Description
L&T
1
Declaration
I the undersigned, Mr. Shiv.P. Naik, hereby declare that this project work entitled
“Working Capital Management” is my own work and is not submitted to any other
university or institution for any other purpose. This is purely meant for academic purpose
only.
Mr. Shiv P Naik
P.G.D.M (Finance)
2
Acknowledgement
I would like to thank and acknowledge from innermost of my heart to all the persons who
had helped me in guiding and preparing my project work. It is a regard to all those who
rendered their valuable support to make this project successful.
Any effort cannot lead to success unless given a proper guidance and direction for the
same. This is why I find myself fortunate to have undergone my industrial training in
Finance & Accounts department at Larsen & Toubro Limited (Hazira). It was a
lifetime opportunity for me to get a chance to experience industry working in such a
reputed company.
Firstly I would like to thank executive vice president for giving me a chance of
working in the company and showing his belief and confidence in me and assigning me
such an esteemed project work. I am indebted to my project guide Mr. Anjan Desai for
his immense support and guidance at each and every step of the project. I am forever
gratified for his valuable teaching and sharing his industry experience with me and giving
me some key ideas to shape my career.
I am also thankful to H.R DEPARTMENT for giving importance guidance and
orientation. I would also like to thank other staff members, friends and all those who have
helped me in completing this project successfully and for treating me as their colleague
and helping me understand the working of the company.
And last but not the least; I would like to thank all the respondents who spared their
valuable time for my project work and my parents because without their blessings I
would not have been successful in completing my project work.
3
Table of Contents
Chapter No. Content Page No.
? Declaration i.
? Acknowledgement ii.
? List of Tables iii.
? List of Figure/Graphs v.
1 Introduction of company
Profile
6
2 Working Capital Account 24
3 Introduction of the study 31
4 Research Methodology 37
5 Data Analysis and
Interpretation
40
6 Results and Findings 70
7 Limitation of the study 74
8 Conclusions and
suggestions
76
9 Bibliography 80
4
List of Tables
Table No.
Title of the Table Page No.
5.1 Working capital Account 41
5.2 Proportion of working capital in total assets 42
5.3 Current ratio 43
5.4 Quick ratio 45
5.5 Working capital turnover ratio 47
5.6 Current asset turnover ratio 49
5.7 Current asset conversion period 51
5.8 Inventory turnover ratio 52
5.9 Inventory conversion period 54
5.10 Account payable turnover ratio 56
5.11 Account payable period 58
5.12 Account receivable turnover ratio 60
5.13 Account receivable conversion period 62
5.14 Operating cycle 63
5.15 Cash cycle 65
5.16 Net profit margin 67
5
List of Graphs/Figure
Figure/Graph No. Title of the Figure/Graph Page
No.
5.2 Proportion of working capital in total assets 42
5.3 Current ratio 44
5.4 Quick ratio 46
5.5 Working capital turnover ratio 49
5.6 Current asset turnover ratio 50
5.7 Current asset conversion period 52
5.8 Inventory turnover ratio 54
5.9 Inventory conversion period 55
5.10 Account payable turnover ratio 58
5.11 Account payable period 59
5.12 Account receivable turnover ratio 61
5.13 Account receivable conversion period 63
5.14 Operating cycle 65
5.15 Cash cycle 67
5.16 Net profit margin 69
6
Chapter – 1
Introduction
Of
Company profile
7
1.1 COMPANY PROFILE
Larsen & Toubro Limited (L & T) is a technology-driven engineering and construction
organization, and one of the largest companies in India?s private sector. It has additional
interests in manufacturing, services and Information Technology. L & T was founded by
two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, in 1938.
Beginning with the import of machinery from Europe, L & T rapidly took on engineering
and construction assignments of increasing sophistication. It now has a major presence in
key sectors of the economy. A strong, customer-focused approach and the constant quest
for top-class quality have enabled the Company to attain and sustain leadership in its
major lines of business across seven decades. With factories and offices located around
the country, further supplemented by a comprehensive marketing and distribution
network, L & T enjoys an image and equity in virtually every district of India. The
Company has an international presence, with a global spread of offices and joint ventures
with world leaders. L & T?s large technology base and pool of experienced personnel
enable it to offer integrated services in world markets. L & T is India?s largest builder of
world-class, custom-made engineering equipment with logistics capabilities of supplying
it to a tight delivery schedule worldwide. It has globally-benchmarked workshops at
Powai in Mumbai, Hazira and Baroda in Gujarat, and Kansbahal in Orissa. L & T is
consistently expanding the magnitude, scope and range of its operations to offer value-
addition to client and shareholder alike. With its unique strengths – technological
sophistication, quality consciousness, and top-class manpower – L & T strides into the
future, confident of conquering the challenges ahead. L & T's Heavy Engineering
Division activities are organized under self-reliant Strategic Business Units (SBUs)
catering to the needs of core sector industries through supply of equipment to Process
Plant Industries and Defense, Nuclear Power & Aerospace Sectors. The Division
operates at the upper end of the technology spectrum and has been at the forefront of
introducing new processes, products and materials into manufacturing sector, for over six
decades. Heavy Engineering Division has the state of the art manufacturing facilities
which are capable of meeting the challenges of technology, quality conformance &
delivery, while ensuring cost competitiveness.
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1.2 HISTORY
L & T was founded in Mumbai in 1938 by two Danish engineers, Henning Holck-Larsen
and Soren Kristian Toubro. Both of them were strongly committed to developing India's
engineering capabilities to meet the demands of industry.Beginning with the import of
machinery from Europe, L & T rapidly took on engineering and construction assignments
of increasing sophistication. Today, the company sets global engineering benchmarks in
terms of scale and complexity.In 1938, the two friends decided to forgo the comforts of
working in Europe, and started their own operation in India. All they had was a
dream,and the courage to dare.Their first office in Mumbai (Bombay) was so small that
only one of the partners could use the office at a time!In the early years, they represented
Danish manufacturers of dairy equipment for a modest retainer. But with the start of the
Second World War in 1939, imports were restricted, compelling them to start a small
work-shop to undertake jobs and provide service facilities.Germany's invasion of
Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to
stand on their own feet and innovate. They started manufacturing dairy equipment
indigenously. These products proved to be a success, and L & T came to be recognized as
a reliable fabricator with high standards.The war-time need to repair and refit ships
offered L & T an opportunity, and led to the formation of a new company, Hilda Ltd., to
handle these operations. L & T also started two repair and fabrication shops - the
Company had begun to expand.Again, the sudden internment of German engineers
(because of the War) who were to put up a soda ash plant for the Tatas, gave L & T a
chance to enter the field of installation - an area where their capability became well
respected.
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1.3 JOURNEY
In 1944, ECC was incorporated. Around then, L & T decided to build a portfolio of
foreign collaborations. By 1945, the Company represented British manufacturers of
equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and
glass.In 1945, L & T signed an agreement with Caterpillar Tractor Company, USA, for
marketing earthmoving equipment. At the end of the war, large numbers of war-surplus
Caterpillar equipment were available at attractive prices, but the finances required were
beyond the capacity of the partners. This prompted them to raise additional equity capital,
and on 7th February 1946, Larsen & Toubro Private Limited was born.Independence and
the subsequent demand for technology and expertise offered L & T the opportunity to
consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and
New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in
Powai. Today, Powai stands as a tribute to the vision of the men who transformed this
uninhabitable swamp into a manufacturing landmark.Seven decades of a strong,
customer-focused approach and the continuous quest for world-class quality have enabled
it to attain and sustain leadership in all its major lines of business.L & T has an
international presence, with a global spread of offices. A thrust on international business
has seen overseas earnings grow significantly. It continues to grow its overseas
manufacturing footprint, with facilities in China and the Gulf region.The company's
businesses are supported by a wide marketing and distribution network, and have
established a reputation for strong customer support.L & T believes that progress must be
achieved in harmony with the environment. A commitment to community welfare and
environmental protection are an integral part of the corporate vision.
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1.4 MISSION
We shall strive to become the world?s best organization in engineering manufacture and
integration of custom-built, technology-intensive equipment & systems, creating
significant value for customers, stakeholders and society.
1.5 VISION
L & T shall be a professionally managed Indian multinational, committed to total
customer satisfaction and enhancing shareholder value. L & T- it shall be an innovative,
entrepreneurial and empowered team, constantly creating value and attaining global
benchmarks.L & T shall foster a culture of caring, trust and continuous learning while
meeting expectations of employees, stakeholders and society.
In April 1999, the present C.E.O. & M.D., Mr. A. M. Naik took over the reins of the
Company. In June 1999, a major re-structuring exercise was undertaken through M/s
Boston Consultancy Group (BCG – a leading global strategy consulting firm) to drive
changes that unlock value within L & T and transform it into a premium Conglomerate/
Indian multinational.
In the restructured plan there are four core businesses,
(i) Civil Construction
(ii) E & C Projects
(iii) Heavy Engineering
(iv) Electrical & Electronics
(v) Various small diversified businesses form the fifth Business Group.
(vi) The sixth group is Cement and lastly IT & Communication.
Each of the six businesses forms an individual Operating Division (OD) and they are part
of Larsen & Toubro Limited. IT & Communication business is handled by L & T
InfoTech – a separate 100% subsidiary of L & T. Each of the Six Operating Divisions
(ODs) within L & T is headed by a full time Executive Board Member. They all, along
with the CEO/MD and Director-Finance & Personnel, form the Corporate Management
11
Committee (CMC), which meets at least once a week to guide the destiny of the
company.Down the line, each Operating Division is governed through its own Business
Management Committee (BMC), which meets regularly to give direction to the Operating
Divisions. Under each Operating Divisions (ODs), its businesses are further subdivided
into Clusters and Strategic Business units (SBU). Each SBU is an independent profit
center within the particular Operating Division (OD).
1.6 GLOBAL PRESENCE
L & T has a global presence. A thrust on international business over the years has seen
overseas revenues growing steadily.The company has manufacturing facilities in India,
China, Oman and Saudi Arabia.It has a global supply network with offices in 10 locations
worldwide, including Houston, London, Milan, Shanghai, Seoul.Customers include
global majors in over 30 countries.
1.7 TECHNOLOGY
In every sphere of L & T's operations, technology is the key enabler, reinforcing its
leadership position, and sustaining its competitive strengths. While for some, technology
is a means to an end, for L & T, technology represents endless possibilities
1.8 ENGINEERING & CONSTRUCTION (E & C)
In engineering and construction, L &T's technology capabilities include a strategic mix of
in-house strengths and the expertise of its joint venture partners. Engineering Centers at
Mumbai, Vadodara and Delhi carry out process design and simulation, analysis of
computational fluid dynamics, mechanical design, failure analysis and trouble shooting.
L & T has set up an engineering and project management centre in Abu Dhabi, to
undertake oil and gas related projects as well as engineering and consultancy services. An
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engineering centre in Sharjah is an extended arm in the Gulf. This is supplemented
through collaborations with key partners: L & T-Valdel for engineering services in the
upstream hydrocarbon sector, L & T-Chiyoda for the mid and downstream sectors, and L
& T Sargent & Lundy for the power sector.The engineering services provided by L & T's
Engineering Design Research Centers at Chennai and Kolkata include feasibility studies,
project reports, system engineering, architectural, structural and civil design for
infrastructure development projects. L & T-Ramboll Consulting Engineers provides civil
engineering and consultancy services for a wide range of projects in the transportation
sector - ports, airports, highways and bridges.
1.8 MANUFACTURING
L & T's design & engineering capabilities in manufacturing enable it to set new
benchmarks in terms of scale, sophistication and speed. The Company has dedicated
engineering centers at the manufacturing locations. Two „Technology Development
Centers? have been set up to develop new products and manufacturing technologies. L &
T also collaborates with the organizations like ISRO to bolster its capabilities in the
strategic sectors of aerospace, defense and nuclear power. L & T's Electrical &
Electronics Division, is a pioneer in the design of switchgear and switchboards that are
engineered for tropical conditions. It has built further on this experience, and has
leveraged its R&D strengths to develop a host of new products and features. In 2008-09,
the division filed applications for over 100 patents, improving its previous year?s score of
101 patents. Cumulatively, L & T's Electrical & Electronics Division has applied for and
secured 409 patents - a landmark for an Indian company. Patent applications cover
innovations made on a variety of low voltage indigenously developed switchgear
products like the air circuit breakers (ACBs) and molded case circuit breakers (MCCBs),
medical products, petroleum dispensing pumps, tooling solutions and switchboards.
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1.9 TECHNOLOGY & SERVICES
L & T provides its global clients with the winning edge through the development of
optimal solutions. L & T's e-engineering services leverage the Company's own
engineering heritage and experience. The Embedded Systems unit provides technological
assistance across a broad spectrum - design, maintenance, re-engineering, testing,
prototyping and industrial design.
1.10 CORPORATE SOCIAL RESPONSIBILITY
L & T believes that the true and full measure of growth, success and progress lies beyond
balance sheets or conventional economic indices. It is best reflected in the difference that
business and industry make to the lives of people. Through its social investments, L & T
addresses the needs of communities residing in the vicinity of its facilities, taking
sustainable initiatives in the areas of health, education, environment conservation,
infrastructure and community development. The Company proactively provides
assistance in situations such as natural calamities and assists victims of nature's fury or
social neglect. Many social initiatives are undertaken in partnership with government
agencies and NGOs.
1.10.1 Health
L & T's participates in building a healthy community through continuing initiatives in
several areas of healthcare, with a focus on mother & child care and HIV/AIDS
awareness. All L & T locations, including construction sites, have in-house AIDS
awareness programs. Five additional mother & child care centers were set up in 2006-07.
In partnership with local NGOs, these centres benefit children of commercial sex
workers, street children and tribal communities.
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Through health care centres and regular family camps L & T organizes health checkups,
provides gynecology and laboratory facilities, carries out free cataract surgeries and intra
ocular lens implants, and helps maintain health data for children.Supply of equipment and
aid for orphanages and physically challenged children, periodic counseling to combat
rampant alcoholism, awareness camps on childcare, reproductive health, sanitation,
dental check-up, provision for safe drinking water, cancer awareness etc. are other
healthcare activities that L & T supports.
1.10.2 Education
L & T's diverse and sustained programes in education provide underprivileged children
with learning opportunities through supply of educational materials, teaching aids,
recreational tools and up scaling school infrastructure. L & T also enriches children's
lives through programs like summer camps, maths coaching, providing facilities like
science laboratories, scholarship to deserving students, etc.
The vocational training institutes of the Larsen and Toubro Public Charitable Trust;
provide local communities with skill-based training in Formwork, Masonry, Agro
Mechanics, Electricals, Fabrication, Welding and Housekeeping.Various diploma courses
are also conducted by L & T Institute of Technology for the children of employees. L &
T has developed training modules in local languages in six centers across India for
imparting skills sets in construction. L & T Training Centers provide courses for
improving the standards of electrical engineering practices and for upgrading knowledge
of maintenance, repair and welding.
1.10.3 Environment
Global warming: at L & T, we have always been conscious of the need to maintain
harmony with the environment. We continuously seek newer environment-friendly
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approaches in all our operations – energy conservation, exploring alternative sources like
wind and solar energy, waste water reduction, etc.
The Zero Discharge approach of the Powai Campus saves over 350,000 litters water
every day through water treatment and recycling. More than 13,500 trees have been
planted in different L & T campuses in the last year, and an additional 4,000 saplings
were distributed among local communities.
1.10.4 Response to natural calamities
L & T and its employees have provided relief measures during natural calamities like
earthquake and floods. L & T has assisted in disaster relief through employee and
corporate donations, employee volunteering, supply of construction material, medical and
food supplies. After the floods in Surat (Gujarat-India), L & T played a major role in
road-clearing operations, organizing medical camps, and supply of food, water, clothes
and other relief materials.
1.10.5 Employee volunteering
L & T encourages employees to volunteer for CSR activities, resulting in a self-driven
approach while retaining consistency. L & T employees and the ladies clubs formed by
their families at different locations, serve their communities by investing personal
resources and time.
From taking initiatives in building the next generation of productive citizens,
empowering women, paying regular visits to old age homes and orphanages, to
organizing blood donation camps, our employees have always believed in truly making a
difference to the world in which they live.
16
Share pri ces:-
Table 1:
Larsen &Toubro Limited
As of Jul 08, 2010
Exchange
Current
Previous
Close
Today's
High
Today's
Low
52 Week
High
52 Week
Low
Volume
BSE1 1818.80 1786.40 1825.00 1800.00 1843.75 1305.00 197258
NSE2 1819.90 1786.85 1829.00 1799.90 1843.00 1305.40 1039221
CHART 1:
INR
L & T
Di vi dend Hi story:
? For the financial year 2008-09 - Rs 10.50 per share of Rs 2/- each
? For the financial year 2007-08 - Rs 17 per share of Rs 2/- each
? For the financial year 2006-07 - Rs 13 per share of Rs 2/- each
? For the financial year 2005-06 - Rs 22 per share of Rs 2/- each
17
? For the financial year 2004-05 - Rs 17.50 per share of Rs 2/- each
? Special Dividend for the financial year 2004-2005 - Rs.10.00 per share of Rs.2/- each
? For the financial year 2003-2004 - Rs.16.00 per share of Rs.2/- each
? For the financial year 2002-2003 - Rs.7.50 per share of Rs.10/- each
? For the financial year 2001-2002 - Rs.7.00 per share of Rs.10/- each
Bonus hi story:
Table 2:
YEAR BONUS RATIO
2008 1:1
2006 1:1
1986 3:5
1982 3:5
1977 1:2
1973 1:3
1970 1:10
1965 1:7
Heavy Engineering Division (HED):
Heavy Engineering Division (HED) is one the oldest divisions of Larsen & Toubro
Limited. It primarily involves with in-house Design & Manufacture of hi-tech custom
built fabricated equipments for all core sector industries like Oil & Gas, Refineries,
Petrochemicals, Fertilizers and also Nuclear Plants, Aerospace & Defense Sectors.
Heavy Engineering Division (HED) comprises of 5 Strategic Business Units (SBUs) and
6 manufacturing plants located in different parts of the country.
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SBUs:-
1. FPEX: Fertilizer, Petrochemical & Heat Transfer Equipment Business Unit.
2. CGPP: Coal Gasifier & Thermal Power Plant Equipment Business Unit.
3. DNA: Defense, Nuclear & Aerospace.
4. RCOG: Refinery, Cracker Plant and Oil & Gas Equipment Business Unit.
5. Ship Building.
Powai Works in Mumbai is the oldest manufacturing unit of Larsen & Toubro Limited.
During mid-eighties, as the process plants sizes grew due to economies of scale, a need
was felt to enlarge its capabilities for manufacture of heavier and over dimensioned
equipments, which form the core (e.g. high pressure reactors, etc.) of any large process
plant. Powai Works being primarily landlocked, it was difficult to transport out large and
heavy equipments from there to various customers? sites. L & T, thus, acquired land at
Hazira, Surat with a large waterfront in order to enlarge its capability for manufacturing
heavier/OD equipments, with a proper logistics support for its finished products through
the sea route.
Today, Powai, Hazira and Ranoli Works at Baroda form the core manufacturing facility
of Heavy Engineering Division. They are under the direct control of an Executive Vice
President, below whom there are three clusters (A, B & C) and five Strategic Business
Units (SBUs). The other three plants – Kansbahal Works, LTM and Audco factories
manufacture other specialized products and have their own individual SBUs.
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Product Range of Manufacturing Units
1 Powai
Works
Heat Exchangers, Pressure Vessels, Multi-wall Vessels, Cryogenic
Vessels, Columns & Towers, etc.
2. Hazira
Works
Large, Heavy and Over Dimensioned eqpts. – e.g. Pressure Vessels,
Reactors, Columns & Towers, Boiler Components, End Shields/Steam
Generators, etc.
3. Ranoli
Works
Thin wall Stainless Steel Sheet metal, Aluminum & Non-ferrous
fabricated equipments, etc.
4. Kansbahal
Works
Roll Crushers, Impactors, Wobblers, Feeders, Jaw Crushers, Hammer
Mill, Ring Granulator, Breakers and Equipments for Material
Handling for steel plants, Pulp & Paper, Minerals & Metals industries.
5. LTM –
Chennai
Tire curing process, Blow molding machines, Helicopter landing
grids, etc.
6. Audco –
Chennai
All types of Valves & Accessories, used in Process Plants.
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Hazira Works:
This new manufacturing facility, covering an area of 200 acres, was created on the banks
of river Tapi at the outskirts of Surat city, 6 km upstream of Arabian Sea, during
November 1987 with an initial investment of Rs.41 Cr. At Hazira Works (HZW), HED
has three Production Centers, PC-1, PC-2, and Large Equipment Manufacturing Facility
(LEMF). The first two Production Centers are under covered manufacturing shops. A
fourth production centre - Modular Fabrication Facility (MFF) under E&C (Operating
Division) is meant for manufacture of equipments for Offshore Oil & Gas installations.
Later a major expansion was carried out during 1992-93 and another large investment as
part of a Modernization Scheme during 1998-2000. Apart from these two large one-time
investments, each year some balancing/replacement equipment is also added into the
facility. As on date the total investment at Hazira Work is as under.
HZW is largely an independent unit, having a totally decentralized system/ organization
set-up within L & T/HED with complete operational freedom in practically all areas of
operation except in areas of –
(i) Finance/Accounts – herein Corporate Finance Department lays down the finance
policy for the entire group. Hazira Finance & Accounts department works within the
frame work of the laid down policies.
(ii) Human Resource Function – herein certain policies are laid down by Central
Personnel Department, e.g. Salary/Perks/ Rewards & Promotion guidelines for
supervisory and above staff, GET Recruitment, etc.
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FACILITIES:-
Total Area : 200 + 115 Acres = 315 Acres
Covered Shops : 65,627 sq.m.
Open developed yard : 296,250 sq.m.
Water Front : 1.2 km
Captive jetties : 3
No of trees : Over 22000
No. of employees : 1300
No. of contract labor (varies) : 3000 - 5000
Jetties:-
Main Jetty 100m x 18m (5 m above MSL)
RO - RO Jetty 60m x 40m (5 m above MSL)
Heavy Load-Out 80m x 40m (5 m above MSL)
Product Range (Hazira Works):-
HZW manufactures a very wide variety of fabricated products. These can be basically
classified into two categories:
(i) Equipments for Process Plants - Reactors, Columns, Pressure Vessels, etc. These are
manufactured in Production Centre-1 and LEMF
(ii) Equipments for Nuclear, Aerospace and Defense Sectors - End Shields, Steam
Generators for Nuclear Power Plants, Rocket Motor Casings for Space Launch
Vehicles and other specialized equipments for the Defense Sectors. These are
manufactured in Production Centre-2.
All these equipments are engineered to Order and manufactured under various design
codes as per the individual customer/project consultants? requirements.
22
Sr. No Product Design Code
1 Pressure Vessels (Columns, Towers, Reactors)
ASME Sec VIII Div. 1
ASME Sec VIII Div. II
AD Merkblatt
2 Heat Exchangers TEMA
3 Process Piping
ASME B 31.3
API 1101
4 Nuclear Power Components ASME Sec III
5 Power Boilers
ASME Sec 1 (S)
IBR
These vastly different fabricated products have varying cycle time of manufacture, which
varies from 5 months to 2 years, generally depending upon the job?s complexity.
Customers:-
Customers of HZW basically fall into two categories.
(i) Process Plant Equipment Sector: These generally consist of Refineries,
petrochemicals, Fertilizers and Oil & Gas sectors. Till a few years ago most of our
customers for such equipments were located in India – IOCL, BPCL, HPCL, RIL,
MRPL, KRIBHCO, IFFCO, etc. However, we have made a major thrust in exports during
last 3 years. During this period, we have exported our products to Exxon-Mobil
Refineries in UK, USA, Canada and Europe; Tosco Refineries-USA; Chevron
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Chemicals-USA; Saudi Polyolefin- Saudi Arabia, IBN-ZAHR Petrochemicals-Saudi
Arabia; Petro bras Refineries-Brazil; TOSCO Refineries – Syria.
Presently have orders for 24 different equipments for OMIFCO-Oman, EO Reactors,
Acronitrile Reactors and HDPE Reactors for China, FCC Revamp for Kuwait Petroleum,
Steam Drums for France, etc.
(ii) Nuclear, Aerospace and Defense Sector. These are highly specialized and
sophisticated equipments. In this segment, presently all our customers are from India only
– NPCL, BARC, ISRO, Indian Navy, etc.
24
Chapter 2
Working Capital
Management
25
2.1 Defining Working Capital
1. According to Guttmann & Dougall-
“Excess of current assets over current liabilities”.
2. According to Park & Gladson-
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories)
over current items owned to employees and others (such as salaries & wages payable,
accounts payable, taxes owned to government)”.
The term working capital refers to the amount of capital, which is readily available to an
organization. That is, working capital is the difference between resources in cash or
readily convertible into cash (Current Assets) and organizational commitments for which
cash will soon be required i.e. Current Liabilities. Current Assets are resources, which are
in cash or can readily be converted into cash in “ the ordinary course of business”.
Current Liabilities are commitments, which will soon require cash settlement in “the
ordinary course of business”.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
There are two concept of working capital: gross working capital and net working capital.
Gross working capital is total of all current assets. Net working capital is the difference
between current assets and current liabilities. The concept of net working capital is
commonly used, it is an accounts concept with little economic meaning.
There are two concepts of working capital management
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1. Gross working capital
Gross working capital refers to the firm?s investment I current assets. Current assets are
the assets which can be convert in to cash within year includes cash, short term securities,
debtors, bills receivable and inventory.
2. Net working capital
Net working capital refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outsiders which are expected tomature for payment
within an accounting year and include creditors, bills payable and outstanding expenses.
Net working capital can be positive or negative. Efficient working capital management
requires that firms should operate with some amount of net working capital, the exact
amount varying from firm to firm and depending, among other things; on the nature of
industries.net working capital is necessary because the cash outflows and inflows do not
coincide. The cash outflows resulting from payment of current liabilities are relatively
predictable. The cash inflow are however difficult to predict. The more predictable the
cash inflows are, the less net working capital will be required. The concept of working
capital was, first evolved by Karl Marx. Marx used the term „variable capital? means
outlays for payrolls advanced to workers before the completion of work. He compared
this with „constant capital? which according to him is nothing but „dead labour?. This
„variable capital? is nothing but wage fund which remains blocked in terms of financial
management, in work-in-process along with other operating expenses until it is released
through sale of finished goods. Although Marx did not mentioned that workers also gave
credit to the firm by accepting periodical payment of wages which funded a portioned of
W.I.P, the concept of working capital, as we understand today was embedded in his
„variable capital?.
2.2 Disadvantages of redundant or excessive working capital
27
1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation of
inventories.
3. Excessive working capital implies excessive debtors and defective credit policy
which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and
other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
2.3 Determinants of working capital
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital
is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. public utility services like
railways, infrastructure oriented project etc. their requirement of working capital is less.
On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of raw
material till the end of final production of finished products itself is quit high. As such
amount may be blocked either in raw material or work in progress or finished goods or
even in debtors. Naturally their need of working capital is high.
3. Size and growth of business
28
In very small company the working capital requirement is quit high due to high overhead,
higher buying and selling cost etc. as such medium size business positively has edge over
the small companies. But if the business start growing after certain limit, the working
capital requirements may adversely affect by the increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may
be more as the company may like to buy more raw material, may increase the production
and sales to take the benefit of favorable market, due to increase in the sales, there may
more and more amount of funds blockedin stock and debtors etc. similarly in the case of
depressions also, workingcapital may be high as the sales terms of value and quantity
may be reducing, there may be unnecessary piling up of stack without getting sold, the
receivable may not be recovered in time etc.
5. Terms of purchase and sales
Sometime due to competition or custom, it may be necessary for the company to extend
more and more credit to customers, as result which more and more amount is locked up
in debtors or bills receivables which increase the working capital requirement. On the
other hand, in the case of purchase, if the credit is offered by suppliers of goods and
services, a part of working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital requirement will be higher.
6. Profitability
The profitability of the business may be vary in each and every individual case, which is
in turn its depend on numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because the profits to the extent
that they earned in cash may be used to meet the working capital requirement of the
company.
7. Operating efficiency
29
If the business is carried on more efficiently, it can operate in profits which may reduce
the strain on working capital; it may ensure proper utilization of existing resources by
eliminating the waste and improved coordination etc.
2.4 Approaches to Working Capital Management
The objective of working capital management is to maintain the optimum balance of each
of the working capital components. This includes making sure that funds are held as cash
in bank deposits for as long as and in the largest amounts possible, thereby maximizing
the interest earned. However, such cash may more appropriately be “invested” in other
assets or in reducing other liabilities. Working capital management takes place on two
levels:
? Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management.
? The individual components of working capital can be effectively managed by
using various techniques and strategies.
When considering these techniques and strategies, departments need to recognize that
each department has a unique mix of working capital components. The emphasis that
needs to be placed on each component varies according to department. For example,
some departments have significant inventory levels: others have little if any inventory.
Furthermore, working capital management is not an end itself.
It is an integral part of the department?s overall management. The needs of efficient
working capital management must be considered in relation to other aspects of the
department?s financial and non-financial performance.
2.5 Classification of Current Assets and Current Liabilities
Current Assets:
? Inventory
30
? Raw materials and components
? Work-in-progress
? Finished goods
? Trade debtors
? Loan and Advances
? Cash and Bank Balance
? Others
Current Liabilities:
? Sundry Creditors
? Trade advances
? Borrowings (Short Term)
? Commercial Banks loans
? Provisions
? Others
The current classification applies to those assets that will be realized in cash, sold, or
consumed within one year (or operating cycle, if longer), and those liabilities that will be
discharged by use of current assets or the creation of additional current liabilities within
one year (or, operating cycle, if longer). The current liability section of a balance sheet is
also intended to include obligations that are due on demand or will be due on demand
within one year from the balance sheet date, even though liquidation may not be expected
within that period. Short-term obligations shall be excluded from current liabilities only if
the enterprise intends to refinance the obligations on a long-term basis and has the
demonstrated ability to consummate the financing. The ordinary operations of a business
involve a circulation of capital within the current asset group. Cash is expended for
materials, labor, operating expenses, and other services and such cash expenditures are
included in the inventory value. Upon sale of products or performance of services, the
accumulated expenditures are converted into receivables and ultimately into cash again.
The average period of time intervening between the cash-to-cash conversions is the
operating cycle of the business. When the business has no clear operating cycle, or when
31
the operating cycle is shorter than 12 months, a 12-month period should be used to
segregate current assets.
32
Chapter 3
Introduction
Of
The study
33
3.1 Literature Review
Working Capital Management:
Most companies concentrate their managerial effort on controlling profit. They try to
increase sales revenue, reduce their production cost and control their overheads.
Operational budgets are drawn up, standard costs are set and considerable effort is
expended on identifying and rectifying variances of actual results against these budgets
and standards. However, too few companies worry very much about managing another,
possibly equally important, part of their business- the area of working capital
management. But, managing the area of working capital management makes the
difference between business survival and business failure. Many profitable companies
fail each year because their management fails to manage their working capital. They may
be profitable, but they are not able to meet their daily needs.
Managing working capital is a matter of balance. A department must have sufficient cash
on hand to meet its immediate needs while ensuring that idle cash is invested to the
organization?s best possible advantage. To avoid tipping the scale, it is necessary to have
clear and accurate reports on each of the components of working capital and an
awareness of the potential impact of outside influences.
Working capital management is concerned with the problems arise inattempting to
manage the current assets, the current liabilities and the interrelationship that exist
between them. The term current assets refers to thoseassets which in ordinary course of
business can be, or, will be, turned in to cashwithin one year without undergoing a
diminution in value and withoutdisrupting the operation of the firm. The major current
assets are cash,marketable securities, account receivable and inventory. Current liabilities
warehouse liabilities which intended at there inception to be paid in ordinary courseof
business, within a year, out of the current assets or earnings of the concern.The basic
current liabilities are account payable, bill payable, bank over-draft,and outstanding
expenses.The goal of working capital management is to manage the firm?s current
assetsand current liabilities in such way that the satisfactory level of workingcapitalis
34
mentioned. The current should be large enough to cover its current liabilitiesin order to
ensure a reasonable margin of the safety.
3.2 Background of the study
Whatever may be the organization, working capital plays an important role, as the
company needs capital for its day to day expenditure. Thousands of companies fail each
year due to poor working capital management practices. Entrepreneurs often don?t
account for short term disruptions to cash flow and are forced to close their operations.
In simple term, working capital is an excess of current assets over the current liabilities.
Good working capital management reveals higher returns of current assets than the
current liabilities to maintain a steady liquidity position of a company. Otherwise,
working capital is a requirement of funds to meet the day to day working expenses. So a
proper way of management of working capital is highly essential to ensure a dynamic
stability of the financial position of an organization.
L & T is one of the largest company doing business in hydrocarbon, transportation
infrastructure, heavy civil infrastructure, metallurgical & material handling (MMH),
water & renewable energy, power, Heavy Engineering, Electrical & Automation,
Machinery and Industrial Products Business sectors in the country which plays important
role in construction and engineering all over the world.
Seeing the good opportunity to study financial system and practices of L & T, it is
relatively important take up internship assignment on „WORKING CAPITAL
MANAGEMENT IN L & T? during the project work, the working capital position of this
organization has been analyzed. Decisions relating to working capital and short financing
are referred to as working capital management. These involve managing the relationship
between a firm?s short term assets and its short term liabilities. The goal of working
capital management is to ensure that the firm us able to continue its operations and that it
has sufficient money flow to satisfy both maturing short term debt and upcoming
operational expenses.
35
Working capital management deals with maintaining the levels of working capital to
optimum, because if a concern has inadequate opportunities and if the working capital is
more than required then the concern will lose money in the form of interest on the
blocked funds. Therefore working capital management plays a very important role in the
profitability of a company. And also due to heavy competitions among different
organization?s it is now compulsory to look after working capital.
3.3Need of the study
Working Capital refers to that part of the firm?s capital, which is required for financing
short-term or current assets such as cash marketable securities, debtors and inventories.
Funds thus, invested in current assets keep revolving fast and are constantly converted
into cash and this cash flow out again in exchange for other current assets.
Corporate executives devote a considerable amount of attention to the management of
working capital. Working capital is the life blood of any business, without which the
fixed assets are inoperative.
? To study the company manages its current assets to maintain better financial
position.
? To know the reasons of deviations in the working capital position of the company.
? To study the Working capital management with help of liquidity management,
inventory management, receivables management of the company.
3.4 Problems of the study
During the study of this project some problems I found which are mention below:-
? This research is based on the secondary data and during the study of working
capital there are so many data required from various departments which involve detailed
analysis and in-depth study.
36
? Approx. data are been taken for the calculation purpose.
.
3.4.1 The Importance of Good Working Capital Management
Money invested in one area may “cost” opportunities for investment in other areas. If a
department is operating with more working capital than is necessary, this over investment
represents an unnecessary cost to the company. From a department?s point of view,
excess working capital means operating inefficiencies. The following are the major
advantages of an adequate working capital:
? Solvency of The Business: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
? Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
? Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans from banks and other on easy and favorable terms.
? Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
? Regular Supply of Raw Material: Sufficient working capital ensures regular
supply of raw material and continuous production.
? Regular Payment Of Salaries, Wages And Other Day TO Day Commitments:
It leads to the satisfaction of the employees and raises the morale of its employees,
increases their efficiency, reduces wastage and costs and enhances production and profits.
? Exploitation Of Favorable Market Conditions: If a firm is having adequate
working capital then it can exploit the favorable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for higher
prices.
? Ability To Face Crises: A concern can face the situation during the depression.
37
? Quick And Regular Return On Investments: Sufficient working capital enables
a concern to pay quick and regular of dividends to its investors and gains confidence of
the investors and can raise more funds in future.
? High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
3.5 Objectives of the study
1) To study the need & importance of working capital.
2) To study the relevancy of working capital management in financial management
of an organization.
3) To see how the day to day operation of a company takes place.
4) To see whether the company is prepared with enough working capital to face any
kind of contingencies.
5) To study the methods adopted by the organization to maintain adequate working
capital level.
6) To study what measures should be taken for maintaining adequate working
capital.
38
Chapter 4
RESEARCH
Methodology
39
Research methodology is a way to systematically solve the research problem. Itmay be
understood as a science of studying now research is donesystematically. In that various
steps, those are generally adopted by a researcherin studying his problem along with the
logic behind them.It is important for research to know not only the research method but
also knowmethodology. ”The procedures by which researcher go about their work
ofdescribing, explaining and predicting phenomenon are called methodology.”Methods
comprise the procedures used for generating, collecting and evaluatingdata. All this
means that it is necessary for the researcher to design hismethodology for his problem as
the same may differ from problem to problem.
Data collection is important step in any project and success of any project willbe largely
depend upon now much accurate you will be able to collect and howmuch time, money
and effort will be required to collect that necessary data, thisis also important step.Data
collection plays an important role in research work. Without proper dataavailable for
analysis you cannot do the research work accurately.
4.1 Types of data collection
There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1) Primary data
The primary data is that data which is collected fresh or first hand, and for firsttime
which is original in nature. Primary data can collect through personalinterview,
questionnaire etc. to support the secondary data.
2) Secondary data collection method
The secondary data are those which have already collected and stored.Secondary data
easily get those secondary data from records, journals, annualreports of the company etc.
40
It will save the time, money and efforts to collectthe data. Secondary data also made
available through trade magazines, balancesheets, books etc.
4.2 Method of Data collection:
This Project is based on
1. Annual report of L & T LIMITED 2011-12
2. Annual report of L & T LIMITED 2012-13
3. Balance sheet and Profit & Loss of L & T
4.3 Data – analysis techniques
There are several tools of analyzing of working capital of a concern. The important of
them adopted as followed.
STATIC TOOLS
a) Working Capital ratio
b) Working Capital Trend Analysis
41
Chapter 5
Data Analysis
&
Interpretation
42
1. Working Capital
Particulars 2012 2013
Current assets:
? Current investment
6787.19 5580.69
? Inventories
1776.62 2064.18
? Trade receivables
18716.94 22613.01
? Cash & bank balance
1778.12 1455.66
? Short term loans & advances 5005.62 5498.84
? Other current assets
11922.36 11790.66
Less
Current liabilities:
? Short term borrowings 2936.72 734.53
? Current maturities of long term borrowings 1628.99 828.65
? Trade payments 15607.76 16730.65
? Other current liabilities 14009.40 14352.65
? Short term provisions 2112.04 2083.81
Change in Working Capital 9691.94 14272.75
43
1. Proportion of working capital in total assets:
Table 5.2: Proportion of Working Capital in Total Assets (in %)
YEAR 2012 2013
TOTAL ASSETS 67632.40 72174.21
WORKING CAPITAL 9691.94 14272.75
Proportion of working capital 14.33% 19.78%
Chart 5.2: Proportion of Working Capital in Total Assets
Interpretation:
From the table 5.2 we can see that L & T had contribution of working capital around
21.08% in 2012 while it was 19.78% in 2013. It decreased in 2013 because increase in
44
current liabilities was tremendous which brought down the proportion of working capital
in total assets.
1) CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and
its most widely used to make the analysis of short-term financial position or liquidity of a
firm. It is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
? Current assets include cash, marketable securities, bill receivables, sundry
debtors, inventories and work-in-progresses. Current liabilities include outstanding
expenses, bill payable, dividend payable etc.
? A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the hand a low current ratio represents
that the liquidity position of the firm is not good and the firm shallnot be able to pay its
current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current
assets double the current liabilities is considered to be satisfactory.
? The current ratio is an indication of a firm's market liquidity and ability to meet
creditor's demands. Acceptable current ratios vary from industry to industry. If a
company's current ratio is in this range, then it is generally considered to have good
short-term financial strength. If current liabilities exceed current assets (the current ratio
is below 1), then the company may have problems meeting its short-term obligations. If
the current ratio is too high, then the company may not be efficiently using its current
45
assets or its short-term financing facilities. This may also indicate problems in working
capital management.
Table 5.3: Current Ratio (in times)
YEAR 2012 2013
CURRENT ASSETS 45986.85 49003.04
CURRENT LIABILITIES 36294.91 34730.29
CURRENT RATIO 1.27 times 1.41 times
Chart 5.3: Current Ratio
Interpretation:
From the table 5.3 we can see that the current ratio in 2012 was 1.27; ideally which
should be 2, but still anything greater than 1 is good for the company as they can meet
1.2
1.25
1.3
1.35
1.4
1.45
,2012 ,2013
CURRENT RATIO
CURRENT RATIO
46
their current liabilities with their current assets easily. But in 2013 it increased a bit and
the current ratio was 1.41 this happened because the rise in current assets was greater
than the rise in current liabilities.
2) QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash with a short period without loss
of value. It measures the firms? capacity to pay off current obligations immediately.The
quick ratio measures a company's ability to meet its short-term obligations with its most
liquid assets. The higher the quick ratio, the better the position of the company.The quick
ratio is more conservative than the current ratio, a more well-known liquidity measure,
because it excludes inventory from current assets. Inventory is excluded because some
companies have difficulty turning their inventory into cash. In the event that short-term
obligations need to be paid off immediately, there are situations in which the current ratio
would overestimate a company's short-term financial strength.
QUICK RATIO = QUICK ASSETS/CURRENT LIABILITES
OR
QUICK RATIO = (CURRENT ASSETS-INVENTORIES)/CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms?
liquidity position is not good.
47
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if
quick assets are equal to the current liabilities then the concern may be able to meet its
short-term obligations. However, a firm having high quick ratio may not have a
satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm
having a low liquidity position if it has fast moving inventories.
Table 5.4: Quick Ratio (in times)
YEAR 2012 2013
Quick Assets 44210.23 46938.86
Current Liabilities 36294.91 34730.29
Quick Ratio 1.22 times 1.35 times
Chart 5.4: Quick Ratio
1.15
1.2
1.25
1.3
1.35
1.4
,2012 ,2013
Quick Ratio
Quick Ratio
48
Interpretation:
Idle quick ratio is 1:1. Here quick ratio in 2012 is 1.22 times which is more than 1. This
shows that company is in good position. This ratio increases in 2013 and reaches to 1.35
times.
3) Working capital turnover ratio
It signifies that for an amount of sales, a relative amount of working capital isneeded. If
any increase in sales contemplated working capital should beadequate and thus this ratio
helps management to maintain the adequate level ofworking capital. The ratio measures
the efficiency with which the workingcapital is being used by a firm. It may thus compute
net working capital turnover by dividing sales by working capital.
This provides some useful information as to how effectively a company is using its
working capital to generate sales.
A company uses working capital (current assets - current liabilities) to fund operations
and purchase inventory. These operations and inventory are then converted into sales
revenue for the company. The working capital turnover ratio is used to analyze the
relationship between the money used to fund operations and the sales generated from
these operations. In a general sense, the higher the working capital turnover, the
better because it means that the company is generating a lot of sales compared to the
money it uses to fund the sales.
Working capital turnover = Sales / Net working capital
49
Table 5.5: working Capital Turnover ratio (in times)
Year 2012 2013
Sales 53170.52 60873.26
Net working capital 9691.94 14272.75
Working-capital turnover ratio 5.49 times 4.26 times
50
Chart 5.5: Working Capital Turnover
Interpretation:
From Table we can see that for L & T working capital turnover has been very
satisfactory. In 2012 it was 5.49 while it decreased in 2013 to 4.26 which is not very good
and it shows that company is lacking in converting its working capital into sales.
4) Current assets turnover ratio:
Current assets turnover ratio is calculate to know the firms efficiency ofutilizing the
current assets .current assets includes the assets like inventories,sundry debtors, bills
receivable, cash in hand or bank, marketable securities,prepaid expenses and short term
loans and advances. This ratio includes theefficiency with which current assets turn into
sales. A higher ratio implies amore efficient use of funds thus high turnover ratio indicate
to reduced the lockup of funds in current assets. An analysis of this ratio over a period of
0
1
2
3
4
5
6
,2012 ,2013
Working-capital turnover ratio
Working-capital turnover
ratio
51
timereflects working capital management of a firm. Ratio that indicates how efficiently a
firm is using its current assets to generate revenue.
Current Assets TOR = Sales / Current Assets
Table 5.6 Current Assets Turnover Ratio (in times)
Year 2012 2013
Sales 53170.52 60873.26
Current Assets 45986.85 49003.04
Current Assets TOR 1.16 times 1.24 times
Chart 5.6 Current Assets Turnover Ratio
1.12
1.14
1.16
1.18
1.2
1.22
1.24
1.26
,2012 ,2013
Current Assets TOR
Current Assets TOR
52
Interpretation:
The Current Assets TOR was consistent for 2012 and 2013 i.e. 1.16 and 1.24
respectively. This was very good as company was maintaining its efficiency in
converting its current assets into sales. And anything above 1 is good for the company.
5) Current Assets conversion period:
This ratio gives us the number of days a company takes to convert its current assets into
sales. Lesser the days better the efficiency of the company.
It is obtained by the formula:
CURRENT ASSETS CONVERSION PERIOD = 365/ CURRENT ASSETST
Table 5.7: Current Assets conversion period
YEAR 2012 2013
CURRENT ASSETST OR 1.16 1.24
CURRENT ASSETS CONVERSION
PERIOD (Days)
314 days 294 days
53
Chart 5.7: Current Assets conversion period
Interpretation:
The Current Assets conversion period was not consistent because 2012 and 2013 depicted
the conversion period of 314 and 294 days respectively. It is good that current assets
conversion period decreases. This shows that company is watching stick on inventor y.
6) Inventory turnover ratio:
Every firm has to maintain a certain amount of inventory of finished goods so as to meet
the requirements of the business. But the level of inventory should neither be too high nor
280
285
290
295
300
305
310
315
320
,2012 ,2013
CURRENT ASSETS CONVERSION
PERIOD (Days)
CURRENT ASSETS
CONVERSION PERIOD
(Days)
54
too low. Because it is harmful to hold more inventory as some amount of capital is
blocked in it and some cost is involved in it. It will therefore be advisable to dispose the
inventory as soon as possible.Inventory turnover ratio indicates the efficiency of the firm
in producing andselling its products. It is calculated by dividing the cost of goods sold by
average inventory:
Inventory Turnover Ratio = Cost of goods sold / Average inventory
OR
= Sales / Inventory
As such, the general rule high inventory turnover is desirable but high inventory turnover
ratio may not necessary indicates the profitable situation. An organization, in order to
achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not
result into high amount of profit.
Table 5.8: inventory Turnover Ratio (in times)
YEAR 2012 2013
SALES 53170.52 60873.26
INVENTORY 1776.62 2064.18
INVENTORY
TURNOVER RATIO
29.93 times 29.49 times
55
Chart 5.8: inventory Turnover Ratio
Interpretation:
L & T had inventory turnover ratio of 29.93, and 29.49 in 2012, and 2013 respectively.
The chart shows that L & T has been very consistent in turning over its inventory
effectively. The ratio is desirably high which shows that the money is not blocked in
holding inventory.
7) Inventory Conversion Period:
This is a measure to determine the number of days a company takes to convert its
inventory into sales. Lesser the conversion period the better is for the company. This ratio
is obtained from the following formula.
Inventory conversion period = 365 / Inventory
29.2
29.3
29.4
29.5
29.6
29.7
29.8
29.9
30
,2012 ,2013
INVENTORY TURNOVER RATIO
INVENTORY TURNOVER
RATIO
56
This shows that inventory conversion period is inversely proportional to inventory
turnover ratio.
Table 5.9: inventory conversion period (in days)
YEAR 2012 2013
INVENTORY TURNOVER RATIO 29.93 29.49
INVENTORY CONVERSION
PERIOD (DAYS)
12
days
12 days
Chart 5.9: Inventory Conversion Period
Interpretation:
From the tablewe can see that inventory conversion period is very low and very
consistent as well which is very difficult to maintain. This shows that company is very
strict in turning their inventory.
0
2
4
6
8
10
12
14
,2012 ,2013
Inventory Conversion Period (Days)
INVENTORY CONVERSION
PERIOD (DAYS)
57
8) Accounts payable turnover:
? A short-term liquidity measure used to quantify the rate at which a company pays
off its suppliers. The measure shows investors how many times per period the company
pays its average payable amount.
? The Account Payable Turnover Ratio (or APT ratio) is used to measure the length
of time that is needed for a company to repay (liquidity of the company) its suppliers.
The suppliers of a company are simply companies that produce different parts that the
company could assemble together. For example a glass manufacturer is a window
supplier for a car manufacturer, as the car manufacturer gives orders of windows of
specific sizes and shapes to the glass manufacturer.
? The APT ratio main purpose is to measure short term liquidity, as suppliers allow
short a payment period; however this period is dependent on many factors, such as the
industry norm, relative size of the supplier to that of the company, and the financial
condition of the supplier.The formula for the Account Payable Turnover ratio is
Accounts Payable Turnover Ratio = Cost of Goods sold/Accounts Payable
? To fully understand this formula, first, we need to define the terms in the
numerator and the denominator of the formula.
Cost of goods sold:
? Cost of goods sold is simply the money a company spends to manufacture the
given product. The cost of goods take many things into consideration, such as the cost of
raw materials and different parts from suppliers, the total cost of labor per good (divide
total wages with number of goods sold on the market), electric bill per sold good, and
many other types of costs. In the above formula this refers to the total costs of all of the
goods produced in a set period of time.
58
Accounts payable:
? Accounts payable are the short term credits that the company has to pay within a
set period of time, usually within less than one year, but more often than not this period is
a few months.
Table 5.10: Accounts Payable Turnover Ratio (in times)
YEAR 2012 2013
COGS 41022.39 47952.40
ACCOUNTS
PAYABLES
2936.72 734.53
ACCOUNTS
PAYABLE
TURNOVER
17.11 times 65.28 times
59
Chart 5.10: Accounts Payable Turnover Ratio
Interpretation:
Accounts payable turnover in 2012 is 13.97 times which increased to 65.28 times in
2013. It shows that company is utilizing its credit benefit. The reason for increase in ratio
is increase in Cost of Goods Sold and decrease in accounts payables.
9) Accounts Payable Period:
As the name suggests this ratio tells us the number of days a company takes to pay to
their suppliers in return of the purchases made. Desirably the company should make
payment after enjoying the credit limit granted by the suppliers. But the payment should
not be delayed above the limit which could turn the relationship with the suppliers sour
and result in losses by losing discount in future from the suppliers.
60
Table 5.11: Accounts Payable Period (in days)
YEAR 2012 2013
ACCOUNTS
PAYABLE
TURNOVER RATIO
17.11 65.28
ACCOUNTS
PAYABLE
CONVERSION
PERIOD (DAYS)
21 days 6 days
Chart 5.11: Accounts Payable Period
Interpretation:
L & T is following a very consistent approach in paying their suppliers. The figures show
that the conversion period for two years was 26 days and 6 days for 2012 and 2013. This
is a good sign for the company and shows that company keeps a close watch on its
0
5
10
15
20
25
30
,2012 ,2013
Accounts Payable Conversion Period (Days)
ACCOUNTS PAYABLE
CONVERSION PERIOD
(DAYS)
61
accounts payable period. But the company should make full use of their credit limit given
by the suppliers so that they can retain their money for a longer time and use it for some
other purpose.
10) Accounts receivables turnover:
? An accounting measure used to quantify a firm's effectiveness in extending credit
as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets.
? A concern may sell its goods on cash as well as on credit to increase its sales and
a liberal credit policy may result in tying up substantial funds of a firm in the form of
trade debtors. Trade debtors are expected to be converted into cash within a short period
and are included in current assets. So liquidity position of a concern also depends upon
the quality of trade debtors.
? Increasing volume of receivables without a matching increase in sales is reflected
by a low receivable turnover ratio. It is indication of slowing down of the collection
system or an extend line of credit being allowed by the customer organization. The latter
may be due to the fact that the firm is losing out to competition. A credit manager engage
in the task of granting credit or monitoring receivable should take the hint from a
fallingreceivable turnover ratio use his market intelligence to find out the reasonbehind
such failing trend.Debtor turnover indicates the number of times debtors turnover each
year.Generally the higher the value of debtor?s turnover, the more is themanagement of
credit.
? Accounts Receivables TOR can be calculated from the formula:
Accounts Receivables TOR = Sales / Average Account Receivables
? In the denominator instead of average accounts receivable we can also take only
accounts receivables. Average is taken for more accuracy.
? By maintaining accounts receivable, firms are indirectly extending interest-free
loans to their clients. A high ratio implies either that a company operates on a cash basis
62
or that its extension of credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure the
timely collection of imparted credit that is not earning interest for the firm.
Table 5.12: Account Receivable Turnover (in times)
YEAR 2012 2013
SALES 53170.52 60873.26
ACCOUNTS
RECEIVABLES
18716.94 22613.01
ACCOUNTS
RECEIVABLES
TURNOVER
2.84 times 2.69 times
Chart 5.12 Accounts Receivable Turnover
Interpretation:
2.6
2.65
2.7
2.75
2.8
2.85
2.9
,2012 ,2013
Accounts Receivables Turnover
ACCOUNTS RECEIVABLES
TURNOVER
63
Table indicates that company is very consistent in recovering money from the customers.
They are very efficient in converting their credit sales into cash. In 2012 it was 2.84 times
and in 2013 it was 2.69 times, which are almost the same. That means the company
follows very strict policy for recovering money from their debtors and they are efficient
as well.
11) Accounts Receivables Conversion Period:
? This ratio gives us the number of days the company takes to collect money from
its debtors. Lesser the days, the more better for the company. The company should try to
make efficient collection policies from their debtors in order to avoid bad debts. It is
calculated from the following formula:
Accounts Receivables Conversion Period = 365 / Accounts Receivables
Table 5.13:Accounts Receivables Conversion Period (in days)
YEAR 2012 2013
ACCOUNTS RECEIVABLE
TURNOVER RATIO
2.84 2.69
ACCOUNTS RECEIVABLE
CONVERSION PERIOD
(DAYS)
129 days 136 days
64
Chart 5.13: Accounts Receivable Conversion Period
Interpretation:
As shown in table account receivable conversion period in 2012 is 129 which is less than
136 days in 2013. This is not good situation. Company has to try to minimize the days so
that it increases profitability of company.
12) Operating Cycle:
? The investment in working capital is influenced by four key events in the
production and sales cycle of the firm:
? Purchase of raw materials
? Payment of raw materials
? Sale of finished goods
124
126
128
130
132
134
136
138
,2012 ,2013
Accounts Receivable Conversion Period (Days)
ACCOUNTS RECEIVABLE
CONVERSION PERIOD
(DAYS)
65
? Collection of cash for sales
? The need of working capital arrived because of time gap between production
ofgoods and their actual realization after sale. This time gap is called “OperatingCycle”
or “Working Capital Cycle”. The operating cycle of a company consistof time period
between procurement of inventory and the collection of cashfrom receivables. The
operating cycle is the length of time between thecompany?s outlay on raw materials,
wages and other expanses and inflow ofcash from sales of goods.Operating cycle is an
important concept in management of cash andmanagement of cash working capital. The
operating cycle reveals the time thatelapses between outlays of cash and inflow of cash.
Quicker the operating cycleless amount of investment in working capital is needed and it
improvesprofitability. The duration of the operating cycle depends on nature of
industriesand efficiency in working capital management.
? The time between the purchase of an asset and its sale, or the sale of a product
made from the asset. Most companies desire short operating cycles because it creates
cash flow to cover the company's liabilities. A long operating cycle often necessitates
borrowing and thereby reduces profitability.
? A long operating cycle tends to harm profitability by increasing borrowing
requirements and interest expense. It can be calculated from the following formulae:
Operating Cycle = Inventory Period + Accounts Receivable period
Table 5.14: Operating Cycle( in days)
YEAR 2012 2013
INVENTORY PERIOD 12.19 12.37
ACCOUNTS RECEIVABLE PERIOD 128.52 135.69
OPERATINGCYCLE (DAYS) 141 days 148 days
66
Chart 5.14: Operating Cycle
Interpretation:
Looking at the table we can see that L & T has a very consistent operating cycle around
145 days. In 2012 it was 141 days and in 2013 it was 148 days. Looking at these figures
we can see that operating cycle is not long and very appropriate for a big company like L
& T. But the most important part is they are consistent in maintaining this operating
cycle. And the major credit goes to low inventory conversion period. The company is
turning its inventory very fast due to which it is achieving this consistent operating cycle.
13) CASH CYCLE:
? A metric that expresses the length of time, in days, that it takes for a company to
convert resource inputs into cash flows. The cash conversion cycle attempts to measure
the amount of time each net input dollar is tied up in the production and sales process
before it is converted into cash through sales to customers. This metric looks at the
amount of time needed to sell inventory, the amount of time needed to collect receivables
and the length of time the company is afforded to pay its bills without incurring penalties.
136
138
140
142
144
146
148
150
,2012 ,2013
Operating Cycle
operating Cycle
67
? Usually a company acquires inventory on credit, which results in accounts
payable. A company can also sell products on credit, which results in accounts
receivable. Cash, therefore, is not involved until the company pays the accounts payable
and collects accounts receivable. So the cash conversion cycle measures the time between
outlay of cash and cash recovery.
? This cycle is extremely important for retailers and similar businesses. This
measure illustrates how quickly a company can convert its products into cash through
sales. The shorter the cycle, the less time capital is tied up in the business process, and
thus the better for the company's bottom line.
? In management accounting, the Cash Conversion Cycle (CCC) measures how
long a firm will be deprived of cash if it increases its investment in resources in order to
expand customer sales. It is thus a measure of the liquidity risk entailed by growth.
However, shortening the CCC creates its own risks: while a firm could even achieve a
negative CCC by collecting from customers before paying suppliers, a policy of strict
collections and lax payments is not always sustainable.
It is obtained by the formula:
Cash Cycle = Operating cycle – Accounts Payable Period
Table 5.15: Cash Cycle (in days)
YEAR 2012 2013
OPERATING CYCLE 140.7 148.06
ACCOUNTS PAYABLECONVERSION PERIOD 21 6
CASH-CYCLE
119.7 142.06
68
Chart 5.15: Cash Cycle
Interpretation:
The cash cycle has been like a see-saw. In 2012 it was 114.7 days, and in 2013 it
increased to 142.06 days. It needs to monitor their cash cycle very keenly. The company
should try to bring down this cycle as much as possible to avoid capital being tied up in
business process.
14) Net Profit Margin:
? The profit margin tells you how much profit a company makes for every RS.1 it
generates in revenue or sales. Profit margins vary by industry, but all else being equal, the
higher a company's profit margin compared to its competitors, the better.
? A ratio of profitability calculated as net income divided by revenues, or net profits
divided by sales. It measures how much out of every rupee of sales a company actually
0
20
40
60
80
100
120
140
160
,2012 ,2013
Cash-cycle
CASH-CYCLE
69
keeps in earnings.Profit margin is very useful when comparing companies in similar
industries. A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. Profit margin is displayed as a
percentage; a 20% profit margin, for example, means the company has a net income of
Rs.0.20 for each rupee of sales.
? Looking at the earnings of a company often doesn't tell the entire story. Increased
earnings are good, but an increase does not mean that the profit margin of a company is
improving. For instance, if a company has costs that have increased at a greater rate than
sales, it leads to a lower profit margin. This is an indication that costs need to be under
better control.
? It can be calculated from the following formulae:
NET PROFIT MARGIN = (PAT / NET SALES) %
Table 5.16: Net Profit Margin (in %)
YEAR 2012 2013
PAT 4456.50 4910.65
NET SALES 53170.52 60873.26
NET PROFIT MARGIN % 8.40% 8.10%
70
Chart 5.16: Net Profit Margin
Interpretation:
Net profit margin decreases from 2012 to 2013 which is not good for company. Company
has to increase its sales to increase net profit margin.
7.95
8
8.05
8.1
8.15
8.2
8.25
8.3
8.35
8.4
8.45
,2012 ,2013
Net Profit Margin
net profit margin
71
Trend analysis
Particular Yr’12 Yr’13
Sales 53170.52 60873.26
EBIT 1853.83 1800.50
PAT 4456.50 4910.65
Current assets 45986.85 49003.04
Current liabilities 36294.91 34730.29
Gross fixed assets 63620 71240
Net assets 67632.40 72174.21
Total assets 67632.40 72174.21
Net worth - -
dividend 79.06 6.45
72
Chapter 6
Results
&
Findings
73
Findings:
? Since the financial matter are sensitive in nature the same could not be acquired
easily
? One main area where Hazira Works outperformed L & T as a whole was its Net
profit margin is far greater than L & T as a whole.
74
Chapter 7
LIMITATION OF
THE STUDY
75
Limitation of study
Following are the limitation of the study
? The topic working capital management is itself a very vast topic yet very
important also. Within the available time, I have tried my best to cover most of the ratios
relating to Working capital of the company. Given an opportunity, I shall be obliged to
further explore the subject.
? Many facts and data are such that they are not to be disclosed because of the
confidential nature of the same.
? Since the financial matter are sensitive in nature the same could not be acquired
easily
? The study is restricted to two year data of L & T.
76
Chapter 8:
Conclusions
&
Suggestions
77
Conclusion:
? The objective of working capital management is to maintain the optimum balance
of each of the working capital components.
? This includes making sure that funds are held as cash in bank deposits for as long
as and in the largest amounts possible, thereby maximizing the interest earned.
? However, such cash may more appropriately be "invested" in other assets or in
reducing other liabilities.
? When considering these techniques and strategies of Working capital,
departments need to recognize that each department has a unique mix of working capital
components. The emphasis that needs to be placed on each component varies according
to department.
? For example, some departments have significant inventory levels; others have
little if any inventory.
? Furthermore, working capital management is not an end in itself. It is an integral
part of the department's overall management.
? The needs of efficient working capital management must be considered in relation
to other aspects of the department's financial and non-financial performance.
78
Suggestions
GENERAL ACTION
? Set planning standards for stock days, debtor days and creditor days.
? Having set planning standards (as above) KEEP TO THEM. Impress on staff that
these targets are just as important as operating budgets and standard costs.
? Instill an understanding amongst the staff that Working Capital Management
produces profits.
ACTION ON STOCKS
? Keep stocks levels as low as possible, consistent with not running out of stock and
not ordering stock in uneconomically small quantities. “Just-in-time” stock management
is fine, as long as it is “Just-in-Time” and never fails to deliver on time.
? Consider keeping stock in suppliers? warehouses, drawing on it as needed and
saving warehousing cost.
? Some of the tools of lean manufacturing which helps in inventory management
and control are:-
1. Kanban (pull production): The Japanese refer to Kanban as a simple parts-
movement system that depends on cardsand boxes/containers to take parts from one work
station to another on a production line. Kanban stands for Kan- card, Ban- signal. The
essence of the Kanban concept is that asupplier or the warehouse should only deliver
components to the production line as andwhen they are needed, so that there is no storage
in the production area.
Advantages of Kanban Process
? A simple and understandable process
? Provides quick and precise information
79
? ·Low costs associated with the transfer of information
? Provides quick response to changes
? ·Limit of over-capacity in processes
It should be checked that all the Kaizen principles followed are beingimplemented
properly.· Employees should be asked to implement Kaizen principle on their ownand
their valuable suggestions should be kept in mind, and as far aspossible, should be
implemented.Another point that must be kept in mind is that Kaizen need not be a big
change;it can be as small as keeping a chart of most frequently used telephone
numbersnear your desk, to big changes like replacing a number of old machines with
amulti-tasking/many- in-one machine.
ACTION ON DEBTORS/ CUSTOMERS
? Assess all significant new customers for their ability to pay. Take references,
examine accounts, and ask around. Try not to take on new customers who would be poor
payers.
? Re-assess all significant customers periodically. Stop supplying existing
customers who are poor payers- you may lose sale, but you are after QUALITY of
business rather than QUANTITY of business.
? Consider factoring sales invoices- the extra cost may be worth it in terms of quick
payment of sales revenue, less debtor administration and more time to carry out your
business (rather than spend time chasing debts).
? Consider offering discounts for prompt settlement of invoices, but only if the
discounts are lower than the costs of borrowing the money owed from other sources.
ACTION ON CREDITORS:
? Do not pay invoices to early- take advantage of credit offered by suppliers- its
free!
80
? Only pay early if supplier is offering a discount. Even then, consider this to be an
investment will u get a better return by using working capital to settle the invoice and
take the discount then by investing the working capital in some other way.
BIBLIOGRAPHY
1. www.larsen&toubro.com
2. www.google.com
3. Financial management – I.M.Pandey
4. Financial management – Prasana Chandra
5. Annual report of company (Financial Year 2012-13)
6. Information pertaining to the company?s profileis taken from the company?s
annual report for the financial year 2012-13.
doc_465595722.pdf
L&T
1
Declaration
I the undersigned, Mr. Shiv.P. Naik, hereby declare that this project work entitled
“Working Capital Management” is my own work and is not submitted to any other
university or institution for any other purpose. This is purely meant for academic purpose
only.
Mr. Shiv P Naik
P.G.D.M (Finance)
2
Acknowledgement
I would like to thank and acknowledge from innermost of my heart to all the persons who
had helped me in guiding and preparing my project work. It is a regard to all those who
rendered their valuable support to make this project successful.
Any effort cannot lead to success unless given a proper guidance and direction for the
same. This is why I find myself fortunate to have undergone my industrial training in
Finance & Accounts department at Larsen & Toubro Limited (Hazira). It was a
lifetime opportunity for me to get a chance to experience industry working in such a
reputed company.
Firstly I would like to thank executive vice president for giving me a chance of
working in the company and showing his belief and confidence in me and assigning me
such an esteemed project work. I am indebted to my project guide Mr. Anjan Desai for
his immense support and guidance at each and every step of the project. I am forever
gratified for his valuable teaching and sharing his industry experience with me and giving
me some key ideas to shape my career.
I am also thankful to H.R DEPARTMENT for giving importance guidance and
orientation. I would also like to thank other staff members, friends and all those who have
helped me in completing this project successfully and for treating me as their colleague
and helping me understand the working of the company.
And last but not the least; I would like to thank all the respondents who spared their
valuable time for my project work and my parents because without their blessings I
would not have been successful in completing my project work.
3
Table of Contents
Chapter No. Content Page No.
? Declaration i.
? Acknowledgement ii.
? List of Tables iii.
? List of Figure/Graphs v.
1 Introduction of company
Profile
6
2 Working Capital Account 24
3 Introduction of the study 31
4 Research Methodology 37
5 Data Analysis and
Interpretation
40
6 Results and Findings 70
7 Limitation of the study 74
8 Conclusions and
suggestions
76
9 Bibliography 80
4
List of Tables
Table No.
Title of the Table Page No.
5.1 Working capital Account 41
5.2 Proportion of working capital in total assets 42
5.3 Current ratio 43
5.4 Quick ratio 45
5.5 Working capital turnover ratio 47
5.6 Current asset turnover ratio 49
5.7 Current asset conversion period 51
5.8 Inventory turnover ratio 52
5.9 Inventory conversion period 54
5.10 Account payable turnover ratio 56
5.11 Account payable period 58
5.12 Account receivable turnover ratio 60
5.13 Account receivable conversion period 62
5.14 Operating cycle 63
5.15 Cash cycle 65
5.16 Net profit margin 67
5
List of Graphs/Figure
Figure/Graph No. Title of the Figure/Graph Page
No.
5.2 Proportion of working capital in total assets 42
5.3 Current ratio 44
5.4 Quick ratio 46
5.5 Working capital turnover ratio 49
5.6 Current asset turnover ratio 50
5.7 Current asset conversion period 52
5.8 Inventory turnover ratio 54
5.9 Inventory conversion period 55
5.10 Account payable turnover ratio 58
5.11 Account payable period 59
5.12 Account receivable turnover ratio 61
5.13 Account receivable conversion period 63
5.14 Operating cycle 65
5.15 Cash cycle 67
5.16 Net profit margin 69
6
Chapter – 1
Introduction
Of
Company profile
7
1.1 COMPANY PROFILE
Larsen & Toubro Limited (L & T) is a technology-driven engineering and construction
organization, and one of the largest companies in India?s private sector. It has additional
interests in manufacturing, services and Information Technology. L & T was founded by
two Danish engineers, Henning Holck-Larsen and Soren Kristian Toubro, in 1938.
Beginning with the import of machinery from Europe, L & T rapidly took on engineering
and construction assignments of increasing sophistication. It now has a major presence in
key sectors of the economy. A strong, customer-focused approach and the constant quest
for top-class quality have enabled the Company to attain and sustain leadership in its
major lines of business across seven decades. With factories and offices located around
the country, further supplemented by a comprehensive marketing and distribution
network, L & T enjoys an image and equity in virtually every district of India. The
Company has an international presence, with a global spread of offices and joint ventures
with world leaders. L & T?s large technology base and pool of experienced personnel
enable it to offer integrated services in world markets. L & T is India?s largest builder of
world-class, custom-made engineering equipment with logistics capabilities of supplying
it to a tight delivery schedule worldwide. It has globally-benchmarked workshops at
Powai in Mumbai, Hazira and Baroda in Gujarat, and Kansbahal in Orissa. L & T is
consistently expanding the magnitude, scope and range of its operations to offer value-
addition to client and shareholder alike. With its unique strengths – technological
sophistication, quality consciousness, and top-class manpower – L & T strides into the
future, confident of conquering the challenges ahead. L & T's Heavy Engineering
Division activities are organized under self-reliant Strategic Business Units (SBUs)
catering to the needs of core sector industries through supply of equipment to Process
Plant Industries and Defense, Nuclear Power & Aerospace Sectors. The Division
operates at the upper end of the technology spectrum and has been at the forefront of
introducing new processes, products and materials into manufacturing sector, for over six
decades. Heavy Engineering Division has the state of the art manufacturing facilities
which are capable of meeting the challenges of technology, quality conformance &
delivery, while ensuring cost competitiveness.
8
1.2 HISTORY
L & T was founded in Mumbai in 1938 by two Danish engineers, Henning Holck-Larsen
and Soren Kristian Toubro. Both of them were strongly committed to developing India's
engineering capabilities to meet the demands of industry.Beginning with the import of
machinery from Europe, L & T rapidly took on engineering and construction assignments
of increasing sophistication. Today, the company sets global engineering benchmarks in
terms of scale and complexity.In 1938, the two friends decided to forgo the comforts of
working in Europe, and started their own operation in India. All they had was a
dream,and the courage to dare.Their first office in Mumbai (Bombay) was so small that
only one of the partners could use the office at a time!In the early years, they represented
Danish manufacturers of dairy equipment for a modest retainer. But with the start of the
Second World War in 1939, imports were restricted, compelling them to start a small
work-shop to undertake jobs and provide service facilities.Germany's invasion of
Denmark in 1940 stopped supplies of Danish products. This crisis forced the partners to
stand on their own feet and innovate. They started manufacturing dairy equipment
indigenously. These products proved to be a success, and L & T came to be recognized as
a reliable fabricator with high standards.The war-time need to repair and refit ships
offered L & T an opportunity, and led to the formation of a new company, Hilda Ltd., to
handle these operations. L & T also started two repair and fabrication shops - the
Company had begun to expand.Again, the sudden internment of German engineers
(because of the War) who were to put up a soda ash plant for the Tatas, gave L & T a
chance to enter the field of installation - an area where their capability became well
respected.
9
1.3 JOURNEY
In 1944, ECC was incorporated. Around then, L & T decided to build a portfolio of
foreign collaborations. By 1945, the Company represented British manufacturers of
equipment used to manufacture products such as hydrogenated oils, biscuits, soaps and
glass.In 1945, L & T signed an agreement with Caterpillar Tractor Company, USA, for
marketing earthmoving equipment. At the end of the war, large numbers of war-surplus
Caterpillar equipment were available at attractive prices, but the finances required were
beyond the capacity of the partners. This prompted them to raise additional equity capital,
and on 7th February 1946, Larsen & Toubro Private Limited was born.Independence and
the subsequent demand for technology and expertise offered L & T the opportunity to
consolidate and expand. Offices were set up in Kolkata (Calcutta), Chennai (Madras) and
New Delhi. In 1948, fifty-five acres of undeveloped marsh and jungle was acquired in
Powai. Today, Powai stands as a tribute to the vision of the men who transformed this
uninhabitable swamp into a manufacturing landmark.Seven decades of a strong,
customer-focused approach and the continuous quest for world-class quality have enabled
it to attain and sustain leadership in all its major lines of business.L & T has an
international presence, with a global spread of offices. A thrust on international business
has seen overseas earnings grow significantly. It continues to grow its overseas
manufacturing footprint, with facilities in China and the Gulf region.The company's
businesses are supported by a wide marketing and distribution network, and have
established a reputation for strong customer support.L & T believes that progress must be
achieved in harmony with the environment. A commitment to community welfare and
environmental protection are an integral part of the corporate vision.
10
1.4 MISSION
We shall strive to become the world?s best organization in engineering manufacture and
integration of custom-built, technology-intensive equipment & systems, creating
significant value for customers, stakeholders and society.
1.5 VISION
L & T shall be a professionally managed Indian multinational, committed to total
customer satisfaction and enhancing shareholder value. L & T- it shall be an innovative,
entrepreneurial and empowered team, constantly creating value and attaining global
benchmarks.L & T shall foster a culture of caring, trust and continuous learning while
meeting expectations of employees, stakeholders and society.
In April 1999, the present C.E.O. & M.D., Mr. A. M. Naik took over the reins of the
Company. In June 1999, a major re-structuring exercise was undertaken through M/s
Boston Consultancy Group (BCG – a leading global strategy consulting firm) to drive
changes that unlock value within L & T and transform it into a premium Conglomerate/
Indian multinational.
In the restructured plan there are four core businesses,
(i) Civil Construction
(ii) E & C Projects
(iii) Heavy Engineering
(iv) Electrical & Electronics
(v) Various small diversified businesses form the fifth Business Group.
(vi) The sixth group is Cement and lastly IT & Communication.
Each of the six businesses forms an individual Operating Division (OD) and they are part
of Larsen & Toubro Limited. IT & Communication business is handled by L & T
InfoTech – a separate 100% subsidiary of L & T. Each of the Six Operating Divisions
(ODs) within L & T is headed by a full time Executive Board Member. They all, along
with the CEO/MD and Director-Finance & Personnel, form the Corporate Management
11
Committee (CMC), which meets at least once a week to guide the destiny of the
company.Down the line, each Operating Division is governed through its own Business
Management Committee (BMC), which meets regularly to give direction to the Operating
Divisions. Under each Operating Divisions (ODs), its businesses are further subdivided
into Clusters and Strategic Business units (SBU). Each SBU is an independent profit
center within the particular Operating Division (OD).
1.6 GLOBAL PRESENCE
L & T has a global presence. A thrust on international business over the years has seen
overseas revenues growing steadily.The company has manufacturing facilities in India,
China, Oman and Saudi Arabia.It has a global supply network with offices in 10 locations
worldwide, including Houston, London, Milan, Shanghai, Seoul.Customers include
global majors in over 30 countries.
1.7 TECHNOLOGY
In every sphere of L & T's operations, technology is the key enabler, reinforcing its
leadership position, and sustaining its competitive strengths. While for some, technology
is a means to an end, for L & T, technology represents endless possibilities
1.8 ENGINEERING & CONSTRUCTION (E & C)
In engineering and construction, L &T's technology capabilities include a strategic mix of
in-house strengths and the expertise of its joint venture partners. Engineering Centers at
Mumbai, Vadodara and Delhi carry out process design and simulation, analysis of
computational fluid dynamics, mechanical design, failure analysis and trouble shooting.
L & T has set up an engineering and project management centre in Abu Dhabi, to
undertake oil and gas related projects as well as engineering and consultancy services. An
12
engineering centre in Sharjah is an extended arm in the Gulf. This is supplemented
through collaborations with key partners: L & T-Valdel for engineering services in the
upstream hydrocarbon sector, L & T-Chiyoda for the mid and downstream sectors, and L
& T Sargent & Lundy for the power sector.The engineering services provided by L & T's
Engineering Design Research Centers at Chennai and Kolkata include feasibility studies,
project reports, system engineering, architectural, structural and civil design for
infrastructure development projects. L & T-Ramboll Consulting Engineers provides civil
engineering and consultancy services for a wide range of projects in the transportation
sector - ports, airports, highways and bridges.
1.8 MANUFACTURING
L & T's design & engineering capabilities in manufacturing enable it to set new
benchmarks in terms of scale, sophistication and speed. The Company has dedicated
engineering centers at the manufacturing locations. Two „Technology Development
Centers? have been set up to develop new products and manufacturing technologies. L &
T also collaborates with the organizations like ISRO to bolster its capabilities in the
strategic sectors of aerospace, defense and nuclear power. L & T's Electrical &
Electronics Division, is a pioneer in the design of switchgear and switchboards that are
engineered for tropical conditions. It has built further on this experience, and has
leveraged its R&D strengths to develop a host of new products and features. In 2008-09,
the division filed applications for over 100 patents, improving its previous year?s score of
101 patents. Cumulatively, L & T's Electrical & Electronics Division has applied for and
secured 409 patents - a landmark for an Indian company. Patent applications cover
innovations made on a variety of low voltage indigenously developed switchgear
products like the air circuit breakers (ACBs) and molded case circuit breakers (MCCBs),
medical products, petroleum dispensing pumps, tooling solutions and switchboards.
13
1.9 TECHNOLOGY & SERVICES
L & T provides its global clients with the winning edge through the development of
optimal solutions. L & T's e-engineering services leverage the Company's own
engineering heritage and experience. The Embedded Systems unit provides technological
assistance across a broad spectrum - design, maintenance, re-engineering, testing,
prototyping and industrial design.
1.10 CORPORATE SOCIAL RESPONSIBILITY
L & T believes that the true and full measure of growth, success and progress lies beyond
balance sheets or conventional economic indices. It is best reflected in the difference that
business and industry make to the lives of people. Through its social investments, L & T
addresses the needs of communities residing in the vicinity of its facilities, taking
sustainable initiatives in the areas of health, education, environment conservation,
infrastructure and community development. The Company proactively provides
assistance in situations such as natural calamities and assists victims of nature's fury or
social neglect. Many social initiatives are undertaken in partnership with government
agencies and NGOs.
1.10.1 Health
L & T's participates in building a healthy community through continuing initiatives in
several areas of healthcare, with a focus on mother & child care and HIV/AIDS
awareness. All L & T locations, including construction sites, have in-house AIDS
awareness programs. Five additional mother & child care centers were set up in 2006-07.
In partnership with local NGOs, these centres benefit children of commercial sex
workers, street children and tribal communities.
14
Through health care centres and regular family camps L & T organizes health checkups,
provides gynecology and laboratory facilities, carries out free cataract surgeries and intra
ocular lens implants, and helps maintain health data for children.Supply of equipment and
aid for orphanages and physically challenged children, periodic counseling to combat
rampant alcoholism, awareness camps on childcare, reproductive health, sanitation,
dental check-up, provision for safe drinking water, cancer awareness etc. are other
healthcare activities that L & T supports.
1.10.2 Education
L & T's diverse and sustained programes in education provide underprivileged children
with learning opportunities through supply of educational materials, teaching aids,
recreational tools and up scaling school infrastructure. L & T also enriches children's
lives through programs like summer camps, maths coaching, providing facilities like
science laboratories, scholarship to deserving students, etc.
The vocational training institutes of the Larsen and Toubro Public Charitable Trust;
provide local communities with skill-based training in Formwork, Masonry, Agro
Mechanics, Electricals, Fabrication, Welding and Housekeeping.Various diploma courses
are also conducted by L & T Institute of Technology for the children of employees. L &
T has developed training modules in local languages in six centers across India for
imparting skills sets in construction. L & T Training Centers provide courses for
improving the standards of electrical engineering practices and for upgrading knowledge
of maintenance, repair and welding.
1.10.3 Environment
Global warming: at L & T, we have always been conscious of the need to maintain
harmony with the environment. We continuously seek newer environment-friendly
15
approaches in all our operations – energy conservation, exploring alternative sources like
wind and solar energy, waste water reduction, etc.
The Zero Discharge approach of the Powai Campus saves over 350,000 litters water
every day through water treatment and recycling. More than 13,500 trees have been
planted in different L & T campuses in the last year, and an additional 4,000 saplings
were distributed among local communities.
1.10.4 Response to natural calamities
L & T and its employees have provided relief measures during natural calamities like
earthquake and floods. L & T has assisted in disaster relief through employee and
corporate donations, employee volunteering, supply of construction material, medical and
food supplies. After the floods in Surat (Gujarat-India), L & T played a major role in
road-clearing operations, organizing medical camps, and supply of food, water, clothes
and other relief materials.
1.10.5 Employee volunteering
L & T encourages employees to volunteer for CSR activities, resulting in a self-driven
approach while retaining consistency. L & T employees and the ladies clubs formed by
their families at different locations, serve their communities by investing personal
resources and time.
From taking initiatives in building the next generation of productive citizens,
empowering women, paying regular visits to old age homes and orphanages, to
organizing blood donation camps, our employees have always believed in truly making a
difference to the world in which they live.
16
Share pri ces:-
Table 1:
Larsen &Toubro Limited
As of Jul 08, 2010
Exchange
Current
Previous
Close
Today's
High
Today's
Low
52 Week
High
52 Week
Low
Volume
BSE1 1818.80 1786.40 1825.00 1800.00 1843.75 1305.00 197258
NSE2 1819.90 1786.85 1829.00 1799.90 1843.00 1305.40 1039221
CHART 1:
INR
L & T
Di vi dend Hi story:
? For the financial year 2008-09 - Rs 10.50 per share of Rs 2/- each
? For the financial year 2007-08 - Rs 17 per share of Rs 2/- each
? For the financial year 2006-07 - Rs 13 per share of Rs 2/- each
? For the financial year 2005-06 - Rs 22 per share of Rs 2/- each
17
? For the financial year 2004-05 - Rs 17.50 per share of Rs 2/- each
? Special Dividend for the financial year 2004-2005 - Rs.10.00 per share of Rs.2/- each
? For the financial year 2003-2004 - Rs.16.00 per share of Rs.2/- each
? For the financial year 2002-2003 - Rs.7.50 per share of Rs.10/- each
? For the financial year 2001-2002 - Rs.7.00 per share of Rs.10/- each
Bonus hi story:
Table 2:
YEAR BONUS RATIO
2008 1:1
2006 1:1
1986 3:5
1982 3:5
1977 1:2
1973 1:3
1970 1:10
1965 1:7
Heavy Engineering Division (HED):
Heavy Engineering Division (HED) is one the oldest divisions of Larsen & Toubro
Limited. It primarily involves with in-house Design & Manufacture of hi-tech custom
built fabricated equipments for all core sector industries like Oil & Gas, Refineries,
Petrochemicals, Fertilizers and also Nuclear Plants, Aerospace & Defense Sectors.
Heavy Engineering Division (HED) comprises of 5 Strategic Business Units (SBUs) and
6 manufacturing plants located in different parts of the country.
18
SBUs:-
1. FPEX: Fertilizer, Petrochemical & Heat Transfer Equipment Business Unit.
2. CGPP: Coal Gasifier & Thermal Power Plant Equipment Business Unit.
3. DNA: Defense, Nuclear & Aerospace.
4. RCOG: Refinery, Cracker Plant and Oil & Gas Equipment Business Unit.
5. Ship Building.
Powai Works in Mumbai is the oldest manufacturing unit of Larsen & Toubro Limited.
During mid-eighties, as the process plants sizes grew due to economies of scale, a need
was felt to enlarge its capabilities for manufacture of heavier and over dimensioned
equipments, which form the core (e.g. high pressure reactors, etc.) of any large process
plant. Powai Works being primarily landlocked, it was difficult to transport out large and
heavy equipments from there to various customers? sites. L & T, thus, acquired land at
Hazira, Surat with a large waterfront in order to enlarge its capability for manufacturing
heavier/OD equipments, with a proper logistics support for its finished products through
the sea route.
Today, Powai, Hazira and Ranoli Works at Baroda form the core manufacturing facility
of Heavy Engineering Division. They are under the direct control of an Executive Vice
President, below whom there are three clusters (A, B & C) and five Strategic Business
Units (SBUs). The other three plants – Kansbahal Works, LTM and Audco factories
manufacture other specialized products and have their own individual SBUs.
19
Product Range of Manufacturing Units
1 Powai
Works
Heat Exchangers, Pressure Vessels, Multi-wall Vessels, Cryogenic
Vessels, Columns & Towers, etc.
2. Hazira
Works
Large, Heavy and Over Dimensioned eqpts. – e.g. Pressure Vessels,
Reactors, Columns & Towers, Boiler Components, End Shields/Steam
Generators, etc.
3. Ranoli
Works
Thin wall Stainless Steel Sheet metal, Aluminum & Non-ferrous
fabricated equipments, etc.
4. Kansbahal
Works
Roll Crushers, Impactors, Wobblers, Feeders, Jaw Crushers, Hammer
Mill, Ring Granulator, Breakers and Equipments for Material
Handling for steel plants, Pulp & Paper, Minerals & Metals industries.
5. LTM –
Chennai
Tire curing process, Blow molding machines, Helicopter landing
grids, etc.
6. Audco –
Chennai
All types of Valves & Accessories, used in Process Plants.
20
Hazira Works:
This new manufacturing facility, covering an area of 200 acres, was created on the banks
of river Tapi at the outskirts of Surat city, 6 km upstream of Arabian Sea, during
November 1987 with an initial investment of Rs.41 Cr. At Hazira Works (HZW), HED
has three Production Centers, PC-1, PC-2, and Large Equipment Manufacturing Facility
(LEMF). The first two Production Centers are under covered manufacturing shops. A
fourth production centre - Modular Fabrication Facility (MFF) under E&C (Operating
Division) is meant for manufacture of equipments for Offshore Oil & Gas installations.
Later a major expansion was carried out during 1992-93 and another large investment as
part of a Modernization Scheme during 1998-2000. Apart from these two large one-time
investments, each year some balancing/replacement equipment is also added into the
facility. As on date the total investment at Hazira Work is as under.
HZW is largely an independent unit, having a totally decentralized system/ organization
set-up within L & T/HED with complete operational freedom in practically all areas of
operation except in areas of –
(i) Finance/Accounts – herein Corporate Finance Department lays down the finance
policy for the entire group. Hazira Finance & Accounts department works within the
frame work of the laid down policies.
(ii) Human Resource Function – herein certain policies are laid down by Central
Personnel Department, e.g. Salary/Perks/ Rewards & Promotion guidelines for
supervisory and above staff, GET Recruitment, etc.
21
FACILITIES:-
Total Area : 200 + 115 Acres = 315 Acres
Covered Shops : 65,627 sq.m.
Open developed yard : 296,250 sq.m.
Water Front : 1.2 km
Captive jetties : 3
No of trees : Over 22000
No. of employees : 1300
No. of contract labor (varies) : 3000 - 5000
Jetties:-
Main Jetty 100m x 18m (5 m above MSL)
RO - RO Jetty 60m x 40m (5 m above MSL)
Heavy Load-Out 80m x 40m (5 m above MSL)
Product Range (Hazira Works):-
HZW manufactures a very wide variety of fabricated products. These can be basically
classified into two categories:
(i) Equipments for Process Plants - Reactors, Columns, Pressure Vessels, etc. These are
manufactured in Production Centre-1 and LEMF
(ii) Equipments for Nuclear, Aerospace and Defense Sectors - End Shields, Steam
Generators for Nuclear Power Plants, Rocket Motor Casings for Space Launch
Vehicles and other specialized equipments for the Defense Sectors. These are
manufactured in Production Centre-2.
All these equipments are engineered to Order and manufactured under various design
codes as per the individual customer/project consultants? requirements.
22
Sr. No Product Design Code
1 Pressure Vessels (Columns, Towers, Reactors)
ASME Sec VIII Div. 1
ASME Sec VIII Div. II
AD Merkblatt
2 Heat Exchangers TEMA
3 Process Piping
ASME B 31.3
API 1101
4 Nuclear Power Components ASME Sec III
5 Power Boilers
ASME Sec 1 (S)
IBR
These vastly different fabricated products have varying cycle time of manufacture, which
varies from 5 months to 2 years, generally depending upon the job?s complexity.
Customers:-
Customers of HZW basically fall into two categories.
(i) Process Plant Equipment Sector: These generally consist of Refineries,
petrochemicals, Fertilizers and Oil & Gas sectors. Till a few years ago most of our
customers for such equipments were located in India – IOCL, BPCL, HPCL, RIL,
MRPL, KRIBHCO, IFFCO, etc. However, we have made a major thrust in exports during
last 3 years. During this period, we have exported our products to Exxon-Mobil
Refineries in UK, USA, Canada and Europe; Tosco Refineries-USA; Chevron
23
Chemicals-USA; Saudi Polyolefin- Saudi Arabia, IBN-ZAHR Petrochemicals-Saudi
Arabia; Petro bras Refineries-Brazil; TOSCO Refineries – Syria.
Presently have orders for 24 different equipments for OMIFCO-Oman, EO Reactors,
Acronitrile Reactors and HDPE Reactors for China, FCC Revamp for Kuwait Petroleum,
Steam Drums for France, etc.
(ii) Nuclear, Aerospace and Defense Sector. These are highly specialized and
sophisticated equipments. In this segment, presently all our customers are from India only
– NPCL, BARC, ISRO, Indian Navy, etc.
24
Chapter 2
Working Capital
Management
25
2.1 Defining Working Capital
1. According to Guttmann & Dougall-
“Excess of current assets over current liabilities”.
2. According to Park & Gladson-
“The excess of current assets of a business (i.e. cash, accounts receivables, inventories)
over current items owned to employees and others (such as salaries & wages payable,
accounts payable, taxes owned to government)”.
The term working capital refers to the amount of capital, which is readily available to an
organization. That is, working capital is the difference between resources in cash or
readily convertible into cash (Current Assets) and organizational commitments for which
cash will soon be required i.e. Current Liabilities. Current Assets are resources, which are
in cash or can readily be converted into cash in “ the ordinary course of business”.
Current Liabilities are commitments, which will soon require cash settlement in “the
ordinary course of business”.
WORKING CAPITAL = CURRENT ASSETS – CURRENT LIABILITIES
There are two concept of working capital: gross working capital and net working capital.
Gross working capital is total of all current assets. Net working capital is the difference
between current assets and current liabilities. The concept of net working capital is
commonly used, it is an accounts concept with little economic meaning.
There are two concepts of working capital management
26
1. Gross working capital
Gross working capital refers to the firm?s investment I current assets. Current assets are
the assets which can be convert in to cash within year includes cash, short term securities,
debtors, bills receivable and inventory.
2. Net working capital
Net working capital refers to the difference between current assets and current liabilities.
Current liabilities are those claims of outsiders which are expected tomature for payment
within an accounting year and include creditors, bills payable and outstanding expenses.
Net working capital can be positive or negative. Efficient working capital management
requires that firms should operate with some amount of net working capital, the exact
amount varying from firm to firm and depending, among other things; on the nature of
industries.net working capital is necessary because the cash outflows and inflows do not
coincide. The cash outflows resulting from payment of current liabilities are relatively
predictable. The cash inflow are however difficult to predict. The more predictable the
cash inflows are, the less net working capital will be required. The concept of working
capital was, first evolved by Karl Marx. Marx used the term „variable capital? means
outlays for payrolls advanced to workers before the completion of work. He compared
this with „constant capital? which according to him is nothing but „dead labour?. This
„variable capital? is nothing but wage fund which remains blocked in terms of financial
management, in work-in-process along with other operating expenses until it is released
through sale of finished goods. Although Marx did not mentioned that workers also gave
credit to the firm by accepting periodical payment of wages which funded a portioned of
W.I.P, the concept of working capital, as we understand today was embedded in his
„variable capital?.
2.2 Disadvantages of redundant or excessive working capital
27
1. Excessive working capital means ideal funds which earn no profit for the firm and
business cannot earn the required rate of return on its investments.
2. Redundant working capital leads to unnecessary purchasing and accumulation of
inventories.
3. Excessive working capital implies excessive debtors and defective credit policy
which causes higher incidence of bad debts.
4. It may reduce the overall efficiency of the business.
5. If a firm is having excessive working capital then the relations with banks and
other financial institution may not be maintained.
6. Due to lower rate of return n investments, the values of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
2.3 Determinants of working capital
1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed capital
is more rather than working capital. These businesses sell services and not the
commodities and that too on cash basis. As such, no founds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. public utility services like
railways, infrastructure oriented project etc. their requirement of working capital is less.
On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the acquisition of raw
material till the end of final production of finished products itself is quit high. As such
amount may be blocked either in raw material or work in progress or finished goods or
even in debtors. Naturally their need of working capital is high.
3. Size and growth of business
28
In very small company the working capital requirement is quit high due to high overhead,
higher buying and selling cost etc. as such medium size business positively has edge over
the small companies. But if the business start growing after certain limit, the working
capital requirements may adversely affect by the increasing size.
4. Business/ Trade cycle
If the company is the operating in the time of boom, the working capital requirement may
be more as the company may like to buy more raw material, may increase the production
and sales to take the benefit of favorable market, due to increase in the sales, there may
more and more amount of funds blockedin stock and debtors etc. similarly in the case of
depressions also, workingcapital may be high as the sales terms of value and quantity
may be reducing, there may be unnecessary piling up of stack without getting sold, the
receivable may not be recovered in time etc.
5. Terms of purchase and sales
Sometime due to competition or custom, it may be necessary for the company to extend
more and more credit to customers, as result which more and more amount is locked up
in debtors or bills receivables which increase the working capital requirement. On the
other hand, in the case of purchase, if the credit is offered by suppliers of goods and
services, a part of working capital requirement may be financed by them, but it is
necessary to purchase on cash basis, the working capital requirement will be higher.
6. Profitability
The profitability of the business may be vary in each and every individual case, which is
in turn its depend on numerous factors, but high profitability will positively reduce the
strain on working capital requirement of the company, because the profits to the extent
that they earned in cash may be used to meet the working capital requirement of the
company.
7. Operating efficiency
29
If the business is carried on more efficiently, it can operate in profits which may reduce
the strain on working capital; it may ensure proper utilization of existing resources by
eliminating the waste and improved coordination etc.
2.4 Approaches to Working Capital Management
The objective of working capital management is to maintain the optimum balance of each
of the working capital components. This includes making sure that funds are held as cash
in bank deposits for as long as and in the largest amounts possible, thereby maximizing
the interest earned. However, such cash may more appropriately be “invested” in other
assets or in reducing other liabilities. Working capital management takes place on two
levels:
? Ratio analysis can be used to monitor overall trends in working capital and to
identify areas requiring closer management.
? The individual components of working capital can be effectively managed by
using various techniques and strategies.
When considering these techniques and strategies, departments need to recognize that
each department has a unique mix of working capital components. The emphasis that
needs to be placed on each component varies according to department. For example,
some departments have significant inventory levels: others have little if any inventory.
Furthermore, working capital management is not an end itself.
It is an integral part of the department?s overall management. The needs of efficient
working capital management must be considered in relation to other aspects of the
department?s financial and non-financial performance.
2.5 Classification of Current Assets and Current Liabilities
Current Assets:
? Inventory
30
? Raw materials and components
? Work-in-progress
? Finished goods
? Trade debtors
? Loan and Advances
? Cash and Bank Balance
? Others
Current Liabilities:
? Sundry Creditors
? Trade advances
? Borrowings (Short Term)
? Commercial Banks loans
? Provisions
? Others
The current classification applies to those assets that will be realized in cash, sold, or
consumed within one year (or operating cycle, if longer), and those liabilities that will be
discharged by use of current assets or the creation of additional current liabilities within
one year (or, operating cycle, if longer). The current liability section of a balance sheet is
also intended to include obligations that are due on demand or will be due on demand
within one year from the balance sheet date, even though liquidation may not be expected
within that period. Short-term obligations shall be excluded from current liabilities only if
the enterprise intends to refinance the obligations on a long-term basis and has the
demonstrated ability to consummate the financing. The ordinary operations of a business
involve a circulation of capital within the current asset group. Cash is expended for
materials, labor, operating expenses, and other services and such cash expenditures are
included in the inventory value. Upon sale of products or performance of services, the
accumulated expenditures are converted into receivables and ultimately into cash again.
The average period of time intervening between the cash-to-cash conversions is the
operating cycle of the business. When the business has no clear operating cycle, or when
31
the operating cycle is shorter than 12 months, a 12-month period should be used to
segregate current assets.
32
Chapter 3
Introduction
Of
The study
33
3.1 Literature Review
Working Capital Management:
Most companies concentrate their managerial effort on controlling profit. They try to
increase sales revenue, reduce their production cost and control their overheads.
Operational budgets are drawn up, standard costs are set and considerable effort is
expended on identifying and rectifying variances of actual results against these budgets
and standards. However, too few companies worry very much about managing another,
possibly equally important, part of their business- the area of working capital
management. But, managing the area of working capital management makes the
difference between business survival and business failure. Many profitable companies
fail each year because their management fails to manage their working capital. They may
be profitable, but they are not able to meet their daily needs.
Managing working capital is a matter of balance. A department must have sufficient cash
on hand to meet its immediate needs while ensuring that idle cash is invested to the
organization?s best possible advantage. To avoid tipping the scale, it is necessary to have
clear and accurate reports on each of the components of working capital and an
awareness of the potential impact of outside influences.
Working capital management is concerned with the problems arise inattempting to
manage the current assets, the current liabilities and the interrelationship that exist
between them. The term current assets refers to thoseassets which in ordinary course of
business can be, or, will be, turned in to cashwithin one year without undergoing a
diminution in value and withoutdisrupting the operation of the firm. The major current
assets are cash,marketable securities, account receivable and inventory. Current liabilities
warehouse liabilities which intended at there inception to be paid in ordinary courseof
business, within a year, out of the current assets or earnings of the concern.The basic
current liabilities are account payable, bill payable, bank over-draft,and outstanding
expenses.The goal of working capital management is to manage the firm?s current
assetsand current liabilities in such way that the satisfactory level of workingcapitalis
34
mentioned. The current should be large enough to cover its current liabilitiesin order to
ensure a reasonable margin of the safety.
3.2 Background of the study
Whatever may be the organization, working capital plays an important role, as the
company needs capital for its day to day expenditure. Thousands of companies fail each
year due to poor working capital management practices. Entrepreneurs often don?t
account for short term disruptions to cash flow and are forced to close their operations.
In simple term, working capital is an excess of current assets over the current liabilities.
Good working capital management reveals higher returns of current assets than the
current liabilities to maintain a steady liquidity position of a company. Otherwise,
working capital is a requirement of funds to meet the day to day working expenses. So a
proper way of management of working capital is highly essential to ensure a dynamic
stability of the financial position of an organization.
L & T is one of the largest company doing business in hydrocarbon, transportation
infrastructure, heavy civil infrastructure, metallurgical & material handling (MMH),
water & renewable energy, power, Heavy Engineering, Electrical & Automation,
Machinery and Industrial Products Business sectors in the country which plays important
role in construction and engineering all over the world.
Seeing the good opportunity to study financial system and practices of L & T, it is
relatively important take up internship assignment on „WORKING CAPITAL
MANAGEMENT IN L & T? during the project work, the working capital position of this
organization has been analyzed. Decisions relating to working capital and short financing
are referred to as working capital management. These involve managing the relationship
between a firm?s short term assets and its short term liabilities. The goal of working
capital management is to ensure that the firm us able to continue its operations and that it
has sufficient money flow to satisfy both maturing short term debt and upcoming
operational expenses.
35
Working capital management deals with maintaining the levels of working capital to
optimum, because if a concern has inadequate opportunities and if the working capital is
more than required then the concern will lose money in the form of interest on the
blocked funds. Therefore working capital management plays a very important role in the
profitability of a company. And also due to heavy competitions among different
organization?s it is now compulsory to look after working capital.
3.3Need of the study
Working Capital refers to that part of the firm?s capital, which is required for financing
short-term or current assets such as cash marketable securities, debtors and inventories.
Funds thus, invested in current assets keep revolving fast and are constantly converted
into cash and this cash flow out again in exchange for other current assets.
Corporate executives devote a considerable amount of attention to the management of
working capital. Working capital is the life blood of any business, without which the
fixed assets are inoperative.
? To study the company manages its current assets to maintain better financial
position.
? To know the reasons of deviations in the working capital position of the company.
? To study the Working capital management with help of liquidity management,
inventory management, receivables management of the company.
3.4 Problems of the study
During the study of this project some problems I found which are mention below:-
? This research is based on the secondary data and during the study of working
capital there are so many data required from various departments which involve detailed
analysis and in-depth study.
36
? Approx. data are been taken for the calculation purpose.
.
3.4.1 The Importance of Good Working Capital Management
Money invested in one area may “cost” opportunities for investment in other areas. If a
department is operating with more working capital than is necessary, this over investment
represents an unnecessary cost to the company. From a department?s point of view,
excess working capital means operating inefficiencies. The following are the major
advantages of an adequate working capital:
? Solvency of The Business: Adequate working capital helps in maintaining the
solvency of the business by providing uninterrupted of production.
? Goodwill: Sufficient amount of working capital enables a firm to make prompt
payments and makes and maintain the goodwill.
? Easy loans: Adequate working capital leads to high solvency and credit standing
can arrange loans from banks and other on easy and favorable terms.
? Cash Discounts: Adequate working capital also enables a concern to avail cash
discounts on the purchases and hence reduces cost.
? Regular Supply of Raw Material: Sufficient working capital ensures regular
supply of raw material and continuous production.
? Regular Payment Of Salaries, Wages And Other Day TO Day Commitments:
It leads to the satisfaction of the employees and raises the morale of its employees,
increases their efficiency, reduces wastage and costs and enhances production and profits.
? Exploitation Of Favorable Market Conditions: If a firm is having adequate
working capital then it can exploit the favorable market conditions such as purchasing its
requirements in bulk when the prices are lower and holdings its inventories for higher
prices.
? Ability To Face Crises: A concern can face the situation during the depression.
37
? Quick And Regular Return On Investments: Sufficient working capital enables
a concern to pay quick and regular of dividends to its investors and gains confidence of
the investors and can raise more funds in future.
? High Morale: Adequate working capital brings an environment of securities,
confidence, high morale which results in overall efficiency in a business.
3.5 Objectives of the study
1) To study the need & importance of working capital.
2) To study the relevancy of working capital management in financial management
of an organization.
3) To see how the day to day operation of a company takes place.
4) To see whether the company is prepared with enough working capital to face any
kind of contingencies.
5) To study the methods adopted by the organization to maintain adequate working
capital level.
6) To study what measures should be taken for maintaining adequate working
capital.
38
Chapter 4
RESEARCH
Methodology
39
Research methodology is a way to systematically solve the research problem. Itmay be
understood as a science of studying now research is donesystematically. In that various
steps, those are generally adopted by a researcherin studying his problem along with the
logic behind them.It is important for research to know not only the research method but
also knowmethodology. ”The procedures by which researcher go about their work
ofdescribing, explaining and predicting phenomenon are called methodology.”Methods
comprise the procedures used for generating, collecting and evaluatingdata. All this
means that it is necessary for the researcher to design hismethodology for his problem as
the same may differ from problem to problem.
Data collection is important step in any project and success of any project willbe largely
depend upon now much accurate you will be able to collect and howmuch time, money
and effort will be required to collect that necessary data, thisis also important step.Data
collection plays an important role in research work. Without proper dataavailable for
analysis you cannot do the research work accurately.
4.1 Types of data collection
There are two types of data collection methods available.
1. Primary data collection
2. Secondary data collection
1) Primary data
The primary data is that data which is collected fresh or first hand, and for firsttime
which is original in nature. Primary data can collect through personalinterview,
questionnaire etc. to support the secondary data.
2) Secondary data collection method
The secondary data are those which have already collected and stored.Secondary data
easily get those secondary data from records, journals, annualreports of the company etc.
40
It will save the time, money and efforts to collectthe data. Secondary data also made
available through trade magazines, balancesheets, books etc.
4.2 Method of Data collection:
This Project is based on
1. Annual report of L & T LIMITED 2011-12
2. Annual report of L & T LIMITED 2012-13
3. Balance sheet and Profit & Loss of L & T
4.3 Data – analysis techniques
There are several tools of analyzing of working capital of a concern. The important of
them adopted as followed.
STATIC TOOLS
a) Working Capital ratio
b) Working Capital Trend Analysis
41
Chapter 5
Data Analysis
&
Interpretation
42
1. Working Capital
Particulars 2012 2013
Current assets:
? Current investment
6787.19 5580.69
? Inventories
1776.62 2064.18
? Trade receivables
18716.94 22613.01
? Cash & bank balance
1778.12 1455.66
? Short term loans & advances 5005.62 5498.84
? Other current assets
11922.36 11790.66
Less
Current liabilities:
? Short term borrowings 2936.72 734.53
? Current maturities of long term borrowings 1628.99 828.65
? Trade payments 15607.76 16730.65
? Other current liabilities 14009.40 14352.65
? Short term provisions 2112.04 2083.81
Change in Working Capital 9691.94 14272.75
43
1. Proportion of working capital in total assets:
Table 5.2: Proportion of Working Capital in Total Assets (in %)
YEAR 2012 2013
TOTAL ASSETS 67632.40 72174.21
WORKING CAPITAL 9691.94 14272.75
Proportion of working capital 14.33% 19.78%
Chart 5.2: Proportion of Working Capital in Total Assets
Interpretation:
From the table 5.2 we can see that L & T had contribution of working capital around
21.08% in 2012 while it was 19.78% in 2013. It decreased in 2013 because increase in
44
current liabilities was tremendous which brought down the proportion of working capital
in total assets.
1) CURRENT RATIO
Current Ratio, also known as working capital ratio is a measure of general liquidity and
its most widely used to make the analysis of short-term financial position or liquidity of a
firm. It is defined as the relation between current assets and current liabilities. Thus,
CURRENT RATIO = CURRENT ASSETS/ CURRENT LIABILITES
The two components of this ratio are:
1) CURRENT ASSETS
2) CURRENT LIABILITES
? Current assets include cash, marketable securities, bill receivables, sundry
debtors, inventories and work-in-progresses. Current liabilities include outstanding
expenses, bill payable, dividend payable etc.
? A relatively high current ratio is an indication that the firm is liquid and has the
ability to pay its current obligations in time. On the hand a low current ratio represents
that the liquidity position of the firm is not good and the firm shallnot be able to pay its
current liabilities in time. A ratio equal or near to the rule of thumb of 2:1 i.e. current
assets double the current liabilities is considered to be satisfactory.
? The current ratio is an indication of a firm's market liquidity and ability to meet
creditor's demands. Acceptable current ratios vary from industry to industry. If a
company's current ratio is in this range, then it is generally considered to have good
short-term financial strength. If current liabilities exceed current assets (the current ratio
is below 1), then the company may have problems meeting its short-term obligations. If
the current ratio is too high, then the company may not be efficiently using its current
45
assets or its short-term financing facilities. This may also indicate problems in working
capital management.
Table 5.3: Current Ratio (in times)
YEAR 2012 2013
CURRENT ASSETS 45986.85 49003.04
CURRENT LIABILITIES 36294.91 34730.29
CURRENT RATIO 1.27 times 1.41 times
Chart 5.3: Current Ratio
Interpretation:
From the table 5.3 we can see that the current ratio in 2012 was 1.27; ideally which
should be 2, but still anything greater than 1 is good for the company as they can meet
1.2
1.25
1.3
1.35
1.4
1.45
,2012 ,2013
CURRENT RATIO
CURRENT RATIO
46
their current liabilities with their current assets easily. But in 2013 it increased a bit and
the current ratio was 1.41 this happened because the rise in current assets was greater
than the rise in current liabilities.
2) QUICK RATIO
Quick ratio is a more rigorous test of liquidity than current ratio. Quick ratio may be
defined as the relationship between quick/liquid assets and current or liquid liabilities. An
asset is said to be liquid if it can be converted into cash with a short period without loss
of value. It measures the firms? capacity to pay off current obligations immediately.The
quick ratio measures a company's ability to meet its short-term obligations with its most
liquid assets. The higher the quick ratio, the better the position of the company.The quick
ratio is more conservative than the current ratio, a more well-known liquidity measure,
because it excludes inventory from current assets. Inventory is excluded because some
companies have difficulty turning their inventory into cash. In the event that short-term
obligations need to be paid off immediately, there are situations in which the current ratio
would overestimate a company's short-term financial strength.
QUICK RATIO = QUICK ASSETS/CURRENT LIABILITES
OR
QUICK RATIO = (CURRENT ASSETS-INVENTORIES)/CURRENT LIABILITES
Where Quick Assets are:
1) Marketable Securities
2) Cash in hand and Cash at bank.
3) Debtors.
A high ratio is an indication that the firm is liquid and has the ability to meet its current
liabilities in time and on the other hand a low quick ratio represents that the firms?
liquidity position is not good.
47
As a rule of thumb ratio of 1:1 is considered satisfactory. It is generally thought that if
quick assets are equal to the current liabilities then the concern may be able to meet its
short-term obligations. However, a firm having high quick ratio may not have a
satisfactory liquidity position if it has slow paying debtors. On the other hand, a firm
having a low liquidity position if it has fast moving inventories.
Table 5.4: Quick Ratio (in times)
YEAR 2012 2013
Quick Assets 44210.23 46938.86
Current Liabilities 36294.91 34730.29
Quick Ratio 1.22 times 1.35 times
Chart 5.4: Quick Ratio
1.15
1.2
1.25
1.3
1.35
1.4
,2012 ,2013
Quick Ratio
Quick Ratio
48
Interpretation:
Idle quick ratio is 1:1. Here quick ratio in 2012 is 1.22 times which is more than 1. This
shows that company is in good position. This ratio increases in 2013 and reaches to 1.35
times.
3) Working capital turnover ratio
It signifies that for an amount of sales, a relative amount of working capital isneeded. If
any increase in sales contemplated working capital should beadequate and thus this ratio
helps management to maintain the adequate level ofworking capital. The ratio measures
the efficiency with which the workingcapital is being used by a firm. It may thus compute
net working capital turnover by dividing sales by working capital.
This provides some useful information as to how effectively a company is using its
working capital to generate sales.
A company uses working capital (current assets - current liabilities) to fund operations
and purchase inventory. These operations and inventory are then converted into sales
revenue for the company. The working capital turnover ratio is used to analyze the
relationship between the money used to fund operations and the sales generated from
these operations. In a general sense, the higher the working capital turnover, the
better because it means that the company is generating a lot of sales compared to the
money it uses to fund the sales.
Working capital turnover = Sales / Net working capital
49
Table 5.5: working Capital Turnover ratio (in times)
Year 2012 2013
Sales 53170.52 60873.26
Net working capital 9691.94 14272.75
Working-capital turnover ratio 5.49 times 4.26 times
50
Chart 5.5: Working Capital Turnover
Interpretation:
From Table we can see that for L & T working capital turnover has been very
satisfactory. In 2012 it was 5.49 while it decreased in 2013 to 4.26 which is not very good
and it shows that company is lacking in converting its working capital into sales.
4) Current assets turnover ratio:
Current assets turnover ratio is calculate to know the firms efficiency ofutilizing the
current assets .current assets includes the assets like inventories,sundry debtors, bills
receivable, cash in hand or bank, marketable securities,prepaid expenses and short term
loans and advances. This ratio includes theefficiency with which current assets turn into
sales. A higher ratio implies amore efficient use of funds thus high turnover ratio indicate
to reduced the lockup of funds in current assets. An analysis of this ratio over a period of
0
1
2
3
4
5
6
,2012 ,2013
Working-capital turnover ratio
Working-capital turnover
ratio
51
timereflects working capital management of a firm. Ratio that indicates how efficiently a
firm is using its current assets to generate revenue.
Current Assets TOR = Sales / Current Assets
Table 5.6 Current Assets Turnover Ratio (in times)
Year 2012 2013
Sales 53170.52 60873.26
Current Assets 45986.85 49003.04
Current Assets TOR 1.16 times 1.24 times
Chart 5.6 Current Assets Turnover Ratio
1.12
1.14
1.16
1.18
1.2
1.22
1.24
1.26
,2012 ,2013
Current Assets TOR
Current Assets TOR
52
Interpretation:
The Current Assets TOR was consistent for 2012 and 2013 i.e. 1.16 and 1.24
respectively. This was very good as company was maintaining its efficiency in
converting its current assets into sales. And anything above 1 is good for the company.
5) Current Assets conversion period:
This ratio gives us the number of days a company takes to convert its current assets into
sales. Lesser the days better the efficiency of the company.
It is obtained by the formula:
CURRENT ASSETS CONVERSION PERIOD = 365/ CURRENT ASSETST
Table 5.7: Current Assets conversion period
YEAR 2012 2013
CURRENT ASSETST OR 1.16 1.24
CURRENT ASSETS CONVERSION
PERIOD (Days)
314 days 294 days
53
Chart 5.7: Current Assets conversion period
Interpretation:
The Current Assets conversion period was not consistent because 2012 and 2013 depicted
the conversion period of 314 and 294 days respectively. It is good that current assets
conversion period decreases. This shows that company is watching stick on inventor y.
6) Inventory turnover ratio:
Every firm has to maintain a certain amount of inventory of finished goods so as to meet
the requirements of the business. But the level of inventory should neither be too high nor
280
285
290
295
300
305
310
315
320
,2012 ,2013
CURRENT ASSETS CONVERSION
PERIOD (Days)
CURRENT ASSETS
CONVERSION PERIOD
(Days)
54
too low. Because it is harmful to hold more inventory as some amount of capital is
blocked in it and some cost is involved in it. It will therefore be advisable to dispose the
inventory as soon as possible.Inventory turnover ratio indicates the efficiency of the firm
in producing andselling its products. It is calculated by dividing the cost of goods sold by
average inventory:
Inventory Turnover Ratio = Cost of goods sold / Average inventory
OR
= Sales / Inventory
As such, the general rule high inventory turnover is desirable but high inventory turnover
ratio may not necessary indicates the profitable situation. An organization, in order to
achieve a large sales volume may sometime sacrifice on profit, inventory ratio may not
result into high amount of profit.
Table 5.8: inventory Turnover Ratio (in times)
YEAR 2012 2013
SALES 53170.52 60873.26
INVENTORY 1776.62 2064.18
INVENTORY
TURNOVER RATIO
29.93 times 29.49 times
55
Chart 5.8: inventory Turnover Ratio
Interpretation:
L & T had inventory turnover ratio of 29.93, and 29.49 in 2012, and 2013 respectively.
The chart shows that L & T has been very consistent in turning over its inventory
effectively. The ratio is desirably high which shows that the money is not blocked in
holding inventory.
7) Inventory Conversion Period:
This is a measure to determine the number of days a company takes to convert its
inventory into sales. Lesser the conversion period the better is for the company. This ratio
is obtained from the following formula.
Inventory conversion period = 365 / Inventory
29.2
29.3
29.4
29.5
29.6
29.7
29.8
29.9
30
,2012 ,2013
INVENTORY TURNOVER RATIO
INVENTORY TURNOVER
RATIO
56
This shows that inventory conversion period is inversely proportional to inventory
turnover ratio.
Table 5.9: inventory conversion period (in days)
YEAR 2012 2013
INVENTORY TURNOVER RATIO 29.93 29.49
INVENTORY CONVERSION
PERIOD (DAYS)
12
days
12 days
Chart 5.9: Inventory Conversion Period
Interpretation:
From the tablewe can see that inventory conversion period is very low and very
consistent as well which is very difficult to maintain. This shows that company is very
strict in turning their inventory.
0
2
4
6
8
10
12
14
,2012 ,2013
Inventory Conversion Period (Days)
INVENTORY CONVERSION
PERIOD (DAYS)
57
8) Accounts payable turnover:
? A short-term liquidity measure used to quantify the rate at which a company pays
off its suppliers. The measure shows investors how many times per period the company
pays its average payable amount.
? The Account Payable Turnover Ratio (or APT ratio) is used to measure the length
of time that is needed for a company to repay (liquidity of the company) its suppliers.
The suppliers of a company are simply companies that produce different parts that the
company could assemble together. For example a glass manufacturer is a window
supplier for a car manufacturer, as the car manufacturer gives orders of windows of
specific sizes and shapes to the glass manufacturer.
? The APT ratio main purpose is to measure short term liquidity, as suppliers allow
short a payment period; however this period is dependent on many factors, such as the
industry norm, relative size of the supplier to that of the company, and the financial
condition of the supplier.The formula for the Account Payable Turnover ratio is
Accounts Payable Turnover Ratio = Cost of Goods sold/Accounts Payable
? To fully understand this formula, first, we need to define the terms in the
numerator and the denominator of the formula.
Cost of goods sold:
? Cost of goods sold is simply the money a company spends to manufacture the
given product. The cost of goods take many things into consideration, such as the cost of
raw materials and different parts from suppliers, the total cost of labor per good (divide
total wages with number of goods sold on the market), electric bill per sold good, and
many other types of costs. In the above formula this refers to the total costs of all of the
goods produced in a set period of time.
58
Accounts payable:
? Accounts payable are the short term credits that the company has to pay within a
set period of time, usually within less than one year, but more often than not this period is
a few months.
Table 5.10: Accounts Payable Turnover Ratio (in times)
YEAR 2012 2013
COGS 41022.39 47952.40
ACCOUNTS
PAYABLES
2936.72 734.53
ACCOUNTS
PAYABLE
TURNOVER
17.11 times 65.28 times
59
Chart 5.10: Accounts Payable Turnover Ratio
Interpretation:
Accounts payable turnover in 2012 is 13.97 times which increased to 65.28 times in
2013. It shows that company is utilizing its credit benefit. The reason for increase in ratio
is increase in Cost of Goods Sold and decrease in accounts payables.
9) Accounts Payable Period:
As the name suggests this ratio tells us the number of days a company takes to pay to
their suppliers in return of the purchases made. Desirably the company should make
payment after enjoying the credit limit granted by the suppliers. But the payment should
not be delayed above the limit which could turn the relationship with the suppliers sour
and result in losses by losing discount in future from the suppliers.
60
Table 5.11: Accounts Payable Period (in days)
YEAR 2012 2013
ACCOUNTS
PAYABLE
TURNOVER RATIO
17.11 65.28
ACCOUNTS
PAYABLE
CONVERSION
PERIOD (DAYS)
21 days 6 days
Chart 5.11: Accounts Payable Period
Interpretation:
L & T is following a very consistent approach in paying their suppliers. The figures show
that the conversion period for two years was 26 days and 6 days for 2012 and 2013. This
is a good sign for the company and shows that company keeps a close watch on its
0
5
10
15
20
25
30
,2012 ,2013
Accounts Payable Conversion Period (Days)
ACCOUNTS PAYABLE
CONVERSION PERIOD
(DAYS)
61
accounts payable period. But the company should make full use of their credit limit given
by the suppliers so that they can retain their money for a longer time and use it for some
other purpose.
10) Accounts receivables turnover:
? An accounting measure used to quantify a firm's effectiveness in extending credit
as well as collecting debts. The receivables turnover ratio is an activity ratio, measuring
how efficiently a firm uses its assets.
? A concern may sell its goods on cash as well as on credit to increase its sales and
a liberal credit policy may result in tying up substantial funds of a firm in the form of
trade debtors. Trade debtors are expected to be converted into cash within a short period
and are included in current assets. So liquidity position of a concern also depends upon
the quality of trade debtors.
? Increasing volume of receivables without a matching increase in sales is reflected
by a low receivable turnover ratio. It is indication of slowing down of the collection
system or an extend line of credit being allowed by the customer organization. The latter
may be due to the fact that the firm is losing out to competition. A credit manager engage
in the task of granting credit or monitoring receivable should take the hint from a
fallingreceivable turnover ratio use his market intelligence to find out the reasonbehind
such failing trend.Debtor turnover indicates the number of times debtors turnover each
year.Generally the higher the value of debtor?s turnover, the more is themanagement of
credit.
? Accounts Receivables TOR can be calculated from the formula:
Accounts Receivables TOR = Sales / Average Account Receivables
? In the denominator instead of average accounts receivable we can also take only
accounts receivables. Average is taken for more accuracy.
? By maintaining accounts receivable, firms are indirectly extending interest-free
loans to their clients. A high ratio implies either that a company operates on a cash basis
62
or that its extension of credit and collection of accounts receivable is efficient.
A low ratio implies the company should re-assess its credit policies in order to ensure the
timely collection of imparted credit that is not earning interest for the firm.
Table 5.12: Account Receivable Turnover (in times)
YEAR 2012 2013
SALES 53170.52 60873.26
ACCOUNTS
RECEIVABLES
18716.94 22613.01
ACCOUNTS
RECEIVABLES
TURNOVER
2.84 times 2.69 times
Chart 5.12 Accounts Receivable Turnover
Interpretation:
2.6
2.65
2.7
2.75
2.8
2.85
2.9
,2012 ,2013
Accounts Receivables Turnover
ACCOUNTS RECEIVABLES
TURNOVER
63
Table indicates that company is very consistent in recovering money from the customers.
They are very efficient in converting their credit sales into cash. In 2012 it was 2.84 times
and in 2013 it was 2.69 times, which are almost the same. That means the company
follows very strict policy for recovering money from their debtors and they are efficient
as well.
11) Accounts Receivables Conversion Period:
? This ratio gives us the number of days the company takes to collect money from
its debtors. Lesser the days, the more better for the company. The company should try to
make efficient collection policies from their debtors in order to avoid bad debts. It is
calculated from the following formula:
Accounts Receivables Conversion Period = 365 / Accounts Receivables
Table 5.13:Accounts Receivables Conversion Period (in days)
YEAR 2012 2013
ACCOUNTS RECEIVABLE
TURNOVER RATIO
2.84 2.69
ACCOUNTS RECEIVABLE
CONVERSION PERIOD
(DAYS)
129 days 136 days
64
Chart 5.13: Accounts Receivable Conversion Period
Interpretation:
As shown in table account receivable conversion period in 2012 is 129 which is less than
136 days in 2013. This is not good situation. Company has to try to minimize the days so
that it increases profitability of company.
12) Operating Cycle:
? The investment in working capital is influenced by four key events in the
production and sales cycle of the firm:
? Purchase of raw materials
? Payment of raw materials
? Sale of finished goods
124
126
128
130
132
134
136
138
,2012 ,2013
Accounts Receivable Conversion Period (Days)
ACCOUNTS RECEIVABLE
CONVERSION PERIOD
(DAYS)
65
? Collection of cash for sales
? The need of working capital arrived because of time gap between production
ofgoods and their actual realization after sale. This time gap is called “OperatingCycle”
or “Working Capital Cycle”. The operating cycle of a company consistof time period
between procurement of inventory and the collection of cashfrom receivables. The
operating cycle is the length of time between thecompany?s outlay on raw materials,
wages and other expanses and inflow ofcash from sales of goods.Operating cycle is an
important concept in management of cash andmanagement of cash working capital. The
operating cycle reveals the time thatelapses between outlays of cash and inflow of cash.
Quicker the operating cycleless amount of investment in working capital is needed and it
improvesprofitability. The duration of the operating cycle depends on nature of
industriesand efficiency in working capital management.
? The time between the purchase of an asset and its sale, or the sale of a product
made from the asset. Most companies desire short operating cycles because it creates
cash flow to cover the company's liabilities. A long operating cycle often necessitates
borrowing and thereby reduces profitability.
? A long operating cycle tends to harm profitability by increasing borrowing
requirements and interest expense. It can be calculated from the following formulae:
Operating Cycle = Inventory Period + Accounts Receivable period
Table 5.14: Operating Cycle( in days)
YEAR 2012 2013
INVENTORY PERIOD 12.19 12.37
ACCOUNTS RECEIVABLE PERIOD 128.52 135.69
OPERATINGCYCLE (DAYS) 141 days 148 days
66
Chart 5.14: Operating Cycle
Interpretation:
Looking at the table we can see that L & T has a very consistent operating cycle around
145 days. In 2012 it was 141 days and in 2013 it was 148 days. Looking at these figures
we can see that operating cycle is not long and very appropriate for a big company like L
& T. But the most important part is they are consistent in maintaining this operating
cycle. And the major credit goes to low inventory conversion period. The company is
turning its inventory very fast due to which it is achieving this consistent operating cycle.
13) CASH CYCLE:
? A metric that expresses the length of time, in days, that it takes for a company to
convert resource inputs into cash flows. The cash conversion cycle attempts to measure
the amount of time each net input dollar is tied up in the production and sales process
before it is converted into cash through sales to customers. This metric looks at the
amount of time needed to sell inventory, the amount of time needed to collect receivables
and the length of time the company is afforded to pay its bills without incurring penalties.
136
138
140
142
144
146
148
150
,2012 ,2013
Operating Cycle
operating Cycle
67
? Usually a company acquires inventory on credit, which results in accounts
payable. A company can also sell products on credit, which results in accounts
receivable. Cash, therefore, is not involved until the company pays the accounts payable
and collects accounts receivable. So the cash conversion cycle measures the time between
outlay of cash and cash recovery.
? This cycle is extremely important for retailers and similar businesses. This
measure illustrates how quickly a company can convert its products into cash through
sales. The shorter the cycle, the less time capital is tied up in the business process, and
thus the better for the company's bottom line.
? In management accounting, the Cash Conversion Cycle (CCC) measures how
long a firm will be deprived of cash if it increases its investment in resources in order to
expand customer sales. It is thus a measure of the liquidity risk entailed by growth.
However, shortening the CCC creates its own risks: while a firm could even achieve a
negative CCC by collecting from customers before paying suppliers, a policy of strict
collections and lax payments is not always sustainable.
It is obtained by the formula:
Cash Cycle = Operating cycle – Accounts Payable Period
Table 5.15: Cash Cycle (in days)
YEAR 2012 2013
OPERATING CYCLE 140.7 148.06
ACCOUNTS PAYABLECONVERSION PERIOD 21 6
CASH-CYCLE
119.7 142.06
68
Chart 5.15: Cash Cycle
Interpretation:
The cash cycle has been like a see-saw. In 2012 it was 114.7 days, and in 2013 it
increased to 142.06 days. It needs to monitor their cash cycle very keenly. The company
should try to bring down this cycle as much as possible to avoid capital being tied up in
business process.
14) Net Profit Margin:
? The profit margin tells you how much profit a company makes for every RS.1 it
generates in revenue or sales. Profit margins vary by industry, but all else being equal, the
higher a company's profit margin compared to its competitors, the better.
? A ratio of profitability calculated as net income divided by revenues, or net profits
divided by sales. It measures how much out of every rupee of sales a company actually
0
20
40
60
80
100
120
140
160
,2012 ,2013
Cash-cycle
CASH-CYCLE
69
keeps in earnings.Profit margin is very useful when comparing companies in similar
industries. A higher profit margin indicates a more profitable company that has better
control over its costs compared to its competitors. Profit margin is displayed as a
percentage; a 20% profit margin, for example, means the company has a net income of
Rs.0.20 for each rupee of sales.
? Looking at the earnings of a company often doesn't tell the entire story. Increased
earnings are good, but an increase does not mean that the profit margin of a company is
improving. For instance, if a company has costs that have increased at a greater rate than
sales, it leads to a lower profit margin. This is an indication that costs need to be under
better control.
? It can be calculated from the following formulae:
NET PROFIT MARGIN = (PAT / NET SALES) %
Table 5.16: Net Profit Margin (in %)
YEAR 2012 2013
PAT 4456.50 4910.65
NET SALES 53170.52 60873.26
NET PROFIT MARGIN % 8.40% 8.10%
70
Chart 5.16: Net Profit Margin
Interpretation:
Net profit margin decreases from 2012 to 2013 which is not good for company. Company
has to increase its sales to increase net profit margin.
7.95
8
8.05
8.1
8.15
8.2
8.25
8.3
8.35
8.4
8.45
,2012 ,2013
Net Profit Margin
net profit margin
71
Trend analysis
Particular Yr’12 Yr’13
Sales 53170.52 60873.26
EBIT 1853.83 1800.50
PAT 4456.50 4910.65
Current assets 45986.85 49003.04
Current liabilities 36294.91 34730.29
Gross fixed assets 63620 71240
Net assets 67632.40 72174.21
Total assets 67632.40 72174.21
Net worth - -
dividend 79.06 6.45
72
Chapter 6
Results
&
Findings
73
Findings:
? Since the financial matter are sensitive in nature the same could not be acquired
easily
? One main area where Hazira Works outperformed L & T as a whole was its Net
profit margin is far greater than L & T as a whole.
74
Chapter 7
LIMITATION OF
THE STUDY
75
Limitation of study
Following are the limitation of the study
? The topic working capital management is itself a very vast topic yet very
important also. Within the available time, I have tried my best to cover most of the ratios
relating to Working capital of the company. Given an opportunity, I shall be obliged to
further explore the subject.
? Many facts and data are such that they are not to be disclosed because of the
confidential nature of the same.
? Since the financial matter are sensitive in nature the same could not be acquired
easily
? The study is restricted to two year data of L & T.
76
Chapter 8:
Conclusions
&
Suggestions
77
Conclusion:
? The objective of working capital management is to maintain the optimum balance
of each of the working capital components.
? This includes making sure that funds are held as cash in bank deposits for as long
as and in the largest amounts possible, thereby maximizing the interest earned.
? However, such cash may more appropriately be "invested" in other assets or in
reducing other liabilities.
? When considering these techniques and strategies of Working capital,
departments need to recognize that each department has a unique mix of working capital
components. The emphasis that needs to be placed on each component varies according
to department.
? For example, some departments have significant inventory levels; others have
little if any inventory.
? Furthermore, working capital management is not an end in itself. It is an integral
part of the department's overall management.
? The needs of efficient working capital management must be considered in relation
to other aspects of the department's financial and non-financial performance.
78
Suggestions
GENERAL ACTION
? Set planning standards for stock days, debtor days and creditor days.
? Having set planning standards (as above) KEEP TO THEM. Impress on staff that
these targets are just as important as operating budgets and standard costs.
? Instill an understanding amongst the staff that Working Capital Management
produces profits.
ACTION ON STOCKS
? Keep stocks levels as low as possible, consistent with not running out of stock and
not ordering stock in uneconomically small quantities. “Just-in-time” stock management
is fine, as long as it is “Just-in-Time” and never fails to deliver on time.
? Consider keeping stock in suppliers? warehouses, drawing on it as needed and
saving warehousing cost.
? Some of the tools of lean manufacturing which helps in inventory management
and control are:-
1. Kanban (pull production): The Japanese refer to Kanban as a simple parts-
movement system that depends on cardsand boxes/containers to take parts from one work
station to another on a production line. Kanban stands for Kan- card, Ban- signal. The
essence of the Kanban concept is that asupplier or the warehouse should only deliver
components to the production line as andwhen they are needed, so that there is no storage
in the production area.
Advantages of Kanban Process
? A simple and understandable process
? Provides quick and precise information
79
? ·Low costs associated with the transfer of information
? Provides quick response to changes
? ·Limit of over-capacity in processes
It should be checked that all the Kaizen principles followed are beingimplemented
properly.· Employees should be asked to implement Kaizen principle on their ownand
their valuable suggestions should be kept in mind, and as far aspossible, should be
implemented.Another point that must be kept in mind is that Kaizen need not be a big
change;it can be as small as keeping a chart of most frequently used telephone
numbersnear your desk, to big changes like replacing a number of old machines with
amulti-tasking/many- in-one machine.
ACTION ON DEBTORS/ CUSTOMERS
? Assess all significant new customers for their ability to pay. Take references,
examine accounts, and ask around. Try not to take on new customers who would be poor
payers.
? Re-assess all significant customers periodically. Stop supplying existing
customers who are poor payers- you may lose sale, but you are after QUALITY of
business rather than QUANTITY of business.
? Consider factoring sales invoices- the extra cost may be worth it in terms of quick
payment of sales revenue, less debtor administration and more time to carry out your
business (rather than spend time chasing debts).
? Consider offering discounts for prompt settlement of invoices, but only if the
discounts are lower than the costs of borrowing the money owed from other sources.
ACTION ON CREDITORS:
? Do not pay invoices to early- take advantage of credit offered by suppliers- its
free!
80
? Only pay early if supplier is offering a discount. Even then, consider this to be an
investment will u get a better return by using working capital to settle the invoice and
take the discount then by investing the working capital in some other way.
BIBLIOGRAPHY
1. www.larsen&toubro.com
2. www.google.com
3. Financial management – I.M.Pandey
4. Financial management – Prasana Chandra
5. Annual report of company (Financial Year 2012-13)
6. Information pertaining to the company?s profileis taken from the company?s
annual report for the financial year 2012-13.
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