Project Report ON working capital management PDF

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SUMMER TRAINING REPORT SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF POST GRADUATE DEGREE IN INTERNATIONAL BUSINESS

WORKING CAPITAL MANAGEMENT On Kotak Mahindra Group

INDUSTRY GUIDE

FACULTY GUIDE

AMITY INTERNATIONAL BUSINESS SCHOOL, NOIDA

AMITY UNIVERSITY – UTTAR PRADESH

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TABLE OF CONTENTS

Chapter No.

Subject

Ch No.1 Ch No.2 2.1 2.2 2.3 2.4 2.5 2.6 Ch No.3 Ch No.4 Ch No.5 Ch No.6 Ch No.7 7.1 7.2 7.3 Ch No.8 Ch No.9 Ch No.10 Ch No.11 Ch No.12 12.1 12.2 Ch No.13 Ch No.14

Executive Summary…………………. Research Methodology……………… Primary Objective(s)…………. Hypothesis…………………… Research Design……………… Sample Design……………….. Scope of the Study……………. Limitations……………………. Critical Review of Literature……….. Company Profile ……………………. Industry Profile……………….. SWOT Analysis…………………. Data………………………………….. Collection……………………… Primary Data…………………… Secondary Data….…………….. Working Capital- Overall View……… Findings & Analysis…………………. Recommendations…………………… Bibliography…………………………. Annexure…………………………….. Tables…………………………. Graphs………………………… Case Study...…..................................... Synopsis of the Project……………….

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9 18 21 45 46

53 100 112 114 115

117 122

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CH NO.1: EXECUTIVE SUMMARY The Indian Life Insurance Company has seen a remarkable shift since the time of establishment of the first company, Oriental Life Insurance Company in 1823. At the time of Independence and thereafter, there were more than 200 companies operating in India and not all of them on sound ethical principles. Many factors combined together to prompt the then Government to nationalize the life insurance industry in 1956 to form the Life Insurance Corporation of India. Insurance sector was once a monopoly, with LIC as the only company, a public sector enterprise. But nowadays the market opened up and there are many private players competing in the market. There are thirteen private life insurance companies who has entered the industry. The study in the first part gives detail information on the on-job training provided the competitive analysis of product of Kotak Mahindra Old Mutual Life Insurance Ltd. with ICICI Prudential Life Insurance. Also, analysis of financial statements. In the second part, is a project on “How does the Indian mutual fund industry compare vis a - vis global standards and what should be our future expectations from it?” The paper begins by analyzing the current scenario in the industry characterized by problems with distribution, low investor awareness and concentration of corporate investors. In the next section, a comparison of the Mutual Fund Industry with global standards reveals that the industry still compares unfavorably with developed countries in terms of penetration, investor awareness and diversity of products and the extent of use of risk management techniques. Further comparison reveals that the attitude of regulator towards investor protection and the governance of mutual funds are at par with global standards. The paper then analysis the future expectations from the mutual fund industry in terms of increased investor awareness, product diversity and improvement in penetration and distribution. In the end I recommend certain steps that SEBI and AMCs should take in order to build investor confidence and trust.

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CH NO. 2: RESEARCH METHODOLOGY Primary Objective(s) The Basic objective of cash management is two fold: 

To meet the cash disbursement needs (payment schedule);

 To minimize funds committed to cash balances. These are conflicting and mutually contradictory and the task of cash management is to reconcile them.

Hypothesis: 1. Customers have basis of preference in selection of the final Kotak Mahindra Old Mutual Life Insurance 2. The choice of the Kotak Mahindra Old Mutual Life Insurance might have an effect either of the personal preference or the country of origin 3. The final decision is based on prior experience

Sample Size: The size of the sample was around 70 people considering the time constraint.

Research Design: Data Collection: Data has been collected through both primary and secondary approach. Data Sources The research involved gathering Secondary data as well as Primary data. For the purpose two types of survey was conducted by me to collect the data  

Customer survey and Consumer survey

Primary Data Consumer survey was done to know their purchasing behaviour because they are the one who constitute the market and are the target of the business . In Insurance Industry untill and unless we have the knowledge of the consumer behaviour and factor which influence them to buy a paticular brand ,companies cannot focus upon the target market. Hence a consumer survey was done to know their wants, purchasing power, and buying habits in

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order to segment the market , and based on this consumer profile was identified. Secondary Data Secondary data regarding sales figures, promotional expenses and other related expenses was collected from the company’s own record to analyse the impact on sales due to the running schemes and make cost benefit analysis.

Scope of the Study Both primary and Secondary data has been be used for the study. Primary data was collected through direct interaction with the company’s finance and accounts department. If needed schedule/questionnaires would be devised to get the information on all the relevant areas of the study such as receivable management, inventory management, management of cash etc. And I collected the data from the secondary sources comprising Annual Reports of the firm, other journals and peridocials. Apart from the conducting this research work on the basis of these informations, various techniques of financial management e.g., comparative statement, trend analysis and ratio analysis etc. were used in the present study. To present a broad view so far the purpose of the analysis and to make it easy to understand the problem/concept of a few graphs and tables shall also be presented. In each chapter, the analysis has been compared with actual management practices of the company under study.

Limitation of the Study  The present study is limited to one Co., i.e. Kotak Mahindra Life Insurance Ltd., and covers a period from 2005 and 2006 due to limitation of time and accessibility to data base.  The authenticity of the suggestions and recommendations depend upon the rationality of the data provided to me.  Have to rely upon the data supplied.  Executives are not ready to part with the information beyond a limit.

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CH NO. 3: CRITICAL REVIEW OF LITERATURE WORKING CAPITAL - OVERALL VIEW Working Capital management is the management of assets that are current in nature. Current assets, by accounting definition are the assets normally converted in to cash in a period of one year. Hence working capital management can be considered as the management of cash, market securities receivable, inventories and current liabilities. In fact, the management of current assets is similar to that of fixed assets the sense that is both in cases the firm analyses their effect on its profitability and risk factors, hence they differ on three major aspects: 1. In managing fixed assets, time is an important factor discounting and

2.

compounding aspects of time play an important role in capital budgeting and a minor part in the management of current assets. The large holdings of current assets, especially cash, may strengthen the firm’s liquidity position, but is bound to reduce profitability of the firm as ideal car yield nothing.

3.

The level of fixed assets as well as current assets depends upon the expected sales, but it is only current assets that add fluctuation in the short run to a

business. To understand working capital better we should have basic knowledge about the various aspects of working capital. To start with, there are two concepts of working capital:  Gross Working Capital  Net working Capital Gross Working Capital: Gross working capital, which is also simply known as working capital, refers to the firm’s investment in current assets: Another aspect of gross working capital points out the need of arranging funds to finance the current assets. The gross working capital concept focuses attention on two aspects of current assets management, firstly optimum investment in current assets and secondly in financing the current assets. These two aspects will help in remaining away from the two danger points of excessive or inadequate investment in current assets. Whenever a need of working capital funds arises due to increase in level of business activity or for any other reason the arrangement should be made quickly, and similarly if some surpluses are available, they should not be allowed to lie ideal but should be put to some effective use.

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Net Working Capital: The term net working capital refers to the difference between the current assets and current liabilities. Net working capital can be positive as well as negative. Positive working capital refers to the situation where current assets exceed current liabilities and negative working capital refers to the situation where current liabilities exceed current assets. The net working capital helps in comparing the liquidity of the same firm over time. For purposes of the working capital management, therefore Working Capital can be said to measure the liquidity of the firm. In other words, the goal of working capital management is to manage the current assets and liabilities in such a way that a acceptable level of net working capital is maintained. Importance of working capital management: Management of working capital is very much important for the success of the business. It has been emphasized that a business should maintain sound working capital position and also that there should not be an excessive level of investment in the working capital components. As pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy or mis-management of working capital is one of a few leading causes of business failure. Current assets, in fact, account for a very large portion of the total investment of the firm. Table showing Current assets as percentage of Total assets Year 2004

Percentage 31%

2005 2006

26% 35%

40 35 30 25 20 15 10 5 0 2004

2005

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It can be visualized from the table that in the first year of our study i.e. 2004 it was 31% which was reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend. Determinants of Working Capital: There is no specific method to determine working capital requirement for a business. There are a number of factors affecting the working capital requirement. These factors have different importance in different businesses and at different times. So a thorough analysis of all these factors should be made before trying to estimate the amount of working capital needed. Some of the different factors are mentioned here below:1. Nature of business: Nature of business is an important factor in determining the working capital requirements. There are some businesses which require a very nominal amount to be invested in fixed assets but a large chunk of the total investment is in the form of working capital. There businesses, for example, are of the trading and financing type. There are businesses which require large investment in fixed assets and normal investment in the form of working capital. 2. Size of business: It is another important factor in determining the working capital requirements of a business. Size is usually measured in terms of scale of operating cycle. The amount of working capital needed is directly proportional to the scale of operating cycle i.e. the larger the scale of operating cycle the large will be the amount working capital and vice versa. 3. Business Fluctuations: Most business experience cyclical and seasonal fluctuations in demand for their goods and services. These fluctuations affect the business with respect to working capital because during the time of boom, due to an increase in business activity the amount of working capital requirement increases and the reverse is true in the case of recession. Financial arrangement for seasonal working capital requirements are to be made in advance. 4. Production Policy: As stated above, every business has to cope with different types of fluctuations. Hence it is but obvious that production policy has to be planned well in advance with respect to fluctuation. No two companies can have similar production policy in all respects because it depends upon the circumstances of an individual company.

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5. Firm’s Credit Policy: The credit policy of a firm affects working capital by influencing the level of book debts. The credit term is fairly constant in an industry but individuals also have their role in framing their credit policy. A liberal credit policy will lead to more amount being committed to working capital requirements whereas a stern credit policy may decrease the amount of working capital requirement appreciably but the repercussions of the two are not simple. Hence a firm should always frame a rational credit policy based on the credit worthiness of the customer. 6. Availability of Credit: The terms on which a company is able to avail credit from its suppliers of goods and devices credit/also affects the working capital requirement. If a company in a position to get credit on liberal terms and in a short span of time then it will be in a position to work with less amount of working capital. Hence the amount of working capital needed will depend upon the terms a firm is granted credit by its creditors. 7. Growth and Expansion activities: The working capital needs of a firm increases as it grows in term of sale or fixed assets. There is no precise way to determine the relation between the amount of sales and working capital requirement but one thing is sure that an increase in sales never precedes the increase in working capital but it is always the other way round. So in case of growth or expansion the aspect of working capital needs to be planned in advance. 8. Price Level Changes: Generally increase in price level makes the commodities dearer. Hence with increase in price level the working capital requirements also increases. The companies which are in a position to alter the price of these commodities in accordance with the price level changes will face fewer problems as compared to others. The changes in price level may not affect all the firms in same way. The reactions of all firms with regards to price level changes will be different from one other.

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CIRCULATION SYSTEM OF WORKING CAPITAL In the beginning the funds are obtained by issuing shares, often supplemented by long term borrowings. Much of these collected funds are used in purchasing fixed assets and remaining funds are used for day to day operation as pay for raw material, wages overhead expenses. After this finished goods are ready for sale and by selling the finished goods either account receivable are created and cash is received. In this process profit is earned. This account of profit is used for paying taxes, dividend and the balance is ploughed in the business. Working capital is considered to efficiently circulate when it turns over quickly. As circulation increases, the investment in current assets will decrease. Current assets turnover ratio speaks about the efficiency of Kotak Mahindra in the utilisation of current assets. Fast turnover current assets results in a better rate on investment. Table showing Current Assets Turnover Ratio Year 2004

Ratio (in times) 1.78

2005 2006

2.98 1.98

Average: 2.24

3 2.5 2 1.5 1 0.5 0 2004

2005

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The ratio average is 2.24 times in the study period of 3 years. In 2005 current assets turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this year company has achieved sales growth 44.36% over the previous year and additional activity needs more funds. KOTAK MAHINDRA LIFE INSURANCE LTD. Ratios useful to analyze working capital management (A) Efficiency Ratios 1. Working Capital Turnover (times)

2004 4.84

2005 10.23

2006 5.71

Ideal Ratio -

2. Current Assets Turnover (times) 3. Inventory turnover (times)

1.78 9.49

2.98 9.20

1.97 7.88

-

1. Current Ratio

2.12

1.80

2.41

2.0

2.AcidTestRatio

1.15

0.98

1.03

1.0

3. Cash Ratio

0.57

0.08

0.05

0.5

(B) Liquidity Ratio

(C) Structural Health of Working Capital Ratio/Year 1. CA

2004 0.31

2005 0.26

2006 0.35

2. CL

0.15

0.14

0.14

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3. Cash to CA 4. Receivables to CA

0.27 0.27

.04 0.50

0.02 0.40

5. Loans and Advances to CA 6. Inventory to CA

0.15 0.42

0.19 0.38

0.15 0.50

7. RM to Inventory

0.44

0.46

0.30

8. Stock spares to inventory

0.12

0.14

0.11

9. WIP to inventory 10. Finished Goods to Inventory

0.06 0.38

0.08 0.32

0.03 0.56

Interpretation (Ratio Analysis)  The utilization rate of net working capital as depicted by working capital turnover ratio is fluctuating during the period. It shows that working capital has not been effectively used over the period of years except in the year 2005.  As shown by current assets turnover ratio, the utilisation of current assets in terms of sales has shown a decreasing trend which shows that current assets has been effectively used to achieve sales.  Again if we look at the efficiency with which individual elements of working capital have been utilized, the picture of inventory turnover is not very bright.  Receivables turnover also shows a declining trend. Generally such a situation does not suit the company.  As we look at the extent of liquidity of working capital, we notice that the ratio shows an increasing trend. This indicates improvement on the liquidity front.  If we analyze the structural health of working capital, the proportion of current assets to total assets has been appropriate during this period. Such a higher proportion of current asset in the assets portfolio of Kotak Mahindra Life Insurance Ltd. is quite acceptable. Our analysis above indicates the areas of concern to management in making best possible use of resources. Decreasing efficiency in the use of current assets hints of the possibility of problems in working capital management.

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On further analysis, inventory constitutes a major proportion of total current assets. Among its various components, raw materials, stocks, spared and finished goods in particular need further analysis as here stand out to the pr...