Financial Policies of Lucky Knits Pvt Ltd

Financial Policies of Lucky Knits Pvt Ltd10

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Financial Policies of Lucky Knits Pvt LtdSubmitted To: Kamran Rabbani Submitted By: Ghansham Kessani Daryl Anthony Khizer Moosvi

LETTER OF TRANSMITTAL

SIR KAMRAB RABBANIProf. Introduction to Business FinanceInstitute of Business Management

Respected Sir,

We are submitting here the Term Project of IBF given to us on the topic Financial management policies of Lucky Knits Pvt Ltd. The research on this report has provided us extensive knowledge of our course concepts as well as its implementation in practical world. We believe that the report will be in accordance with the guide lines provided for its preparation.The following report has prepared us for the financial practices operated in industries and strategic implementation of almost all the topics of our course which will help us to a greater extent in our future professional careers. We owe gratitude to the Finance Manager of Lucky Knits, Mr. Shiraz Mahmood for providing us with the information and giving us precious time

We are thankful to you for your assistance in making this report. If you have any queries regarding the report we will be obliged to discuss it with you at your request. We will be grateful if you provide us with suggestions to improve our study.

Yours sincerely,Ghansham KessaniDaryl AnthonyKhizer Moosvi

INTRODUCTION -LUCKY KNITS PVT LTD

Lucky Knits is a private limited company. Itis a latest addition to Yunus- Karims Group of companies and was established in 2004. A totally vertical facility for knit garments with an initial installed capacity of 800,000 lbs. a month and phase II scheduled for June 2006 for 2 million lbs a month capacity. They are one of the largest vertically integrated companies manufacturing a variety of fabrics and products.

INDUSTRY ANALYSIS COMPETITIONCompetitors: -In textile market, there are a lot of competitors of lucky knits. But lucky knits had a powerful brand image in market. Its due to the YUNUS BROTHERS because it is a largest conglomerate in Pakistan. Competitors of Lucky knits are: -The little Knit kit CompanyPure HandknitRowan BerrecoSt John Draper Kniting. OUP VIEWGROUP VIEWYunus Brothers Group ("YB") was founded in 1962 as a commercial exporter of cotton yarn to far-east countries under the dynamic leadership of late Mr. Abdul Aziz TabbaYB consists of nine companies with an annual turnover of over USD 800 million with export sales accounting for over 68% of annual turnoverYB is a leading textile house and is engaged in diverse aspects of textile manufacturing consisting of spinning, weaving, processing, finishing and stitchingBesides playing a leading role in textile, YB has diversified its activities and owns the largest cement manufacturing plant in the country with a production capacity of 7.5 million tons per annumYB received more than 20 export trophies from the Government of Pakistan, including one for the highest overall exports and another for the highest exports in the Textile sectorYUNUS BROTHERS (YB)

Yunus Brothers is the flagship company and trading arm of the group which was formed in 1962 by Chairman (Late) Haji Abdul Aziz Tabba. Starting as a small commercial Exporter of Yarn and Grey Cloth to Far Eastern countries, the company developed rapidly and expanded its Exports to Europe and USA also. Yunus Brother Group is recognized internationally in the world of Textiles and enjoying a strong reputation in respect of consistent quality, reliability and superb customer services. The YB Group is engaged in diversified manufacturing activities including Textile Spinning, Weaving, Processing, Finishing, Stitching, Trading, Cement Manufacturing and Power Generation. The Group consists of the following industrial units:

1. Lucky Cement Limited

2. Gadoon Textile Mills Limited

3. Fazal Textile Mills Limited

4. Yunus Textile Mills Limited

5. Lucky Textile Mills

6. Lucky Energy (Private) Limited

7. Lucky Knits (Private) Limited

8. Royale Linen New Jersey - USA

9. Security Electric Power Company Limited

10. Lucky Paragon Ready Mix Limited

11. Yunus Energy Limited

The YB Group is not only a partner in the economic development of the country, but also a well-wisher who believes in the highest ideals of Corporate Social Responsibility. The YB Group has established Aziz Tabba Foundation which is engaged in a number of social welfare activities for the benefit of poor and needy people. The projects sponsored by the Group include:

1.Tabba Heart Institute, Karachi

2.Aziz Tabba Dialysis Centre, Karachi

3.Women & Children Hospital Ghazni Khel

4.Lucky Welfare Dispensary, Pezu

Yunus Brothers Group:Yunus brothers Group (YB) was initiate its operations in 1962 as a commercial exporter of cotton yarn to a number of Far East countries whilst being an active member in the international trading of numerous commodities.

Fazal Textile Mills LimitedFazal Textile is a spinning mill with over 65,000 installed spindles that produce 100% Grey cotton ring spun yarn and a wide range of Blended and Heather yarns.

Gadoon Textile Mills LimitedThe first of only two mills in the world which started producing compact core spun yarn, the Gadoon Textile Mills house 194,392 installed spindles producing high quality compact yarn, murata jet spinning yarn, core spun yarn and 100% Grey cotton ring spun yarn.

Lucky Cement LimitedLucky Cement is the largest Portland cement producer in Pakistan that has a capacity of 7.75 mtpa. It has a dry process technology that runs on 100% coal firing system.

Yunus Textile Mills LimitedA complete vertically integrated textile mill that incorporates state-of-the-art machinery which employs the processes of weaving, printing, dyeing and finishing. With a subsidiary branch in New Jersey USA by the name of Royale linens, it is the largest exporter of home textiles from Pakistan.

Lucky Energy (Pvt) LimitedA NEPRA approved captive power unit that supplies uninterrupted power to Fazal Textile Mills and Lucky Textile Mills with a generation capacity of 17.60MW.

Aziz Tabba FoundationIncorporated in 1987, it is a platform where various humanitarian projects in the fields of health, education and housing have been initiated. It provides steadfast financial support to Aziz Tabba kidney center as well as the Tabba Heart Institute.

Aziz Tabba Kidney CenterState-of-the-art health and laboratory facilities are available which provide dialysis facilities at exceptionally subsidized rates, treating patients without any discrimination whether it is financial or otherwise. The center has also invested in 24 dialysis machines that are present, catering to an average of 100 dialysis procedures a day, working round the clock.

Tabba Heart InstituteThe institute is a highly modern 120 bed hospital which has treated more than 30,000 patients since its inception. It includes clinical laboratory services and satellite outlets throughout the city.

COMPANY PROFILE

Lucky Knits Pvt Ltd A strategic global player with core businesses in textile and commercial, industrial and residential real estate

A debt free corporation with aggressive investment projects in Pakistan.

A socially responsible company, striving to serve our business partners, communities and collaborators.

A service company, with manufacturing and technological capabilities

Established in Year 2001 under the umbrella of Yunus Brothers, the plant has grown over the last ten years to be one of the prominent Garment exporting houses in Pakistan.

Are one of the few company which have a vertical infrastructure starting from Spinning to finishingMISSION STATEMENTMission of Yunus Brothers:To provide our customers with products and services of a higher quality and value, promptly catering to their needs with efficiency and honesty, making them our partners and allies. In turn, they will reward us with leadership in sales, generation wealth and prosperity for our employees, associates, shareholders and the communities that we serve.

Vision of Yunus Brothers:To be leaders in our core business, Textiles and Real Estate, by providing added value for the products and services we offer and always exceeding our customer's expectation.

Mission of Lucky Knits Pvt LtdTo provide unrivalled quality and assurance to all our customers by employing techniques that serve both our internal and external environments with most economical of prices with 100% on time deliveries.

Vision of Lucky Knits Pvt LtdTo be recognized as the best knitted garment manufacturing in the World Whilst providing a socially responsible commitment to the environments we invest in.

OBJECTIVEWe believe in forging long-term relationships with our customers and our employees. Our main goal is delivering our customers superior customer service by catering their needs with efficiency and honesty as well as making allies in every business opportunity.

We believe in excellence: we strive to exceed our customer's expectations. We believe in sharing and nurturing the development of the communities in which we have operations. We believe that people are the most valuable resource we have. We pride ourselves in developing core capabilities striving to be a partner and success factor for our customers and clients.

SWOT ANALYSIS OF THE COMPANY

STRENGTHS: (capabilities of the company)

Extensive and inside local - global market knowledge.

Strategic alliances with corporations in the supply chain - access to technology and innovation.

Powerful group of companies, mainly because of established name

In-House logistics - lowering transportation costs to balance economies of scale.

Debt free corporation

Vertically integrated operations.

Strong financial position

Incentives and promotional opportunities to employees and workers

Recently captured ICI

WEAKNESSES:

Low Advertising and Less Exposure.

Dependency on cotton yarn

Low Gratuity and PF funds.

Increasing General & Administrative Expenses

OPPORTUNITIES:

Less competitors

Demand for cotton yarn in Gulf region

Less freight charges for export of cotton yarn

Expansion in textile industry due to loans by bank and support of umbrella companies

Advancements in technology.

Interest loan from Bank Al-Habib at low cost may be an effective tool for competing in market

THREATS:

Government Regulations on process cycle

Price Competition- price of raw material

Alliance Opposition

Environmental factors of Pakistan ( energy crisis and political unrest )

Labor Union problems lack of man power

Modular production- in chain form

Cost threat in international market

Financial Management PoliciesWorking Capital Management

Working capital managementinvolves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. It consists of three main approaches which are as following:1. Aggressive approach: Using short term notes to finance the working capital2. Conservative approach: Using long term loan to finance the working capital3. Hedging approach: Using short and long term finance against the working capitalWhen we interviewed the finance manager asking him about the approaches, he answered that since the company has a stable business and an established umbrella company although not as large as huge brands or renowned mills and industries, thus they use the aggressive approach which tells that they risk more in order to generate more change either profit or loss depending on the performance of the business. The main eye of the company is on exporting its products and incurring profit with quality service. So that they make sure that they dont have to face losses as they previously had more risky investments which led to losses in two consecutive years (2009). They now try to reduce risk elements. For these reasons the financial manager and staff devote a considerable portion of their time to working capital matters. The management of cash, marketable securities, accounts receivable, accruals, and means of short term financing is the direct responsibility of the finance manager, except managing inventories. It finances through equity, bank borrowing and lending via various sources. Their hedging approach consists of booking foreign exchange currency, receipt invoices in foreign currency and investment in stock market. It is discussed in detail in receivable management.The manger also told us that if working capital is not managed properly, it will effect directly on the companys returns and share price. Similarly the company has to safeguard its fixed assets as well which will be discussed below.

Current/Fixed Assets Management

As truly said,

Procedures should be such that if expensive equipment is removed, it will be missed within a reasonable time, and some record will exist as to who had access during that period.Raymond H. Peterson, Accounting for Fixed Assets, 2nd ed. (New York: John Wiley and Sons, 2002)The best practices help to seek out potential savings in companys fixed asset base and save time in the process. These are the guides of the company: Establish an accurate baseline of fixed assets Select the right tool for the job Rely on accurate depreciation calculations Stay up-to-date with legislative changes Produce targeted financial reports Get trained on the system you employ The manager also told us that they purchase high level of fixed assets. The trade cycle of the company is of 120 days i.e. 3 times a year. It wholly includes the collection of yarn, spinning, dyeing, apparel work, making of products (finishing) and their sale. In short it consists of the activities involved from production to exporting the yarn. Therefore the company requires high level of fixed assets to yield greater output. The manager also told us that this leads them to finance their loans from banks (if borrowed) and generates enough funds for other miscellaneous expenses. Depreciation is charged using the reducing balance method. The whole trade cycle also requires current assets, but investment is a little greater in fixed assets comparatively. This tells that the company has low liquidity high profitability and high risk. The purchase of firms fixed assets are determined by its scale of production. Disposal of asset is recognized when significant risk and rewards incidental to ownership have been transferred to buyersThe permanent current assets are the minimum amount of current assets required by the company to maintain its operations. The major assets on the banks balance sheet are long term loans, advances, stock in trade, secured trade debts, cash and loans from associated companies.Cash Management / Inventory Management

Cash management is not the core job of the company. The company keeps minimum cash balance and it also has marketable securities and investments to replenish cash in times of urgency. 80% of the purchase of raw material is local so they maintain safety stock to keep the production in flow throughout the year without hindrance of environment and prices. They follow FIFO inventory system.CONSIDERATION BANKING:We asked the manager about consideration banking and the system used by them. The manager replied that they use London international banking standards. The funds are transferred via eFunds transfer as the money is efficiently transferred abroad and received here. Their main business is exporting outside Pakistan. Thus they rely on Bank Al-Habib. Being old customers and project of established group, Bank Al-Habib has provided them with certain rates according to KIBOR (Karachi Interbank Offered Rate). Other option for generating cash is discounting of receivable bills from Bank Al-Habib. Since their operations are concerned with customers outside Pakistan, they have sales in dollars and the difference in currency rates gives them the advantage. Also, the company uses indirect cash flow method. Investments in marketable securities

All the purchases and sales of securities that require delivery within the frame established by regulation or market convention such as T+2 purchases and sales are recognized at the trade date. Trade date is the date on which the company commits to purchase or sale of assets. 50% investment is by YB. AT&A (American textile and apparel) is the major buyer.The management determines the appropriate classification of the investment made by the company in accordance with the requirements of International Accounting Standards (IAS). It classifies its investments in the following categories:Financial assets at fair value through profit and lossInvestments that are acquired for the purpose of generating profit from short term fluctuations in prices are classified as financial assets at fair value through profit or loss held for trading. These investments are marketed to market. Net gains and losses arising from these are then taken to the profit and loss account.Held to maturity investmentsInvestments with a fixed maturity where the company has the intent and ability to hold to maturity are classified as held to maturity investments. These are carried at amortized cost using effective interest rate method.Available for sale investmentsInvestments intended to be held for an indefinite period of time, which may be sold in response to the needs for liquidity or changes in market prices are classified as available for sale.net gains and losses arising on change in fair values of these investments are taken to the other comprehensive income. When these securities are disposed off or impaired, the related fair value adjustments previously taken to equity are transferred to profit and loss account.Receivable Management

Lucky Knits is an Exporting company. The credit policies for customer are 75 to 180 days. Polices for supplier are 45 to 75 days, collections made by bank in time due to transaction in LCs. Trade cycle is 120 days. The receivables are recognized at original invoices less an allowance for uncollectible amounts. An estimate is made when collection of full amount is no longer probable. The mode of transfer is through cheque and LCs. All the payments and receivables abroad are dollar based. The main banking system used by them is Bank Al-Habib. The interesting point is that when the company requires funds for its operations, it gets these bills discounted by Bank Al-Habib. The export invoices are discounted at 0.25%. This is the way they use hedging approach. They dont take payments from the banks on the spot, instead they negotiate with the bank at some rates lets say they will take the money of all the receipts not at the current prevailing rate but after 3 months at Rs 108 per dollar. Basically they hedge in order to insure themselves against a negative event.Credit risk:

The companys overall risk management focuses on the unpredictability of financial markets. Credit risk is the risk that one party will fail to discharge an obligation and cause other party to incur financial losses. It arises when a number of financial instruments or contracts are entered into with the same party, or when the counter party is engaged in similar business activities. Concentration of credit risk indicates that relative sensitivity of the companys performance to development affect a particular industry.Operating and Financial Leverage: interest cost loans

The main duties of the manger are: the allocation of Funds & to manage treasury account Keeping debt information about debtors Maintain liquidly & inventory position Operating Leverage is a measurement of the degree to which a firm or project incurs a combination of fixed and variable costs.Financial leverage: The degree to which aninvestororbusinessis utilizing borrowedmoney.Companiesthat arehighlyleveragedmay beat riskofbankruptcyif they are unable tomakepaymentson theirdebt; they may also be unable to find newlendersin thefutureA business that makes many sales, with each sale contributing a very slight margin, is said to be less leveraged. As the volume of sales in a business increases, each new sale contributes less to fixed costs and more to profitability. The company maintains a leverage of 20 % (Operating) to 80% (financial). Lucky Knits uses intercompany lending as well as loans from Bank Al-Habib at negotiated interest rate. Interest rate is according to KIBOR. Lending is also taken from outside sources, thus this company is an American dependent organization. Financial Forecasting and Planning Budget

We asked the manager: How does the company make budget for future forecasting? What is the main variable responsible for fluctuation in the budget?Answer: like other knitting companies, Lucky Knits also focuses on planning for future targets and making budgets to estimate the costs and expenses to be incurred by the company, and also purchase of assets and funds for their purchase. Lucky Knits policy for making budget forecasting focus on following points:

Financial targets, including revenue, margin, profit, cash flow (indirect method), and debt levels.

Operating targets and key performance indicators, including inventory turns, product and service quality, supplier effectiveness, sales closing rate, and customer satisfaction.

Main variable: Yarn in Raw material and Labor wages and incentives.Review:

It has kicked off the second quarter of the ongoing fiscal with a strong performance. The top line touted growth of 14 percent compared to the same period of FY12Lucky knits needs to review its risk policies. It should concentrate on current asset management as wellThe strongest investment of lucky knits is in the discounting of bills at dollar rate and then hedging the foreign currency. As Bank Al-Habib is their main bank for carrying transactions, they are offered loans at nominal interest cost. They are benefitted from certain Intercompany lendings also @ 0% interest chargeThey have a stable receivable turnover which is 3 times a year. This shows that they have reliable and loyal customers. They have reduced stock out chances by maintain sufficient amount of safety stock and standardized cost accounting systemsBeing a part of already established name, it should concentrate on social projects from its own side.

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