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1 | P a g e Expense Budgeting at Bectochem Consultants & Engineers Pvt Ltd

Expense budgeting

at Bectochem Consultants & Engineers Pvt Ltd

By

Nagesh Kashyap Akshintala

May, 2011

Ghaziabad


Expense budgeting

at Bectochem Consultants & Engineers Pvt Ltd

By


Under the Guidance of

Mr. N. K. Unnikrishnan

Business Head - Pharma

Pharmacy Business Head

Bectochem Consultants & Engineers Pvt Ltd

Dr. Gunjan Malhotra

Assistant Professor

Operations Management

Institute of Management Technology

May, 2011

Ghaziabad


Certificate of Approval

The following Summer Project Report titled "Expense Budgeting at Bectochem Consultants &

Engineers Pvt Ltd" is hereby approved as a certified study in management carried out and presented

in a manner satisfactory to warrant its acceptance as a prerequisite for the award of Post-Graduate

Diploma in Business Management for which it has been submitted. It is understood that by this

approval the undersigned do not necessarily endorse or approve any statement made, opinion

expressed or conclusion drawn therein but approve the Summer Project Report only for the purpose it

is submitted.

Summer Project Report Examination Committee for evaluation of Summer Project Report

Name Signature

1. Faculty Examiner _______________________ ___________________

2. PG Summer Project Co-coordinator _______________________ ___________________


Certificate from Summer Project Guides

This is to certify that Mr. Nagesh Kashyap Akshintala, a student of the Post-Graduate Diploma in

Business Management, has worked under our guidance and supervision. This Summer Project

Report has the requisite standard and to the best of our knowledge no part of it has been reproduced

from any other summer project, monograph, report or book.

Dr. Gunjan Malhotra

Assistant Professor

Operations Management

Institute of Management Technology

Raj Nagar, Ghaziabad, Uttar Pradesh

201001

Date:

Mr. N. K. Unnikrishnan

Business Head - Pharma

Bectochem Consultants & Engineers Pvt Ltd

Building 5C/204, Mittal Estate,

Andheri-Kurla Road, Andheri(E), Mumbai

400059

Date:


Abstract

Expense budgeting at Bectochem Consultants & Engineers Pvt Ltd

By


The Company under study, Bectochem Consultants & Engineers Pvt Ltd is a leading process

equipment manufacturer that produces machinery for pharmacy companies. It has a wide range of

product portfolio catering needs of Pharmacy, cosmetic and food processing industries. Its

head office is present in Mumbai and it has two manufacturing plants located at Ankleshwar(Gujarat)

and Pune. Job order production is carried out by this company. The major production is

carried out at Ankleshwar plant.

The objectives of the project are:

• To find various expenses those occur in producing a job and to compare the expenses

in job production with present pricing policy.

• To analyse if the present investment, cash management scenario is at par with the

industry and consistent with the performance.

As part of project following approach is adopted

Micro Analysis of the expenses involved in the production of an individual job.

In this study the P&L report for the year 2010-11 is considered and the expenses are

classified under Factory Expenses, Labour, Marketing and Material heads. The percentage

share of these individual heads on sales is calculated.

Further, seven jobs were considered for study and all possible direct costs were calculated

and the costs which cannot be calculated are apportioned as a percentage of sale value which

is derived from p&L document. Thus expenses involved in production of these jobs are

estimated and compared with the traditional costing process of the company.

The annual expenses under different heads are restructured as expenses for different

activities, using Activity Based Costing process. Later the jobs which were studied earlier are

also represented in Activity Based Costing Format. This representation supports in

managerial decision making regarding the expenses incurred in various activities.

It is observed that the expenses estimated from job costing vary with the price quoted either

ways. So, sometimes a greater profit is realised and sometimes expenses may be more than

estimated. This way of costing helps in cross checking if the price quoted is adequate.

Financial Statement Analysis

The Financial Statement Analysis is carried out in the following manner

1) Trend Analysis : Performance of company over a period of 5 years

2) Cross sectional Analysis: Performance of company with respect to its peer companies


3) Working capital Management: The current asset, liability, inventory management

over time and with respect to peers

Under each study, a horizontal analysis, vertical analysis and a ratio analysis is carried out.

The observations are recorded and conclusions and recommendations regarding the

performance of the company are assessed.

The detailed job analysis brings out the fact that, there is a variation in the traditional price

estimation method and the actual expenses incurred. Especially the labour costs appear to be

more than estimated, and the share of different cost centres is not in sync with the way they

are estimated.

Secondly, the company is working on a lower profit margin, compared to its peers. The

growth has not been in sync with industry pace. Hence it is strongly recommended to increase

capacity to cater the activity needs.

Thirdly the working capital management has to be made effective. Efficient management of

working capital through effective credit, purchase and inventory policy can fetch greater net

profit that adds to the growth.

There should be a coordinated growth rather than growth in a single dimension. Focus to

grow in one direction may lead to inconsistencies in business processing. Hence it is

recommended to initiate a coordinated growth.

The study is also constrained by few limitations, especially in detailed production and

transport costs. Further study can be focussed on,

Capacity Adequacy for the present sales growth

Review of Credit Policy for sales and Purchase


Acknowledgement

I would like to thank Mr. Alok Bector and Mrs. Sangeeta Bector for giving me this

opportunity to work on a project which has been challenging and a great learning experience.

I am very much thankful to my project guide Mr. N. K. Unnikrishnan (DGM, Pharmacy

Business Head) for the support, guidance and the encouragement he has given all through the

project. My special thanks to my IMT faculty project guide Dr. Gunjan Malhotra for her

guidance during my project.

I thank the Planning, Accounts, HR, Production and Quality departments of Bectochem

Ankleshwar plant, Accounts department Mumbai office and all the staff members for their

prompt support in guiding and sharing the information for my project.

My special thanks Mr. M. S. Pandey and Mrs. Vidya who have been taking care of all my

requirements during the project.

- Nagesh Kashyap Akshintala


Table of Contents

Certificate of Approval 3

Certificate from Summer Project Guides 4

Abstract 5

Acknowledgement 7

Table of Contents 8

List of Tables 9

List of Figures 10

List of Appendices 11

Chapter 1 : Company Profile

1.1 About the Company 13

1.2 Operation Procedure 14

1.3 Product Portfolio 18

Chapter 2: Project Introduction

2.1 Introduction 21

2.2Problem definition 21

2.3 Literature 21

Chapter 3: Job Costing

3.1 Overhead Break Up 24

3.2 Job Costing 24

3.3 Activity Based Costing 29

3.4 Learning 33

3.5 Recommendations 33

3.6 Limitations and Further Study 33

Chapter 4: Financial Statement Analysis

4.1 Financial Statement Analysis 35

4.2 Trend analysis 36

4.3 Competitor Analysis 46

4.4 Working Capital Management 55

4.4 Recommendations from FSA Summary

Appendix

58

59

61


List of Tables

Table 1.1: Kick off SOP 16

Table 1.2: Design SOP 17

Table 1.3: Planning SOP 17

Table 1.4: Manufacture SOP 18

Table 1.5: Testing SOP 18

Table 1.6: Dispatch SOP 19

Table 2.1: Job Costing Break Up 23

Table 3.1: Cost head Break up 25

Table 3.2: Costing sheet sample 26

Table 3.3: Job Costing 29

Table 3.4: Comparison with Bectochem Costing 29

Table 3.5 : Departmental costing 31

Table 3.6: Activity Cost 31

Table 3.7: Cost Driver 32

Table 3.8: Activity cost appropriation 33

Table 9: Activity Based Job Costing 33

Table 3.10: Cost comparison 34

Table 4.1: Horizontal analysis Observations 39

Table 4.2: Vertical analysis 40

Table 4.3: Vertical Analysis Observations 42

Table 4.4: Ratio Analysis Output 44

Table 4.5: Ratio Analysis Observations 45

Table 4.6: Growth rate of peer companies 49

Table 4.7: Horizontal analysis observations 50

Table 4.8: Vertical Analysis Observations 53

Table 4.9: Ratio Analysis 54

Table 4.10: Ratio Analysis Observations 55

Table 4.11: Over Trading Symptoms

57


List of Figures

Figure 1.1: SOP 14

Figure 3.1: 2010-11 Annual Overhead Break Up 24

Figure 3.2: Activity Expenses Break Up 31

Figure 4.1: P&L Trend 36

Figure 4.2: Capital Structure Trend 37

Figure 4.3: Application of Funds 37

Figure 4.4: Expenses Break Up Trend 39

Figure 4.5: Capital Structure Mix 40

Figure 4.6: Application of Funds Mix 40

Figure 4.7: Indirect Expense Comparison 50

Figure 4.8: Direct Expenses 50

Figure 4.9: Capital Structure 51

Figure 4.10: Funds Application 51

Figure 4.11: Overtrading Cycle 56

Figure 4.12: CCC trend 57


List of Appendices

Appendix 1: P&L Break Up

Appendix 2: Job costing

Appendix 3: Freight Rates

Appendix 4: Average Contract worker man hour calculation

Appendix 5: Financial reports of Bectochem from 2005-2010

Appendix 6: Horizontal Analysis of Bectochem financial elements during 2005-10

Appendix 7: Vertical Analysis of Bectochem Financial Elements during 2005-10

Appendix 8: Horizontal Analysis of Financial Reports of Bectochem and its peer companies


Chapter 1 : Company Profile


1.1 About the Company

Bectochem Consultants & Engineers Pvt Ltd is one of the leading process equipment manufacturers

in INDIA since 1978.It deals in pharmaceutical, active pharmaceutical ingredients, food and

cosmetics and allied industries. It has a 500 + work force in INDIA. It has manufacturing setups at

ANKALESHWAR (Gujarat) and PUNE (Maharashtra).It has Joint ventures with 6 organizations in

INDIA. They are :-

1. FITZPATRICK

2. Hecht

3. Sterivalve

4. Riva

5. RML

6. CSP

Bectochem has 4 major product divisons:-

1. Pharma

2. Food and cosmetics

3. Isolators

4. API.

The products of Bectochem are found in 5 continents of the world. Introducing barrier isolator

technology to India in 2004, Bectochem is the acknowledged expert in the specialised and technically

demanding field of design & manufacture of high specification barrier containment systems.

The industries that are served are:-

1. API Manufacturing

2. Solids Formulations

3. Liquid Formulations

4. Ointment Formulations

VISION :

Think Different Engineer Smart

MISSION :

To be a INR 1000 million company by 2011

VALUES :

Passion

Respect

Integrity

Diligence

Ethical

Values are enhanced

through:-

Product

People

Process

Certifications: ISO 9001:2008


1.2 Operation Procedure

As mentioned earlier, Job order production is followed at Bectochem. Following are the series of

activities involved from getting purchase order from the client till finishing the installation of machine

at client location.

Figure 1.1: SOP

Kick off meeting Mumbai

Kick off Meeting

Plant

Design Planning

Store

Production Testing

Installation

Recording


Kick Off Meeting at Mumbai

Kick Off meeting is initiated after getting the URS from the client.

Task Person

Responsible

Review Time Line

Ones the URS is received, a Kick Off

meeting has to be initiated

Project Director Within a week

of receiving

URS

Besides FAQ, technical details are

discussed and timelines for design,

planning, production, installation are

fixed

Project Director

MoM is prepared and signed by

Project director and Client

Representative

Project Engineer 1 day after

meeting

Project plan is prepared

Project Engineer 2 days

A Technical Checklist is prepared

consisting of following details

Layout Details

Mechanical Design data

Details of main components

Material data

PLC automation and control

Electrical Instrumentation

Utilities

Overall Dimensions

Level of Documentation

List of spares

Marketing

dept/Project

Engineer

Project Director 2 days

Update of order details job no and job

details in Brahma

Marketing Dept General Manager 2 days

FDS and Component list is forwarded

for clients approval

Documentation

Dept

QA Manager 5 days

A kick off meeting is held at plant

level by PMO, production, quality,

design teams

Table 1.1: Kick off SOP


Design

After Kick off meeting, the GA and PI drawings are prepared by design team

Task Person

Responsible

Review Timeline

Indent drawing is sent to production

for planning purpose

Drawing Dept Design Manager 3 days

Making of drawing log according to

sequence of drawing

Drawing Dept Design Manager 1 day

Sending drawings to client and getting

approved, making required correction

Project Engineer Project Director 10 day

Commercial Implication of approved

Drawing

Project Director

Issue of approved drawings to Works

at Mumbai, Pune and Ankleshwar

Drawing Dept Project Director 1 day

Old drawings returned from Works

Production Dept Design Manager 1 day

Update of clients approval of drawings

in Bramha

Marketing Dept General Manager 1 day

Table 1.2: Design SOP

Planning

After receiving the detailed design, Planning team prepares BOM, checks available material and

orders required material

Task Person

Responsible

Review Time Line

Preparation of BOM

Planning dept Technical director Approx 45

days

Forwarding the BOM to Store for

update of JTR

Planning Dept Technical Director

PO for material not available with

store

Planning Dept Technical Director

Procurement of material, Quality

testing of the material and binning,

MRN update in Focus

Store, QA dept Technical Director

Table 1.3: Planning SOP


Manufacture

Ones the material is procured, production process starts

Task Person

Responsible

Review Timeline

Production of Job

Production Dept Technical Director

Monitoring progress of job

Production

Engineer

Technical Director

Weekly reporting of the status of job

Production

Manager

Technical Director

Table 1.4: Manufacture SOP

Testing

After production the job is tested as follows

Task Person

Responsible

Review Timeline

Pre FAT

Production Dept

FAT trail by QA department and client

QA Engineer Production

Manager

Documentation of FAT protocol

Documentation

Dept

QA manager

Table 1.5: Testing SOP

Despatch and Installation

Task

Person

Responsible

Review Timeline

Issuance of Dispatch Instructions to

plant

Project Director

Advance intimation by factory 10 days

before

Production

Manager

Thorough checking of equipment

before despatch

QA Engineer

Arrangements to comply with legal

norms

Production

Manager

Insurance of goods and unloading

instructions

Production

manager

Submission of documents/manuals to

client

Documentation

dept

QA Mnager

Generation of Shipment document and

Invoice

Marketing Dept

Filing of records in Job file By all


Table 1.6: Dispatch SOP

1.3 Product Portfolio

Bectochem manufactures wide variety of machinery to cater the needs of pharma, food and cosmetic

and isolator industries. The products produced at Bectochem can be classified under following

sections.

1) Dry Syrup Powder

a. Sifters

i. Mechanical Sifter

ii. Vibro Sifter

iii. Rota Sifter

b. Mixer

i. Horizontal Mass Mixer

ii. Planetary Mixer

iii. Rapid Mixer Granulator

iv. Starch Paste Kettle

v. Fluid Bed Processor

c. Miller

i. Multi Mill

ii. Co Mill

d. Dryer

i. Tray Drier

ii. Fluid Bed Dryer

e. Blender

i. Double Cone Blender

ii. Y Blender

iii. Ribbon Blender

iv. Drum Blender

v. Rotating Type Drum Blender

vi. Vertical Blender

vii. Octagonal Blender

f. Coating

i. Conventional Solid Coating

ii. Auto Coater

g. CIP/WIP

i. Automated/Manual CIP/WIP Skids

ii. Bin wash systems

2) Paste/Pulp

a. Preparation of Paste

i. Jacketed Titling Pan Hemispherical Type

ii. Jelly Storage and Processing Kettle

iii. Transfer Pumps and piping

b. Mixing

i. Planetary Mixing

ii. Paste Mixer

c. Liquid Preparation

i. Sugar Syrup Preparation Tanks


d. Storage/Transfer

i. Holding/Storage Tanks

ii. Pumps/Transfer Lines

iii. Horizontal Filters

e. Homogenization

i. Continuous Mixer

ii. Batch Mixer

iii. Mega shear

3) Containment

a. Isolation

i. Split Butterfly Valves

ii. RTP

iii. Flexible Isolator

iv. Rigid Wall Isolator

4) Material Handling Equipment

i. Bowl Lifting and tilting Device

ii. IPC Lifting and Loading Device

iii. IPC and Bins

iv. Conveyors and Trolleys

v. Jacking Trolleys and Raising Platforms

5) Process Equipment

i. Reactors

ii. Heat Exchanges

iii. Evaporators and Crystallizers

iv. Disperses

v. Extractor

vi. Hydrogenator

vii. Condenser


Chapter 2: Project Introduction


2.1 Introduction

“Companies need financial professionals who know to communicate not only what a company spent but

also how it consumed that spending and where it provided value and alignment to strategy. The financial

skills that are needed are those which allow us to focus on the future as well as the past, with a common

thread of creating value.”

- Ralph W Canter

Bearing Point

The Objective of every business is to create value. Every organisation works for this objective but in

its own unique method. Few Organisations focus on product innovation, few others focus on customer

satisfaction. Whatever might be the approach organisations should timely review if they are spending

right amount to create this value. The present project is one such attempt to review the financial health

of the organisation under study.

2.2Problem definition

Problem Are the expenses incurred in different activities are relevant and

creating value

Research Objective To classify and estimate different expenses and compare their

behaviour overtime and with competitors’.

Scope of study Ranges from as small as individual job cost study to annual expenses

trend. Relates costs incurred in all functional departments, especially

material and production.

Tools/Techniques used Job Costing, ABC Costing, FSA (Horizontal, Vertical and Ratio),

Working capital Management

2.3 Literature

Bectochem Consultants & Engineers Pvt Ltd is one of the leading process equipment manufacturers.

As mentioned in chapter 1, a series of activities are followed to produce jobs (capital goods) on order

by the customers. In order to assess if the expenses are at par, following methodology is adopted.

1) Job Costing[1]: In this method, different expenses that occur in the production of a job are

classified under following heads and the total cost of job is estimated. Thus derived cost is

compared with the price quoted by traditional techniques at Bectochem. The difference in the

costs will assess if the job is being produced at profit or loss and approximate margin. This

method can be used on regular basis on random jobs to timely review if the pricing is

appropriate with the actual expenses.


Table 2.1: Job Costing Break Up

2) Activity Based Costing[1]: The Activity Based Costing Technique assigns the expenses

occurred in producing a job to different activities involved in the production of a job. This

allows the management to cross check the expenses of each activity and to take necessary

action to control individual activity costs.

3) Financial Statement Trend analysis[2][3]: This analysis reviews the performance of sales,

expenses, profits, capital structure and its application over a period of time. In the trend

analysis financial reports of the company for the years 2010-2005 are studied by computing

horizontal, vertical common formats and ratio analysis.

4) Financial Statement Cross Sectional Analysis[2][3]: This analysis reviews the performance of

sales, expenses, profits, capital structure and its application with those of its peer companies.

In the cross sectional analysis financial reports of the company and two of its peers for the

years 2009-10, 2008-09 are studied by computing horizontal, vertical common formats and

ratio analysis.

5) Working Capital Management[4]: It is an investigation into the effectiveness of working

capital management of the organization with particular reference to its liquidity and solvency

and impact on commercial operations of the organization.

References:

[1] : Management Accounting By Anthony A Atkinson

[2] : Financial Accounting

[3]: Financial Accounting for Non Specialists 2nd Edition by Catherine Gowthrope

[4]: Working capital management in heavy engineering firms by Dr. D. Mukhopadhyay

Cost Head Details

Material Cost Under this head costs of material that is purchased and in stock is

considered

Transport The transport, packing, octrai, tax door delivery costs during purchase of

material, production of sub components and delivery of final product are

considered

Labour The production staff expenses, In house contractor cost and vendor costs

along with a portion of overheads are considered

Factory Overheads Expenses of different allied departments associated with production and a

portion of indirect costs are considered

Marketing Overhead Expenses of Marketing department and remaining portion of overheads are

considered


Chapter 3: Job Costing


3.1 Overhead Break Up:

The annual expenses for the year 2010-11 are considered and classified under the following heads.

The detailed expense classification is mentioned in Appendix 1. All the expenses are mentioned as a

percentage of the sales. The aggregate overhead break up is as follows.

Table 3.1: Cost head Break up

3.2 Job Costing:

Making use of the percentages above, different costs of individual jobs are estimated. Following is

one such case explained in detail. Individual job costing of six other jobs is mentioned in Appendix 2.

Product: Fluid Bed Dryer (FBD)

Product No: 10651.01.01

Client: Kina Pharma

The different costs involved in the production of this job are

1) Material cost : Cost of Stock and Purchase

2) Transport: Freight, Octrai, Tax, Packing, Door delivery charges during material procurement ,

production and delivery.

3) Labour : The production department, In house Contractor Charges, Vendor Charges, 40% of

indirect labour and admin overheads

4) Factory Overhead: Electricity, different department expenses involved with production,

factory expenses and 35% of admin and indirect labour overhead.

5) Marketing Expenses: Marketing Dept expenses and 25% of admin and Indirect Labour

expenses.

3.2.1 Material Calculation:

cost head

Value

(lakh Rs) %

material 3,989 64.45

factory 855 13.81

labour 994 16.06

marketing 368 5.94

profit 466 7.53

sales 6,189 100.00


Direct Cost of material is available from costing sheet maintained by planning department. The cost

sheet of the job will have ddescription of each individual component of job and its quantity, weight,

price and supplier details. Components can be classified as steel and non steel and also stock and

purchase items.

A sample costing will have 50 entries for each component. The important details of the costing are as

follows,

Ind

Sr

No Product Name

P

p

p

Q

ty

P

p

p

W

t

Pp

p

T

W

t

MRN

Date MRN No.

Cost

of

Prod

uct Party Name

101

.29

Ball Valve TC End 1 ½”

SS 304 1

0.

00

0.

00

18-04-

2011

ANK/11-

12/438

2,29

0

Shakti Engineering

Equipment Co.

101

.23

Bend ERW 1 ½” OD

14swg 90° SS 304 1

0.

00

0.

00

17-03-

2011

ANK/10-

11/9557 90

SHREE FORGE

INDUSTRIES Table 3.2: Costing sheet sample

The total Cost of the product thus calculated is,

Purchase: Rs 3, 03, 979

Stock: Rs 2, 28, 462

3.2.2 Transport Cost:

3.2.2.1 Transport Purchase:

Under this the details of all the suppliers (taken from costing sheet) and their locations are considered.

A standard transport cost charges manual is considered as mentioned in Appendix 3.

Using the charging standard the cost of procuring each component is estimated. The sum of all such

costs gives the total cost of purchase transport.

In this case, 382 Kgs of Steel items are purchased from Bafna Metal Corporation.

So as per Manual, each kg of steel costs 1.3 Rs of freight, Door delivery charges of 700 Rs at Mumbai

and 400 Rs at Ankleshwar and a CST of 2% on purchase. So the cost of transport is,

Freight = 382*1.3

CST = 0.02* 72618

Door Delivery Charges = 1100

Total Transport: 3048.96 Rs

Similarly cost of transport of components from each supplier is calculated and total transport cost of

material purchase is determined.

The cost of transport for purchase is: Rs 33,714

3.2.2.2 Transport Production:

Some of the sub assemblies are outsourced for manufacture to vendors. So there is a transport cost

incurred in the procurement of such subassemblies. The same approach adopted for purchase is used

in the transport cost estimation.


The component details are mentioned in the costing sheet under the name work order (Appendix 3).

In this case Panel Box 1050Ht X 1100W X 350Deep 16Swg MS is fabricated at Shivam Fabrications

and procured on part load transport basis. For this costing is as follows,

Door Delivery Charges: 1400

CST: 0.02*6468 = Rs 129

Total Cost: 1529 Rs

3.2.2.3 Transport Outward:

The transport cost for delivery depends on the location of delivery and the size of the job. The data of

delivery charges is estimated based on previous charging pattern. Besides a percentage component of

1.92% is added to account for packing, octrai and other expenses.

Transport Outward: 1.92% sales + actual freight = Rs 33,622

Total Transport Cost: Rs 68,905

3.2.3: Labour Charges:

3.2.3.1 Production charges:

This is taken as 1.07% of sales. As we are not aware of final selling price following formula can be

used. This apportions for salary of supervisory production department and their expenses.

1.07% of sales = (material cost/0.6645) * (1.07/100)

The same approach is followed where ever % apportionment has to be made.

3.2.3.2 In house Contractor Charges:

(1) The bills made by each contractor are studied. As the contractor for a particular job is known,

the cost he charged previously for a similar job is referred and the contract cost is estimated.

(2) From Appendix 4 the total charges of contractors are matched to the man hour labour input.

This gives the average per month charges of labour. This can be further calculated for a single

man hour. Secondly the standard man hours required for a job are also recorded. Multiplying

it by per hour average cost of labour also gives approximate contractor cost.

For this case in house contractor is R R Industries and they charge Rs 54500 for this kind of job as per

records.

3.2.3.3 Vendor Charges

The Material Charge mentioned in costing sheet against components under work order are taken as

cost of vendors. Care should be taken that these items are not included in material cost also.

For this particular job the vendor is Shivam and the cost of fabrication is Rs 6468.

3.2.3.4 CRM charges

CRM charges are calculated as 1.67% of sale value. This includes the salary, travelling

accommodation and expenses of CRM employee apportioned appropriately.


1.67% of sale = material cost/0.6645 * 1.67/100

CRM charges for the Job : Rs 13, 796

3.2.3.5 Overhead

35% of indirect labour and admin expenses are accounted by this overhead charge. This is calculated

as 3.35% of sale price.

3.35% of selling price = material cost/0.6645 * 3.35/100

Overhead charge for the Job: Rs 27,675

3.2.4 Factory Overhead

The factory overhead accounts for per job expenses of all departments involved in production activity

directly viz PMO, Planning, Purchase, design, store, Quality and factory expenses which consist of

electricity, consumable, late delivery charges, factory expenses and 40% of admin and indirect labour

charges.

This is calculated as 8.03% of selling price.

Factory Overhead of the Job: Rs66, 338

3.2.5 Marketing overhead

The marketing overhead accounts for marketing department salary, travelling and lodging expenses,

stationery, late delivery and promotional expense and 25% of admin and indirect labour charges.

It is calculated as 5.94% of selling price.

Marketing Overhead of the job: Rs 49, 072


3.2.6 Consolidated cost and comparison with traditional costing

Thus adding up all these values the cost of producing is determined. Following Table represents the

job costing.

Job No

10651.01.01 Kina Pharma FBD

Cost Head Details Predefined % Value

% of cost of

sale

material cost

purchase from cost sheet 3,03,979 36.71

stock from cost sheet 2,28,462 27.59

Total Material

Cost 5,32,441 64.30

Transport

purchase purchase freight 33,714 4.07

production production freight 1,529 0.18

distribution

1.92%+ delivery

freight 33,662 4.07

Total Transport

Cost 68,905 8.32

Labour

Production 1.07% 8,840 1.07

In House

Contractor R R Ind 54,500 6.58

Vendor Shivam 6,468 0.78

CRM 1.67% 13,796 1.67

overhead 3.35% 27,675 3.34

Total Labour Cost 1,11,279 13.44

Factory Overhead 8.03% 66,338 8.01

Marketing

Overhead 5.94% 49,072 5.93

Cost of sale before

profit 8,28,035 100.00 Table 3.3: Job Costing

Job No 10651.01.01 Kina Pharma FBD

Cost Head Bectochem % Bectochem System Job Costing % Costing

Material 55% 532441 532441 58

Labour 10% 96807 111279 12

Consumable 8% 77446

overhead 17% 164573 184315 20

cost of sale

871267 828035

profit 10% 96807 92004 10

selling price

968075 920039

Table 3.4: Comparision with Bectochem Costing

The difference between two costing methods is Rs 43, 232


3.3 Activity Based Costing

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical

manner than the traditional approach. Activity based costing first assigns costs to the activities that are

the real cause of the overhead. It then assigns the cost of those activities only to the products that are

actually demanding the activities.

3.3.1 Approach

Step 1: Identification of activities

As per SOP, following activities come under processing of job

1) Kickoff: meeting to finalise job FAQs and timelines

2) Planning: Detailed planning for material, technical checklist

3) Design: GA and detailed drawing

4) Purchase: Ordering, procuring of material and follow up with the suppliers

5) Inspection: Inspection of purchased material for quality compliance and rejection of

disqualified ones

6) Store: maintenance of procured material and Inventory

7) Production: fabrication, machining, fitting, polishing, electrical operations required for the job

8) Inspection: Testing the performance of job at different levels of production and documenting

9) Pre FAT/ FAT: Final internal and main testing for certification

10) Packing, dispatch, transport: packing of job, bills settlement, transfer of job, user manual etc

11) Maintenance: Installation, testing and maintenance of job at client location

12) Admin: Admin activity refers to the core activity of every department. For example the

quality department does QA at stores and various stages of production, FAT and

documentation. Besides this its core activity is to train the staff on quality standards, .aintain

the measuring devices and develop documents on QA practises. These activities accounted as

20% of their annual effort are mentioned under admin activities. Similarly core activity

efforts of each department are defined under admin activity head.

13) Marketing: Presales, VTOP, following up with clients, coordination with production and

design teams, etc comes under marketing activity.

Step 2: Contribution of each team for a given activity (% of effort)

Each team will be responsible for a particular task; however they need not be necessarily limited to a

single task. Each team will be allocating its time and resources into different activities. The % amount

of effort of a team for different activities is tabulated.

Step 3: Distributing departmental expenses among activities, on substituting the expenses in the

activity cost table, we get cost of activities also

Using the proportions mentioned in the above table, the expenses of each team are distributed over

different activities according to the % effort. Thus expanses of each activity is determined and

tabulated as follows.


Dept wise annual expense Activity Wise Annual Expense

Team Expense % of

sales

Activity expense % of

sales

PMO

2679600 0.42

Kick off

56,84,653 0.89

Planning

2237883 0.35

Planning

40,42,416 0.63

Design

4904691 0.77

Design

65,07,403 1.02

Purchase

1780683 0.28

Purchase

44,01,306 0.69

Store

1485380 0.23

Store

42,13,178 0.66

Quality

5002776 0.79

Procuction

Indirect

1,11,85,762 1.76

Production

6637934 1.04

Production

Direct

5,72,68,050 8.99

Vendor

55122439 8.65

FAT Indirect

62,98,251 0.99

Inhouse

Contract 2384012 0.37

FAT Direct

5,06,361 0.08

CRM

10360814 1.63

Dispatch

48,44,296 0.76

Admin

4738738 0.74

Maintenance

1,24,87,744 1.96

Accounts

3068475 0.48

Marketing

1,94,19,034 3.05

Commercial

642541 0.10

Admin

82,16,629 1.29

Export

1611996 0.25

Total

14,50,75,081 22.77

IT 252000 0.04

Table 3.6: Activity

Cost

spares 288000 0.05

vendor

management 1104000 0.17

Remuneration 18720000 2.94

Marketing 22053119 3.46

Total 145075081 22.77

Table 3.5 : Departmental costing


Step 4: Determining Activity Cost Drivers

Each activity for a given job will be measured in terms of a cost driver and the expense will be

determined.

Table 3.7: Cost Driver

Step 5: Calculating Activity Cost Driver Rate

Following table represents the value of cost drivers, ie the expenses of activities per unit cost driver.

Step 6: Activity Expense of Kina Pharma FBD

Activity Activity Expense Cost Driver Cost Driver

expense

rate of activity expense per

100 rs cost driver expense

Kick off

56,84,653 Net Sales 6.19E+08 0.92

Planning

40,42,416 Net Sales 6.19E+08 0.65

Design

65,07,403 Net Sales 6.19E+08 1.05

Purchase

44,01,306 Net Sales 6.19E+08 0.71

Store

42,13,178 Net Sales 6.19E+08 0.68

Production Indirect

1,11,85,762 Net Sales 6.19E+08 1.81

Production Direct

5,72,68,050 Net Sales 6.19E+08 9.25

FAT Indirect

62,98,251 Net Sales 6.19E+08 1.02

FAT Direct

5,06,361 Net Sales 6.19E+08 0.08

Dispatch

48,44,296 Net Sales 6.19E+08 0.78

Maintenance

1,24,87,744 Net Sales 6.19E+08 2.02

Marketing 1,94,19,034 Net Sales 6.19E+08 3.14

Admin

82,16,629 Net Sales 6.19E+08 1.33

Table 3.8: Activity cost appropriation

Activity Activity Cost

Driver

Kick off Net Sales

Planning Net Sales

Design Net Sales

Purchase Net Sales

Store Net Sales

Production Net Sales

FAT Net Sales

Dispatch Net Sales

Maintenance Net Sales

Indirect Net Sales


Step 6: Calculating the Activity cost of individual job

Using the cost driver rates, the activity expenses for the FBD are determined.

Job No 10651.01.01 Kina Pharma FBD

Cost head % Value effective %

Material

5,32,441 64.69

Kick off 0.92

7,587 0.92

Planning 0.65

5,395 0.66

Design 1.05

8,685 1.06

Purchase 0.71

5,874 0.71

Store 0.68

5,623 0.68

Production + FAT

indirect 2.62

21,645 2.63

Production+FAT Direct

60,968 7.41

Dispatch 0.78

6,465 0.79

Maintenance 2.02

16,666 2.02

Marketing 3.14

25,917 3.15

Admin 1.33

10,966 1.33

Activity Cost

1,75,791 21.36

transport

68,905 8.37

overhead 5.56

45,933 5.58

cost of sale before profit

8,23,070 100.00 Table 9: Activity Based Job Costing

3.4 Learnings:

Average Overheads derived from job costing and annual ratio are

Cost Overhead % from p&l Average from 7 job costing

Material 64.45 66.52

Transport 5.21 5.72

Labour 16.06 13.33

Factory 8.03 8.29

Marketing 5.94 6.13 Table 3.10: Cost comparision

Out of activities production activity costs 39% of net sales.

Out of seven cases in 5 cases labour cost is estimated more in job costing technique

than traditional method.


The job costing done in this particular year jobs will be in most of the cases less than

traditional costing. The reason being that, in job costing the material cost is derived as

64% as per P&L break up(=> selling price = material/0.64), but traditional costing

maintains material at 55% (=> selling price = material/0.55)

Job costing expenses may be sometimes at par with traditional estimation. Sometimes

the will be more than the traditional estimates.

3.5 Recommendations

As the behaviour of expenses is variable it is suggested to apply a detailed job costing

technique on a regular basis on randomly selected jobs to review if the traditional

costing is estimating the price with a considerable margin.

As the job costing labour costing is more than traditional weightage in majority cases,

the labour having taken by analysing the billing of each contractor implies that the

share of labour expense has to be increased in traditional costing to 13 to 15% this

includes CRM also.

The lower bound of final price is estimated as 1.25% of material+labour cost in

traditional method; however the overheads ranged from a minimum of 27% and

maximum of 30%. It is suggested to maintain overhead estimate in this range.

The activity based costing can be used to observe the expense pattern. Suppose

overtime, the cost of individual department increases, then the corresponding activity

cost shares also increases. A deeper study easily identifies the variations caused.

3.6 Limitations and Further Study

The direct costing heads like labour and transport can change the cost estimate

significantly. So a further detailed study to estimate labour cost on man hour basis for

jobs of different capacities and a more accurate transport costing technique can be

worked on to make the job costing more detailed and accurate.


Chapter 4: Financial Statement Analysis


4.1 Financial Statement Analysis

Financial statement analysis is defined as the process of identifying financial health of an

organisation by establishing relationship between the items of the balance sheet and the P&L

statement. Financial analysis determines a company’s health and stability. The data gives an intuitive

understanding of how the company conducts business.

There are various techniques used in analysing Financial Statements as mentioned in literature. The

approach in the analysis is as follows

1) Trend analysis

a. Horizontal Analysis

b. Vertical Analysis

c. Ratio Analysis

d. Observations

2) Competitor Analysis

a. Horizontal Analysis

b. Vertical Analysis

c. Ratio Analysis

d. Observations

3) Working Capital Management

a. Ratio Analysis

b. Cash conversion cycle

c. Observations

4) Summary and Recommendations


4.2 Trend analysis

In the trend analysis the P&L and balance sheet statements of past five years of Bectochem are

considered as mentioned in Appendix 5. These statements are related by horizontal, vertical and ratio

analysis and the trend of different constituent elements are studied and interpreted.

4.2.1 Horizontal Analysis

In the Horizontal Analysis, the statements of one particular year are maintained constant and the

change in corresponding elements over time with the basic statements are derived and compared.

In this case the values of balance sheet and P&L elements for the year 2005-06 are maintained as 100

each and the values of the elements of the subsequent years are taken as % of 2005-06 values.

For example, sales in 2005-06 are Rs 3141.75 lakhs and that in 2006-07 are Rs 4683.41 lakhs. In

horizontal analysis sales of 2005-06 are maintained as 100 and that of 2006-07 will be

Sales 2006-07 = (actual sales 2006-07/actual sales 2005-06) * 100

Sales 2006-07 = 149.07 sales 2005-06 = 100

Similarly all the elements of P&L and balance sheet are calculated. This kind of calculation relates

and presents the behaviour of each individual element over years. The resultant Horizontal Analysis is

mentioned in Appendix 6,

The observations are as follows,

Figure 4.1: P&L Trend


Figure 4.2: Capital Structure Trend

Figure 4.3: Application of Funds


Observations:

P&L sheet sales was undry ing till 2007-08 but there was a gradual fall from 2007-08.

There is not much difference in change in stock (opening stock-closing stock)

however there was a sudden rise in 2009-10, the closing stock has increased

to a great value

The amount of material consumed remained constant over 4 years, but if the

closing stock is considered in the amount of material handled, 2009-10

registered highest value in the stock handling

The Fall in net profit is very high compared to the fall in sales or gross profit.

This implies that the variation of sales expenses and gross profit are in sync

but the variation of net profit is relatively high.

The loan procured in the year 2009-10 is high above the trend which resulted

in increased interest payment. The trend of interest is increasing year by year.

There is a rise in profit till 2007-08 followed by a fall, this follows the sales

trend. The fall in 2009-10 is due to increased personnel expense, interest and

reduced sales also primarily of material cost

Balance Sheet

The equity contribution was constant over past three years. The reserves and

surplus is also decreasing gradually.

Since there is a need for capital, it is raised from loans as the reserves are

decreasing. This is observed in the high growth of loan contribution.

So the trend of capital structure is it is rising with additional loan capital as

the equity is constant and surplus is decreasing

Among the assets the gross block and investments were constant, where as

the inventory has been increasing

The increase in inventory can be attributed to increased volume of activity

rather than safety stock increase as majority of the work is carried on with job

order production, so material is procured only after order is made leaving

little chance to safety stock

The sundry debtors value has slightly decreased, however when observed in

the trend it has fallen from a high value of 218% in 2006-07 to 91%, this is a

good phenomenon as most of the sales are realised in cash, this trend has to

be continued

The cash balance has come down to very low, on the other hand undry

creditors value has been increasing. This is not a healthy situation as there

can be cash crunch regularly, poor performance or loosing of suppliers.

Loans and advances given are maintained at a low % after a growing trend.

This is indeed a goo phenomenon; however the amount of loan is relatively

small. Table 4.1: Horizontal analysis Observations


4.2.2 Vertical Analysis In the vertical analysis the total capital developed is taken as 100 for each year and the share of each

constituent element is calculated for each year. Similarly the application of funds is also calculated as

a % of the total amount. In P&L sales is taken as 100 and all the other elements are taken as a % of it

for a given year. Similar computation is done for remaining years. The vertical analysis is reported in

Appendix 7.

In this case for the year 2005-06 capital structure and the common size sheet for vertical analysis are

as follows

Capital Structure element Actual Vertical

Share Capital 200 37.34

Reserves & Surplus 111.34 20.79

Total Share Holder Fund 311.34 58.12

Total Loan 224.09 41.84

Total Amount 535.65 100 Table 4.2: Vertical analysis

This gives the mix of capital, application of funds and performance year by year. The observations are

as follows,

Figure 4.4: Expenses break up Trend


Figure 4.5: Capital Structure Mix

Figure 4.6: Application of Funds Mix


Observations:

Element Observation

P&L

The material purchased has been gradually increasing, the purchase was

highest in 2009-10, this implies increased activity, and however the closing

stock is also increasing, which shows proportional sales are not realised in

the same year.

Direct and personnel overheads were gradually increasing. This is obvious

with increased activity. The admin costs were reduced in the year 2009-10

slightly. However this fall is relative to the sales, so value wise they are

increasing

Though the gross margin has been increasing, the net margin has decreased

in 2009-10 because of increased loan and interest payment

The interest component in the expenses is increasing at the expense of

profit while the expenses are more or less constant.

Balance Sheet

The trend which has been impressive from 2006-09 is disturbed in 2009-10

with loan share increasing and reserves share decreasing. This implies and

increase in cost of capital

The equity remaining constant, the share capital was increasing with added

surplus each year and the loan capital was increasing as the share capital is

not sufficient to handle the expenses. The year 2009-10 has an increased

share of loan

The gross block is more or less constant. But its share in assets is variable

due to changes in other asset/liabilities.

In the current assets, inventory and sundry debtors have major share

As inventory control is not predictable due to job order production, the

sundry debtors share is gradually decreasing indicating decrease in actual

value of debtors which implies faster payments

The proportion of cash maintained is very low. This might be risky as this

leads to situations of cash crunch

The proportion of sundry creditors has been decreasing; however it still

forms the major chunk of current liabilities. This is not a good phenomena

as this results in poor supplier performance

On an aggregate the proportion of current liabilities has been decreasing

where as current assets is increasing. However most of the current asset

items are non cash item, which take time to be converted into cash. Table 4.3: Vertical Analysis Observations


4.2.3 Ratio Analysis

Different ratios are applied among the elements of balance sheet and P&L statement of a particular

year. These ratios give the performance, efficiency and risk coverage capability of that year. The

variation of these ratios provides insights into the trend of efficiency performance and risk coverage

capacity of firm. The ratios considered are,

Overall Performance

ROIC NOPLAT/Invested Capital

ROE PAT/Net Worth

Operating Management

Net Margin PBIT/Net Sales

Gross Profit Ratio

Net Sales-Cost of Goods Sold/Net

Sales

Operating Ratio Operating Expenses/Net Sales

Efficiency in use of resources

Asset Turnover Net Sales/Invested Capital

Fixed Asset Turnover Net Sales/Net Fixed Asset

Current Asset Turnover Net Slaes/Current Asset

Working Capital Turnover Net Sales/Working Capital

Sundry Debtors Turnover Net Sales/Sundry Debtors

Inventory turnover Net Sales/Inventory

Average Collection Period sundry debtors/avg net sales per day

Average Payment Period trade creditors/avg purchases per day

Solvency & liquidity

Interest Coverage PBIT/Interest

Net Financial Leverage Debt/Net Worth

Current Ratio Current Asset/Current Liability


Ratio Analysis Output

Ratio 2009-10 2008-09 2007-08 2006-07 2005-06

Overall Performance

ROIC 0.14 0.21 0.23 0.15 0.14

ROE 0.12 0.2 0.26 0.25 0.13


Net Margin 0.069 0.071 0.072 0.055 0.032

Gross Profit Ratio 0.061 0.056 0.059 0.036 0.033

Operating Ratio 0.939 0.944 0.941 0.964 0.967


Asset Turnover 2.7 4.25 4.42 3.94 5.87

Fixed Asset Turnover 11.42 12.36 12.63 12.35 9.1

Current Asset Turnover 1.51 1.95 2.12 1.67 1.79

Working Capital Turnover 4.06 8.12 8.55 7.02 18.22

Sundry Debtors Turnover 3.41 3.65 3.98 3.24 4.75

Inventory turnover 3.47 10.64 11.45 5.14 5.68

Average Collection Period 87.85 82.3 75.44 92.58 63.22

Average Payment Period 143.19 118.74 105.3 130.11 117.68


Interest Coverage 3.03 5.9 5.43 7 3.59

Net Financial Leverage 0.51 0.26 0.57 1.18 0.72

Current Ratio 1.59 1.32 1.33 1.31 1.11

Table 4.4: Ratio Analysis Output


Observations

ROIC

There was a rise till 2007-08 but a fall after that. The fall in 2008-09

is due to reduced sales and the fall in 2009-10 is due to reduced

sales as well as increased investment

ROE

This also follows a similar trend s ROIC, however the fall in 2009-

10 is greater than that of ROIC this is due to reduction in numerator

over a relatively small value

Net Margin

Net margin has been almost same implying an almost equal expense

head over years

Gross Profit Ratio

This is also a similar ration except for not considering few indirect

costs, it has been increasing constantly implying the sales and

expenses are following a similar trend of growth

Operating Ratio

There is a slight fall in operating expenses which can be

proportional to reduced sales in 2009-10

Asset Turnover

This also follows the pattern of ROIC and the reasoning is also the

same

Fixed Asset Turnover

The fixed asset turnover also follows same trend as asset

turnover but the fall in ratio value is small, this implies

investment in fixed assets is low. The extra investment procured

is to address expenses rather than increasing capacity of fixed

assets

Current Asset Turnover

The current asset turnover follows the ROIC trend and the variation

is also great, this implies the major investment is into current asset

(inventory). So the fall in ratio is of a bigger magnitude.

Working Capital Turnover

The working capital ratio has fallen in 2009-10 greatly because of

fall in sales and an increase in working capital I e inventory

Sundry Debtors Turnover

A reverse of this ratio gives the % of credit sales. It has been

growing since past three years. In 2009 it is about 30%, This %

has to be reduced as this delay in collection may also have

driven for loan procurement to address expenses.

Inventory turnover

There is a great fall in inventory turnover in 2009-10 from 10 to 3,

this is due to reduced sales and increase in inventory. So measures

have to be taken either to increase capacity or streamline sales with

capacity

Average Collection Period

The average collection period has decreased from a high of 92 days

in 2007-08 to 87 days in 2009-10. Though this fall is small, it has to

be further reduced to realise the cost at the earliest

Average Payment Period

The average supplier payment period has reached at an all time high

of 143 days. This is the result of increased activity debtors and

inventory, money is not being allocated to suppliers in time

Interest Coverage A reverse of this ratio shows the % of interest paid from PBIT.

This has increased to 33% which is pretty high.

Net Financial Leverage

The debt portion is gradually increasing, and this also indirectly

reduces the profit (interest payment) thus reducing the share capital

and on the other hand debt is increased

Table 4.5: Ratio Analysis Observations


4.2.4 Trend Analysis Summary

Sales, expenses and gross profit follow same trend and same level of variation, but

net profit variation will be high for a given change in sales. A small increase in

sales can increase the net profit by a greater value and same is the case with fall in

sales. A reverse trend is observed in interest payment trend. It is increasing with fall

in sales.

In the capital structure, reserves are gradually falling where as loan is increasing.

The cost of reserves will be lesser than cost of loan. The increase in loan is not a

favourable symptom. In the application of funds, the net current assets have

increased while the change in fixed assets is negative and small. From this it is

understood that the loan procured is to address the working capital management.

From Vertical analysis it is understood that there is an increase in profit and interest

component while the expense component is slightly reduced. In the recent year

(2009-10) there is a fall in profit and rise in interest. This is good symptom and also

not following the trend.

The trend observed in the capital structure from 2006-09 is disturbed in 2009-10. In

the former the reserves were increasing while equity and loan were decreasing, in

2009-10 the loan has increased at the expense of reserves. This is bringing back to

the structure that is observed in 2005-06. In the application part the net current

assets are increasing while the investments and fixed assets are decreasing.

Two critical observations from the ratio analysis are

1) The debtors value is 30% of sales and creditors are 47% of material purchased

2) The interest paid is 33% of PBIT in 2009-10 These two symptoms indicate the risk resulted due to credit sale policy and the capital

structure policy.


4.3 Competitor Analysis

This analysis follows the same approach as in trend analysis. The only difference being the data

considered. The financial reports of two peer companies LT and praj for the year 2008-09 and 2009-

10 are considered and following set of analysis tools are applied.

1) Horizontal Analysis

2) Vertical Analysis

3) Ratio Analysis

4.3.1 Horizontal Analysis

In the horizontal Analysis the financial reports of Bectochem and two of its peers for the year 2008-09

and 2009-10 are considered and the relative change in each element of the financial statements is

recorded. These trend values are compared.

For example the sales of the three companies for two years are as follows,

LT 2009-10 LT 2008-09 Praj 2009-10 Praj 2008-09 Bectochem

2009-10

Bectochem

2008-09

36,870.19 33,856.54 602.28 771.88 4239.84 4957.82

In horizontal analysis the sales change in 2 years is considered and compared,

LT Praj Bectochem

8.9 -21.97 -14.48

Thus the trend of all the elements is calculated and tabulated in Appendix 8. The observations are,

Asset Liability

Head Details

LT 2009-10 &

2008-09

Praj 2009-10 &

2008-09

becto 2009-10 &

2008-09

Share Holders Funds

Owner’s

fund

Equity

share

capital 2.82 0.71 0.00

Share

application

money

Reserves &

surplus 47.29 21.79 23.26

Total Share Holders

Funds 47.07 20.04 13.16

Debt Capital

Secured -13.30 -100.00 171.21


loans

Unsecured

loans 7.18 69.74

Total Debt 3.73 -100.00 116.88

Total Capital 32.11 16.69 34.87

Application of

Funds

Fixed Assets

Gross

block 29.79 8.85 5.89

Less :

revaluation

reserve -5.29

Less :

ccumulat

e

depreciatio

n 21.55 38.67 23.19

Net block 32.84 3.00 -7.44

Capital

work-in-

progress -17.61 248.62

Total Fixed Asset 22.68 25.93 -7.44

Investments 65.85 29.39

Current assets, loans

& advances 11.91 -24.59 10.52

Less : current

liabilities &

provisions 18.35 -24.22 -8.59

Total net current

assets -9.28 -26.32 70.90

Miscellaneous

expenses not written -100.00 -32.62

Total Appliction 32.11 16.69 34.52

Income/Expense

Head Details

LT 2009-10 &

2008-09

Praj 2009-10 &

2008-09

becto 2009-10 &

2008-09

sales Income 8.90 -21.97 -14.48

Expenses

Material

consumed 8.74 -10.47 -21.41

Manufactur

ing

expenses 7.02 -26.45 9.98

Personnel

expenses 19.07 -3.76 1.92

Selling

expenses -1.88 -41.21

Adminstrat

ive -10.87 -37.80 -21.48


expenses

Expenses

capitalised 48.08

Cost of sales 6.97 -16.06 -15.03

Gross Profit 22.73 -41.49 -5.14

Indirect Income 30.15 134.53 -25.46

Adjusted PBDIT 23.87 -25.37 -12.22

Other Expenses

Financial

expenses 29.27 -15.38 60.67

Depreciatio

n 34.69 28.64 13.48

Other write

offs 46.27

Adjusted PBT 21.85 -27.73 -33.12

Tax Expenses 34.08 -70.44 -40.15

Adjusted PAT 16.39 -19.33 -28.73

Non recurring items 55.95 -73.00

Other non cash

adjustments 113.99

Reported net profit -1.49 -24.28 -28.73 Table 4.6: Growth rate of peer companies

Observations

Note

The companies being compared are of different sizes, LT being the largest

Bectochem being second largest and Praj being smallest. LT sales are 60 times

greater than Praj and Bectochem is 7 times greater. So the % changes doesn’t exactly

imply there is a equivalent value change in all three companies

P&L sheet

There is a growth of 9% in LT sales and a fall of 21% sales in Praj, Bectochem

experienced 14% decrease in sales. So the overall industry was experiencing a

slowdown in this year

The material consumption is also proportional to sales, Praj & Bectochem

experienced a decrease in consumption where as LT has increased its consumption

Though there is a small increase in Bectochem manufacturing expenses, the overall

cost of sales was decreased. The same is the case with Praj and LT has an increase in

expenses. However the % fall in expenses of Praj is not as big as in Bectochem. That

is why it experienced more fall in profit unlike Bectochem

There is a positive growth in indirect income of two competitors where as there is a

decrease in Bectochem indirect income.

Overall, LT has realised greater growth in profit compared to its sales growth and

Praj experienced greater fall is profit than sales. Bectochem had a lesser fall in gross

profit than sales which implies sales had a direct impact on direct expenses. In case of

praj the fall in expenses is not at pace with fall in sales which implies there is

operational inefficiency in the company

The interest payment of LT and Bectochem has increased but that of Praj has

decreased


On an overall, LT has experienced growth in sales supported by operational

efficiency, by drawing extra investment from loan. It has experienced a good profit.

Praj had a great fall in sales, but the fall in expenses is not at par, these further

reduced profits however the fall in interest payment helped reduce the difference in

gross margin and net margin. In Bectochem, the fall in sales and fall in expenses

considerable controlled the fall in gross margin however increase in interest reduced

net margin further

Balance

Sheet

The increase in surplus is great in LT compared to Praj and Bectochem which are at

par. This implies that a greater portion of profit is transferred to reinvestment at LT

There is a small increase in the debt capital of LT. The total debt of Praj is cleared

off but Bectochem has borrowed a lot off amount

Major investment of LT is into fixed assets and other investments. Infact Praj also

invested a major portion in fixed assets. Praj will be expanding its capacity to address

the demand. Bectochem did not have significant investment in fixed assets

There is a 10 % current asset increase in Bectochem and LT indicating increase in

activity. But there is a fall in current assets of Praj as it is in expansion and has

reduced its activity greatly.

There is a fall in current liabilities of Bectochem and Praj but that of LT has increased

by 18% and its current assets are not sufficient to cover liabilities. This leads to

mismanagement of working capital

The capital developed and applied has grown by 34% in Bectochem and 16% at Praj.

As praj is in expansion, the growth might be traded at the cost of expansion Table 4.7: Horizontal analysis observations


4.3.2 Vertical Analysis

In the vertical Analysis, the same approach adopted in trend analysis is formed. The data considered is

the financial reports of the three companies for the year 2008-09 and 2009-10.

Figure 4.7: Indirect Expense Comparison

Figure 4.8: direct Expenses


Figure 4.9: Capital Structure

Figure 4.10: Funds Application


Observations

P&L The expense break up is quite different in LT and Bectochem. In

Bectochem Majority of the expense is in material but in LT it is in

manufacturing. In Praj the material cost is almost at par with Bectochem.

So this implies in long run the focus should be in reducing material cost

and to own manufacturing setup rather than outsourcing

The personnel cost and admin expenses are also high in Bectochem

compared to the peers. Especially LT managed to maintain admin and

personnel cost at a low margin. This can be due to heavy investment into

manufacturing and material that has reduced the share of personnel and

admin. The total cost of sales is maintained below 85% in both the

companies but it is as high as 94% in Bectochem

The interest payment is found high in LT and Bectochem, but very low in

Praj. As mentioned earlier LT borrowed for asset expansion, Bectochem

for expenses and Praj has cleared its loan

The gross profit is 16% in LT 21% in Praj. This implies the margin should

not be less than 15% however in Bectochem it is 8%. The gap in gross and

net profit is around 4 to 8 % majorly consumed by interest payment.

However in Bectochem’s case , the operational expenses share reduce the

profit share to a very low %.

Balance Sheet Among the capital structure of three companies, LT and Praj has similar

structure, maintaining minimum equity share and majority of reserves to

invest. In Bectochem, reserves contribute only 44% of the capital structure

and equity and debt form a considerable portion. The cot of debt and equity

is more than reserve.

The Fixed Asset Level is at par with industry level but the investment

share is less and also constant unlike other companies. Secondly the

current asset and liability value is having unlikely high share. This implies

majority of investment is used in managing working capital than other

factors Table 4.8: Vertical Analysis Observations

4.3.3 Ratio Analysis


Following Performance, efficiency and risk coverage ratios are computed and compared.

Ratio LT Avg Praj Avg Becto Avg

Overall Performance

ROIC 0.224 0.326 0.240

ROE 0.121 0.343 0.159


Net Margin 0.144 0.236 0.070

Gross Profit Ratio 0.260 0.204 0.058

Operating Ratio 0.740 0.796 0.942


Asset Turnover 1.626 1.412 3.476

Fixed Asset Turnover 6.181 4.248 11.891

Current Asset Turnover 1.401 1.482 1.731

Working Capital Turnover 6.703 8.376 6.092


Interest Coverage 5.812 450.512 4.460

Net Financial Leverage 0.450 0.014 0.386

Current Ratio 1.269 1.215 1.454 Table 4.9: Ratio Analysis

Observation

ROIC

The ROIC value of LT is 22%, that of Praj is 34% and Bectochem is

24%. This implies the PBIT is at par with industry margins

ROE

RoE is very less compared to ROIC as PAT is considered the ROE is

very low in LT as its main source of investment is reserves, it is not the

same in Bectochem hence there was relatively high margin

Net Margin the net margin is less compared to industry standards, Major

expenses are going into operational expenses

Gross Profit Ratio

As discussed in vertical analysis the gross margin is less compared to

industry standards, it should maintain either good margin or go for a

greater production

Operating Ratio

This is a complementary ratio of gross profit ratio. So this also suggests

the operational expenses are greater compared to industry level

Asset Turnover The Asset Turnover is high compared to its peers. This is a good

phenomenon as the investment is resulting in good turnover

Fixed Asset Turnover

The Fixed asset turnover is way above its peers. This is due to absence of

expansion in fixed assets and an increase in sales

Current Asset Turnover

Current asset turnover is almost at par with its peers. But is

declining over 2 year’s time. Additional info to be taken from trend

analysis

Working Capital Turnover Working Capital Turnover is at par with LT.

Interest Coverage Interest coverage is lowest among the three, this implies the

increasing interest payments that are reducing profit margin


Net Financial Leverage Debt is almost 40% of equity. LT is also maintaining the same range.

However the investment of debt is different in both the cases

Current Ratio

The current assets seem to be slightly above its peers. Though it is

suggestible to have current assets more than liabilities, fairly high value

is also not desired Table 4.10: Ratio Analysis Observations

4.3.4 Competitor Analysis Summary

There is an overall fall in income in the companies during 2008-10, the growth in

expenses has been doubled in the peer companies this was not the case in Bectochem.

The sales and expenses of peers have doubled within five years, but Bectochem’s

growth is not at par.

The equity capital remained constant whereas those of peers were increasing. Both the

competitors are investing in fixed assets and the share allotted for investments is also

increasing. This is constant in Bectochem. The current assets and liabilities have

increased significantly in the peer companies compared to Bectochem. This is due to

increased activity.

From vertical Analysis, it is understood that the major share in expenses is material

for Bectochem and Praj whereas it is manufacturing in LT. So as company grows

material cost has to be reduced. Also personnel cost is relatively high at Bectochem.

The financial expenses are also growing as compared to peer companies.

The capital structure of peer companies consists of mainly reserves as major

investment, this is not the case with Bectochem, debt and equity also have equal

contribution compared to reserves.

From ratio analysis it can be inferred that

o Net margin is very low compared to peers

o Peers were investing in assets

o The activity growth in peers is high


4.4 Working Capital Management

It is an investigation into the effectiveness of working capital management of an organization with

particular reference to its short term liquidity and solvency and impact on commercial operations of

the organization.

The primary reason for this investigation is the observations and interpretations derived from FSA

There is a sudden rise in activity in 2009-10 indicated by high level of inventory,

material handled

Though Current assets are capable of covering current liabilities, loan is procured to

address operational expenses

The average collection period, average payment period and inventory turnover period

are very high

This kind of situation leads to a phenomenon called ‘Overtrading’.

Overtrading

It is a situation of under capitalisation. It is a term that is used to refer to a situation where an

organisation aggressively increases its sales or business activities, especially where trading is made on

credit sales without sufficient funds (capital) to support such increasing trading activities.

This is where an organisation has increasing sales volume, usually with lots of customer’s credit sales.

But the prolonged credit sales period (credit limit) implies that company may not have immediate or

sufficient funds from its credit sales and may run the risk of not having sufficient funds to meet its

operational expenses and possibly be faced with liquidation.

This is often a big problem for small medium enterprise (SME) who focus on increasing sales and

business at the inception of business, such that if they are caught up with poor (and inadequate)

current account management policies, they run the risk of overtrading.

The overtrading scenario can be identified by observing the behaviour of few ratios.

Element 2010-11 2009-10 2008-09 2007-08 2006-07

sales 43.82618 -14.4818 -3.46228 9.655785 49.0701

inventory 162.6079 3.894192 -50.8253 64.92177

cost of

sales 43.19389 -15.0146 -3.07547 6.951335 48.6939

gross profit -12.3884 -2.00933 35.29744 103.9373

net profit

-29.0517 -7.4392 45.70089 237.0891

receivables -8.714 5.310797 -10.6431 118.3209

payables

8.967789 1.478856 -20.6797 30.45688

debt

240.9465 -12.6166 151.6391 292.6179

debtors Vol 28.85203 9.395662 8.73038 19.46808

avg collection period 109.8146 102.8761 94.30586 115.729

avg payment period 178.9866 148.4195 131.6289 162.639

inventory conversion period 86.5561 28.18699 26.19114 58.40424

cash&bank balance 26.48 39.38 122.17 79.51


Table 4.11: Over Trading Symptoms

From the above data it is evident that

1) The change in net profit is high for a given change in sales or gross profit.

2) The sales have risen in 2010-11

3) Debt is increased indicating that funds are procured to meet expenses

4) Inventory percentage has also increased considerably

5) Receivables and payables experienced less change, ie the average accounts

payable/receivable has been maintained at a constant level

6) Debtors volume is 30% of sales

7) Cash in hand/bank has been decreased

8) The average collection period is 109 days and average payment period is 178 days

and inventory conversion period is 86 days in 2009. These values are very high

compared to the previous values

9) Though current ratio is decent, quick ratio and cash ratio are not impressive

Effect of Overtrading

Mission to aggressive sales

high level of orders high

initial investment

procurement of loan to address as cash in hand

is less

high inventory and high

amount of debtors result in

late payments

more orders require more

investment and late payment to

suppliers

current ratio 1.591755 1.316518 1.329083 1.312371

quick ratio 0.719134 0.725504 0.774659 0.714137

cash ratio

0.015017 0.020415 0.066945 0.037237

Figure 4.11: Overtrading Cycle


Cash Conversion Cycle

Cash Conversion Cycle (CCC) measures how long a firm will be deprived of cash if it increases its

investment in resources in order to expand customer sales. It is thus a measure of the liquidity risk

entailed by growth.

CCC = # days between disbursing cash and collecting cash in connection with undertaking a discrete

unit of operations.

= Inventory conversion period + Receivables conversion period – Payables conversion

period

CCC trend

The trend of CCC and its constituent elements is as follows

Figure 4.12: CCC trend

From the trend it is evident that there is a sudden rise in CCC time to 23 days. This implies that the

organisation may realise accounts receivables 23 days after it clears all the payments. This was

negative earlier, which means, on an average the company was receiving money from debtors before

making payments. But the present scenario has changed. Though the current assets are capable of

addressing the operational expenses, it is the unavailability of funds at the right time that had costed in

procuring loan. This doesn’t imply that firms should not apply for loans, but an efficient working

capital management would have substituted the burden of loan and thus the expense of interest

resulting in a greater profit and a consistent capital structure.

54.60 60.56

27.84 29.85

92.2379.02

115.73

94.31102.88

109.81

147.10162.64

131.63

148.42

178.99

-13.48

13.65

-9.48

-15.70

23.05

-50.00

0.00

50.00

100.00

150.00

200.00

2009-10 2008--09 2007-08 2006-07 2005-06

inventory cycle accounts receivable cycle

accounts payable period cash conversion cycle


4.5 Recommendations from FSA

The high share of debtors and creditors has to be reduced (debtors 30% of sales,

creditors 47% of purchases). The presence of high amount of debtors and creditors

may create liquidity issues. Hence it is suggested to control the values of each.

The high value of inventory observed, is majorly work in progress the company

carries job order production. The rise in inventory conversion period from 29 to 92 is

a matter of concern. Because to procure this inventory money has to be invested, and

the return on this inventory will be realised after a period which is equal to inventory

conversion period + average collection period. Thus leads to liquidity problems.

The profit margin (Gross Profit = 8% and net profit 5%) is significantly below the

margin maintained by the peers. The ideal profit margin to be maintained is 15%.

Besides these Personnel expenses are high compared to peers, the relative share of

this expense has to be controlled.

The loan component affects directly the profit; this has to be controlled by proper

working capital management. The capital structure of peers has reserves as a major

investing component. Also cost of reserves will be compared to cost of loan or equity.

The activity pace should be enhanced which hints at capacity expansion as done by

peers