Description
The PPT highlights analysis and comparision financial ratios, cash management analysis of Dabur and Emami.
Financial Ratio
LIQUIDITY RATIOS
Dabur India Ltd
Emami Ltd
Current ratio Quick ratio Debt to equity Debt to total assets
1.11 1.78 0.18 0.06
1.35 0.94 1.48 0.59
Debt to total capitalization
COVERAGE RATIO
0.15
0.68
EBIT to Interest ratio
ACTIVITY RATIO
32.86
6.18
Receivable turnover ratio Receivable turnover in days Payable turnover ratio Payable turnover in days Inventory Turnover ratio Inventory turnover in days Operating cycle Cash cycle Total assets turnover
PROFITABILITY RATIOS
21.32 17 days 10.96 33 days 5.58 65 days 82 days 49 days 1.08
14.62 25 days 8.13 45 days 4.21 86 days 111 days 66 days 0.99
Gross profit margin Net profit margin Return on Assets Return on equity
39% 15.58% .16% .50%
64% 12.28% 12.21% 30.7%
Current Ratio: Higher ratio is an indication that Emami is liquid and has the ability to pay its current obligations in time and when they become due. Lower ratio indicates that the liquidity position of Dabur is not good and the firm shall not be able to pay its current liabilities in time with no difficulties. Quick Ratio: Higher ratio of Dabur gives an indication that the firm is liquid and has the ability to meet its current / liquid liabilities in time and on the other hand a low ratio represents that Emami?s liquidity position is not good. This discrepancy between the current and quick ratio is explained by the fact that Emami carries more inventories thus having low quick ratio. Debt to Equity Ratio: Higher ratio shows that Emami has a higher proportion of debt financing in comparison to share holder?s equity which increases the level of risk in comparison with Dabur Ltd. As Dabur has a lower debt component and higher proportion of equity in its financing.
Debt to Total Asset Ratio: Ratio is fairly low for Dabur which can be explained the fact that Dabur is a larger company as compared to Emami and thus Dabur has a larger operations Base and higher amount of assets; also the debt component is small.
Debt to Total Capitalization Ratio: The higher the debt to capital ratio, the more debt the Company has compared to its equity. Emami has high ratio which shows weak financial strength because the cost of debts may weigh on the company and increase its default risk.
EBIT to Interest Ratio: In case of Dabur, a high ratio assures the lenders a regular and periodical interest income. It shows that Dabur has more ability than Emami to meet its interest payments. In case of Emami, low ratio may create some problems to the financial manager in raising funds from debt sources. Accounts Receivable Turnover Ratio: indicates the number of times the receivables are turned over a year. The higher value suggests that Dabur is more efficient in the management of receivables. Receivable Turnover in Days: As per report, Dabur is collecting more quickly on its accounts in 17 days As compared to 25 days taken by Emami. It clearly means that Dabur is managing its receivables more efficiently than Emami.
Payable Turnover ratio: Higher ratio of Dabur signifies that creditors are being paid promptly. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.
Payable Turnover in Days: It signifies the credit period enjoyed by the firm in paying creditors. The higher the payable turnover in days, the lesser number of times the payables are turned over in a year.
Inventory Turnover Ratio: For Dabur, higher ratio indicates the efficient management of inventory as more frequently the stocks are sold; the lesser amount of money is required to finance the inventory.
Inventory Turnover in Days: In case of Dabur, 65 days mean that inventory is being converted into sales more quickly as compared to 86 days in Emami.
Operating Cycle: It shows that Dabur is able to generate money by operations, faster than Emami therefore, showing more efficient operating procedures of Emami as compared to Dabur.
Cash Cycle: Shorter cash cycle is leading Dabur to a comfortable cash position, efficient management of working capital as compared to Emami.
Above 8 ratios will be discussed later in detail during the presentation.
Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami.
Gross Profit Margin: The margin is higher for Emami which means that cost of production is lower for Emami as compared to Dabur.
Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami.
Return on Assets: It evaluates how effectively the company employs its assets to generate a return, indicating efficiency of the firm. Here Emami has higher ROA ratio thus suggesting about more earnings for the amount of assets and their well efficient use of business assets. It means that Emami is earning more money with less investment as compared to Dabur.
Return on Equity: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Higher ratio indicates that investment in Emami is more attractive than Dabur. It indicates that Emami is getting more return on the invested capital against other investment opportunities like stocks, real estates, savings etc, as compared to Dabur.
Transactions Motive:
to meet payments arising in the ordinary course of business to take advantage of temporary opportunities to maintain a cushion or buffer to meet unexpected cash needs
Speculative Motive:
Precautionary Motive:
“Speeding up” Cash Receipts
“slowing down”
Cash payouts
Customer mails check
Firm receives check
Mail Float: time the check is in the mail.
Firm receives check
Firm deposits check
Processing Float: time it takes a company to process the check internally.
Firm deposits check
Firm’s bank account credited
Availability Float: time consumed in clearing the check through the banking system.
Processing Float
Availability Float
Deposit Float: time during which the check received by the firm remains uncollected funds.
Mail Float
Processing Float
Availability Float Deposit Float
Collection Float: total time between the mailing of the check by the customer and the availability of cash to the receiving firm.
?
? ? ?
?
For example, suppose that XYZ Company has book balance as well as available balance of Rs 5 Lac as on April 30. On May 1 XYZ Company receives a Cheque for Rs. 1.5 Lac from a customer which it deposits in the Bank. It increases its book balance by Rs. 1.5. Lac. However, this amount is not available to ABC Company until its bank presents the Cheque to the customer's bank on, say May 5 So, between May 1 and May 5 ABC Company has a collection float of (-) Rs. 1.5 Lac. Collection float = Firm's available Bank Balance-Firm's book balance.
Here, collection float = Rs 5.0 Lac - Rs. 6.5 Lac = (-) Rs. 1.5 Lac.
?
?
?
? ? ?
?
For example, suppose that XYZ Company has book balance as well as available balance of Rs 5 Lac as on April 30. On May 1 XYZ Company receives a Cheque for Rs. 1.5 Lac from a customer which it deposits in the Bank. It increases its book balance by Rs. 1.5. Lac. However, this amount is not available to ABC Company until its bank presents the Cheque to the customer's bank on, say May 5 So, between May 1 and May 5 ABC Company has a collection float of (-) Rs. 1.5 Lac. Collection float = Firm's available Bank Balance-Firm's book balance.
Here, collection float = Rs 5.0 Lac - Rs. 6.5 Lac = (-) Rs. 1.5 Lac.
?
?
Earlier Billing Accelerate preparation and mailing of invoices :
? ? ? ? ?
computerized billing invoices included with shipment invoices are faxed advance payment requests preauthorized debits
LOCKBOX A company rents a local post office box and authorizes its bank to pick up customer remittances from the box.
?:
Facilitates the cash management where, instead of being delivered to business address, customer payments are delivered to a special post office (PO) box.
TRADITIONAL LOCKBOX PROCESS ?The company?s bank picks up the mail several times a day and the cheques are deposited directly into company?s account. TRADITIONAL LOCKBOX PROCESS IN INDIA?It is only the customers? payments that are delivered in the PO box and the company?s own bank collects the amount and delivers them to the banks of the customers. ?The bank of the customers opens and processes the payments for direct deposit to the bank account of the company. Lockbox contents are regularly removed and processed. ELECTRONIC LOCKBOX?A collection service provided by a firm?s bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.
Advantage
Receive remittances sooner which reduces processing float.
Disadvantage
Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.
The movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.
?
? ?
Improves control over inflows and outflows of corporate cash. Reduces idle cash balances to a minimum. Allows for more effective investments by pooling excess cash balances
DEPOSITORY TRANSFER CHECK : A non-negotiable
check payable to a single company account at a concentration bank.
AUTOMATED CLEARING HOUSE (ACH) ELECTRONIC TRANSFER : An electronic version of the depository
transfer check (DTC).
WIRE TRANSFER : A generic term for electronic funds
transfer using a two-way communications system, funds are considered available upon receipt of the wire transfer.
?
The amount of Cheque issued but not presented for payment is known as the disbursement float. For example, suppose that ABC Company has a book balance as well as available balance of Rs 4 Lac with its bank, State Bank of India, as on March 31. On April 1 it pays Rs 1 Lac by Cheque to one of its suppliers and hence reduces its book balance by Rs. 1 Lac. State Bank of India, however, will not debit ABC Company account till the Cheque has been presented for payment on, say, April 6. Until that happens the firm's available balance is greater than its book balance by Rs. 1 Lac. Hence, between April 1 and April 6 ABC Company has a disbursement float of Rs. 1 Lac.
?
?
?
?
?
The net float at a point of time is simply the overall difference between the firm's available bank balance and the balance shown by the ledger account of the firm.
Positive net Float: Payment float >is more than receipt float, Available bank balance > the book balance. Negative net Float: receipt float > payment float available bank balance <book balance, then the firm has For example, a firm has a payment float of Rs. 1,00,000 and receipt float of Rs, 80,000. This firm has positive net float, which may be ascertained as follows: Net float=Payment float-Receipt float = Rs. 1,00,000 - 80,000= Rs. 20,000. If a firm has positive net float (i.e. the payment float is more than the receipt float),it can issue more Cheque even if the net bank balance shown by the books of account may not be sufficient. A firm with a positive net float can use it to its advantage and maintain a smaller cash balance than it would have in the absence of the float.
?
?
?
? ?
?
? ? ?
?
The course of action adopted by a firm to manage the payment and the receipt float is known as playing the float It has emerged as an important technique of cash management in most of the firms. Float management helps avoiding stagnation of funds. Money paid by Cheque by customers to the firm but not yet available to the latter, as it is tied in the float is stagnant money. Similarly, Cheque issued but no presented t the firm's bank is stagnant money. This can be used by a proper and careful float management.
Since what matters is the available balance, as a finance manager one should try to maximize the net float. This means that one should strive to speed up collections and delay disbursements.
?
Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.
PAYROLL & DIVIDEND DISBURSEME NT
PAYABLE THROUGH DRAFT ZERO BALANCE ACCOUNT
DISBURSEMENT
?
A check-like instrument that is drawn against the payer and not against a bank as is a check. After a PTD is presented to a bank, the payer gets to decide whether to honor or refuse payment. Delays the time to have funds on deposit to cover the draft.
Some suppliers prefer checks.
?
? ?
Banks will impose a higher service charge due to the additional handling involved
?
The firm attempts to determine when payroll and dividend checks will be presented for collection. Many times a separate account is set up to handle each of these types of disbursements. A distribution scheduled is projected based on past experiences. Funds are deposited based on expected needs. Minimizes excessive cash balances.
?
?
? ?
100%
75% The firm may plan on payroll checks being presented in a similar pattern every pay period.
Percent of Payroll Collected
50%
25% 0% F (Payday) M T W H F M and after
A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs.
Remote disbursement ? Controlled disbursement
?
A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. This may stress supplier relations, and raises ethical issues.
A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-today basis.
? The
exchange of business information in an electronic (non-paper) format, including over the Internet. ? Electronic Data Interchange -- The movement of business data electronically in a structured, computer-readable format.
EDI
Electronic Funds Transfer (EFT)
Financial EDI (FEDI)
Electronic Funds Transfer (EFT) -- the electronic movements of information between two depository institutions resulting in a value (money) transfer.
Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)
EDI Subset
Financial EDI -- The movement of financially related electronic information between a company and its bank or between banks. Examples include: Lockbox remittance information Bank balance information
? Subcontracting
a certain business operation to an outside firm, instead of doing it “in-house.” ? Why might a firm outsource?*
1. 2. 3.
Improving company focus Reducing and controlling operating costs Freeing resources for other purposes
CASH MANAGEMENT ANALYSIS
ABUR AND EMAMI
DABUR ? The receivable turnover in days is 17 days which means that the company receives its outstanding amounts from debtors in 17 days, while their payable turnover in days is 33. This shows that the company is efficient in managing its cash as its receivables happen faster than payables. hence we can deduce that the company is effectively using methods to slow down payments like trying to take extend period of credit from suppliers and at the same time tightening their credit policy towards customers, stockists etc. EMAMI ? The receivable turnover in days is 25 days which means that the company receives its outstanding amounts from debtors in 25 days, while their payable turnover in days is 45.This shows that the company is efficient in managing its cash as its receivables happen faster than payables.
DABUR VS EMAMI
? ? ? ?
?
?
Cash management is effective when receivables are quicker and payables are slowed down. Therefore the cash cycle of the firm should be small( since payables are subtracted), which indicates good cash management. CASH CYCLE= OPERATING CYCLE- PAYABLE TURNOVER IN DAYS OPERATING CYCLE= RECEIVABLE TURNOVER IN DAYS+ INVENTORY TURNOVER IN DAYS Now for cash cycle to be small, either the Payables Turnover in days should be large or the Operating cycle should be small. Cash cycle of Dabur( 49 days) is smaller than that of Emami (66 days), which shows that Emami is not efficient in managing its cash as compared to Dabur.. Closer look shows that Payables Turnover in days for Emami is greater than that of Dabur, but yet the cash cycle for Emami is greater than that of Dabur. Which means the operating cycle of Emami (111) days is more than operating cycle of Dabur (82) days. The major reason for this is the inventory turnover of Emami (86) days which is more than the whole operating cycle of Dabur . So in order to bring down its operating cycle Emami should try to reduce its inventory turnover days by adopting better inventory management practices.. Emami in order to shorten cash cycle period should manage their inventory correctly, since the problem lies in converting inventories into accounts receivable through sales.
? Assets
?
? ?
can be classified as:-
Monetary assets
Money or claims to receive fixed sum of money Idea of unexpired cost not appropriate Items which will be used in future in production and sale of goods and services Amount recorded on balance sheet when acquired at cost Amount shown on balance sheet thereafter is value not yet written off as expense
?
Non monetary assets
?
?
?
Ready cash segment
Marketable Securities Portfolio
Controllable cash segment Free cash segment
Safety
• Refers to the likelihood of getting back the same amount of rupees originally invested. • Judged on the basis of the treasury issue by the central government in any country, which is held certain if held until maturity
Marketability
• Related to the owner`s ability to convert it into cash in a short notice. • Active secondary market- that is, a second hand market where a security can be traded after issuance- is necessary for a security to have a high marketability.
Yield
• Refers to the interest and/or appreciation of principal provided by security.
Maturity
• To the life of security. • Longer the maturity, greater the yield, but at the same time more exposure to yield risk.
Treasury bills
Repurchase Agreements Commercial Papers Certificate of Deposit Banker’s Acceptance
Safety
Issued by central Government of any country
Marketability
Available both in primary and secondary market
Yield
Zero risk instruments
Maturity
GOI through RBI issues three types of T-Bills
Low Yield
One of the safest
Highly marketable
91 days, 182 days, 364 days
Payment details
• • • • Central Government issues T- Bills at a price less than their face value (par value) Promise to pay full face value on maturity The government pays the holder its face value at maturity Difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument.
Issuance details
• • • • T-Bills are issued through a bidding process at auctions. Bid can be prepared either competitively or non-competitively. In case of competitive bidding, the return required on maturity is specified in the bid. In non competitive bidding, return required is not specified and the one determined at the auction is received on maturity
Auctioning of T-Bills
• T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system • The Reserve Bank of India issues a quarterly calendar of T-bill auctions • 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays.
Purpose of RBI in issuing T-bills
• To absorb liquidity from the market by contracting the money supply - Reverse Repurchase (Reverse Repo) • RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market - Repo (Repurchase)
?
A repurchase agreement or „repo? is the sale of short term securities by the dealer to the investor wherby the dealer agrees to repurchase the securities at an established higher price at a specified future time.
?
?
? ? ?
?
The investor thus receives a given yield while holding the securities. The rate of interest agreed upon is called the Repo rate. The holding time itself is tailored to the needs of the investor, thus it provides the investor a great deal of flexibility with respect to maturity Limited marketability Maturity –- Overnight to a few days Safety– depends on the reliability and financial condition of the dealer. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc.
Safety
Marketability
Actively traded in secondary market
Issued in form of Promissory note, freely transferrable in Demat Form
Yield
Yield higher as compared to T-Bills
Maturity
Comes with a fixed maturity Ranges from 1 to 270 days
Not backed by any collateral
Less secured, not a zero risk instrument
Commercial Paper contd.
Low-cost alternative to bank loans Strong credit rating of the issuing company a must
As no collaterals, only firms with high credit rating will find buyers easily Issued by corporate to impart flexibility in raising working capital resources at market determined rates.
A promissory note issued by a bank in form of a certificate entitling the bearer to receive interest.
The certificate bears ? the maturity date, ? the fixed rate of interest and ? the value. It can be issued in any denomination.
Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also.
The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR).
Banker’s Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank.
?
It is a buyer?s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral.
?
The person drawing the bill must have a good credit rating otherwise the Banker?s Acceptance will not be tradable.
?
The most common term for these instruments is 90 days. However, they can very from 30 days to180 days.
?
For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown.
?
The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.
?
? Mutual
fund companies usually provide products which can be categorized into following three types
? Debt
fund ? Balanced fund ? Equity fund
? Dabur
follows the mutual fund route for managing its liquid cash. ? Dabur has invested portions of liquid cash in products of 27 Mutual Fund companies like
• •
•
•
Fidelity Cash Fund LIC Mutual Fund DWS Mutual Fun Taurus Mutual Fund
Dabur has liquid cash which needs management to maximise returns
Dabur invests part of its liquid cash in Fidelity Cash fund
72.92% of total investments(Part of Dabur Ltd included) from various companies is invested by Fedility in money market by use of Certificate of Deposits and Commercial Papers Dividend received by all participant companies as per the dividend decided by Fiedility and market norms.
Earnings for Dabur for its idle Cash.
Name of Investment Fidelity Cash Fund
Unit Purchased
Unit Sold
Valuation
Return for Dabur Rs. 17,431
8771890.76 8771890.76 NA 867636 867636
Dividend as on 25th September 2009 - 0.01987142/unit held.
If Dabur was holding the said Units Result in Dabur Earning Rs. 17,431 per month on its idle cash
? Emami
has also followed the mutual fund route to invest its idle cash in marketable securities. ? However the investments made by Emami are much lower when compared with investing activities of Dabur India Ltd.
?
Reason:? ?
Dabur sales nearly 3 and half times higher. Emami involved in acquiring Zandu Pharma at the cost of 242 crores.
Name of Units Investment purchased
Birla Cash 7,98,59,64 Plus 3.718 Institutional Premium Daily Dividend
Unit sold
Difference
Current valuation NA
7,98,59,643 0 .718
ICICI 2,51,63,04 Prudential 4.315 Institutional Liquid Plan - Super Institutional Growth
2,51,63,04 4.315
3,267.22(In lacs)
Proportion of investments in various money market instruments
Bonds, 1.17%
Securitised Debts, 4.01% Cash and current assets, 20.21%
Corporate T-Bills, Debts, 0.20% 0.03%
Money market instruments, 40.12%
Floating rate investments, 33.05%
The liquid cash for Dabur India Ltd. is more as compared to Emami Ltd which may be an indicator of the increased sales of Dabur. The sales of Dabur stand at 242,367.89 lacs which is nearly 3 and a half times more than that of Emami which stands at 73,959.87 lacs. ? However both the companies are following similar method that of investing in marketable securities through mutual fund route. This strategy of both the companies indicates that both the companies do not have a portfolio management staff. The investment portfolio of the company is mainly managed by the Mutual Fund companies.
?
?
?
Cash management involves the efficient collection, disbursement, and temporary investment of cash. A cash budget is instrumental in the process, it tells us how much cash we are likely to have, when we are likely to have it, and for how long. Thus serves as a foundation for cash forecasting. In addition to the cash budget, the firm needs systematic information on cash as well as a detailed report on changes in this position. Efficient management of information is essential for a firm to manage its cash ultimately. Newer upcoming methods like Electronic Data Interchange, are facilitating information transfer between financial institutions. E-commerce regulations are coming in and might replace manual methods because of their advantages. Apart from the cash level maintained, companies usually invest in marketable securities which act as short term investment which enable them to earn money on their otherwise idle cash.
doc_396022944.pptx
The PPT highlights analysis and comparision financial ratios, cash management analysis of Dabur and Emami.
Financial Ratio
LIQUIDITY RATIOS
Dabur India Ltd
Emami Ltd
Current ratio Quick ratio Debt to equity Debt to total assets
1.11 1.78 0.18 0.06
1.35 0.94 1.48 0.59
Debt to total capitalization
COVERAGE RATIO
0.15
0.68
EBIT to Interest ratio
ACTIVITY RATIO
32.86
6.18
Receivable turnover ratio Receivable turnover in days Payable turnover ratio Payable turnover in days Inventory Turnover ratio Inventory turnover in days Operating cycle Cash cycle Total assets turnover
PROFITABILITY RATIOS
21.32 17 days 10.96 33 days 5.58 65 days 82 days 49 days 1.08
14.62 25 days 8.13 45 days 4.21 86 days 111 days 66 days 0.99
Gross profit margin Net profit margin Return on Assets Return on equity
39% 15.58% .16% .50%
64% 12.28% 12.21% 30.7%
Current Ratio: Higher ratio is an indication that Emami is liquid and has the ability to pay its current obligations in time and when they become due. Lower ratio indicates that the liquidity position of Dabur is not good and the firm shall not be able to pay its current liabilities in time with no difficulties. Quick Ratio: Higher ratio of Dabur gives an indication that the firm is liquid and has the ability to meet its current / liquid liabilities in time and on the other hand a low ratio represents that Emami?s liquidity position is not good. This discrepancy between the current and quick ratio is explained by the fact that Emami carries more inventories thus having low quick ratio. Debt to Equity Ratio: Higher ratio shows that Emami has a higher proportion of debt financing in comparison to share holder?s equity which increases the level of risk in comparison with Dabur Ltd. As Dabur has a lower debt component and higher proportion of equity in its financing.
Debt to Total Asset Ratio: Ratio is fairly low for Dabur which can be explained the fact that Dabur is a larger company as compared to Emami and thus Dabur has a larger operations Base and higher amount of assets; also the debt component is small.
Debt to Total Capitalization Ratio: The higher the debt to capital ratio, the more debt the Company has compared to its equity. Emami has high ratio which shows weak financial strength because the cost of debts may weigh on the company and increase its default risk.
EBIT to Interest Ratio: In case of Dabur, a high ratio assures the lenders a regular and periodical interest income. It shows that Dabur has more ability than Emami to meet its interest payments. In case of Emami, low ratio may create some problems to the financial manager in raising funds from debt sources. Accounts Receivable Turnover Ratio: indicates the number of times the receivables are turned over a year. The higher value suggests that Dabur is more efficient in the management of receivables. Receivable Turnover in Days: As per report, Dabur is collecting more quickly on its accounts in 17 days As compared to 25 days taken by Emami. It clearly means that Dabur is managing its receivables more efficiently than Emami.
Payable Turnover ratio: Higher ratio of Dabur signifies that creditors are being paid promptly. However a very favorable ratio to this effect also shows that the business is not taking the full advantage of credit facilities allowed by the creditors.
Payable Turnover in Days: It signifies the credit period enjoyed by the firm in paying creditors. The higher the payable turnover in days, the lesser number of times the payables are turned over in a year.
Inventory Turnover Ratio: For Dabur, higher ratio indicates the efficient management of inventory as more frequently the stocks are sold; the lesser amount of money is required to finance the inventory.
Inventory Turnover in Days: In case of Dabur, 65 days mean that inventory is being converted into sales more quickly as compared to 86 days in Emami.
Operating Cycle: It shows that Dabur is able to generate money by operations, faster than Emami therefore, showing more efficient operating procedures of Emami as compared to Dabur.
Cash Cycle: Shorter cash cycle is leading Dabur to a comfortable cash position, efficient management of working capital as compared to Emami.
Above 8 ratios will be discussed later in detail during the presentation.
Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami.
Gross Profit Margin: The margin is higher for Emami which means that cost of production is lower for Emami as compared to Dabur.
Total Asset Turnover ratio: It measures the activity of assets and the ability of the business to generate sales and income through the use of the assets. Higher ratio is showing effective utilization of its assets by Dabur. Lower ratio means underutilization of assets by Emami.
Return on Assets: It evaluates how effectively the company employs its assets to generate a return, indicating efficiency of the firm. Here Emami has higher ROA ratio thus suggesting about more earnings for the amount of assets and their well efficient use of business assets. It means that Emami is earning more money with less investment as compared to Dabur.
Return on Equity: This ratio is more meaningful to the equity shareholders who are interested to know profits earned by the company and those profits which can be made available to pay dividends to them. Higher ratio indicates that investment in Emami is more attractive than Dabur. It indicates that Emami is getting more return on the invested capital against other investment opportunities like stocks, real estates, savings etc, as compared to Dabur.
Transactions Motive:
to meet payments arising in the ordinary course of business to take advantage of temporary opportunities to maintain a cushion or buffer to meet unexpected cash needs
Speculative Motive:
Precautionary Motive:
“Speeding up” Cash Receipts
“slowing down”
Cash payouts
Customer mails check
Firm receives check
Mail Float: time the check is in the mail.
Firm receives check
Firm deposits check
Processing Float: time it takes a company to process the check internally.
Firm deposits check
Firm’s bank account credited
Availability Float: time consumed in clearing the check through the banking system.
Processing Float
Availability Float
Deposit Float: time during which the check received by the firm remains uncollected funds.
Mail Float
Processing Float
Availability Float Deposit Float
Collection Float: total time between the mailing of the check by the customer and the availability of cash to the receiving firm.
?
? ? ?
?
For example, suppose that XYZ Company has book balance as well as available balance of Rs 5 Lac as on April 30. On May 1 XYZ Company receives a Cheque for Rs. 1.5 Lac from a customer which it deposits in the Bank. It increases its book balance by Rs. 1.5. Lac. However, this amount is not available to ABC Company until its bank presents the Cheque to the customer's bank on, say May 5 So, between May 1 and May 5 ABC Company has a collection float of (-) Rs. 1.5 Lac. Collection float = Firm's available Bank Balance-Firm's book balance.
Here, collection float = Rs 5.0 Lac - Rs. 6.5 Lac = (-) Rs. 1.5 Lac.
?
?
?
? ? ?
?
For example, suppose that XYZ Company has book balance as well as available balance of Rs 5 Lac as on April 30. On May 1 XYZ Company receives a Cheque for Rs. 1.5 Lac from a customer which it deposits in the Bank. It increases its book balance by Rs. 1.5. Lac. However, this amount is not available to ABC Company until its bank presents the Cheque to the customer's bank on, say May 5 So, between May 1 and May 5 ABC Company has a collection float of (-) Rs. 1.5 Lac. Collection float = Firm's available Bank Balance-Firm's book balance.
Here, collection float = Rs 5.0 Lac - Rs. 6.5 Lac = (-) Rs. 1.5 Lac.
?
?
Earlier Billing Accelerate preparation and mailing of invoices :
? ? ? ? ?
computerized billing invoices included with shipment invoices are faxed advance payment requests preauthorized debits
LOCKBOX A company rents a local post office box and authorizes its bank to pick up customer remittances from the box.
?:
Facilitates the cash management where, instead of being delivered to business address, customer payments are delivered to a special post office (PO) box.
TRADITIONAL LOCKBOX PROCESS ?The company?s bank picks up the mail several times a day and the cheques are deposited directly into company?s account. TRADITIONAL LOCKBOX PROCESS IN INDIA?It is only the customers? payments that are delivered in the PO box and the company?s own bank collects the amount and delivers them to the banks of the customers. ?The bank of the customers opens and processes the payments for direct deposit to the bank account of the company. Lockbox contents are regularly removed and processed. ELECTRONIC LOCKBOX?A collection service provided by a firm?s bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.
Advantage
Receive remittances sooner which reduces processing float.
Disadvantage
Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.
The movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.
?
? ?
Improves control over inflows and outflows of corporate cash. Reduces idle cash balances to a minimum. Allows for more effective investments by pooling excess cash balances
DEPOSITORY TRANSFER CHECK : A non-negotiable
check payable to a single company account at a concentration bank.
AUTOMATED CLEARING HOUSE (ACH) ELECTRONIC TRANSFER : An electronic version of the depository
transfer check (DTC).
WIRE TRANSFER : A generic term for electronic funds
transfer using a two-way communications system, funds are considered available upon receipt of the wire transfer.
?
The amount of Cheque issued but not presented for payment is known as the disbursement float. For example, suppose that ABC Company has a book balance as well as available balance of Rs 4 Lac with its bank, State Bank of India, as on March 31. On April 1 it pays Rs 1 Lac by Cheque to one of its suppliers and hence reduces its book balance by Rs. 1 Lac. State Bank of India, however, will not debit ABC Company account till the Cheque has been presented for payment on, say, April 6. Until that happens the firm's available balance is greater than its book balance by Rs. 1 Lac. Hence, between April 1 and April 6 ABC Company has a disbursement float of Rs. 1 Lac.
?
?
?
?
?
The net float at a point of time is simply the overall difference between the firm's available bank balance and the balance shown by the ledger account of the firm.
Positive net Float: Payment float >is more than receipt float, Available bank balance > the book balance. Negative net Float: receipt float > payment float available bank balance <book balance, then the firm has For example, a firm has a payment float of Rs. 1,00,000 and receipt float of Rs, 80,000. This firm has positive net float, which may be ascertained as follows: Net float=Payment float-Receipt float = Rs. 1,00,000 - 80,000= Rs. 20,000. If a firm has positive net float (i.e. the payment float is more than the receipt float),it can issue more Cheque even if the net bank balance shown by the books of account may not be sufficient. A firm with a positive net float can use it to its advantage and maintain a smaller cash balance than it would have in the absence of the float.
?
?
?
? ?
?
? ? ?
?
The course of action adopted by a firm to manage the payment and the receipt float is known as playing the float It has emerged as an important technique of cash management in most of the firms. Float management helps avoiding stagnation of funds. Money paid by Cheque by customers to the firm but not yet available to the latter, as it is tied in the float is stagnant money. Similarly, Cheque issued but no presented t the firm's bank is stagnant money. This can be used by a proper and careful float management.
Since what matters is the available balance, as a finance manager one should try to maximize the net float. This means that one should strive to speed up collections and delay disbursements.
?
Firms should be able to: 1. shift funds quickly to banks from which disbursements are made. 2. generate daily detailed information on balances, receipts, and disbursements. Solution: Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.
PAYROLL & DIVIDEND DISBURSEME NT
PAYABLE THROUGH DRAFT ZERO BALANCE ACCOUNT
DISBURSEMENT
?
A check-like instrument that is drawn against the payer and not against a bank as is a check. After a PTD is presented to a bank, the payer gets to decide whether to honor or refuse payment. Delays the time to have funds on deposit to cover the draft.
Some suppliers prefer checks.
?
? ?
Banks will impose a higher service charge due to the additional handling involved
?
The firm attempts to determine when payroll and dividend checks will be presented for collection. Many times a separate account is set up to handle each of these types of disbursements. A distribution scheduled is projected based on past experiences. Funds are deposited based on expected needs. Minimizes excessive cash balances.
?
?
? ?
100%
75% The firm may plan on payroll checks being presented in a similar pattern every pay period.
Percent of Payroll Collected
50%
25% 0% F (Payday) M T W H F M and after
A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Eliminates the need to accurately estimate each disbursement account. Only need to forecast overall cash needs.
Remote disbursement ? Controlled disbursement
?
A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time. This maximizes disbursement float. This may stress supplier relations, and raises ethical issues.
A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-today basis.
? The
exchange of business information in an electronic (non-paper) format, including over the Internet. ? Electronic Data Interchange -- The movement of business data electronically in a structured, computer-readable format.
EDI
Electronic Funds Transfer (EFT)
Financial EDI (FEDI)
Electronic Funds Transfer (EFT) -- the electronic movements of information between two depository institutions resulting in a value (money) transfer.
Society of Worldwide Interbank Financial Telecommunications (SWIFT) Clearinghouse Interbank Payments System (CHIPS)
EDI Subset
Financial EDI -- The movement of financially related electronic information between a company and its bank or between banks. Examples include: Lockbox remittance information Bank balance information
? Subcontracting
a certain business operation to an outside firm, instead of doing it “in-house.” ? Why might a firm outsource?*
1. 2. 3.
Improving company focus Reducing and controlling operating costs Freeing resources for other purposes
CASH MANAGEMENT ANALYSIS
ABUR AND EMAMIDABUR ? The receivable turnover in days is 17 days which means that the company receives its outstanding amounts from debtors in 17 days, while their payable turnover in days is 33. This shows that the company is efficient in managing its cash as its receivables happen faster than payables. hence we can deduce that the company is effectively using methods to slow down payments like trying to take extend period of credit from suppliers and at the same time tightening their credit policy towards customers, stockists etc. EMAMI ? The receivable turnover in days is 25 days which means that the company receives its outstanding amounts from debtors in 25 days, while their payable turnover in days is 45.This shows that the company is efficient in managing its cash as its receivables happen faster than payables.
DABUR VS EMAMI
? ? ? ?
?
?
Cash management is effective when receivables are quicker and payables are slowed down. Therefore the cash cycle of the firm should be small( since payables are subtracted), which indicates good cash management. CASH CYCLE= OPERATING CYCLE- PAYABLE TURNOVER IN DAYS OPERATING CYCLE= RECEIVABLE TURNOVER IN DAYS+ INVENTORY TURNOVER IN DAYS Now for cash cycle to be small, either the Payables Turnover in days should be large or the Operating cycle should be small. Cash cycle of Dabur( 49 days) is smaller than that of Emami (66 days), which shows that Emami is not efficient in managing its cash as compared to Dabur.. Closer look shows that Payables Turnover in days for Emami is greater than that of Dabur, but yet the cash cycle for Emami is greater than that of Dabur. Which means the operating cycle of Emami (111) days is more than operating cycle of Dabur (82) days. The major reason for this is the inventory turnover of Emami (86) days which is more than the whole operating cycle of Dabur . So in order to bring down its operating cycle Emami should try to reduce its inventory turnover days by adopting better inventory management practices.. Emami in order to shorten cash cycle period should manage their inventory correctly, since the problem lies in converting inventories into accounts receivable through sales.
? Assets
?
? ?
can be classified as:-
Monetary assets
Money or claims to receive fixed sum of money Idea of unexpired cost not appropriate Items which will be used in future in production and sale of goods and services Amount recorded on balance sheet when acquired at cost Amount shown on balance sheet thereafter is value not yet written off as expense
?
Non monetary assets
?
?
?
Ready cash segment
Marketable Securities Portfolio
Controllable cash segment Free cash segment
Safety
• Refers to the likelihood of getting back the same amount of rupees originally invested. • Judged on the basis of the treasury issue by the central government in any country, which is held certain if held until maturity
Marketability
• Related to the owner`s ability to convert it into cash in a short notice. • Active secondary market- that is, a second hand market where a security can be traded after issuance- is necessary for a security to have a high marketability.
Yield
• Refers to the interest and/or appreciation of principal provided by security.
Maturity
• To the life of security. • Longer the maturity, greater the yield, but at the same time more exposure to yield risk.
Treasury bills
Repurchase Agreements Commercial Papers Certificate of Deposit Banker’s Acceptance
Safety
Issued by central Government of any country
Marketability
Available both in primary and secondary market
Yield
Zero risk instruments
Maturity
GOI through RBI issues three types of T-Bills
Low Yield
One of the safest
Highly marketable
91 days, 182 days, 364 days
Payment details
• • • • Central Government issues T- Bills at a price less than their face value (par value) Promise to pay full face value on maturity The government pays the holder its face value at maturity Difference between the purchase price and the maturity value is the interest income earned by the purchaser of the instrument.
Issuance details
• • • • T-Bills are issued through a bidding process at auctions. Bid can be prepared either competitively or non-competitively. In case of competitive bidding, the return required on maturity is specified in the bid. In non competitive bidding, return required is not specified and the one determined at the auction is received on maturity
Auctioning of T-Bills
• T-bills auctions are held on the Negotiated Dealing System (NDS) and the members electronically submit their bids on the system • The Reserve Bank of India issues a quarterly calendar of T-bill auctions • 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364- day T-bills are auctioned every alternate week on Wednesdays.
Purpose of RBI in issuing T-bills
• To absorb liquidity from the market by contracting the money supply - Reverse Repurchase (Reverse Repo) • RBI purchases back these instruments at a specified date mentioned at the time of transaction, liquidity is infused in the market - Repo (Repurchase)
?
A repurchase agreement or „repo? is the sale of short term securities by the dealer to the investor wherby the dealer agrees to repurchase the securities at an established higher price at a specified future time.
?
?
? ? ?
?
The investor thus receives a given yield while holding the securities. The rate of interest agreed upon is called the Repo rate. The holding time itself is tailored to the needs of the investor, thus it provides the investor a great deal of flexibility with respect to maturity Limited marketability Maturity –- Overnight to a few days Safety– depends on the reliability and financial condition of the dealer. Repo/Reverse Repo transactions can be done only between the parties approved by RBI and in RBI approved securities viz. GOI and State Govt Securities, T-Bills, PSU Bonds, FI Bonds, Corporate Bonds etc.
Safety
Marketability
Actively traded in secondary market
Issued in form of Promissory note, freely transferrable in Demat Form
Yield
Yield higher as compared to T-Bills
Maturity
Comes with a fixed maturity Ranges from 1 to 270 days
Not backed by any collateral
Less secured, not a zero risk instrument
Commercial Paper contd.
Low-cost alternative to bank loans Strong credit rating of the issuing company a must
As no collaterals, only firms with high credit rating will find buyers easily Issued by corporate to impart flexibility in raising working capital resources at market determined rates.
A promissory note issued by a bank in form of a certificate entitling the bearer to receive interest.
The certificate bears ? the maturity date, ? the fixed rate of interest and ? the value. It can be issued in any denomination.
Its term generally ranges from three months to five years and restricts the holders to withdraw funds on demand. However, on payment of certain penalty the money can be withdrawn on demand also.
The returns on certificate of deposits are higher than T-Bills because it assumes higher level of risk. While buying Certificate of Deposit, return method should be seen. Returns can be based on Annual Percentage Yield (APY) or Annual Percentage Rate (APR).
Banker’s Acceptance: It is a short term credit investment created by a non financial firm and guaranteed by a bank to make payment. It is simply a bill of exchange drawn by a person and accepted by a bank.
?
It is a buyer?s promise to pay to the seller a certain specified amount at certain date. The same is guaranteed by the banker of the buyer in exchange for a claim on the goods as collateral.
?
The person drawing the bill must have a good credit rating otherwise the Banker?s Acceptance will not be tradable.
?
The most common term for these instruments is 90 days. However, they can very from 30 days to180 days.
?
For corporations, it acts as a negotiable time draft for financing imports, exports and other transactions in goods and is highly useful when the credit worthiness of the foreign trade party is unknown.
?
The seller need not hold it until maturity and can sell off the same in secondary market at discount from the face value to liquidate its receivables.
?
? Mutual
fund companies usually provide products which can be categorized into following three types
? Debt
fund ? Balanced fund ? Equity fund
? Dabur
follows the mutual fund route for managing its liquid cash. ? Dabur has invested portions of liquid cash in products of 27 Mutual Fund companies like
• •
•
•
Fidelity Cash Fund LIC Mutual Fund DWS Mutual Fun Taurus Mutual Fund
Dabur has liquid cash which needs management to maximise returns
Dabur invests part of its liquid cash in Fidelity Cash fund
72.92% of total investments(Part of Dabur Ltd included) from various companies is invested by Fedility in money market by use of Certificate of Deposits and Commercial Papers Dividend received by all participant companies as per the dividend decided by Fiedility and market norms.
Earnings for Dabur for its idle Cash.
Name of Investment Fidelity Cash Fund
Unit Purchased
Unit Sold
Valuation
Return for Dabur Rs. 17,431
8771890.76 8771890.76 NA 867636 867636
Dividend as on 25th September 2009 - 0.01987142/unit held.
If Dabur was holding the said Units Result in Dabur Earning Rs. 17,431 per month on its idle cash
? Emami
has also followed the mutual fund route to invest its idle cash in marketable securities. ? However the investments made by Emami are much lower when compared with investing activities of Dabur India Ltd.
?
Reason:? ?
Dabur sales nearly 3 and half times higher. Emami involved in acquiring Zandu Pharma at the cost of 242 crores.
Name of Units Investment purchased
Birla Cash 7,98,59,64 Plus 3.718 Institutional Premium Daily Dividend
Unit sold
Difference
Current valuation NA
7,98,59,643 0 .718
ICICI 2,51,63,04 Prudential 4.315 Institutional Liquid Plan - Super Institutional Growth
2,51,63,04 4.315
3,267.22(In lacs)
Proportion of investments in various money market instruments
Bonds, 1.17%
Securitised Debts, 4.01% Cash and current assets, 20.21%
Corporate T-Bills, Debts, 0.20% 0.03%
Money market instruments, 40.12%
Floating rate investments, 33.05%
The liquid cash for Dabur India Ltd. is more as compared to Emami Ltd which may be an indicator of the increased sales of Dabur. The sales of Dabur stand at 242,367.89 lacs which is nearly 3 and a half times more than that of Emami which stands at 73,959.87 lacs. ? However both the companies are following similar method that of investing in marketable securities through mutual fund route. This strategy of both the companies indicates that both the companies do not have a portfolio management staff. The investment portfolio of the company is mainly managed by the Mutual Fund companies.
?
?
?
Cash management involves the efficient collection, disbursement, and temporary investment of cash. A cash budget is instrumental in the process, it tells us how much cash we are likely to have, when we are likely to have it, and for how long. Thus serves as a foundation for cash forecasting. In addition to the cash budget, the firm needs systematic information on cash as well as a detailed report on changes in this position. Efficient management of information is essential for a firm to manage its cash ultimately. Newer upcoming methods like Electronic Data Interchange, are facilitating information transfer between financial institutions. E-commerce regulations are coming in and might replace manual methods because of their advantages. Apart from the cash level maintained, companies usually invest in marketable securities which act as short term investment which enable them to earn money on their otherwise idle cash.
doc_396022944.pptx