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OBJECTIVES
It is well known fact that we remember 20% of what we hear, we remember 40% of
what we see but we remember 75% of what we do. Undergoing B.B.A is the first step to
prepare myself as a manager and visualize the ever-dynamic business world and my
main objective while taking up the training was to familiarize myself with the working of
the finance department of Escort Agri Machinery Group (AMG).
Objective of the Study
Resources of cash inflow of the company.
Cash flow factors which have effect of cash inflow.
Cash flow statement in the company.
Cash flow management in the company.
Methods of Study
o Primary Data Survey report of market, questionnaire
o Secondary Data Books and journals
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1990 annual production rose to 1, 40,000 units making India an exporter to countries,
mainly to Africa. After De-licensing of tractor industry, production exceeded 2, 55,000
units in 1997.
The growth of the industry over the last three decades resulted in the entry of severalnew entrants including all the major multinational companies. The industry now consists
of 14 manufactures with an aggregate installed capacity of approximately 4.50 lack
tractors. In the tractor industry, following are the key manufacturers:
Mahindra& Mahindra Limited (M&M),
Gujarat Tractors Limited,
Tractors and Farm Equipment Limited,
Hindustan Machine Tools Limited,
Bajaj Tempo Limited
In 1999-2000. Since then, however the industry declined to a level of 1.72 lack tractors
in the year 2002-2003, a decline of 33.3% over three years.
Despite the step decline in the industry, Escorts consciously decided to aggressively
reduce channel inventory further by approximately 3,500 units reduces in the previous
year. This has not only impacted their revenue and profit adversely but has also
enabled the company to balance the cash flow of company effectively.
Tractors form an integral part of farm mechanization and have a crucial role to play in
increasing agriculture productivity. In India, 90% of the tractors are financed by banks-
credit at concessional rates.
Availability of credit therefore is the most crucial factor, impacting tractor demand.
Increased use of irrigation facilities, shift towards multicropping, consolidation of lands
holdings, promotion of cooperatives and higher investment in agriculture also
contributes to higher tractor demand.
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FUTURE OF ESCORT INDUSTRY
The tractor industry in India has been on a growth trajectory since the second half of
2003-04, after going through a minimum variation for consecutive years. The key factors
driving this growth are increasing farm incomes, aggressive financing resulting in easy
availability of low cost credit, sharp inventory correction and strong export growth.
The demand in tractor industry is expected to grow mainly due to the agricultural sector,
with the expected increase in agricultural production. Also, the shift in trend for demand
towards higher HP tractors is expected to continue. This will be further strengthened by
the launch of several new models. In the next 2-3 year, demand for tractors is expected
to increase significantly in the eastern states, where traditionally, tractor usage has
been low. Exports are expected to increase significantly as several Indian players are
targeting the hobby farming segment in the U.S, which is considerably large. Also,
tractors of most Indian manufacturers comply with the emission standards accepted in
the U.S.
Most exports are likely to be through overseas partnerships or joint ventures. McKinley
has also forecasted tractor population requirements of 75 lacs over the next 18 years
vs. current population of 26 lacs. The extension of the 150 per cent deduction on R&D
expenditure up to march 31, 2009, in the Budget 2008-09 will also benefit the industry in
terms of new product development besides increase in the area under irrigation under
the Bahrat Nirman Project and the micro irrigation scheme.
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MARKET SHARE OF TRACTOR INDUSTRY
For the year 2007-08
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COMPANYS PROFILE
ESCORTS SYMBOL
The Escorts symbol means more than a seen by eye. It has been prepared with certain
objective in mind and is symbol in more than one way.
The philosophy behind Escorts and the e in the Escorts is enterprise.
The hexagon is a symbol of productivity. Precision when interposed as a nut. It
symbolizes a craft man ship and mending productivity. The sprains super imposed on
the hexagon represent the workers and the people of Escorts. This forms the letter E
the first of Escorts a company even of more changing unveiling the future
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MISSION
For an Enterprise business mission embodies of its endeavor, which acts as a guiding
light for continuous development & growth. Mission ofESCORTS is:
Engineering Changes through core competency for greater synergy reinforcing bonds
with customers & establishing powerful symbiotic relationship with international allies,
preparing global market. The company wants to make a lasting difference to its
shareholders, its customers, its business associates, its employee and the country as a
whole. The company also gives better quality and better technology to customer and
treats every customer as special to build respect for, and loyalty to, Escorts.
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QUALITY POLICY
We shall strive to continuously improve to meet the ever rising
expectation of our customers at the lower cost. Each one of us must fulfill
the need of our customer, both internal and external with the highest degree of
commitment thereby creating a quality organization geared to ensure total customer
satisfaction and the sustained health and prosperity
of our business.
Customer Orientation: To fulfill the requirement of our internal and
external customer.
Process Orientation: To optimize and harmonize interrelated process
rather than individual function.
Preventive Behavior: To prevent the mistake to happen.
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business by merger of ETL with EL and having off various divisions into separate
companies. Biwheeler division was spun off to Escorts Yamaha Motors Ltd.,
construction equipment division to Escorts construction equipment Ltd.,
telecommunication equipment division to Escorts communication Ltd., EL booked gains
of Rs. 2091 million over
the four year period 1994-95 to 1997-98 though the sale of these the sale
of these divisions. The main products of Escorts group currently comprise of
agrimachinery, information technology, health care, financial services,
railway components, auto components, construction and material handling equipment.
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BOARD OF DIRECTORS
Managing Director &Chairman Mr. Rajan Nanda
Joint Managing Directors Mr. Nikhil Nanda
Directors Dr. M.G.K. Menon
Dr. S.A. Dave
Dr. P.S. Pritam
Sr.Vice President Mr. S.C. Bhargava
Law & Company Secretary Mr. G.B. Mathur
Exec. Vice President &
Group Chief Financial Officer Mr. R.K.Budhiraja
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SUBSIDERIES
Escorts Asset Management Ltd.
Escorts Automotive Ltd.
Escorts Class Ltd.
Escorts Construction Equipment Ltd.
Escorts Heart Institute and Research Centre Ltd
Escorts Hospital and Research Centre Ltd.
Escorts Securities Ltd.
Escorts Telecommunication Ltd.
Esconet Services ltd.
Cellnext Solutions Pvt. Ltd.
I Serv India Solutions Pvt. Ltd.
Escosoft Technologies Ltd.
Escosoft Technologies (USA) Ltd.
Escosoft Technologies (UK) Pvt. Ltd.
Escosoft Singapore Pvt. Ltd.
E-Soft (Mauritius) Holdings Ltd.
Escotel Mobile Communication Ltd.
Escotel Telecommunication Ltd.
Escorts Agri machinery
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BANKERS
1) IDBI BANK
2) ABN AMRO BANK
3) N.V. BANK OF BARODA.
4) CITIBANK, N.A.
5) DEUTSCHE BANK
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AGRI MACHINERY GROUP
INTRODUCTION
Having pioneered farm mechanization in the country, Escorts has played a pivotal role
in the agricultural growth of India for over five decades. One of the leading tractor
manufacturers of the country, Escorts produces tractors in the 27-75 HP range and has
already sold over 6 lakh tractors. Escorts AGRI MACHINERY GROUP (AMG) was set
up in 1960 and they rolled out their batch of tractors in 1965 under the brand name of
Escorts. Today its tractors are marketed under three brand names, viz. Escort,
Powertrac and Farmtrac.
Escorts Brand of tractors is symbolic of reliability and enjoys the confidence of the
farming community for the last 40 years.
Powertrac Brand of tractors is the most fuel-efficient tractor in their
respective categories that offer excellent value for money and have helped the farmer
improve their quality of life.
Farmtrac Brand is the most powerful premium range of tractors that give maximum
productivity to the farmers.
Spanning these three brands, the company has a full range of tractors to cater to the
domestic as well as overseas markets. The company is developing state-of-the-art
highly fuel efficient engines with the assistance of AVL of Australia and have also
entered into a Joint venture with CARRARO SPA of Italy for the manufacturing oftransmission and axles.
To sustain the present momentum and to realize the future goals, Escorts has invested
Rs. 60 crore towards strengthening new product.
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Development programs and enhancement of R&D capabilities.Additionally, Rs.400
crore has been invested towards modernization of its manufacturing facilities bringing
them to international standards. The company has one of the most comprehensive
distribution networks comprising of over 500 dealership / outlets and 30 area offices
spread across the country. It has a manufacturing capacity of 75000 tractors per
annum. Escorts Agri Machinery Group is looking at forward and backward integration
through genetic engineering. In line to their vision for becoming a major player in sub
100 HP segment by 2011 in the global markets, they have increased their reach from a
major regional player to major global markets, which stretch from North America to
Australia covering all the continents. Despite the strict competition by other major tractor
manufactures they have been able to gain constant volumes in the global market. Their
target for this year is to export 25% volumes of their total production volumes.
To consolidate its presence in the overseas markets, the company as ventures in the
USA and Europe (Poland). It has recently acquired a majority stake in Long
Agribusiness LLC, a tractor distributing company in USA and Poland Escort Spolka
Z.O.O., Poland. Besides the USA and Poland, Escorts has strong presence in Turkey,
Australia, Bangladesh, Sri Lanka, Nepal, Kenya, Tanzania and South Africa etc. though
its dealers network in these countries. Escorts have very ambitious plans to expand
the network in other potential countries in the coming year. By the end of next year, the
company hopes to be largest exporter of tractors in theIndian tractor industry.
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AGRI MACHINERY GROUP CONTRIBUTION
AMG contribution is Almost Half of the Total Revenues of Escort Group.
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MODERNIZATION OF AGRI MACHINERY GROUP
Escorts Agri Machinery Group (AMG) has invested overUS $7.5 million in state of the
Art & Research and Development Center.
Construction
Virtual prototypes of components and aggregate assemblies are made and assembled
on computer workstations using 3D technology. Their performance is checked on
computers using simulation techniques thus saving a lot of time for the end-user as well
as lowering development costs. The R&D center uses advanced 3D modeling, analysisand simulation software for engines, transmission and vehicles. Physical prototypes are
then extensively tested for performance, durability and reliability. Facilities include a
high technology engine laboratory featuring fully computerized test-beds with on line
control, data collection, and analysis
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PRODUCTS
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COMPANYS FUTURE
The growing domestic demand for food gains and agri products promises a very good
future for companys business. With exemption of excise duty on tractors and growing
importance of agriculture sector in the growth of Indian economy India can become a
major exporter of agri products and increased demand both domestic and export will
call for increased yields. Tractors population today is concentrated in 10% of villages
and even today 70% of the villages do not have tractor .Crisil infa has estimated an
annual demand 3.0 lacks to 3.20 lakhs of tractorsby 2007-08 vs. 2.4 lakhs in 2006-
07. All these show great potential for growth in the industry and thus in the company
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CASH MANAGEMENT
INTRODUCTION
Cash is the important current asset for the operation of the business. Cash is a medium
of exchange to purchase the goods and services and to discharge the liabilities. Cash is
the basic input needed to keep the business running on a continuous basis; it is also the
ultimate output expected to be realized by selling the service or product manufactured
by the firm. The firm should keep sufficient cash, neither more nor less. Cash shortage
will disrupt the firms manufacturing operations while excessive cash will simply remain
idle, without contributing anything towards the firms profitability. Thus a major function
of the financial manager is to maintain a sound cash position.
Cash is the money which a firm can disburse immediately without any restriction. The
term cash includes coins, currency and cheques held by the firm, and balances in its
bank accounts. Sometimes near cash terms, such as marketable securities or bank time
deposits, are also included in cash. The basic characteristic of near cash asset is that
they can readily be converted into cash. Generally, when a firm has excess cash, it
invests it in marketable securities. This kind of investment contributes some profit to the
firm.
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CASH FLOW MANAGEMENT
Cash flow management is a process of monitoring, analyzing, and adjusting ones
business cash flows. The most important aspect of cash flow management is avoiding
extended cash shortages, caused by having too great a gap between cash inflows and
outflows. Therefore, one needs to perform a cash flow analysis on a regular basis, and
use cash flow forecasting so that one can take the steps necessary to head off cash
flow problems. Cash management involves the efficient collection, disbursement and
temporary investment of cash. The treasurer department of a company is usually
responsible for the firms cash management system. A cash budget, instrumental in the
process, tell us how much cash we likely to have it, and for how long.
In cash flow management I studied many statements like as follows:
A) Cash flow Statement
B) Cash Budget
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CASH MANAGEMENT SYSTEM
With timely information reporting a firm can generate significant income by properly
managing collections, disbursement cash balance and cash equivalents investment,
a) Collection Disbursement
b) Cash
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IMPORTANCE OF CASH MANAGEMENT
Cash management assumes more important than other current assetsbecause cash is
the most significant and the least productive asset that afirm holds. It is significant
because it is used to pay the firms obligations.
However cash is unproductive. Unlike fixed assets or inventories, it does not produce
goods for sale. Therefore, the aim of cash management is tomaintain adequate control
over cash position to keep the firm sufficiently liquid and to excess cash in some
profitable way.Cash management is also important because it is difficult to predict cash
flow accurately, particularly the inflows and there is no perfect coincidence between the
inflows or outflows of cash. During some periods, cash outflows will exceed cash
inflows, because payments for taxes, dividends, or seasonal inventory build up. At
other times, cash inflows will be more than cash payments because there will be large
cash sales and debtors may be realized in large sums promptly.
Cash Equivalents Control Through Information Report Cash management is significant
because cash constitutes the smallest portion of the total current assets, yet
managements considerable time is devoted in managing it.
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CASH MANAGEMENT STRATEGIES
The firm should develop appropriate strategies for cash management. The firm should
evolve strategies regarding the following four facets of cash management: Cash
planning cash inflow and outflow should be planned to project cash surplus or deficit
for each period for each period of the planning period. Cash budget should be prepared
for this purpose. Managing the cash flows the flow of cash should be properly
managed. The cash inflows should be accelerated while, as far as possible, the
cashoutflows should be decelerated. Optimum cash level the firms should decide
about the appropriate level of cash balances. The cost of excess cash and danger of
cash deficiency should be matched to determine the optimum level of cash
balances .Investing surplus cash the surplus cash balances should be properly
invested to earn profits. The firm should decide about the division of such cash balance
between short-term investment opportunities such as bank deposits, marketable
securities, or inter- corporate lending.
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CASH OUTFLOW
For cash management, the control of cash outflows, which is directly related to
organizational arrangements for budget execution, can pose more difficulties than the
control of cash inflows. However, issues related to cash management should not be
confused with issues related to the distribution of responsibilities for accounting control
and administration of the payment system. The major purpose of controlling cash
outflows is to ensure that there will be enough cash until the date payments are due and
to minimize the costs of transactions, while keeping cash outflows compatible with cash
inflows and fiscal constraints. The first condition for ensuring that cash outflows fit fiscal
constraints is good budget preparation and budget implementation covering both cash
and obligations. However, during budget implementation, cash outflows must also be
regulated through cash plans to smooth cash outflows.
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CASH INFLOW
It is necessary to minimize the interval between the time when cash is received and the
time it is available for carrying out expenditure programs. Collected revenues need to be
processed promptly and made available for use. When tax collection is done by the tax
administration offices (or by Treasury offices) the administrative organization of these
offices may have to be reviewed and their equipment modernized. Commercial banksby virtue of the banking sector infrastructure are often able to collect revenues more
efficiently than tax offices, which should therefore focus instead on tracking taxpayers.
When revenues are collected by commercial banks, arrangements must be defined to
foster competition and ensure prompt transfer of collected revenues to government
accounts. Systems of bank remuneration through float, which consists of authorizing the
banks to keep the revenues collected for a few days, present inconveniences. Stringent
rules to ensure prompt transfers must be established. Moreover, bank remuneration
through fees is more transparent and promotes competitive bidding. An appropriate
system of penalties for taxpayers is also an important element in avoiding delays in
revenue collection.
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CASH FLOW STATEMENT
Meaning:
IT IS a summary of firms cash receipts and cash payments during period of time.
The purpose of cash flow statement is to report a firms cash inflow and outflows, during
a period of time, segregated in to three categories: operating, investing and financing
activities.
The statement of cash flow explains changes in cash and cash equivalent such as
treasure bill and the activities that increase and decrease cash. The cash flow
statement may be presented using either a direct method (Which is encouraged by
financial accounting standards board) or an Indirect Method (which is likely to be the
method followed by good majority of firms). The only difference between the direct and
indirect method of presentation concern the reporting of operating activities; the
investing and financing activities section would be identical under either method. Under
the direct method, operating cash flow reported directly by major classes of operating
cash receipts (from customers) and payment (to suppliers and employees). A separate
indirect reconciliation of Net income to net cash flow from operating activities must be
provided. The reconciliation starts with reported net income and adjusts this figure for
non-cash income statement items and related changes in balance sheet items to
determine cash provides by operating activities.
Cash flow statement has three activities like as follow:
Operating Activities:- Shows impact of transactions not defined as investigation or
financing activities. These cash flows are generally the cash effects or transaction thatenter into the determination of net income. Thus, we see items that not all statement
users might think of as operating flows-items such as dividends and interest received,
as well as interest paid.
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Investing Activities:- Shows impact of buying and selling fixed assets or equity
securities of other entities.
Financing Activities:- Shows impact of all cash transactions with shareholders and the
borrowing and repaying transactions with lenders.
IMPORTANCE
The effects of cash and non-cash investing and financing
transaction.
A manager can assess the reason for differences between net
income and net cash flow from operating activities.
It is also helpful for a company to generate future net cash inflows
from operations to pay debts, interest and dividends.
It gives indication to a companys need for external financing.
A cash flow statement is straightforward and easy to
Understand.
It gives a strong indication of how viable the company will be over
time.
The extent of success or failure of cash planning can be known by
comparing the actual cash statement with the budgeted cash flow
statement and remedial measures can be taken.
It discloses the volume and the speed at which cash flows in
different segments of the business
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DAILY CASH FLOW REPORT
The Daily Cash Flow report is prepared with an objective to keep incessant check on
the cash flows of the firm, which includes both inflow and outflow cash. The cash flows
are planned to project cash surplus or deficit for each period i.e daily, monthly,
quarterly, semi-annual & annual basis. The framework of report highlights all the effects,
which lead to cash surplus or deficit. It is a measure, which calculates the details of
daily transaction in terms of sale and purchase, which further includes the means
through which they take place.
At Escorts-AMG, the daily cash flow report is designed in a format suiting their
requirements .The sales of tractors is their primary goal which includes exports as well.
The bills are presented for desired collection from various channels i.e dealers,
stockiest, distributors through which the tractors are supplied in the market. Besides
tractors they also deal in engines, backend, implements which are included in the
category of other receipts. The receipts are other than collections as they arent
generated through sales. Next come the payments, which are made in discharge of
financial obligation towards various suppliers, bank payments, excise duty, salary &
wages etc.
Through the various collections, receipts and payment, we are now in a position to
derive the surplus or deficit which is the result of above transactions. The surplus
balance shows that the collections & receipts are more than payments and vice-a-versa
in case of deficit. Though surplus is an indicator of sound financial position and deficits
the other way round, but excess surplus is also not considered healthy which has
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reasons to it like inventory pile up and so on. The last component of the cash flow report
is the outstanding debtors, which is calculated by subtracting billing & collection from
opening o/s of debtors in domestic, export and other categories. This way the day to
day cash transactions are maintained through the cash flow report which leads to
proper functioning of an organizations resources both men & material.
COMPONENTS
The annual cash flow statement at Escort- AMG is prepared for the fiscal period
commencing from 01/10/20XX to 31/09/20XX. They are also maintaining the daily cash
flow report with a purpose of keeping constant check on the daily flow of cash i.e cash
inflow and cash outflow, for different products categories, their parts and other
miscellaneous.
The main products at ESCORTS AMG are TRACTORS which are available in
three major categories:
Farmtrac
Powertrac
Escorts
These products are sold into the market through intermediaries like dealers, stockists
and distributors , these parties charge a commission for the services provided by them.
Among these parties dealers are given priority over the stockists & distributors for the
delivering the product to the end customer and the commission also varies in the same
manner.The following are the transactions that take place in the daily cash flow
report under the following main heads:
Particulars,
Year to date i.e the very first day of the financial year till the previuos months end (in
which the daily report is being made),
The previous month,
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Plan for the ongoing month,
The particular day for which the report is being made,
Month to date (from the beginning of the current month till the day for which report is
being made).
SALES This includes the number of tractors sold in the domestic boundaries as well
as overseas.
BILLING It is the process of sending accounts to customers for goods or services.
The document used is called an invoice, the invoice may be attached to the goods or
forwarded separately. The average sale value of each tractor is calculated as a follows :
Total sales of tractors
Number of tractors sold
COLLECTION The collections is recovered from all those parties to whom the
products is being sold. The parties involved are :
Tractors ( Direct ) This includes the sale made through dealers to the end customer,
for which a predetermined amount is given as commission to the opposite party. If the
dealer fails to make the sale till the due date than he has to pay interest on it thereon.
Tractors ( Stockists ) This includes the sale made through stockists, who doesnt sell
the product by themselves but sells them through dealers. The credit period allowed to
stockists by the company is less in comparison than that of dealers, which yields to
faster generation ofincome .
Tractors ( Channel financing ) This system is adopted to improve the working
capital of the company by avoiding inventory pile up an dearning speedy collections.
Furthermore, Channel Financing is an innovative option for extending working capital
finance to dealers who have business relationships with large companies. Channel
Financing is the mechanism through which a Bank / Financial Institution meets the
Various Channel Financing could cover : -
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Party a/c dr.
To bill discounting supplier a/c
( being paid to party through bank )
Bill discounting supplier a/c dr. .
To bank a/c
( being payment made to bank)
Letter of credit : The LC can also be the source of payment for a transaction, meaning
that redeeming the letter of credit will pay an exporter. Letters of credit are used
primarily in international trade transactions of significant value, for deals between a
supplier in one country and a customer in another. The parties to a letter of credit areusually a beneficiary who is to receive the money, the issuing bank of whom the
applicant is a client, and the advising bank of whom the beneficiary is a client. Almost
all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior
agreement of the beneficiary, the issuing bank and the confirming bank. In this 100
%payment is not given to the supplier by the bank due to loss in transition, rejection &
shortage . in if loss doesnt occur than 100 % is given to the supplier on the due date.
Packing credit : when we receive an export order from countries , thanwe can availloan from bank at nominal interest as packing credit loan. It provides the exporters with
working capital between the time of the receipt of order and the time of shipment to
arrange for production or procurement of goods. Pre-shipment finance is of particular
importance to small scale manufacturers and exporters who do not possess sufficient
financial resources to meet the expenditure involved in the production of goods for
export.
Pre shipment finance is normally provided by the commercial banks. As in the case of
many other advances the bank takes into consideration a number of factors before
making the necessary other advances to exporters viz., (1) honesty, integrity and capital
of the borrower, (2) exporters experience in the line, (3) security offered, (4) the margin
of interest (5) the banks experience about the exporter to ensure that his name does
not appear on the caution list of the Reserve Bank.
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Pre- shipment : when the company receives order
Post shipment : when assignment is dispatched from the company.
The following entries to be passed in the books for packing credit loan :
Party a/c dr.
To export a/c
( being export order received)
Bank a/c dr.
Bank charges a/c dr. .
To packing credit loan
( being loan granted by bank )
Bank a/c dr.
To party a/c .
( being payment made to bank)
Pcl a/c dr.
To bank a/c
( being payment of loan made to bank)
Credit note : This note is presented to the other party for the payment to be made by
the opposite party. Whereas debit note is given to the company by the other party incase of payment is to be made by the company.
PAYMENTS : It is the transfer of wealth from one party (such as a person or company)
to another. A payment is usually made in exchange for the provision of goods, services
or both, or to fulfill a legal obligation. The payments at Escorts AMG includes Direct
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(hundis, LC ), bank payment , excise duty which is lieved on the parts of the tractors,
ladt ( local area development tax), sales tax , salary and wages, vrs, spare parts,
implements, electricity, overhead, finance charges, capex is the capital expenditure
made to purchase the fixed assets or adding value to the existing fixed asset, credit
note, corporate loan, loan rapyments, interest, wcdl payment, packing credit & bill
discounting.
OUTSTANDING : Outstanding debtors are calculated by the following
formula
Closing O/S = Opening O/S + Billing Collection
In this, values are calculated for debtors outstanding in different point of time in
domestic and overseas sales of tractors & its part.
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CASH BUDGET
MEANING
A forecast of estimated cash receipts and disbursements for a specified period of time.
A cash budget is arrived at through a projection of future cash receipts and cash
disbursements of the firm over interval of time, it reveals the timing and amount of
expected cash inflows and outflows over the period. With this, the firm will be able to
determine its future cash needs, and exercise control over the cash and liquidity of the
firm. Though the cash budget may be prepared almost any interval of time, its monthly
projection are most common. In short, we can say that cash budget is a forecast of a
firms future cash flows arising from collection and disbursement, usually on a monthly
basis..The key to the accuracy of most cash budgets is the sales forecast. This forecast
can be either internal or external analysis, in internal approach, sales representatives
are asked to project sales for the forthcoming period, We can then consolidate these
sales estimates for the product line. The estimates for the various product lines are then
combined in to an overall sales estimate for the firm. The basic problem with an internal
approach is that it can be too myopic, often significant trends in the economy and in the
industry are overlooked. Many companies use an external analysis as well, in external
approach economic analysts make forecast of the economy and of industry sales for
several years to come. They may use regression analysis to estimate the association
between industry sales and the economy in general. After these basic predictions of
business conditions and the industry are made. The next step is to estimate the market
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share by individual products, price that are likely to prevail and the expected reception
of new product. By this way we can prepare an external forecast.
For Effective Cash Budget
A firm may be able to delay its capital expenditure or its payment for purchase,
Purpose of cash budget should be to determine the timing and
magnitude of prospecting financing needs so that the most appropriate method of
financing can be arranged,
A decision to obtain long term financing should be based on longrange funds
requirement.
On the basis of cash budget the manager should be able to plan to invest excess
funds in cash equivalents.
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BANK RECONCILIATION STATEMENTS
Bank reconciliation involves comparing the companys record of transactions and
balances to the banks record of transactions and balances. The company should go
through every transaction in their account and make sure the company and the bank
agree on the transaction.
Its important to go through the process of bank reconciliation. If thecompany doesnt,
than it is taking few risks. Without bank reconciliation, the company may not have a
clear idea of how much cash is available in their accounts. They might bounce Cheques
and incur overdraft charges. Without bank reconciliation, the company also expose
yourself to risk. People may be stealing from the companys account. If they never look
through each transaction, theyll never know about it. If they dont notify the bank quickly
enough, they may be out of luck. The same goes for bank mistakes. With regular bank
reconciliation the company can find problems quickly and make them go away. Bank
reconciliation can be done manually, in excel & theres electronic bank reconciliation as
well.
Though the manual way for handling companys large bank accounts is not appropiate,
it is helpful when there are less transactions. But still it important for any manager to
learn it as it is the basic form of doing it.
For reconciling the companys record of transaction with the bank balances , there are
three essential requirements :
Bank book
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Bank statement
Bank reconciliation statement of preceding month
Than the above transactions needs to be tally & unmatched have to be reconciled
accordingly. Below is an example of how is it done manually:-
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CASH RATIOS
MEANING
Cash ratios are also important tool of cash control. There are various ratios which
explain the efficiency of cash management or viceversa. They are the acids test ratio,
cash ratio, receivables turnover ratio, inventory turnover ratio, cash turnover ratio etc.
These are calculated as
LIQUIDITY RATIOS
Liquidity ratio measures the ability of the firm to meet its current obligations. It is
necessary to strike a proper balance between high liquidity and lack of liquidity. A high
degree of liquidity means that a firms fund will be unnecessarily tied up in currentassets. Whereas lack of liquidity, implies failure of a company to meet its obligations
due to lack of sufficient liquidity.
The ratios, which are used for the analysis of Escorts liquidity position in this report, are:
Current Ratio
Quick Ratio
CURRENT RATIO
Current ratio is calculated by dividing current assets by current liabilities:
Current ratio = Current Assets
Current Liabilities
2006-07 2007-08
Current Ratio 1.12 1.16
From the above table it can be interpreted that Escorts liquidity position is not constant.
As a conventional rule a current ratio of 2:1 or more is considered satisfactory because
in a worse situation, even if the value of current assets become half, the firm will be able
to meet its obligations. Current ratio refers to a margin of safety for creditors therefore
higher the current ratio, the greater the margin of safety.
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QUICK RATIO
Quick ratio establishes a relationship between quick or liquid assets and current
liabilities. An asset is liquid if it can be converted into cash immediately or reasonably
soon without a loss of value. Inventories are considered to be less liquid thereforecalculating quick ratio they are deducted from current assets.
Quick Ratio = Current Assets inventory
Current liabilities
2006-07 2007-08
Quick Ratio 0.90 0.99
Escorts quick ratio in the current year has decreased in comparison to previous year,yet it can be considered to be satisfactory, as it is 1:1 times of current liabilities.
Although quick ratio is more penetrating test of liquidity than current ratio. Yet it should
be used cautiously, as all debtors may not be liquid and cash may be immediately
needed to pay operating expenses.
The value of quick ratio is decreasing every year. The satisfactory level of the quick
ratio is 1:1. This shows the worse situation of the company.
The current liabilities are more than the quick assets.
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FIXED ASSETS TURNOVER RATIO
A firms ability to produce a large volume of sales for a given amount of net assets is the
most important aspect of its operating performance. Unutilized or underutilized assets
increase the firms need for costly financing as well as expenses for maintenance andupkeep. Fixed assets turnover is calculated by dividing net sale by net fixed assets.
Fixed Assets Turnover = Sales
Fixed Assets
2006-07 2007-08
F.A.T 2.29 2.35
Escorts fixed asset turnover have increased in 2003-04. The fixed asset turnover of
2.78 implies that it is producing Rs.2.78 of sales for one rupee of capital employed.
The higher the ratio, more it is satisfactory It should be interpreted very cautiously
because the denominator of the ratio includes fixed asset net of depreciation. Thus old
assets with lower book value may create a misleading impression of high turnover
without any improvement in sales
DEBTORS TURNOVER RATIO
Debtors turnover indicates the number of times debtors turnover each year. Higher the
value of Debtors turnover, the more efficient is the management of credit. The liquidity
position of the firm depends on the quality of the debtors to a great extent.
Debtors Turnover = Credit SalesAvg. Debtors
2006-07 2007-08
Debtors Turnover 4.44 4.29
Escorts debtors turnover is quite lower. The debtors turnover ratio is high at 2003-04 .
The ratio is decreasing. Also the debt collection period has its own importance. The
debt collection period of Escorts was 76 days in 2003-04 but it has increased to 95 days
. This does not show the satisfactory level. The shorter the collection period, the better
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the quality of debtors, since a short collection period implies prompt payment by
debtors. A too low collection period is also not necessarily favorable as it may indicate a
very restrictive collection and credit policy. Because of the fear of bad debt loses the
firm may be selling to those only whose financial conditions are sound and who are very
prompt in making the payments.
CREDITOR TURNOVER RATIO
Creditors Turnover = Total Purchases
Creditors
2006-07 2007-08
Creditors Turnover 3.55 3.45
Though the days are very high and apparently appears to substitute right collection, this
extended credit has its own drawback like:
High interest inbuilt in cost system.
Sub-quality creditors may be accepted.
Quality of material may be accepted.
The payment period of Escorts Limited is 90 days in 2007-08, which is more reasonable
than previous years. This helps to make good quality product and also better
relationship with suppliers.
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WORKING CAPITAL TURNOVER RATIO
Working capital turnover ratio has its own significance in the business organizations. It
shows the efficiency of the firm. How much sale that the company get with the
utilization of the limited working capital.
Working Capital Turnover = Net Sales
Net Working Capital
2006-07 2007-08
Working.Cap.Turn. 113.45 28.30
In the case of working capital turnover ratio Escorts is significantly going very
downward. This is a very dangerous point of the firm. The company should try toimprove it earlier. It shows that the company requires more money to generate sales.
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RECEIVABLE MANAGEMENT
The term receivable is defined as debt owed to the firm by customers arising from
sales of goods in the ordinary course of business. The sale of goods on credit is an
essential part of modern day business.
The credit sales are generally made on open account in the sense that there are no
formal obligations through a financial instrument. However extension of credit involves
risks and cost. Management should weigh the benefits as well as the cost to determine
the goal of receivable management. The benefits from receivables are the increased
sales and profits anticipated because of more liberal policy. When firm extend trade
credit, i.e. invest in receivables, they intend on increase the sales level. The motive of
liberal credit policy can be either growth oriented or sales retention. The extension of
credit has a major impact on sales, costs and profitability. Other things being equal, a
relatively liberal policy and therefore higher investments in receivables will produce
larger sales.
However the cost will be higher with liberal policies then with more stringent measures.
Therefore account receivable management should aim at a trade- of between profit and
risk.
The costs associated with the extension of credit and account receivables are
collection cost
capital cost
delinquency cost
default cost
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CREDIT TERMS
The second decision area in accounts receivable management is the credit terms. After
the credit standard have been establish and the credit worthiness of the customers is
assessed, the management of a firm must determine the terms and conditions on which
trade credit will be made available. Credit terms have three components : credit period,
cash discount and cash discount period. Credit period is the duration of time for which
trade credit is extended whereas cash discount is the amount by which the over the due
amount will be reduced thus benefiting the customer. The credit terms like the credit
standard affect the profitability as well as the cost of the firm therefore a firm should
determine the credit terms on the basis of cost-benefit trade-off.
COLLECTION POLICIES
The collection policies refer to the procedures followed to collect account receivable
when after expiry of the credit period they become due. This policy covers two aspects :
first is the degree of effort to collect the over due and second is the type of collection
efforts.
Escort Limited has a zero debt credit policy. However it is giving the following facilities
to its dealers to promote the sales, as liberal credit policy has a direct impact on sales.
CHANNEL FINANCE FACILITIES
The company arranges these facilities with various bankers for the company dealers to
support their cash needs. The goods are sold on credit against hundis. Hundis can be
drawn for 50 or 75 or 90days subject to qualifying criteria of bank.
CREDIT FACILITIES
Escort provides thirty days interest free credit to the dealers. For this in respect of all
hundis the company bears 30 days interest and the remaining cost of interest, delayed
payment charges are borne by the dealers.
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PENALTY ON BOUNCING OF HUNDIES / CHEQUES
Bouncing of hundis/ cheques drawn in favor of the company is viewed very strongly and
usually following actions are taken.
Tractor supplies are suspended and restored only after all dues are cleared.
All charges debited by the bank such as collection charges, penal interest are
debited to the dealer.
The bank extending channel financing policy have clearly stated that if a dealer has
two or more bouncing he will be black listed and his limit will be withdrawn with
immediate effect. Company also makes sales to such dealers only against letter of
credit or demand draft.
CASH DISCOUNT ON EARLY PAYMENT
Cash discount of 1% is payable on tractors dispatched against funds available in the
form of letter of credit or demand draft. Interest is charged/ paid at 12% per annum on
outstanding/ credit balance early payment incentive.
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PAYABLE MANAGEMENT
Creditors are a vital part of effective cash management and should be managed
carefully to enhance the cash position. Purchasing initiates cash outflows and an over-
zealous purchasing function can create liquidity problems. A better strategy is to shrink
the vendor base radically, then use ones clout to negotiable longer terms with the
vendors. Vendor rationalization is a process that can pay off in a big way.
Apart from the question that who should authorize purchasing in the company should
it be tightly managed or spea among a number of (junior) people? The following comes
under good payable management.
Purchase quantities should be geared to demand forecasts.
Order quantities should be used which takes account of stock holding and
purchasing costs.
The cost to the company of carrying stock should be clearly defined.
A Company should have alternative sources of supply. It should get quotes from
Major suppliers and shop around for the best discounts, credit terms and reduce
dependence on a single supplier.
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RECOMMENDATIONS
LOANS AND ADVANCES
Special efforts should be made to analyze loans & advances, which are between 35%
to 56% of current assets. This can be classified between production / operation relation
related and non-production / operation related. No production related cases might be
financed from other sources like debenture etc. and treated separately.
INVENTORY
Inventory should be reviewed constantly to identify show / dead / obsolete item and then
disposed . Optimum level should be revised periodically, keeping in view, distance ofsuppliers, production lead time of supplier, transport problem if any and reliability of
suppliers. This will help to avoid obsolesce and dead inventory.
DEBTORS
A study may be conducted if required by experts to pinpoint reason behind Escorts high
correction period of 95 days in 2007-08 against 50 days of Mahindra & Mahindra. It is
due to quality of products,quality of customer, the segment of customers marketing
effort, distribution pattern or other reasons.
CREDITORS
Though high payout days may be appartenly beneficial for the company. It has it very
heavy long term cost like high interest cost, bad credit ratings and shyness of good
quality / standard suppliers.
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RATIOS
The company should try to improve its current situation. The ratios, which are taken in
this research to evaluate the companys position, are Current ratio, Quick ratio and
Activity ratio. These ratios show the actual position of the company. The Quick ratio is
declining since 2001-02 till now. There is a drastic declining in the working capital
turnover ratio.
This ratio goes to ve position in current year compared to previous. TheDebts
collection period is 359 days for Exporters. This shows the poor collection policy. The
current ratio is 1.12 in 2006-07, which is not upto the ideal ratio. This shows that the
current assets are equal to the current
liabilities. Not satisfactory.
OTHERS
More attention must be given to market forecasts can be made and the surplus of
inventory is reduced to minimum
Company should not follow the competitors only. New productsshould be produced
for the farmers having low income and small holdings.
Proper market survey should be carried out. The company should explore the export
market to study the present and prospective demand.
Proper inventory plans should be made in order to reduce the carrying cost.
New market strategies should be devised from time to time. This is because, even if
the tractor is of good quality, the competitors may produce the same product with
additional features and at lower prices.
Marketing network should be enhanced. Company should also produce more tractors
of higher H.P. But new developments should be made continuously in order to survive
in this competitive world.
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LIMITATIONS
Although every effort has been in to collect the relevant information through the sources
available, still some relevant information could not be gathered.
Busy Schedule of Concerned Executives: The concerned executives were having
very busy schedule because of which they were reluctant to give appointment.
Time: The time duration could not provide ample opportunity to study every detail of
working capital management of the company.
Unawareness: Executives were unaware of many terms related to working capital
study while asking to them.
Confidential Information: As the company on account of confidential report has not
disclosed some figures. Moreover, in some cases separate accounts of division are not
separately maintained thereby, leading to restrictions in study.
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BIBLIOGRAPHY
BOOKS
Financial Management- S.K Gupta
Management Accountancy-D k Gole
Cost and Management Accountancy-S.N.Maheshwari
Financial Management And Policy, James C.Van Horne
WORLD WIDE WEB
www.escortsagri.com
www.economictimes.com
www.planware.com
www.icraindia.com
Other than Web
M.I.S of the company
Annual Reports
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ANNEXURES
Q1. Are you satisfied with escort brand?
Ans. a) yes b) no
Q2. Are you aware of escort products?
Ans. a) yes b) no
Q3. Do you know the concept of cash flow management?
Ans. a) yes b) no
Q4. Are you satisfied with escort industry performance?
Ans. a) yes b) no
Q5. Do you know the cash flow management process of escort?
Ans. a) yes b) no
Q6. Would you like to invest in escort shares?
Ans. a)yes b) no
Q7. Which product of escort have you used till date?
Ans. a)generators b)tractors
Q8. Would you like to purchase escort product?
Ans. a) yes b) no c) of no use yet
Q9. Are you satisfied with after sales service of escort company?
Ans. a)yes b)no
Q10. Are you satisfied with products quality of escort company?
Ans. a)yes b) no