PROJECT REPORT ON COST AND FINANCIAL ANALYSIS

A STUDY CONDUCTED AT:BIRLA CEMENT WORKS CHITTORGARH (RAJ.)

http://www.studygalaxy.com/

BIRLA CORPORATION LIMITED

(BIRLA CEMENT WORKS & CHITTOR CEMENT WORKS)

M P BIRLA GROUP

QUALITY POLICY

Birla Corporation Limited, Chanderiya is committed to comply with the requirements of customers to their entire satisfaction & continually improve the effectiveness of Quality Management System by

1 Enhancing customer satisfaction by supplying consistent quality cement. 2 Regular up gradation of technology, optimum utilization of resources & upkeep of equipment for reducing costs.
2

3 Training & involvement of employees to develop quality culture in the unit.

OUR EMBLEM

The corporate symbol of concentric circles around a triangle represents this very multi-dimensional nature. The apex of the triangle is a visual
3

representation of the force that drives the entire corporation the unifying force in search of excellence. The various sub-business units are diverse in interest & operation. But they are held together by this centripetal drive. The circles represent the inspiration to explore new frontiers of growth.

INDEX
CEMENT INDUSTRY,STRUCTURE & DEVELOPMENTS COMPANY PROFILE PRODUCT PROFILE THE PROJECT
OBJECTIVE RESEARCH METHODOLOGY

COST ANALYSIS
RAW MATERIAL CONSUMED MANUFACTURING EXPENSES PAYMENT AND PROVISION FOR EMPLOYEES SELLING,ADMINISTRATION & OTHER EXPENSES INTEREST

FINANCIAL ANALYSIS
LIQUIDITY RATIO LEVERAGE RATIO
4

ACTIVITY / EFFICIENCY RATIO PROFITABILITY RATIO

CONCLUSION SUGGESTION LIMITATION BIBLIOGRAPHY ANNEXURE

CEMENT INDUSTRY STRUCTURE & DEVELOPMENTS

India is the second largest cement producer in the world next only to china. Despite the fact that the Indian economy continues to reel under the recessionary environments the Domestic cement industry emerged as an exception and registered a growth rate of 11 % in Production over the previous year.

There are more than 130 large plants owned by 52 companies In. 20052006 the total installed capacity for cement manufacture stood 160.24 million tones. The capacity utilization of 88 %, the highest ever as compared to 83 % in the previous year. The industry recorded a production of 141.81 million tones. The share of blended cement has been increasing to 61 % from 56 %. As companies shifting their emphasis from OPC to blended cement. The cement industry on the whole, recorded a CARG of 10 % over the last two decades.

The export during the year 2005-2006 is increased at 6.01 million tones against 4-07 million tones in the 2004-2005. However export of clinker went down to 3.18 million tones against 5.99 million tones.

OPPORTUNITES & THREATS :

The cement industry in India is poised to grow satisfactorily as demand is anticipated due to in going BHARAT NIRMAN" plan I other ambitious targets projected by Government; planning for timely completion of road project and focus on agriculture. The industry continues to be plagued by very high taxes both at the Central and state level, this is a major worry for the cement industry.

Outlook :
The long term outlook for the cement industry is encouraging. The demand for cement from the government and private sector would continue to increase in coming year, because of substantial additional plan outlay provided by the central government in the infrastructure development and housing sector. The cement production has been increasing in the recent years with increased emphasis on production of blended cement.
6

Risk & Concerns:

The truck loading restrictions imposed by state governments is a matter of concern as it increases overall cost to the industry. High level of taxed and duties imposed by Central as well as State Government and higher prices of fuels and freight are major concerns of the Industry.

SCENARIO OF INDAIN CEMENT INDSUTRY

Cement industry is a core sector and forms the backbone of the infrastructure development of the country. Cement manufacturing began is India in 1911 the 1st plant had a capacity of 200 tones per day. The industry was delicensed and uncontrolled in 1989. The Investment cost per ton installed capacity in 2002 for a cement plants is Rs. 4500 /- per ton as compared to Rs. 600/- per ton in late 70's India is one the best quality cement manufacturer's of the world . It stands in the top 5 cement producing nations of the world. There are many big concerns producing cement in India.

%Growth in Cement Production-(2006-07/2005-06) (April-March)

State 1.Northern Region a. Punjab b. Rajasthan 4 9 %chang State e 4.Western Region a. Gujarat b. Maharashtra 12 6 %change

c. Himachal Pradesh 7 Northern region 8 Western Region 10

2.Eastern Region a. Bihar b. Jharkhand c. Orissa d. West Bengal e. Chattisgarh

0 29 5 10 8 9

5.Central Region a. Uttar Pradesh b. Pradesh 5

Madhya 9

Eastern region

10

Central Region

All India

10

YEAR 2005-06

Region

Installed Capacity(in MT)

Production (in MTS) 29.67 44.88 20.05 24.93 22.28 141.81

Share

Of

Production

NORTH SOUTH EAST WEST CENTRE TOTAL

29.31 50.96 23.38 28.94 25 157.59

21% 30% 15% 19% 15% 100%

YEAR 2006-07
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REGION

INSTALLED CAPACITY (in MT)

PRODUCTION (IN MTS)

%SHARE

OF

PRODUCTION

NORTH SOUTH

32.60 53.48

32.10 49.81

21.00 32.00

EAST WEST CENTRE TOTAL

25.19 28.94 25.50 165.71

22.07 27.30 24.04 155.32

14.00 18.00 15.00 100

NORTH: Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K, West U.P. & Northern Parts of M.P. WEST: Maharashtra, & Gujarat SOUTH: Tamil Nadu, A.P., Karnataka, & Kerala EAST: Bihar, Orrisa, W.B., Assam, Meghalya, Chattisgarh, & Jharkhand CENTRAL: U.P., M.P.

% Growth in Cement Production

11

35 30 25 State 20 15 10 5 0 %change State %change

COMPANY PROFILE
12

Birla Corporation Limited a well known name in the business world was established by late Shri Ghanshyam Das Birla in the year 1919. He set up the first Indian owned jute mill near Calcutta and named it Birla Jute Manufacturing Company Limited. The named of the company was changed to Birla Jute I Industries Limited in 1983 and finally to Birla Corporation Limited in 1998. From G.D. Birla the unit passed on to his Nephew Late Shri M. P. Birla, who with his entrepreneurial abilities and keen management mind expanded it into an industrial empire with manifold diversification in various areas. The company has seven divisions in six different states namely Rajasthan, M.P. U.P. West Bengal, Maharashtra and Haryana. The Company has following divisions 1. Cement division 2. Jute division 3. Synthetics division
4. Carbides and Gases Division

5. Vinoleum division 6. Auto trim division

13

Financial Performance. :

Cement Division of the company performed well during the year with higher capacity utilization increased volumes and improved profitability. During the year all the plants operated satisfactorily. The total turnover registered a growth of 25% in 2006-07 as compared to 2005-06 due to setting up of new plants and other expansion plans would help the company in maintaining the momentum of growth. Since I had done my summer training at cement division situated at Chanderia i.e. BCW I CCW so here I am giving a brief description of these two unitsBirla Corporation Limited is having two plants in Chanderia namely BCW (Birla Cement Works) and CCW (Chanderia Cement Works). BCW was set up in feb. 1967 while CCW in 1986. The Company carried out various modifications and de - bottlenecking in these plants, as a result of which the installed capacity has increased to 20 lac tones from 14 lac tones. Consequently, the installed capacity of the company increased from 39.1 to 45.1 lac tones.

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FINANCIAL PERFORMANCE

PARTICULAR

2006-07

2005-06

CHANGE [Rs. In lacs]

Total Income

159341

122859.85

29.69

Total expenditure Operating Profit Interest Profit after interest Depreciation Profit before tax Profit after tax

107348.79

103673.21

3.55

51992.21

19186.64

170.98

1852.71 50139.50

1361.96 17824.68

36.03 181.29

3965.48 46174.02

3415.78 14408.90

16.09 220.45

32623.02

12575.90

159.41

15

CEMENT DIVISION:
At present the company is having following 6 cement units:-

Name of the unit Satna Cement Works

Year of establishment 1959

Birla Cement Works

1967

Durgapur Cement Works Grinding unit Birla Cement Works

1974

1982

Chittor Cement Works

1986

Raebareli Cement Grinding unit

1998

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AWARDS RECEIVED BY CHITTOR UNITS:Sl.No 1. Name of Award ISO9001:2000 Certification 2. IS/ISO:14001Certification Awarding Insititute BVQI,UK in 2002 to BCW &CCW BIS,New Delhi, in 2002 to BCW &CCW

3. 4. 5.

Best Productivity Award II Best Productivity Award Certificate of Merit for productivity

NPC to CCW in 1989-90 & again in 1993-94 NPC to CCW in 1991-92 NPC to CCW in 1998-99

6.

Best improvement in the thermal energy Performance

NPC to BCW in 1992-93 & CCW in 1993-94

7. 8.

Best improvement Energy Performance Bhamashah award of Educational Activities

NPC to BCW in 1992-93 Govt. of Rajasthan to BCW in 1996-97 IIT, Chennai & Vibration engineers Consultants(P) Ltd, & to BCW &CdW in 1996-97 VEC(P)Ltd, Chennai for

9.

Excellent award for maintaining Healthy Condition of Machinery

10.

Merit Award
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sustained implementation of condition Monitoring & continued Machine Machine Health improvement in 2001 11. Workers Education Trophy Central Board for Workers Education, Udaipur, Ministry of Labour, Govt. of India to BCW &CCW in 1998-99 & again in 2001-02 12. Lal Bahadur Shastri Gold National Memorial Award International Green land Society for Excellent Pollution control Implementation by CCW in 2002-03 13. Best supporting core Plant Regional training Center, Nimbahera in 1998-99 , 200001, & 2001-02 14. Award of Captive mines(safety Week celebration in Udaipur region) DGMS, Udaipur 1995(1),1996(2),1997(1),1998 (3), 1999(4),2000(2),2001(5),2002 (3) 15. Best income Tax Payee(TDS) award Income Tax Department , Udaipur Range to BCW in199697

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BCW & CCW have received the quality certification ISO9001-2000 for quality management system and ISO-14001 for environment management system. CAPEXIL has awarded the BCL two export awards for 1990-91, 1991-92 and 1998-99, and1999-00 for export of cement.

Information System:
Company is having LAN installation using UNIX oracle-7 generation. Most of the software application are developed in-house and even used at Satna and Mumbai Office. The Process of computerization is growing rapidly. Total investment to around Rs. 1.5 crore.

Human Resource Development:Diagnostics studies over, the relevant system are being implemented in a phased manner. The response is encouraging.

Social Activities:
Our Company has contributed tremendously toward the economic and social development of this area. These include expansion of the building of the Govt. referral hospital at chittorgarh , renovation of Kalika Mata Temple at Chittor Fort, construction of a secondary school building at village Nagari at a cost of 21 Lac for which we were conferred the Bhamashah Samman award and the construction and expansion for a number of other school and temple buildings in the area around Chittorgarh. Tranist cattle Camps were opened during severe drought conditions in the state. Free eye operation Camps are organized from time to time for the rural population of this area.
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We have also made handsome donation for social welfare and the development of Sangam Sthal at Chittorgarh.

PRODUCT PROFILE
CEMENT
Cement is a binding material. Earlier the cement murad was used as a binding material. Cement is one of the strongest binding materials with long life. The weathering effect on cement is very low. For manufacturing of cement the basic raw materials is limestone (calcium carbonate). The limestone used in manufacturing of cement should have at least 80% purity.

Cement is a great business. After food, shelter is the next priority that any human being seeks. And in India, we still have to build millions and millions of homes. Along with homes there is need for roads, bridge, ports & other infrastructure. Therefore there will always be a large & growing demand for this product.

Cement is also a simple business. "Simple" in the sense that all it needs is a large amount of capital. Unlike other industries it does not suffer rapid technological obsolescence or shifting consumer tastes.

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But there is a downside that comes with this. The large demand and simplicity of business attracts new investments. As a result there will always be surplus capacity in the market as well as competition. Lime-stone, Laterite, Gypsum, Fly-ash and coal is used as raw-material in manufacturing cement.

MANUFACTURING PROCESS OF CEMENT

1) Mining: The manufacturing process of limestone is done in such a way

so as to get approximately 78% to 82% pure limestone.

2) Crushing: The bit lump of limestone received from mines by dumpers is

crushed to the 16-25 mm of size. This is done at mines itself & then crushed limestone is send to the factory by overland belt conveyer (OLBC).

3) Grinding: Crushed limestone than grinned to a fine powder with an

additive known as Literate in bal mill and stored in silos. This is done so as to extend its setting time. This fine powder is termed as Raw Meal.

4) Heating: Preheaters are used to heat the raw meal before feeding into

kiln. Thesis used to bring down the level of energy required in the kiln for calcinations. Preheating is done
21

by

using hot

gases.

The

temperature attained at 830 degree Celsius in the preheaters. During

this process huge amount of Co2 is expelled out & it is done to achieve maximum calcinations. After calcinations whole material is in the form of calcium oxide (CaO), which is highly reactive.

5) Burning: Next zone is burning zone, where temperature is maintained

between 1400 to 1450 degree Celsius. At this temperature, the material is converted from solid fine powder to liquid forms, which reacts with iron, silica & aluminum & form a blank substance called Clinker.

6) Cooling: Next process is in cooling zone, where the clinker is cooled

initially from 1400 to

240 degree Celsius. After this further

cooling is done outside the kiln by the coolers.

7) Grinding: It is done to convert it in fine powder with addition of 5-6 % of

gypsum depending upon the initial setting time required for cement. This cement is called OPC. However if 15-25 % pozzolanic material, which is brick base, white clay, fly-ash is added in addition to gypsum. Then the product is termed as Pozzolanic Portland cement.

8) Storage: The cement is conveyed to the cement storage silos by

pneumatic conveying system then stored in different silos depending upon the fineness of cement during the grinding. Higher the fineness higher the grade.

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9) Packing: The cement produced by BCW & CCW is packed in PP bags by

rotary packers. CCW plant is a fully automatic plant which is controlled through computerized central control room & an online X-ray analyzer.

ESP & bag dust collector is used in the chimneys in order to reduce the pollution & is also helps in retrieving the cement , which was otherwise going as waste. The basic difference between OPC and PPC is of the Pozzolona material, which is used in PPC to increase the day term strength of cement and also, it reduces the manufacturing cost.

The OPC comes in 2 grades: 43 grades 53 grades The basic difference between these 2 grades is the strength they attain in 28 days.

PRODUCT DEVELOPMENT
The quality of cement manufacturing in India is improving day by day. Today for different end applications. Consumers can get following types of cement. 1. Ordinary Portland Cement 2. Pozzoland Portland Cement 3. Blast furnace slag Cement 4. Sulphate Resisting Cement 5. Granulated Slag Cement 6. Masonry Cement 7. Super Sulphate Cement
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ORDINARY PORTLAND CEMENT:

OPC, popularly known as Gary cement has 95 % Clinker and 5 % Gypsum and other materials. It account s for 50 % of the total consumption, White Cement is a variation OPC and is used for decorative purpose like rendering of wall, flooring etc. it contains a very low proportion of iron oxide. It is available in two grades like 43 and 53 for different uses.

POZZOLANA PORTILAND CEMENT:

PPC has 80 % clinker and 15 % Pozzolana and 5 % gypsum and accounts for 60 % of total consumption Pozzolana has siliceous and aluminous materials that do not posses cementing properties but develop these properties in the presence of water. It is cheaply manufactured because it uses Fly ash / coal waste as the main ingredient. It has lower heat of Hydration, Which helps in preventing cracks where large volumes are being cast.

PORLAND BLAST FURNACE SLAG CEMENT:PBFSE consists of 45% clinkers, 50% blast furnace slag & 5% gypsum & accounts for 8% of the total cement consumed. It has a heat of hydration even lower than PPC & is generally used in construction of dams & similar massive construction.

WHITE CEMENT

24

It is an OPC clinker using fuel oil (instead of coal) & with iron oxide content below for 0.4% to insure whiteness. Special cooling technique is used to enhance aesthetic value, in tiles & for flooring. White cement is much more expensive than grey cement.

SPECIALIZED CEMENT:1. Oil well cement:

It is made from special additives to prevent any porosity.

2. Rapid hardening Portland cement: It is similar to OPC; it is grinded much finer, so that on casting the compressive strength increases rapidly.

3. Water proof cement:OPC, with small portion of calcium state or non-sponifible oil used to impart waterproofing properties.

VARIETIES OF CEMENT AVAILABLE IN THE MARKET

Common types of cement normally available in the market and their specific uses are as under25

S.N O. 1.

CEMENT TYPE PPC(clay based ) (Portland Pozzolona Cement)

SPECIFIC USE Construction of dams, like sewage Pipes, Plastering Masonary & finishing works.

2.

PBFS(Portland blast furnace slag cement)

Construction of Bridger Sea Parts where saline water comes in construction of channels through which the washing of acids,salts,sulphur etc.

3.

White Cement

Manufacture of tiles, artistic decorations,floor,concrete etc. Generally means for non-structure uses.

4.

SRC(Sulphate Resistant Cement)

Marine Structure underground Construction Chemical Plants,effluent treatment works, foundation `pills etc.

5.

Oil Well cement

Used by petroleum industry for cementing gas and oil as well at

26

high temperature and pressures.

6.

Masonary Cement

Mortars for bricks, stone and concrete blocks masonary as well as for rendering and plastering works.The Cement is not be used for structured work.

7.

Rapid Hardening cement

Quick setting and high early strength cement, filling cracks in dams, fast construction words of Army.

THE PROJECT
27

OBJECTIVES OF THE PROJECT These were the main objective to conduct a deep research on companys financial and cost statement:
1.

To find out and analyze the factor which create impact on the cost of the cement. Give suggestions to reduce the cost of cement by comparing its cost factors with another industry players like Shree Cement ltd. And industry standard.

2.

3. To find out the reasons in the cost of cement and bring them in notice of top management.
4.

Analyze the financial efficiency by using various ratios and compare them to the industry standard.

5. Give suggestions about operational and financial performance to the top management of the Birla Cement Works.

RESEARCH METHODOLOGY

28

The methodology adopted to do my study & research is briefed in the following paragraphs:-

The Research Design:- As the objective of my study was to compare the mechanism & impact of cost and financial analysis in the cement industry, so I studied & analyzed the available annual reports of the companies.

DATA COLLECTION:-The secondary data is collected & used

from the following sources:1. Annual reports of companies. 2. Financial Statements birla Cement & Chanderiya Cement Works. 3. www.birlacorporation.com as well as from dealers.

Analysis of collected data:-The data collected was

calculated theoretically & mathematically &inferences were drawn on the basis of the same.

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COST ANALYSIS
MAJOR COST FACTORS INCLUDED IN PRODUCTION OF CEMENT AT BCW IN 2006-07

17% 1%

13%

Raw mat. Consumed Manufacturing Exp. Payment and Prov. For employees Selling, administration and other Exp. Interest Excise duty

19% 41% 9%

1. RAW MATERIAL CONSUMED

Raw material plays a very vital role in determining cost of any product and in cement it covers about 12.82% of total cost and utmost care should be taken to see that there is no unnecessary loss or wastage on account of material. Cement raw material comprises limestone, late rite, gypsum, clay, Pozzolana/fly ash.

Raw Material Consumed in the year 2007

7%

22%

3% 2% 66%

Lime stone Redochre Laterite fly-ash Gypsum

30

Limestone: It is extracted by companys own mines situated at jaisurjana nearby plant, which
have been taken on lease from the govt. of Rajasthan.

Literite : Gypsum:

Also called Iron-Ore is easily available from nearby mines at Sawa It is purchased from Hanumangarh / Nagpur districts of Rajasthan. The main pozzolanic material is china clay, wich was brought from areas between Nimbahera and Chittorgarh. Now instead of pozzolana. Fly ash is used for manufacturing PPC, which is brought from Kota and own thermal power plants.

Pozzolanic Material:

C TP RTON OS E
600 500 400 425 340 445 310 181.45 77.84 168 87.78 158.5 90.56 137.34 86.43 144.98 85.65 456 365 448 421 456 414 479.37 412.72

RS .

300 200 100 90 0 I.S. 2002-03 2003-04 2004-05 2005-06 2006-07 160

YE AR LIME STONE LATERITE GYPSUM FLY-ASH

OBSERVATION:
These are the main items, which used in production of cement as a raw material.

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Limestone is produced from companys own mines. The cost of limestone is increased till
2004-05 but in the year 2007 it fall down nearly 1 %. It is also lower than the industry standard but the cost of limestone in Aditya Cement is only Rs. 70 /-, which also produces from its own mines so there is a more need to cut this limestone cost.

Laterite is brought from Sawa and nearby areas and the transportation cost is the main factor in
increasing its cost. But here the cost of laterite is reducing year by year than industry though Aditya has its cost only Rs. 114 /- per ton due to the nearity of mines. To reduce its cost the only option is to reduce its transportation cost.

Gypsum is brought from Hanumangarh and Nagpur districts which is miner fluctuating year by
year but very higher than the industry standards. It has got increased from the last year i.e. from 456 479 per tone.

Fly Ash is brought from Kota Thermal power plant. In the year 2003 its cost was only Rs. 310
per ton lower than the Industry standards i.e. Rs. 340 per tone but now its cost has increased to Rs. 414 per tonne which is much higher than the the industry players. Company has to find new sources of Fly Ash to lower its cost.

RAW MATERIAL CONSUMED

Raw material Limestone Laterite Gypsum Red ochre Fly Ash

Qty.2003-04 Amt.

Qty. 2004-05 Amt.

Qty. 2005-06 Amt.

Qty. 2006-07 Amt. 2062.82 172.53 1075.89 188.72 1710.32

2509395 2150.43 2399539 2056.29 2396584 104850 175282 71123 208250 1520.12 48914 3272.11 8402.54 220416 136.94 71998 84969

2061.06 2398625 191.53 76538

1154.84 180579 138.62 974.35 70959 307521

1161.79 167227 186.16 71933

8594.87 231881

1318.34 398956

RAW MAT C . . ONS UME %OFT ALE P NS S D OT XE E 20.00

P RC NT E E AGE

15.00 10.00 5.00 0.00

14 .94 1 1.07 1 1.44

15.4 0

2003-04

2004-05 YE AR

2005-06

2006-07

OBSERVATION:
The cost of Raw Material is increasing day by day as a percent of total expenses. In the industry where most of the firms have only 10% as total expense, the company has nearly 11% of the total expenses in the year 2003-04 which increases more upto 15% in the year 2006-07. The increased cost of gypsum and fly ash is the main reason for that.

33

2.

MANUFACTURING EXP.

Manufacturing Expenses in the year 2007

5% 25% Store, Spare and Packing Mat. Repairs of Fixed assets and other manufacturing Exp. power and Fuel 57% 13% Royalty.

In this head we include power and fuel, store, spare parts, repairing of fixed assets and packing material. The major form of power and fuel used in production i.e. coal, furnace oil, electricity and other utilities separately.

BCW plants power requirement is fulfilled from their own thermal power plant, DG sets and also purchase from electricity board.

Coal is purchased from various mines of Coal India Ltd. brought from Jharia pits. Pet coke is purchased from reliance and Chinese coal is imported from abroad. Nearly 2/3 cost of total cost of production is manufacturing exp.

34

MANUFACTURING EXPENSES % OF TOTAL EXPENSES IN THE YEAR 2007

PERCENTAGE 60 40 20 0 2003-04 2004-05 YEAR 2005-06 2006-07 49.94 49.17

40.89

41.23

OBSERVATION:
There is a clear increase in the proportion of the manufacturing expense to the total expenses. In the year 2003-04 it was only 40.89% now it has been reached to 49.17% this is mainly due to the increase in the cost of power, fuel and other manufacturing expenses.

S tore, S pare and Packingm e pens s s at. x e

100 50 C S OT 100 00 5 00 0 0 2 0 -0 03 4 2 4 5 00 -0 YA ER 2 05 6 0 -0 20 6 0 -07 8 7 .8 89 139 9 0 7 .1 168 4 3 1 .5 1 0 1.3 18 2

35

P E ANDF LE P NS S OW R UE X E E 33000 32000 31000

CO T S

31922.86

32237.04 30594.66

30000 29000 28000 27000

29387.76

2003-04

2004-05
YE AR

2005-06

2006-07

OBSERVATIONS:
Stores, spares and other packing Material cost both have increased from the last year. A power and Fuels expense has increased per unit from Rs. 29387.76 in the year 2003-04 to Rs 32237.04 in year 2005-06. In the year 2002 due to the commencement of new thermal power plants at Satna and Chanderia units. All these efforts reduced the expenses in the year 2007 to Rs. 30594.66, which is lowest during last two years.

36

3. Payment to and Provision for employees:

Payment and Provision for Employees in the year 2007

5%

19%
Salaries, Wages, Bonus etc. Contribution to P.F., G.F. & S.F. Employees Welfare Expenses

76%

Among the 5m of management Man, Machine, Material, Money and Method, Man power is the most important and effective tool to get the better quality product with minimum resources. It is manpower which coordinate with all other available resources and makes efficient production possible. Its duty of an organizations management to not only satisfy employees physiological needs but also fulfill their safety, social, esteem and self-actualization needs. So excluding salaries and wages the company provides 3% of total product expenses like Bonus and allowances, contribution to provident, super annotation fund gratuity and employee welfare expenses for the employees .

37

Employees Cost / ton (Rs.)

255 250 245 COST 240 235 230 250.19 237.13 238.61 237.99

2003-04

2004-05
YEAR

2005-06

2006-07

EMPLOYEE EXP. % OF TOTAL EXP.

10.6 9.61 PERCENTAGE 11.7 11.46

2003-04

2004-05 YEAR

2005-06

2006-07

OBSERVATION:
Employee expenses are increasing every year. In 2004-05 it was Rs. 237 per tone but in 2007 it went upto Rs. 238 per tone. Increasing contribution to provident fund, contribution fund and employee welfare expenses are the main reason for increasing this cost. To face the competition a major part is also paid to the sales persons as salaries. Employee expenses is also increasing in proportion to total expenses, in 2004-05 it was only 9.61 % but in 2007 it reached up to 11.46 % of the total expenses. This is a matter of investigation for the top management.

38

Change in Salaries and Bonus / Change in Sales

25.19 30 25 20 Rs. 15 10 5 0 -5 10.51 11.8 14.86 7.12 -2.28 3.78 2.38

2003-04

2004-05
Year

2005-06

2006-07

% Change in Sales

% Change in Salaries & Bonus

OBSERVATION:
Salaries, Wages and Bonus which is major part of payment and provision to employee is never increased in proportion of the sales volume. In the year 2003 though the sales got increased by 11% but it (cost) got increased only by 12%, in 2007 the sales increased by 25% but salaries and bonus increased by 2% thus it looks that this expenses is due to the new recruitment policy and the retirement.

W re exp. %of total em elfa ployeesexp. 2006-07 Y r ea 2005-06 2004-05 2003-04 0 2 4 6 8 10 4.23 4.35 13.15 11.96 12 14

Percentag e

OBSERVATION:
39

To maintain the trained man power in the company Birlas welfare expenses decreases every year in proportion to total employee expenses, which is good sign to maintain the employees.

4. Selling, Administration & Other Expenses:

Selling, Administration & Other Expenses in the Year 2007

21% 2%

Transport & Forwarding Expenses Advertising & Publicity Other Expenses

77%

This expense is nearly of the total cost of production. These expenses include freight & cartage, exp. On advertising, commission to selling agent, material handling expenses, marketing office expenses, travelling expenses of staff, telephone charges, godown rent, office rent, provision for doubtful debts, insurance etc

40

S elling&Adm E %of T l E . xp. ota xp.

3 0 2 5 2 0 1 5 1 0 5 0 2 .18 8 2 0.12 2 1.09 2 7 2.5

P RC NT E E AGE

2 003-04

2 4-05 00

2 5-06 00

20 6-0 0 7

Y AR E

S elling& Adm Cos . t/Ton s ales AMOUNT(R .) S

40 8 40 6 40 4 40 2 40 0 30 8 2 0 -0 03 4 2 0 -0 04 5 2 0 -0 05 6 2 0 -0 06 7 48 7 3 .7 44 1 1 .9 40 8 3 .0 48 4 6 .8

Y EAR

OBSERVATION
Selling & Administration expenses are increasing every year as % of Total Expenses due to the cutthroat competition in the industry. In 2005 it was only 20.12% but now it has reached up to 22.57% of the total expenses in 2007. Selling & Administration cost per ton sales has shown a upward trend. In the year 2005 it was only Rs. 414.91 but it reached to Rs. 468.84 in the year 2007.This is due to the Inefficient Utilization and low production from the available resources
41

T nsporta ra tion&F orwa rdingE .%of S xp elling&Adm exp. .

8 4 8 .4 2 7 .8 9 5 7 .3 6 9 7 .5 6 1

percenta e g

8 2 8 0 7 8 7 6 7 4 7 2 2 0 -0 03 4

2 0 -0 04 5

YE AR

2 0 -0 05 6

2 0 -0 06 7

OBSERVATION:
Transportation and Forwarding is a major part of the Selling and administration Expenses. Goods are being transported by the Rail and Road mode. This cost is reducing year by year as% of Selling & Adm. Expenses due to the Fast movement of goods by Rail, Trucks and Trailors to their designated places.
% Change in S. & A., A. & P. and Sales Value
% Change in Selling and Adm. Exp. 60 40 20 0 -20 -40 2003-04 -35.13 2004-05 2005-06 2006-07 10.1 11.79 -0.55 14.86 % Change in Adv. & Publicity Exp. 49.36 25.29 6.41 7.12 11.26 % Change in Sales Value

-3.72

-3.26

OBSERVATION:
42

Selling and Administration Expenses is increasing most of the time in proportion to sales so it is clear that if sales is increasing the selling and administration expenses will also increase. Advertising and Publicity Expenses didnt have a clear relation with the sales, in the year 2004-05 though the sales got increased by 15% but the Advertising and Publicity expenses deepen by 35% and in the very next year i.e. 2005-06 though the sales increases by only 7% but Advertising and Publicity expenses increases to 49%.Again in 2003-04 it deepen to 3% while the sales increases to 25%.

5. Interest:
Interest in the Year 2007 15% 29%
Bank on Working Capital Loans Financial Institutions,Bank etc. on Term Loans etc. Other

56%

To fulfill the short term as well as long-term requirement of the Company they take loan. Companies take long-term loan from financial institution to fund fresh assets, expansion, debottlenecking, modernization and the upgradation of equipment. Company borrows short-term loan to finance working capital requirement. Short-term loan is also available from banks, staff and other deposited and trade deposited. On behalf of loan taken, company have to pay interest to all concerned parties or debenture holders, this cost is nearly 3% of the total expenses, which can vary from company to company.

43

Interes C t %of Total Ex t os p.

2 .5 P C TAGE ER EN 2 1 .5 1 0 .5 0 2 3-0 00 4 200 4-05 Y R EA 20 -0 05 6 2 6-07 00 2 2 .1 1 .7 1.3

Interest Cost/Ton Produced

52.71 60 AMOUNT(RS.) 40 20 0 2003-04 2004-05 2005-06 2006-07 43.24 26.44

35.25

YEAR

OBSERVATION:
Interest Cost which was around 2% of the Total Expenses in the year 2004 deepen to 1.7% in the year 2006-07, which shows lower dependency on the long term and short term loan from the Market compare to other industry competitions. Interest Cost Per Ton Production has also deepen from Rs.52.71 in 2003-04 to Rs.35.25 in the year 2006-07 which is the result of Re-Negotiation on the rates of loan from the Financial Institutions.

44

Interest to F ncia Institutions%of T ina l otal Interest 80 60 72.94 44.83 49.37 56.47

% 40
20 0 2003-04

2004-05

2005-06

2006-07

YE AR

OBSERVATION:
It is clear that most of the portion of the Interest goes to the Financial Institutions for the Long-term loan. In the year 2004-05 it was only 44.83%, which increased up to 56.47% in 2006-07.

S ESVOL AL UME
5 3 5 2 5 1 5 0 4 9 4 8 4 7 4 6 4 5

5 7 2.0 4 .7 9 7 4 .8 7 4
+ 2 0 -0 04 5 2 0 -0 05 6

5 .3 2 1

QT [IN Y. T ONS ]

2 0 -0 03 4

2 0 -0 06 7

YE AR

45

%CHANGE IN S ES AL
3 0 2 5 2 0 1 5 1 0 5 0 25 .29 1 1.65 1 .8 4 6 7.12

P R E AGE E C NT

20 3-0 0 4

20 4-0 0 5
Y AR E

20 5-0 0 6

20 6 7 0 -0

OBSERVATION:

Birlas Sales Volume is increasing from year to year which is a clear indication of the Companys growth. As we can clearly see that in the year 2006-07 the Companys sales has increased around 25%.

We can also make good prediction about the future of the Cement Industry as the govt. is taking initiative on Infrastructure Building particularly the North-South Corridor popularly known as Golden Quadrilateral and Pradhan Mantri Gramin Sadak Yogana. Also the Mass programme of Housing Sector like 2 million houses per annum scheme. Such scheme is expected to act as catalyst to the growth.

46

FINANCIAL ANALYSIS
Ratio are a very useful tool to analyze the companies working by the data available by its balance-sheet and P. & L. a/c, by the ratio we can compare companys financial condition with the other industry player, All the external persons from the company can view companys financial condition only by these ratios.

USE AND SIGNIFICANCE OF RATIO ANALYSIS :

1. Useful in analysis of financial statement:Accounting ratio simplifies and systematizes a long array of accounting figures to make them understandable. The importance of ratio, that is relationship worked out among various accounting data which are mutually dependent and which influence each other, arises from the fact that often absolute figures standing alone convey no meaning.
47

They become significant only when considered along with other figures.

2. Useful in simplifying accounting figures:Accounting ratio simplifies summaries and systematizes a long array of accounting figures to make them understandable. The importance of ratio, that is relationship worked out among various accounting data, which are mutually dependent and which influence each other arise from the fact that often- absolute figures standing alone convey no meaning. They become significant only when considered along with each other figures.

3. Useful in judging the operating efficiency of business:Accounting ratios are helpful for diagnosis of the financial health of a business concern. This is done by evaluating liquidity solvency, profitability etc. Such an evaluation enables management to assess financial requirement and the capabilities of various business units.

4. Useful for forecasting purpose:Accounting ratios are also like for forecasting purpose supposes sales this year are Rs.10 lakhs and the stock is 1/5 of sales. If the firm wishes to increase sales next year to Rs. 12 lakhs, it must be ready to carry a stock of Rs. 240000 i.e. 1200000/5 similarly other requirement can be worked out. Accounting ratio tabulated for a number of years indicate the trend of the business. This help in preparation of estimates for the future.

5. Useful in locating the weak spots of the business:Accounting ratio is of a great assistance in locating the weak spots in the business even through the overall performance may be quite good. For example if the firm find that the increase distribution expenses is more than proportionate to the result achieved, these can examined in detail and depth to remove any wastage that may be there.

6. Useful in comparison of performance:A firm would like to compare its performance with that of other firm and of industry in general. This is called inter firm comparison. If the
48

performance of different units belonging to the same firms to be compared, it is called intra firm accounting ratio.

LIMITATION OF RATIO ANALYSIS:-

Though ratios are simple to calculate and easy to understand, they suffer from some limitations.

1. Limited use of a single ratio:A single ratio does not convey much of a server. To make a better interpretation, a number of ratio have to be calculated which is likely to confuse the analyst rather than help him in making any meaningful conclusion.

2. Inherent limitation of accounting:Like financial statement ratios also suffer from the inherent weakness of the accounting records such as their historical nature. Ratios of the past are not necessary true indicators of the future.

3. Change of accounting procedure:Frequent change in accounting procedure by a firm often make ratio analysis misleading i.e. a change in the valuation methods of inventories from FIFO to LIFO increasing the cost of sales and reduce considerably the value of closing stock turnover ratio to be lucrative and an unfavorable gross profit ratio.

4.

Window dressing:Financial statement can easily be window dressed to present a better picture of its financial, one has to be very careful in making decision from ratio calculated from such financial statement.

5.

Incomparable:-

Not only industries different in their nature but also the firm of the similar business

49

Widely procedure etc. It makes comparison of ratio difficult and misleading.

Personal bias:Ratios are only means of financial analysis and not an end in itself. Ratios have to be interpreted in it self and different. Peopled may interpret the same ratios in different ways.

Absolute figures destructive:-

Ratio devoid of absolute figures may prove destructive, as ratio analysis is primarily a quantitative analysis and not a qualitative analysis.

Ratio no substitutes:-

Ratio analysis is merely a tool of financial statement hence ratio becomes useless it separated from the statement from which they are computed.

THE MAIN RATIOS ARE:[A] LIQUIDITY RATIO:-

This ratio shows a companys ability to meet its short-term financial obligation like current ratio and quick ratio.

[A.1]

CURRENT RATIO:-

Current ratio is the ratio of total current assets to the current liabilities.

CURRENT RATIO = CURRENT ASSETS / CURRENT LIABILITIES

Current assets include cash and bank balances, marketable securities, inventory of raw material; semi-finished (work in progress) and finished good, debtors net of provision for bad and doubtful debts, bills receivable and prepaid expenses. Current liabilities include trade creditors, bills payable, banks credit, and provision for taxation payable and outstanding expenses.

Rationale of current ratio:

50

The current ratio of a firm measures its short-term solvency. As a measure of short-term financial liquidity, it indicates the rupees of current assets available for each rupee of current liability. The higher the current ratio the larger the amount of rupees available per rupee of current liability, the more the ability of the firm to meet the current obligations and the greater the safety of funds of short-term creditors. Thus current ratio in a way is a measure of margin of safety to the creditors. The need for the margin of safety arises from the inevitable unevenness in the flow of funds through the current assets and liabilities account. If the flow were absolutely smooth and uniform each day so that inflows exactly equaled maturity obligations, the requirement of the safety margin would be small. But it rarely happens so the size of the current assets should be sufficiently larger than the current liabilities so that the firm is able to pay it is current maturing debt a sand when it becomes due. The current liabilities can be settled by only making payments whereas the current assets available to liquidate them are subject to shrinkage for various reasons such as debt debt inventories becoming obsolete or unsalable and occurrence of unexpected losses in marketable securities and so on. The current ratio measures the size of the short-term liquidity buffer. A satisfactory current ratio would enable a firm to meet its obligations even when the value current assets decline.

GENERAL INTERPRETATION:

In case of inter firm comparison, the firm with a higher current ratio has a higher liquidity and better short-term solvency, but a very high ratio of current assets and current liabilities may be indicative of slack management practices, as it might signal excessive inventories for current requirement and poor credit management in term of over extended accounts receivable. At the same time the firm may not be making full use of its borrowing capacity. Conventionally a current ratio of 2:1 is considered satisfactory. The logic underlying the conventionally rule is that even with a drop out of 50% in the value of current assets, a firm can meet its obligations, i.e. a 100% margin of safety is assumed to be sufficient to ward off the worst of situations. But this rule can not be applied mechanically. What is satisfactory ratio will depend on the development of the capital market and the availability of long-term funds to portion of the current assets is financed by
51

the current liabilities. This policy of relying to a limited extent on short-term credit is probably to avoid the difficulty in which the creditors may put the firm in times of temporary adversity. Under developed and developing countries rely heavily on short term financing.

Another factor, which has a bearing on the current ratio, is the nature of the industry. Current ratio is only a quantitative index of liquidity. The term quantitative refers to the fact that it takes into account the total current assets without making any distinction between the types of current assets to the total current assets. A satisfactory measure of liquidity should consider the liquidity of the various current assets. Current liabilities are fixed but current assets are subject to shrinkage, e.g. possibility of bad debt, unsalability of inventory and so on. Some of the current assets are more liquid as compared to the others; cash is the most liquid of all and inventories the least liquid of all. Thus the current ratio is not a conclusive index of the real liquidity of the firm. A more logistic measure is the quick ratio.

C URRE RAT NT IO
1 .4 1 .2 1 0 .8 0 .6 0 .4 0 .2 0 1.25 1.2 8 1 3 .0 1 8 .1

P R E AGE E C NT

2 3-04 00

200 5 4-0
YE AR

20 5-0 0 6

20 -0 06 7

OBSERVATION:The current ratio of a firm measures its short-term solvency. As a measure of short term financial liquidity, it indicates the rupees of current assets available for each rupee of current liability current ratio shows declining trend that indicates an inadequate margin of safety between the assets that presumably are or will be available to liquidate claims and obligation to be paid.
52

The highest Current ratio was in the year 2004-05 i.e. 1.28%, due to the striking difference in inventories pilling up. In this year the inventory component comprises a large part of the current assets. But it has started to decline. The inventory component varies between 40-42% of current assets. This law level of inventory in the company is the main reason for decline in current ratio.

[A.2]

QUICK RATIO:

Quick ratio is a more refined measure of the firms liquidity. This ratio established the relationship between liquid assets and current liabilities. As assets is liquid, if it can be converted into cash immediately without a loss of value. Cash is the most liquid assets. The other assets, which are considered to the relatively liquid, are debtors and marketable securities. Stock and prepaid expenses are considered to be less liquid. Inventories normally require some time for converted into cash; the value of cash also has a tendency to fluctuate. It is calculated by dividing quick assets by current liabilities.

QUICK RATIO = QUICK ASSETS / CURRENT LIABILITIES

Quick assets include: 1. Cash 2. Book debts (Debtors and bills receivable)

Inventories are excluded because it takes time to sell finished goods and to convert raw material and work in progress into finished good. There is also an uncertainty as so whether or not the inventories can be sold. Prepaid expenses should also be excluded because they cannot be converted into cash.

GENERAL INTERPRETATION:

53

Generally a quick ratio of 1:1 is considered adequate to present a satisfactory current financial condition. If the ratio is lower than the ideal then it implies that a large part of the current assts of the firm is tied up in slow moving and unsalable inventories and slow paying debts. The firm would find it difficult to pay its current obligations. To get an idea regarding the firms relative current financial conditions, its current ratio should be compared with industry averages.

QUIC R IO K AT
PER CENTAGE
1 0.8 0.6 0.4 0.2 0 2 03-0 0 4 20 4-05 0 200 -0 5 6 20 -07 06 0 8 .6 0.82 0 4 .8 0 8 .6

Y S EAR

OBSERVATION:-

Generally a quick ratio of 1:1 is considered adequate to present a satisfactory current financial condition. If the ratio is lower than the idle then it implies that a large part of the current assets of the firm is tied up in slow moving and unsalable inventories and slow paying debts. Birla cement has a quick ratio 0.82 in the year 2004-05 which is fluctuating year by year it deepened to 0.68 in the year 2005-06; it clearly indicates that a large of the current assets is invested in the slow moving items and slow moving debts. In 2006-07 the liquidity position of the company has improved and its cash and bank balances constitute 14.2% of Current Assets, which is highest against other years. Therefore the trend shows that the Quick Ratio is fluctuating year after year and it is very below than the industry standard.
54

[B.]

Leverage Ratio:-

This ratio measures the extent to which the company has been financed by short term and long term debt obligation like debt equity ratio. It is also called capital structure ratio. These ratios are calculated to judge the longterm financial position of the firm. These ratios reveal the funds provided by owners and outsiders. These ratios show how much amount the owners introduce in business. Generally these ratio are beneficial to the long-term creditors debenture holder, financial institutions etc.

B.1

DEBT EQUITY RATIO:-

The debt equity ratio is the measure of the relative of the creditors and owners against the firms assets. This ratio is calculated in various ways. One view is to calculate the debt equity ratio as long-term debt divided by the shareholders equity. Past accumulated losses and deferred expenditure should be excluded from the ratio is also called debt to net worth ratio. Another variation of the debt equity ratio is to divide the total debt by the shareholders equity.

DEBT EQUITY RATIO = TOTAL DEBT / SHAREHOLDERS EQUITY

This ratio takes into consideration both current liabilities and non-current liabilities in the numerator of the debt equity ratio.

GENERAL INTERPRETATION:-

55

Whatever way the debt equity ratio is calculated it shows the extent to which debt financing has been used in the business. A high ratio shows that the claims of the creditors are greater than those of the owners; a very high ratio is unfavorable from the firm point of view. This introduces inflexibilities in the firms operations due to increasing interference and a pressure from creditors.A highly levered company is able to borrow funds on restrictive terms and conditions. The loan agreement mar require a firm to maintain a certain level of working capital or a minimum of current ratio or restrict the payment of dividends or fix limits to the officers and employees salary. Heavy indebtedness resulting in creditors undue pressures clouds independent business judgment and saps managements energies. During the period of low profit, a highly debt financed companies suffers great strains it cannot earn sufficient profit even to pay interest charges to its creditors. To meet the working capital needs the firm finds it difficult to get credit, it may have to borrow on highly unfavorable terms. A low debt equity ratio implies a greater claim of owners and creditors from the point of view of creditors it represent a satisfactory capital structure of business since a high proportion of equity provides a larger margin for them. During the periods of law profits, the debt servicing will prove to be less burdensome for a company with low debt equity ratio. However from the shareholders point of view there is a disadvantage during the periods of good economic activities if the firm employs a low amount of debt. The higher the debt equity ratio the higher return on investment than there is a need to strike a proper balance between the use of debt of equity. The most appropriate debt equity ratio would involve a trade off between risk and return.

D BTE E QUIT R IO Y AT
0.5 0.4 0.3 0.2 0.1 0 2 3 4 00 -0 2 4 00 -05
Y R EA

0 .42 0 5 .2 0 1 .3 0 2 .3

P C ER ENTAGE

2 5-06 00

20 6-07 0

56

OBSERVATION:This ratio shows the extent to which Debt Financing has been used in the business. A high shows that the claims of the creditors are greater than those of the owners. Here we find that the debt-equity ratio of the company is increasing year by year. In 2006-07 it reached up to 0.42, which is more than the industry standard. Which shows Inflexibilities in the firm operation due to increasing Inferences and Pressures from the creditors.

[C]

Activity / Efficiency ratio:-

Investment of the fund of creditors and owners in various kinds of assets is done to generate sales and profit. The effective management of assets will increase the amount of sales. Activity ratio is computed to evaluate the efficiency with which the firm manages and utilizes its assets. These ratios are also called turnover ratios because they indicate the rapidity with which assets are being converted or turned over into sales.

C.1

INVENTORY TURNOVER RATIO:

The inventory or stock turnover indicates the efficiency of the firms inventory management. It is calculated by dividing the cost of goods sold by the average inventory.

INVENTORY TURNOVER = COST OF GOODS SOLD / AVERAGE INVENTORY

If data regarding the above are available then the ratio can calculate by applying the following formula.

INVENTORY TURNOVER = SALES / INVENTORY

57

If the firm has a strong seasonal character, it is more desirable to take the average of the monthly inventory levels.

GENERAL INTERPRETATION:
The inventory turnover shows how rapidly the inventory is turning into receivables through sales. Generally a high inventory is indicative of goods inventory management, and a lower inventory suggests an inefficient inventory management. A low inventory turn over implies excessive inventory levels than warranted by production and sales activities or slow moving or obsolete inventory. A high level of sluggish inventory amounts to unnecessary tie up of funds, impairment of profits, and increased cost, if the obsolete inventories have to be written off this will adversely affect the working capital position and liquidity of the firm. A high inventory may be the result of a very low level of inventory, which result in frequent stock outs. The situations of frequent stock outs and too low inventory ratio shold be further investigated. The computation of inventory for individual components of inventory may help to detect imbalanced investment in the various inventory components.

58

INV ENTOR TURNOV RATIO Y ER 16 14 12 10 8 6 4 2 0 13 11 14 13

DAY S

2003-04

2004-05
Y R EA

2005-06

2006-07

OBSERVATION:The Inventory Turnover shows how rapidly the inventory is turning into receivables through sales. Generally a High Inventory Turnover is indicative of Good Inventory management and a Low inventory suggests an inefficient inventory management. It is maintained by company throughout four years.

59

C.2

TOTAL ASSETS TURNOVER RATIO:

Although fixed assets are directly concerned with the generation of sales, but other assets also contribute to the production and sales activities of the firm. The firm must manage its total assets efficiently and should generate maximum sales through their proper utilization. The total assets turnover I calculated as follows:

TOTAL ASSETS TURNOVER = SALES / TOTAL ASSETS

It generates the sales generated per rupee of investment in total assets.

GENERAL INTERPRETATION:
The total assets turnover ratio is a significant since it shows the firms ability of generating sales from all financial resources committed to the firm. As this ratio increases, there is more revenue generated per rupee of total investment in assets. The firms ability of a large volume of sales on a small total assets basis an important part of the firm overall performance in term of profits. Idle or non-performing used assets increase the firms need for costly financing and the expenses maintaining and upkeep. The total assets turnover should be cautiously used. In the denominator of this ratio assets are net of depreciation. Hence lower assets with a lower book value create a misleading impression of high turnover. While calculating assets turnover, fictitious assets like debit balance of profit and loss account and deferred expenditure should be excluded.

60

AS E ST S T URNOVERRAT IO 2 DAYS 1.5 1 0.5 0 2003-04 2004-05 YE AR 2005-06 2006-07 1.8 1.68

1.41

1.23

OBSERVATION:
This ratio shows the firms ability of generating sales from all the financial resources committed to the firm. As this ratio decreases, there is less revenue generated per rupee of total investment in assets. Companys assets turnover ratio is decreasing from 1.8 in the year 2003-04 to 1.23 in the year 2006-2007.

C.3

DEBTOR TURNOVER RATIO:

A firm sells goods on credit and cash basis. When the firm extends credit to its customer, debtors are created in the firms account. Debtors are converted into cash over a short period, and therefore are included in current assets. The liquidity position of the firm depends on the quality of debtors to a great extent. Financial analysts employ two ratios to judge the quality of debtors. One is debtors turnover and the other is average collection period.

DEBTOR TURNOVER = CREDIT SALES / AVERAGE DEBTORS

Sometimes due to non-availability if the following formula can also be used.
61

DEBTORS TURNOVER = TOTAL SALES / DEBORS

The debtors turn over indicate the number of times on the average that debtors turnover each year. Generally the values of debtors turnover, the more efficient are the management of assets.

AVERAGE COLLECTION PERIOD:It brings out the nature of firms credit policy and the quality of debtors more clearly. It is calculated as follows:

AVERAGE COLLECTION PERIOD = DAYS IN A YEAR / DEBTORS TURNOVER

Average collection period represented the average number of days for which the firm must wait after making sales before collection cash from the customers.

GENERAL INTERPRETATION:
The average collection period measures the debtors since it indicates the rapidity or slowness of the collectibles. The shorter the average collection period, the better the debtors management as a short collection period should be compared against the firms credit terms and policy to judge its credit collection efficiency. An excessively long collection period implies a too liberal and inefficient credit and collection performance. This certainly delays the collection of cash and impairs the firms debt paying ability. The chance of necessarily favorable rather it indicates a very restrictive credit and collection policy. Such a policy succeeds in avoiding the bad debts losses, but so severely curtails the sales that overall profits are quite low. The collection period thus provides the analyst with two significant measurements of debtors. He can initially test a companys
62

collection to determine the collectability of debtors and measure credit and collection efficiency. Then he can gauge the companies ratio against the industry average to ascertain its competitive and weakness relative to credit and overall financial accomplished.

D BT 'SC L C ION P R E OR OL E T E IOD

1 4 1 2 1 0 8 6 4 2 0 12 13 12

D S AY

2003-0 4

2 004-0 5

2 005-06

20 06-07

Y AR E S

OBSERVATION:

This ratio indicates the speed with which debtors are converted into cash. It indicates the Efficiency of the Trade Credit Management. The chart indicates that the debtors management in our organization is very effective. In the 2003-04 it was only 12 days as compared to other industry competitors and Industry Standard it was very low. it has shown slightly increasing in the year 2004-05 than after it has shown a decreasing trend. In the year 2006-07 it was only 6 days that shows the Stringent Credit
63

policies, Tight Credit Standard and policies followed by the company that resulted in the Minimum Cost and Chances of Bad Debt but then they restrict their sales and profit margin. The reason of this lowest debtors period is the cash discount of Rs. 4 per bag for payment made in one day and general inducements to them at the end of the year.

[D]

PROFITABILITY RATIO:-

The main objective of a company is to earn profits because profits are necessary to survive and grow over a long period of time. Profit is the ultimate output of a company, and it will have no future if it fails to make sufficient profit. The term profitability may be defined as ability of a given investment to earn a return from its use. The profitability ratio measures how efficiently a company management has generated profit on sales and investment.
64

D.1

NET PROFIT TO SALES:-

This ratio is a symbol of profitability and efficiency of the business. Higher the ratio the more favorable for the business as it denotes sounds management and efficiency. Lower ratio reveals decline in profits and mismanagement.

NE P T ROF T S E IT O AL S P RC NT E E AGE
2 0 1 5 1 0 5 0 2 3 00 -04 2 04 5 0 -0 20 05-0 6 20 06-0 7 3 1 .5 6.43 8.77 1 8 8.1

Y ARS E

OBSERVATION:This ratio shows the overall efficiency of the business. Higher the ratio betters the business. As increase in ratio over the previous period shows improvement in the efficiency. Profit before tax is a better indicator then profit after tax since tax liability on profit is beyond the control of the enterprise. As the chart reveals that net profit of the enterprise is showing increasing trend, it was 3.51% in 2004 which increases up to 18.18% in 2007 which shows great efficiency utilization in the company and indicates firms capacity to face adverse economic conditions such as price, competition, demand etc.

D.2

OPERATING RATIO:-

This ratio is computed by dividing the operating cost by the net sales Operating ratio = Operating Cost / Sales * 100

GENERAL INTERPRETATION:
65

A high ratio is unfavorable since it will leave a small amount of operating income to meet interest, dividend etc.

OP R INGRAT E AT IO P RC NT E E AGE
3 0 2 0 1 0 0 2 0 -0 03 4 2 0 -0 04 5 2 0 -0 05 6 2 0 -0 06 7 2 .5 8 6 2 .0 6 4 2 .4 6 2 .1 3

Y ARS E

OBSERVATION:As a working proposition a low ratio is favorable while a high one is unfavorable. The implication of a high ratio is that only a relatively small percentage share of sales is available for meeting financial liabilities like interest, tax and dividend. Operating ratio, which was 28.56 in 2003-04, now deepens to 23.1 in the year 2006-07. As we know that low ratio is favorable, the following are the reason for decrease in operating ratio.
A. Efficiency of the marketing department leading to controlled expenses.

B. Effective advertisement. C. Effective utilization of resources. D. Decrease in selling expenses. E. Reduction in Power consumption.

CONCLUSION

66

By the Comparative study of the companys financial statement of the last consecutive four years and compare them with industry standard I conclude the following points:

Companys liquidity position is sound to face the short-term demand, both Current and Quick ratios are below from the industry standard. More than one-fourth of the current assets are blocked in the inventory, which clearly shows the sufficient management of the inventory. Long-term loan is taken from the financial institutions like ICICI and IDBI the rate of Interest being 14-15%, which looks higher than the market availability. Interest Cost which was around 2% of the Total Expenses in the year 2003-04 deepen to 1.7 % in the year 2006-07, which is the result of Re-Negotiation on the rates of loan from the Financial Institutions, payment to loans and no fresh borrowing, The Cost of Gypsum and Fly-Ash is very high as compare to Industry standard and the other Industry players. Raw Material Cost is increasing every year to the Cost of Production. Selling and Administration expense now effecting very much to the cost of Production and Expenses is increasing most of the time in proportion to the sales so it is clear that if sales is increasing Selling and Administration Expenses will also increase of the Company. Advertising and Publicity Expenses didnt have a clear relation with the sales. Debtors collection period and Assets Turnover ratio both are sufficient as compare to the Industry Standards. Company purchases power from the AVVNL and produce its own but the cost of purchase is very much higher than the Power Produced.

67

SUGGESTIONS
After making a deep research of the companys financial and cost statement of the last five year I want to put the following points as the suggestions to the company:

Company should use computerized mining software for production of limestone to improve the quality, rising yield in process and reduce its cost. To reduce the raw material cost there should be enough change in raw material mix design of the product. Assuming that employees better know the cost rising factors and to cut that cost company should introduce a suggestion scheme for the employees, best suggestion should appreciated among the employees with monetary rewards. Proper training and development programs, equal work environment and amenities for employee of all the departments & replacement of old senior employees with young professional executives will surely increase employee efficiency, increase sales and reduce employee cost per ton of production. Company should change its advertising policy and sales promotion schemes. Shine-board & wall painting advertising should be replaced by electronic & print media advertising. Advertising in national dailies like Times Of India, Punjab Kesri, The Hindu, Weekly magazine like India Today & news channels like Aaj Tak & Star News can be shown to target an Indian Cement Consumer. To reduce the interest cost and reduce the interest coverage Ratio Company should take debt from the market instead of using creditors fund. A wide re-negotiation from the financial institutions should be taken on the matter of the interest rates of the long term funds. Company should replace its working capital by long-term loans. To attract more customers and increase in the sales company has an option to liberalize its credit policy, this will increase the average collection period which is still half of the industry standards and reduce the selling and distribution expense per ton. To reduce the cost of cement, to face the competition and to cope-up with the customers changing Demand Company should establish a research and development department. To improve companys liquidity position it should invest more in current assets so that its current and quick ratio can reach up to industry standards. A proper attention on companys inventory is essential to reduce the inventory ratio of the company.
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LIMITATIONS
Cost analysis is a very important tool to reduce the cost. Cost of any product depends on various internal and external factors and easy availability of the resources, which may be different between different companies; one factor may too cheaper than other companies and another factor may be very costly for the company due to availability of resources.

For the cost analysis a deep detail about every item is needed but due to confidential data, only public documents, Balance sheets and P. & L. a/c had provided to us, which were inefficient for financial Analysis and the Cost.

The total sales and total purchases have been assumed as credit sales and purchase.

Inherent limitations of Ratio analysis also constitute the limitations of the analysis.

Ratio predicts only the quantitative aspects of the firm not the qualitative aspects.

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BIBLIOGRAPHY

Annual reports of Birla Corporation Limited, Shree Cement Limited, Financial Statement of Birla Cement Works, Chanderia Cement Works. Financial Management I.M. Pandey Financial Management M.Y. Khan & P.K. Jain Management Accounting M.R. Agarwal www.birlacement.com

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