LG Electronics India Ltd

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Summer Internship Training Project Report

On

“Forex and Working Capital Management in ! "lectronics td#$

Submitted in Partial Fulfillment for the requirement of the Award of Post-

Graduate Degree of

Master of Business Administration

(Batch- 2!"-2!#$

Submitted b%&

%inish &umari

M'( )!eneral* +IIIrd Semester

Roll no#,- 140702530300063

Submitted to&

(char.a %ishnu !upt Su/harti Institution o0 Management and Commerce

SW(MI %I%"&(1(12 S3'4(RTI 31I%"RSIT5

M""R3T

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2"C(R(TIO1

Date – 7th

September 2015

I hereby declare that the Summer Internship Proect !or" entitled Forex and Working

Capital management in ! electronics P6t# td submitted by me# %inish &umari#

"nrolment 1o# 140702530300063 $or the partial $ul$illment o$ the %aster o$ &usiness

'dministration to Su/harti Institute o0 Management and commerce )SIMC*7 Meerut is

my o(n ori)inal (or" and has not been submitted earlier either to SIMC or to any other

Institution $or the $ul$illment o$ the re*uirement $or any course o$ study+ I also declare that no

chapter o$ this manuscript in (hole or in part is li$ted and incorporated in this report $rom any

earlier , other (or" done by me or others+

2ate , 8th Septem/er 9:;<

Signature o0 Student,

1ame o0 Student, %inish &umari

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(C&1OW"2!"M"1T

I deri-e immense pleasure in ha-in) an opportunity here to ac"no(led)e and to e.press myhumble )ratitude to the mana)ement team here at LG Electronics Pvt. Ltd. (ho (as "ind

enou)h to )rant me this opportunity to conduct and to learn $rom this summer internship at

their presti)ious or)ani/ation+ 'lthou)h it is impossible to indi-idually than" each and e-ery

person (ho helped me durin) the course o$ this internship# yet I remember all those (ho

helped me at (or" and in the success$ul completion o$ this internship report+

irst o$ all# I (ould li"e to e.press my pro$ound indebtedness and deep sense o$ )ratitude to

IS'& %IS' SI # (ho pro-ided me (ith this opportunity to under)o this

internship at electronics p-t# ltd+ urther I am than"$ul to %r+ 'lo" umar inance

Dept+# (ho is the proect in8char)e and the company )uide and pro-ided his precious time

inspite o$ his busy schedule+

I (ould also li"e to than" my institute and especially 'ssistant Pro$+ Sh(eta Somal (ho

continuously supported me throu)hout the tenure o$ this proect+

ast but not the least9 I (ould li"e to than" my parents (ho stood by me durin) the (hole

period+

%inish &umari

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Certi0icate o0 the compan.

Certi0icate 0rom the head o0 department

2eclaration

(ckno=ledgement

CO1T"1T

C4(PT"

R

TIT" P(!"

1O#

; 'ackground and introduction

;#; Introduction

9 ! "lectronics India ltd#

9#; and Introduction

9#9 :he bac")round and present status

9#> ;ompany Pro$ile

9#? acts and i)ures

> Foreign "xchange

>#; :heory and Practice o$ ore. and mana)ement

>#9


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< Research methodolog.


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C4(PT"R ;

'(C&!RO312 (12 I1TRO23CTIO1

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I1TRO23CTIO1

:his proect is about si)ni$icance o$ $orei)n e.chan)e = (or"in) capital o$ a company

+thus analysis is mental process o$ understandin) the items o$ such statement and $ormin)option about the $inancial health# pro$itability# e$$iciency and -arious other aspect o$ the

company+

Working capital Working capital abbre-iated WC is a $inancial metric (hich

represents operatin) li*uidity a-ailable to a business# or)ani/ation# or other entity#

includin) )o-ernmental entity+ 'lon) (ith $i.ed assets such as plant and e*uipment#

(or"in) capital is considered a part o$ operatin) capital+ >et (or"in) capital is calculated

as current assets minus current liabilities+ It is a deri-ation o$ (or"in) capital# that is

commonly used in -aluation techni*ues such as D;s Discounted cash $lo(s+ I$ current

assets are less than current liabilities# an entity has a =orking capital de0icienc.# also

called a =orking capital de0icit+

!or"in) ;apital ? ;urrent 'ssets

>et !or"in) ;apital ? ;urrent 'ssets @ ;urrent iabilities

ore. mana)ementA manu$acturin)# import and e.port companies handles $ore. rates

throu)h ban"s $or payin) money to his $orei)n suppliers # and (hich procedures they

$ollo(# ho( they handle :here$ore $ore. mana)ement and (or"in) capital alto)ether$orm a indispensable part o$ or)ani/ation +i ha-e $urther put my e$$orts elucidated both the

aspect in detail throu)h medium o$ my proect+

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C4(PT"R- 9

! "lectronics India td

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9#; #!# (1 I1TRO23CTIO1


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9#9 COMP(15 PROFI",

!ith international standards at orea and is one o$ the most SystemG# (hich preser-e the nutrition in $ood and (ashin)

machines ha-e Gabricare SystemG# (hich ta"es the health $actor do(n to ones clothes+ 'll the

products o$$ered by the company ha-e uni*ue technolo)ies# de-eloped by its =D

departments that )i-e customers a healthier en-ironment to li-e8in+

India has also been ta"in) on a sle( o$ initiati-es as a part o$ ;orporate Social

esponsibility+ oida

$acility+ e.tends ree %edical ;are# (hich comprises o$ $ree chec"ups and a $reedistribution o$ medicines on a daily basis+


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9#> Mission and %ision and SWOT anal.sis,

electronics is pursuin) the -ision o$ becomin) a true )lobal di)ital leader# attractin)

customers (orld(ide throu)h its inno-ati-e products and desi)n+ :he companyHs )oal is to

ran" amon) the top 3 consumer electronics and telecommunications companies in the (orld

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by 2017+ :o achie-e this# (e ha-e embraced the idea o$ reat ;ompany# reat PeopleJ#

reco)ni/in) that only )reat people can create a )reat company+

Mission,

:he mission o$ isA• :o create the -alue $or customers

• :o respect human di)nity

• :o become the best in its class by (innin) customerHs acclaim as a true leader in the

)lobal mar"et+

%ision,

:he *uest to ma"e the most e.citin) and success$ul enterprise8 (ill be (on on the $actory

$loor# in the o$$ices# on the $ield# $ace to $ace (ith the customers# (ith e-eryone understandin)

and $ocused on the essentioal mission o$ a corporation8 Ser-in) customers+ !innin) dependsnot on the bi) deals# a*uisititions etc+ but on a thousand smaller -ictoeis doin) thin)s and in

doin) so# ma"in) li-es better and our or)ani/ation :< &


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STP

Segment

%obile ;ommunications# ome


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Threats

1+ Price (ar (ith close orean competitors li"e Samsun) can

disrupt )ro(th in price sensiti-e mar"ets

2+ i)hly competiti-e industry dynamics

3+ Sta)nant urban demand

4+ Instances o$ $alse )reen claims can erode brand -alue and

consumer trust

Competition

Competitors

1+ Samsun)

2+ Sony

3+ Panasonic

4+ :oshiba

5+ !hirlpool

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http://www.mbaskool.com/brandguide/consumer-electronics/5386-panasonic.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/5386-panasonic.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/8999-toshiba.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/8999-toshiba.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/9075-whirlpool.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/9075-whirlpool.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/8999-toshiba.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/9075-whirlpool.htmlhttp://www.mbaskool.com/brandguide/consumer-electronics/5386-panasonic.html


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9#? COMP(15 PRO23CTS

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9#< F(CTS (12 FI!3R"S

&

• &an" o$ 'merica+

9#


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C4"PT"R->

FOR" M(1(!"M"1T

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>#; T4" T4"OR5 (12 PR(CTIC" OF FOR" M(1(!"M"1T,-

orei)n e.chan)eJ e.ists# and you ha-e an in"lin) o$ (hat the ne(spapers are tal"in) about

(hen they mention it# but you really donHt understand the basics o$ (hat $orei)n e.chan)e is

and ho( it (or"s+ ere# there$ore# is a short primerJ on the basics o$ $orei)n e.chan)e+

:he term $orei)n e.chan)eJ basically re$ers to buyin) the currency o$ one country (hile

sellin) the currency o$ another country+ 'll nations ha-e their o(n# di$$erent "inds o$ money

currency+ :his has e.isted throu)hout the a)es# probably since the time o$ the &abylonians+

's tradin) de-eloped bet(een nations# the need to con-ert one "ind o$ money to another also

de-eloped+ :his is ho( a $ormal system o$ $orei)n e.chan)e arose+ 's trade bet(een nationsde-eloped# &ritain# as the nation (ith the lar)est and stron)est na-y# could spread its

commercial interests $ar and (ide+ It there$ore became the most acti-e tradin) nation# (ith a

-ast empire o$ colonies+ 's a result# &ritainHs currency# the pound sterlin)# became a

benchmar" to (hich other currencies (ere compared and e.chan)ed $or most o$ the

se-enteenth# ei)hteenth and nineteenth centuries+ :oday# most currencies are compared to the

K+S+ Dollar# currently the most acti-e and commercially stron) tradin) nation9 many

currencies are still pe))edJ to the K+S+ Dollar $or their e.chan)e rate+

>#;#; 4o= exactl. are currencies tradedG

' company that (ants to import )oods into the Knited States has to buy the $orei)n currency

o$ the country the )oods are comin) $rom# in order to pay $or them+ :he $ollo(in) is an

e.ampleA an 'merican shoe store may sell a lot o$ &ra/ilian shoes# since &ra/il is a lar)e

e.porter o$ leather )oods about M1+C &illion per year+ :he o(ner o$ this store (ould ha-e to

buy &ra/ilian eals the currency o$ &ra/il to pay $or a shipment o$ shoes+ e has a number

o$ choices+ irst# he could buy the eals throu)h his ban" or a $orei)n e.chan)e bro"er at

$i.ed rate o$ e.chan)e# and then order the shoes+ Since he "no(s the e.chan)e rate# he "no(s

ho( much the shoes are (orth in dollars# and ho( much his bill in dollars (ill be (hen he

has to pay $or the shipment o$ shoes+ !hen he ta"es deli-eryJ o$ the eals that is# he tells

his ban" to pay the &ra/ilian e.porter# his ban" (ill debit him the K+S+ Dollar e*ui-alent at

the rate a)reed upon (hen he purchased the eals+

:his importer has the second option o$ (aitin) until the shoes arri-e in the Knited States# and

then buy the eals to pay $or them+ e (ill not "no( ho( much he has to pay $or this

shipment o$ shoes until he pays $or the eals# rather (hen he entered into the contract to

purchase the shoes+ I$ the eal )ot stron)er# in other (ords# became more e.pensi-e

compared to the dollar# he (ould pay more $or them in dollars than on the day o$ his contract+

e could also pay less i$ the eal became (ea"er+ &ut most businessmen (ant to protect

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themsel-es and the price o$ their products a)ainst hi)her costs and be able to mana)e their

bud)ets+

no(in) the e.chan)e rate o$ the real (hen he processed his order (ith the &ra/ilian

e.porter (ould allo( him include that rate into his sellin) costs+ I$ he ris"s that the rate (illcome do(n by not buyin) eals ahead o$ time# and it )oes up instead# he may end up (ith a

loss in the price o$ his shoes+ %ost businessmen (ould rather lea-e this "ind o$ speculatin)J

to $orei)n e.chan)e tradersN

orei)n


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b 'ny &ranch# o$$ice and a)ency# (hich is situated outside India# but is o(ned or

controlled by a person resident in India+

c 'ny contra-ention o$ pro-isions o$


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• 'ny e.penditure incurred in connection (ith $orei)n tra-el# education and

medical care o$ parents# spouse and children+


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5 I$ credit terms and conditions con$orm to sales contract# Seller prepares )oods

and documentation# and arran)es deli-ery o$ )oods to carrier+6 Seller presents documents e-idencin) the shipment and dra$t bill o$ e.chan)e to

payin)# acceptin) or ne)otiatin) ban" named in the credit the ad-isin) ban"

usually# or any ban" (illin) to ne)otiate under the terms o$ credit+7 &an" e.amines the documents and dra$t $or compliance (ith credit terms+ I$

complied (ith# ban" (ill pay# accept or ne)otiate+ &an"# i$ other than the issuin) ban"# sends the documents and dra$t to the issuin)

ban"+C &an" e.amines the documents and dra$t $or compliance (ith credit terms+ I$

complied (ith# SellerGs dra$t is honored+10 Documents release to &uyer a$ter payment# or on other terms a)reed bet(een the

ban" and &uyer+11 &uyer surrenders bill o$ ladin) to carrier in case o$ ocean $rei)ht in e.chan)e $or

the )oods or the deli-ery order+

>#>#; M"(1S OF P(5M"1T

:he chie$ means o$ payment in $orei)n trade areA

;he*ues

&ills o$ e.chan)e

a* CheHues, ' che*ue is a (ritten order )i-en by the customer to his ban" to pay a

certain sum o$ money o$ his current account to the payee named in the che*ue+

The parties to a cheHue are,

1

1 the dra(er (ho dra(s the che*ue# (ho orders his ban" to be paid

2 the payee to (hom the che*ue is to be paid

3 the dra(ee – it is the ban" (hich pays it

There are t=o kinds o0 cheHues A

1

a a che*ue to bearer (hich may be paid by a ban" to anyone (ho presents it

b a che*ue to order must be endorsed by the payee# it means that the payee must

(rite his name on the bac" o$ the che*ue be$ore it is paid to him

/* 'ills o0 exchange

' bill o$ e.chan)e is a (ritten order re*uirin) the person to (hom it is addressed to pay on

demand or at a $i.ed $uture time a certain sum o$ money+

:he parties o$ bill o$ e.chan)e areA

1

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1 the dra(er

2 the dra(ee to (hom it is addressed

3 :he payee to (hom it is to be paid+ :he payee may be identical (ith dra(er+

>#>#9 M"T4O2S OF P(5M"1T,

!hen decidin) (hich method o$ payment to use# or combination o$ methods# the seller must

(ei)h the ris"s and costs in-ol-ed+ :he buyer doesnGt (ant to tie up capital on product that it

doesnGt yet possess# (hich means that the seller can lose the sale i$ its competitors are (illin)

to o$$er more attracti-e terms+ En the other hand# the seller needs assurances that the buyer

(onGt de$ault on payment once it has recei-ed the )oods+ ;ompanies need to de-elop an

international credit policy that does not impede sales# but protects a)ainst loss+

Ence the seller has determined the ris"s its company can a$$ord to ta"e# itGs time to e-aluate

the ris"s associated (ith the more common methods o$ payment+ ;onsultin) (ith a *uali$ied

international ban"er at this time can help the seller ma"e an in$ormed selection+ an"ed in

order o$ ris" $rom the sellerGs perspecti-e# $rom the most secure to the least secure# the more

common methods o$ payment areA

a ;ash in ad-ance

b Documentary collection

c Epen account

d etter o$ credit

e &uyerHs line o$ credit

a* Cash in (d6ance

;ash in ad-ance is typically considered the sa$est method o$ collectin) payment $or the seller+

;ash in ad-ance can ta"e the $orm o$ a (ire trans$er or payment by chec"+ 'n international

(ire trans$er is the pre$erred method# because it allo(s $or *uic" receipt o$ )ood $unds+

Sellers should pro-ide clear routin) instructions to the buyer (hen usin) an international (ire

trans$er includin) the name and address o$ the recei-in) ban" and branch# the ban"Gs S!I:#

:ele.# and '&' numbers# and the sellerGs name and address# ban" account title# and accountnumber+

;ollectin) payment usin) an international chec" is a less attracti-e option than (ire trans$er

because it can result in len)thy delays o$ $inal receipt o$ )ood $unds+ I$ the $orei)n buyer pays

by chec"# made payable in K+S+ dollars and dra(n on a K+S+ ban"# the collection process is

the same as any K+S+ chec"+ I$# ho(e-er# the chec" is in a $orei)n currency or dra(n on a

$orei)n ban"# the collection process becomes more complicated and can delay the a-ailability

o$ $unds+ :here is also a ris" that any chec" may be returned due to insu$$icient $unds in the

buyerGs account+ :his can result in a char)e8bac" and possible o-erdra$t char)es in the buyerGs

account+

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>#>#> ST"P '5 ST"P PROC"SS ,

a+ Deal is $inali/ed bet(een e.porter and importer+

b+ Purchase order is raised by material department+c+ Payment is made throu)h (ire trans$er to e.porter+

d+ :hen e.porter ships the )oods+

e+ 'nd $inally# importer recei-es the )oods+

Fig, >#;

/* OP"1 (CCO31T

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'n open account transaction means that the )oods are shipped and deli-ered be$ore payment

is due# usually in 30 to C0 days+ Eb-iously# this is the most ad-anta)eous option to the

importer in cash $lo( and cost terms# but it is conse*uently the hi)hest ris" option $or an

e.porter+ &ecause o$ the intense competition $or e.port mar"ets# $orei)n buyers o$ten press

e.porters $oropen account terms+ In addition# the e.tension o$ credit by the seller to the buyeris more common abroad+ :here$ore# e.porters (ho are reluctant to e.tend credit may $ace the

possibility o$ the loss o$ the sale to their competitors+

ey Points

:he )oods# alon) (ith all the necessary documents# are shipped directly to the

importer (ho a)rees to pay the e.porterHs in-oice at a $uture date# usually in 30 to

C0 days+

D SKPPI'IS< :< DD P';'I> IS: :E +

5 SD :IS DE;K%: ': :< PE: E ;: '>D P'LS I: :E 'DFISEL &'> E

SKPPI


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Fig>#9

c* 2OC3M"1T(R5 CO"CTIO1S,

:here are basically t(o types o$ method+ :hey are as $ollo(sA8

;* 2D( + Documents a)ainst 'cceptance A :he buyer recei-es the documents a$ter his

acceptin) a &ill o$ e.chan)e dra(n on him $or the price# at a )i-en period may be30# 60# or e-en C0 days+

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9* 2DP – documents a)ainst payment means cash a)ainst documents A:he speci$ied

documents (ith a copy o$ the in-oice are handed o-er to the buyer on payment o$

the $ull price in cash+

In


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Fig,>#>

d* "TT"R OF CR"2IT

SKPPI:+ :he letter o$ credit is issued by the

buyerHs ban" to the sellerHs ad-isin) ban"+ It is an instrument issued by the ban" on the behal$

o$ importer $a-orin) the e.porter# (hich is bein) routed throu)h an ad-isin) ban" con$irmin)that i$ the e.porter,bene$iciary $ul$ills the terms# and conditions mentioned in the instrument

ie+ ,; then the issuin) ban" )uarantees the payment+ :he issuin) ban" has to be in the

importersH country and the ad-isin) ban" has to be a correspondin) ban" o$ the issuin) ban"+

:he sa$est and the most reliable method o$ payment used in international trade is

documentary credit or in other (ords# etter o$ ;redit+ :he letter o$ credit ta"es into account

the e.pectations o$ both the seller and the buyer related to per$ormance and payment+ the

letter o$ credit authori/es the seller to dra( a speci$ied sum o$ money under speci$ied terms#

usually throu)h the receipt by the ban" o$ certain documents (ithin a )i-en time# the $orei)n

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buyer applies $or issuance o$ a letter o$ credit $rom the buyerHs ban" to the e.porterHs ban"

and is there$ore called the applicantA the e.porter is called the bene$iciary+

Payment under a documentary letter o$ credit is based on documents# not on terms o$ sale or

the physical condition o$ the )oods+ :he letter o$ credit speci$ies the documents re*uired bythe e.porter# such as the ocean bill o$ ladin)# in-oice# manu$acturerHs statement# bene$iciary

statement+ &e$ore the payment# the ban" responsible $or payment -eri$ies that the proper

documents con$orm to the letter o$ credit re*uirements+

"TT"R o0 credit is o0 0ollo=ing t.pes,

• Irre-ocable letter o$ credit

• e-ocable letter o$ credit

• ;on$irmed irre-ocable letter o$ credit

• Kncon$irmed irre-ocable letter o$ credit

• estricted ne)otiable letter o$ credit

• e-ol-in) letter o$ credit

• reely ne)otiable letter o$ credit

• :rans$erable letter o$ credit

• >on8:rans$erable letter o$ credit

Fig,>#? etter o0 credit

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e* '35"RS I1" OF CR"2IT

&uyerHs credit is an a)reement that arises bet(een the importerHs ban" and the importer+ It is

a $orm o$ loan desi)ned to $inance a speci$ic transaction in-ol-in) import o$ )oods andser-ices+ Knder this the lendin) ban" pays the e.porter on presentation o$ the ori)inal

documents and shippin) details li"e bill o$ ladin) or air(ay bill and bill o$ e.chan)e+

:he importer and the lendin) ban" (or"s out the de$erred payment a)reement# (hich the

ban" treats as a loan+ :his is treated as any other loan and the ban" char)es interest $rom the

importer as per the )oin) rates+ ' number o$ $ormalities ha-e to be completed be$ore the

e.porter can dra( the $unds+

Follo=ing are the steps 0or 'C,

a :he buyer arran)es to obtain allocation o$ $unds under the credit line $rom the

borro(er+

b :he deli-ery period stipulated in the contracts should be such that credit can be

dra(n $rom ban" (ithin the terminal disbursement date stipulated under the

respecti-e line o$ credit a)reements+ 'lso all contracts should pro-ide $or pre8

shipment inspection by the buyer or a)ent nominated by the buyer+

c :he buyer arran)es to comply (ith procedural $ormalities as applicable in hiscountry and then submits the contract to the borro(er $or appro-al+ :he borro(er

in turn $or(ards copies o$ the contract to ban" $or appro-al+

d &an" ad-ices o$ the contract to the borro(er# (ith copy to e.porter# indicatin)

appro-al number# eli)ible contract -alue# last date $or disbursement# and other

conditions subect to (hich appro-al is )ranted+

e '$ter all the procedure the payment is done on due date+

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Fig, >#< 'u.ers ine o0 Credit

>#>#? 'I OF "1TR5

T5P"S OF 'I OF "1TR5,

&ill o$ entry should be o$ one o$ three types+ Eut o$ these# t(o types are o$ clearance $rom

customs (hile third is o$ clearance $rom (arehouse+

a &I E :L E ;K>SK%P:IE>A8

:his $orm# called &ill o$


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c &I E :L E D ;;<:he third type is $or #A 'ill o0 "ntr. Process

>#? 4"2!I1!

ed)in) is a strate)y desi)ned to minimi/e e.posure to an un(anted business ris"# (hile still

allo(in) the business to pro$it $rom an in-estment acti-ity+ :ypically# a hed)er mi)ht in-est

in a security that he belie-es is under8priced relati-e to its O$air -alueO $or e.ample a

mort)a)e loan that he is then ma"in)# and combine this (ith a short sale o$ a related security

or securities+ :hus the hed)er is indi$$erent to the mo-ements o$ the mar"et as a (hole# and is

interested only in the per$ormance o$ the Gunder8pricedG security relati-e to the hed)e+

olbroo" !or"in)# a pioneer in hed)in) theory# called this strate)y Ospeculation in the

basis#O1T (here the basis is the di$$erence bet(een the hed)eGs theoretical -alue and its actual-alue or bet(een spot and $utures prices in !or"in)Gs time+

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Some $orm o$ ris" ta"in) is inherent to any business acti-ity+ Some ris"s are considered to be

OnaturalO to speci$ic businesses# such as the ris" o$ oil prices increasin) or decreasin) is

natural to oil drillin) and re$inin) $irms+ Ether $orms o$ ris" are not (anted# but cannot be

a-oided (ithout hed)in)+ Someone (ho has a shop# $or e.ample# can ta"e care o$ naturalris"s such as the ris" o$ competition# o$ poor or unpopular products# and so on+ :he ris" o$ the

shop"eeperGs in-entory bein) destroyed by $ire is un(anted# ho(e-er# and can be hed)ed -ia

a $ire insurance contract+ >ot all hed)es are $inancial instrumentsA a producer that e.ports to

another country# $or e.ample# may hed)e its currency ris" (hen sellin) by lin"in) its

e.penses to the desired currency+ &an"s and other $inancial institutions use hed)in) to control

their asset8liability mismatches# such as the maturity matches bet(een lon)# $i.ed8rate loans

and short8term implicitly -ariable8rate deposits+

>#?#; W4(T IS 4"2!I1!G W45 2O COMP(1I"S 4"2!"G

ed)in)# in commerce# is a method by (hich traders use t(o counterbalancin) in-estment

strate)ies so as to minimi/e any losses caused by price $luctuations+ It is )enerally used by

traders on the commodities mar"et+ :ypically# hed)in) in-ol-es a trader contractin) to buy or

sell one particular )ood at the time o$ the contract and also to buy or sell the same or similar

commodity at a later date+ In a simple e.ample# a miller may buy (heat that is to be

con-erted into $lour+ 't the same time# the miller (ill contract to sell an e*ual amount o$

(heat# (hich the miller does not presently o(n# to another trader+ :he miller a)rees to deli-er

the second lot o$ (heat at the time the $lour is ready $or mar"et and at the price current at the

time o$ the a)reement+ I$ the price o$ (heat declines durin) the period bet(een the millerGs

purchases o$ the )rain and the $lourGs entrance onto the mar"et# there (ill also be a resultin)

drop in the price o$ $lour+ :he miller must sustain that loss+ o(e-er# since the miller has a

contract to sell (heat at the older# hi)her price# the miller ma"es up $or this loss on the $lour

sale by the )ain on the (heat sale+ Stoc" and bond traders# e.port8import traders# and some

manu$acturers also employ hed)in)+

;orporations in (hich indi-idual in-estors place their money ha-e e.posure to $luctuations in

all "inds o$ $inancial prices# as a natural by8product o$ their operations+ inancial prices

include $orei)n e.chan)e rates# interest rates# commodity prices and e*uity prices+ :he e$$ecto$ chan)es in these prices on reported earnin)s can be o-er(helmin)+ E$ten# you (ill hear

companies say in their $inancial statements that their income (as reduced by $allin)

commodity prices or that they enoyed a (ind$all )ain in pro$it attributable to the decline o$

the ;anadian dollar+

:his (ill )i-e a brie$ o-er-ie( o$ the di$$erent (ays in (hich $irms approach this $inancial

price ris" and it (ill introduce the rationale $or usin) deri-ati-e products+ !hile there has

been a )reat deal o$ ne)ati-e attention paid to deri-ati-es in the mainstream press# the

opportunities they pro-ide ma"e deri-ati-es a necessary part o$ the $uture o$ any corporation+

uture articles in this series (ill identi$y the bene$its and dra(bac"s o$ indi-idual deri-ati-es

34


35/83

structures and e.plain some o$ the brea"do(ns in the application o$ deri-ati-es by corporate

end8users+

Ene reason (hy companies attempt to hed)e these price chan)es is because they are ris"s

that are peripheral to the central business in (hich they operate+ or e.ample# an in-estor buys the stoc" o$ a pulp8and8paper company in order to )ain $rom its mana)ement o$ a pulp8

and8paper business+ She does not buy the stoc" in order to ta"e ad-anta)e o$ a $allin)

;anadian dollar# "no(in) that the company e.ports o-er 75U o$ its product to o-erseas

mar"ets+ :his is the insurance ar)ument in $a-or o$ hed)in)+ Similarly# companies are

e.pected to ta"e out insurance a)ainst their e.posure to the e$$ects o$ the$t or $ire+

&y hed)in)# in the )eneral sense# (e can ima)ine the company enterin) into a transaction

(hose sensiti-ity to mo-ements in $inancial prices o$$sets the sensiti-ity o$ their core

business to such chan)es+ 's (e shall see in this article and the ones that $ollo(# hed)in) is

not a simple e.ercise nor is it a concept that is easy to pin do(n+ ed)in) obecti-es -ary

(idely $rom $irm to $irm# e-en thou)h it appears to be a $airly standard problem# on the $ace

o$ it+ 'nd the spectrum o$ hed)in) instruments a-ailable to the corporate :reasurer is

becomin) more comple. e-ery day+

'nother reason $or hed)in) the e.posure o$ the $irm to its $inancial price ris" is to impro-e or

maintain the competiti-eness o$ the $irm+ ;ompanies do not e.ist in isolation+ :hey compete

(ith other domestic companies in their sector and (ith companies located in other countries

that produce similar )oods $or sale in the )lobal mar"etplace+ ')ain# a pulp8and8paper

company based in ;anada has competitors located across the country and in any othercountry (ith si)ni$icant pulp8and8paper industries# such as the Scandina-ian countries+

;ompanies that are the most sophisticated in this $ield reco)ni/e that the $inancial ris"s that

are produced by their businesses present a po(er$ul opportunity to add to their bottom line

(hile prudently positionin) the $irm so that mo-ements in these prices do not peorati-ely

a$$ect it+ :his le-el o$ sophistication depends on the $irmGs e.perience# personnel and

mana)ement approach+ irms that ha-e )ood ris" mana)ement pro)rams can use this stability

to reduce their cost o$ $undin) or to lo(er their prices in mar"ets that are deemed to be

strate)ic and essential to the $uture pro)ress o$ their companies+

%ost importantly# hed)in) is contin)ent on the pre$erences o$ the $irmGs shareholders+ :here

are companies (hose shareholders re$use to ta"e anythin) that appears to be $inancial price

ris" (hile there are other companies (hose shareholders ha-e a more (orldly -ie( o$ such

thin)s+ It is easy to ima)ine t(o companies operatin) in the same sector (ith the same

e.posure to $luctuations in $inancial prices that conduct completely di$$erent policy# purely by

-irtue o$ the di$$erences in their shareholdersG attitude to(ards ris"+

>#?#9 4"2!I1! O'E"CTI%"S

35


36/83

Some o$ the best8articulated hed)in) pro)rams in the corporate (orld (ill choose the

reduction in the -ariability o$ corporate income as an appropriate tar)et+ :his is consistent

(ith the notion that an in-estor purchases the stoc" o$ the company in order to ta"e ad-anta)e

o$ their core business e.pertise+

Ether companies ust belie-e that en)a)in) in a $or(ard outri)ht transaction to hed)e each o$

their cross8border cash $lo(s in $orei)n e.chan)e is su$$icient to deem themsel-es hed)ed+

Let# they are e.posin) their companies to untold potential opportunity losses+ 'nd this could

impact their relati-e per$ormance peorati-ely+

I$ the 'ir India %ana)ement thin"s that the rupee (ill appreciates a)ainst the rench $ranc in

si. months# it may not co-er itHs $orei)n e.chan)e e.posure+ :his is a hi)h8ris" approach+ It

can bene$it 'ir India si)ni$icantly# i$ later on the rupee actually appreciates+ &ut the potential

cost is -ery hi)h+ I$ subse*uently the rupee depreciates# instead o$ appreciatin) as predicted

by the 'ir India %ana)ement# the company cost can be -ery hi)h+ Some companies ha-e a

policy o$ partially co-erin) the e.posure+ :his policy co-ers $rom subecti-ism as there is no

sound method o$ decidin) ho( much to co-er and ho( much to "eep unco-ered+ :he $irmHs

ris" remains unlimited in the partially co-ered e.posure+ In $act# "eepin) the $orei)n

e.chan)e e.posure totally or partially unco-ered tantamount to speculation+

:here are $our alternati-es a-ailable to the companies to hed)e a)ainst the $orei)n e.chan)e

rate e.posureA

1

• or(ard rates

• Eptions

• utures

• %oney %ar"et

>#?#> For=ard Contracts

'ir India may li"e to eliminate $ully its currency ris"+ ence it can ta"e a $ull $or(ard co-er

a)ainst its $orei)n e.chan)e e.posure and entirely hed)e its ris"+ It can contract (ith a ban"

to buy rench $ranc $or(ard at an e.chan)e rate+ Suppose the si. month $or(ard rate is I>

6+70, 1+00+ :his means that 'ir India has a de$inite cost o$ I> 6700 million+ Irrespecti-e

o$ the actual e.chan)e rate at the end o$ the si. months# its cost (ill remain I> 6700

million+ :he ad-anta)e o$ this approach is that 'ir India mana)ement can concentrate on its

operations rather than (orryin) about the $orei)n e.chan)e loss or )ain+ %ost internationalcompanies ha-e the policy o$ co-erin) 100 U o$ their $orei)n e.chan)e ris"+ Suppose the 'ir

36


37/83

India %ana)ement is e.pectin) the rench $ranc to $all+ It may there$ore its e.posure

unco-ered since it (ould bene$it the company+ &ut the mana)ement is not sure that the

rench $ranc (ill $all de$initely+ ence instead o$ )oin) $or a $ull $or(ard co-er or "eepin)

the e.posure $ully unco-ered# the 'ir India mana)ement (ill decide to )o $or partial $or(ard

co-er+ Suppose it co-ers 50 percent o$ its e.posure# "eepin) 50 percent o$ the e.posureunco-ered+ :his is a subecti-e policy as there is no obecti-e (ay to determine the

appropriate ratio o$ co-ered and unco-ered e.posure+ urther# this policy implies that 'ir

India (ould buy I> 3300 million (ith $or(ard contracts o$ I> 6+70, 1+00 and I> 3300

million e.posure is unco-ered+ I$ the rench $ranc appreciates# 'ir India (ould incur a hea-y

loss+ :he partial co-er policy is ne-er a (in8(in situation+

a* OPTIO1,

' contract in (hich the (riter o$ the option )rants the buyer o$ the option the ri)ht

purchase $rom or sell to the (riter a desi)nated instrument $or a speci$ied price (ithin

a speci$ied period o$ time+

:he (riter )rants this ri)ht to the buyer $or a certain sum o$ money called the option

premium+ 'n option that )rants the buyer the ri)ht to buy some instrument is called a

call option+ 'n option that )rants the buyer the ri)ht to sell an instrument is called a

put option +:he price at (hich the buyer an e.ercise his option is called the e.ercise

price# stri"e price or the stri"in) price+

/* F3T3R"S,

' $uture contract is an a)reement bet(een t(o parties to buy or sell an asset at a

certain speci$ied time in $uture $or certain speci$ied price+ It is similar to $or(ard

contract+

&ut contrary is in the (ay the mar"ets are or)ani/ed# pro$iles o$ )ains and losses #

"inds o$ participants in the mar"ets and the (ays in (hich they use the t(o

instruments+

>#?#? MO1"5 M(R&"T

inancial mar"et are a $undin) techni*ue #(hich permit a borro(er to access one mar"et and

then e.chan)e the liability $or another type o$ liability+ :he )lobal $inancial mar"et presents

borro(ers and in-estors (ith a (ide -ariety o$ $inancin) and in-estment -ehicles in terms o$

currency and type o$ coupon8$i.ed or $loatin)+ loatin) rates are tide to an inde. (hich could

be the ondon interban" borro(in) rate I&E KS :reasury bill rate etc+ this helps

in-estorsH e.chan)e one type o$ asset $or another $or a pre$erred stream o$ cash $lo(s+

>#< C(S4 M(1(!"M"1T

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38/83

;ash mana)ement is one o$ the "ey areas o$ (or"in) capital mana)ement+ ;ash is the li*uid

current asset+ :he main duty o$ the $inance mana)er is to pro-ide ade*uate cash to all

se)ments o$ the or)ani/ation+ :he important reason $or maintainin) cash balances is the

transaction moti-e+ ' $irm enters into -ariety o$ transactions to accomplish its obecti-es

(hich ha-e to be paid $or in the $orm o$ cash meanin) o$ cash+

:he term cashJ (ith re$erence t senses+ In a narro(er sense it includes coins# currency notes#

che*ues# ban" dra$ts held by a $irm+ n a broader sense it also includes near8cash assetsJ such

as mar"etable securities and time deposits (ith ban"s+

>#


39/83

In most o$ the companies there are usually no $ormal (ritten instructions $or in-estin) the

surplus cash+ It is le$t to the discretion and ud)ment o$ the $inance mana)er+ !hile e.ercisin)

such ud)ment# he usually ta"es into consideration the $ollo(in) $actors8

Securit., :his can be ensured by in-estin) money in securities (hose price

remains more or less stable+

iHuidit.A :his can be ensured by includin) shaort term $i.ed deposits (ith

ban"s+

5ield, %ost corporate mana)ers )i-e less emphasis to yield as compared to

security and li*uidity o$ in-estment+ So they pre$er short term )o-ernment

securities $or in-estin) surplus cash+

Maturit., It (ill be ad-isable to select securities accordin) to their maturities so

the $inance mana)er can ma.imi/e the yield as (ell as maintain the li*uidity o$

in-estments+

Cash Management in SS, :he cash mana)ement is carried out in sea(ays by

;:% ;orporate :reasury %ana)ement+ ;:% is a commonly $ollo(ed

procedure in most o$ the companies+

atio 'nalysis is one o$ the important techni*ues that can be used to chec" thee$$iciency (ith (hich cash mana)ement is bein) mana)ed by a $irm+

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40/83

C4(PT"R ?

R"C"I%('"S M(1(!"M"1T

40


41/83

?#; Introduction,

ecei-ables constitute a si)ni$icant portion o$ the total assets o$ the business+ !hen a $irm

seller )oods or ser-ices on credit# the payments are postponed to $uture dates and recei-ables

are created+ I$ they sell $or cash no recei-ables created+

Meaning,

ecei-able are asset accounts representin) amounts o(ed to the $irm as a result o$ sale o$

)oods or ser-ices in the ordinary course o$ business+

?#;#; Purpose o0 recei6a/les,

'ccounts recei-ables are created because o$ credit sales+ :he purpose o$ recei-ables isdirectly connected (ith the obecti-es o$ ma"in) credit sales+ :he obecti-es o$ credit sales

are as $ollo(s8

• 'chie-in) )ro(th in sales+

• Increasin) pro$its+

• %eetin) competition

actors a$$ectin) the si/e o$ ecei-ablesA :he main $actors that a$$ect the si/e o$ the

recei-ables are8

• e-el o$ sales+• ;redit period+

• ;ash discount+

?#;#9 Costs o0 maintaining recei6a/les, :he costs (ith respect to maintenance o$

recei-ables are as $ollo(s8

a* Capital costs,

:his is because there is a time la) bet(een the sale o$ )oods to customers and the payment by

them+ :he $irm has# there$ore to arran)e $or additional $unds to meet its obli)ations+

/* (dministrati6e costs,

irm incur this cost $or manu$acturin) accounts recei-ables in the $orm o$ salaries to the sta$$

"ept $or maintainin) accountin) records relatin) to customers+

c* Collection costs,

:he $irm has to incur costs $or collectin) the payments $rom its credit customers+

41


42/83

d* 2e0aulting costs,

:he $irm may not able to reco-er the o-er dues because o$ the inability o$ customers+ Such

debts treated as bad debts+

?#;#> Recei6a/les management,

ecei-ables are direct result o$ credit sale+ :he main obecti-e o$ recei-ables mana)ement is

to promote sales and pro$its until that point is reached (here the EI in $urther $undin) o$

recei-ables is less than the cost o$ $unds raised to $inance that additional credit i+e+9 cost o$

capital+ Increase in recei-ables also increases chances o$ bad debts+ :hus# creation o$

recei-ables is bene$icial as (ell as dan)erous+ inally mana)ement o$ accounts recei-able

means as the process o$ ma"in) decisions relatin) to in-estment o$ $unds in this asset (hichresult in ma.imi/in) the o-er all return on the in-estment o$ the $irm+

?#;#>#; Recei6a/les management and Ratio (nal.sis,

atio 'nalysis is one o$ the important techni*ues that can be used to chec" the e$$iciency

(ith (hich recei-ables mana)ement is bein) mana)ed by a $irm+ :he most important ratios

$or recei-ables mana)ement are as $ollo(s8

?#;#>#9 2"'TORS T3R1O%"R R(TIO, -

Debtors constitute an important constituent o$ current assets and there$ore the *uality o$ the

debtors to a )reat e.tent determines a $irmHs li*uidity+ It sho(s ho( *uic"ly recei-ables or

debtors are con-erted into cash+ In other (ords# the D: is a test o$ the li*uidity o$ the

debtors o$ a $irm+ :he li*uidity o$ $irmHs recei-ables can be e.amined in t(o (ays they are

D: and '-era)e ;ollection Period+

?#9 I1%"1TOR5 M(1(!"M"1T

In-entories are stoc" o$ the product a company is manu$acturin) $or sale and components+

:hat ma"eup the products+ :he -arious $orms in (hich in-entories e.ist in a manu$acturin)

company areA a(8materials# (or"8in8process# $inished )oods+

Ra=-Materials, 8 're those basic inputs that are con-erted into $inished products

throu)h the manu$acturin) process+ a(8materials in-entories are those units# (hich

ha-e been purchased and stored $or $uture production+

Work in progress,- !or"8In8Process in-entories are semi8manu$actured products+

:he represent products that need more (or" be$ore they become $inished products $or

sale+

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43/83

Finished goods, inished oods in-entories are those completely manu$actured

products# (hich are ready $or sale+ Stoc"s o$ ra(8materials and (or"8in8process

$acilitate production (hich stoc" o$ $inished )oods is re*uired $or smooth mar"etin)

operations+ :hese in-entories ser-e as a lin" bet(een production and consumption o$)oods+

Stores and spares are also maintained by some $irms+ :his includes o$$ice and plant

cleanin) materials li"e soaps# brooms# oil# $uel# li)ht# bulbs etc+ :hese materials do

not directly enter in production+ &ut are necessary $or production process+

?#9#; 1eed to holding in6entor.,

:he *uestion o$ mana)in) in-entories arises only (hen the company holds in-entories+

%aintainin) in-entories in-ol-es tyin) up o$ the companyGs $unds and incurrence o$ stora)e

and handlin) cost+ It is e.pensi-e to maintain in-entories# (hy does company hold

in-entoriesV :here are three )eneral moti-es $or holdin) in-entories+

a+ Transaction Moti6eA 8 ecessitates holdin) o$ in-entories to )uard a)ainst the

ris" o$ unpredictable chan)es in demand and supply $orces and other $actors+

c+ Speculati6e moti6eA 8 In$luences the decision to increase or reduce in-entory le-els

to ta"e ad-anta)es o$ price in$luences+

?#9#> WOR&I1! C(PIT( M(1(!"M"1T T4"OR5

Decisions relatin) to (or"in) capital and short term $inancin) are re$erred to as working

capital management. !or"in) capital mana)ement in-ol-es the relationship bet(een a $irmGs

short8term assets and its short8term liabilities+ :he )oal o$ (or"in) capital mana)ement is to

ensure that a $irm is able to continue its operations and that it has su$$icient ability to satis$y

both maturin) short8term debt and upcomin) operational e.penses+ :he mana)ement o$

(or"in) capital in-ol-es mana)in) in-entories# accounts recei-able and payable# and cash+

2ecision criteria

&y de$inition# !or"in) capital mana)ement entails short term decisions 8 )enerally# relatin)

to the ne.t one year period 8 (hich are Ore-ersibleO+ :hese decisions are there$ore not ta"en

on the same basis as ;apital In-estment Decisions >PF or related# as abo-e rather they (ill

be based on cash $lo(s and , or pro$itability+

• Ene measure o$ cash $lo( is pro-ided by the cash con-ersion cycle 8 the net number

o$ days $rom the outlay o$ cash $or ra( material to recei-in) payment $rom the

customer+ 's a mana)ement tool# this metric ma"es e.plicit the inter8relatedness o$decisions relatin) to in-entories# accounts recei-able and payable# and cash+ &ecause

43


44/83

this number e$$ecti-ely corresponds to the time that the $irmGs cash is tied up in

operations and una-ailable $or other acti-ities# mana)ement )enerally aims at a lo(

net count+

• In this conte.t# the most use$ul measure o$ pro$itability is eturn on capital E;+

:he result is sho(n as a percenta)e# determined by di-idin) rele-ant income $or the12 months by capital employed9 eturn on e*uity E


45/83

$inished )oods+ !ith the sale $inished )oods turn into accounts recei-able# presumin) )oods

are sold as credit+ ;ollection o$ recei-ables brin)s bac" the cycle to cash+

:he company has been e$$ecti-e in carryin) (or"in) capital cycle (ith lo( (or"in) capital

limits+ It may also be obser-ed that the P&: in absolute terms has been increasin) as a year toyear basis as could be seen $rom the abo-e table althou)h pro$it percenta)e turno-er may be

lo(er but in absolute terms it is increasin)+ In order to $urther increase pro$it mar)ins# SS

can increase their mar)ins by e.tendin) credit to )ood customers and also by payin) the

creditors in ad-ance to )et better rates+

?#>#; WOR&I1! C(PIT( (12 R(TIO (1(5SIS

:he e$$iciency (ith (hich (or"in) capital is bein) mana)ed by a $irm+ :he most important

ratios $or (or"in) capital mana)ement are as $ollo(s

>et !or"in) ;apitalA

:here are t(o concepts o$ (or"in) capital namely )ross (or"in) capital and net (or"in)

capital+ >et (or"in) capital is the di$$erence bet(een current assets and current liabilities+ 'n

analysis o$ the net (or"in) capital (ill be -ery help $ull $or "no(in) the operational

e$$iciency o$ the company+ :he $ollo(in) table pro-ides the data relatin) to the net (or"in)

capital o$ SS+

> ;'PI:' ? ;K: 'SS


46/83

• %a"e decisions re)ardin) in-estin) or lendin) capital9

Ether decisions that+ inancial ratio analysis is a -aluable tool $or your small business+ irst#

you ha-e to learn to calculate the ratios and understand (hat they mean+ :hey are a

comparati-e tool o$ analysis $or li*uidity# pro$itability# debt# and asset mana)ement+ :hese arethe maor cate)ories o$ $inancial ratio analysis+

Lou need to ha-e industry ratios and,or time series data $rom your o(n $irm $or a basis o$

comparison+ :hen# you can compare the ratios $or your $irm to the ratios o$ other $irms in

your industry and other *uarters or years o$ data $or your $irm+

I$ you do an accurate $inancial ratio analysis usin) comparati-e data# you can learn a lot

about the $inancial position o$ your $irm and ma"e necessary $inancial adustments to

enhance your per$ormance+

Goals

inancial analysts o$ten assess the $irmGsA

1 Pro$itability 8 its ability to earn income and sustain )ro(th in both short8term and

lon)8term+ ' companyGs de)ree o$ pro$itability is usually based on the income

statement# (hich reports on the companyGs results o$ operations9

2 Sol-ency 8 its ability to pay its obli)ation to creditors and other third parties in the

lon)8term93 i*uidity 8 its ability to maintain positi-e cash $lo(# (hile satis$yin) immediate

obli)ations9 Both 2 and 3 are based on the companys balance sheet! which indicates

the "inancial condition o" a business as o" a given point in time.

4 Stability8 the $irmGs ability to remain in business in the lon) run# (ithout ha-in) to

sustain si)ni$icant losses in the conduct o$ its business+ 'ssessin) a companyGs

stability re*uires the use o$ both the income statement and the balance sheet# as (ell

as other $inancial and non8$inancial indicators+

Methods

inancial analysts o$ten compare $inancial ratios o$ sol-ency# pro$itability# )ro(th# etc+A

1• Past Per$ormance 8 'cross historical time periods $or the same $irm the last 5 years

$or e.ample#

• uture Per$ormance 8 Ksin) historical $i)ures and certain mathematical and statistical

techni*ues# includin) present and $uture -alues# :his e.trapolation method is the main

source o$ errors in $inancial analysis as past statistics can be poor predictors o$ $uture

prospects+

•

;omparati-e Per$ormance 8 ;omparison bet(een similar $irms+

46


47/83

:hese ratios are calculated by di-idin) a )roup o$ account balances# ta"en $rom the

balance sheet and , or the income statement# by another# $or e.ampleA

n # e$uity % return on e$uity

&et income # total assets % return on assets'tock price # earnings per share % P#E(ratio

;omparin) $inancial ratios are merely one (ay o$ conductin) $inancial analysis+

inancial ratios $ace se-eral theoretical challen)esA

a+ :hey say little about the $irmGs prospects in an absolute sense+ :heir insi)hts

about relati-e per$ormance re*uire a re$erence point $rom other time periods

or similar $irms+

b+ Ene ratio holds little meanin)+ 's indicators# ratios can be lo)ically interpreted

in at least t(o (ays+ Ene can partially o-ercome this problem by combinin)

se-eral related ratios to paint a more comprehensi-e picture o$ the $irmGs

per$ormance+

c+ Seasonal $actors may pre-ent year8end -alues $rom bein) representati-e+ '

ratioGs -alues may be distorted as account balances chan)e $rom the be)innin)

to the end o$ an accountin) period+ Kse a-era)e -alues $or such accounts

(hene-er possible+

d+ inancial ratios are no more obecti-e than the accountin) methods employed+

;han)es in accountin) policies or choices can yield drastically di$$erent ratio-alues+

e+ :hey $ail to account $or e.o)enous $actors li"e in-estor beha-ior that are not

based upon economic $undamentals o$ the $irm or the )eneral economy

$undamental analysis

'# Ratio (nal.sis

inancial ratio analysis is a -aluable tool $or your small business+ irst# you ha-e to learn to

calculate the ratios and understand (hat they mean+ :hey are a comparati-e tool o$ analysis

$or li*uidity# pro$itability# debt# and asset mana)ement+ :hese are the maor cate)ories o$

$inancial ratio analysis+

Lou need to ha-e industry ratios and,or time series data $rom your o(n $irm $or a basis o$

comparison+ :hen# you can compare the ratios $or your $irm to the ratios o$ other $irms in

your industry and other *uarters or years o$ data $or your $irm+

I$ you do an accurate $inancial ratio analysis usin) comparati-e data# you can learn a lot

about the $inancial position o$ your $irm and ma"e necessary $inancial adustments to

enhance your per$ormance+

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atio 'nalysis is a techni*ue o$ analy/in) $inancial statement+ I: help in estimatin) $inancial

soundness or (ea"ness on (hich basis mana)ement can ta"e -arious decisions+ It is also

si)ni$icant $or other parties related to business to interpret -arious conditions o$ the business#

re)ardin)8A

1• Pro$itability

• i*uidity

• ;apital Structure

• Debt eturn ;apacity

• eturn $rom the &usiness

?#>#9 3S"F31"SS OF R(TIO (1(5SIS

1

• elp$ul in comparati-e study

• elp$ul in determinin) trends o$ business

• elp$ul in measurin) operatin) e$$iciency

•

elp$ul in $indin) (ee" points

• elp$ul in determinin) pro$itability

• elp$ul in ta"in) decisions

• elp$ul in $indin) debt capacity

• elp$ul in controllin) and $orecastin)

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C4(PT"R -<

R"S"(RC4 M"T4O2OO!5

49


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52/83

1

• State ban" o$ India

• Deutshe

• Standard chartered

• I;I;I

• Shinhan

• ;iti

• S&;

• P>&

• &an" o$ 'merica+

:his $ormed the sample $or the present study+ :he report (as prepared in e.cel sheet+

2(T(7 ITS T5P" (12 CO"CTIO1

Primary data can be collected in -arious (aysA throu)h obser-ation# $ocused )roup# sur-eys#

beha-ioral data# and e.periments+ Durin) this research data ha-e been collected usin) sur-ey

method+ Sur-ey method is best suited $or descripti-e research+ ;ompanies underta"e sur-eys

to learn about peopleHs "no(led)e# belie$s# pre$erences# and satis$action# and to measure these

ma)nitudes in the )eneral population+

2(T( CO"CTIO1, :here are t(o important sources o$ collection o$ dataA

•

;ensus data• Sample data

T5P"S OF 2(T(, :here are t(o types o$ data

1 Primary data2 Secondary data

a* PRIM(R5 2(T(

!e collect primary data durin) the course o$ doin) e.periment research but in case (e doresearch o$ the descripti-e type and per$orm sur-eys (hether sample sur-ey or census

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C4(PT"R A

2(T( (1(5SIS (12

I1T"RPR(T(TIO1

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A#; 2ata (nal.sis Interpretation

:he researcher is no( presentin) the analysis o$ the data as per the classi$ication

presented belo( in se*uence+ urther all the $i)ures are in a"hs $or the $inancial

years under (hich they are mentioned in the table+

Fig, A#; Classi0ication o0 Ratios

(* IB3I2IT5 R(TIO

i*uidity means ability o$ the $irm to pay+ Its short8term debts in time+ i*uidity ratios are

calculated to measure the short8term $inancial position o$ the $irm+

i* C3RR"1T R(TIO, -

:his ratio establishes the relationship bet(een current assets and current liability+

;urrent 'ssets are those (hich are con-erted into cash (ith one year or an operatin) cycle+

:hey include cash in hand# ban" balance stoc"# Debtors# Prepaid


56/83

;K: ':IE ?;K: 'SS


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ii* B3IC&D IB3I2IT5D (CI2 T"ST R(TIO,

:his ratio establishes a relationship bet(een *uic" assets and current liability+

Ebecti-e8A :he obecti-e o$ computin) this ratio is to measure the ability o$ the $irm to meetits short8term obli)ations as and (hen due (ithout relyin) upon the reali/ation o$ stoc"+

IQKIDI:L ':IE ? IQKIDI:L 'SS BuickD iHuidit.D (cid Test Ratio

'>'LX


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iii* ('SO3T" IB3I2 R(TIO

:his is called the super *uic" ratio+ :his is calculated by di-idin) absolute li*uid assets by

current liability+

'&SEK:< IQKID ':IE? ;ash Y&an" Y%ar"etable Securities,;urrent iability+'bsolute i*uid atio is 0+5A1

Ta/le (/solute iHuid Ratio is :#


59/83

'* PROFIT('IIT5 R(TIO,-

Pro$itability ratios are calculated to "no( the ans(er o$ the $ollo(in) *uestionA8

• 're the pro$it earned by the $irm ade*uateV

• !hat is the rate o$ return on capital employed and share holderHs $undsV• !hat is the rate o$ net pro$it and )ross pro$it on salesV

• !hat are the earnin) per shareV

• o( much di-idend related to salesV

Pro"itability )atios are related to sales.

i* !ROSS PROFIT R(TIO

:his ratio measures the relationship bet(een )ross pro$it and net sales+Ebecti-e8 :he main obecti-e o$ computin) this ratio is to determine the e$$iciency (ith

(hich production and purchase operations are carried on+

ESS PEI: ':IE?ESS PEI:,>


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Fig A#< !ross Pro0it Ratio

'>'LX


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ii* 1"T PROFIT R(TIO

:his ratio measures the relationship bet(een net pro$it and net sales+

Ebecti-e8 :o determine the o-erall pro$itability due to such -arious $actors such as

operational e$$iciency# tradin) on e*uity etc+

>


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iii* OP"R(TI1! PROFIT R(TIO

:his ratio is measures the relationship bet(een operatin) pro$it and net sales+

Ebecti-e8 :he main obecti-e o$ computin) this ratio is determine the operational e$$iciency

o$ the mana)ement+

EP


63/83

C* PROFIT('IIT5 R(TIO '(S"2 O1 I1%"STM"1T

:o "no( (hether the business is earnin) ade*uate return on the capital in-ested or not+

i* R"T3R1 O1 TOT( (SS"TS:his ratio measures a relationship bet(een net pro$it be$ore interest and ta.# and total assets+

Ebecti-e8 :o $ind out ho( e$$iciency the total assets ha-e been used by the mana)ement+

E> :E:' 'SS


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ii* R"T3R1 O1 C(PIT( "MPO5"2

:his ratio measures a relationship bet(een net pro$it be$ore interest and capital employed+

Ebecti-e8:o $ind out ho( e$$iciency the lon)8term $unds supplied by the creditors and

shareholders ha-e been used+

E> ;'PI:'


65/83

iii* R"T3R1 O1 S4(R" 4O2"RS F312

:his ratio measures a relationship bet(een net pro$it a$ter interest# and ta. and shareholders

$unds+

Ebecti-e8A :o $ind out ho( e$$iciently the $unds supplied by the e*uity share holders ha-e been used+

E> :E:' S'< EDD? P&I:, :E:' S'< ED


66/83

i6* R"T3R1 O1 "B3IT5 S4(R" F312S

:his ratio measures a relationship bet(een net pro$it a$ter interest# ta. # and pre$erence

di-idend and e*uity shareholderHs $unds+Ebecti-e8 :o $ind out ho( e$$iciency the $unds supplied by the e*uity shareholders ha-e

been used+

E>


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6* "(R1I1! P"R S4(R"

:his ratio measures the earnin) a-ailable to an e*uity shareholder on a per share basis+

Ebecti-e 8 :o measure the pro$itability o$ the $irm on per e*uity share basis+


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6i* 2"'T "B3IT5 R(TIO

:his ratio establishes a relationship bet(een lon)8term debts and share8holderHs $unds+

Ebecti-e 8:o measure the relati-e proportion o$ debt and e*uity in $inancin) the assets o$ a

$irm+

D


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6ii* 2"'T- TOT( F312 R(TIO-,

:his ratio is a -ariation o$ the debt8 e*uity ratio and )i-es the similar indications as the

debt8e*uity ratio+ In this ratio# the outside lon)8term liabilities are related to the total

capitali/ation o$ the $irm and not merely to the share holdersH $unds+

DD ':IE 0+507 0+401

Fig A#;? 2e/t Total Fund Ratio

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2* (CTI%IT5 R(TIO

i* C(PIT( T3R1 O%"R R(TIO

:his ratio establishes a relationship bet(een net sales and capital employed+Ebecti-e8 :E determine the e$$iciency (ith (hich the capital employed is utili/ed+

;'PI:' :K> EF


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iii* STOC& T3R1O%"R R(TIO

:his ratio establishes a relationship bet(een cost o$ )oods sold and a-era)e in-entory+

Ebecti-e8 :o determine the e$$iciency (ith (hich the in-entory is utili/ed+

S:E; :K>EF


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i6* 2"'TORS T3R1O%"R R(TIO

:his ratio establishes a relationship bet(een net credit sales and a-era)e trade debtors+

Ebecti-e 8 :o determine the e$$iciency (ith (hich the trade debtors are mana)ed+

DEF


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6* 1et Pro0it Ratio,

's e-ery business is to earn pro$it# this ratio is -ery important because it measures the

pro$itability o$ sales+ ' business may yield hi)h )ross income but lo( net income because o$

increasin) operatin) and non8operatin) e.penses+ :his situation can easily be detected bycalculatin) this ratio+

:he pro$its used $or this purpose may be pro$its a$ter,be$ore ta.+ :o obtain this ratio# the

$i)ure o$ net pro$its a$ter ta. is di-ided by the $i)ure o$ net pro$its a$ter ta. is di-ided by the

$i)ure o$ sales the ratio is also "no(n as sales mar)in as (e can ascertain (ith its help the

mar)in (hich the sales lea-e later deductin) all the e.penses+ :he unit o$ e.pression is

percenta)e# as is the case (ith pro$itability ratios+

In0erence, i)her the ratio better is the pro$itability+

rom the table the ratio is declinin) $rom 2011 to 2012 is increase+ ')ain decrease in the year

2014+>et Pro$it atio is not e$$ecti-e o-er the period o$ study+ ;ompany has not control o-er

the cost o$ )oods sold# sellin)# administrati-e and distribution e.penses+ So# e$$ecti-e steps

are to be ta"en to increase the pro$its+

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C4(PT"R 8

CO1C3SIO1S (12

R"COMM"12(TIO1S

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8#; T4" FI12I1!S A8

Proect (as mainly $ocused on basic concepts o$ import system in E


77/83

:he company may stri"e a balance bet(een the current assets and current liabilities to

maintain the sol-ency position+

Eptimum utili/ation o$ (or"in) capital can be planned so as to result in sound

$inancial position+

;urrent "no(led)e about the $luctuation in the currency o$ other countries+

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B3"STIO11(IR"

Buestionnaire Code,LLL#D:8D;< Completion 2ate,LLLLLL#

This Huestionnaire is designed to assist in stud.ing 'Fore and wor)ing ca*ital of +G

electronics, # In0ormation pro6ided =ill onl. /e used 0or purpose o0 this stud. and =ill

/e kept con0idential# &indl. complete it as reHuired#

1ame o0 the RespondentLLLLLLLLLLLLL##

;# What is .our position in the compan.G

T %ana)in) Director

T inance E$$icer,'ccountant

T Procurement %ana)er,E$$icer

9# 4o= long ha6e .ou ser6ed in the current positionG

T ess than 2 years

T 2 – 4 years

T 4 – 6 years T 6 – years

T %ore than years

># What is the compan.s current asset /aseV

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[++

?# What is the compan.s current mem/ership sie )1o o0 outgro=er 0armers*G

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[+


79/83

A# 4o= man. da.s do .ou allo= prior to actual receipts 0rom da. o0 noticeDin6oiceG

T 0 days

T 15 days

T 15 – 30 days T 30 – 45 days

T 45 – 60 days

T %ore than 60 days

8# From .our experience7 ho= =ould .ou classi0. the 0ollo=ing tools in terms o0 their

application to realiing the compan.s recei6a/lesG );-4ighl. Pre0erredN 9-Moderatel.

Pre0erredN >-o=l. Pre0erred*

1 2 3

Insistence on cash payment T T T

Prompt in-oicin) T T T

Sendin) o-erdue notices T T T

'sset attachment T T T

'dditional char)es T T T

Debt ;ollection ser-ices T T T

@# What are the compan.s outstanding annual de/ts in the last 0i6e .ears7 each ending

>;st 2ecem/erG

5ear 2010 2011 2012 2013 2014

2e/ts

K# 4o= =ould .ou classi0. the compan. in terms o0 its credit uptakeG

T i)h credit consumer

T %oderate credit consumer

T o( credit consumer

T >o credit at all

;:# Rank the 0ollo=ing creditors depending on their credit-6olume ad6ancement to the

compan.#

T Suppliers

T endin) Institutions

T %embers

T [[[[[[[[[[[[[[[[[[[[[[[[[[[[[[+Speci$y

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;;# What is the compan.s pre0erred period )da.s* 0or credit pa.mentG

T 0 days

T 15 days

T 15 – 30 days T 30 – 45 days

T 45 – 60 days

T %ore than 60 days

;9# 4o= signi0icant are the 0ollo=ing pa.ment techniHues to the compan.G );-1ot

Signi0icantN 9-Moderatel. Signi0icantN >-4ighl. Signi0icant*

1 2 3

Payment in installments T T T

>e)otiation $or e.tensions T T T

;han)e o$ payment conditions T T T

Immediate settlement (hen cash is a-ailable T T T

In-estin) cash to pay at maturity o$ )race period T T T

;># What is the leading 0orm o0 in6entor. in the compan.G

T arm inputs

T eneral merchandise

T [[[[[[[[[[[[[[[[[[[[[[[[[[[[[[++Speci$y

;?# 4o= long )da.s* does it take to recei6e ordered goods 0rom suppliersG

T ess than 10 days

T 10 – 20 days

T 20 – 30 days

T 30 – 40 days

T %ore than 40 days

;


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;A# 4o= common do the 0ollo=ing in6entor. situations a00ect the compan. )in the past <

.ears*G

i)h %oderate o( >on8


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99# 4o= has the compan. per0ormed in the last 0i6e .ears on net pro0its and total

assetsG )Complete the ta/le /elo=*

Lear 2010 2011 2012 2013 2014

>et Pro$it +

:otal 'ssets +

9># From .our experience7 =hat hinders Sugarcane Outgro=er Companies 0rom

optimiing their returns through management o0 their =orking capitalG

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[

9?# What =ould /e .our ad6ice to 0inance practitioners in the industr. regarding

=orking capital managementG

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[

[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[[++

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'I'IO!R(P45

R"F"RR"2 'OO&S,

Introduction to inancial %ana)ement – I% P'>D '>D P++B'I>

W"'SIT"S,

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