998 and ISO 14001 certification for all vehicle manufacturing

units in 2002. In 2006 Ashok Leyland became the first auto company in India to

receive the TS16949 Corporate Certification.

Ashok Leyland is a technology leader in the commercial vehicles sector of

India. Its annual turnover exceeds USD 1 billion. Selling close to around 83,000

medium and heavy vehicles each year, Ashok Leyland is India's largest exporter of

medium and heavy duty trucks out of India.

It is also one of the largest Private Sector Employers in India - with about

12,000 employees working in 6 factories and offices spread over the length and

breadth of India. The Company recently acquired Czech-based Avia's Truck Business

Unit, since renamed Avia Ashok Leyland Motors s.r.o. This gives Ashok Leyland a

foothold in the highly competitive European Truck market.

The Hinduja Group also recently bought out IVECO's indirect stake in Ashok

Leyland for an undisclosed amount. Thus Ashok Leyland is now purely a Hinduja

Group Company. Ashok Leyland is currently headed by Mr R. Seshasayee. Under his

leadership, the company has expanded from a purely India-centric company to a

company with global focus.

Eight out of ten metro state transport buses in India are from Ashok Leyland.

At60 million passengers a day, Ashok Leyland buses carry more people than the

entire Indian rail network. Ashok Leyland has a near 98.5% market share in the

Marine Diesel Engines Markets in India. The company has six manufacturing

locations in India:

ℵ Ennore, Chennai

ℵ Hosur, Tamilnadu (3 plants)

ℵ Alwar, Rajasthan

ℵ Bhandara, Maharastra

Last Financial year (2006-2007) the company sold a record 83,101 vehicles

which is an all time high considering the past sales history of Ashok Leyland. It is one

of the leading suppliers of defense vehicles in the world. It is one of the leading

Brands in India and most easily recognizable one.

The company has increased its rated capacity to 84,000 vehicles per annum.

Also further investment plans including putting up two new plants - one in North

India and one in Middle East Asia are fast afoot. After expansion, the company shall

attempt to dominate the medium- and heavy-duty commercial vehicles market in

India. The company is actively considering and has made plans to enter the second

hemisphere markets like Africa and Middle East. It has already a sizable presence in

African Countries like Nigeria, Ghana, Egypt and South Africa.

Additionally, Ashok Leyland is looking to expand its production operations

overseas to make it a more global company. To assist in this goal, the company is

looking to acquire small- to medium-sized commercial vehicles manufacturers in

China and other developing countries which have an established product line. The

company has recently announced a joint venture with Japanese auto giant Nissan

(Renualt Nissan Groupe) which will share a common manufacturing facility in

Chennai, India.

Ashok Leyland, the largest supplier of logistics vehicles to the Indian Army, is

on the verge of expanding their activities in the overseas markets. In this regard,

Ashok Leyland is looking at opportunities for tie-ups with local partners in various

countries to market its products. The Company is willing to discuss co-production in

various countries with local value addition as also, depending on volumes, to consider

transfer of technology for local manufacture of logistic vehicles and application based

variants such as recovery vehicles, fire fighters, tankers, dispensers, troop carriers etc.

Ashok Leyland is also looking for partners in respect of technology innovations and

new applications for manufacture and sale, both in India and overseas markets.

Ashok Leyland also has the technical expertise to design and integrate vehicle

aggregates to dovetail the vehicle configuration to suit specific needs and will provide

the most cost effective option with maximum reliability and performance.

Chapter IV

Data analysis and interpretation

Ratio Analysis:

Current ratio:

Current asset

Current ratio = -------------------

Current liability

(Rs.Millions)

Year 2003 2004 2005 2006 2007

Current asset 13,404.7 14,636.67 21,572.63 22,324.13 26,977.14

Current

liability

5,926.68 8,327.02 11,656.67 14,085.16 17,558.55

Current ratio 2.26 1.75 1.85 1.58 1.54

Table No: 1

Current ratio

2.261.75 1.85

1.58 1.54

1

10

2003 2004 2005 2006 2007

Year

Curr

ent r

atio

Current ratio

Inference:

The ideal current ratio is 2:1. The ratio has come down from 2.26 in 2003 to

1.54 in 2007. In the year 2005 the cash and bank balance is higher due to inwarding of

FCCN funds which has led to a marginal increase in the current ratio. Though the

ratio gradually reduces to 1.54, creditors will be able to get their dues in full.

Quick ratio:

Quick asset

Quick ratio = ---------------------

Current liability

(Rs. Millions)

Year 2003 2004 2005 2006 2007

Quick asset 9,300.14 9,567.26 15,891.82 13,298.52 16,273.93

Current

liability

5,926.68 8,327.02 11,656.67 14,085.16 17,558.55

Quick ratio 1.57 1.15 1.36 0.94 0.93

Table No: 2

00.20.40.60.8

11.21.41.6

Quick ratio

2003 2004 2005 2006 2007

Year

Quick ratio

Quick ratio

Inference:

The ideal ratio is 1:1. The quick ratio gradually decreases from 1.57 in 2003 to

0.93 in 2007. The ideal ratio is not met in the year 2006 and 2007. However, the

decrease is only marginal & ideal ratio is met once the inventories are sold and

converted into debtors or cash.

Stock turnover ratio:

Cost of goods sold

Stock turnover ratio = --------------------------

Average stock

(Rs. Millions)

Year 2003 2004 2005 2006 2007

Cost of goods sold 29,038.93 36,408.13 44,562.72 56,008.08 77,002.11

Average stock 5,028.98 4,586.99 5,375.11 7,353.21 9,864.41

Stock turnover ratio 5.77 7.94 8.29 7.62 7.81

Table No: 3

Inference:

The ratio has increased from 5.77 in 2003 to 8.29 in 2005, and then it slightly

decrease in to 7.62 in 2006. The decrease is due to increase in stock in the year 2006.

The stocks should not be piled up which might lead to obsolescence, it might be

justified as a state of readiness to meet increased demand at any particular point of

time. The ratio increased in the year 2007 due to increase in the sales.

Stock turnover period:

Days or months in the year

Stock turnover period = ----------------------------------

Stock turnover ratio

Year 2003 2004 2005 2006 2007

Days in the year 360 360 360 360 360

Stock turnover ratio 5.77 7.94 8.29 7.62 7.81

Stock turnover

period

62 45 43 47 46

Table No: 4

Inference:

Stock turnover period determines the number of days in which the stock is

turned over during the particular accounting period. The stock turnover period is

decreasing which indicates that the stocks are moving out fast which results in

increase in sales.

Debtor’s turnover ratio:

Net sales

Debtor’s turnover ratio = -----------------

Receivables

(Rs. Millions)

Year 2003 2004 2005 2006 2007

Net sales 30,739.95 33,920.19 41,823.78 52,476.57 71,681.76

Receivables 5,181.5 4,056.19 4,587.66 4,243.37 5,228.75

Debtor’s turnover

ratio

5.93 8.36 9.12 12.4 13.7

Table No: 5

Debtor’s turnover ratio

5.93

8.36 9.12

12.413.7

02468

10121416

2003 2004 2005 2006 2007

Year

Debt

or's

turn

over

ratio

Debtor’s turnoverratio

Inference:

Debtor’s turnover ratio has increased from 5.93 in 2003 to 13.7 in 2007. This is

mainly due to increase in the activity levels. The increase in sales is on account of

buoyancy in the commercial vehicle market. Also, decrease in the debtor’s level is

mainly due to collection of debts within a short period.

Debtor’s turnover period:

Days in the year

Debtor’s turnover ratio = ---------------------------

Debtor’s turnover period

Year 2003 2004 2005 2006 2007

Days in the year 360 360 360 360 360

Debtor’s turnover

ratio

5.93 8.36 9.12 12.4 13.7

Debtor’s turnover

period

61 43 39 29 26

Table No: 6

Inference:

The debtor’s turnover period has decreased drastically from 61 to 26 days

from 2003 to 2007. The debtor’s are converted into cash within shorter period. The

company has effective collection policy from debtors. The company is able to reduce

the collection period by less than half in a span of 5 years.

Working capital turnover ratio:

Net sales

Working capital ratio = --------------------------

Net working capital

(Rs. Millions)

Year 2003 2004 2005 2006 2007

Net sales 30,739.95 33,920.19 41,823.78 52,476.57 71,681.76

Net working capital 7,480.93 6,309.65 9,915.96 8,238.6 9,418.59

Working capital

turnover ratio

4.1 5.38 4.22 6.37 7.61

Table No: 7

4.1

5.38

4.22

6.37

7.61

012345678

WC turnover

ratio

2003 2005 2007

Year

Working capital turnover ratio

Working capitalturnover ratio

Inference:

The working capital turnover ratio is gradually increasing from 4.1 times to

7.1 times which indicates working capital does not proportionately change for every

change in sales. This indirectly implies that the working capital is effectively

managed despite increase in the level of operations of the business.

Working capital analysis for the year ended 2003-04:

(Rs. Millions) Particulars 2003 2004 Increase in

working

capital

Decrease in

working

capital Current asset (A)

Inventories 4,104.56 5,069.41 964.85

Sundry debtors 5,181.50 4,056.19 1,125.31

Cash & bank

balances

2.219.23 3,249.74 1,030.51

Loans & Advances 1,899.41 2,261.33 361.92

Total A = 13,404.7 14,636.67

Current liabilities

(B)

Liabilities 4,928.65 6,821.01 1,892.36

Provisions 995.12 1,504.36 509.24

Total B = 5,923.77 8,325.37

(A-B) Working

capital

7,480.93 6,311.3 2,357.28 3,526.91

Net decrease in

working capital

1,169.63 1,169.63

Table No: 8

Inference:

ℵ Inventories have gone up to Rs.5,069 million compared to Rs.4,105 million.

This is due to the increase in activity levels.

ℵ Debtors have come down due to decrease in the collection period in the year

2004.

ℵ Increase in liabilities was due to increase in commodity price, resulted in

increase in input cost.

ℵ The decrease in debtors & increase in liability has resulted in decrease in the

net working capital.

Working capital analysis for the year ended 2004-05:

(Rs. Millions)

Particulars 2004 2005 Increase in

working

capital

Decrease in

working

capital Current asset (A)

Inventories 5,069.41 5,680.81 611.4

Sundry debtors 4,056.19 4,587.66 531.47

Cash & bank

balances

3,249.74 7,966.82 4,717.08

Loans & Advances 2,261.33 3,337.34 1,076.01

Total A = 14,636.67 21,572.63

Current liabilities

(B)

Liabilities 6,856.71 9,611.87 2,755.16

Provisions 1,470.31 2,044.80 574.49

Total B = 8,327.02 11,656.67

(A-B) Working

capital

6,309.65 9,915.96 6,935.96 3,329.65

Net increase in

working capital

3,606.31 3,606.31

Table No: 9

Inference:

ℵ Sundry debtors increased due to increase in credit sales level. But the increase

in debtors and inventory is less than proportionate to the activity increase.

ℵ Cash and bank balance increased to Rs.7,966.82 million from Rs.3,249.74

million of last year due to deposit of FCCN funds in the banks.

ℵ Increase in loans and advances mainly due to higher bills receivables in the

current year.

ℵ Current liabilities increased due to increase in raw materials and increase in

creditors for raw materials.

ℵ Increase in the net working capital is mainly due to inwarding of FCCN funds

during the year 2004-05.

Working capital analysis for the year ended 2005-06:

(Rs. Millions)

Particulars 2005 2006 Increase in

working

capital

Decrease in

working

capital Current asset (A)

Inventories 5,680.81 9,025.61 3,344.8

Sundry debtors 4,587.66 4,243.37 344.29

Cash & bank

balances

7,966.82 6,028.76 1,938.06

Loans & Advances 3,337.34 3,026.39 310.95

Total A = 21,572.63 22,324.13 Current liabilities

(B)

Liabilities 9,611.87 11,468.95 1,857.08

Provisions 2,044.80 2,616.21 571.41

Total B = 11,655.67 14,085.16

(A-B) Working

capital

9,915.96 8,238.97 3,344.8 5,021.79

Net decrease in

working capital

1,676.99 1,676.99

Table No: 10

Inference:

ℵ Inventories have gone up to Rs.9,026 million compared to Rs.5,681 million in

2005 due to increase in finished inventory levels. The finished inventory level

increased to 5652 vehicles from 2393 vehicles of last year.

ℵ Debtors level decreased to Rs.4,243 million from Rs.4,588 million due to

higher collections in 2006.

ℵ Cash & Bank balance decreased to Rs.6,029 million due to utilization of

FCCN funds inwarded last year.

ℵ Current liabilities & provisions increased in the year 2006 due to higher bills

payable and increase in proposed dividend.

ℵ Decrease in the net working capital is due to the utilization of FCCN funds.

Working capital analysis for the year ended 2006-07: (Rs. Millions) Particulars 2006 2007 Increase in

working

capital

Decrease in

working

capital Current asset (A)

Inventories 9,025.61 10,703.21 1,677.6

Sundry debtors 4,243.37 5,228.75 985.38

Cash & bank

balances

6,028.39 4,349.39 1,679.00

Loans & Advances 3,026.39 6,695.79 3,669.40

Total A = 22,323.76 26,977.14

Current liabilities

(B)

Liabilities 11,468.95 16,516.25 5,047.3

Provisions 2,616.21 1,042.30 1,573.91

Total B = 14,085.16 17,558.55

(A-B) Working

capital

8,238.6 9,418.59 7,906.29 6,726.3

Net increase in

working capital

1,179.99 1,179.99

Table No: 11

Inference:

ℵ Increase in inventories is due to increased activity levels and robust demand in

the export market and the launch of new products & increase in raw materials

consumption.

ℵ Debtors levels increased to Rs.5,229 million from Rs.4,243 million of last year

due to higher level of fully built vehicles supplied to Defence.

ℵ Cash & Bank balance decreased by Rs.1,679 million due to increased

investments in capacity expansion/ up gradation.

ℵ Increase in loans & advances mainly due to higher capacity advances paid for

future plan.

ℵ Current liabilities increased to 16,516 million from 11,468.95 last year due to

higher bills payable and increase in commodity prices.

ℵ Net working capital increase is mainly due to higher inventory levels.

Fund flow statement for the year ended 2003-04 Net Change in working capital

(Rs. Millions)

Particulars 2003 2004 Absolute increase

Absolute decrease

Current asset 13,404.7 14,636.67 1,231.97

Current liability 5,923.77 8,325.37 2,401.6 Working capital 7,480.93 6,311.3 Net decrease in working capital

1,169.63 1,169.63

Total 7,480.93 7,480.93 2,401.6 2,401.6

Adjusted profit & loss account

Dr (Rs. Millions) Cr

Particulars Amount Particulars Amount

By balance b/d 8,405.57

Increase in miscellaneous expenses

323.24

To balance c/d 9,328.68 By FFO 599.87

Total 9,328.68 Total 9,328.68

Fund flow statement (Rs. Millions)

Source Amount Application Amount

Increase in deferred tax liability

117.87 Repayment of secured loan

1.942.06

Decrease in investment

109.74 Repayment of unsecured loan

242.43

Decrease in net block 276.9 Increase in capital WIP

89.52

Net decrease in working capital

1,169.63

FFO 599.87

Total 2,274.01 Total 2,274.01

Table No: 12

Inference:

ℵ During the year 2003-04 the funds from operations are Rs.599.87 million.

ℵ During the year 2003-04 there is deficit in working capital due to the fact that

debtors are collected for repayment of loan funds of the year.

ℵ Redemption of investments & sale of the assets are also used to fund the

repayment of loans.

Fund flow statement for the year ended 2004-05 Net Change in working capital

(Rs. Millions)

Particulars 2004 2005 Absolute increase

Absolute decrease

Current asset 14,636.67 21,572.63 6,935.96

Current liability 8,327.02 11,656.67 3,329.65 Working capital 6,309.65 9,915.96 Net increase in working capital

3,606.31 3,606.31

Total 9,915.96 9,915.96 6,935.96 6,935.96

Adjusted profit & loss account

Dr (Rs. Millions) Cr

Particulars Amount Particulars Amount

Decrease in miscellaneous expenses

129.92 By balance b/d 9,328.68

To balance c/d 10,489.36 By FFO 1,290.6

Total 10,619.28 Total 10,619.28

Fund flow statement

(Rs. Millions)

Sources Amount Applications Amount

Increase in unsecured loan

4,283.58 Increase in net block 190.17

FFO 1,290.6 Decrease in deferred tax liability

94.38

Increase in working capital

3,606.31

Increase in investment 825.88

Repayment of secured loan

468.6

Increase in capital WIP 388.84

Total 5,574.18 Total 5,574.18

Table No: 13

Inference:

ℵ During the year 2004-05 the company has been able to procure its fund only

from loan fund- unsecured.

ℵ An addition, an insignificant portion of the fund utilized for repayment of

secured loan, purchasing fixed assets and investments.

ℵ Increase in working capital is funded through fund from operations. The

increase in activity levels is the reason for higher profits.

Fund flow statement for the year ended 2005-06 Net Change in working capital

(Rs. Millions)

Particulars 2005 2006 Absolute increase

Absolute decrease

Current asset 21,572.63 22,324.13 751.5

Current liability 11,656.67 14,085.16 2,428.49 Working capital 9,915.96 8,238.97 Net decrease in working capital

1,676.99 1,676.99

Total 9,915.96 9,915.96 2,428.49 2,428.49

Adjusted profit & loss account

Dr (Rs. Millions) Cr

Particulars Amount Particulars Amount

Decrease in miscellaneous expenses

120.25 By balance b/d 10,489.36

To balance c/d 12,902.94 By FFO 2,533.83

Total 13,023.19 Total 13,023.19

Fund flow statement

(Rs. Millions)

Sources Amount Applications Amount

Increase in deferred tax liability

88.41 Increase in net block 494.25

FFO 2,533.83 Repayment of secured loans

788.05

Net decrease in working capital

1,676.99 Repayment of unsecured loan

1,096.73

Increase in share capital

32.3 Increase in investment 1,389.88

Increase in capital WIP 562.62

Total 4,331.53 Total 4,331.53

Table No: 14

Inference:

ℵ During the year 2005-06, the company generated sufficient funds from the

internal sources.

ℵ The working capital levels are lower during the year 2005-06 because of

higher collections from the debtors & lower bank balance in 2006. The funds

are applied for repayment of loan and increase the investments.

Fund flow statement for the year ended 2006-07 Net Change in working capital

(Rs. Millions)

Particulars 2006 2007 Absolute increase

Absolute decrease

Current asset 22,323.76 26,977.14 4,653.38

Current liability 14,085.16 17,558.55 3,473.39 Working capital 8,238.6 9,418.59 Net increase in working capital

1,179.99 1,179.99

Total 9,418.59 9,418.59 4,653.38 4,653.38

Adjusted profit & loss account

Dr (Rs. Millions) Cr

Particulars Amount Particulars Amount

By balance c/d 12,902.94

Increase in miscellaneous expenses

171.11

To balance c/d 17,621.8 By FFO 4,547.75

Total 17,621.8 Total 17,621.8

Fund flow statement

(Rs. Millions)

Sources Amount Applications Amount

Increase in deferred tax liability

172.4 Increase in net block 3,637.62

Decrease in investment

1,470.84 Repayment of unsecured loan

2,270.55

Increase in secured loan

1,755.25 Increase in working capital

1,179.99

FFO 4,547.75 Increase in capital WIP 960.74

Increase in share capital

102.28

Total 8,048.52 Total 8,048.52

Table No: 15

Inference:

ℵ During the year 2006-07 FFO is Rs. 4,547.75 million, which plays the main

source for the capital expenditure.

ℵ The company also generates its fund from loan and sale of investment, and it

has been utilized for purchasing of fixed assets and repayment of loan.

ℵ The buoyancy in the market has led to higher sales, in turn increase in the

debtor’s level.

Chapter V

Findings

ℵ There is a continuous increase in the sale revenue due to heavy demand for

commercial vehicles. The company is able to sell higher number of vehicles

every year and effectively collect the dues from the customers. This reduces

the debtors position and in turn the working capital cycle time.

ℵ Profit margins are improving from year to year.

ℵ Assets are efficiently used for the operation of the business.

ℵ It has been found that in the last five years the utilization of idle cash is

increasing.

ℵ On the whole, the performance of the company is extremely well as indicated

by increase in the level of operations and efficient & effective working capital

management.

Chapter VI

Suggestions

ℵ Despite, the current assets position is good in the company (2:1), the

composition of stock in the current asset is increasing. Although this might be

viewed as a level of preparedness to meet the increased market demand, the

company will lose heavily in case of down turn in demand. The company

might be stuck with stock for a longer time leading to increased working

capital cycle which will affect the financial position drastically. The company

needs to be more careful in building the inventory levels.

ℵ The finished stock of vehicles is increasing from 2660 vehicles in 2004 to

6076 vehicles in 2007. This pilling up of inventory may lead to locking of

funds in inventory, in turn borrowing huge money for working capital

requirement. This will lead to higher interest payment and erosion in the

profits of the company. There is also a risk that the inventory may be obsolete

due to rusting and introduction of new models in the market.

ℵ Even though the collection period is coming down, there is still much scope

for higher reduction. Higher cash discounts and incentives could hasten the

collection period.

Conclusion

Through the project study, practical exposure of the business was understood.

The theory was so simple and with lot of assumption in the book. But there are so

many issues which are so practical and could not be learnt theoretically and that was

possible in the project study.

With the help of ratio analysis, a business understanding was possible and was

able to reason out the movement in the various elements. It also gave ideas for better

analysis with the use of statistical tools like correlation analysis. The company is able

to demonstrate and exercise significant control & reduction in working capital where

in the sale revenue has doubled during the review period.

Bibliography Financial and Management Accounting - T.S. Reddy

- Y. Hari Prasad Reddy

Management Accounting - J.V. Prabhakara Rao

- V. Subbarayudu

Financial Management - P.V. Rathnam

Management Accounting - Dr. V. Balu

- Dr. M. Sakthivel Murugan

Accounting Principles - Robert.N.Anthony

Financial Management - I.M.Pandey

Principles of Management Accounting - Dr.S.N.Maheswari