Copy of a Report

8/9/2019 Copy of a Report

1/65

A REPORT

ON

ASSESSMENT OfWORKING CAPITAL

IN

SUBMITTED TO:

JAGAN INSTITUTE OF MANAGEMENT STUDIES

IN FULFILLMENT OF THE REQUIREMENTS FOR

POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)

SUBMITTED BY

1


2/65

ANKITA ARORAPGP

ACKNOWLEDGEMENT

For the successful completion of this project, the guidance and inputs of

Mr. Mohit Goyal, EXECUTIVE HISSAR BRANCH.

I would like to thank Mr. Lokesh Singhal, Branch Head, Hissar Branch, for

provided me the opportunity to undertake my summer training in this

prestigious bank.

I also express my gratitude towards other staff members of AXIS BANK

Ltd., HISSAR BRANCH, who helped me to polish my skills, enhance my

knowledge, provide practical knowledge which would help me in my future

course of professional carrier.

I am also thankful to my all teachers and mentor for providing me

supportive and cooperative environment, and guiding me towards the

completion of the project. Without the help and guidance of all the above

this project would not have been possible.

ANKITA ARORAP.G.P I

2


3/65

CONTENTS OF INDEX

1. Introduction Pg No.

1.1 Synopsis 6

1.2 Problems 8

1.3 Justification 9

1.4 Limitation of the Study 10

2. Outline 11

3. Company Profile

3.1 Introduction 12

3.2 Financial Performance 14

2.3 Vision and Mission 17

2.4 Core Values 18

2.5 Products 19

2.6 Credit Facility 21

3. Working Capital Management

3.1 An Introduction 25

3.2 Operating Cycle or Working Capital Cycle 27

3.3 Objective of working capital 39

3


4/65

4. Assessment of Working Capital

4.0 Introduction 41

4.1 Methods of Assessment 43

5. Financial Analysis

5.0 Fund Flow Analysis 49

5.1 Ratio Analysis 515.3 Conclusion 63

6. Bibliography 64

4


5/65

Preface

Masters in Business Administration, A course conducted

which strives to achieve harmonious relationship between

theoretical and practical aspects of business.

As a part of curriculum it is imperative for the students

passing this course to undergo training in an organization ofrepute to understand its functioning and have a practical

exposure of management. I was thus Assigned summer

training for two months with AXIS BANK Hissar.

As the part of my M.B.A programme, I was accorded the

opportunity to under go project of AXIS Bank. During the

period of Axis Bank the topic of Assessment of Working

Capital was taken.

5


6/65

INTRODUCTION

SYNOPSIS

TITLE OF THE PROJECT : ASSESSMENT OF WORKING

CAPITAL MANAGEMENT

DURATION OF THE : 45 DAYS

PROJECT

OBJECTIVE:- The present study of Working Capital Management in

AXIS BANK is intended to examine the efficiency of management

performance in working capital. It has been determined by the efficient

administration of various components of working capital, Inventory, account

receivable and cash.

The projects aim is to determine the efficiency and effectiveness of

management in each segment of working capital. The extent to which the

current asset and current liability are administered, determines to a very

large extent the success or failure of the business.

The project has been carried out with the help of data provided by annual

accounts and related data of other section of development. Ratio analysis,Cash Flow Statement has been used as an analytical tool for better

understanding of Working Capital Management.

6


7/65

PRIMARY OBJECTIVES

TO GAIN DETAILED KNOWLEDGE OF GIVEN TOPIC AND

THE RELATED TOPICS

TO LEARN AND PRACTICE THE FINANCE CONCEPTS AND

TOOLS USED DURING THE PROJECT.

SECONDARY OBJECTIVES

TO STRENGTHEN OUR BASE WHILE DOING THE PROJECTBEFORE OPTING FOR SPECIALISATION IN FINANCE

TO GAIN SOME PRACTICAL KNOWLEDGE WHILE

INTERACTING WITH COMPANY EXECUTIVES

TO IMPROVE REPORT WRITING SKILLS

7


8/65

1.1 PROBLEM

The DEVELOPING ECONOMIES are generally faced with

problem of inefficient utilization of resources available to them. Capital is

the scarcest productive resource in such economies and proper utilization of

these resources promotes the rate of growth, cut down the cost of production

and above all improves the efficiency of the productive system. Fixed

capital and working capital are the dominant contributors to the total capital

of developing country. Fixed capital investment generates

Productive capacity whereas working capital makes the utilization of

capacity possible. Thus, the study of working capital behavior occupies an

important place in financial management. . The earlier emphasis of financial

management was more on long-term financial decisions. Working capital

management which is concerned with short-term financial decision appears

to have been relatively neglected in the literature of finance. A deeper

understanding of the importance of working capital and its satisfactory

provision can lead not only to material savings in the economical use of

capital but can also assists in furthering the ultimate aim of a business,

namely, that of maximizing financial returns on the minimum amount of

capital which need to be employed.

In addition working capital has acquired a great significance and sound

position for the twin objects of profitability and liquidity. All the above

factors clearly indicate the crucial importance of working capital in

management of finance.

1.2 JUSTIFICATION FOR THE STUDY

8


9/65

Importance of working capital management stems from the two reasons viz.,

(i) a substantial portion of total investment is invested in current assets and

(ii) level of current assets will changed quickly with the variation in sales.

Hence, in this study an attempt has been made to analysis the size and

composition of working capital and whether such an investment has

increased or declined over a period of time. After determining the

requirements of current assets, one of the important tasks of the financial

analyst is to select an assortment of appropriate source of finance for the

current assets. Normally, the excess of current assets over current liabilitiesshould be financed by long-term sources. Precisely it is not possible to find

out which long-term source has been used to finance current assets, but it

can be examined as to what proportion of current assets has been financed

by long-term funds. Therefore, an attempt has been made in this regard. In

working capital analysis, the direction of change over a period of time is of

crucial importance. Not only that, analysis of working capital trends

provides a base to judge whether the practice and prevailing policy of the

management with regard to working capital is good enough or an

improvement is to be made in managing the working capital funds. Hence in

this study, an attempt is made about the trend of the working capital

management of the selected enterprise, to have higher profitability, the firms

may sacrifice solvency and maintained a relatively low level of current

assets. When the firms do so, their profitability will improve as less funds

are tide up in the idle current assets, but their solvency will be threatened.

Hence an attempt is made to study the association of profitability with the

9


10/65

working capital ratios. With this end in view, an effort has been made in this

project to make an in depth study of working capital.

1.3 LIMITATION OF THE STUDY

In my view my study of the working capital management has certain

limitations. Because I just spent only 45 days in the company and whatever

information during that short period I could gather, I worked upon that. Thus

my study does not present an overall view of the working capitalmanagement at AXIS BANK.

10


11/65

OUTLINE

Name of Bank : Axis Bank

Operation Begun In : 1994

Registered Office : Ahmedabad

Central Office : MumbaiCEO : Mrs. Shikha Sharma

Branches : 835

ATMs : 3595

11


12/65

COMPANY PROFILE

.Axis Bank India, the first bank to begin operations as new private banks in

1994 after the Government of India allowed new private banks to beestablished. Axis Bank was jointly promoted by the Administrator of thespecified undertaking of the Unit Trust of India (UTI-I), Life InsuranceCorporation of India (LIC) and General Insurance Corporation Ltd. Alsowith associates viz. National Insurance Company Ltd., The New IndiaAssurance Company, The Oriental Insurance Corporation and UnitedInsurance Company Ltd. On July 30, 2007 UTI Bank has changed its nameto Axis Bank. This is the first time that a bank has gone in for a brand-change voluntarily; earlier names of banks have been changed either due toa merger or an acquisition

Axis Bank has business of Rs.1,02,000.00 crore with a market capitalizationof Rs.21,817.00Crore making it the fifth largest Bank in India. It has 60 lakhcustomers and communicating to them the name change would be the primeexercise for the bank.

It has more than 574 branch offices and Extension Counters in the countrywith over 2428 Axis Bank ATM proving to be one of the largest ATMnetworks in the country. It commits to adopt the best industry practices

internationally to achieve excellence. It has strengths in retail as well ascorporate banking.

By the end of June 2007, Axis Bank in India had over 60 lakhs debit cards.This is the first bank in India to offer the AT PAR Cheque facility, withoutany charges, to all its Savings Bank customers in all the places across thecountry where it has presence.

12


13/65

Few milestones of the Axis bank:

Mar '07 : Axis Bank joins hands with IIFCL to provide leverage for

infrastructural projects in the country.Mar '07 : AXIS Bank comes up with full license bank branch in Hong Kong.

Feb '07 : Finance minister Shri P. Chidambaram introduces Shriram AXISBank Co - Branded Credit Card especially for Small Road TransportOperators (SRTOS).

Aug'06 :AXIS Bank holds the position of being the first Indian Bank tosuccessfully issue Foreign Currency Hybrid Capital in the InternationalMarket.

Aug '06 : AXIS Bank launches the beneficial scheme of issuance of "SeniorCitizen ID Card" in collaboration with Dignity Foundation.

Dec '05 : AXIS Bank adds International Financing Review (IFR) Asia 'IndiaBond House' award for the year 2005 in its appreciation record.

Jul '05 : AXIS Bank and Visa International launch Mobile Refill facility -Anytime, Anywhere Pre-Paid Mobile Refill for all Visa Cardholders inIndia.

Mar '05 :AXIS Bank gets counted on the London Stock Exchange, raises US$239.30 million through Global.

Financial Performance:

13


14/65

The bank continues to record an impressive year-on-year performance,

earning a net profit of Rs. 1,81,5.36 crores for the financial year 2008-09

against Rs. 1,071.03 crores in the previous year.

Rising Profitability ( in crores)

335

485

659

1071

1815

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2004-05 2005-06 2006-07 2007-08 2008-09

Net Profit

CORE MANAGEMENT TEAM

14


15/65

Mr. R.K. Bammi : President - North Zone

Mr. S.K. Nandi : President West ZoneMr. S.K. Mitra : President East Zone

Mr. C.P. Rangarajan : President South Zone

Highlights

Profit after Tax up 69.50% to Rs. 1,815.36 crores

15


16/65

Net Interest Income up 42.58% to Rs.

3,686.21crores Fee and other Income up 63.63% to Rs. 2523.02

crores

Deposits up 33.95% to Rs. 1,17,374.11 crores

Net NPA ratio as a percentage of net customer

assets down to 0.35% from 0.36%

Earning Per Share increased from Rs. 32.15 to

50.61

MISSION AND VISION

16


17/65

Customer Service and Product Innovation tuned to

diverse needs of individual and corporate clientele.

Continuous technology upgradation while maintaining

human values.

Progressive globalization and achieving international

standards.

Efficiency and effectiveness built on ethical practices.

CORE VALUES

Customer Satisfaction through:

17


18/65

Providing quality service effectively and

efficiently Smile, it enhances your face value is a service

quality stressed on

Periodic Customer Service Audits

Maximization of Stakeholder value

Success through Teamwork, Integrity and People

PRODUCTS AT A GLANCE:

18


19/65

ACCOUNTS AND DEPOSITS

Banking should be effortless. With AXIS Bank, the efforts are rewarding.No matter what a customer's need and occupational status, we have a rangeof solutions that are second to none.

Whether customer employed in a company and need a simple Savingsaccount or run your own business and require a robust banking partner,AXIS Bank not only has the perfect solution for you, but also canrecommend products that can augment planning for the future.

Savings Accounts

These accounts are primarily meant to inculcate a sense of saving for thefuture, accumulating funds over a period of time. Whatever occupation,

bank is confident that customer will find the perfect banking solution.Features offered for Trust/Associations/Government Bodies/NGOs:

Saving Account with no minimum balance requirement.

At Par Cheque Facility.

Free anywhere banking.

Free Collections of Cheques. Free Demat Account.

Current Accounts

Now, with an AXIS Bank Current Account, experience the freedom ofmulti-city banking! Users can have the power of multi-location access totheir account from any of our 835 branches in 228 cities. Not only that,

they can do most of their banking transactions from the comfort of theiroffice or home without stepping out.

Fixed Deposits

19


20/65

Long-term investments form the chunk of everybody's future plans. Analternative to simply applying for loans, fixed deposits allow you to borrowfrom your own funds for a limited period, thus fulfilling your needs as well

as keeping your savings secure.

LOANS:

Personal Loans brings customer one step closer to their dreams

Retail Loan

Personal Loan

Vehicle Loan Consumer Loan Loan against Property Loan against Deposit

Education Loan

Corporate Loan

Credit Facility:

Credit Facility is broadly classified into two categories:

20


21/65

FUND BASED CREDIT FACILITY

Cash Credit Or Overdraft:

Types of Credit Facilities

Fund Based Credit FacilitesNon Fund Based Credit Facilites

Cash Credit

Term Loan

Bill Finance

BankGuarantee

Letter Of

Credit

21


22/65

A cash credit or overdraft is an arrangement by which a banker allows

his customer to borrow up to a certain limit. This is the most popular

made of borrowing by large commercial and industrial concerns in

India, on account of the advantage that a customer need not borrow at

once, the whole of the amount he is likely to require, but can draw such

amount as and when require.

Term Loan:

Term loans are granted to customers generally for meeting capitalexpenditure needs of the business. Term loans are granted in one lump sum

and are allowed to be repaid over a period of time in installments.

Bill Finance:

Bill Finance is also one of the important facets of lending by banks.

Generally the bill finance is conducted through discounting of bills of

exchange drawn by the borrower or third persons on the borrower

Basis of Difference Cash Credit Over Draft

Securities Primary securities on Primary security on

22


23/65

stocks and Book

debts. property.

Requirement Stock statement is

required

Stock statement not

required.Charges Bank charges on

stock and book

debts.

No charge on stock

and book debts

Inspection Quarterly inspection

is mandatory

Inspection is not

mandatory

NON FUND BASED CREIDT FACILITY

Guarantee facility:

23


24/65

Banker in his business of lending extends various facilities to its

constituents. Under this facility the bank undertakes to discharge the liability

of borrower to third parties.

Letter of Credit Facility

Letter of credit facility is another Non Fund Based facility extended by

bankers to their constituents. Under this facility banker undertakes to pay

on presentation of documents of title of goods.

WORKING CAPITAL

The word working capital is a combination of two words working and

capital. In business, the word working means circulation of capital from one

24


25/65

form to another form during day to day operations of the business, where as

the word capital refers to the monetary value of all assets (tangible and

intangible) of the business.

Working capital is that part of the firms capital which is required for

financing short term or current assets such as inventories, debtors,

marketable securities and cash. It is also known as circulating or revolving

capital or short term capital or liquid capital. There is a lot of difference of

options among accountants, financial experts, entrepreneurs and economists.

Therefore, it is essential to mention the different concepts of workingcapital.

Traditional or balance sheet concept

Operating cycle method

Traditional concept:

According to this concept, working capital depicts the position of the firm at

a certain point of time. It is calculated on the basis of a balance sheetprepared at a specific date. With this point of view, working capital is of twotypes as

1. Gross working capital

2. Net working capital

Gross working capital:

The sum of current assets of the firm represents working capital. All the

current assets of the business, whether these have been financed either from

long term funds or short term funds, form the working capital of a firm.

25


26/65

Net working capital

It is the difference between current assets and current liabilities or the excess

of current assets over current liabilities. It may be defined as that part of a

firms current assets which financed with long term funds. The net working

capital may either be positive or negative. When the current assets exceed

the current liabilities, the working capital is positive. The negative working

capital results when the current liabilities are more than current assets.

The excess of current assets over current liabilities is a Qualitative aspect of

working capital and it measures the firms liquidity. It also indicates the

extent to which working capital can be financed with the long term funds.

According to this concept, an increase in current assets would not affect the

net working capital if there is a corresponding increase in current liabilities,

as the difference between current assets current liabilities will remain thesame. The net working capital can only be increased by

Increased in the share capital long term loans

sale of fixed assets Ploughing back of profits.

This concept is useful only for accountants, investments, creditors or those

persons who have interest in liquidity and financial soundness of the firm.

The gross concept is suitable from business pint of view, where as, from

accounting point of view, net concept is more appropriate. As per general

26


27/65

practice, net gross capital is simply as working capital and gross capital is

circulating capital or current capital.

A firm should maintain an optimum level of gross working capital. This will

help in avoiding the unnecessary stoppage of work or chance of liquidation

due to insufficient working capital. On the other hand, net working capital is

the amount of funds that must be invested by the firm, more or less,

regularly in current assets.

Operating cycle concept:

The Working Capital cycle or Cash Conversion cycle as it is also called is

usually expressed in terms of the number of days. This figure is the average

time that it takes to turn investment in books into cash and profit. Typically,

investment in raw materials, work-in-progress and finished goods is

followed by sales for cash or on credit. Credit sales funds are usually

collected at a later date. Investment is needed at each stage to finance

current assets. The cycle may be expressed in terms of the length of time

between the acquisition of raw materials and other inputs and the flow of

cash from the sale of goods. The following diagram shows the operating

cycle of a manufacturing firm:-

27


28/65

Operating Cycle refers to the length of time necessary to

complete the following cycle of events.

1. Conversion of cash into raw materials.

2. Conversion of raw materials into work in progress.

3. Conversion of work in progress into finished goods.

4. Conversion of finished goods into receivable and

5. Conversion of receivable into cash.

In symbols it can be expressed as follows:

28


29/65

O = R + W + F + D - C

Where,

O = Time duration of operating cycle

R = Raw material and storage period

W = Work in progress period

F = Finished goods storage period

D = Debtors collection period and

C = Creditors period

The components of operating cycle can be calculated as

follows: -

Average stock of raw materials and stores

R =

-------------------------------------------------------------------

Average raw materials and stores consumption per

day

Average work in process inventory

W = -------------------------------------------------

Average cost of production per day

Average finished goods inventory

F = ---------------------------------------------------

29


30/65

Average cost of goods sold per day

Average book debts

D = -------------------------------------------

Average credit sales per day

Average trade creditors

C = --------------------------------------------

Average credit purchase per day

Types of working capital:

It may be defined in 2 ways as on the basis of balance sheet concept

on the basis of time

On the basis of balance sheet concept, working capital is classified as grossworking capital and net working capital as described earlier.

On the basis of time, working capital may be classified as

Permanent or regular working capital

Variable or temporary working capital.

Permanent or regular working capital:

Permanent or regular working capital represents the irreducible minimum

amount which is permanently blocked in the business and that cannot be

30


31/65

converted into cash in the normal course of business. It is required for

permanent investments in holding minimum quantity of stock of raw

material and finished goods, debtors and cash. This amount is a continuous

basis for maintaining the circulation of current assets. As the business

grows, the requirement of permanent working capital also increase in

current assets. This portion of working capital is financed through long term

sources.

Permanent working capital has the following characteristics: It keeps on changing its form one current assets to another.

The size of working capital grows with the growth of business. As long as firm is a going concern, this part of working capital can

not be substantially reduced.

Variable or temporary working capital:

Any amount over and above the permanent level of working capital is

variable or temporary working capital. It keeps on fluctuating from time to

time as per the change in production and sales activities. As the requirementof this part of working capital fluctuates, therefore it should be financed

from short term funds, whenever needed.

It may be classified as:

Seasonal working capital:-

31


32/65

The capital required to meet the seasonal demands of the enterprise is called

seasonal working capital. Seasonal working capital being of short term

nature , it has to be financed from short sources like bank loan etc.

Specific working capital:-

It is that part of working capital which is required to meet unforeseen

contingencies like slump, strike, flood, war etc. sometimes, additional

working capital is to be arranged to meet special emergencies such as

launching of extensive marketing campaign, purchase of goods for stock in

view of future increase in price etc.

32


33/65

How to determine working capital ?

There is no criterion or formula to determine the amount of working

capital needs that may be applied to all the firms. The amount of working

capital required depends upon a large no of factors and each factor has its

own importance. These are as follows:-

NATURE OF BUSINESS

The requirement of working capital is very limited in public utility

undertaking such as Electricity, Water Supply and Railways because they

offer cash sales only and supply services not products and no funds are tied

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

financial firm requires less investment in fixed assets but have to invest

large amounts in current assets. The manufacturing undertaking requires

sizable amount of working capital along with fixed investments.

PRODUCTION POLICY: -

The determination of working capital needs depends upon the production

policy of the business. The demand for certain products is seasonal i.e.; such

products are purchased in certain months of a year. For such industries, two

types of production policy can be followed. Firstly they can produce the

goods in the months of demand or secondly, they produce for the whole

year. If the second alternative were followed, it would mean that until the

33


34/65

time of demand finishes, product would have to be kept in stock. It would

require additional working capital.

LENGTH OF PRODUCTION CYCLE: -

The longer the manufacturing time, the raw material and other supplies have

to be carried for a longer time in the process with progressive increment of

labor and service costs before the final product is obtained. Therefore,

working capital is directly proportional to the length of the manufacturing

process.

RATE OF STOCK TURNOVER: -

There is an inverse co-relationship between the quantum of working capital

and the velocity or speed with which the sales are affected. A firm having a

higher rate of stock turnover will need lower amount of working capital as

compared to a firm having a low rate of turnover.

CREDIT POLICY: -

Credit policy affects the working capital requirements in two ways:

(a) Terms of credit allowed by customer to the firm,

(b) Terms of credit available to the firm.

A concern that purchases its requirements on credit and sells its

product/services on cash requires lesser amount of working capital and

vice-versa.

34


35/65

WORKING CAPITAL CYCLE: -

The speed with which the working cycle completes one cycle determines

the requirements of working capital. Longer the cycle larger is the

requirement of working capital.

35

WORKI

NGCAPI

TALCYCLE


36/65

Each component of working capital (namely inventory, receivables and

payables) has two dimensions ... TIME ......... and MONEY. When it comes

36


37/65

to managing working capital - TIME IS MONEY. If you can get money to

move faster around the cycle (e.g. collect monies due from debtors more

quickly) or reduce the amount of money tied up (e.g. reduce inventory levels

relative to sales), the business will generate more cash or it will need to

borrow less money to fund working capital. As a consequence, you could

reduce the cost of bank interest or you'll have additional free money

available to support additional sales growth or investment. Similarly If you

can negotiate improved terms with suppliers e.g. get longer credit or an

increased credit limit, you effectively create free finance to help fund futuresales

IF.

You.. Then..

Collect receivables (debtors)faster

You release cash from thecycle

Collect receivables (debtors)slower

Your receivables soak up cash

Get better credit (in terms ofduration or amount) fromsuppliers

You increase your cashresources

RATE OF GROWTH AND EXPANSION OF BUSINESS: -

The larger size businesses require more permanent and variable working

capital in comparison to small business. If a company is growing, its

37


38/65

working capital requirements will also go on increasing. Thus, the growing

concerns require more working capital as compared to the stable industries.

SEASONAL VARIATION: -

Generally, during the busy season, a firm requires larger working capital

than in the slack season

BUSINESS FLUCTUATION

In period of boom, when the business is prosperous, there is a need for

larger amount of working capital due to rise in sales, rise in prices,

optimistic expansion of business etc. On the contrary in time of depression,

the business contracts, sales decline, difficulties are faced in collection from

debtors and the firm may have a large amount of working capital idle.

PRICE LEVEL CHANGES: -

Price level changes also affect working capital needs. If the prices of

different goods increase, to maintain same level of production, more

working capital is needed.

AVAILABILITY OF RAW MATERIAL: -

Availability of raw material on the continuous basis affects the requirement

of working capital. There are certain types of raw materials, which are not

available regularly. In such a situation firm requires greater working capital

to meet the requirements of production. Some raw materials are available in

38


39/65

particular season only for example wool, cotton, oil seeds, etc. They have to

keep greater working capital.

MAGNITUDE OF PROFIT: -

Magnitude of profit is different for different businesses. Nature of product,

control on the market and ability of managers etc. determine the quantum of

profit. If the profit margin is high, it will help to arrange funds internally,

which will also increase the working capital.

OTHER FACTOR: -

a) Operating efficiency

b) Management ability

c) Irregularities of supply

d) Import policy

e) Asset structure

NEEDS AND OBJECTIVES FOR WORKING CAPITAL

Every business needs some amount of working capital. The needs for

working capital, arises due to time gap between production and realization

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

realization of cash. There are time gaps in purchase of raw material and

production, production and sales, and realization of cash.

39


40/65


41/65

Assessment of Working Capital:

For running any business activity the unit/firm requires mainly two type of

assets i.e. Current Assets and Fixed Assets. For financing Fixed Assets Bank

generally sanction Term Loan and for current assets bank sanction cash

credit limit/ bill purchases.

Mainly three type of borrowers approaching banks for working capitalfinance

Trading Concerns

Manufacturing Units

Service Sector

In case of manufacturing units, Current Assets comprises Raw Material,

Semi Finished Goods, Finished Goods, Receivables, Cash etc. These assets

go through the operating cycle of business units and based on operating

cycle requirement for working capital decided.

41


42/65

In case of Trading concerns, Current Assets comprises stocks, debtors,

receivables and advances paid to suppliers of stocks. Where as in Service

Activity, Current Assets comprises expenses on wages, rent, electricity etc.

Working Capital Assessment is to ensure that genuine day to day business

needs of the borrowers are met. This is based on Accepted Project

Production/Sales, Margin available with the party, accepted holding level of

stocks.

With the streamlining credit delivery system of commercial banks, RBI hadappointed several committees in the past. Some important committees are

Daheja Committee in 1968

Tondon Committee in 1975

42


43/65

Methods for Assessment of Working Capital:

1. Turn Over Method:a. For Micro and Small Enterprises (MSEs) as per our banks

credit policy. Borrowers- limit upto Rs.5 crores.b. For Non-MSE borrowers-limit upto Rs.1crores.

Calculation of limit as per Turn Over Method:

1. Accepted level of Projected Annual Turn Over (PAT)2. Working Capital funds @25% of PAT.

3. Borrowers contribution:a. 5% of PAT

b. Projected NWCc. Higher of 3(a) and 3(b)

43


44/65

4. Bank finance:

a. 20% of PAT

b. minus 3c

5. .Permissible Bank finance

a. Lower of 4 (a) and 4( b).

Important points to be kept in mind while deciding limits based onPAT:

The projected annual turnover shouldbe realistic and achievable. The assessment of working capitalcredit limits should be done both as per PAT basis and traditionalmethod. Higher of the limit calculated from the method should besanctioned to the borrower.

The level of trade credit should be intune with past practice. Where projected trade credit is lower than

the past level.

44


45/65

2. Traditional method:

a. For MSE borrower-limit of above Rs.5 crore but less thanRs.50 crore.

b. For non MSE borrower-limit if above Rs.1 crore and less than

Rs.50 crores

Assessment of Working Capital Requirement as per Traditional method/

Tandon Committee Method/ MPBF Method.

1st method of lending

Total Current Assets (CA) 100

Less: Other Current Liabilities 60

45


46/65

Excluding bank borrowing

Working Capital Gap 40

Less: 25%of WCG or NWC 10

Whichever is higher

Maximum permissible bank finance 30

Minimum current ratio 1.17:1

Applicable for sick and weak units.

2nd Method of lending

Total Current Assets (CA) 100

Less: Other Current Liabilities 60

Excluding Bank Borrowings

Working Capital Gap 40

Less: 25%of CA or NWC 25

Whichever is higher

Maximum Permissible Bank Finance 15

Minimum Current Ratio 1.33:1

All borrowers other than sick/weak units and seasonalindustries. For sugar industry, the Minimum Current Ratio

prescription is 1:1.

46


47/65

3. Cash budget method:

a. For MSE borrowers dealing in cyclical industries (seasonal) like. Tea,sugar etc.

b. For borrowers availing fund based working capital limits ofRs.50crores and above.

Under this method the borrower is required t submit the Cash Budget to

the bank along with actual as well as projected Financial Statement. The

Budget will provide the following information.

1) The Peak Level of bank finance requirement during the course ofthe year.

2) The Current level of bank finance requires as forecast by the splitbudget (monthly/quarterly) basis.

47


48/65


49/65

Fund Flow Analysis

INTRODUCTION

A fund flow statement is statement of sources and uses of funds for a

given period. It is also known as-Statement of Changes in Financial

Position.

While Balance sheet shows the position of sources and uses of funds

as on a given date, fund flow statement, shows flows of funds duringa specific period. Similarly while a profit and loss account shows flow

of only revenue nature transaction during a period, fund flow

statement shows flow of funds both capital and revenue nature

during a period.

Itmes treated as Sources of funds:

1) Increase in an item ofliability - eg. Increase in Capital, Term

Loan, Debentures, Deferred Credits etc.

49


50/65

2) Decrease in an item of Assets - eg. Sale of

Investment/Machinery.

Items treated as Use of funds:

1) Decrease in an item of liability eg. Repayment of Term Loan,

Withdrawal of Capital, Decrease in Bank Borrowings.

2) Increase in an item of assets eg. Purchase of Machinery,

Land, Investment etc.

How does a Banker treat the following items while preparing

fund flow statement:

1. Reserves and Surplus: Instead of writing the increase in

reserves and surplus as a sources, PROFIT AFTER TAX is

written as source and Dividends paid during the period as use.

2. Profit: Profit being prime source of fund, fund flow statement

begins with profit as the source. Profit may be Net Profit before

tax or net profit after tax. Where Net Profit Before Tax is taken as

source, the amount of tax paid is shown as use.

3. Fixed Assets: Change in Net Fixed Assets is not taken into

consideration, instead the gross Fixed Assets position is taken

50


51/65

into account and increase and decrease of the same is taken or

source respectively.

4. Depreciation: The increase in depreciation during the period is

taken as source of fund.

5. Dividends: Dividends payments during the period are taken as

Uses of Fund.

Use of fund flow statement for sanction and disbursal of term

loan facility

This statement provides information regarding various points:

1. How much and when funds are required for the project.

2. From where funds will be coming.3. When the term loan disbursement are to be made.

The term loan is released as per projected Fund Flow Statement at

periodic intervals and is compared with the actual availability of funds

from the projected sources.

Use of fund flow statement for monitoring of advances:

Fund flow statements are used for monitoring of both Term loan and

working capital facilities sanctioned to the constituents. Monitoring is

done by comparing the projected figures in CMA with the actual

submitted in QIS and variance found out for taking remedial action.

51


52/65

RATIO ANALYSIS:

Ratio analysis is a technique of analysis and interpretation of financial

statements. It is the process of establishing and interpreting various ratios for

helping in making certain decisions. However, ratio analysis is not an end

itself. It is only a means of better understanding of financial strength and

weakness of a firm.

The following are four steps involved in the ratio analysis:-

Selection of relevant data from financial statement depending uponobjective of analysis.

Calculation of the appropriate ratios from the above data.

Comparison of the calculated ratios with the ratio of same firm in the past,

or the ratios developed from projected financial statements or the ratios of

52


53/65

some other firms or the comparisons with ratios of the industry to which the

firm belongs.

1 Key Working Capital Ratios

A few key performance ratios of a working capital management system are

the working capital ratio, inventory turnover and the collection ratio. Ratio

analysis will lead management to identify areas of focus such as inventory

management, cash management, accounts receivable and payable

management. The following are some of the important ratios in working

capital assessment

Ratio Formulae Result Interpretation

Stock

Turnover

Average Stock

* 365/

= x

days

On average, you turn over the value of

your entire stock every x days. You may

53


54/65

(in days)Cost of Goods

Sold

need to break this down into product

groups for effective stock management.

Obsolete stock, slow moving lines will

extend overall stock turnover days. Faster

production, fewer product lines, just in

time ordering will reduce average days.

Receivables

Ratio

(in days)

Debtors * 365/

Sales

= x

days

It take you on average x days to collect

monies due to you. If your official credit

terms are 45 day and it takes you 65

days... why?

One or more large or slow debts can drag

out the average days. Effective debtor

management will minimize the days.

Payables

Ratio

(in days)

Creditors *

365/

Cost of Sales

(or Purchases)

= x

days

On average, you pay your suppliers every

x days. If you negotiate better credit terms

this will increase. If you pay earlier, say, to

get a discount this will decline. If you

simply defer paying your suppliers

(without agreement) this will also increase

- but your reputation, the quality of service

and any flexibility provided by your

suppliers may suffer.

Current Total Current = x Current Assets are assets that you can

54


55/65

Ratio

Assets/

Total Current

Liabilities

times

readily turn in to cash or will do so within

12 months in the course of business.

Current Liabilities are amount you are due

to pay within the coming 12 months. For

example, 1.5 times means that you should

be able to lay your hands on $1.50 for

every $1.00 you owe. Less than 1 times

e.g. 0.75 means that you could have

liquidity problems and be under pressure

to generate sufficient cash to meet

oncoming demands.

Quick Ratio

(Total Current

Assets -

Inventory)/

Total Current

Liabilities

= x

times

Similar to the Current Ratio but takes

account of the fact that it may take time to

convert inventory into cash.

Working

Capital Ratio

(Inventory +

Receivables -

Payables)/

Sales

As %

Sales

A high percentage means that working

capital needs are high relative to your

sales.

55


56/65

5.1 Ratio AnalysisThe two main types of ratios that have been analyzed in this topic are as

follows:

(a) Liquidity Ratios:

The importance of adequate Liquidity in the sense of the ability of a firm

to meet current or short term obligation when they become due for

payment can hardly be over stressed. In fact, liquidity is a prerequisite

for the very survival of a firm. The short term creditors of a firm are

interested in the short term solvency or liquidity of a firm. But liquidity

implies, from the view point of utilization of the funds of the firms, that

funds are idle or they earn very little. A proper balance between the two

contradictory requirements that is liquidity and profitability is requiredfor efficient financial management. The liquidity ratios, measure the

ability of a firm to meet its short term obligations and reflect the short

term financial strength or solvency of the firm.

56


57/65

The ratios that indicate the liquidity of a firm are:

Current Ratio

Liquid Ratio

Cash Ratio

(b) Activity Ratios: Funds are invested in various assets in business to

make sales and earn profits. The efficiency with which assets are managed

directly effect the volume of sales. The better the management of assets, the

larger is amount of sales and profits. Activity ratios measures are efficiency

or effectiveness with which a firm manages it resources or assets. These

ratios are also called turnover ratios because they indicate the speed with

which Assets all are converted into sales. Depending upon the purpose, a

number of turnover ratios can be calculated.

Following are the activity ratios:

Stock Turnover Ratio

Inventory Conversion Ratio

Debtors Turnover Ratio

Average Collection Period

Creditors Turnover Ratio

Average Payment Period

Fixed Asset Turnover Ratio

Working Capital Turnover Ratio

57


58/65

A. LIQUIDITY RATIOS

1. Current Ratio =Current Assets

Current Liabilities

Year2006-2007 2007-2008 2008-2009

C.A.C.L.

55,36,81,086

24,03,53,05

8

54,08,18,489

23,66,64,063

64,73,83,780

42,00,28,914

C.R. = 2.3 = 1.02 = 1.54

COMMENTS

From the above figures it is evident that CR decreased from 2.3% to 1.02%and in next year increases to 1.54%. Ideal CR is 2:1. in the year 2006-07 Crwas higher than the normal standards but afterwards it declined to greatextend which is not a good sign for the company.

2. Liquid Ratio =Liquid Assets

Current Liabilities

58


59/65

COMMENTS

Generally a quick ration 1:1 is considered satisfactorily. As we see thatcompany quick ratio is not the benchmark in any of the years, hence it is nota good sign for the company. Although in the year 2007-08, the ratio is closeto 1 but in the year 2008-09 it has shown a big decline.

3. Cash Ratio =Cash

Current Liabilities

Year2006-2007 2007-2008 2008-2009

L.A.

C.L.

13,84,14,066

24,03,53,05

8

18,75,76,604

23,66,64,063

17,12,66,939

42,00,28,914

L.R. = 0.58 = 0.79 = 0.41

59


60/65

YEAR2006-2007 2007-2008

2008-2009

Cash

C.L.CL

4,28,88,012

24,03,53,058

12,38,25,078

23,66,64,063

6,02,68,163

42,00,28,914

= 0.18 = 0.52 = 0.14

COMMENTS

The cash ratio was very good in the year 2007-08, but in the year 2008-09, ithas shown a big decline which is not a good sign for the company. Normally20% of the current liabilities should be kept in form of cash and bank

balances.

B. ACTIVITY RATIOS

1. Capital Turnover Ratio =Net Sales

Capital employed

Year2006-2007 2007-2008 2008-2009

NetSalesCapitalEmp.

4,83,63,87,055

36,98,10,690

4,81,25,23,940

48,08,51,925

6,19,31,59,238

29,13,42,952

C.T.R. =13.08 = 10.01 = 21.26

60


61/65

COMMENTS

The C.T.R. is very high for the company continuously and the in the year2008-09 it has shown a tremendous increase, which is a very good sign forthe company.

2. Total Assets Turnover ratio =Sales

Net Assets

COMMENTS

Total assets turnover is increasing in the year 2008-09, which reveals thatthe current assets of company is increasing but its current liabilities are alsoincreasing. So, it shows the strengthen position of company.

3. Debtors Turnover =Sales

Debtors

Year2006-2007 2007-2008 2008-2009

SalesNetAssets.

4,83,63,87,055

1,28,92,82,675

4,81,25,23,940

1,40,64,41,981

6,19,31,59,238

1,11,43,08,955

T.A.T.. =3.75 = 3.42 = 5.56

61


62/65

Year2006-2007

2008-2009

Sales

Debtors.

4,83,63,87,055

9,55,26,054

4,81,25,23,940

6,37,51,526

6,19,31,59,238

11,09,98,776

D.T.R. =50.63 = 70.49 = 55.8

COMMENTS

It indicates the number of times debtors turnover each year. Generally thehigher value of debtors turnover the more efficient is the management.

Increasing debtors turnover ratio therefore reveals better management ofcredit. In fact in last three fiscal years, this ratio has been excellent for thecompany.

4. Average Collection period =Debtors

x 360Sales

Year

2006-2007 2007-2008 2008-2009

Debtors

Sales.

9,55,26,054

4,83,63,87,055

6,37,51,526

4,81,25,23,940

11,09,98,776

6,19,31,59,238

A.C.P.. =7.11 = 4.77 = 6.45

62


63/65

COMMENTS

It measures the quality of debtors since it indicates the speed of their

collection, the shorten the collection period the better quality of debtors.Hence this period is very short in all the years, therefore the quality ofdebtors of the company is very good.

CONCLUSION

AXIS bank is a leading bank in the private sector. It has a large no. of

branches in various cities and has a large no of potential customers. In my

training period I observed that bank is facing a much stiffer competitive

environment that just temporary aberration of recession. They have to face

situation like a rapid erosion of technology advantage, disappearance of

natural boundaries, aggressive competition, uncertain consumer behavior

63


64/65

fragmentation of media, individualization of taste and move relating

specifically to different categories. Now from my study of assessment of

working capital I learnt various methods of assessing working capital.

Working capital gives information about credibility of organization. On the

basis of working capital various ratios can be calculated. Different ratios

show financial position of an organization. So assessing working capital

helps bank to know about credit worthiness of its client.

Finally, We can say that on overall basis the project taken provides deep

knowledge and practical aspects.

Bibliography

Books

C. R. Kothari: Research Methodology

Financial management I.M. Panday

Annual report of :

AXIS BANK

Websites

www.AXISbank.com

64
http://www.axisbank.com/http://www.axisbank.com/


65/65

Magazines

Business Today

Business World

65

Documents

Copy of a Report