1.

INTRODUCTION

WORKING CAPITAL:

Working capital may be regarded as the life blood of business. Working capital is of
major importance to internal and external analysis because of its close relationship with the
current day-to-day operations of a business. Every business needs funds for two purposes.

Long term funds

Long term funds are required to create production facilities through purchase of fixed
assets such as plants, machineries, lands, buildings & etc

Short term funds

Short term funds are required for the purchase of raw materials, payment of wages, and
other day-to-day expenses. . It is otherwise known as revolving or circulating capital.

It is nothing but the difference between current assets and current liabilities. i.e. Working
Capital = Current Asset – Current Liability.

Businesses use capital for construction, renovation, furniture, software, equipment, or

machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also
used often by businesses to put a down payment down on a piece of commercial real estate.
Working capital is essential for any business to succeed. It is becoming increasingly important to
have access to more working capital when we need it.

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1.1 STATEMENT OF THE PROBLEM

To study the working capital management to analyze and evaluate the financial and
working capital position of Ashok Leyland Limited with special reference to the working
capital ratios.

1.2 OBJECTIVE OF THE STUDY

 To examine the combined effect of the ratios relating to working capital management
point with the assistance of correlation co-efficient.

 Management practices of the company

 To analyses the impact of profitability on working capital.

 To determine the working capital leverage for examining the sensitivity of ROI to
changes in the level of gross working capital of the company.

2
 1.3 HYPOTHESIS OF THE STUDY

Having identified the object of the study the following hypothesis have been formulated
and tested during the period of study:

 There is no significant difference between the five years average Current Ratio of this
company to the standard.

 Correlation between ROI and Liquidity Ratio of does not differ significantly.

 Correlation between ROI and Working Capital Turnover Ratio of does not differ
significantly.

 Correlation between ROI and Cash Position Ratio of does not differ significantly.

 Correlation between ROI and Inventory Turnover Ratio of does not differ significantly.

 Correlation between ROI and Debtors Turnover Ratio of does not differ significantly.

 Correlation between ROI and Cash Turnover Ratio of does not differ significantly.

 Correlation between ROI and Working Capital to Total Assets Ratio of does not differ
significantly.

 Correlation between ROI and Current Assets Turnover Ratio of does not differ
significantly.

3
1.4 SCOPE OF THE STUDY

The study is conducted at Ashok Leyland Limited. The topic selected is “A study on the
Working Capital Management of Ashok Leyland Limited from the financial year 2002-2003 to
2006-2007. So the project work is confined to finance department only. Tools of financial
analyze like working capital ratio have been used. Based on analyze some findings and
recommendation are given.

1.5 LIMITATIONS OF THE STUDY

 The study is restricted for the five years from 2002-2003 to 2006-2007.

4
  The analyses are based on secondary data taken from annual reports of the
company.

 Time has been a limited factor and it has been difficult to analysis the various
aspect of finance within the prescribed time.

 The figures from the working capital statement for analysis were historical in
natures.

 Working capital ratios will not completely show the company’s good or bad
financial position.

1.6 CHAPTERISATION

CHAPTER -1

5
 The first chapter deals with introduction, statement of the problem, scope of the
study, objectives of the study & the study, objectives of the study & Limitations of the
study.

CHAPTER -2

The Second Chapter is related to the industry profile cum company profile.

CHAPTER -3

The Third Chapter deals with the review of literature of the study.

CHAPTER -4

The fourth Chapter deals with overview of the Theoretical Perspective of the
study.

CHAPTER -5

The fifth chapter deals with Research Methology, research design, sampling
design, data collection, analytical tool applied and statistical tools.

CHAPTER -6

The sixth chapter deals with data analysis and interpretation.

CHAPTER -7

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 The seventh chapter deals with findings, suggestion and conclusion.

CHAPTER -8

The eight chapter deals with bibliography.

2. INDUSTRY CUM COMPANY PROFILE

INDUSTRIAL PROFILE

The industry encompasses commercial vehicles, multi-utility vehicles, passenger cars,

two wheelers, three wheelers, tractors and auto components. There are in place 15
manufacturers of and multi utility vehicles, 9 of commercial vehicles, 14 of Two/Three wheelers,
and 10 of Tractors besides 5 of engines. With an investment of Rs.50, 000 Cores, the turnover
was Rs.50, 9000 Cores in Automotive Sector during 1999 – 2000. It employs 4, 50, 00 people
directly and 100, 00,000 people indirectly and is now inhabited by global majors in keen
contention. India manufactures about 38, 00,000 2-wheelers, 5, 70,000 passenger cars, 1, 25.000
Multi utility Vehicles, 1, 70.000 Commercial Vehicles and 2, 60,000 tractors annually. India
ranks seconds in the production of two wheelers and fifth in commercial vehicles.

India’s automatic component industries manufacture the entire range of parts required by
the domestic automobile industry and currently employ about 250,000 persons. Auto component
manufacturers supply to two kinds of two kinds of buyers – original equipment manufacturers
(OEM) and the replacement market. The replacement market is characterized by the presence of
several small-scale suppliers who lower overheads. The demand from the OEM market, on the
other hand, is dependent on the demand for new vehicles. There has been a slowdown in the

7
automob8le sector in the past two years. However, the component industry maintained a low but
positive growth rate mainly due to its export performance. Over the years, the component
industry has maintained a 10% - 12% share of exports in the total production. Roads occupy an
eminent position in transportation as they, as per the present estimate, carry nearly 65% of
freight and 87% of passenger traffic. Although, India has 3.3 million kilometers of road
network, which is the second largest in the world, the Indian highways are getting overpopulated.
Traffic management and road sense also need attention.

COMPANY PROFILE

The origin of Ashok Leyland can be traced to the urge for self-reliance, felt by
independent India. Pandit Jawaharlal Nehru, India’s first Prime Minister persuaded Mr.
Raghunadan Saran, an industrialist, to enter automotive manufacture in 1948, Ashok Motors was
set up in what was then Madras, for the assembly of Austin Cars. The Company’s destiny and
name changed soon with equity participation by British Leyland and Ashok Leyland commenced
manufacture of commercial vehicles in 1955.

Since then Ashok Leyland has been a major presence in India’s commercial vehicle
industry with a tradition of technological leadership, achieved through tie-ups with international
technology leaders and through vigorous in-house R&D.

Access to international technology enabled the Company to set a tradition to be first with
technology. Be it full air brakes, power steering or rear engine busses, Ashok Leyland pioneered
all these concepts. Responding to the operating conditions and practices in the country, the
Company made its vehicles strong, over-engineering them with extra metallic muscles.
“Designing durable products that make economic sense to the consumer, using appropriate
technology”, became the design philosophy of the Company, which in turn has mould consumer

8
attitudes and the brand personality. Ashok Leyland vehicles have built a reputation for reliability
and ruggedness. The 5, 00,000 vehicles we have put on the roads have considerably eased the
additional pressure placed on road transportation in independent India.

In the populous Indian metros, four out of the five State Transport Undertaking (STU)
buses come from Ashok Leyland. Some of them like the double-decker and vestibule buses are
unique models from Ashok Leyland, tailor-made for high-density routes.

In 1987, the overseas holding by Land Rover Leyland International Holdings Limited
(LRLIH) was taken over by a joint venture between the Hinduja Group, the Non-Resident Indian
transnational group and IVECO. (Since July 2006, the Hinduja Group is 100% holder of
LRLIH).

The blueprint prepared for the future reflected the global ambitions of the company,
captured in four words: Global Standards, Global Markets. This was at a time when
liberalization and globalization were not yet in the air. Ashok Leyland embarked on a major
product and process up gradation to match world-class standards of technology.

In the journey towards global standards of quality, Ashok Leyland reached a major
milestone in 1993 when it became the first in India’s automobile history to win the ISO 9002
certification. The more comprehensive ISO 9001 certification came in 1994, QS and ISO 14001
certification for all vehicle manufacturing units in 2002. It has also become the first Indian auto
company to receive the latest ISO/TS 16949 Corporate Certification (I n July 2006) which is
specific to the auto industry.

Ashok Leyland has six manufacturing plants – the mother plant at Ennore near Chennai,
two plants at Hosur (called Hosur I and Hosur II, along with a Press shop), the assembly plants at
Alwar and Bhandara. The total covered the space at these six plants exceeds 450,000 sq m and
together employ over 11,500 personnel.

9
Ennore:

Spread over 135 acres, Ashok Leyland Ennore is a highly integrated Mother Plant
accounting for over 40% All production. The plant manufactures a wide range of vehicles and
house production facilities for important aggregates such as Engines, Gear Box, Axles and other
key in-house components.

Hosur-Unit-I:

Established in 1980, Hosur-I is the engine-manufacturing center within the Ashok

Leyland production system. Apart from producing various types of diesel engines (including the
engines manufactured under license from Hino of Japan) and CNG engines, the plant also
manufactures and assembles heavy duty and special vehicles, Axles, AGBs, Marine Gear Box,
etc. The facility is spread over 103 acres and is innovatively laid out, optimizing the use of all
resources.

Hosur-Unit-Ii:

Ashok Leyland established this state-of-the art production facility in 1994 at Hosur.
Spread over 236 acres, Hosur-II housed finishing and assembly facilities including sophisticated
painting facilities. The complex also houses one of the largest press facilities in India for
pressing frame side members. Laid out with an eye for the future, Hosur-II has won acclaim
from several automotive experts who have visited the facility.

Bhanadra:

10
 Ashok Leyland’s Bhandara Unit houses manufacturing and assembly facilities for
sophisticated synchromesh transmission and also has facilities for assembly of vehicles.

Alwar Unit:

Established in 1982, the Alwar Unit in Rajasthan is an assembly plant for a wide range of
vehicles with an emphasis on passenger chassis, including CNG buses, situated close to the
northern market.

ORGANIZATION CHART

PLANT DIRECTOR

GENERAL MANAGER

PERSONAL PRODUCA QUALITY

FINANCE PURCHASE STORES
& ADMIN TION SYSTEM

AXL SM C C
FA CW CA
E M P T

SMP - Side Member Press

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 FA - Frame Assembly

CW - Cab Weld

CP - Cab Paint

CT - Cab Trim

CA - Chassis Assembly

From the above chart, the budget is prepared to the corporate office of AL in Ennore
(Chennai). The Finance Department is Head mainly assists it. The budget is approved by the
Chairman and MD (R.Seshaeyee). The Units are individually informed to their approved budget
status. In the finance dept., Totally 5 executives and 5 divisions are there such as treasury 7
payables Excise, time office, costing and financial account. All the records are submitted to the
Head Divisional Manager (N.V. Ramachandran)

Milestone Growth of Hosur

1966- Full air brakes introduced

1967- Double ducker buses introduced

1968- Power steering offered in commercial vehicles

1979- Multilane tricks introduced

1980- Integral bus with air suspension

1992- Self – certification status for defense supplies & restituted buses.

1993- ISO 9000 certification

1994- ISO 9001 certification

1997- India’s first CNG powered bus

1998- QS 9000 certification

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 1999- CNG (Compressed Natural Gas) introduced

2000- Euro-I, Engines/vehicles introduced

2001- ISO14000 - Environment – Management System

2002- Exclusive machine line – 2 for Hino cylinder block and

Cylinder heat established at stop 5

2002 – IRAQ order

2003 – E-COMET launched

2004 – 50,000 mark vehicle produced

Product Profile
At offer a comprehensive product range with trucks from 7.5 tons GVW to 125 tons
GVW. From 19 to 80 seats a host of special application vehicles and diesel engines from
industrial genset & marine application.

RESEARCH AND DEVELOPMENT:

World-Class Technology
To offer world-class technology that is relevant and affordable to the Indian customer is
the philosophy that drives R&D at Ashok Leyland. Over the years, this philosophy has been
translated time and again into products that seamlessly integrate international technology with
local needs. “The role of R&D is central in fulfilling the company-wide commitment to total
customer satisfaction” states Mr.R.Seshasayee, Managing Director, and adds that the increased

13
infrastructural and financial support expresses the company’s determination to become self-
reliant in R&D.

Value to the Customer

The immediate R&D priorities are to pro-actively address safety and environmental
issues, harness and adopt technologies that provide value to the customer in an atmosphere
enabling creativity and innovation. Powering those who “engineer tomorrows” with an enabling
infrastructure has been top priority for the company.

Test Tracks
But our R&D is not confined within walls. It extends to the test tracks as well. Rigorous
tests are carried out under stringent simulated conditions that replicate the most treacherous
landscapes. Vehicle ruggedness and longevity are a prime customer concern, as they directly
impact earnings. Ever conscious of this, Ashok Leyland makes extensive use of a modern CAD
set-up, a comprehensive test track facility (Where cobblestones are calibrated and reset
periodically), accelerated fatigue testing rigs and rigorous durability testing facilities. Together
they ensure that there is a constant improvement in the life and on-road performance of every
make of Ashok Leyland vehicle to hit the roads Safety, durability and through our R&D efforts.

Innovations
Ashok Leyland product development successes have come from a keen sense of
anticipation and attentiveness. The company initiated research into alternative fuels well before

14
legislative debate had even begun in the country. The result was the implementation of CNG
technology ahead of the rest promising a breath of fresh air for polluted cities.

Hosur – Unit II
Ashok Leyland’s brand new Cab Panel Press Shop is an imposing addition to the
industrial skyline of Hosur. At 800 m above sea level, it is also the tallest in the Hosur industrial
belt. This state-of-the-art facility is housed in a 99-acres expanse with a built up area of over
15,000 sq.m. The Shop is equipped to stamp select panels for Cargo cab, G-45 and C-45 FES –
totally, 55 panels and their variants. Right now it houses eight presses of the presses can be
utilized for making panels of complex shapes and profiles with appropriate tooling and dies. In
addition to catering to our present needs, the Press Shop can take up additional panels of
new/current models.

Right at the design stage, a rainwater harvesting facility was integrated into the Shop. A
60,000 sq.m lawn and the 2,500 sapling saplings planted recently in the premise will give the
Shop a cool green cover. Built with an investment of Rs 1350 million, the Shop is designs and
developed to be a state-of-the art facility. The 210m long Press Shop consists of two bays with a
36m span in each bay. The 24m high Press bay has an underground tunnel, 7.1m deep and 90m
long, to handle the end bits generated during the process of panel pressing. The other bay is 17m
high.

Green Mission

We are concerned about the earth our children will inherit. That is why we make sure our
vehicles consume less, pollute less. This concern is reflected in the manufacturing systems, the
various processes, energy conservation measures and conscious greening initiatives of the
Company”.

In 2002, all the vehicle-manufacturing units of Ashok Leyland were ISO 14001 certified
with Environmental Management System. We are concerned about the earth our children will
inherit. That is why we make sure our vehicles consume less, pollute less. This concern is
reflected in the manufacturing systems, the various processes, energy conservation measures and

15
conscious greening initiatives of the company. In 2002, all the vehicle-manufacturing units of
Ashok Leyland were ISO 14001 certified with Environmental Management System.

Environment Policy

We are committed to preserving the environment through a comprehensive

Environmental Policy and a proactive approach in planning and executing our manufacturing and
service activities. The objective of Ashok Leyland’s Environmental Policy is to adhere to all
applicable environmental legislations and regulations, adopt pollution preventive techniques in
design and manufacture, conserve all resources such as power, water etc;, and optimize its usage,
through scientific means, minimize waste generation by all possible ways and Reduce, Reuse
and Recycle the same through a time bound action plan as well as provide a clean working
environment to our employees, contractors and neighbors. Towards this, we propagate our
environmental policy and our commitment to continuous improvement to all employees,
suppliers, customers and neighbors.

Our People

“We consider our employees as our most valuable asset and are committed to provide full
encouragement and support to them, to enhance their potential and contribution to the
Company’s business” – From Ashok Leyland’s value statement.

We are close to 12,000 people, molding and managing technology and reaching the
benefits of technology to our customers. Offering is transport solutions and after-market support
wherever our products operate – which is almost everywhere.

We are spread throughout India, and even outside India. Our tasks very, so do our skills.
But we are bound together by a healthy chain of interdependence, to deliver value to the
customer.

Functional Distribution of Executives

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 We are committed to maintaining our technological leadership. We manage this through
continuous learning. So that we can master ever-evolving technologies. And meet changing
customer needs.

Understandably, a career with Ashok Leyland offers a lifetime of learning

Structured training programmers address the needs of workers, apprentices, graduate
engineering trainees, executives in the managerial levels for knowledge and skills up gradation,
computerization, attitudinal changes, self-development, and supervisory and managerial skills
orientation to new technologies as also requirements specific to various functional areas. The
breadth is reflected in the comprehensive annual training calendar.

Annually Five Executive Days Are Invested In Terminal

Besides nominations to external training programmers in IIMs, ASCI Hyderabad and
other Indian and international institutions of repute, Ashok Leyland also has arrangements for
ongoing distant learning and residential programmers with management institutes. An instance
is the modular programmer for marketing executives developed in collaboration with TA Pai
Management Institute, Mani pal.

3. REVIEW OF LITERATURE

Many researchers have studied working capital from different views and in different
environments. The following ones were very interesting and useful for our research:

(Carole Howorthand Paul West head) Working capital management routines of a large
random sample of small companies in the UK are examined. Considerable variability in the take-
up of 11 working capital management routines was detected. Principal components analysis and
cluster analysis confirm the identification of four distinct ‘types’ of companies with regard to
patterns of working capital management. The first three ‘types’ of companies focused upon cash
management, stock or debtors routines respectively, whilst the fourth ‘type’ were less likely to
take-up any working capital management routines. Influences on the amount and focuses of
working capital management are discussed. Multinomial logistic regression analysis suggests

17
that the selected independent variables successfully discriminated between the four ‘types’ of
companies. The results suggest that small companies focus only on areas of working capital
management where they expect to improve marginal returns.

(Eljelly, 2004)1 elucidated that efficient liquidity management involves planning and
controlling current assets and current liabilities in such a manner that eliminates the risk of
inability to meet due short-term obligations and avoids excessive investment in these assets. The
relation between profitability and liquidity was examined, as measured by current ratio and cash
gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia using
correlation and regression analysis. The study found that the cash conversion cycle was of more
importance as a measure of liquidity than the current ratio that affects profitability. The size
variable was found to have significant effect on profitability at the industry level. The results
were stable and had important implications for liquidity management in various Saudi
companies. First, it was clear that there was a negative relationship between profitability and
liquidity indicators such as current ratio and cash gap in the Saudi sample examined. Second, the
study also Raheman & Nasr 282 revealed that there was great variation among industries with
respect to the significant measure of liquidity.

(Deloof, 2003)2 discussed that most firms had a large amount of cash invested in
working capital. It can therefore be expected that the way in which working capital is managed
will have a significant impact on profitability of those firms. Using correlation and regression
tests he found a significant negative relationship between gross operating income and the
number of days accounts receivable, inventories and accounts payable of Belgian firms. On
basis of these results he suggested that managers could create value for their shareholders by
reducing the number of days’ accounts receivable and inventories to a reasonable minimum.
The negative relationship between accounts payable and profitability is consistent with the view
that less profitable firms wait longer to pay their bills.

(Ghosh and Maji, 2003)3 In this paper made an attempt to examine the efficiency of
working capital management of the Indian cement companies during 1992 – 1993 to 2001 –
2002. For measuring the efficiency of working capital management, performance, utilization,

18
and overall efficiency indices were calculated instead of using some common working capital
management ratios. Setting industry norms as target-efficiency levels of the individual firms, this
paper also tested the speed of achieving that target level of efficiency by an individual firm
during the period of study. Findings of the study indicated that the Indian Cement Industry as a
whole did not perform remarkably well during this period.

(Gitman, 1998) 4 Moses and White reveal that Lockboxes were widely used to accelerate
the collection process. Virtually all large firms use lockbox systems as do a large percentage of
smaller firms. This somewhat lower use by smaller firms is a reflection of the costs versus the
gains from lockbox systems. The survey farther reveals that to bring collected funds together for
use, over one-half of all large firms use concentration banking, with wire transfers and
depository transfer checks being the primary means of moving funds from one bank to another.
The survey was also extended to management of disbursement. The survey says the primary
tools for the management of cash outflows are zero-balance accounts and centrally controlled
disbursing. Central control of disbursements is the major tool for about 70 percent of large firms.
The vast majority of larger firms use zero-balance accounts, although smaller firms use them less
frequently.

(Gitman, 1976) 5 & others survey was that almost all-large firms prepare cash forecast.
Similar finding can also be obtained from Rappaport and others survey (1984, pp.45-64). In
particular the survey indicates that a substantial number of firms keep a stock of short-term
investments for precautionary reasons. Another conclusion of the report was that many firms also
borrow to address unanticipated cash needs, either directly from banks or through the
commercial paper market. The survey also indicates that in general, quantitative and statistical
models are in wide use in working capital management. The models are in use by less than 10
percent against of large firms. Further, smaller firms do not use them all.

(Greg Filbeck and Thomas M. Krueger, 2005) 6 Firms are able to reduce financing costs
and/or increase the funds available for expansion by minimizing the amount of funds tied up in
current assets. We provide insights into the performance of surveyed firms across key
components of working capital management by using the CFO magazine’s annual Working

19
Capital Management Survey. We discover that significant differences exist between industries in
working capital measures across time. In addition, we discover that these measures for working
capital change significantly within industries across time.

( R. Kamath, S. Khaksari, H.Meier, and J. Winklepleck, 1985 )7 Reveals that almost

all large firms invest surplus cash in money market instruments. The most popular investment is
commercial paper, certificates of deposit, repurchase agreements, treasury securities, and
bankers’ acceptances.

(Shin and Soenen, 1998)8 Highlighted that efficient Working Capital Management
(WCM) was very important for creating value for the shareholders. The way working capital was
managed had a significant impact on both profitability and liquidity. The relationship between
the length of Net Trading Cycle, corporate profitability and risk adjusted stock return was
examined using correlation and regression analysis, by industry and capital intensity. They found
a strong negative relationship between lengths of the firm’s net trading Cycle and its
profitability. In addition, shorter net trade cycles were associated with higher risk adjusted stock
returns.

(Smith and Begemann 1997)9 It Emphasized that those who promoted working capital
theory shared that profitability and liquidity comprised the salient goals of working capital
management. The problem arose because the maximization of the firm's returns could seriously
threaten its liquidity, and the pursuit of liquidity had a tendency to dilute returns. This article
evaluated the association between traditional and alternative working capital measures and return
on investment (ROI), specifically in industrial firms listed on the Johannesburg Stock Exchange
(JSE). The problem under investigation was to establish whether the more recently developed
alternative working capital concepts showed improved association with return on investment to
that of traditional working capital ratios or not. Results indicated that there were no significant
differences amongst the years with respect to the independent variables. The results of their
stepwise regression corroborated that total current liabilities divided by funds flow accounted for
most of the variability in Return on Investment (ROI). The statistical test results showed that a

20
traditional working capital leverage ratio, current liabilities divided by funds flow, displayed the
greatest associations with return on investment.

REFERENCE:

1. Eljelly, A. 2004. “Liquidity-Profitability Tradeoff: An empirical Investigation in an

Emerging Market”, International Journal of Commerce & Management, Vol 14 No 2 pp.
48 – 61
2. Deloof, M. 2003. “Does Working Capital Management Affects Profitability of Belgian
Firms?”, Journal of Business Finance & Accounting, Vol 30 No 3 & 4 pp. 573 – 587

3. Ghosh, S. K. and Maji, S. G. 2003. “Working Capital Management Efficiency: A study

on the Indian Cement Industry”, The Institute of Cost and Works Accountants of India.

4. Gitman, Managerial Financial Management, 8th Edition, Thomson, 1998, pp. 350-390.

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 5. Lawrence Gitman, D. Keith Forrester, and John R. Forrester, “Maximizing Cash
Disbursement Float,” Financial Management (summer 1976), p 15-24.

6. Greg Filbeck and Thomas M. Krueger, “An Analysis of Working Capital

Management Results Across Industries”, American Journal of Business, 2005, vol. 20,
issue 2, pages 11-18
7. Kamath R., S. Khaksari, H Meier, and J. Winklepleck, “Management of Excess
Cash: Practices and Development,” Financial Management (Autumn 1985), pp. 70-77.

8. Shin, H.H and Soenen, L. 1998. “Efficiency of Working Capital Management and
Corporate Profitability”, Financial Practice and Education, Vol 8 No 2, pp 37-45

9. Smith, M. Beaumont, Begemann, E. 1997 “Measuring Association between Working

Capital and Return on Investment”, South African Journal of Business Management, Vol
28 No 1.

4. THEORETICAL PERSPECTIVE

Ashok Leyland Ltd., is one of the leading Automobile Manufacturers in India,

manufactures world-class commercial vehicles of different models in their manufacturing plants
located at various places throughout India. Finance Department is responsible for the following
Working Capital Management Activities.

4.1 WORKING CAPITAL MANAGEMENT

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 Working capital management refers to all management decisions and actions that
ordinarily influence the size and effectiveness of the working capital. It is concerned with the
most effective choice of working capital sources and the determination of the appropriate levels
of the current assets and their use. It focuses attention to the managing of the current assets,
current liability and their relationships that exist between them. In other words, working capital
management may be defined as the management of a firm’s liquid assets viz-cash, marketable
securities, accounts receivable and inventories.

In the present day context of rising capital cost and scarce funds, the importance of
working capital needs special emphasis. It has been widely accepted that the profitability of a
business concern likely depends upon the manner in which its working capital is managed. The
inefficient management of working capital not only reduces profitability but ultimately may also
lead a concern to financial crisis. On the other hand, proper management of working capital leads
to a material savings and ensures financial returns at the optimum level even on the minimum
level of capital employed. We also know that both excessive and inadequate working capital is
harmful for a firm. Excessive working capital leads to un-remunerative use of scarce funds. On
the other hand inadequate working capital usually interrupts the normal operations of a business
and impairs profitability. There are many instances of business failure for inadequate working
capital.

Definition of working capital

The net working capital of a business is its current assets less its current liabilities.

Current Assets Current Liabilities

• Stocks of raw materials • Trade creditors
• Work-in-progress • Accruals
• Finished goods • Taxation payable
• Trade debtors • Dividends payable
• Prepayment • Short term loans

23
 Every business needs adequate liquid resources in order to maintain day-to-day cash
flow. It needs enough cash to pay wages and salaries as they fall due and to pay creditors if it is
to keep its

Importance of Adequate Working Capital

A business firm must maintain an adequate level of working capital in order to run its
business smoothly. It is worthy to note that both excessive and inadequate working capital
positions are harmful. Working capital is just like the heart of business. If it becomes weak, the
business can hardly prosper and survive. No business can run successfully without an adequate
amount of working capital.

Danger of inadequate working capital

When working capital is inadequate, a firm faces the following problems.

Fixed Assets cannot efficiently and effectively be utilized on account of lack of sufficient
working capital. Low liquidity position may lead to liquidation of firm. When a firm is unable to
meets its debts at maturity, there is an unsound position. Credit worthiness of the firm may be
damaged because of lack of liquidity. Thus it will lose its reputation. There by, a firm may not be
able to get credit facilities. It may not be able to take advantages of cash discount.

4.2 WORKING CAPITAL ANALYSIS

24
 W o rk in g C a p ita

C u rre n t A s s e t
FACTORS INFLUENCING WORKING CAPITAL REQUIREMENTS

25
 The working capital needs of a firm are influenced by numerous factors. The important
ones are:

 Nature of business

 Seasonality of operations

 Production policy

 Market conditions

 Conditions of supply

Sources of Working Capital

1. Long Term Sources
o Issue of shares

o Issue of debentures

o Retained profits

o Sale of fixed assets

o Security from employees

2. Short Term Sources

Internal Source External Sources

26
  Depreciation funds 1. Trade Credit
 Provision for taxation 2. Credit paper

 Accrued expenses 3. Bank credit

4. Customers Credit
5. Public Deposit
6. Managing Director or
Directory
7. Government Assistance

Working Capital Cycle

The working capital cycle can be defined as:

The period of time which elapses between the point at which cash begins to be expended
on the production of a product and the collection of cash from a customer. The diagram below
illustrates the working capital cycle for a manufacturing firm.

Working-in-progress

stock Stock
Raw materials Finished Goods
Overheads Sale
Wages &
Trade Creditors Selling Expenses

Trade Debtors
Cash

Taxation Shareholders

27
Loan Creditors
Fixed Assets
Lease Payment
CURRENT ASSETS MANAGEMENT

Liquidity Analysis:

The liquidity position of the firm has been influenced by short term financial
management. The ability of paying the financial debts in a timely manner is called the liquidity
if the firm.

Liquidity management deals with current assets and current liabilities of leveled in the
balance sheet. These current assets and current liabilities have a life of one year of less. For
example a marketable security is considered short-term asset because it would be easily
converted into cash.

The current asset and current liabilities are short term because they are collected within a
month of two they are labeled on the balance sheet. However the combination is always
changing because existing payable are being paid and new receivable and payable are continuous
by being created.

Even through current assets and current liabilities short term. They always appear on the
balance sheet. However the composition is always changing because exist payable are being
paid and new receivable and payable are continuously being created

28
Managing Current Assets.

The following show the normal situation over time the firm has growing base of fixed
assets and a growing base of permanent working capital permanent working capital consist of a
base or minimization level of case. Receivable and the inventory that the corporation will
always have corporation are rarely if ever void of either receivable or inventory and therefore
will always have some base level of working capital. In addition to this base of permanent
working capital is the varying level of temporary current assets which is a function of the
seasonable nature of the firm’s sales.

4.3 FORMAT OF WORKING CAPITAL IN ASHOK LEYLAND LIMITED

Format of working capital means the study of elements of current assets and current
liabilities. The main element of current assets in Ashok Leyland Limited is

Current Assets

 Inventories

 Sundry debtors

 Cash and bank balance

 Loans and advances

Current Liabilities

 Liabilities

 Provisions

Funds Flow Statement

29
 Funds flow statement is a widely used tool in the hands of financial executives for
analyzing the financial performance of a concern. This statement shows how the activities of a
business have been financed or how the available financial resources have been used during a
particular period. Simply presenting finance statement will not be useful unless otherwise the
data given in the financial statements are analyses.

For analyzing this thing different tools are utilized. One among the tool is funds flow
statement. Funds flow analysis is an effective management tool to study how funds have been
processes for the business and how have been components between two dates. The comparison
of current assets and current liabilities as shown in the balance sheet at the beginning and end of
specified period shows a change in type of current assets as well as sources from which working
capital have been obtained.

Objectives of Funds Flow Statement

 Analysis of financial position

 Evaluation of the firm financing

 An instrument for allocation of reserves

 Future guide

 Control device

4.4 NET WORKING CAPITAL

It can be defined in two different ways.

30
 It is excess of Current Assets (C.A.) over Current Liability (C.L.) in other words the
difference between Current Assets and Current Liabilities. The constituents of current
liabilities are sundry creditors, Trade advance, borrowing, provisions.

 It is that portion of firm’s current assets which is financed by long term funs because a
part of current assets can be & financed by the firm through purchasing on credit or
postponing certain payments in other works by creation of current liabilities rest will
have to be financed from long term source of fund.

Current Assets

Net Working Capital = ---------------------------

Current Liabilities

TABLE - 1

SCHEDULE OF CHAGNGES IN WORKING CAPITDAL OF ASHOK

LEYLAND LTD.

FOR THE PEIROD OF 2003 to 2007

PARTICULARS
2003 2004 2005 2006 2007

CURRENT ASSETS

31
 Inventories
4104.56 5069.41 5680.81 9025.61 10703.21
Sundry Debtors
5181.50 4056.19 4587.66 4243.37 5228.75
Cash And Bank Balances
1899.41 3249.74 7966.82 6028.76 4349.89

Loans And Advances

2219.23 2261.53 3337.34 3026.39 6695.79

Total Current Assets (A) 13404.70 14636.67 21572.63 223244.13 26977.14

CURRENT LIABILITES

Liabilities
4931.56 6821.01 9611.87 11468.95 16516.25
Provisions
995.12 1504.36 2044.80 2616.21 1042.30

Total Current
5926.68 8325.37 11656.67 14085.16 17558.55
Liabilities (B)

NET WORKING
CAPITAL (A) - (B) 7477.82 6311.3 9915.96 8238.98 9418.59

4.5 WORKING CAPITAL RATIO

Working capital ratios indicate the ability of a business concern in meeting its current
obligations as well as it are efficiently in managing the current asset for generation of sales.
These ratios are applied to evaluate the efficiency with which the fire manages and utilizes its
current assets.

The following three categories of ratios are used for efficient management of working
capital.

1. Efficiency ratio

32
 2. Liquidity ratio

3. Structural health ratio

1. EFFICIENCY RATIO

Working capital is to sales ratio. This ratio is computed by dividing sales by working
capital. This ratio helps to measure the efficiency of the utilization of net working capital. It
signifies that for an amount of sales a relative amount of working capital is needed. If any
increase in sales is contempt, working capital should be adequate and this ratio helps
management to maintain the adequate level of working capital. This ratio is measures and
efficiency with which the working is being used by a firm. High ratio indicates efficiently
utilization of working capital. But a very high ratio is not a good indication for firm which may
be due to over trading

Sales

Efficiency Ratio = ---------------------------

Working Capital

 Inventory Turnover Ratio

The ratio establishes relationship between the sales with average stock. It measures the
velocity of converting stock into sales. This ratio indicates the effective and efficiency of the
inventory management. The ratio shows how speedily the inventory is turned into accounts
receivable through sales, the higher the ratio, the more efficiently the inventory is said to be
managed and vice versa. A high ratio indicates inefficient management of inventory because

33
more frequently the stocks at sold the lesser amount of money is required to finance the
inventory. Allow ratio indicates an inefficient inventory, over investment in inventory. Sluggish
business, poor quality of goods and lower profit as compared total investment.

Sales

Inventory Turnover Ratio = -----------------------

Inventory

Inventory Turnover Period

Inventory turnover ratio can be related to time. The ratio can be expressed in term of
days/month. The general objective is to increase the stock velocity as much as possible or in
effect decrease the days for which items remain in stock.

Days in a Year

Inventory Turnover Period = --------------------------------

Inventory Turnover Ratio

 Current Assets Turnover Ratio

This ratio indicates the efficiency with which current turn into sales. A higher ratio
implies by and large a more efficient use of funds. These a high turnover rate indicates reduced
look-up of funds in current assets. An analysis of this ratio over a period of time reflects
working capital management of a firm.

34
 Sales

Current Assets Turnover Ratio = -------------------------

Current Assets

2. LIQUIDITY RATIO

Liquidity refers to the ability of a concern to meet its current obligations as and when
these become due. The short term obligations are met by realizing amounts from current,
floating or circulating assets. The current assets should either be liquid or near liquidity. These
should be convertible into cash for paying obligations of short term nature. The sufficiency or
insufficiency of current assets should be assessed by comparing them with short term (current)
liabilities. If current assets can pay off current liabilities then liquidity position will be
satisfactory. On the other hand, if current liabilities may not be easel met out of current assets
then liquidity position will be bad. The bankers, suppliers of goods and other short term
creditors are interested in the liquidity of the concern. They will extend credit only if they are
sure that current assets are enough to pay out the obligations. To measure the liquidity of a firm
the following ratios can be calculated.

 Current Ratio

 Quick or Acid test or Liquid Ratio

 Cash Position Ratio

 Current Ratio
35
 The current ratios find the liquidity position of the firm. The standard form of the current
ratio is 2:1(i.e.) the amount of the 2 rupees of current assets is to meet the 1 rupee of the current
liability of the firm.

Current ratio expresses relationship between current assets and (cash, marketable
securities, accounts receivable and inventory) and current liabilities (sundry creditors, bills
payable, bank overdraft and inventory). When a contingent liability for fill discounted also
appears by way of foot note in the balance sheet then. This item is to be included in both current
assets and current liabilities when calculating the current ratio. The reason is that this will also
affect the current ratio position. This ratio is computed by dividing current assets by current
liabilities

Current Assets

Current Ratio = --------------------------

Current Liabilities

o Current Asset = [Inventories + Sundry Debtors + Cash And Bank

Balance + Loan and Advances]

o Current Liabilities = Liabilities + Provisions

A highest current ratio explains that the company will be able to pay its debts maturing
within a year. On the other hand a low current ration points to the possibility that the company
may not be able to pay its short-term debts. However from management points of view highest
current ratio is indicative of poor planning since excessive amount of funds lie idle. On the
contrary a low ratio would mean indecency of working capital which may hinder the smooth
functioning of the enterprise.

36
  Quick Ratio

The quick ratio indicates the immediate liquid position of the firm. Where all the liquid
assets are excepting stock taken in to consideration. The standard norm of this ratio was 1:1.

The current ratio does not show the real position of the weakness of the soundness of the
liquidity of the firm. It fails to serve as a realistic guide to the solvency of the concern. Some
time management misguided with current ratio when there is an increase in the current assets due
to stock or debtors in such cash enough funds will not be generated by the circular flow to meet
the needs of immediate commitments. The quick or liquid ratio shows the ability of a business to
meet its immediate commitments. It is calculated by dividing the liquid assets by the current
liabilities. The liquid assets will include all the current assets excluding closing stock.

Liquid Assets (Current Assets- Closing Stock)

Quick Ratio = ---------------------------------------------------------------

Current Liabilities

 Cash Position Ratio

Although receivables, debtors and bills receivable are generally more liquid than
inventories, yet there may be doubts regarding their realization into cash immediately or in time.
Hence, some authorities are of the opinion that the absolute liquid ratio should also be calculated
together with current ratio and acid test ratio so as to exclude even receivable from the current
assets and find out the absolute liquid assets.

Cash & Bank +short-term Securities

Cash Position Ratio = ------------------------------------------------------

Current Liabilities

37
 3. STRUCTURAL HEALTH RATIO

 Current Assets To Total Net Assets

This ratio explains the relationship between Current Assets and total investment in assets.
A business enterprise should use its Current Assets effectively and economically because it’s out
of the management of their assets that profits accrue. A business will end-up in losses if there is
any lacuna in managing the assets to the advantage of business.

Total Net Assets

Current Assets to Total Net Assets = ----------------------------

Current Assets

 Debtors Turnover Ratio

A concern may sell goods on cash as well as on credit. Credit is one of the
important elements of sales promotion. The volume of sales can be increased by
following a liberal credit policy. But the effect of a liberal credit policy may result in
tying up substantial funds of a firm in the form of trade debtors. Trade debtors are
expected to be converted into cash within a short period and are included in current
assets. Hence, the liquidity position of a concern to pay its short-term obligations in time
depends upon the quality of its trade debtors. Two kinds of ratios can be computed to
evaluate the quality of debtors.

Total Sales

38
 Debtors Turnover Ratio =--------------------------

Debtors

 Debtors Collection Period

This ratio measure how long it takes to collect amount from debtors. The ratio
represents the average number of days for which a firm has to wait before there receivable
are converted into cash. It measures the quality of debtors. The shorter average collection
period is considered the high quality debtors. The shorter average collection period B
considers the high quality debtors. A higher collection period implies inefficiency in
collection of debtors which in term adversely affects the liquidity or short-term paying
capacity of the firm. The longer the average collection period is higher the chances for
turning into bad debts. The actual collection period can be compared with the stated credit
terms of the company.

Days in a Year

Debtors Collection Period =----------------------------------

Debtors Turnover Ratio

39
RETURN ON INVESTMENT (ROI)

Return on capital employed. ROI is used to measure the operational and managerial
efficiency. It indicates the percentage of return on capital employed in the business. ROI is used
to measure the operational and managerial efficiency. It is calculated on the basis of the
following formula.

Operating Profit

ROI= -------------------------------

Capital Employed

The term ‘operating profit’ mean profit before interest and tax non-trading
incomes such as interest on government securities etc. Non-trading loan is such as account of
time etc. Will also be excluded. The term capital employed has been given different meaning by
different accountant or authors. Some of the popular meaning as an follows.

1. Total assets (Fixed & Current Assets)

2. Total of Fixed Assets

3. Total of long term funds employed in the business.

40
 5. RESEARCH METHODOLOGY

Research refers to the search for knowledge; it is a scientific investigation for the search
for relevant information. The purpose of methodology is to describe the research procedure. It
describes the overall research design and data collection methods.

5.1 RESEARCH DESIGN

A research design is purely a framework for a study that guides the collection and
analysis of the data exploratory type of research design is used in this study. Research is a
careful investigation leading to the discovery and interpretation of information. There are many
different types of research that discover or reinterpret information collected by experimentation
or observation and suggest practical applications or theoretical implications of that information.

“A research design is the arrangement of conditions for collection and analysis of data in
a manner that aims to combine relevance to the research purpose with economy in procedure.”

Analytical research is used in this study because it will ensure the minimization of bias
and maximization of reliability of data collected. The researcher had to use fact and information
already available through financial statement of earlier ear and analysis these to make critical

41
evaluations of the available material. Hence by making the type of the research conducted in
analytical. From the study a type of data to be collected and the procedure to be used for this
purpose were decided.

5.2 SAMPLING DESIGN

 Sampling Unit:

The Sampling Unit is a Financial Year.

 Sampling Size:

The sample size of the study is FIVE year from 2002-2003 to 2006-2007.

 Sampling Method:

Convenience sampling is a method under non probability sampling selected at the

convenience of the researcher who is to select a sample. This type of sampling is also called
accidental sampling as the respondents in the sample are included in it merely on account of the
being available, where the survey is progress. Convenience sampling method was adapted to
selected 5 years from the life time of the company since its inception.

42
5.3 DATA COLLECTION

Data is defined as a raw fact. It becomes information when it is processed and analyzed,
when which analyzed, which helps in decision making. There are two sources for data collection
they are primary source and secondary source. To collect primary data, separate questionnaire
were set up for both agents and customers.

Primary data also involved personal interviews, based on which assumptions and
conclusions were made. Secondary data about the company, organization set up, sales figures
etc., was collected from the organization records and leaflets. Secondary data includes both
internal and external data. The internal data includes the annual report of the firm sales results.
While the external data is includes commercial sources, industrial sources and various journals.

5.4 ANALYTICAL TOOL APPLIED

Working Capital Ratio

Under this (a) Efficiency Ratio

(b) Liquidity Ratio

(c) Structural Health Ratio

5.5 STATISTICAL TOOLS

43
 The statistical tool is correlation; I have been used normal correlation. In statistical
analysis we come across the study of two variables where in the change in the value of one
variable produces changes are correlated or there is a correlation between two variables may
have a positive correlation, a negative correlation or they maybe uncorrelated.

If r > 0 the variables are positively correlation

If r < 0 the variables are negatively correlation

If r = 0 the variables are independent

6 DATA ANALYSIS AND INTERPRETATION

By the time you get to the analysis of your data, most of the really difficult work has been
done. It’s much more difficult to define the research problem; develop and implement a
sampling plan; conceptualize, operationalise and test your measures; and develop a design
structure. If you have done this work well, the analysis of the data is usually a fairly
straightforward affair. In most social research the data analysis involves three major steps, done
in roughly this order;

Descriptive statistics are used to describe the basic features of the data in a study. They
provide simple summaries about the sample and the measures. Together with simple graphics
analysis, they form the basis of virtually every quantitative analysis of data. With descriptive
statistics you are simply describing what is, what the data shows.

Inferential statistics investigate questions, models and hypotheses. In many cases, the
conclusions from inferential statistics extend beyond the immediate data alone. For instance, we
use inferential statistics to try to infer from the sample data what the population thinks. Or, we

44
use inferential statistics to make judgments of the probability that an observed difference
between groups is a dependable one or one that might have happened by chance in this study.
Thus, we use inferential statistics to make inferences from our data to more general condition;
we use descriptive statistics simply to describe what’s going on in our data.

Secondary analysis involves the utilization of existing data, collected for the purposes of
a prior study, in order to pursue a research interest which is distinct from that of the original
work.

TABLE - 2

COMPUTATION OF CURRENT RATIO

CURRENT
YEAR CURRENT ASSETS CURRENT LIABILITY RATIO

2002-03 13404.70 5926.12 2.26

2003-04 14636.67 8325.67 1.86

2004-05 21572.63 11656.67 1.85

2005-06 22324.13 14085.16 1.58

2006-07 26977.44 17558.55 1.54

MEAN 1.80

STANDARD DEVIATION 0.29

CORRELATION 0.98
Source: Annual Report

45
 CHART-1

CURRENT RATIO

46
Inference:

As it could be observed in table 2 Current Ratio indicates the availability of Current

Assets in rupees for every one rupee of Current Liability. The accepted norms of Current ratio
2:1 but last 5 years from 2003 to 2007 The Ratio was reduced from 2.26 to 1.54 which was due
to the disproportionate increase in current liability than the current assets. The Current Ratio
position of the firm is less than the satisfactory level, the correlation of this table was +VE
between Current Assets and Current Liability

TABLE - 3
COMPUTATION OF LIQUIDITY RATIO

47
 LIQUIDITY
YEAR LIQUIDITY ASSETS CURRENT LIABILITY RATIO

2002-03 9300.15 5926.12 1.57

2003-04 9567.26 8325.67 1.15

2004-05 15891.82 11656.67 1.36

2005-06 13298.52 14085.16 0.94

2006-07 16273.93 17558.55 0.93

MEAN 1.19

STANDARD DEVIATION 0.28

CORRELATION 0.86
Source: Annual Report

48
 CHART-2

LIQUIDITY RATIO

Inference:

As it could be observed in table 3 Liquidity Ratio was decreased in the years

2004, 2006 and 2007. 2004-2005 this year only liquidity ratio is increased. It was increased the
standard norms of liquidity ratio 1.1 but the ratio was less than the standard norms due increasing
current liability. The correlation of this table was positive between the liquidity assets and
current liability. Mean value is 1.19 and Standard Deviation is 0.28

49
 TABLE - 4

COMPUTATION OF WORKING CAPITAL TURNOVER RATIO

YEAR COST OF SALE NET WORKING CAPITAL WTR

2002-03 30739.95 7477.82 4.11

2003-04 39272.73 6311.3 6.22

2004-05 48108.01 9915.96 4.85

2005-06 60531.08 8238.98 7.35

2006-07 83047.17 9418.59 8.82

MEAN 6.27

STANDARD DEVIATION 1.89

CORRELATION 0.59

Source: Annual Report

50
 CHART-3

WORKING TURNOVER RATIO

Inference:

51
 As it could be observed in table 4 Working Capital Turnover Ratio was increased 4.11 to
8.82 in 2003 to 2007. But 2004-2005 it was decreased 4.85. The ratio measures the efficiency
with which the working capital is being used by firm. A higher ratio indicates efficient
utilization of working capital and a low ratio indicates otherwise. The mean value is 6.27, the
standard deviation value is 1.89 and the correlation coefficient is positive between cost of sales
and net working capital.

TABLE - 5

COMPUTATION OF CASH POSITION RATIO

YEAR CASH & BANK CURRENT LIABILITY CPR

2002-2003 2,219.23 5926.12 0.37

2003-2004 3,249.74 8325.67 0.39

2004-2005 7,966.82 11656.67 0.68

2005-2006 6,028.76 14085.16 0.43

2006-2007 4,349.39 17558.55 0.25

MEAN 0.42

STANDARD DEVIATION 0.16

CORRELATION 0.48

52
Source: Annual Report

CHART - 4

CASH POSITION RATIO

53
Inference:

As it could be observed in table 5 Cash Position Ratio was increased the value of 0.68 on
2004-2005 than it was decreased 0.25 for last three years because the current liability value was
increased past five years. The mean value is 0.42, the standard deviation is 0.16 and the
correlation coefficient is positive between cash & bank balance and current liability.

TABLE - 6

54
 COMPUTATION OF INVENTORY TURNOVER RATIO

YEAR SALES INVENTORY ITR

2002-2003 30,739.95 4,104.56 7.49

2003-2004 39,272.73 5,069.41 7.75

2004-2005 48,108.01 5,680.81 8.47

2005-2006 60,531.08 10,703.21 5.66

2006-2007 83,047.17 10,703.21 7.76

MEAN 7.42

STANDARD DEVIATION 1.05

CORRELATION 0.91

Source: Annual Report

55
 CHART -5

INVENTORY TURNOVER RATIO

Inference:

As it could be observed in table 6 The Inventory Turnover Ratio indicates the number of
times the inventory replaced in the year. This inventory turnover was higher (8.47) in 2004-2005
then previous years. The higher ratio indicates efficient use of stocks. In the year 2006 the ratio

56
was low it indicate ineffective use of stock and poor inventory management. Last year 2007 the
ratio was increased 7.76 then previous years. The mean value is 7.42, the standard deviation
value is 1.05 and the correlation coefficient is positive between sales and inventory.

TABLE – 7

COMPUTATION OF DEBTORS TURNOVER RATIO

YEAR CREDIT SALES DEBTORS DTR

2002-2003 30,739.95 5,181.50 5.93

2003-2004 39,272.73 4,056.19 9.68

2004-2005 48,108.01 4,587.66 10.49

2005-2006 60,531.08 4,243.37 14.26

2006-2007 83,047.17 5,228.75 15.88

MEAN 11.25

STANDARD DEVIATION 3.93

CORRELATION 0.25

Source: Annual Report

57
 CHART -6

DEBTORS TURNOVER RATIO

Inference:

As it could be observed in table 7 The Debtor Turnover Ratio was increased from 5.93 to
15.88 for last five year 2003 - 2007. This ratio shows how rapidly debts are collected. The
higher the DTO, the better it is for the organization. The mean value is 11.25, the standard

58
deviation is 3.93 and the correlation coefficient value is positive (0.25) between credit sales and
debtors.

TABLE - 8

COMPUTATION OF DEBTORS COLLECTION PERIOD

DEBTORS COLLECTION
YEAR DAYS DTR PERIOD

2002-2003 360 5.93 60.68

2003-2004 360 9.68 37.18

2004-2005 360 10.49 34.33

2005-2006 360 14.26 25.24

2006-2007 360 15.88 22.67

MEAN 36.02

STANDARD DEVIATION 15.06

Source: Annual Report

59
 CHART -7

DEBTROS COLLECTION PERIOD

Inference:

As it could be observed in table 8 The Debtor Collection Period was decreased

from 60.68 to 22.67. Actually the mean value is 36.02 but first two years it was increased then

60
mean value of 36 days it means that the collection is slow and last three years it was decreased
then mean value of 36 days it means that the collection is prompt. The standard deviation is
15.06.

TABLE - 9

COMPUTATION OF CASH TURNOVER RATIO

YEAR SALES CASH CTR

2002-2003 30,739.95 2,219.23 13.85

2003-2004 39,272.73 3,249.74 12.08

2004-2005 48,108.01 7,966.82 6.04

2005-2006 60,531.08 6,028.76 10.04

2006-2007 83,047.17 4,349.39 19.09

MEAN 12.22

STANDARD DEVIATION 4.82

CORRELATION 0.32

Source: Annual Report

61
 CHART -8

CASH TURNOVER RATIO

Inference:

62
 As it could be observed in table 9 The Cash Turnover Ratio was decreased from 13.85 to
6.04 for 2003 to 2005. The mean value is 12.22, the standard deviation is 4.28 and the correlation
coefficient is positive (0.32) between the sales and cash.

TABLE -10

COMPUTATION OF WORKING CAPITAL TO TOTAL ASSETS RATIO

NET WORKING
YEAR CAPITAL TOTAL ASSETS WCTR

2002-2003 7477.82 24378.83 0.31

2003-2004 6311.30 25637.11 0.25

2004-2005 9915.96 33847.95 0.29

2005-2006 8238.98 36925.86 0.22

2006-2007 9418.59 44877.50 0.21

MEAN 0.26

STANDARD DEVIATION 0.04

CORRELATION 0.73

Source: Annual Report

63
 CHART -9

WORKING CAPITAL TO TOTAL ASSETS RATIO

Inference:

As it could be observed in table10 Working Capital to Total Assets Ratio was

decreased from 0.31 to 0.21 for 2003 to 2007. A low or decreasing ratio indicates the company

64
may have too many total current liabilities, reducing the amount of working capital available.
The mean value is 0.26, the standard deviation is 0.04 and correlation coefficient is positive
(0.73) between net working capital and total assets.

TABLE -11

COMPUTATION OF CURRENT ASSETS TURNOVER RATIO

CURRENT
YEAR SALES ASSETS CATR

2002-2003 30,739.95 13,404.70 2.29

2003-2004 39,272.73 14,636.67 2.68

2004-2005 48,108.01 21,572.63 2.23

2005-2006 60,531.08 22,324.13 2.71

2006-2007 83,047.17 26,977.44 3.08

MEAN 2.60

STANDARD DEVIATION 0.35

CORRELATION 0.95

Source: Annual Report

65
 CHART -10

CURRENT ASSETS TURNOVER RATIO

Inference:

66
 As it could be observed in table 11 The Current Assets Turnover Ratio was
decreased from 2.29 to 2.23 for 2003 to 2005 after two years were increased from 2.71 to 3.08
and the mean value is 2.60. When the rate of increase in current assets is higher than the rate of
increase in turnover, the ratio will fall. The standard deviation is 0.35 and the correlation
coefficient is positive (0.95) between sales and current assets.

TABLE -12

COMPUTATION OF PROFIT BEFORE TAX TO TOTAL ASSETS

YEAR PBT TOTAL ASSETS PBTTA

2002-2003 1,701.02 24378.83 0.07

2003-2004 2,864.60 25637.11 0.11

2004-2005 3,550.10 33847.95 0.10

2005-2006 4,523.00 36925.86 0.12

2006-2007 6,045.06 44877.5 0.13

MEAN 0.11

STANDARD DEVIATION 0.02

CORRELATION 0.97

Source: Annual Report

67
 CHART -11

PROFIT BEFORE TAX TO TOTAL ASSETS

Inference:

68
 As it could be observed in table12 Profit before Tax to Total Assets was increased
from 0.07 to 0.13 for 2003 to 2007. The mean value is 0.11, the standard deviation is 0.02 and
the correlation coefficient is positive (0.97) between PBT to total assets.

TABLE -13

COMPUTATION OF RETURN ON INVESTMENT

YEARS EBIT CAPITAL EMPLOYED ROI(%)

2003 1787.71 18452.16 9.69

2004 2959.79 17311.56 17.10

2005 3645.93 22191.19 16.43

2006 4305.85 22840.70 18.85

2007 6175.82 27318.95 22.61

CHART -12

RETURN ON INVESTMENT

69
Inference:

As it could be observed in table12 Return on Investment was increased for last

five years. So it is going to well position of The Ashok Leyland Limited.

TABLE - 14

ALL RATIOS

ROI
YEAR CR LR WTR CPR ITR DTR CTR WCTAR CATR PBTTA
%

2003 2.26 1.57 4.11 0.37 7.49 5.93 13.85 0.31 2.29 0.07 9.69

2004 1.86 1.15 6.22 0.39 7.75 9.68 12.08 0.25 2.68 0.11 17.10

2005 1.85 1.36 4.85 0.68 8.47 10.49 6.04 0.29 2.23 0.1 16.43

70
 2006 1.58 0.94 7.35 0.43 5.66 14.26 10.04 0.22 2.71 0.12 18.85

2007 1.54 0.93 8.82 0.25 7.76 15.88 19.09 0.21 3.08 0.13 22.61

Correlation
Co-efficient (r) 0.98 0.86 0.59 0.48 0.91 0.25 0.32 0.73 0.95 0.97

CHART -13

ALL RATIOS

71
Testing of Hypotheses

72
H0: There is no significant difference between the five years average current ratio of this
company to the standard.

H1: There is significant difference between ROI and Liquidity Ratio of this company to the
standard.

H2: There is significant difference between ROI and Working Capital Turnover Ratio of this
company to the standard.

H3: There is significant difference between ROI and Cash Position Ratio of this company to the
standard.

H4: There is significant difference between ROI and Inventory Turnover Ratio of this company
to the standard.

H5: There is significant difference between ROI and Debtors Turnover Ratio of this company to
the standard.

H6: There is significant difference between ROI and Cash Turnover Ratio of this company to the
standard.

H7: There is significant difference between ROI and Working Capital to Total Assets Ratio of
this company to the standard.

H8: There is significant difference between ROI and Current Assets Turnover Ratio of this
company to the standard.

H9: There is significant difference between ROI and Profit before tax to total assets of this
company to the standard.

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 7. FINDING, SUGGESTION & CONCLUSION

4.5 FINDINGS

 This company’s liquidity position is good and current assets and current liabilities
have positive correlation, it indicated that when current ratio increases profitability
increased.

 In during the study period, this ratio has fluctuating every year, but it was always in a
conventional norm. Though this company has been maintaining a satisfactory
liquidity ratio.

 The company is not able to find a consistent improvement in the cash position ratio,
but they maintaining the satisfactory level.

 Working capital turnover ratio has a higher ratio. It indicates efficient utilization of
working capital.

 During the study period, The Company is maintained efficient inventory

management and efficiency of business operation. Higher ratio indicates efficient use
of stocks for last year

 The co-efficient of correlation between ROI and DTR shows positive association of
(+) 0.005. It was significant difference between Debtor’s turnover ratio and
profitability moved in same direction.

 The company is maintaining to satisfactory level in case of cash turnover ratio.

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4.6 SUGGESTIONS

As this company is a profit seeking one, it has to direct all of its resources to achieve this
goal. This company is trying to enhance the value of its own and thereby to its shareholders.
While searching for profitability, the liquidity and solvency positions are crucial elements to be
watched carefully. On the basis of the analysis and observations an attempt is made to offer some
suggestions as bellow.

 The current ratio has been increased by increasing the current assets like cash
and by decreasing current liabilities.

 Working capital need of the firm should be met out by fixed deposits.

 By decreasing inventory, inventory-carrying cost has to be decreased.

 The company should reduce the materials handling cost like transport etc.,
which may reduce the cost of production.

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 4.7 CONCLUSION

From the study of working capital management of the company we can conclude that the
company is any change in the working capital will have an effect on a business's cash flows. A
positive change in working capital indicates that the business has paid out cash, for example in
purchasing or converting inventory, paying creditors etc. Hence, an increase in working capital
will have a negative effect on the business's cash holding. However, a negative change in
working capital indicates lower funds to pay off short term liabilities (current liabilities), which
may have bad repercussions to the future of the company.

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 5 BIBILOGRAPHY

 I.M. PANDEY - FINANCIAL MANAGEMENT, Ninth Edition,

Vikas Publishing House Pvt., Ltd.

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 R. S.N. MAHESHWARI - PRINCIPLES OF MANAGEMENT ACCOUNTS

Sultan Chand & Sons

 R.K. SHARMA &

SHASHI K. GUPTA - MANAGEMENT ACCOUNTING,

8TH Edition, Kalyani Publishers

 C.R.KOTHARI - RESEARCH METHODOLOGY,

New Age International (P) Limited, Publishers

 ARORA P.N. & ARORA S., - STATISTICS FOR MANAGEMENT

S. Chand & Company Ltd., New Delhi, 2003

 ASHOK LEYLAND LIMITED - ANNUAL REPORTS

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