Fm Project

PROJECT REPORT

WORKING CAPITAL MANAGEMENT

VS

RIDA SHEIKH (61573) WAQAR MASNOOR (62790) ALI ABDULLAH (61112) MUHAMMAD ALI (61251)

WORKING CAPITAL MANAGEMENT Page 1

TABLE OF CONTENTS: 1. INTRODUCTION OF A COMPANY 2. WORKING CAPITAL MANAGEMENT 3. OBJECTIVES OF WORKING CAPITAL MANAGEMENT 4. APPROACHES TO WORKING CAPITAL MANAGEMENT 5. CALCULATIONS OF WORKING CAPITAL RATIOS 6. COMPARISON OF THE COMPANIES 7. SWOT ANALYSIS 8. CONCLUSION

WORKING CAPITAL MANAGEMENT Page 2

INTRODUCTION: Born in November 1906 in Tenryu, Japan, and died in August 1991 (aged 84), Mr. Honda founded in 1948 the Honda Motor Company. Honda Motor Company Limited is perhaps best known as an automaker--it is the third largest automaker in Japan--but the company has its roots in motorcycles, and is the world's top motorcycle manufacturer. Its best market is in the United States, where the majority of its sales are generated. Honda's automobile product line accounts for approximately 90 percent of its sales, and includes well-known U.S. top-sellers such as the Accord, Legend, Civic, Prelude, and the luxury Acura. The company's power products division makes other items that bolster annual sales, such as agricultural and industrial-use machinery, portable generators, outboard motors, and all-terrain vehicles.

WORKING CAPITAL MANAGEMENT: Working capital management refers to a company's managerial accounting strategy designed to monitor and utilize the two components of working capital, current assets and current liabilities, to ensure the most financially efficient operation of the company. The primary purpose of working capital management is to make sure the company always maintains sufficient cash flow to meet its short-term operating costs and short-term debt obligations.

OBJECTIVES OF WORKING CAPITAL MANAGEMENT: The main objectives of working capital management are: 





Maintaining the working capital operating cycle and to ensure its smooth operation. Maintaining the smooth operation of the operating cycle is essential for the business to function. The operating cycle here refers to the entire life cycle of a business. From the acquisition of the raw material to the smooth production and delivery of the end products – working capital management strives to ensure smoothness, and it is one of the main objectives of the concept. Mitigating the cost of capital. Minimizing the cost of capital is another very important objective that working capital management strives to achieve. The cost of capital is the capital that is spent on maintaining the working capital. It needs to be ensured that the costs involved for maintenance of healthy working capital are carefully monitored, negotiated and managed. Maximizing the return on current asset investments. Maximizing the return on current investments is another objective of working capital management. The ROI on currently invested assets should be greater than the weighted average cost of the capital so that wealth maximization is ensured.

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APPROACHES TO WORKING CAPITAL MANAGEMENT: The short-term interest rates are, in most cases, cheaper compared to their long-term counterparts. This is due to the amount of premium which is higher for short term loans. As a result, financing the working capital from long-term sources means more cost. However, the risk factor is higher in case of short term finances. In case of short-term sources, fluctuations in refinancing rates are a major cause for concern, and they pose a major threat to business. There are mainly three strategies that can be employed in order to manage the working capital. Each of these strategies takes into consideration the risk and profitability factors and has its share of pros and cons. The three strategies are: 

THE CONSERVATIVE APPROACH:

As the name suggests, the conservative strategy involves low risk and low profitability. In this strategy, apart from the permanent working capital, the variable working capital is also financed from the long-term sources. This means an increased cost capital. However, it also means that the risks of interest rate fluctuations are significantly lower. 

THE AGGRESSIVE APPROACH:

The main goal of this strategy is to maximize profits while taking higher risks. In this approach, the entire variable working capital, some parts or the entire permanent working capital and sometimes the fixed assets are funded from short-term sources. This results in significantly higher risks. The cost capital is significantly decreased in this approach that maximizes the profit. 

THE MODERATE OR HEDGING APPROACH:

This approach involves moderate risks along with moderate profitability. In this approach, the fixed assets and the permanent working capital are financed from long-term sources whereas the variable working capital is sourced from the short-terms sources.

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CALCULATIONS:

HONDA

2018

CURRENT ASSETS Stores and spares Stock-in-trade Trade debts Advances, prepayments and other receivables Short term investments Cash and bank balances Total CURRENT LIABILITIES Current portion of deferred revenue Current portion of long-term finances Short term borrowings - secured Accrued mark-up Income tax payable Trade and other payables Total

2017

2016 Average

138,779 134,569 122,954 132,101 8,208,043 6,658,735 4,009,825 6,292,201 92,441 49,536 86,242 76,073 13,135,180 9,088,890 1,006,233 7,743,434 20,674,900 20,943,345 1,149,777 14,256,007 10,993,000 9,536,380 5,963,117 8,830,832 53,242,343 46,411,455 12,338,148 37,330,649

3,026

4,480

6,194

14,218 305,126 41,191,665 37,637,055 41,195,473 37,960,879

669

782

4,567

5,223 305,126 8,031,319 28,953,346 8,038,182 29,064,845

WORKING CAPITAL = Current assets – Current liabilities = 37,330,649 – 29064845 = 8265804

RATIO ANALYSIS: Sales Cost of Sales

91,522,872 62,802,753 40,085,521 81073777 53681061 34038741

Current Ratio = Total Assets / Total Liabilities Current Ratio

1.3

1.2

1.5

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1.35

WORKING CAPITAL TURNOVER RATIO: Working Capital Turnover Ratio = Sales ÷ Average working capital 11.07

7.59

4.84

7.8

RECEIVABLE TURNOVER RATIO: Receivable Turnover = Net Sales ÷ Average Accounts Receivable 8.2363736

12.442197

32.127699

DAYS SALES OUTSTANDING:

Days Sales Outstanding = 360 Days ÷ Receivable Turnover

43.708556

28.933798

11.205284

INVENTORY TURNOVER: Inventory Turnover = Cost of Sales ÷ Average Inventory Average Inventory 2018 Stock-in-trade 8,208,043 Average Inventory 10762757

2017 6,658,735 7339193

2016 2015 4,009,825 5,523,796 7528709

Cost of Sales

81073777

53681061

34038741

Inventory Turnover

7.5328079

7.3143007 4.5211926

DAYS INVENTORY OUTSTANDING: Days Inventory Outstanding = 360 Days ÷ Inventory Turnover 47.790944

49.218649 79.625009

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ACCOUNT PAYABLE TURNOVER: Accounts Payable Turnover = Net Credit Purchases ÷ Avg. Accounts Payable Net Credit Purchases Account Payable Trade and other payables

45234353 41191665

31186105 37637055

16601726 8031319

1.10

0.83

2.07

DAYS PAYABLE OUTSTANDING: Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover Days Payable Outstanding

327.83

434.47

174.16

TOTAL ASSETS TURNOVER: Total Asset Turnover = Net Sales ÷ Average Total Assets Sales 91,523,000 62,803,000 40,086,000 Total Assets 41195473 37960879 8038182 Total Asset Turnover 0.45 0.60 0.20

DEBT RATIO: Debt Ratio = Total Liabilities ÷ Total Assets Total Assets Total Liabilities Debt Ratio

53242343 46411455 12338148 41195473 37960879 8038182 0.7737352 0.8179205 0.6514902

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INDUS MOTORS: CURRENT ASSETS Stores and spares Stock-in-trade Trade debts Loans and advances Short-term prepayments Accrued return Other receivables Short-term investments Cash and bank balances

CURRENT LIABILITIES Current portion of deferred revenue Unclaimed dividend Unpaid dividend Trade payables, other payables and provisions Advances from customers and dealers Taxation - net

2018 2017 2016 AVERAGE 301,254 203,829 153,561 219,548 11,150,736 9,317,883 7,785,245 9,417,955 1,453,670 758,872 1,131,702 1,114,748 3,714,654 1,652,906 1,125,490 2,164,350 14,639 20,839 45,520 26,999 120,016 376,037 513,355 336,469 556,284 402,304 191,303 383,297 55,031,103 41,487,709 33,696,804 43,405,205 2,200,772 3,221,120 2,737,569 2,719,820 74,543,128 57,441,499 47,380,549 59,788,392

3,933 3,933 182,437 167,301 174,869 60,445 60,445 15,731,241 9,515,578 10,035,145 11,760,655 27,491,128 22,188,881 19,127,360 22,935,790 1,690,827 807,068 744,880 1,080,925 45,160,011 32,678,828 29,907,385 35,915,408

WORKING CAPITAL = Current assets – Current liabilities = 59,788,392 – 35,915,408 = 23,872,984

RATIO ANALYSIS: SALES COST OF SALES

9,53,77,638 7,64,08,972

1,17,21,899 1,07,82,577 4,98,37,289 6,55,87,568

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CURRENT RATIO: Current Ratio = Total Assets / Total Liabilities Current Ratio

1.7

1.8

1.6

1.7

WORKING CAPITAL TURNOVER RATIO: Working Capital Turnover Ratio = Sales ÷ Average working capital 3.995212 0.491011 0.451664 1.645963

RECEIVABLE TURNOVER RATIO: Receivable Turnover = Net Sales ÷ Average Accounts Receivable 198.9961026

39.4938031

60.060029

INVENTORY TURNOVER RATIO: Inventory Turnover = Cost of Sales ÷ Average Inventor Stock-in-trade Average Inventory Cost of Sales

11,150,736 14893251

9,317,883 12444186.5

7,785,245 10042622.5

11583100

9245000

9102700

0.78

0.74

0.91

Inventory Turnover

DAYS INVENTORY OUTSTANDING: Days Inventory Outstanding = 360 Days ÷ Inventory Turnover Days Inventory Outstanding

462.88

484.58

397.17

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0.8

ACCOUNT PAYABLE TURNOVER: Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable Net Credit Purchases

101424363

81173819

81396691

Trade payables, other payables and provisions

15,731,241

9,515,578

10,035,145

6.45

8.53

8.11

Accounts Payable Turnover

7.7

DAYS PAYABLE OUTSTANDING: Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover Days Payable Outstanding

55.84

42.20

44.38

47.5

TOTAL ASSETS TURNOVER: Total Asset Turnover = Net Sales ÷ Average Total Assets Sales 1,402,080,000 81,927,064 Total Assets Total Asset Turnover 0.06

112,272,000 63,879,723 0.57

108,759,000 57,536,994 0.53

0.4

DEBT RATIO: Debt Ratio = Total Liabilities ÷ Total Assets Total Assets Total Liabilities Debt Ratio

81,927,064 45,160,011 0.55

63,879,723 32,678,828 0.51

57,536,994 29,907,385 0.52

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0.5

SUZUKI: WORKING CAPITAL: CURRENT ASSETS Stores, spares and loose tools Stock-in-trade Trade debts Loans and advances Trade deposits and short term prepayments Current portion of long-term installment sales receivables Accrued profit on bank deposits Other receivables Taxation – net Sales tax and excise duty adjustable Cash and bank balances

CURRENT LIABILITIES Trade and other payables Advances from customers Security deposits Provision for custom duties and sales tax

2017 2016 2015 AVERAGE 114,789 111,006 98,801 108,199 23,946,058 16,288,608 13,084,447 17,773,038 211,358 1,205,269 1,561,823 992,817 37,481 163,019 194,932 131,811 965,722 77,129 70,862 371,238 320,996 291,254 347,976 320,075 28,699 120,761 193,429 114,296 147,775 167,306 89,446 134,842 4,899,972 1,894,297 1,589,882 2,794,717 1,143,685 1,651,301 277,801 1,024,262 9,189,552 8,548,293 15,006,007 10,914,617 41,006,087 30,518,243 32,515,406 34,679,912

11,391,952 6,300,123 6,441,748 8,044,608 5,331,948 1,625,472 4,226,341 3,727,920 4,600,552 3,673,164 2,068,361 3,447,359 36,299 36,299 36,299 36,299 21,360,751 11,635,058 12,772,749 15,256,186

WORKING CAPITAL = Current assets – Current liabilities = 34,679,912 – 15,256,186 = 19,423,726

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RATIO ANALYSIS: Sales Cost of Sales

101,811,611 76,516,040 84,548,757 92,159,038 69,167,463 73,061,309

CURRENT RATIO: Current Ratio = Total Assets / Total Liabilities Current Ratio

1.9

2.6

2.5

2.4

RECEIVABLE TURNOVER: Receivable Turnover = Net Sales ÷ Average Accounts Receivable

219.579872 170.79816 176.27361 DAYS SALES OUTSTANDING: Days Sales Outstanding = 360 Days ÷ Receivable Turnover 1.63949454

2.107751

2.0422796

INVENTORY TURNOVER: Inventory Turnover = Cost of Sales ÷ Average Inventory Average Inventory Stock-in-trade Average Inventory

2017 2016 2015 2014 23,946,058 16,288,608 13,084,447 14,976,001 28261637 21228751 21518225

Cost of Sales

92,159,038 69,167,463 73,061,309

Inventory Turnover

3.26092356

3.2581975

3.3953224

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DAYS INVENTORY OUTSTANDING: Days Inventory Outstanding = 360 Days ÷ Inventory Turnover

Days Inventory Outstanding

110.398172 110.49054 106.02822

ACCOUNT PAYABLE TURNOVER: Accounts Payable Turnover = Net Credit Purchases ÷ Ave. Accounts Payable

Net Purchases Account Payable Trade and other payables

86,441,330 11,391,952

Accounts Payable Turnover

9.77

64,257,884 63,980,788 6,300,123 6,441,748 10.09

11.24

DAYS PAYABLE OUTSTANDING: Days Payable Outstanding = 360 Days ÷ Accounts Payable Turnover Days Payable Outstanding

36.84

35.69

32.04

TOTAL ASSETS TURNOVER: Total Assets Turnover = Net Sales ÷ Average Total Assets Sales Total Assets Total Asset Turnover

101,811,611 76,516,040 84,548,757 50,910,467 37,851,965 37,451,987 0.50 0.49 0.44

DEBT RATIO: Debt Ratio = Total Liabilities ÷ Total Assets Total Assets Total Liabilities

50,910,467 37,851,965 37,451,987 21,360,751 11,635,058 12,772,749

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4,945,271

Debt Ratio

0.41957484

0.3073832

0.3410433

WORKING CAPITAL TURNOVER RATIO: Working Capital Turnover Ratio = Sales ÷ Average working capital

5

3.939308

4.3528598

COMPARISON OF THE COMPANIES:

WORKING CAPITAL CURRENT RATIO RECEIVABLE TURNOVER RATIO WORKING CAPITAL TURNOVER RATIO

HONDA 82,65,804 1.35 17.60209

INDUS MOTORS 23,872,984 1.7 99.51664

SUZUKI 19,423,726 2.4 188.883883

7.8

1.6

5

SWOT ANALYSIS: Strengths Weaknesses        

Strong overall financial performance Strong reputation and quality Strong position is Asian market Research and development Production pipeline system and cost management Diversified product portfolio Financial services are still undeveloped Huge expenses on pensions and post-retirement benefits

Opportunities Threats     

Increasing demand for hybrid and environmental-friendly cars Expansion in emerging Asian markets Financial and other non-auto division development New car models Global economic crisis

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5

  

Strong competition in automotive industry Yen and US dollar exchange rates Tight environmental regulations on carbon emissions

CONCLUSION: Working capital is a crucial ingredient to running a business. It is the money a business has available to spend on its operations after paying off its bills and short-term debts. The working capital turnover ratio measures how efficiently a business uses its working capital to produce sales. A higher ratio indicates greater efficiency. In general, a high ratio can help your company’s operations run more smoothly and limit the need for additional funding. As the above calculation shows Honda has the highest working capital ratio than the Competitors’ turnover ratios so it gives competitive edge in the industry.

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