WORKING CAPITAL MANAGEMENT OF HERO MOTOR CORPORATION Rajesh Saha (U409024) Rabi Narayan Mohanty (U409023) Hitanshu Sahu

(U409009)

WORKING CAPITAL CONSTITUENTS: HERO HONDA MOTORS LTD

Negative working capital

The working capital of the company is negative Current liabilities of the company are more than the current assets of the company. The reason behind this is that at any given point of time the amount blocked in creditors is more than the amount blocked in its current assets, mainly in the inventory cash and debtors.

No short term bank borrowings

There are no short term bank borrowings taken by the company to finance the current assets of the company. Current assets of the company are finance by the credit deferral toward its creditors.

The current ratio of the company is very low which indicates that the company is following aggressive policy. Under this policy the company does not have the short term liquidity but the amount blocked in the net working capital is Lower current ratio zero which gives the company more profitability.

USE OF INVENTORY CONTROL TECHNIQUE

JUST IN TIME - control inventory on the shop floors.
Using JIT, company are able to reduce the handling cost which means when the raw materials are needed for the input at that time only the inventory are brought down on the job floor.

supply chain management system , company directly send finished goods to the customers so again it reduces the handling cost of the finished goods.

Using supply chain management system, the

company also reduces the time of converting raw material into finished goods and then selling it to end customers.

DEBTORS - DEALERS

Company uses focused system called DEALERS MANAGEMENT

SYSTEM, and this is an online network system through which the company is directly related to their dealers all over the INDIA. For example when any dealers are in shortage of the products then the demand is directly sent to the company so the time gap is reduced in placing the order and then receiving the order. DMS system also helps in receiving the money from debtors on time, as debtors get aware when they have to pay to the company and it also helps in determining the discounts availed in different order of lots of goods.

USE OF CREDIT DEFERRAL POLICY AS FINANCING ALTERNATIVE AND ALSO BANK CREDIT

Many companies finance their working capital by the

deferral policy of credit or by bank credit. Using deferral policy many companies are able to manage their working capital at very low cost. Use of bank credit is very old system but thing which matters is how they use their credit system in managing working capital. Companies try to pay their debts as late as possible through which they can use their credit period in managing working capital which also not affects their goodwill in the industry.

DECENTRALISED CASH MANAGEMENT SYSTEM

Collection of money from dealers or other debtors is a big problem for the company these days in any industry. In the last two years many companies have decentralized their system in collecting the cash from the debtors. By this system many companies have reduced their cost of collection from their debtors and even they have increased the working capital of the company.

OPERATING CYCLE ANALYSIS FINANCIAL ANALYSIS

There has been a constant decline in the raw materials conversion period, predominantly due to :1) Good vendor management system 2) Just in time ( JIT ) 3) E-Kanban system

Work in process conversion period

Hero Honda has a low WIP Conversion period of .72 days due to its high technological know how as it has a collaboration with the Honda company, Japan.
Their operational efficiency and their e-kanban system is in place.
They use the JIT system and all this decreases their WIP conversion period.
OUTCOME There has been an increase of 11.2% in the sales of hero Honda but the overall figure has changed from 3000751 to 3336756 so the absolute figure is very large so to change the work in process into finished goods at a fast pace was very important in case of hero Honda.

 In the case of hero Honda ltd the FGCP is 2.4 which is vey less as compared to the industry. The reasons are their better relationship with their dealers, better network and the CRM and SCM in place.

The trend is the same across all the companies as there has been a sudden increase in the prices of raw materials( steel, nickel and aluminium ) and thats why the receivables are increasing throughout the industry. As they want to have better relationship with their creditors.

Finished goods conversion period

Debtors conversion period

The hero Honda is cashing on the better relationship with their suppliers and the cash discount they give, they are capitalizing on that.

Creditors deferral period

RATIO ANALYSIS
Current ratio and quick ratio: it is the ratio of the current

assets to current liabilities. In the case of Hero Honda it is low, showing the aggressive polices the Hero Honda is following and the same case is with the Bajaj but in case of TVS it is increasing as they have a conservative approach.

Inventory turnover
In the case of Hero Honda we see a gradual increase in the

inventory turnover Better percentage increase in the sales of Hero Honda and also the raw material costs as a percentage of total sales increase from 69.5% to 72.5% i.e. a increase of 3%.

Inventory Holding Period

There has been a constant decline in hero Honda. As their conversion of inventory is better because of their efficient operations and their JIT and SAP in place whereas in case of TVS it is increasing because they have a conservative approach and they keep a high level of safety stock.

Debtors turnover
Last three years trend depicts decreasing statistics as Hero Honda has dealer management system where they sell their product to the dealers and then the dealers sell it to the consumers.

Current assets to fixed assets ratio

This shows what kind of policy we are following a high ratio

shows conservative approach whereas a low ratio shows aggressive approach Hero Honda and Bajaj auto ltd. have high ratio: A aggressive approach whereas in TVS have low ratio: A conservative approach.

VENDOR MANAGEMENT SYSTEM

It is information technology method which supports the process and management of acquiring the inputs or raw materials from the suppliers. Tasks associated with vendor management are: Managing suppliers performance Negotiating with the suppliers Obtaining and evaluating quotes from suppliers The performance of supply management departments and supply management professionals is commonly measured in terms of amount of money saved for the organization.

JUST IN TIME
It is an integrated set of activities designed to achieve highvolume production using minimal inventories of raw materials that arrive at the workstations exactly when they are needed. JIT helps in avoiding waste, machine downtime and it also keeps proper check on the quality aspect of the inventory.

ENTERPRISE RESOURCE PLANNING:

ERP is software which integrates the different functions in the organizations. It eliminates the need to obtain different applications for each of the business needs.

SUPPLY CHAIN MANAGEMENT:

it is a technique in which the idea is to apply a total systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customers.

DEALERSHIP MANAGEMENT SYSTEM

This is a program which manages the entire dealer of the company which improves the communication level between dealers and the company and it also reduces the cost of handling them

IMPLICATIONS IN THE COMPANY

IT has a direct online network with its suppliers to ensure a seamless flow of parts from vendors to its units. Through vendors management system HERO has reduces it manufacturing and processing cost from to 1.74% to 1.64%. To improve the efficiency and inventory cost, it is also using the concept of JUST IN TIME beyond the shop floors.
With the help of vendors management HERO uses only the required inventories which is to be processed as to avoid the inventory cost on the shop floors. Through this concept the raw materials can be properly checked on the aspect of quality the company is also able to reduce the handling cost of inventory on the job floor. The implications of vendor management system in HERO, has increased the total numbers of vendors to 135 from 46 and in the same time the ordering cost and handling cost have also decreased which in the end affecting the companys working capital. The company places online order to the suppliers which is reducing the time gap taken in supply of raw materials. HERO also uses the enterprise resource planning which is SAPR/3 through which it is able to integrate its different functions inside the organization. Using the ERP System, Honda was easily able to implement the new system of VAT when it was implemented by Haryana government, without much investment in its financial system.