OBJECTIVES OF THE STUDY

Study of the working capital management is important because unless the working capital
is managed effectively, monitored efficiently planed properly and reviewed periodically
at regular intervals to remove bottlenecks if any the company cannot earn profits and
increase its turnover. With this primary objective of the study, the following further
objectives are framed for a depth analysis. 1. To study the working capital management
of Alcon Cable Ltd. 2. To study the optimum level of current assets and current liabilities
of the company. 3. To study the liquidity position through various working capital related
ratios. 4. To study the working capital components such as receivables accounts, cash
management, Inventory position 5. To study the way and means of working capital
finance of the company. 6. To study the cash cycle of the company.

Products / Services :
ALUMINUM CONDUCTOR XLPE INSULATED , PVC INSULATED
ARMOURED AND UNAROMOURED CABLE.
COPPER CONDUCTOR XLPE INSULATED, PVC INSULATED ARMOURED
AND UNARMOURED CBALE.
COPPER FLEXIBLE CABLE.
COPPER FLAT CABLE

Company Profile :
We are manufacture of LT power and control cable and flexible cable
Establishment Year: 1959
Firm Type: Partnership
Nature of Business: Manufacturer
Level to Expand: State

Products & services

>> Other products and services

Twine, cordage, ropes and cables

Twine, man-made fibre
Cords, natural fibre
Cords, man-made fibre
Cords, silk and cotton waste
Cords, paper
Cords, braided
Cords, impregnated
Cords, endless
Cords, plastic or latex coated

Cables, cords and ropes, plaited bands and stranded wire slings, metal
Cables, stainless steel wire
Cables, galvanised steel wire
Cables, iron and steel, mixed cables
Cables, mixed, metal-textile fibres
Cables, multi-wire, 4 to 16 strands, non-ferrous metals
Cables, metal, covered
Cables, metal, braided

Power line cable and wire fittings

Terminals, power line cable and wire
Connectors, power line cable and wire
Clamps, power line cable and wire
Cable clips and wiring clips, electric
Cable cleats and saddles, electric
Brackets, power line cable and wire
Cable glands
Cable glands for hazardous areas
Junction boxes
3

Junction boxes, watertight

Junction boxes, earth-cable, fused
Power line vibration dampers and spacer dampers
Cable tensioners and cable laying equipment, electric
Cable support systems
Cable suspenders, electric
Cable racks, electric
Cable trays, electric
Cable thimbles and sockets, electric
Cable end sleeves, electric
Cable joint accessories, underground distribution

Electric wires and cables, insulated

Wire, mineral fibre covered, electric
Wire, ceramic covered, electric
Wire, textile covered, electric

Wires and cables for telecommunications and electronics

Cables, coaxial
Cables, coaxial, microwave
Cables, miniature, electric

Local area network (LAN) equipment NES

Local area network (LAN) systems, complete
Local networks, optical fibre cable
Local networks, coaxial cable

Computer cable assemblies and connectors

Computer data cable assemblies, pre-assembled
Computer serial cable assemblies
Computer parallel cable assemblies
Computer keyboard and mouse extension cable assemblies

Contact Information :
Web-site: Visit Website
Contact Person: B.K.SAGGI
Designation: PARTNER
Phones (Office) : 1762329943
Phones (Resi.) : 329943
Mobile: 9316603066
Fax: 1762232687
Address: 27-A, FOCAL POINT, RAJPURA
RAJPUA - 140401
(Punjab) India

CHAPTER II
WORKING CAPITAL MANAGEMENT

Introduction

Need of working capital

Gross W.C. and Net W.C.

Types of working capital

Determinants of working capital

Introduction
Working capital management is concerned with the problems arise in attempting to
manage the current assets, the current liabilities and the inter relationship that exist
between them. The term current assets refers to those assets which in ordinary
course of business can be, or, will be, turned in to cash within one year without
undergoing a diminution in value and without disrupting the operation of the firm.
The major current assets are cash, marketable securities, account receivable and
inventory. Current liabilities ware those liabilities which intended at their inception
to be paid in ordinary course of business, within a year, out of the current assets or
earnings of the concern. The basic current liabilities are account payable, bill
payable, bank over-draft, and outstanding expenses. The goal of working capital
management is to manage the firms current assets and current liabilities in such
way that the satisfactory level of working capital is mentioned. The current asset
should be large enough to cover its current liabilities in order to ensure a reasonable
margin of the safety.

Need of working capital management

The need for working capital gross or current assets cannot be over emphasized. As
already observed, the objective of financial decision making is to maximize the
shareholders wealth. To achieve this, it is necessary to generate sufficient profits can
be earned will naturally depend upon the magnitude of the sales among other things
but sales cannot convert into cash. There is a need for working capital in the form of
current assets to deal with the problem arising out of lack of immediate realization
of cash against goods sold. Therefore sufficient working capital is necessary to
sustain sales activity. Technically this is refers to operating or cash cycle. If the
company has certain amount of cash, it will be required for purchasing the raw
material may be available on credit basis. Then the company has to spend some
amount for labour and factory overhead to convert the raw material in work in
progress, and ultimately finished goods. These finished goods convert in to sales on
credit basis in the form of sundry debtors. Sundry debtors are converting into cash
7

after expiry of credit period. Thus some amount of cash is blocked in raw materials,
WIP, finished goods, and sundry debtors and day to day cash requirements.
However some part of current assets may be financed by the current liabilities also.
The amount required to be invested in this current assets is always higher than the
funds available from current liabilities. This is the precise reason why the needs for
working capital arise.

Gross working capital and Net working capital

There are two concepts of working capital management 1. Gross working capital
Gross working capital refers to the firms investment in current assets. Current
assets are the assets which can be convert in to cash within year includes cash, short
term securities, debtors, bills receivable and inventory. 2. Net working capital Net
working capital refers to the difference between current assets and current
liabilities. Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors, bills payable
and outstanding expenses. Net working capital can be positive or negative. Efficient
working capital management requires that firms should operate with some amount
of net working capital, the exact amount varying from firm to firm and depending,
among other things; on the nature of industries.net working capital is necessary
because the cash outflows and inflows do not coincide. The cash outflows resulting
from payment of current liabilities are relatively predictable. The cash inflow are
however difficult to predict. The more predictable the cash inflows are, the less net
working capital will be required.

Type of working capital

The operating cycle creates the need for current assets (working capital). However
the need does not come to an end after the cycle is completed to explain this
continuing need of current assets a destination should be drawn between permanent
and temporary working capital. 1) Permanent working capital The need for current
assets arises, as already observed, because of the cash cycle. To carry on business
certain minimum level of working capital is necessary on continues and
uninterrupted basis. For all practical purpose, this requirement will have to be met
permanent as with other fixed assets. This requirement refers to as permanent or
fixed working capital. 2) Temporary working capital Any amount over and above
the permanent level of working capital is temporary, fluctuating or variable,
working capital. This portion of the required working capital is needed to meet
fluctuation in demand consequent upon changes in production and sales as result of
seasonal chang
9

Determinants of working capital

The amount of working capital depends upon the following factors:1. Nature of business
Some businesses are such, due to their very nature, that their requirement of fixed
capital is more rather than working capital. These businesses sell services and not
the commodities and that too on cash basis. As such, no founds are blocked in piling
inventories and also no funds are blocked in receivables. E.g. public utility services
like railways, infrastructure oriented project etc. there requirement of working
capital is less. On the other hand, there are some businesses like trading activity,
where requirement of fixed capital is less but more money is blocked in inventories
and debtors.
2. Length of production cycle
In some business like machine tools industry, the time gap between the acquisition
of raw material till the end of final production of finished products itself is quite
high. As suchamount may be blocked either in raw material or work in progress or
finished goods or even in debtors. Naturally there need of working capital is high.
3. Size and growth of business
In very small company the working capital requirement is quit high due to high
overhead, higher buying and selling cost etc. as such medium size business
positively has edge over the small companies. But if the business start growing after
certain limit, the working capital requirements may adversely affect by the
increasing size.

10

4. Business/ Trade cycle

If the company is the operating in the time of boom, the working capital
requirement may be more as the company may like to buy more raw material, may
increase the production and sales to take the benefit of favourable market, due to
increase in the sales, there may more and more amount of funds blocked in stock
and debtors etc. similarly in the case of depressions also, working capital may be
high as the sales terms of value and quantity may be reducing, there may be
unnecessary piling up of stack without getting sold, the receivable may not be
recovered in time etc.
5. Terms of purchase and sales
Some time due to competition or custom, it may be necessary for the company to
extend more and more credit to customers, as result which more and more amount
is locked up in debtors or bills receivables which increase the working capital
requirement. On the other hand, in the case of purchase, if the credit is offered by
suppliers of goods and services, a part of working capital requirement may be
financed by them, but it is necessary to purchase on cash basis, the working capital
requirement will be higher.
6. Profitability
The profitability of the business may be vary in each and every individual case,
which is in turn its depend on numerous factors, but high profitability will
positively reduce the strain on working capital requirement of the company,
because the profits to the extent that they earned in cash may be used to meet the
working capital requirement of the company.

11

7. Operating efficiency
If the business is carried on more efficiently, it can operate in profits which may
reduce the strain on working capital; it may ensure proper utilization of existing
resources by eliminating the waste and improved coordination etc.

12

Statement of Working Capital

As per financial records of Alcon Rail Nirman Ltd up to 31st March 2009.

Particulars
(A)

2005-06
Rs.

2006-07
Rs.

2007-08
Rs.

2008-09
Rs.

194799131
243587499

427052993
407657437

895384581
341241874

837351802
482447680

504777909

256301747

294468615

151038089
88478801

330596825
107711253

366076803
80783339

Current
Assets
Inventories
Sundry

Debtors
Cash
& 76113686
Bank
Balance
Other C.A. 80003943
Loan
& 54583090
advances
Total
649087349
(B) Current Liabilities
Liabilities
78816022
Provisions
30004352
Total
108820374
Working
540266975

1579005229 1931236280 2061128239

346003954
62270017
408273971
1170731258

397798913
77884176
475683089
1455553191

Capital

13

319271072
51215931
370487003
1690641236

14

CHAPTER III WORKING CAPITAL

RATIO ANALYSIS
Introduction
Role of Ratio Analysis
Limitations of Ratio Analysis
Classification of Ratio Analysis
Quarterly Trends

15

Introduction

Ratio analysis is the powerful tool of financial statements analysis. A ratio is define
as the indicated quotient of two mathematical expressions and as the relationship
between two or more things. The absolute figures reported in the financial
statement do not provide meaningful understanding of the performance and
financial position of the firm. Ratio helps to summaries large quantities of financial

Role of ratio analysis

Ratio analysis helps to appraise the firms in the term of their profitability and
efficiency of performance, either individually or in relation to other firms in same
industry. Ratio analysis is one of the best possible techniques available to
management to impart the basic functions like planning and control. As future is
closely related to the immediately past, ratio calculated on the basis historical
financial data may be of good assistance to predict the future. E.g. On the basis of
inventory turnover ratio or debtors turnover ratio in the past, the level of
inventory and debtors can be easily ascertained for any given amount of sales.
Similarly, the ratio analysis may be able to locate the point out the various areas
which need the management attention in order to improve the situation. E.g.
Current ratio which shows a constant decline trend may be indicate the need for
further introduction of long term finance in order to increase the liquidity position.
As the ratio analysis is concerned with all the aspect of the firms financial analysis
liquidity, solvency, activity, profitability and overall performance, it enables the
interested persons to know the financial and operational characteristics of an
organization and take suitable decisions.

Limitations of ratio analysis

16

1. The basic limitation of ratio analysis is that it may be difficult to find a basis for
making the comparison 2. Normally, the ratios are calculated on the basis of
historical financial statements. An organization for the purpose of decision making
may need the hint regarding the future happiness rather than those in the past. The
external analyst has to depend upon the past which may not necessary to reflect
financial position and performance in future. 3. The technique of ratio analysis may
prove inadequate in some situation if there is differs in opinion regarding the
interpretation of certain ratio. 4. As the ratio calculates on the basis of financial
statements, the basic limitation which is applicable to the financial statement is
equally applicable. In case of technique of ratio analysis also i.e. only facts which
can be expressed in financial terms are considered by the ratio analysis. 5. The
technique of ratio analysis has certain limitations of use in the sense that it only
highlights the strong or problem areas, it does not provide any solution to rectify the
problem areas

17

The following ratio may be calculated for the purpose of analyzing the working
capital of ALCON:
1. Liquidity Ratio
2. Leverage Ratio
3. Turnover Ratio
4. Profitability Ratio

1.Liquidity Ratio
Liquidity ratios measure the short term solvency, i.e., the firms ability to pay its
current dues and also indicate the efficiency with which working capital is being
used. Commercial banks and short-term creditors may be basically interested in the
ratios under this group. They comprise of following ratios:

Current Ratio

This ratio measures the solvency of the company in the short term. Current assets
are those assets which can be converted into cash within a year. Current liabilities
and provisions are those liabilities that are payable within a year. The ratio is mainly
used to give an idea of the company's ability to pay back its short-term liabilities
with its short-term assets. The higher the current ratio, the more capable the
company is of paying its obligations. However, a very high ratio indicates idleness of
funds, poor investment policies of the management and poor inventory control. A
ratio under 1 suggests that the company would be unable to pay off its obligations if
they came due at that point. A lower ratio indicates lack of liquidity and shortage of
working capital. A current ratio of 2:1 indicates a highly solvent position. A current
ratio of 1.33:1 is considered by banks as the minimum acceptable level for providing
working capital finance.

18

Current Assets
Current Ratio= Current Liability
Year
2005-06
2006-07
2007-08
2008-09

Current Assets
649087349
1579005229
1931236280
2061128239

Current Liability
108820374
408273971
475683089
370487003

Ratio(CA/CL)
5.96
3.86
4.05
5.56

Interpretation
As we know that ideal current ratio for any firm is 2:1. If we see the current
ratio of the company for last three years it has increased from 2006 to 2008. The
current ratio of company is more than the ideal ratio. This depicts that
companys liquidity position is sound. Its current assets are more than its
current liabilities.

Quick Ratio
19

Quick ratio is used as a measure of the companys ability to meet its current
obligations. Cash is the most liquid asset. Debtors, bills receivables and marketable
securities are relatively liquid and included in quick assets. Inventories are
considered to be less liquid, hence not a quick asset. A quick ratio of 1:1 is
considered standard and ideal, since for every rupee of current liabilities, there is a
rupee of quick assets. A decline in the liquid ratio indicates overtrading, which, if
serious, may land the company in difficulties.

Current Assets - Inventories

Quick Ratio = Current Liability
Year
2005-06
2006-07
2007-08
2008-09

Liquid Assets
454288218
1151952236
1035851699
1223776437

Current Liability
108820374
408273971
475683089
370487003

Ratio(CA/CL)
4.17
2.82
2.17
3.30

Interpretation
A quick ratio is an indication that the firm is liquid and has the ability to meet its
current liabilities in time. The ideal quick ratio is 1:1. Companys quick ratio is
more than ideal ratio. This shows company has no liquidity problem.

20

Leverage Ratio

Leverage refers to the use of debt finance. While debt finance is a cheaper source of
finance but it is riskier also. These ratios help in assessing the risk arising from the
use of debt capital. A leverage ratio reveals the firms ability to meet its obligations
in long run. The short term creditor, like bankers and raw material suppliers, are
more concern with the firms current debt paying ability. On the other hand, long
term creditors, like debenture holders, financial institutions etc. are more concern
with the firms long term financial strength. In fact, a firm should have a strong
short as well as long term financial position.

Debt Ratio
The firm may be interested in knowing the proportion of the interest-bearing debt
in the capital structure. It may, therefore, compute debt ratio by
Total Debt
Debt Ratio = Capital Employed
Year
2005-06
2006-07
2007-08
2008-09

Debt
414635193
540857896
761455005
822617264

Capital Employed
591103847
1238879545
1625514244
1862460512

21

Ratio(D/CE)
0.70
0.43
0.46
0.44

Interpretation
The debt ratio of 0.43 means that lenders have financed 43% of ALCONs net
assets (capital employed). It obviously means that owners have provided the
remaining finances i.e. 57%. For consecutive years also, the lenders have financed
less than 50% highlighting that the firm has a strong financial position. It has very
less chances of going bankrupt.

Debt Equity Ratio

22

The debt-equity ratio is worked out to ascertain soundness of the long term financial
policies of the firm. This ratio expresses a relationship between debt (external
equities) and the equity (internal equities). Debt means long-term loans, i.e.,
debentures, public deposits, loans (long term) from financial institutions. Equity
means shareholders funds, i.e., preference share capital, equity share capital,
reserves less losses and fictitious assets like preliminary expenses. It indicates the
extent to which the firm depends upon outsiders for its existence. A high debt-equity
ratio may indicate that the financial stake of the creditors is more than that of the
owners. A very high debt-equity ratio may make the proposition of investment in the
organization a risky one. While a low ratio indicates safer financial position, a very
low ratio may mean that the borrowing capacity of the organization is being
underutilized.

Debt
23

Debt Equity Ratio = Net worth (Equity)

Year
2005-06
2006-07
2007-08
2008-09

Debt
414635193
540857896
761455005
822617264

Net Worth
176468654
695616233
858068314
1029553358

Interpretation

24

Ratio(D/NW)
2.34
0.77
0.88
0.79

This relationship describes the lenders contribution for each rupee of the owners
contribution. It is clear that the lenders contribution is 0.77, 0.88, 0.79 times of
owners contribution. The company is conservative in financing its growth with
debt but this is beneficial as there is less chances of it going bankrupt.

Activity or Turnover Ratio

25

Funds of creditors and owners are invested in various assets to generate sales and
profits. The better the management of assets, the larger the amount of sales. Activity
ratios are employed to evaluate the efficiency with which the firm manages and
utilises its assets. These ratios are also called turnover ratios because they indicate
the speed with which the assets are being converted or turned over into sales. Higher
turnover ratio means, better use of resources, which in turn means better
profitability ratio. The following are the important activity (turnover) ratios:

Inventory Turnover Ratio

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. A low inventory turnover implies a slow-moving or obsolete inventory.
However, a relatively high inventory turnover should be carefully analysed. A high
inventory turnover may be due to a very low level of inventory, which results in
frequent stock-outs. The turnover will also be high if the firm replenishes its
inventory in too many small lot sizes.
Net Sales
Inventory Turnover ratio = Average Inventory

Year
2005-06
2006-07
2007-08
2008-09

Net Sales

Average

Ratio(NS/Avg.

901324171
1881201406
2480267871
2814977170

Inventory
162817698
310926062
661218787
866368191.5

Inv)
5.53
6.05
3.75
3.24

26

27

Interpretation
The inventory turnover shows how rapidly the inventory is turning into receivable
through sales. A high ratio indicates good inventory management. ALCON has
turned its inventory of finished goods into sales 6.05 times a year which has then
fallen to 3.75 times and then to 3.24. Though it is not low for a construction
company but it should pay more attention to maintain the stability of this ratio.

Debtor Turnover Ratio

It measures whether the amount of resources tied up in debtors is reasonable and
whether the company has been efficient in converting debtors into cash. The higher
the ratio, the better the position.
Net sales
Debtor turnover ratio = Sundry Debtor

Year
2005-06
2006-07
2007-08
2008-09

Net Sales
901324171
1881201406
2480267871
2814977170

Sundry Debtor
243587499
407657437
341241874
482447680

28

Ratio(NS/SD)
3.7
4.61
7.26
5.83

Interpretation
Generally, the higher the value of debtors turnover, the more efficient is the
management of credit. The ratio for the firm has from 4.61 to 7.26 and then fallen to
5.83. It depicts that the firm has not been following an efficient credit policy.

Average Collection Period

The average collection period ratio represents the average number of days for which
a firm has to wait before its receivables are converted into cash. It measures the
quality of debtors. Generally, shorter the average collection period the better is the
quality of debtors as a short collection period implies quick payment by debtors and
vice-versa.
360
Average Collection Period = Debtor turnover Ratio

Year
2005-06
2006-07
2007-08
2008-09

No. of days

Debtors

Ratio(360/DTR)

360
360
360
360

Turnover Ratio
3.7
4.61
7.26
5.83

97days
78 days
50 days
62 days

29

Interpretation
The Average collection period measures the quality of debtors since it indicates the
speed of their collection. Though it has fallen from 78 days to 62 days, it still implies
a very liberal and inefficient credit and collection performance.

Working Capital Turnover Ratio

The working capital turnover ratio measures the efficiency with which the working
capital is being used by a firm. A high ratio indicates efficient utilization of working
capital and a low ratio indicates otherwise. But a very high working capital turnover
ratio may also mean lack of sufficient working capital which is not a good situation.
Net Sales
Working Capital Turnover Ratio = Working Capital

Year
2005-06
2006-07
2007-08
2008-09

Net Sales
901324171
1881201406
2480267871
2814977170

Working Capital
540266975
1170731258
1455553191
1690641236

Interpretation
30

Ratio(NS/WC)
1.66
1.60
1.70
1.66

In alcon, the management needs to utilize the working capital in a better manner so
that it can increase the income.

31

Fixed Asset Turnover Ratio

The fixed-asset turnover ratio measures a company's ability to generate net sales
from fixed asset investments - specifically property, plant and equipment (PP&E) net of depreciation. A higher fixed-asset turnover ratio shows that the company has
been more effective in using the investment in fixed assets to generate revenues.
Net Sales
Fixed Assets Turnover Ratio = Fixed Assets

Year
2005-06
2006-07
2007-08
2008-09

Net Sales
901324171
1881201406
2480267871
2814977170

Fixed Assets
55759485
68148287
166961053
168819276

Interpretation
32

Ratio(NS/FA)
16.16
27.6
14.6
16.67

A high ratio indicates a high degree of efficiency in fixed assets utilization. The
company has been effective in using the investment in fixed assets to generate
revenues.

33

Current Assets Turnover Ratio

It measures the efficiency with which the current asset employed. A high ratio
indicates a high degree of efficiency in current asset utilization and vice-versa. But
again too high ratio indicates overtrading on the basis of these ratios.
Net Sales
Current Asset Turnover Ratio = Current Assets

Year
2005-06
2006-07
2007-08
2008-09

Net Sales
901324171
1881201406
2480267871
2814977170

Current Assets
649087349
1579005229
1931236280
2061128239

Interpretation
Alcon turns over its fixed assets faster than current assets.

34

Ratio(NS/CA)
1.38
1.19
1.28
1.36

Total Asset Turnover Ratio

This ratio indicates the number of times total assets are being turned over in a year.
The higher the ratio indicates overtrading of total assets, while a relatively lower
ratio indicates idle capacity.
Net Sales
Total Assets Turnover Ratio = Total Assets

Year
2005-06
2006-07
2007-08
2008-09

Net Sales
901324171
1881201406
2480267871
2814977170

Total Assets
704846834
1647153516
2101197333
2232947515

Ratio(NS/CA)
1.27
1.14
1.18
1.26

Interpretation
The total assets turnover has been slowly increasing implying that ALCON
generates a sale of Rs. 1.26 for one rupee investment in fixed and current assets
together.

35

Profitability Ratio
The purpose of study and analysis of profitability ratios are to help assessing the
adequacy of profit earned by the company and also to discover whether profitability
is increasing or declining. The profitability ratio shows the combined effects of
liquidity, asset management and debt management on operating results.
Profitability ratio are measured with reference to sale, capital employed, total asset
employed, shareholders fund etc.

Net Profit Margin

A measure of how well a company controls its costs. It is calculated by dividing a
company's profit by its revenues and expressing the result as a percentage. The
higher the net profit margin is, the better the company is thought to control costs.
Investors use the net profit margin to compare companies in the same industry and
well as between industries to determine what are the most profitable.
Net Profit
Net profit Ratio = Net Sales
Year
2005-06
2006-07
2007-08
2008-09

Net Profit
36092058
94415570
142160782
104392055

Net Sales
901324171
1881201406
2480267871
2814977170

36

Ratio(NPx100/NS)
4%
5%
5.73%
3.7%

Interpretation
The firm is having a low net margin and is further declining which might be
difficult for the firm to survive in adverse economic condition and also in the face of
falling selling price, rising cost of production or declining demand.

Return on Equity
This ratio is an important yardstick of performance for equity shareholders since it
indicates the return on the funds employed by them. The factor which motivates
shareholders to invest in a company is the expectation of an adequate rate of return
on their funds and periodically, they want to assess the rate of return in order to
decide whether to continue with their investment.
Net Profit
Return on Equity = Net Worth

Year

Net Profit

Net Worth

Ratio(NPx100/NW

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

36092058
94415570
142160782
104392055

176468654
695616233
858068314
1029553358

)
20.45%
13.5%
16.56%
10.13%

37

Interpretation
The ratio reveals that the shareholders funds are being utilized efficiently though
last year the return was not satisfactory.

38

Return on Capital Employed

It is used in finance as a measure of the returns that a company is realising from its
capital employed. It is commonly used as a measure for comparing the performance
between businesses and for assessing whether a business generates enough returns
to pay for its cost of capital. ROCE measures the profitability of the capital
employed in the business. A high ROCE indicates a better and profitable use of longterm funds of owners and creditors. As such, a high ROCE will always be preferred.
Net Profit
Return on Capital Employed = Capital employed

Year
2005-06
2006-07
2007-08
2008-09

Net Profit
36092058
94415570
142160782
104392055

Capital Employed
591103847
1238879545
1625514244
1862460512

Ratio(NPx100/CE)
6.10%
7.62%
8.74%
5.60

Interpretation
The ROCE is on the lower side depicting that the company has a low earning power.

QUARTERLY TRENDS FROM 2006-2010

2006-07
39

QUARTER 1

QUARTER 2

QUARTER 3

QUARTER 4

(Apr-Jun

(Jul-Sep

(Oct-Dec

(Jan-Mar

2006)

2006)

2006)

2006)

Income
Expenditure
Interest
Depreciation
Profit before

Rs.
19.374 cr.
17.089 cr.
0.7 cr.
0.15 cr.
1.435 cr.

Rs.
37.233 cr.
32.727 cr.
1.008 cr.
0.15 cr.
3.348 cr.

Rs.
49.035 cr.
41.988 cr.
1.113 cr.
0.1 cr.
5.834 cr.

Rs.
82.481 cr.
76.47 cr.
1.827 cr.
0.2 cr.
3.984 cr.

Tax
Tax
Net Profit
Equity

0.443 cr.
0.992 cr.
4.946 cr.

1.302 cr.
2.046 cr.
4.946 cr.

2.1 cr.
3.734 cr.
8.772 cr.

0.309 cr.
3.675 cr.
10.498 cr.

Capital
EPS

4.14

4.26

3.5

CUMMULATIVE

ANNUAL

(2006-07)

(2006-07)

40

Income
Expenditure
Interest
Depreciation
Profit before Tax
Tax
Net Profit
Equity Capital
EPS

(Rs.)

(Rs.)

188.12 cr.
168.27 cr.
4.648 cr.
0.6 cr.
14.6 cr.
4.154 cr.
10.447 cr.
10.498 cr.
9.95

188.12 cr.
168.98 cr.
3.9 cr.
0.62 cr.
14.6 cr.
5.16 cr.
9.44 cr.
10.52 cr.
8.97

41

*EPS in the Annual Report was 15.31 which should have been 8.97

2007-08
QUARTER 1

QUARTER 2

QUARTER 3

QUARTER 4

(Apr-Jun

(Jul-Sept

(Oct-Dec

(Jan-Mar

2007)

2007)

2007)

2007)

(Rs.)

(Rs.)

(Rs.)

(Rs.)

Income
Expenditure
Interest
Depreciation
Profit before

48.134 cr.
42.571 cr.
0.978 cr.
0.2 cr.
4.384 cr.

43.867 cr.
38.332 cr.
1.158 cr.
0.1 cr.
4.277 cr.

93.865 cr.
83.131 cr.
1.572 cr.
0.15 cr.
9.013 cr.

48.791 cr.
45.023 cr.
0.793 cr.
0.15 cr.
2.825 cr.

Tax
Tax
Net Profit
Equity Capital
EPS

1.49 cr.
2.894 cr.
10.498 cr.
2.76

1.368 cr.
2.909 cr.
10.521 cr.
2.76

2.796 cr.
6.216 cr.
10.521 cr.
5.91

0.7 cr.
2.125 cr.
10.727 cr.
3.5

42

43

Income
Expenditure
Interest
Depreciation
Profit before Tax
Tax
Net Profit
Equity Capital
EPS

CUMMULATIVE

ANNUAL

(2007-08)

(2007-08)

(Rs.)

(Rs.)

234.65 cr.
209.05 cr.
4.05 cr.
0.6 cr.
20.95 cr.
6.35 cr.
14.6 cr.
10.73 cr.
13.6

248.02 cr.
222.82 cr.
3.16 cr.
0.88 cr.
21.16 cr.
6.95 cr.
14.21 cr.
10.73 cr.
13.25

44

45

2008-09

QUARTER 1

QUARTER 2

QUARTER 3

QUARTER 4

(Apr-Jun

(Jul-Sept

(Oct-Dec

(Jan-Mar

2008)

2008)

2008)

2009)

(Rs.)

(Rs.)

(Rs.)

(Rs.)

Income
Expenditure
Interest
Depreciation
Profit before

59.486 cr.
51.54 cr.
1.827 cr.
0.23 cr.
5.889 cr.

87.764 cr.
80.105 cr.
2.178 cr.
0.27 cr.
5.212 cr.

72.59 cr.
65.754 cr.
2.295 cr.
0.25 cr.
4.292 cr.

61.654 cr.
57.211 cr.
2.336 cr.
0.2 cr.
1.907 cr.

Tax
Tax
Net Profit
Equity Capital
EPS

1.79 cr.
4.099 cr.
10.72 cr.
3.82

2.027 cr.
3.185 cr.
11.22 cr.
2.84

1.327 cr.
2.965 cr.
11.22 cr.
2.64

0.629 cr.
1.278 cr.
11.22 cr.
1.13

46

47

Income
Expenditure
Interest
Depreciation
Profit before Tax
Tax
Net Profit
Equity Capital
EPS

CUMMULATIVE

ANNUAL

(2008-09)

(2008-09)

(Crores)

(Crores)

281.5
254.61
8.63
0.95
17.3
5.77
11.52
11.22
10.27

281.5
255.91
8.14
1.4
16.05
5.61
10.44
11.22
9.3

48

2009-10
QUARTER 1

QUARTER 2

QUARTER 3

QUARTER 4

(Apr-Jun

(Jul-Sept

(Oct-Dec

(Jan-Mar

2009)

2009)

2009)

2010)

(Rs.)

(Rs.)

(Rs.)

(Rs.)

Income
Expenditure
Interest
Depreciation
Profit before

36.018 cr.
30.918 cr.
2.199 cr.
0.359 cr.
2.542 cr.

26.022 cr.
23.553 cr.
1.806 cr.
0.375 cr.
0.289 cr.

37.642 cr.
34.587 cr.
0.36 cr.
2.172 cr.
0.522 cr.

60.799 cr.
53.392 cr.
1.467 cr.
0.407 cr.
5.533 cr.

Tax
Tax
Net Profit
Equity Capital
EPS

0.864 cr.
1.678 cr.
11.22 cr.
1.49

0.011 cr.
0.278 cr.
12.24 cr.
0.23

0.265 cr.
0.257 cr.
12.24 cr.
0.2

1.881 cr.
3.652 cr.
12.24 cr.
2.98

49

*EPS in the 3rd quarter was found 0.02 in the report which must be 0.2
CUMMULATIV
E
(2009-10)

50

(Rs.)
Income
Expenditure
Interest
Depreciation
Profit before Tax
Tax
Net Profit
Equity Capital
EPS

160.48 cr.
142.45 cr.
5.83 cr.
3.31 cr.
8.88 cr.
3.02 cr.
5.86 cr.
12.24 cr.
4.8

CHAPTER IV
WORKING CAPITAL MANAGEMENT
COMPONENTS
51

 Receivables Management
Cash Management
Inventory Management

52

Working Capital management Components

RECEIVABLES MANAGEMENT
Receivables or debtors are the one of the most important parts of the current assets
which is created if the company sells the finished goods to the customer but not
receive the cash for the same immediately. Trade credit arises when firm sells its
products and services on credit and does not receive cash immediately. It is essential
marketing tool, acting as bridge for the movement of goods through production and
distribution stages to customers. Trade credit creates receivables or book debts
which the firm is expected to collect in the near future. The receivables include three
characteristics 1) It involve element of risk which should be carefully analysis. 2) It
is based on economic value. To the buyer, the economic value in goods or services
passes immediately at the time of sale, while seller expects an equivalent value to be
received later on 3) It implies futurity. The cash payment for goods or serves
received by the buyer will be made by him in a future period.

Objective of receivable management

The sales of goods on credit basis are an essential part of the modern competitive
economic system. The credit sales are generally made up on account in the sense
that there are formal acknowledgements of debt obligation through a financial
instrument. As a marketing tool, they are intended to promote sales and there by
profit. However extension of credit involves risk and cost, management should
weigh the benefit as well as cost to determine the goal of receivable management.
Thus the objective of receivable management is to promote sales and profit until
that point is reached where the return on investment in further funding of
receivables is less .than the cost of funds raised to finance that additional credit.

53

Size of receivables

Year
Sundry

2005-06
243587499

2006-07
407657437

Debtor

54

2007-08
341241874

2008-09
482447680

Average collection period

The average collection period measures the quality of debtors since it indicate the
speed of their collection. The shorter the average collection period, the better the
quality of the debtors since a short collection period implies the prompt payment by
debtors. The average collection period should be compared against the firms credit
terms and policy judges its credit and collection efficiency. The collection period
ratio thus helps an analyst in two respects. 1. In determining the collectability of
debtors and thus, the efficiency of collection efforts. 2. In ascertaining the firms
comparative strength and advantages related to its credit policy and performance.
The debtors turnover ratio can be transformed in to the number of days of holding
of debtors.
Average Collection Period
Year
Average

2005-06
97

2006-07
78

2007-08
50

Collection
Period

OBSERVATION
55

2008-09
62

Alcon as such do not have a credit policy. As the company undertakes government
projects so there is no worry about not getting the cash for the bills receivables.
Though the average collection period has fallen over the years, still the company
needs to follow a credit policy for timely recovery of the cash for the bills receivables

CASH MANAGEMENT
Cash is common purchasing power or medium of exchange. As such, it forms the
most important component of working capital. The term cash with reference to cash
management is used in two senses, in narrow sense it is used broadly to cover cash
and generally accepted equivalent of cash such as cheques, draft and demand
deposits in banks. The broader view of cash also induce hear- cash assets, such as
marketable sense as marketable securities and time deposits in banks. The main
characteristics of this deposits that they can be really sold and convert in to cash in
short term. They also provide short term investment outlet for excess and are also
useful for meeting planned outflow of funds. We employ the term cash management
in the broader sense. Irrespective of the form in which it is held, a distinguishing
feature of cash as assets is that it was no earning power. Company have to always
maintain the cash balance to fulfil the dally requirement of expenses. There are
three primary motive for maintain the cash as follows

Motive of holding cash

There are three motives for holding cash as follow 1. Transaction motive 2.
Precautionary motive 3. Speculative motive

Transaction motive
Cash balance is necessary to meet day-to-day transaction for carrying on with the
operation of firms. Ordinarily, these transactions include payment for material,
wages, expenses, dividends, taxation etc. there is a regular inflow of cash from
operating sources. But since they do not perfectly synchronize, a minimum cash
balance is necessary to uphold the operations for the firm if cash payments exceed
56

receipts. Always a major part of transaction balances is held in cash, a part may be
held in the form of marketable securities whose maturity conforms to the timing of
anticipated payments of certain items, such as taxation, dividend etc.

Precautionary Motive
Cash flows are somewhat unpredictable, with the degree of predictability varying
among firms and industries. Unexpected cash needs at short notice may also be the
result of following: 1. Uncontrollable circumstances such as strike and natural
calamities. 2. Unexpected delay in collection of trade dues. 3. Cancellation of some
order for goods due unsatisfactory quality. 4. Increase in cost of raw material, rise in
wages, etc. The higher the predictability of firms cash flows, the lower will be the
necessity of holding this balance and vice versa. The need for holding the
precautionary cash balance is also influenced by the firms capacity to have short
term borrowed funds and also to convert short term marketable securities into cash.

Speculative motive:
Speculative cash balances may be defined as cash balances that are held to enable
the firm to take advantages of any bargain purchases that might arise. While the
precautionary motive is defensive in nature, the speculative motive is aggressive in
approach.

However, as with precautionary balances, firms today are more likely to rely on
reserve borrowing power and on marketable securities portfolios than on actual
cash holdings for speculative purposes.

Advantages of cash mnagement

57

Cash does not enter in to the profit and loss account of an enterprise, hence cash is
neither profit nor losses but without cash, profit remains meaningless for an
enterprise owner. 1. A sufficient of cash can keep an unsuccessful firm going despite
losses 2. An efficient cash management through a relevant and timely cash budget
may enable a firm to obtain optimum working capital and ease the strains of cash
shortage, fascinating temporary investment of cash and providing funds normal
growth. 3. Cash management involves balance sheet changes and other cash flow
that do not appear in the profit and loss account such as capital expenditure.

OBSERVATION
Alcon has a relatively small amount of cash in hand which is usually employed in
administrative expenses and payment to employees. The company carries out the
various construction projects by borrowing 100% cash from various banks. The
cash to be borrowed is entirely based on the project and varies from project to
project.

58

CASH CYCLE
One of the distinguishing features of the fund employed as working capital is that
constantly changes its form to drive business wheel. It is also known as
circulating capital which means current assets of the company, which are changed
in ordinary course of business from one form to another, as for example, from cash
to inventories, inventories to receivables and receivables to cash. Basically cash
management strategies are essentially related to the cash cycle together with the
cash turnover. The cash cycle refers to the process by which cash is used to purchase
the raw material from which are produced goods, which are then send to the
customer, who later pay bills.
TENDER NOTICES
CASH
RAW MATERIALS (for construction)
DEBTORS
FINISHED CONSTRUCTION
Work in Progress
The cash cycle for the construction company is entirely different from manufacturing
companies. The various stages in the cycle are described below:

59

TENDER NOTICES
Alcon looks out for the various tender notices published out by the government in
national newspapers. The company, upon evaluating its eligibility criteria according to
the tender, files the tender with a competitive bid. The company which fulfils the
eligibility criteria, has a good credential and has the lowest bid gets the tender for
completion of the project.

CASH
Upon successfully getting a project in its hand, the company lifts cash by borrowing from
various banks. The cash to be borrowed is entirely based on the project and varies from
project to project.

RAW MATERIALS
The company purchases the materials required for the construction and completion of the
project. The amounts of the material along with its specification/designation are provided
in the tender. Complying with those, materials are bought, stocked and put to use.

WORK in PROGRESS
This is the stage where construction is in progress. The government pays to the company
progressively in parts after a certain amount of work is completed.

FINISHED CONSTRUCTION
Finally, the construction project is finished and in case any material is left out, it is kept
in stock for future use.

60

DEBTORS
Debtors mainly here are the government bodies like Railways, etc. that are yet to pay the
remaining cash for the completion of the project.

61

INVENTORY MANAGEMENT
Inventories constitute the most significant part of current assets of a large majority of
companies in India. On an average, inventories are approximately 60 % of current assets
in public limited companies in India. Because of the large size of inventories maintained
by firms maintained by firms, a considerable amount of funds is required to be committed
to them. It is, therefore very necessary to manage inventories efficiently and effectively in
order to avoid unnecessary investments. A firm neglecting a firm the management of
inventories will be jeopardizing its long run profitability and may fail ultimately. The
purpose of inventory management is to ensure availability of materials in sufficient
quantity as and when required and also to minimize investment in inventories at
considerable degrees, without any adverse effect on production and sales, by using simple
inventory planning and control techniques.

Needs to hold inventories:There are three general motives for holding inventories:

Transaction motive emphasizes the need to maintain inventories to facilitate

smooth production and sales operation.

Precautionary motive necessities holding of inventories to guard against the risk

of unpredictable changes in demand and supply forces and other factors.

Speculative motive influences the decision to increases or reduce inventory levels

to take advantage of price fluctuations and also for saving in reordering costs and
quantity discounts etc.

Objective of Inventory Management:The main objectives of inventory management are operational and financial. The
operational mean that means that the materials and spares should be available in
sufficient quantity so that work is not disrupted for want of inventory. The financial
62

objective means that investments in inventories should not remain ideal and minimum
working capital should be locked in it.

The following are the objectives of inventory management:

To ensure continuous supply of materials, spares and finished goods.

To avoid both over-stocking of inventory.

To maintain investments in inventories at the optimum level as required by the

operational and sale activities.

To keep material cost under control so that they contribute in reducing cost of
production and overall purchases.

To eliminate duplication in ordering or replenishing stocks. This is possible with

the help of centralizing purchases.

To ensure perpetual inventory control so that materials shown in stock ledgers

should be actually lying in the stores.

To ensure right quality of goods at reasonable prices.

To facilitate furnishing of data for short-term and long term planning and control
of inventory

63

OBSERVATION
Alcon does not hold much inventory. It follows the Just-in-Time Systems, where in
the materials required are bought and put to use. The construction company, after
getting a project in its hand, buys and stocks the materials which will be needed for
construction.

The

tender

itself

describes

the

amount

and

the

specification/designation of the materials which are to be needed for the

construction, so accordingly the materials are purchased. Alcon also follows a Firstin-First-out (FIFO) method wherein the materials purchased first are put to use
first.

64

CHAPTER V
WORKING CAPITAL FINANCE
Introduction
Bank Finance for Working Capital
Form of Bank Credit
Security required in Bank Finance

65

Introduction
Funds available for period of one year or less is called short term finance. In India
short term finance is used as working capital finance. Two most significant short
term sources of finance for working capital are trade credit and bank borrowing.
Trade credit ratio of current assets is about 40%, it is indicated by Reserve Bank of
India data that trade credit has grown faster than the growth in sales. Bank
borrowing is the next source of working capital finance. The relative importance of
this varies from time to time depending on the prevailing environment. In India the
primary source of working capital financing are trade credit and short term bank
credit. After determine the level of working capital, a firm has to consider how it
will finance.

Bank Finance for Working Capital

Banks are the main institutional sources of working capital finance in India. Bank
credit is the most important source of financing working capital requirements. A
bank considers a firms sales and production plans and the desirable levels of
current assets in determining its working capital requirements. The amount
approved by the bank for the firms working capital is called credit limit. Credit
limit is the maximum funds which a firm can obtain from the banking system. In the
case of firms with seasonal businesses, banks may fix separate limits for the peak
level credit requirement and normal, non-peak level credit requirement indicating
the periods during which the separate limits will be utilised by the borrower. In
practice, banks do not lend 100% of the credit limit; they deduct margin money.
Margin requirement is based on the principle of conservatism and is meant to
ensure security. If the margin requirement is 30%, bank will lend only upto 70% of
the value of the asset.

66

Form of bank credit

Bank provides working capital finance in the following ways

Overdraft
Under the overdraft facility, the borrower is allowed to withdraw funds in excess of
the balance in his current account upto a certain limit during a stipulated period.
Though overdrawn amount is repayable on demand, they generally continue for a
long period by annual renewals of the limits. It is a very flexible arrangement from
the borrowers point of view since he can withdraw and repay funds whenever he
desires within the overall stipulations. Interest is charged on daily balances-on the
amount actually withdrawn-subject to some minimum charges. The borrower
operates the account through cheques.

Cash credit
Under the cash credit facility, a borrower is allowed to withdraw funds from the
bank upto the sanctioned credit limit. He is not required to borrow the entire
sanctioned credit once, rather, he can draw periodically to the extent of his
requirements and repay by depositing surplus funds in his cash credit account.
There is no commitment charge; therefore, interest is payable on the amount
actually utilised by the borrower. Cash credit limits are sanctioned against the
security of current assets. Though funds borrowed are repayable on demand, banks
usually do not recall such advances unless they are compelled by adverse
circumstances.

Bills purchased / discounted

This form of assistance is comparatively of recent origin. This facility enables the
company to get the immediate payment against the credit bills / invoice raised by the
company. The banks hold the bills as a security till the payment is made by the
customer. The entire amount of bill is not paid to the company. The company gets
67

only the present worth of amount of bill from of discount charges. On maturity,
bank collects the full amount of bill from the customer.

Letter of credit
Suppliers, particularly the foreign suppliers, insist that the buyer should ensure that
his bank will make the payment if he fails to honour its obligation. This is ensured
through a letter of credit (L/C) arrangement. A bank opens an L/C in favour of a
customer to facilitate his purchase of goods. If the customer does not pay to the
supplier within the credit period, the bank makes the payment under the L/C
arrangement. This arrangement passes the risk of the supplier to the bank. Bank
charges the customer for opening the L/C. It will extend such facility to financially
sound customers.

Security Required in Bank Finance

Banks generally do not provide working capital finance without adequate security.
The following are the modes of security which a bank may require.

Hypothecation
Under this, the borrower is provided with working capital finance by the bank
against the security of movable property, generally inventories. The borrower does
not transfer the property to the bank; he remains in the possession of property made
available as security for the debt. Banks generally grant credit hypothecation only to
first class customers with highest integrity.

Pledge
Under this arrangement, the borrower is required to transfer the physical possession
of the property offered as a security to the bank to obtain credit. The bank can
retain possession of the goods pledged unless payment of the principal, interest and
68

any other expenses is made. In case of default, the bank may either (a) sue the
borrower for the amount due, or (b) sue for the sale of goods pledged, or (c) after
giving due notice, sell the goods.

Lien
Lien means right of the lender to retain property belonging to the borrower until he
repays credit. It can be either a particular lien or general lien. Particular lien is a
right to retain property until the claim associated with the property is fully paid.
General lien, on the other hand, is applicable till all dues of the lender are paid.
Banks usually enjoy general lien.

OBSERVATION
Alcon, being a construction company, looks out for various tender notices
opened out by the government. Upon successfully getting a project in its hand,
the firm borrows cash from various banks including State Bank of India, State
Bank of Patiala, Yes Bank, HDFC, AXIS Bank. The banks provide working
capital finance to the firm through one of the methods described above. The
companys borrowings are entirely based on the projects in hand and usually
the amount of cash to be spent on the completion of the project is 100%
borrowed.

69

CONCLUSION
Working capital management is important aspect of financial management. The
study of working capital management of Alcon Rail Nirman (Engineers) Ltd. has
revealed that the company shows no liquidity problem. The study has been
conducted on working capital ratio analysis, working capital leverage, working
capital components which helped the company to manage its working capital
efficiently and effectively. 1. Working capital of the company was increasing and
showing positive working capital per year. It shows good liquidity position. 2.
Positive working capital indicates that company has the ability of payments of short
terms liabilities. 3. The study of receivables management of the company shows that
they do not have a credit policy and hence have a high average collection period. 4.
The study of cash management reveals that the company carries out the various
construction projects by borrowing 100% cash from various banks and varies from
project to project. 5. The study of inventory management reveals that the company
follows Just-in-Time Systems and FIFO method.
Over all company has good liquidity position and sufficient funds to repayment of
liabilities. Company has accepted conservative financial policy and thus maintaining
more current assets balance.

70

BIBLIOGRAPHY
Books Referred
1. I. M. Pandey - Financial Management - Vikas Publishing House Pvt. Ltd. Ninth Edition 2006 2. M.Y. Khan and P.K. Jain, Financial management Vikas
Publishing house Ltd.

Annual Reports of ALCON

2005-06

2006-07 2

007-08

2008-09

Website Referred

www.Alcon.net

www.wikipedia.org

www.investopedia.com

www.google.com

71

72