Published on March 20, 2014
TILAK MAHARASHTRA UNIVERSITY, PUNE A Project Report On WORKING CAPITAL MANAGEMENT OF AAI MASTER OF BUSINESS ADMINISTRATION (FINANCE) Submitted in partial fulfillment of the requirements for the award of Master of Business Administration of Tilak Maharashtra University, Pune 2007-2008 SUBMITTED BY Name: MANOJ S HULE. MBA(FINANCE) PRN NO Of ___________________________ ___________________________ Guided by Prof.Mr R.Subramanian. TILAK MAHARASTHRA UNIVERSITY GULTEKDI, PUNE -411037. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 1
TILAK MAHARASHTRA UNIVERSITY, PUNE Tilak Maharashtra University, Pune (Deemed Under Section 3 of UGC ACT 1956 vide Notification No:F.9-19/85- U3 dated 24th April, 1987 By the Government of India.) Vidyapeeth Bhavan, Gultekdi, Pune-411037. CERTIFICATE This fis to Certify that the Project titled Working Capital Management of Airports Authority of India", is a bonafide work carried out by Mr. Manoj Shantaram Hule a student of Master of Business Administration Semester 3rd/5th, Specialization in Finance PRN________________ Under Tilak Maharashtra University, in the year 2008. Head of the Department Examiner Examiner Internal External Date: University Seal Place: WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 2
TILAK MAHARASHTRA UNIVERSITY, PUNE CERTIFICATE TO WHOMSOVER IT MAY CONERN This is to certify that Mr.Manoj Shantaram Hule , MBA Student of Tilak Maharashtra University, Pune has successfully collected thé data for thé Project report for award of Master Degreee of Business Administration. He has done the Project on " Working Capital Management of Airports Authority of India". Company Name Company Seal Désignation Signature : WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 3
TILAK MAHARASHTRA UNIVERSITY, PUNE CERTIFICATE OF INTERNAL GUIDE This is to certify that the project titled "Working Capital Management of Airports Authority of India" is a bonafide work carried out by Mr. Manoj Shantaram Hule a candidate for the award of Master of Business Administration of Tilak Maharashtra University, Pune under my guidance and direction. Signature of guide Name: Designation: Institute: Date: Place: WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 4
TILAK MAHARASHTRA UNIVERSITY, PUNE Acknowledgement I am thankful to Prof. Mr.R.Subramanian my project guide, who has been instrumental in giving me the required inputs and providing an outline through out the duration of the abovementioned project. I would also like to express my thank to Mr. Ajay Pinge, Our Centre Co-ordinator for giving me the opportunity to undertake a project entitled "Working Captial Management". I specially thanks to Shri K.S. Sivakumar, Dy.General Manager(Finance& Accounts), Airports Authority of India, Western Region, Mumbai, who gave me time for interview out of their busty schedule for responding to questions on the concerned study and Mrs. S.Anandavalli, Lecturer in Commerce who has given me her valuable guidance and suggestions for completing my project work. Finally, I would like to thank all the personalities behind the successful completion of the Project. I thank my friends and colleagues for the suggestions they provided to me from time to time. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 5
TILAK MAHARASHTRA UNIVERSITY, PUNE TABLE OF CONTENTS PAGE NO CHAPTER 0 : EXCUTIVE SUMMARY 07 CHAPTER 1 : RATIONALE FOR STUDY. 08-14 CHAPTER 2 : OBJECTIVE OF STUDY. 15-17 * TITLE OF THE PROJECT. 15 * OBJECTIVE OF THE STUDY. 15-16 * SCOPE OF THE STUDY. 17 CHAPTER 3 : PROFILE OF AIRPORTS AUTHORITY OF INDIA. 18-19 CHAPTER 4 : THEORETICAL PERSPECTIVE. 20-35 CHAPTER 5 : RESEARCH METHODOLOGY. 36 CHAPTER 6 : DATA ANALYSIS AND INTERPRETATIONS USING VARIOUS 37 CHARTS AND GRAPHS. CHAPTER 7 : FINDINGS. 38 CHAPTER 8 : LIMITATIONS. 39 CHAPTER 9 : EXPECTED CONTRIBUTION FROM THE STUDY. 40 CASE STUDY- THE ITC. 41-43 APPENDIX : COPIES OF QUESTIONNAIRE. 44-45 : BIBLIOGRAPHY. 46 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 6
TILAK MAHARASHTRA UNIVERSITY, PUNE Executive Summary: Traditional analysis of working capital is defensive; it asks " Can the company meet its short-term cash obligations?" But working capital accounts also tell you about the operational efficiency of the company. The length of the cash conversion cycle tells you how much working capital is tied up in ongoing operations. And trends in each of the days- outstanding numbers may foretell improvements or declines in the health of the business. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital. Thus the importance of adequate of working capital in commercial undertakings can never be over emphasized. The various studies conducted by the Bureau of Public Enterprises have shown that one of the reasons for the poor performance of public sector undertakings in our country has been the large amount of funds locked up in working capital. This results in over capitalization. Over capitalization implies that a company has too large funds for its requirements, resulting in a low rate of situation which implies a less than optimal use of resources. Insolvency risk is there in the case of under capitalization of working capital. Hence working capital management plays a pivotal role in growth or to sustain in market for any organization. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 7
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-1 RATIONALE FOR STUDY WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 8
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-1 RATIONALE FOR STUDY Working capital is the money used to make goods and attract sales. The less working capital is used to attract sale, the higher is it likely to be the return of investment. Working capital management is about the commercial and financial aspect of inventory, credit, marketing, royalty and investment policy. The higher the profit margin, lower is it likely to be the level of working capital tied up in creating and selling titles. The faster that we create and sell the books the higher is it likely to be the return on investment. The perfect world does not requires or concentrates about current assets and current liabilities because there would not be uncertainty, no transaction costs, information search costs, scheduling costs or production and technology constraints. The unit cost of production would not vary with the quantity produced . Capital, Labour and products markets shall be perfectly competitive and would reflect all available information. Thus in such an environment , there would be no advantage for investing in short term assets. Whereas, the world in which we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed. There are spreads between the borrowing and lending rates for investments and financing of equal risk. Similarly each organization is faced with its own limits on the production capacity and technology it can employ. There are fixed as well as variable costs associated with producing goods. In other words, the markets in which real firms operate are not perfectly competitive. These real world facts introduce problems and require the necessity of working capital. The most important areas in the day to day management of the firm, is the management of working capital. Working capital Management is the functional area of finance that covers all the current accounts of the firm. It is concerned with management of the level of individual current assets as well as the management of total working capital. Working Capital Management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 9
TILAK MAHARASHTRA UNIVERSITY, PUNE capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. For example, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial inputs in future at reasonable price. This may necessitate the holding of inventory i.e. current assets. Similarly an organization may be faced with an uncertainty regarding the level of its future cash inflows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of a reserve of short- term marketable securities, again a short term capital asset. The unpredictable and uncertain global market plays a vital role in working capital. Though the globalization of economy and free trading of products envisages the continuous availability of products but now much its cost effective and quality based varies concern to concerns. Working Capital refers to the funds invested in current assets, ie. Investment in stocks, sundry debtors, cash and other current assets. Current assets are essential to use fixed assets profitably. The term current assets refers to those assets which in the ordinary course of business can be converted into cash within one year without undergoing diminish in value and without disrupting the operations of the firm. The current assets are cash. Marketable securities, accounts receivable and inventory. Current liabilities are those which are to be paid within a year out out of the current assets or earnings of the concern. The current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 10
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-2 OBJECTIVE OF STUDY * TITLE OF THE PROJECT. * OBJECTIVE OF THE STUDY. * SCOPE OF THE STUDY. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 11
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-2 OBJECTIVE OF STUDY * TITLE OF THE PROJECT WORKING CAPITAL MANAGEMENT OF AIRPORTS AUTHORITY OF INDIA. * OBJECTIVE OF WORKING CAPITAL MANAGEMENT The main objective is to ensure the maintenance of satisfactory level of working capital in such a way that it is neither inadequate nor excessive. It should not only be sufficient to cover the current liabilities but ensure a reasonable margin of safety also. 1. To minimize the amount of capital employed in financing the current assets. This also leads to an improvement in the "Return of Capital Employed". 2. To manage the current assets in such a way that the marginal return on investment in these assets is not less than the cost of capital acquired to finance them. This will ensure the maximization of the value of the business unit. 3. To maintain the proper balance between the amount of current assets and the current liabilities in such a way that the firm is always able to meet the financial obligations, whenever due. This will ensure the smooth working of the unit without any paucity of funds. 4. To decide upon the optimum level of investment in various current asset I.e. determining the size of working capital. 5. By optimizing the investment in current asset and by reducing the level of current liability, the company can reduce the locking up of funds in working capital and thereby it can improve the return on capital employed in the business. 6. To decide upon the optimum mix of short-term funds in relation to long-term capital. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 12
TILAK MAHARASHTRA UNIVERSITY, PUNE 7. The company should always be in a position to meet its current obligation, which should be properly supported by current assets available with the firm. Maintaining excess fund in working capital means locking of funds without any returns. 8. To locate appropriate source of short term financing. 9. Maintaining working capital at appropriate levels. 10. Availability of sufficient funds at time of need. 11. The Firm should manage its current asset in such a way that marginal returns on investment in current asset is not less than the cost of capital employed to finance the current assets. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 13
TILAK MAHARASHTRA UNIVERSITY, PUNE * Scope Of Study:(Airports Authority of India-Working Capital Management). The Scope of the Study is as follows: 1. Debt Collection: By proper Working Capital Management the Debts collection period of Sundry Debtors could be reduced as against the prevailing Debt collection period by vigour's follow up which in turn will increased the Cash/Bank Balances available at the disposal of the company to run the day to day efforts and for Short Term Deposits and so also for liquidation the current liabilities which will be an ideal situation of a good Working Capital Management. The study aims in achieving this goal of better Working Capital Management. 2. Inventory Management: The Excess storage of Inventories more than the normal required level to carry out the day to day functions of the Company speaks of poor Working Capital Management, which results in locking on up precious working capital. Keeping optimum inventory level, the study aims at avoiding over stocking and over stocking so also avoid blocking of funds. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 14
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-3 PROFILE OF THE COMPANY WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 15
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-3 PROFILE OF THE COMPANY HISTORY OF AVIATION INDUSTRY The aviation industry in India has been growing exponentially over the past few years with the new reforms being introduced by the government. This industry has seen a major boom in terms of sales turnover of air service operators. The Indian Civil aviation Industry took its first steps in the early 1930s, when the TATA's established TATA AIRLINES. The next two decades saw the entry of several private carriers. In 1953, the government chose to nationalize private carriers and set up Indian Airlines to serve the domestic market and Air India to serve the international market. The national carriers enjoyed a monopoly till 1990- 91, when the Open Sky policy was implemented. With the repeal of the Air Corporation Act, several private players such as Jet Air, Sahara Airlines, Modi luft, and East Weste Airlines were allowed to operate commercial airlines and a new chapter in the history of Indian Aviation began. In 2003, more reforms were introduced in the aviation sector like an increase in the FDI limit to 49% from 40%, and a reduction of excise duty on aviation turbine fuel to 8% from 16%. The policy reforms and a favorable business environment attracted several more private players like Air Deccan, Spice Jet, Go Airways, Indigo Airlines, etc, who were set-up to operate under a low cost model. The Indian aviation sector is currently pegged at US $ 7.7 billion and is expected to grow four-fold to US $ 33.4 billion in the next three years. Currently, there are 0.1 million travelers using the air transport services. It is estimated that 50 million people belonging to the middle income group will use the low cost airlines in the coming years. The aviation industry is all set to conquer greater heights with WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 16
TILAK MAHARASHTRA UNIVERSITY, PUNE many new air service operators entering this market. The government is planning to establish an independent regulatory authority, to be called Airport Economic Regulatory Authority (AERA), to regulate tariffs in heavy- traffic sectors. However, there are a few major challenges that may hinder the growth of the aviation industry. These include high fuel costs, high airport charges, and the high rate of failure in the airline business. It is very essential to understand the history of aviation sector because growth of Airports Authority of India is related to the Aviation sector. It cannot exist independently as both are mutually dependent and share the ups and downs in the industry. But there is difference in the route of development which has taken place in the formation of Airports Authority of India. The organization has evolved to its present state many developments and changes in the ownership. Before Airports Authority was formed it was only Civil Aviation Department (CAD) which was trusted with development, management and expansion of airports in the country. The department was purely a Central Government entity and management was under direct purview of the then Minister. The first branching from the Civil Aviation Department took place when two divisions were formed namely International Airports Authority of India (IAAI) and National Airports Authority (NAA). The IAAI was formed to manage and expand the four international airports of the country and the other airports were under the management of NAA. This was the first time a professional management was introduced in the civil aviation sector by forming a public sector undertaking. Under the Honorable late Prime Minister Rajiv Gandhi a new initiative was taken by merging the two divisions which were although a monopoly sector were competing for the same market. A new entity was formed and was named as Airports Authority of India(AAI). The entire journey leading up to the formation of WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 17
TILAK MAHARASHTRA UNIVERSITY, PUNE AAI has been depicted in a diagrammatic format for ease of undertaking and putting the above words in one picture. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 18
TILAK MAHARASHTRA UNIVERSITY, PUNE AIRPORTS AUTHORITY OF INDIA AT PRESENT Corporate Office Airports Authority of India Rajiv Gandhi Bhavan, Safdarjung Airport, New Delhi-110 003 Phone:91-11-24632950 Airports Authority of India(AAI) was constituted by an Act of Parliament and came into being on 1st April, 1995 by merging erstwhile National Airports Authority and International Airports Authority of India. The merger brought into existence a single organization entrusted with the responsibility of creating, upgrading , maintaining and managing Civil Aviation infrastructure both on the ground and air space in the country. Despite many tragic occurrences like 9/11, Afghan War, Iraq war and SARS that struck the Civil Aviation sector the world over during the last few years and left it bleeding, Airports Authority of India (AAI) has persistently come up with good results, showing all around growth including increased revenue and higher level of profitability while building up the infrastructure. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 19
TILAK MAHARASHTRA UNIVERSITY, PUNE AAI manages 126 airports, which include 11 international airports, 89 domestic airports and 26 civil enclaves at Defence airfields. AAI provides air navigation services over 2.8 million square nautical miles of airspace. During the year 2002-03, AAI at various airports handled about 5 lakhs aircraft movements(4 lakhs domestic and 1 lakh international); 40 million passengers (26 millions domestic and 14 million international) and 9 lakh tones of cargo(3 lakh domestic and 6 lakh international). AAI also provides Air Traffic Management Services over entire Indian Air Space and adjoining oceanic areas with ground installations at all airports and 25other locations to ensure safety of aircraft operations. FUNCTIONS OF AAI . Control and management of the Indian airspace extending beyond the territorial limits of the country, as accepted by ICAO. . Design, Development, Operation and Maintenance of International and Domestic Airports and Civil Enclaves. . Construction, Modification and Management of Passenger Terminals. . Development and Management of Cargo Terminals of International and Domestic airports. . Provisions of Passenger Facilities and Information System at the Passenger Terminals at airports. . Expansion and strengthening of operation area viz. Runways, Aprons, Taxiway, etc. . Provision of visual aids. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 20
TILAK MAHARASHTRA UNIVERSITY, PUNE . Provision of Communication and Navigational aids viz. ILS, DVOR, DME, Radar etc. AAI has set for itself ambitious targets for upgrading the infrastructure during the 10th Five- Year Plan and is working steadily to achieve these targets. The airports at Ahmedabad, Amirtsar, Bangalore, Goa, Guwahati, Hyderabad and CIAL(Pvt.), in addition to those at Mumbai, Delhi, Calcutta, Chennai and Thiruvananthapuram, are today International Airports open to operations even by Foreign International Airlines. Besides the International flights by National Flag Carriers operate from Calicut, Coimbatore, Tiruchirappalli, Vananasi, Jaipur and Gaya Airports too. Tourist Charter now touch Agra, Coimbatore, Jaipur, Lucknow , Patna airports etc. AAI's proposal to lease out, on global tender basis, the four most profitable jewels in its crown viz. Delhi, Mumbai, Kolkatta and Chennai airports primarily aims to upgrade these to emulate the world standars. All major air-routes over Indian landmass are Radar covered (24 Radar installations at 11 locations) along with VOR/DVOR coverage (72 installations) co- located with Distance Measuring Equipment (71 installations), 39 runways provided with ILS installations with Night Landing Facilities at 36 Airports and Automatic Message Switching System at 15 airports. AAI's successful implementation of Automatic Dependence Surveillance system, using indigenous technology, at Calcutta and Chennai Air Traffic Control Centers, gave India the distinction of being the first country to use this advanced technology in the South East Asian region enabling effective Air Traffic Control over oceanic areas using satellite mode of communication. Use of remote controlled VHF coverage, along with satellite communication links, has given added strength of our WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 21
TILAK MAHARASHTRA UNIVERSITY, PUNE Air Traffic Management System. Linking to 80 locations by V-Sat installations during 2005 shall vastly enhanced Air Traffic Management and in turn safety of aircraft operations besides enabling administrative and operational control over our extensive airport network. AAI's endeavour in enhanced focus on "customer's expectations' has evinced enthusiastic response to independent agency organized customer satisfaction surveys at 3 busy airports. These surveys have enabled us to undertake improvements on aspects recommended by the airport users. The receptacles for our 'Business reply letters' at airports have gained popularity; these responses enable us to understand the changing aspirations of airport users. During the first year of the millennium, AAI endeavours to make its operations more transparent and the availability of instantaneous information to customers by deploying state- of-art information Technology. The specific training focus on improving employee response and professional skill up gradation has been manifested. AAI's four training establishments viz. Civil Aviation Training College- Allahabad, National Institute of Aviation Management and Research- Delhi and Fire Training Centres at Delhi and Kolkata are expected to be busier than ever before during 2001. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 22
TILAK MAHARASHTRA UNIVERSITY, PUNE BOARD MEMBERS OF AAI. Dr. K.Ramalingam Chairman WHOLE-TIME MEMBERS Shri P.Seth Member(Operations) Shri H.S.Bains Member(Pers & Admin) Shri S.C.Chhatwal. Member(Finance) Shri V.P.Agrawal. Member(Planning) PART-TIME MEMBERS Shri K.Gohain, Director General, Director General For Civil Aviation Shri Raghu Menon, IAS, Joint Secretary, WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 23
TILAK MAHARASHTRA UNIVERSITY, PUNE MINISTRY OF CIVIL AVIATION Shri K.N.Shrivastava, IAS, Joint Secretary, Shri S.R.Mehra, IPS Commissioner of Civil Security(Civil Aviation), Bureau of Civil Aviation Security. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 24
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-4 THEORETICAL PERSPECTIVE WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 25
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER 4 THEORETICAL PERSPECTIVE The financial management of any business organization involves the three following vital functions. 1. Management of Long Term Assets. 2. Management of Long Term Capital. 3. Management of Short Term Assets and Liabilities. In most of the organizations of the first & second one which refers to Capital Budgeting and Capital Structure respectively will be maintained and cope up with organization growth. The third one which refers to Working Capital Management requires more skills for sustaining and steady growth rate for any organization. The working capital management includes decisions 1. How much stock/inventory to be hold. 2. How much cash/bank balances should be maintained. 3. How much the firm should provide credit to its customers. 4. How much the firm should enjoy credit from its suppliers. 5. What should be the composition of current assets. 6. What should be the composition of current liabilities. Some of the definitions of working capital management: PROF K V SMITH: “Working capital management is concerned with problems that arise in attempting to manage the current asset, the current liability and the interrelation that exist between them”. WESTON AND BRIGHAM: “Working capital management refer to all aspect of administration of both current asset and current liability”. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 26
TILAK MAHARASHTRA UNIVERSITY, PUNE JAMES C VAN HORNE: “Current asset, by definition are asset normally converted into cash within one year. Working capital management is concerned with the administration of these asset-namely cash and marketable securities”. IMPORTANCE OF WORKING CAPITAL MANAGEMENT According to Husband and Hockery,”the prime object of management is to make a profit, either or not this is accomplished, depend on the manner in which working capital is accomplished”. The primary object of working capital is management is to manage the firm’s current asset and current liability in such a manner that a satisfactory level of working capital is maintained. The firm may become insolvent if it cannot maintain a satisfactory level of working capital. Working capital assists in increasing the profitability of the concern. The working capital position decide the various policies in the business with receipt to general operation viz importance of working capital. Positive correlation between sale and current assets: There is a positive correlation between the sale of the product of the firm and its current assets. Increase in the sale of the product requires a corresponding increase in current assets. Therefore, the current asset must be managed properly. Investment in current asset: Generally more than half of the total capacity of the firm is invested in current assets. Thus less than half of the capital is blocked in fixed asset. Therefore management of working capital attracts the attention of the management. No alternative for current asset: While fixed capital can be acquired on lease in emergency, there is no alternative for current asset. Investment in current asset cannot be avoided without substantial losses. Important for small unit: The management of working capital is more important for small unit because they do not relay on long term capital market and have easy access to short term finance source such as trade credit, short term bank loans etc. FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS The various factors determining the working capital requirement in a business firm: WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 27
TILAK MAHARASHTRA UNIVERSITY, PUNE (A) Nature of businesses: (B) Size of business unit: (C) Seasonal variation: (D) Time consumed in manufacture: (E) Turnover of circulating capital: (F) Labour intensive versus capital intensive industries: (G) Need to stockpile raw material and finished goods: (H) Terms of purchase and sale: (I) Conversion of current asset into cash. (J) Growth and extension of business: (K) Business cycle fluctuation: (L) Profit margin and profit appropriation: (M) Price level changes: (N) Dividend policies: (O) Close coordination between production and distribution policy: (P) An absence of specialization in the distribution of products: (Q) If the means of transporting and communication are less developed: (R) Hazards in a particular business also decide the magnitude of working capital required. The main source of working capital financing, namely trade credit, bank credit, RBI framework/regulation of bank credit/finance/advances, factoring and commercial papers. METHODS OF ESTIMATING WORKING CAPITAL REQUIREMENT Operating cycle method CASH ACCOUNTS RECEIVABLE PURCHASE OF RAW MATERIAL INVENTORY FINISHED GOODS WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 28
TILAK MAHARASHTRA UNIVERSITY, PUNE W.I.P OPERATING CYCLE OF WORKING CAPITAL Percent of sales method: Some of the types of working capital report are: Inventory report Cash report Receivables report WORKING CAPITAL RATIO Working capital ratios indicate the ability of a business concern in meeting its current obligation as well as its efficiency in managing the current asset in the generation of sales. These ratios are applied to evaluate the efficiency with which the firm manages and make use of its current assets. The fallowing three categories of ratio are used for efficient management of working capital (a) efficiency ratios (b) Liquidity ratios (c) Structural health ratios. Efficiency ratio: This ratio is computed by dividing the working capital by sale. This ratio helps to measure the efficiency of utilization of networking capital. It signifies for an amount of sale a relative amount of working capital is needed. If any increase in sale is contemplated, working capital should be adequate and thus this ratio is useful for maintaining adequate level of working capital. Inventory turnover ratio: This ratio indicate the effectiveness and efficiency of the inventory management .The formulae is as fallows INVENTORY TURNOVER RATIO = SALES / CURRENT ASSET This ratio shows how speedily the inventory is turned into accounts receivable through sales. The lower the inventory of sales ratio, the more efficiently the inventory is said to manage and vice versa. Current assets turnover ratio: This ratio formula is: CURRENT ASSET TURNOVER RATIO = SALES / CURRENT ASSETS This ratio indicates the efficiency with which the current asset turn into sales. The lower the current asset to sales ratio, it implies a more efficient use of funds. Thus, a high turnover rate indicates reduced lock up of funds in current assets. An analysis of this ratio over a period of time reflects working capital management of a firm. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 29
TILAK MAHARASHTRA UNIVERSITY, PUNE Liquidity ratio: This ratio indicate the extend of soundness of the current financial position of an undertaking and the degree of safety provided to the creditors. The higher the current ratio, the larger amount of rupee available, per rupee for current liability, the more the firms ability to meet current obligation and the greater safety of funds of short term creditors. The liquidity ratio formulae is LIQUIDITY RATIO = CURRENT ASSET, LOANS, ADVANCES/ CURRENT LIABILITY Current assets are those assets, which can be converted into cash within an accounting year. Current liability and provisions are those liability that are payable within a year. A current ratio of 2: 1 indicates a highly solvent position. Banks consider a current ratio of 1: 3: 1 as minimum acceptable level for providing working capital finance. The constituents of the current asset are as important as current asset themselves for evaluation of companies solvency position. Quick ratio: This ratio is a more refined tool to measure the liquidity of an organization. It is a better test of financial strength than the current ratio, because it excludes very slow moving inventories and the item of current asset, which cannot be converted into cash easily. This ratio shows the extend of cushion of protection provided from the quick assets to the current creditors. A quick ratio of 1: 1 is usually considered satisfactorily through it is again a rule of the thumb only. Structural health ratio: This ratio explains the relationship between current asset and total investment in current asset. A business enterprise should use its current asset effectively and economically because it is out of the management of these assets that profits accrue. A business will end up in losses if there is any lacuna in managing assets to the advantage of business. Investment in fixed assets being inelastic in nature there is no elbowroom to make an amendment in this sphere and its impact on profitability remains minimal. This structural ratio can be indicated as S.H.R = NET ASSETS / CURRENT ASSET An analysis of current assets composition enable one to examine in which components the working capital funds are locked up. Large tie up of funds in inventories effect profitability of the business adversely owing to carry over cost .in addition losses are likely to occur by the way of depreciation, decay, obsolesce, evaporation and so on. Receivable constitute another component of current assets If the major portion of current assets are made of cash alone the profitability will be decreased because cash is a non earning asset. If the portion of cash balance is excessive then it can be said that management is not efficient to employ surplus cash. Debtor turnover ratio: This ratio shows the extend of trade credit granted and the efficiency in the collection of debts and thus it is an indicative of trade credit management. The lower the debtor to sale ratio the better the trade credit management and better the quality of debtors. The lower debtor means prompt WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 30
TILAK MAHARASHTRA UNIVERSITY, PUNE payment by customers. An excessive long collection period on the other hand indicates a very liberal ineffective inefficient credit and collection policy. DEBTOR TURNOVER RATIO = SALES / DEBTORS Average collection period measures how long it takes to collect amounts from debtors. The actual collection period can be compared with the stated credit terms of the company. If it is longer than those terms, this indicate some insufficiency in the procedure of collecting debts Bad debts to sale ratio: This ratio indicates the efficiency of the controlled procedure of the company. The actual ratio is compared with the target of norms to decide whether or not it is acceptable. Creditor turnover period: The measurement of creditor turnover period shows the average time taken to pay for goods and service by the company. In general the longer the credit period achieved the better, because delay in payments means that the operation of the company is financed interest free by suppliers funds. But there will be point beyond which if they are operating in a sellers market, may harm the company. If too long a period is taken to pay creditors, the credit rating of the company may suffer, thereby making it more difficult to obtain supplier in future. CREDIT TURNOVER PERIOD = CREDITORS * 365 / PURCHASES WORKING CAPITAL LEVERAGE One of the important objectives of working capital management is by maintaining the optimum level of investment in current asset and by reducing the current liability .The company can minimize the investment in working capital and thereby improve the return of capital employed. The term working capital leverages refer to the impact of level of working capital on company’s profitability. The working capital management should improve the productivity of investment and current asset and ultimately it will increase the return on capital employed. Higher level of investment in current asset than is required means increase in the cost of interest charged on short term loans and working capital finance raised from banks and will resulting the lover return on capital employed and vice versa. Working capital leverages measures the responsiveness of ROCE for changes in current asset. It is measured by applying the fallowing formulae Working capital leverages = C.A / T.A - טּC.A Where: C.A = CURRENT ASSET T.A = TOTAL ASSETS (net fixed asset = current asset ) טּC.A = CHANGE IN CURRENT ASSET WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 31
TILAK MAHARASHTRA UNIVERSITY, PUNE OVERTRADING Overtrading arises when a business expands beyond the level of funds available. Overtrading an attempt to finance a certain volume of production and sales with inadequate working capital .If the company does not have enough funds of its own to finance stock and debtors it is forced, if it wish to expand, to borrow from creditors and from banks on overdraft sooner or later and such expansion financed completely by funds of others, will lead to a chronic imbalance in the working capital ratio. Expansion is advantageous so long as the business has funds available to finance stock and debtors involved. Overtrading begins at a point where the business relies on extra trade credit and increased turnover are financed by taking longer period of credit from suppliers and/or negotiating an extension of overdraft limits with the banks. Over dependence on outside finance is a sign of weakness, unless the expansion is curtailed, suppliers may refuse credit beyond certain limit, and the banks may call for the reduction in overdrafts. If this happens the business may be insolvent in that it does not have sufficient liquid resource to pay for current operation or to repay current liability until customers pay for sale made on credit terms, or unless the stock is sold for a loss for immediate cash payments. Using the fallowing ratios it will be possible to analyze the situation properly 1. Working capital = current asset: current liability 2. Acid test = quick asset: current liability 3. Stock turnover = stock: cost of sale 4. Debtor’s turnover = debtors: credit purchases 5. The object of using these ratios is to detect a disorientation of liquidity position of a firm and increase reliance upon trade creditors and overdraft facilities. OVERCAPITALIZATION AND UNDER CAPITALIZATION OF WORKING CAPITAL If there are excessive stock, debtors and cash and very few creditors, there will be an over investment in current asset. The inefficiency of managing working capital will cause this excessive working capital resulting in lower returns in working capital employed. and long-term funds will be unnecessarily tied up WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 32
TILAK MAHARASHTRA UNIVERSITY, PUNE when they could be invested to earn profit. This situation is known as overcapitalization of working capital. Under capitalization is a situation where a company does not have funds sufficient to run the normal operation smoothly. This may happen, due to inefficient working capital or diversion of working capital funds to finance capital items. If the company faces the situation of undrecapitalization, then it will face difficulty in meeting current obligation, procurement of raw material, meeting day- to-day running expense etc. The result will ultimately be reduced profitability, and reduced turnover. The finance manager must take immediate and proper step to overcome the situation by making arrangements for sufficient working capital. For this purpose he should prepare the realistic cash flow and fund flow statement of the company. STRATEGIES IN WORKING CAPITAL MANAGEMENT At present more finance option are available to the finance manager to see the operation of his firm go smoothly. Depending on the risks of business strategies is evolved to manage the working capital. Conservative working capital strategy: A conservative strategy suggests carrying high levels of current asset in relation to sales. Surplus current asset enable the firm to absorb sudden variation in sales, production plans, and procurement time without destructing production plans. Additionally the higher liquidity level reduces the risk of insolvency. But lower risk translates into lower returns. Large investment in current asset lead to higher interest and carrying cost and encouragement for efficiency. But conservative policy will enable the firm to absorb day o day risk. It assures continuous flow of operation and illuminates worry about recurring obligation. Under this strategy, long term financing covers more than the total requirement of capital. The excess cash is invested in short- term marketable securities and in need these securities are sold off in the market to meet the urgent requirement of working capital. Aggressive working capital strategy: Under this approach current asset are maintained just to meet the current liability without keeping cushions for the variation in working capital needs. The companies working capital is financed by long-term source of capital and seasonal variation are met through short-term borrowing. Adoption of this strategy will minimize the investment in net working capital and ultimately it lowers the cost financing working capital needs. The main drawback of this strategy is that it necessitates frequent financing and also increase, as the firm is variable to sudden shocks. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 33
TILAK MAHARASHTRA UNIVERSITY, PUNE A conservative current asset financing strategy would go for more long-term finance, which reduces the risk of uncertainty associated with frequent refinancing. The price of this strategy is higher financing cost since long-term rates will normally exceed short-term rates. But when aggressive strategy is adopted, some time the firm runs into mismatches and defaults. It is a cardinal principle of corporate finance that long term source and short-term assets should finance long term asset by a mix of long and short-term source. Efficient working capital management techniques are those that compressed operating cycle. The length of operating cycle is equal to the sum of the length of the inventory period and the receivable period. Just in time inventory management techniques reduce carrying cost by slashing the time that goods are parked as inventories. To shorten the receivables period without necessary reducing the credit period, corporate can offer trade discount for prompt payment. Rs SECULAR GROWTH LONG TERM FINANCING SEASONAL INVESTMENT IN VARIATION MARKETABLE SECURITY Tim e CONSERVATION WORKING CAPITAL STRATEGY WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 34
TILAK MAHARASHTRA UNIVERSITY, PUNE Rs Seasonal variation Short term financing Secular growth Long term financing Time AGGRESSIVE WORKING CAPITAL STRATEGY ROLE OF CASH AND BANK IN WORKING CAPITAL MANAGEMENT Good cash management can have a major impact on overall working capital management. The key elements of cash management are: 1. Cash forecasting; 2. Balance management; 3. Administration; 4. Internal control. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 35
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-5 RESEARCH METHODOLOGY WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 36
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER 5 Research Methodology: Research Design: Two years of Annual Reports 2005-06 and 2006-07. Data Collection Methods: For this project I have collected the Primary Data from Personal Interview, questionnaire. The Secondary Data has been collected from Annual Reports, Case study of ITC from ITC.Com Sampling Plan Sampling Unit: 1. Sr.Level Management(Finance)., Western Region, AAI, Mumbai. Sampling Size: 1(as Policies are decided at CHQ Level, New Delhi). Sampling Methods: Questionnaire, Personal Interview(Sr.Level Management) WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 37
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-6 DATA ANALYSIS AND INTERPRETATIONS USING VARIOUS CHARTS AND GRAPHS WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 38
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-6 DATA ANALYSIS AND INTERPRETATIONS USING VARIOUS CHARTS AND GRAPHS FINANCIAL PERFORMANCE The financial highlights of AAI for the year 2006-07 are as under: (Rupees in crores) Particulars 2006-07 2005-06 a) Revenue 3,726.23 3,490.46 b) Expenditure 2,196.90 2,236.3 c) Profit before Tax 1529.33 1,254.43 d) Provision for Tax 775.99 595.82 e) Deferred Tax Liability(Asset) (106.51) (59.01) f) Profit after Tax 859.85 717.62 g) Proposed Dividend 172.00 143.52 h) Tax on Dividend* 27.45 20.13 i) Appropriations to Reserves: i) Specific Reserves 309.16 221.31 ii) General Reserves 351.24 331.97 j) Internal Resources 1,126.34 984.98 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 39
TILAK MAHARASHTRA UNIVERSITY, PUNE *including interim dividend WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 40
TILAK MAHARASHTRA UNIVERSITY, PUNE WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 41
TILAK MAHARASHTRA UNIVERSITY, PUNE CAPITAL STRUCTURE (Rupees in crores) Particulars As on 31st March,2007 As on 31st March,2006 a) Government Capital 463.63 449.63 b) Reserves & Surplus 4,381.76 3,720.23 c) Long Term Loans 65.28 82.33 d) Net worth 4,542.99 3,868.59 e) Capital Employed 3,652.32 3,260.70 f) Working Capital 1,491.81 1,285.81 Payment to Government During the year following payments excluding taxes were made to Government of India. Dividend (incl.interim dividend of Rs:60 crores for 2006-07) 163.52 Guarantee Fee 0.59 Interest on Government budgetary support loan 0.54 Prepayment/Repayment of Government Loans 18.00 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 42
TILAK MAHARASHTRA UNIVERSITY, PUNE Interim Dividend: AAI paid an Interim Dividend of Rs:60 crores for the year 2006-07 to Government of India. Statement showing the Performance at glance for working capital (RS.IN CRORES) Particulars 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Current Assets 6,366.20 5,286.68 4,285.34 3,509.34 3,322.28 2,881.91 Current Liabilities 4,874.39 4,000.87 3,160.81 2,612.64 2,501.76 2,140.29 Working Capital 1,491.81 1,285.81 1,124.53 896.70 820.52 741.62 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 43
TILAK MAHARASHTRA UNIVERSITY, PUNE Statement showing the Performance at glance-Ratios Ratios UNIT 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Profit After Tax to Net worth Percentag e 19% 19% 10% 11% 11% 12% Profit Before Tax to capital Employed Percentag e 42% 38% 23% 20% 20% 20% Profit After Tax to Capital Employed Percentag e 24% 22% 11% 12% 11% 11% Turnover to Capital Employed Percentag e 102% 107% 99% 97% 94% 94% Current Ratio Ratio 1.31:1 1.32:1 1.36:1 1.38:1 1.33:1 1.35:1 Profit Before Tax to Total Revenue Percentag e 41% 36% 23% 21% 21% 21% WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 44
TILAK MAHARASHTRA UNIVERSITY, PUNE Ratios UNIT 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 Profit After Tax to Total Revenue Percentag e 23% 21% 11% 12% 12% 12% Average Debt Collection Period Days 164 131 149 200 188 164 No.of Aircraft Movements per Employee Nos. 55 42 36 32 27 25 Revenue per employee Rs.in '000 1,906 1,786 1,502 1,297 1,135 1,079 Revenue Exp. Per Rs in '000 1,124 1,133 1,159 1,029 898 850 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 45
TILAK MAHARASHTRA UNIVERSITY, PUNE employee STATEMENT SHOWING WORKING CAPITAL OF AIRPORTS AUTHORITY OF INDIA (RS: IN LAKHS) S.NO PARTICULARS CURRENT YEAR 2006-07 (RUPEES) PREVIOUS YEAR 2005-06(RUPEES) A CURRENT ASSEST 1 STORES & SPARES 25,44,51,040 13,76,07,279 2 SUNDRY DEBTORS 517,36,82,170 495,32,02,052 3 CASH & BANK BALANCE 1980,86,82,858 1551,39,00,247 4 DEPOSITS,LOANS & ADVANCES 3539,03,37,428 2949,22,13,116 5 INTEREST ACCURED ON INVESTMENTS/DEPOSITS 148,00,61,574 87,58,38,079 6 ANY OTHER ITEM i) PREPAID EXPENSES 2,12,01,438 2,37,77,215 ii) INCOME ACCURED BUT NOT DUE 153,35,73,531 187,03,30,441 B CURRENT LIABILITIES WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 46
TILAK MAHARASHTRA UNIVERSITY, PUNE 1 LIABILITIES 1763,97,34,240 1334,80,84,638 2 PROVISION 3110,41,24,759 2666,07,08,931 C CONTINGENT LIABILITIES 94,398 1,36,301 CURRENT ASSETS: 1. SUNDRY DEBTORS: The Sundry debtors includes National Carriers Operators(ie. Air India, Indian Airlines, Alliance Air), Private Taxi Operators(i.e. Jet Airways, Kingfisher Airlines, Jetlite Airways, Air Deccan etc), Small Domestic Operators,(for e.g. Pawan Hans , Reliance, ) Commerical Parties etc. The following are Particulars of Sundry Debtors for the F.Y. 2006-07 and 2005-06 S.N PARTICULARS 2006-07 2005-06 SUNDRY DEBTORS (RUPEES) (RUPEES) 1 DEBTS OUTSTANDING FOR A PERIOD LESS THAN 6 MONTHS 338,39,68,964 329,48,93,870 2 DEBTS OUTSTANDING FOR A PERIOD MORE THAN 6 MONTHS 802,25,97,190 697,30,56,442 TOTAL 1140,65,66,154 1026,79,50,312 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 47
TILAK MAHARASHTRA UNIVERSITY, PUNE LESS:PROVISION FOR BAD AND DOUBTFUL DEBTS 623,28,83,984 531,47,48,260 DEBTORS AFTER PROVISION 517,36,82,170 495,32,02,052 PARTICULARS OF SR DEBTORS 2006-07 2005-06 a) Debts considered good and in respect of which the Authority is fully secured 177,15,99,355 150,83,94,368 b) Debts considered good for which the Authority holds no security other than the Debtor's personal security. 340,20,82,815 344,48,07,683 c) Debts considered doubtful and provided for 623,28,83,984 531,47,48,261 TOTAL 1140,65,66,154 1026,79,50,312 The Debt more than 2 years old recoverable from parties other than Government Departments are considered doubtful and provided for. Security Deposit available has not been considered while making the provision for doubtful debts. In cases where the matter has been referred to arbitration/litigation/disputed, necessary provision is made in the accounts irrespective of the period of debt. The Sundry Debtors(RS:517.37 crores) This is overstated by Rs:1.00 crore due to non accounting of relief granted to India Tourism Development Corporation in the arbitration award relating to duty free shops pronounced in October,2006 and accepted by the Board in February,2007. This has resulted in overstatement of profit by Rs:1.00 crores. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 48
TILAK MAHARASHTRA UNIVERSITY, PUNE 2. CASH AND BANK BALANCES S.NO PARTICULARS 2006-07 2005-06 1 CASH AND STAMPS 84,43,953 2,40,92,828 2 CHEQUES IN HAND 5,43,32,048 10,12,78,330 3 REMITTANCE IN TRANSIT 41,47,76,251 5,47,09,864 4 SHORT TERM DEPOSITS WITH BANKS - INDIA 1822,61,35,130 1323,89,47,130 5 BANK BALANCES IN CURRENT ACCOUNT- INDIA 101,47,06,472 195,23,90,106 6 EXCHANGE EARNERS FOREIGN CURRENCY ACCOUNTS 9,02,89,004 14,24,81,989 7 CASH IN TRANSIT - TOTAL 1980,86,82,858 1551,39,00,247 3. DEPOSITS , LOANS AND ADVANCES S.N PARTICULARS 2006-07 2005-06 1 ADVANCES TO STAFF 266,51,40,081 279,42,42,826 2 ADVANCES FOR PURCHASES 37,37,91,761 9,52,91,487 3 OTHER ADVANCES 216,41,08,996 92,29,80,975 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 49
TILAK MAHARASHTRA UNIVERSITY, PUNE 4 DEPOSITS 38,00,37,967 21,44,41,046 5 LOAN TO VAYUDOOT - 6 ADVANCE INCOME TAX & TDS 2885,78,71,711 2456,40,43,575 7 INTEREST ACCURED /DUE ON LOANS - 8 PREPAID EXPENSES - 9 AMOUNT DUE FROM GOVERNMENT BUDGETARY SUPPORT - 10 DEPOSITS WITH STATE ELECTRICITY BOARD 24,01,46,245 23,21,22,811 11 OTHER DEPOSITS 70,92,40,665 66,90,90,396 TOTAL 3539,03,37,428 2949,22,13,116 Deposits, Loans and Advances(Rs:3539.03 Crore) a) This includes an amount of Rs:6.55 crore lying with Delhi Development Authority(DDA) f0 deposit work for development of land for resettlement at Delhi. Out of this an amount of Rs:3.36 crore has been certified by the DDA as expenditure incurred, which should have been charged off to revenue. Non changing of the amount has resulted in overstatement of the above head and understatement of "Other expenses" by RS:3.36crore. Consequently, profit stands overstated by the same amount. b) This includes a) RS:1.57 crore being clam against contractor at Hyderabad pending in arbitration and b) RS:70 lakh being claim disallowed by arbitrator. As the recovery of the above amounts is uncertain, the same should have been provided WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 50
TILAK MAHARASHTRA UNIVERSITY, PUNE for. Non provision towards these has resuled in overstatement of profit by Rs:2.27 crore. 4. Stores and Spares Rs:25.45 Crore: This includes Rs:91.89 lakh being value of inventory items whose unit prices were Rs:5000 and less in contravention of accounting policy No.6. This has resulted in understatement of expenditure and overstatement of profit by Rs:91.89 Lakhs. i) Stock/Spares consumed during the year are changed as revenue expenditure. ii) Stock at year end(except store/spare with unit cost of Rs:5,000 and less) is valued at cost price on FIFO basis for a period of five years from the date of receipt. Thereafter the valuation is to be done as under: 6th year : 70% of the cost 7th year : 40% of the cost 8th year onwards : 10% of the cost iii) Unconsumed stock of store/spare as 01.04.2005 is valued at 10% of the cost. CURRENT LIABILITIES WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 51
TILAK MAHARASHTRA UNIVERSITY, PUNE S.N PARTICULARS 2006-07 2005-06 1. LIABILITY FOR : Goods Supplied/Work Done-Capital 154,60,53,611 111,32,81,370 Goods Supplied/Work Done-Revenue 38,73,56,569 32,57,83,335 Pay & Allowances and Exgratia 224,68,21,751 187,65,06,262 Provident Fund 7,42,49,544 3,42,20,223 Municipal Taxes 30,19,44,254 28,14,90,044 Arbitration 18,33,84,962 - Recoveries Awaiting Remittance 41,57,24,749 14,52,76,267 Benevolent Fund 16,18,81,325 -2,24,54,937 MET Expenses 116,32,00,000 174,90,70,037 Other Expenses 253,44,66,815 221,55,96,310 SUNDRY CREDITORS 9,38,78,765 14,07,79,149 LIQUIDATED DAMAGES 16,00,43,997 11,44,47,204 ANTI-HIJACKING EXPENSES 103,03,85,242 101,35,03,191 WORKS TAX PENDING REMITTANCE 2,47,62,562 2,21,17,004 CISF EXPENDITURE 70,45,02,852 75,56,47,528 SECURITY DEPOSITS, EMD 112,36,38,170 98,36,50,481 INTEREST ACCURED BUT NOT DUE ON LOANS- -INDIAN LOANS 22,07,192 8,88,699 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 52
TILAK MAHARASHTRA UNIVERSITY, PUNE -FOREIGN LOANS 3,24,776 25,04,026 -COMMERCIAL CAPITAL 167,60,56,849 167,60,56,849 INCOME RECEIVED IN ADVANCE BUT NOT DUE 14,71,39,877 17,95,08,785 ADVANCES FROM CLIENTS 37,12,31,012 28,02,46,491 DEPOSIT FOR DEPOSIT WORKS 12,35,71,847 21,22,77,028 DEPOSIT WORK BY CPWD - 12,18,220 BUREAU OF CIVIL AVIATION SECURITY DEPOSIT - - INCOME HELD UNDER SUSPENSE - - MISCELLANEOUS DEPOSITS 26,69,07,520 24,64,71,072 ADVANCES FROM CLIENTS UPFRONT FEE FROM JVCs 290,00,00,000 - TOTAL 1763,97,34,240 1334,80,84,638 CURRENT LIABILITIES : i) This is understated by Rs: 30.22 crore due to non-inclusion of liability towards taxes payable (Rs: 29.32 crore) and leasing and other charges payable (Rs: 90.48 Lakh). Consequently, accumulated profit is overstated by Rs: 30.22 crore. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 53
TILAK MAHARASHTRA UNIVERSITY, PUNE ii) This is overstated by Rs: 3.51 crore due to creation of liabilities in excess of requirement (Rs: 1.29 crore) and non write back of liabilities outstanding for over three years for which no claims are pending (Rs: 2.22 crore). Consequently, net profit is understand by Rs: 3.51 crore. iii) This is understand by Rs: 2.52 crore due to non inclusion of liabilities towards cost of work done and bills received upto 31st March, 2007. Consequently Gross Block of Fixed Assets and Capital Work in Progress stand understand by Rs: 1.25 crore and Rs: 1.27 crore respectively. Depreciation is also understated and profit overstated by Rs: 12.40 Lakh. PROVISIONS S.N. PARTICULARS 2006-07(RUPEES) 2005-06(RUPEES) 1 INCOME TAX -INDIA 2197,22,08,366 1820,93,51,856 2 EXCHANGE FLUCTUATION - - 3 PROPOSED DIVIDEND 112,00,00,000 103,52,37,551 4 TAX ON DIVIDEND 19,03,44,000 14,51,92,069 5 OTHERS 782,15,72,393 727,09,27,455 TOTAL 3110,41,24,759 2666,07,08,931 Provision: Rs:3110.41 Crore WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 54
TILAK MAHARASHTRA UNIVERSITY, PUNE This is understated by Rs:6.17 crore due to incorrect calculation of actuarial valuation for Gratuity liability(Rs:1.48 Crore) and provision for fringe benefit tax (Rs:4.69 Crore). Consequently profit is overstated by the some amount. CHAPTER-7 FINDINGS WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 55
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER:7 FINDINGS: By perusing the primary data of the company, I could get an insight about the various components of the Working Capital Management ie. Sundry Debtors and related Debts collection period, Cash Flow of the Company and the richness of the company enjoys due to its status in the Industry(i.e. Monopoly). The details of Stock Accounting of the Company and the implications of the same on the Working Capital Management also could be analysed. I could also know about how Creditors of the Company are being discharged so also the various provisions being made by the Company in its Books of Accounts at the end of the Financial Year and its implications on the Working Capital Management. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 56
TILAK MAHARASHTRA UNIVERSITY, PUNE The good management of working capital is part of good financial management. Effective use of working capital will add to the operational efficiency of a department; optimal use will help to generate maximum returns so also the STATUS of 'GOOD PAY MASTER" in the Industry. Ratio analysis can be used to identify working capital areas, which require closer management. Various techniques and strategies, discussed above are available for managing specific working capital items. Debtors, creditors, cash and in some cases inventories are the areas most likely to be relevant to a firm. CHAPTER-8 LIMITATION IF ANY WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 57
TILAK MAHARASHTRA UNIVERSITY, PUNE Chapter-8 Limitations The Stock Accounting in respect of Airports Authority of India is governed by the Company Accounting Policy in this regard. Taking into account the policy guidelines prevailing the suggestion noted for better Inventory Management has a limitation to this effect towards overall Working Capital Management. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 58
TILAK MAHARASHTRA UNIVERSITY, PUNE CHAPTER-9 WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 59
TILAK MAHARASHTRA UNIVERSITY, PUNE EXPECTED CONTRIBUTION FROM THE STUDY CHAPTER-9 Expected Contribution from the Study: 1. Better Debts Collection. 2. Timely discharge of Current Liabilities. 3. Increased cash flow which could be used even for Short Term Investments WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 60
TILAK MAHARASHTRA UNIVERSITY, PUNE which in turn increases the liquidity taking into account the interest accrued on such investments. 4. Better Stock Management. CASE STUDY THE ITC ITC is one of the India's foremost private sector companies with a market capitalization of nearly US $ 18 billion and a turnover of over US $ 5.1 Billion. ITC is raed among the World's Best Big Companies. Asia's 'Fab 50' and the World's Most Reputable Companies by Forbes magazine, among India's Most Respected WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 61
TILAK MAHARASHTRA UNIVERSITY, PUNE Companies by BusinessWorld and among India's Most Valuable Companies by Business Today. ITC also ranks among India's top 10 'Most Valuable (Company) Brands', in a study conducted by Brand Finance and published by the Economic Times. ITC has a diversified presence in Cigarettes, Hotels, Paperboards and Speciality Papers, Packaging, Agri-Business, Packaged Foods and Confectionery, Information Technology, Branded Apparel, Personal Care, Stationery, Safety Matches and other FMCG products. While ITC is an outstanding market leader in its traditional businesses of Cigaretters, Hotels, Paperboards, Packaging and Agri- Exports, it is rapidly gaining market share even in its nascent businesses of Packaged Foods and Confectionery, Branded Apparel, Personal Care and Stationery. As one of India's most valuable and respected corporations, ITC is widely perceived to be dedicatedly nation-oriented. Chairman Y C Deveshwar calls this source of inspiration "a commitment beyond the market". In his own words: "ITC believes that its aspiration to Crete enduring value for the nation provides the motive force to sustain growing shareholder value. ITC practices this philosophy by not only driving each of its businesses towards international competitiveness but by also consciously contributing to enhancing the competitiveness of the larger value chain of which it is a part." ITC's diversified status originates from its corporate strategy aimed at creating multiple drivers of growth anchored on its time-tested crore competencies: unmatched distribution reach, superior brand-building capabilities, effective supply chain management and acknowledged service skills in hoteliering. Over time, the strategic forays into new businesses are expected to garner a significant share of these emerging high-growth markets in India. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 62
TILAK MAHARASHTRA UNIVERSITY, PUNE ITC's Agri-Business is one of India's largest exporters of agricultural products. ITC is one of the country's biggest foreign exchange earners (US $ 3.2 billion in the last decade). The Company's 'e-Choupal" initiative is enabling Indian Agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Company's marketing reach. ITC's wholly owned Information Technology subsidiary, ITC Infotech India Limited, is aggressively pursuing emerging opportunities in providing end-to-end IT solutions, including e-enabled services and business process outsourcing. ITC's production facilities and hotels have won numerous national and international awards for quality, productivity, safety and environment management systems. ITC was the first company in India to voluntarily seek a corporate governance rating. ITC employees over 24,000 people at more than 60 locations across India. The Company continuously endeavors to enhance its wealth generating capabilities in a globalising environment to consistently reward more than 3,81, 000 shareholders, fulfill the aspirations of its stakeholders and meet societal expectations. This over- arching vision of the company is expressively captured in its corporate positioning statement: "Enduring Value. For the nation. For the Shareholder." STATEMENT SHOWING WORKING CAPITAL OF ITC Particulars 2007 – 2008 Rs in Crores 2006 – 2007 Rs in Crores WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 63
TILAK MAHARASHTRA UNIVERSITY, PUNE CURRENT ASSETS: Inventories 4050.52 3354.03 Sundry debtors 736.93 636.69 Cash and Bank balance 570.25 900.16 Other current asset 146.07 183.04 Loans and advances 1515.50 1215.8015278 TOTAL CURRENT ASSET (A) 7019.27 6289.72 CURRENT LIABILITY Current liability 2786.97 2384.75 Provisions 1645.33 1472.84 TOTAL CURRENT LIABILITY (B) 4432.30 3857.59 NET WORKING CAPITAL (A-B) 2586.97 2432.13 QUESTIONNAIRE 1. NAME : _______________________________________ WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 64
TILAK MAHARASHTRA UNIVERSITY, PUNE 2. DESIGNATION : ________________________________________ 3. ADDRESS : ________________________________________ 4. OCCUPATION : ________________________________________ 5. AGE : ________________________________________ 1. Whether Working Capital Management is done in your Organization. Yes/No 2. How the Working Capital is managed in your Organization? Very Efficiently Efficiently Average Less Efficiently Inefficient 3. What is your contribution to the Management of Working Capital? 100% 75% 50% 25% Less than 25% 4. Rankings to what aspects you consider for working capital management S.NO FACTORS RANKING 1 LIQUIDITY 2 PROFITABILITY 3 PRICE CHANGES WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 65
TILAK MAHARASHTRA UNIVERSITY, PUNE 4 SERVICE CONSIDERATION 5 SATISFACTION OF CUSTOMERS. 5. What steps should be required to be taken for improving the Working Capital Management? ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 66
TILAK MAHARASHTRA UNIVERSITY, PUNE BIBLIOGRAPHY: 1. 12th Annual Report 2006-07-Airports Authority of India. 2. Case Study-ITC- from ITC.COM. WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 67
TILAK MAHARASHTRA UNIVERSITY, PUNE WORKING CAPITAL MANAGEMENT- MANOJ S.HULE. 68
TILAK MAHARASHTRA UNIV
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