Final Prject On Working Capital Management-Neha Desai-09BS000681-IBS Ahmedabad

A
Final Report
On
THE STUDY OF
WORKING CAPITAL MANAGEMENT
&
COMPARATIVE ANALYSIS
At
(CADILA HEALTHCARE LIMITED)
Submitted to:
Faculty Guide: Company Guide:
Prof. Pankaj Madhani Mr. Kalpesh Patel
Faculty of Finance Deputy General Manager
ICFAI Business School Cadila Healthcare Limited
Submitted By:
Neha Desai
09BS000681 – Batch 2011
Contact no - +91-9428508387
Email ID: desaineha_289@yahoo.co.in
Acknowledgement
Summer Internship Program 1
To get the water from the well, we need the help of the rope and bucket. Similarly, to learn so
many practical aspects of such a large organization, without anybody’s help is not possible. I am thankful to
all the employees of Zydus Cadila, who provided factual information technical notes and moral support.
I am obliged to Cadila Healthcare Limited for providing an opportunity to undergo training in their
esteem organization for fourteen weeks. Summer training in Zydus Cadila has aided me to gain practical
insight to develop a professional attitude. During my project, I got a tremendous co-operation from the whole
Finance Department.
With an overwhelming sense of pride and obligation, I bestow my gratitude to my company guide,
Mr. Kalpesh Patel and also to my faculty guide, Mr. Pankaj Madhani of ICFAI BUSINESS SCHOOL for
their able guidance, constant encouragement, constructive and critical appraisal, generous help and vital
suggestions. It was acumen of their supervision that saved me from the taste of several errors and placed me
in right place at right times.
I extend my profound sense of gratitude to Mr. Jayesh K. Patel for his valuable and constant
suggestions and guidance during the course of this project. I am even thankful to
Mr. Mitesh Pandya

Mr. Sanket Adeshra
Mr. Maulik Pandya
Mr. Manish Shah
Mr. Manish Mehta
Mr. D. P. Patel
Ms. Laveena D’
for providing me with factual information, technical notes and moral support.
Last but not the least, I thank all those who knowingly and unknowingly, directly or indirectly have
helped me in the fulfillment of this project.
ABSTRACT

The project undertaken by me at CADILA HEALTHCARE LIMITED is “THE STUDY OF WORKING
CAPITAL MANAGEMENT” for the duration of 14 weeks. Working capital management refers to all
management decisions and actions that ordinarily influence the size and effectiveness of the working capital.
It is concerned with the most effective choice of working capital sources and the determination of the
appropriate levels of the current assets and their use.
The main areas that will be covered under this project are divided into six stages. The first phase is to
determine the net working capital (operating) cycle that is the time duration required to convert sales, after the
conversion of resources into inventories, into cash.
The second phase is to study about the Cash management, to accomplish various tasks of cash collection,
payment of outstanding and arranging for deficit funding or surplus investment at a minimum cost or it should
be at maximum returns. It assumes more importance than other assets because cash is the most significant and
least productive asset that a firm holds. It aims to maintain adequate control over cash position to keep the
firm sufficiently liquid and to use excess cash in some profitable way.
The third phase is to study the Inventory management that will have the emphasis on learning the methods
which are used by the company for the ordering and purchase of inventory. Finally, inventories are held to
obtain an optimum utilization of people, place, time and equipments.
The fourth phase is to study about the Receivables management which is a tool that acts as a bridge for the
movement of goods through production and distribution stages to customers.
The fifth phase was of financial analysis that can be applied in a wide variety of situations to give business
managers the information they need to make critical decisions. While Ratio Analysis is the main part of
financial analysis which will help to compare the company with the other main players of the industry, in
order to get an idea of its position in the industry.
The sixth phase is to learn about the following activities: 1.) To get an idea about the business processes by
learning SAP R/3 – Finance module, 2.) Also to learn about a software Vision21 used by Dial for Health Ltd.
(Subsidiary of Zydus), 3.) To learn about few topics in brief like sales tax, service tax, treasury control
management, foreign exchange, supply chain management etc. as per the permission granted by the
authorities.
Table of Content

Sr. No. Particulars Page No.
1 Acknowledgement 2
2 Abstract 3
3 Introduction
* Project Title 5
* Description of the project 5
* Objectives of the project 5
* Methodology 6
* Schedule 6
4 Overview of the industry
* Global Pharma Industry 7
* Indian Pharma industry 8
5 Company Profile 12
6 Working Capital Management 15
* Net Working Capital (operating) Cycle 21
* Cash Management 29
* Inventory Management 51
* Receivable Management 67
* Ratio Analysis 88
7 Extra Learning
* Auditing at Dial For Health’s Retail Shops 139
* VAT 140
* CST 141
* Concurrence 143
* Calculation of NRV and MPV 144
8 Practical work on SAP 145
9 Practical work in Vision 162
10 Learning 171
11 Recommendation 172
12 Conclusion 172
13 References 174

 Project title: Working Capital Management and Comparative Analysis
 Description of Project in brief:

 Analysis of the annual reports of the company for the year 2004-05, 2005-06, 2006-07, 2007-08,
2008-08 to get aware about the company’s products, its capital, sources of funds, borrowings,
creditors, debtors, expenses and revenue.
 To compare the company’s position with help of finacial analysis (Ratio) and to suggest company,
how to improve their position over its competitors.
 To gain the practical knowledge of the working capital management which includes:
 MRP-material requirement planning
 Raw material & packaging material
 Inventory management
 Cash & bank management
 Debtors management
 Disbursement (creditors) management
 Transaction related to FOREX
 To understand the policy adopted by the company for working capital management
 To get an idea of the financial system of the company by working with the software SAP which
company has implemented since last 2-3 years.
 To get an idea about the another software VISION 21, used by Dial for Health- subsidiary company
of the Zydus Cadila Healthcare Limited.
 Objective of the Project:
 Computation of Working Capital Management
 Operating Cycle of the firm
 Financial plan estimation
 Working capital credit limits
 Ratio analysis
 How to handle working capital
 Working capital management’s application in corporate to learn routine operations of the corporate
finance.

 Methodology:
The methodology to be adopted for the project is explained as under:
 The initial step of the project was studying about the company and then evaluating the
financial position of the company on the basis of ratio analysis.
 Comparing the firm’s financial position with respect to its competitors i.e.,
 Sun pharma, Ranbaxy , Dr.reddy, Lupin, Nicholas Piramal with the help of following ratios-
1. Profitability Ratios,
2. Leverage Ratios,
3. Turn over ratios,
4. Liquid Ratios and many more.
 The project will focus on the study of overall working capital management at the
organizations, for which the following study and analysis will be undertaken:
1. This project is aimed to estimate the operating plan.
2. This will also include the calculations and analysis of the operating Cycle for the day.
3. It will also include the ratio analysis of the financial statement so that the profitability
and liquidity trade off can be analyzed.
 Limitations of the Study:

Some limitations, which have been identified, by me are:
1. Generalizations and calculated assumptions had to be made in some areas while analyzing the
financial statements, ratios etc. due to non-availability of complete information.
2. The segment wise and product wise study of the various product segments and units of the
company have been excluded from the scope of the project due to data and time constraints.
 Schedule of the project:

Sr. No. Activity Duration
1 Introduction to Company 23/02 to 28/02
2 Ratio Analysis of Company 02/ 03 to 08/03
3 Ration analysis of Industry 09/03 to 15/03
4 Practical work on SAP and VISION 16/03 to 04/04
5 Inventory management 06/04 to 12/04
6 Working capital and other topics 13/04 to 03/05
7 Cash Management 04/05 to 10/05
8 Receivables Management 11/05 to 18/05
9 Business Process and others 19/05 to 21/05

 Overview of Industry:
The global pharma market
A pharmaceutical company, or drug company, is a commercial business, whose focus is to research,
develop, market and/or distribute drugs, mostly in the context of healthcare. They can deal in generic and/or
brand medications. They are subject to a variety of laws and regulations regarding the patenting, testing and
marketing of drugs. The major stages of the pharmaceutical value chain comprise drug discovery, drug
development, manufacturing, distribution, and sales and marketing. Improving efficiency for a speedy ROI
in every stage has become a critical factor to ensure the success of the company.
Patents build fortresses around inventions, trademarks establish and identify brands, Copyrights
provide protection to accompanying literature, and Designs Registrations cover novelties in shapes, forms
and ornamentation which visually impact consumers. Globally, these tools of Intellectual Property Rights
(IPR) are key components of strategy formulation and implementation by Pharmaceutical Corporations.
Protected intellectual assets preserve exclusive markets, maintain profit margins, provide market access and
give freedom to operate. IPR portfolio has now become an effective platform for benchmarking of
intellectual assets and innovative capabilities of corporations, business entrepreneurs and researchers. This
is extensively being used in today’s world of mergers, acquisitions, strategic alliances, and collaborations,
licensing arrangements and Venture Capital Funding in Pharmaceutical and Allied Industries. Of the top 50
pharmaceutical companies, 18 are with their head offices in the USA, 21 in Europe, and the other 11 in
Japan. Worlds patenting activities are also most intense in these regions.
 Expected growth rate in 2010:

The global pharmaceutical market research has been done by many companies and almost all of the
market reports indicate a significant growth of of pharma market in 2010. The forecasting indicates
pharmaceutical market growth of about 4 - 6% in 2010.
If present industry overview is taken into consideration then the global pharmaceutical market in 2010
is projected to grow 4 - 6% exceeding $825 billion. The global pharmaceutical market sales are expected to
grow at a 4 - 7% compound annual growth rate (CAGR) through 2013. This industry growth is driven by
stronger near-term growth in the US market and is based on the global macro economy, the changing
combination of innovative and mature products apart from the rising influence of healthcare access and
funding on market demand. Global pharmaceutical market value is expected to expand to $975+ billion by
2013. Different regions of the world will influence the pharmaceutical industry trends in different ways.
The pharma market world over will experience significant shifts. Asia-Pacific region will emerge as the
fastest growing pharmaceutical market over the recent past. The reason for this positive shift can be
attributed to the low costs and favorable regulatory environment. This region has experienced important
developments regarding contract manufacturing, especially in generics and APIs. Increased R&D activities
in the region has helped Asia-Pacific pharmaceutical industry to achieve an estimated market size of around
US$ 187 Billion in 2009. Here, the pharmaceutical industry is expected to grow at a CAGR of around

12.6% during 2010-2012. It can, in fact, become the global API production hub in next few years.
Pharmaceutical sales are growing at a fast rate in India, China, Malaysia, South Korea and
Indonesia due to the rising disposable income, several health insurance schemes (that ensures the sales of
branded drugs), and intense competition among top pharmaceutical companies in the region (that has
boosted the availability of low cost drugs). China’s pharmaceutical market will continue to grow at a 20+ %
annually, and will contribute 21% of overall global growth through 2013. India - 3rd Largest Producer of
Pharmaceuticals Across the World- is already a US$ 8.2 Billion pharmaceutical market. The Indian
pharmaceutical industry is further expected to grow by 10% in the year 2010.
 Exports trends:
India exported drugs worth US$ 7.2 billion in 2007-08 to the US and Europe, followed by Central and
Eastern Europe, Latin America and Africa. A report by industry research firm, RNCOS forecasts that
pharmaceutical exports will grow at a CAGR of 18.5 per cent between 2007-08 and 2011-12. This growth
will be fuelled by multi-billion dollar patent expirations and growth in the global generics market.
Pharmaceuticals exports (valued in US dollar terms) registered an impressive growth rate at 30.7 per cent
during April-October 2008 compared to the corresponding period last year.
 Pharmaceutical retail:
India has 5.5 million chemists and druggists, and the organized retail market accounts for just 2 per cent
of the industry but is posting a year-on-year growth of 30-40 per cent. The country's pharmaceutical retail
market is expected to cross the US$ 10 billion mark in 2010 and be worth an estimated US$ 12 billion- US$
13 billion by 2012.
 Government initiative:
The Government has taken various policy initiatives for the pharmaceutical sector:
 Government has offered tax-breaks to the pharmaceutical sector. Units are eligible for weighted tax
deduction at 150 per cent for the R&D expenditure incurred.
 Steps have been taken to streamline procedures covering development of new drug molecules,
clinical research etc.
 Government has launched two new schemes—New Millennium Indian Technology Leadership
Initiative and the Drugs and Pharmaceuticals Research Program—specially targeted at drugs and
pharmaceutical research.
The Indian Pharma Market:
The Indian pharmaceutical market is the world's fourth largest by volume (8% of global total) and
thirteenth largest by value (less than 1% of global total). Although prices are the lowest in the world, 70%
of the population does not have access to drug therapy and 2002 per capita consumption was only $3.33.
The lack of pharmaceutical patents means that there is an average of 200 brands for every molecule on the
market.
 Advantages to Indian Pharma Industry:

 Low-cost skill base
 Current Good Manufacturing Practice (CGMP) and U.S. FDA compliance level
 High visibility in generics
 High-quality, compliant manufacturing
 Strong financial position with ability to scale up
 Manufacturing capacity
 Access to new technologies
 Cost efficiency and track record
 Industry position
 Recognition of product patents
 Disadvantages to Indian Pharma Industry:

 Pricing Issues
 Regulatory Reforms
 R&D Spending
 Role of Pharmaceutical Industry in India GDP-Facts
 The Pharmaceutical Industry in India is one of the largest in the world.

 It ranks 4th in the world, pertaining to the volume of sales.
 The estimated worth of the Indian Pharmaceutical Industry is US$ 6 billion.
 The growth rate of the industry is 13% per year.
 Almost most 70% of the domestic demand for bulk drugs is catered by the Indian Pharma Industry.
 The Pharma Industry in India produces around 20% to 24% of the global generic drugs.
 The Indian Pharmaceutical Industry is one of the biggest producers of the active pharmaceutical
ingredients (API) in the international arena.
 The Indian Pharma sector leads the science-based industries in the country.
 The pharmaceutical sector has the capacity and technology pertaining to complex drug
manufacturing.
 Around 40% of the total pharmaceutical produce is exported.
 55% of the total exports constitute of formulations and the other 45% comprises of bulk drugs.
 The Indian Pharma Industry includes small scaled, medium scaled, large scaled players, which
totals nearly 300 different companies.
 There are several other small units operating in the domestic sector.
 Pharmaceutical Industry in India-Growth:

 As per the present growth rate, the Indian Pharma Industry is expected to be a US$ 20 billion
industry by the year 2015.
 The Indian Pharmaceutical sector is also expected to be among the top ten Pharma based markets
in the world in the next ten years.
 The national Pharma market would experience the rise in the sales of the patent drugs.
 The sales of the Indian Pharma Industry would worth US$ 43 billion within the next decade.
 With the increase in the medical infrastructure, the health services would be transformed and it
would help the growth of the Pharma industry further.
 With the large concentration of multi national pharmaceutical companies in India, it becomes
easier to attract foreign direct investments.
 The Pharma industry in India is one of the major foreign direct investments encouraging sectors
 Future of pharma industry:
The future of Indian pharmaceutical sector looks extremely positive. Indian pharma companies are
vying for the branded generic drug space to register their global presence. Several Indian pharmaceutical
companies have acquired companies in the US and Europe and many others are raising funds to do so.
The dream of Indian pharmaceutical companies for marking their presence globally and competing
with the pharmaceutical companies from the developed countries like Europe, Japan, and United States is
now coming true.
The new patent regime has led many multinational pharmaceutical companies to look at India as an
attractive destination not only for R&D but also for contract manufacturing, conduct of clinical trials and
generic drug research. With market value of about US$ 45billion in 2005, the generic sector is expected to
grow to US$ 100billion in the next few years.
The Indian companies are using the revenue generated from generic drug sales to promote drug
discovery projects and new delivery technologies. Contract research in India is also growing at the rate of
20-25% per year and was valued at US$ 10-120million in 2005. India is holding a major share in world's
contract research business activity and it continues to expand its presence.
Clinical Research Outsourcing (CRO), a budding industry valued over US$ 118 million per year in
India, is estimated to grow to US$ 380 million by 2010, as MNCs are entering the market with ambitious
plans. By revising its R&D policies the government is trying to boost R&D in domestic pharma industry. It
is giving tax exemption for a period of ten years and relieving customs and excise duties of all the drugs and
material imported or exported for clinical trials to promote innovative R&D.
 SWOT Analysis of Pharma Industry:

 Strengths:
 R&D innovation with a broad therapeutic coverage
 Marketing strength in major geographical and therapeutic areas
 Existing Patent protection for a number of years on key products
 Opportunities:
 Decreasing development time through favorable R&D collaborations and internal efforts
 Emergence of integrated global markets and globalisation for new products
 Co-marketing agreements with companies wishing to capitalize on 's marketing
 Strengths, providing with strong products and therefore revenue growth.
 Weaknesses:
 Discontinuation of products in the latter stages of development
 Co-marketing agreements can limit 's global presence
 Increased size and operational complexity makes a less agile company
 Threats:
 Increased competition for core products like Viagra as its high cost encourages use of cheaper
alternative treatments
 Competition from products similar to in R&D that reach the market close to or
before products
 The new economic potential of emergent China, India and competition in diverse
Company Profile:
COMPANY MISSION
Zydus Cadila is dedicated to life… In all its dimensions. Our world is shaped by a passion for
innovation, commitment to partners and concern for people in an effort to create healthier communities,
globally.
COMPANY VISION
To be a leading global healthcare provider with a robust product pipeline and sales of over $1 bn by
2010; we shall achieve sales of over $3 bn by 2015 and be a research-based pharmaceutical company by
2020.
 The Beginning:
The dawn of 50’s ushered in an era of awakening. Having broken free from the bondage of dormant
history, a need arose for the country to be self-sufficient in all spheres. Healthcare at this time was the sole
domain of a few pharmaceutical giants. Coupled to this was the enormous task fighting the myth and
malady by cutting across the barriers of communication so as to reach out to people and to ensure the most
effective cure in the shortest possible time? Under such circumstances with tenacity of purpose and
unfailing zeal to achieve perfection in quality, Cadila was founded, in 1952.
At the time of India's independence in 1947 our Late Founder, Mr. Ramanbhai B. Patel was
completing his graduation at the Baroda Science College. After completing his studies in pharmaceutical
sciences, he went on to join L. M. College of Pharmacy, one of the oldest pharmacy colleges in India as a
Lecturer. With the entire nation gearing up to make India self reliant, Mr. Ramanbhai B. Patel turned an
entrepreneur, determined to contribute his share by setting up a pharmaceutical company. Emerging as a
modest pharmaceutical company, Cadila in the early years came out with a wide range of innovative
products. Zydus Cadila is an innovative global pharmaceutical company that discovers, develops,
manufactures and markets a broad range of healthcare products. The group’s operations range from API to
formulations, animal health products and cosmeceuticals. Headquartered in the city of Ahmedabad in India,
the group has global operations in four continents spread across USA, Europe, Japan, Brazil, South Africa
and 25 other emerging markets.

In its mission to create healthier communities globally, Zydus Cadila delivers wide ranging healthcare
solutions and value to its customers. With over 9,000 employees worldwide, a world-class research and
development centre dedicated to discovery research and eight state-of-the-art manufacturing plants, the
group is dedicated to improving people’s lives.
By the early 1990s, Cadila was ranked the third largest pharmaceutical company in India. (ORG –
December 1991, 1992, 1993). This decade also marked the beginning of a new economic framework and a
shift in government policies. To thrive in this evolving environment, it became imperative for Cadila to
restructure and streamline its business operations. Thus in 1995, Cadila Laboratories emerged as Cadila
Healthcare under the aegis of the Zydus groups. Moving beyond pharmaceuticals, the concept of total
healthcare now forms the commercial heart of the group's operations and activities.
Management:
Board of directors
Mr. Pankaj R. Patel
[Chairman & Managing Director]
Mr. Sharvil P Patel

[Deputy Managing Director]
Mr. Mukesh M. Patel

[Director]
Mr. Pranlal Bhogilal

[Director]
Mr. H. K. Bilpodiwala
[Director]
Mr. Humayun Dhanrajgir

[Director]
Mr. Apurva S Diwanji

[Director]
CADILA’S STRUCTURE:

ZYDUS GROUP
CADILA HEALTH CARE LTD.
SUBSIDIARIES JOINT VENTURE
* Zydus Pharmaceuticals Limited,

* Zydus Nycomed Healthcare Private
India Limited
* German Remedies Limited, India * Zydus Pharmaceuticals USA Inc.
* Dialforhealth India Ltd, India
* Zydus Hospira Oncology Private
* Liva Healthcare Limited, India
* Zydus Aminal Care Limited, India Limited
* Dialforhealth Unity Limited, India * Zydus BSV Pharma Private Limited
* Zydus Wellness Limited, India * Zydus Noveltech Inc., USA
* Zydus Technologies Pvt. Ltd, India
* Zydus Technologies Limited
* Zydus International Pvt. Ltd,
Ireland
* Zydus Healthcare SA (Pty) Ltd,
South Africa
* Simalya Pharmaceutical [Pty]
Limited, South Africa
* Laboratories Combix, Spain
* Enta Biotech S.R.L. (Italy)
* Zydus Healthcare (USA) LLC,
USA
* Zydus Pharmaceuticals USA Inc,
USA
* Zydus Noveltech Inc, USA
Working
* Zydus Netharlands B.V., the
Netherlands
* Zydus Healthcare Brasil Ltda,
Brazil
* Quimica E Farmaceutica NIKKHO
Capital
Do Brasil Ltda, Brazil
* Zydus France SAS, France
* Nippon Universal Pharmaceutical
Company Limited, Japan
* Zydus IntRus Limited, Russia
Management
 Introduction:
Working capital management is concerned with the problems arise in attempting to manage the
current assets, the current liabilities and the inter relationship that exist between them. The term current
assets refers to those assets which in ordinary course of business can be, or, will be, turned in to cash within
one year without undergoing a diminution in value and without disrupting the operation of the firm. The
major current assets are cash, marketable securities, account receivable and inventory. Current liabilities
were those liabilities which intended at there inception to be paid in ordinary course of business, within a
year, out of the current assets or earnings of the concern.The basic current liabilities are account payable,
bill payable, bank over-draft, and outstanding expenses.
The goal of working capital management is to manage the firm’s current assets and current liabilities
in such way that the satisfactory level of working capital is mentioned. The current should be large enough
to cover its current liabilities in order to ensure a reasonable margin of the safety.
 Definition:
The term working capital refers to the amount of capital, which is readily available to a company.
That is, working capital is the difference between resources in cash or readily convertible into cash (Current
Assets) and organizational commitments for which cash will soon be required (Current Liabilities).
 Current Assets are the resources, which are in cash or will soon be converted into cash in “the
ordinary course of business”.
 Current Liabilities are commitments, which will soon require cash settlements in “the ordinary
course of business”.
Thus, Working Capital = Current Assets – Current Liabilities
 Need of working capital management:
The need for working capital gross or current assets cannot be over emphasized. As already observed,
the objective of financial decision making is to maximize the shareholders wealth. To achieve this, it is
necessary to generate sufficient profits can be earned will naturally depend upon the magnitude of the sales
among other things but sales can not convert into cash. There is a need for working capital in the form of
current assets to deal with the problem arising out of lack of immediate realization of cash against goods
sold.
Therefore, sufficient working capital is necessary to sustain sales activity. Technically this is refers to
operating or cash cycle. If the company has certain amount of cash, it will be required for purchasing the
raw material may be available on credit basis. Then the company has to spend some amount for labour and
factory overhead to convert the raw material in work in progress, and ultimately finished goods. These
finished goods convert in to sales on credit basis in the form of sundry debtors. Sundry debtors are
converting into cash after expiry of credit period. Thus some amount of cash is blocked in raw materials,
WIP, finished goods, and sundry debtors and day to day cash requirements. However some part of current
assets may be financed by the current liabilities also. The amount required to be invested
in this current assets is always higher than the funds available from current liabilities. This is the precise
reason why the needs for working capital arise.
Working Capital signifies funds required for day to day operations of the firm. In financial literature
there exist two concepts of working capital:
1. Gross working Capital

2. Net working Capital
1) Gross working capital:
Gross working capital refers to the firm’s investment I current assets. Current assets are the assets which
can be convert in to cash within year includes cash, short term securities, debtors, bills receivable and
inventory.
2) Net working capital:
Net working capital refers to the difference between current assets and current liabilities. Current
liabilities are those claims of outsiders which are expected to mature for payment within an accounting year
and include creditors, bills payable and outstanding expenses.
Net working capital can be positive or negative. Efficient working capital management requires that
firms should operate with some amount of net working capital, the exact amount varying from firm to firm
and depending, among other things; on the nature of industries.net working capital is necessary because the
cash outflows and inflows do not coincide. The cash outflows resulting from payment of current liabilities
are relatively predictable. The cash inflow are however difficult to predict. The more predictable the cash
inflows are the less net working capital will be required.
 Type of working capital:
The operating cycle creates the need for current assets (working capital).However the need does not
come to an end after the cycle is completed to explain this continuing need of current assets a destination
should be drawn between permanent and temporary working capital.
1) Permanent working capital :
The need for current assets arises, as already observed, because of the cash cycle. To carry on business
certain minimum level of working capital is necessary on continues and uninterrupted basis. For all
practical purpose, this requirement will have to be met permanent as with other fixed assets. This
requirement refers to as permanent or fixed working capital.
2) Temporary working capital:
Any amount over and above the permanent level of working capital is temporary, fluctuating or variable,
working capital. This portion of the required working capital is needed to meet fluctuation in demand
consequent upon changes in production and sales as result of seasonal changes.
 Determinants of working capital:
The amount of working capital is depends upon following factors:
1. Nature of business:
Some businesses are such, due to their very nature, that their requirement of fixed capital is more rather
than working capital. These businesses sell services and not the commodities and that too on cash basis.
As such, no founds are blocked in piling inventories and also no funds are blocked in receivables. E.g.,
public utility services like railways, infrastructure oriented project etc. there requirement of working
capital is less. On the other hand, there are some businesses like trading activity, where requirement of
fixed capital is less but more money is blocked in inventories and debtors.
2. Length of production cycle:
In some business like machine tools industry, the time gap between the acquisition of raw material till
the end of final production of finished products itself is quit high. As such amount may be blocked
either in raw material or work in progress or finished goods or even in debtors. Naturally there need of
working capital is high.

3. Size and growth of business:
In very small company the working capital requirement is quit high due to high overhead, higher buying
and selling cost etc. as such medium size business positively has edge over the small companies. But if
the business start growing after certain limit, the working capital requirements may adversely
affect by the increasing size.
4. Business/ Trade cycle:
If the company is the operating in the time of boom, the working capital requirement may be more as
the company may like to buy more raw material, may increase the production and sales to take the
benefit of favorable market, due to increase in the sales, there may more and more amount of funds
blocked in stock and debtors etc. similarly in the case of depressions also, working capital may be
high as the sales terms of value and quantity may be reducing, there may be unnecessary piling up
of stack without getting sold, the receivable may not be recovered in time etc.
 Calculation of Working Capital:
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Current Assets
Inventory 2,211 2,475 3,896 4,729 6,012
Sundry debtors 1,235 1,990 2,784 3,555 4,845
Cash and Bank 612 438 990 9,26 2,517
Loans & Advances 924 1,588 2,201 2,013 2,237
Total [A] 4,992 6,491 9,871 11,223 15,611
Current Liabilities
Current Liability 2,060 2,404 4,588 4,138 5,729
Provisions 606 605 858 913 1,186
(-) Buyer’s credit (231) (190) (399) (235) 0
Total [B] 2,435 2,819 5,047 4,816 6,915
Working Capital [A-B] 2,557 3,672 4,824 6,407 8,696

Working Capital
10000
8696
9000
8000
7000 6407
6000
4824
5000 Series 1
Rs. 3672
4000
30002557
2000
1000
0
2004-05 2005-06 2006-07 2007-08 2008-09
Year
 Interpretation:
In this case we can observe that the working capital requirement for the company is increasing rapidly
32% to 36% in both years 2007-08 and 2008-09, which means that it has sound financial position. This can
easily attract the investors. But this leads to underutilization of funds as the amount of Cash & Bank
maintained by the company is very high, that means the funds are remaining idle and thus reducing the
profitability. Thus the company should plan out to utilize the funds efficiently and earn high profits.
Five main parts covered under working capital management:
1. Net working capital (operating) cycle: Operating cycle is the time duration required to convert sales,
after the conversion of resources into inventories, into cash. The operating cycle of a company involves
three phases:
*Acquisition of resources such as raw material, labor, power etc.
*Manufacturing a product which includes conversion of raw materials into work-in-progress into
finished goods.
*Sale of the product either for cash or on credit. Credit sales create accounts receivable for
collection.
2. Cash management: The main objective of cash management is to accomplish various tasks of cash
collection, payment of outstanding and arranging for deficit funding or surplus investment at a minimum
cost or it should be at maximum returns. It assumes more importance than other assets because cash is
the most significant and least productive asset that a firm holds. It aims to maintain adequate control
over cash position to keep the firm sufficiently liquid and to use excess cash in some profitable way.
3. Inventory management: The prime objective of maintaining proper inventory is to avoid unnecessary
investment, loss of sales, loss of profit and reduction in costs. It can further reduce the chances of loss of
liquidity. Finally, inventories are held to obtain an optimum utilization of people, place, time and
equipments.
4. Receivables management: The main objective of receivables management is to increase sales because
when a company sells goods on credit, it will be in a position to sell more goods and thereby increase
profits. It is a tool acting as a bridge for the movement of goods through production and distribution
stages to customers.
5. Financial Analysis: Ratio Analysis is the main part of financial analysis which will help to compare the
company with the other main players of the industry, in order to get an idea of its position in the
industry.
Net working Capital

(Operating) Cycle
 Introduction:
Working capital cycle is more popularly known as operating cycle. This title is more popularly known
as the operating cycle of Pharma Company starts with cash, go through the successive segment of the
operating cycle, viz, raw material storage period, packing material storage period, conversion period,
finished goods storage period and average collection period before getting back cash along with profit. The
total duration of all the segments mentioned above is known as ‘gross operating cycle period’. In case the
company is placed in advantageous position of being able to sell its product for cash then the segment of
average collection period will disappear from the gross operating cycle period and to that extent the total
duration of the cycle gets reduced. In case advanced payments are to be made for procuring materials,
operating cycle will period increases. The purchase of raw materials, components etc., are usually made on
the credit basis, thereby giving rise to the spontaneous current liability, viz, account payable. When the
average payment period of the company to its supplier is deducted from gross operating cycle period the
resultant period is called net operating cycle period or simply operating cycle period.
 Definition:
The phrase operating cycle refers to the period of time that a company’s cash is tied up in inventory
and/or receivables before recovering the initial investment.
 Operating Cycle Applications:

The operating cycle concept indicates a company’s true liquidity. By tracking the historical record
of the operating cycle of a company and comparing it to its peer groups in the same industry, it gives
investors investment quality of a company. A short company operating cycle is preferable since a company
realizes its profits quickly and allows a company to quickly acquire cash that can be used for reinvestment.
A long business operating cycle means it takes longer time for a company to turn purchases into cash
through sales. In general, the shorter the cycle, the better a company is since less time capital is tied up in
the business process.
 Impacts of operating cycle:
 Short Operating cycle:

A short operating cycle is one in which the time between purchasing inventory and recovering the
investment is brief. The company recovers its investment and/or realizes profits quickly.
 Long operating cycle:

With a long operating cycle, cash may be tied up in inventory and/or receivables for an extended period
of time before the business is able to recover its initial investment. Investments with a long operating
cycle can be sound, as long as the organization has sufficient access to capital to meet its short-term
obligations.
Operating cycle (working capital cycle) consists of the following event which continues throughout the
life of business.
 Conversion of cash into raw-materials.
 Conversion of raw-materials into work-in-progress.
 Conversion of work-in-progress into finished stock.
 Conversion of finished stock into accounts receivables through sales
 Conversion of account receivables into cash.
Raw Material Packaging Conversion Period

Storage Period Material Storage
Period
+ + +
FG Storage
Period
Average Payment Average Collection

Period Period

- +
Particulars 2009-10
(Rs. in Million)
Annual Raw Material Consumed:
Opening Stock of Raw Material 1,503

(+) Purchases 7,806
(-) Closing stock of Raw Material 1,811
Total of annual Consumption of Raw Material: 7,498
Particulars 2009-10
(Rs. in Million)
Annual Cost of Production:
Opening work-in-progress 618

(+)Consumption of Raw Material 7,498
(+)Consumption of Packaging Material 1,672
(+)Manufacturing Expenses:
Stores and spare parts consumed 332
Power and fuel 660
Processing charges 369
Repairs on plant and machinery 164 1,525
(+)Depreciation 8,734
(-) Closing stock of work in progress 706
Total of annual Cost of production: 20,753
Particulars 2009-10
(Rs. in Million)
Annual Packaging Material Consumed:

Opening Stock of Packaging material 408
(+) Purchases 1,642
(-) Closing stock of packaging material 378
Total of annual Consumption of Packaging Material: 1,672
Particulars 2009-10
(Rs. in Million)
Annual Cost of Sales:
Opening stock of finished goods 3,272

(+)Cost of production 20,753
(+)Administration Expenses:
Personnel expenses 3,930
Insurance 87
Repairs: Building 41
Others 113
Rent 126
Rates and taxes 220
M.D.’s remuneration 326
Commission to directors 4
Travelling expenses 872
Legal and professional taxes 359 6,078
(+)Selling and distribution expenses:
Commission on sales 839
Freight and forwarding on sales 931
Sales promotion expenses 1503
Advertisement 651
Seminar, conference and exhibition 236
Representative allowances incentives 625
Bad debts written off 4
Provision for doubtful debts 64
Other marketing expenses 1,092 5,945
(+)Customs and Excise duties 3
(-) Closing stock of finished goods 4,153
Total of annual Cost of sales: 40,204
Particulars (Rs. in Million)

(2008-09) (2009-10)
Annual Sundry Debtors:
debts outstanding for a period exceeding 6 months:
Considered goods 375 250
Considered doubtful 106 170
(-)Provision for doubtful debts 106 170
other debts – Considered good 4,412 4,220
Groups proportionate share in Sundry Debtors of J.V. 58 198
Total Sundry Debtors: 4,845 4,668
 Particulars (Rs. in Million)

(2008-09) (2009-10)
Annual Sundry Creditors
For Capital Goods 54 252
Others 5,201 5,894
Total Sundry Creditors: 5,255 6,146
Raw Material & Packaging Material storage period:
(1) Average Daily Consumption of RM & PM = Annual Con. Of RM & PM / 365

= 7,498 + 1,672 / 365
= 25.12
(2) Average stock of RM & PM = (Opening Stock + Closing stock) / 2

= (1,503 + 408 + 1,811 + 378) / 2
= 2,050
(3) RM & PM storage period = (2) / (1)

= 2,050 / 25.12
= 82 Days……………………………………………………………… (n1)
 Conversion Period:
(1) Average Daily Cost of production = Annual cost of production / 365

= 20,753 / 365
= 56.86

(2) Average stock of W-I-P = (Opening Stock + Closing stock) / 2
= (618 + 706) / 2
= 662
(3) Conversion period = (2) / (1)

= 662 / 56.86
= 12 Days…………………………………………………………………… (n2)
 Finished goods storage period:
(1) Average Daily Cost of sales = Annual cost of sales / 365

= 40,204 / 365
= 110.15
(2) Average stock of FG = (Opening Stock + Closing stock) / 2

= (3,272 + 4,153) / 2
= 3,712.5
(3) Finished goods storage period = (2) / (1)

= 3,712.5 / 110.15
= 34 Days………………………………………………………….. (n3)
 Average Collection Period:
(1) Average Daily Credit Sales = Annual Credit sales / 365

= 35,741 / 365
= 97.92
(2) Average Balance of sundry Debtors = (Opening Stock + Closing stock) / 2

= (4,845 + 4,668) / 2
= 4,756.5
(3) Average Collection period = (2) / (1)

= 4,756.5 / 97.92
= 49 Days…………………………………………………………….. (n4)
 Average Payment Period:
Credit Purchase = Raw Material + Packaging Material + Finished Goods + others*

= 7,806 + 1,642 + 3,024+7,651

= 20,123
(1) Average Daily Credit Purchases = Annual credit purchases / 365

= 20,123 / 365
= 55.13
(2) Average Balance of creditors = (Opening Stock + Closing stock) / 2

= (5,255 + 6,146) / 2
= 5,700.5
(3) Average Payment period = (2) / (1)

= 5700.5 / 55.13
= 103 Days……………………………………………………………… (n5)
Gross Operating Cycle = (n1 + n2 + n3 + n4 )

= 82 + 12 + 34 + 49
= 177 Days
Net Working Capital (Operating) Cycle Period = (n1 + n2 + n3 + n4 - n5)

= (82 + 12 + 34 + 49 -103)
= 74 Days
Interpretation and Recommendation:
* Raw Material Storage Period: Raw Material storage period is 82 days. i.e., for more than 2.5 months
it is stored in the warehouse and then used for production. So this means that the company purchases the
raw material in advance so that there are no hurdles in the production process. But here the duration
should be reduced to one month or so, which will help in increasing the no. of operating cycles per year
and reducing the Working Capital Requirement.
*Conversion Period: As we can see only 12 days takes place for the product in the WIP stage, which is the
lowest among all the other stages of operating cycle. This is a good sign for the production department.
So no steps are to be taken for this stage.
* Finished Goods storage Period: But in case of finished goods it takes more time, as the medicines and
other pharmaceutical product are to be packed in proper shape and in required packing material with
utmost care. Then also the company should try to minimize this time period so as to reduce the working
capital requirement.
* Average Collection Period: CHL is very strict when the debtors come into picture. For the same they
have made one credit control policy and that is why this duration is almost half part of its collection
period.
*Average Payment Period: CHL tries to make the payment within 90 days to their creditors and also
CHL’s average payment Period is 103 days which is very closer to their standard period. So, no
recommendation is needed here.
So. Net Operating Cycle’s duration is 74 days. That means company is investing into inventory at present,
they will get their money back after 2.5 months.

82
Cash
Management

 Introduction:
Cash is common purchasing power or medium of exchange. As such, it forms the most important
component of working capital. The term cash with reference to cash management is used in two senses, in
narrow sense it is used broadly to cover cash and generally accepted equivalent of cash such as cheques, draft
and demand deposits in banks. The broader view of cash also induce hear- cash assets, such as marketable
sense as marketable securities and time deposits in banks. The main characteristics of this deposits that they
can be really sold and convert in to cash in short term. They also provide short term investment outlet for
excess and are also useful for meeting planned outflow of funds. We employ the term cash management in
the broader sense. Irrespective of the form in which it is held, a distinguishing feature of cash as assets is that
it was no earning power. Company have to always maintain the cash balance to fulfill the dally requirement
of expenses. There are four primary motive for maintain the cash as flow.
 Meaning of Cash:
There are two ways of viewing the term ‘Cash’. In a narrow sense it includes actual cash in the form
of notes and coins and bank draft held by company and deposit withdrawable on demand. And in the broader
sense it includes even marketable securities which can be immediately sold or convertible into cash.
 Motive of holding cash:
There are four motives for holding cash as follow
1. Transaction motive
2. Precautionary motive
3. Speculative motive
4. Compensating motive
(1) Transaction motive;
Cash balance is necessary to meet day-to-day transaction for carrying on with the operation of firms.
Ordinarily, these transactions include payment for material, wages, expenses, dividends, taxation etc.
there is a regular inflow of cash from operating sources, thus in case of CHL there will be two-way flow
of cash- receipts and payments. But since they do not perfectly synchronize, a minimum cash balance is
necessary to uphold the operations for the firm if cash payments exceed receipts. Always a major part of
transaction balances is held in cash, a part may be held in the form of marketable securities whose
maturity conforms to the timing of anticipated payments of certain items, such as taxation, dividend etc.
(2) Precautionary Motive:
Cash flows are somewhat unpredictable, with the degree of predictability varying among firms and
industries. Unexpected cash needs at short notice may also be the result of following:
1. Uncontrollable circumstances such as strike and natural calamities.
2. Unexpected delay in collection of trade dues.
3. Cancellation of some order for goods due unsatisfactory quality.

4. Increase in cost of raw material, rise in wages, etc.
The higher the predictability of firm’s cash flows, the lower will be the necessity of holding this balance and
vice versa. The need for holding the precautionary cash balance is also influenced by the firm’s capacity to
have short term borrowed funds and also to convert short term marketable securities into cash.
(3) Speculative motive:
Speculative cash balances may be defined as cash balances that are held to enable the firm to take
advantages of any bargain purchases that might arise. While the precautionary motive is defensive in
nature, the speculative motive is aggressive in approach. However, as with precautionary balances, firms
today are more likely to rely on reserve borrowing power and on marketable securities portfolios than on
actual cash holdings for speculative purposes.
(4) Compensating Motive:
Yet another motive to hold cash balance is to compensate banks for providing certain services to
company, such as clearance of cheques, supply of credit information transfer of funds and so on. While
for some of these services banks charge a commission or fee, for other they seek indirect compensation.
Usually clients are required to maintain a minimum balance of cash at the bank. Since this balance
cannot be utilized by the company for transaction purpose, banks themselves can use the amount to earn
a return. Such balances are compensating balance.
 Objectives:
 Securing solvency at all time.

 Minimizing costs of cash management and financing
 Optimization of currency positions.
 Decrease downside risk.
 Benefit from opportunities.
 Maximization of investment revenues.
 Advantages of cash management:
Cash does not enter in to the profit and loss account of an enterprise, hence cash is neither profit nor losses
but without cash, profit remains meaningless for an enterprise owner.
1. A sufficient of cash can keep an unsuccessful firm going despite losses.

2. An efficient cash management through a relevant and timely cash budget may enable a firm to
obtain optimum working capital and ease the strains of cash
Shortage, fascinating temporary investment of cash and providing funds normal growth.
3. Cash management involves balance sheet changes and other cash flow that do not appear in the
profit and loss account such as capital expenditure.
 Flow of cash management cycle:
Business Information
Operation
Cash Cash
Collections Payment
Surplus
Deficit
Invest
Borrow
From the above figure the cash management process shown that in starting information of business is given
i.e. of trading of material for the payment and sales of goods for receiving the payment and accordingly cash
collection and payment is done in the company. When cash is collected by the company from its debtors at
that time if there is surplus cash held with the company than they invest the cash in some securities to get
interest on it. When the company do payments to its creditor at that time if there is a deficit of cash than
company borrow money from bank and pay interest on it. This is a ideal cycle of cash which is there in all
organization.
 Activities of collection system in CHL:
The collection system of this company is aimed at timely collection of the receivables.It mainly consist the
following activities:
 Monitoring the status of the receivables

 Dispatch of letter to customer whose due date is approaching, telegraphic and telephonic advice
to the customer around the due date
 Legal actions against the overdue accounts.
 From the outstation parties, the collection of the receivables is done through CITI BANK.
Company has made one contract with CITI BANK. The cheques are presented to CITI bank and
the very next day the amount is received by the company. It doesn’t matter whether the bank has
actually received it or not but it has to pay it to the company.
 Company is using CAPS (Collection and Payment System) to ease the collection system.
 Collection Procedure of the CHL:

The bellow given collection procedure is only applicable and implementable for the domestic market.
There are almost 33 to 35 C&F (Carrying and forwarding) agents in Cadila Health Care ltd. through
which the whole domestic selling process and collection process from the various part of the country are
being carried out.
The collection system of the company is shown in the following diagram:

Collection
System
Direct Indirect
Selling Selling
Selling
C&F
Agent
Local Parties Outstation Parties
Fast Collection Cheque collection

System System
Collection System
Days-7 Days - 21
Credit period
Cheque on Advance Cheque
Delivery System
Payment Mode

From the above figure shows that company is having two types of selling : Direct selling and Indirect
selling.
 Direct Selling:
Here the goods are dispatched from the bond house to the destination concerned through roadways.
Generally this type of selling can be seen in case of hospitals and charitable institutes. CHL sells its product
directly to the local or outstation parties through Medical Representatives (MR), Area Business Manager
(ARM) and Regional Branch Manager (RBM).
 Indirect Selling:
In this type of selling the company sells the goods through C&F (Carrying and forwarding) Agents to the
local as well as outstation parties.
There are two types of the collection system:-Fast Collection System and Cheque Collection System.
 Fast Collection System:
The collection from the local parties is done through cheque on delivery and for the same FCS (fast
collection system). In FCS, the party makes the payment on the spot of delivery i.e. cheque on delivery
(COD). For local supply credit limit for the payment is 7 days from the date of delivery and the cheque date
will also be 7th day from the delivery.
 Cheque Collection System:
The collection from the outstation parties is on the Demand Draft, pay order or on the advanced cheques
.The system adopted or outstation party’s collection is CCS (Cheque collection System). In CCS, the party
gives an advance cheque to C&F agent and hence this system works on Advance Cheque System. For
outstation stockiest due date will be 21st day from the day of LR.

Transactions between CHL, C&F (Carrying and forwarding) and CITI BANK:
C Flow of Flow of Collection

dispatchment of
goods
CHL Stockies
t
C&F C&F
Agent Agent
Stockist CITI
BANK’s
Person
CITI
BANK
MUMBA
 In the above chart, the process goes in this way i.e. first CHL gives the goods to C&F agent who are
around 33in the country. C&F is an agent of the company. Now, C&F agent delivered the goods to the
stockiest, whole seller, etc. This is a process when company dispatches the goods.
 Collection should be done in this way. The stockiest give blank cheques to the C&F agent and these
cheques are collected by the CITI BANK’s person i.e; CMS (Cash Management Service) agent.CMS
agents forward these cheques to CITIBANK MUMBAI and than the amount transferred into the account
of the company according to the terms and condition of the company.
 Procedure After Collection:
 As per the below diagram, C&F agents get the sealed and signed Purchase order along with signed
undated blank cheques from stockiest and enter the sales order in the Vision21 / S.A.P.
 C&F Agent prepares the sales invoice and Payment Advice in favour of the stockiest after dispatch of
goods and also enters the Lorry Receipt date in the software.
 C&F agents fill up the amount and date (7 days after the date of dispatch of goods in case of local
sales and 20 days after the date of Lorry Receipt in case of outstation sales) in blank signed cheques
as per Payment Advice & passes entry for advance collections.
 C&F agent prints two copies of payment advice. Out of which one copy is sent to stockiest along
with invoice and the other one is to be filed by him.
 Pay in Forms (PIF) is prepared by the C&F agent including the PIF number and division at the back
of the cheque so that it can be easily correlated when the cheque gets bounced.
 Enter the PIF number against each payment received in the software and sort out the local and
outstation cheques, date wise separately.
 In case of local cheques, the cheque date and PIF date should be the same. Local clearing cheques are
handed over to courier agencies a day in advance of the cheque date. Citibank will credit on the date
of cheque.
 In case of outstation cheques, cheque date should be one day prior to the date of PIF. Outstation
cheques should be handed over to the courier agencies two working days prior to the date of the
cheque.
 One copy of the acknowledged PIF is sent to the HO at the end of the month.
 The cheques of local parties are deposited in the Citibank on the 6th day and that of outstation parties
are deposited on the 19th day of issuing the Lorry Receipt.
 Everyday an employee of Citibank collects all the cheques from C&F agents located at different
locations, between 11 a.m. and 12 noon.
 All these cheques collected from different locations are transferred to Mumbai branch of Citibank on
the same day.
 Irrespective of the clearing of the cheques, Citibank will give credit to the cash management account
of the company and on next day that amount is transferred to the current account. So the company
gets all the funds immediately and can invest in some other areas or can make payments on time
After Collection Procedure

Stockiest C&F CMS Agent
Agent
CITI
BANK
Cheque
Cheque
Legal Accepted
Dishonored
Action-30 days
Criminal Amt. not Paid Amt. Paid by

Action-45 days by the party the party
Summon of
1 Day
police
Credit
Bad
Debt
Transfer to
other Bank
Charges
.
to Bank

 After getting the opening balance and expected collection for the day from Citibank, the company
transfers the amount leaving the balance of certain amount to Bank of Baroda account from the
Citibank account.
 Bank of Baroda acts as a payment agent for our company, as CITIBANK only collects the amount
from the parties account and credit that in our account.
 Company gets the collection files from Citibank on daily basis.
 One collection file shows the total expected collection for the day. This file is verified with the
collection figure taken from Citibank.
 Another file is PIF wise collection file of the company. Division wise collection report showing
collection for the day and up to the day of the month is prepared. This is then compared with
percentage to find out the target of the month.
 The increase or decrease in collection as compared to the same date of the previous month is
analyzed.
 The C&F agents are informed by letter regarding the cheques deposited, but if unrealized for more
than 60 days than such parties are kept on hold and this information is sent to the divisional heads
and the credit control department.
 After preparing debtors outstanding for more than 60 days, all divisional heads take up the matter
with their RBMs (regional business managers) and give reasons for the outstanding cheques and the
date by which the same would be recovered.
 A legal notice is sent to the party within the 30 days of the cheque being bounced for the failure of
payment and to make the payment as soon as possible i.e. within next 30 days.
 The reasons of cheques being outstanding may be due to bank or due to the party. If it is due to party,
the reasons can be like insufficient funds in the account, signature doesn’t match, or the arrangements
of payments are not proper etc.
 If cheques are outstanding for more than 90 days, then the cheque dishonor entry is to be passed.
Hence, the further prosecution of the order is stopped. The same is informed to the divisional heads
as well as to the credit control department.
 Company gets the information from Citibank regarding the cheque dishonored for the day based on
the file pass entries for cheque dishonored. The amount of the cheques dishonored along with the
debtors will be debited and deducted from the next payment.
 If the bounced cheque amount is up to Rs. 20000, then only legal notices could be issued but criminal
complaints cannot be filed.
 A criminal notice will be issued to the debtors, if payment is not received even after 45 days of the
issuance of the legal notice; the company sends a note in this regard to all the divisional heads for
taking up the matter with the stockists through the RBMs.
 If the payment is not made, a legal case under section 138 (A) as a criminal is filed and legal
department is given intimation about this.

 If the outstanding amount is received, then the company inform about it to the legal department to
withdraw the complaint, to divisional heads for information and to the credit control department for
initiating further supplies.
 If the outstanding amount is not received even after criminal notice than a Summon is sent with the
police to the party by the court. And even after that the amount is not received than it should be
entered into the software as BAD DEBTS.
 It can be possible that the amount might be recovered after one year or so, and then the reverse entry
of bad debts recovered has to be made. Sometimes such cases are observed.
 Modes of collection:
(1) Bank
(2) Lorry receipt
(3) Cheque on delivery
(4) Cheque system
(5) Advanced Demand Draft / Cheque / Pay Order
 Bank:
The company sends all documents like credit note, debit note, L.R., hundi copy, invoice of the goods to
the party bank. The parties to whom the goods are sent pay the amount to the bank and release the
documents of the goods from the bank. The bank sends the Demand Draft of that amount to the company.
Bank takes the charge for that service.
Limitation: The company and the stockiest face many problems like both have to pay charges to the
bank. The stockiest face the problem of collecting documents from the bank. In case of goods return the
company face the problem of receiving the documents. So, the company does not prefer bank system.
 Lorry Receipt:
The party sends the D.D. or cheques to the company in the system, On that basis the company sends the
L.R. to the party. The party gives the L.R. to the transporter and releases the goods and documents.
Limitation: The company faces various problems in the system like if the goods are of large amount the
transporters are not ready to hold the goods in that place and in case of rebooking the company faces the
difficulties. The economic capability of the transporters is very low which disable them to hold the goods
in the case of non acceptance of the goods from the stockiest.
 Cheque On Delivery:
The party books an order to C&F(Carrying and forwarding) agent in the system. The C&F agent has to
prepare an invoice, which he sends along with the goods to the party by their own person. The person has
to deliver the goods and collect the cheque on behalf of the C&F agent, which is dated, 7 th day form the
date of receiving the goods. But this is possible in only in same city where C&F has located. In out station
it is not possible.

 Cheque system:
The party sends an outstation blank cheque with order. For this the company prepares an invoice and
sends goods through transporters and sends a L.R. copy by courier direct to party. The party takes the
delivery of goods from the transporters against the L.R. the company tendency to deposit party cheque
after 21 days from the date of L.R. so, stockiest get an easy delivery & goods credit time so, company sale
will increase.
 Advanced DD/ Cheque / Pay Order:
In all the system the most preferable system is goods sale on the advanced payments. In the system when
company receives the D.D. or Pay Order then only it has to prepared an invoice and send to the party. In
this system the main drawback is that party is not able to invest huge amount for company’s products, as
he has to give on an advance payment to the company. So, we can say that company depends on the
party’s capacity for its sales.
 Commission charged by CITI BANK:

 Local Banks: For the local branches of the bank, no commission is to be charged.
 Corresponding Banks: For those bank with whom company and CITI bank has tied up,bank charges
are X% per Rs. 10,000 of collection. But the charges vary according to the distance.
 No corresponding bank: The bank with whom there is no tie up of Citibank or the company, then
(X+Y)% per Rs. 10,000 (approximately) is charged by that bank. Such transaction takes place when
there is outstation party and there are no branches of CITIBANK in the nearby area.
 Transferring Facility provided by the Bank:
Both facilities given below are introduced by the RBI (Reserve Bank of India) to facilitate the party.
(1) RTGS : (Real Time Gross Settlement):

In RTGS System transfer of money takes place from one bank to another on the fastest possible basis.
Settlement in “real time” means payment transaction is not subjected to any waiting period. The
transactions are settled as soon as they are processed. “Gross settlement” means the transaction is settled
on one to one basis without bunching with any other transaction. The minimum amount to be remitted
through RTGS is Rs.1 lakh.

(2) NEFT : (National Electronic Fund Transfer):
This system is nation wide fund transfer system to facilitate transfer of funds from any bank branch to
any other bank branch. The maximum amount can be remitted through NEFT is Rs. 1 lakh. This facility
takes less than 2 days.
Difference between RTGS and NEFT
RTGS works on Gross settlement while NEFT works on net settlement and NEFT transfer funds from
one part of any country to any other part of the country unlike RTGS which is restricted to 15 centers
where RBI offices are located.
 Transfer of amount from CITI BANK:
The collection of the company is done from Citi Bank and then all the cash is further transferred according
to the requirement of the company. The company has 2 more banks from which company deals i.e. Bank of
Baroda and IDBI Bank. From Bank of Baroda, the company does all local payments and rest payments are
done from IDBI. All the collected amount of company is transferred into these banks.
Now every bank is giving the facility of Core Banking System. The reasons for still continuing the Citi
Bank are,

 CHL has made contract with CITI BANK in 2000-01.At that time CITI BANK was the only bank
which had high-tech facility. So, they are company’s long term partners.
 Collection of money timely from the parties.
 No minimum amount required in account.
 Less commission charged on cheques.
 There is very less probability of losing cheques and Demand Drafts. From 2000 till now, the amount
of lost cheques and Demand Draft by CITI BANK is zero.
 CITI BANK provides tailor made reporting and they are linked with S.A.P also.
 International collection procedure:
 Bank of Baroda, Standard chartered and SBI are the main banks of “Cadila” in international
collection.
 There are two modes of international collection:
1] Letter Of Credit
2] Packing Credit
 Letter of Credit:
Letter Of Credit means “ an agreement, where by a bank(issuing bank), acting at the request and on the
instructors of a customer (the applicant) or on its behalf. This is ‘Irrevocable L/C’ by nature, it means it
can neither be amended nor cancelled without the agreement of all parties concerned.
We will try to understand the procedure of it with the help of following diagrams.
Import foreign
Export Contract of Sale
country
Ahmedabad
(Applicant)
(Beneficiary)
Application for opening

Forward LOC to
2 LOC
4
Bank of Baroda Opening LOC and send it Import’s Bank of

Ahmedabad to Foreign Country
(Advising bank) (Issuing Bank)

The Process is as under:
 The transaction originates when the exporter in Ahmedabad and importer in foreign country enters into
a contract of sale. The contract covers all important particulars such as the description, value and
quantity of goods, the due date of shipment etc.
 The importer applies to his bank requesting and authorizing the bank to open a letter of credit in favor of
the exporter ‘Cadila’. The application would stipulate the conditions, especially with regard to the
documents to be submitted by the exporter along with bill.
 On the strength of the application form the importer, the bank issues a letter of credit. It is addressed to
the exporter and contains an undertaking by the bank that bills drawn under the credit would be paid by
it provided the conditions stipulated therein are met.
 Though the letter of credit is addressed to the exporter, it would normally be sent to the Bank of Baroda
with a request to forward it to the beneficiary.
Export Ship Goods to Export

Ahmedabad Ahmedabad
(Beneficiary) (Beneficiary)
Present Documents and Obtain Recovers amount from

Payment From 6 8
Export Obtain Reimbursement Export

Ahmedabad Ahmedabad
(Beneficiary) (Beneficiary)
 Within the stipulated date of shipment, the exporter ‘Cadila’ ships the goods to a port in importer’s
country from Mumbai port in and obtain bill of lading from the shipping company.
 The exporter draws a bill of exchange on importer’s bank along with bill of lading and other documents
required. Presents them for negotiation to his bank i.e. Bank of Baroda.
 Bank of Baroda verifies the documents to make sure that they satisfy the conditions stipulated in the
letter of credit and pay the amount to ‘Cadila’. Then the documents are forwarded to importer’s bank for
payment.
 On receipt of the documents and after verifying that they satisfy the requirements of the letter of credit,
Importer’s bank makes payment to Bank of Baroda. The amount of the bill would be recovered by the
bank from importer and the documents would be delivered to him.
 Packing Credits:
Packing credits or Pre-shipment Finance is the advance granted to the exporter to procure process,
manufacture, pack and prepare the goods for export. It is facility extended to the exporter before and till
the goods are shipped for export. The pre-shipment credit can be granted to exporter on the strength of
letter of credit establishment.
For this purpose company has tie-up with two banks:
Bank of Baroda: For Indian Currency
Standard chartered and SBI: For Foreign Currency.
In this way ‘Cadila’ manages its cash collection system without disturbing the day to day need of cash in
the company.
Fund Management
 Objectives of Fund Management:

There are mainly two important objectives of Fund management:
(1) Try to minimize the cost of raising the fund.
(2) To get the high return as much as possible from that raised fund.
 Sources of funds:
Decision for the sources of funds is depended on the requirement of fund. There are mainly 2
sources for funds:

Secured
Long Fund
Term Fund Unsecured
Sources of Fund
Funds Secured
Short Fund
Term
Fund Unsecured
Fund
(A) Long Term funds:
There are many long term funds which can be used in running our business smoothly but in CHL, they are
using common long term funds along with the below long term funds.
(1) Rupee Term Loan
(2) Foreign currency Loan
These loans are available on mortgaging some securities against the amount of loan same as other loans. For
the same purpose some ratios are maintained.
(1) Rupee Term Loan:

 It is nothing but the same loan which we can avail from any Indian bank.
 It is available in rupee terms.
 Its rate of interest is called ‘Rupee rate of interest.
 Interest is to be paid quarterly, on standard due dates i.e. 15/4, 15/7, 15/10 and
15/1 every year.
(2) Foreign Currency Loan:

 The loan other than Rupee term loans is called Foreign Currency Loan.
 They are available foreign currency term.
 The interest rates offered are based on six months US Dollar LIBOR + spread (Fixed Margin Rate)
or LIBOR in any other currency.
 The margin over LIBOR is generally reset at the end of every 5 years.

 What Is LIBOR?
LIBOR stands for London Interbank Offered Rate. Each day LIBOR rates are released, a 1 month US dollar
LIBOR rate. LIBOR is the primary benchmark for interest rates around the world.
The interest structure for Foreign Currency Loan is
LIBOR + Spread = Interest Rate

Suppose;
Date LIBOR Spread Interest Rate

01/01/2010 0.45 2.5 2.95
01/06/2010 0.41 2.5 2.91
Note: - LIBOR can be charged on monthly, 3 monthly or 6 monthly bases.

- Spread is fixed margin which is decided by the negotiation of the bank and borrowed party.
(B) Short-term loans:

Short term loans can mostly be taken for the purpose of working capital financing. They are available in
both Rupees and foreign currency term. There are many short term loan options are available in the market
which are used by CHL along with 3 new options. Those 3 options are sources for Short Term Loans.
Sources of short term loans used by CHL:
(1) Cash Credit Limit

Available
(2) Short Term Loans or WCDL-working Capital Demand Loans
Only in Rs.
(3) PCFC-Packing Credit in Foreign Currency
(4) EPC – Export Packing Credit
(1) Cash Credit Limit:

Meaning :
Cash credit is an arrangement under which a customer of a bank or financial institution is allowed an
advance up to certain limit against credit granted by bank. That means a loan may be granted say for Rs.
1 lakh however the customer/borrower of the loan may take the amount of loan to the extent required by
him but not exceeding the limit of Rs. 1 lakh.
Minute Difference between overdraft and Cash credit

Overdraft Cash Credit
An overdraft occurs when withdrawals Cash Credit is a short-term cash loan to a

from a bank account exceed the available company. A bank provides this type of
balance which gives the account a negative funding, but only after the required security is
balance - a person can be said to have given to secure the loan. Security is in the form
gone "overdrawn". of hypothecation of goods and book debts.
Depending upon the value of goods and book
debts every month Drawing Power (D.P.) limit
is decided. Once a security for repayment has
been given, the business that receives the loan
can continuously draw from the bank up to a
certain specified amount. This type of
financing is similar to a line of credit.
 Advantages of Cash Credit Limit over Regular Loan:
 The advantage of a line of credit over a regular loan is that interest is not usually charged on the part of
the line of credit that is unused, and the borrower can draw on the line of credit at any time that he or
she needs to. Depending on the agreement with the financial institution, the line of credit may be
classified as a demand loan, which means that any outstanding balance will have to be paid
immediately at the financial institution's request.
For Example; If the credit limit is 1 Lakh. Now, amount required by Company say on a particular day
is Rs. 92,000 but they take entire amount Rs. 1,00,000 he will have to pay interest on entire amount of
Rs. 1 lakh. However if he would have only taken Rs. 92,000 which he required he would have to pay
interest on Rs. 92,000 only and not on Rs 1,00,000.
 A line of credit, generally arranged before the funds are actually required, provides flexibility for the
customer in that it ensures the ability to meet short-term cash needs as they arise.
Lenders:
Any banks and financial institutions are the main lenders of this facility.In CHL, there is one word is
used for the group of the banks – ‘CONSORTIUM’. There are 7 banks in this group and there is one lead
bank from whom we get the highest credit limit.
In CHL, BOB is the lead bank. CHL got overall 560cr. Credit limit from these banks in which
410 crores is Fund Base and 150 crores is Non Fund Base.
Cash Credit Limit Circulation:

Suppose,
Rate of Interest on Cash Credit Limit is 10%.Credit limit is say Rs.10,00,000.
Sr.No. Date Debit Credit Balance Interest calculation Interest(Rs.)

1 01/01/2010 ----- ----- 1,00,000 (Cr.) No int. as it’s open.bal. ----
2 02/01/2010 2,00,000 ----- 1,00,000 (Dr.) [1,00,000*10%*(1/365)] 27.40
3 03/01/2010 3,00,000 ----- 4,00,000 (Dr.) [4,00,000*10%*(1/365)] 109.59
4 04/05/2010 ----- ----- 4,00,000 (Dr.) [4,00,000*10%*(1/365)] 109.59
5 05/05/2010 1,00,000 9,00,000 4,00,000 (Cr.) No interest ----
6 06/05/2010 ----- ----- 4,00,000 (Cr.) No interest ----
Explanation:
In the first transaction, our opening balance in the bank is Rs.1,00,000. On the second day, I have
utilized the facility of Cash Credit Limit of Rs. 2,00,000 so, my account in the bank is debited by Rs.
1,00,000 so it is called negative balance. Interest is only calculated only on negative balance that is the
only amount which is utilized from credit limit and as per norms interest are charged only on the utilized
amount rather than whole amount. Calculation of interest is done on daily bases in Cash Credit Limit
facility. So, interest = 27.40 (as per above calculation). 3rd transaction is same as 2nd one. In the 4th the
transaction, nothing is debited and credited so the interest for 1 day was calculated on the C/F amount
which is 4,00,000. So now interest is 109.59 (as per above table calculation). In the 5 th transaction, I
have utilized the facility of Rs.1,00,000 and credited Rs.9,00,000 to my account so now my credit
balance is 4,00,000 (4,00,000 + 1,00,000 - 9,00,0000).Now no interest is calculated on the credited
(Which is positive) amount.
(2) PCFC – Packing Credit in Foreign Currency:
Bank provides PCFC in the foreign currency to the exporters enabling them to fund their
procurement, manufacturing/ processing and packing requirements. These loans are available at very
competitive international interest rates covering the cost of both domestic as well as import content of the
exports. The PCFC can be availed in US$, Euro, GBP and Japanese Yen.
This facility is available only in dollars and will also be liquidated in dollars only. Its interest structure
will be the same as ‘Foreign Currency Term Loan’. i.e., LIBOR + Spread
This facility is available at very cheap rate compare to EPC.
(3) EPC – Export Packing Credit:

This facility is availed in rupee as money is transferred into rupees as per prevailing dollar
rate but liquidated (repaid) in dollar term.
When rupees are depreciated against dollar, EPC would be the best option and if rupee is
appreciated at that time PCFC would be the desirable option.
Particulars Amount in Rs. Dollar / Rs. rate Amount in dollar

Loan taken rate 10,00,000 50 $ / 1 Rs. 20,000 $
(-) Loan is liquidated 10,00,000 40 $ / 1 Rs. 25,000 $
Foreign Currency Liquidation Loss: -5,000 $
Particulars Amount in Rs. Dollar / Rs. rate Amount in dollar

Loan taken rate 10,00,000 50 $ / 1 Rs. 20,000 $
(-) Loan is liquidated 10,00,000 55 $ / 1 Rs. 18,182 $
Foreign Currency Liquidation Gain: 1,818 $

Inventory
Management
 Introduction:

Inventory management refers to the process of managing the stocks of finished products, semi-
finished products and raw materials by a firm. Inventory management, if done properly, can bring down
costs and increase the revenue of a firm.
The inventory management process begins as soon as one has started production and ordered raw
materials, semi-finished products or any other thing from a supplier. If you are a retailer, then this process
begins as soon you have placed your first order with the wholesaler.
Once orders have been placed, there is generally a short period of time available to a firm to put an
inventory management plan in place before the supplies are delivered. Inventory management helps a firm
to decide in advance where these supplies should be stored. If a firm is getting supplies of small-sized
goods, it may not be much of a problem to store them, but in the case of large goods, one has to be careful
so that the warehousing space is optimally utilized.
From invoices to purchase orders, there is lot of paperwork and documentation involved in inventory
management. Several software programs are available in market, which help in inventory management.
The goal of effective inventory management is to minimize the total costs-direct and indirect – that
are associated with holding inventories. However, the importance of inventory management of the company
depends upon the extent of the investment in inventory. It is industry-specific.
 The role of inventory in working capital:
The working capital management refers to the management of the levels of all these individual
current assets. On the other hand, inventory, which is one of the important elements of current assets,
reflects the investment of a firm’s fund. Hence, it is necessary to efficiently manage inventories in order to
avoid unnecessary investments. A firm, which neglects the management of inventories, will have to face
serious problems relating to long-term profitability and may fail to survive. With the help of better
inventory management, a firm can reduce the levels of inventories to a considerable degree. The following
are some characteristics of inventory which are important in working capital management.
1. Current assets: It is assumed that inventories will be converted to cash in the current accounting cycle.
2. Level of liquidity: Inventories are viewed as source of near cash. The liquidity aspect of inventory
becomes highly important to the manager of working capital in the case of economic slowdown and
changes in the market trend. The inventories are to be considered as the least liquid of current assets.
3. Liquidity Lags: Inventories are tied to the firm’s pool of working capital in a process that involves 3
specific lags namely;
(A) Creation Lag: Manufactured or purchased, the firm will hold inventories for a certain time
period before the payment is made. This liquidity lag offers benefit to the firm.
(B) Storage Lag: Once goods are available for resale, they will not be immediately converted into
cash. Thus, the firm will usually pay suppliers, workers, and overheads expenses before the
goods are actually sold. This lag represents cost to the firm.

(C) Sale Lag: Once goods have been sold, they normally do not create cash immediately. The firm
must wait to collect its receivables. This lag also represents a cost to the firm.
4. Circulating Activity: Inventories are in a rotating pattern with other current assets. They get converted
in to receivables which generate cash and invested again in inventory to continue operating cycle.
Avoid losses of Sale

P
u
rc
h
Gain quantity
as
P Discount
e
Firm ro
Holding d Which
Inventory u Helps
to ce
Reduce order cost
S
el
l
Achieve efficient
Source: ICFAI Business School/Finance Management production
 Motives of inventory management:

There are three motives for holding inventories:
a) Transaction Motive: It emphasizes on facilitating smooth production and sales operations.
b) Precautionary Motive: It protects against risk of unpredictable changes in demand and supply forces
and other factors.
c) Speculative Motive: It influences the decision of movement of inventory levels to take the advantage of
price fluctuations.

 Purpose of Inventory Management:
The purpose of holding inventories is to allow the firm to separate the processes of purchasing,
manufacturing, and marketing of its primary products. Within this statement of purpose, we can identify
specific benefits that accrue from holding inventories:
 To avoid the lost of sales.

 To gain quantity discounts.
 To reduce order cost.
 To achieve efficient production runs.
 To reduce risk of production shortage.
 To handle seasonal or cyclical fluctuations.
 To obtain optimum utilization of people, place, time and equipments.
 For customer Satisfaction.
 To gain the market share in key products
 Types of Inventory Management:
In the era of industrialization and globalization inventories cover a very wide range. The range of inventory
has become larger and more diversified. Inventories are maintained to widen the latitude in planning and
scheduling successive operations. So inventories are classified into four main types in the pharmaceutical
industry:
1. Raw material inventory:
This consists basic of raw material that has not yet been committed to production in a manufacturing firm.
The purpose of maintaining the raw material inventory is to uncouple the production function from the
purchasing function so that delays in a shipment of raw material do not cause production delays.
In cadila healthcare limited, Raw material inventory is maintained at the formulation and at API units. Raw
material means any type of ingredient which is required to prepare formulations and convert the drugs into
dosage form. There are basically two types of raw material:
(A) Active pharmaceutical ingredients (API): API, are the drugs that works to cure any kind of disease.
These drugs are used by the company to produce pharmaceutical products and are also sold to other
pharmaceutical companies in the form of final product without any further processing. It constitutes
85-90% of total raw material inventory.
(B) Expients: It consist of other chemical materials used in formulating the drugs like binding agents,
preservatives, colors, etc. these materials are outsource by the company. It consists of 10-15% of total
raw material inventory.
2. Packaging material:

Packaging Material is very important in the Pharma Company as each and every have to be packed with
utmost care and in proper packing. There are two types of packing materials, which are outsourced by the
company:
(A) Primary packing materials: It consists of capsule, labels, etc.
(B) Secondary packing materials: It consists of cartons, labels etc.
There is a packing development department at the factory which makes the sketches, layouts, colors and the
entire art-work with specifications and gives it to the outsourced firm.
Some of the firms to which packing materials is outsourced are- Hindalco (aluminum foils), Gujarat Glass
(Bottles), ARTO prints (printed packing material), etc
3. Working in process inventory:
This category includes those materials that have been committed to the production process but have not been
completed. The more complex and lengthy the production process, the larger will be the investment in
Working in process inventory. The quantity and the value of the work in progress depend upon the length of
the operating cycle. Without work –in- process inventory, a bottleneck at any stage in the production process
renders idle the machines and facilities at subsequent stages.
This type of inventory in Zydus is maintained in its formulation units and at its API.
4. Finished goods inventory:
These are completed products awaiting sale. The purpose of finished goods inventory is to uncouple the
productions and sales functions so that it no longer is necessary to produce the goods before a sale can occur.
These kinds of inventory are maintained by the firm so that they can meet the customer demand and there is
no loss of sale to the company. The basic motive behind finished goods inventory is to uncouple the
production and the sales function so that it is not necessary to produce the goods before a sale can occur and
therefore sales can be made directly out of inventory.
In case of Zydus the finished goods inventory is at the Hubs and at the C&F location.
The four formulation units of Zydus are situated at village Moraiya, Dist. Ahmedabad; Goa; Baddi, and
Solan. The two API units are situated at Ankleshwar, Gujarat; and Dabhasa, Dist. Vadodara.
 Costs associated with holding inventories:
Every company maintains some stock of raw materials, work in progress and finished goods inventory
depending upon the requirements of the company. The company is benefited by holding the inventory but on
the other hand there are various costs associated they are:
 Material cost
 Ordering cost
 Carrying Cost
 Cost of funds tied up with inventory
 Cost of running out goods
1. Material Cost: These are the costs of purchasing the goods including transportation and handling the
costs.
2. Ordering Cost: The costs of ordering include the cost of acquisition of inventories. It is the cost of
preparation and execution of an order, including cost of paper work and communicating with the
supplier. Basically this category refers to those cost, which is incurred at the time of placing an order.
At the Hubs of Zydus inventories are ordered in bulk so that they can have various benefits of bulk orders
and thus, try to minimize the cost.
3. Carrying Cost: This is the cost incurred in keeping or maintaining an inventory of one unit of raw
material or work in progress or finished goods. Cost of storage and cost of financing are two basic costs
associated with holding a unit in inventory.
Carrying cost is a very important portion in the total inventory cost of Zydus.
4. Cost of funds tied up with inventory: Whenever a firm commits its resources to inventory, it is using
funds that otherwise might have been available for other purposes. The firm has lost the use of funds for
other profit making purposes. This is its opportunity cost. Whatever the source of funds, inventory has a
cost in terms of financial resources. Excess inventory represents unnecessary cost.
5. Cost of running out goods: A running out of stock is a situation in the firm when the firm is not
having units of items in the stores but there is a demand for that either from the customer or from the
production department. Normally the cost of stock outs is quite expensive for the company.
Zydus maintains sufficient amount of stock of finished stock as well as of raw materials to meet such
contingencies.
 Benefits of Inventory Management:
1) Inventory management can remove barriers between manufacturer and retailers and establish a closer
relationship between them.
2) It helps in frequent analysis of purchases, sales and inventory records.
3) It gets the complete information about the value of inventory.
4) It gives complete knowledge of the exact size of merchandizing inventory.
5) Organization has full knowledge of its inventory.
6) Simple inventory management software functionality can range from almost free to high end systems
costing millions of dollars.
 Inventory Management Cycle
(1) Sales projection by marketing Department:
The cycle starts with the sales projection, which is done by the marketing department every month for
its existing and new products.
 It is done after considering the following factors like demand of the product, financial aspects,
economic environment, sales of previous month, current month, marketing feasibility etc.
 Marketing people have monthly budget fixed and target set to sell the products and in order to meet
the market demand the sales projection that is done by them has to be conveyed to the PPMC
department.
(2) PPMC Department:
The PPMC stands for Production Planning and Material Control which refers to the planning of
production, acquisition, quality control etc.
 The need for this department exists in order to produce specific medicines, for which raw material
has to be acquired well in advance.
 It calculates the requirement of the raw material on the basis of the sales projection done and places
an order to the purchase/procurement department.
 This department plays a very crucial role in coordinating all the activities for proper inventory
management as it is interlinked with all the three main departments i.e. Purchase, production and
marketing department.
 It also maintains the record of inventory received from all the departments for various types of
material.
 As pharmaceutical industry is a very sensitive sector, more emphasis is on the quality of material.
 Department caries stringent quality checks before any material is taken for production. The other
reason may be also that production cannot be started if all the ingredients are not available.
 Even packing materials like labels is not available, and then production cannot be started, so there is
a great need for PPMC.
 Now PPMC department gives order to purchase department.
(3) Purchase Department:

Purchase department places an order to the existing suppliers and as the company says to the “approved
suppliers” on the basis of the credit terms as well as timely delivery of the raw material.
 If the department thinks to deal with the new suppliers whose credit terms are more favorable to the
existing ones then it first takes the permission from the top management and places a small order to
them and if satisfied, they gradually increase the quantum of the order.

 This department takes into consideration the information conveyed by the PPMC department for the
amount of material to be ordered and also checks the production schedule, in order to verify that
whether the quantity of material needed will be procured by them or not. If there is any problem,
then this department informs about is to the PPMC department and further it is solved by them.
(4) Testing:
After receiving the order from the purchase department, the supplier dispatches the material to the store
department of the company.
 Than the physical verification of the material received is done.

 Now the testing process is conceded on the raw material in order to check whether the raw material
is as per the quality prescribed by the company at the time of placing an order.
 This process is undertaken by the QA & QC Department, which plays a very crucial role in this
pharmaceutical company as all the products are related to health of the people.
(5) Quality assurance & Quality control Department:

This department has an important role to play in all the three stages of inventory i.e. raw material, work-
in-progress and finished goods. As the quality of the material should be checked at every stage of
production.
 The company follows Batch Production Process where unique batch number and lot number is
assigned to each raw material so that, if any problem occurs during the production or any later stage
then, the fault can be easily detected.
 Quality Assurance department is used to check the quality when the production is going on so that
the wastage of material and energy is avoided.
 Quality control department is used to examine whether the quality of finished product is as per the
standards or not.
 After quality assurance and quality control, the product is sent to the packing department and from
there to the bond room.
(6) Production Department:
 After the testing of the raw materials by the QA&C department, the production department converts
it into semi-finished or finished goods.
 Goods Receipt Number is made for each batch of finished goods and then transfer ticket is made as
the product enters into the lobby.
 Only finished goods with all the above process being completed is transferred to the bond room.

The inventory management cycle start from the marketing department which makes the sales projection
based on past sales month.
Sales Projection
Sales PPMC
Department
C & F agent Purchase

Department
Testing
Duty Paid
Godown
Quality control &

Bond Quality Assurance
Room Department
Production
Department

(7) Bond room:
Bond room is the centralized store house where finished goods are kept without paying excise duty till
they are executed.
 If the goods do not reach to the bond room, they are treated as W.I.P., even though they are finished
goods.
 Only when the goods reach to the bond room, they are treated as finished goods.
 Physical verification of the stock is done.
(8) Duty Paid Godown:
After bond room, the finished goods are transferred to the duty paid godown.
 Only after paying excise duty, the goods are dispatched from the bond room and send to the C& S
agent.
 The payment of the excise duty is done on the 5th on next month except March.
 Here the part of excise ends.
(9) C & F Agents:
 The company selects its C & F agents on the basis of the financial position, past records, location,
etc of them.
 The C & F agents receive the finished goods from the Bond Room of the company.
 There are 33 centralized C & F agents in almost all the states of the country.
 There are different base sales for different C & F agents on which the company pays commission of
1.18% on base sales and in case of the sales exceeding the base sales, the company pays a
commission of 1% on the excess sales(apart from the base sales).
(10) Sales:
 The last stage in the cycle is done by the sales department of selling the finished good and also keeps
a constant eye on the schedule or the targets made by them.
 And further continue with the sales projection for the future and thus the cycle goes on.
In Zydus, inventory is analyzed by bucket wise. This analysis is done on daily consumption of inventory.
So,for the smooth analysis, Raw Material and Packaging Material are categorized into 3 groups. They are
 Non – moving inventory: - No consumption of such inventories

- It lies more than 200 days.

 Slow – moving inventory: It lies 180 days to 200 days
 Moving inventory: Its lies not more than 180 days.
Company’s GDSO (Global demand and supply organization) has categorized their safety stock into 2
groups.
Safety Stock
Fixed Safety Stock: Dynamic Safety Stock:
 For sensitive market like USA  For critical API product

 Demand is fixed.  Demand volume is high
 Availability is very less
 This safety stock varies by days, like 30 days of average
consumption.
 This safety stock days calculation is based on the lead time of the
product.

GDSO Department:
After learning about the INVENTORY MANAGEMENT CYCLE AT CHL, given below is the brief
description of how the material is being purchased by them. The purchase work is done by GDSO
department. GDSO Department stand for global demand and supply organization.
This department is the come into existence as a recommendation of project SPEED (Supply Planning-
Effective Efficient to meet Demand). In the process the department has just completed nine months. The
motive behind having this department is to streamlining the whole supply chain of Cadila Healthcare. Some
of the associated objective of this department:
 Cost optimization for every relevant supply chain processes.
 Achieving growth both in size and scale.
 More adaptive response to market with highest efficiency and effectiveness.
The department GDSO (Global Demand and Supply Organization) has been divided into five major
divisions.
1. Demand Planning
2. Supply Planning
3. Procurement
4. Distribution and Planning
5. Investment and controling
(1) Demand Planning:

Main focus of this division is on forecasting of saleable products. The forecast process, consensus,
consider every possible input to make it an effective one. This division is also the interface to sales front
with effective operational decision (S & OP). Through their activity they expected to come out with
accurate forecast data and thus the customer satisfaction.
(2) Supply planning:
Major feed for manufacturing department is the outcome of this supply planning. Transform the
Committed volume into required figure is the task of the division. Generating right procurement
schedule and cost effective inventory management are two major responsibility of this division.

This department is in the very heart of the whole organization being a major player in revenue
generation. It closely interacts with marketing and finance departments. On the other hand the
manufacture department is fully dependent as requirement generated by GDSO is the main feed for
them. Production schedule and raw material purchase decision is controlled by this department only. If
this department fails to take proper feedback from the market every process down the supply chain will
suffer the heat of lost sell.
(3) Procurement:
This division is the working ground of supply planner. The major activities involved are procurement
scheduling and vendor management.
The procurement group is further divided into 5 categories:
 Raw Materials (RM): There function is to carry purchase of raw materials that will be
directly used in manufacturing the Pharma products.
 Package Materials (PM): This group carries out the function of purchasing of package
materials that will indirectly help in packaging of the finished
products.
 Gift & Misc: The function of this group is to make the purchase of promotion materials
like certain gift items that would be provided to the doctors and other free
samples which are provided to the distributors.
 API- Procurement:This includes the purchase of raw materials that would indirectly
help in manufacturing of other raw materials. This means that CHL
prepares some API products that would be used by other Pharma
companies in development of other finished products.
 Capital procurement: This includes the purchase of machineries as well as other

necessary tools and equipments that are required for maintenance.

Procurement Process:
Indent received
Inquiry: by procurement dept
Quotations from vendors received
Comparative statement is generated
Order goes to the lowest bidder; also try to pull rates down
Order generation
(4) Distribution and logistics:

The division is solely responsible for the integration of the whole distribution. Their major input comes
from demand team and supply planner commitments for various products to every C&S location. They
also take care of making the dispatch process more efficient. Cost optimization through proper planning
is also under the purview of this division.
(5) Inventory and controlling:
This division is started just 2 month back. The main purpose of this department is that whatever
investment has been done should not be wasted. For controlling purpose, there are various controlling
Machines into this division.

 Performance Parameters:
There are mainly 3 performance parameters: R, C, A which is mainly used for the management of the
supply chain.
R = Requirement
C = Commitment
A = Actual Production Delivery.
There is rigorous monitoring on R, C, A so that R, C, A can go higher and can reach at 100%. GDSO
Department tries to maintain R to C’s ratio at 100% but it comes around 95%. And remaining 5% is
considered as ‘Gap of R v/s C’.
 Contract Manufacturing or EMO (External Manufacturing organization):
CHL manufactures its product into its plant. But there are some products which is not possible to produce by
the CHL so they give contract to other pharmaceutical company. There are mainly 2 contracts which are
used by CHL.
1. Loan licensing
2. P2P (Principal to Principal OR Party to Party)
(1) Loan licensing:

In this contract, CHL provides Raw Material and Packaging Material to other party. Other party
manufactures into their plant. So, manufacturing is done by other party but product is marketed by
CHL.
(2) P2P(Principal to Principal OR Party to Party):

In P2P, Raw Material and Packaging Material are of other party and it is also manufactured by
other party (who provides RM and PM) at its plant. Here, also manufacturing is done by other
party but marketed by CHL.
The only difference between above 2 contracts is provision of inventory.

 Forecasting Tool:
For forecasting the requirement of the inventory for current month and for next 2 month, GDSO Department
uses the forecasting tool, named Rolling Sales Plan (RSP).Under this plan, they do forecasting of the next 4
months and assign version to each months and this tool provide them sales plan.
For example:
Suppose, we are making forecasting for the month of August in the month of May (present month).
Then what will be our requirement in August is called ‘version-4’, what will be our requirement in august
when we will make forecasting in the month of June is called ‘Version – 3’ and so on.
Present month = May

Forecasting Month = August
V1 = May to August = In the month of May and RSP gives the sales plan for August.
V2 = June to August = In the month of June and RSP gives the sales plan for August.
V3 = July to August = In the month of July and RSP gives the sales plan for August.
V4 = August to August = In the month of August and RSP gives the sales plan for August.

Receivable
Management

 Introduction:
Receivables or debtors are the one of the most important parts of the current assets which is created if
the company sells the finished goods to the customer but not receive the cash for the same immediately.
Trade credit arises when firm sells its products and services on credit and dose not receive cash immediately.
It is essential marketing tool, acting as bridge for the movement of goods through production and distribution
stages to customers. Trade credit creates receivables or book debts which the firm is expected to collect in
the near future. The receivable management includes three characteristics
1) It involve element of risk which should be carefully analysis.
2) It is based on economic value. To the buyer, the economic value in goods or services passes
immediately at the time of sale, while seller expects an equivalent value to be received later
on.
3) It implies futurity. The cash payment for goods or serves received by the
buyer will be made by him in a future period.
 Purpose of Receivable Management:
The objective of receivables management is to promote sales and profits until that point is reached where the
returns that company gets from funding of receivable is less than the cost that the company has to incur in
order to fund these receivables. Hence, purpose of the receivable is directly connected with the company’s
objectives of making credit sales, which are:
 To increase total sales of the company because when company gives goods on credit than there will
be more sales.
 To increase the profit of the company because when there is more sales than automatically profit
will rise but company should take care about the credit period which is provided to suppliers.
Company also have higher margin on credit sales than cash sales.
 To be in the competitive market and for this company need to give better credit facilities than their
competitors.
 To promote sales and profit till that point where company returns from funding of receivables is
more than the cost incurred by them. Then only it is profitable for the company.
Thus, the receivables bring some costs as well as benefits to the firm. Both the cost and the benefits are to be
looked carefully and a trade-off between them should be attempted.
 Cost of maintaining receivable management:
If the receivables are implemented by the company, then it is beneficial to the company, but following are
the cost involved in it:

1. Additional fund requirement of the company
2. Administrative cost
3. Collection cost
4. Defaulting cost
1) Additional fund requirement of the company:
The credit sales delays at the time of receiving money from the customers and therefore the time gap between
incurring the cost and the revenue receipts is extended. Thus the firm has to block its funds during that period of
time. Thus, the company has to arrange funds to meet its own obligation towards payment to the supplier,
employees, etc. These funds are to be procured at some explicit or implicit cost. This is known as the cost of
financing the receivables.
2) Administrative cost:
A company incurs cost before and after the credit sales is done. Before credit sales, costs are incurred on
obtaining information regarding credit worthiness of the customers, while after credit sales, the cost are
incurred for maintaining the record of credit sales and collection in future.
3) Collection cost:
These are the cost which firm has to incur for collection of the amount at the appropriate time from the
customers.
4) Defaulting cost:
If there is a default by a customer and the receivables becomes, partly or wholly, unrealizable, then this
amount, known as bad debt, also becomes a cost for the company. This cost does not appear in case of cash
sales.
Receivables Management basically includes four main aspects mentioned below:
a. Distribution Channel
b. Credit Control Policy
c. Collection Policy
d. Claims Settlement

(A) Distribution Channel:
After the finished goods reach the Bond Room and then the duty paid godown, the goods are ready for sale
and there comes the role of marketing and distribution channel of the company. Following diagram shows
the basic marketing and distribution channel followed by CHL:
Steps for Marketing
Marketing Manager
Divisional Manager Head
Regional Business Manager
Area Business Manager
Medical Representative
At Cadila Healthcare Ltd. Sales is done through different ways. And each of this type is described
below:
 Domestic Trade System (Distribution Channel):

CHL’s Distribution Channel
Direct Indirect Selling
Super
Direct Supply
C & S Agent
Depot
C & F Agent
Local Out
Parties station
Parties
Retailer

CHL do the selling of goods in two ways-
 Direct selling:
 Direct selling means company does direct sell its goods to medical stores or final seller. Cadila do this
kind of trading very less.
 Cadila always have atleast one intermediary between them for trading. Sometimes, Direct selling is
done in the case of exports of goods to the direct dealer. This is done by Medical representatives, Area
Business Manager, and Regional Branch Manager.
 Here the goods are dispatched from the bond house to the designation. For direct supply, orders are
generally received and executed at head office.
 For interstate supply 4% CST (Central Sales Tax) is applicable. 30 days credit period is allowed for
outstation stockiest.
 Generally the products are directly supplied to Government Institutions, Nourishing Homes and
Hospitals.
Disadvantages:
 This is a risky system because it is not possible for a big company to take care of its all debtors.
 This is a time consuming as there is lots of seller who takes the products of the company.
 Company cannot recover all the debts which are held for the company as the amount is less but there
is large number of customers from whom the money should be taken.
 Indirect Selling:
Indirect selling is a selling which is done through various intermediaries, in this system 3 or more parties are
involved. Here, selling is done by intermediary who takes commission for further selling of goods. They are
the link between the manufacturers and shopkeepers. With the help of intermediary goods are transferred.
There are various kinds of indirect seller which are as follows:
(A) Super Stockiest:
Super stockiest is an intermediary which takes order from shops and provides them the medicines according
to their requirement. Generally, this kind of indirect selling does by Medium-Small enterprises. For the large
enterprise it is not suitable. Super stockiest have a large amount of stock kept with them. There is no CST
(Central Sales Tax), only local tax has been charged.
 Super Stockiest is sending their order along with blank undated cheque to HO.
 Company has allowed 30 days credit period on each supply from the date of Lorry Receipt (LR).
 Company has to take security coverage by the way of deposits or bank guarantee.
 Company is not responsible for the outstanding of stockiest for onward sales. Super stockiest have to
recover their dues from the stockiest at their own.

 Super Stockiest should pass the scheme and products to the stockiest as per the company norms and all
the expired goods are returned by them on monthly basis at Ahmedabad and the company issues the
credit note for the goods received.
Disadvantages:
 There is a monopoly of the stockiest in the market because the particular product which has a high
demand, the stockiest will gave that product to their preferred shop either their own shop or most
preferred shop which creates a monopoly in the market.
 There is a partiality done by the stockiest to send the goods at preferred shop first than the rest of the
shops.
 This type of indirect selling is most suitable for the medium enterprise and as Cadila is large enterprise
so this type does not suit to the company.
 C & F Agent (carrying and forwarding agent):
Cadila has appointed C&F agent in every State of India, They store the goods and pass it on to the stockiest
as per the instruction of the company. For rendering this kind of services. He charges rent for storage and
commission based on the number of transactions entered. They are paid 1.18% service commission on base
sales and 1% for additional sales i.e., above base sales He is supposed to collect cheque from both outstation
parties and local parties. They are required to give security deposit for 30 days stock or sale and the second
requirement is a well built infrastructure.
 The business is carried on the sales tax number of the company then agents in the chain are referred as
C&F and in case business is carried out on the sales tax number of the agent then that agents are
termed as C & S.
 This is the reason ZYDUS has formed a marketing company ZYDUS Pharmaceuticals limited and has
taken number in its name and carries on its business in its name and further has appointed as C&F.
 Why C&F agent:-
 In this type of agent are transferred and nit sold to them.
 It saves 4% CST.
 There will be ease in distribution.
 Company can deliver its goods as and when required, to the any remote area.
 Criteria for selection of C&F Agents:
From all the above selling channels at CHL, C&F Agents plays very important role. Major sales are
done through this channel only. So following steps are taken while selecting any C&F agent:
A. The guarantee offered by financial viability along with past records and reputation in the
Market.
B. Banker Credit worthiness Certificate
C. Maintaining information of number of transaction done and value of goods sold in a consistent
manner.
D. Relations maintained with other stockiest.
Advantage:
 This kind of system is secured as a company point to view. As all the collection is done under the
name of the company ‘Cadila Healthcare Limited’. So the agent never deny for the payments.
 The company gives a commission for sales of the goods so the more sales of goods more the
commission is given to the agent. So they work hard to get more commission.
Disadvantage:
 The main drawback is slow delivery of goods as the whole state is covered by 1 C&F agent so
sometimes it is difficult for them to do fast delivery.
 There is a high freight charge in this system. As according to the requirement the company has to send
the goods immediately when and where required.
There are two ways for collection of the amount-for local parties and for outstation parties.
1. Local Parties: For local parties collection is done by C&F agent. After 7 days of delivery the cheque
has been collected from them and submitted into the bank and the amount is directly credit into the
company account.
 To receive orders from stockiest.

 Entering of order
 Preparation of invoice and payment advice.
 Dispatch of goods.
 Collection of cheque from 7th day from delivery.
2. Outstation Parties: For the outside parties collection is done by C&F agent after 21 days from the
delivery. Company takes advance cheques from the dealer and make invoice according to the cheque.
The amount is directly credited to the company accounts.
 C&F Agent Ranking:
Company gives ranking to the C&F Agents to encourage their work. This system also helps in providing
efficient performance measure types of criteria’s which is decided by different departments like Finance,
Servicing, Marketing, Distribution etc
Benefit from this C & F agents get on Quarterly and Yearly basis. Both the benefits respectively are shown
below:

Ranking (Quarterly Basis):
1st = 15,000
2nd = 10,000
3rd = 5,000
Ranking (Yearly Basis):
 Company invites on the annual day all C & F agent at H.O

 100000/- cash prize is given to the C & F agent whose average results (average of Quarterly results)
is higher than all other C & F agents.
 Company even gives Certificate and Trophy to the C & F agent.
 Ranking of quarterly and yearly basis respectively are sending to all C & F agent.
Before grating the credit from debtors “Cadila” takes care of the following components:
* Character:
This factor attempts to measure customer's willingness to pay.
* Capacity:
This is a maximum credit purchaser will obtain. This information refers to the size of a buyer
and expected level of sales.
* Capital:
This factor refers to customer’s ability to pay. This aspect of the decision is often investigated using the
tools of financial statement analysis.
* Collateral:
This is simply the assets the customer can offer to secure debt.
* Conditions:
This is the customer’s vulnerability to changes in business conditions, or other specific events.
 Stockiest:
After the goods are transferred to the C&F Agent, further they are sold to the stockiest at 8% to 10%
discounted rate as mentioned in the norms of the company. Here the stock is not transferred to the stockiest
but actual sales are made and thus VAT or CST has to be paid depending on the type of transaction i.e.
intrastate or interstate respectively. Basically there are two types of stockiest as mentioned below:

A. Local Stockiest: Here the transaction is within state and therefore only VAT of 4% or 12.5%
(according to the type of goods mentioned in the SALES TAX ACT) will be charged to the goods
sold. After the receipt of goods, 7 days credit period is given to them for the payment.
B. Outstation Stockiest: Here the transaction is undertaken between two states and therefore 2% or
4% CST will be charged on the goods. While they are given 21days credit period for the payment.
Advantage:
 There is fast delivery of goods is possible as there are many agent which is made in the country.
 Only company has to pay local taxes.
 ‘F’ form should be given.
 Tax liability is on the C&S agent which is benefit for the company.
Disadvantage:
 This is more risky as collection is done in the favor of the agent not of the company.
 Late payment to the company is possible as cheques are not directly transferred to the company so
there is a possibility of delay in the payments.
 C&S Agents:
 In this type of distribution channel, the Consignment & sales Agent (C&S Agent) acts as a distributor
where the goods are not transferred but sold to them.
 Company has only 1 or 2 C&S agents, which are only for Generics.
 They further sell it to the local stockiest by charging only local tax and no CST, as all the transaction
are made within state only.
 Here they don’t have to obtain the drug license no., only the sales tax no. is needed and so the party
has to make payments in the name of C&S Agents and not the company.
 So the tax liability has to borne by the C&S Agents.
 Here there is high risk as the payments are received in the name of the agents, so they can do scam or
fraud with the company.
 They have to obtain “F- Form” from the government.
Disadvantages:
 Highly risky, as the payments are received in the name of the agent and not the company.
 If the payments are not received by the agents then the payment to the company is delayed.
 Depot:
 Company can arrange their own depot at various locations for smooth distribution of their products.
 So no service commission has to be given to them.
 It has to occupy godown, manpower and sell their products to distributors.
 All the expenses are to be borne by the company.

 All the services to supply the goods are to be rendered by the company depot and therefore there is no
chance of doing partially while supplying the goods and also for passing the benefits of various
schemes to other stockiest.
 The problem of high freight charges in case of C&F Agent is solved in this system.
Disadvantages:
 Generally the company with huge turnover can afford to have a Depot as it involve high establishment
cost.
 There are many chances of scam as the manager is of the company.
 Credit Control Policy:

(1) Order execution:
* Amount of goods ordered is entered in the computer and packing slip is generated.
* Send the packing slip to the stores and take out materials as mentioned.
* Invoice is generated on the same day or latest by the next day.
* Goods are dispatched to the stockiest within 48 hours.
* Order of goods received from the local parties should be properly sealed and signed.
* If the goods are to be dispatched outstation, then it has to be duly sealed and signed accompanied with
blank undated cheques that are eligible for execution and all the documents are given to the transporter
and LR receipt is obtained.
* In the LR receipt following items like consignees name, destination, number of packs and weight date
etc. are verified.
* If a party has given cheque with the remark i.e. “not over Rs….. (Some amount)” then the order should
be executed within the limit of that cheque amount and not more than that.
* If supply is done through bank all documents are send to the bank by register post.
* If any fax or telephonic orders are received during the month, then it should not be executed. But if the
undated cheque is received in advanced before the last date of that month by the C&F Agent, then the
order can be dispatched after confirmation with the party. If the confirmation is not received within 48
hours, then C&F Agent have to proceed to raise a “full invoice cancellation” credit note.

* C&F Agents should collect certain statutory forms from the stockiest within stipulated time i.e. C –
Form should collected quarterly and F – Form should be collected every month and if the forms are not
received from the party then it should be kept on hold.
* C&F Agents has to ensure that the cheques are drawn on Nationalized Bank only as the cheques drawn
on co-operative banks are not acceptable
.
(2) Dispatch of the goods:
All the dispatches should be completed within 48 hours from the date of execution.
* For invoice raised on the last day of the month the dispatched should be completed within three days
from the date of invoice.
* In case of local parties supply should be made only against cheques.
* Delivery of goods should not be made without collection of cheque from party.
* On the receipt of LR, C&F agents should prepare Payment Advice within 24 hours and dispatch it to the
local parties.
* On 5th of every month not a single claim should be left pending for the settlement of the goods received
by the C&F agents.
(3) Stockiest appointment:
* The main necessity to appoint the stockiest:

 Reputed stockiest for increasing the sales
 Need of expansion
 Existing stockiest is default
* Three main items should be provided by the stockiest are annual reports of last 3 years in the same
business, C&F recommendation and No Objection Certificate (NOC) from the association.
* Criteria for the new stockiest:
 For the new stockiest the credit limit starts with Rs. 50000
 And if the order is more than Rs. 50000, company asks for the reason for more requirements.
* Criteria for existing stockiest:
 Stock provided should be two times of the average collection received in the last two months.
 No of cheque bounced should be bounced till that date.
 Unpaid goods return should not be more than Rs. 5000 or else the stockiest has to be kept on
hold till the receipt of H.O. approva
(4) Credit limit:

* Credit limit is the time period given by the company to its agents and the different stockiest to pay the
amount due to them.
* The basic criteria followed in the company for fixing the credit limit is two times on average collection
received in the last two months.
* It is generally fixed at 21 days for the C&F agents however if any variation required then the HO has the
power to make the necessary changes in it. But for the variations certain things are needed to be checked
as mentioned below:
 The reason for increasing the credit limit.

 Headquarters credit limit is within limit of 2 times of headquarter target. Credit limit should not
be increased by exceeding this limit of that H.O.
 Past records of the party like number of cheques bounces, returned gods, unpaid interest debit
notes, average sales are to be checked.
 Credit limit should not be increased for any party whose credit limit was reduced earlier due to
any adverse circumstances.
Credit Days:
Local Stockiest 1 to 7 days as per agreed norms
Outstation Party 21 days
Doctors /Institution supply 21 days to 90 days on case to case basis as approved by H.O.
Credit Period Lengthened Profit Increased
Sales Increased
Bad debts Receivables Average collection

Increased IncreasedProgram
Summer Internship period increased 78
(5) Collection:
* The entries of collection are to be passed only for those Demand Drafts and Cheques which are
physically received in advanced at the H.O.
* The collection should be credited only in the name of the party from whom the payment is received and
in the name of concerned division.
* After the receipt of DD, PIF (Pay in Form) should be prepared and draft should be deposited with the
bank immediately.
* C&F agent should be very vigilant in case of advanced payment received against the supply of goods, as
the amount should be adjusted in the account of the stockiest who has paid the amount.
(6) Unrealized Cheque:
* On daily basis the company receives the report on details of each and every cheque received by the
Bank and reconciliation is done by the company.
* If certain cheque gets bounced after that the day of reconciliation then the details of all that cheque is
received at the end of every month.
* If the amount is not realized within 45 days then the party has to be put under hold and further no
transaction is to be made with that company.
* Further explanation is done in detail in the CASH MANAGEMENT SYSTEM.
(7) Resumption of supply in case of Cheque Bounced Parties:
* If the cheque bounces for the 1st time and the party issues apology letter for the same, and if it bounces
due to some other mistake by bank, then in both the cases no action will be taken against the party. Only
if the mistake is done by the party or there is insufficient balance or some other reason, then only the
action will be taken against party.
* If the cheque bounces for the 2nd time, then the party will be supplied the goods on advanced demand
draft basis for the next two months and the supply is suspended for the two months. After this period
gets over, the assurance of the cheque being honored is taken from the C&F agent and the supplier, by
the company to get the original credit limit.
* If the cheque bounces for the 3rd time, then its supply is stopped for next four months and advanced
demand draft is taken for next four months supply. And even the credit limit is reduced to Rs. 50000/-.

* Here, the no. of occasions will be considered and not the no. of instruments being dishonored. Finance
department will inform about this to the marketing department.
* In all the above cases, if the cheque is not honored within 30 days of receipt of goods then the company
will send legal notice to the party, and if the amount is not received yet, then criminal notice will be
send to the party and lastly after 45 days, summon of the court will be send to the party and it will put on
hold or in blacklist for further supply of the goods.
(8) MIS Reports:

Every month the C&F Agents should submit the following MIS Reports:
1.Unmatched transactions of Bank.

2.Payment advice not given to the party after the supply is made.
3.Pending Debit and credit note.
4.Late dispatch of goods.
5.Late deposition of cheque/demand draft.
6.Advanced cheque amount not recorded.

7.Advanced cheque/ DD not received.
8.Payment not received against the bounced cheques etc.
All the MIS report should have proper remarks and explanation of each and every transaction.
(9) Policy of return of saleable goods:
* If the goods of worth more than Rs.5000, are returned then the party should be kept at hold manually,
the supply to the same will be made only after the approval of H.O.
* Marketing department will provide the reasons of the return of goods and the finance department will
verify the reasons so mentioned and recover the expenses of C&F commission and freight from the
defaulter that can be either field staff, C&F or the party.
 Important dimensions of Credit Policy:
1. Credit standards:
A company has a wide range of choice in this respect. At the one end of spectrum, it may decide not to
extend credit to any customer, however strong his credit rating may be. At the other end, it may decide
to grant credit to all customers irrespective of their credit rating.
In general, liberal credit standards tend to push sales up by attracting more customers. This is, however
accompanied by a higher incidence of bad debt loss, a larger investment in receivables and a higher cost
of collection. Stiff credit standards have the opposite effects. They tend to depress sales, reduce the
incidence of bad debt loss, decrease the investment in receivables and lower cost of collection.
2. Credit period:
Credit period refers to the length of time customers are allowed to pay for their purchases.
Lengthening of the credit period pushes sales up by inducing existing customers to purchase more and
attracting additional customers. This is however, accompanied by a large investment in debtors and a
higher incidence of bad debt loss. Shortening of the credit period would have opposite influences.
3. Cash discount:
Company generally offers cash discounts to induce customers to make prompt payment. Liberalizing the
cash discount policy may mean that the discount percentage is increased and/or the discount period is
lengthened.
4. Collection effort:
The aim of the company for this is timely collection of receivables which may consist of legal actions
against overdue accounts, monitoring the state of receivables. A rigorous collection programme tends to
decrease the sales, shorten the avg. collection period, reduce bad debt percentage, and increase the
collection expense. A lax collection programme would push sales up, lengthen the avg.
 Collection:
The collection of the cash is done in this way in the company. There are 33 C&F Agent in India. All the
cheques which are received by the C&F Agent in previous day, they have to give in to the Citi Bank
person on the next morning. Citi Bank person takes all the cheques to the bank and deposit it. Next day,
the company gets the credit in the bank account. If there is any dishonor of cheque on the later dates
than the company debit the account on that day. Citi Bank sends daily reports to the company about the
receipt of cheques. In all the company receives around 40 reports daily. All collection done in Citi Bank
and then it is further transferred to the other banks i.e. Bank of Baroda and IDBI Bank according to the
requirement of the company.
 Claim Settlement:
For the settlement of the claims, CHL issues credit note for the settlement. There are several reasons for
which credit notes are required to be generated. In this company, few credit notes are made manually
while few are made automatically in SAP. The reason behind this is SAP has a drawback in making the
credit note of some quantity of goods and therefore quantity based credit notes are to be made manually
only.

Mainly credit notes are of two types which are shown in the below chart:
(A) Value Based Credit Note:
In this type, the credit notes are made for the price of total goods returned by the stockiest. The Value
Based credit notes are made for the following type of goods:
1. Saleable Goods:
When the party returns saleable stock, the C&F Agent has to ask for the purchase invoice no and
date, as he needs to enter those details in the credit note. If those things are not available then he will
take the help of SAP or VISION 21 for its details. Credit note should be issued only after proper
authorization. It should be issued after 25th of every month. After credit note is prepared, the
company mentions the quantity, amount and the reason of the goods returned on the invoice copy.
Claim Settlement
Credit Note
Value Based Credit Quantity Based

Notes Credit Notes
* Short of goods
* Free product
* Octroi
* Rate of difference
* Scheme
Saleable Non-Saleable * Interest
Others
Goods Goods
* Discount & Special
discount
* Expiry
* Special Rebate
* Full Invoiced
* Commission
return
* Service charges
* Part Invoiced Summer
* ST &Internship
CST claimsProgram 82
Return
* Freight
2. Non - saleable goods:
Issuing credit note for non-saleable goods is totally different from the issuing credit note for saleable goods.
* C&S agents are supposed to check the goods that are returned by the party and then GRN
(Goods Return Note) is prepared for goods returned. The copy of GRN is to be put in the checked
carton.
* In the absence of purchase details C&S will take the help of invoice of given product batch no.
available in query menu for getting the correct purchase details. This will help issuing the correct credit
note to the party.
* Deduction of the scheme as mentioned above if party had returned the goods in loose pack.
* Credit note should be issued only after proper authorization. It should be issued after 25th of
every month on the basis of GRN and then C&S forward one copy to finance department in binding
with every month.
* Credit note should be adjusted with next supply of the party.
* Non-saleable goods are sent to distribution department by the C&S agent. Value based credit
note is made only in BIOGEN DIVISION. In such cases updating of stock is not done. In the Csdila,
ALIDAC, MEDICA etc. quantity based settlements are done which is known as RP to RP (replacement
against replacement).
Some of the major reasons are as follows:
1. Expiry:

CHL gives the products to its C&F agents for further selling and they take the amount pertaining to these
sales from these C&F agents. Now there is possibility that these agents are unable in selling these
products and meanwhile these products had expired. So the C&F agent returns these products back to
the CHL and the latter will pay that amount back and thus will prepare the credit notes. If the goods are
returned within 6 months from the date of purchase along with the Lorry Receipt, 100% value is allowed
and if the goods are returned after 6 months.
2. Parts returned:
There is every possibility that certain portions of these products are defective i.e. there is some leakage
in syrup bottle or the medicine had come out of strip. In such cases the agent returns these defected
products and thus CHL prepares credit notes and thereby pays certain amount to agent.
3. Full Invoice returned:
There are certain chances that complete consignment gets returned because of certain reasons like
defects or order cancellation. In such cases credit notes of full amount are prepared to pay the party. The
amount required to be paid is decided before carrying out this transaction.
Others:
1. Short of goods:
Similarly if the goods supplied is short then the actual order, the company needs to make the credit note
of the difference amount as the party must have paid full amount in advance through cheque or DD. So
credit note of the short of goods will be made.
2. Free product:
Marketing department requires free samples for promotional purposes. In case of goods given free of
charge with other products, the company incurs cost for those goods given as free. The C&F agents are
supposed to make an invoice for such products given free of cost. They will keep the invoice copy and
another copy is sent to the head office to maintain record. All the details of the product are to be
maintained by them. So the finance department prepares credit notes in order to provide these samples.
3. Octroi:
Octroi charges are different for different states, generally ranging from 1.5 %-2%. Now if CHL in its
invoice had levied more Octroi charges for particular agent than CHL have to pay back part of this
Octroi for which finance department had to prepare the credit notes.
4. Rate Difference:
CHL provides additional discounts to certain institutions (e.g.: Government institutions). Now when
agents take the products from CHL they have to pay the actual (non-discounted) price of the product.
Now if he sells these products to approved institutions at discounted prices then he is eligible to get the
additional amount back. So after providing necessary proofs, the agent gets this amount back for which
finance department prepares the credit notes. These credit notes are issued from the finance department
at the H.O.
5. Scheme:
Occasionally CHL announces the schemes in order to boost up its sales. E.g. If CHL decides to have a
scheme of providing 3 units free for every 10 units. Now the agent has to sell the products according to
this scheme to its parties. So the agent in that case gets its money back for every free unit that he had
sold. These credit notes are issued from the finance department at the H.O.
There are two types of scheme are given:
1. On percentage base: E.g., 10% at every 100 Rs. purchase

2. On quantity base: E.g., 1 strip with purchse of every 10 strips.
* Every month scheme is added in Master of its monthly based skill.

* If goods are sold without scheme then credit note is issued for the same.
Scheme is given as under:
For example; If there is a scheme of 10% on Rs. 100 then on purchase of every Rs. 150, scheme is given as
under:
For 100 + 10 =110
110…….10
150…… (?)
Deduction from TP = 150 * 10 / 110 = 13.64

So, company is not giving directly 10% of 150 which is 15.
6. Interest:
If an agent is able to pay advance Demand draft (DD), then he will receive 1.5% interest on this
advanced amount paid within 60 days. Generally such benefit is given to the C&F Agent in Jammu
only.
7. Discount and Special Discount:
Every party gets some credit days for making its payment. Now if the party pays it early i.e. before the
credit limit then that particular party gets 8% to 10% discount. While special discount is given when the
agent does bulk purchases and avail the benefits of huge discounts.

8. Special Rebate:
Credit notes for special rebate are prepared very rarely. E.g.- CHL introduces a scheme in which for
every 5 empty strips collected and provided to the distributor, the party gets 2 strips of that particular
product free. So for every free product sold by distributor, CHL rebates him by providing similar
product for free.
9. Commission:
For the sales, which are made by agents, they get fixed commissions decided on the basis of prescribed
norms. So credit notes are prepared for paying the amount of commission paid less to these parties.
10. Service charge:
Similarly, if the service charge paid by the agent is more than the actual amount to be paid, the company
has to make credit note for the amount left to be paid.
11. ST and CST claims:
Generally such types of credit notes are made when the amount of ST and CST is not paid at an actual
rate i.e. 3.84% based on MRP and 4% no based without MRP. Thus that amount is to be paid back to the
agents, which requires formation of credit notes.
12. Freight:
Here the credit notes are made when fewer amounts is paid as freight. As the rate of freight varies from
state to state.
13. Reimbursement of claims:
There are certain expenses that are borne by different department like marketing expenses and
distribution expenses for which credit notes are required to be made. Generally certain amount is
borrowed by the individual or department in advanced for some purpose, but whole withdrawn amount
is utilized and more expense is incurred, in such case credit notes are to be made.
(B) Quantity based notes:
Product to product (Retail Price to Retail Price) claims:
If the agent returns certain products to CHL for certain reason than CHL gives same product against the
defected products for which credit notes is required to be paid. In case of the party wants to replace the
goods for the other products, the amount or cost of the goods i.e. the Retail Price must be the same. The
company provides the claim for the boxes and not for the strips. Thus the products which are to be
replaced must cost same, so as the replacement transaction is eased. The products that are to be replaced
can be different but the cost matters a lot so as to reduce adjustments. All calculations are done at RP,
while schemes, sales tax, discounts are not considered.
Ratio
Analysis

 Introduction:
Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in
a company's financial statements. The level and historical trends of these ratios can be used to make
inferences about a company's financial condition, its operations and attractiveness as an investment. Ratio
analysis can also help us to check whether a business is doing better this year than it was last year; and it can
tell us if our business is doing better or worse than other businesses doing and selling the same things. It is
an arithmetical relation between two related or inter-dependent items. Ratio Analysis is the process of
determining and interpreting numerical relationship between figures of the financial statements. An absolute
figure often does not convey much meaning. In other words, business results and situations are understood
properly only when the relevant figures are considered together. Thus the ratio analysis is an important
technique of financial analysis as it is a means of judging the financial health of the concern.
(1) Liquidity Ratio:
1.1 Current ratio:
Current ratio=current assets / current liability
The current ratio measures the number of times that the short term assets can cover the short term debts. In
other words, it indicates an ability to meet the short term obligations as & when they fall due.

Benchmark: 2:1
Cadila Healthcare Limited (Consolidated) (Rs. In million)
Particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Current Assets
Inventory 2,211 2,475 3,896 4,729 6,012
Sundry debtors 1,235 1,990 2,784 3,555 4,845
Cash and Bank 612 438 990 9,26 2,517
Loans & Advances 924 1,588 2,201 2,013 2,237
Total 4,992 6,491 9,871 11,223 15,611
Current Liabilities
Provisions 606 605 858 913 1,186
(-) Buyer’s credit (231) (190) (399) (235) 0
Total 2,435 2,819 5,047 4,816 6,915
Current Ratio 2.05 2.30 1.96 2.33 2.26
Current Ratio
2.4 2.33
2.3
2.26
2.3
2.2
2.05
2.1 Column2
Ratios 1.96
2
1.9
1.8
1.7
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above data we can conclude that current ratio in the year 2004-05 and 2006-07 is very closer to
benchmark ratio i.e. 2:1; while in the rest of the year current ratio is almost nearer to standard ratio, so we
can say that short term financial position of the company is very good. But in 2006-07, CHL is having low
ratio compares to other years because there is proportionate increase in current liabilities is 91% which is the
highest increase in among all years. There is a steep increase in current assets of 52% which is also highest
among all years but here denominator is bigger so ratio comes lower. While in 2008-09, the ratio is slightly
higher than the standard ratio and also higher than last year because there is an increase in inventories and
debtors. Such higher inventory shows that our fund is idly blocked.
Particulars Sun Pha. Ranbaxy Dr.Reddy Lupin Piramal CHL
Cuurent Assets
Inventory 9,757 19,643 13,250 9,572 4,834 6,012
Sundry debtors 8,811 13,310 14,406 10,349 4,866 4,845
Cash and Bank 16,690 23,956 5,623 778 946 2,517
Other Current Assets 441 2,283 0 0 102 0
Loans & Advances 6,983 7,729 5,519 2,780 4,161 2,237
Total 42,683 66,922 38,798 23,478 14,908 15,611
Current Liabilities
Current Liability 3,767 39,719 15,118 11,504 6,307 5,729
Provisions 3,431 7,720 1,994 1,827 1,909 1,186
(-) Buyer’s credit (0) (121) (0) (1,265) (0) (0)
Total 7,198 47,318 17,112 12,066 8,215 6,915
Current Ratio(2008-09) 5.93 1.41 2.27 1.95 1.81 2.26

(2007-08) 6.33 2.10 2.64 3.30 1.98 2.33
(2006-07) 9.81 2.34 3.34 3.80 2.16 1.96
 Inter firm ratio analysis:
Current Ratio (2008-09)

5.93
6
5
4
3 2.27 2.26
Ratios 1.95 1.81
2 1.41 Column2
1
0
Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
Pharma
Companies
Interpretation (2008-09):-
 Sun Parma: Here the ratio is the highest in the industry which is very far away from the standard ratio.
Its C.A. is very higher than its C.L. Sun Parma has huge cash fund due to which their C.A. are high.
This cash fund may be used for some other beneficial purposes.
 Ranbaxy: Here there is not much difference between its C.A. and C.L. Its C.L is much higher than
others while Ranbaxy is having higher amount of cash on hand which should be used behind the
payment of this liabilities.
 Dr. Reddy: here the ratio is nearer to the standard ratio. Company has invested much into its inventory
so its cash on hand is very less vis-à-vis its current liabilities are also much high.
 Lupin & Piramal: Here both company’s ratio is closer to standard ratio which is a very good sign for
the company.
Recommendation:
 CHL: Our company should reduce the amount of its liabilities which is increasing year by year and
reduce the amount of debtors for which we can reduce our average collection period.
 Industry: Our company has very sound position for short term financing and is very consistent in
maintaining its current ratio as compared to other competitors.
1.2 Quick- ratio:
Quick ratio = [current assets – inventories] / current liability
Quick ratio indicates the ability to meet short term payments using the most liquid assets. This ratio is more
conservative than the current ratio because it excludes inventory and other current assets, which are more
difficult to turn into cash.
Benchmark: 1:1
Cadila healthcare limited (consolidated) (Rs. In million)
Particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Cuurent Assets
Inventory 2,211 2,475 3,896 4,729 6,012
Sundry debtors 1,235 1,990 2,784 3,555 4,845
Cash and Bank 612 438 990 926 2,517
Loans & Advances 924 1,588 2,201 2,013 2,237
(-) Inventories 2,211 2,475 3,896 4,729 6,012
Total 2,771 4,016 5,975 6,494 9,599
Current Liabilities
(-) Buyer’s credit (231) (190) (399) (235) 0
Total 1,829 2,214 4,189 3,903 5,729
Quick Ratio 1.52 1.81 1.43 1.66 1.68
Interpretation:
The ratio for the year 2006-07 is better among the all, because the proportionate increase in C.L. is 89%
that is more than the proportionate increase in the liquid assets i.e. 49%. While in 2008-09, the ratio is
higher than standard ratio and other years as well. In this year the amount of debtors is very high so our
cash sales might be very low and due to this our requirement for working capital will be high.

Quick Ratio
1.81
2 1.66 1.67
1.8 1.52
1.43
1.6
1.4
1.2
Ratios 1 Column2
0.8
0.6
0.4
0.2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
 Inter Firm Ratio Analysis:
Particulars Sun Pharma Ranbaxy Dr.Reddy Lupin Piramal CHL
Cuurent Assets
Inventory 9,757 19,643 13,250 9,572 4,834 6,012
Sundry debtors 8,811 13,310 14,406 10,349 4,866 4,845
Cash and Bank 16,690 23,956 5,623 778 946 2,517
Loans & Advances 6,983 7,729 5,519 2,780 4,161 2,237
(-) Inventories 9,757 19,643 13,250 9,572 4,834 6,012
Total 32,926 47,279 25,548 13,906 10,074 9,599
Current Liabilities
(-) Buyer’s credit (0) (121) (0) (1265) (0) (0)
Total 3,767 39,598 15,118 10,239 6,307 5,729
Quick Ratio (2008-09) 8.74 1.19 1.69 1.36 1.60 1.68

(2007-08) 8.77 2.09 1.87 2.65 1.64 1.66
(2006-07) 7.84 2.07 3.05 3.29 1.34 1.43
Quick Ratio (2008-09)

8.74
9
8
7
6
5
Ratios 4
3 1.69 1.6 1.68 Column2
1.19 1.36
2
1
0
Pharma
Companies
Interpretation (2008-09):

 Sun Parma: Here the ratio is very high, because the company has high amount of liquidity because of
cash and bank and very lower amount for liabilities.
 Ranbaxy: Here the ratio of the company is best among the all. There is very low difference between its
C.L. and L.A. which makes ratio closer to standard ratio. Here L.A. is higher due to debtors and cash
and bank.
 Dr. Reddy: Here the ration is highest among the all, as the company has very high amount of liquidity
which is not a good sign for the company’s growth. Here amount of debtor’s is very high as its average
collection period is 77days which is quite higher.
 Lupin: We can say that its ratio is nearer to the benchmark. Though its debtor’s amount is high but
company’s C.L. is also higher which pulls this ratio nearer to benchmark.
 Piramal: Here the condition is very fair enough as its debtor’s amount is low along with its liabilities.
Recommendation:
 CHL: Our company should maintain enough cash fund for its liquidity positions and for working
capital.
 Industry: Sun Parma should minimize their amount of debtors along with its average collection period
and our company should try to raise their liquid assets so that our ratio can come closer to benchmark.
(2) Profitability Ratio:
1.1 Gross Profit Ratio:
Gross profit ratio = [GP/sales] * 100
The Gross Profit Ratio is that ratio which tells about the profit earned from the business with related to the sales of the
company. Gross Profit only considers cost of goods sold (direct expenses) but does not include other cost (indirect
cost). It tells about the gross profit contributed by one rupee of gross sales revenue.
Particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
gross profit:
sales 12,779 14,845 18,288 23,229 29,275
(-)consumption of RM and FG 4,840 5,688 6,372 7,903 9,566
(-)processing charges 83 99 211 328 304
(-)store and spare parts consumed 122 167 209 240 208
(-)power and fuel 227 309 348 447 499
(-)repairs on P/M 46 34 41 46 131
Total: 7,461 8,548 11,107 14,265 18,567
sales: 12,779 14,845 18,288 23,229 29,275

Gross Profit Ratio 58.38 57.58 60.73 61.41 63.42
Gross profit ratio
63.42
64
63 61.41
62 60.73
61
60 58.58
Ratios 58.38 Column2
59
58
57
56
55
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above data, we can observe that GP ratio is increasing year by year, because the direct cost to
produce goods is quite less. So it can be said that company has control over direct expenses.
Particulars Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
Gross Profit:
sales 42,723 74,214 67,904 38,666 32,448 29,275
(-)cons. of RM & FG 8,556 30,335 23,223 16,043 12,792 9,566
(-)processing charges 0 19 387 372+(-2.2) 230 304
(-)store & spare Parts Cons. 525 748 0 899 268 208
(-)power and fuel 978 1,204 1,227 1,391 811 499
(-)manu. & con.charges 513 3,695 1,158 0 0 0
(-)repairs on P/M 314 172 871 235 398 131
Total: 31,838 38,041 41,038 19,725 17,950 18,567
Sales: 42,723 74,214 67,904 38,666 32,448 29,275
Gross Profit Ratio(2008-09) 74.52 51.26 60.44 51.01 55.32 63.42

(2007-08) 73.89 53.58 58.33 51.39 56.02 61.41
(2006-07) 67.06 53.80 53.49 44.92 55.60 60.73

Gross Profit Ratio (2008-09)
74.52
80
60.44 63.42
70 55.32
60 51.26 51.01
50
40
Ratios
30 Column2
20
10
0
Pharma
Companies
 Sun Parma: Here the ratio is the highest among all. As there is not huge difference between GP and net
sales.
 Ranbaxy & Lupin: Here the ratio is very moderate compare to others.
 Dr. Reddy & Piramal: Here the ratio is nearer to CHL. So it can be said that company has control over
direct expenses.
Recommendation:
 CHL: Our Company should first use the existing stock and then only order new inventory, so that its
proper utilization will reduce the closing stock and thereby help to increase the gross profit.
 Industry: From this table, we can conclude that our company has good % of GP ratio when compared
to other competitors but still it should try to reduce its direct expenses and thereby increases its GP ratio.
2.2 Net Profit Ratio:
Net profit margin = [net profit (inclusive exceptional items) / net sales] * 100
Net profit ratio is determines the overall efficiency of the business. Higher the net profit ratio, better the
business. This ratio helps in determining the operational efficiency of the business.
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Net Profit (Incl. Exceptional Items)

Net Profit 1,199 1,524 2,338 2,576 3,031
Exceptional Items 125 115 0 69 241
Total: 1,324 1,639 2,338 2,645 3,272
Net Sales (Including Operational) 12,779 14,845 18,288 23,229 29,275
Net Profit Margin: 10.36 11.04 12.78 11.39 11.18

Net Profit ratio
12.78
14
11.04 11.39 11.18
12 10.36
10
8
Ratios Column2
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
We can observe that our company has achieved good % of NP ratio in the year 2006-07 because in this
year % increase in NP is more than the % increase in net sales. In 2008-09, operating efficiency of the
company is good but try to sell goods at higher prices in case of domestic market.
Net Profit (Incl. Except. Items)

Net Profit 18,177 -9,512 -9,172 5,015 6,829 3,031
Exceptional Items 0 0 14,628 0 446 241
Total: 18,177 -9,512 5,456 5,015 7,275 3,272
Net Sales (Incl. Operational) 42,723 74,214 67,904 38,666 32,448 29,275
Net Profit Margin (2008-09) 42.55 -12.82 8.04 12.97 22.42 11.18
(2007-08) 44.30 11.09 8.92 14.12 24.12 11.39
(2006-07) 36.78 8.31 15.01 15.32 20.45 12.78
Net Profit Margin (2008-09)

50 42.55
40
30 22.42
20 12.97 11.18
Ratios 8.04
10
Column2
0
-12.82
-10 Pharma
-20
Companies

 Sun Parma: The NP ratio of this company is the best in whole industry, as the NP of the company is
almost 4times more than that of CHL while net sales is 46% more than that of CHL. So this means that
this company has very sound operating efficiency.
 Ranbaxy: Here the NP ratio is negative which is not good sign for the company as their operating
expenses are very high compare to its sales or income.
 Dr. Reddy: Here the company’s net profit is very low compare to its net sales, so its NP ratio is lower
than others.
 Piramal: Here the ratio is double than CHL, because the net sales are almost double than CHL.
Recommendations:
 CHL: The Company has a NP ratio is low which means that company has high indirect expenses which
had reduced the profit. So the company needs to reduce the expenses which ultimately increase the
profit of the company.
 Industry: our company needs to increase the ratio by reducing the cost and increasing the sales of the
company. This will help the company long run and will have a good competition in the market.
2.3 Return on Capital employed:

Return on capital employed = Net profit before exceptional items (net of tax) /
Average adjusted capital employed
Return on capital employed is profitability indicator because it gauges management's ability to generate
earnings from a company's total pool of capital. It is commonly used as a measure for comparing the
performance between business and for assessing whether a business generates enough returns to pay for its
cost of capital.
Particulars 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
NPBEI (Net of Tax)

Net Profit ----- 1,215 1,524 2,338 2,576 3,031
Exceptional Items (net of tax) ----- 108 100 -236 69 203
Total: ----- 1,323 1,624 2,102 2,633 3,234
Average Capital Employed:

Net Worth 5,211 5,856 6,989 8,655 10,622 11,914
(+)exceptional items [net of tax] 107 108 100 -236 57 203
Debt 4,376 3,834 4,432 4,535 8,377 12,674
Buyer's Credit Acceptance 166 231 190 399 235 0

Differed Tax Liability 972 1,010 1,097 1,137 1,234 1,316
Total: 10,832 1,1039 12,808 14,490 20,525 26,107
Avg.adjusted Capital Employed: ----- 10,935.5 11,923.5 13,649 17,507.5 23,316
Return on Capital Employed ----- 12.10 13.62 15.40 15.04 13.87
Net Profit ratio
15.4 15.04
16 13.62 13.87
14 12.1
12
10
Ratios 8 Column2
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
In 2008-09, ROCE of our company is lower compare to 2006-07’s ROCE. So, we can conclude that
higher the ROCE, lower would be company’s borrowing rate. Here company is not using their capital.
and highly dependent on borrowings. In 2008-09, the company is having higher debt amount compare
the 2006-07 and that is the only reason behind its lower ROCE.

NPBEI (net of tax)
Net Profit 18,177 -9,512 -9,172 5,015 3,163 3,031
Exceptional Items (net of tax) 0 0 9,069 0 409 203
Total: 18,177 -9512 -103 5,015 3,571 3,234
Average Capital Employed:

Net Worth 70,499 41,205 35,261 14,248 13,171 11,914
(+)exceptional items [net of tax] 0 0 9,069 0 409 203
Debt 1,789 43,114 19,976 12,232 13,391 12,674
Buyer's Credit Acceptance 0 121 0 1,265 0 0
Differed Tax Liability 1,228 247 914 1,387 1,275 1,316
Total: 43,466 84,688 65,220 29,133 28,245 26,107
Avg.adjusted Capital Employed: 62,454 48,456 65,432 28,242 23,851 23,316
ROCE (2008-09) 29.10 -19.63 -0.16 17.76 14.97 13.87

(2007-08) 32.60 19.52 6.66 17.70 19.21 15.04
(2006-07) 20.78 8.92 16.29 17.16 13.57 15.40
29.1 ROCE (2008-09)

30
25 17.76
20 14.97 13.87
15
10
Ratios 5
-0.16
0 Column2
-5 Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
Pharma -19.63
-10
-15
-20
Companies
 Sun Parma: Here the company is quite high ratio compare to others, because company is maintaining
good amount in profit. So company S.H. will get good amount of return for investment and for
providing funds to company.
 Ranbaxy: Here company is incurring loss which leaves very bad impact on their S.H. ,
Investors, funders, because their ROC will come into negative that means company is not able to give
return to their stakeholders. The company has reserved very huge amount for their reserved and surplus
and debt is quite high so that we can say that company is not in condition to pay returns on their S.H.’s
capital and not able to repay their debt.
 Dr. Reddy: here also the company’s ROC comes into negative which is not good sign for their
stakeholders. Here also they have retained much amount into their reserves and then borrowed from
outsides.
 Lupin & Piramal: Here both companies ratio is very closer to each other and here the companies’
profit amount is reasonable along with its equity funds and borrowings.
Recommendation:
 CHL: Our company should try to increase the operating profit and try to reduce the reliance on
borrowed funds. They should utilize their capital (net worth) for financial trading.
 Industry: Ranbaxy and Lupin are highly dependent on borrowings; therefore they are getting their
ROCE in negative. Ranbaxy has enough amount of capital (net worth).They should utilize their capital
into their financial trading and minimize their dependence on borrowings so that they can reduce their
payment behind debt and interests as well.
2.4 Return on equity:

Return on equity = [net profit before exceptional items (net of tax) /
Average adjusted equity] * 100
Return on equity measures how much the shareholders earned for their investment in the company. The
company with the higher return on equity will be favored by the investors. In addition to this, a greater
market valuation will be placed on its shares.
Particulars 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
NPBEI (net of tax) ------- 1,323 1,624 2,102 2,633 3,234
Average adjusted Equity

Net worth 5,211 5,856 6,989 8,655 10,622 12,352
Exceptional items (net of tax) 107 108 100 -236 57 203
(-)FCMITDA unmortised 0 0 0 0 0 438
Total adjusted equity 5,318 5,964 7,089 8,419 10,679 12,117
Average adjusted equity ------ 5,641 6,526.5 7,754 9,549 11,398
Return on equity ------ 23.45 24.88 27.11 27.57 28.37
Return On Equity
27.57 28.37
30 27.11
24.88
23.45
25
20
Ratios 15 Column2
10
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
Here we can say that through out the all years ROE is increasing which is the positive sign for investors.
In 2008-09.there is higher amount in net worth which means shareholders are investing good amount in
the company shares and also getting good amount for return.
Particulars Sun Phar. Ranbaxy Dr. Reddy Lupin Piramal CHL

NPBEI (net of tax) 18,177 -9,512 -103 5,015 3,572 3,234
Average adjusted Equity

Net worth 70,449 41,206 35,261 14,248 13,171 12,352
Exceptional items (net of tax) 0 0 9,069 0 409 203
Total adjusted equity 70,449 41,206 44,330 14,248 13,580 12,117
Average adjusted equity 60,181.9 34,614 44,649 13,522.5 12,399.35 11,398
Return on equity (2008-09) 30.20 -27.48 -0.23 37.09 28.80 28.37

(2007-08) 38.30 28.75 10.32 37.94 32.83 27.57
(2006-07) 35.95 20.29 31.85 41.24 21.04 27.11
ROE (2008-09)
37.09
40 30.2 28.8 28.37
30
20
10
Ratios
-0.23
0
Sun Ranbaxy Dr.Reddy Lupin Piramal CHL Column2
-10 -27.48
Pharma
-20
-30
Companies
Interpretation(2008-09):
 Sun Parma: This company’s ROE is better than CHL, as it has good amount of profits and better
operating efficiency.
 Ranbaxy & Dr. Reddy: Here both company are getting their ROE in negative which is not good sign
for their investors. Company keeps high amount of profit into reserves and surplus and thus it provides
very less amount of returns to its S.H.
 Lupin: Here the company maintains low amount into reserves and surplus compare to others. That is
why company has highest ROE.
 Piramal: this company and CHL’s ROE are very closer to each other.
Recommendations:
 CHL: Our company should try to increase the amount of profit by decreasing operating expenses and
should reduce amount of R&S so that S.H. fund increases and thereby reduces ROE.
 Industry: While comparing with the competitors, CHL’s return is not so good but Company need to
improve the return by reducing the reserves so that S.H. will be more satisfied.

2.5 Return on total assets:
Return on total assets = [Net profit before exceptional items (net of tax) /
Average adjusted total assets] * 100
ROA is considered a measure of how effectively assets are used to generate a return. (This ratio is not very
useful for most businesses.).This ratio is an indicator of how efficiently the company manages its assets.
Particulars 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
NPBEI (net of tax) ------- 1,323 1,624 2,102 2,633 3,234
Average adjusted Total assets:

Total assets 13,091 13,365 15,534 19,915 25,478 33,485
Exceptional items (net of tax) 107 108 100 -236 57 203
Total adjusted assets 13,198 13,473 15,634 19,679 25,535 33,250
Average adjusted total assets ------ 13,335.5 1,45,553.5 17,656.5 22,607 29,392.5
Return on total assets ------ 9.92 11.16 11.91 11.65 11.00
Return On Total Assets
11.91 11.65
11.16 11
12 9.92
10
Ratios 6 Column2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
In 2008-09, company is earning 11% on 1Rs. Invested in assets. Year 2006-07 is considered very
beneficial to this ratio because in this year we are getting high return on what we have invested behind
assets. in 2008-09 our profit is high with our total investment in assets. So we can say that in 2008-09
our company is not more capital intensive.
Particulars Sun Ranbaxy Dr. Reddy Lupin Piramal CHL

NPBEI (net of tax) 18,177 -9,512 -103 5,015 3,572 3,234
Average adjusted total assets

Total assets 82,634.5 1,34,437 73,263 41,342 36,126 33,485
Exceptional items (net of tax) 0 0 9,069 0 409 203
Total adjusted Assets 82,634.5 1,34,437 82,332 41,342 36,535 33,250
Average adjusted Total Assets 71,167.9 1,14,256 79,742 37,489.9 30,964.9 29,392.5
Return on total assets (2008-09) 25.54 -8.33 -0.13 13.34 11.53 11.00
(2007-08) 28.88 8.65 5.68 14.51 14.94 11.65
(2006-07) 18.94 6.93 13.75 14.44 10.59 11.90
Return on Total Assets (2008-09)
30 25.54
25
20 13.34
11.53 11
15
Ratios 10
5 Column2
-0.13
0
-8.33
-5 Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
-10 Pharma
Companies
 Sun Parma: This company has better ration than CHL, because company’s profit and amount of total
assets are higher compare to others.
 Ranbaxy & Dr. Reddy: This company’s ROA comes into negative. That means we are loosing our
money behind investing 1Rs. behind investment. we can say that in those years we are getting our profit
less than total assets then in those years company is more capital intensive.
 Lupin & Piramal: Both company’s ratio is higher than CHL because of high amount in profit and total
assets.
Recommendations:
 CHL: Our company should try to increase the amount of investment to get proper returns on it and
thereby improve the profits in order to increase ROA.
 Industry: We can conclude that our company has good returns on the total assets but still it should try
to reduce its operating expenses so that profit can be increased and there by improve its ROA.
2.6 Profit before tax margin:

PBT margin = [PBT (exclusive exceptional items) / net sales] * 100
This measure combines all of the company's profits before tax, including operating, non-operating,
continuing operations and non-continuing operations. PBT exists because tax expense is constantly changing
and taking it out helps to give an investor a good idea of changes in a company's profits or earnings from
year to year.
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
PBT (xclusive exceptional items)

PBT 1,371 1,768 2,739 3,234 3,698
(+) Exceptional Items 125 115 0 69 241
Total PBT: 1,496 1,883 2,739 3,303 3,939
Net Sales: 12,779 14,845 18,288 23,229 29,275
PBT Margin 11.71 12.68 14.98 14.22 13.46
PBT Margin
14.98
16 14.22
13.46
12.68
14 11.71
12
10
Ratios 8 Column2
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
As we can see from the above graph that trend of the PBT margin is not consistent, in initial years it
increases and then suddenly starts decreasing. In 2008-09 it is 13 which is moderate PBT margin
compare to other years. In the same year its profit is high along with its net sales.

PBT(exclusive exception items)
PBT 19,492 -15,000 -6,564 6,060 3,408 3,698
(+)exceptional items 0 0 14,628 0 446 241
Total: 19,492 -15,000 8,064 6,060 3,854 3,939
Net sales: 42,723 74,214 67,904 38,666 32,448 29,275
PBT margin (2008-09) 45.62 -20.21 11.88 15.67 11.88 13.46

(2007-08) 47.65 14.30 11.09 18.68 14.28 14.22
(2006-07) 39.09 10.60 19.27 20.23 11.22 14.98
PBT Margin (2008-09)

45.62
50
40
30 15.67
11.88 13.46
20
Ratios 10 11.88
0 Column2
Sun -20.21
Ranbaxy Dr.Reddy Lupin Piramal CHL
-10
-20 Pharma
-30
Companies
Interpretation (2008-09) :
 Sun Parma: This company’s ratio is the best in whole industry. Its PBT and net sales are also
higher than others. So we can say that this company has very sound operating efficiency.
 Ranbaxy: Here the PBT margin is in negative due to negative PBT. Here net sales of the company
is very higher even though company is incurring loss. As per financial analysis, it is not sound
condition for the company in the market.
 Dr. Reddy & Piramal: Here both company is having very PBT margin among all because of
lower amount of profit. Here the net sales are at sound still its profit is very low. On the basis of
this data we can say that company may have high amount of credit sales or their operating
expenses are higher than their operating income.
 Lupin: This company’s PBT margin is good compare to CHL due to healthy net profit and net
sales.
Recommendation:
 CHL: Our company should increase the amount of PBT and also net sales with proper planning so
that PBT margin of our company can be increased.
 Industry: Ranbaxy should improve their net operating cycle so that they can achieve the point of
profit and so their PBT margin comes into positive.
2.7 EBITDA margin:

EBITDA margin = [EBITDA / net sales] * 100
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
EBITDA
Net Sales 12,779 14,845 18,288 23,229 29,275
(-)consumption of RM and FG 4,840 5,688 6,372 7,903 9,566
(-)general expenses 4,773 5,483 7,051 9,408 12,087
(-)research expenses 736 797 1,344 1,336 1,564
Total EBITDA: 2,430 2,877 3,521 4,582 6,058
Net Sales: 12,779 14845 18,288 23,229 29,275
EBITDA Margin: 19.02 19.38 19.25 19.73 20.69
EBITDA Margin
14.98
16 14.22
13.46
12.68
14 11.71
12
10
Ratios 8 Column2
6
4
2
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
EBITDA
net sales 42,723 74,214 67,904 38,666 32,448 29,275
Cons. of RM and FG 8,556 30,335 23,223 16,043 12,792 9,566
Conversion charges 0 0 1,158 0 0 0
ED and other duties and taxes 0 0 387 0 0 0
Manufacturing 0 3,695 0 10,359 0 0
Foreign ex. Loss (Gain) 0 3,362 0 0 0 0
Indirect Taxes 890 0 0 0 0 0
Personnel Cost 34,010 9,670 9,920 4,872 5,010 0
General & opratin exp. 8,138 20,469 17,205 0 8,774 12,087
Inc / Dec. in W-I-P / FG 0 0 0 0 -426 0
(-)research expenses 3,099 4,314 4,093 0 849 1,564
Financial charges 0 0 972 0 0 0
Fair valuation loss on derivative 0 7,702 1 0 0 0
Total EBITDA: 18,640 -5,332 10,945 7,393 5,451 6,058
Net Sales: 42,723 74,214 67,904 37,759 32,448 29,275
EBITDA (2008-09) 43.63 -7.19 16.12 19.58 16.80 20.69

(2007-08) 46.21 13.10 13.54 22.95 18.16 19.73
(2006-07) 31.54 14.37 21.94 14.51 13.71 19.25
EBITDA Margin (2008-09)
50 43.63
40
30 19.58 20.69
16.12 16.8
20
Ratios
10 Series 1
0 -7.19
-10
Companies
(3) Leverage Ratio
3.1 Debt – Equity ratio:

Debt-equity ratio = debt (deducting cash &bank but including buyer’s credit) / equity adjusted
The ratio measures how the company is leveraging its debt against the capital employed by its owners. If the
liabilities exceed the net worth then in that case the creditors have more stake than the shareowners.
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Debt(Deducting cash and inclu. Buyer’s credit) 3,834 4,432 4,535 8,377 12,674
(+) Buyer’s credit 231 190 399 235 0
(-) cash and bank 612 438 990 926 2,517
Total: 3,453 4,184 3,944 7,686 10,157

Equity Adjusted:
Shareholder’s fund 5,933 6,989 8,655 10,622 12,352
(-)FCMID 78 0 0 0 438
Total: 5,855 6,989 8,655 10,622 11,914
Debt – Equity ratio 0.59 0.60 0.46 0.72 0.85
Debt -Equity Ratio
0.85
0.9
0.72
0.8
0.7 0.59 0.6
0.6 0.46
0.5 Series 1
Ratios
0.4
0.3
0.2
0.1
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
In 2008-09, debt-equity ratio is increased significantly due to huge increase in debt compare to increase
in share equity. High debt-equity ratio means less protection for creditors and less debt-equity means
more protection for creditors as creditors feel that the owner’s funds can help to absorb possible losses
of income and capital. Ratio is lowest in 2007-08 because bonus shares are issued in 1:1 proportion due
to which owner’s capital has increased.

Debt(Deducting cash and inclu. 1,789 4,3114 19,976 12,233 13,391 12,674
Buyer’s credit)
(+) Buyer’s credit 0 121 0 1,265 0 0
(-) cash and bank 16,690 23,956 5,623 778 946 2,517
Total: -14,901 19,279 14,353 1,22,720 12,445 10,157
Equity Adjusted:
Shareholder’s fund 70,449 41,206 35,261 14,248 13,171 12,352
(-)FCMID 0 0 0 0 0 438
Total: 70,449 41,206 35,261 14,248 13,171 11,914
Debt – Equity ratio (2008-09) -0.21 0.47 0.41 0.89 0.94 0.85
(2007-08) -0.24 1.32 0.27 0.83 0.61 0.72
(2006-07) -0.096 1.42 0.16 0.59 0.54 0.46
Debt - Equity Ratio (2008-09)

0.89 0.94
1 0.85
0.8
0.47
0.6 0.41
0.4
Ratios 0.2
Series 1
0 -0.21
-0.2
-0.4
Companies
Interpretation:
 Sun Parma: Here the company’s debt is very low and its cash fund is high so total debt can be pay out
of the company’s cash fund only and its equity shareholder enjoys the high amount of benefits (incase of
liquidation).
 Ranbaxy: Here the company has high amount of leverage as it highly depends on borrowings but its
shareholder’s fund is very high so it comes very lower compare to others.
 Dr. Reddy: Here the company’s debt is high and cash balance is very less to pay all the debt while co.
is having high shareholder’s fund which is higher than debt, so here also equity shareholder enjoys the
high amount of benefits (incase of liquidation).
 Lupin: Here company’s borrowed fund is high while its available cash fund is low and shareholder’s
capital is higher in company. Under these circumstances chances of S.H.’s benefits would be less.
 Piramal: here debt is higher than the S.H.’s fund, so company can not avail the benefit of trading on
equity.
Recommendation:
We can conclude that our company has very good debt-equity ratio, so it will be able to give better
returns to its S.H.
3.2 Debt-assets ratio:
Debt-assets ratio = debt (incl. Buyer’s credit) / total assets
This ratio indicates what proportion of equity and debt that company is using to finance its
assets. If this ratio is greater than one means assets are mainly financed with debt and less
than one means equity provides a majority of financing.

Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
Debt ( including Buyer’s credit) 3,834 4,432 4,535 8,377 12,674
(+) Buyer’s credit 231 190 399 235 0
Total: 4,065 4,622 4,535 8,377 12,674
Total assets (incl. FCMID) 13,365 15,534 19,915 25,478 33,485
Debt – assets ratio 0.30 0.30 0.25 0.34 0.38
Debt -Assets Ratio
0.38
0.4 0.34
0.35 0.3 0.3
0.3 0.25
0.25
Ratios 0.2 Series 1
0.15
0.1
0.05
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
As we can observe that ratio of the company is very consistent and amount of the debt is also less than
the total assets, hence company has good amount of liquidity to pay off the debt.
Particulars Sun Ranbaxy Dr.reddy Lupin Piramal CHL
Debt ( including Buyer’s credit)

Debt 1,789 43,114 19,976 828 13,391 12,674
(+) Buyer’s credit 0 121 0 0 0 0
Total: 1,789 43,235 19,976 828 13,391 12,674
Total assets (incl. FCMID) 82,635 1,34,437 73,262 41,342 36,126 33,485
Debt – assets ratio (2008-09) 0.022 0.32 0.28 0.05 0.37 0.38
(2007-08) 0.024 0.44 0.26 0.062 0.29 0.34
(2006-07) 0.26 0.47 0.32 0.399 0.28 0.25

Debt - Assets Ratio (2008-09)
0.37 0.38
0.4
0.32
0.35 0.28
0.3
0.25
0.2
0.15 Series 1
Ratios
0.1 0.05
0.02
0.05
0
Companies
 Sun Parma: Here the ratio of the company is lower than competitors, so it is better. As it has less
amounts of borrowed funds.
 Ranbaxy & Piramal: Here the ratio is ratio is lower than CHL, so these companies have less risk than
CHL.
 Dr. Reddy: Here the ratio of the company is lower than the CHL, so it is better. As it has less amount
of borrowed funds and assets are in good proportion.
 Lupin: Here also the ratio is very lower. It is the best company among all ,as its debt fund is very
less compare to its assets.
Recommendation:
 CHL: Our company should try to reduce the amount of loan fund, so as to reduce the risk of paying
the liabilities from the total assets.
 Industry: We can conclude that our company has high ratio, and so it needs high amount of liquidity
and also it depends on outside funds for smooth functioning of its business.
3.3 Proprietor’s Fund OR Net Worth Ratio:

Proprietor's Ratio/Net Worth Ratio=(Proprietor's Fund / Total Assets)
Proprietary Ratio represents the proportion of Proprietors’ Equity to Total Assets. It is a test of capitalization
and a high or low ratio may indicate low or high earnings respectively per share. The higher this Proprietary
ratio denotes that the shareholders have provided the funds to purchase the assets of the concern instead of
relying on other sources of funds like bank borrowings, trade creditors and others. This ratio is a test of
credit strength as too low a proprietary ratio would mean that the enterprise is relying a lot more on its
creditors to supply its working capital.
Cadila healthcare limited (consolidated) (Rs. in Millions)
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Proprietor's Fund
Capital 314 314 628 628 682

Reserve & Surplus 5,619 6,675 8,027 9,994 11,670
Total 5,933 6,989 8,655 10,622 12,352
Total assets
fixed assests 7,906 8,329 9,783 14,001 17,187
capital W-I-P 0 0 0 0 0
Goodwill on Consolidation 0 0 0 0 0
investments 467 714 261 254 249
current assests 4,992 6,491 9,871 11,223 15,611
deffered assests 0 0 0 0 0
FCMI Diff. a/c OR Misc. Exp. 0 0 0 0 438
Total 13,365 15,534 19,915 25,478 33,485
Proprietor's Ratio/Net Worth Ratio 0.44 0.45 0.43 0.42 0.37
Proprietor / Net Worth Ratio
0.44 0.45
0.43 0.42
0.45 0.37
0.4
0.35
0.3
0.25 Series 1
Ratios
0.2
0.15
0.1
0.05
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
Here the company’s ratio is decreasing continuously, as the amount of fixed assets goes on increasing
and thereby the shareholders fund increases slowly. This means that creditors don’t need to supply the
working capital and are safe as the total assets are high.
 Industry Firm Analysis:

Proprietor's Fund
Capital 1,036 2,102 842 828 418 682
Reserve & Surplus 69,414 39,104 34,419 13,420 12,753 11,670
Total 70,450 41,206 35,261 14,248 13,171 12,352
Total assets
fixed assests 14,625 44,900 29,270 12,012 19,464 17,187
capital W-I-P 1,571 4,707 4,296 2,240 927 0
Goodwill on Consolidation 3,253 0 0 3,174 0 0
investments 18,595 5,432 523 216 278 249
current assests 42,683 66,922 38,798 23,478 14,908 15,611
deffered assests 1,907 12,476 376 223 549 0
FCMID a/c OR misc.expenditure 0 0 0 0 0 438
Total 82,634 1,34,437 73,263 41,343 36,126 33,485
Proprietor/NetWorthRatio (2008-09) 0.85 0.31 0.48 0.34 0.36 0.37

(2007-08) 0.84 0.30 0.58 0.38 0.44 0.42
(2006-07) 0.64 0.30 0.52 0.39 0.47 0.43
Proprietor / Net Worth Ratio (2008-09)

0.85
0.9
0.8
0.7
0.6 0.48
0.5 0.34 0.36 0.37
0.4 0.31
Ratios 0.3 Series 1
0.2
0.1
0
Companies
 Sun Pharma: Here the ratio of this company is higher than CHL, so the shareholders have provided
the funds to purchase the assets of the concern instead of relying on other sources of funds like bank
borrowings, trade creditors and others.
 Ranbaxy:This company’s ratio and CHL’s ratio are almost the same and they are also at moderate
level sowe can say that they are not highly dependent on their shareholders for financing their assets.
 Dr.Reddy: Here the ratio of this company is better than our company; as the amount of total assets
and shareholder’s fund are higher than our company.
 Lupin and Piramal: This companies’s ratio and CHL’s ratio are almost the same and they are also at
moderate level sowe can say that they are not highly dependent on their shareholders for financing
their assets.
Recommendation:
 CHL: Here also our company should try to increase the amount of reserves and surplus so the
proprietors fund increases and thereby the creditors will be on safer side.
 Industry: We can conclude that our company has lower ratio, and so it should increase its reserves
and surplus to make the creditors safe.

(4) Turnover Ratio:
4.1 Stock Turnover Ratio:

Stock turnover ratio = COGS / average turnover
Stock Turnover indicates whether the inventory is efficiently used or not. This ratio checks that the required
minimum amount has been invested or not. It tells about the number of times the average stock has turned
over during the period of one year.
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Cost of goods sold:

Cons. of RM and FG 4,840 5,688 6,372 7,903 9,566
Stores and spare parts consumed 122 167 209 240 208
Power and fuel 227 309 348 447 499
Processing charges 83 99 211 328 304
Excise Duty 0 0 0 0
Manufacturing charges 0 0 0 0 0
Repairs on P/M 46 34 41 46 131
Total of COGS: 5,318 6,297 7,181 8,964 10,708
Total of average inventory: 1,994.5 2,348 3,185.5 4,312.5 5,370.5
Stock turnover ratio 2.67 2.68 2.25 2.08 1.99
Stock Turnover Ratio
3 2.67 2.68
2.25
2.5 2.08 1.99
2
Ratios 1.5 Series 1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above data we can conclude that stock T/O ratio is decreasing day by day, because
consumption of raw material, finished goods and spare parts are increasing along with inventory.

Particulars Sun Ph. Ranbaxy Dr.Reddy Lupin Piramal CHL
Cost of goods sold:

Cons. of RM and FG 8,566 30,335 23,223 16,043 12,792 9,566
Stores and spare parts consumed 525 748 0 899 268 208
Conversion charges 0 0 1,158 0 0 0
Power and fuel 978 1,204 1,227 1,391 811 499
Processing charges 0 0 0 372 230 304
Excise Duty 0 19 387 -2.2 0 0
Manufacturing charges 513 3,695 0 0 0 0
Repairs on P/M 314 172 871 235 398 131
Total of COGS: 10,885 36,172 26,866 18,942 14,498 10,708
Total of average inventory: 8,742 18,026 12,134 8,732.5 4,433 5,370.5
Stock turnover ratio (2008-09) 1.25 2.01 2.00 2.17 3.27 1.99
(2007-08) 1.22 1.99 2.22 2.31 2.97 2.08
(2006-07) 1.19 1.91 4.23 2.87 2.99 2.25
Note: In Piramal, we are not considering excise duty because in schedule – 18,
excise duty is given with rates and we don’t know the rates of excise duty,
Stock Turnover Ratio (2008-09)

3.27
3.5
3
2.5 2.17
2.01 2 1.99
2
1.25
1.5
Ratios Series 1
1
0.5
0
Companies
 Sun Parma: Here the ratio is lower than CHL due to more utilization of inventory, but unable to
generate high amount of gross sales.
 Ranbaxy & Dr. Reddy: Here the ratios are higher than CHL because there is noticeable increase in
the COGS and inventory.
 Lupin: Here the ratio is higher than CHL, Ranbaxy & Dr. Reddy, but increase in COGS is lesser than
the Ranbxy & Dr. Reddy and inventory is also decreasing.

 Piramal: This company’s ratio is higher than others because there is huge amount of difference
between its COGS and its inventory. we can say that their expenses behind inventory is lesser than its
consumption of inventory.
Recommendations:
 CHL: Our company should not spend their funds behind purchase of inventory instead of these they
should utilize the opening stock of inventory so that stock does not remain idle and thus it is possible
to company to generate high gross sales.
 Industry: While comparing with the competitors, the company has a good ratio but company needs to
maintain that ratio by increasing the sales and by keeping minimum inventory as possible.
4.2 Working capital turnover ratio:

Working capital turnover ratio = net sales / working capital
A company uses working capital (current assets - current liabilities) to fund operations and purchase
inventory. These operations and inventory are then converted into sales revenue for the company. The
working capital turnover ratio is used to analyze the relationship between the money used to fund operations
and the sales generated from these operations. In a general sense, the higher the working capital turnover, the
better because it means that the company is generating a lot of sales compared to the money it uses to fund
the sales.
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Cuurent Assets
Inventory 2,211 2,475 3,896 4,729 6,012
Sundry debtors 1,235 1,990 2,784 3,555 4,845
Cash and Bank 612 438 990 9,26 2,517
Loans & Advances 924 1,588 2,201 2,013 2,237
Total [A] 4,992 6,491 9,871 11,223 15,611
Current Liabilities
Provisions 606 605 858 913 1,186
(-) Buyer’s credit (231) (190) (399) (235) 0
Total [B] 2,435 2,819 5,047 4,816 6,915
Working Capital [A-B] 2557 3672 4824 6407 8696
Total Net Sales 12779 14845 18288 23229 29275
Working Capital Ratio: 5.00 4.04 3.79 3.63 3.37

Working Capital Turnover Ratio
5
5
4.04
4.5 3.79 3.63
4 3.37
3.5
3
Ratios 2.5 Series 1
2
1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above data we can conclude that trend of the ratio is negative that means year by year ratio is
decreasing which is not good sign for the company. When working capital ratio is decreasing, the
company is generating a very lower amount of sales compared to the money it uses to fund the sales.
 Inter firm analysis:
Particulars Sun Ph. Ranbaxy Dr.Reddy Lupin Piramal CHL
Cuurent Assets
Inventory 9,757 19,643 13,250 9,572 4,834 6,012
Sundry debtors 8,811 13,310 14,406 10,349 4,866 4,845
Cash and Bank 16,690 23,956 5,623 778 946 2,517
Loans & Advances 6,983 7,729 5,519 2,780 4,161 2,237
Total 42,683 66,922 38,798 23,478 14,908 15,611
Current Liabilities
Provisions 3,431 7,720 1,994 1,827 1,909 1,186
(-) Buyer’s credit (0) (121) (0) (1,265) (0) (0)
Total 7,198 47,318 17,112 12,066 8,215 6,915
Working Capital 35485 19604 21686 5102 6692 8696
Total net sales: 42723 74214 67904 38666 32448 29275
Working Capital Ratio (2008-09) 1.20 3.77 3.13 7.58 4.85 3.37
(2007-08) 0.99 2.97 2.44 2.67 4.91 3.63
(2006-05) 0.79 2.61 2.45 1.87 4.30 3.79

Working Capital Turnover Ratio (2008-09)
7.58
8
7
6 4.85
5
3.37 3.13 3.37
4
3 Series 1
Ratios 1.2
2
1
0
Companies
 Sun Parma: Here the ratio of the company is lower than other competitors that mean the company is
very slow to meet its current liabilities with the help of its current assets.
 Ranbaxy & Dr. Reddy: Here the ratio of our company is better than this company, as the working
capital is higher than ours. So company can more easily pay off their liabilities with the help of their
assets than us.
 Lupin: The turnover ratio of the company is the highest in the industry as their working capital is very
lower. Here the higher ratio indicates that the company can generate a lot of sales compared to the
money it uses to fund the sales.
 Piramal: Here the ratio of this company is higher than ours as working capital is more due to current
liabilities and current assets.
Recommendation:
 CHL: Here the company should try to decrease the current assets so as to reduce liquidity and thereby
increase the profitability so that co. can invest the funds in some other profitable plans.
 Industry: Sun Parma is having the least working capital ratio so they should try to maintain their
working capital compare to their sales.
4.3 Debtor’s turnover ratio:

Debtor’s turnover ratio = credit sales / average debtors
Debtor’s turnover ratio indicates the number of times the debtors are turned over a year. The higher the value
of debtor’s turnover the more efficient is the management of debtors or more liquid the debtors are.
Similarly, low debtors turnover ratio implies inefficient management of debtors or less liquid debtors. It is
the reliable measure of the time of cash flow from credit sales. There is no rule of thumb which may be used
as a norm to interpret the ratio as it may be different from firm to firm.

particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Total credit sales: 12,779 14,845 18,288 23,229 29,275
Average of debtors 1623.5 1612.5 2387 3169.5 4200
Debtor’s turnover ratio 7.87 9.21 7.66 7.33 6.97
Debtor's Turnover Ratio
9.21
10
9 7.87 7.66 7.33 6.97
8
7
6
Ratios 5 Series 1
4
3
2
1
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above data, we can observe that in 2008-09, debtor’s ratio is lower than other financial years
which is very bad sign for the company. The company is inefficient in managing his debtors because in
2008-09 company’s debtors are turned over 6 times in a year.
Total credit sales: 42,723 74,214 67,904 38,666 32,448 29,275
Average of debtor's 11493.8 14,120 10,464 8,894 4,658 4,200
Debtor’s turnover ratio (2008-09) 3.72 5.26 6.49 4.35 6.97 6.97
(2007-08) 3.20 4.56 6.86 5.04 7.01 7.33
(2006-07) 4.10 4.53 9.96 5.63 7.93 7.66

Debtor's TurnoverRatio (2008-09)
6.97 6.97
6.49
7
6 5.26
5 4.35
3.72
4
3
Ratios Series 1
2
1
0
Companies
 Sun Parma: The ratio of the company is lowest in the whole industry due to high amount of debtors
with fewer amounts of credit sales.
 Ranbaxy: Here the ratio of collection is lower than our company as Ranbaxy collects the cash against
its debtors only 5 times in a year.
 Dr. Reddy: The ratio of the company is considered good amongst all other company as here company
collects their receivable 6 times in a year.
 Lupin: Lupin’s collection period is lower than others. So we can say that collection policy is very
liberal.
 Piramal : Here the ratios of both the company are similar and are the highest in the industry as their
debtors are quite low and their credit sale is higher than debtors.So on the basis of lower amount of
debtors, we can say that their the collection policy of both the company is very strict.
Recommendations:
 CHL: Company does not require any recommendation as their credit control policy is very strict and
that’s why company maintains lower debtor’s turnover ratio.
 Industry: Sun Parma and Lupin are having very low debtor’s turnover ratio, so only recommendation
to them to make better and stricter credit policy so that cash conversion cycle moves faster.
4.4 Creditor’s turnover ratio:

Creditor’s turnover ratio = credit purchase / average creditors
The average payment period ratio represents the number of days by the firm to pay its creditors. A high
creditor’s turnover ratio signifies that the creditors are being paid promptly. This situation enhances the
credit worthiness of the company. However a very favorable ratio to this effect also shows that the business
is not taking the full advantage of credit facilities allowed by the creditors.
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Credit Purchase:
raw material 2,256 2,568 4,186 4,508 5,730
packing materials 341 496 781 1,050 1,291
finished goods 2,392 2,553 2,447 2,954 3,337
total of credit purchase: 4,989 5,617 7,414 8,512 10,358
Average of creditors: 1,589.50 1,801.50 2,908.50 3,742.50 4,448.00
Creditor's turnover ratio 3.14 3.12 2.55 2.27 2.33
Creditor's Turnover Ratio
3.5 3.14 3.12
3 2.55
2.27 2.33
2.5
2
Ratios Series 1
1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
In 2008-09, company’s creditor’s turnover ratio is lower than other financial years which is not good
sign for the company. It maens that company takes time in the payment of their creditors. It could be
adversely affect our company’s credit worthiness and in some cases it can be happened that CHL will
not get huge amount of credit while purchasing their materials.
Credit purchase:
Rraw Material 10,025 19,689 16,749 11,602.9 8,874 5,730
Packing Mmaterials 0 3,365 3,853 0 0 1,291
Finished goods & traded goods 569 10,515 4,344 5,875.3 4,037 3,337
Total of credit purchase: 10,594 33,569 24,946 17,478 12,911 10,358
Average of creditors: 2,468 8,370 12,665 5,686.25 3,955.30 4,448

Creditor's T/O (2008-09) 4.29 4.01 1.97 3.07 3.26 2.33
(2007-08) 5.01 3.31 0.94 3.86 3.26 2.27
(2006-07) 6.84 3.16 3.09 3.76 3.47 2.55
Creditor's TurnoverRatio (2008-09)

4.29
4.5 4.01
4 3.26
3.5 3.07
3 2.33
2.5 1.97
2
Ratios 1.5 Series 1
1
0.5
0
Companies
 Sun Parma: The ratio of the company is the highest among all other competitors’ ratio which is good
sign for the company as the company pays out their creditors 4times in a year.
 Ranbaxy: here the ratio of this company is better than our company as they are paying their creditors
4 times in a year.
 Dr. Reddy: the ratio of this company is quite lower than others which is not good sign for the
company. Company pays out their creditors only 2 times in a year.
 Lupin & Piramal: Here the ratio of the company is higher than our company so we can say that the
payment policy of this company is stricter than our company.
Recommendations:
 CHL: We can conclude that our company should try to increase their payment cycle in a year so that
they can increase the credit period and can use credit facilities as much as possible.
 Industry: Dr. Reddy is very strict when it comes to collection of dues from the debtors but when it
comes to the payment to its supplier, it delays a lot. It may affect the credibility of the company in the
market and company should try to pay their suppliers as many times as possible in a year.
(5) Market Based Ratio:
5.1 Earning Per Share:
Earning Per Share = Net Profit / No. Of Equity Shares
Earnings per Share (EPS) indicates the profit available to the ordinary shareholders. This ratio helps in
evaluating the prevailing market price of the share in the light of profit earning capacity. Higher the earning

per share, better are the performance and prospects of the company. Generally 10-20 times of EPS are
considered as a justified market price of share.
Cadila healthcare limited (consolidated) ( Rs.In Millions)
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Net Profit 1,199 1,524 2,338 2,576 3,031
No. of equity shares

ESC 628 628 628 628 682
Face Value 5 5 5 5 5
No. of equity shares=(ESC/Face Value) 125.6 125.6 125.6 125.6 136.4
Earning Per Share 9.55 12.13 18.61 20.51 22.22
In 2004-05 and 2005-06, company has issued bonus shares on 1:1 ratio. So,
actual no. of shares without bonus share is 6, 28, 06, 854. Now, adding bonus
shares into actual Equity shares, we will get total equity shares of 12,56,13,708.
Earning Per Share
25 22.22
20.51
18.61
20
15 12.13
Ratios 9.55 Series 1
10
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
As we can see that our EPS is increasing year by year so it means that our company will give good
return to their shareholder on their investment. In 2004-05 and 2005-06, company has issued bonus
shares so their EPS was reduced.
Net Profit 18,177 9,512 -9,172 5,015 6,829 3,031

ESC 1,036 2,102 842 828.2 418 682
Face Value 5 5 5 10 2 5
No. of equity shares 207.2 420.4 168.4 82.82 209 136.4
EPS (2008-09) 87.73 22.63 -54.47 60.55 32.67 22.22

(2007-08) 71.76 20.76 26.08 49.74 31.24 20.51
(2006-07) 40.55 13.70 57.49 38.41 23.47 18.61
EPS (2008-09)
87.73
100
80 60.55
60 32.67
40 22.63 22.22
Ratios 20 -54.47
0 Series 1
-20
-40
-60
Companies
 Sun Pharma: Here the earning per share of the company is the highest in the whole industry, as it has
high amount of profits and their no. of equity shares are lower. This company is able to give high
returns to its equity shareholders and thus have high potential to grow.
 Ranbaxy: This company’s EPS and CHL’s EPS are almost the same but compare to their profit and
their no. of equity shares, they are distributing less amount to their shareholders.
 Dr.Reddy: Here company is incurring loss so that their EPS is negative. A negative cash EPS means
the company has more operating cash outflows than inflows. This requires extra financing either from
shareholders' money or banker's loans.
 Lupin: Here the earning per share of the company is almost 2.5 times more than that of CHL, as there
is not any huge difference in their profits but Lupin no. of shares is lesser than CHL
 Piramal: This company’s EPS is 1.5 times of CHL’s EPS because their profitability is higher than us
and they are also providing good returns to their S.H. inspite of higher no. of equity shares than CHL.
Recommendation:
 CHL: Our company should make some positive changes towards their profit only because their no. of
equity shares are at moderate level. Our Company should try to decrease the operating expenses, so that
the profit increases, but along with that our company should to reduce the amount of other research
expenses and thereby increase the earning per share.
 Industry: We can conclude that our company should try to increase its profit and even the no. of
shares, as it has very acute competition in the industry. Most of the competitors are earning high
amount of profit and are able to give better returns to their shareholders.
5.2 Dividend Per Share[DPS]:

Dividend Per Share = Dividend / No. Of Equity Shares
Dividend per Share reveals the amount of dividend paid to the ordinary shareholders.
Cadila healthcare limited (consolidated) (Rs. In Millions)
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
dividends:(from standalone B*S)

prposed dividends 377 377 502 565 614

ESC 628 628 628 628 682
Face Value 5 5 5 5 5
No. of equity shares 125.6 125.6 125.6 125.6 136.4
Dividend Per Share 3.00 3.00 4.00 4.50 4.50
In 2004-05 and 2005-06, company has issued bonus shares on 1:1 ratio. So,
actual no. of shares without bonus share is 6, 28, 06, 854. Now, adding bonus
shares into actual Equity shares, we will get total equity shares of 12,56,13,708.
Dividend Per Share
4.5 4.5
4.5 4
4
3.5 3 3
3
2.5
Ratios Series 1
2
1.5
1
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
As we can observe that our company is able to give good dividend per share to their shareholders.DPS
of the company is increasing year by year due to high rate of dividend. In 2004-05 and 2005-06
company has issued bonus shares in 1:1 ratio so their equity share capital was reduced and in the same
years dividend was less compare to other years, so their ratio will definitely come down.so in those
years inplace of distributing their profit among their stakeholders, they would have preferred to issue
bonus shares so on one side company got cash fund from their shares and on the other side they increase
their profit.

 Inter firm analysis:
Dividends:(from standalone
B*S)
proposed dividends[total] 614
Preference Shares ------ ------ ------ ------ ------ ------
Equity shares 2,848 0 1053 1035 878 ------
Equity Shares-Final (P.Y.) ------ ------ ------ ------ ------ ------
Equity Shares-Interim - paid ------ ------ 1 0.1 ------ ------
Total Dividends 2848 0 1054 1035.1 878 614
No. of equity shares and pref.

shares
ESC 1036 2102 842 828 418 682
PSC ------ ------ ------ ------ ------ ------
Face Value of ES 5 5 5 10 2 5
Face Value of PS ------ ------ ------ ------ ------ ------
No. of ES[A] 207.2 420.4 168.4 82.8 209 136.4
No. of PS[B] ------ ------ ------ ------ ------ ------
Total no. of shares[A+B] 207.2 420.4 168.4 82.8 209 136.4
Dividend Per Share (2008-09) 13.74 0 6.26 12.50 4.20 4.50

(2007-08) 10.50 2.50 3.76 4.90 4.26 4.50
(2006-07) 6.28 8.50 3.75 3.25 2.80 4.00
Dividend per Share (2008-09)

13.74
14 12.5
12
10
8 6.26
6 4.2 4.5
Ratios Series 1
4
2 0
0
Companies

 Sun Pharma: This Company’s DPS is highest among all other competitors due to high dividend
distribution and lower no. of equity shares. Their DPS is 4 times than CHL due to their high earning
capacity.
 Ranbaxy: Here company is not distributing their profit among their shareholders which will adversely
affect their image in the market.If company does not want to declare dividend then they should have
distributed bonus shares among their shareholders.
 Dr.Reddy: Inspite of incurring loss in 2008-09, company has declared to distribute dividend.
That means company may utilizing their reserves.
 Lupin:In this company, dividend is almost 1.5 times of CHL’s dividend and their EPS is very less
than others so that DPS will be definitely higher than CHL
 Piramal: Here the company is distributing very less amount as dividend but their dividend is higher
than our CHL’s dividend.
Recommendation:
 CHL: Our company should increase the amount of their dividend rather than increasing the amount of
the reserves. For distribution of more profit, CHL should reduce their operating expenses along with
R&D expenses.
 Industry: Inspite of earning higher profit, our company is giving very less dividend to their
stakeholders. Our company should try to increase their amount of the dividend as there is very acute
competition in the pharma industry and some of the competitors are earning less amount of the profit
and still they are declaring good amount of dividend for their shareholders
5.3 Dividend payout ratio:

Dividend payout ratio = [dividend / net profit] * 100
Dividend payout ratio is the fraction of net profit a firm pays to its stockholders in dividends.
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)

prposed dividends 377 377 502 565 614
Corporate dividend 53 53 85 96 105
Total dividend: 430 430 587 661 719
Net profit: 1,199 1,524 2,338 2,576 3,031
Dividend Payout Ratio 35.86 28.22 25.11 25.66 23.72

Dividend Pay Out Ratio
40 35.86
35 28.22
30 25.11 25.66
23.72
25
Ratios 20 Series 1
15
10
5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
In CHL the dividend payout ratio is decreasing year by year, so we can say that they pay a dividend to
its shareholders but at decreasing rate. They may use their profit by reinvesting in the firms activities
rather than as a cash payout to shareholders.

proposed dividends[total] 614
Preference Shares ------ ------ ------ ------ ------ ------
Equity shares 2,848 0 1053 1035 878 ------
Equity Shares-Final (P.Y.) ------ ------ ------ ------ ------ ------
Equity Shares-Interim - paid ------ ------ 1 0.1 ----- ------
Corporate dividend on tax 484 0 178 176 147 105
Total Dividend: 3,332 0 1,232 1,211 1,027 719
Net Profit: 18,177 -9,512 -9,172 5015 3,163 3,031
Dividend Payout Ratio (2008-09) 18.33 0 -13.43 24.15 32.47 23.72

(2007-08) 17.13 47.91 16.85 15.23 31.22 25.66
(2006-07) 18.91 70.80 7.63 17.23 34.26 25.11

Dividend Pay Out Ratio (2008-09)
32.47
35
30 24.15 23.72
25 18.33
20
15
Ratios 10
5 0
Series 1
0
-5 -13.43
-10
-15
Companies
 Sun Parma: Here the dividend payout ratio is low compare to other competitors. From the above
table, we can see that this company pays higher dividend to their shareholders compare to their net
profit.
 Ranbaxy: Ranbaxy’s dividend payout ratio is zero, in other words they do not pay a dividend to its
shareholders. This is the case for most high growth firms, their profits are better spent by reinvesting
in the firms activities rather than as a cash payout to shareholders.
 Dr. Reddy: Here this company’s ratio is negative as company is incurring loss and under such
condition also, they are paying dividend to their stakeholders.
 Lupin: This company’s DPR is very moderate as their net profit and total dividend both are at
moderate level.
 Piramal: This company has highest DPR in the whole industry, so we can see that this company is
very safe from the investors point of view to invest as they will get good amount of returns on their
investments.
Recommendation:
 CHL: Our company should try to distribute dividends from their net earnings rather investing them
because at the end it will increase our goodwill in the market.
 Industry: Ranbaxy’s dividend payout ratio is zero, in other words they do not pay a dividend to its
shareholders. This is the case for most high growth firms, their profits are better spent by reinvesting
in the firms activities rather than paying dividends to their shareholders.
(6) Others
6.1 Average Collection Period:
Average Collection Period = [(Debtors + B/R) / Credit Sales] * 365
The average collection period means the approximate amount of time that it takes for a business to receive
payments owed, in terms of receivables, from its customers and clients. Higher the ratio, better it is for the
company as it means that the company is able to collect the dues from its debtors in a short time period.
While if the ratio is lower, it means that the collection policy of the company is very liberal and high credit
facilities are granted to its customers.
Cadila healthcare limited (consolidated) (Rs. in Millions)
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
debtors 1,235 1,990 2,784 3,555 4,845
credit sales
net sales 12,430 14,453 17,855 22,660 28,624
other income from operations 349 392 433 569 651
toatl credit sales: 12,779 14,845 18,288 23,229 29,275
Average Collection Period 35.27 48.93 55.56 55.86 60.41
Average Collection Period
40 35.86
35 28.22
30 25.11 25.66
23.72
25
Ratios 20 Series 1
15
10
5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
As we can see that the average collection period of our company is increasing year by year, which means
that the collection from the debtors are delayed as the debtors are increasing at a rapid rate than the net
sales due to liberal collection policy.
particulars Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
debtors 8,811 13,310 14,406 10,349 4,866 4,845
credit sales
net sales 42,723 74,214 67,904 37759 32,448 28,624
other income from operations 0 0 0 908 0 651
toatl credit sales: 42,723 74,214 67904 38,666 32,448 29,275

Average Collection Period(2008-09) 75.28 65.46 77.44 97.69 54.74 60.41
(2007-08) 154.16 78.05 48.44 93.90 57.02 55.86
(2006-07) 116.22 93.38 44.30 73.20 55.40 55.56
Average Collection Period (2008-09)

97.69
100
90 75.28
80 65.46
70 60.41
54.74
60
50
40 77.44
Ratios Series 1
30
20
10
0
Companies
 Sun Pharma & Dr.Reddy: Here the duration of our company is slightly better than this company as
the dues from the debtors are collected only within 2 months while this company collects after 2.5
months.
 Ranbaxy:Here the ACP ratio is almost similar to our company both are giving only 2 months credit
due to tight credit policy.
 Lupin: The collection period of this company is the highest in the whole industry due to high amount
of debtors with fewer amounts of net sales. This means that the credit period given to the debtors is
almost one quarter.
 Piramal: This compant’s ratio is little bit lower than our company.They collect payment from their
debtors within 2 months.
Recommendation:
We can conclude that our company has better average collection period than almost all the companies in
the industry except Piramal, as the collection policy of this company is conservative and therefore the
no. of debtors are very less and thus this company has high creditability in the industry. So the only
suggestion for our company is to make a better and stricter collection policy so that the cash conversion
cycle moves faster and thus increase the goodwill in the market.
6.2 Average Payment Period:

Average Payment Period = [(Creditors + B/P) / Credit Purchase] * 365
Average Payment Period means prompt employment of capital being one part of good management working
capital one should ascertain whether the firm is enjoying actually the credit promised by suppliers. If
suppliers allow credit period of one month but if, as per calculations a firm is taking 2 months credit period
of one month but if, as per calculations, a firm is taking 2 months credit period, it may seem either that the

facilities given by creditors are not being fully utilized or that the firm is unnecessarily damaging its credit in
the markets.
Cadila healthcare limited (consolidated) ( Rs. In Millions)
particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)
Creditors
For small scale industrial undertakings 13 20 38 0 0
For capital goods 50 59 123 83 54
Others 1567 1894 3683 3558 5201
Total of creditors: 1630 1973 3844 3641 5255
Credit Purchase:
Raw material 2256 2568 4186 4508 5730
Packing materials[note:1] 341 496 781 1050 1291
Finished goods 2392 2553 2447 2954 3337
Total of credit purchase: 4989 5617 7414 8512 10358
Average Payment Period: 119.25 128.21 189.24 156.13 185.18
Average Payment Period
189.24 185.18
200
180 156.13
160 128.21
140 119.25
120
Ratios 100 Series 1
80
60
40
20
0
2004-05 2005-06 2006-07 2007-08 2008-09
Years
Interpretation:
From the above chart we can see that, APP is fluctuating.But it is increasing in the most of the years.
this means that the payment to the creditors is delayed as the creditors are increasing at a rapid rate than
the net purchases. Thus our company is enjoying the full benefits of the credit facilities provided by the
suppliers.
particulars Sun Ranbaxy Dr.Reddy Lupin Piramal CHL
Creditors
For small scale industrial undertakings 2 ----- ----- 66 0 0
For capital goods 0 ----- ----- 0 0 54
Others 2,541 ----- ----- 6,941 4,237 5,201
Total of creditors: 2,543 8,183 15,056 7,007 4,237 5,255
Credit Purchase:
Raw material 10,025 19,689 16,749 11,603 8,874 5,730
Packing materials[note:1] 0 3,365 3,853 0 0 1,291
Finished goods / Traded goods 569 10,515 4,344 5875 4,036 3,337
total of credit purchase: 10,594 33,569 24,946 17,478 12,910 10,358
Average Payment Period (2008-09) 87.55 88.97 220.29 146.32 119.78 185.18
(2007-08) 103.85 113.51 399.55 110.78 122.35 156.13
(2006-07) 49.67 112.52 126.72 110.26 110.76 189.24
Average Payment Period (2008-09)
250
185.18
200
146.32
150 119.78
87.55 88.97 220.29
100
Ratios Series 1
50
Companies
Interpretation:
 Sun Pharma & Ranbaxy: The duration of this company is less than our company as the payment
policy of this company is very bit stricter than our company. As this company has high net sales, we
can say that it has better goodwill in the whole industry.
 Dr. Reddy: This company’s ratio is the highest amongst all due to its high credit purchase and less
creditors which is not good sign for the company because they are paying their supplier’s almost after
7 months.
 Lupin: Here the ratio of this company is better than our company as the dues to the creditors are paid
by us after 4.5months while this company pays after 6 months.
 Piramal: Here the ratio of this company is better than our company as the dues to the creditors are
paid by us after 4 months while this company pays after 6 months.
Recommendation:
We can conclude that our company is very strict when it comes to collection of dues from the debtors
but when it comes to the payment to its suppliers, it delays a lot. So this means that it enjoys the credit
facilities provided by the suppliers to its best. But this might affect it creditability and goodwill in the
market and thus company should pay their suppliers almost for the same no. of times as the dues are
collected from the debtors.

Ranbaxy: Piramal:
note:1 Note:1
con. of RM = opening + pur.of RM - closing con. of RM = opening + pur. of RM – closing
(2006)15229.11 = 4433.22+pur.-5079.93 (2006) 6267.9 = 1138.2 + pur. - 1926.0
pur. = 15875.82 pur. = 7055.7
(2007)16339.32 = 5079.93+pur.-5328.82 (2007) 8196.5 = 1926 + pur. - 1760.3
Pur. = 16588.21 Pur. = 8030.8
(2008)18328.78 = 5328.82+pur.-6689.18 (2008) 8755.4 = 1760.3 + pur. – 1879.2
Pur. = 19689.14 pur. = 8874.3
Dr.Reddy:
note:1
consumption of Stores, chemicals, spares and packing material=opening+purchase-closing
(2006-07) 1226.135=428.381+pur.-554.587
pur.=1352.341
(2007-08) 2121.896=554.587+pur.-740.814
pur.=2308.123
(2008-09) 4206.000=740.814+pur.-879.000
pur.=4344.186
Lupin:
note:1
consumption of raw and packaging materials=opening+pur.-closing
(2006-07)7369=1343.7+pur.(-)1762.2
pur.=7787.50
(2007-08)10195.1=1762.2+pur.(-)2377.2
pur.=10810.10
(2008-09)10838.5=2377.2+pur.(-)3141.6
pur.=11602.9
Intra - Firm Ratio Analysis for the last 5 financial Years (Consolidated Balance Sheet)
Particulars 2004-05 2005-06 2006-07 2007-08 2008-09
1)Liquidity Ratio:
1.1Current Assets 2.05:1 2.30:1 1.96:1 2.33:1 2.26:1
1.2Quick Ratio 1.52:1 1.81:1 1.43:1 1.66:1 1.68:1
2)Profitability Ratio:
2.1Gross Profit Ratio 58.38% 57.58% 60.73% 61.41% 63.42%
2.2Net Profit Ratio 10.36% 11.04% 12.78% 11.39% 11.18%
2.3Retorn on Capital employed 12.10% 13.62% 15.40% 15.04% 13.87%
2.4Return on Equity 23.45% 24.88% 27.11% 27.57% 28.37%
2.5Return on Total Assets 9.92% 11.16% 11.91% 11.65% 11.00%
2.6PBT Margin 11.71% 12.68% 14.98% 14.22% 13.46%
2.7EBITDA Margin 19.02% 19.38% 19.25% 19.73% 20.69%
3)Leverage Ratio
3.1Debt-Equity Ratio 0.59 0.60 0.46 0.72 0.85
3.2Debt-Assets Ratio 0.30 0.30 0.25 0.34 0.38
3.3Net Worth / Proprietor’s Ratio 0.44 0.45 0.43 0.42 0.37
4)Turn over Ratio
4.1Stock Turnover Ratio(In times) 2.67 2.68 2.25 2.08 1.99
4.2Working Capital Turnover Ratio (In 5.00 4.04 3.79 3.63 3.37
times)
4.3Debtor’s Turnover Ratio(In times) 7.87 9.21 7.66 7.33 6.97
4.4Creditor’s Turnover Ratio(In times) 3.14 3.12 2.55 2.27 2.33
5)Market Based Ratio
5.1Earning Per Share 9.55 12.13 18.61 20.51 22.22
5.2Dividend Per Share 3.00 3.00 4.00 4.50 4.50
5.3Dividend Payout Ratio 35.86% 28.22% 25.11% 25.66% 23.72%
6)Others
6.1Average Collection Period 35.27 48.93 55.56 55.86 60.41
6.2Averege Payment Period 119.25 128.21 189.24 156.13 185.18
Inter Firm Ratio Analysis for the year 2008-09
Particulars SunPharm Ranbaxy Dr. Reddy Lupin Piramal

a
1)Liquidity Ratio:
1.1Current Assets 5.93:1 1.41:1 2.27:1 1.95:1 1.81:1
1.2Quick Ratio 8.74:1 1.19:1 1.69:1 1.36:1 1.60:1
2)Profitability Ratio:
2.1Gross Profit Ratio 74.52% 51.26% 60.44% 51.01% 55.32%
2.2Net Profit Ratio 42.55% -12.82% 8.04% 12.97% 22.42%
2.3Retorn on Capital employed 29.10% -19.63% -0.16% 17.76% 14.97%
2.4Return on Equity 30.20% -27.48% -0.23% 37.09% 28.80%
2.5Return on Total Assets 25.54% -8.33% -0.13% 13.34% 11.53%
2.6PBT Margin 45.62% -20.21% 11.88% 15.67% 11.88%
2.7EBITDA Margin 43.63% -7.19% 16.12% 19.58% 16.80%
3)Leverage Ratio
3.1Debt-Equity Ratio -0.21 0.47 0.41 0.89 0.94
3.2Debt-Assets Ratio 0.022 0.32 0.28 0.05 0.37
3.3Net Worth / Proprietor’s Ratio 0.85 0.31 0.48 0.34 0.36
4)Turn over Ratio
4.1Stock Turnover Ratio(In times) 1.25 2.01 2.00 2.17 3.27
4.2Working Capital Turnover
Ratio (In times) 1.20 3.77 3.13 7.58 4.85
4.3Debtor’s Turnover Ratio(In 3.72 5.26 6.49 4.35 6.97
times)
4.4Creditor’s Turnover Ratio(In
times) 4.29 4.01 1.97 3.07 3.26
5)Market Based Ratio
5.1Earning Per Share 22.63 -54.47
87.73 60.55 32.67
5.2Dividend Per Share 0 6.26 12.50 4.20
13.74
5.3Dividend Payout Ratio 18.33% 0 -13.43% 24.15% 32.47%
6)Others
6.1Average Collection Period 75.28 65.46 77.44 97.69 54.74
6.2Averege Payment Period 146.32 119.78
87.55 88.97 220.29

Extra
Learning
 Some Extra Learning:
I was able to learn about certain financial and accounting topics like DuPont Analysis, Value Added tax
and Central sales Tax, Consolidation of the Balance Sheets, costing, Export Licenses and some practical

work of preparing cash reconciliation at Dial for Health which help me to know about the financial
soundness of the company.
(1) Auditing at Dial For Health’s retail shop
About Dial for Health:
Dial for Health is the subsidiary of Cadila healthcare limited (CHL). DFH is a pharmacy retail store
network. There are 15 stores in Ahmedabad, 7 stores in Baroda and 7 stores in Mumbai. In layman
language we can say that DHL is modified version of chemist shop.
Objective:
 For internal control on all retail shops.

 For transparency.
 For close examination of the petty cash balance.
 To gauge the efficiency of retailers (who is handling store for time being).
 To maintain petty cash account properly on monthly basis.
 To reduce expenses, losses, malpractice of money.
Findings:
 Company is using SAP not only as an internal system but also it is linked with its retails outlet. They
are using this system for its inventory and accounting (petty cash) management.
 Retailers have to submit reports of cash, sales, purchases and inventory on daily basis to their
respective departmental head.
 The retailers are trained in such a way that if there is a shortage of a particular product in their
particular retail outlet, they can get the same product from the nearest outlet immediately.
 Retail outlet provides facilities like; home delivery of products, payments through electronic cards,
credit sales to their trustworthy customers.
 This retail outlets have products of other pharma companies along with zydus’ products.
 They also allow 10% discount only on all medicated products which does not include cosmetic
products.
 The departmental head of the particular outlet makes surprise visits by sending his/her representative
in disguise of a customer to scrutinize the atmosphere of the outlet and the response from the retailers.
Conclusion:
 Due to this internal system of management, there is very less chances of malaccounting of money as
well as inventory.
 The system of maintenance of petty cash account is stable and accurate so that their transparency level
is very high.

 Before appointing the retailer for particular store, company gives him/her training for the system of
maintenance. So now the responsibilities of DH are reduced.
Recommend:
Here, I would recommend that,
 There should be regular/daily deposition of cash to the nearest bank.

 Petty cash account for outlet expenses should be regularly maintained with their respective bills of
expenses.
 During the day time when customers are not coming, they should save their electricity expenses by
switching off extra lights, fans and A.C.
(2) VAT:
A type of consumption tax that is placed on a product whenever value is added at a stage of production and
at final sale. The amount of VAT that the user pays is the cost of the product less any of the costs of
materials used in the product that have already been taxed.
VAT is applicable within state transaction.
For example;
When a medicine is built by a company in Ahmedabad, the manufacturer is charged a VAT on all of the
supplies they purchase for producing the medicine. Once the television reaches the shelf, the consumer
who purchases it must pay the VAT that applies to him or her.
Assume that,
CHL= manufacturer
XYZ=seller
CHL purchases RM of Rs. 100.there is 4% vat is applicable on TP. Our material cost will be 104Rs. [100+
(100*4%)].Here 4Rs. is our ITC and 100Rs. Is our actual material cost.
Now we have made finished goods [medicines] from the above RM and sold it to our stockiest at Rs.200.
Here also 4% VAT is applicable and we are receiving 208 Rs. From which we will suppose to pay 8 Rs.
Government, but actually we will pay only 4 Rs. to government. Since government has 4 Rs. Credit in the
name of CHL which is the amount of VAT, we have paid in the first (purchasing) transaction.
Now stockiest will sell the same medicines to retailer at 300 Rs. and retailer will pay 312 Rs. with the
payment of VAT on 300 Rs. Now stockiest will pay only 4 Rs. to government as he has 8 Rs. credit with
government.

Conclusion:
From the above transaction medicine will be sold at 300 Rs. and government will receive net 4 % VAT
on it i.e., 12 Rs.
Amount of the VAT In Rs. VAT paid in Rs. VAT Actual amt. payable
product (2) (3) Receivable in to govt. (In Rs.)
Rs.(4) (3-4)
100 4% 4 0 4
200 4% 8 4 4
300 4% 12 8 4
Total: 12
(3) Central sales Tax:
Registration for CST and VAT are done seperataly.CST is mainly applicable for interstate and international
transactions. For the payment of CST, we have to make application to the government in filling up the forms
like FORM-C, FORM-H and FORM-F etc.
 FORM – C:
Form-c is applicable for interstate transaction. Current rate for FORM-C is 2%. And if party is not
considering FORM-C, its rate is 4% that is called local tax without FORM-C.
It is issued on Quarterly basis.
 FORM – H:
FORM – H will be applicable for export transactions .Here no tax is levied on transaction amount
because of export.
FORM – H is submitted on quarterly basis.

CHL in Guj.
FORM –H
for sale
Agent in
Mumbai
imum.bai
Party in USA
Export
CHL is selling some goods to USA by appointing one agent who is in the Mumbai.
FORM – H will be presented along with Airway bills and receipts in which there is no name of our
USA’s party.
FORM – H: In which CHL will not pay CST because finally transaction is considered as ‘Export’ and
there is no tax on export.
 FORM – F:
FORM – F will be applicable for interstate transaction but it has to be between same company’s units
i.e., (1) CHL Uttar Pradesh to CHL Gujarat. (2) Hub to C&F Agent.
It is presented on monthly basis.
Why no tax?
In the bellow chart, we can see that goods are transferred from one hub to C&F. Here we are
transferring goods from one pocket to another.

CHL
UP
CHL
A’ bad
CHL CHL
MP Delhi
 When should ‘Return’ be submitted?
If we have made sales in February, we have to submit our return within 30 days of the next month i.e.,
30th March and tax should be paid within 22 days of the next month i.e., 22nd April.
If any case there is failure of not submitting of return on due date, penalty will be of Rs. 100 for first
seven days and in such a way penalty can be paid at the most 10,000 Rs.
(4) Concurrence System:
1. Concurrence system means budget vs. actual expense summary.

2. Budgeted expenses will be given to concurrence department to
add up in the system.
3. Concurrence will allow expense in limit of the budget.
4. If any department wants to incur more expense than budget than
required permission of CFO/CMD for the same.
5. Concurrence system has a lock in period concordance system of
90 days.
6. Every division has to use that fund within 90 days after that it
got to be locked.And if any division head wants it after the lock in period has to ask for the
permission of Budget cell and CMD.
7. In case of excess money after the lock in period money would
be transferred into the company’s fund.
8. After all the actual expenses are occurred all the entries of
expenses with their bills being entered in SAP system under account department.

(5) Calculation of NRV And MRP (Costing Structure):
Here NRV stand for Net Realistion Value and MPV stand for Maximum Retail Price.
* NRV is the price of CHL.

* TP is the price of stockiest.
* MRP is the price of Retailer.
MRP includes all expenses like VAT, Excise Duty.
For Example;
Here, VAT is 4% and Excise Duty (ED) is 4.12% (4% + 3%) .Here, we are taking non-scheduling
drugs. So, Exemption from the excise duty to wholesaler is 10% and to retailer is 20%.Excise Duty is
calculated on 65% of MRP’s amount as per the government norms.
Particulars Price
MRP 205.28
VAT (205.28 * 4 / 104) 7.90
ED (205.28 * 65% * 4.12%) 5.5
Trade price 159.01
NRV 143.66
Calculation for Trade Price:
Trade Price (20% exemption):
TP = (MRP –VAT – ED) 0.8 + ED

= (205.28 – 7.9 – 5.5) 0.8 + 5.5
= 159.01
TP to NRV (10% exemption):
NRV = (TP – ED) 0.9 + ED

= (159.01 – 5.5) 0.9 + 5.5

= 143.66
(6) Practical work done in sap software
SAP is the software which is used by the company for maintaining the books of accounts. This software has
started before 2-3 years back. Before this software all the entries are done in the VISION software which is
also used by the company. Still some work is done in VISION but soon company will try to do all the entries
in the SAP software. It covers all the entries related to expenses, credit note, debit note, purchases of the
goods and many more. There are the snap shots of the SAP on which I had worked on. There are the
following steps to work on it-
 SAP LOG IN Window:
 User ID and Password Window:

 Window Pop_UP after entering ID and PASSWORD:
 Enter the t-code (transaction code):
Click on the particular menu in which u want to work. Here, I have clicked on ZTL OR U can enter the
t-code in the above blank place. T-Code means Transaction code. It varies by transaction to transaction.
I have entered mir6. Mir6 is the T-code for Invoice overview.

 OR click on mir6.
 The first window open after clicking on T-code:

 After entering into this window, accounting year and company code will automatically come up. Zydus
has total 29 subsidiaries and Joint ventures so that they have given different code to their companies.
Here 2100 id for ZTL (Zydus technology Limited).
 Now click on ‘Get Variant Button’:
 Variant window will pop-up and now in this window click on ZTL.

 Now enter the Document No.
 Now in the nxt task click on execute to see the details about the the above doc. No.

 Click on the doc. No. to open one particular doc.
 Now match the invoice date, amount and VAT code with physical invoice and also watch that posting
date is correct or not.
 Posting date should be today’s date on which date we are doing posting.
 Now write down business place and Text.

In Text, we need to write about the invoice no. or reference no.

 Check Details option:

 Click on TAX and compare the particulars with Basic data's tax statement
 Check the quantity and amount with physical bill.

 Check Tax code, it should be as per tax code which is given in the Basic Data.
 Click on Purchase order no of the item:

 Next window:
 Item no. and item name come

 Click on one item and check out its quantity and amount with physical help
 There are 3 options :Header, item overview , Item details

Open header. In it, the final amount, vendor name and his code should be matched.

 Item Overview Option:
 Click on PRINT PREVIEW
 Purchase order will be opened. On this window Next, previous page options are given so that we can
move to other pages.
 This is the second page of Purchase order;
 Now click on Back And then click on Simulate

 Now we are heading towards the posting

 Now click on POST and that will generate the Document no. and new window pop-up
 Now click on FOLLOW ON DOCS :

 This is the data entry view.
 Practical work done in vision software

VISION 21 is software which is used by the company for doing the entries. It is started before so many years
and all the entries done in this software only. Before 2-3 years new software called SAP is started. But still
company is using this software for many kinds of entries. It covers all the entries related to expenses, credit
note, debit note, purchases of the goods and many more. There are the snap shots of the VISION on which I
had worked on.
There are following steps that should be worked on:
 There is an icon on the screen for “VISION 21”. When we click on the icon one screen appear where
we have to fill the user name and password. There is no unique user name and the password. For
different departments, even for different work there are different user name and the password which is
made by the employee. So when we give user name and password than the below screen appears-
This step is a common step to proceeds further in the VISION software for any kind of entries. This is the
first screen for the VISION software. This screen appears after giving the user name and password. There are
different codes for different types of entries like for claims, debit note, credit note, etc. There are separate
code and description over there and according to that we can do the entries in it.
 Suppose we want to do the entries of PURCHASE (Domestic) so for that we need to go in File menu
and in Open button. One screen is appears ‘Vision21 Menu’. In that we have to go in transaction and
in PURCHASE BILL (DOMESTIC). So we have to click on that and in bottom finance and give OK
button.

Here select the doc. Series. I have selected PB code which is used for the entry of purchase bill of
Baroda.
 Then press TAB and automatically Doc. No., Doc. Date and Party Code will come.
 Now enter bill Date and Party’s name, due date and Number in Bold –next to Party code, pur.Type will
automatically generate.
 Then enter department code and DOC. Narration.

 Now enter General Ledger code, Sub A/C code and press TAB.

 Press TAB to reach the TAX Code Place.
 Then enter Tax code

 Now enter the amount of Excise Duty , sales tax or VAT and Adv. TAX.

 Then Click on OK and then Click on Accounting effect.
 In the below small window both debit and credit amount should be matched.
 If both are matched then click on OK.
 Then save (alt+s) or click short cut bar on save purchase entery for baroda cash

Learning
And
Conclusion
 Learning:
From the current project:

* First and foremost, I learnt about the actual scenario of the pharmaceutical industry in India along with
the various key issues and regulations of the industry, some concepts, main businesses and the
profitability of the five major pharmaceutical players and many other vital things.
* I was able to learn about how to read the Balance sheet and Annual Reports of the company and gather
all the financial terms and some new concepts which is very new to me.
* In the annual reports and in the balance sheet all the informations are not given i.e., percentage of
taxation. So, with the help of my mentor I have found out those items which are not given but very vital
in the calculation of ratios.
* In order to judge the financial position of the company, I calculated the ratios of CHL standalone and
consolidated along with its five main competitors.
* I was able to learn about how the working capital is managed at CHL and also able to work upon the
working capital requirement of the company by calculating the net operating cycle.
* I learnt about the inventory management system of the company, regarding how the company is able to
judge about the requirement of various products in the market
* The inventory planner that is made by the GDSO department and also about the procurement cycle for
the goods.
* Also learnt about the credit control system functions and activities performed by the credit control
department. The entire operation of the distribution and marketing channel from factory to customer,
including the concepts of stockiest and C&F agents.
* The method of claim settlement opted by the company for the various types of claims of local as well as
outstation parties.
* The Domestic Cash management system and International Collection system followed by CHL.
* I also learnt about the various topics in brief like the calculation of sales tax, service tax, about the TDS,
some briefing regarding the FOREX market, and also an overview about the process of making the Cost
Sheet and consolidation of balance sheet.
* I got a thorough understanding of the entire export procedure followed by the company as well as how
these exports are financed.
* I also learnt about the practical work of entries that is done in SAP R/3 and VISION 21, which should
be done with utmost care as the entries are not reversible and cannot be cancelled. If any mistake is done
than it affects till the end of transaction.
* I had a practical exposure to the plant about how actual inventory (raw material, packing material and
finished goods) is stored, processed and manufactured by the company.
* I was able to learn about certain financial tools like DuPont Analysis, sustainable growth rate, which
help me to know about the financial soundness of the company.
Other than project:

* During my free hours, I used to visit the retail shop of Dial For Health and monitored its petty cash
accounts, cleanliness of the store, response from the chemist, its inventory stock.
* I learned to adjust to different working places and conditions and also learned the importance of being
assertive and not aggressive.

* I was a bit impulsive by nature in the initial period of SIP but this training proved to be very profitable
for me as I learned two very important skills - patience and tolerance.
* During my training, interpersonal skills is one of the most important learning that I have gained. As this
skill can either make or break the career. We are a social being and the virtue of humility and mutual
cooperation is a must in making.
* It also leveraged on my creative approach in the problem solving and decision making situations. There
were some situations in which we have to give some new idea to our mentors.
* Apart from these, Discipline, Punctuality, humanity are the other values that have to be imbibed in us
for a successful career and a person.
* Above all my vision and focus towards my career path has also improved. I got one new area of work
which I was considered as only the world of medicines but in Pharmaceutical industry also finance is
very much important.
* In CHL, I learnt that no work is big or small, every work should be given equal weightage.
* In CHL, they are offering every month body-check up facility for all the employees so I have also
undergone the same procedure of the body check up and then only realized that physical body check up
is very vital in this corporate world where we are piled of work.
 Recommendation:
* CHL is very strict about giving credit to their debtors but they should also be very vigilant in the
payment to their suppliers. So that they can improve their credit worthiness and also goodwill of the
company in market.
* Study each Product’s Life Cycle, understand which stage it is and make some addition to that
product depending on the requirement of the customer with additional combinations & formulations.
This will help in improving the net operating cycle.
* Increase the profitability and market share by expanding the foreign market shares.
* Study some market nationally and internationally and introduce some product depends on the
requirement of the market.
* CHL should take the advantage of Trading on Equity and can easily mobilize by way of issuing
shares or debentures or public deposits or debt from financial institutions or FDIs or FIIs as it has a
reputed value in the national and international market.
 Conclusion:
This is very much known to all the individuals that a company value cannot be maximized in the long run
until unless it cannot survive in short run. If the working capital dips low, the business risk running out of
cash. Any profitable business can go into trouble if there short term obligation cannot be fulfilled. Sound
working capital is requisite for a company to survive in the competitive market. Understanding about the

working capital management of a company and analysis of its financial components of the company with
other companies has brought into the light.
While studying and understanding about the project, it has made clear that:
* The company has strong system from order execution to collection which makes the company
competitive in the pharmaceutical industry.
* Collection system is very well built that there is less chance of bad debts which is a profitable for the
company.
* Even company is having strong inventory control which is hardly have any stock out in the company.
* As it is a Pharma company, the sales forecast should be done accurately, as this sector has high growth
rate, so the production should be done according. And CHL is successful in inventory management with
the help of their two main department PPMC and GDSO which co-ordinates all the procedure of rest of
the departments.
* The company has very strong and wide spread distribution channel all over the world which helps them
to meets the market demand and thereby get good revenue through high turnover.
* Cash management initiative with Citibank had helped CHL in faster transfer of cash and thereby
achieving higher liquidity. Thus the cash conversion cycle is very fast as the payment system accepted is
through advanced demand draft or cheque. Therefore the working capital requirement will be less and so
that cash can be invested in other projects of the company.
* Industry analysis helped me know the position of our company by analyzing the strength and weakness
of it through comparison of ratios of other competitors.
* Ratio analysis help me to determine the significance and meaning of financial statement data and
thereby making me understand how each and every ratio has its own significance regarding the future
prospect for the company.
* The calculation of net operating cycle helped me to know about the storage period stages for the
particular product in the Pharma Company and also at which point changes should be made, so that the
operating cycle period is minimum, which will convert the cash rapidly and thereby reduce the working
capital requirement.

 References:
 Annual Reports of the company – ZYDUS CADILA HEALTHCARE LTD:
* For the year 2004-05
* For the Year 2008-09
 “Analysis of Financial Statements” and “Working Capital management” by Dr. Prasanna Chandra-
Tata McGraw Hill Publishing Co. Ltd.
 www.investopedia.com
 www.google.com
 http://en.wikipedia.org/wiki/
 www.zyduscadila.com
 www.sunpharma.com
 www.ranbaxy.com
 www.lupin.com
 www.drreddy.com
 www.piramal.com
 www.invstopedia.com
 www.managementparadise.com
 www.ucobank.com
 www.rbidocs.rbi.org.in
 www.accountingformanagement.com


Final Prject On Working Capital Management-Neha Desai-09BS000681-IBS Ahmedabad

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Final Prject On Working Capital Management-Neha Desai-09BS000681-IBS Ahmedabad

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Mr. Mitesh Pandya

Summer Internship Program 2

Summer Internship Program 3

Summer Internship Program 4

 Description of Project in brief:

Summer Internship Program 5

 Limitations of the Study:

 Schedule of the project:

Summer Internship Program 6

 Expected growth rate in 2010:

Summer Internship Program 7

The Indian Pharma Market:

 Advantages to Indian Pharma Industry:

 Disadvantages to Indian Pharma Industry:

 Role of Pharmaceutical Industry in India GDP-Facts

 The Pharmaceutical Industry in India is one of the largest in the world.

 Pharmaceutical Industry in India-Growth:

Summer Internship Program 9

 Future of pharma industry:

 SWOT Analysis of Pharma Industry:

Summer Internship Program 12

Mr. Sharvil P Patel

Mr. Mukesh M. Patel

Mr. Pranlal Bhogilal

Mr. Humayun Dhanrajgir

Mr. Apurva S Diwanji

Summer Internship Program 13

CADILA HEALTH CARE LTD.

SUBSIDIARIES JOINT VENTURE

* Zydus Pharmaceuticals Limited,

 Need of working capital management:

1. Gross working Capital

1) Gross working capital:

2) Net working capital:

 Type of working capital:

1) Permanent working capital :

2) Temporary working capital:

 Determinants of working capital:

The amount of working capital is depends upon following factors:

2. Length of production cycle:

Summer Internship Program 17

4. Business/ Trade cycle:

 Calculation of Working Capital:

particulars (2004-05) (2005-06) (2006-07) (2007-08) (2008-09)

Working Capital [A-B] 2,557 3,672 4,824 6,407 8,696

Summer Internship Program 18

Five main parts covered under working capital management:

Net working Capital

 Operating Cycle Applications:

Summer Internship Program 21

 Impacts of operating cycle:

 Short Operating cycle:

 Long operating cycle:

Raw Material Packaging Conversion Period

Average Payment Average Collection

Summer Internship Program 22

Opening Stock of Raw Material 1,503

Opening work-in-progress 618

Summer Internship Program 23

Opening stock of finished goods 3,272

Particulars (Rs. in Million)