1.

INTRODUCTION

1. 1 INTRODUCTION TO THE TOPIC

Asset management may be defined as a comprehensive and structured

approach to the long term management of assets as tools for the efficient and
effective delivery of community benefits. The emphasis is on the assets being
a means to an end, not an end in them."

The World Road Association (PIARC) has adopted an definition of

asset management, "A systematic process of effectively maintaining,
upgrading and operating assets, combining engineering principles with sound
business practice and economic rationale, and providing the tools to facilitate
a more organized and flexible approach to making decisions necessary to
achieve the return's expectations."

The main streams in asset management are:

• Identification of need for the asset, in the light of community

requirements.
• Provision of the asset, including its ongoing maintenance and
rehabilitation to suit continuing needs operation of the asset.
• Disposal of the asset when the need no longer exists or it is no
longer appropriate for the asset to be retained.

This is been analyzed and the essential of periodic study of assets necessity
is been discussed in this study.

1
 1.2 INDUSTRY PROFILE

The automotive industry designs, develops, manufactures,

markets, and sells the world's motor vehicles. In 2008, more than 70 million
motor vehicles, including cars and commercial vehicles were produced
worldwide.

In 2007, a total of 71.9 million new automobiles were sold worldwide:

22.9 million in Europe, 21.4 million in Asia-Pacific, 19.4 million in USA and
Canada, 4.4 million in Latin America, 2.4 million in the Middle East and 1.4
million in Africa. The markets in North America and Japan were stagnant,
while those in South America and other parts of Asia grew strongly. Of the
major markets, Russia, Brazil, India and China saw the most rapid growth.

About 250 million vehicles are in use in the United States. Around the
world, there were about 806 million cars and light trucks on the road in 2007;
they burn over 260 billion gallons of gasoline and diesel fuel yearly. The
numbers are increasing rapidly, especially in China and India. In the opinion
of some, urban transport systems based around the car have proved
unsustainable, consuming excessive energy, affecting the health of
populations, and delivering a declining level of service despite increasing
investments. Many of these negative impacts fall disproportionately on those
social groups who are also least likely to own and drive cars. The sustainable
transport movement focuses on solutions to these problems.

2
 In 2008, with rapidly rising oil prices, industries such as the automotive
industry are experiencing a combination of pricing pressures from raw
material costs and changes in consumer buying habits.

The industry is also facing increasing external competition from the

public transport sector, as consumers re-evaluate their private vehicle usage.
Roughly half of the US's fifty-one light vehicle plants are projected to
permanently close in the coming years, with the loss of another 200,000 jobs
in the sector, on top of the 560,000 jobs lost this decade. Combined with
robust growth in China, in 2009, this resulted in China becoming the largest
automobile producer and market in the world.

IN INDIA

An embryonic automotive industry started in India in the 1940s.

However, for the next 50 years, the growth of the industry was hobbled by the
Socialist policies and the bureaucratic hurdles. Following economic
liberalization in India from 1991, and the gradual easing of restrictions on
industry, India has seen a dynamic 17% annual growth in automobile
production and 30% annual growth in exports of automotive components and
automobiles. India produces around 2 Million automobiles currently. The
Largest companies in India are TATA and Mahindra & Mahindra. Total
turnover of the Indian automobile industry is expected to grow from USD 34
Billion in 2006 to USD 122 Billion in 2016. Tata Motors has just launched
Tata Nano, the cheapest car in the world at USD 2200. Recently India has
overtaken China in global auto exports of compact car this year. Suzuki
Motor Corp, Hyundai Motor Co, and Nissan Motor Co are making India a
manufacturing hub of minicabs.

3
AUTOMOTIVE INDUSTRY CRISIS

The Automotive Industry crisis of 2008–2009 was a part of a global

financial downturn. The crises affected European and Asian automobile
manufacturers, but it was primarily felt in the American automobile
manufacturing industry. The downturn also affected Canada by virtue of the
Automotive Products Trade Agreement.

The automotive industry was weakened by a substantial increase in the

prices of automotive fuels linked to the 2003-2008 energy crisis which
discouraged purchases of sport utility vehicles (SUVs) and pickup trucks
which have low fuel economy. The popularity and relatively high profit
margins of these vehicles had encouraged the American "Big Three"
automakers, General Motors, Ford, and Chrysler to make them their primary
focus. With few fuel-efficient models to offer to consumers, sales began to
slide. By 2008, the situation had turned critical as the credit crunch placed
pressure on the prices of raw materials.

Car companies from Asia, Europe, North America, and elsewhere have
implemented creative marketing strategies to entice reluctant consumers as
most experienced double-digit percentage declines in sales. Major
manufacturers, including the Big Three and Toyota offered substantial
discounts across their lineups. The Big Three faced criticism for their lineups,
which were seen to be irresponsible in light of rising fuel prices. North

4
American consumers turned to higher-quality and more fuel-efficient product
of Japanese and European automakers. However, many of the vehicles
perceived to be foreign were actually "transplants," foreign cars manufactured
or assembled in the United States, at lower cost than true imports.

CRISIS IN INDIA

Citing falling production numbers, the State Bank of India reduced

interest rates on automotive loans in February 2009. For the first few months
of 2009, Tata Motors conducted a widespread marketing campaign heralding
the debut of the Tata Nano. Billed as "the people's car," the manufacturer
hopes the low cost will encourage customers to purchase the vehicle despite
the ongoing credit crisis

GAINING PROSPECTS OF INDUSTRY

Indian auto- component industry is relatively small by global

standards with some individual global auto component companies
having sales far in excess of that of the Indian auto component industry
as a whole. The size of the industry has, however, increased in the last
decade with the rapid growth in Indian automobile production, triggered
largely by the economic liberalization and with global automobile
players setting up manufacturing facilities in India. The other driver for
expansion of the Indian auto-component industry has been the increasing
volume of exports. Major global automobile manufacturers/Tier-1
suppliers are already sourcing auto components from India for their
global requirements.

5
 The competitive edge Indian auto-component manufacturers enjoy
which could enable them become global players are:

 Cost effective manufacturing technology and a penetrative

strategy.
 High levels of quality and productivity achieved by embracing
Japanese concepts and best practices such as Total Quality management
(TQM), Total productivity management (TPM), and Lean Production
system etc., by some of the companies including Rane Brake Lining Ltd.
 Legal, financial and accounting systems in place in the country.
Rane Brake Lining Ltd supply asbestos and asbestos free
brake linings to most of the passenger and commercial vehicles
manufactures, disc pads, railway blocks and clutch facings and
emerged itself as a global player in this competitive auto-mobile
industry for past several years.

6
2.1 TITLE OF THE PROJECT:

“A STUDY ON ASSET PRODUCTIVITY TO FIND

RETURN ON INVESTMENT UNDERTAKEN AT
ASHOKLEYLAND LIMITED, ENOORE, CHENNAI”.

2.2 NEED FOR THE STUDY:

It is known fact that success of every organization depends

upon its effective utilization of its available resources and deriving
the optimum output. Fixed Assets are not only costly resources to
manufacturing concerns but also prone to obsolete unless they have
monitored effectively. It’s necessary to have a periodic
maintenance & verification and have a track over it.

Rane Brake Lining Limited has considered

‘improving the asset productivity’ as one of the key success factors
to achieve their goals as specified in Strategic Business Plan (SBP),
which is being prepared for a period of 5 years. In this regard,
various processes such as physical verification, utilization factor
and Pareto study for improving selected machineries studied to
achieve the targeted asset productivity. Assets true value can be

7
 assessed by this study, which would be useful to know return on
investments.

2.3 OBJECTIVES OF THE STUDY:

Primary objective:
 To measure the overall return on investment of assets in Rane
Brake Lining Limited, Chennai.

Secondary objectives:

 To physically verify availability of the assets as per asset register.

 To evaluate critical and costly assets performance and utilization

of various assets.

 To analyze the assets productivity capacity for past years

 To suggest measures to utilize the available assets in an effective

manner.

8
2.4 SCOPE OF THE STUDY:

Company’s one of the Strategic Business Objective is to improve

its assets productivity. In this regard, evaluation of usefulness of existing
assets and utilization is the first and foremost process to derive a way
forward and plan of action to achieve the desired results.
Each Plant has assigned the task of analyzing the assets on cost
wise (Pareto analysis) and utilization factor to be assigned to the same.
In the process of generating the details and completing the said exercise,
Physical verification of assets enables the management to know exact
value of assets available for productivity purpose. Physical verification
of assets would be useful in considering about assets based finance
acquiring for extending its business in future years.
It helps management to track over existing assets and to evaluate
its performance and contribution to organization profit. Assessing real
worth of assets would enable to judge the repaying capacity of Rane
Brake Lining Limited. The study of physical assets verification would
help management to trace assets productivity. It would suggest
elimination of unwanted machineries and scrap out idle assets. It enables
to evaluate the financial strength over its investment made on assets.

9
 4. REVIEW OF THE LITERATURE

4.1 INTRODUCTION

We obviously know that each and every sector of business is

commenced with a hard strive. Even if it is started in an easiest manner it’s
too difficult to strive in this competitive world. With the utilization of limited
resources it has to optimize both companies’ growth as well as its revenue
maximization. It cannot be done so easily, it needs continuous development
plans and good control over its resources. A man knowing his full
potentiality and a manager knowing his companies resources full potentiality
are said to be successful ones and nothing can oppose them.

There by we can know the urge of manufacturing sectors importance

towards knowing their assets productivity and its contribution towards
revenue. Thus this review of literature is revolved on the topic of knowing
what are assets, depreciation and assets productivity. It in brief reveals how
fixed assets play a dominant role in increase the productivity and the impact
of having assets verification in a manufacturing concern. The importance of
having such sound track over existing assets and its performance is been
analyzed in this review of literature.

4.2 FIXED ASSET MEANING:

10
 Any item of economic value owned by an individual or corporation,
especially that which could be converted to cash. Examples are
cash, securities, accounts receivable, inventory, office equipment, real estate,
a car, and other property. On a balance sheet, assets are equal to the sum
of liabilities, common stock, preferred stock, and retained earnings.

An accounting perspective, assets are divided into the following

categories: current assets (cash and other liquid items), long-term assets
(real estate, plant & equipment), prepaid and deferred assets (expenditures for
future costs such as insurance, rent, and interest) and intangible
assets (trademarks, patents, copyrights, goodwill).

4.2.1 FIXED ASSET DEFINITION IN REAL TERMS OF BUSINESS

FIXED ASSET

An asset not readily convertible to cash that is used in the normal

course of business. Examples of fixed assets include machinery, buildings,
and fixtures. A firm whose total assets are made up primarily of fixed assets is
in a less liquid financial position, thus entailing greater risk of a big tumble in
profits if its revenues fall.

The benefits that a business obtains from a fixed asset extend over
several years. For example, a company may use the same piece of production
machinery for many years, whereas a company-owned motor car used by a
salesman probably has a shorter useful life.

By accepting that the life of a fixed asset is limited, the accounts of a

business need to recognize the benefits of the fixed asset as it is "consumed"

11
over several years. This consumption of a fixed asset is referred to
as depreciation.

4.2.2 ASSET VALUATION MEANING

It is the process of determining the current worth of a portfolio or

companies, investment, or balance sheet items. The tools used for asset
valuation include quantitative methods and statistics, financial statement
analysis, ratio analysis, fundamental analysis, and valuation economics.

Asset in view of financial statements

Assets are things that a company owns that have value. This typically
means they can either be sold or used by the company to make products or
provide services that can be sold. Assets include physical property, such as
plants, trucks, equipment and inventory. It also includes things that can’t be
touched but nevertheless exist and have value, such as trademarks and
patents. And cash itself is an asset. So are investments a company makes.

Liabilities are amounts of money that a company owes to others. This can
include all kinds of obligations, like money borrowed from a bank to launch a
new product, rent for use of a building, money owed to suppliers for
materials, payroll a company owes to its employees, environmental cleanup
costs, or taxes owed to the government. Liabilities also include obligations to
provide goods or services to customers in the future.

12
 Shareholders’ equity is sometimes called capital or net worth. It’s the
money that would be left if a company sold all of its assets and paid off all of
its liabilities. This leftover money belongs to the shareholders, or the owners,
of the company.

The following formula summarizes what a balance sheet shows:

ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY

A company's assets have to equal, or "balance," the sum of its liabilities and
shareholders' equity

Assets are generally listed based on how quickly they will be

converted into cash. Current assets are things a company expects to convert to
cash within one year. A good example is inventory. Most companies expect to
sell their inventory for cash within one year. Noncurrent assets are things a
company does not expect to convert to cash within one year or that would
take longer than one year to sell. Noncurrent assets include fixed assets. Fixed
assets are those assets used to operate the business but that are not available
for sale, such as trucks, office furniture and other property.

Brief View about Fixed Assets

Fixed assets refer to physical or tangible things of value a company owns

such as facilities, equipment, and land. The term "fixed assets" reflects the
traditional notion that these kinds of assets are fixed and do not require much
consideration after they are purchased. Contemporary accounting literature,
however, now calls fixed assets "property, plant, and equipment" for the most

13
part. Companies rely on their assets, including fixed assets, to generate
profits. Modern equipment in good repair, for example, is essential for high
productivity and efficiency, and hence for profits. Fixed asset analysis
involves calculating the earnings potential, use, and useful life of fixed assets.
In addition, fixed asset analysis determines if fixed assets are sufficiently
maintained to ensure current and future earning power as well as the relative
profitability contributed by fixed assets and fixed asset acquisitions.

A decrease in operational efficiency and productivity results from the

improper or inadequate maintenance of malfunctioning and inefficient assets
as well as from the failure to replace obsolete and irreparable assets. Asset
analysis examines the age and condition of each major asset category, as well
as the costs of replacing old assets to determine the output levels, downtime,
and temporary discontinuances.

The measure of efficiency involves the calculation of these ratios:

• Fixed asset acquisition to total assets

• Repairs and maintenance to fixed assets

• Repairs and maintenance to sales

• Sales to fixed assets

• Net income to fixed assets

To present the state of or the changes in various plant and equipment

assets, accountants often prepare financial statements and schedules that plot
out this information. These statements include the dispositions of company
property, plant, and equipment as well as the acquisitions and divestitures of

14
fixed assets. In preparation of these reports, accountants generally determine
the age and condition of the major fixed assets and the replacement cost of
them. Technology companies in particular benefit from examining this
information. Accountants also compute the different ratios listed above and
compare them with the industry averages to see how their companies use their
fixed assets in relation to their competitors. In addition, accountants make
note of assets that are no longer being used as well as those that are not
productive.

Companies using specialized equipment—such as those manufacturing

specialized or trendy items—especially need to keep track of their fixed asset
to avoid obsolescence.

Fixed asset analysis also may involve having accountants determine

the hours or mileage of usage for various assets and produce reports that
indicate hours of usage per month for buildings and equipment and the
mileage of usage per month for vehicles. Such reports enable efficient
comparison and help managers identify underused assets. Armed with this
information, managers can decide whether to reallocate, sell, or otherwise use
or dispose of fixed assets with low usage.

Companies benefit from fixed asset analysis by taking control of

their fixed assets and maintaining their condition in order to ensure proper
operation. Controlling fixed assets allows companies to avoid losses
associated with misused and misplaced assets as well as with deterioration. In
addition, fixed asset analysis enables companies to maximize the use of
property, plant, and equipment.

4.3 VALUATION OF FIXED ASSETS

15
4.3.1 INTRODUCTION:
In Business and Accounting, Assets are everything of value that is owned by
a person or company. It is a claim on the property your income of a borrower.
The balance sheet of a firm records the monetary value of the assets owned by
the firm. It is money and other valuables belonging to an individual or
business. Financial statements disclose certain information relating to fixed
assets. In many enterprises these assets are grouped into various categories,
such as land, buildings, plant and machinery, vehicles, furniture and fittings.

4.3.2 DEFINITION:
According to Accounting Standard-10 “Fixed asset is an asset held
with the intention of being used for the purpose of producing or providing
goods or services and is not held for sale in the normal course of business.”

In other words fixed assets are held by an enterprise for the purpose
of producing goods or rendering services, as opposed to being held for resale
in the normal course of business.

For example, machines, buildings, patents or licenses can be fixed assets

of a business. The two major asset classes are tangible assets and intangible
assets:
Tangible assets contain various subclasses, including current assets and fixed
assets. Current assets include inventory, while fixed assets include such items
as buildings and equipment.

Intangible assets are nonphysical resources and rights that have a value
to the firm because they give the firm some kind of advantage in the market
place. Examples of intangible assets are goodwill, copyrights, trademarks,

16
patents and computer programs, and financial assets, including such items as
accounts receivable, bonds and stocks.

Thus valuation of all physical assets comprises of verification

of all physical assets and having a separate register of its existence and real
worth of it and providing right amount as depreciation to it and evaluating its
efficiency and contribution towards making revenue to the organization.

4.4 ASSET PRODUCTIVITY

The objective of making physical verification of assets is to know the asset

productivity, which is the key role of conducting verification of assets and
which leads to know the return on investments made on assets.

At present, industry leaders are looking at the economic earnings model

in a new perspective that is asset productivity. This view focuses squarely on
the fixed asset base and directs a lens towards creating shareholder value by
improving the productivity of that fixed base while avoiding significant new
capital investment.

In contrast to a capital project approach which rewards efficient capital

spending through completed projects and increased capital investment, the
asset productivity model seeks to utilize existing assets to their maximum
capacity, increasing productivity without additional investment. Greater
productivity and asset effectiveness ultimately drives a sustainable
competitive advantage by increasing revenue and profit, reducing capital
investment, and achieving operational excellence.

17
 The new asset productivity perspective of the economic earnings
model enables top line growth, minimizes costs, and positions the capital
infrastructure to compete, adapt, and win. Research shows that the best
performers know how to measure and sustain asset productivity by depending
on resources other than new capital as the enabler of operational excellence.
This shift in mindset can have a significantly positive impact on shareholder
value and economic value creation.

4.5 ASSET PRODUCTIVITY/ PERFORMANCE OFFERING TO

ORGANIZATION:

1. Creates Shareholder Value: The asset productivity methodology

emphasizes improvements with minimal capital and enables precise
evaluation of return on investment through an analytically-derived metric.
The result is higher economic earnings and growth in shareholder value

2. Enables Profitable Growth: Asset productivity drives profitability by

optimizing productivity, capacity growth, and adaptability to market
conditions. Increased asset productivity enables operational excellence that
drives a sustainable competitive advantage in both growing and mature
market sectors

3. Supports Capital Allocation Strategies: Companies make better capital

allocation decisions when they employ metrics to identify opportunities for:

18
 1) Utilizing the most effective assets, 2) Re-Deploying under-performing
assets, and 3) eliminating surplus or poorly performing assets

4. Drives Cost Leadership: Asset productivity improvements yield

significant increases in capacity, which can then be leveraged to increase
revenue, decrease unit cost, and reduce capital. Asset productivity stands at
the intersection of peak efficiency, optimal productivity and high quality
assurance

4.5.1 OPERATING ASSET EFFECTIVENESS

Operating Asset Effectiveness (OAE) is the comprehensive metric that

determines asset utilization improvement. The OAE formula combines
utilization, throughput, and acceptance. It also monitors the impact of an asset
productivity program which extracts the most value from the existing asset
base. This value extraction enables companies to achieve the highest
sustainable throughput rate at the lowest possible cost.

How asset productivity can be measured?

An asset productivity program collects and analyzes key data

across several functions, including output volume, planning, engineering,
operations, quality assurance, and maintenance. These indicators are then
used to diagnose root-cause issues of underperforming assets. The overall
OAE metric is a very powerful analytical microscope into an organization’s
operational health and its ability to adapt to various business, market, or
competitive conditions — in addition to its value creation role in capital
preservation and optimization.

Results

19
 The study delivers breakthrough improvement could be brought
through program management to propel a successful asset productivity
program. A cross-industry asset productivity methodology can be tailored to a
company’s specific operating environment and business conditions. The
methodology will also address the existing cultural attitudes, values, and
behaviors that are the foundation of a successful, company-wide adoption of
the new approach.

Asset productivity methodology also offers:

1. A systematic enhancement of operations, equipment performance, and

process capability

2. Industry-specific expertise and functional skills

3. Clear evaluation methods and analytic process improvement models to

determine asset performance benchmarks

4. Root-cause analysis to drive operational and strategic adjustments for

peak productivity and capacity

5. A train and do approach that fosters successful process adoption across

client organizations

It enables company to infuse asset productivity into their unique

corporate cultures. This approach would effectively institutionalize
fundamentals and enforces their execution through tracking key performance
metrics and management procedures. This transformation not only requires
asset effectiveness expertise, but also a strong culture and change

20
management methodology, solid end-user training, and performance
measurement.

4.5.2 ASSET PRODUCTIVITY TURNAROUND:

THE GROWTH/EFFICIENCY CHALLENGE

Growth and productivity have been linked together as the path to

increasing profitability. However, companies that embark on aggressive
growth strategies often find their efficiency severely compromised. This
research examined companies whose asset productivity declined severely
during periods of aggressive growth. Contrary to conventional turnaround
wisdom, asset pruning and debt reduction did not accompany asset
productivity turnarounds.

A successful turnaround companies has decreased their long-term debt

ratios as they continued to expand. Companies that failed to turn around their
asset productivity declines suffered subsequent declines in sales and income
growth. Although the firms in this study did not publicly acknowledge the
presence of decline, takeover attempts were more likely to occur during or
immediately after the period of asset productivity decline.

4.6 ASSET PRODUCTIVITY RATIOS FOR INVESTMENT

ANALYSIS

Asset productivity ratios describe how effectively business assets are

deployed. These ratios typically look at sales generated per unit of resource.
Resources can include accounts receivable, inventory, fixed assets, and
occasionally other tangible assets. Similar analyses may also be done not just

21
for financial assets but also for operational assets like square footage, number
of employees, and airplane seat miles.

4.6.1 FIXED ASSET TURNOVER

Formulae

Fixed asset turnover = sales / fixed asset

Obviously, all else being equal, the company that produces the most sales or
revenue of fixed assets wins and has stability in the market.

4.6.2 TOTAL ASSET TURNOVER

Formulae

Total asset turnover = sales / total asset

We shall get a bigger picture of asset productivity as measured by the

generation of sales to the total assets. For the first time, intangible assets are
included. Again, industry norms form the benchmark. Comparing a railroad to
a software company probably doesn't make sense.

4.7 ASSETS ARE CLOSELY RELATED TO DEPRECIATION

4.7.1 DEPRECIATION

Depreciation is a key concept accountant’s use when analyzing fixed

assets and the examination of depreciation helps to clarify the useful life of
assets. Depreciation refers to the decreasing potential of fixed assets to
generate revenues over their useful life, resulting from deterioration and
obsolescence. In addition, depreciation involves accountants spreading the
total cost of fixed assets out over their useful life.

22
Definition

"Depreciation may be defined as the permanent decrease in the value of an

asset due to use and/or the lapse of the time." -Terminology of Institute of
Cost and Management Accountants, England

"Depreciation is the permanent and continuous diminution in the

quality, quantity or value of an asset." -Pickles

"Depreciation may be defined as measure of the exhaustion of effective

life of an asset from any cause during a given period." -Spicer and Pegler

"Depreciation is' the gradual and permanent decrease in the value of an

asset from any cause."-Carter

Again, the comparison of the depreciation rate to the industry average will
underscore the findings of the repairs and maintenance ratios. To determine
the adequacy of the depreciation charge, the following can be done:

• Calculating the trend in depreciation expenses to fixed assets.

• Determining the trend in depreciation expenses to sales.

• Comparing the book depreciation to tax depreciation.

If the trends are declining, depreciation charges may be inadequate.

If sales are decreasing as asset expenditures are increasing, the company may
be over expanding and lifting its bottom line through large write-offs rather
than operating margins. Unwarranted changes in the lives or salvage values of
fixed assets will increase depreciation expenses, and thus overstate earnings.

WHAT IS DEPRECIATION?

23
 Depreciation is the permanent and continuing diminution in the
quality, quantity or value of an asset. Depreciation Accounting deals with the
allocation of costs of fixed assets over their useful lives. More simply, that
part of cost of this asset which is being periodically (monthly) allocated as
expense into the Income Statement to match the revenue the asset is
generating.

For example, when we buy fixed asset like factory machinery,

this is merely an advance payment of which we expect that this fixed asset is
able to enhance or earn certain earnings for the business. Over a period of
time, the fixed asset we buy will become valueless or unable to generate the
necessary earnings. To reflect this continuing diminution in the value of the
factory machinery, we need to apply depreciation accounting.

The reasons for depreciation are:

Wear and tear [physical using up like corrosion, rot, rust and decay]

Obsolescence [change of fashion or new substitutes or inventions] Fall in

market price [foreign exchange, competition,]

Effluxion of time [passage of time, fixed assets become less valuable]

Physical factors [natural disasters like flood, earthquakes, excessive heat or

cold]

Inadequacy or superfluous [business operation increased hence fixed assets

inadequate]

4.7.2 NEED TO PROVIDE FOR DEPRECIATON

To ascertain the net earnings/profit for an accounting period,

depreciation needs to be computed. Depreciation normally constitutes a major
24
part of the expenses of the business. As the business buys fixed assets, it
expects the fixed assets over the useful lives are able to generate the necessary
revenues for its business. Whilst revenues being earned and if there is no
allocation of depreciation cost to match these revenue, income will then be
overstated. Depreciation therefore follows very closely to the matching
concept;

The fixed assets in the Balance Sheet will be overstated if depreciation is

not provided for. Only that part of the costs of fixed assets that have not
expired should be reflected in the Balance sheet otherwise
the financial statement will not reflect a true and fair view.

If depreciation is not provided for and assuming if the whole profits

were withdrawn during the life of the asset, additional capital would have to
be raised when it is time to replace the fixed assets.

By charging depreciation against profits, the ultimate residual profit

available for distribution is lowered and that funds are retained in the business
for future replacement.

SALIENT POINTS TO BE CONSIDERED

1. The varying depreciation rates can mean a higher or lower depreciation

charge to the Income Statement. Therefore, it is very important to estimate
correctly the useful lives of the fixed assets.

2. It is interesting to note that in accounting fraud, management can accelerate

the depreciation charges or understate them.

25
3. Depreciation is in reality based on a matching concept meaning that the
charge out depreciation amount is to match with the revenue that are
generated from deploying these fixed assets.

4. In accounting, the depreciation charge/rate does not necessarily equal to the

tax accounting treatment of depreciation. Sometimes, they differ quite
drastically as a result of certain tax concession given by the Inland Revenue.

Life span of an asset to a business rests primarily, on the purpose of its

acquisition and secondary, on its nature. An item acquired for immediate
consumption or sale is a short-lived asset and that meant for prolonged use, is
long lived asset, though both produce revenues. Whereas the former asset
expires within one year of its acquisition, the latter asset lasts longer.

Hence almost entire expenditure on a short lived asset becomes an expense

and is matched against current year's revenue.

But the position is otherwise with a long-lived asset which wears out or
depreciates over a long period. Accordingly, the outlay of a fixed asset is
spread over several years and annually only a fraction thereof expires.
Simply, this fraction, called expired cost or depreciation, is charged against
current revenues and the rest, termed unexpired cost, is carried forward for
future expiration.

Objects of making provision for depreciation

For attaining following objects, depreciation accounting is a must for every

business:

(1) Recovery of cost incurred on fixed assets over their useful life so as to
keep owner's capital intact;

26
(2) Provision is for replacement cost on the retirement of original assets

(3) To include the depreciation in the cost of production to find out the correct
cost of production;

(4) To find out correct profit for the year

(5) To find out the correct financial position through balance sheet.

4.7.3 CAUSES OF DEPRECIATION

Depreciation may be of two types:-

Internal-depreciation

External-depreciation

(1) Internal-Depreciation which occurs for certain inherent normal causes

is known as internal depreciation.

The causes of internal depreciation are:

(1.1) Wear and Tear- An asset declines on account of continued use e.g.
building, plant, machinery etc. such decline depends upon quantum of use of
an asset. If a factory works double-shift instead of single shift, depreciation
on plant and machinery will be doubled. It is obvious that such loss is
unavoidable. An asset may be kept in proper working conditions
through repairs for the time being, but it can not be done so permanently. At
one time the asset will become unfit for repairs, when it will no longer be
suitable.

(1.2) Depletion-Some assets decline in value proportionate to the quantum of

production, e.g. mines, quarry etc. With the raising of coal etc. from coal

27
mine, the total deposit reduces gradually and after some time it will be fully
exhausted. Then its value will be nil.

(2) External-Depreciation caused by some external reasons is called

external
depreciation.

The causes of external depreciation are:

(2.1) Obsolescence

Some assets, though in proper working order, may become obsolete. For
example old machine becomes obsolete with the invention of more
economical and sophisticated machine, whose productive capacity is
generally higher and cost of production is lesser.

In order to survive in the competitive market the manufacturer must install

new machine replacing the old one.

(2.2) Passage of time

Some assets diminish in value on account of sheer passage of time, even

though they are not used e.g. lease hold property, patent rights, copy rights
etc.

(2.3) Accidents

Assets may be destroyed by abnormal reasons such as fire, earth quake, flood
etc. In such a case the destroyed asset may be written-off as loss and a new
one purchased.

Need for Provision of Depreciation

The need for provision for depreciation arises for the following reasons:

28
(1) Ascertainment of true profit or loss-Depreciation is a loss. So unless it is
considered like all other expenses and losses, true profit/loss cannot be
ascertained. In other words, depreciation must be considered in order to find
out true profit/loss of a business.

(2) Ascertainment of true cost of production-Goods is produced with the help

of plant and machinery which incurs depreciation in the process of
production. This depreciation must be considered as a part of the cost of
production of goods. Otherwise, the cost of production would be shown less
than the true cost. Sale price is normally fixed on the basis of cost of
production. So, if the cost of production is shown less by ignoring
depreciation, the sale price will also be fixed at a low level resulting in loss to
the business;

(3) True Valuation of Assets-Value of assets gradually decreases on account

of depreciation. If depreciation is not taken into account, the value of asset
will be shown in the books at a figure higher than its true value and hence the
true financial position of the business will not be disclosed through Balance
Sheet.

(4) Replacement of Assets-After some time an asset will be completely

exhausted on account of use. A new asset then purchased requiring large sum
of money. If the whole amount of profit is withdrawn from business each year
without considering the loss on account of depreciation, necessary sum may
not be available for buying the new assets.

In such a case the required money is to be collected by introducing fresh

capital or by obtaining loan by selling some other assets. This is contrary &
sound commercial policy.

29
(5) Keeping Capital' Intact-Capital invested in buying an asset, gradually
diminishes on account of depreciation. If loss on account of depreciation is
not considered in determining profit/ loss at the year end, profit will be shown
more. If the excess profit is withdrawn, the working capital will gradually
reduce, the business will become weak and its profit earning
capacity will also fall.

(6) Legal Restriction-According to Sec. 205 of the Companies Act, 1956 dividend cannot
be declared without charging depreciation on fixed assets. Thus in "Case of joint stock
companies charging of depreciation is compulsory.

4.8 DIMENSIONS TOWARDS THE TOPIC OF STUDY:

Asset management or study of asset productivity in the new economy

“Profitability is no longer just about growing sales.”

- Mike Laszkiewicz

Not since the 1970s has the industry faced an economic challenge as
we did during the past two years—and for many who joined the work force in
the 1980s, this is the first significant economic setback they have experienced.

The sudden shift from a boom economy to a recession has caused a

dramatic change in the direction business leaders are driving their individual
manufacturing facilities. During this time, manufacturers and maintenance
departments have learned some valuable lessons about operational efficiency.

The economy is slowly beginning to improve, but many companies

still face the challenge of improving growth and achieving greater

30
profitability with fewer human and capital assets. The past several years have
not gone by, however, without many vital lessons on achieving better
operational efficiencies.

Those who learn and adapt will survive—Lean Manufacturing

Become proactive through asset optimization—Integrated Condition

Monitoring

Operational efficiency starts in the storeroom—Outsourcing

Departments can no longer work autonomously—Enterprise Wide Integration

From all indicators, it looks like the end of the current economic
downturn may be within sight. This is good news for the manufacturing
industry, which began to feel the first effects of the economic downturn about
thirty months ago.

However, many companies are still facing the challenge of improving

growth and achieving greater profitability with fewer human and capital
assets. Fortunately, the past several years have provided many companies act
as good example for factors on achieving better operational efficiencies.

Example #1

Many of the companies that flourished in the booming economy of the 1980s
and 1990s no longer exist. The survivors are the ones who have adapted to the
new economic reality of the twenty-first century: profitability is no longer just
about growing sales; it's also about organizational efficiency.

Businesses are driving out inefficiencies, reducing and consolidating

management layers, and seeking to outsource noncore competencies
whenever possible—being lean is the new goal.
31
Many are undertaking full-scale process reviews aimed at finding ways to cut
costs and improve processes. Untouchable areas within an organization are
now undergoing scrutiny at the micro level for any reductions in fixed and
variable costs—activity-by-activity and line-by-line—starting at the plant
floor.

For some, this represents a major change in philosophy.

In the area of maintenance, for example, there has been an increased

emphasis on maximizing uptime by maintaining asset availability, while at
the same time reducing repair parts and outsourcing repair and/or
remanufacturing capabilities whenever possible. Because maintenance, repair,
and operations (MRO) physical assets typically represent a company's single
largest capital investment, it is no surprise that maintenance activities have
never more directly tied to manufacturing and business performance.

For some, millions of dollars in savings remain on the table.

Example #2

Asset management is primarily about capital assets—the productive

assets in which an organization has invested. The line is blurring, however,
and asset management is expanding to human assets within organizations as
well.

It is the job of maintenance and operations professionals to continually

look for methods to get more out of production and understand how
equipment on the factory floor is performing.

Leading edge maintenance departments are expanding programs like

asset management, reliability centered maintenance, and condition-based

32
monitoring tools (such as vibration, oil and lubricant analysis, and
thermographs) to monitor equipment health to reduce unexpected downtime.

Organizations that employ asset management strategies have reported

20% reductions in plant downtime and 30% reductions in maintenance
budgets. In recent years, maintenance has evolved beyond preventative
activities into a system of predictive maintenance measures—asset
optimization.

Fully optimized assets means knowing and achieving the full potential
of your plant floor and performing maintenance only when warranted. For
example, instead of routinely changing oil on a piece of equipment at the
same time every month, advanced monitoring technology is capable of
predicting when the oil is breaking down. It may be breaking down later than
initially thought, which can save time and money on maintenance. When we
incorporate these predictive techniques on a plant wide basis, slashing
maintenance expenses can easily happen.

This strategy represents a significant shift in philosophy and resource

allocation. That is, an investment and commitment needs to be made to not
simply fix a problem but to also ferret out the root cause—going beyond
knowing that the bearings in the motor need to be replaced to determining
why it is happening.

Is it simply a lack (or excess) of lubrication, or is the motor working

beyond capacity? If it is the latter cause, then breakdowns would inevitably
begin to permeate the line.

4.9 ASSET MANAGEMENT RESOURCES

33
 For businesses from foundries to pharmaceuticals, tracking a complex
fixed asset inventory isn’t simple without asset management resources. That’s
probably why most businesses don’t have an accurate accounting of their
fixed assets – costing billions of rupees each year in tax overpayment,
regulatory non-compliance, and inefficiency.

Asset Management or verification of assets can bring it all under

control over it. Whether the goal is personal property tax reduction for
businesses, or improving the accuracy and visibility of data in your
information systems, the fixed asset management services will get you
there efficiently, cost-effectively and with absolute confidence.

4.9.1 ASSET MANAGEMENT CORE RESULTS

• Fixed asset tracking, featuring wall-to-wall fixed asset inventory and

reconciliation (FAIR)

• Calculate the personal property tax for businesses

• Expert cost segregation and fixed asset consulting services to maximize

exempt allowances and incorporate proper depreciation schedules

4.9.2 BOTTOM-LINE RESULTS SERVICES

 Reduce personal property taxes for businesses - most companies are

paying too much at present.

 Reduce risks and report with confidence about the real assets values
and its productivity.

 Increase profitability and shareholder value – through improved asset

inventory strategic decision support

34
  Protecting business investments by ensuring data accuracy in corporate
databases

4.9.3 IMPACT OF ASSETS BEEN MANAGED OR VERIFIED

Asset management includes of comprehensive inspection programs,

condition assessment and tracking, maintenance management, life-extension
technologies, strategic planning and prioritization, and refurbishment and
replacement policies.

Asset management can be applied to helps the utilities to be

addressed aging of various assets and distribution infrastructure, reliability
and business risk challenges in an organized and orderly fashion. Applied
correctly, asset management explicitly recognizes that the utility's equipment
exists to serve its customers and that all decisions regarding its use and care
are made on the basis of business needs and profitability in performing the
utility's mission.

When the company is interested in knowing how asset management

works to benefit their companies, it is very important to get to know how
asset management really works. This includes the services that asset
management employs to handle assets, the costs of utilizing asset
management services, the available software designed to manage assets, even
the qualifications of certified asset management advisors.

For instance : Most electric utilities in North America have significant

portions of their electrical infrastructure that are “aged” – composed mostly of
equipment that has been in service so long that wear and tear have had an
obvious effect, but not so deteriorated that immediate replacement is
obviously needed. Asset management focuses on all aspects of managing

35
aging assets well, from a far-reaching look at aging and its impacts on the
T&D system, customer reliability, and the utility’s bottom line, to the various
means through which utilities can manage aging, its costs and effects in an
efficient manner.

It is very important to know that the asset lifecycle has four broad stages
that asset management firms take into consideration. Planning and
procurement, including carefully considering which to procure, ordering these
and even receiving and testing these are salient features of asset management.
Managing the daily operations of assets enabling companies to maximize
productivity is also an important feature of asset management. Knowing how
much it costs to operate the company and comparing it to the profits and the
existing assets make for balanced returns and even more commonly returns to
the part of the companies.

4.10 RELEVANCE OF STUDY IN PRESENT SCENARIO

4.10.1 Asset Based Finance (ABF)

ABF is a financing method that is driven by the assets of

companies. Assets include current assets, such as accounts receivables and
inventory, and fixed assets, such as plant and machinery. ABF allows an SME
to utilize its own assets to meet its short, medium and long term funding
needs.

Short term financing (up to one year) Offered in forms like factoring or
accounts receivable/inventory revolving loans.

4.10.2 Asset Based Finance

36
 Asset based lending or asset based financing refers to loans secured by
a wide variety of assets. Businesses can obtain asset based lending by using
the liquid, current assets of the company (such as accounts receivable and/or
inventory) or the fixed assets of a business (such as plant, property, and
equipment) as collateral.

The asset-based financial services industry has burgeoned in recent

years, and small businesses have fueled much of its growth. Although a
stigma is still associated with using your assets to get cash, this type of
financing is becoming more popular.

Asset based financing relies on the value of the underlying collateral to

minimize the loan's credit risk. Asset based loans also can include equipment
loans and real estate mortgages. Commercial finance is the term most
commonly affiliated with the industry group of asset based lenders that
provides all types of asset based loans to business and commercial borrowers.
Asset based lenders are sometimes referred to as secured lenders.

4.11 THE PROS AND CONS OF ASSET-BASED FINANCING

4.11.1 Pros

Covenants. In most cases, asset-based financing involves fewer and more

flexible covenants than cash flow loans. In many cases, the only covenant
focuses on the borrower's liquidity level.

Availability. A company's access to asset-based financing often increases as

its working capital needs increase because that's when assets are growing.

4.11.2 CONS

37
Reporting. In most cases, borrowers must provide monthly or quarterly
reports to show that they are meeting loan covenants. Strong performance and
high liquidity enable companies to negotiate more flexible reporting rules.

Cost. In general, asset-based arrangements cost more than cash flow loans,
but pricing depends on the borrower's creditworthiness. In recent years,
interest rate spreads between asset-based and cash flow-based loans have
remained steady, but fees on collateralized loans have increased in some
cases.

Accounts receivable/inventory financing: A revolving loan against the

entire accounts receivable and inventory of a company.

Medium term financing (one year to three years): Based on a company's

existing plant and equipment that is free from encumbrances. Can be in the
form of hire purchase, leasing, sale and lease back, etc.

Long term financing (three to seven years): A term loan based on the real
estate of the company.

4.12 ASSET BASED FINANCING

4.12.1 Types of Asset Based Financing

• Financial Lease - "Increase company’s productive capacity acquiring

fixed assets and / or recover liquidity with a lower need of having additional
guarantees."

• Operating Lease - "Keep the benefits for the possession and usage of
the leased assets without having credit debts in company balance account"

• Secured Loan - "Have a more profitable business" then "Increase the

fixed assets the company"
38
• Mortgage Secured Loan- "Credit Contract to face any need of
financing in the long term for the company"

• Industrial Mortgage Secured Loan - "Credit to foment the

development of your industry and to rest on its cycle of production"

• Raw Material & Working Capital Loan- "Fortify your productive

cycle and obtain the necessary resources for the growth of your business,
covering your requirements of cash flow, mainly for the integration of
working capital"

• Inventory Secured Facilities- "Cover company’s necessities in the

acquisition and maintenance of inventories, imbalances of treasury and obtain
the resources to acquire raw material for the production"

4.12.2 DEFINITION

Asset-based financing is a way for rapidly growing, cash-strapped

companies to meet their short-term cash needs. In general, companies can tap
their assets to generate cash flow through asset-based loans or through
factoring.

4.12.3 BENEFITS FROM ASSET-BASED LENDING:

Companies can experience rapid growth

Leverage capacity of companies can be increased

Companies with a short operating history could be developed

4.12.4 --ADVANTAGES AND DISADVANTAGES OF ABF

The main advantage of asset-based financing is that small companies can

usually get more cash more quickly than they could from a traditional bank

39
loan. Also, asset-based lenders and factors offer an array of services including
accounts receivable processing, collections and invoicing.

The drawback of asset-based loans and factoring is the expense. Using

assets to generate cash flow increases your cost of funds and cuts into profits.
You need to weigh your situation carefully and determine whether this type of
financing is necessary to expand your company or keep it afloat.

5. RESEARCH METHODOLOGY

Research is common parlance refers to search for knowledge. In fact,

research is an art of scientific investigation. The advance learner’s dictionary
of current English lays down the meaning research as a “careful investigation
or inquiry especially through search of new facts in any branch of knowledge.

5.1 RESEARCH DESIGN

Research design could be defined as the blue print specifying every

stage of action in the course of research. Research design is the arrangement
of conditions for collecting and analysis of data in a manner that aims to
combine relevance to the research purpose with economy in procedure. This
dissertation work is based on analytical research design.

TYPES OF RESEARCH BEEN USED

40
 The type of research designs undertaken is Exploratory Research and
Descriptive Research.

The research design adapted is said to be exploratory because no

problem or issue is not clearly defined. The research design adopted just
provides insights into and comprehended the study area and helps to
understand how assets is been considered in whole organization.

The study describes the data and characteristics of fixed assets which are
physically verified for its existence and utilization. Although the research
design was aimed at higher accuracy, the causes behind the situation could
not be gathered, so it’s just a descriptive research.

STUDY AREA

The area covered under this study is mainly focused on Finance

department of the plant. The relevant data are collected from the finance
manager and from the employees in other related departments.

5.2 DATA COLLECTION METHODS

Data refers to information or facts. It is not only refers numerical figures but
also includes descriptive facts. After the research problem and design have
been defined, the task of data collection begins.

Types of data collection

• Primary data collection

• Secondary data collection
PRIMARY DATA

41
 The primary data are those which are collected fresh and for the first time
and thus happen to be original in character. Here in this study, data’s been
collected by face to face interactions and questions. Moreover from the
personnel discussion with the officer and the staff members of accounts
department, the information is obtained.

The questions used for data collection from concerned respondents of

respective departments were unstructured ones and was asked to be kept
confidential.

Few questions used at time of data collection are:

 How far is assets are maintained by user Dept.?

 Is assets periodically serviced and repaired?
 What type of assets been acquired and put into production process?
 Why some assets in plant does not have machine no and asset
description in it? And so on ….
SECONDARY DATA

Secondary Data are those data which have been collected by someone
else and which have been passed through the statistical process. Such data are
collected and used for some other objective of understanding the past status of
any problem.

In this study Secondary Data collection method has helped the to a

great extent in arriving at the results. Secondary data have been mainly
obtained from company website, annual reports, records and books of RBL

42
The secondary data were also collected from audited financial statements
periodicals and other records like SAP register maintained by RBL.

5.3 TOOLS USED FOR THE STUDY:

 RATIO ANALYSIS
 TREND ANALYSIS
 PARETO CHART

PERIOD OF THE STUDY:

The period of the study undergone for the project was five months.

5.4 LIMITATION OF THE STUDY:

1. The nature of financial statements is based on past data, which cannot

be the index of future and cannot be basis for future estimation,
forecasting budgeting and planning of new assets purchase would be
possible.
2. Different users may interpret results of the analysis differently.
3. Financial statements analysis cannot be a substitute for judgment
because analysis is a tool, which can be utilized usefully by an expert
but may lead to erroneous conclusions by unskilled analyst.
4. Limitations of the tools of analysis.
5. Confidentiality of revealing some assets details.
6. Time is the main constraint for study.
7. Change of records maintenance from Oracle to SAP made difficulty in
obtaining full assets register values and details.

43
 Operating Capital
profit Employed Ratio
Year ( Rs’ in 000) ( Rs’ in 000) (In %)
2004-05 223697 542367 41.24
2005-06 190518 593448 32.16
2006-07 212461 684272 31.09
2007-08 190518 641908 30.56
2008-09 223697 911356 25.38

6. DATA ANALYSIS AND INTERPRETATIONS

6.1 RETURN ON INVESTMENT

A performance measure used to evaluate the efficiency of an investment
or to compare the efficiency of a number of different investments.

Return on Investment = Operating Profit / Capital Employed*100

TABLE 6.1.1 RETURN ON INVESTMENT

44
 FIGURE 6.2.1 RETURN ON INVESTMENT

INFERENCE

The ratio was highest in the period 2004 – 2005 and it shows a
decreasing trend. The efficiency of making investments is decreasing due
rapid change in market conditions

45
 Net
profit(after
tax) Sales Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in %)
2004-05 190826 1396056 13.67
2005-06 137702 1577811 8.73
2006-07 168861 1796733 9.40
2007-08 89408 1810234 4.94
2008-09 28936 1913481 1.51

6.2 NET PROFIT RATIO

Net Profit ratio is used to measure the overall profitability and hence it is very
useful to proprietors. The ratio is very useful as if the net profit is not
sufficient, the firm shall not be able to achieve a satisfactory return on
its investment. Net Profit Ratio = (Net profit / Net sales) × 100

TABLE 6.1.2 NET PROFIT RATIO

46
 FIGURE 6.2.2 NET PROFIT RATIO

INFERENCE: The net profit ratio was highest in the period 2004 – 2005
and it shows a decreasing trend. The efficiency of making profits is declining
may be due to stiff competition.

6.3 OPERATING RATIO

A ratio that shows the efficiency of a company's management by comparing

operating expense to net sales. The formula is

TABLE 6.1.3 OPERATING RATIO

Operating Cost Sales Ratio

Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 1208336 1396056 0.87
2005-06 1345290 1577811 0.85
2006-07 1595855 1796733 0.89
2007-08 1609812 1810234 0.89

47
 2008-09 1718949 1913481 0.90

FIGURE 6.2.3 OPERATING RATIO

INFERENCE

The operating ratio is been kept in stable and the management is

following effective measures to have operating cost under control for last
three financial years. Since operating ratio is high in last three years the profit
during these years will be less.

6.4 EXPENSES RATIO

The ratio can be calculated for individual items of expense or a group of

items. [Expense Ratio= (Total expense / Net sales) × 100]

TABLE 6.1.4 EXPENSES RATIO

48
 Total
Expenses Sales
Year ( Rs’ in 000) ( Rs’ in 000) Ratio (in %)
2004-05 1294490 1396056 92.7
2005-06 1426668 1577811 90.4
2006-07 1706618 1796733 94.9
2007-08 1730750 1810234 95.6
2008-09 1888227 1913481 98.6

FIGURE 6.2.4 EXPENSES RATIO

INFERENCE

The expenses ratio shows unstableness’ and in 2008-09 it is very high.

The cost of raw materials and other cost of production might be increased.

49
6.5 CAPITAL TURNOVER RATIO

Capital turnover is used to calculate the rate of return on common equity,

and is a measure of how well a company uses its stockholders' equity to
generate revenue. The higher the ratio is, the more efficiently a company is
using its capital.

Formulae = (Sales / Capital Employed)

TABLE 6.1.5 CAPITAL TURNOVER RATIO

Capital
Sales employed Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 1396056 542367 2.57
2005-06 1577811 593448 2.66
2006-07 1796733 684272 2.63
2007-08 1810234 641908 2.82
2008-09 1913481 911356 2.10

FIGURE 6.2.5 CAPITAL TURNOVER RATIO

INFERENCE

The capital turnover ratio is more stable and it reveals that the
management is making utilization of capital which is been employed in
business.
50
6.6 FIXED ASSETS TURNOVER RATIO

Fixed assets turnover ratio is also known as sales to fixed assets ratio. This
ratio measures the efficiency and profit earning capacity of the concern.

Formulae = Sales / Fixed Assets

TABLE 6.1.6 FIXED ASSETS TURNOVER RATIO

Sales Fixed Assets Ratio

Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 1396056 554908 2.52
2005-06 1577811 598588 2.64
2006-07 1796733 703987 2.55
2007-08 1810234 854171 2.12
2008-09 1913481 955219 2.00

FIGURE 6.2.6 FIXED ASSETS TURNOVER RATIO

INFERENCE

The Fixed assets turnover ratio is declining and it reveals that in recent
years the efficiency of utilization fixed assets is declining.

51
6.7 WORKING CAPITAL TURNOVER RATIO

Working capital turnover ratio indicates the velocity of the utilization of net
working capital. Following formula is used

[Working Capital Turnover Ratio = Cost of Sales / Net Working Capital]

TABLE 6.1.7 WORKING CAPITAL TURNOVER RATIO

Working
Sales Capital Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 1396056 250148 5.58
2005-06 1577811 350999 4.50
2006-07 1796733 400983 4.48
2007-08 1810234 381610 4.74
2008-09 1913481 373900 5.12

FIGURE 6.2.7 WORKING CAPITAL TURNOVER RATIO

52
INFERENCE

The Working capital turnover is fluctuating and it reveals that in recent

years the efficiency of utilization working capital has is increasing.

6.8 FIXED ASSET TO NET WORTH RATIO

The ratio indicates the extent to which proprietor’s (shareholder’s) funds are
Fixed Assets Net worth Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 554908 974663 0.57
2005-06 598588 1054776 0.57
2006-07 703987 1166050 0.60
2007-08 854171 656933 1.30
2008-09 955219 667349 1.43
sunk into fixed assets. This will indicate the long-term financial soundness
of business. Fixed Asset to net worth Ratio = Fixed Assets/Proprietor’s Funds
(i.e., Net Worth)

TABLE 6.1.8 FIXED ASSET TO NET WORTH RATIO

FIGURE 6.2.8 FIXED ASSET TO NET WORTH RATIO

53
INFERENCE: The fixed assets relationship with net worth is steadily
increased in current year when compared to previous years and it reveals that
in recent years the company is gaining good financial soundness.

6.9 FIXED ASSETS TO LONG TERM FUNDS

This ratio helps to find the relationship between fixed assets utilized with the
amount of capital employed

Formulae = Fixed Assets / Capital Employed

TABLE 6.1.9 FIXED ASSETS TO LONG TERM FUNDS

Capital
Fixed Assets Employed Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 554908 793338 0.70
2005-06 598588 966728 0.62
2006-07 703987 1162892 0.61
2007-08 854171 1296703 0.66
2008-09 955219 1370429 0.70
54
 FIGURE 6.2.9 FIXED ASSETS TO LONG TERM FUNDS

INFERENCE

The fixed assets relationship with long term fund shows there was a
decrease as well as increase in current year when compared to previous years,
which indicate a positive relationship.

6.10 FIXED ASSETS TO CURRENT LIABILITY

This ratio helps the relationship of fixed assets towards current liability.
The solvency position at times of liquidity can be identified

Formulae = Fixed Assets / Current Liability

TABLE 6.1.10 FIXED ASSETS TO CURRENT LIABILITY

55
 Current
Fixed Assets Liability Ratio
Year ( Rs’ in 000) ( Rs’ in 000) ( in times)
2004-05 554908 238587 2.33
2005-06 598588 275947 2.17
2006-07 703987 337067 2.09
2007-08 854171 297237 2.87
2008-09 955219 233088 4.10
FIGURE 6.2.10 FIXED ASSETS TO CURRENT LIABILITY

INFERENCE

56
 The fixed assets relationship with current liability shows there is a good
improvement in the company’s solvency position. It can meet liability with its
internal funds. In 2008-09 ratio sounds good.

6.11 ASSETS UTILIZATION OF PLANT FOR PAST 20 YEARS

TABLE 6.1.11 BUILDING UTILIZATION

Percent
Asset value of
Asset Years (In ‘rs.) utilization( in % )
Building 1990-1995 7986124 21.10
Building 1996-2000 17263643 45.61
Building 2000-2005 7260560 19.18
Building 2005-2010 5339099 14.11
37849426 100

FIGURE 6.2.11 BUILDING UTILIZATION

INFERENCE

57
 The buildings are the place where production is been taken. In the year
1996-2000 more buildings were been acquired or build and the more
utilization of building done in the 1996-2000.

6.12 FURNITURE & FITTINGS UTILIZATION DURING LAST 20

YEARS

TABLE 6.1.12 FURNITURE & FITTINGS UTILIZATION

Percent
Asset value of
Asset Year ( in ‘rs) utilization( in % )
Furniture & Fittings 1990-1995 2260842 46.71
Furniture & Fittings 1996-2000 1376237 28.43
Furniture & Fittings 2000-2005 736538 15.22
Furniture & Fittings 2005-2010 466327 9.63
4839944

FIGURE 6.2.12 FURNITURE & FITTINGS UTILIZATION

INFERENCE

58
 The furniture and fixture are the common things present in the plant
which facilitate the production. In the year 1990-1995 more furniture’s were
been acquired and the more utilization was been done.

6.13 OFFICE EQUIPMENTS UTILIZATION DURING LAST 20

YEARS

TABLE 6.1.13 OFFICE EQUIPMENTS UTILIZATION

Asset Percent
value of
Asset Year ( in ‘rs) utilization( in % )
Office equipments 1990-1995 1224380 17.65
Office equipments 1996-2000 2456251 35.41
Office equipments 2000-2005 2092428 30.17
Office equipments 2005-2010 1163435 16.77
6936494
FIGURE 6.2.13 OFFICE EQUIPMENTS UTILIZATION

59
INFERENCE

The equipments are the common things present in the plant which
facilitate the production operations. In the year 1996-2000 more equipments
were been acquired and the more utilization was been done.

6.14 PLANT & MACHINERY UTILIZATION DURING LAST 45

YEARS

TABLE 6.1.14 PLANT & MACHINERY UTILIZATION

VALUE ASSET UTILIZED

ASSET YEARS ( IN ‘ RS ) (IN %)
Plant & machinery 1966-1970 2530556 0.43
Plant & machinery 1971-1975 2039639 0.35
Plant & machinery 1976-1980 8761873 1.49
Plant & machinery 1981-1985 10583791 1.80
Plant & machinery 1986-1990 25605285 4.36
Plant & machinery 1991-1995 89331140 15.22
Plant & machinery 1996-2000 223760350 38.11
Plant & machinery 2001-2005 105718120 18.01
Plant & machinery 2006-2010 118768013 20.23
587098767

FIGURE 6.2.14 PLANT & MACHINERY UTILIZATION

60
INFERENCE: The plant and machinery are the common things present in
the plant which facilitate the production operations. In the year 1996-2000
more Plant & machinery were been acquired and the more utilization was
been done.

6.15 DEPOT AND CORPORATE DEPARTMENT ASSETS

UTILIZATION

TABLE 6.1.15 CORPORATE ASSETS UTILIZATION

Value Percent of utilization

Assets ( in rs) (in %)
Building 12006417 14.70
Furniture & fitting 1849991 2.26
Office equipment 639785 0.78
Plant Machinery 66283099 81.13
Vehicles 923058 1.13
81702350

FIGURE 6.2.15 CORPORATE ASSETS UTILIZATION

61
INFERENCE

The plant and machinery is the major things present in the corporate
that facilitate the research and development. Plant & machinery was acquired
more and the more utilization was been done.

6.16 ASSET PERFORMANCE IN RELATION TO PRODUCTION OF

YEAR 2009

TABLE 6.1.16 ASSET PERFORMANCE IN RELATION TO

PRODUCTION

Plant production Asset value Production Asset Production

modules. (rs in‘000) ( rs in ‘000) ( in % ) ( in % )
Barking 52541 43212 54.231 55.891
Disc Pad 19568 19922 20.197 25.767
Clutch Facing 10447 4022 10.783 5.202
RBB 8701 3871 8.981 5.007
Brake pad 5627 6288 5.808 8.133
96884 77315 100 100

62
 FIGURE 6.2.16 ASSET PERFORMANCE IN RELATION TO
PRODUCTION

INFERENCE

It reveals that barking module and disc pad modules produces more
with assets available for making production and contributes more output to
the concern.

6.17 COMPARISON OF FIXED ASSETS WITH OPERATING COST

(i.e. repairs & maintenance)

TABLE 6.1.17 Assets Vs Operating Expense

Fixed Assets Operating Cost ( Repairs&

Year ( Gross Block) Maintenance)
2008-09 911356 49703
2007-08 641908 54287
2006-07 684272 47585
2005-06 593448 41623
2004-05 542367 38603

63
 FIGURE 6.2.17 Assets Vs Operating Expenses

INFERENCE

The above details depicts clearly that additions in gross block of assets
naturally decreases the operating cost of production such as main expenses of
assets that is repairs and maintenance.

6.18 GROWTH OF ASSETS AND TREND ANALYSIS OF ASSETS

VALUE INCREASE WITH 2002-2003 AS BASE YEARS.

TABLE 6.1.18 TREND ANALYSIS OF ASSETS

64
 Net Fixed
Assets
( Rs. in
Year millions) Trend Increase Of Assets
2002-03 548.14 100
2003-04 557.94 101.7
2004-05 544.62 99.38
2005-06 554.62 101.24
2006-07 598.59 109.2
2007-08 703.99 128.43
2008-09 641.91 117.1
2009-10 911.36 166.26

FIGURE 6.2.18 TREND ANALYSIS OF ASSETS

65
INFERENCE:

The trend analysis shows there is steady growth in value of assets over the
period of 2002-03 to 2009-10 and value of assets has attained to position of
166.26 millions

6.19 COMPARISON OF ASSETS VALUE ACQUIRED AND SOLD

TABLE 6.1.19 ASSETS VALUE ACQUIRED AND SOLD

Acquisition Sales
Year ( Rs in ‘000) ( Rs in ‘000)
2008-09 210084 6222
2007-08 294307 11882
2006-07 197983 20640
2005-06 120040 95
2004-05 91213 6378

FIGURE 6.2.19 ASSETS VALUE ACQUIRED AND SOLD

66
 INFERENCE

An asset acquisition implicates there is increase in demand for the

products produced and above table indicates every year addition of assets is
more than value of assets sold.

TABLE 6.1.20

Tota El
Categor Ele
l Co e La Matl MF O P& Q/ R& Wor
y % Bldg Equ FF OE QAD VEH
Cou mp Ins nd Hand D HS M M D ks
p
nt tl
Total 100 7,5 2,2
552 25 152 940 257 3 389 244 40 1,865 637 17 31 6 211
% 77 08
WDV
one 3,1
42% 119 1 63 332 236 - 231 678 229 8 787 356 5 10 4 105
rupee 64

Less
8
than 10K 11% 72 4 21 182 6 1 32 234 3 1 151 112 - 1 - 17
37
Balance
3,5 1,2
Record 47% 361 20 68 426 15 2 126 12 31 927 169 12 20 2 89
76 96
Categori
6
zed item 8% 361 - - 7 13 2 - 89 9 1 122 - - - 2 -
06
Still
2,9 1,2
pending 39% - 20 68 419 2 - 126 3 30 805 169 12 20 - 89
70 07

67
6.21 STATUS ON FIXED ASSET PHYSICAL VERIFICATION

ASSETs AS ON 30.09.2009 - PLANT 1

TABLE 6.1.21 STATUS ON FIXED ASSET PHYSICAL

VERIFICATION

Gross Depn. *Rs.in ‘000

Category % WDV *
Block * Res *

Total 100% 643,443 421,504 222,583

WDV one rupee 17% 107,394 107,392 2

Less than 10K 1% 5,171 3,074 2,742

Balance
83% 530,877 311,038 219,840
Record
Categorized
22% 139,880 99,549 40,331
item
Still pending 61% 390,997 211,489 179,509

FIGURE 6.2.21 STATUS ON FIXED ASSET PHYSICAL

VERIFICATION

68
 Category Gross
Depn.reserve WDV
block
Rs.in 000’ Rs.in 000’
Rs.in 000’
Clubbing of Asset 33,544 10,172 23,372
Other Plant 6,537 1 6,536
Traceable 414 198 215
Identified 99,260 89,063 10,197
To be scrapped 125 115 10

INFERENCE: The written down value of assets indicates the true value of
assets. The above data shows 61% of assets after process of physical
verification are still in pending to be categorized.

6.22 BREAKUP FOR CATEGORIESED ITEMS

TABLE 6.1.22 BREAKUP FOR CATEGORIESED ITEMS

69
 FIGURE 6.2.21 BREAKUP FOR CATEGORIESED ITEMS

INFERENCE

The categorized assets after physical verification implies how far the
assets is been clubbed and merged with other plants and assets to be scrapes
as it no more utilized in production process.

7. FINDINGS

• The Return on Investment ratio was highest in the period 2004 – 2005
of 41.24 and it shows a decreasing trend and current year it declined to
25.38.

70
• The net profit ratio was highest in the period 2004 – 2005 was 13.97
and it shows a steady decreasing trend.

• The operating ratio is been kept in stable and the management is

following effective measures to have operating cost under control.

• The expenses ratio shows unstableness’ and in 2008-09 it is very high

of 98.6%.

• The capital turnover ratio is more stable and it shows a slight decrease.
The capital turnover ratio was 2.10 in year 2008-09.

• The Fixed assets turnover ratio is declining and it decreased to 2 in

2008-09 from value of 2.12 times in previous financial year.

• The Working capital turnover is fluctuating and it reveals that in recent

years the value increased to 5.12.

• The fixed assets relationship with net worth is steadily increased in

current year to 1.43 when compared to year 2004-05 which had just
0.57.

• The fixed assets relationship with long term fund shows there was a
decrease as well as increase in current year when compared to previous
years.

• The fixed assets relationship with current liability shows a good

relationship and in 2008-09 ratio sounds good with 4.10 times.

• In the year 1996-2000 more buildings were been acquired or build and
the more utilization of building done in the 1996-2000.

71
• In the year 1990-1995 more furniture’s were been acquired and the
more utilization was been done.

• In the year 1996-2000 more equipments were been acquired and the
more utilization was been done.

• In the year 1996-2000 more Plant & machinery were been acquired and
the more utilization was been done.

• In barking module and disc pad modules produces more with assets
available for making production and contributes more output when
compared to other modules.

• The additions in gross block of assets naturally decrease the operating

cost of production such as main expenses of assets that is repairs and
maintenance gradually.

• There is steady growth in increase value of assets over the period of

2002-03 to 2009-10 and value of assets has attained to position of
166.26 millions.

• Every financial year addition of assets is more than value of assets sold.

• More assets are in pending list to be categorized in appropriate

category and to ascertain their true nature.

72
 8. SUGGESTIONS

The Rane Brake Lining Ltd can invest more in assets which give more
return in terms of production and as well which has high demand in market. It
is found that original equipment producing machineries yields high returns.
Thus by indentifying high return yielding assets and having a complete record
over them would facilitate a good maintenance over such classified assets.
The unutilized assets can be removed from asset registers after making a
complete verification which would facilitate tax advantage and must be
cleared as soon as possible when it is known that those assets would not
contribute to production. Periodic verification of high value assets should be
done in regular intervals which would reduce heavy burden in regular routine
of organization work. New capital assets must be purchased according to
increasing demand of products. A good asset tracking of system should be
adopted and must be used over a long period of time. Capital purchase of
assets must be done periodically and it should be purchased in a manner that
it caters the increasing demands.

From the financial position of the Rane Brake Lining Ltd is observed
that return on investment is not satisfactory throughout all the years, there
was a too much fluctuation in the percentage of return on fixed assets so the
company should try to decrease the fluctuations, for that the management
should concentrate on increasing its operating profit.

73
 9. CONCLUSION

After analyzing the financial position Rane Brake Lining Ltd and
evaluating its Assets productivity by Trend Analysis and Ratio Analysis,
the following conclusions are drawn from the project preparation. The study
of asset productivity emphasis that RBL has good return on its investment
over assets. The physical verification of assets as per asset registers in the
company emphasis to know whether all the registered assets have physical
existence. The physical existence of assets ensures the company makes
utilization of all available assets. The capital assets performance and its
utilization emphasis how necessary it is to spend over its maintenance to
avoid frequent repairs.

The production of company is related with the plants and machinery

which is been utilized. RBL employs high value assets in areas where high
demand occurs. Periodic maintenance and tracking of all assets through good
asset management procedure, the RBL could have better and efficient control
over its assets in forthcoming years. From the above study it can be said that
the Rane Brake Lining Ltd Financial position on assets is quite satisfactory
and in terms of tracking over assets existence additional measures need to be
taken.

74
75