Sunday, February 24, 2013

CMA- Part 2: Arithmetics

As you know, the CMA format was evolved or got evolved for the purpose of Working Capital Assessment. The idea is that the unit's figures for a year/ on a date in Company Act format (designed for the shareholders/tax authorities/ statutory requirements etc.) is to be transmuted to a format conducive to Bank Lending. The CMA is filled up and signed by the applicant's representative and is to be checked by us. That's convenient to the lazy DO but initially it's best to try to fill up a big and complicated report into the CMA form- may be Reliance This or That Ltd. or Infosys, just for the fun. The totals, that is size, of the BS will be different as in the earlier form, current liabilities are netted out of current assets. Classification will differ, for instance instalments of term loan payable next year are to be shown as CL in CMA, while in the statutory format, outside debt is either classified as secured or unsecured, noting to do with tenure. To a small extent, the classification will be subjective also. The three step assessment will start hereafter in the Assessment format. 

Nowadays the computer based package will generate ratios automatically but that implies that you are going by the subjective, or basically motivated classification of the company- they'll try to classify in order to inflate the current asset or understate the CL, or inflate the NWC. Best is to reclassify the CMA into a format that is used as a standard format and in our bank is often called the A form. The following two tables represent a company's P/L as per CMA and as per form A. The classification is the same as the CMA has also been filled in by the banker. 

Essentially, what has been done is that the topline has been converted from Sales to Production. Ratio analysis is to be done based upon Production based figures, as the total year's expenses on various heads including profit (operating) will add up to production, so that if you want to find RMC %, the '100' is the Production and not Sales. This is because on the one hand, some goods produced this year may be left unsold  and figure in BS as closing stocks, likely to be sold next year, i.e. will form not form part of this year's sales, whereas the expenses would be incurred this year. It could be the other way round also, goods produced last year, put in BS and sold this year.

In other words, given sales figure for say 2012-13, to arrive at production figures, one has to find out whether some goods produced but unsold in 2011-12 have been sold in 2012-13, in which case the production of 2012-13 will be less to 'that extent' than the Sales of 2012-13. It could be the other way round also. That is, some goods produced in 2012-13 may be left unsold, and the Sales will be less to 'that extent' than the Production.

The figure 'that extent'  is called 'Net Inventory' and is arrived at by deducting the red figures from the green ones. In the first case the NI will be negative , and in the second case, positive. It's represented here in yellow.

Operating Statement                                     
4 YEAR CONSEQ.                                       

Total Gross Sales112.15184.97281.50450.40
Less : Excise Duty
Net Sales (1-2)112.15184.97281.50450.40
Jobwork receipts
Total net Sales112.15184.97281.50450.40
Growth in sales65%52%60%
Cost of Sales
a. Raw Material (Imported )38.5063.53100.24161.10
b. Raw material (Indigenous)15.6125.0240.1065.51
c. Stores & Spares (Imported)0.601.201.562.00
d. Stores & Spares (Indigenous)0.400.500.700.90
Power & Fuel0.500.500.600.60
Direct Labour15.6325.7835.2359.55
Repairs and maintenance
Other Mfg. Expenses
Depreciation 3.003.755.256.00
Sub Total74.24120.28183.68295.66
Add: Opening Stock in Process0.
Sub Total74.24120.28183.68295.66
Deduct : Closing Stock in Process
Cost of Production 74.24120.28183.68295.66
Add: Opening Stock of Finished Goods0.0012.3018.4223.60
Sub Total74.24132.58202.10319.26
Deduct : Closing Stock OF Finished Goods12.3018.4223.6036.80
Sub Total ( Total Cost of Sales)61.94114.16178.50282.46
Gross profit50.2170.81103.00167.94
Gross Profit/ Sales44.77%38.28%36.59%37.29%
Selling Expenses8.226.009.0217.12
Administrative Expenses18.8628.7143.7870.66
Sub Total 89.02148.87231.30370.24
Operating Profit before interest 23.1336.1050.2080.16
a. Interest on CC.
b.Interest on TL
c.Other interests
Total Interest0.
Operating Profit after Interest23.1336.1050.2080.16
Other non operating Incomes
  a.Interest/Dividend/Royalties etc..
  b. Other Income
Sub Total0.
Deduct other non operating expenses
a.Interest/Dividend/Royalties etc..6.006.607.207.80
b. Other Expenses0.500.500.540.90
c.Intangibles written off  -1
Sub Total6.507.107.748.70
Net of other non operating Income/Expenses(6.50)(7.10)(7.74)(8.70)
Profit before Tax /Loss (PBT)16.6329.0042.4671.46
Provision for Taxes5.499.5714.0123.58
Net Profit/Loss (PAT)11.1419.4328.4547.88
Cash Accruals14.1423.1833.7053.88
Dividend paid + IT on Dividend5.0016.14
Retained Profit11.1414.4312.3147.88
26.a Transferred to Reserve11.1414.4312.3147.88


Net Sales112.15184.97281.50450.40
Net Inventory12.306.125.1813.20
PRODUCTION 124.45100191.09100286.68100463.60100
Raw material consumed55.6144.6890.7547.49143.2049.95230.1149.64
Direct Expenses15.6312.5625.7813.4935.2312.2959.5512.85
Admnistrative Expenses18.8615.1528.7115.0243.7815.2770.6615.24
Selling Expenses8.226.616.
Bank charges0.500.400.500.260.540.190.900.19
Net profit from operations16.6313.3629.0015.1842.4614.8171.4615.41
Other income0.
Other non operational expenses0.
Net profit before tax (11+12-13)16.6329.0042.4671.46
Net profit after tax11.1419.4328.4547.88
Carried to BS11.1419.4328.4547.88

Net inventory= ( closing FG+closing SIP ) less (opening FG+opening SIP )


Hereafter will be discussed why a ratio may have changed, whether it's for the good or worse, whether we can deduce anything from the changes, what needs to be done, or what other information is to be sought to protect our interest. For example when the RMC/Production ratio suddenly drops by say 20/30 %, it's likely that the unit is not getting its own orders and is doing job-work. The factors may be internal and external and you then need to personally check the stock statement against the unit's books, and you'll find that the goods never figured in the books, as they belonged to another company's books. Your loan is thus unsecured and irregular and you'd better do something.

We leave ratio trend analysis to the next post. 


Please try to formulate your responses to the following observations of the Statutory Auditor- it may happen to you this year:

(i) The stock statement of ABC Ltd. as on 31.03.2012 shows a  level of stocks that is different from that in the Audited Balance Sheet as on 31.03.2012. So, the account holder is indulging in manipulation...

(ii) If you deduct unpaid creditors from the stocks, the account will be short of DP and will be unsecured to an extent, maybe fully....

(iii) Account was technically irregular (outstanding exceeds DP) in otherwise good unit. Basically due to delay in granting enhancement. 90 day delinquency on 31.03.2013. However, before date of statutory audit, the the account is regularised by normal and healthy credits. Auditor asks you to classify it as NPA. 

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