INTRODUCTION

Finance
Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term finance may thus incorporate any of the following:

The study of money and other assets; The management and control of those assets; Profiling and managing project risks; As a verb, "to finance" is to provide funds for business.

The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments. An entity whose income exceeds its expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary, such as a bank or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference. A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders of different sizes to coordinate their activity. Banks are thus compensators of money flows in space since they allow different lenders and borrowers to meet, and in time, since every borrower, in theory, will eventually pay back.

Page 1

A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. You own 1/100 of the net difference between assets and liabilities on the balance sheet. Of course, in return for the stock, the company receives cash, which it uses to expand its business in a process called "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure. Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), etc., as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments, with consideration to their institutional setting. Finance is one of the most important aspects of business management. Without proper financial planning, a new enterprise cannot even start, let alone be successful. As money is the single most powerful liquid asset, managing money is essential to ensure a secure future, both for an individual as well as an organization.

Business finance
In the case of a company, managerial finance or corporate finance is the task of providing the funds for the corporations' activities. It generally involves balancing risk and profitability. Long term funds would be provided by ownership equity and long-term credit, often in the form of bonds. These decisions lead to the company's capital structure. Short term funding or working capital is mostly provided by banks extending a line of credit. On the bond market, borrowers package their debt in the form of bonds. The borrower receives the money it borrows by selling the bond, which includes a promise to repay the value of the bond with interest. The purchaser of a bond can resell the bond, so the

Page 2

actual recipient of interest payments can change over time. Bonds allow lenders to recoup the value of their loan by simply selling the bond. Another business decision concerning finance is investment, or fund management. An investment is an acquisition of an asset in the hopes that it will maintain or increase its value. In investment management - in choosing a portfolio - one has to decide what, how much and when to invest. In doing so, one needs to

Identify relevant objectives and constraints: institution or individual - goals time horizon - risk aversion - tax considerations Identify the appropriate strategy: active vs. passive - hedging strategy Measure the portfolio performance

Financial management is duplicate with the financial function of the Accounting profession. However, Financial Accounting is more concerned with the reporting of historical financial information, while the financial decision is directed toward the future of the firm. Financial statements (or financial reports) are formal records of a business' financial activities. These statements provide an overview of a business' profitability and financial condition in both short and long term. There are four basic financial statements: 1. Balance Sheet - also referred to as statement of financial condition, reports on a company's assets, liabilities and net equity as of a given point in time. 2. Income Statement - also referred to as Profit or loss statement, reports on a company's operating, results of operations and over a period of time. activities. 3. Cash Flow Statement - reports on a company's cash flow activities, particularly its investing financing 4. Statement of Retained Earnings - explains the changes in a company's retained earnings over the reporting period.

Page 3

Because these statements are often complex, an extensive set of Notes to the Financial Statements and management discussion and analysis is usually included. The notes will typically describe each item on the Balance sheet, Income statement and Cash flow statement in further details. Notes to Financial Statements are considered an integral part of the Financial Statements.

Users of Financial Statements

Financial statements are used by a diverse group of parties, both inside and outside a business. Generally, these users are: 1. Internal Users: are owners, managers, employees and other parties who are directly connected with a company.

Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis are then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's report to its stockholders, as it form part of its Annual Report.

Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings.

2. External Users: are potential investors, banks, government agencies and other parties who are outside the business but need financial information about the business for a diverse number of reasons.

Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analysis are often used by investors and is prepared by professionals (Financial Analysts), thus providing them with the basis in making investment decisions.

Page 4

Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

Government entities (Tax Authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Media and the general public are also interested in financial statements for a variety of reasons.

Page 5

Working Capital Management

Decisions relating to working capital and short term financing are referred to as working capital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is to ensure that the firm is able to continue its operations and that it has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses. By definition, Working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the interrelatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant

Page 6

income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above. ROC measures are therefore useful as a management tool, in that they link shortterm policy with long-term decision making. See Economic value added (EVA). Net Working Capital = Gross Working capital (current assets) Current Liabilities

Working Capital Operating Cycle

Working capital refers to that part of firms capital which is required for financing short term or current assets cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted into cash and this cash flows out again in exchange for other current assets. Hence, it is also known as circulating capital. The circular flow concept of working capital is based upon this operating or working capital cycle of a firm. The cycle starts with the purchase of raw materials and other resources and ends with the realization of cash from the sale of finished goods. It involves purchase of raw material and stores, its conversion into stock of finished goods through work in progress with progressive increasment of labour and service costs, conversion of finished stock into sales, debtors and receivables and ultimately realization of cash and this cycle continues again from cash to purchase of raw material and so on.the speed/time duration required to complete one cycle determines the requirements of working capital-longer the period of cycle, larger is the requirement of working capital. Net operating cycle period= Gross operating cycle period - Payable deferral period

Page 7

Operating Cycle

Cash

Raw Materials

Debtors

Work in Progress

Sales

Finished Goods

Kinds of Working Capital

On The Basis On The Basis Kinds of Working Capital Of concept Of Time Gross Working Capital Net Working Capital Regular
Page 8

Permanent or Fixed

Temporary or Variable Seasonal

Reserve

Special

Classification or kinds of working capital

Working capital may be classified in two ways: (a) on the basis of concept (b) on the basis of time On the basis of concept, working capital is classified as gross working capital and net working capital. This classification is important from the point of view of the financial manager. On the basis of time, working capital may be classified as: 1. Permanent or fixed working capital. 2. Temporary or variable working capital. 1. Permanent or fixed working capital: 1. Permanent or fixed working capital is the minimum amount which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets . there is always a minimum level of current assets which is continuously required by the enterprise to carry its normal business operations. For example, every firm has to maintain a minimum level of raw materials, work in progress, finished goods and cash balance. This minimum level of current assets is called permanent or fixed working capital as this part of capital is permanently blocked in current assets. The permanent working capital also increases due to the increase in current assets. The permanent working capital can further be classified as regular working capital and reserve working capital required to ensure circulation of current assets from cash to inventories, from inventories to receivables and from receivables to cash and so on. Reserve working capital is the excess amount over the requirement for regular working capital which may be provided for contingencies that may arise at unstated periods such as strikes, rise in prices, depression, etc. 2. Temporary or variable working capital: temporary or variable working capital is the amount of working capital which is required to meet the seasonal demands and some special exigencies. Variable working capital can

Page 9

be further classified as seasonal working capital and special working capital. Most of the enterprises have to provide additional working capital to meet the seasonal and special needs. The capital required to meet the seasonal needs of the enterprise is called seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaigns for conducting research, etc. Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in the business.

Importance or advantages of adequate working capital

Working capital is the life blood and nerve centre of a business. Just as circulation of blood is essential in the human body for maintaining life, working capital is very essential to maintain the smooth running of a business. No business can be successfully without an adequate amount of working capital. The main advantages of maintaining an adequate amount of working capital are as follows: 1. Solvency of business: adequate working capital helps in maintaining solvency of the business by providing uninterrupted flow of production 2. Goodwill: sufficient working capital enables a business concern to make prompt payments and hence helps in maintaining and creating goodwill. 3. Easy loans: a concern having adequate working capital, high solvency and good credit standing can arrange loans from banks and others on easy and favorable terms. 4. Cash discounts: adequate working capital also enables a concern to avail cash discounts on the purchases and hence it reduces costs. 5. Regular supply of raw materials: sufficient working capital ensures regular supply of raw materials and continuous production. 6. Regular payment of salaries, wages, and other day to day commitments: a company which has ample working capital can make regular payment of salaries, wages, and other day to day commitments which raises the morale of
Page 10

employees, increases their efficiency, reduces wastages and costs and enhances production and profits. 7. Exploitation of favorable market conditions: only concerns with adequate working capital can exploit favorable market conditions such as purchasing its requirement in bulk when the prices are lower and by holding its inventories for higher prices 8. Ability to face crises: adequate working capital enables a concern to face business crisis in emergencies such as depression because during such periods, generally, there is much pressure on working capital 9. Quick and regular returns on investments: every investor wants a quick and regular return on his investments. Suffiency of working capitals enables a concern to pay quick and regular dividends to its investors as there may not be much pressure to plough back profits. This gains the confidence future. 10. High morale: adequacy of working capital creates an environment of security, confidence, and high morale and creates overall efficiency in a business. of its investors and creates a favourable market to raise additional funds in the

Page 11

Excess or inadequate working capital

Every business concern should have adequate working capital to run its business operations. It should have neither redundant nor excess working capital nor inadequate or shortage of working capital both excess as well as short working capital positions are bad for any business. However, out of the two, it is the inadequacy of working capital which is more dangerous from the point of view of the firm.

Disadvantages of redundant or excessive working capital

1. Excessive working capital means idle funds which earn no profits for the business and hence the business cannot earn a proper rate of return on its investments. 2. When there is a redundant working capital, it may lead to unnecessary purchasing and accumulation of inventories causing more chances of theft, waste and losses. 3. Excessive working capital implies excessive debtors and defective credit policy which may cause higher incidence of bad debts. 4. It may result into overall inefficiency in the organization. 5. When there is excessive working capital, relations with banks and other financial institutions may not be maintained. 6. 7. Due to low rate of return on investments, the value of shares may also fall. The redundant working capital gives rise to speculating transactions.

Disadvantages or dangers of inadequate working capital

Page 12

1.

A concern which has inadequate working capital cannot pay its short term liabilities in time. Thus, it looses reputation and shall not be able to get good credit facilities. 2. It cannot buy its requirements in bulk and cannot avail of discounts, etc.

3. 4. 5. 6.

It becomes for the firm to exploit favourable market conditions and undertake profitable projects due to lack of working capital The firm cannot pay day to day expenses of its operations and it creates inefficiencies, increases costs and reduces the profits of the business. It becomes impossible to utilize efficiently the fixed assets due to non availability of liquid funds. The rate of return on investments also falls with the shortage of working capital.

Factors

determining

the

working

capital

requirements
The working capital requirements of a concern depend upon a large number of factors such as nature and size of business, the character of their operations, the length of production cycles, the rate of stock turnover and the state of economic situation. It isnt possible to rank them because all such factors are of different importance and influence of individual factors changes for a firm over time. However, the following are the important factors generally influencing the working capital requirements. 1. Nature or character of business: the working capital requirements of a firm basically depend upon the nature of its business. Public utility undertakings like Electricity, Water supply and railways need very limited working capital because they offer cash sales only and supply services, not products, and as such no funds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but have to invest large amounts in current assets like inventories, receivables and cash; as such they need large amount of working capital. The manufacturing
Page 13

undertakings also require sizable working capital along with fixed investments. 2. Size of business or scale of operations: the working capital requirements of a concern are directly influenced by the size of its business which may be measured in terms of scale of operations. Greater the size of business unit, generally larger will be the requirements of working capital. 3. Production policy: in certain industries the demand is subject to wide fluctuations due to seasonal variations. The requirements of working capital in such cases depend upon the production policy. The production could be kept either steady by accumulating inventories during slack periods with a view to meet high demand during the peak season or the production could be curtailed during the slack season and increased during the peak season. If the policy is to keep production steady by accumulating inventories, it will require higher working capital. 4. Manufacturing process/ Length of production cycle: in manufacturing business the requirements of working capital increase in direct proportion to length of manufacturing process. The longer the manufacturing time, the raw materials and the other supplies have to be carried for a longer period in the process with progressive increment of labor and service cost before the finished product is finally obtained. 5. Seasonal variations: in certain industries raw material is not available throughout the year. They have to buy raw materials in bulk during the season to ensure an uninterrupted flow and process them during the entire year. A huge amount is, thus, blocked in the form of material inventories during such season, which gives rise to more working capital requirements. 6. Working capital cycle: in a manufacturing concern , the working capital cycle starts with the purchase of raw materials and ends with the realization of cash from the sale of finished products. The speed with which the working capital completes one cycle determines the requirements of working capital longer the period of the cycle, larger is the requirement of working capital. 7. Rate of stock turnover: There is a high degree of inverse co relationship between the quantum of working capital and the velocity or speed with which

Page 14

the sales are affected. A firm having a high rate if turnover will need lower amount of working capital as compared to a firm having a low rate of turnover. 8. Credit policy: the credit policy of a concern in its dealings with debtors and creditors influence considerably the requirements of working capital. A concern that purchases its requirement on credit and sells its products on cash requires lesser amount of working capital. On the other hand, a concern buying its requirements for cash and allowing credit to its customers shall need larger amount of working capital as very huge amount of funds are bound to be tied up in debtors or bills receivables. 9. Business cycles: business cycle refers to alternate expansion and contraction in general business activities. In a period of boom there is a need of larger amount of working capital due to increase in sales , rise in prices , optimistic expansion of business, etc .On the contrary, in the times of depression, the business contracts, sales decline, difficulties are faced in collection from debtors and firms may have a large amount of funds lying idle. 10. Rate of growth of business: the working capital requirements of a concern increase with the growth and expansion of its business activities. For normal rate of expansion in the volume of business, we may have retained profits to provide for more working capital, but in fast growing concerns, we shall require larger amount of working capital. 11. Earning capacity and dividend policy: some firms have more earning capacity than others due to quality of their products, monopoly conditions, etc. Such firm with high earning capacity may generate cash profits from operations and contribute to their working capital. The dividend policy of a concern also influences the requirements of its working capital. 12. Price level changes: changes in the price level also affect the working capital requirements. Generally the rising prices will require the firm to maintain larger amount of working capital as more funds will be required to maintain the same current assets and vice-versa. 13. Other factors: certain other factors as operating efficiency, management ability, irregularity in supply, import policy, asset structure , importance of

Page 15

labor, banking facilities, etc. also influence the requirements of working capital.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash

Page 16

conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

Cash Management
Introduction
Cash management has assumed importance because it is the most significant of all the current assets. It is required to meet business obligations and it is unproductive when not used. Cash Management deals with the following: (i) (ii) (iii) Cash inflows and outflows. Cash flows within the firm Cash balances held by the firm at a point of time.

Cash Management needs strategies to deal with various facets of cash. Following are some of its facets: (a) Cash Planning:

Page 17

Cash Planning is a technique to plan and control the use of cash. A projected cash flow statement may be prepared, based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash. (b) Cash Forecasts and Budgeting: A cash budget is a most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay. The short-term forecasts can be made with the help of cash flow projections. The finance manager will make estimates of likely receipts in the near future and the expected disbursements in that period. Though it is not possible to make exact forecasts even then estimates of cash flows will enable the planner to make arrangement for cash needs. It may so happen that expected cash receipts may fall short or payments may exceed estimates. A financial manager should keep in mind the sources from where he will meet short-term needs. He should also plan for productive use of surplus cash for short periods. The long-term cash forecasts are also essential for proper cash planning. These estimates may be for three, four, five or more years. Long-term forecasts indicate companys future financial needs for working capital, capital projects, etc. Both short-tem and long-term cash forecasts may be made with the help of following methods: (i) (ii) Receipts and disbursements method Adjusted net income method

(i) Receipts and Disbursements Method: In this method the receipts and payments of cash are estimated. The cash receipts may be from cash sales, collections from debtors, sale of fixed assets, receipts of dividend or other incomes of all the items; it is difficult to forecast sales. The sales may be on cash as well as credit basis. Cash sales will bring receipts at the time of sale while credit sales will bring cash later on. The collection from debtors (credit

Page 18

sales) will depend upon the credit policy of the firm. Any fluctuation in sales will disturb the receipts of cash. Payments may be made for cash purchases, to creditors for goods, purchase of fixed assets, for meeting operating expenses such as wage bill, rent, rates, taxes or other usual expenses, dividend to shareholders etc. The receipts and disbursements are to be equaled over a short as well as long periods. Any short fall in receipts will have to be met from banks or other sources. Similarly, surplus cash may be invested in risk free marketable resources. It may be easy to make estimates for payments but cash receipts may not be accurately made. The payments are to be made by outsiders, so there may be some problem in finding out the exact receipts at a particular period. Because of uncertainty, the reliability of this method may be reduced.

(ii) Adjusted Net Income Method: This method may also be known as sources and users approach. It generally has there sections: sources of cash, users of cash and adjusted cash balance. The adjusted net income method helps in projecting the companys need for cash at some future date and to see whether the company will be able to generate sufficient cash. If not, then it will have to decide about borrowing or issuing shares , etc. in preparing its statements the items like net income, depreciation , dividends, taxes, etc. can easily be determined from companys annual operating budget. The estimation of working capital movement becomes difficult because items like receivables and inventories are influenced by factors such as fluctuations in raw material costs, changing demand for companys products and likely delays in collection. This method helps in keeping a control on working capital and anticipating financial requirements.

Page 19

Receivables Management
Introduction
A sound managerial control requires proper management of liquid assets and inventory. These assets are a part of working capital of the business. An efficient use of financial resources is necessary to avoid financial distress. A receivables result from credit is required to allow credit sales in order to expand its sales volume. It is not always possible to sell goods on cash basis only. Sometimes, other concerns in that line might have established a practice of selling goods on credit basis. Under these circumstances, it is not possible to avoid credit sales with out adversely affecting sales. The increase in sales is also essential to increase profitability. After a

Page 20

certain level of sales the increase in sales will not proportionately increase production costs. The increase in sales will bring in more profits. Thus, Receivables constitute a significant portion of current assets of a firm. But for investment in receivables, a firm has to incur certain costs. Further, there is a risk of bad debts also. It is, therefore, very necessary to have a proper control and management of receivables.

Meaning
Receivables represent amounts owed to the firm as a result of sale of goods or services in the ordinary course of business. These are claims of the firm against its customers and form part of its current assets. Receivable are also known as accounts receivables, trade receivables, customers receivables, or book debts. The receivables are carried for the customers. The period of the credit and extent of receivables depends upon the credit policy followed by the firm. The purpose of maintaining or investing in receivables is to meet competition, and to increase the sales profits.

Meaning and objectives of receivable management

Receivable management is the process of making decision relating to investment in trade debtors. We have already stated that certain investment in receivable is necessary to increase the sales and the profits of a firm. But at the same time investment in this asset involves cost considerations also. Further, there is always a risk of bad debts too. Thus, the objective of receivables management is to take a sound decision as regards in debtors. In the words of Bolton, S.E., the objective of receivables management is to promote sales and profits until that point is reached where the return on investment in further funding of receivables is less than the cost of funds raised to finance that additional credit.

Page 21

Factors Influencing the Size of Receivables

Besides sales, a number of other factors also influence the size of receivables. The following factors directly and indirectly affect the size of receivables: (1) Size of Credit Sales. The volume of credit sales is the first factor which increases or decreases the size of receivables. If a concern sells only on cash basis, as in the case of Bata Shoe Company, then there will be no receivables, the higher the part of credit sales out of total sales, figures of receivables will also be more or vice versa. (2) Credit Policies. A firm with conservative credit policy will have a low size of receivables while a firm with liberal credit policy will be increasing this figure. The vigor with which the concern collects the receivables also affects its receivables. If collections are prompt then even if credit is liberally extended the size of receivables will remain under control. In case receivables remain outstanding for a long period, there is always a possibility of bad debts. (3) Terms of Trade. The size of receivables also depends upon the terms of trade. The period of credit allowed and rates of discount given are linked with receivables. If credit period allowed is more then receivables will also be more. Sometimes trade policies of competitors have to be followed otherwise it becomes difficult to expand the sales. The trade terms once followed cannot be changed without adversely affecting sales opportunities. (4) Expansion Plans. When a concern wants to expand its activities, it will have to enter new markets. To attract customers, it will give incentives in the form of credit facilities. The periods of credit can be reduced when the firm is able to get permanent customers. In the early stages of expansion more credit becomes essential and size of receivables will be more. (5) Relation with Profits. The credit policy is followed with a view to increase sales. When sales increase beyond a certain level the
Page 22

additional costs incurred are less than the increase in revenues. It will be beneficial to increase sales beyond a point because it will bring more profits. The increase in profits will be followed by an increase in the size of receivables or vice-versa. (6) Credit Collection Efforts. The collection of credit should be streamlined. The customers should be sent periodical reminders if they fail to pay in time. On the other hand, if adequate attention is not paid towards credit collection then the concern can land itself in a serious financial problem and efficient credit collection machinery will reduce the size of receivables. If these efforts are slower then outstanding amounts will be more. (7) Habits of Customers. The paying habits of customers also have a bearing on the size of receivables. The customers may be in the habit of delaying payments even though they are financially sound. the concern should remain in touch with such customers and should make them realize the urgency of their needs.

Inventory Management
Introduction
The investments in inventory are very high in most of the undertakings engaged in manufacturing, whole-sale and retail trade. The amount of investment is sometimes more in inventory than in other assets. In India, a study of 29 major industries has

Page 23

revealed that the average cost of materials is 64 paisa and the cost of labor overheads 36 paisa in a rupee. In industries like sugar, the raw materials cost is as high as 65.75 per cent of the total cost. About 90 percent of working capital is invested in inventories. It is necessary for every management to give proper attention to inventory management. A proper planning of purchasing, handling, storing and accounting should form a part of inventory management. An efficient system of inventory management will determine (a) what to purchase (b) how much to purchase (c) from where to purchase (d) where to store, etc. There are conflicting interests of different departmental heads over the issue of inventory. The finance manager will try to invest less in inventory because for him it is an idle investment, whereas production manager will emphasize to acquire more and more inventory as he does not want any interruption in production due to shortage of inventory. The purpose of inventory management is to keep the stocks in such a way that neither there is over-stocking nor under-stocking. The over-stocking will mean a reduction of liquidity and starving of other production processes; understocking, on the other hand, will result in stoppage of work. The investments in inventory should be kept in reasonable limits.

Objectives of inventory management

The main objectives of inventory management are operational and financial. The operational objectives mean that the materials and spares should be available in sufficient quantity so that work is not disrupted for want of inventory. The financial objective means that investments in inventories should not remain idle and minimum working capital should be locked in it. The following are the objectives of inventory management:
Page 24

(1) To ensure continuous supply of materials, spares and finished goods so that production should not suffer at any time and the customers demand should also be met. (2) To avoid both over-stocking and under-stocking of inventory. (3) To maintain investments in inventories at the optimum level as required by the operational and sales activity. (4) To keep material cost under control so that they contribute in reducing cost of production and over all costs. (5) To eliminate duplication in ordering or replenishing stocks. This is possible with the help of centralizing purchasing. (6) To minimize losses through deteriorations, pilferage, wastages and damages. (7) To design proper organization for inventory management. Clear cut accountability should be fixed at various levels of the organizational. (8) To ensure perpetual inventory control so that materials shown in stock, ledgers should be actually lying in the stores. (9) To ensue right quality goods at reasonable prices. Suitable quality standards ensure proper quality of stocks. The price-analysis, the costanalysis and value analysis will ensure payment of proper price. (10) To facilitate furnishing of data for short-term and long-term planning and control of inventory.

Tools and Techniques of Inventory Management

Effective inventory management requires an effective control system for inventories. A proper inventory control not only helps in solving the acute problem of liquidity but also increases profits and causes substantial reduction in the working capital of the

Page 25

concern. The following are the important tools and techniques of inventory management: 1. Determination of stock levels 2. Determination of safety stocks. 3. Selecting a proper system of ordering for inventory. 4. Determination of economic order quantity. 5. A.B.C. analysis. 6. VED analysis. 7. Inventory turn over ratios. 8. Aging schedule of inventories. 9. Classification and codification of inventories. 10. Preparation of inventory reports. 11. Lead time. 12. Perpetual inventory system. 13. JIT control system. 1. Determination of stock levels Carrying of too much and too little of inventories is determined to the firm. If the inventory level is too little, the firm will face frequent stock-outs involving heavy ordering cost and if the inventory level is too high it will be unnecessary tie-up of capital. Therefore, an efficient inventory management requires that a firm should maintain an optimum level of inventory where inventory costs are the minimum and at the same time there is no stock-out which may result in loss of sale or stoppage of production. Various stock levels are discussed as such: (a) Minimum Level. (b) Re-ordering Level. (c) Maximum Level. (d) Danger Level. (e) Average Stock Level. 2. Determination of Safety Stocks

Page 26

Safety stock is a buffer to meet some unanticipated increase in usage. The usage of inventory cannot be perfectly forecasted over a period of time. The demand for materials may fluctuate and delivery of inventory may also be delayed and in such a situation the firm can face a problem of stock-out. The stock-out can prove costly by affecting the smooth working of the concern. In order to protect against the stock out arising out of usage fluctuations, firms usually maintain some margin of safety or safety stocks. The basic problem is to determine the level of quantity of safety stocks. Two coasts are involved in the determination of this stock i.e. opportunity cost of stock-outs and the carrying costs. The stock-outs of raw materials cause production disruption resulting into higher cost of production. Similarly, the stock-outs of finished goods result into the failure of the firm in competition as the firm cannot provide proper customer service. If a firm maintains low level of safety frequent stock-outs will occur resulting into the larger opportunity costs. On the other hand, the larger quantity of safety stocks involves higher carrying costs. 3. Ordering Systems of Inventory The basic problem of inventory is to decide the re-order point. The point indicates when an order should be placed. The re-order point is determined with the help of these things: (a) average consumption rate, (b) duration of lead time, (c) economic order quantity, when the inventory is depleted to lead time consumption, the order should be placed. There are three prevalent systems of ordering and a concern can choose any one of these: (a) Fixed order quantity system generally known as economic order quantity (EOQ) system ; (b) Fixed period order system or periodic re-ordering system or periodic review system ; (c) Single order and scheduled part delivery system. 4. Economic Order Quantity (EOQ) A decision about how much to order has great significance in inventory management. The quantity to be purchased should neither be small nor big because buying and carrying materials are very high. Economic order quantity is the size of the lot to be purchased which is economically viable. This is the quantity of materials which can

Page 27

be purchased at minimum costs. Generally, economic order quantity is the point at which inventory carrying costs are equal to order costs. In determining economic order quantity it is assumed that cost of managing inventory is made up solely of two parts i.e., ordering costs and carrying costs. 5. A-B-C Analysis The materials are divided into a number of categories for adopting a selective approach for material control. It is generally seen that in manufacturing concern, a small percentage of items contribute a large percentage of value of consumption and a large percentage of items contribute a small percentage of value. In between these two limits there are some items which have almost equal percentage of value of materials. Under A-B-C analysis, the materials are divided into three categories viz., A, B and C. 6. VED Analysis The VED analysis is used generally for spare parts. The requirements and urgency of spare parts is different from that of materials. A-B-C analysis may not be properly used for spare parts. The demand for spares depends upon the performance of the plant and machinery. Spare parts are classified as Vital (V), Essential (E) and Desirable (D). 7. Inventory Turnover Ratios Inventory turnover ratios are calculated to indicate whether inventories have been used efficiently or not. The purpose is to ensure the blocking of only required minimum funds in inventory. The Inventory Turnover Ratio also known as stock velocity is normally calculated as Sales/Average Inventory or Cost of goods sold/Average inventory cost.

8. Aging Schedule of Inventories

Page 28

Classification of inventories according to the period of their holdings also helps in identifying slow moving inventories thereby helping in effective control and management of inventories. 9. Classification and Codification of Inventories The inventories of a manufacturing concern may consist of raw materials, work in progress, finished goods, etc. All these categories may have their sub divisions. The raw materials used may be 3-4 types, finished goods may also be of more than 1 type, space might be of a number of types and so on. For a proper recording and control of inventory, a proper classification of various types of items is essential. The inventory should first be classified and then code numbers should be assigned for their identification. 10. Inventory Reports: From effective inventory control, the management should be kept informed with the latest stock position of different items. This is usually done by preparing periodical inventory reports. These reports should contain all information necessary for managerial action. 11. Lead Time: Is the period that elapses between the recognition of need and its fulfillment. There is a direct relationship between lead time and inventories. The level of inventory of an item depends upon its lead time. During lead time there will be no delivery of materials and consuming departments will have to be served from the inventories held.

12. Perpetual inventory System:

Page 29

The stock taking may either be done annually or continuously. In the latter method, the stock taking continues throughout the year. A schedule is prepared for stock taking of various bins. One bin is selected at random and the goods are checked as per shown in the bin card. Then some other bin is selected at random and so on. 13. Just in time inventory control system Just in time philosophy, which aims at eliminating waste from every aspect of manufacturing and its related activities, was first developed in Japan. The term JIT refers to a management rule that helps to produce only the needed quantities at needed time. JIT control system involves the purchase of materials in such a way that delivery of purchased material is assured just before their use or demand. This system implies that the firm should maintain a minimum (or zero level) of inventory and rely on suppliers to provide materials just in time to meet the requirements.

Page 30

Sources of working capital

The working capital requirements of a concern can be classified as: (a) Permanent or fixed working capital requirements. (b) Temporary or variable working capital requirements.

Sources of Permanent Capital:

Shares Debentures Public Deposits Ploughing Back of Profits Loans from Financial Institutions

Sources of Temporary or Variable Capital:

Indigenous Bankers Trade Credit Installment Credit Advances Accounts receivable credit or Factoring Accrued Expenses Deferred Incomes Commercial Paper Commercial Banks

Page 31

Research design
Introduction:
Business organization get funds from various sources and apply them into long term and short term assets. The funds applied to meet the short term needs of the organization are generally referred to as working capital. A study on working capital management enables us to understand short term financial position and performance of the company.

Statement of Problem:
Working capital is considered as the life blood of the business. Its effective provision can do much to ensure the success of a business enterprise. The firm should maintain a sound working capital position and should have adequate funds to run the business operations. A company with a favorable working capital is always in a position to take advantage of any beneficial business opportunity that may arise at any given point of time. Hence the purpose of this study is to review the management of working capital at Pantaloon Retail India Limited.

Objective of the study:

1. To study the working capital management of the company with respect to 3 years cash, inventory and receivables management. 2. To study the performance of the company for the given 3 years with the help of ratio analysis. 3. To identify liquidity, collection time and turn over in terms of stock and working capital. 4. To study the method of financing of working capital and to find flow of funds.

Page 32

5. To identify, understand and interpret the problems of working capital and put forward suggestions.

Research methodology:
Three years of Balance Sheet and Profit & Loss Account stated in the annual reports were used for analysis. Working capital and concerned ratios were used as a tool of analysis. Based on the computation, the financial position and performance of the business was evaluated and suggestions were made. Regarding the financing of working capital, both the methods were evaluated by extracting information from the balance sheet of 3 years, then the best alternative was chosen on which the companys position regarding the financing of working capital was known.

Reference period:
The study period covered in this case study is for 3 financial years i.e., from 2005 2006 2006 2007 2007 2008

Scope of study:
The study of working capital management is limited to the specific company, Pantaloon Retail India Limited.

Page 33

Data Collection:
The requirement of data for the study was collected from the secondary sources of information. The secondary data has been obtained from the financial statement of the company in the form of Balance sheet and Profit and Loss Account. The secondary data has also been collected from the business journals, magazines, internet and other published information. The analysis and interpretation has been thus derived with the help of secondary data available. There was use of primary data in the case of financing of working capital through paper work and discussions held with the senior financial manager.

Tools of Analysis:
Ratios Analysis, Percentages and Fund Flow Analysis were used as tools of analysis in study.

Limitation of the Study:

1. The prime limitation is that the study uses mainly secondary data for the analysis of the performance of the company. 2. Limited time was also a hindrance in the detailed study. 3. Only general tools of financial analysis are used for the study. 4. The study also suffers from cost constraints.

Page 34

Chapter Scheme:

Chapter No. Chapter Name

1 2 3 4 5 6 7 8 Introduction Research Design Company Profile Analysis & Inference Management of Cash, Receivables & Inventory Management Fund Flow Statement Summary of Findings Suggestions and Conclusions

Page 35

INDUSTRY PROFILE
India represents an economic opportunity on a massive scale, both as a global base and as a domestic market. Indian Retail sector consists of small family-owned stores, located in residential areas, with a shop floor of less than 500 square feet. At present the organized sector accounts for only 2 to 4% of the total market although this is expected to rise by 20 to 25% on YOY basis.

Retail growth in the coming five years is expected to be stronger than GDP growth, driven by changing lifestyles and by strong income growth, which in turn will be supported by favorable demographic patterns and the extent to which organized retailers succeed in reaching lower down the income scale to reach potential consumers towards the bottom of the consumer pyramid. Growing consumer credit will also help in boosting consumerdemand.

The structure of retailing will also develop rapidly. Shopping malls are becoming increasingly common in large cities, and announced development plans project at least 150 new shopping malls by 2008. The number of department stores is growing much faster than overall retail, at an annual 24%. Supermarkets have been taking an increasing share of general food and grocery trade over the last two decades. However, Distribution continues to improve, but it still remains a major inefficiency. Poor quality of infrastructure, coupled with poor quality of the distribution sector, results in logistics costs that are very high as a proportion of GDP, and inventories, which have to be maintained at an unusually high level. Distribution and marketing is a huge cost in Indian consumer markets. It's a lot easier to cut manufacturing costs than it is to cut distribution and marketing costs.

Page 36

Also, government has relaxed regulatory controls on foreign direct investment (FDI) considerably in recent years, while retailing currently remains closed to FDI. However, the Indian government has indicated in 2005 that liberalization of direct investment in retailing is under active consideration. It has allowed 51% FDI in "singlebrand"retail. The next cycle of change in Indian consumer markets will be the arrival of foreign players in consumer retailing. Although FDI remains highly restricted in retailing, most companies believe that will not be for long. Indian companies know Indian markets better, but foreign players will come in and challenge the locals by sheer cash power, the power to drive down prices. That will be the coming struggle. According to this years Global Retail Development Index India is positioned as the leading destination for retail investment. This followed from the saturation in western retail markets and we find big western retailers like Wal-mart and Tesco entering into Indian market. Indias retail industry accounts for 10 percent of its GDP and 8 percent of the employment to reach $17 billion by 2010. There are about 300 new malls, 1,500 supermarkets and 325 departmental stores being built in the cities very soon. A shopping revolution is ushering in India where, a large population between 20-34 age groups in the urban regions is boosting demand by 11.1 percent in 2007-08 to an Rs 23,308 purchasing power. This has resulted in huge international retail investment and a more liberal FDI.

Page 37

The changing face of Indian Consumerism

The Indian consumers lifestyle and profile is also evolving rapidly. India has one of the youngest populations in the world with 54% of the population below the age of 25. Discretionary spending has seen a 16% rise for the urban upper and middle classes and the number of high income households has grown by 20% year on year since 1995-96. There is an increasing shift from price consideration to design and quality, as there is a greater focus on looking and feeling good (apparel as well as fitness). At the same time, the new Indian consumer is not beguiled by retailed products which are high on price but commensurately low on value or functionality. There is an easier acceptance of luxury and an increased willingness to experiment with mainstream fashion. This results in an increased tendency towards disposability and casting out - from apparel to cars to mobile phones to consumer durables. The self-employed segment of the population has replaced the employed salaried segment as the mainstream market. 40% of primary wage earners in the top 2-3 social classes in towns with a population of 1 million or more are self employed professionals and businessmen. This has driven growth in consumption of productivity goods, especially mobile phones and two and four-wheelers. Finally, credit friendliness, drop in interest rates and easy availability of finance have changed mindsets. Capital expenditure (jewellery, homes, and cars) has shifted to becoming redefined as consumer revenue expenditure, in addition to consumer durables and loan credit purchases.

Page 38

What do Indians buy?

The 4 major organized retail sectors are Food & Grocery, Clothing, Consumer Durables and Books & Music. In 2003-04, private consumption expenditure in India amounted to Rs 1,690,000 crores (USD 375 billion) of which, retail sales constitute about 61% (USD 230 billion). The retail industry is constituted by different sector in the following proportion: ales Pie - 2005 Durables 4% Clothing 7% Food & Grocery 77% Books & music 1% Footwear 1% Jewelry & accessory 4% Home furnishings 2% Health & beauty 2% Medical services 2% Source: Industry

Food & Grocery (USD154 billion) contributes about 41% of private consumption expenditure and about 77% of total retail sales. However, this segment is largely controlled by the unorganized small outlet sector - penetration of organized retail is about 1% in this segment. This is one of the primary reasons for Indias low organized retail penetration rate. The sector is defined by low gross margins, but there is a tremendous growth potential in the organized sector in the form of hypermarkets, supermarkets and hard discount chains. In such a scenario, pricing and network will be the key to success. Clothing is the second largest segment in terms of retail sales.

Page 39

COMPANY PROFILE
Pantaloon Retail (India) Limited, is India's leading retail company with presence across multiple lines of businesses. The company owns and manages multiple retail formats that cater to a wide cross-section of the Indian society and is able to capture almost the entire consumption basket of the Indian consumer. Headquartered in Mumbai (Bombay), the company operates through 4 million square feet of retail space, has over 140 stores across 32 cities in India and employs over 14,000 people. The company registered a turnover of Rs 2019 crore for FY 2005-06. Pantaloon Retail forayed into modern retail in 1997 with the launching of fashion retail chain, Pantaloons in Kolkata. In 2001, it launched Big Bazaar, a hypermarket chain that combines the look and feel of Indian bazaars, with aspects of modern retail, like choice, convenience and hygiene. This was followed by Food Bazaar, food and grocery chain and launch Central, a first of its kind seamless mall located in the heart of major Indian cities. Some of its other formats include, Collection i (home improvement products), E-Zone (consumer electronics), Depot (books, music, gifts and stationary), aLL (fashion apparel for plus-size individuals), Shoe Factory (footwear) and Blue Sky (fashion accessories). It has recently launched its etailing venture,futurebazaar.com. The group's subsidiary companies include, Home Solutions Retail India Ltd, Pantaloon Industries Ltd, Galaxy Entertainment and Indus League Clothing. The group also has joint venture companies with a number of partners including French retailer Etam group, Lee Cooper, Manipal Healthcare, Talwalkar's, Gini & Jony and Liberty Shoes. Planet Retail, a group company owns the franchisee of international brands like Marks & Spencer, Debenhams, Next and Guess in India.

Page 40

Future Group
Pantaloon Retail is the flagship enterprise of the Future Group, which is positioned to cater to the entire Indian consumption space. The Future Group operates through six verticals: Future Retail (encompassing all retail businesses), Future Capital (financial products and services), Future Brands (management of all brands owned or managed by group companies), Future Space (management of retail real estate), Future Logistics (management of supply chain and distribution) and Future Media (development and management of retail media). Future Capital Holdings, the group's financial arm, focuses on asset management and consumer finance. It manages two real estate investment funds (Horizon and Kshitij) and consumer-related private equity fund, Indivision. It also plans to get into insurance, consumer credit and other consumer-related financial products and services in the near future.

Future Group's vision

"Deliver Everything, Everywhere, Every time to Every Indian Consumer in the most profit manner." One of the core values at Future Group is, 'Indianess' and its corporate credo is Rewrite rules, Retain values.

Page 41

Future groups mission

We share the vision and belief that our customers and stakeholders shall be served only by creating and executing future scenarios in the consumption space leading to economic development. We will be the trendsetters in evolving delivery formats, creating retail realty, making consumption affordable for all customer segments for classes and for masses. We shall infuse Indian brands with confidence and renewed ambition. We shall be efficient, cost- conscious and committed to quality in whatever we do. We shall ensure that our positive attitude, sincerity, humility and united determination shall be the driving force to make us successful.

Core Values
Indianness: confidence in ourselves. Leadership: to be a leader, both in thought and business. Respect & Humility: to respect every individual and be humble in our conduct. Introspection: leading to purposeful thinking. Openness: to be open and receptive to new ideas, knowledge and information. Valuing and Nurturing Relationships: to build long term relationships. Simplicity & Positivity: in our thought, business and action. Adaptability: to be flexible and adaptable, to meet challenges. Flow: to respect and understand the universal laws of nature.

Page 42

Major Milestones
1991 1992 1994 Launch of BARE, the Indian jeans brand. Initial public offer (IPO) was made in the month of May. The Pantaloon Shoppe exclusive menswear store in franchisee format launched across the nation. The company starts the distribution of branded garments through multi-brand retail outlets across the nation. 1995 1997 2001 2002 2004 2005 John Miller Formal shirt brand launched. Pantaloons Indias family store launched in Kolkata. Big Bazaar, Is se sasta aur accha kahi nahin - Indias first hypermarket chain launched. Food Bazaar, the supermarket chain is launched. Central Shop, Eat, Celebrate In The Heart Of Our City - Indias first seamless mall is launched in Bangalore. Fashion Station the popular fashion chain is launched

aLL a little larger - exclusive stores for plus-size individuals is launched 2006 Future Capital Holdings, the companys financial arm launches real estate funds Kshitij and Horizon and private equity fund Indivision. Plans forays into insurance and consumer credit. Multiple retail formats including Collection i, Furniture Bazaar, Shoe Factory, EZone, Depot and futurebazaar.com are launched across the nation. Group enters into joint venture agreements with ETAM Group and Generali.

Board of Directors
Mr. Kishore Biyani, Managing Director:

Page 43

Kishore Biyani is the Chief Executive Officer of Future Group and Managing Director, Pantaloon Retail India Ltd. He started off his entrepreneurial career with manufacturing and distribution of branded mens wear products. Mr. Gopikishan Biyani, Wholetime Director Mr. Rakesh Biyani, Wholetime Director Mr. Ved Prakash Arya Director, Operations & Chief Operating Officer Mr. Shailesh Haribhakti, Independent Director Mr. S Doreswamy, Independent Director Dr. D O Koshy, Independent Director Ms. Anju Poddar, Independent Director Ms. Bala Deshpande, Independent Director Mr. Anil Harish, Independent Director

Page 44

Lines of Business
E-tailing
Futurebazaar.com Futurebazaar.com offers the widest range of products at lowest prices everyday! Having pioneered the retailing business in India, PRIL has now decided to revolutionize the consumer e-commerce business in India. It intends to provide customers with a streamlined, efficient and world class personalized shopping experience, which will be supported with the best technology platform. Buying products is a 3 step simple process. All one has to do is Search, Register and Buy. Here you can expect a shopping experience akin to shopping at an actual bazaar but with added simplicity & everyday low prices and an assurance of 'your product' will be delivered within 7 days of purchase.

Foods
Food Bazaar Ab Ghar Chalaana Kitna Aasaan Food Bazaar invites you for a shopping experience, unique by its ambience. At Food Bazaar you will find a hitherto unseen blend of a typical Indian Bazaar and International supermarket atmosphere. Flagged off in April02, Food Bazaar is a chain of large supermarkets with a difference, where the best of Western and Indian values have been put together to ensure your satisfaction and comfort while shopping.

Page 45

The western values of convenience, cleanliness and hygiene are offered through pre packed commodities and the Indian values of "See-Touch-Feel" are offered through the bazaar-like atmosphere created by displaying staples out in the open, all at very economical and affordable prices without any compromise on quality. The best of everything offered with a seal of freshness and purity will definitely make your final buying decision a lot easier. Cafe Bollywood Cafe Bollywood brings to you the flavour of Bollywood served on a platter. Cafe Bollywood is a national chain of eateries that serve fast food at delicious prices. Located in and around our various formats these joints carry a distinct Bollywood flavour that reflects in the ambience and the offerings. Mouth-watering Indian street food, burgers, pizzas, juices and lots more, served in a traditional chaat-bhandaar like atmosphere make this place absolutely irresistible. The smell and the sounds of the food being prepared add to the ambience of the place. The hygiene levels are maintained high while the prices lie low. So next time when youre out shopping, dont forget to grab a bite at PRIL's very own Cafe Bollywood. Sports Bar A bistro focused on the world of sport, the Sports Bar is complimented with an unrivalled ambience. With features like giant screen, regular television sets, a basketball court, pool tables, punching bags and dart boards, you will feel the adrenaline rush that only a true sports enthusiast can describe. Prominent sports celebrities like Kapil Dev, Sunil Gavaskar, Anil Kumble, Rahul Dravid, Leander Paes, Mahesh Bhupati, Bhaichung Bhutia to name a few have honoured the Sports Bar with their presence.

Page 46

Fashion
Brand Factory Brand Factory brings to the Indian consumers the promise of revolutionizing value shopping by offering the best Indian and International brands at Smart Prices Brand Factory promises its customers that value shopping is not about seconds experience, its not about a garage sale environment and its not about buying cheap. Instead, its all about an amazing experience of Buying Smart. Gini & Jony Freedom Wear Gini and Jony is a lifestyle brand with a radical approach to kids fashion. The brand caters to an age group of 2 to 16 years, that is uber chic, style conscious and stresses on a head to toe fashion concept. Gini and Jony Freedom wear, GJ Jeans UnLtd. and Palmtree are three brands under the Gini and Jony brand umbrella. With creativity and dynamism as the central brand idea, and a rich history of 25 years, Gini and Jony has emerged as the trendsetter of childrens wear in India.

Page 47

Pantaloons
Celebrate the Fresh Look, Fresh Feel & Fresh Attitude at Pantaloons Fresh Fashion ! Fashion is all about the now. Why, then should people not see a fresh look every time they walk into a Pantaloons store? That is the thought behind 'Fresh Fashion'. An idea that has captured the imagination of young India. With a focus on the youth of today, Pantaloons offers trendy and hip fashion that defines the hopes and aspirations of this demography. Pantaloons Fresh Fashion stands out as a fashion trendsetter, on the lines of how fashion is followed internationally. The look and whats in today for the season is sacrosanct. Pantaloons takes its promise of 'fresh fashion' very seriously making available to its customers the latest in fashion every week! All Pantaloons stores reflect the new ideology -- Fresh Feeling, Fresh Attitude, Fresh Fashion. The stores offer fresh collections and are visually stimulating thanks to appealing interiors and attractive product display! The first Pantaloons was opened in Gariahat in 1997. Over the years, it has undergone several transitions. When it was first launched, this store mostly sold external brands. Gradually, it started retailing a mix of external brands while at the same time introduced its own private brands. Initially positioned as a family store, it finally veered towards becoming a fashion store with an emphasis on 'youth' and clear focus on fresh fashion. Today, the fashion store extends to almost all the major cities across the country. Pantaloons has established its presence with stores not just in the metros, but also in smaller towns. Pantaloons stores have a wide variety of categories like casual

Page 48

wear, ethnic wear, formalwear, party wear and sportswear for Men, Women and Kids.

General Merchandise
BigBazaar Big Bazaar is not just another hypermarket. It caters to every need of your family. Where Big Bazaar scores over other stores is its value for money proposition for the Indian customers. At Big Bazaar, you will definitely get the best products at the best prices -- thats what we guarantee. With the ever increasing array of private labels, it has opened the doors into the world of fashion and general merchandise including home furnishings, utensils, crockery, cutlery, sports goods and much more at prices that will surprise you. And this is just the beginning. Big Bazaar plans to add much more to complete your shopping experience. Central Shop, Eat and Celebrate Launched in May'04 at Bangalore, Central is a showcase, seamless mall and the first of its kind in India. The thought behind this pioneering concept was to give customers an unobstructed and a pure shopping experience and to ensure the best brands in the Indian market are made available to the discerning Indian customer. Central offers everything for the urban aspirational shopper to shop, eat and celebrate. Located in the heart of the city, Central believes its customers should not have to travel long distances to reach us; instead we must be present where customers frequently visit. Central houses over 300 brands across categories, such as apparels, footwear and accessories for women, men, children and infants, apart from a whole range of Music,

Page 49

Books, Coffee Shops, Food Courts, Super Markets (Food Bazaar), Fine Dining Restaurants, Pubs and Discotheques. The mall also has a separate section for services such as Travel, Finance, Investment, Insurance, Concert/Cinema Ticket Booking, Bill Payments and other miscellaneous services. In addition, Central houses Central Square, a dedicated space for product launches, impromptu events, daring displays, exciting shows, and art exhibitions. Central is an integral part of the city and in the long run a City should become part of Central!

Wellness & Beauty

Star & Sitara Salon & Beauty Parlour Star & Sitara, a unique beauty salon for men and women, introduces many new features and products for the first time in India. At Star & Sitara we aim to democratise salon services for easy access to all and deliver quality service at very affordable prices Star & Sitara, evokes a theme of Bollywood and promises to make you a Star (Sitara in Hindi)! Glamour as a theme is an essential ingredient in the world of cinema and we do not disappoint you on that note. The space, dcor, lighting is reminiscent of movies and will transport you from the ordinary world to that of the reel world.

Books & Music

Depot Books, Music & Gifts

Page 50

Depot is one of the youngest brands from the Pantaloon stable and is a tribute to our freedom of thought, speech and expression shared in a novel fashion with customers as books, multimedia, toys, stationary and gifts.

Home & Electronics

Collection i Collection i, a lifestyle furniture store is built on the concept of ideas for home dcor, offering the trendiest and latest in furniture, furnishings and home accents. e-zone e-Zone brings to you the trendiest in electronics, at the lowest prices. Technology changes at a rapid pace and so does our merchandise. Home Town A one-stop destination for every need of the aspirational Indian home-owner, Home Town, brings together a vast range of products and services under one roof.

Leisure & Entertainment Bowling Co. There is something for everyone at this state-of-the-art premium family entertainment centre, offering multiple, novel and unique leisure and entertainment options. 20 championship-play bowling lanes and a huge video arcade are some of the unique features that you can witness here. F 123

Page 51

An entertainment zone, F 123 is a leisure solution for all age groups. F 123 aims to put an end to the value seekers quest for leisure and entertainment.

Analysis and Inference

I. Liquidity Ratios: Liquidity means the ability of a firm to meet its current liabilities. Therefore liquidity ratios try to establish a relationship between current liabilities, which are an obligations soon becoming due and current assets, which presumably provide the source from which these obligations will be met. The failure of a company to meet its obligations due to lack of adequate liquidity will result in bad credit ratings, loss of creditors confidence or even in law suits against the company. 1. Current Ratio: This ratio is most commonly used to perform the short-term financial analysis. Also known as the working capital ratio, this ratio matches the current assets of the firm to its current liabilities. Formula: Current Ratio = Current assets Current liabilities Table: 4.1 (Rs. in crores)

2005-2006 Current Assets

884.12

2006-2007
1,751.44

2007-2008
2,655.76

Page 52

Current Liabilities Current Ratio

291.94

417.42

732.69

3.02

4.19

3.62

Graph no. 4.1

CURRENTRA TIO
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008

Interpretation: The current ratio in first year is 3.02, second year is 4.19 and third year is 3.62. As conventional rules, a current ratio of 2:1 or more is considered satisfactory. The higher the current ratio, the greater the margin of safety, the larger the amount of current assets in relation to current liabilities, the more the items ability to meet its current obligations. The ratio has dropped in the first year, regained in the second year; however has a downfall in the third year. Taking into consideration all the three years, the average ratio is above the satisfactory level, thus the company has a favorable current ratio.

Page 53

2.

Quick Ratio: This ratio is also known as acid test ratio or liquid ratio. It is a more severe test of liquidity of a company. Its shows the ability of a business to meet its immediate financial commitments. It is used to supplement the information given by the current ratio. Formula: Quick Ratio = Quick liquid assets Quick liabilities

Table: 4.2

(Rs. in crores)

2005-2006 Quick Liquid Assets Quick Liabilities Quick Ratio 357.10 291.94 1.22

2006-2007 865.48 417.42 2.07

2007-2008 1315.48 732.69 1.79

Graph no. 4.2

Page 54

QUICKRA TIO
2.5 2 1.5 1 0.5 0 2006 2007 2008

Interpretation: The quick ratio in the first year is 1.22, in the second year is 2.07 and the third year is 1.79. By conversion a quick ratio of 1:1 is considered satisfactory. It is considered that if quick assets equal to current liabilities, then the concern can meet its obligations. The first year companys quick ratio was comparatively lower, in the second year it was above the expected standards, however there is a downfall in the third year. Taking into consideration all the years the companys Quick Ratio is above the satisfactory level, which is a good sign for the company.

3.

Absolute Liquid Ratio:

Page 55

This ratio is known as super quick ratio or cash ratio. Higher the ratio, higher the cash liquidity. A low ratio is not serious matter because the company can always borrow from the bank for short term requirements. Formula: Absolute Quick Ratio = Cash in hand & at bank + Short term Marketable securities Current liabilities

Table: 4.3

(Rs. in crores)

2005-2006 Cash in hand & bank 28.78 Current Liabilities Absolute Ratio 291.94

2006-2007 162.97 417.42 0.39

2007-2008 251.39 732.69 0.34

Liquid 0.09

Page 56

Graph no. 4.3

AB OL S UTEL IQUIDRA TIO

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2006 2007 2008

Interpretation: The absolute quick ratio for the first year is 0.09, second year is 0.39 and third year is 0.34. As mentioned earlier, higher the absolute liquidity, better it is, in the first year the companys absolute liquid ration is lower compared to the preceding years. In the second and third year the companys absolute liquid ratio has increased and hence the company is in a favorable position to meet its contingent liabilities.

Page 57

II. Turnover Ratios: Turnover ratios are used to indicate the efficiency with which assets and resources of the firm are being utilized. These ratios are known as indicate the speed wit which the assets are turnover ratios because they

being converted or turned over into sales. These ratios thus, express the relationship between sales and various assets. A higher turnover ratio generally indicates better use of capital resources which in turn has a favorable effect on the profitability of the firm. 1. Inventory Turnover Ratio: This ratio establishes the relationship between the cost of goods sold during a given period and the average amount of stock carried during the period. However when cost of goods sold figure is not available sales figure can be used. Formula: Inventory Turnover Ratio = Cost of goods sold/ Sales Average Inventory

Table: 4.4

(Rs. in crores)

2005-2006 Cost of Sales Average stock Inventory ratio 1,808.58 462.55

2006-2007 3,175.52 812.15 3.91

2007-2008 4,832.47 1288.65 3.75

turnover 3.91

Page 58

Graph no. 4.4

INVENT ORYTURNOVERRA TIO

3.95 3.9 3.85 3.8 3.75 3.7 3.65 2006 2007 2008

Interpretation: The inventory turnover ratio for year ending 2006 is 3.91, for 2007 is 3.91 and for 2008 is 3.75. A high inventory turnover indicates efficient management of inventory and low inventory turnover indicates inefficient management of inventory. No standard inventory turnover is laid down. The company is almost consistent in converting its stock into sales. There is only a negligible drop in the ratio by 0.16 point in the third year.

Page 59

2.

Working Capital Turnover Ratio: This ratio indicates the efficiency or inefficiency in the utilization of working capital in making sales. Higher the ratio, efficient is the use of working capital. Formula: Working Capital Turnover Ratio = Sales Net Working Capital

Table: 4.5

(Rs. in crores)

2005-2006 Sales Net working Capital Working 1,808.58

592.18

2006-2007 3,175.52
1,334.02

2007-2008 4,832.47
1,923.07

Capital 3.05

2.38

2.5

Turnover Ratio

Page 60

Graph no. 4.5

WORK CAPIT TURNOVERRA ING AL TIO

3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008

Interpretation: The companys working capital ratio for year ending 2006 is 3.05, for 2007 it is 2.38 and for 2008 it is 2.5. There is no standard or ideal working capital turnover ratio. But one can say that a higher working capital turnover ratio indicates the efficiency of the management in the utilization of working capital. Here, since the ratio is depreciating, the company must pay heed to this situation and maintain a better working capital operating cycle.

Page 61

3.

Debtors Turnover Ratio: This ratio indicates relationship between net credit sales and trade debtors. It shows the rate at which cash is generated by the turnover of debtors. Formula: Debtors Turnover Ratio = Credit Sales Average Debtors

Table: 4.6

(Rs. in crores)

2005-2006 Credit Sales Average Debtors Debtors Ratio 658.31 19.95

2006-2007 1052.80 14.94 70.46 Times

2007-2008 1867.78 14.67 12.31 Times

Turnover 33 Times

Page 62

Graph no. 4.6

DEB ORSTURNOVERRA T TIO

140 120 100 80 60 40 20 0 2006 2007 2008

Interpretation: The debtors turnover ratio for the first year is 33, for the second year is 70 and the third year is 127.31. There is no fixed norm of this ratio. As a rule, higher ratios indicate better efficiency. The company has a consistent graph of the debtors turnover ratio, which is very favorable for the company. This indicates that the debts are being collected more quickly and periodically. Marginal changes in this ratio show the changes in companys credit policies.

Page 63

Average Collection Period =

Days in the year Debtors turnover ratio

Table: 4.6a

2005-2006 Days in the year Debtors 365 365

2006-2007

2007-2008 365 127.31 2.86

Turnover 33

70.46 5.18

Ratio Average Collection 11.06 Period

Page 64

Graph no. 4.6a

AVERAGECOL ECTIONPERIOD L
12 10 8 6 4 2 0 2006 2007 2008

Interpretation: The average collection period for year ending 2006 is approximately 11 days, for 2007 it is almost 5 days and 2008 it is almost 3 days. The lower collection period, better the situation for the company. Since, here the average collection period is decreasing; it is a suitable condition for the company, as it indicates that the debts are realized faster.

Page 65

4.

Creditors Turnover Ratio: This ratio measures the relationship between Credit Purchases and average accounts payable. Formula: Creditors Turnover Ratio: Net Credit Purchases Average Accounts Payable

Table: 4.7

(Rs. in crores)

2005-2006 Credit Purchases Average Payable Creditors Ratio 481.31

2006-2007 818.64 46.13 17.74

2007-2008 1474.52 102.57 14.37

Accounts 15.61 Turnover 30.83

Page 66

Graph no. 4.7

CREDIT ORSTURNOVERRA TIO

35 30 25 20 15 10 5 0 2006 2007 2008

Interpretation: The creditors turnover ratio for the first year is 30.83, for the second year is 17.74, for the third year it is 14.37. Although, there is no ideal creditors turnover ratio, higher the ratio means faster the creditors are being disposed. Here the declining graph depicts the poor condition of disposal of creditors. It was observed earlier that the company maintains a good debtors turnover ratio, in spite of that if creditors payments are delayed it shows that the working capital funds are allocated elsewhere.

Page 67

Average Payment Period =

Days in the year Creditors Turnover Ratio

Table: 4.7a

2005-2006 Days in the year Creditors 365 365

2006-2007

2007-2008 365 14.37 25.40

Turnover 30.83

17.74 20.05

Ratio Average Payment 11.83 Period

Page 68

Graph no. 4.7a

AVERAGEP YMENTPERIOD A
30 25 20 15 10 5 0 2006 2007 2008

Interpretation: The average payment period for the first year is almost 12 days, for the second year it is approximately 20 days and the third year it is approximately 25 days. Although, the payment period is not too high, it is comparatively growing from its previous years performances. The company must strive to maintain its earlier set payment period cycle.

Page 69

5.

Fixed Assets Turnover Ratio: This ratio indicates the efficiency with which the firm is utilizing its investments in fixed assets such as plant and machinery, land & building etc., in order to generate sales. Formula: Fixed Assets turnover Ratio = Sales (or cost of sales) Net Fixed Assets

Table: 4.8

(Rs. in crores)

2005-2006 Cost of Sales Net Fixed Assets Fixed 1,808.58

309.43

2006-2007 3,175.52
674.60

2007-2008 4,832.47
1,198.17

Assets 5.84

4.70

4.03

Turnover Ratio

Page 70

Graph no. 4.8

F ED S TURNOVERRA IX AS ET TIO
6 5 4 3 2 1 0 2006 2007 2008

Interpretation: The fixed assets turnover ratio of the company for year ending 2006 is 5.84, for year ending 2007 is 4.70 and for year ending 2008 is 4.03. There cannot be any norms for those ratios also. However, as a rule, more than turnover better is utilization. Here, although, there have been fluctuations in the three consecutive years, the point of difference is not high. Therefore, it is not a great matter of concern until the company maintains its consistency.

Page 71

6.

Capital Turnover Ratio: This ratio shows the relationship between cost of sales (or sales) and the total capital employed. Formula: Capital Turnover Ratio = Costs of Sales (or Sales) Total Capital Employed

Table: 4.9

(Rs. in crores)

2005-2006 Sales Total 1808.58 Capital 526.9

2006-2007 3175.52 1092.18 2.9

2007-2008 4832.47 1846.62 2.61

Employed Capital Turnover 3.43 Ratio

Page 72

Graph no. 4.9

CAPIT TURNOVERRA AL TIO

3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008

Interpretation: The companys capital turnover ratio for the first year is 3.43, for second year is 2.9 and for the third year is 2.61. A higher capital turnover ratio indicates the possibility of greater profit and a lower ratio is a sign of insufficient sales and possibility of lower profits. The company here maintains a decent figure of capital turnover ratio, with minor fluctuations, but the company must avoid any further decrease in the ratio.

Page 73

III.Profitability Ratio: Every business should earn sufficient profits to survive and grow over a long period of time. In fact efficiency of a business is measured in terms of profit. Profitability in relation to sales indicates the amount of profit per rupee. 1. Net Profit Ratio: This is the ratio of net profit to net sales. Formula: Net Profit Ratio = Net Profit * 100 Net Sales

Table: 4.10

(Rs. in crores)

2005-2006 Net Profit Net Sales Net Profit Ratio 64.16 1968.09 3.26

2006-2007 119.99 3399.1 3.53

2007-2008 125.97 5337.71 2.36

Page 74

Graph no. 4.10

NETPROF RA IT TIO
4 3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 2008

Interpretation: The net profit ratio for the year ending 2006 is 3.26, for 2007 is 3.53 and for 2008 it is 2.36. This ratio indicates the efficiency of the management in administering and other activity of the company. This ratio is a measure of companys profitability. A higher net profit ratio indicates that the profitability of the company is good. If the net profit is not sufficient, the company will not be too able to carry out its work properly. The company has maintained a good net profit ratio in the first two years, it has dropped by 1.17 point in the third year suggesting that the company has to pay due consideration to this matter and reduce the further decline in this ratio. The company must keep up the consistency displayed in the first two years.

Page 75

IV. Expenses Ratio: These ratios present the relationship that exists between each item (or group) of expenses and the net sales. It indicates the portion of the sales which is consumed by the various items of operating cost. 1. Cost of Goods Sold Ratio = Cost of Goods Sold * 100 Net Sales

Table: 4.11

(Rs. in crores)

2005-2006 Cost of Goods Sold Net Sales 1808.58 1968.09

2006-2007 3175.52 3399.1 93.42

2007-2008 4832.47 5337.71 90.53

Cost of Goods Sold 91.89 Ratio

Page 76

Graph no. 4.11

COS OFGOOD S D RA T OL TIO

93.5 93 92.5 92 91.5 91 90.5 90 89.5 89 2006 2007 2008

Interpretation: The Company has an operating ratio of 91.89 in first year, 93.42 in the second year and 90.53 in the third year. A high ratio is unfavorable for the company, as it leaves a lower margin of profit to met non-operating expenses. The company is consistent with its cost of goods sold, but the ratio is very high which is a not a good sign.

Page 77

2.

Administrative Overheads Ratio = Office & Admin Overheads * 100 Net Sales

Table: 4.12

(Rs. in crores)

2005-2006 Office & Admin 198.69 1968.09

2006-2007 358.38 3399.1 10.54

2007-2008 527.28 4832.47 10.9

Overheads Net Sales Office &

Admin 10.09

Overheads Ratio

Page 78

Graph no. 4.12

ADMINIS TIVEOVERH TRA EADRA TIO

11 10.8 10.6 10.4 10.2 10 9.8 9.6 2006 2007 2008

Interpretation: The administrative overheads ratio for the year ending 2006 is 10.09, for 2007 it is 10.54 and for the year 2008 it is 10.9. The marginal increase in expenses in the second year is negligible, but, in the third year the expenses have gone up by a considerable amount. The company must strive to maintain consistency, because higher the ratio of expenses, lower the profit margin.

Page 79

3.

Selling & Distribution = Selling & Distribution overhead * 100 Overhead Ratio Net Sales

Table: 4.12

(Rs. in crores)

2005-2006 Selling & Dist. 170.07 1968.09

2006-2007 291.72 3399.1 8.5

2007-2008 372.54 5337.71 6.9

Overhead Net Sales Office &

Admin 8.64

Overheads Ratio

Page 80

Graph no. 4.13

S L EL INGANDD TRIB IS UTION OVERH EAD RA TIO

10 8 6 4 2 0 2006 2007 2008

Interpretation: The selling and distribution overheads ratio for the year ending 2006 is 8.64, for the year ending 2007 is 8.5 and for the year ending 2008 is 6.9. The company is almost consistent in its advertising and related expenses, which is a good sign and a favorable condition with respect to the profit margin.

Page 81

MANAGEMENT OF CASH, RECEIVABLES AND INVENTORY

CASH MANAGEMENT
The Company mainly transacts in cash. Maximum sales are cash sales. They mainly transact through cash and credit cards. The company has a collection account with HDFC bank. Each format of Pantaloon has a separate account in this bank. The company has pick up agreements with the bank, hence, the bankprovides the facility of going to each Pantaloon store, collecting the daily cash and depositing it in the respective accounts. The company gathers its funds in the form of cash credit and loans from banks and other financial institution and also uses its internally generated funds.

RECEIVALBLES MANAGEMENT
Managing receivables of a company is one of the most important aspects of management. For a retail company like pantaloon, matching the daily sales with the daily collection is a very tedious and risky job. 55% of sales is in form of cash, 40% in form of credit cards and 5% in form of gift vouchers, loyalty cards, sodexo coupons (accepted at food bazaar) etc. Incase of cards, there is 1-2 days debtors, because the cash is realized from the customers bank only after receiving the cheque on the following day. In case of coupons, the debtor is maintained for about 30-45 days. Bad debts also occur on cards and coupons, but the ratio is 0.01% to sales.

INVENTORY MANAGEMENT

Page 82

The company uses SAP as the software for the purpose of inventory management. All the branches of Pantaloons Retail India support this software. Each and every inventory detail of every format of Pantaloon is updated here. In order to replenish its stock, every store places an indent to its respective warehouse. The required stock level at the warehouse is maintained on the basis of average sales of 52 weeks. Yet, the minimum stock level for fast moving consumer goods (FMCG) is 1- 2 days and for durables it is 2-4 weeks. The stock level also depends on the shelf space. The price of inventory is accounted for, by calculating weighted average moving price of last 6 months. Pantaloons undertakes both manufacturing and buying of goods on the different formats. It also undertakes job working. Where they outsource manufacturing of certain specific brands from specified manufacturers.

Page 83

SCHEDULE OF CHANGES IN WORKING CAPITAL

Meaning of fund flow statement
The Funds Flow Statement is an attempt to report the flow of funds between various assets and liabilities and owners capital during an accounting period. Such a statement is prepared to indicate the increase and utilization of resources of a business during an accounting period. It is prepared using Schedule of changes in working capital and calculating funds from operation

Meaning of flow of fund

Taking fund in the sense of net working capital, flow of fund arises when the net effect of a transaction is to increase or decrease the amount of working capital. When a transaction results in the increase of fund, such a transaction is said to be a source of fund. On the other hand, if a transaction results in decrease of fund, such a transaction is said to be application of fund. A transaction that does not result in either increase or decrease of funds does not result in flow of funds.

Statement of Changes in Working capital.

This statement is prepared with the help of only current assets and current liabilities. Increase in current assets , increases the net working capital and increase in current liabilities decreases the net working capital. Thus the variation in working capital can be verified by preparing a statement of changes in working capital.

Page 84

As per year 2006 2007

Schedule of changes in working capital
(Rs. In crores)

Particulars
CURRENT ASSETS Inventory Debtors Cash & Bank balances Loans and advances Other Current Assets TOTAL CURRENT ASSESTS CURRENT LIABILITIES Creditors Other current liabilities Provisions TOTAL CURRENT LIABILITIES NET WORKING CAPITAL NET INCREASE IN WORKING CAPITAL

30.06.06
527.02 21.03 28.78 303.20 4.09

30.06.07
885.96 65.17 162.97 633.85 3.49

884.12

1751.44

136.93 116.51 38.5

223.93 149.07 44.42

291.94 592.18

417.42 1334.02

741.84

INTERPRETATION: There is a net increase in working capital by 741.84, which is not too favorable. The current assets have doubled, which means a lot of funds are blocked here, especially in form of inventory and loans and advances. On the other hand the current liabilities have performed well, having a decreasing effect on working capital, which has sustained the companys capital from going even higher.

Page 85

As per year 2007 2008

Schedule of changes in working capital
(Rs. In crores)

Particulars
CURRENT ASSETS Inventory Debtors Cash & Bank balances Loans and advances Other Current Assets TOTAL CURRENT ASSESTS CURRENT LIABILITIES Creditors Other current liabilities Provisions TOTAL CURRENT LIABILITIES NET WORKING CAPITAL

30.06.07
885.96 65.17 162.97 633.85 3.49

30.06.08
1340.10 98.80 251.39 960.18 5.29

1751.44

2655.76

223.93 149.07 44.42

457.93 245.86 28.9

417.42 1334.02

732.69 1923.07

NET INCREASE IN WORKING CAPITAL

589.05

INTERPRETATION: There is a net increase in working capital at a diminishing rate.

This is a positive sign for the company. But still the increase in working capital is too high and the company should give heed to the situation. There is a drastic increase in the current assets of the company, but, this is not supported by equal corresponding increase in the current liabilities, which is giving rise to this situation in both the years.

Page 86

SUMMARY OF FINDINGS
Ratio Analysis

LIQUIDITY RATIOS:
1. The current ratio of the company is in an improving position. The company has 3.6 times the assets compared to its liabilities. 2. The quick ratio also re-enforces the fact that the company is in a comfortable position to meet its obligations. 3. The absolute liquidity graph is moving upwards indicating that the company has enough liquid funds, thus it is in a comfortable position to meet immediate financial obligations.

TURNOVER RATIOS:
1. The inventory turnover ratio has dropped during the third year. It might seem a negligible drop, but it has an effect in the working capital. It shows inventory has been stocked up and not realized in form of sales. 2. The working capital turnover ratio has also shown a negative performance. It is already observed that the inventory is piled up, not generating sales; and also other current assets like loans and advances have increased, thus resulting in poor performance of working capital.

Page 87

3. The debtors turnover ratio of the company has been improving consistently. Average collection period moving down to only 6 days in the year ending 2008. The main reason for this efficiency is because its a retail company, and the credit sales are only through credit cards which always deliver quick and prompt payments. The percentage of bad debts is almost negligible. 4. The creditors turnover ratio of the company is not good. Average payment period is also too high, although the debtors are so prompt in their payments. This means that the realized from debtors are used elsewhere, thus affecting working capital.

5. The fixed assets are adequately used for the purpose generating sales, resulting in satisfactory performance of fixed assets turnover ratio. 6. The capital turnover ratio graph indicates marginal decrease in the ratio, which means there is no corresponding increase in sales with increase in capital put in use by the company.

PROFITABILITY RATIOS:
1. The net profit ratio performance is dull indicating that the net profit of the company has diminished. The companys non operating expenses have increased in the given period, thus resulting in corresponding decrease in the net profit .

Page 88

EXPENSES RATIOS:
1. The cost of goods sold ratio has decreased by 2.89 which is a good sign, but a high cost of goods sold ratio is unfavorable, hence the company should give heed to the situation.

2. The administrative expenses have increased, which again shows that the companys non operating expenses have been increasing continuously. 3. The selling and distribution expenses of the company have reduced in the year ending 2008. It depicts that the company made highest advertising expenses in the year 2006.

Management of Cash, Receivables and Inventory

The company has a specific and systematic method of managing its cash, receivables and inventory. The pick up agreements that it has with its bank serves beneficial in order to deposit daily cash. Maintenance of receivables is little critical because maximum sales is cash sales, and since, reconciling of daily cash with daily sales is very important. Its inventory management techniques are also satisfactory.

Page 89

Statement of changes in Working Capital

As per year 2006 2007
There is a net increase in working capital during this period. An increase could mean more funds are required to meet the working capital requirements. Which in turn means need of short term funds has increased. The main reason for increase is large amount of inventory and increasing loans and advances with a disproportionate increase in the current liabilities.

As per year 2007-2008

The net increase in working capital during this period is comparatively lower than the previous year. The reasons for the increase in working capital being the same as above. . Excessive investment in inventories has lead to blocking of funds, as they are not converted into sales. The company must be wiser while stocking its inventory into sales. The company must be wiser while stocking its inventory and not over estimate its sales.

Page 90

SUGGESTIONS AND CONCLUSION

The companys Inventory turnover ratio is weak, thus, it should emphasize on converting its stock into sales on a consistent basis, resulting in better flow working capital. The cost of goods sold ratio of the company is very high indicating that the operating expenses are lofty. The company should concentrate and try to decrease the operating expenses in order to improve the working capital and profitability of the firm. The company must be more prompt in payments to its creditors. It maintains a very poor creditors turnover ratio. The funds arriving from debtors must be first utilized to clear off the creditors obligation. The company has shown good utilization of fixed assets and capital employed but there is a marginal decrease during the three years. So there is scope of improvement in that area. The companys net profit ratio has to be improved. This can be done by curbing the non operating , indirect expenses and by improving the inventory turnover. The working capital performance of the company in the last 2 years has been depreciating. There has been a tremendous increase in the net working capital. It has made excessive investments in the inventory and also loans and advances are blocking the funds, resulting in increase of current asset, but there is no corresponding increase in the current liabilities. Thus, it is observed that Pantaloon Retail India Limited has an average

Page 91

performance with regards to working capital, with its most efficient performance being during the year 2007-2008, when conmpared to the other two years.

BIBLIOGRAPHY
Referred the following books
Financial Management - Shashi K. Gupta, R. K. Sharma and Neeti Gupta (Kalyani Publishers) Management Accounting - M. N. Arora (Himalaya Publishing House) Cost and Financial Analysis - Shashi K. Gupta, Neeti Gupta and Anu Putney (Kalyani Publishers)

Web-sites referred
www.wikipedia.com www. rediff.com www.pantaloon.com www.futurebytes.com www.google.com

Page 92

5-YEAR FINANCIAL SUMMARY BALANCE SHEET

(Rs. In crores)
BALANCE SHEET AS AT Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments 2,655.76 732.69 1,923.07 4,038.40 507.91 1,114.04 1,751.44 417.42 1,334.02 2,391.76 243.12 27.44 884.12 291.94 592.18 1,128.29 131.73 38.99 405.17 159.16 246.01 0.28 507.73 23.08 31.80 234.49 83.45 151.05 0.40 331.54 5.22 0.24 1,368.76 170.59 1,198.17 330.64 586.52 767.07 92.47 674.60 131.13 252.01 366.01 56.58 309.43 86.06 140.62 251.10 37.36 213.74 15.79 31.92 184.71 24.32 160.39 14.44 5.26 1,991.77 200.01 4,038.40 951.93 347.65 2,391.76 428.10 173.29 1,128.29 256.17 30.04 507.73 215.29 21.36 331.54 31.86 63.26 1,751.50 29.35 0.01 1,062.82 26.88 500.02 22.00 3.00 196.53 19.14 75.75 Jun ' 08 Jun ' 07 Jun ' 06 Jun ' 05 Jun ' 04

Page 93

Contingent liabilities Number of equity sharesoutstanding (Lacs)

133.44 1592.92

160.57 1467.51

36.66 268.85

5.06 219.98

5.19

191.37

5- YEAR FINANCIAL SUMMARY PROFIT & LOSS ACCOUNT

Jun ' 08 Income: Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Adminstrative expenses Expenses capitalised Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnigs before appropriation 5,295.88 3,556.21 100.66 275.78 372.54 527.28 4,832.47 463.41 30.93 494.34 201.45 83.39 209.50 69.68 139.82 -13.88 0.03 125.97 241.73 Jun ' 07 3,393.47 2,239.53 78.15 207.74 291.72 358.38 3,175.52 217.95 4.36 222.31 95.93 36.86 89.52 60.96 28.56 91.49 -0.06 119.99 236.58 Jun ' 06 Jun ' 05 Jun ' 04 655.00 445.67 19.19 27.61 52.09 57.30 601.86 53.14 1.44 54.58 20.03 8.79 0.13 25.63 4.56 21.07 -0.73 -0.56 19.78 54.03

1,960.86 1,084.11 1,268.15 58.96 112.72 170.07 198.69 1,808.58 152.28 3.93 156.21 43.22 20.82 92.18 27.67 64.52 -0.25 -0.11 64.16 130.66 716.49 37.48 50.75 90.71 104.20 999.63 84.48 3.31 87.78 26.08 13.33 0.12 48.24 14.54 33.71 4.79 0.05 38.55 76.63

Page 94

Equity dividend Preference dividend Dividend tax Retained earnings

10.67 1.81 329.25

7.54 1.28 227.76

6.72 0.94 123.00

5.50 0.77 70.36

2.87 0.38 50.78

Page 95