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Why Our Company Is Not Getting The Results

By Marketing Research Team, 3EA
Why Our Company Is Not Getting The Results

Best Engines is a leading manufacturer in Engines. Its profitability is decreasing for last three years in spite of cost control. It is putting specific efforts in reducing working capital cost. Still profitability is not increasing. The participants are required to find out is it because of improper management of working capital or are there any other reasons leading to decreasing profit.

Summarised profit and loss account for the year ended 31st March

Rs. In lakhs

  2002 2001 2000
Total income 76324 83375 84325
Total Expenses 73585 79204 74895
PBT 2739 4171 9430
Tax 876 37 712
PAT 1863 4134 8718
Net Profit Ratio 2% 5% 10%


Balance sheet as on 31st March

Rs. In lakhs

Sources of funds 2002 2001 2000
Shareholder's Funds
Loan Funds
37131
10821
35080
11538
36650
16505
Total funds provided 47952 46618 53155
Application of funds 2002 2001 2000
Fixed Assets
Investments
Current Assets
Less Current Liabilities
Misc. Expenditure
13917
21229
30010
-17203
0
15316
18877
32553
-20128
0
16549
16314
41207
-20981
66
Total funds applied 47953 46618 53155


Cash flow statement for the year ended 31st March

  2002 2001 2000
Net Cash Generated from operations
Net Cash Generated from Investing Activities
Net Cash generated from Financing activities
Net increase/ (decrease) in cash
Opening cash
Closing Cash
5683
-2306
-3074
303
1228
1531
9050
-1251
-8161
-362
1590
1228
8068
3724
-13509
-1717
3307
1590


Mr. Satish Kane is a Manager - Finance in Best Engines Ltd. He has 6 years' experience in manufacturing industry to his credit. He is known for putting forth innovative ideas in financial decision making. He was responsible for working capital management of the company.

Best Engines Ltd., established in 1971 is a leading manufacturer in diesel engines. It produces three different types of engines

Small Engines:
up to 20hp which are used in farm machinery, gen-sets and construction machinery.

Medium Engines:
20hp to 30hp which are used primarily in tractors, power generation and material handling equipment.

Medium Engines:
20hp to 30hp which are used primarily in tractors, power generation and material handling equipment.

Best Engines was facing a tough competition from its competitors for the last 3/4 years. Adding to it, the recessionary conditions put pressure on the company's sales.

The profitability of the company is decreasing consistently in spite of strict cost control initiatives like self-empowered teams on manufacturing lines, value engineering etc. the net profit to sales ratio has come down from 10% in 2000 to 5% in 2001 and to 2% in 2002.

Mr. Vinay Kumar - Manager(Production) is of the opinion that profitability is reducing due to improper working capital management. He argues that current ratio has also decreased from 2.62 in 2001 to 2.34 in 2002.

However, Mr Kane strongly disagrees with the view taken by Mr. Vinay Kumar. In fact, working capital is one of the areas where company is putting its efforts to control the cost. One aspect was to minimise the investments in working capital by keeping working capital at minimum level. Secondly it is restructuring its working capital finances.

EXHIBIT 1

Profit and Loss account for the year ended 31st March

Income 2002 2001 2000
Sales and other operating income
Dividend, interest
Other income
74446
1062
816
79416
1081
2878
74480
1374
8471
TOTAL INCOME 76324 83375 84325
Expenditure
Expenditure
Material
Employee cost
Interest and Finance cost
Selling and other expenses
Depreciation
49867
8000
1532
11422
2764
53330
6606
2344
14113
2811
51419
6436
3794
10376
2870
TOTAL EXP 73585 79204 74895
Profit before tax
Provision for tax
2739
876
4171
37
9430
712
PROFIT AFTER TAX 1863 4134 8718
Net profit ratio 2% 5% 10%


EXHIIT 2

Balance Sheet as on 31st March
Rs. In Lakhs

EXHIBIT 3

Excerpts from Cash Flow Statements
Rs in lakhs

Desi MNC's

India today issue dated 13th October 2003 has an article titled "Desi MNC.s". Some of the important facts of the article have provided the base for the case developed below:

The year 2003 has seen the biggest ever rush for the Indian corporates acquiring foreign tags. 'Mergers and acquisitions service' of the 'Centre for monitoring the Indian economy' reports that in the first eight months of this year, Indian companies acquired 31 foreign companies. Every company is in it scouting for value proposition, to shift into higher gear, spending nearly 25 percent of its time on drafting acquisition strategies. Indian corporations are on a shopping spree. Armed with a strong rupee and an easy access to credit and spurred by a new confidence, they want to acquire new companies to gain access to brands, markets, technologies, assets and people. After six years of the downslide and the pain, they are going for the strategic shift to move beyond boundaries, to de-risk their growth strategy. International consultants say that by next year almost all fortune 500 companies will go for offshore outsourcing.

Videocon Chairman Venugopal Dhoot is shopping for capacities in motor compressors and glass shells and the strategy is to be the backbone supplier of components for consumer durable FMCG's worldwide.

Kumarmangalam Birla has acquired four companies including two copper mines in Australia and a manufacturing unit in China. His aim is to control much of the raw resource in the non-ferrous metal production and to blend Indian management skills with better technology to be globally competitive.

V.V. Burman of Dabur, India has acquired three companies to reach new markets. Wipro has acquired Nerve Wire to front end their consultancy expertise.

These are just some of the success stories that came through. An equal number of deals have either been dumped or lie stalled, even lost to their opposition. Anyone worth his MBA is working on some acquisition deal or another. No mistaking it for fashion, every player is in it for a value proposition. In fact, for the first time, private equity managers and investment bankers are chasing Indian companies. They believe Indian firms now have both mature managements and the requisite skills to turn around companies and be creators of wealth. Indian transnationals are taking their first adult step.

But the adolescence has not been easy, Indian companies have learnt the virtues of efficiency both in operations and in resource allocations. They do not part with their cash so easily.

Some argue that the acquisitions are low cost and puny. Overseas acquisitions still need permissions, despite all the talk of liberalizations of capital account. Some information has to be submitted to the government to take the permissions. The same information would be leaked out to the competitors or used profitably in the stock market.

Despite the handicaps the Indian Inc. is playing hardball, as serious players playing for the long term. They have the money. To quote Finance Minister Jaswant Singh, "Corporate India is sitting on over 40,000 crores in cash surplus." As Mr Ratan Tata says, "We must ensure that we are not dependent on India and expand beyond India." The Prime Minister Vajpayee may get used to being received by Indian tycoons in foreign delegations when he goes abroad.

The changing scenarios in various Indian markets are a challenge to the H.R. department to develop their manpower. What kind of Training and Development program would you recommend for the middle level managers of such Desi MNCs?

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Article by: Marketing Research Team, 3EA