A STUDY OF WORKING CAPITAL

MANAGEMENT IN SELECTED UNITS JDF

AUTOMOBILE INDUSTRY IN INDIA

ABSTRACT

Thesis submitted for the Degree of

Soctor of $I)ilo!Sopt)|>
IN
BUSINESS ADMINISTRATION

n
MOHD. AAMIR KHAN

UNDEfl THE SUPERVISION OF

Dr. AZHAR KAZMI
Professor of Bustnesa Adfninistration
•v.

D E P A R T M E N T O F BUSINESS A D M I N I S T R A T I O N
FACULTY O F M A N A G E M E N T STUDIES AND RESEARCH
ALIGARH M U S L I M U N I V E R S I T Y
ALIGARH ( I N D I A )

1996
 1

ABSTRACT

An organization needs two forms of capital in order to make its

business successful. Capital employed in fixed assets that form the

infrastructure of the organization and working capital that makes the fixed

assets operative. Lack of fixed assets will no doubt lead to lower profits but

shortage of working capital will lead to business failure. Thus the significance

of working capital is much more than fixed assets.

A unique character of working capital is that Its excess or deficiency

both are undesirable. A high level of working capital will mean high liquidity

but it will adversely affect profitability and vice-versa. The main thrust of

working capital is to provide funds \AJhen needed. Thus a trade off has to be

made between profitability and liquidity.

The present study is an endeavor by the researcher to find how working

capital is managed in different companies of the automobile industry ,the

extent to which working capital has been efficiently managed and also to find

the aspects of inefficiency in this regard.

 2

This research is divided into seven chapters and each chapter is

divided into several sections. A brief outline of the chapter contents follows.

Chapter I describes the methodology adopted for this research. The

chapter starts with a review of literature followed by identification of research

gap, and the need for the study on the basis of which the research problem

has been stated. A brief profile of automobile industry and the companies

under study is given. Next the questionnaire design, data collection, method

of analysis of data and finally limitations of the study are given.

A uniform structure has been adopted in chapter II to VI which deal v^th

the individual issues in working capital management. First the concept is

described followed by the responses to the research questionnaire. The third

part of each chapter presents the analysis of relevant ratios.

The first part of Chapter II briefly explains the concept of capital

followed by the concept of working capital, its objectives, policy and planning.

The second part of the chapter provides the responses of the questionnaire

given by the executives of six companies regarding objectives, policy and

planning of working capital, organization, control and review of working capital.

Finally, the last part of the chapter presents the ratio analysis in thirteen major

companies in the three segments of the industry.

 The first part of Chapter III briefly explains the concept of financing of

working capital followed by forecasting of working capital, the concept of

operating cycle and finally the sources of working capital finance. The

second part of the chapter provides the responses of the questionnaire

given by the executives of six companies regarding approaches of financing,

forecasting, sources and forms of financing and the policy of the companies in

this regard. Finally the last part of the chapter presents the ratio analysis in

thirteen major companies in the three segments of the industry.

The first part of Chapter IV briefly explains the concept of cash

management and its objectives, its process and marketable securities as a

special case of cash management. The second part of the chapter provides

the responses of the questionnaire given by the executives of six companies

regarding cash planning, organization of cash management, control, review

and problems in cash management. Finally the last part of the chapter

presents the ratio analysis in thirteen major companies in the three segments

of the industry.

The first part of Chapter V briefly explains the objectives of receivables,

loans advances and its management. The second part of the chapter provides

the responses of the questionnaire given by the executives of six companies

regarding objectives, policy and planning of working capital, organization,

control, review, credit collection, constituents of advances, policy, financing

and interest on advances, its organization, control and review of advances,

and some general aspects in this regard. The last part of this chapter

presents the ratio analysis in thirteen major companies in the three segments

of the industry.

The first part of Chapter VI briefly explains the concept and motives of

inventory, forms of inventory control, cost of holding inventory, concerns of

inventory management, and inventory management system. The second part

of the chapter provides the responses of the questionnaire given by the

executives of six companies regarding objectives, policy and planning of

working capital, organization, control and review, and problems of inventory

management. Finally the last part of the chapter presents ratio analysis in

thirteen major companies in the three segments of the industry.

The last chapter, i.e. Chapter VII states the summary, conclusions and

suggestions on the basis of the study done. In the end, direction for future

research are given to help researchers to make further studies in this regard.

The evaluation of working capital management can help one to

understand how working capital is managed in the organization. It can also

 5

help the executives taking decisions in this regard about how to make such

decisions more effective. Others, especially students, interested in corporate

finance will get an insight about how different companies manage working

capital and also learn how to interpret the hidden information.

 A STUDY OF WORKING CAPITAL MANAGEMENT IN SELECTED

UNITS OF AUTOMOBILE INDUSTRIES IN INDIA

RESEARCH GAP

After going through the paragraphs of the literature review it can be

observed that no research is done to study the management of working capital

in the automobile Industry. Rather, this industry has been ignored by the

researchers as far as its management of working capital is concerned. Only

one such study was done in 1986 and that too in a specific segment i.e.

scooter manufacturing companies by S.K. Jindal. Of all the researches

surveyed several of them are superficial in the sense that they do not consider

the specific management of different components of working capital.

While trying to identify the research gap the researcher has gone

through the bibliography of doctoral dissertations by the Association of Indian

Universities (AID) Social Science Research Abstracts. ICSSR (Indian Council

for Social Science Research) Survey of Research in Management and

University News. None of these sources specified any research work in

progress or submitted except the one mentioned above. Besides this despite

the fact that the Government and the business executives have been
concerned about the efficiency and effectiveness in the management of

working capital and its components this industry has not been of concern to

researchers. The present study is an attempt to fill this research gap.

STATEMENT OF RESEARCH PROBLEM

Once the research gap was identified it motivated the researcher to

make an attempt at fulfilling the need in the subject. This also helped in the

formulation of the research problem.

Later on, adequate steps were taken for the proposed research topic

like sufficient necessary subject background, ensuring that necessary data and

analysis can be procured, and also the feasibility of completing the work in a

reasonable time frame. Besides this, it was also ensured that the study

remains within the manageable limits. As the researcher had already

undertaken a two months summer training project on working capital

management in Modi Rubber Limited while pursuing his M.B.A. degree the

topic for research v^s decided as "A Study of Working Capital

Management in Selected Units of Automobile Industry in India."

 8

The selection of working capital measures is primarily guided by the

researchers summer training study while doing his M.B.A. It was during this

time researcher realized that better working capital management can

substantially improve the level of profitability of the organizations. The finding

also injected the inquisitiveness to study the impact of similar measures in

the industry in general with the help of better techniques and approach. As a

result the following major working capital components have been considered

for the study:

1. Financing of working capital

2. Management of cash

3. Management of accounts receivables, loans and advances

4. Management of inventory

The above measures form the basic components of working capital in

any standard text in the area of financial management. Moreover, as the

components chosen contribute towards the achievement of higher profits they

form the basis of this study.

RESEARCH METHODOLOGY

A very exhaustive questionnaire comprising of ninty-five questions was

prepared on the basis of research of Dr. K.R. Rao on Working Capital

 G

Management. Almost all the questions contain multiple choices. The

questionnaire was first pre-tested at the Hero Honda Ltd. through personal

interview after which some inadequacies were indentified that were removed

later on and thus the final questionnaire vy^s prepared.

The questionnaire was separately distributed in five sections so that

responses from the concerned persons who actually deal with them can be

obtained.

The first section of questionnaire comprises of seventeen questions

dealing with an overall view of Working Capital. The second section of the

questionnaire comprises of eleven questions regarding Financing of Working

Capital. The third section comprises twenty questions on Cash Management.

The fourth section includes twenty-five questions on Management of Account

Receivables Loans and Advances and the last section on Inventory

Management comprises of twenty-two questions.

Both primary and secondary data has been used in the study. The

methods, policies and procedures of working capital has been studied through

questionnaire. The executive were not willing much to disclose the procedures

in detail. Executive at Maruti clearly refused to part with any information.

Initially the researcher approached all the units under study at Delhi,
 10

however, he could get responses only from Hero Honda, Escorts, Eicher

Motors, Eicher Tractors and Bajaj Auto. The executives of other units

suggested to approach there corporate offices that were situated out of Delhi.

Since it was not possible for the researcher to approach the offices of such

units it was thought appropriate to mail the questionnaire at the respective

corporate offices, however, the researchers could get only one response from

Bajaj Tempo.

The secondary data was collected mainly through annual reports and

data compiled from CAPITALINE and CMIE. The data provided in annual

reports, CMIE and CAPITALINE v^^s sufficient enough to analyse and

evaluate the performance of working capital through ratio analysis. The ratios

helped in analysing the size, composition and efficiency of the various

components of Working Capital.

The presentation of data has been done in two ways i.e. descriptive and

numerical. The descriptive information is presented on the basis of the

responses received from the executives of the six companies namely Hero

Honda, Eicher Motors, Eicher Tractors, Bajaj Auto, Bajaj Tempo and Escorts

through the questionnaire. The numerical data is presented in a tabular form

and ratio analysis has been done for past five years concerning various

issues in working capital management. Thus although both the presentations

 li

highlight different aspects of working capital the presentation has been done

differently in both ways to understand the complexities of working capital

management.

The presentation of descriptive information broadly highlights aspects

likes planning, objective, organization, control and review, and peculiar

problems of the different aspects of the working capital.

The numerical data presentation has been done after considering

relevant ratios studied while going through ratio analysis in various books.

Moreover only those ratios have been calculated the data for which can be

procured. The tables present ratios for five years. Since industry norms were

available to compare the performance of the company ratios with the industry

norms the companies have been divided into three segments namely

commercial, cars and jeeps and two and three wheelers.

OVER ALL CONCLUSIONS -

In this section the major conclusions and suggestions emerging out of

the present study conducted on working capital management in automobile

industry have been highlighted.

 12

1. The companies are not using real professional assistance and are not

using scientific analysis effectively. Although they have been

emphasizing upon coordination and joint decisions, in reality

decisions are made independently. Decisions are taken in short term

perspective and its viability and the impact in long term for expansion

and replacement are not given due consideration.

2. Most of the companies study the past trends of different components of

working capital and try to make decisions on their basis.

3. The companies rely more on bank borrowing and do not try to generate

funds from internal sources. Besides this, the cost effectiveness of each

source of fund is not analyzed. The costs of different sources of funds

are also not compared.

4. Cash planning is not effective and they are finding it difficult to procure

from operations leading to overtrading. The companies are not clear in

determining cash levels.

5. The companies are becoming more strict regarding collections. But the

credit terms of the companies are varying. A major portion of current

assets are blocked in advances.

6. The investment in inventory is reducing showing clearly that the companies are

now managing inventory more efficiently than was done during previous year.
 A STUDY OF WORKING CAPITAL
MANAGEMENT IN SELECTED UNITS OF
AUTOMOBILE INDUSTRY IN INDIA

Thesis submitted for the Degree of

Boctor of $I)ilo£(opt)?
IN
aUSINESS ADMINISTRATION

BY
MONO. AAMIR KHAN

UNDER THE SUPERVISION OF

Or. AZHAR KAZMI
Professor of Business A d m i n i s t r a t i o n

D E P A R T M E N T O F BUSINESS A D M I N I S T R A T I O N
FACULTY O F M A N A G E M E N T STUDIES AND RESEARCH
AUGARH MUSLIM UNIVERSITY
ALIGARH (INDIA)

1996
T4933
 _, rCxtmnal. ?lb4?
'''"'"''VimmMl: 30'
DEPARTMENT OF BUSINESS ADMINISTRATION
"^/^ AUGARH MUSLIM UNIVERSITY
(Horn.). M.BA., Dip. TO. DDE, Ph.D.
ALIGARH—202 002 (U.P )
lOFESSOR & CHAIRMAN

CERTIFICATE

Certified that Mr. Mohd. Aamir Khan, a candidate for the degree of Doctor
of Philosophy in Business Administration, has completed his dissertation entitled
" A Study of Working Capital Management in Selected Units of Automobile
Industry in India" under my supervision.

To the best of my knowledge and belief the research work is b a s ^ on

the investigations made, data collected and analysed by him and it has not been
submitted in any other University or Institution for the award of any degree or
diploma.

IK^s^
Aligarh Dr. Azhar Kazmi
^ mm. 1997 Professor of Business Administration
 ACKNOWLEDGMENT

This work is the result of sincere co-operation by a number of people

from different quarters.

Prof. Najmul Hasan, who is unfortunately no more to see this work

completed, had always been a guiding force for me. I have no words to

express my gratitude for his guidance throughout my career. What I am today

is only because of his constant encouragement and inspiration. I humbly

dedicate this work to his everlasting memory.

I am deeply indebted to my supervisor Prof. Azhar Kazmi who

convinced and inspired me. He took exceptionally great pains in structuring

this study and provided a meticulous direction. He not only heard me patiently

but also helped me in all possible ways throughout this study. Mere words will

not suffice for expressing my sincere gratitude for his able guidance, and

effective and timely help.

 I wish to express my deep and heartfelt gratitude to my teachers Prof.

S.M. Ozair, Mr.Kaleem Mohd. Khan, Dr. Shamim Ahmad, and Dr. Khalid Azam

for their constant support in completing this work.

I owe a deep debt of gratitude to all those who have contributed in

making this study see the light of the day. My special thanks are to Mr. Neraj

Govil (Manager Finance) Escorts Limited, Mr. Nitin Sehlot (Manager Finance)

Eicher Motors and Mr. Surender Chabra (Manager Finance) of Hero Honda.

I am also .grateful to Mr. Aditya C. Kenghe, Mr. Faizan Siddiqui, Mr.

Sohail Aamir, and Mr. Sufiyan Sadique for their sincere co-operation, effective

aid and advice.

I wish to take this opportunity to thank my colleagues Dr. Israr-ul-Haq,

Mr. Jamal Ahmad Farooqui, Mr. Parvaiz Talib, Mr. Valeed Ansari, Dr. Zillur

Rehman, Mr.Shamsuzzaman , and Mrs. Salma for their valuable and timely

suggestions.

I must express a special debt of gratitude to my students Naved Khan,

Asif, Rehan, Ahsan and Anas for their co-operation in compiling this work.
 I am also thankful to the executives of the companies, librarians, and

office staff of various organizations who extended their co-operation in

completing this work.

Words fail me as I acknov\/ledge the tremendous contribution of my

revered parents and mother-in-law who were a constant source of strength

and inspiration in completing this work. My personality, so to say, was

nurtured and developed in the warm atmosphere at home where affection,

trust and love was never lacking. My father's unwavering confidence in my

ability and mother's unflinching faith in ALMIGHTY ALLAH went a long v^y

towards accomplishing this task.

A very special thank is due to my brother Ashar Khan who made

convenient my stay in Delhi in connection with this work.

I must thank Mrs. Najmul Hasan and Sadia for their utmost concern and

prayers for the successful completion of this work.

A special note of thanks to Mrs. Zeba Kazmi, Adela, Nabila and Wasif

for sacrificing their precious family time and in ensuring that my work gets due

attention from my guide even at unreasonable hours.

 It goes without saying that my sincerest thanks are due to my wife

Samina and my children Nabiha and Abdullah who smilingly bore my long

hours of absence from home and never complained about the lack of care and

attention rightfully due to them. Needless to say that without their unstinting

emotional and moral support I could never have committed myself in

undertaking this project.

4i^^^. 1997 _ { MOHD. AAMIR KHAN )

 CONTENTS
Preface

CHAPTER-I METHODOLOGY 1-41

1.1 Review Of Literature 1

1.1.1 Research Gap 7
1.2 Need For Study 8
1.2.1 Statement Of Research Problem 9
1.3 Research Question 11
1.4 Brief Profile Of Automobile Industry In India 13
1.5 Brief Profile Of Companies Surveyed 16
1.6 Design Of Research Questionnaire 24
1.7 Data Collection 28
1.7.1 Primary Data 29
1.7.2 Secondary Data 30
1.7.3 Presentation Of Data 30
1.8 Analysis And interpretation Of Data 31
1.9 Limitations Of The Study 32
References 35

CHAPTER-il MANAGEMENT OF WORKING CAPITAL 42-76

2.1 Concept Of Capita) 42

2.1.1 Concept Of Wori^ing Capital 44
2.2 Company Wise Woricing Capital Practices 48
2.2.1 Objectives Policy And Planning 49
2.2.2 Organization 53
2.2.3 Control And Review 55
2.3 Evaluation Of Worthing Capital 60
2.3.1 Current Assets Cun-ent Liabilities 61
AndWoildng Capital
2.3.2 Working Capital As A Percentage Of Total Assets 63
2.3.3 Current Assets To Sales 65
2.3.4 Working Capital To Sales 67
2.3.5 Current Ratio 70
References 73

CHAPTER - in FINANCING OF WORKING CAPITAL 77-97

3.1 Concept Of Financing Of Working Capital 77

3.1.1 Forecasting Of Woricing Capital Requirement 78
3.1.2 Concept Of Operating Cycle 79
3.1.3 Sources Of Woridng Capital Finance 80
3.2 Con^any Wise Financing Of Woricing Capital Practices 80
3.2.1 Approaches To Financing 81
3.2.2 Forecasting 81
3.2.3 Sources And Forms Of Financing Woricing Capital 83
3.2.4 Policy 84
3.3 Evaluation Of Financing Of Woricing Capital 85
 3.3.1 Major Components Of Bon'owings 87
3.3.2 Net Worth. Current Liability (including Short 90
Tenm Bonrowing), Long Term Borrowings To
Total Liability
3.3.3 Interest As A Percentage Of Debt 93
3.3.4 Profit Before Interest And Tax^s To Interest Ratio 95
References 97

CHAPTER - IV CASH MANAGEMENT 98-122

4.1 Concept Of Cash 98

4.1.1 Cash Management Objective 100
4.1.2 Cash Management Process 100
4.1.3 Marl^etable Securities : A Spec^ial Case Of Cash 101
Management
4.2 Company Wise Cash Management Practices 102
4.2.1 Cash Planning 102
*.2.2 OtgaTiiizaYiDTi 01 Cash Wianag^iTr^Tft 'i^'h
4.2.3 Control And Review 104
4.2.4 Problems In Cash Management 105
4.3 Evaluation Of Cash 109
4.3.1 Cash And Bank Balances As A Percentage Of 110
Cun-ent Assets
4.3.2 Cash As An Percentage Of Sales 112
4.3.3 Cash As A Percentage Of Current Liability 114
4.3.4 Average Days Of Creditors 116
4.3.5 Investment To Current Assets 118
References 120

CHAPTER-V MANAGEMENT OF RECEIVABLES 123-155

LOANS AND ADVANCES

5.1 Concept Of Receivables 123

5.1.1 Objectives Of Receivables Loans And Advances 124
5.1.2 Management Of Receivables 124
5.2 Company Wise Receivables, Loans And Advances 126
Management Practices
5.2.1 Objectives Policy And Planning 126
5.2.2 Organization 128
5.2.3 Control And Review 130
5.2.4 Credit Collection 131
5.2.5 Constituents Of Advance 133
5.2.6 Policy Of Advances 134
5.2.7 Financing Of Advances 135
5.2.8 Interest On Overdues 136
5.2.9 Organization 136
5.2.10 Control And Review 137
5.2.11 General 139
5.3 Evaluation Of Receivables Loans And Advance 142
5.3.1 Receivables To Current Assets 142
5.3.2 Receivables To Total Assets 144
5.3.3 Receivables To Sales 146
 5.3.4 Average Days Of Debtors 148
5.3.5 Loans And Advances To Current Assets 150
5.3.6 Loans And Advances To Total Assets 152
References 154

CHAPTER - VI MANAGEMENT OF INVENTORY 156-186

6.1 Concept And Motives Of Inventory 156

6.1.1 Forms Of Inventory Control 157
6.1.2 Cost Of Holding Inventory 158
6.1.3 Concerns Of Inventory Management 159
6.1.4 Inventory Management System 159
6.2 Company Wise Inventory Management Practices 160
6.2.1 Objectives Policy And Planning 160
6.2.2 Organization 166
6.2.3 Control And Review 169
6.2.4 Problems Of Inventory Management 172
6.3 Evaluation Of Inventory Management 174
6.3.1 Inventory To Cun-ent Assets 175
6.3.2 Average Days Of Raw Material Stock 177
6.3.3 Raw Material To Sales 179
6.3.4 Average Days Of Finished Goods Stock 181
6.3.5 FInished'Goods To Sales Ratio 183
References 185

CHAPTER - VII SUMMARY, CONCLUSIONS AND SUGGESTIONS 187-212

7.1 Management Of Wodcing Capital 188

7.1.1 Summary 188
7.1.2 Conclusion 191
7.1.3 Suggestions 192
7.2 Financing Of Working Capital 193
7.2.1 Summary 193
7.2.2 Conclusions 195
7.2.3 Suggestions 195
7.3 Cash Management 196
7.3.1 Summary 197
7.3.2 Conclusions 199
7.3.3 Suggestions 199
7.4 Management Of Receivables And Advances 200
7.4.1 Summary 201
7.4.2 Conclusions 203
7.4.3 Suggestions 203
7.5 Management Of Inventory 205
7.5.1 Summary 205
7.5.2 Conclusions 207
7.5.3 Suggestions 208
7.6 Over All Conclusions 209
7.7 Directions For Future Research 210
Bibliography 213-223
Appendix - 1 : Questionnaire on Working Capital 224-250
 PREFACE

An organization needs two forms of capital in order to make its

business successful. Capital employed in fixed assets that form the

infrastructure of the organization and working capital that makes the fixed

assets operative. Lack of fixed assets will no doubt lead to lower profits but

shortage of working capital will lead to business failure. Thus the significance

of working capital is much more than fixed assets.

A unique character of working capital is that its excess or deficiency

both are undesirable. A high level of working capital will mean high liquidity

but it will adversely affect profitability and vice-versa. The main thrust of

working capital is to provide funds when needed. Thus a trade off has to be

made between profitability and liquidity.

The present study is an endeavor by the researcher to find how working

capital is managed in different companies of the automobile industry.the

extent to which working capital has been efficiently managed and also to find

the aspects of inefficiency in this regard.

 Chapter I describes the methodology adopted for this research. The

chapter starts with a review of literature followed by identification of research

gap, and the need for the study on the basis of which the research problem

has been stated. A brief profile of automobile industry and the companies

under study is given. Next the questionnaire design, data collection, method

of analysis of data and finally limitations of the study are given.

A uniform structure has been adopted in chapter II to VI which deal v^th

the individual issues in working capital management. First the concept is

described followed by the responses to the research questionnaire. The third

part of each chapter presents the analysis of relevant ratios.

The first part of Chapter II briefly explains the concept of capital

followed by the concept of working capital, its objectives, policy and planning.

The second part of the chapter provides the responses of the questionnaire

given by the executives of six companies regarding objectives, policy and

planning of working capital, organization, control and review of working capital.

Finally, the last part of the chapter presents the ratio analysis in thirteen major

companies in the three segments of the industry.

 The first part of Chapter ill briefly explains the concept of financing of

working capital followed by forecasting of working capital, the concept of

operating cycle and finally the sources of working capital finance. The

second part of the chapter provides the responses of the questionnaire

given by the executives of six companies regarding approaches of financing,

forecasting, sources and forms of financing and the policy of the companies in

this regard. Finally the last part of the chapter presents the ratio analysis in

thirteen major companies in the three segments of the industry.

The first part of Chapter IV briefly explains the concept of cash

management and its objectives, its process and marketable securities as a

special case of cash management. The second part of the chapter provides

the responses of the questionnaire given by the executives of six companies

regarding cash planning, organization of cash management, control, review

and problems in cash management. Finally the last part of the chapter

presents the ratio analysis in thirteen major companies in the three segments

of the industry.

The first part of Chapter V briefly explains the objectives of receivables,

loans advances and its management. The second part of the chapter provides

the responses of the questionnaire given by the executives of six companies

regarding objectives, policy and planning of \Arorking capital, organization,

control, review, credit collection, constituents of advances, policy, financing

and interest on advances, its organization, control and review of advances,

and some general aspects in this regard. The last part of this chapter

presents the ratio analysis in thirteen major companies in the three segments

of the industry.

The first part of Chapter VI briefly explains the concept and motives of

inventory, forms of inventory control, cost of holding inventory, concerns of

inventory management, and inventory management system. The second part

of the chapter provides the responses of the questionnaire given by the

executives of six companies regarding objectives, policy and planning of

working capital, organization, control and review, and problems of inventory

management. Finally the last part of the chapter presents ratio analysis in

thirteen major companies in the three segments of the industry.

The last chapter, i.e. Chapter VII states the summary, conclusions and

suggestions on the basis of the study done. In the end, direction for future

research are given to help researchers to make further studies in this regard.

The evaluation of working capital management can help one to

understand how working capital is managed in the organization. It can also

help the executives taking decisions in this regard about how to make such

decisions more effective. Others, especially students, interested in corporate

finance will get an insight about how different companies manage working

capital and also learn how to interpret the hidden information.

Dated 1 1.1997 ( MOHD. AAMIR KHAN )

 CHAPTER -1

METHODOLOGY

This chapter deals with the methodology of the study. It is divided into

nine parts. The first part deals with the review of literature on the basis of

which the research gap has been identified. This is followed by the need for

the study on the basis of which the statement of research problem is done.

Then the research questions have been stated. After this a brief profile of

automobile industry in India is given followed by profile of the companies

surveyed. Next the designing of the research questionnaire has been done,

followed by data collection which is divided into three parts primary data,

secondary data and presentation of data. After this the basis of analysis and

interpretation of data has been explained and finally the limitations of the

study have been stated.

1.1 REVIEW OF LITERATURE

One of the ways by which the company can operate profitably is by

managing its current assets effectively and efficiently as no company can

survive by simply adding some margin to its cost. With a continuous rise in
price and rate of inflation a company has to perform in a way that it can sell its

goods at an acceptable price. One of the ways of increasing efficiency is by

managing working capital. Ineffective management of working capital will lead

to default in payment which will frustate creditors thereby leading to technical

insolvency. As emphasized by many authors it is the life-blood of an

organization. Despite its significance, unfortunately, not much research has

been done in this area. In the following paragraphs a brief review of literature

has been done.

In 1966 NCAER^ (National Council of Applied Economic Research)

made a study in this area emphasizing the scope in three industries namely

fertilizer, sugar and cement. But it emphasized only upon the structural

framework of working capital i.e. the composition of working capital. The study

did not highlight the management of different components of working capital.

In 1975 Dr. R.K. Mishra^ made a study on working capital concentrating

only upon six large public undertakings for a period between 1960-61 to

1967-68. However the changes after 1968 leaves much to work upon.

In 1977 Dr. N.K. Agarwal^ selected thirty four large manufacturing and

trading public limited companies for a period between 1966-67 to 1973-74. He

concluded that, although all the companies were using scientific techniques in
controlling the various components of working capital, still there was scope for

reducing the investment in inventory, cash and receivables.

In 1981" Dr. S.P. Vijayasaradhi included loans and advances, cash,

inventories and receivables etc. in his study on problems of working capital in

public enterprises. He emphasized exhaustively upon the problems in working

capital management.

In 1980 Dr. Vijayasaradhi and R.Rao^ made a study on management of

advances in public enterprises . They suggested methods of controlling the

levels of advances from the government. Besides these there are few other

articles and contributions that have emphasized some specific or general

aspects of management of working capital. Some of the recent work in the field

of working capital done by researchers and scholars have been highlighted

below.

In 1983 B. Banerjee^ made a study on financing of working capital

under conditions of inflation.

In 1984 H.L. Agarwal^ developed an analytical model of working capital

policy. In the same year Dr. Raman® made a study on working capital
management in State Road Transport Undertaking. Dr. Satyanarayana

Murthi^ made a study on cash management.

In 1985 N. Agarwal^" made a study on working capital in selected units

of paper manufacturing companies. Dr. T. Hossain" made a study on

management of \Arorking capital in selected units of cotton textile industry of

Bangladesh.

In 1986 S.C. Bardia^^ made a study on working capital management

with specific reference to Iron and Steel industry in India. Dr. Jindal^^ made a

similar study in scooter manufacturing companies. Dr. N. Sharma^" made a

study on working capital management in textile industry. Dr. R.Jain^^ made a

study on working capital management in state enterprise. During this period

three article were published in Management Accountant covering the aspects

of planning, financing, and general aspect of working capital. In the Indian

Management G. V. Chalan and D. Murthy^^ made a brief study on trends in

selected units of Indian private corporate sector.

In 1988 S.C. Bardla^^ used the concept of operating cycle in forecasting

and control of working capital. H. Bhattacharyya^^ explained the techno-

financial approach towards the theory of v^rking capital. S.K. Chawla'^ used a

practical approach in determining working capital. S. Grai and A Mallick^

determined the role of working capital in manufacturing industries. S. P.

Deshpande^^ used a unified approach towards product costing and working

capital requirements.

In 1989 A.K. Sharma^^ made a study on cash planning and

management in corporate sector. K. Gupta^^ studied working capital in

fertilizer industry. S. K. Gupta^"* made a study on working capital management

in TV manufacturing companies. J. Rao^^ reported on working capital

management in small scale industrial units. C.K. Shah^^ made a study on

working capital management in drugs and pharmaceutical industry. O.P.

Sharma^^ studied working capital management in zinc industry while D.

Singhal^® wrote a case study on management of working capital in Modi

Steels. A. K. Sharma^® made a study on working capital management in State

level Corporations of Haryana. P. Chand^ made a study on working capital in

State Electricity Boards of India. S. Srinivasan^^ in Indian Management

emphasized upon how to balance liquidity and profitability in working capital.

R. C. Reddy^^ emphasized upon working capital management in co-operative

sugar mills.

In 1990 K. Kumar^^ made a study on cash management in selected

units of state level manufacturing public enterprises. A Singh^ highlighted the

problems of management of working capital in State Undertaking of Assam. J.

 8

Moray'^ reported on management of working capital in sugar Industry. Dr. M.S.

Poonia^ made a study of credit planning and working capital management in

bicycle industry in India, V. M. Saxena and P. Kumar^'^ in their article in

Chartered Accountant, emphasized upon cash disbursement plan for better

liquidity management. K.Gopal^ in Management Accountant discussed how to

manage inventory effectively.

In 1991 S.LaP® made a study on cash management in Nepalese public

enterprises. S.Kumar'*° studied the working capital in TV.# manufacturing

companies. Jayaram"*^ in his study emphasized upon how working capital is

deployed in the corporate sector.

P.M. Reddy and C.S. Reddy"^ in their article in Accounting Finance

reported an analytical study on cash working capital and balance sheet

working capital. S.N. Basu^^ in his article in Management Accountant made a

study of working capital in tyre companies. D.Banerjee'*^ made a case study of

working capital management in Grasim Industries Ltd.

In 1993 A. Sreekumar^^ and others made a study on control limit models

of cash management in bank branches. S. Chander and C. K. Mahajan'^

reported on disclosure of valuation of inventories. J. K. Kundu"'^ made a study

on funds flow statement emphasizing upon the treatment on provisions and its

effect on working capital management.

In 1994 N. Jankisan and V.P. Gupta''^ made a case study on working

capital management and profit planning through PERT network. S.P.

Deshpande'^ presented a mathematical study of working capital management

in the Journal of Accounting and Finance.

1.1.1 RESEARCH GAP

After going through the paragraphs of the literature review it can be

observed that no research is done to study the management of working capital

in the automobile industry. Rather, this industry has been ignored by the

researchers as far as its management of working capital is concerned. Only

one such study was done in 1986 and that too in a specific segment i.e.

scooter manufacturing companies by S.K. Jindal. Of all the researches

surveyed several of them are superficial in the sense that they do not consider

the specific management of different components of working capital/

While trying to identify the research gap the researcher has gone

through the bibliography of doctoral dissertations by the Association of Indian

Universities (AID) Social Science Research Abstracts. ICSSR (Indian Council

 8

for Social Science Research) Survey of Research in Management and

University News. None of these sources specified any research work in

progress or submitted except the one mentioned above. Besides this despite

the fact that the Government and the business executives have been

concerned about the efficiency and effectiveness in the management of

working capital and its components this industry has not been of concern to

researchers. The present study is an attempt to fill this research gap.

1.2 NEED FOR STUDY

Phor to liberalization the Indian Companies operated in a very protected

environment. The government in order to develop the industries imposed

heavy duties on imports and also restricted the multinationals. Such kind of

atmosphere led to a typical monopolistic situation as the industry was able to

cope with any shortage situation by borrowing from the government at a very

low rate of interest. There are a number of instances where the government

was compelled to extend loans to the industry and then not only waive the

default of interest payment and capital but also protect them by extending

additional subsidies. Such kind of policy led to lethargy in the executives. At

the same time this protection was also a hindrance to the development of a
 9

competitive industry as there were too much of regulatory policies and state

control. Besides this rigid licensing, expansion, modernization and capacity

utilization further hampered the industry development.

Later on with major industrial policy changes and deticencing, removal

of restriction on production and capacity, encouragement of multinationals in

the country and open pricing policy the industry is finding itself very shaky on

the question of how to compete with these multinationals on the basis of price

and quality. It is therefore considered that at a time when there is a severe

shortage of funds and very few external source of funding are available it is

high time to study working capital management in automobile industry and

suggest ways by which the Indian companies can reduce the total cost by

managing working capital more effectively. This study will make an attempt

towards this end.

1.2.1 STATEMENT OF RESEARCH PROBLEM

Once the research gap was identified it motivated the researcher to

make an attempt at fulfilling the need in the subject. This also helped in the

formulation of the research problem.

 10

Later on, adequate steps were taken for the proposed research topic

like sufficient necessary subject background, ensuring that necessary data and

analysis can be procured, and also the feasibility of completing the work in a

reasonable time frame. Besides this, it was also ensured that the study

remains within the manageable limits. As the researcher had already

undertaken a two months summer training project on working capital

management in Modi Rubber Limited while pursuing his M.B.A. degree the

topic for research was decided as "A Study of Working Capital

Management in Selected Units of Automobile Industry in India."

The selection of working capital measures is primarily guided by the

researchers summer training study while doing his M.B.A. It was during this
«

time researcher realized that better working capital management can

substantially improve the level of profitability of the organizations. The finding

also injected the inquisitiveness to study the impact of similar measures in

the industry in general with the help of better techniques and approach. As a

result the following major working capital components have been considered

for the study :

1. Financing of working capital

2. Management of cash

3. Management of accounts receivables, loans and advances

4. Management of inventory
 II

The above measures form the basic components of working capital in

any standard text In the area of financial management. Moreover, as the

components chosen contribute towards the achievement of higher profits they

form the basis of this study.

1.3 RESEARCH QUESTION

Based on the survey of literature and the need for research, a set of

research questions were framed as follows :

1. What is the level of liquidity of the different automobile companies and

to what extent do they vary?

2. How is the financing of working capital done by the companies and

what are the vahous forms and sources of financing?

3. How is cash managed by the companies? Do the companies undertake

any cash budgeting techniques or not? What are the roles and

responsibilities of the financial executives in this regard? What are the

problems of the companies regarding cash credit?

 12

4. What is the main thrust of the companies regarding management of

account receivables? What are their objectives in this regard? What are

the terms of credit of the companies? What are the responsibilities of the

finance executives in this regard ? What are the methods of controlling

accounts receivables? What are the major components of advances?

What is the policy of the companies regarding granting, financing and

charging overdues? What are the responsibilities of the financial

executives regarding advances? What are the methods of controlling

advances?

5. What are the objectives of the companies regarding management of

inventory? What are the methods of planning and controlling the

different components of inventory? Hov\/ is inventory financed by the

companies? What are the responsibilities of the finance executive

regarding inventory management? How is excess/shortage of inventory

determined?

The research questions as above guided the conduct of the research

study. Before stating the method of questionnaire design it v^ould be in order

to present a brief profile of the automobile industry in India and the

automobile companies under study.

 13

1.4 BRIEF PROFILE OF AUTOMOBILE INDUSTRY IN INDIA

The first road power vehicle was made by a Frenchman Nicholas

Cugnut in 1770.^ The industry in its evolutionary stage was developed in

Germany and France. In 1886 G. Dilemma got an internal^^ combustion engine

patented and in 1887 C. Berg another German engineer built with this engine

a tricycle.^^ The first firm was established in 1894^^ by the name Reve Panhard

and Emile Larassor in Paris which manufactured a car and got patents and

rights of Daimler. In India this industry came into existence in 1940's when

Ford and General Motors established assembly plants in Bombay. Both the

companies discouraged India entrepreneurs for manufacturing indigenous

54
cars.

The Indian automobile industry is more than 50 years old. In 1950^^ it

produced only 4122 vehicles which is expected to reach 5500000^® by the

year 2000. The industry had a Rs. 22000 crores turnover in 1994-95.^^ The

production of vehicles in the first six months of 1996-97 is expected to be

16.48 lakhs as against 12.97 lakh for the same period the previous year

recording a growth of 27%.^

 14

The industry manufactures a wide range of vehicles like buses, trucks,

cars, commercial vehicles, jeeps, scooters, motorcycles, mopeds and

three-wheelers. The industry is very capital intensive. The industry structure is

thus fairly varied.

The industry made a substantial growth in 1995-96 of 23% and

produced over 3.5 million vehicles. The car sector made a growth of 33%

producing 3.53 lakhs, two wheelers made a growth of 20% producing 2.66

millions, and light and heavy trucks a growth of 24%. Such rise in growth has

attracted international manufacturers. At present projects of value of over Rs.

10,000 crores are in process.

It is feared that the Indian market is on the verge of saturation level as

there is too much conjestion in cities. However there is demand for the

vehicles as about 35 million households are having an income over Rs. 1.2

lakhs. At present there are about 2.5 million cars excluding those owned by

professional, corporate and taxi sector. The market potential is obviously there

if we compare with other countries like South Korea that could absorb 1.15

million cars, Malaysia 2.02 lakhs, Thailand 4.78 lakhs and a small country like

Taiwan 2.78 lakhs.^®

A brief review of financial performance in the automobile industry is

given in Table 1.1.

 15

TABLE 1.1

FINANCIAL PERFORMANCE OF AUTOMOBILE INDUSTRY IN 1995

Rs. in CRORES
COMMERCIAL PASSENGER TWO and THREE
VEHICLE CARS and JEEPS WHEELERS
Current Assets 4957.14 4661.75 2101.47
Current Liabilities 12862.38 3724.54 1322.57
Net Profit 26.33 31.10 37.31
Asset Turnover (times) 1.14 1.26 1.54
Sales in Terms of 1.88 3.09 2.91
Capital employed (times)
Networth as a % 34.72 25.96 35.73
of Total Liability
Paid up Capital as 5.81 5.10 7.96
a % of total Liability
Profit after tax as a % of
- Sales 4.58 5.28 7.47
- Networth 15.08 25.67 32.23
- Capital employed 8.65 16.30 21.74
- Gross fixed assets 12.02 18.08 20.59
- Total assets 5.23 6.66 11.52

SOURCE : - BASED ON DATA COMPILED FROM CMIE NEW DELHI.

 16

1.5 BRIEF PROFiLE OF COMPANIES SURVEYED

1. TELCO -

The company was established in 1945 when it took over from

Peninsular Locomotive works. It is the largest company in the industry. Initially

it was manufacturing steam locomotives and boilers for the Indian Railways till

1970. It started commercial vehicles production in 1954 in collaboration with

Daimler-Benz A.G. West Germany. In 1961 it started manufacturing

excavators. Then in 1968 it started producing press tools and complex dies

after amalgamating with Investa Machine Tools and Engineering Company

Ltd. in 1965. The alloy iron foundry was established in 1975. An Engineering

Research Center was also set. It also manufactures construction and

earthmoving equipment crawler mounted shovels, draglines, excavators,

clamshells, dumpers and cranes. It introduced Tata mobile 206 truck in 1988.

It also manufactures passenger cars like Tata Sierra, Tata Estate and Tata

Calypso.
 17

The company was incorporated as Ashok Motors Ltd. in 1948 as a

subsidiary of British Leyland International Holdings Ltd. Initially it was involved

in assembling of Austin cars and trucks. Hov^ver in 1955 it was renamed as

Ashok Leyland Ltd. By 1952 the company stopped assembling and started

concentrating on Leyland commercial vehicles. Initially its manufacturing plant

was established in Ennore. The company has also established plants at Alwar

and Bhandara.

The company is owned by the Hindujas Group and Is the only one that

manufactures double-decker buses. Its main activity is manufacturing heavy

commercial vehicles. In addition to this it also manufactures diesel engines for

marine and industrial applications.

3. Escorts -

The company was established in 1944 as a private company at Lahore.

However after partition it shifted to Delhi. Initially it was concerned with trading

activities: it represented many foreign manufacturers wtio intended to sell their

 18

goods in India. It started manufacturing activities in 1958 at Patiala

manufacturing piston rings etc., then in 1960 it started manufacturing Rajdoot

motorcycles, railway shock absorbers etc. After this, in 1965, it started

manufacturing tractors and farm machinery, railway brake equipments in 1968,

industrial X - ray equipments in 1969, distributor control valves and hydraulic

pumps in 1970, mobile cranes/loaders and Ford tractors in 1971. In 1977 it

started manufacturing piston assemblies, and in 1978 piston rings and cylinder

lines. It started manufacturing mobile cranes, Yamaha motorcycle and

escavators in 1979. In 1983 it has set up a dry dock for shop repairs in

Bombay. The 1000 Yamaha motorbike project was established in 1985 and

EPABX in 1986. It also has a Escorts Employees Ancillaries Ltd. owned by the

employees which supplies carburetors for Rajdoot motorcycles.

The company is owned by the Escorts group and its subsidiaries are

Escorts Herion Ltd., Escorts Class Ltd., Escorts Holding Ltd. and Escorts

J.C.B. Ltd.

4. Baiai Tempo Ltd. -

The company was founded in 1945 by Firodia and others as Bachraj

Trading Co. It was incorporated as a private limited company in September

1958. Initially it was manufacturing three wheelers. Later in 1961 it became a

 13

public limited company after which it also started manufacturing four Nwheelers

which includes Matador and Tempo travellers followed by Matador pick-up

trucks and Tempo Trax.

5. Eicher Tractors Ltd. -

Eicher Tractors was promoted by Eicher Goodearth in 1960. Initially it

was incorporated as Eicher Diesels Pvt. Ltd. which commenced its

operations in 1983. In 1986 it was renamed as Eicher Tractor Ltd.

Initially it was manufacturing only 25 HP tractors but later on it also

started manufacturing 35 HP and 50 HP tractors. It has also promoted other

companies like Eicher Consultancy Services, Eicher Agrotech and Eicher

Span Financial Services.

6. Eicher Motors Ltd. -

The company was incorporated in 1982 owned by the Eicher group. Its

main activity is manufacturing light commercial vehicles.

 20

It started production in 1986 however its losses mounted due to low

volumes, yen appreciation and government policies. At present it is trying to

make a faster indigenisation and higher volumes. It also plans to enter the car

segment in collaboration with Volkswagen Germany.

7. Hindustan Motors -

The company is the first car (Ambassador) manufacturing company in

India that was established in Baroda (Gujarat) on 1942. Initially it was

involved in assembly of cars. It commenced manufacturing in 1948 at

Uttarapara West Bengal. Besides car manufacturing it also started

manufacturing diesel engines in 1968, earthmoving equipment in 1973 and

heavy duty transmissions in 1985. It introduced a new car Contessa Classic in

1986 with the collaboration of Isuzu Motors Japan. It also manufactures

medium and heavy commercial vehicles, light commercial vehicles, hydraulic

pumps/valves, machine tools, axle assemblies, gear and gear boxes, cranes

etc.

The company is owned by C.K. Biria group of companies and it has two

subsidiaries Hindustan Motor Corporation Ltd. and H.M. Exports Ltd.

 21

8. Mahindra & Mahindra -

The company was set up in 1945 in Bombay and is the only

manufacturing company of jeeps. Initially it was involved in assembling

activities however by 1955 it started its manufacturing process. The

instrumentation electronic division was formed in 1968 which started

manufacturing in 1975 at Calcutta. By 1980 it started manufacturing light

commercial vehicles and pick-up vehicles.

The company Is owned by the Mahindra group. Its subsidiaries are

Mahindra Engineering and Chemical Products, Mahindra Exports, Mahindra -

British Telecom and Mahindra Sintered Products.

9. Baiai Auto Ltd. -

The company was established in 1945 as Bachraj Trading Corpn.

Initially the company was involved in assembling of autorickshaws, scooters

etc. Later on in 1960 the company was renamed as Bajaj Auto Pvt. Ltd. and

started producing scooters. It had the collaboration v^th Piagio of Italy till

1971.

The company is owned by the Bajaj Group and its main activity is

producing scooters and motorcycles.

 22

10. L.M.L. LTD -

The company is owned by Deepak Singhaniagroup \A/hich was

incorporated in 1972 as Lohia Machines Pvt. Ltd. Its main activity is

manufacturing two wheelers. Initially it was concerned with yarn manufacturing

however in 1978 it converted into Public Limited company. It started

manufacturing scooters in collaboration with Piagglo Vespa of Italy. The LML

was established in 1982 as a separate unit. Some of its popular brands of

scooters are NV Special Select, Supremo and Select II.

11. T.V.S. Suzuki -

The company was incorporated in 1982 as Indian Motorcycles Pvt. Ltd.

Later the name changed to Indo-Suzuki Motorcycles Pvt. Ltd. The company is

promoted by Sundaram Clayton in collaboration with Suzuki Motors Co. Ltd.

of Japan. It started production since 1984 and by 1987 it started manufacturing

mopeds after acquiring the assets of the moped division of Sundaram Clayton

Ltd. The company's name was further changed to T.V.S. Suzuki with effect

from August 1986. The company launched tv\«) models of motorcycles

'Samurai' and 'Shogun'.

 23

The company is owned by T.V.S. Iyengar Group. It has one subsidiary

namely Lakshmi Auto Components Pvt. Ltd. Its main activity is manufacturing

two wheelers.

12. Hero Honda Motor Ltd. -

The company in collaboration with Hero Honda Co. Ltd. Japan was

established in 1984. The production commenced in 1984 in Dharuhera

Haryana. The company's main activity is manufacturing motorcycles. Its first

model was Hero Honda CD-I 00 followed by Sleek and then Hero Honda

Splendor. Later, in 1985, it received the permission for manufacturing two

wheelers upto 350 c.c.

The company has no subsidiary and is owned by Hero (Munjals) Group.

13. Kinetic Honda Motors Ltd. -

The company was incorporated in 1984 and is owned by Firodia group.

Its main activity is manufacturing scooters. It is the leading manufacturer of

 24

mopeds and has a technical and financial collaboration with Honda Motor Co.

Japan.

It exports to countries like Singapore, Africa, Sri Lanka etc. Its licensed

capacity is 2 lac motorised two wheelers and three wheelers upto 350 c.c.

1.6 DESIGN OF RESEARCH QUESTIONNAIRE -

A very exhaustive questionnaire comprising of ninty-five questions was

prepared. Luckily while conducting the literature survey the researcher went

through a research work of K.R. Rao ^ on "Working Capital Management". Its

Planning and Control in India Public Enterprises. The study was exhaustively

based upon a questionnaire. While going through the contents of the

questionnaire the researcher observed that the questions almost matched the

contents and the approach of his endeavor. Later on with some changes in

the structure and some reframing most of the questions were based on Dr.

Rao's work and then almost all of these were presented with multiple choices

to make the task of the respondent more convenient. While considering the

multiple choices for questions again Dr. Rao's work v\/as used exhaustively.

Ultimately what emerged was an exhaustive set of questions which were

 2b

pre-tested through personal interview at Hero Honda Ltd. The inadequacies

were removed based on the responses and, thus, the final questionnaire was

prepared.

As working capital management is not done by an individual or few

persons so the questionnaire was divided into general questions on working

capital, financing of working capital, management of cash, management of

accounts receivables, loans and advances, and management of inventory so

that the responses could be received from individuals dealing in that particular

area.

The first part of the questionnaire includes seventeen questions. The

objectives were to know the degree of professionalism involved in the

organization. Besides this an attempt was also made to know about the

objectives of working capital, a broad framework of policy of working capital,

methods of determining working capital requirement, basis of working capital

determination, budget preparation of working capital and its coordination with

production, sales and collection function. Questions were also included to

know about the executive responsible for the overall management of working

capital, his duties and responsibilities regarding planning, organizing, and

controlling of working capital, the policy of authorization of working capital, and

whether any ratios are calculated to determine v^rking capital norms. Finally it
 26

also included questions regarding methods and techniques of control and

review of \A«)rking capital.and questions such as whether the working capital

norms were reviewed, has the company experienced any shortage or excess,

and are there any unique problems of v^rklng capital management.

The second part of the questionnaire contains eleven questions

regarding financing of working capital which attempts to inquire into the

approach of working capital finance, usage of forecasting technique, usage of

operating cycle in forecasting working capital, the sources of finance available

to the companies, the major forms of financing working capital, the overall

policy regarding financing of working capital and the peculiar problems in the

organization regarding financing of working capital. The third part of the

questionnaire contains twenty questions regarding cash. It contains question

on content of cash, levels of cash determination, minimum or optimum cash

level determined, cash budgeting done, the executive responsible for the

overall cash management, whether cash management is centralized or

decentralized, and the benefits the managers perceive of decentralized cash

management, ratio analysis done in this regard, control of cash flows, control

of the balances of the divisions difference between planned and actual

cashflows, and how are the expenditures and revenues phased. Questions

also related to cash inadequacy, bottlenecks in cashflows, factors considered

in determining the cash credit requirements, cash credit problems fixed assets
 27

expansion affecting the cash flows and finally the peculiar problems regarding

cash management.

The fourth part comprises of twenty-five questions on management of

account receivables, loans and advances. The questions inquired regarding

the main thrust of the credit policy, the objectives of credit policy, the duration

of credit plan, terms of credit, basis of determining credit terms, risk analysis of

customers, the executive responsible for the overall granting and collection

operations, techniques of control, ratio used in determining credit norms,

procedure of credit collection, credit extension and its linkage with increased

demand extra clerical cost, cost of excessive investment, bad debts, collection

cost, capacity utilization. The problems peculiar to the organization regarding

receivables, the major constituents of loans and advances, the policy

regarding granting, financing and charging interest on overdues, type of

financing the company recommends, interest on advances were also the

questions included in this part.

Finally there were questions related to the executive responsible for the

overall granting of loans and advances, method of management control,

recovery/adjustment schedules prepared, possibility for minimum advances and

the problems peculiar to the organization in this regard.

 28

The last part of the questionnaire was on management of inventory

which comprises of twenty-two questions regarding the objectives and policy of

inventory management, revision of objectives, methods of planning

components of inventory, the duration of inventory planning, and the

production schedule. Questions were also included regarding the control of

inventory financing, the executive responsible in this regard and his

responsibilities. Method of controlling inventory, techniques applied in such

control, whether investment in inventory determined from time to time, ratios

used to determine inventory norms, the methods and techniques of inventory

control, analysis of inventory turnover were also included besides the

performance evaluation of inventory department, how the company deals with

the price fluctuation in purchase of material, how is excess inventory detected,

and finally whether there are any problems peculiar to the organization

regarding inventory management.

1.7 DATA COLLECTION -

Both primary and secondary data has been used in the study. The two

sub-sections that follow describe the collection of primary and secondary data.
 29

1.7.1 PRIMARY DATA

The study of methods, policies and procedures of working capital

management is done by a detailed questionnaire.

However the executives of the selected units were not much willing to

respond to the questionnaire on the ground that they could not disclose the

procedures etc. in much detail. Executives at Maruti totally refused to provide

any information through questionnaire. Initially the researcher personally

approached the offices of the concerned units, however he could get

responses only from Hero Honda, Escorts, Eicher Motors, Eicher Tractors

Bajaj Tempo and Bajaj Auto others suggested to approach their respective

corporate offices situated outside Delhi. However owing to paucity of time and

money it was decided to mail the questionnaire.

For mailing the questionnaire it was thought feasible to secure the

names and addresses of the financial managers for management of working

capital in the companies included in the survey. The Delhi office of the

companies could supply this information. Mail questionnaire was, therefore, the

only feasible option.

 30

1.7.2 SECONDARY DATA -

The secondary data sources are mainly the annual reports and the data

computed and compiled by CAPITALINE and CMIE. They are the most

important and reliable sources of financial data. The data provided in the

annual reports has been analyzed and evaluated primarily through ratio

analysis. The reason of using ratio analysis is to analyze the size, composition

and efficiency of the various components of working capital.

1.7.3 PRESENTATION OF DATA -

The presentation of data has been done in two ways i.e. descriptive and

numerical. The descriptive information is presented on the basis of the

responses received from the executives of the six companies namely Hero

Honda, Eicher Motors, Eicher Tractors, Bajaj Auto, Bajaj Tempo and Escorts

through the questionnaire. The numerical data is presented in a tabular form

and ratio analysis has been done for past five years concerning various

issues in working capital management. Thus although both the presentations

highlight different aspects of working capital the presentation has been done

differently in both ways to understand the complexities of working capital

management.
 31

The presentation of descnptive information broadly highlights aspects

likes planning, objective, organization, control and review, and peculiar

problems of the different aspects of the working capital

The numencal data presentation has been done after considering

relevant ratios studied while going through ratio analysis in vanous books

Moreover only those ratios have been calculated the data for which can be

procured The tables present ratios for five years Since industry norms were

available to compare the performance of the company ratios with the industry

norms the companies have been divided into three segments namely

commercial, cars and jeeps and two and three wheelers

1.8 ANALYSIS AND INTERPRETATION OF DATA

The analysis of data has been done in two ways The qualitative

analysis is done through the descriptive information that is based on the

responses of the questionnaire recieved from the executives of six

companies Since most of the questions were containing multiple choices and
 32

the executives responded exceptionally to any other alternative the analysis

has been convenient in this manner.

The quantitative analysis of data has been done for thirteen companies

which form the representative sample of the industry. The ratios calculated are

basically the extended impression of what has been responded by the

executives of the companies during qualitative analysis. However the number

of companies considered for quantitave analysis are thirteen so that an intra

firm segment comparison can be made to make the analysis more realistic.

Thus the interpretation of data has been done collectively in cases

where the responses of the questionnaire and ratio analysis are available.

Some additional ratios have also been calculated to know the effectiveness of

working capital management in case the responses were not given in the

questionnaire. However the overall interpretation of data has been generalized

on a collective basis.

1.9 LIMITATIONS OF THE STUDY

The study has the following limitations

 33

1. The study has concentrated only on the major areas of working capital

although there may be scope in increasing efficiency by more

effectively managing miscellaneous requirements of working capital.

2. The areas of working capital selected for analysis are the major ones in

working capital. An in-depth study of each component was not done.

3. The study is limited only to thirteen companies.

4. The study is limited to one industry i.e. automobile industry only.

5. The study relies relatively more on secondary data.

6. The study has been done for five years only owing to paucity of time and

money and the constraints in availability of secondary data.

7. The research nowadays is becoming more and more cost-intensive

which is a great constraint on the study.

8. The financial years of the units in the industry are different. Therefore it

is presumed that two units with two different financial years have

operated in similar economic environment during a particular year.

9. Control of investment in working capital may be classified as physical

and financial. This study is limited to financial aspect of control of

working capital analysis and physical variation has been ignored.

10. The executive might have some reservation in answering the questions.

Therefore some of the facts may not have been revealed in the study.
 34

11. There may be some degree of human error in calculating ratios and

interpreting the same as there are no fixed standards in this regard.

12. Since the industry standards are deferred regarding working capital level

so measuring the performance was more a personal and subjective

judgment.
 35

REFERENCES

1. NCAER Structure of Working Capital 1966.

2. Mishra.R.K., Problems of Working Capital (PhD thesis) University of

Rajasthan 1975.

3. Agarwal,N.K., Management of Working Capital (Ph.D thesis) University of

Delhi 1977.

4. Vijayasaradhi.S.P., Problems of Working Capital Management in Public

Enterprises in Lok Udvoo 1981.

5. Vijayasaradhi.S.P., and R. Rao Management of Advances of.Public

Enterprises in India in Lok Udvoo Jan, 1980.

6. Banerjee.B /Financing of Working Capital Under Conditions of Inflations'

Business Standard 1983.

7. Agarwal.H.L., 'Working Capital Policy-Developing an Analytical Model'

Management Accountant 1984.

8. Raman, A.V., Working Capital Management in Selected State Road

Transport Undertaking^ Ph.D. thesis) Poona University 1984.

 36

9. Murthi.Satyanarayana., Cash Management in Andhra Pradesh S.R.T.C.

(Ph.D. thesis) Osmania 1984.

10. Aganval, N., Management of Working Capital - A Study of Selected

Paper Manufacturing Units in India ( Ph.D. thesis) Meerut University

1983-86.

11. Hossain.T., Management of Working Capital in Cotton Textile Industry of

Bangladesh ( Ph.D. thesis) Kalyani 1981-85.

12. Bardia.S.C, Working Capital Management of Iron and Steel Industry in

India ( Ph.D. thesis) University of Jaipur 1986.

13. Jindal.S.K., Working Capital Management in Scooter Manufacturing

Companies in India ( Ph.D." thesis) Rajasthan University 1986.

14. Sharma.N.K., Working Capital Management in the Textile industry in

Private Corporate Sector in Raiasthan( Ph.D. thesis) Rajasthan University

1986.

15. Jain.R.K., Working Capital Management of State Enterprises in Rajasthan

( Ph.D. thesis) Rajasthan University 1986.

16. Murthy.D.D., and G.V.Chalan 'Working Capital Trends in Indian Private

Corporate Sector" Indian Management 1986.

 37

17. Bardla.S.C, 'Forecasting and Control of Working Capital - Operating

Cycle Approach' Management Accountant 1988.

18. Bhattacharya.H., 'Towards a Comprehensive Theory of Working Capital -

A Techno - Financial Approach' Economic and Political Weekly 1987.

19. Chawla.S.K., 'Working Capital Management - A Practical Approach'

Management Accountant 1987.

20. Grai.S., and A. Mallick 'Role of Working Capital in Manufacturing

Industries - Case Study in Indian Perspective' Res Bull Calcutta -1988.

21. Deshpande.S.P., ' A Unified Approach to Product Costing and Working

Capital Requirement' Management Accountant 1988.

22. Sharma.A.K., Cash Planning and Management in Corporate Sector in

India - Automobile Tvre Manufacturing Companies - A Case Study (Ph.D.

thesis) Meerut University 1983-89.

23. Gupta,K.K., Working Capital Management in Fertilizer Industry in India

(Ph.D. thesis) Rajasthan University 1986-89.

24. Gupta Kumar,S., Working Capital Management in Electronic T.V.

Manufacturing Companies in India ( Ph.D. thesis) Rajasthan University

1987-89.
 V
8

25. Rao.J., Working Capital Management in Small Scale Industrial Units - A

Study of Selected Units in Andhra Pradesh ( Ph.D. thesis) Kakatiya

University 1989.

26. Shah.C.K., Working Capital Management of Drugs and Pharmaceutical

industry in India ( Ph.D. thesis) Rajasthan University 1986-89.

27. Sharma.O.P., Working Capital Management of Zinc Industry in India

(Ph.D. thesis) Rajasthan University 1986-89.

28. Singhai.D.K., Management of Working Capital - A Case Study of Modi

Steels ( Ph.D. thesis) Meerut University 1983-89.

29. Sharma.A.K., Management of Working Capital in State Level Corporation

of Haryana ( Ph.D. thesis) Agra University 1989.

30. Chand Tambi,P., Management of Working Capital in S.E.B. of India - A

Case Study of Selected Boards ( Ph.D. thesis) Rajasthan University

1983-89.

31. Srinivasan.S., 'Working Capital - Balancing Liquidity and Profitability'

Indian Management 1989.

32. Reddy.R.C, Working Capital Management in Co- operative Sugar Mills in

Tamil Nadu ( Ph.D. thesis) Research Bulletin Calcutta University 1988.

 V
9

33. Kumar, K.K., Cash Management in Selected State Level Manufacturing

Public Enterprises in Andhra Pradesh ( Ph.D. thesis) Osmania University

1990.

34. Singh.A., Management of Working Capital in State Undertaking of Assam -

An Inguirv into its Problems ( Ph.D. thesis) Gauhati University 1990.

35. Moray,J., Management of Working Capital in Sugar industry Gujarat

(Ph.D. thesis) Gujarat University 1988-90.

36. Poonia.M.S., Credit Planning and Working Capital Management of Bicycle

Industry in India ( Ph.D. thesis) Rajasthan University 1989-90.

37. Saxena.V.M., and P. Kumar 'Cash Disbursement Plan for Better Liquidity

Management - A Conceptual Framework' Chartered Accountant 1989.

38. Gopal,K., 'Inventory Management' - Management Accountant 1989.

39. Lal.S., Cash Management in Nepalese Public Enterprises ( Ph.D. thesis)

Delhi University 1991.

40. Kumar.S., Working Capital Management of Electronic - T.V.

Manufacturing Companies in India ( Ph.D. thesis) Rajasthan University

1991.
 40

41. Jayaram.N., Corporate Sector and Working Capital Deployment in India

(Ph.D. thesis) Kerala University 1991.

42. Reddy.C.S., and P.M. Reddy 'Cash Working Capital Versus Balance

Sheet Working Capital' - An Analytical Study' Accounting Finance 1992.

43. Basu.S.N., 'Working Capital in Tyre Companies' Management Accountant

-1992.

44. Banerjee.D., and M.K. Hazra 'Working Capital Management in Grasim

Industries Ltd. - A Case Study' Management Accountant 1992.

45. Sreekumar.A., Control Limits Model of Cash Management in Bank

Branches ( Ph.D. thesis) Praynan 1992.

46. Chander.S., and C.K.Mahajan 'Disclosure of Valuation of Inventories'

Management Accountant 1992.

47. Kundu.J.K., 'Funds Flow Statement - Treatment of Provisions and Effect

in Working Capital Management' Allahabad Kitab Mahal 1990.

48. Jankisan.N., and V.P. Gupta 'Working Capital Management and Profit

Planning Through PERT Networth - A Case Studv' 1888-89.

49. Deshpande.S.P., 'Mathematics of Working Capital Requiremenf

Accounting and Finance 1993.

 41

50. Joseph Heitner - Automotive Mechanics-Principles and Practices, East -

West Press. New Delhi 1967.

51. 'The Birth of Automobile" The Economic Times Feb 10, 1989.

52. Joseph Heitner op, cit.

53. The Birth of Automobile, op. cit.

54. Vidyadhar Date 'History of the Industry in India' The Economic Times

Junes, 1989.

55. Industrial Databook 1988-89, Facts and Figures 1991-92. Automotive

Components Manufacturers Association of India New Delhi 1993.

56. "The 1990s Looking Ahead" Indian Auto. 1990.

57. Economic Survey 1996.

58. Economic Times Feb. 1996.

59. 'Survey of Industry' The Hindu -1996.

60. Rao,K.R., 'Working Capital Planning and Control in Public Enterprises in

India' Aianta Publications 1985.

 42

CHAPTER - II

MANAGEMENT OF WORKING CAPITAL

This chapter has been divided into three parts. The first part deals with
the concept of capital and working capital. The second part analyses the
responses of the executives in six companies namely Bajaj Auto, Bajaj
Tempo, Eicher Motors, Eicher Tractors, Hero Honda and Escorts regarding
working capital management. In the last part, the performance of working
capital is evaluated for thirteen companies on the basis of their annual
reports.

2.1 CONCEPT OF CAPITAL -

The term capital has been defined differently by economists and

accounting experts. In economics capital means the stock of man made goods
as machinery, tools and buildings etc^. Such goods help in production of other
goods and do not directly satisfy consumers. Production needs resources i.e.
land, labor, entrepreneurship and capital. An economist by capital means
"capital goods' like machine, plants, building, raw material and
goods-in-process etc.^ Thus capital in economic sense is one of the factors of
production.

In a balance sheet the above items will be placed on the assets side
v\/hile the capital is shown on the liabilities side. For an accounting executive
capital means the contribution of the owner towards the business that can be
measured in money terms. He will not add capital to the assets side as he
considers business as a separate legal entity different from businessman and
 43

the business owes to businessman wtiat he has contributed Such kind of

separation between business and businessman will not be done by an

economist ^

The position statement has to be balanced This balancing is done in a

way that the net worth increases without increasing the business nsk The

balancing is financing" that is whenever there will be a rise in assets without

any simultaneous fall in any other existing asset there will surely be a nse in

capital and/or liability Liability is the obligation of a business towards

shareholders' (owners')/creditors' claims against the assets of a business ^

A firm borrows money from shareholders and creditors by which it

purchases various fixed assets No doubt fixed assets are essential for the

productive activities of the business but to make them operative a firm

requires additional capital A balance sheet only explains where the money

has been invested, while profit and loss account explains how the firm has

fared in a given time frame Thus the two statements are independent except

net worth in the balance sheet which is affected by a profit or loss ^

It IS important to note here that two similar profit and loss accounts of

two firms may not have similar balance sheets as financing of the operations

and fixed assets may be different ^

 44

Assets are the wealth of the firm that can be broadly grouped as fixed

assets and current assets. However, the entrepreneur will prefer to hold more

of fixed assets than current assets. His endeavor will be to find an ideal

situation v^^iere he can have the smallest production cycle, convert finished

goods into cash immediately, and the supply is so perfect that any quantity of

raw material is available when desired at fixed price. However, such ideal

situation never exists. An entrepreneur will find that production takes some

more time than expected, finished goods have to be sold even on credit, all

goods are not sold immediately, and supply is also not perfect. All these

non-ideal situations compel the owner to hold assets known as 'current

assets'. Thus current assets are the caution funds to be used for working

expenses. Since a business is a going concern it demands immediate

financing whenever needed. Thus the funding of working expenses is termed

as working capital.

2.1.1 CONCEPT OF WORKING CAPITAL -

In its evolutionary stage the term 'variable capital' was used by Karl

Marx and which meant payment to workers for the v^rk that is not yet

complete. He differentiated it from 'constant capital' which according to him

was a 'dead labor* that has already been used for processing raw material in
 45

the earlier stages to make it fit for further processing in the present stage.*

Thus 'variable capital' means the capital blocked in the process of converting

raw material into finished goods upto cash realization. Thus the concept of

working capital is embedded in 'variable capital.'

There are two distinct concepts of working capital : gross working

capital and net working capital. The first view is supported by Jules Bogen,

Edward S. Mead, John C Baker, D.W. Mallot, Kenneth Field, A.S. Dewing,

and A.K. Sen. According to them working capital means current assets.® Since

current assets are also financed by long term funds the concept of net balance

of current assets and current liabilities is not acceptable. The concept of gross

working capital in this study means cash and bank balances, short term

investments, accounts receivable and inventories.

A modern finance manager uses the going concern approach. Thus, no

doubt, there will be immediate exhaustion of current assets and liabilities but

because of continuous production cycle the market evolves a pattern where,

at all times, some sales are on credit, some purchases are on credit, some

goods -raw and finished- are in stores. Thus continuously new current assets

and current liabilities are contracted and both these components are dynamic

and stable in the present business environment. A modern finance manager,

now, not only searches for cheapest and convenient source of financing but
 46

also keeps an optimum balance between current assets and current liabilities

and also current assets and fixed assets. To conclude, the concept of gross

working capital is more alluring to the modern financial executive.

An economist defines fixed capital as long term assets, but a finance

executive considers fixed capital as one that has a long term maturity. He will

use fixed capital to finance not only fixed assets but also some portion of

current assets or even the whole of current assets. The capital needed to

finance current assets is known as gross working capital. Thus gross working

capital and current assets are interchangeable^" terms and it helps to give a

better understanding of profitability regarding management of current assets^\

The second^^ view is supported by E.A. Saliers, E. Lincoln, W.M.

Stevens, H.G. Guthman, H.E. Dougall, C. Park, J.W. Gladson and V.L. Gole

who defined working capital as excess of current assets over current

liabilities. The groups interested in this concept are the creditors who would

like to know the liquidity''^ position of the firm to pay current liabilities. Through

net working capital a creditor is able to know the 'margin of safety' that can be

determined by current ratio and more accurately by quick ratio. Through this

concept one is able to know the technical solvency^'' position of the firm. Thus

through gross working capital concept one is able to know the application^^ of

funds and by net vy«3rking capital concept the sources of funds.

 47

Although the two concepts are to be used in different situations they

have to be considered together from the view-point of risk, return and

uncertainty in order to understand working capital management.^^

There is another concept of working capital given by Gerstenberg^'^ as

'circulating capital'. By circulating capital he means all assets that change their

form in the ordinary course of business for example cash to inventories,

inventories to sales and from sales to cash. The time span as defined by

conventional definitions regarding circulation is one year.^^ But Park and

Gladson^® has suggested that the time span of one operating cycle be the

operating period, that is the period in which cash changes into cash after

changing into inventories and receivables^". After these various other

attempts were made to define the duration of operational cycle but none of

them proved satisfactory. This concept in India was first used by Chakrabort/^

when he defined current assets as all those assets that will convert into cash

v^thin the operating cycle period while the rest of the assets were non-current.

However, an operating cycle could even be negative when the number

of days of credit period availed is more than the credit days given, days of raw

material store, work in process days and finished good days. Ramamorth/^
 48

also could not explain this precarious situation and he suggested that this may

be due to excess suppliers' credit.

To conclude, since the purpose of the study is to examine working

capital management in automobile industry it is assumed that the executives

will be concerned with not only optimum utilization of current assets but also

the sources of finance. In this study the researcher has used the term working

capital in the sense of net working capital. As Citiman explains The goal of

working capital management is to manage cash of the firm current assets and

current liabilities in such a way that an acceptable level of net working capital

is maintained.^^

2.2 COMPANY WISE WORKING CAPITAL PRACTICES -

The second part presents the analysis of certain general issues

pertaining to working capital in automobile companies considered in the

research study. The section that follows describes the management of

working capital as practiced company wise. The first part explains the

objectives, policy and planning of working capital and is followed by the

 4S

organizational framework regarding working capital and finally the control and

review of working capital.

2.2.1 OBJECTIVES POLICY AND PLANNING -

In Hero Honda the highest ranking official in the functional area of

finance is Senior Vice President finance. He reports to the Directors. In

Escorts the Managing Director is the highest ranking official in the functional

area of finance who reports to the Board of Directors. In Eicher Motors and

Eicher Tractors the Group General Manager is the highest ranking official in

the functional area of finance and he reports to the Managing Director. In Bajaj

Auto Manager Finance is the highest ranking official in the functional area of

finance and he reports to the General Manager Finance. In Bajaj Tempo the

Senior General Manager Finance is the highest ranking official in the

functional area of finance and he reports to the Chairman and Managing

Director.

The recording and accounting procedures in the finance department is

fully computerized in Hero Honda. In Escorts it was likely to be fully

computerized by October 1996. In Eicher Motors and Eicher Tractors it is

partially computerized. The accounting and recording procedures is partially

computerized in Bajaj Auto. The working capital management is centralized

 50

and the objective of working capital management is efficient use of current

assets, liquidity and profitability in Hero Honda. In Escorts working capital

management is partly centralized and partly decentralized as limits are

decided at the Division level and whenever there is shortage at the Division it

takes the money from the Head Office, also the surplus at the Divisions are

transferred to the Head Office. The objective of working capital is liquidity. In

Eicher Motors and Eicher Tractors the objective is efficient use of current

assets. In Bajaj Auto the objective of working capital management is liquidity,

profitability and efficient use of current assets. In Bajaj Tempo the recording

and accounting procedures in the finance department is partially computerized

and the working capital management is decentralized. The objective of working

capital management in the company is liquidity, profitability and efficient use

of current assets.

Hero Honda's policy of working capital is to achieve its objectives of

efficient and timely production, minimum level of each component of working

capital, and continuous review of situations for effective management of

Inventory. The policies of Escorts is to achieve its objectives of efficient and

timely production, minimum level of each component of working capital and

continuous review of situation, managing Inflows and outflows without affecting

production and sales, maximizing creditors and minimizing receivables,

effective management of Inventory, review and follow up of credits. The

 51

policies of Eicher Motors and Tractors to achieve its working capital objectives

are efficient and timely production and effective management of inventory. In

Bajaj Tempo the policy of working capital is to achieve its objective of

managing inflows and outflows without affecting production and sales.

In Hero Honda the working capital requirement is determined by overall

budgeting method and cash forecasting. The budget is prepared for long term

(for a period of five years) and also annually and half yearly. Once the budget

is prepared it is reviewed periodically. The budget is prepared in coordination

v^rith the production budget, sales and collection. The only problem of

coordination the company has faced is due to the exchange rate fluctuations of

imported components.

In Escorts the methods of determining working capital requirement are

overall budgeting and cash forecasting method. The basis of determination are

sales, operating cycle, installed capacity and capacity actually used. The

working capital budget is prepared on long term basis (for a period of five

years) and objectively for a period of two years, quarterly, monthly and

weekly. The budget cycle is followed and subsequently reviewed. It is

prepared in coordination with the budgets of production, sales and collection.

The problems experienced in coordination are inadequate information from

coordinating departments, difficulty in determining the dispatch schedule to

 52

meet customer requirements and terms of payment and invoicing. The

company further added that they regularly supply the products and the

government also allov^ to import. It gets no subsidy except duty drawbacks,

there are instances of obsolescence in case of design, at times they even

receive cooked up information from the coordinating department and there is

delay in collection of receivables. However the collection of receivables is

monthly reviewed by the zonal managers and follow up is done by the

marketing manager. The company has to maintain a high level of imported

inventory, they have line production, and the products are well accepted in the

market.

In Eicher Motors and Eicher Tractors overall budget method is used to

determine working capital requirement. The basis of determination are

production and sales. The budget is prepared on an annual basis with half

yearly budget period and are subsequently reviewed. The problems

experienced in the matter of coordination is delay in collection of receivables.

In Bajaj Auto budget is prepared at the Head Office. In Bajaj Tempo the

v^rking capital requirement is determined by overall budgeting method. The

basis of working capital determination is production and sales, and the

working capital budget is prepared on an annual basis. Once the budget cycle

is determined, the subsequent budget periods are reviewed. The working

 53

capital budget is prepared in co-ordination with the budgets of production,

sales and collection functions. The problems experienced in the matter of

co-ordination are matching production with sales and difficulty in scheduling

of production of long production cycle items and short production cycles.

2.2.2 ORGANIZATION -

In Hero Honda a chain of top executives are responsible for the overall

v^rarking capital management, headed by Senior Vice President aided by

Senior Manager Finance (Operations) who formulate and implement the

policies. Senior Manager Finance (Corporate Affairs) compiles data, studies

various techniques, implements them, and coordinates different activities. The

Manager Finance (Treasury) looks after management information system and

prepares reports. In Bajaj Tempo Senior Manager Finance is responsible for

the overall working capital management.

The responsibilities of the Finance Executive regarding planning of

working capital management are determining working capital requirement,

fixing norms for vyrarking capital components and determining sources of

working capital funds. For organizing working capital management the

responsibilities are preparing information reports for managerial action,

reporting to the management about money locked up in working capital and

 54

monitoring sources and application of funds. For controlling working capital the

responsibilities are of utilization of funds for maximizing profitability, debtors

payment and cash operations.

In Escorts the Chief Finance Officer (Financial Controller) is responsible

for the overall \Arorking capital management. For planning, the responsibilities

of the financial executives are determining working capital requirement, fixing

norms for working capital components, formulation of accounting policies and

installing systems of inventory valuation. For organizing, the responsibilities

are preparing information reports for management action, monitoring levels of

working capital and reporting to management about money locked up in

working capital. Controlling is done at the plant level and the responsibilities

are utilization of funds for maximizing profitability, controlling the carrying,

holding and ordering cost, debtors payments and cash operations.

In Eicher Motors and Eicher Tractors the Group General Manager

Finance is responsible for the overall working capital management. The

responsibilities of the financial executive regarding planning are determining

working capital requirement, methods of controlling working capital and

sources of working capital funds. For organizing the responsibilities are

preparing information reports, monitoring levels of working capital and

reporting to management the money locked up in working capital. For

 Ci

controlling the responsibilities are utilization of funds for maximizing

profitability, controlling, holding and carrying costs.

In Bajaj Auto the General Manager Finance is responsible for overall

working capital management. In Bajaj Tempo the responsibilities of the

financial executive regarding planning of working capital are determining

working capital requirement, fixing norms for working capital requirement,

formulation of effective cash and credit management and installing system of

inventory valuation. Regarding organizing, the responsibilities are preparing

information reports of working capital for managerial action, monitoring levels

of working capital and report to the management the money locked up in

working capital. For controlling the responsibilities are utilization of funds for

' maximum profitability.

2.2.3 CONTROL AND REVIEW -

In Hero Honda the company follows the policy of authorization of

working capital expenditure and determining the expense limits based on

budgets. The limit of authorization varies from time to time. There are

instances when the limits have been exceeded. The main reasons for this are

price escalation, shortage of raw material stores and spares etc., changes in

government policies, control, increase in costs and volume of output. There is

 56

no manual containing rules and procedures related to working capital. For

determining NA/orking capital norms it calculates net working capital to net worth

ratio and current ratio. Current ratio is an industry norm, wtiile organization

norm is an average of past achievements. Besides this, control is also done by

information system v^ich includes reports, statements, feedback and review

and just-in-time approach that means no excess goods in store. The working

capital norms are reviewed quarterly.

The company has only one human problem that is playing safe by the

operating executives. It has not experienced any working capital shortage.

However, there have been situations of excess working capital that has been

temporarily invested and also utilized for repayment of debt. They do not face

problems in following Tandon Committee recommendations as they have low

inventory and receivables because of better profitability, control and surplus

funds. There is no peculiar problem regarding working capital management in

the organization.

Escorts follows the policy of authorization of working capital expenditure

at the plant level. The company does not allow use of funds in excess of

authorization limits. There is no manual containing rules and procedures

related to working capital. The company uses current assets to fixed assets

ratio, net working capital to net worth ratio, net working capital to total assets
 57

ratio and current ratio as working capital norms. The company uses return on

investment ratio as the industry norm, \A/hile organization norm is an average

of the past achievement.

It also uses information system which includes reports, statements,

feedback, review and government guidelines. The working capital norms are

reviewed monthly.

The company is facing human problem in production as the concerned

executives want to keep too much inventory whereas financial executives want

to have an optimum level of inventory. Other problems are wrong codification,

diversity of product line, increased outstanding, sudden changes in prices of

crucial products and government decisions regarding pricing.

The company has experienced working capital shortages occasionally.

The main reasons of shortage are shortfall in receipts from sale proceeds,

delay in realization of dues from debtors, excessive credit granting to

customers and payments withheld by clients. There have been excess working

capital situations, but this excess amount has been temporally invested and

utilized for repayment of debt.

 58

The problems peculiar to the organization are power and water supply,

difficulties in collection of dues, poor control over import and occasionally

there are too high current asset levels due to contingent payment.

In Eicher Motors and Eicher Tractors the authorization of working

capital expenditure is done at the divisional level based on the division's

requirements. There is no manual containing rules and procedures related to

working capital. To determine the working capital norms the company

calculates net working capital to total assets and current ratio. The company

uses organization norms which is an average of the past achievement. The

methods used to control and review the working capital is information system

which includes reports, statements, feedback, and review.

The working capital norms are annually reviewed. The company has

faced the problem of increased outstanding in working capital control. The

company has not faced any working capital shortage. The excess working

capital remains unutilised. The company finds difficulty in implementing

Tandon Committee norms regarding inventory. The only peculiar problem of

v^rking capital management is the problem of collection.

Bajaj Auto follows the policy of authorization of v^rking capital

expenditure. There is no manual containing rules and procedures related to

 58

working capital. The norms are reviewed annually. The company has faced

the human problem of playing safe by the operating executives. It has not

faced any working capital shortage. There have been instances of excess

working capital that was temporarily invested in certificate of deposits.

Bajaj Tempo follows the policy of authorization of working capital. The

company uses current assets to current liabilities ratios to determine working

capital norms. The company also considers industry norms in this regard.

To control and review vw^rking capital the company uses net working

capital to net worth ratio that indicates the real picture of industrial wealth

since it takes into account the overall profitability and working capital position.

The company reviews its working capital norms monthly. The company faces

the human problems that is production executives want to keep as high

inventory as possible whereas financial executives want to keep an optimum

level. Another problem is of wrong codification. There have been instances of

excess working capital that has been utilized for repayment of debt by the

company. The company is facing a peculiar problem of non-availability of

credit and non-standardized items.

 60

2.3 EVALUATION OF WORKING CAPITAL

In the last part of the chapter the evaluation of working capital has been

done for thirteen companies with the help of ratios for a period of five years.

The company has to manage its fixed assets and current assets

effectively in order to achieve the objective of generating profits. In managing

working capital, the executive has to make a trade off between liquidity and

profitability. A high liquidity will help in eliminating the risk of technical

insolvency though it will also have long term repercussions. At the same time

low level of liquidity will mean more risk of non- payment to creditors on time

which may lead to irregular supply leading to irregular production v^ich will

again mean more blockage of funds in working capital. To achieve an

optimum level of working capital it is important that it should be available in

right quantity and at right times. This section attempts to analyze the liquidity

and profitability of working capital management in selected units and measure

the performance of the companies quantitatively vis-a-vis industry.

 61

2.3.1 CURRENT ASSETS CURRENT LIABILITIES AND WORKING

CAPITAL

This table helps to know the rise and liquidity position of the companies

under study. It clearly shows that in general the size of current assets, current

liabilities and working capital has continuously increased although the rate of

increase has been varying.

The highest rise in current assets and current liabilities have been in

car and jeep segment of the industry while the highest rise in working capital

has been in two and three wheelers segment. In company wise analysis it is

observed that the increase in current assets was highest in Bajaj Auto v\/hile

the highest increase in current liability was in Bajaj Tempo and the highest

increase in working capital was in T.V.S. Suzuki.

The proportional rise in current assets has been more than the rise in

current liabilities except Bajaj Tempo, Eicher Motors, and Kinetic Honda.

However only in car and jeep segment of the industry the proportional rise in

current liabilities is more than current assets.

It can also be observed from the table that during 1993-94 all the

companies except Bajaj Tempo, and Eicher Motors have shown a fall in

current assets, current liabilities and working capital, even the industry

averages has fallen during this period in the commercial vehicle segment.
 62
TABLE 2.3.1

CURRENT ASSETS, CURRENT LIABILITIES AND WORKING CAPITAL

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95
TELCO 1170 72 1952 93 2408 34 2260 63 2707 93
895 90 1324 86 1682 14 155155 1928 63
274 82 628 07 726 20 709 08 779 30

ASHOK LEYLAND 438 17 746 80 784 63 76) 10 1326 93

21150 337 65 286 94 323 35 433 72
226 67 409 15 497 69 435 75 893 21

ESCORTS 350 71 384 48 410 74 455 43 542 75

223 09 268 20 277 69 293 54 309 15
127 62 116 28 133 05 16189 233 60

BAJAJ TEMPO 93 76 107 57 126 32 194 24 250 78

56 83 64 40 79 67 145 78 190 49
36 93 43 17 46 65 48 46 60 29

EICHER TRACTORS 56 12 67 85 90 09 110 29 118 89

38 63 31 90 54 30 44 93 60 32
17 49 35 95 35 79 65 36 58 57

EICHER MOTORS 45 93 5721 56 35 59 02 87 37

3193 41 49 46 52 45 67 63 75
14 00 15 72 9 83 13 35 23 62

COMMERCIAL 1897.62 3026.22 3566.48 3470.99 4957.14

VEHICLE INDUSTRY 1388.33 1952.28 2293.17 2269.97 2862.38
AVERAGE 509.29 1073.94 1273.31 1201.02 2094.76

HINDUSTAN MOTORS 317 84 304 47 334 01 351 40 388 60

254 04 268 85 300 88 275 30 296 28
63 80 35 62 33 13 76 10 92 32

MAHINDRAAND 469 38 541 50 653 97 953 37 1149 06

MAHINDRA 263 68 324 54 401 55 395 62 544 97
205 70 216 96 • 252 42 557 75 604 09

CAR AND JEEP 1742.68 1777.98 1994.26 2817.67 4661.75

AVERAGE 1150.60 1241.73 1437.62 2179.75 3724.54
592.08 536.25 556.64 637.92 937.21

BAJAJ AUTO 383 29 427 65 428 46 654 27 1246 10

262 55 27135 217 36 276 23 332 35
120 74 156 30 211 10 378 04 913 75

LML 154 03 129 26 150 93 183 06 232 45

155 45 153 38 180 50 176 44 211 87
-142 -26 12 -29 57 6 62 20 58

T V S SUZUKI 58 73 56 90 63 00 70 72 110 05
79 36 76 35 77 70 72 89 92 24
-20 63 -19 45 -14 70 -2 17 17 81

HERO HONDA 63 68 76 63 93 77 112 79 145 03

62 38 57 40 57 99 84 53 127 82
130 19 23 35 78 28 26 1721

KINETIC HONDA 23 50 3194 44 44 42 16 5148

14 58 2198 24 09 21 12 32 95
8 92 9 96 20 35 2104 18 53

TWO AND THREE 903.24 966.68 1043.03 1336.04 2101.47

WHEELER INDUSTRY 823.29 857.28 890.35 1038.47 1322.57
AVERAGE 79.95 91.40 152.68 297.57 778.90
SOURCE : BASED ON DATA COMPILED FROM CMIE AND CAPITALINE, NEW DELHI.
2.3.2 WORKING CAPITAL AS A PERCENTAGE OF TOTAL ASSETS -

This ratio indicates the current assets sufficiency as compared to total

assets. The table shows that Ashok Leyland has the highest ratio in all the

years except in 1993-94 when it was second highest. The ratio is lowest in

Eicher Motors for the last three years. The trends over the years show that the

ratio in TELGO and Bajaj Tempo are declining and in Eicher Motors it is

rising. However even the industry averages are also not showing any

consistency.

In car and jeep segment of the industry the ratio is very high in

Mahindra & Mahindra for last three years when compared with industry

averages. The ratio was too low in Hindustan Motors except for last year

when compared with industry averages. The ratio is showing a rising trend in

both the companies.

In two and three wheelers segment of the industry the ratio is very high

in Bajaj Auto when compared with industry averages. Similar is the case with

Kinetic Honda and Hero Honda where the ratio was less than industry average

during 1994-95. However Bajaj Auto is showing a rising trend.

Since 1992-93 all the segments in the industry are shov\/ing a declining

trend.
 64
TABLE 2.3.2

WORKING CAPITAL TO TOTAL ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 16 19 23 78 2174 2105 18 83

ASHOK LEYLAND 37 4« 41 44 44 28 34 99 46 71

ESCORTS 24 58 20 07 22 00 24 87 31 31

BAJAJ TEMPO 28 65 29 62 27 99 20 03 19 43

EICHER TRACTORS 2148 35 72 24 02 37 66 32 02

EICHER MOTORS 22 43 20 29 12 52 15 10 19 19

COMMERCIAL 20.95 18.60 26.01 25.41 22.86

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 12 22 6 07 5 26 1166 13 62

MAPflNDRAAND 27 61 25 89 26 01 44 61 39 81
MAHINDRA

CAR AND JEEP 27.52 22.67 18.92 16.91 14.37

AVERAGE

BAJAJ AUTO 17 54 21 15 29 30 4140 57 81

LML 00 00 00 00 00 00 2 66 6 33

T V S SUZUKI 00 00 00 00 00 00 00 00 10 80

HERO HONDA 1 04 13 60 22 22 15 04 7 52

KINETIC HONDA 2142 19 18 3141 34 05 25 10

TWO AND THREE 4.09 5.42 5.71 9.29 15.59

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 65

2.3.3 CURRENT ASSETS TO SALES -

This ratio indicates the amount of funds blocked in raw material,

finished goods and debtors. Too low ratio will indicate that the company does

not have sufficient funds to operate while too high ratio will indicate that the

funds are not optimally used.

in the commercial vehicle segment the ratio is highest in Ashok Leyland

except in 1992-93 when it was second lowest. The ratio was lowest in Eicher

Tractors for the period of study except for 1993-94 and 1994-95 when it was

second lowest. The ratio is shoving variable trends in companies and

commercial vehicle segment industry in general.

In car and jeep segment Hindustan Motors is shov^ring a falling trend

while Mahindra & Mahindra is showing a rising trend. However there is no

substantial rise in trend in this segment in general.

In the two and three wheelers segment the ratio was highest in LML

throughout the period except in 1995 when it was second highest and the

ratio was lovy^st in Kinetic Honda except for 1995 when it was second lowest.

The industry average has shown a very slow rising trend except for 1995 when

it substantially increased.

The rise in this ratio over the period was highest in the commercial

vehicle segment however it was not substantially high when compared with car

and jeep segment, and two and three wheelers segment.

 66
TABLE 2.3.3

CURRENT ASSETS TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 0 46 0 63 0 81 0 62 0 48

ASHOK LEYLAND 0 47 0 71 0 80 0 62 0 86

ESCORTS 0 37 0 36 0 43 0 44 0 40

BAJAJ TEMPO 0 37 0 38 0 37 0 38 0 45

EICHER TRACTORS 0 24 0 30 0 34 0 45 0 41

EICHER MOTORS 0 33 041 0 47 0 42 0 42

COMMERCIAL 0.46 0.63 0.76 0.59 0.60

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 0 50 0 51 0 48 0 40 0 39

MAHINDRAAND 0 47 0 45 0 45 0 57 0 56
MAHINDRA

CAR AND JEEP 0.47 0.41 0.42 0.49 0.59

AVERAGE

BAJAJ AUTO 0 33 0 35 0 34 0 41 0 58

LML 0 68 061 0 58 0 52 0 45

T V S SUZUKI 0 42 0 34 0 34 0 26 0 27

HERO HONDA 0 33 0 30 0 28 0 31 0 30

KINETIC HONDA 0 16 0 18 0 28 0 23 0 29

TWO AND THREE 0.40 0.39 0.39 0.40 0.48

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI.
 67

2.3.4 WORKING CAPITAL TO SALES -

This ratio indicates the company's liquidity and profitability positions. A

high ratio indicates undertrading which means that the company should invest

more in fixed assets than current asset and the company is very liquid. A low

ratio indicates overtrading and the company should divert funds in current

assets.

Following is the analysis of this ratio in the three segments of the industry.

In commercial vehicle segment the ratio has been highest in Ashok

Leyland throughout the period when compared with the segment averages.

Escorts and Eicher Motors have shown a continuous rise in the ratio since

1991-92 and 1992-93 respectively. However other companies and the

segment in general are showing no consistent rise or fall in the ratio during the

period.

In the car and jeep segment the ratio in Mahindra and Mahindra is very

high as compared to segment averages and is substantially on the rise for last

two years. However, this ratio is showing a declining trend till 1992-93.
 68

In two and three wheelers segment the ratio is highest in Bajaj Auto throughout

the period. Besides this it is also showing a substantial rising trend. However

Kinetic Honda is showing a declining trend since 1992-93. The ratio in the

segment on an average is showing a substantial rising trend.

The ratio is showing a rising trend in two and three wheelers and

shov\/ing a declining trend in car and jeep segment.

 69
TABLE 2.3.4

WORKING CAPITAL TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 10 77 20 23 24 33 19 33 13 82

ASHOK LEYLAND 24 18 38 66 50 95 35 94 57 92

ESCORTS 13 36 10 85 13 95 15 75 17 08

BAJAJ TEMPO 14 65 15 38 13 64 951 10 84

EICHER TRACTORS 7 38 16 08 13 59 26 75 20 00

EICHER MOTORS 10 20 11 18 8 29 961 11 32

COMMERCIAL 14.54 12.29 22.31 27.23 20.57

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 10 01 6 01 4 76 8 66 9 36

MAHINDRAAND 20 61 1831 17 32 33 34 29 65
MAHnvfDRA

CAR AND JEEP 19.15 16.03 12.33 11.82 11.09

AVERAGE

BAJAJ AUTO 1041 12 86 16 94 23 58 42 51

LML 00 00 00 00 00 00 190 3 98

T V S SUZUKI 00 00 00 00 00 00 00 00 4 36

HERO HONDA 061 7 09 1187 7 75 3 61

KINETIC HONDA 6 23 5 73 12 90 1168 10 31

TWO AND THREE 2.88 3.50 3.66 5.77 8.97

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 70

2.3.5 CURRENT RATIO -

This ratio helps to determine the technical solvency as well as short

term financial strength of the firm. Although this ratio does not define clearly

the ability to pay off current liabilities, it indicates whether the firm has the

capacity to carry on its operations smoothly or not. While determining the

liquidity position of the firm on the basis of this ratio it should also be kept in

mind whether the company will be able to realize inventory and receivables in

full and also whether any contingent liability has to be paid in future. A high

ratio indicates that the company is having idle cash or majority of current

assets are having poor liquidity, a high ratio may be also because of window

dressing. A low ratio is also indicative of the fact that a company has a high

turnover. This ratio helps in knowing whether there is any overtrading.

The analysis of this ratio is given below -

In the commercial vehicle segment the ratio is highest in Ashok Leyland

that is showing a consistent rise in the ratio. Escorts is showing a rising trend

while Bajaj Tempo is showing a declining trend. None of the companies are

matching the industry average. Even the industry average is fluctuating over

the study period.

 71

The car and jeeps segment is also showing similar trends except that

the industry average in this segment is continuously on decline.

In two and three wheelers Bajaj Auto, LML, and TVS Suzuki are

showing a rising trend. Even the industry average is showing a rising trend.

Although T.V.S. Suzuki is showing a rising trend still the ratio is too low as far

as liquidity is concerned.
 72
TABLE 2.3.5

CURRENT RATIO

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 131 147 143 146 140

ASHOK LEYLAND 2 07 221 2 73 2 35 306

ESCORTS 157 143 148 155 176

BAJAJ TEMPO 165 167 159 1 33 1 32

EICHER TRACTORS 145 2 13 166 2 45 197

EICHER MOTORS 144 1 38 1 21 1 29 1 37

COMMERCIAL 1.48 1.71 1.90 1.68 2.41

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 125 1 13 1 11 128 1 31

MAHINDRAAND 178 1 67 163 241 2 11

MAHINDRA

CAR AND JEEP 1.55 1.50 1.45 1.30 1.25

AVERAGE

BAJAJ AUTO 146 1 58 197 2 37 3 75

LML 0 99 0 83 0 84 104 1 10

T V S SUZUKI 0 74 0 75 081 0 97 1 19

HERO HONDA 102 1 34 162 133 1 13

KINETIC HONDA 161 145 1 84 2 00 1 56

TWO AND THREE 1.12 1.12 1.20 1.32 1.62

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 73

REFERENCES

1. Saluja, Mehta, Saluja 'An Introduction To Economic Theory' Arva Book

Depot. Educational Publishers and Book sellers 30. Nai Wala. Karol

Bagh New Delhi.

2. Samuelson.P.A., 'Economics' Eleventh edition McGraw Hill Kogakusha

Tokyo 1980.

3. Ibid.

4. Bhattacharya Hrishikes., 'Toward A ComprehensiveTheory of Working

Capital A Techno-Financial Approach ' Economics And Political Weekly

August 29, 1987.

5. C.F.A. glossary.

6. Ibid. 4.

7. Ibid. 4.
 74

8. Luxembourg Rosa The Accumulation of Capital' Modern Reader

Paperbacks U.S. 1968.

9. For different opinions on working capital see -

Jules L. Bogen, Financial Handbook The Ronald Press Co. New York

1993.

Edward S. Mead 'Corporate Finance' Appleton Century Company, New

York 1933.

John C. Backer and D.W. Mallot, 'Introduction to Corporate Finance,

McGrawHill Book Co.. New York 1936.

Kenneth Field 'Corporation Finance' The Ronald Press Company. New

York 1938.

Dewing A.S. 'The Financial Policy of Corporations' The Ronald Press

Company New York 1953.

Sen A.K. 'Working Capital in the Indian Economy - A Conceptual

Framework and some Estimates in Pricing and Fiscal Policies', George

Allen and Unwin Ltd. London 1964

10. Bogen,J.I., 'Financial Hand Book' Third Edition Ronald Press 1948.

11. Vijaya Saradhi.S.P., and K. Rajeshwara Rao 'Working Capital Inyestment

and Financing in Public Enterprises' Manaoement Accountant 1978.

12. For the definition of net Working Capital see-

 75

Saliers.E.A., Handbook of Corporate Management Procedure, McGraw

Hills New York 1934.

Lincoln.E.E., 'Applied Business Finance' McGraw Hill 1929.

Stevens,W.M., 'Financial Organization and Administration' McGraw Hill

New York 1934.

Guthman,H.G., and H.E. Dougall 'Corporate Financial Policy' Prentice

Hall New York1959.

Park,C., and J.G. Gladson, 'Working Capital' Macmillan Company New

York 1963.

Gole.V.L., 'The Management of Working Capital' Australian Accountant,

Melbourne 1959.

13. Maness Terry S., 'Introduction to Corporate Finance' McGraw Hill

international Edition 1988.

14. Walter James C, 'Determination of Technical Solvency 'Journal of

Business 1957.

15. William H. Husband and James C. Dorkeray 'Modern Corporation

Finance' Richard D. Irwin Inc.. Illinois 1966.

16. James C. Van Home, 'Financial Management and Policy' Prentice Hall of

India Pvt. Ltd. 1983.

 76

17. Gerstenberg.C, 'Financial Organization and Management of Business'

ivth edition Asia Publishing House Bombay 1960.

18. International Accounting Standard Committee' Current Assets and

Current Liabilities' 1978.

19. Park.C, and J. W. Gladson 'Working Capital' The Macmillan Co. New

York 1963.

20. Kirkman,P., 'Working Capital Management' Issues in Finance Philip Allen

Publishers Oxford 1986.

21. Chakraborty.S.K., 'Management of Working Capital' and the Operating

Cycle Concept' IIM Calcutta.

22. Ramamorthy.V.E., 'Working Capital Management' Institute for Financial

Management and Research Madras 1976.

23. Citiman.L.I., Principles of Management Finance' Harper and Rao

Publishers 1976.
 77

CHAPTER - III

FINANCING OF WORKING CAPITAL

This chapter is divided into three parts. The first part deals wth the

concept of financing of working capital followed by the responses of executives

of six companies i.e. Bajaj Auto, Eicher Motors, Eicher Tractors, Hero Honda,

Bajaj Tempo and Escorts. In the last part financing of working capital has been

evaluated in thirteen companies through annual reports for the last five years.

The first part explains the concept of working capital financing, forecasting,

then operating cycle and finally the sources of working capital finance.

3.1 CONCEPT OF FINANCING OF WORKING CAPITAL -

A firm has to judiciously use funds to generate profits. "For without

proper finance there will be no efficient planning, nor purchase of raw material,

nor production, nor marketing, nor arfyCfafr profit the latter in its turn forming

the foundation of finance itself'.^

There are conflicting views regarding the nature of financing v^rking

capital. One view is that working capital needs are short term in nature as they
 78

are self liquidating^ in nature. Another view is that since a firm is a going

concern, so >A/orking capital needs are continuous as well as long term in

nature.

The third view is that financing Is need based. According to this view

the working capital requirement is not consistent throughout the year. Its need

will fluctuate taking into account the nature of business, seasonality etc.

There will be a fixed requirement of working capital throughout the year to pay

for rent, salary etc. and variable requirement which will increase or decrease

with the level of production. The fixed part should be financed by long term

sources and the fluctuating part from short term sources.^

A bank will prefer to finance only that part of working capital which can

be realized even in worst conditions, while, the balance however as margin

money^, be arranged by the owner.

3.1.1 FORECASTING OF WORKING CAPITAL REQUIREMENT -

To determine financial needs of a company sales forecasting is done

generally for two different time frames i.e. long term (3-5 years) and short term

(six months, three months or one month). The short term sales forecasting

helps in forecasting working capital requirement.^

 78

"Forecasting becomes the basis of co-ordinated thinking about the

future and reduces emergency decisions and surprises. It can be used to set

standards of performance to measure and control the separate and collective

decisions in various parts of the company. It can be used to anticipate financial

needs and the financial effects of new and changing policies. It also forms a

good basis for discussing the fund needs with prospecting creditors."^

There are two methods of forecasting : conventional and statistical.

Conventional forecasting is a purely human judgement analysis where the

projections are based upon the intuition and logic of individuals or group of

persons. Statistical method brings in more accuracy to projections although

the element of uncertainty is not eliminated by this method also.^

3.1.2 CONCEPT OF OPERATING CYCLE -

The concept of operating cycle was developed by Park Gladston* it

begins with the acquisition of raw materials and ends up with the collection of

receivables.® The fundamental function of working capital is to meet cash

demand on a continuous basis^°. The need of working capital at a given time

will be determined by the operating cycle.

 80

An operating cycle is a summation of raw material and stores stocking

period, work-in-process period, debtors collection period, finished goods

storage period less the creditors payment period.

3.1.3 SOURCES OF WORKING CAPITAL FINANCE -

The sources of finance can broadly be divided into short and long term

sources. The long term finance includes external sources like ordinary shares,

preference shares, debentures and loans from financial institutions and

internal sources like retained earning, provisions for depreciation etc. The

short term finance includes external sources like goods on credit, bank

borrowings, discounting of bills, overdraft, advances and deposits from friends

and employees etc., and internal sources like gratuity, dividend,

contingencies, pension, provision for taxation and other miscellaneous

liabilities like unclaimed dividend, outstanding salaries and wages, etc.

3.2 COMPANY WISE FINANCING OF WORKING CAPITAL

PRACTICES-

The second part of this chapter deals with the responses received from the

excutives of Hero Honda, Eicher Motors, Eicher Tractors, Bajaj Auto, Bajaj Tempo
 81

and Escorts. First it explains the approacties to financing, followeci by forecasting,

sources and forms of financing and finally the policy of the companies regarding

financing of working capital.

3.2.1 APPROACHES TO FINANCING -

Hero Honda Eicher Motors, Eicher Tractors and Escorts use hedging

approach in financing of working capital. Bajaj Auto and Bajaj Tempo have a

conservative approach of financing working capital.

3.2.2 FORECASTING -

In all the companies working capital forecasting is done by

formal/statistical methods. Hero Honda, Escorts and Bajaj Auto use panel of

experts, moving averages, exponential smoothing, trend adjusted exponential

smoothing and trend projection tools for forecasting working capital. In Bajaj

Tempo, Eicher Motors and Eicher Tractors working capital forecasting is done

by informal method.
 82

All the companies have experienced situations when forecasted values

deviated from actual requirements of working capital. However, all the

companies emphasized uncontrollable factors being responsible for such

occurrence.

The duration of operating cycle in Hero Honda and Escorts is

approximately fortyfive days. In Escorts it is about forty days and in Eicher

Motors and Eicher Tractors it has being varying between forty to fifty five days .

Bajaj Auto did not respond. In Bajaj Tempo the duration of operating cycle is

thirty days.

Operating cycle remains constant in Hero Honda while it fluctuates in

Escorts, Eicher Motors and Eicher Tractors. Bajaj Auto did not respond. The

operating cycle remains constant in Bajaj Tempo.

In Hero Honda and Escorts operating cycle period is considered in

forecasting. Eicher Motors, Eicher Tractors and Bajaj Auto did not respond. In

Bajaj Tempo operating cycle is incorporated in forecasting working capital

requirement through constant study of market and mobilization of funds.

Operating cycle is kept constant while determining demand on the basis

of advance booking, followed by supply schedules and finally with the help of
 83

dedicated ancillaries in Hero Honda. Eicher Motors, Eicher Tractors and Bajaj

Auto did not respond.

3.2.3 SOURCES AND FORMS OF FINANCING WORKING CAPITAL -

The main sources of working capital finance in Hero Honda are long

term external sources such as debentures and loans from financial institutions;

long term internal sources like retained earnings; short term external sources

like bank borrowings, discounting of bills and overdraft and short term internal

sources when provision of funds made for future payments are used for

working capital requirements. In Escorts the major sources of financing

working capital are long term external sources like ordinary shares, preference

shares, debentures and loans from financial institutions; long term internal

sources like retained earnings; short term external sources like goods on

credit, bank borrowings, discounting of bills, and overdraft. In Eicher Motors

and Eicher Tractors the main sources of financing of working capital are short

term external sources like borrowings. In Bajaj Auto the major sources of

financing are long term external sources like ordinary shares and short term

external sources like bank borrowing and goods on credit earning. In Bajaj

Tempo the major sources of working capital finance are long term external

sources like loan from financial institution; long term internal sources like
 84

retained earning; short term external sources like goods on credit and bank

borrowing; and short term internal sources like provision for taxation.

The major forms of financing in Hero Honda are current liability, cash

credit, working capital loan from central government and equity/long term

loans. In Escorts the major forms include all the above specified in case of

Hero Honda except working capital loan from central government; it also

includes deferred credit. In Eicher Motors and Eicher Tractors the major form

of financing is cash credit. Current liability is the major form of financing in

Bajaj Auto. In Bajaj Tempo the major forms of financing working capital are

current liability, cash credit, deferred credit and equity/long term loans.

3.2.4 POLICY -

The overall policy of Hero Honda regarding financing of working capital

is to satisfy all variable needs with short term sources and only for the periods

needed, and financing inventory only from long term sources and one half of

the current assets by long term sources. The overall policy of Escorts in this

regard is to finance a portion of variable need with long term sources and a

portion of the permanent needs from short term sources. The overall policy of

Eicher Motors, Eicher Tractors and Bajaj Auto is to satisfy all variable needs

with short term sources and only for the period needed. The overall policy of
 85

Bajaj Tempo regarding financing of working capital is to satisfy all variable

need with short term sources and only for the period needed and inventories

only from long term sources.

There was no peculiar problem regarding financing of working capital in

any of the companies. Hero Honda further emphasised that they do not face

much problem in this regard because of well defined system, dedicated

ancillaries, production based on actual demand. Product is the main constraint

as the company is using full capacity whereas demand is high. Company is

expanding its plant capacity and is about to set up a new plant also. Besides

this it also has a well-defined dealer network and specific transporters. In Bajaj

Tempo there is no peculiar problem regarding financing of working capital

but changing credit policy and constant market fluctuations create a lot of

problems in formulating working capital requirements. At times they get normal

credit from suppliers and sometimes they have to pay immediately for urgency

of material which results in cash crunch or cash crisis for a short while.

3.3 EVALUATION OF FINANCING OF WORKING CAPITAL-

In the last part of the chapter the evaluation of financing of working

capital has been done for thirteen companies with the help of ratios for a

period of five years.

 86

It was emphasised in chapter II that funds should be made available in

right quantity and at right time to manage working capital effectively. Here it

needs to be mentioned that funds should be made available from right sources

as their procurement also involves a cost.

Since it was almost impossible for the researcher to distinguish between

permanent and temporary working capital only the pattern of financing, the

safety of such borrowing, the cost involved in financing, and their impact on

liquidity and profitability with reference to working capital management has

been discussed broadly on the basis of eight ratios.

 87

3.3.1 MAJOR COMPONENTS OF BORROWINGS -

Bank borrowings have the major share in total borrowings in commercial

vehicle segment. However, when companies were studied in this segment

debentures, fixed deposits and institutional borrowings had the major share.

Only in TELCO the share of bank borrowing is highest Not only this it has

substantially borrowed from bank when compared with industry averages.

Another feature of this segment can be observed in Bajaj Tempo where fixed

deposits form a major share of total borrowings. Moreover the company is not

at all borrowing from bank. Eicher Motors has been substantially borrowing

from financial institutions. A unique feature of this segment is that the share of

bank borrowing is showing a continuous declining trend.

In car and jeep segment bank borrowing has a major share in total

borrowings. Hindustan Motors has shifted its major borrowings from bank to

financial institutions for the last two years. Both the companies are borrowing

less than others from the bank as is evident from industry averages. The

proportion of bank borrowings has been continuously varying in the companies

and the segment, in general, over the period.

 88

In the two and three wheelers segment major share of borrowing has

been from bank and financial institutions. There has been a substantial hse in

bank borrowings in Hero Honda and Kinetic Honda during last years. They

are relying more on borrowings from financial institutions than bank. A unique

feature of this segment is that it is showing a declining trend in bank

borrowings.
 83
TABLE 3.3.1

MAJOR COMPONENTS OF BORROWING

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 5105 44 80 38 67 35 98 50 01
2153D 27 13D 13 231 10 231 32 90D
15 35FD 9 991 27 12D 38 88D 10 32FD
ASHOK LEYLAND 56 29 30 85 19 07 27 65 1100
23 77FD 21 52 25 00 18 68 16 57
ESCORTS 23 36 28 07 39 99 22 86 26 58
38 12D 32 74 29 34 31 78 55 79
BAJAJ TEMPO 50 09 46 43 25 91 00 00 00 00
10 43D 10 19 13 36 00 00 00 00
18 51FD 16 10 20 27 80 57 77 62
EICHER TRACTORS 23 53 0 04 22 16 12 44 15 52
39 861 39 73 34 44 20 52 10 58
24 98] 40 89 20 78 58 33 63 08
EICHER MOTORS 28 42 34 83 39 67 30 86 29 78
60 451 56 76 52 79 57 82 59 07
COMMERCIAL 39.70 36.21 33,00 28.98 36.13
VEHICLE INDUSTRY 20.00D 32.68 26.79 33.93 24.05
AVERAGE
HINDUSTAN MOTORS 41 59 37 54 40 15 37 71 35 94
27 601 34 38 37 25 40 74 40 74
21 32D 16 36 13 78 13 45 1165
MAHINDRAAND 1841 25 46 24 67 16 03 33 45
MAHINDRA 29 871 38 29 33 60 40 13 26 11
42 76D 2194 33 01 3174 29 70
CAR AND JEEP 44.61 52.53 48.23 39.90 50.42
AVERAGE 21.761 23.77 19.67 26.62 21.43
22.25D 11.97 15.77 16.29 14.11
BAJAJ AUTO 56 29 30 58 19 07 27 65 11 19
16 12D 21 52FD 25 OOFD 18 68D 6 64D
23 77FD 18 54CP 13 051 7 091 16 57FD
LML 31 89 3183 35 48 35 42 42 14
22 95D 23 70 27 64 28 00 17 06
T V S SUZUKI 48 99 45 75 49 50 40 28 42 02
25 941 3185 28 91 39 74 36 34
HERO HONDA 24 52 12 91 17 90 12 50 50 87
58 051 54 82 55 34 44 26 32 26
7 07D 15 83 12 51 14 74 16 86
KINETIC HONDA 24 26 34 28 40 13 00 00 62 22
75 741 5125 59 87 100 00 37 78
TWO AND THREE 36.33 26.24 22.75 23.55 24.50
WHEELER INDUSTRY 18.461 24.95 23.66 15.75 11.02
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 90

3.3.2 NET WORTH. CURRENT LIABILITY (INCLUDING SHORT TERM

BORROWING). LONG TERM BORROWINGS TO TOTAL LIABILITY-

The ratio of net worth to total liability will indicate the level of security to

outside financers. A high ratio will indicate that the company can generate its

working capital funds from internal sources with lower cost of funding.

Similarly a high ratio of current liability to total liability will mean less

cost of funding working capital.

As can be seen from Table 3.3.2 that the ratio of current liability to total

liability is highest in all the companies and even the industry average is

highest in the commercial vehicle segment except in the Ashok Leyland and

Eicher Tractors. Borrowings (excluding short term) to total borrowing is

showing a declining trend in Ashok Leyland since 1992-93. Escorts is

showing a rising trend in long term borrowings to total liability and a declining

trend in current liability to total borrowing. Bajaj Tempo is showing no rise in

net worth to total liability ratio, at the same time it is showing a declining trend
 Si

in long term borrowing to total liability and rising trend in current liability to

total liability.

In car and jeep segment the ratio of current liability to total liability is

highest in Hindustan Motors as well as segment average. In both Hindustan

Motors and Mahindra & Mahindra the ratio of net worth to total liability

including long term borrowing is showing a rising trend and ratio of total

liability is showing a declining trend since 1992-93.

In two and three wheelers segment the ratio of current liability to total

liability is highest as compared to Bajaj Auto and Kinetic Honda. However this

ratio is showing a declining trend in the segment average as well as Bajaj

Auto, LML and Suzuki. Hero Honda is showing a rising trend since 1992-93.

The ratio of long term borrowing to total liability is showing a declining trend in

all the companies and the segment averages.

 92
TABLE 3.3.2

BORROWINGS TO TOTAL LL\BILITV

I NET WORTH TO TOTAL BORROWING, CURRENT LIABILITY TO TOTAL BORROWING
AND BORROWING (EXCLUDING SHORT TERM) TO TOTAL BORROWINGS 1

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 34.35 27 87 22 97 24 82 34 31
52 78^ 50 16 50 36 46 06 46 59
12 87 21 98 26 68 29 12 19 10
ASHOK LEYLAhFD 28 95 19 35 33 63 34 94 49 26
34 97 34 20 25 53 25 85 22 68
36 09 46 46 40 85 39 22 28 06
ESCORTS 30 58 27 92 26 59 24 94 26 62
42 96 46 29 45 92 45 09 4143
26 46 25 77 27 49 29 97 31 97
BAJAJ TEMPO 37 36 37 79 37 78 37 09 37 52
44 09 44 18 47 80 60 24 61 38
18 56 18 04 1441 2 67 1 11
EICHER TRACTORS 33 75 40 12 31 75 37 14 36 18
47 45 31 70 36 72 25 89 32 97
18 80 28 18 31 53 36 97 ^0 85
EICHER MOTORS 17 75 16 30 7 54 14 53 20 39
51 15 53 54 59 27 51 65 51 80
31 11 30 16 33 19 33 82 27 82
COMMERCIAL 28.55 23 08 23.28 24.92 34.72
VEHICLE INDUSTRY 50.70 47.28 45.76 43 21 39.50
AVERAGE 20.74 29 64 30 97 31.87 25.77
PBNDUSTAN MOTORS 19 33 14 09 13 97 22 93 26 70
48 67 45 82 47 74 42 19 43 71
32 00 40 09 32 29 34 88 29 59
MAHINDRAAND 14 82 24 39 22 71 40 44 47 83
MAHINDRA 34 40 38 73 41 37 3164 35 91
49 79 36 88 35 92 27 93 16 26
CAR AND JEEP 20.95 22.95 22.54 25.50 35.96
AVERAGE 44.05 43.81 43.67 49.11 59.11
35.00 33.24 33.79 25.39 14.93
BAJAJ AUTO 46 00 46 15 51 86 53 63 67 76
38 14 36 72 30 17 30 25 2103
15 86 17 13 17 97 16 11 11 22
LML 13 18 3 33 0 55 12 30 18 19
63 77 71 70 80 01 71 01 65 14
23 05 24 98 1944 16 69 15 95
1 V s suzuia 8 94 12 05 14 87 22 47 33 62
70 31 69 22 67 69 59 65 55 95
20 75 18 73 17 44 17 88 10 43
HERO HONDA 21 16 27 58 31 43 .32 86 32 29
50 12 40 61 36 01 44 98 55 82
28 72 31 81 32 57 22 16 10 90
KJNEnC HONDA 26 97 27 29 45 16 57 02 52 36
35 01 42 33 37 18 34 18 44 64
38 02 30 39 17 66 8 80 2 99
TWO AND THREE 16.78 14.36 15.45 20.66 35.73
WHEELER INDUSTRY 53.97 54.67 54.19 54.40 46.97
AVERAGE 29.25 30.97 30.36 24.94 17.30

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALDVE,

NEW DELHI
 S3

3.3.3 INTEREST AS A PERCENTAGE OF DEBT -

It can be observed from Table 3 3 3 that the ratio in the commercial

vehicle segment is on the decline since 1992-93 similar is the case with

Ashok Leyland, Escorts, and Eicher Motors However the ratio is showing a

rising trend in Eicher Tractors and, substantially in Bajaj Tempo

In the car and jeep segment the segment average and Hindustan

Motors are showing a rising trend although Mahindra & Mahmdra is showing a

declining trend

The two and three wheeler segment is showing variability in this regard

Bajaj Auto, L.M L., T.V S Suzuki are showing a declining trend although Hero

Honda is showing a rising trend

 S4
TABLE 3.3.3

INTEREST TO DEBT

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 18 29 12.94 16.18 16 74 16.29

ASHOK LEYLAND 13 10 10.12 15.67 12.64 12 74

ESCORTS 19 14 23.42 20 93 20.85 16.29

BAJAJ TEMPO 3177 16.46 14,87 67.75 113 08

EICHER TRACTORS 15.58 14 66 15 20 16 01 18 60

EICHER MOTORS 15 45 15 91 18 30 18 97 16 34

COMMERCIAL 16.08 12.49 15.93 15.79 13.28

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 14 97 17 34 17 87 17 85 18 65

MAHINDRAAND 12 38 17.12 13.38 12.84 1148

MAHINDRA

CAR AND JEEP 13.10 17.74 14.28 16.75 23.51

AVERAGE

BAJAJ AUTO 12 10 15.79 16 11 7.50 5.80

LML 23 88 30.50 27 58 24 73 16 45

T V S SUZUKI 24 79 29 02 25 40 22 24 17 62

HERO HONDA 11 84 12 79 12 48 15.36 17 29

KINETIC HONDA 16 27 12.83 18 03 38 24 19 66

TWO AND THREE 17.45 19.40 20.15 18.47 19.50

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 S5

3.3.4 PROFIT BEFORE INTEREST AND TAXES TO INTEREST RATIO -

This ratio will indicate the level of interest being secured by current

operation A high ratio will indicate that operations are carried on effectively

Table 3 3 4 shows that in the commercial segment average the ratio is

slowly increasing indicating that the current operations are managed

effectively. The ratio is showing an increasing trend in Escorts, and

substantially increasing in Bajaj Tempo, Telco and Eicher Motors. However the

ratio is decreasing in Eicher Tractors

The car and jeep segment the average, Hindustan Motors and Mahindra

& Mahindra are showing a nsing trend The two and three wheelers segment is

also showing a rising trend while company wise such a trend can be observed

in Bajaj Auto, LML, Suzuki, Hero Honda and Kinetic Honda

 S8
TABLE 3.3.4

PROFIT BEFORE INTEREST AND TAXES TO DEBT

NAME O F THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 3 87 2 51 1 13 143 3 40

ASHOK LEYLAND 2 32 148 105 1 52 1 94

ESCORTS 2 56 143 1 16 122 2 35

BAJAJ TEMPO 2 72 2 67 3 40 631 8 18

EICHER TRACTORS 7 02 4 15 2 43 167 163

EICHER MOTORS 2 84 1 29 0 06 0 59 2 68

COMMERCIAL 2.96 2.(14 1.02 1.35 2.68

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 1 01 0 71 0 55 1 29 1 58

MAHINDRAAND 1 19 1 29 140 2 47 4 93
MAfflNDRA

CAR AND JEEP 1.51 1.20 1.06 1.84 2.64

AVERAGE

BAJAJ AUTO 4 65 3 47 4 70 18 27 40 16

LML 109 0 00 0 68 2 66 3 09

TVS SUZUKI 0 81 1 29 1 38 2 67 8 26

HERO HONDA 4 08 3 51 2 99 3 10 5 31

KINETIC HONDA 2 63 2 11 1 14 4 42 6 63

TWO AND THREE 1.77 1.30 1.79 3.73 5.10

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 S7

REFERENCES

1. Ministry of Finance, 'Report on Small Scale Industnes in India'

International Planning Team, Govt of India 1955

2. Chakraborty S.K., KK. Bhattacharya, N K Rao, P K. Sen Tinancial

Management and Control' MacMillan India Ltd 1981

3. Wassel.R H , Trinciples of Financial Analysis - A Study of Financial

Management'New York, The MacMillan Co 1961

4 Ibid.

5 Chandra Prasanna, 'Fundamentals of Financial Management' Tata

McGraw Hill 2nd Edition.

6 Erich A Helfert Techniques of Financial Analysis' Revised edition

Richard D Invin. Homewood Illinois 1967

7. Parker George G.C. and S Edilberto 'Hov^ to Get a Better Forecast'

Harvard Business Review 1971 April

8. Park Gladston - 'Working Capital' Macmillan Co New York 1963

9. Chandra Prasana, op. cit.

10 Chakraborty et al op. cit.

 98
CHAPTER - IV

CASH MANAGEMENT

This chapter is divided into three parts. The first part explains briefly

the concept of cash, objectives of cash management and concept of

marketable securities as a special case of cash management. The second part

provides the responses to the questionnaire given by the executives in six

companies i.e. Bajaj Auto, Bajaj Tempo, Eicher Motors, Eicher Tractors, Hero

Honda and Escorts. In the last part performance of cash has been evaluated

in thirteen companies through ratios for the last five years in this regard.

4.1 CONCEPT OF CASH

It is also termed as cash fund^ which "consists of capital in the form of

cash or equivalent assets available at management's discretion for meeting

obligations as they mature for investment in operating assets. Included in the

cash fund are cash on hand, bank deposits, gold bullion and temporary

investments made as a means for holding cash until it is needed. Such

investments can be converted to cash without material delay or loss to meet

obligations for payments. While some income may be derived from assets in
 ss

the cash fund, capital is ordinarily held in this form for its earnings because

the rate of return is substantially lower than that realized from capital invested

in most other business assets "^

It IS rather a hub around which other financial activities revolve ^ It is the

most important component in working capital which helps in maintaining the

company's solvency position ^

If cash IS inadequate it will not put the company in the position of

technical insolvency but also too short of cash may even compel the company

to be liquidatedI 5

However, a unique dilemma with this component of current asset is that

It IS the most idle form of asset and holding it also leads to opportunity cost ®

Not only this, holding cash beyond the limit of operations needs also

cuts asset turnover and rate of return '^ So it is necessary to hold cash in the

right amount, it should be available at nght time, at the right place and at a

right cost ® Thus cash has to be in the company, but at the minimum level to

maintain a balance between minimum level and current obligations ^

 ICO

There are four basic motives of holding cash namely transaction motive,

precautionary motive, speculative motive and compensative motive^".

4.1.1 CASH MANAGEMENT OBJECTIVE -

The objective of cash management is to reconcile two conflicting

objectives simultaneously -

"a. to meet cash disbursement needs (payment schedules) so as to avoid

technical insolvency.

b. to minimize funds committed to cash balances""

It is necessary to determine the level of cash so that the risk of being

out of cash is eliminated. There are number of models that can be used v\/ith

some adjustments in determining cash levels like Baumol^^ model, Miller and

Orr^^ model and Robicek^" model.

4.1.2 CASH MANAGEMENT PROCESS -

The cash management process involves two techniques, one is to get

speedy collection and other is to slow down disbursement without affecting the

liquidity and solvency of the firm. The various techniques of speedy collection
 101

are prompt payment by customers, early conversion of payment into cash by

reducing deposit float^^, decentralization of collection through concentration

banking^® which helps in storing cash^'^ and lock box system. The various

techniques of reducing disbursements are avoidance of early payments,

centralized disbursements, cheque Kitting""^, paying from a distant bank,

cheque encashment analysis and bank overdraft.

4.1.3 MARKETABLE SECURITIES : A SPECIAL CASE OF CASH

MANAGEMENT -

Marketable securities can be defined as securities that can be sold on

short notice for close to their quoted market prices^^. Special care is needed to

make investment in marketable securities, so that there should be no default

risk, interest rate risk, purchasing power risk, or liquidity risk^°. It should be

kept in mind that all these risks affect yields. "In general lower the default risk

and better the marketability, lower the yield. Securities with these desirable

characteristics have higher prices and since prices and yield are inversely

related, hence lower yields"^^

 102

4.2 COMPANY WISE CASH MANAGEMENT PRACTICES-

This part of the chapter deals with the responses received from

executives in the six companies regarding cash management. The first section

deals with cash planning, follov^d by organization of cash management,

control and review, and finally, problems in cash management.

4.2.1 CASH PLANNING -

Cash balances includes cash in hand, cheques and cash in transit in all

the companies. The level of cash is determined on day-to-day basis alongwith

minimum and optimum cash balances. No company follows contingency

approach to cash management. Cash budgeting is done by all the companies

though periodicity varies in companies. Budgeting was generally done on

weekly and monthly basis. The cash flow statement is prepared separately for

capital operations and revenue operations. These statements are prepared on

the basis of cash from operation, working capital changes and flow of cash.

In Baja Tempo cash balances are maintained both for minimum and

optimum level. The reason for maintaining minimum cash level is from interest

and security point of view while optimum cash level is maintained from
 1G3

emergency point of view like urgency of material and urgent needs for the

employees, etc. The company is preparing cash budget on a weekly basis.

The cash budget is prepared by determining weekly requirement of cash and

accordingly managing short term requirements for capital operations. Capital

budgets are thus prepared, listing out the revenue and capital items separately

and getting it filled by the concerned department.

4.2.2 ORGANIZATION OF CASH MANAGEMENT -

In Hero Honda the Corporate Senior Manager Finance is responsible

for overall cash management while in rest of the companies Deputy Manager

Finance is responsible. He is responsible for ensuring cash sufficiency and

investing the surplus, matching disbursements with expected collections,

avoiding overdraft and making cashflow analysis. In Bajaj Tempo Senior

General Manager Finance is responsible for overall cash management

operations.

Except for Escorts where cash management was decentralized in others

it was centralized. Hero Honda was facing no problem In centralized cash

management while Bajaj Auto was facing the problem of coordination and

unexpected cashflows. Escorts were of the opinion that decentralized cash

management provided the benefit of elimination of delays in receipts of funds

 1C4

from Head Office alongwith considerable reduction in inter-office transfer of

funds and elimination of idle pockets and accounting. In Bajaj Tempo the

responsibilities of the financial executive regarding cash management

operations are ensuring cash sufficiency and investing surplus (if any) in

marketable security, matching disbursement with expected collections,

avoiding overdrafts and making cash flow analysis. The cash management

function is centralized and the only problem faced in this regard is unexpected

cash outflows.

4.2.3 CONTROL AND REVIEW -

Normal days of cash and peak days of cash are used in Hero Honda to

determine cash level norms while in Escorts only peak days of cash are used

to determine cash level norms. No response was provided by Eicher Motors,

Eicher Tractors and Bajaj Auto. Cashflows are controlled by regular and

periodic review and reporting of cash available and cash required by

mobilizing collection and staggering payments, by disposing each payment

on merit, by comparing the actual expenditure vAih budgeted figures and

taking corrective action and by maintaining minimum level of cash balances in

Hero Honda and Escorts. In Eicher Motors and Eicher Tractors cashflows are

controlled by comparing the actual expenditure with budgeted figures and

taking corrective action. In Bajaj Auto cashflows are controlled by regular

 1C5

periodic review, reporting of cash availability and requirement, and by

maintaining minimum cash balances. Bajaj Tempo computes normal days of

cash to determine cash level norms. Control is exercised by mobilizing

collection and staggering payments and by comparing the actual expenditure

vvith budgeted figures and taking corrective action.

Cash balances of Divisions/Units are controlled through budget and

reports, payment schedules of the divisions are to be submitted in advance

and expenditure iDeyond budgeted and sanctioned limits are to be approved

first by Head Office in Hero Honda and Escorts. In Eicher Motors and Eicher

Tractors it is controlled by budgets and reports only. In Bajaj Auto cash of the

Divisions is controlled by close coordination between divisions and

headquarter in matter of cash records and collections. In Bajaj Tempo the cash

balances of Division/Unit is controlled by budget and report.

4.2.4 PROBLEMS IN CASH MANAGEMENT -

Escorts was having a peculiar problem of heavy contingency payments.

Eicher Motors and Tractors were facing the problem of irregular flow of cash.

Hero Honda and Bajaj Auto had no peculiar problem. In Bajaj Tempo the

peculiar problem regarding cash management is heavy contingency payments.

 1C6

Hero Honda had no problem of difference in planned cashflows and

actual cashflows, Escorts faced the problem of non-receipts of funds in time,

variation in sales forecast and receivables, unusual disbursement/payment of

bills for raw material and fluctuations in the collection and payment by sundry

debtors and to sundry creditors. Eicher Motors and Eicher Tractors rarely

faced any problem and Bajaj Auto faced the problem of fluctuations in the

collection and payment by sundry debtors and sundry creditors. Bajaj Tempo

is facing the problem of differences in planned and actual cash outflows, the

main reason being changes in credit policy.

Hero Honda and Bajaj Auto did not face any problem in the phasing of

expenditures and revenues. Escorts faced the problem of slippages in the

production and delivery schedules of purchase, and capital expenditure could

not be estimated correctly. In Eicher Motors and Tractors the problem was

of sales scheduling in revenues and procurement schedule of expenditure.

The problem in phasing of expenditures and revenues in Bajaj Tempo is

slippages in the production and delivery schedules of purchases.

No company faced the problem of cash inadequacy. In Hero Honda new

projects are funded by loans and internal accruals and existing project through

internal account. Bajaj Tempo has faced cash inadequacy situations because

of new projects involving excessive capital expenditure and initial long term
 1C7

payments in new projects and huge expenditures on Infrastructure and

blocking of funds in pipelines.

There were no bottlenecks in cash flows in Hero Honda while Escorts

faced the problems of variation in production and dispatch targets and

schedule and delays in payment by customers. Eicher also faced the problem

of delays in payments by the customers. Bajaj Auto had the problem of

communication gap between Divisions and Departments. In Bajaj Tempo the

bottleneck in cash flows is due to communication gap between divisions and

departments.

In determining the cash credit requirements, Hero Honda considered

expected payments and receipts, production and sales activities, cash flow

forecasts, total working capital requirements less amount financed by the

government, and the requirements of stores, spares, raw material, finished

goods and semi-finished goods was done by budgets. Escorts, in addition to

above, also considered requirements of additional funds for expansion

scheme, terms of payment in receipts from customers, purchase policy and

advances to suppliers, inventory build up and production plan and capacity

utilization. Eicher considered only production and sales activities, and

requirement in respect of stores, spares, raw material, finished and semi

finished goods. Bajaj Auto did not give any response. The factors used in
 1C8

determining cash credit requirements in Bajaj Tempo are expected payment

and receipts, production and sales activities, requirement of additional funds

for expansion schemes, purchase policy and advances to suppliers and finally

inventory build up.

Hero Honda faced the problem of cash credit because of cash

requirements for new projects. In Escorts this problem was because of

shortage in expected cash flows and cash requirements for new projects.

Eicher and Bajaj did not give any response. In Bajaj Tempo the problem of

going in for cash credit arises because of cash requirements for new projects.

None of the companies had the problem of obtaining cash credit from

banks for working capital loans from Central Government. Bajaj Tempo does

not have any problem with regard to working capital loans from Central

Government.

Hero Honda is affected by RBI policy of reducing cash credit limits and

now has to rely on other finance media. Escorts and Eicher also were affected

by limiting cash overdraft facilities from banks arising out of making part of

cash credit limit @ 60% as term loans. Bajaj Auto did not give any response.

Bajaj Tempo is not affected much by Reserve Bank of India policy of reducing

cash credit limit since their dependence on bank is much less.

 1C9

Finally, in Hero Honda and Eicher cash flows were not affected by fixed

assets expansion while in Escorts cash flows were affected by need for

expansion, replacement, new machines etc. Bajaj Auto did not respond. Bajaj

Tempo's cash flow is not affected by fixed assets expansion since they have

annual budgets for fixed assets, use long term finance for long term

requirements of fixed assets, and avoid misuse of funds.

4.3 EVALUATION OF CASH-

In the last part of the chapter the evaluation of cash has been done

for thirteen companies with the help of ratios for a period of five years.

As already discussed in chapter II that in managing working capital

trade off is to be made between liquidity and profitability. Holding too much

cash will help in maintaining liquidity but at the same time it will also have an

adverse effect on profitability. Besides this, cash being idle asset will also lead

to higher opportunity cost. In this section five ratios segment-wise have been

analyzed to know the performance of cash management in thirteen companies.

 no

4.3.1 CASH AND BANK BALANCES AS A PERCENTAGE OF CURRENT

ASSETS -

Table 4.3.1 shows that in commercial vehicle segment the ratio of cash

and bank balance as a percentage of current assets has been variable. A

unique feature can be observed is that nov^ the industry is keeping a low level

of cash as compared to previous years. Telco is keeping a very low level of

cash while Bajaj Tempo is comparatively keeping a very high level of cash. In

Escorts the variation in cash level has been comparatively less over the

period.

In the car and jeep segment the ratio has shown a rising trend except for

last year. But Hindustan Motors is showing a slow rising trend while Mahindra

& Mahindra is showing a falling trend.

The two and three wheelers segment is showing a rising trend on an

average. Similar is the case with Suzuki and Kinetic Honda. L.M.L. is showing

a declining trend while in Hero Honda it has substantially reduced over last

year.
 111
TABLE 4.3.1

CASH AND BANK BALANCES TO CURRENT ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 5.64 1.01 1.56 0.82 0.68

ASHOK LEYLAND 0.20 0.95 10.17 0.46 6.41

ESCORTS 7.01 11.63 8.29 12.44 10.96

BAJAJ TEMPO 1.83 9.05 1.75 30.02 25.46

EICHER TRACTORS 14.33 14.28 2.68 7.09 8.12

EICHER MOTORS 10.78 4.42 3.96 6.83 9.66

COMMERCIAL 4.35 1.71 3.88 2.79 6.90

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 5.30 5.22 6.08 7.89 8.78

MAHINDRAAND 7.75 7.56 10.48 4.72 3.99

MAHINDRA

CAR AND JEEP 4.61 5.04 5.17 6.40 3.81

AVERAGE

BAJAJ AUTO 4.87 4.55 5.82 3.31 10.77

LML 11.43 12.08 11.93 12.20 10.50

T V S . SUZUKI 0.70 0.53 1.68 7.81 11.59

HERO HONDA 5.75 4.76 6.15 10.13 2.94

KINETIC HONDA 13.57 7.20 12.17 17.50 19.39

TWO AND THREE 4.73 4.92 6.11 6.06 9.61

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMBE AND CAPITALINE,

NEW DELUL
 119

4.3.2 CASH AS A PERCENTAGE OF SALES -

Table 4.3.2 shows that in the commercial vehicle segment the ratio of

cash as a percentage of sales has been varying. Only Eicher Motors is

showing a rising trend. In Telco it is showing a falling trend. But the table

indicates that the companies in this segment are having very little cash sales.

In the car and jeep segment the performance of Hindustan Motors

seems better that Mahindra & Mahindra as its ratio is higher. But in this

segment also cash sales is very low.

In the two and three wheelers segment only Kinetic Honda and Suzuki

are showing a rising trend but the rise is very slow. Besides this the ratio in

other companies has been varying over the period. But all the companies in

this segment are also having a very low level of cash sales.
 113
TABLE 4.3.2

CASH TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 2 67 066 128 051 0 33

ASHOK LEYLAND 0 09 0 68 8 21 0 29 5 54

ESCORTS 2 61 4 22 3 63 5 58 4 42

BATAJ TEMPO 0 06 3 46 0 58 1144 1149

EICHER TRACTORS 4 27 4 37 0 93 3 22 3 32

EICHER MOTORS 3 70 183 191 2 91 4 06

COMMERCIAL DATA NOT AVAILABLE

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 2 66 2 72 2 92 3 15 3 46

MAfflNDRAAND 3 78 3 56 4 81 0 03 2 28
MAfflNDRA

CAR AND JEEP DATA NOT AVAILABLE

AVERAGE

BAJAJ AUTO 9 61 161 2 01 136 6 26

LML 2 83 244 3 87 5 36 4 58

T V S SUZUKI 0 29 0 18 0 57 2 03 3 12

HERO HONDA 172 134 191 3 13 0 89

KINETIC HONDA 2 26 134 3 48 4 16 4 23

TWO AND THREE DATA NOT AVAILABLE

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 114

4.3.3 CASH AS A PERCENTAGE OF CURRENT LIABILITY -

Table 4.3.3 shows that in the commercial vehicle segment the ratio of

cash as a percentage of current liability has been varying over the period.

Judged from this ratio, it can be seen that the company's liquidity position is

not sound.

Similar is the situation in car and jeep segment and two and three

wheelers segment except in Suzuki which is showing a rising trend but the rise

is not large enough to condude that the company's liquidity position is sound.
 115
TABLE 4.3.3

CASH TO CURRENT LUBILITY

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 8 89 2 07 3 19 160 1 10

ASHOK LEYLAND 0 46 2 93 34 35 124 22 45

ESCORTS 9 01 1411 13 61 18 25 19 49

BAJAJ TEMPO 3 90 16 66 2 12 35 36 29 50

EICHER TRACTORS 4 16 29 77 5 25 19 32 18 53

EICHER MOTORS 1861 8 08 6 98 11 12 15 76

COMMERCIAL DATA NOT AVAILABLE

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 11 56 10 97 12 61 17 57 17 00

MAHINDRAAND 16 24 15 60 2171 14 34 1141

MAHINDRA

CAR AND JEEP DATA NOT AVAILABLE

AVERAGE

BAJAJ AUTO 4 69 661 7 92 5 43 22 40

LML 4 88 9 47 14 16 23 00 14 06

T V S SUZUKI 0 67 0 50 169 931 15 74

HERO HONDA 7 09 6 92 1185 14 98 9 01

KINETIC HONDA 23 58 13 49 29 10 34 93 32 21

TWO AND THREE DATA NOT AVAILABLE

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMDE AND CAPITALINE,

NEW DELHL
 116

4.3.4 AVERAGE DAYS OF CREDITORS -

It helps us to know the extent to \Nh\ch cash needs are postponeable.

As can be observed from Table 4.3.4 Telco is having a very high average

days of creditors but it is declining after 1992-93. Similar is the case v^th

Ashok Leyland, Eicher Motors and even the industry average. Bajaj Tempo is

showing a rising trend.

In the car and jeep segment neither the industry average nor the

companies are showing any consistent trend. But one thing can be observed

is that both the companies under study are enjoying a higher average days of

creditors than the industry average in general.

In the two and three wheelers segment the average days of creditors

has been almost constant throughout the period except for 1991-92. It can

also be seen that LML has availed a very high level of average credit period,

and Kinetic Honda a very low average credit period when compared with the

segment average. Although Hero Honda and Kinetic Honda is showing a rising

trend the rise has not still matched even the industry segment average.
 117
TABLE 4.3.4

AVERAGE DAYS OF CREDITORS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 127 136 178 161 118

ASHOK LEYLAND 82 91 100 92 92

ESCORTS 90 94 94 112 79

BAJAJ TEMPO 66 67 96 103 110

EICHER TRACTORS 48 43 61 55 60

EICHER MOTORS 85 101 123 113 117

COMMERCIAL 112 124 155 138 116

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 140 170 149 107 119

MAHINDRAAND 129 120 112 90 102

MAHINDRA

CAR AND JEEP 72 79 90 91 70

AVERAGE

BAJAJ AUTO 62 79 64 70 70

LML 136 149 184 159 132

T V S . SUZUKI 203 181 159 112 93

HERO HONDA 68 57 36 62 74

KINETIC HONDA 28 37 44 53 74

TWO AND THREE 85 91 84 85 85

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 118

4.3.5 INVESTMENT TO CURRENT ASSETS -

The ratio of investment to current assets can also be interpreted as the

level of idle cash being invested by the company. In the commercial vehicle

segment the ratio is rising on an average since 1993-94 as can be observed in

Table 4.3.5 Eicher Tractors has a substantial ratio and is also on the rise and

similar is the case with Bajaj Tempo, Escorts and Teico. Eicher Motors has an

extremely lov/ ratio and it is almost constant for last four years.

In the car and jeep segment the ratio has substantially increased in

1994-95. Hindustan Motors is having a very low ratio when compared with the

industry average but is on the rise. Similar is the case with Mahindra &

Mahindra.

In two and three wheelers segment the ratio is on the rise. Similar

trends can be observed in Bajaj Auto, LML and Hero Honda. No company is

showing a substantial fall in the ratio.

 118
TABLE 4.3.5

INVESTMENT TO CURRENT ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 9 27 14 65 7 27 7 04 12 66

ASHOK LEYLAND 124 2152 3 54 6 87 5 13

ESCORTS 7 13 8 69 8 91 12 56 21 56

BAJAJ TEMPO 0 80 0 79 0 80 0 94 2 04

EICHER TRACTORS 10 58 14 02 15 85 20 26 23 53

EICHER MOTORS 4 75 0 05 0 05 0 05 0 03

COMMERCIAL 6.18 14.80 5.73 6.16 8.44

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 0 58 0 60 0 90 0 85 3 03

MAHINDRAAND 1178 11.72 6 15 20 30 25 24

MAHINDRA

CAR AND JEEP 17.72 8.26 3.44 11.77 24.87

AVERAGE

BAJAJ AUTO 12 49 10 27 931 25 38 27 85

LML 6 69 2 59 2 22 6 55 8 14

T V S SUZUKI 6 69 6 91 6 24 6 26 4 03

HERO HONDA 20 82 8 56 17 29 21 13 20 72

KINETIC HONDA 00 00 00 00 0 23 0 55 0 45

TWO AND THREE 12.72 10.13 8.33 18.30 21.06

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI.
 120

REFERENCES

1. National Association of Accountants Cash Flow Analysis for Managerial

Control N.AA. Research Report 1961.

2. Ibid.

3. Bradley.J.F., 'Administrative Financial Management. Holt, Rinehart and

Winston Inc. New York 1969.

4. Howard.B.B. and U.Upton 'Introduction to Business Finance" Hill Book

Co. inc. New York 1953.

5. Agarwal.N.K., 'Management of Working Capital' Sterling Publishers Pvt.

Ltd. New Delhi 1983.

6. Lovis.K.B., 'Analysis for Financial Management' Prentice Hall Inc.,

Englewood Cliffs. New Jersey 1971.

7. Hund.P., W. Charles and G. Donaldson 'Basic Business Finance Text

and Cases' R.D. Irwin illinois 1966.

8. Bari.R.R., 'Selected Readings in Cash Management' Triveni Publications

Delhi 1981.
 121

9. Cooke,G.W., and E.G. Bomali 'Business Finance Management' Boston

1967.

10. Keynes John Maynard, The General Theory of Employment Interest and

Money. H.B. Joramovech Inc. New York 1936.

11. Khan and Jain 'Financial Management' Tata McGraw Hill Publishing Co.

Ltd.

12. Baumol.W.J. 'The Transactions Demand for Cash Inventory Theory

Approach'<3uarterlv Journal of Economics Vol LXVI 1952.

13. Miller.M.H. and Orr D. 'A Model of the Demand for Money for Firms'

Quarterly Journal of Economics VOL LXXX 1966.

14. Robicek,A.A. and Others 'Optimal Short Term Financing Decisions

Management Science' 1965.

15. Joy O.M. introduction to Financial Management' Irwin 1977.

16. Van Home Financial Management and Policy Prentice Hall 1974.

17. Solomon.E. and J.J. Pringle 'An Introduction to Financial Management'

Good Year Publishing Company 1977.

18. Gitman Lawrence, Principles of Management Finance, Harper and Row

New York 1979.

 122

19. Greer.C.C, 'The Optimal Credit Acceptance Policy' Journal of Financial

and Quantitative Analysis 1984.

20. Mao.J.C.T., 'Controlling Risk in Accounts Receivables Management'

Journal of Business Financing and Accounting 1974.

21. Campsey.B.J., and Eugene F. Brigham 'Introduction to Financial

Management. The Drvden Press New York.

 123

CHAPTER-V

MANAGEMENT OF RECEIVABLES LOANS

AND ADVANCES

This chapter is divided into three parts. The first part deals with the

concept of receivables , objectives of receivables loans and advances, and

management of receivables. The second part provides the responses to the

questionnaire given by the executives in six companies. In the last part

performances of receivables, loans and advances has been evaluated in

thirteen companies through ratios for the last five years in this regard.

5.1 CONCEPT OF RECEIVABLES-

Receivables can be defined as "asset accounts representing amounts

owned to the firm as a result of the credit sale of goods or services in the

ordinary course of business. The value of these claims are carried on to the

balance sheet titles, titles such as accounts receivable, trade receivables,

customer receivables or sundry debtors".^ There are number of factors that

help in determining the level of receivables such as credit terms policies and
 124

practices of the firm, payment by creditors and collection policies^. The other

factors may be to sell out over stocked goods, help genuine customers who

have some short term credit crisis, and competitive factors etc^.

5.1.1 OBJECTIVES OF RECEIVABLES LOANS AND ADVANCES -

The objective of receivables is to increase sales, thereby leading to

more profits, meet competition effectively, and satisfy genuine customers.

Increase in receivables will also increase collection cost, capital cost,

delinquency cost and default cost.'' The company should first determine the

level of risk^ to be borne by extending credit profit earned on credit sales

generated because receivables must atleast equate the cost of funds raised to

finance that additional credit.^ Thus there has to be an optimal credit policy'^.

The objectives of extending advances are to avoid delay in supply of

raw material, faster production, employees satisfaction, etc.

5.1.2 MANAGEMENT OF RECEIVABLES -

An organization has three tools to minimize risk in managing

receivables'. They are credit policies credit terms, and collection policies.
 125

The credit policies help to determine whether or not to extend credit to

customers and also the level of credit to be extended^. This involves two

components : credit standards and credit analysis. Credit standards provide

the criteria on the basis of which the firm extends credit. It may be restrictive or

liberal. Credit analysis involves two steps. First the firms obtain credit

information about the customer through various sources like financial

statement, bank references etc., and secondly the analysis of the given

information.

Credit terms specify the time frame for which credit is to be extended.

It defines three things credit period, cash discount and cash discount period^°.

Finally collection policies covers two aspects first, degree of efforts to

collect their dues and secondly, the type of collection efforts^\

An organization, to manage advances, has to determine the amount to

be blocked in advances, the ways to finance them a, id extent to which it can

be reduced to the minimum without disrupting production, and affecting

employees satisfaction.
 126

5.2 COMPANY WISE RECEIVABLES. LOANS AND ADVANCES

MANAGEMENT PRACTICES-

This part of the chapter deals with the responses received from the

executives of six companies through questionnaire .

5.2.1 OBJECTIVES POLICY AND PLANNING -

The main thrust of credit policy was limited credit with frequent checks

in Hero Honda, Eicher Motors, Eicher Tractors and Bajaj Auto. The main thrust

of credit policy in Bajaj Tempo is open credit as well as restricted credit.

The objective of credit policy in Hero Honda was growth in sales and

financing the customers. In Escorts the objectives were growth in sales, to

meet competitors and increase profits, in Eicher Motors and Eicher Tractors it

was growth in sales and in Bajaj Auto it was increased profits. The objective of

credit policy in Bajaj Tempo was growth in sales, meet competitors and

finance the customers.

 127

All the firms except Escorts prepared their credit plan on short term

basis for one or two years. Hero Honda considered expected sales, credit

worthiness, repayment schedules and sales forecast, Escorts considered sales

to total asset ratio in credit plan preparation. In Bajaj Tempo the credit plan is

prepared on a long term basis for two years.

In Hero Honda the credit term for indigenous customers was advance

booking through dealers; they pay in advance and then receive the delivery.

But credit was given to specific dealers in specific cases also. In case of

foreign customers the credit terms were based on L/C system. In Escorts, the

credit term for indigenous customers were thirty days maximum. Though it may

also vary from customer to customer. In foreign customers the credit terms

were as per L/C system. In Eicher Tractors and Eicher Motors credit terms for

indigenous customers were twentyfive days. Bajaj Auto did not respond. In

Bajaj Tempo the credit terms for indigenous customers is immediate payment

against delivery and for foreign customers is against Letter of Credit.

Hero Honda determined the credit terms on the basis of usual terms of

sale of the industry and on the terms followed by the organization in the past.

In Escorts, in addition to above, it also considered terms of sale of the

competitor. In Eicher Motors credit terms of sale were determined in usual

terms of sale of the industry. Bajaj Auto determined credit terms on the basis of
 128

usual terms of sale of the Industry and terms followed by the organization In

the past. In Bajaj Tempo credit terms are based on usual terms of sale of the

industry.

In all the companies risk analysis of the customer was done before

granting credit. Hero Honda considered net worth, past experience,

background, reputation and expected sales while Escorts considered past

performance, balance sheet and overall view in this regard. Bajaj Auto and

Eicher Motors and Tractors did not respond. In Bajaj Tempo risk analysis of

customers is done before granting credit.

5.2.2 ORGANIZATION -

In Hero Honda the Chairman takes decision after consulting the

Marketing Head regarding overall credit granting and collection operations. In

Escorts the Managing Director and the Chief of Marketing were responsible

for the overall credit granting and collection operations. In Eicher Motors and

Tractors this responsibility was decentralized while Bajaj Auto did not

respond. In Bajaj Tempo the responsibility of overall credit granting and

collection operation lies with Finance Manager and Divisional Manager

(Purchase).
 122

The responsibility of the finance executives with regard to credit

management in Hero Honda was follow up and timely action in relation to

debts outstanding, insurance, prompt billing, realization and review of

outstanding, avoiding possible loss due to bad debts and controlling

receivables, collecting the dues and keeping receivables within norms,

ascertaining from Marketing Department the reasons for outstanding,

enforcing budgetary control on receivables, reviewing budgets and introducing

effective reporting system.

In Escorts it also included, in addition to above, laying down credit

policies and monitoring the levels of receivables, collection of at least

undisputed amounts in disputed bills and financial scrutiny of proposed credit

terms. In Eicher Motors and Tractors the responsibilities of the finance

executive were follow up and timely action in relation to debts outstanding,

avoiding possible loss due to bad debts and controlling receivables, collecting

the dues and keeping receivables within norms and enforcing budgetary

control on receivable review budgets and introducing effective reporting

system. In Bajaj Auto the responsibilities of finance executive were laying

down credit policies and monitoring the level of receivables, follow up and

timely action in relation to debt outstanding, avoiding possible loss due to bad

debts and controlling receivables and financial scrutiny of proposed credit

terms. The responsibilities of the finance executive with regard to credit

 130

management in Bajaj Tempo are laying down credit policies and monitoring

the level of receivables, follow up and timely action in relation to debts

outstanding, insurance, prompt billing, realization of outstanding, avoiding

possible loss due to bad debts and ascertaining from marketing department

the reasons for outstanding.

5.2.3 CONTROL AND REVIEW -

In order to control credit Hero Honda and Bajaj Auto used the

techniques of ratio analysis, agewise analysis, reporting and review systems,

fixing credit limits for major renowned customers and, in other case, restricting

credit limits to the extent of bank guarantee only. In Escorts it considered all

the above techniques except ratio analysis and it considered debts exceeding

six months as doubtful. Eicher Motors and Tractors considered only reporting

and review system. In Bajaj Tempo credit control is done by ratio analysis and

agewise analysis.

Hero Honda .Escorts and Bajaj Auto considered receivables to current

asset ratio, receivable to sales ratio and collection period in determining credit

norms. While Eicher Motors and Tractors considered only collection period in

determining credit norms. Bajaj Tempo uses collection period as a credit norm.
 131

5.2.4 CREDIT COLLECTION -

The credit collection procedures were undertaken in ordinary

circumstances and in case of delinquent accounts. In Hero Honda it included

aspects like collection by personal follow up, disputed items constantly

reviewed and settled by mutual negotiations, claims made through banks

against bank guarantees, the reasons for pendency of debts identified and

follow up initiated according to the reason for delay, further credit stopped till

clearance of old dues is done, legal actions taken where all other efforts had

failed.

In Escorts also the credit collection procedures are undertaken under

ordinary circumstances and in case of delinquent accounts. It includes aspects

like, collection were taken by personal follow up, disputed items are

constantly reviewed and settled by mutual negotiations, payment are

demanded through correspondence and reminders, claims are made through

banks against bank guarantees, the reasons for pendency of debts are

identified and follow up is initiated according to the reason for delay, collection

of dues is made by sending sales personnel to the customers end, further

credit is stopped until clearance of old dues and legal action is taken where all

other efforts had failed. In Eicher Motors and Tractors the problem of
 132

collecting overdues is relayed to appropriate levels in the customer

organization and where appropriate to the Government. In Bajaj Auto disputed

items are constantly reviev\/ed and settled by mutual negotiations, claims are

made through banks against bank guarantees, further credit is stopped until

clearance of old dues and legal action is taken where all other effort had

failed. In Bajaj Tempo the credit collection procedure undertaken in ordinary

circumstances is, disputed items are constantly reviewed and settled by

mutual negotiations and collections are made through agencies identified

within the organization

Credit was extended in Hero Honda when there was an increase in

demand and variations in the level of sales and capacity utilization.

In Escorts it was extended with increase in demand and variations in

the level of sales, the extra clerical costs increased, there was increased

probability of bad debts, excessive collection cost and delay in payments by

existing customers In Eicher Motors and Tractors, and Bajaj Auto extension of

credit would increase demand, clerical cost, and collection cost In Bajaj

Tempo credit was extended on increase in demand and verifications in the

level of sales on confirmation through bank, extra clerical cost by comparing

sales level, delay in payment by existing customers through review of

performance and capacity utilization by study of constraints

 13J

There was no peculiar problem in Hero Honda with regard to granting

excessive credit and belated collection Escorts faced the problem of long

delays in payment of debts and chasing the parties for collection While in

Eicher Motors and Tractors there are differences in the interpretation of the

terms of contract with reference to dues In Bajaj Auto they emphasised

outdated rules and codes followed by the Government in this regard In Bajaj

Tempo, however, the peculiar problem regarding granting of excessive credit

and belated collection is outdated rules and codes followed by Government

departments

5.2.5 CONSTITUENTS OF ADVANCE -

The major constituents of Loan and Advances in Eicher Motors and

Tractors were advances to suppliers, advances to employees for meeting

expenditure on the occasion of festivals, marriages etc, advances to

contractors, deposits with customers. Central Exercise and Port Trust

Authonties, advances to electricity boards and advance income tax While in

Hero Honda it considered all the above aspects except advances to electricity

board Escorts also considered all the aspects as emphasised by Eicher

Motors and Tractors except deposits with customers. Central Excise and Port

Trust Authorities and advances to Electricity Boards Bajaj Auto loans and
 134

advances constitute deposits with customs, Central Excise and Port Trust

Authorities, advance income tax interim cash deposits, and advances to

associate companies. In Bajaj Tempo the major items constituting loans and

advances are advances to suppliers, employees, contractors, income-tax and

deposits with Customs, Central Excise and Port Trust Authorities.

For Hero Honda advances to suppliers was most important and

advances to employees was least important For Escorts advances to

suppliers and advances to employees was most important while deposits with

customs, Central Excise and Port Trust Authorities were least important as it

considered them as locked funds. Eicher Motors and Tractors considered

advances to suppliers, employees and contractors as most important Bajaj

Auto considered interim cash deposits as most important and deposits with

Excise, Customs and Port Trust Authorities as least important. For Bajaj

Tempo advances to suppliers and Government authorities was most important

and advances to customers was least important

5.2.6 POUCY OF ADVANCES -

The policy of Hero Honda regarding granting of loans and advances

was as per the rules, terms and conditions prescnbed by their management

and the budget provision. In Escorts of loans and advances granting was
 135

whenever there was an absolute need and according to the terms of agreement

after negotiations. In Eicher Motors and Tractors granting was according to

the terms of agreement after negotiations while in Bajaj Auto granting was

whenever there was an absolute need for such granting and as per the rules,

terms and conditions prescribed by their managements and the budget

provision. In Bajaj Tempo the policy regarding granting loans and advances

was whenever there was an absolute need for it.

5.2.7 FINANCING OF ADVANCES -

Financing in Hero Honda was done by advances received from

customers, and financing from operating funds. In Escorts financing was done

by short term sources, financing from operating funds and through loan funds.

In Eicher Motors and Tractor financing was done from operating funds and in

Bajaj Auto it was done by advances received from customers, financing from

cash savings through a policy of getting proportionate credit from suppliers

and restricting credit to customers and loan funds. In Bajaj Tempo the policy

regarding financing of loans and advances is advances received from

customers only.
 136

5.2.8 INTEREST ON OVERDUES -

Hero Honda charges interest on overdues on case to case basis while

Escorts charges interest at a predetermined rate. Eicher Motors and Tractors

do not charge interest if not included in the terms of agreement for supply and

in Bajaj Auto it charges interest on overdues on case to case basis and

does not charge if not included in the terms of agreement for supply. In Bajaj

Tempo the policy regarding charging interest on overdues is on case to case

basis.

Hero Honda recommends booking amount and operating funds for

financing. While Escorts recommends short term financing and Eicher Motors

and Tractors recommend short term deposits and operating funds for

financing. Bajaj Auto did not suggest any type of financing.

All the companies recommend charging interest on advances

outstanding for long period.

5.2.9 ORGANIZATION -

Senior Vice President Finance alongwith the Chairman are responsible

for the overall loans and Advances and for granting and collection in Hero
 v5 i

Honda. The Finance and Business Head are responsible in Escorts in this

regard. In Eicher Motors and Tractors this authority is decentralized and in

Bajaj Auto General Manager Finance is responsible. In Bajaj Tempo respective

departmental heads are responsible for the overall loans and advances

granting and collection operations.

All the companies determine the limits of expenditure for loans and

advances.

5.2.10 CONTROL AND REVIEW -

In Escorts managerial control regarding collection of advances is done by

budgetary control and preparation of outstanding statements, obtaining

financial concurrence, demanding clearance before granting fresh ones,

granting advances only after fulfilling the required conditions and operating

special accounts for monitoring and control of advances on monthly, quarterly

and annual periodicity basis. Hero Honda considered all the above aspects

except obtaining financial concurrence for grants based on need and

collection of the same immediately after the purpose of granting was over and

operating special accounts for monitoring and control of advances on monthly,

quarterly and annual periodicity basis. In Eicher Motors and Tractors

 138

managerial control was exercised by budgetary control and preparation of

outstanding statement while in Bajaj Auto managerial control was exercised by

budgetary control and preparation of outstanding statement, demanding

clearance before granting fresh ones and by operating special accounts

formonitonng and controlling of advances on monthly, quarterly and annual

penodicity basis. In Bajaj Tempo managerial control regarding granting and

collection of advances are budgetary control and preparation of outstanding

statement and granting advances only after fulfilling the required conditions

All the companies prepare recovery and adjustment schedule in respect

of loans and advances In Hero Honda this schedule was prepared as monthly

recovery schedules for advances to employees and by statement of

outstanding with age wise analysis in the advances to suppliers In Escorts and

Bajaj Auto it also considered, in addition to above, party wise accounts in

subsidiary registers and watching the monthly recoveries/adjustments In

Eicher Motors and Tractors it was prepared through statement of outstanding

with age wise analysis of advances to suppliers Bajaj Tempo prepares

recovery schedule of loans and advances v\/hich is prepared on the basis of

monthly recovery schedules for advances to employees and statement of

outstanding with agewise analysis lof advances to suppliers

 138

5.2.11 GENERAL -

None of the companies were facing any peculiar problem in the

management of loans and advances except Eicher Motors and Tractors where

periodic review was not regular.

All the companies were of the view that there was scope for minimizing

advances. As Hero Honda suggested, there was scope of reducing advances'

to suppliers by insisting on bank guarantees which can be invoked, by

negotiating and choosing a standard supplier and by negotiating bills through

banks. The advances to contractors^an be reduced by choosing a financially

sound contractor, by passing the bills and charging to concerned work through

accounting entries at a faster rate and by granting advances strictly based on

the stage of completion of work based on architect certificate. The advances to

employees may be reduced by reviewing the balance of dues, by restricting

further grants until earlier dues were refunded. The advances to Customs,

Excise, Port Trust etc. be reduced by adopting Government policy regarding

requirement of deposits and by restricting the deposits only to the extent

required. Advances to Income Tax'can be reduced by preparing quarterly

estimate of income after taking into considerations the trends of business and

by proper tax planning.

 140

In Escorts advances to suppliers can be reduced by paying bills and

simultaneously adjusting to material account, by making effective purchase

from suppliers giving credit terms, and by negotiating the bills through banks.

Advance to contractors can be reduced by choosing a financially sound

contractor, and by granting advances strictly based on the stage of completion

of works. Advances to employees can be reduced by obtaining surety bonds

from permanent employees, by reviev^ng the balance of dues, by asking them

to approach commercial banks and by restricting further grants until earlier

dues were refunded. Deposits with customs, Excise, Port Trust etc. be reduced

by restricting the deposits only to the extent required. Advance to income tax

can be reduced by preparing quarterly estimate of income after taking into

consideration the trends of business and by proper tax planning.

Eicher Motors and Tractors suggested that advances to suppliers can

be reduced by negotiating and choosing a standard supplier. Advances to

contractors can be reduced by granting advances strictly based on the stage

of completion of works. Advances to employees be reduced by restricting

further grants until earlier dues were refunded. Deposits with customs, Excise,

Port Trust etc. be reduced by restricting the deposits only to the extent

required and advance income tax can be reduced by proper tax planning.
 14i

Bajaj Auto suggested that advances to suppliers can be reduced by

negotiating and choosing a standard supplier and by making effective

purchase from suppliers giving credit terms. Advances to contractors can be

reduced by granting advances strictly based on the stage of completion of

works. Advances to employees can be reduced by reviewing the balance of

dues. Advances to customs, Excise, Port Trust etc. be reduced by adopting

Government's policy regarding requirements of deposits and by restricting the

deposits only to the extent required. Advance income tax can be reduced by

preparing quarterly estimate of income after taking into considerations the

trends of business and by proper tax planning. Bajaj Tempo has suggested

that advances to suppliers can be reduced by negotiating and choosing a

standard supplier, by making effective purchase from suppliers giving credit

terms and by negotiating the bills through banks. It suggested that advances to

contractors can be reduced by choosing a financially sound contractor and by

granting advances strictly based on the stage of the completion of work.

Advances to employees can be reduced by obtaining surety bonds from

permanent employees and advances with Customs, Excise, Port Trust etc. can

be reduced by adopting Government's policy regarding requirement of

deposits. Finally advance income tax can be reduced by proper tax planning.
 142

5.3 EVALUATION OF RECEIVABLES LOANS AND ADVANCES-

In the last part of the chapter the evaluation of receivables loans and

advances has been done for thirteen companies with the help of ratios for a

period of five years.

5.3.1 RECEIVABLES TO CURRENT ASSETS -

The ratio of receivables to current assets explains the amount of current

assets blocked in receivables.

In the commercial vehicle segment the ratio has been continuously on

the rise although at different rate. Ashok Leyland, Eicher Tractor and Eicher

Motors are also showing similar trends. In Telco, Escorts and Bajaj Tempo the

ratio has declined atleast during last year.

The car and jeep segment is not showing any significant trend. In

Hindustan Motors and Mahindra & Mahindra the ratio is almost matching the

industry average.

In the two and three wheelers segment, all the companies and the

segment in specific are showing a declining trend atleast from 1992-93.

 143
TABLE 5.3.1

RECEIVABLES TO CURRENT ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 46 96 48 63 50 59 59 45 57 91

ASHOK LEYLAND 43 31 39 02 52 94 59 28 65 53

ESCORTS 46 04 42 38 48 39 45 36 37 97

BAJATTEMPO 18 72 17 34 21 10 14 39 10 78

EICHER TRACTORS 35 26 34 81 43 23 46 58 48 04

EICHER MOTORS 32 44 34 91 47 44 52 88 55 12

COMMERCIAL 44.05 44.40 49.28 55.97 57.02

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 29 71 43 98 40 09 43 23 4124

MAHINDRAAND 35 17 36 60 43 40 4149 40 14
MAfflNDRA

CAR AND JEEP 33.05 42.34 45.11 47.60 45.76

AVERAGE

BAJAJ AUTO 22 91 27 88 38 21 36 61 33 45

LML 5104 54 67 57 61 49 33 43 13

T V S SUZUKI 46 45 49 82 53 10 44 39 37 16

HERO HONDA 30 98 38 46 38 02 31 11 25 54

KINETIC HONDA 20 21 32 28 30 36 31 31 25 65

TWO AND THREE 30.51 36.28 45,30 39.06 34.78

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 144

5,3.2 RECEIVABLES TO TOTAL ASSETS -

The commercial vehicle segment is showing a consistent rise in the

ratio of receivables to total assets as seen in Table 5.3.2. Similar is the case

with Eicher Motors and Elcher Tractors. But Escorts and Bajaj Tempo are

showing a falling trend.

The car and jeep segment is also showing a continuous rising trend

however such trends cannot be observed in Hindustan Motors and Mahindra &

Mahindra.

The two and three wheelers segment is not showing any specific trend.

Company wise it can be seen that Bajaj Auto is showing a rising trend while

L.M.L. Suzuki and Hero Honda are showing a falling trend since 1992-93.
 145
TABLE 5.3.2

RECEIVABLES TO TOTAL ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 32 39 35 95 36 47 39 89 37 88

ASHOK LEYLAND 31 37 29 51 36 95 36 06 45 47

ESCORTS 3109 28 12 32 87 3175 27 62

BAJAJ TEMPO 13 61 12 79 15 99 11 55 871

EICHER TRACTORS 24 31 23 49 26 34 29 60 31 22

EICHER MOTORS 23 87 25 77 34 06 35 30 39 13

COMMERCIAL 30,53 32.54 35.07 36.99 39.01

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 18 09 22 82 2125 23 28 23 64

MAHINDRAAND 22 16 23 65 29 24 3164 30 39
MAHINDRA

CAR AND JEEP 22.05 26.56 27.32 30.21 33.86

AVERAGE

BAJAJ AUTO 12 76 16 13 22 72 26 23 26 37

LML 32 25 32 61 38 54 36 34 30 82

T V S SUZUKI 24 17 25 70 29 14 25 69 24 81

HERO HONDA 15 85 20 85 22 13 18 67 16 17

KINETIC HONDA 1141 19 85 20 82 2136 17 91

TWO AND THREE 18.07 21.91 28.76 27,33 25.96

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI.
 146

5.3.3 RECEIVABLES TO SALES -

The commercial vehicle segment is showing a falling trend In the ratio

of receivables to sales as can be seen in Table 5 3.3 after 1992-93. Similar is

the case with Telco, Escorts and Bajaj Tempo.

The car and jeep segment is also showing a nsing trend however such

trends cannot be seen in the two companies under study in this segment.

In the two and three wheelers segment LML, Suzuki, Hero Honda and

Kinetic Honda are showing a falling trend.

 14 7
TABLE 5.3.3

RECEIVABLES TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 0 22 031 0 41 0 37 0 28

ASHOK LEYLAND 0 20 0 28 0 43 0 37 0 56

ESCORTS 0 17 0 15 021 0 20 0 15

BAJAJ TEMPO 0 07 0 07 0 08 0 05 0 05

EICHER TRACTORS 0 08 0 11 0 15 0 21 0 20

EICHER MOTORS Oil 0 14 0 23 0 22 0 23

COMMERCIAL 0.20 0.28 0.38 0.33 0.34

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 0 15 0 23 0 19 0 17 0 16

MAHINDRAAND 0 17 0 17 0 19 0 24 0 23
MAHINDRA

CAR AND JEEP 0.16 0,17 0.19 0.23 0.27

AVERAGE

BAJAJ AUTO 0 08 0 10 0 13 0 15 0 19

LML 0 35 0 33 0 33 0 26 0 19

T V S SUZUKI 0 19 0 17 0 18 0 12 0 10

HERO HONDA 0 09 Oil 0 12 0 10 0 08

KINETIC HONDA 0 03 0 06 0 09 0 07 0 07

TWO AND THREE 0.12 0.14 0.18 0.16 0.17

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI
 14S

5.3.4 AVERAGE DAYS OF DEBTORS -

All the segments in the Industry are showing decline in the ratio of

average days of debtor after 1992-93.As can be seen from Table 5.3.4 Bajaj

Tempo is having a very low average as compared to the commercial vehicle

segment average while Telco is having a very high average.

In the car and jeep segment both the companies are showing declining

trend after 1992-93 but still their averages are very high as compared to this

segment average.

All the companies in two and three wheeler segment are also showing a

decline in the average but still the average in L.M.L. is high as compared to

this segment average.

 14i
TABLE 5.3.4

AVERAGE DAYS OF DEBTORS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 66 98 125 115 75

ASHOK LEYLAND 55 70 117 95 116

ESCORTS 40 40 52 52 32

BAJAJ TEMPO 11 09 09 05 03

EICHER TRACTORS 07 12 19 18 26

EICHER MOTORS 17 22 56 50 50

COMMERCIAL 58 83 110 97 77
VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 41 71 57 49 40

MAfflNDRAAND 42 42 46 39 33
MAHINDRA

CAR AND JEEP 22 30 30 24 19

AVERAGE

BAJAJ AUTO 07 10 17 16 16

LML 44 32 43 28 22

T VS. SUZUKI 38 32 45 28 20

HERO HONDA 13 15 29 14 10

KINETIC HONDA 05 14 23 20 19

TWO AND THREE 15 17 27 21 19

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 150

5.3.5 LOANS AND ADVANCES TO CURRENT ASSETS -

Table 5.3.5 presents data pertaining to the rate of loans and advances

to current assets.

In the commercial vehicle segment Ashok Leyland and Eicher Motors

are showing a rising trend while Bajaj Tempo is showing a declining trend.

Although the ratio in Escorts and Eicher Tractors is varying but the ratio is too

high when compared with other companies under study in this segment.

In the car and jeep segment also the ratio is rising in both the

companies but the ratio is very high in Mahindra & Mahindra when compared

with Hindustan Motors.

In two and three wheelers segment the ratio in Bajaj Auto and LML are

very high as compared to other companies under study in this segment.

Others are showing variable ratio over the period.

 151
TABLE 5.3.5

LOANS AND ADVANCES TO CURRENT ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 16 68 12 08 10 73 10 52 2145

ASHOK LEYLAND 10 34 14 56 17 68 2103 32 27

ESCORTS 35 81 33 05 32 20 28 66 33 50

BAJAJ TEMPO 20 10 24 04 27 77 20 37 19 70

EICHER TRACTORS 30 43 28 63 35 77 46 96 40 96

EICHER MOTORS 19 82 13 15 14 95 2141 22 81

COMMERCIAL DATA NOT AVAILABLE

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 7 50 7 37 8 15 10 42 14 16

MAHINDRAAND 13 99 14 29 18 94 33 04 35 13
MAHINDRA

CAR AND JEEP DATA NOT AVAILABLE

AVERAGE

BAJAJ AUTO 39 23 4189 48 07 57 75 55 88

LML 44 00 44 11 39 08 37 75 33 63

T V S SUZUKI 23 04 25 63 18 22 15 93 17 93

HERO HONDA 25 31 27 15 16 26 26 37 2189

KINETIC HONDA 13 94 12 30 8 68 8 29 11 16

TWO AND THREE DATA NOT AVAILABLE

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 152

5.3.6 LOANS AND ADVANCES TO TOTAL ASSETS -

Table 5.3.6 shONA^ that the ratio of loans and advances to total assets

has substantially increased in Telco and Ashok Leyland during last year.

Beside this the ratio is very high in Escorts and Bajaj Tempo as compared to

other companies in the commercial vehicle segment.

The ratio is rising in both the companies under study in the car and jeep

segment but the ratio in Mahindra & Mahindra is very high as compared to

Hindustan Motors.

In the two and three wheelers segment the ratio is very high in LML as

compared to other companies in this segment. There is a high rise in ratio in

LML and Suzuki. No company is showing any substantial declining trend.

 153
TABLE 5.3.6

LOANS AND ADVANCES TO TOTAL ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 18 23 11 93 1109 9 98 20 72

ASHOK LEYLAND 9 97 10 96 15 31 15 27 26 37

ESCORTS 4163 38 85 32 22 3123 3146

BAJAJ TEMPO 2175 28 70 43 14 45 43 45 56

EICHER TRACTORS 3183 24 59 26 09 3143 27 03

EICHER MOTORS 24 29 16 28 18 10 24 19 28 64

COMMERCIAL DATA NOT AVAILABLE

VEHICLE EVDUSTRY
AVERAGE

HINDUSTAN MOTORS 5 82 481 5 46 701 10 68

MAHINDRAAND 10 63 1140 17 13 26 20 26 54
MAHINDRA

CAR AND JEEP DATA NOT AVAILABLE

AVERAGE

BAJAJ AUTO 27 78 34 83 44 14 50 27 48 16

LML 53 36 33 28 37 20 38 54 45 35

T V S SUZUKI 24 25 27 03 20 72 16 78 22 56

HERO HONDA 17 58 21 52 11 29 22 14 21 30

KINETIC HONDA 1191 11 40 8 35 8 58 13 37

TWO AND THREE DATA NOT AVAILABLE

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 154

REFERENCES

1. John J. Hampton 'Financial Decision Making' Prentice India New Delhi

1978.

2. Hunt,P., C M . Williams and G. Donaldson'Basic Business Finance'

Richard D. Irwin. Inc. 1966.

3. Michael Firth 'Management of Working Capital' The Macmillan Press Ltd.

London 1976.

4. Khan and Jain 'Financial Management' Tata McGraw Hill Publishing Co.

Ltd. 1992.

5. Robert W Johnson 'Financial Management' Allvn and Bacon Inc.

Boston 1966.

6. Bolton,S.E., 'Managerial Finance' Boston Honghton Mifflin Co. 1976.

7. Greer.C C , T h e Optimal Credit Acceptance Policy' Journal of Financial

and Quantitative Analysis 1984.

8. Campsey.B.J., and Eugene F. Brigham 'Introduction to Financial

Management' The Drvden Press New York

 155

9. Ezra Solomon and J.J. Pringle 'An Introduction to Financial Management'

Second Edition Scott, Foresman and Co. Ltd.

10. John J.Hampton, 'Financial Decision Making' Prentice Hall of India New

Delhi 1978.

11. Gitman Lawrence, 'Principles of Managerial Finance' Harper and Row

New York 1979.

 15G

CHAPTER-VI

MANAGEMENT OF INVENTORY

This chapter has been divided into three parts. The first part deals with

the theoretical aspects of inventory management explaining the concept of

inventory, followed by forms of inventory control, cost of holding inventories,

oncerns of inventory management and finally inventory management system.

The second part of the chapter deals v^/ith the responses of executives through

questionnaire and, finally, the third part deals with measuring the performance

of working capital management in thirteen companies.

6.1 CONCEPT AND MOTIVES OF INVENTORY

"Inventories include stock on hand at a particular time of raw material,

goods in process of manufacture, finished products, merchandise purchased

for resale and the like tangible assets which can be seen, weighted and

counted."^
 157

The motives of holding inventories are the same as applicable to cash

namely, transactional, precautionary and speculative motive.^

6.1.1 FORMS OF INVENTORY CONTROL -

The problem of inventory control arises because inventory is viewed by

different functional departments differently^. Rather than controlling inventory

as a whole it is controlled and directed by different departments differently.

The production department would like to have abundant quantity of raw

material in store so that the production cycle is not hampered as any delay in

supply of raw material will increase the total time required in production and

will also lead to increased idle man-hours and machine hours. Similarly the

marketing department will like to have abundant quantity of finished goods in

store so that goods can be supplied immediately as and when demanded by

the customer. Finally the finance department may consider stock of raw

material and finished goods as an unnecessary blockage of capital which

would otherwise be invested for generating returns. Thus despite claims of all

departments being genuine still they are having conflicting goals to control

inventory^.

An integrated approach of all the above departments will lead to

minimization of cost and effective production.

 158

6.1.2 COST OF HOLDING INVENTORY -

The various costs of holding inventories includes ordering cost of raw

material when the order is placed to the suppliers. It includes expenses like

inviting quotation from suppliers, typing of order, mailing and follow up cost, it

also includes cost of inspection^. This cost will depend upon the number of

orders placed during the year, higher the number of orders higher will be the

ordering cost. Another cost of holding inventory is cost of material^ which

includes purchase price plus freight inward, handling, sales tax and transit

insurance. Another cost is the cost of investment in inventory^ it includes the

opportunity cost as well as interest payable by the firm on such investments if

financed otherwise. Another cost is the cost of running out of stock.® Another

cost is the cost of inventory storage the firm has to pay for the building where

the inventory is stored either in the form of rent or capital investment. Another

cost is obsolescence and spoilage cost. Such cost occurs because of change

in factors like taste, technology etc. Spoilage cost occurs because of inferior

storage arrangement. Finally there are minor costs such as damage, theft or

pilferage cost.
 159

6.1.3 CONCERNS OF INVENTORY MANAGEMENT

Inventory holding requires a high level of Investment*. Few managers

go to the extent of considering it a necessary evil without analyzing the

benefits the firm receives from such investments. It not only helps in smooth

operation but also helps in planning the activities of purchase department and

the maximum utilization of manpower and machines so that none will remain

idle. Not only this, it helps in reducing the total cost of production and thus

reduces price. This not only helps the firm in increasing market share but also

helps in maximizing customer satisfaction and to counter the competition more

effectively. This also helps the firm to concentrate on research and

development thereby helping the economy in general.

Inventory management involves two important activities, first planning

and control^" and second inventory accounting.^^

6.1.4 INVENTORY MANAGEMENT SYSTEM ~

Inventory management system comprises of three sub-systems. They

are economic-order quantity^^, re-order point^^ and stock level. Economic order

quantity refers to that quantity of order that will lead to lowest ordering and

carrying cost. However the economic order quantity can be determined only if
 160

demand is known, sales occur at a constant rate, cost of running out of order

is ignored and safety stock level is not considered. Re-order point refers to the

time \A4ien the order for goods is to be placed so that the firm does not run out

of goods. While determining the reorder level one has to consider the usage

rate, lead time and safety stock level. The stock level maintains record of the

current level of inventory. It is determined by adding opening stock of

inventory and inventory purchased during the period and from this cost of

goods sold during the period is subtracted. Whenever the stock level indicates

that a particular item is below the re-order level the order will be placed.

6.2 COMPANY WISE INVENTORY MANAGEMENT

PRACTICES-

The second part of the chapter deals with the objectives, policy and

planning, organization, control and review, and finally problems of inventory

management.

6.2.1 OBJECTIVES POLICY AND PLANNING -

The objective and policy of inventory management of Hero Honda and

Escorts is to avoid loss of sales, gain quantity discounts, reduce order cost
 161

and achieve efficient production. Escorts also includes avoiding supply

disruption as their objective of inventory management. The objective of

inventory management in Eicher Tractors and Eicher Motors is to reduce cost

and that of Bajaj Auto is to avoid loss of sales and achieve efficient

production. In Bajaj Tempo the objective and policy of inventory management

is to avoid loss of sales, gain quantity discount, reduce order cost and achieve

efficient production.

All the companies revise their inventory objectives and policies

whenever variations occur. In Hero Honda the factors influencing such

variations includes shifting demand, changing cost, changing competition and

changing contribution. Escorts considers all the above aspects except

changing cost in this regard. Eicher Motors and Eicher Tractors considers only

shifting demand, and Bajaj Auto considers shifting demand, changing cost and

changing competition as the factors influencing change in inventory objectives

and polices. In Bajaj Tempo factors influencing variation in inventory objectives

and policies are changing cost and competition.

Hero Honda takes into account economic order quantity and safety

stock fevel in planning inventory components. For indigenous raw material,

planning is based on annual order with monthly delivery schedule matching

with production and on production program norms of consumption, and cycle

 162

of recoupment and storage capacity. Foreign raw material is planned on the

basis of adhoc procurement on account of delays in imports. Indigenous

stores and spares are planned on the basis of ordering quantities, safety

stocks and the lead time of manufacture and by determining minimum,

maximum stocks and economic order quantities. Foreign stores and spares

are planned on the basis of supply lead time and cycle time of manufacture,

general practice to get a spare set of spare parts and by determining minimum

and maximum stock levels. Work-in-process is planned on process based on

customer requirements and production cycle. Finished goods inventory is

planned on the basis of sales planning, subject to constraints of production

and storage capacity and based on customer requirements.

In Escorts planning for components of inventory is done at the plant

level with the help of Manager purchase and stores. The planning for

indigenous raw material is based on input consumption efficiency statistics

computed and on the basis of annual order with monthly delivery schedule

matching with production. Foreign raw material is planned on the basis of

adhoc procurements on account of delays in imports. Stores and spares

indigenous is planned in order to avoid maintenance and break-down. Foreign

stores and spares are planned for specific time requirement, based on supply

lead time and cycle time of manufacture, general practice to get a spare set of

spare parts and by determining minimum and maximum stock levels. Work in
 163

process is planned on process parameters, usual period of ageing and on

customer requirements and production cycle. It may vary in case of line

production and batch production. Finished goods is planned on the basis of

sales planning, subject to constraint of production and storage capacity, by

determining economic quantity and on customers requirement. The

respondent also said that the finished goods are also classified into high and

low demand goods. High demand goods includes Ford Tractor, Yamaha,

Automative pistons and rings and low demand goods includes Rajdoot and

shockers etc.

Eicher Motors and Tractors plan their indigenous raw material on the

basis of production program, norms of consumption, cycle of recoupment,

and storage capacity. Indigenous stores and spares are planned on the basis

of specific percentage of production cost or manufacturing facilities. Foreign

stores and spares are planned on the basis of general practice to get a set of

spare parts. Work-in-process is planned on the basis of process parameters

and finished goods are planned on the basis of sales planning, subject to

constraints of production and storage capacity.

Bajaj Auto plan their indigenous raw material on the basis of input

consumption efficiency statistics computed and on production program norms

of consumption, cycle of recoupment and storage capacity. Foreign raw

 164

material planning is done on the basis of adhoc procurement on accounts of

delays in imports. Indigenous stores and spares are planned on the basis of

ordering quantities, safety stocks and the lead time of manufacturing while

foreign stores and spares are planned on the basis of supply lead time and

cycle time of manufacturing. Work-in-process is planned on the basis of

customer requirements and production cycle. Finished goods are planned on

the basis of sales planning subject to constraints of production and storage

capacity. In Bajaj Tempo planning for indigenous raw material is based on

input consumption, annual order with monthly delivery schedule matching with

production and based on production program, norms of production, cycle of

recoupment, and storage capacity. The foreign raw material is planned on the

basis of adhoc procurement on account of delays in imports. Planning for

indigenous stores and spares is based on the ordering quantity, lead time to

manufacture and on specific percentage of production cost or manufacturing

cost. The foreign stores and spares are planned on the basis of general

practice to get a set of spare parts. The in-process inventory is planned on the

basis of usual period of ageing customer requirements and production cycle.

Finished goods are planned on the basis of sales planning, subject to

constraints of production and storage capacity and customer requirements.

Inventory in Hero Honda is planned for both long range and short range

duration. Short range duration of indigenous goods is quarterly and for foreign
 165

goods half yearly. In case if any contingency need arises then suppliers are

asked to expedite their production they also have alternative sources to cope

up with the supply. Escorts plan their inventory for short duration only and

based on annual sales target and for scheduling they have developed

vendors. Eicher Motors and Tractors plan their inventory for short range i.e.

for one year. While Bajaj Auto plan their inventory both for long and short

range durations. In Bajaj Tempo inventory is planned for long range for a

period of two years for indigenous inventory and one year for foreign

inventory. It also plans for short duration; indigenous three months, and

foreign for one month.

All the companies undertake production scheduling. In Hero Honda this

scheduling minimizes the production cycle time, pinpoints the need for a

particular item, helps in forecasting the requirement of raw materials, stores

and spares, and regulates inventory planning. In Escorts scheduling

contributes towards minimizing the production cycle time, it forms the main

basis for inventory budgeting and helps in forecasting the requirement of raw

material, stores and spares. In Eicher Motors and Tractors minimizes the

production cycle time and in Bajaj Auto it minimizes the production cycle time

and forms the main basis for inventory budgeting. In Bajaj Tempo production

scheduling is done which helps to minimize production cycle time and regulate

inventory planning.
 16G

Financing of inventory in all the companies is done through short term

sources only through cash credit accounts.

6.2.2 ORGANIZATION -

Business Head of each Division or Group company is responsible for

the overall management in Escorts while in Eicher Motors and Tractor this

authority is decentralized. In Bajaj Tempo General Manager Materials and

Divisional Manager MateriaJs are responsible for overall inventory

management in the organization.

The responsibility of the financial executive with regard to investment in

inventory in Hero Honda is to scrutinize terms of payment and ensure

compliance v^th purchase policy, to give clearance for disposal of surplus

inventory, minimize procurement cost, to introduce and operate suitable

methods of control, to see that the norms (minimum and maximum levels) are

fixed for various items of inventory,to enforce budgetary control on allocation

of funds for purchase of stocks, to provide management information for control

of various components of inventories and to ensure no loss of production. In

Escorts it includes all the above aspects except to give clearance for disposal

of surplus inventory, minimize procurement cost and to provide management

 167

information for control of various components of inventory. In Eicher Motors

and Tractors the financial executives responsibility is to scrutinize terms of

payments and ensure compliance with purchase policy and to enforce

budgetary control on allocation of funds for purchase of stocks. The

responsibility of the financial executive regarding inventory management

includes minimizing procurement cost, to give clearance for disposal of surplus

inventory and to enforce budgetary control on allocation of funds for purchase

of stocks. In Bajaj Tempo the responsibilities of financial executive regarding

inventory management are to scrutinize terms of payment and ensure

compliance with purchase policy, to give clearance for disposal of surplus

inventory and minimize procurement cost.

In Hero Honda the investment in inventory is controlled by the finance

and material manager. In Escorts it is controlled by the Business Head in

consultation with finance head. In Eicher Motors and Tractors this function is

decentralized. Bajaj Auto did not respond. In Bajaj Tempo investment in

inventory is controlled by Senior General Manager (Finance) and General

Manager (Materials).

The techniques applied to control investment in inventory in Hero

Honda, and Escorts are budgetary control, review of stocks and production

requirement, ABC analysis, lead time analysis, performance budgeting and

 168

informations system, approving orders after ascertaining the stock and

movement position and by fixed ordering level system in certain items. In

Eicher Motors and Tractors only budgetary control is used to control

investment in inventory. In Bajaj Auto the techniques used are budgetary

control, review of stocks and production requirement and fixed ordering level

system. Bajaj Tempo controls its inventory by budgetary control, review of

stock and production requirement and ABC analysis.

All the companies determine the investment in inventory from time to

time. In Hero Honda it is determined through monthly M.I.S. statements, past

consumption, production program, replacement program, overhauling program,

as reduced by the material in stock and pipeline, days requirements based on

production level and by analyzing total inventory and identifying the lock up of

funds for non moving items and surplus stocks. In Escorts it is determined by

monthly, quarterly and half yearly reviews and also five yearly production and

business cycle. In Eicher Motors and Tractors it is determined by past

consumption, production program, replacement program, overhauling program,

as reduced by the material in stock and pipeline, by days requirements based

on production level. In Bajaj Auto it is controlled by production requirements of

next two or three years, past consumption, production program, replacement

program, overhauling program, as reduced by the material in stock and

pipeline and with the help of percentage ratios of monthly inventory holding to
 169

monthly consumption. In Bajaj Tempo investment in inventory is not

determined from time to time.

6.2,3 CONTROL AND REVIEW -

To determine inventory norms Hero Honda follows raw material, work in

process, stores and spares and finished goods as percentage of total

inventory ratio, total inventory as percentage of total current asset investment

ratio, inventory as percentage of net working capital ratio, inventory as

percentage of sales ratio. Escorts determine total inventory as percentage of

total current asset investment ratio and inventory as percentage of fixed asset

investment ratio. Eicher Motors and Tractors determines total inventory as

percentage of total current asset investment. Bajaj Auto determines raw

material, work-in-process, stores and spares and finished goods as

percentage of total inventory, total inventory as percentage of total current

asset investment and inventory as percentage of net working capital ratio. In

Bajaj Tempo inventory to sales ratio is used as inventory norm.

Hero Honda and Escorts use ABC analysis and analyze on the basis of

the essentiality, size, shelf life, etc. as techniques for inventory control. It also

uses continuous verification and automatic data handling system methods for

inventory control. Escorts uses automatic data handling system method only to
 170

control inventory. Eicher Motors and Tractors uses ABC Analysis techniques

and annual verification method to control inventory. Bajaj Auto uses only ABC

Analysis to control inventory. In Bajaj Tempo ABC analysis, annual verification

and automatic data handling system is used to control inventory.

All the companies make an analysis of inventory turnover and its audit.

The method of analysis used by Hero Honda, Eicher Motors and Eicher

Tractors and Escorts is comparing current inventory turnover ratio with the

ratio of company's past inventory sales ratio with that of the competitor. In

Bajaj Tempo inventory turnover analysis is done by comparing it v^th the

industry norm, and by comparing inventory sales ratio with that of the

competitor.

All the companies evaluate the performance of inventory department. In

Hero Honda this is done by inventory to sales ratio and by comparing

inventory to sales ratio with that of the competitor. Escorts in addition to

above, also incorporates performance evaluation by measuring standards with

actual performance and by formulation of inventory policies. Eicher Motors

and Tractors evaluate by comparing current inventory turnover ratio with the

ratio of the past and by performance evaluation, by measuring standards with

actual performance. Bajaj Auto evaluates by comparing current inventory

turnover ratio with the norm of inventory turnover and with the ratio of the past
 171

and by inventory to sales ratio. In Bajaj Tempo performance of the inventory

department Is evaluated by measuring standard with actual performance.

Hero Honda deals with the price fluctuations in the purchase of material

by price escalation during the pendency of the order. It is not accepted by

regular business dealings with vendors, normally prices quoted by suppliers

are to be maintained throughout the contract period, in case of controlled

commodities and items difficult to procure, normal escalation are considered

on merit and on the basis of the trend of price fluctuation, the quantum of

purchase is suitably raised, taking into consideration other economies of

inventory management. Escorts deals with price fluctuation problem by price

escalation during the pendency of the order, in case of controlled commodities

and items difficult to procure, normal escalation are considered on merit, and

based on the trend of price fluctuation, the quantum of purchase is suitably

raised taking into consideration other economies of inventory management.

Eicher Motors and Tractors deals with the problem of price fluctuations by

absorbing it in cost. Bajaj Auto deals with this problem by price escalation

during the pendency of the order when it is not accepted, by regular business

dealings with vendors and based on the trend of price fluctuations, the

quantum of purchase is suitably raised, taking into consideration other

economies of inventory management. In Hero Honda the problem of price

fluctuation in the purchase of material is taken care of by absorbing

 172
fluctuations in cost and by studying the trend of price fluctuation where the

quantum of purchase is suitably raised taking into consideration other

economies of inventory management.

6.2.4 PROBLEMS OF INVENTORY MANAGEMENT -

Hero Honda detects the existence of excess inventory by constant

review and movement analysis, analysis of slow moving and non-moving

stocks, budgetary control, by observing minimum, maximum limits, and

declaring obsolete items in order to detect them. The reasons for holding

excess inventory are changes in product design and/or changes in production

plan, short supply and/or long lead time items retained as excess inventory,

change in the assumptions/estimates for material/purchase/consumption and

increasing price trends. Escort detects the existence of excess inventory by

constant review and movement analysis by automation, perpetual inventory,

analysis of slow moving and non-moving stocks, and agewise analysis of items

where old items are scrapped when not needed or there is a change in

design. The reasons for holding excess inventory are changes in product

design and/or changes in production plan, short supply and/or long lead time

items retained as excess inventory and by change in the

assumptions/estimates for material/purchase/consumption. However this

problem arises only in case of serious fluctuations in demand for the product.
 173

Eicher Motors and Tractors do not use any method by \A/hich the existence of

excess inventory can be detected. In Bajaj Auto the excess inventory is

detected by perpetual inventory, budgetary control and agewise analysis of

items. The reasons for holding excess inventory are changes in product design

and/or changes in production plan, and increasing price trends. In Bajaj

Tempo the existence of excess inventory is done by constant review and

movement analysis. The reasons for holding excess inventory are changes in

production design, changes in production plan and increasing price trends.

In none of the companies was there any peculiar problem with regard to

inventory management so far as working capital was concerned.

Hero Honda further added that ever since they have adopted two-three

good policies it has helped it to overcome all problems that may be peculiar to

the industry. These policies include 100% fully dedicated ancillaries, specific

supplies and just in time approach so that no excess inventory exists. In Bajaj

Tempo critical items like CR sheets, span castings and forgings are

maintained at a higher level and under minimum and maximum stock basis.

Although their immediate requirement is very low but this leads to stocking for

minimum quantity. This also leads to unnecessary blocking of funds and

handling of material and unnecessary increased manpower cost. Thus they

feel that inventory policy needs to be revised and a Japanese technique like
 174

one-day-inventory be followed. This will also lead to reduction of tendency in

consuming excess material. Finally, production cycle also needs to be revised

in order to maintain the minimum level of inventory. Bajaj Tempo was not

having any peculiar problem regarding inventory management as far as

working capital management was concerned.

6.3 EVALUATION OF INVENTORY MANAGEMENT-

In the last part of the chapter the evaluation of inventory has been done

for thirteen companies with the help of ratios for a period of five years.
 175

6.3.1 INVENTORY TO CURRENT ASSETS -

As can be seen from Table 6.3.1 in the commercial vehicle segment the

ratio of inventory to current assets on an average as v\^ll as for all the

companies in specific Is showing a declining trend after 1992-93. Although the

ratio is also declining in Bajaj Tempo but still the ratio is very high as

compared to industry segment averages.

The car and jeep segment is also showing a declining trend after

1992-93. Similar is the case with the two companies under study but ratio in

Hindustan Motors is too high when compared with industry average.

The two and three wheelers segment is showing a declining trend on an

average but only two companies Bajaj Auto and Kinetic Honda are showing a

declining trend. Still the ratio is too high in Kinetic Honda. Exceptionally has

the ratio of individual companies been below the segment average.

 176
TABLE 6.3.1

INVENTORY TO CURRENT ASSETS

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 38,13 35.72 40.58 32.70 28.74

ASHOK LEYLAND 55.26 38.51 33,36 33,39 22.92

ESCORTS 39.83 37.30 34,41 29.61 29.51

BAJAJ TEMPO 78.35 72.54 76.28 54.42 61.24

EICHER TRACTORS 39.80 36.86 38,24 26.07 20.31

EICHER MOTORS 52,04 60.62 48,55 40.24 35.18

COMMERCIAL 45,42 39,08 41,11 35.08 27.64

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 64.42 50 20 52,94 48,03 46.96

MAHINDRA AND 45.31 44.12 39,97 33.49 30.63

MAHINDRA

CAR AND JEEP 44.61 44.36 46,28 34,23 25.56

AVERAGE

BAJAJ AUTO 51,79 49.84 40,30 24.66 20.45

LML 30,84 30.65 28,24 31.92 38.23

T.V.S. SUZUKI 46,16 42,74 38,98 41.54 47.22

HERO HONDA 42,45 48,22 38,54 37,64 50,80

KINETIC HONDA 66,21 60,52 57.25 50.64 54.49

TWO AND THREE 43.28 42.03 35.47 28.73 27.40

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI,
 177

6.3.2 AVERAGE PAYS OF RAW MATERIAL STOCK -

The ratio of average days of raw material stock is showing a declining

trend in the commercial vehicle segment and car and jeep segment although it

has increased during last year in two and three wheelers segment. This can

be observed from Table 6.3.2.

Escorts, TELCO and Ashok Leyland are showing a declining trend but

the average in Ashok Leyland is very high when compared with industry

average.

In Hindustan Motors, although the average days are falling but still the

average is very high when compared with industry average.

In two and three wheelers segment LML is showing a declining trend

but still, the average days are very high when compared to segment average.

Kinetic Honda is showing a rising trend.

 178
TABLE 6.3.2

AVERAGE DAYS OF RAW MATERIAL STOCK

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 56 61 50 52 43

ASHOK LEYLAND 78 67 101 77 74

ESCORTS 61 51 57 53 48

BAJAJ TEMPO 115 123 127 95 132

EICHER TRACTORS 36 35 34 42 33

EICHER MOTORS 64 79 84 47 51

COMMERCIAL 67 69 70 65 58
VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 136 131 115 93 91

MAHINDRAAND 67 62 50 53 62
MAHINDRA

CAR AND JEEP 90 84 83 74 72

AVERAGE

BAJAJ AUTO 94 109 70 56 76

LML 119 84 92 90 81

T V S SUZUKI 40 32 30 34 46

HERO HONDA 41 46 33 40 34

KINETIC HONDA 42 47 45 50 70

TWO AND THREE 77 77 57 53 62

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI.
 179

6.3.3 RAW MATERIAL TO SALES -

Table 6.3.3 shows that the commercial vehicle segment on an average

is showing a declining trend for the ratio of raw materials to sales. Telco, Ashok

Leyiand and Escorts are showing a declining trend. But the ratio in Ashok

Leyland is still higher when compared to industry average.

The car and jeep segment, on an average, is showing a rising trend.

Hindustan Motors is showing a slight fail in ratio while Mahindra & Mahindra

has shown a slight rise. Moreover in both the companies the ratio is lower

than the segment average ratio.

The ratio in the two and three wheelers segment has been varying. Only

Kinetic Honda is showing a rising trend.

 ISO
TABLE 6.3.3

RAW MATERIALS TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 0 09 0 10 0 09 0 08 0 07

ASHOK LEYLAND 0 13 0 12 0 16 0 13 0 13

ESCORTS Oil 0 09 0 10 0 09 0 08

BAJAJ TEMPO 0 20 0 20 0 22 0 17 0 23

EICHER TRACTORS 0 07 0 07 0 07 0 08 006

EICHER MOTORS 0 13 0 17 0 17 0 10 0 10

COMMERCIAL 0.11 0.12 0.13 0.10 0,10

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 0 20 0 17 0 16 0 12 0 12

MAHINDRAAND 0 10 0 10 0 08 0 08 0 09
MAfflNDRA

CAR AND JEEP 0.16 0,17 0.19 0.23 0.27

AVERAGE

BAJAJ AUTO 0 13 0 15 0 10 0 07 0 10

LML 0 17 0 13 0 13 0 12 0 12

T V S SUZUKI 0 08 0 06 0 06 0 06 0 09

HERO HONDA 0 09 0 10 0 07 0 09 0 08

KINETIC HONDA 0 08 0 09 0 09 0 09 0 13

TWO AND THREE 0.12 0.12 0.09 0.08 0.10

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 181

6.3.4 AVERAGE DAYS OF FINISHED GOODS STOCK -

The ratio of average days of finished goods stock, as seen in Table

6.3.4, has substantially decreased in all the three segments on an average of

the industry after 1992- 93. The ratio has fallen in all the companies in the

commercial vehicle segment but in Telco the ratio have still been higher than

the segment average. Escorts and Bajaj Tempo have very low average days

when compared with the segment averages.

In the car and jeep segment the average days in Hindustan Motors and

Mahindra & Mahindra are very high compared to segment average.

In two and three wheelers segment the average days in all the

companies are falling except LML and Hero Honda where it has increased

during last year.

 182
TABLE 6.3.4

AVERAGE DAYS OF FINISHED GOODS STOCK

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 32 45 86 45 25

ASHOK LEYLA>fD 46 56 40 28 24

ESCORTS 14 14 17 14 12

BAJAJ TEMPO 32 29 24 14 16

EICHER TRACTORS 09 15 23 16 08

EICHER MOTORS 16 30 32 25 16

COMMERCIAL 36 46 69 38 25
VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 45 32 33 27 24

MAHINDRAAND 41 38 36 40 29
MAHINDRA

CAR AND JEEP 27 21 24 20 14

AVERAGE

BAJAJ AUTO 14 09 14 10 07

LML 14 21 12 16 19

T V S . SUZUKI 41 30 27 16 14

HERO HONDA 15 14 18 11 28

KINETIC HONDA 11 08 27 11 10

TWO AND THREE 17 15 17 13 13

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHL
 lo3
6.3.5 FINISHED GOODS TO SALES RATIO -

Table 6.3.5 provides the relevant data in the commercial vehicle

segment the ratio of finished goods to sales is falling after 1992-93. The ratio

has substantially decreased in Telco. Escorts has almost a constant ratio

throughout the period.

In the car and jeep segment the ratio is showing a declining trend

although the ratio in both the companies is still higher than the segment

average.

In the two and three wheelers segment the ratio is more or less the

same as segment average, however, the ratio has substantially increased in

Hero Honda during last year.

 184
TABLE 6.3.5

FINISHED GOODS TO SALES

NAME OF THE UNITS 1990-91 1991-92 1992-93 1993-94 1994-95

TELCO 0 09 0 12 0 24 0 12 0 07

ASHOK LEYLAND 0 13 0 15 Oil 0 08 0 03

ESCORTS 0 04 0 04 0 05 0 04 0 03

BAJAJ TEMPO 0 09 0 08 0 07 0 04 0 04

EICHER TRACTORS 0 03 0 04 0 06 0 04 0 02

EICHER MOTORS 0 04 0 08 0 06 0 07 0 05

COMMERCIAL 0.10 0.13 0.19 0.10 0.07

VEHICLE INDUSTRY
AVERAGE

HINDUSTAN MOTORS 0 12 0 09 0 09 0 07 0 07

MAHINDRAAND Oil 0 10 0 10 Oil 0 08

MAHINDRA

CAR AND JEEP 0.07 0.06 0.07 0.05 0.04

AVERAGE

BAJAJ AUTO 0 04 0 03 0 04 0 03 0 02

LML 0 04 0 06 0 03 0 04 0 05

T V S SUZUKI Oil 0 08 0 07 0 05 0 04

HERO HONDA 0 04 0 04 0 05 0 03 0 08

KINETIC HONDA 0 03 0 02 0 07 0 03 0 03

TWO AND THREE 0.05 0.04 0.05 0.03 0.03

WHEELER INDUSTRY
AVERAGE

SOURCE : COMPUTATION BASED ON DATA COMPILED BY CMIE AND CAPITALINE,

NEW DELHI.
 185

REFERENCES

1. Raymond A. Hoffman and Henry Gunder 'Inventories Control Costing and

Effect upon Income and Taxes' John Willev and Sons New York 1970.

2. Arrow Kaslin and Scarf, Studies in the Mathematical Theory of Inventory

and Production, Stanford Universitv Press 1958.

3. England, W.B. and M.R. Leenders 'Purchasing and Materials

Manaoement' D.B. Taraporevala Sons and Co. Pvt. Ltd. 1978.

4. Tersins.R.J., 'Materials Management and Inventory Systems' North

Holland Inc. 1976.

5. Shah.N.M., 'An Integrated Concept of Materials Management' Tata

McGraw-Hill Publishing Co. Ltd. 1988.

6. Jr.L.L., and D.W. Dabler 'Purchasing and Materials Management Text

and Cases' Tata McGraw Hill Publishing Co. Ltd. 1981.

7. Gopalakrishanan.P. and M Sundaresan 'Materials Management - An

Integrated Approach' Prentice Hall of India Pvt. Ltd. 1987.

 1S6

8. John J. Hampton - 'Financial Decision Making' Prentice Hall of India Pvt.

Ltd. New Delhi 1977.

9. Hadley.G. and T.M. Whitin - 'Analysis of Inventory System' D.B.

Taraporevala Sons and Co. Pvt. Ltd. 1979.

10. McClain.J.O. and L.J. Thomas 'Operations Management Productions of

Goods and Services' Prentice Hall India 1987.

11. Buffa,E.S., 'Operations Management - Problems and Models' Wiley

International New York Third Edition.

 1S7

CHAPTER-VII

SUMMARY, CONCLUSIONS AND

SUGGESTIONS

On the basis of analysis and interpretation of survey and data in the

four components of working capital identified in the formulation of research

problem a summary of analysis and interpretation is provided initially in this

chapter. This is followed by conclusions drawn from the summary. Finally

suggestions, on the basis of summary and conclusions, are presented for each

component of working capital.

In the initial part of the chapter summary conclusions and suggestions

regarding general aspects of management of working capital are provided.

These are presented with the heading of working capital, financing of working

capital, management of cash, management of receivables, loans and

advances, management of inventory. In the end, overall conclusions and

directions for future research have been provided.

 158

7.1 MANAGEMENT OF WORKING CAPITAL -

This section is divided into three sub-sections. The first section deals

with the summary of analysis and interpretation of survey and data. The

second section deals with the conclusions of analysis and interpretation. The

last section presents conclusions drawn on the basis of summary and

conclusions.

7.1.1 SUMMARY -

In the companies surveyed Senior Vice President (Finance), Managing

Director, or Group General Manager, Manager Finance, as the case may be,

were heading the area of finance and reporting either to The Board of

Directors, Managing Director or the General Manager (Finance). The

recording and accounting procedures were either partly or fully computerized.

The working capital management was either centralized or partly

decentralized. All the companies had clearly defined objectives of working

capital. To achieve the objectives the companies also had well-defined

policies.
 189

Working capital requirement was done by overall budgeting and cash

forecasting methods The duration of budgets were long term (for a period of

five years) To implement it objectively it was prepared for a period of two

years, half yearly, quarterly, monthly and even weekly

The working capital management is done by the top executives in the

organizations headed by Senior Vice President, Chief Executive Officer, or

General Manager as the case may be The responsibilities of the executives

were defined regarding working capital management planning, organizing and

controlling To control working capital the companies followed the policy of

authorization of expenditure (in some cases the authorizations are at divisional

level) and determining expense limits on the basis of budgets There are no

manuals containing rules and procedures related to working capital To

determine working capital norms the ratios such as working capital to net worth,

current asset to fixed asset, net working capital to total assets and current

ratio are used Control also includes reports, statements, feedback and review,

government guidelines and just-in-time approach Some of the peculiar

problems of the organization are power and w^ter supply, difficulties in

collection of dues, poor control over imports and occasionally too high current

asset levels for contingent payments There are also some human problems

in managing working capital The review of working capital norms is done on

 190

annual quarterly and monthly basis. Only one company faces the problem of

implementing the Tandon Committee norms regarding inventory.

Regarding ratio analysis certain statements could be made. There has

been a continuous rise in current assets, current liabilities and working capital.

The proportionate rise in current assets was more than the current liabilities

except for the car and jeep segment. Except for a few companies the rise in

current assets is more than the rise in current liabilities.

Most of the companies are showing a rising trend while calculating the

ratio of working capital to total assets although the specific segment average

are showing a declining trend.

The companies are showing variable trends in working capital to sales

ratio. No specific trends can be observed segment wise except for car and

jeeps segment which is showing a rising trend.

The ratio of working capital to sales is also showing a mixed picture,

both company wise as well as segment wise, except for two and three wheeler

segment which is showing a continuous rising trend.

 191

Similarly the current ratio analysis gives a mixed picture of low and high

proportion of current assets and current liabilities over the years except for

two and three wheeler segment which is showing a continuous rising trend.

7.1.2 CONCLUSION -

Certain conclusions derived from the summary of the information

presented in chapter II related to management of working capital has been

listed below -

1. The top executives in the organization are concerned with the finance

functions as well as working capital functions.

2. The problem in the finance function is to manage more effectively

current assets than current liabilities.

3. There are no sincere efforts on the part of management to control

growth in current assets.

4. The current asset ratio is not very high in the industry.

5. Growth in the ratio of current assets to sales indicate better liquidity.

6. The companies are trying to use a better approach in the management

of working capital as revealed from the responses to the questionnaire.

 1S2

7.1.3 SUGGESTIONS -

Following suggestions are made on the basis after analyzing,

summarizing, and concluding general aspects of \A«5rking capital on the basis

of the data interpretation and questionnaire responses.

1. Norms for current assets and current liabilities should be fixed.

2. There should be perfect coordination of production, sales, inventory and

collections with regard to working capital requirement.

3. Once the budget is defined and passed it should be operated upon

strictly. Besides this, if any deviation takes place in actual performance

immediate action should be taken.

4. There should be a change in management's attitude towards working

capital. Not only the liquidity aspect be considered while managing it,

but the impact on profitability should also be examined simultaneously.

5. Since working capital management needs urgency of decisions it should

be backed up by a very efficient management information system.

6. While making decisions the executives should also consider inter firm

companies.

7. The companies should have a manual containing rules and procedure

relating to working capital which should be updated frequently.

 1S3

7.2 FINANCING OF WORKING CAPITAL -

This section is divided into three sub-sections. The first subsection

deals with the summary of analysis and interpretation of survey and data; the

second deals mih the conclusions of analysis and interpretation and the last

presents conclusions drawn on the basis of summary and conclusions.

7.2.1 SUMMARY -

The companies are using hedging approach except one which is using

a conservative approach. The forecasting of working capital is done by formal

statistical methods. These companies have experienced deviations in

forecasted values and actual need of working capital. The reasons for such

deviations are mainly uncontrollable factors. Operating cycle is considered

while forecasting.

The major sources of financing are short term external sources and long

term internal sources. The permanent working capital need is financed from

long term sources while the variable needs are financed from short term

sources.
 1S4

The ratio analysis reveals that the major source of borrowings in the

different segments Is through bank. However in two and three wheeler

segment bank borrowing is showing a declining trend. Borrowings from

financial institutions, debentures and fixed deposits are other major sources of

borrowing.

The industry's average ratio of current liability to total borrowings is

higher than the average of commercial vehicle segment .Majority of the

companies are showing a declining trend in long term borrowings to total

borrowings barring the commercial vehicle segment. This signifies that this

segment, contrary to the industry norm, relies on long term borrowing as a

major source of financing. The ratio of interest to debt as well shows a

declining trend, with an exception of two companies where it registers (a

reverse) an increasing trend. The average ratio of current liability to total

borrowing is highest in all companies and the segment average except in

commercial vehicle segment. Most of the companies are showing a declining

trend in long term borrowings to total borrowings ratio except one in

commercial vehicle segment.

The ratio of interest to debt is showing a declining trend in most of the

companies and, in segment averages, only two companies are showing a

rising trend in the industry.

 1S5

The ratio of PBIT to interest shows that all the segments and companies

are showing a rising trend except one company.

7.2.2 CONCLUSIONS -

1. Both long term and short term sources of finances are used by the

companies.

2. The companies rely more on bank borrowing and creditors. However

there is no strict and consistent policy of financing.

3. The companies are relying very little on financing from internal sources.

4. The industry in general is trying to reduce the cost of borrowing.

5. The industry operations are effective but there is more scope for

improvement.

7.2.3 SUGGESTIONS -

1. The companies should try to generate finances more from internal

sources because internally generated funds are cheaper than externally

mobilized funds.

2. A high ratio of current liability to total liability also indicates that short

term financing is increasing in proportion to total financing. Besides,

 1S6
this may also indicate that fixed capital expenditure is done without

proper finances being raised.

3. The financing policy once framed should be strictly adhered to.

4. The companies should strictly adhere to allocation of funds for the

purpose for which they have been procured. Long term funds should be

used strictly for long term purposes as well as for permanent need of

working capital. Short term funds should be used for short term

purposes or seasonal needs of working capital.

5. The companies should make a cost-liquidity analysis while deciding

upon financing of working capital.

6. The companies should try to synchronize inflows and outflows so that

borrowings can be reduced.

7. The companies should bring in more accuracy in forecasting working

capital needs.

7.3 CASH MANAGEMENT -

This section is divided into three sub-sections. The first sub-section

deals with the summary of analysis and interpretation of survey and data. The

second sub- section deals with the conclusions of analysis and interpretation
 1S7

and, in the last, suggestions are drawn on the basis of summary and

conclusions.

7.3.1 SUMMARY -

The survey analysis and interpretation can be summarized as below.

The companies determine daily cash requirement alongwith optimum

and minimum balances. Cash budgeting is done by the companies although

they are having different time periods for such budgeting. The cash flow

statements are made on the basis of cash from operation, changes in working

capital, and flow of cash. Deputy Manager Finance/Senior Manager Finance is

responsible for overall cash management in the companies.

For controlling, normal days and peak days of cash are determined.

Besides this, periodic review is also done by various methods. Cash balances

of divisions/units are controlled through coordination between divisions, head

quarters and also by budgets and reports.

The companies are facing the problems of collection and wrong

estimation. Companies are not facing the problem of obtaining cash credit from

bank or working capital loans from Central Government.

 ISS

The data analysis and interpretation has been given below.

No specific trends can be seen in commercial vehicle and car and jeep

segment while two and three wheeler is showing a rising trend. However, cash

level is varying in all the companies.

In all the companes the level of cash sales is very low though a few are

showing a rising trend but the rate of increase is very low.

All the companies in the three segments have a poor liquidity position to

pay off liability.

The average days of creditors has been varying during the period in all

the companies. The average creditors period is high in those companies

whose financial position is very sound and are of repute while in others the

credit period availed is very low.

All the companies and the segment average are showing a rising trend

in investment to current asset ratio. Only one company in the industry has a

very low ratio.

 1S9

7.3.2 CONCLUSIONS -

1. The cash planning in companies is not effective.

2. The level of cash in the companies has been extremely low and there

are fluctuations too.

3. The companies are facing difficulty in procuring cash from operations.

4. The planning and control of cashflows in companies is inefficient.

5. There is overtrading in the industry in general.

6. The companies are not clear regarding the procedure of determining

cash level.

7. The heads of various departments and divisions are not involved

collectively in cash management.

8. The cash level from internal sources is very low.

7.3.3 SUGGESTIONS -

1. Cash management in the companies should be a consistent effort and

proper planning and control of cash is required to be done.

2. The companies should clearly define the cash objectives rather relying

only on cash forecasting by statistical tools.

3. The cash inflows and outflows should be streamlined.

 2C0

4. The companies should clearly define the optimum level of cash. !

5. The investment in marketable securities should be monitored and

attempts be made to reduce it.

6. The companies should evolve a mechanism to determine actual cash

needs, surpluses and deficit.

7. The companies should be strict and vigilant in its operations so that

cash inflows and outflows can be controlled.

8. The departments/divisions should specify cash needs accurately.

9. The receipts and payments should be phased on the basis of

production and sales forecast.

10. All the persons concerned with cash planning and control should

contribute collectively.

11. The companies' management information system should be efficient so

that it can help in coordinating production and sales and prepare a

realistic cash budget.

7.4 MANAGEMENT OF RECEIVABLr^S AND ADVANCES -

This section is divided into three sub-sections. The first subsection

deals with the summary of analysis and interpretation of survey data, the
 o CI

second deals with the conclusions of analysis and interpretations and the last

presents conclusions drawn on the basis of summary and conclusions.

7.4.1 SUMMARY -

The main thrust of credit policy was limited credit and the objective is

growth in sales. The companies prepare credit plans on short term basis. The

credit terms for indigenous and foreign customers were different. The credit

terms were determined on the basis of term of sale in the industry,

competitors, and the past customer analysis is also done before granting

credit.

The decisions regarding overall credit granting was centralized as well

as decentralized. The responsibilities of the finance executives was mainly

timely collections and avoiding bad debts and framing policies in this regard.

The companies control credit in many ways such as ratio analysis, agewise

analysis, reporting and review, etc. The companies also put in rigorous

efforts in collecting dues.

The companies are extending advances and the policies in this regard

are deternuned by the management. The financing of advances is done by

 2C2

short term sources. The companies' policy regarding charging of interest

varies on case to case basis.

The companies' top executives are responsible for the overall policies

regarding loans and advances and the limits of expenditure in this regard are

determined by the companies.

The companies are using various managerial control techniques for

control and review of advances. All the companies are of the view that there is

scope of reducing loans and advances.

The ratio analysis shov^ that the receivables are showing a rising trend

in commercial vehicle segment. Though this ratio has been varying in the

specific companies. There is no specific trend in the car and jeep segment.

The two and three wheeler segment is showing a declining trend in this regard.

But receivables are falling when compared with sales.

All the segments, as well as specific companies, are showing a

continuous decline in average days of debtors but the fall in rate is varying in

all the companies.

 2C3

Loans and advances are increasing in most of the companies after

1992-93.

7.4.2 CONCLUSIONS -

1. The companies are not clear in defining and planning receivables

management objectives as they specify growth in sales as their only

objective and the thrust is on limited credit.

2. The companies are becoming more strict in implementing credit policy.

3. Planning for receivables is done by the top executives in the

companies.

4. The companies' collection procedures are improving over the years.

5. The terms of credit are not well defined in the companies.

6. A major portion of current assets is blocked in current assets in

advances.

7. Cost of financing advances is low.

7.4.3 SUGGESTIONS -

1. Credit policy and process of granting credit should be well established.

2. The collection policies should be regularly monitored in relation to

sales.
 2C4

3. Collection policies should be strictly implemented.

4. In case of fear of doubtful debts quick and appropriate actions should

be taken.

5. Credit should be given after thoroughly evaluating market conditions.

6. Cash discounts can be increased in exceptional cases after thoroughly

estimating collection cost.

7. Credit policy should be framed after the sales objective is defined. .

8. Legal action should be well defined and strictly implemented.

9. Percentage of bad debts to sales and credit outstanding should be

regularly reviewed.

10. Credit should be given on the basis of references of the companies'

employees and credit control procedures should be well defined.

11. The concerned staff should be trained in methods of reducing

receivables and bad debts.

12. Advances should be reduced and one such way may be to charge at

least cost of financing such advances.

13. Advances should be extended after comparing past recoveries.

14. Budget should be allocated for advances after considering past

performance in this regard.

 2C5

7.5 MANAGEMENT OF INVENTORY -

This section is divided into three sub-sections. The first subsection

deals with the summary of analysis and interpretation of survey and data, the

second deals with the conclusions of analysis and interpretation and the last

presents conclusions drawn on the basis of summary and conclusions.

7.5.1 SUMMARY -

The companies' objective regarding inventory management is to avoid

loss of sales and efficient production. These objectives are not static and are

changed whenever need it felt. The companies are using qualitative models in

managing inventory.

The planning for indigenous raw material stores and spares and foreign

raw material stores and spares is done separately. The companies also plan

for work-in- process and finished goods. The planning for inventory is done

for both short-term and long-term periods. The companies also prepare

production schedules which helps in bringing more efficiency in inventory

management. Financing of inventory is done by short term sources in all the

companies.
 2C8

The management of inventory is decentralized. The responsibilities of

the executives in this regard are well defined.

The investment in inventory is controlled by the business head finance

or the material managers. The companies are using different technique to

control investment.

The investment in inventory varies from time to time which is

determined after considering various factors.

To effectively exercise inventory management the companies are using

various ratios, mathematical models, and annual verification methods to

corrtrol inventory. The companies also make the analysis of inventory turnover

and evaluate the performance of inventory department.

The companies also face problems during price fluctuations. The

companies have to keep excess inventory in some situations which is detected

by constant review by different methods.

The summary of data analysis and interpretation is given below.

 2C7

The ratio of investment in inventory is continuously on the decline in all

the segments and the companies except a few.

Most of the companies are showing a declining trend in average days of

raw material stock. Only one company under study has shov^ a rising trend.

Similar analysis can be observed in average days of finished goods.

Most of the companies are showing a falling trend in raw material to

sales in the industry. Only one company has a quite high ratio than the

segment average. Few others are showing either a constant ratio or a very

slow rise in trends. Similar trend can be observed in finished goods to sales

ratio.

7.5.2 CONCLUSIONS -

1. Uptil now inventory has formed a major portion of current assets but

now it is showing a declining trend.

2. The objective of all the companies with regard to inventory management

is efficient production which means that the demand for the goods is

pretty high.

3. Cost of financing inventory is low in the industry as it is financed from

short term sources.

 208

4. The companies are facing problem in coordinating people regarding

inventory management.

5. Review of the management of inventory is done by top level executives.

6. One of the major problems of inventory management is price fluctuations

of raw material.

7. The companies are avoiding overstocking.

7.5.3 SUGGESTIONS -

1. Attempts should be made to procure inventory is in line with sales

requirements so that no excess inventory exists and stocking of

obsolete items is avoided.

2. The design change should be implemented only when the existing

stock of inventory is consumed.

3. Extra care is needed in forecasting so that no inventory lies idle.

4. The external environment should be continuously monitored so that

changes in forecasted values are done accordingly.

5. Once the policy for inventory management is framed it should be strictly

adhered to.

6. The companies should search for dedicated suppliers.

 2C3

7.6 OVER ALL CONCLUSIONS -

In this section the major conclusions and suggestions emerging out of

the present study conducted on working capital management in automobile

industry have been highlighted.

1. The companies are not using real professional assistance and are not

using scientific analysis effectively. Although they have been

emphasizing upon coordination and joint decisions, in reality

decisions are made independently. Decisions are taken in short term

perspective and its viability and the impact in long term for expansion

and replacement are not given due consideration.

2. Most of the companies study the past trends of different components of

working capital and try to make decisions on their basis.

3. The companies rely more on bank borrowing and do not try to generate

funds from internal sources. Besides this, the cost effectiveness of each

source of fund is not analyzed. The costs of different sources of funds

are also not compared.

4. Cash planning is not effective and they are finding it difficult to procure

from operations leading to overtrading. The companies are not clear rn

determining cash levels.

 210

5. The companies are becoming more strict regarding collections. But the

credit terms of the companies are varying. A major portion of current

assets are blocked In advances.

6. The investment in inventory is reducing showing clearly that the

companies are now managing inventory more efficiently than was done

during previous year.

7.7 DIRECTIONS FOR FUTURE RESEARCH -

The researcher has done the research in two perspectives at micro

level as well as macro level. At micro level the researcher has tried to get an

insight into the real working capital management through the questionnaire. At

macro level the researcher has studied the performance of working capital in

three broad segments in the industry vis-a-vis a group of selected companies

in each segment.

On the basis of research done it is appropriate to propose in the last

section of the thesis some directions for future research since a single study

cannot cover all the relevant issues of the subject.

 2il

Some directions for future research are suggested below, i

1. This study can be replicated with wider coverage in terms of units as

well as number of new foreign companies entering the Indian market.

2. Specialized studies can be done in specific segments of the industry

as well as in terms of company age, size and investment.

3. In contrast to survey approach used in this study, case studies approach

can be used for more in-depth studies focusing on one or few

organizations.

4. Working capital need being of both permanent and temporary nature

specific factors can be studied that influence such requirements.

5. Specific study can be done on only one aspect of the study. For

instance, financing of working capital or the cost influence of each

source of financing could be a feasible area to work upon.

6. Since the companies are having a very low level of cash, a study can be

conducted on the question whether the companies can have a zero

cash balance.

7. Another study can be done on finding reasons of having high proportion

of loans and advances and ways to reduce the same. Besides this a

study can also be made on determining the level of credit sales, its

impact on overall profitability and bad debts.

 212

8. Lastly, a study can also be conducted upon inventory management and

ways of reducing the time between raw material procurement and

finished goods disbursement.

All in all, it can be said that working capital management offers ample

scope for future research.

 213

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 215

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 Appendix -1

QUESTIONNAIRE ON MANAGEMENT OF WORKING CAPITAL

Q 1 What IS the objective of Working Capital Managemenf?

(Tick more than one if necessary)
i) Efficient use of current assets
II) Liquidity and profitability
III) Liquidity profitability and efficient use of current assets
iv) Profitability
v) Confer stnctly to Govt regulation
vO Any other (Please Specify)

Q 2 State the policies of Working Capital to achieve its objectives '>

(Tick more than one if necessary)
I) Efficient and timely production
ii) Minimum level of cash balance in each component of working capital and
continuous reviews of situation
III) Managing inflows and outflows without affecting production and sales
iv) Maximizing creditors and minimizing receiveables
y/) Effective management of inventory
vi) Review and follow up of credits
VII) Any other (Please Specify)

Q 3 What are the different methods of determining working capital requirements '>
(Tick more than one if necessary)
i) Over all budgeting methods
II) Cash forecasting
III) Any mathematical/statistical methods
IV) Any other (Please Specify)

Q 4 Which of the following forms the basis for working capital determination '>
I) Production
II) Sales
Ml) Operating Cycle
IV) Installed capacity
v) Capacity actually used
VI) Any other (Please Specify)
 225
Q.5 : (a) On what basis is the working capital budget prepared ?
i) On long term basis
(say anually for 5 years)
ii) Only Annual Budget
(b) State the budget period (Budget Cycle)
i) Weekly
ii) Monthly
iii) Quarterly
Iv) Any others (Please Specify)
(c) If a budget cycle is followed, are the subsequent period budget figures reviewed ?
Yes/No.

Q.6 : Are working capital budgets prepared in co-ordination with the budgets of production, sales and
collection function ? Yes/No
What problems have you experienced in the matter of co-ordination ?
(Tick more than one if necessary)
i) Matching the production with sales due to slippages in production on account of slippages in
delivery schedules in respect of materials, stores, equipments etc.
ii) Variation in consumption of raw materials and stores and high obsolescenes of materials and
products,
iii) Uncertainities assocaited with the supply position of fuel oil, coal etc.
iv) Uncertainities associated with the receipt of subsidy from Govemment, wherever applicable.
V) Inadequate information from the coordinating departments,
vi) Delay in collection of receivables,
vii) In certain cases even if production forecast was less inventory was required to be provided for
a higher capacity utilisation,
viii) Scheduling of production of long production cycle items and short production cycle items was
difficult,
ix) Forecasting of customer clearances for long production cycle items and forecasting of orders
for short production cycle items was difficult.
)() Determining the despatch schedule to meet customer requirements and to suit the terms of
payment and invoicing was difficult,
xi) Any other (Please Specify)

Q.7 : Whoistheexecutiveresponsiblefortheoverallwotkingcapitalmanagementofyourorganisation?

Q.8 : What arethedutiesandresponsibiiitiesofyourFinancial Executive with reganjtoworking capital

management ?
(Tick more than one if necessary)
i) Laying down working capital policies and reviewing financial position,
ii) Planning, forecasting and assessment of working capital requirements through the introduction
 22C

of budgetary control system, periodcal review of budgets, and generating information reports
for managerial action,
iii) Fixation ofnormsforthecomponentsofworkingcapital.monitoringtheievelsof working capital
Keeping in view the opportunity plans, and correction of imbalances in the composition of
working capital,
iv) Report to the management and the Board, the money locked up in working capital suggest
methods of controlling working capital and utilisation of working capital for maximisation of
profitability,
v) Monitoring the fund flows and controlling the activities relating to the sources and application of
funds.
vi) Advise on and generate the sources for meeting the working capital requirements, wherever
possible, wittiout hypothecation of stocks.
vii) Procurement of supplies enforcement of purchase policy, installation of a system of inventory
valuation, and accounting of stocks,
viii) Formulation of accounting policies for valuation of finished goods, work in process and
inventories,
ix) See that inventory carrying costs are maintained at a reasonable level.
;0 Assessment of debtors according to terms of payment and maintenance of records in respect
of debtors according to statutory requirements,
xi) Formulation of a system of effective cash management, including credit arrangements, and
control over cash operations based on annual and monthly budgets.

Q.9 . Do you follow the policy of authorisation of working capital expenditure ? Yes/No
if Yes, please state the
i) Levels of authorisation
ii) Limits of each level

Please state briefly the important reasons for exceeding the authorisation limits.
(Tick more than one if necessary)
i) Change in the volume of price escalation,
ii) Shortage of raw matrial, stores and spares, etc.
iii) Changes in plan priorites resulting in delayed budget allocation,
v) Price variations and unforeseen statutory levies,
vi) Changes in Government policies and credit control
vii) Increase in costs and volume of output.

Q.10:1s there any 'manual' containing rules and procedures related to working capital? Yes/No.
If Yes, please explain briefly how is it followed at different management levels.

Q.11: Do you folow any of the following ratios as working capital norm ?
 Ill
(Tick more than one if necessary)
i) Current assets to fixed assets
ii) Net worl^ing capital to network,
iii) Net working capital to total assets
iv) Current assets to current liablities
v) Any other (please specify)

Which of the following is the ratio stated by you above ?

i) an industry norm
ii) an organisation norm which is :
a) an average of past achievement
b) any other (please specify)

Q.12 ; Please explain the method and technique of Control and Review of Working Capital in your
organisation
(Tick more than one if necessary)
a) Ratio Techniques
(Tick more than one if necessary)
i) Current assets to fixed assets
ii) Net working capital to net worth
iii) Net working capital to total assets
iv) Current assets to current liablities.
\/) Any other (Please Specify)
b) Information System (reports, statements, feed-back and review)
c) Govemment Guidelines
d) Any other control and review techniques (please specify)

Q.13 : Do you review your working capital norms ? Yes/No

If yes how often ?
i) Monthly
ii) Quarterly
iii) Yearly
iv) Any other

What difficulties have you experienced in the working capital control ?

a) Human
(Tick more than one if necessary)
i) Playing safe by the operating executives
ii) Dislike of controls by executives and delay in compiling statements/information.
iii) Production executives want to keep as much inventory as possible whereas financial
executives want to keep optimum levels,
iv) Any other (Please Specify)
 coo

b) Other Problems
i) Maintenance of priced stores ledger on electronic data procesing and wrong codification
resulting therefrom.
ii) Diversity of product - lines.
iii) Increased outstandings from the Govemment/semi Government parties due to non-
availability of funds (due to delay in allocation of funds as a result of plan priorities) with them
and price disputes.
iv) Sudden changes in prices of crucial products in the world market, for example crude oil and
petroleum.
v) Government decision on pricing
vi) Liquidation of finished goods due to difficulty in organising special despatch facilities such
as special wagons, heavy trolleys etc.

Q.14 : Have you experienced working capital shortage ? Yes/No

If yes, does it occur:
a) very frequently ? Yes/No
b) Occasionally ? Yes/No
Please state briefly the main reasons for the shortages
(Tick more than one if necessary)
i) pnce fluctuations,
ii) shortfall in receipts from sale proceeds
iii) delay in realisation of dues from debtors,
iv) decrease in credit period for purchase of raw material,
v) increase in duty on inventory holding
vi) excessive credit granting to customers,
vii) payments withheld by clients,
viii) any other (please specify)

0.15 : Were there any excess working capital situations ? Yes/No

if yes, how was the surplus utilised ?
i) Temporarily invested
ii) Invested in long-term securities
iii) Invested in fixed assets
iv) Utilised for repayment of debt
v) Any other (please specify)

Q. 16 : Please state the difficulties you have experienced in the implementation of Tandon Committee
norms.
 223
What are your comments on the Tandon Committee Recommendations related to the following:
i) Inventory and Receivables norms
ii) Working Capital Gap
iii) Style of credit and information system

Q.17 : What are the problems peculiar to your organisation with regard to working capital manage-
ment?
(Tick more than one if necessary)
i) Inability to obtain a major portion of requisite goods and services on credit terms.
ii) Inadequate return due to Government restrictions on price increase,
iii) Power and water supply
iv) Difficulties in collection of dues.
v) Stock levels maintained were not based on market condition.
vi) Inventory build ups on account of most of the raw materials having been imported and little
control over supplies,
vii) Problem of collecting receivables from the Government,
viii) Too much of decentralised organisational set up.
ix) Non standardisation of materials on account of reliance on indigenous technology.
)0 Non availability of peripherals and other key components in time.
xi) Keeping long lead times in view of the need to import most of the equipments and spares resulting
in large inventories,
xii) Long cycle of manufacture
xiii) Many of materials/components used in manufacture having to be imported, the safety levels to
be maintained have to be high because of long deliveriesquoted by foreign supplies and because
of transit delays,
xiv) Current assets had to be kept at a fairly high level mainly due to contigent payments and the
magnitude of inventory as compared to credit/loan given on short-term basis.
 23G

FINANCING OF WORKING CAPITAL

Q.1 : What is the approach of financing of worlcing capital?

i) IHedging approach
ii) Conservative approach
iii) Any other (please specify)

Q.2 : Whether working capital forecasting is done by

A) Informal/Judgemental
B) Formal /Statistical
If done by (B) then w^ich statistical tools do you use.
a) Judgement forecast
i) Delphi technique
ii) Panel of experts
b) Extension of past history
i) Moving averages
ii) Exponential smoothing
iii) Trend adjusted exponential smoothing
iv) Trend projection
c) Causal forecasting models
i) Regression model
ii) Econometric model
iii) Input output analysis.

Q.4 : Has there been situations when your forecasted values deviated from actual requirements of
working capital ? Yes/No.

a) If yes then did the deviations occured owing to

i) Controllable factors
(Please specify factors)
ii) Uncontrollable factors
(Please specify factors)

Q. 5. : What is the duation of operating cycle? days

Q.6 : Does the operating cycle remain constant / varies during an accounting year ? Yes/No

Q.7 : Is the concept of operating cycle incorporated in forecasting working capital requirement ?
Yes/No.
a) If 'Yes' How is it done ? Please Specify
 23i

b) If 'No' the reasons for not doing so

i) Irregulardemand
ii) Irregular production
iii) Irregular payment of debtors
iv) Irregular delivery by creditors
v) Fluctuating policies of the govt,
vi) Any other (please specify)

Q.8 : What are the sources of working capital finance ?

(Tick more than one if necessary)
a) Long term extemal
i) Ordinary shares
ii) Preferences shares
iii) Debentures
iv) Loans from financial institutions
v) any other (please specify)
b) Long term internal
i) Retained earnings
ii) Provisions
iii) any other (please specify)
c) Short term external
i) Goods on credit
ii) Bank borrowings
iii) Discounting of bills
iv) Overdraft
v) Advances
vi) Any other (please specify)
d) Short term internal
i) Gratuity
ii) Dividend contingencies
iii) Pension
iv) Provision for taxation
v) Unclaimed dividend
vi) Outstanding salaries and wages.

Q.9 : What are the major forms of financing working capital requirements ?
(Tick more than one if necessary)
i) Current liability
ii) Cash credit
iii) Deferred credit
 90 ;

N) Working capital loan from central government

v) Equity/long term loans
vi) Any other (please specify)

Q.10 : What is the overall policy of the organisation regarding financing of working capital ?
i) All variable need with short terms sources and only for the periods needed
ii) A portion of the variable need with long term sources
iii) Inventories only from long term sources
iv) A portion of the permanent needs from short term sources
v) One half of the cun'ent assets financed by long term sources.
vi) Any other (please specify)

Q.11 : What are the problems peculiar to your organisation with regard to financing of working capital?
 MANAGEMENT OF CASH

Q.1 : What constitutes your cash balances ?

(Tick more than one if necessary)
i) Cash in hand
ii) Cheques in hand
iii) Cash with scheduled banks in current accounts, saving/deposit schemes and margin money,
iv) Cash in transit
v) Cash in foreign banks
vO Any other (please specify)

Q.2 : How are the levels of cash determined ?

i) Day to day requirements
ii) Minimum cash balance and an optimum cash balance.
lii) Any other (please specify)

Q.3 : Are the cash balances to be maintained (minimum and optimum) determined ? Yes/No.
If yes, please state the factors which influenced their determination (please state whether any
mathematical techniques are used and if so kindly attach any material to explain it).
MinimumCash level:
Optimum Cash level:
Do you follow any contingency approach in the cash management ? Yes/No.
if yes, please explain its operation.

Q.4 : Is there any cash budgeting in your organisation ? Yes/No.

If yes, please state the periodicity of preparing them,
i) Daily
ii) Weekly
iii) Fortnightly
iv) Monthly
v) Any other
Are the cash flow statements prepared separately for:
i) Capital Operations Yes/No.
ii) Revenue Operations Yes/No.
Please explain briefly the method of preparing them.

0.5 : Who is the executive responsible for the overall cash managment operations ?

What are the responsibilities of your financial executive in this regard ?

 234

(Ti(* more than one if necessary)

i) See the funds were available in the requird amount at correct time and at correct place, and
invest the surplus cash, if any. in short term securities to avoid loss of interest,
ii) Plan the disburesements on the basis of expected collections,
iii) Ensure optimum utilisation of cash balances and avoid overdrafts,
iv) Ensure that cash operations were in accordance with the approved budget for the year,
v) Make cash flow analysis and ensure an equation of receipts with payments.

Q.6 : Is the cash management function of your organisation centralised or decentralised?

Do you face the following problems under centralised cash management ?
i) lack of coordination
ii) centralisation of power and decentralisation of responsbility
iii) lower than anticipated amounts received by Divisions/Units from Head office
iv) lack of adequate planning and arrangements for cash collection
v) inadequate planning for allocation of resources to the Divisions/Units based on their require-
ments
vi) unexpected cash outflows on account of emergency purchases and difficulties in finding ways
and means for procuring finance.
vii) Any other (please specify)

Do you think the following benefits of decentralized cash management ?

i) Elimination of delays in receipt of funds from Head Office and avoidance of operational
inconvenience as a consequences thereof,
ii) Considerable reduction in inter-office transfer of funds resulting in sufficient saving in bank
charges and interest cost, reduced use of cash credit, and minimum delays in the availability
of funds,
iii) Elimination of difficulties in accounting for a large number of transfer credits by banks,
iv) Elimination of idle pockets where fundswere kept, asentirebalancesin the banksaccountsheld
by the Divisions were to be transferred to the Head Office at the end of each day.
v) The organisation earned a substantial amount as compensation from bank.s for the latter's
failure in effecting transfers within the stipulated time,
vi) Any other (please specify)

Q.7 : Are any of the following ratios computed and used as cash level norms ?
(Tick more than one if necessary)
i) Normal days of cash
ii) Peak days of cash
iii) Cash required at 'X' days safety level
iv) Cash required at peak 'X' days safety level
v) Arty other (please specify)
 23ii

Q.8 : How is control exercised on cash flows ?

(Tick more than one if necessary)
i) Regular / periodic review and reporting of cash available and cash required. Excess cash
invested and short fall made good from banks,
ii) By mobilising efforts for collection of receivables and staggering payments.
iii) By disposing of each case of payment on merits.
rv) By comparing the actual expenditure with budgeted figures and taking corrective action,
v) The balance in the cash credit account was reviewed on daily basis for exercising control on
c a ^ operations.
vO By maintaining minimum cash balances,
vii) Any other (please specify)

Q.9 : How are the cash balances of Divisions/Units controlled ?

(Tick more than one if necessary)
i) Divisions are asked to furnish to the Head Quarter a specif ic time requirement of cash and actual
cash balance at the end of a specific time. Received from sales are deposited in collection
account a divisions and transfer to Head Quarters,
ii) The cash operation of the divisions are controlled through budget and reports and they are asked
to send cash balance reports as well as ways of spending during the preceeding month and
expected receipts and payments during ensuing month,
iii) Expenditure involving outflow of cash beyond budgeted figures and sanctioned limits are to be
approved by the Head Office,
iv) Payment scheduled of the regions / divisions were to be submitted in advance and are made
accordingly,
v) Any other (please specify)

Q.10 : What are the problems peculiar to your organisation with regard to cash management ?
(Tick more than one if necessary)
i) Less coordination regarding flow of information about cash receipts and payments
ii) Cash flows were affected on account of fall in production due to natural calamities,
iii) There were larger cash needs on account of uncertainties in the availability of credit for major
inputs
iv) TTiere wee heavy contingency payments
v) Any other (please specify)

Q.11 : Are you facing the problem of differences in planned cash flows and actual cash flows ?
(Tick more than one if necessary)
i) Lesser involvement of Heads of Divisions in the preparation and review of cash flow data
ii) Non receipt of funds in time
iii) Variations in sales forecasts and achievements and delay in realisation of anticipated
receivables
 231>
iv) Price fluctuations and production fluctuations
\^ Unusual disburesments/payment of bills for raw material etc., for which no provision was made
in the monthly forecast. This may be due to late or early receipt of materials etc.
vO Uncertainities in the availability of credit on imports of raw materials and products
vii) Major customer payments were linked with the allocation of funds by Government and their
budget position,
viii) Changes in the credit policy and fluctuation in the collection and payment by sundry debtors
and to sundry creditors
ix) Any other (please specify)

Q.12 : Please state the problems in the phasing of expenditures and revenues ?
(Tick more than one if necessary)
i) Slippages in the production and delivery schedules of purchases
ii) Sales scheduling in respect of revenues and procurement scheduling in respect of expenditure
was diffcuit
iii) Expenditure was high at the time of production where as revenues depends on sale,
iv) Capital expenditure could not be estimated correctly
v) Production plans were dislocated due to uncertainty in the supply position of fuel oil and coal
and frequent power failure has affected sales revenue and influenced the cash credit position,
vi) There was difficulty in meeting fixed expenses such as personnel payments, statutory
requirements, etc., which were always related to the corresponding inflows,
vii) Any other (please specify)

Q.13 : Were there any cash inadequacy situations ? Yes/No.

If yes, state the reasons therefore.
(Tick more than one if necessary)
i) Because of new projects involving excess capital expenditure there was temporary shortage of
cash
ii) There was delay in commissioning new projects and increase in project cost estimates,
iii) There were sudden increases in costs of inputs
iv) Unforeseen payments were made, especially on account of materials and statutory levies,
followed by failure of anticipated receipts
v) Initial long capital payments and new projects consumed huge funds in addition to huge
expenditure on infrastructure and blocking up of funds in pipelines
vi) Any other (please specify)

Q.14 : What are the bottlenecks in cash flows ?

(Tick more than one if necessary)
i) Communication gap between Divisions and Departments
ii) Non availability and slow movement of wagons for carrying goods,
iii) Variations in production/despatch targets and schedules.
 237
iv) Delays in payment by customers.
v) ProWems of product distribution affecting the cash sales.
vi) Any other (please specify)

Q.I 5 : How does the problem of going in for a cash credit arise ?
(Tick more than one if necessary)
i) Shortage in expected cash flows,
ii) Inadeauate internal resources
iii) Cash requirements for day to day working capital needs,
iv) Cash requirements for new projects.

Q.16 : What factors do you consider in determining the cash credit requirements ?
(Tick more than one if necessary)
i) Expected payments and expected time to receive cash from debtors,
ii) Production and sales activities
iii) Cash flow forecasts.
iv) Totat working capital requirements less amount financed by the Government,
v) Re<piirement in respect of stores, spares, raw material, finished and semi finished goods.
vi) Requirement of additional funds for expansion scheme,
vii) a) Terms of payment of respect of receipts from customers.
b) Purchase policy and advances to suppliers.
c) Inventory build up.
d) Production plan and capacity utilisation.

Q.17 : Do you have any problem with regard to :

i) Obtaining cash credit from banks ? Yes/No
ii) Woiting capital loans from Central Govt. ? Yes/No
If yes, please state the problems you are facing regarding:
a) Cash credits from banks
b) Woiking Capital Loans from Central Govt.

Q.18 : How is the Reserve Bank of India's policy of reducing cash credit limits affecting the cash
management of your organisation ?

Q.19 : How are fixed asset expansion affecting the cash flows in your organisation ?

Q.20 : Arethe construction funds helpful in times of inadequate cash forworking capital needs ? How?
 238
MANAGEMENT OF ACCOUNT RECEIVABLE, LOANS AND ADVANCES

Q.I : What is your credit policy ?

(Tick more than one if necessary)
a) Open credit
i) Without approval
ii) Without approval if exceeds a specified limtt
b) Limited credit wtth frequent checks
c) Restricted credl
d) No credit
e) Any other (please specify)

Q.2 : What are the objectives of your credit policy ?

(Tick more than one if necessary)
a) Growth in sales
b) Meet competitcMs
c) Increase profits
d) Finance the customer
e) Any other (please specify)

Q.3 : On what basis is the credit plan prepared ?

a) Long term baas (for... years)
b) Short term baas (for... years)
State the method of determining and planning the size of credit granting from period to period,
(if any mathematical technique is applied please attach any material to explain the technique).

Q.4 : What are the credit terms in respect of (please provide any typed matter describing the terms).
Indigenous Customers Foreign Customers
a) Government Enterprises
b) Private and otheis

Q.5 : On what basis are such credit terms or conditions of sale determined ?
(Tick more than one if necessary)
a) Based on usual terms of sale of the industry
b) Based on the terms of sale of the competitor
c) Based on the temis followed by the organisation in the past.
d) Any other (please specify)

Q.6 : Is any risk analysis of customer made before granting credit ?

if yes, please state what are the problems in determining the risk category of customers.
 233

(Tick more than one if necessary)

a) There are long delays in payment of debts and chase the parties (or collection.
b) Outdated rules and codes are followed by Government department
c) There are differences in the interpretation of the terms of contract with reference to dues.
d) Any other (please specify)

Q.7 : Who is the executive responsible forthe overall credit granting and collection operations in your
organisation ?

Q.8. ; What are the responsibilities of your finance executive with regard to credit management ?
(Tick more than one if necessary)
a) Laying down credit policies and monitoring the levels of receivables.
b) Follow up and timely action in relation to debts outstanding
0) Insurance, prompt billing, realisation and review of outstandings.
d) Avoid possible loss due to bad debts and control receivables.
e) Collect the dues, keep receivables within norms, ensure that credit is granted to renowned
parties of good previous performance and on fully secured basis to others.
f) Collection of at least undisputed amounts pending settlement of disputed portion of the bills
whenever disputes arise.
g) Preparation of outstanding bills periodically and ascertaining from Marketing Department the
reasons for outstanding for taking approapriate action.
h) Enforce budgetary control on receivables review budgets and introduce effective reporting
system thereon,
i) Undertake financial scrutiny of the proposed credit terms,
j) Periodic agewise review of receivables position and supply of information thereon to sales
executives for initiating collection efforts.

Q.9 : Are any techniques of credit control applied in your organisation ? Yes/No
If yes, please state what are the techniques ?
(Tick more than one if necessary)
a) Ratio analysis
b) Agewise analysis
c) Reporting and review system
d) i) Fixing credit limits for major renowned customers keeping in view their monthly off take
and past performance
ii) In other cases restricting credit limits to the extent of bank guarantees
only.

Q. 10 : Do you follow any of the following ratios as credit norms ?

 240

(Tick more than one if necessary)

a) Receivables to current assets
b) Receivablesto sales
0) Collection period
d) Any other (please specify)

Q.11 : What is the management information system for credit management ?

Q.12 : State the credit collection procedures undertaken in your organisation under ordinary circum-
stances and in the case of delinquent accounts ?
(Tick more than one if necessary)
a) Collection were taken by thorough personal follow up.
b) Collections were taken by follow up through telephone talks, telegrams, personal contacts.
c) Disputed items were constantly reviewed and settled by mutual negotiations.
d) Payment was demanded through correspondence and reminders. The due dates of payment
were indicated in invoices.
e) Claims were made through banks against bank guarantees.
f) Collections were made through agencies identified within the organisation.
g) The reasons for pendency of debts were identified and follow up was initiated according to the
reason for delay.
h) The problem of collecting overdues was relayed to appropriate levels in the customer
organisations and, where appropriate, to the Government,
i) Collection of dues was made by sending sales personel to the customers end.
j) Further credit was stopped until clerance of old dues,
k) Legal action was taken where all other efforts had failed.
1) Any other (please specify)

Q.I 3 : What is your policy regarding charging of penal interest on overdues ?

Q.14 : How are the following aspects linked with the decisions involving extension of credit ?
a) Increase in demand and variations in the level of sales
b) Extra clerical costs
c) Cost of excessive investment
d) Increased probability of bad debt losses
e) Excessive collection costs
0 Delayed payments by existing customers
g) Capacity utilisation

Q.15 : What aretheproblemspeculiartoyourorganisation with regard togranting excessive creditand

belated collections ? How are they solved ?
 241
Q.16 : State the names of major items constituting Loans and Advances in order of their importance
and give briefly the reasons for granting them ?
(Tick more than one if necessary)
a) Advances to suppliers for raw materials, stores and spares, plant and equipment and other
scarce material.
b) Advances to employees for meeting expenditure on the occasions of festivals, marriages etc.,
for purchase of household utencils and conveyance equipment such as cycles, scooters, cars
etc., and for construction of houses.
c) Advances to contractors for the construction of projects under various expansion schemes.
d) Deposits with Customs, Central Excise and Port Trust Authorities in connection with the import
of stores and equipment.
e) Advancesto Electricity Boards for supply of power for expansion schemes and to certain local
bodies for the supply of water and other services.
f) Advance income tax.
g) Any other (please specify)

Q.I 7 ; In respect of Loans and Advances what is the policy of your organisation with regard to :
i) Granting
(Tick more than one if necessary)
a) Whenever there was an absolute need for such granting
b) As per the rules, terms and conditions prescribed by their managements
and the budget provision.
c) According to the normal policy paactised by others.
d) According to the terms of agreenrent after negotiation,
b) Financing
ii) Financing
(Tick more than one if necessary)
a) Short terms sources
b) Advances received from customers
c) Financing from operating funds
d) Financing from cash savings through a policy of getting proportionate credit from sup-
pliers and restricting credit to customeis.
e) Loan funds
f) Any other (please specify)
iii) Charging Interest on over dues
(Tick more than one if necessary)
a) Charging interest on personal advance only
b) Charging interest on advances at a predetermined rate
c) Do not charge interest if not included in the terms of agreement for supply.
d) Charging interest on the nature rtthe component supply.
e) Charging interest on case to case basis
f) Any other (please specify)
 24 9

Q.18 : What type of financing do you recommend for Loans and Advances ?

Q.19: Do you recommend charging interest on Advances outstanding for long period? Yes/No
if yes, state the reasons for not charging interest on any advances in the case of your
organisation.

Q.20: Who is the executive responsible for the overall Loans and Advances granting and collection
operations ?

Q.21: Are the limits of expenditure for Loans and Advances determined Yes/No.
If yes, what is the procedure for authorisation of expenditures?

Q.22: How is managerial control exercised with regard to granting and collection of Advances ?
(Tick more than one if necessary)
a) Budgetary control and preparation of outstandings statement
b) Obtaining financial concurrence
c) Demanding clearance of unadjusted overdue advances before granting fresh ones.
d) Grants based on need and essentiality and collection of the same immediately aflerthe purpose
of granting was over.
e) Granted advances only after fulfilling the required conditions. In respect of advances to
suppliers, adjustments were watched through periodical reviews.
f) Operated special accounts called suspense accountswhichformedthebasisformonitoring and
control of advances on monthly, quarterly and annual periodicity.
g) Any other (please specify)

Q.23: Are any recovery and/or adjustment schedules prepared in respect of Loans and Advances?
Yes/No
If yes, please explain the method of its preparation and working.
(Tick more than one if necessary)
a) Preparation of monthly recovery schedules for advances to employees.
b) Statement of outstanding with agewise analysis in the case of advances to suppliers.
c) Parly wise accounts in subsidiary registers and watch the monthly recoveries/adjustments.
d) Any other (please specify)

Q.24: What are the problems peculiar to your oiganisation in the management of Loans and
Advances? How are they solved ?

Q.25: Is there any possibility or scope for minimising any advance ? Yes/No
If yes, please state how can the following advances be minimised :
i) Advance to suppliers
 243
(Tick more than one if necessary)
a) By insisting on bank guarantees wtiich can be invoked
b) By negotiating and choosing a standard supplier.
c) By paying bills and simultaneously adjusting to materials account.
d) By making effective purchase from suppliers giving credit terms.
e) By negotiating the bills through banks.
f) Any other (please specify)
ii) Advances to Contractors
(Tick more than one if necessary)
a) By choosing a financially sound contractor
b) By passing the bills and charging to concerned work through accounting
entries at a faster rate.
c) By granting advances strictly based on the stage of completion of vi/orks.
d) Any other (Please Specify)
iii) Advances to Employee
(Tick more than one if necessary)
a) By obtaining surety bonds from permanent employees.
b) By reviewing the balance of dues.
c) By asking them to approach commercial banks
d) By restricting further grants until earlier dues were refunded.
e) Any other (please specify)
iv) Deposits with Customs, Excise, Port Trusts etc.
(Tick more than one if necessary)
a) By attending Government's policy regarding requirement of deposits
b) By monthly adjustment of deposits by obtaining bills from appropriate authorites.
c) By restricting the deposits only to the extent required.
d) Any other (Please Specify)
v) Advance Income Tax
(Tick more than one if necessary)
a) By preparing quarterly estimate of income after taking into consideration the trends of
business.
b) By proper tax planning
c) Any other (please specify)
 '^LL
MANAGEMENT OF INVENTORY

Q.1 : Stale the objectives and policy of inventory management in your organisation?
(Tick more than one if necessary)
a) Avoid losses of sales
b) Gain quantity discounts
c) Reduce order costs
d) Achieve efficient production
e) Any other (please specify)

Q .2 : Do you revise your inventory objectives and policies w/henever variations occur? Yes/No
If yes, which of the following factors influence such variations ?
(Tick more than one if necessary)
a) Shifting demand
b) Changing cost
c) Changing competition
d) Changing contribution
e) Any others (please specify)

Q.3 : State briefly the method of planning the following components of inventory. (Please explain
briefly the method of determining Economic Order Quantities, Safety, Stocks, Anticipation
Stocks etc. It would be helpful if you can kindly attach any printed or cyclostyted material
explaining the method)
i) Raw material (Indigenous)
(Tick more than one if necessary)
a) Based on input consumption efficiency statistics computed.
b) Based on annual order with monthly delivery schedule matching with production.
c) Based on production programme, norms of consumption, cycle of recoupment, and
storage capacity.
d) Based on Government guidelines
e) Based on annual reviews coupled with inventory level monitoring
f) By determining economic order quantities
g) Any other (please specify)
ii) Raw material (Foreign)
a) Adhoc procurements even through levels are determined, on account of
delays in importation, on availability of shipping space, cargo unloading delays etc.
b) Any other (please specify)
iii) Stores and Spares (Indigenous)
a) Based on the ordering quanities and safety stocks detennined with reference to the
nature of the component/product to be manufactured and the lead time of manufacture.
 245
b) Based on specific percentage of production cost or manufacturing facilities or according
to previous practice
c) Based on past consumption pattern plus ad hoc requirements.
d) Based on production
e) By determining minimum, maximum stocks and economic order quantities.
f) Any other (please specify)
iv) Stores and Spares (Foreign)
a) Planned for specific time requirement
b) Based on supply lead time and cycle time of manufacture.
c) General practice to get a spare set of spare parts.
d) By determining minimum and maximum stocks levels.
e) Any other (please specify)
v) Work in process
a) Based on process parameters
b) Based on usual period of ageing
c) Based on customer requirements and production cycle,
vi) Finished Goods
a) Based on sales planning, subject to constraints of production and storage capacity.
b) By determining economic order quantities
c) Keeping in view the limiting factor
d) Based on customer requirements
e) Any other (please specify)

Q.4 : On which basis is the inventory planned in your organisation ?

a) Long range (for.... years)
i) Indigenous (for.... years)
ii) Foreign (for.... years)
b) Short range (for.... years)
i) Indigenous (for.... years)
ii) Foreign (for .... years)
c) Scheduling
d) Any other (please specify)

Q.5 : Do you have production scheduling in your organisation ? Yes/No

If yes. please state what is the contribution of production scheduling towards the inventory
management ?
(Tick more than one if necessary)
a) Mininwse the production cycle time
b) Pinpoint the need for a particular item and given the basis for inventory management and other
policies regarding economic order quantities
c) Fomn the main basis for inventory budgeting
 246

d) Help in forecasting the requireoient of raw nnaterials, stores and spares both in terms of quantity
and time of demand / need.
e) Regulate inventory planning especially work in process and finished goods.
f) Any other (please specify)

Q.6 : What is the policy of your organisation with regard tofinancingof inventory ?
a) Short term sources only
b) Long term sources only
c) Partly short term and partly long term
d) No cleariy defined policy
e) Any other (please specify)

Q.7 : Who is the Executive responsible for the overall inventory management in your organisation ?

Q. 8 : What are the responsibilities of your financial executive with regard to investment in inventory?
(Tick more than one if necessary)
a) To verify all proposalsforpurchase of inventory, scrutinisethem with regardtotenmsof payment
and requirements indicated by the designs and planning department, and ensure compliance
with purchase policy.
b) To give clearance for disposal of surplus inventory.
c) To review inventory, limit procurement as per budget and minimise procurement cost.
d) To introduce and operate suitable methods of control in order to reduce inventory levels to the
optimum level.
e) To evolve basic inventory policy, budgets and targets for each department and cost centre.
f) To see that the norms, minimum and maximum levels, arefixedforvarious items of inventory.
g) To enforce budgetary control on the allocation of funds for purchase of slocks.
h) To provide management information for control of various components of inventories.
i) To avoid undue locking up of funds in inventory and loss of production on account of shortage
of material,
j) Any other (please specify)

Q.9 : Who will control the investment in invenory in your organisation? What techniques are applied
in exercising such control ?
(Tick more than one if necessary)
a) Budgetory control
b) Review of stocks and production requirement
c) ABC analysis
d) Lead time analysis
e) Perfomriance budgeting and information system
f) Prepration of daily stock statement in respect of raw material and approving orders after
ascertaining the stock and movement position
 247
g) Fixed ordering level system
h) Any other (please specify)

Q.I 0 Is the investment in inventory determined from time to time '> If yes, please state the bases of
determination and the periodicity ? Yes/No
(Tick more than one if necessary)
a) Production requirements of next two to three years
b) PastconsumfSion, producfion programme, replacement programme, overhauling programme,
as reduced by the material in stock and pipeline
c) Days requirements based on production level
d) By analysing total inventory and identifying the lock up of funds for non moving items and surplus
stocks
e) With the help of percentage ratio of monthly inventory holding to monthly consumption

Q 11 Please state briefly the problems with regard to the purchase and stores functions in your
organisation
i) Problems in purchasing
(Tick more than one if necessary)
a) Inadequate staff Many of them are not qualified to work m purchase or stores departments
b) Difficulties in the procurement of material for anticipated customer orders where the scope
of supply and specificiation of material are not available in detail
c) Whenever rejections arise in the case of materials exclusively required for specific
projects, it is difficult to provide for unforeseen requirements.
d) At times indents for materials are received at short notice.
e) Fluctuations in the price of basic raw matenals
f) Any other (please specify)
ii) Problems in Store keepir^
(Tick more than one if necessary)
a) Inadequate storage accommodation
b) There are human problems, especially the attitudes of people working
c) Wrong stocks shown rn electronic data processing records vis-a-vis ground balances, and
defects associated with computensed stores records
d) High obsolescence
e) Variety of plant spares
f) Difficulties in machine wise or group wise codification
g) Inadequate handling facilities in moving stores
h) Longer shelf life of products, mostly in the case of imported and high lead time items
i) Lack of coordination between production, purchase and stores functions
j) Difficulties in storage to facilitate location of materials with reference to product and
material dassification.
k) Any other (please specify)
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Q.12 : Do you follow any of the following ratios as inventory nonns ?

(Tick more than one if necessary)
a) Raw material, work in process, stores and spares and finished goods as % of total inventory
b) Total inventory as % of total current asset investment
c) Inventory as % of net working capital
d) Inventory as % of fixed asset investment
e) Inventory sales ratio
f) Any other (please specify)

Q.13 : What techniques and methods are applied for invenory control in your organisation?
Techniques
(Tick more than one if necessary)
a) ABC Analysis
b) Analysis on the basis of the essentiality, size, shelf life etc.
c) XYZ Analysis
d) Any other (please specify)
Methods
(Tick more than one if necessary)
a) Annual verification
b) Continuousverification
c) Automatic Data Handling system
d) Any other (please specify)

Q.14 : Are you applying 'systems approach' for the inventory management in your organisation?
Yes/No
If 'yes', please explain briefly its application and working

Q.I 5 : Do you make an analysis of inventory turnover and its audit ? Yes/No
If 'yes', please state the method of analysis and audit.
a) Compare with the industry norm of inventory turnover.
b) Compare inventory sales ratio with that of the competitor
c) Compare current inventory tumover ratio with the ratio of past.
d) Any other (please specify)

Q.16 :1s the performance of the inventory department evaluated or have you instituted periodic
inventory tumover audit ? Yes/No
If yes, please explain the method of conducting it.
(Tick more than one if necessary)
a) Comparing current inventory tumoverratiowiththe industry norm of inventory tumoverand with
the ratio of the past.
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b) Inventory to sales ratio
c) Comparing inventory to sales ratio with that of the competitor
d) Performance evaluation by measuring standards with actual performance
e) Formulation of inventory policies
f) Any other (please specify)

Q.17 : What are the methods of purchasing followed ?

a) Open purchase method
b) Limited purchase method
c) Tenders : Single / Repeated / Others
d) Any others (please specify)
Are any time limits fixed for each stage of purchasing ? Yes/No
If yes, please state the reasons for not adhering to the limits :

Q. 18 : How do you deal with the problem of price fluctuations in the purchase of material ?
(Tick more than one if necessary)
a) Price escalation during the pendency of the order was not accepted. Where it became
unavoidable, prior intimation and negotiations were resorted to.
b) Fluctuations are absorbed in cost.
c) By regular business dealings with vendors, rapport is built whereby for large orders price
increases are limited and tied to an agreed price.
d) Normally prices quoted are to be maintained by suppliers throughout the contract period.
e) While contractors who quote fixed prices are preferred, price variationsto the extent of statutory
requirments are allowed. In the case of controlled.commodities and items difficult to procure,
normal escalation are considered on merit.
f) Quoting firm prices with validity upto a certain forementioned date are requested from parties.
g) Based on the trend of price fluctuations, the quantum of purchase is suitably raised, taking into
consideration other economies of inventory management.

Q.19 : Do you have any method by which the existence of excess inventory in your organisation is
detected? Yes/No
If yes, please state briefly the method and the reasons for holding excess inventory.
(i) Methods of detecting excess inventory
(Tick more than one if necessary)
a) Constant review and movement analysis
b) Perpetual inventory
c) Analysis of slow moving and non-moving stocks
d) Budgetary control
f) Agewise analysis of items
g) Observing minimum, maximum limits and declaring obsolete itemsin ordertodetectthem.
h) Any other (please specify)
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(ii) Reasons for holding excess inventory

a) Changes in product design and/or dianges in production plan
b) Short supply and/or long iead time items retained as excess inventory
c) Change in the assumptions/estimates for material/purchase/consumption
d) Increasing price trends
e) Any other (please specify)

Q.20 -. Did stocl<L outs arise at any time in your organisation ? Yes/No
If yes, please state briefly the main reasons therefore.
(Tick more than one if necessary)
a) Irregular and uncertain deliveries, erratic and uncertain consumption pattems
b) Lead time fluctuations, poor quality of supplies obtained, and heavy rejections calling for
replacements
c) Defective accounting leading to wrong stock shown by tx)ok balances and actual ground balance
d) Limited number of suppliers of raw materials and stores
e) i) Non-availability of single source items,
ii) Errors in forecasting and bad planning
iii) Non avaiiabitity of transport facilities
iv) Human delays in taking timely action in individual cases
v) Strikes, lock outs and power cuts in Ifie works of suppliers
vQ Late indenting and ordering delays
vii) Any other (please specify)

Q . 2 1 : Do you have the problem of under utilisation of capacity ? Yes/No

If yes, how is it affecting the inventory management?
(Tick more than one if necessary)
a) Stock pilling of inventory towards the end of the financial year.
b) Holding of minimum stocks and fixed inventories are affected
c) Ways and means position are affected since funds are locked up in inventory and led to the
increased cost of production.
d) Any other (please specify)

Q.22: What are the problems peculiar to your wganisation with regard to inventory management ?
(Please mention human problems also, if any).