Summer internship report_Vadilal

S U M M E R I N T E R N S H I P R E P O R T A T V A D I L A L I N D U S T R I E S L T D .

SUMMER INTERNSHIP REPORT

Titled

“FINANCIAL ANALYSIS”

OF

“VADILAL INDUSTRIES LTD”

Submitted after 2 months practical training as part of curriculum of PGDM

To

Som-Lalit Institute of Management Studies

Prepared by: - GAURAV PRAJAPATI

(Roll No:-40)


DECLARATION

This project report entitled “the functional study of WORKING CAPITAL MANAGEMENT

and Ratio-Analysis at VADILAL INDUSTRIES LIMITED, Prepared to submit SOM-LALIT

INSTITUTE OF MANAGEMENT STUDIES, AHMEDABAD AS THE PART OF PGDM

study, has been completed by me under the guidance of Mr. Milin J. Jani, Finance

Head and the entire staff member at Vadilal Industries Limited, Ahmedabad.

This project report is entitled an outcome of my an own efforts and it is not submitted

either in part or in whole to or copied from any project submitted to any other university

or institute for and other degree.

DATE: GAURAV PRAJAPATI

PLACE: (PGDM)


ACKNOWLEDGEMENT

Knowledge in itself is a continuous process. At this moment of my substantial

enhancement I rarely find enough words to express my gratitude towards those who

were constantly involved with me during my project and making it a success. Men

become good through practice than by nature.

I am grateful to Prof. Arpita Amarnani, faculty of SOM-LALIT INSTITUTE OF

MANAGEMENT STUDIES who created this opportunity to work on the project, i m also

thankful to Prof. Roopa Rao and all the faculty member of SOM -LALIT INSTITUTE

OF MANAGEMENT STUDIES.

I am highly obliged to Mr. Milin J. Jani, Finance Head at Vadilal Industries limited, for

allocating such an interesting and challenging project.

I am grateful to Mr. Ankur Patel (Dy. Finance Manager) at Vadilal Industries Limited,

who had guided me throughout the project with their vast knowledge of existing

system, inspite of being very busy; he was ready to help me whenever required.

The whole staff of finance department and all staff members of Vadilal Industries Ltd.

were highly co-operative and i am thankful for all the support they extended to me. I

would also like to thank my parents and all my friends who have helped me, though

indirectly, throughout the project duration and always have been a source of

encouragement.

DATE: GAURAV PRAJAPATI

PLACE: (PGDM)


PREFACE

“Yesterday is a cancelled check; tomorrow is a promissory note; today is a ready cash”,

this quote from Hubert Tinley expressed Working Capital Management. Working capital

is the excess of Current Assets over Current Liabilities. Decisions relating to working

capital and short term financing are referred to as Working Capital Management. These

involve managing the relationship between a firm’s Assets and its short term Liabilities.

The goal of Working Capital Management is to ensure that the firm is able to continue

its operations and that it has sufficient cash flow to satisfy both maturing short term debt

and upcoming operational expenses.

Working capital management is described as involving the administration of Current

Assets namely, cash and marketable securities, Receivables and Inventories and

administration of Current Liabilities, which includes Account Payables, Bank Loan and

other short term sources of finance. Current Assets flow through the firm. Inventory is

acquired and subsequently sold for cash or on credit. Accounts Receivables are

collected and the cash is used to acquire other income producing assets or to retire

debt. The cycle is then repeated as the firm acquires new inventory for sale.

Every entrepreneur would like to imagine himself in a situation where his production

process takes very little time to convert the input to the finished product which gets sold

immediately in cash the moments it rolls out of the process and the input market is so

perfect that any amount of raw material is available at any time at a fixed price. But the

entrepreneur’s dream is hardly realized. He finds, instead, that his production progress

takes quite long time; the finished goods are not sold so quickly which means a quantity

of stock remains in the stores. Moreover, the sales are not always in cash- some

amount of credit has to be given and the input market is so uncertain that he has to

keep a certain amount of safety stock all the time. Each and every current asset of a

firm is therefore nothing, but congealed fund for working expenses. And because

business is a continuous process, every cycle of operation generates these Current

Assets, which need to be funded for immediate financing of working expenses. All

organizations have to carry working capital in one form or another. The efficient

management of working capital is important from the view of both liquidity and

profitability.


TABLE OF CONTENT

PARTICULAR Pg. No.

Executive Summary 06

Objective of Study 07

Brief Introduction on Ice-cream Market of India 09

Brief Introduction on Vadilal Group of Companies 13

Research Methodology 32

Ratio- Analysis 36

Working Capital 54

Working Capital Management 64

Working Capital Cycle 66

Liquidity Analysis 71

Working Capital Facilities 76

Fund Based Facilities 77

Non-Fund Based Facilities 82

Working Capital Financing 85

Trade Credit 85

Working Capital Financing by Commercial Bank 86

Public Deposit 87

Inter corporate Deposit 88

Form of Bank Finance 89

Guidelines For Bank Finance 91

Conclusion 96

Recommendation 98

Limitation of Study 99

Bibliography 100

Annexure 101


EXECUTIVE SUMMURY

Financial Management decisions are divided into the management of Assets

(investments) and Liabilities (sources of financing), in the long-term and the short-term.

It is common knowledge that a firm's value cannot be maximized in the long run unless

it survives the short run. Firms fail most often because they are unable to meet their

working capital needs; consequently, sound working capital management is a requisite

for firm’s survival.

About 60 percent of a financial manager's time is devoted to working capital

management, and many of the potential employees in finance-related fields will find out

that their first assignment on the job will involve working capital. For these reasons, the

project of working capital policy and management given to me at Vadilal Industries Ltd.

will help me get the required practical experience on various management practices

involved in managing working capital of an organization.

Working capital policy refers to decisions relating to the level of Current Assets and the

way they are financed, while Working Capital Management refers to all those decisions

and activities a firm undertakes in order to manage efficiently the elements of Current

Assets. While Long-Term Financial Analysis primarily concerns strategic planning,

working capital management deals with day-to-day operations. By making sure that

production lines do not stop due to lack of raw materials, that inventories do not build up

because production continues unchanged when sales dip, that customers pay on time

and that enough cash is on hand to make payments when they are due. Obviously

without good working capital management, no firm can be efficient and profitable.


OBJECTIVES OF THE STUDY

The project on analysis of Working Capital Management and short term financing would

be of immense use for a student to manage for the overall understanding of finance

department in any organization. Short term financing forms a vital part of corporate

financing decisions. For any company, working capital and short term financing has an

impact on the profitability and thus the shareholders‟ earnings. The present study is

envisaged with the following objectives:

Understanding the working capital policy followed at Vadilal industries Ltd.

Understanding cash and Liquidity management, Accounts Payable, Accounts

Receivables policy followed at Vadilal Industries Ltd.

Understanding various components of Working Capital and change in them over

time.

To determine the type of relationship between various constituents of Current Assets

and Working Capital.

To assess Liquidity position of Vadilal over the given time period.

To understand various avenues used by Vadilal Industries Ltd to finance its Working

Capital needs.


BRIEF INTRODUCTION ON ICE-

CREAM MARKET OF INDIA

1


ICE-CREAM MARKET IN INDIA

India is considered to be the largest milk producer across the globe and accounts for

one-fifth of the total global milk production. “The ice cream market in India can be

divided into: the branded market and the grey market. The branded market at

present is 100 million Litters per annum valued at more than Rs. 800 crores. The

grey market consists of small local players and cottage industry players.” In 2010-11,

in the branded ice cream market, Amul held the number one spot, with a market

share of 40%, followed by Vadilal at 20%, Kwallity walls at 20%.The ice cream

market in India about Rs 3,000 crore and about 60-70% is gone into the organized

sector.

The per capita consumption of ice cream in India is approximately 300 ml, as against

the world average of 2.3 Litters per annum. The per capita consumption of ice

creams in India is just 300 ml per annum, compared to 22 Litters in the US, 18

Litters in Australia, and 14 Litters in Sweden. India is a way too far behind even in

terms of the world average per capita ice cream consumption of 2.3 Litters per

annum. The Indian ice cream sector is a competitive market with strong competition

from the unorganized sector. "The ice-cream market is growing at an average of 12-

15% a year and has now turned into a game of volumes. Current scenario of market

expecting to grow even better during coming summer.


Market Share of Major Ice-Cream Industries in India:

The above graph reveals that the Amul is the national number one player

having 40% of the total market share. Vadilal is having a 20% market share

and giving tough competition to the major brands like Kwality Walls, cream

bell and regional players.

Market Share of Major Ice-cream Industries in Gujarat:

The graph shown above depicts that in Gujarat Vadilal stands at the first place

with 40% of the market share followed by Amul and Havmor with market share

of 35% and 15% respectively. The market share of Vadilal reveals the strong

position in the mind and hearts of people.


Market Share of Ice-Cream Industries in Ahmedabad

If we see the scenario in Ahmedabad Ice Cream market then we find that

Vadilal is at the first position having the market share of 35%. However the

number one national player Amul is having negligible market share.


BRIEF INTRODUCTION ON

VADIAL GROUP OF COMPANIES

2


VADILAL INDUSTRIES LIMITED

Type Public Limited Company

Industries Conglomerate

Founded 1907

Headquarters Ahmedabad, India

Key people

Shri. Ramchandra Gandhi - Chairman

Shri. Rajesh Gandhi - Managing Director

Shri. Devanshu Gandhi - Managing Director

Products Ice cream, Processed Food, Foreign Exchange,

Chemicals, Real Estate

Revenue 450 Crore (US$89.78 million)

Employees 1000

Parent Vadilal Group

Website www.vadilalgroup.com


ORGANIZATION STRUCTURE OF VADILAL

Vadilal Group is mainly divided into three parts:

VISION & MISSION

“TO BECOME AN INDIAN MNC IN FROZEN FOODS”.

“TO PROVIDE PRODUCTS AND SERVICES AT AN AFFORDABLE PRICE

WITHOUT COMPROMISING THE QUALITY.”

VADILAL

GROUP

VADILAL

INDUSTRIES

LIMITED

VADILAL

ENTERPRISES

LIMITED

VADILAL

CHEMICALS

LIMITED


ABOUT THE COMPANY

Vadilal was established in 1907, a name synonymous to Ice-Cream. A company,

which is around 85 years old, was started by the founder member Late “Shri

Vadilal Gandhi”.

A certain unassuming gentleman started a soda fountain outlet in Ahmedabad.

He, later on, passed on the business to his son Shri. Ranchodlal Gandhi, who ran

a one-man show, and, with a hand-cranked machine, started a small retail outlet

in 1926. which was started in 1907 by Shri Vadilal Gandhi has now turned out

to be third-largest ice-cream brand in India, which boasts of 40 C&F agent, 560

distributors, and more than 50,000 retailers. With its 70-plus flavours, Vadilal

has one of the largest ranges of ice-creams in the country. Brand Vadilal firmly

established itself in the early 1960s. With the entry of Vadilal's grandsons, the

Gandhi family decided to ramp up operations and incorporated the company in

1961. Before introducing automatic machines around in 1960, Gandhi family used

to manufacture ice cream in wooden drums called “Kothis”. A name that

dominates western Indian market, Vadilal, during seventies and eighties, had to

contend with competition from local brands. “Kwality” ice-cream was the only

sizeable player in the still promising ice-cream market. But it faced first real

challenge when dairy giant Amul forayed into ice-cream business in 1996. Backed

by its strong butter brand, cooperative major made quick inroads into the 1,500-

lakh litre ice-cream market in which it now enjoys 40% share. Amul marketed its

ice-creams almost 30-40% cheaper than the existing brands, and that pushed into

market leader Vadilal to the second slot. But Amul's foray also indirectly helped

Vadilal, as it helped in expansion of market in India. As against the per capita

consumption of 23 litres in the US, 18 litres in Australia, 14 litres in Sweden, ice-

cream consumption in India stood at a pathetic 100 ml in the mid-nineties. Vadilal

has been using the growing ice-cream consumption culture to its advantage.


"Brand Vadilal has survived many challenges and it will live through generations,"

said by Vadilal group’s managing director, Shri. Rajesh Gandhi, in the fourth

generation of Vadilal. Today, turnover of Vadilal Group, which has presence in

Ice-Cream, Frozen Food, Chemicals, Forex and Real Estate, stands at about Rs

450 crore.

With an investment outlay of Rs 50 crore, the group has expanded the capacity by

60% to three Lacs Litres per day. While two candy lines having production

capacity of 25,000 pieces per hour. Vadilal has manufacturing facilities of Ice

Cream at Pundhra near Ahmedabad and Bareilly in Uttar Pradesh. Vadilal group

has started airing its commercials on national television. It is spending about Rs 7-

8 crore a year on promotions and planning to increase the budget in coming days.

The group is focusing on the food business. Vadilal launched processed food

business under the brand name 'QUICK TREAT' some five years back that

accounts for Rs 50 crore in our total turnover and growing at almost 80% a year.

While ice-cream remains the core activity, Company also exports ready-to-serve

curries, range of Indian breads, frozen samosa etc to 45 countries". Vadilal serves

popular snacks items like parathas, samosas and kachoris under the 'Quick Treat'

segment. "Recently, company has added two Chinese cuisines including spring

rolls and Chinese samosas under 'Quick Treat'. Going forwards some more

international and domestic cuisines would be added to their RTE portfolio. The

manufacturing facility for frozen foods is located at Dharampur near Valsad in

south Gujarat with a capacity of 32500 Metric tonnes per annum.

The group recently launched ice-cream parlours under the banner of

“HAPPINEZZ”. "They believe that ice-cream is a happy thing, so they named their

chain of ice-cream boutiques Happinezz, which offers rich exotic flavours."

Besides expanding manufacturing and distribution capacitates, company is also

strengthening its milk procurement network from farm-to-factory to cater ice cream

made from the fresh milk."


ICE CREAM DIVISION:

Vadilal the name perform tricks up the image of ice cream laden bowls and a

plethora of new flavours. Starting from one man show with a hand cranked

machine in 1926 as a small retail outlet, the ice cream division now has a

production capacity of one lac litres per day at three sophisticated plants,

located at Ahmedabad, Pundhra and Bareilly. These ISO 9002 certified plants for

Pundhra and Bareilly are established in such a way that they are in consonance

with the market expansion strategies of the division.

Vadilal offers the widest range of ice creams and frozen desserts (More than

200 Stock Keeping units) in the country in packs including cups, party packs,

family bricks, dollies, cones and candies. Something for all taste, preference

and budgets. To meet with the consumer demand on regular basis, Vadilal

introduces new flavours for different segments of customers throughout the

year. People eagerly await Vadilal’s new introductions. Creativity is at

forefront in all the activities of Vadilal.

PROCESS FOOD DIVISION:

Vadilal entered the Horticulture Processing Industries in May 1991.The best way

to ensure total quality is to exercise total control right from the raw material

stage onwards. That’s exactly what Vadilal does. Selected fruits and vegetables

are grown under the company’s guidance in South Gujarat the important ‘Fruit

Bowl’ of India. It is in close proximity to the Alphanso Mango region. This is

where the manufacturing plant is situated. These plants at Dharampur and

Chittoor are modern units with a well-equipped laboratory for product

development and microbiological testing.


Keeping in view the tremendous export potential for the processed foods

Vadilal has set up manufacturing unit having an installed capacity of 32,500

MT per annum. Vadilal is a registered Indian supplier to international mega

brands. The products are exported to Europe, USA, Middle & Far East and

South East Asia. Vadilal is the leading producers and exporters of Mango

Pulp and Green Vegetables in the country.

Vadilal has installed an automated line from Mather & Platt for washing,

desponding, inspecting, blanching and cooling fruits and vegetables. Their

slicing and dicing is done on imported machines. In order it preserves

freshness and enhances shelf life the food is processed using ‘Individually

Quick Frozen’ (IQF) technique. This technology has been imported from

Eurotek Engineering L imited, UK and it involves fluidized belt type continuous

freezing. It can process two tons of material per hour, and it provides the

flexibility of freezing at varying depths for different durations.

It has all been worth the effort, considering that M/s. Underwriters Laboratories

Inc. USA has awarded the ISO 9002 certification for quality system. Vadilal

was also awarded the certificate of merit for excellent export performance by

APEDA (Agricultural and Processed Foods Export Development Authority).

Among IQF vegetables the range includes, green Peas, Sweet Corn, Okra,

Mixed Vegetables etc all. The IQF Fruits range has exotic varieties of the

famous Indian Mangoes- Alphanso, Kesar, Totapuri in pulps, slices, cubes in

addition to strawberries, Samosa and other ready to eat foods and

condiments also from apart from Vadilal’s formidable range.


FOREX ADVISORY SERVICES & FFMC DIVISION:

Vadilal ventured into this segment in April 1996, offering non-banking

financial services. The main activities are:

Forex advisory & Forex Exposure Management to Importers and

Exporters.

Bullion in f o rma t i ve Se rv i ce on Go ld S i l ve r --- A comp le tes useful

guidance to bullion traders, importers and jewellers.

LME-Metal informative service bin base and Scrape metals. A complete

useful ‘guidance and information to metal traders, importers, and Metal

scrap indenting agents.

RBI au thor ized fu l l y fledged money changer – FFMC re la ted

transactions: Sale/Purchase of foreign Currency and Traveller’s Cheque.

VADILAL ENTERPRISE LTD:

An excellent product would be of little use if it didn't have somebody to maintain that

excellence and give it to the world. That is how Vadilal Enterprises Ltd - the

marketing arm of Vadilal Industries came into existence.

Today Vadilal have a dynamic sales force of over 200 sales & marketing

professionals, through which they have improved their promotion strategy and

increasing their sales. The company has effected changes in its organizational

structure and training inputs from time to time, in order to infuse a competitive spirit

amongst peers and build a consolidated force of live-wire professionals. Target

achievement is monitored through an elaborate Management Information System,

across the rank and file. Vadilal has stood the challenge of time and held its own in

the country, even in the presence of global giants.


VADILAL CHEMICALS LTD.:

This division started in 1970, deals mainly in industrial gases and chemicals. The

main products are gases such as Argon Nitrogen, hydrogen and Oxygen,

Speciality gases, Industrial gas mixtures, Calibration Gases, Anhydrous and

Liquor Ammonia. Vadilal is one of the biggest bottlers of Anhydrous

Ammonia. Vadilal Chemicals Ltd. has over 2000 industrial customers. To serve

them, there is a marketing network of twelve branches and eight dealers, a

fleet of 50 cryogenic/liquid transport tankers & commercial vehicles and

25,000-gas cylinders- one of the largest networks for industrial gases in western

India.

PRODUCTS

“It is a process by which the produced from raw material to finished product.”

Without production department, there is no need to finance, marketing and

personnel department. If the company’s product is good and its quality is better,

then people buy its product and that leads to increase in the sales of the company.

Now a day, we can see a tough competition in the market. Everyday new

technology is to be introduced. So it is beneficial to every company for

concentrating on their product quality because if quality is good and by using the

product customer are satisfied, than they will definitely buy.

In VADILAL INDUSTRIES LTD., they have completely concentrated on quality of

the product. For that company has its own R&D department to increase the product

quality. Following are the products of ice-cream of Vadilal group.


ICE CREAM PRODUCTS

NOVELTIES OF PRODUCTS

BIG CUPS

Vanilla

Ripe Strawberry

2 – in –1

Chocolate Chips

Tuti Fruity

Real Mango

Rainbow

Fruit Bonanza

Kaju Draksh

Butter Scootch

Kewra

Jafrani Badam Pista

Fun 2000

Rajbhog (Ice Mithai)

SMALL CUPS

Vanilla

Ripe Strawberry


FAMILY PACK PLAIN FAVOURTIES

Vanilla

Ripe Strawberry

2-in-1

CHOCOLATE ECSTASIES

Chocolate Chips

FRUIT FANTASIES

Real Mango

Fresh Strawberry

NUTTY DELIGHTS

Kaju Draksh

Butter Scotch

Real Kesar Pista

Jafrani Badam Pista

ICE MITHAI

Rajbhog

FROZEN DESSERTS

Snowy

Yummy Kesar Pista

Yummy Mango Munch


KING KONES

Chocolate Drip

Pineapple Delight

Yummy Butter Scotch

Chashmeshahi

Prime Kesar Pista

Almond Kulfi Cone

KULFIES KULFI CORNER

Kesar Pista Kulfis

Chowpati Kulfi

Kewra Kulfi

Pista Kesar Roll Cut

Kewra Roll Cut

DANDY CANDIES

Mango Juicy

Juicee Orange

Kaju Candy

Litchee Dolly

Orange Dolly

Raspberry Dolly

Mango Dolly


Nutty Chocobar

Chocolate Chocobar

Soft Spot (Chocolate)

FROZEN DESSERT

Bargain

Best Chocobar

Mango Tango Dolly

Fun Bhari Raspberry

VADILAL SPECIALS

Heart Throb

Mini Sandwich

Sajan Sajani (Roll Cut)

Quick Sundae

Easy Sundae

August - 15

Cassatta Slice/ (Cut)

Sajan Sajani (Roll)

Vanilla Magic

Strawberry Magic

Mango Mag


ACHIEVEMENTS OF VADILAL:

On 10th November, 2001 Vadilal broke its own record by making "The Largest

Ice Cream Sundae". This ice cream sundae was made using 4950 litres of ice

cream, 125 kg of dry fruits, and 255 kg of Fresh fruits. The length of the sundae

was 20 feet and height was 9 feet, 180 man took 60 minutes to create this record

breaking (registered in Limca Books of records) ice cream sundae. More than

50,000 people enjoyed.

Snow- Storm Ice-Cream Festival (25th December, 2001 to 31st December, 2001)

A week long ice cream festival was held simultaneously in 11 Vadilal Happinezz

Parlours of Gujarat. 71 flavours of Ice Cream, 51 Ice Cream Sundaes, Sorbets,

and Ice Mithai ice creams like Rasgulla, Gulabjamun & other artisan Ice Creams

were available at one stop. Over hundred thousand people have attained this

festival.

The Bareilly plant has been awarded the coveted ISO 9001 Accreditation and

HACCP certification.

Vadilal Ice Cream has achieved 20% market share among Indian Ice Cream

Industry and 40% market share in Gujarat.


They have been awarded the ISO 9002 Certification for quality systems, by

M/s Underwriters Laboratories Inc., USA.

Vadilal was also awarded the Certificate of Merit for Excellent Export

Performance by APEDA (Agricultural and Processed Foods Export

Development Authority)

One of the largest marketing networks for industrial gases in Western India.

In 2011, Vadilal Company has been evaluated by verities certification (UKAS

kcc.no.008) and also meets the requirement of Global Standard Food for Safety.

It has largest cold chain network in India

o 40 Clearing & Forwarding agents across the country.

o 560 distributors in different cities in India.

o Ice Cream sold through more than 50000 retail outlets in India.

‘Export House’ status by Govt. of India since 1994.


MARKETING CHANNEL


NEW TACTIC OF MARKETING CHANNEL:

Due to fewer profit margins in old strategy of distribution, company started to

follow new strategy for distribution which has higher margin of profit and the

product will go directly and according to demand of the customer through the

HAPPINEZZ parlour.


SWOT ANALYSIS OF VADILAL INDUSTRIES LIMITED

STRENGTH:

Vadilal has started frozen food since 1991, which is growing year by year and

Vadilal Group is the only Company which export the frozen food to the other

Indian company with the affordable rate like reliance and many more.

Vadilal has a maximum range of ice-cream products in India, (more than 200

SKUs).

Vadilal Group has mainly target on rural area’s people with the affordable price,

and its generated major revenue from the rural area.

One of the oldest manufacturer of ice-cream in India and hence a well

established brand name, because of that reason maximum customers are

attracted towards its product.

They have a cold chain network with three manufacturing units in India, 40

clearing and forwarding agents, 560 distributors and more than 50000 retailers.

They have their own refrigerated vans for smoother and faster deliveries.

Quality is given at most as depicted in their philosophy to provide quality

products and services at an affordable rate, as we know that Gujarat people are

more quality conscious rather price sensitive.

There is large no. of flavour giving a customer range of choice, around more

than 70 flavours has introduced by the Vadilal Group, Vadilal Ice-creams come

in a wide variety of flavours, with additives such as chocolate flakes or chips,

nuts, Ice-tropper, fruit, and even small candies/sweets. Some of the most trendy

ice cream flavours of Vadilal in markets are vanilla, chocolate, strawberry, and

butter scotch. Many people like ice cream sundaes of our Happinezz Parlour,

which regularly have ice cream, hot fudge, nuts, whipped cream, cherries and

other toppings of their choice.

Market leader in Gujarat, they also gaining markets in Rajasthan as well as Uttar

Pradesh, Uttarakhand, and Zarkhand.


WEAKNESS:

Financial constraints due to high overheads and cost of production. The major

factor affecting to the cost is electricity.

Vadilal Group is not aggressive in promotion and advertisement followed by

lack of innovation and initiatives to introduce a new concept in area.

Lack of innovation in recently launched ice-cream against Amul and Havmor.

Company still perform as a follower of Amul.

OPPORTUNITIES:

The company is also engaged in agro based food processing sector which is

one of the major thrust areas of the new central govt. There is a huge overseas

market for a food processing company.

Huge available market of ice-cream, changing and growing consumption

pattern. They are having manufacturing units at three different locations and

vans for catering the needs of increasing demand in the market.

Vadilal is Pioneers of processed food industries since 1991, therefore they

gathered loyalty to other companies, so there is direct impact on their Selling

and as a result they gained high reputation.

With his loyal dealer network it can easily shift to the new market.

Because of its emphasis on quality, it is held high in mind of the customer.

“A favourite with the customers” because of its large variety of flavours and

SKUs.

Because of its leadership in novelties and impulses items it is a hot favourite

among young generation, by introducing some trendy product like Ice-tropper

in summer with the attractive packages increasing its hold substantially.


THREATS:

High Taxes, Multi National companies entering in to the market and also the

increasing number of local manufacturers, as well as the international

companies like Amul, dairydan, and HUL.

Lack of niche. With increase in competition it would be very difficult to survey

without a niche market.

HAVMOR and Amul with competitive flavours and prices becoming major threat

for the company.


RESEARCH METHODOLOGY

3


Period of Research

Entire research work is done for following period:

16-04-2012 to 16-6-2012

Research Design

Study the source of working capital in VADILAL INDUSTRIES LTD.

Prepared operating statement of the company to understand finance of the

company.

Find out Ratios related to working capital management of VADILAL INDUSTRIES

LIMITED on year to year basis starting from 2008-09 to 2010-11 and interpret

them.

To study practically various transaction processes of the company and its method

of working.

Study various formal documents of the company relating to the sample projects

including Term Loan, Cash Credit, Annual Report, Bills Discounting, Letter of

Credit, Stock Statement. Quarterly Information Statements etc.

To study a live project of Proposed Term-Loan.

Data used

Information about company’s assets, liabilities, revenue, expenditure, bankers

etc.

Information about company’s Bank Guarantee, Letter of Credit & other financial

information.

Data Source

Annual Reports of companies

Balance Sheet

Profit & Loss Accounts


Analyses & Interpretation

The data collected and analyzed subjectively as well as graphically where it is

possible. The analysis is based upon available information & interpreted

accordingly.

Scope of The Study

The study of Financial Analysis is based on tools like trend Analysis, Ratio

Analysis, Working capital Management, Working capital cycle etc. Further the

study is based on last 3 years Annual Reports of VADILAL INDUSTRIES

LIMITED.


RATIO ANALYSIS

4


RATIO ANALYSIS

Introduction:

Ratio Analysis is the basic tool of Financial Analysis and Financial Analysis itself is

an important part of any business planning process. Ratios are the basic tool of the

strategic analysis plays a vital role in a business planning process and no SWOT

analysis would be complete without an analysis of company’s financial position. In

this way Ratio Analysis is very important part of whole business strategic planning.

Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a

quick indication of a firm's financial performance in several key areas. The Ratios

are categorized as Profitability Ratio, Leverage Ratio, Turnover Ratio, and Liquidity

Ratio. Ratios can be used to compare a firm's financial performance with industry

averages. In addition, Ratios can be used in a form of trend analysis to identify

areas where performance has improved or deteriorated over time.

Definition:

Ratio is an expression of mathematical relationship between two variables or

figures; it is the effectively used as a tool of management or analysis of financial

statements along with cash and fund flow statements. Even in the trend analysis

Ratio are used as an effective tool.

Objective Of Ratio Analysis:

To understand the financial statements’ Figures in a better way

To enquire in to the reason for change

To make comparison to facilitate decision making

To compare past and present performance of the company

To analyse the operational activity, profitability, performance efficiency, liquidity,

and other related Ratio.


Classification of Ratio:

Liquidity Ratio: Liquidity Ratio refer to the Ratio which measure the

company’s ability to meet current or short term, usually one year, its obligations.

Liquidity means cash or equivalent available for the payment to creditors for trade

and expenses. Liquidity Ratio is generally based on the relationship between

Current Liability and Current Assets.

Leverage Ratio: Leverage Ratio can also be known as solvency Ratio. This

Ratio means the company’s ability to meet both short-term and long-term

obligation, when they fall due leverage depend upon the profitability of the

business. Financial leverage refers to use of debt. Finance this Ratio help in

assessing the risk arising from the use of debt-capita. Solvency refers to the

soundness of the company.

Turnover Ratio: Turnover Ratio also known as an “Activity Ratio”. Turnover

Ratio measure how effectively assets utilized in the firm. This means the

quickness with which the company is to able to covert Current Assets in to cash.

Turnover means the frequency or the no. of times the item has turnover during the

year.

Profitability Ratio: Profitability in the terms of sales or/and investment to

assess the capacity of the management to earn the profit and to ensure returns to

owner. This Ratio is reflecting the final result of the business operation. There are

two type of profitability Ratio and rate of return Ratio.


Liquidity Ratio: Liquidity Ratio Includes:

1. Current Ratio: Current Ratio is the Ratio of Current Assets to Current Liability. It

is also known as working Capital Ratio, this Ratio is not expressed in percentage

Ratio. Generally (2:1) considered to be favourable Ratio that means Current

Assets twice Current Liability.

Purpose: The purpose of this Ratio is to test Liquidity of the company.

Current Ratio: Current Assets

Current Liability

Interpretations: In 2008-09, Current Ratio of the company was 2.63. Same

way in 2009-10 and 2010-11 comapany’s current Ratio is healthy. In this case it

implies that the company can easily pay its Current Liabilities, Because of the

Company having adequate liquidity in term of Current Assets.

Particular 2008-09 2009-10 2010-11

Current Assets 7897 10425 10961

Current Liability 3005 5173 3917

Current Ratio: 2.63 2.02 2.80


2. Quick Ratio: It is calculated to establish a relationship between Liquid/Quick

Assets and Current Liabilities. Quick Assets are nothing but cash, cash

equivalents, and readily realizable marketable securities excluding stock and

prepaid expenses from Current Assets. This Ratio is considered as an ideal test

for liquidity. The standard Ratio is 1:1.

Purpose: The purpose of this Ratio is to test liquidity of an enterprise

considering cash and cash equivalents as numerators.

Quick Ratio: Quick Assets

Quick Liability

Particular 2008-09 2009-10 2010-11

Quick Assets 4197 4851 5372

Quick Liability 3005 5173 3917

Quick Ratio 1.40 0.94 1.37

Interpretations: Quick Ratio is very much Greater than the standard Ratio of

1:1. This indicates the company is in position to honour its current obligation.


Profitability Ratio: This Profitability Ratio includes following Ratios:

1. Gross Profit Ratio: This Ratio is measure the efficiency of production/purchase

as well as pricing. The higher the Gross Profit, the better is the efficiency of the

management in relation to production/purchase as well as pricing.

Purpose: This Ratio is used to test Profitability of an organisation relating to

trading activity.

Particulars 2008-09 2009-10 2010-11

Gross Profit Ratio

Gross Profit 3403 4469 4934

Net sales 15416 18970 23642

Gross Profit Ratio 22% 24% 21%

Interpretation: Gross Profit of the company in 2008-09,2009-10 and 2010-11 is

22%,24% and 21% respectively.higher GP Ratio implies better runing capacity

of the company.but 22% GP Ratio implies average trading efficiency.

Gross Profit Ratio: Gross Profit

Net Sales


2. Net Profit Ratio: This Ratio is indicating difference between net sales and total

expenses during the period. The higher the Net Profit, the better is the efficiency

of the management. The management should in better position to distribute

higher returns to the owners on the capital invested by them.

Purpose: To test Profitability of organisation.

Net Profit Ratio: Net Profit

Net Sales

Particular 2008-09 2009-10 2010-11

Net Profit 108 575 507

Net Sale 15416 18970 23672

Net Profit Ratio 0.70% 3.03% 2.14%

Interpretation: As above graph shows, even though sales increase in 2010-11,

the Net profit Ratio is not increase at good level, but in 2010-11,sales increases

but Net profit Ratio decreases and also there is increase in expenditure compare

to previous year which shows decline trend in Net profit.


3. Expenses Ratio: This Ratio is indicating the relationship between Operating

Expenses and Net Sales, Expenses Ratio are computed. For example, proportion

of selling expenses or administrative expenses or finance expenses in relation to

net sale.

Purpose: The purpose of this Ratio is to know how much expenses are increases

with accordance to increase in sales.

Expense Ratio: Total expenses

Net sales

Particular 2008-09 2009-10 2010-11

Total Expense 4995 4288 4995

Net Sale 15416 18970 23642

Expense Ratio 32% 23% 21%

Interpretation: This Ratio is combination of all expenditure which include in

operating statement as well as in P & L account, the Ratio is continuously reducing in

last three years that means from 2008 to 2011 which shows higher efficiency of the

company.


4. Return on Capital Employed: It calculated to establish a relationship between

earnings before interest and taxes (EBIT) and capital employed. Capital Employed

means, Share Capital+ Reserve and Surpluses- Fictitious Assets+ Long-Term

Loan. It means the effectiveness of the company in using all its assets to increase

the earnings of the company.

Purpose: This Ratio is calculated to find out how efficiently the long term funds

supplied and used in the company.

Particular 2008-09 2009-10 2010-11

EBIT 865 1433 1616

Total Capital Employee 6022 7968 10977

ROCE: 14% 18% 15%

Interpretation: Higher the Ratio, the management is more efficient. The Capital

Employed Ratio in 2008-09 is low but higher in 2009-10, which show the

management is quite effective again in 2010-11 its decreases in lower level.

ROCE: EBIT

Total Capital Employee


5. Return on Share Holder’s Fund: This Ratio is measure a relationship between net profit after tax and share holder’s fund which include Share Capital + Reserves and Surplus.

Purpose: This Ratio is to find out how efficiently the funds supplied by Equity Shareholders have been used.

ROSF: PAT

Shareholder's fund

Particular 2008-09 2009-10 2010-11

PAT 108 575 507

Shareholder's Fund 3530 3958 4320

ROCE: 3% 15% 12%

Interpretation: This Ratio shows how efficiently the fund supply by the equity

Shareholder has been used and the company is able to get and give sufficient

returns to the Shareholders. As we can see in the graph that the Ratio of 2008-

09 is low as compare to both years which shows that the company is able to pay

sufficient returns to the Shareholders.


6. Operating Margin: It is calculated purely to establish relationship between

Operating Profit and Net Sales when non-operating incomes and expenses are not considered into P & L account.

Purpose: It determines the operational efficiency with production; purchasing and selling operations are carried on.

Operating Margin: COGS + Operating Exp.

Sales

Interpretation: In year 2008-09 Ratio is 91% which is increased up to 93% in year

2010-11 which shows increasing trend of operating margin compare to last 2 years

that means there is healthy operating margin trend.

Particular 2008-09 2009-10 2010-11

COGS 11443 14501 18709

Operating Exp. 2538 3035 3318

COGS + Operating Exp. 13981 17536 22027

Sales 15416 18970 23642

Operating Margin: 91% 92% 93%


Leverage Ratio: Leverage Ratio includes following Ratio:

1. Debt-Equity: This Ratio establishes relationship between long-term debts and

shareholders fund. Debt-Equity Ratio should be less than 1 to show that owners

fund is greater than lender’s fund.

Purpose: This Ratio shows at which extent the company has been financed by

debt, and used to measure the solvency of the company.

Particular 2008-09 2009-10 2010-2011

Total Long-term Debt 2492 4010 6657

Shareholder's Fund 3530 3958 4320

Debt-Equity Ratio 0.71 1.01 1.54

Interpretations: This Ratio shows the relationship between Long Term Debt and

shareholders fund. The main objective of computing this Ratio is to measure the

relative proportion of the Debt and Equity financing Assets of the firm. In this

company it shows company is having more Debt which creates high risk for it. The

company should try to reduce its Loan Funds. Here the Ratio is increase year by

year due to increase in Debt, due to wide capital expansion in last three years.

Debt-Equity Ratio: Total Long-term Debt

Shareholder's Fund


2. Interest Coverage Ratio: This Ratio is useful to know the company has sufficient

profit for liability of interest.

Purpose: This Ratio shows that how many times the interest payable is covered by

the amount of the profit.

Particular 2008-09 2009-10 2010-2011

EBIT 865 1433 1616

Interest 749 631 961

Interest Coverage Ratio 1.15 2.27 1.68

Interpretation: This Ratio is useful to know about firm’s sufficient profit through

which shows the firm is enough capable to pay it’s Liabilities (Interest). It represents

that how many times Interest payable is covered by the amount of profit.

Interest Coverage Ratio: EBIT

Interest


Turnover Ratio: This Ratio includes following Ratios:

1. Stock Turnover Ratio: It measure how frequently inventory sold or how many

times the stock of the business has turnover. This is the Ratio of COGS to

Average Inventory in a stock during the year. Increase in the frequency of stock

turn over indicates increased profit and low level of inventory in the stock and high

Cash Inflow.

Purpose: The main purpose of computing this Ratio is to determine the efficiency

with which inventory is utilized.

Interpretations: This Ratio shows relationship between Cost of Goods Sold and

Average Inventory and to know how frequently inventory is utilised. Higher this

Ratio shows higher efficiency of the company. There is stable capacity of stock

movement compared among last three years.

Stock Turnover Ratio: Cost of Goods Sold

Average Stock

Particular 2008-09 2009-10 2010-11

Cost of Goods Sold 11443 14501 18709

Average Stock 2707 4149 5046

Stock Turnover Ratio 4 3 4


2. Debtors Ratio: The Ratio shows the no. of days taken to collect the Credit Sales. It

shows the efficiency or collection policy of the company.

Purpose: The purpose of use this Ratio is to measure the frequency of the

collection of the Account Recievable (Debtors+ Bills Recievable).

Interpretations: This Ratio describes the effectiveness in the collection period of

dues credit sale. This shows the efficiency of the collection policy of the company,

as we can see in the graph that the collection period of the company is better than

last two years and it is considerably improve day by day.

Debtors Ratio: Debtors + Bills Receivable

*365

Credit Sales

Particular 2008-09 2009-10 2010-11

Debtors + Bills Receivable 2959 3321 3495

Credit Sales 15416 18970 23642

Debtors Ratio (Days) 70 64 54


3. Debtors Turnover Ratio: Debtors Turnover Ratio gives no. of times within which

the amount due for credit sale is collected.

Purpose: This Ratio is able to indicate the ability of the company to meet the short

term current obligation and measure strength of current operation as well.

Debtors Turnover Ratio: No. of days in year

Debtors Ratio

Interpretation: The Debtor’s Turnover Ratio shows the number of times the

amount due for Credit Sales is collected within a year. Higher this Ratio shows

higher efficiency of the company. Here the Debtors Turnover Ratio is continuously

increasing, which shows efficient management of the company.

Particular 2008-09 2009-10 2010-11

No. of days in year 365 365 365

Debtors Ratio 70 64 54

Debtors Turnover Ratio 5 6 7


4. Creditors Ratio: Company will be interested in finding out how much time the firm

is likely to take in repaying the trade creditors. This ratio helps in finding out the

exact time a firm is likely to take in repaying to its trade creditors.

Purpose: This Ratio measures the length of time it takes a company to pay its

creditors.

Interpretation: The number of the days in which the company makes payment to

its Creditors for Credit Purchase. Here the Ratio of 2010-11 is 41 days which is

lower compare to last year 2009-10 which shows company is better managing its

creditors. The company is making faster payment to its suppliers.

Creditors Ratio: Creditors + Bills Payable

*365 Credit purchase

Particular 2008-09 2009-10 2010-11

Creditors + Bills payable 1219 2120 1540

Credit Purchase 9480 12443 13684

Creditors Ratio 50 62 41


5. Creditor’s Turnover Ratio: This Ratio measures how many times the Accounts

Payables are paid in a year. Higher Creditors Turnover Ratio is an indication of strict

credit policy and lower Ratio is an indication of liberal credit policy by the company.

Purpose: This Ratio helps the manager to understand that how many times

company makes a payment to their supplier.

Creditors Turnover Ratio: No. of days in year

Creditors Ratio

Particular 2008-09 2009-10 2010-11

No. of days in year 365 365 365

Creditors Ratio 47 62 41

Creditors Turnover Ratio 8 6 9

Interpretations: The Creditors’ Turnover Ratio shows that the numbers of times

with in which we make payment to our creditors for Credit Purchase is obtained from

Creditor’s Velocity. The Ratio is quite same during 3 years that means there is no

much fluctuation in Ratio, its increase from 8 to 9 times from 2008-09 to 2010-11

which shows the company pays amount for credit purchase 9 times in a year.


WORKING CAPITAL

5


WORKING CAPITAL

Introduction:

The life blood of business, as is evident, signified funds required for day-to-day

operations of the f irm. The management of working capital assumes great

importance because shortage of working capital funds is perhaps the biggest

possible cause of failure of many business units.

Management is a talent of anticipating and preparing for risks, uncertainities and

overcoming obstacles. In morden financing management , efficient allocation of

funds has a great scope, in finance and profit planning, for most effective utilization

of company resources. we would like to present a broad overview of what working

capital is and why it is important. working capital is the money which used in a

business has available to sustain its operations. It's the capital available to

purchase inventory, pay employees, keep the lights on, and finance other short term

expenditures. This makes managing working capital a critical business skill. If there

is no working capital, there is no business.

Working capital in simple term means amount of funds that company requires for

financing its day-to-day operations. Finance manager should develop sound

techniques of managing Current Assets. Not only does working capital management

involve ensuring the business does not fail due to a short term cash problem, but it

also helps to ensure a business does not carry too much cash.

Every business needs investment to procure fixed assets, which remain in use for

a longer period. Money invested in these assets is called ‘Long term Funds’ or

‘Fixed Capital’. Business also needs funds for short-term purposes to finance

current operations. Investment in short term assets like cash, inventories, debtors

etc., is called ‘Short- term Funds’ or ‘Working Capital’. The ‘Working capital can

be categorized, as funds needed for carrying out day-to-day operations of the

business smoothly.


Every running business needs working capital. Even a fully equipped with all type

of assets required is bound to collapse without:

o Adequate supply of raw materials for processing

o Cash to pay wages, various types of bills, salaries etc.

o Creating a stock of finished goods to feed the market demand regularly.

o The ability to grant credit to customers.

All these require working capital. Working capital is thus like “The Lifeblood of a

Business”. The business will not be able to carry on day-to-day activities without

the availability of adequate working capital.

WHAT IS WORKING CAPITAL?

Working capital refers to the investment by the company in Short Terms Assets such

as cash, marketable securities. Net Current Assets or Net Working capital refers to

the Current Assets less Current Liabilities.

Symbolically, it means,

DEFINITIONS OF WORKING CAPITAL:

The following are the most important definitions of Working capital:

1. Working capital is the difference between the inflow and outflow of Funds. In other

words it is the net cash inflow.

2. Working capital represents the total of all Current Assets. In other words it is the

Gross working capital, it is also known as Circulating capital or Current capital for

Current Assets are rotating in their nature.

3. Working capital is defined as the excess of Current Assets over Current Liabilities

and provisions. In other words it is the Net Current Assets or Net Working Capital.

Net Current Assets = Current Assets-Current Liabilities.


FEATURES:

Working capital is regarded as the excess of Current Assets over Current Liabilities.

Working capital indicates circular flow of funds in the day-to-day activities of

business. That’s why it is also called circulating capital.

Working capital represents the minimum amount of investment in raw materials,

work-in progress, finished goods, stores and spares, accounts receivables and cash

balance.

SIGNIFICANCE OF WORKING CAPITAL:

Working capital may be regarded as the lifeblood of the business. Without

Insufficient working capital, any business organization cannot run smoothly or

successfully.

In the business the Working capital is comparable to the blood of the Human body.

Therefore the study of working capital is of major importance to the internal and

external analysis because of its close relationship with the current day to day

operations of a business. The inadequacy or mismanagement of working capital is

the leading cause of business failures.

To meet the current requirements of a business enterprise such as the purchases

of services, raw materials etc. working capital is essential. It is also pointed out that

working capital is nothing but one segment of the capital structure of a business.

In short, the cash and credit in the business, is comparable to the blood in the

human body like finance s life and strength i.e. profit of solvency to the business

enterprise. Financial management is called upon to maintain always the right cash

balance so that flow of fund is maintained at a desirable speed not allowing slow

down. Thus enterprise can have a balance between liquidity and profitability.

Therefore the management of working capital is essential in each and every

activity.


TYPES OF WORKING CAPITAL


These are the two concept of Working Capital:

Gross working capital:

Net working capital:

1. Gross Working Capital: The Gross Working Capital refers to firm’s

investment in Current Assets. Current Assets are the assets which can be

converted into the cash with in accounting year and with in cash, short-term

securities, debtors, bills receivable and stock. Therefore, gross working capital is

the Current Assets of the company.

It can be represented by following equation:

Gross working capital= Total of the Current Assets

2. Net Working Capital: Net working capital is difference between Current

Assets and Current Liability. Current Liabilities are those claims which are

expected to mature of the payment with in accounting year and include creditors,

bills payable and outstanding expenses.net capital can be negative or positive.

A positive working capital occurs when Current Assets are excess of Current

Liabilities.

A negative working capital occurs when Current Liabilities are excess of Current

Assets.

It can be represented by following equation:

Net working capital= Current Assets – Current Liabilities


ON THE BASIS OF TIME, WORKING CAPITAL MAY BE CLASSIFIED AS:

Permanent or fixed working capital

Temporary or variable working capital

1. PERMANENT OR FIXED WORKING CAPITAL:

Permanent or fixed working capital is minimum amount which is required to ensure

effective utilization of fixed facilities and for maintaining the circulation of Current

Assets. Every firm has to maintain a minimum level of raw material, work-in-process,

finished goods and cash balance. This minimum level of Current Assets is called

permanent or fixed working capital as this part of working is permanently blocked in

Current Assets. As the business grow the requirements of working capital also

increases due to increase in Current Assets.

2. TEMPORARY OR VARIABLE WORKING CAPITAL:

Temporary or variable working capital is the amount of working capital which is

requires meeting the seasonal demands and some special exigencies. Variable

working capital can further be classified as seasonal working capital and special

working capital. In the Vadilal industries, they purchase raw materials for ice-cream

in winter seasonal.

The capital required to meet the seasonal need of the company is called seasonal

working capital. “Temporary working capital is the additional assets required to

meet the variations in sales above the permanent level.” Special working capital

is that part of working capital which is required to meet special exigencies such as

launching of extensive marketing for conducting research, etc.


Figure: Capital Requirements of a firm over time

IMPORTANCE OF MAINTAINING ADEQUATE WORKING CAPITAL

Adequate working capital helps in maintaining solvency of the business by providing

uninterrupted production.

Prompt payment and maintenance of goodwill with the customers of the firm is

ensured by maintaining sufficient amount of working capital.

High solvency and high credit rating will help the firm in availing loans from banks

and other financial institutions on easy and favourable terms.

Maintaining adequate working capital will help the firm in getting cash discounts from

its suppliers which will eventually reduce cost.

Regular supply of raw material and continuous production of its products will be

ensured if a firm maintains sufficient working capital.


Maintenance of adequate working capital will help a firm in making regular payment

of salaries, wages and other day-to-day commitments that will eventually result in

satisfaction of its employees, an increase in their efficiency & enhanced production

as well as profits of the firm.

If a firm is having adequate working capital, then it can exploit favourable market

conditions such as purchasing raw materials in bulk when their prices are lower &

holding its inventories when the prices are higher.

Sufficient working capital will enable a firm to pay quick & regular dividends to its

Investors, gain confidence of the investors and raise more funds in the future.

DISADVANTAGES OF HAVING AN EXCESSIVE WORKING CAPITAL

Excessive working capital means ideal funds which won’t result in any profit for the

firm and business cannot earn the required rate of return on its investments.

Redundant working capital leads to unnecessary purchasing and accumulation of

inventories.

Excessive working capital implies excessive debtors and defective credit policy

which causes higher incidence of bad debts.

It may reduce the overall efficiency of the business.

If a firm is having excessive working capital then the relations with banks and other

financial institution may not be maintained.

Due to lower rate of return n investments, the values of shares may also fall.

The redundant working capital gives rise to speculative transactions.


Taking into consideration the advantages to a firm in maintaining adequate working

capital and the disadvantages for a firm in having an excessive working capital, we can

say that it is imperative for a firm to maintain right levels of working capital. This requires

efficient management of the Current Assets and the Current Liabilities of a firm i.e.

employing efficient working capital management policies which will have a considerable

impact on the profitability, liquidity and structural health of the firm. Various aspects of

working capital management have been described in detail in the subsequent pages.

Structure of Working Capital

The different elements or components of Current Assets and Current Liabilities

constitute the structure of working capital which can be illustrated in the shape of a

table as follows:

Current Liabilities Current Assets

Bank Overdraft Cash and Bank Balance

Creditors Inventories: Raw-Materials

Work-in-progress

Finished Goods

Outstanding Expenses Stores & Spare

Bills Payable Accounts Receivables

Short-term Loans Bills Receivables

Proposed Dividends Accrued Income

Provision for Taxation, etc. Prepaid Expenses,

Short-term Investments


WORKING CAPITAL MANAGEMENT

6


WORKING CAPITAL MANAGEMENT

Working Capital Management is significant in Financial Management. It plays a vital

role in keeping the wheel of the business running. Every business requires capital,

without it can’t be promoted. Investment decisions are concerned with investment in

Current Assets and Fixed Assets. Working Capital plays a key role in a business

enterprise just as the role of heart in human body. It acts as grease to run the

wheels of Fixed Assets. Its effective provision can ensure the success of business

while. Its inefficient management can lead not only to loss but also to the ultimate

downfall of what otherwise might be considered as a promising concern. Efficiency

of a business enterprise depends largely on its ability to its working capital. Working

capital management is one of the important facts of affirms overall financial

management.

Working Capital Management refers to management of Current Assets and

Current Liabilities. The major thrust of course is on the management of Current

Assets .This is understandable because Current Liabilities arise in the context of

Current Assets. Working Capital Management is a significant fact of financial

management.

Working capital is that part of company’s capital which is used for purchasing raw

material and involve in sundry debtors. We all know that Current Assets are very

important for proper working of Fixed Assets. Suppose, “If you have invested

your money to purchase machines of company and if you have not any more money

to buy raw material, then your machinery will no use for any production without raw

material.” From this example, you can understand that working capital is very useful

for operating any business organization. We can also take one more liquid item of

Current Assets that is cash. If you have not cash in hand, then you cannot pay for

different expenses of company, and at that time, your many business works may

delay for not paying certain expenses. If we define working capital in very simple

form, then we can say that working capital is the excess of Current Assets over

Current Liabilities.


WHAT IS WORKING CAPITAL MANAGEMENT?

“A Managerial Accounting Strategy focusing on maintaining efficient levels of both

components of working capital, Current Assets and Current Liabilities, in respect to

each other. Working Capital Management ensures a company has sufficient cash

flow in order to meet its short-term debt obligation and operating expenses.”

Components of working capital and their basis of valuation

Components of W.C Basis of Valuation

Stock of R.M Purchase Cost of R.M

Stock of W.I.P At cost or market value

Stock of Finished Goods Cost of Production

Debtors Cost of Sale

Cash Working Expenses


WORKING CAPITAL CYCLE

Introduction:

Working Capital Cycle is helpful in various senses for the company. Working

Capital Cycle is one of the several measures for effectiveness of the management. It

is also known as a “cash conversation cycle”. Depending upon the type of time

period this cycle is referred to as a short period WC Cycle. It is able to suggest that

this has good cash flow. It measures how fast a company can convert cash on hand

into even more cash on hand. The WCC does this by following the cash as it is first

converted into Inventory and Accounts Payable (AP), through sales and Accounts

Receivable (AR), and then back into cash. Generally, the lower this number is the

better for the company. It can be especially useful for comparing close competitors

because the company with the lowest WCC is often the one with better

management.

As far as manufacturing company like Vadilal is concern, there working capital cycle

starts with the purchase of raw materials and ends with realization of cash from the

sale of finished goods. The cycle involves the purchase of Raw Materials and ends

with the realization of cash from the sale of finished products. The cycle involves

purchase of raw materials and stores, its conversion in to stock of finished goods

through work in progress with progressive increment of labor and service cost,

conversion of finished stick in to sales and receivables and ultimately realization of

cash and this cycle continuous again from cash to purchase of Raw Materials and so

on.


What is WCC?

The WCC is a combination of several activity Ratios involving Accounts Receivable,

Accounts Payable and Inventory Turnover. AR and inventory are Short-term Assets,

while AP is a liability; all of these Ratios are found with the help of the balance sheet. In

essence, the Ratios indicate how efficiently management is using Short-term Assets

and Liabilities to generate cash. This allows an investor to gauge the overall health of

the company.

How do these Ratios relate to business? If the company sells what people want to buy,

cash cycles through the business quickly. If management cannot figure out what sells,

the WCC goes slow down. For instance, if too much inventory builds up, cash is tied up

in goods that cannot be sold - this is not good news for the company. If AR is handled

poorly, it means that the company is having difficulty in collecting payment from

customers. The longer a company has to wait to be paid, the longer that money is

unavailable for investment elsewhere. On the other hand, the company benefits by

slowing down payment of AP to its suppliers, because that allows the company to make

use of the money for longer.

OPERATING CYCLE:

The duration of time required to complete the following sequence of events, in case

of manufacturing firm, is called the operating cycle:

1. Conversation of cash into Raw Materials

2. Conversation of Raw Material in to work-in-progress

3. Conversation of work in process in to finished goods

4. Conversation of Finished Goods into Debtors and Bills Receivables through

sales.

5. Conversation of Debtors and Bills Receivable in to cash.


Duration of the Operating Cycle:

The duration of the operating cycle is equal to the sum of the duration of each of

these stages less the credit period allowed by the suppliers of the company.

In symbols,

CASH CYCLE

PARTICULAR 2009 2010 2011 Average Days Months

Operating Cycle: 188 204 163 185 6

Accounts Payable Period 39 53 30 41 1

Cash Cycle (In Month) 149 151 133 144 5

Operating cycle: Inv. Period + A/c. Receivable- A/c. Payable


INVENTORY PERIOD

A manufacturing company converts the raw material in to Finished Goods and then

sells the same. The time lag between the purchase of Raw Material and the sales of

Finished Goods is the Inventory Period. Based on the data of the past 3 years,

Vadilal industries Ltd. takes an average of 122 days between the purchase of raw

materials and the sale of finished goods that means Average Credit Period for

inventory is 4 months.

ACCOUNT RECEIVABLES PERIOD


ACCOUNT RECIEVABLE PERIOD:

DEBTOR 2959 3321 3495 3258

ANNUAL CREDIT SALES 15416 18970 23642 19343

ACCOUNT RECIEVABLE PERIOD 70 64 54 63 2

After a company sells the finished goods to its customer, customers will pay their bills

after availing credit period. Time duration between the date of sales and the date of

collection of receivables is the Accounts Receivable Period. For Vadilal industries

Ltd., it takes on an average 63 days after the date of sales to receive the payments

from its customer.


INVENTORY PERIOD:

Inventory 3700 5573 5589 4954

COGS 11443 14501 18709 14884

INVENTORY PERIOD 118 140 109 122 4


ACCOUNT PAYABLES PERIOD

The company begins with the purchase of Raw Material which is paid for after a

specified time period, which represents the Accounts Payable Period. Vadilal

Industries ltd. takes an average of 41 days from the date of purchase of raw materials

to pay the raw material supplier that means there is 1 month period. Year 2010 has

longest accounts payable period of 53 days but again its decrease in 2011.


ACCOUNT PAYABLE PERIOD:

CREDITORS 1219 2120 1540 1626

ANNUAL PURCHASE 11443 14501 18709 14884

ACCOUNT PAYABLE PERIOD 39 53 30 41 1


LIQUIDITY ANALYSIS

Maintenance of liquidity is one of the prime concerns of working capital management.

Through Liquidity Analysis, we can come to know which year the company had

maximum liquidity.

METHODOLOGY

For the purpose of Liquidity Analysis, first of all the components of Gross Working

Capital are taken as % of total block. Through this we get the % composition of each

constituent for a particular year. Furthermore, rankings are given to each constituent

across all the years. Ranks are given to each component depending on its relative

liquidity. As inventories are less liquid compared to cash balances the year having least

% inventory is given rank 1 and the year having highest % inventory is given the lowest

rank. Similarly, cash balances, which are one of the most liquid Current Assets, the year

where its % is highest is given rank 1 and the year where its % is the lowest is given the

lowest rank. After giving ranks to each constituent, individual rankings of each

constituent for each year are added up and the year with the least total is given the

highest rank and the year with the highest total is given the lowest rank. Year with the

highest rank is considered to be the most liquid year and the year with the lowest rank is

considered to be the least liquid year. Thus, by this way, we can compare the Annual

liquidities and perform liquidity analysis. Following example shows the company’s

Liquidity position over the past three years.


LIQUIDITY ANALYSIS

GROSS WORKING CAPITAL

YEAR 2008-09 % 2009-10 % 2010-11 %

CURRENT ASSETS 7897 100 10425 100 10961 100

a) Inventories 3700 47 5573 53 5589 51

b) Sundry Debtors 2959 37 3321 32 3495 32

c) Cash and Bank bal. 162 2 247 2 138 1

d) Interest Receivable 63 1 161 2 196 2

e) Loans and Advances 1012 13 1123 11 1450 13

RANKING

YEAR 2008-09 2009-10 2010-11

a)Inventories 1 3 2

b)Sundry Debtors 3 1 1

c)Cash and Bank bal. 1 1 3

d)Interest Receivable 1 2 2

e)Loans and Advances 1 3 1

Total 7 10 9

Ranks 1 3 2

INFERENCE

In case of Vadilal Industries Ltd., on the basis of the Liquidity Analysis, we can see that

the year 2010-11 ranks the best and the year 2008-09 ranks the worst as far as liquidity

is concerned. It implies that during this year the mix of Current Assets was the most

liquid. We will look at each component separately and see how each affects the liquidity

of a company.


INVENTORIES

Inventory forms a major portion of the company’s Current Assets. Inventory

occupies 47% to 53% of the company’s total Current Assets over the past three

years. One must also consider the fact that a firm has to maintain sufficient

inventory so as to prevent any shortages due to unexpected rise in the demand.

However, company can try to reduce its inventory in order to save the inventory

holding cost and enhance liquidity.

SUNDRY DEBTORS

Along with Inventories, Debtors also form a major portion of the company’s

Current Assets. Debtors occupy 32 to 37% of the company’s total Current Assets

over the past three years. Thus, it can be inferred that major part of the

company’s sales are on credit. High composition of Sundry Debtors in the

company can not only reduce the liquidity of the company, but also makes the

company more open to defaults.

CASH & BANK BALANCES

Cash & Bank balances are one of the most liquid Current Assets. Cash & bank

balances occupy 1% to 3% of the company’s Current Assets over the past three

years. We can observe that the company has a very low balance of cash

throughout the past three years. It can look to better its overall liquidity by

maintaining higher cash and bank balances.

LOANS & ADVANCES

After Cash & Bank Balances, Loans & Advances can be termed as highly liquid

in nature. Portion of Loans & Advances are in the range of 11% to 13% over the

past three years. As compared to Inventories & Debtors, Loans & Advances

occupy relatively less portion of company’s total Current Assets.


OTHER CURRENT ASSETS (INTEREST RECEIVABLES)

Over the past three years, Interest Receivables have occupied about 1% to 2%

of the company’s Current Assets. In the year 2009-10 & 2010-11, interest

receivables have occupied about 2.0% of the company’s Current Assets which is

the highest since the past 3 years.

LIMITATIONS OF LIQUIDITY ANALYSIS

As it considers only the % figures, no in-depth analysis can be provided.

Secondly, the Liquidity Analysis does not help us in identifying the reasons

resulting in variation of the figures.


WORKING CAPITAL FACILITIES

7


WORKING CAPITAL FACILITIES:

There are two types of working capital facilities:

1. Fund based working capital:

Fund based working capital facilities include:

1. Term Loan

2. Cash Credit

3. EPC

4. PCFC

2. Non fund based working capital:

Non fund based working capital includes:

1. Letter of Credit:

2. Bank Guarantee:

I. Advance:

II. Corporate:

III. Performance base:

3. Bill Discount (Purchase Bill Discount):


A) Fund based working capital:

Fund based working capital facilities include:

1. Term Loan:

All banks have Term-Loan program that can offer to all type of businesses for the

purpose of acquisition of fixed assets. viz., Land, Building, Plant and Machinery for

setting up of new industrial units or expansion/modernisation of existing units,

financing for the purchase of second hand machinery (both indigenous as well as

imported) can also be considered subject to certain conditions. Organization will use

the funds from the term loan to purchase Fixed Assets such as equipment used in its

production process. Bank will provide fund in term of loan to the company, then bank

will finance the loan in the proportion of ratings of the company. It is different from

case to case of company’s credit ratings, generally 1:3 Ratio is applicable. That

means Company’s Promoter takes out Re. 1.00 then bank will give Rs. 3.00. For

example, the total cost of project is of Rs.15.00 crores, than Bank will finance of Rs.

10.00 crores and company’s contribution would be Rs. 5.00 crores. “Vadilal

Industries Limited” having total Term Loan of Rs. 91.00 Cr, In which they have

borrowed loan from various banks i.e. BOB, SBI, SBT, IDBI and EXIM

proportionately as per their consortium sharing pattern.

2. Cash credit:

Cash Credit is also known as “Working Capital”. Cash Credit is a facility to withdraw

the amount from the business account even though the account may not have

enough credit balance. The limit of the amount that can be withdrawn is sanctioned

by the bank based on the business cycle of the company, working

capital requirement and the drawing power of the company. This drawing power is

determined, based on the stock and book debts statements submitted by the

company at monthly intervals against the security by hypothecating of stock of

commodities and book debts. The Cash Credit facility is quite useful to those

businesses where cash payment like wages, transportation, cash purchases are to

be made and the receivables are not realized in time.


Drawing Power:

Drawing Power is a capacity of a company to avail a finance facility against the

Debtor and stock. There are two methods for determining finance available to a

company. As per policy, bank cannot give 100 % of Finance to a company. As far

as Vadilal is concern, they are mainly using the second method for finding out the

drawing power. A company needs to put some money as a Margin Money for

Working Capital. On basis of that there are two methods use which are as

follows:

Method-1

Rs. In Lacs

Particular Rs. Total Amt.

Stock 100

Less: Margin (25%) 25

Net stock (A) 75

Debtors 120


Net Debtors (B) 84

(A+B) 159

Less: Creditors 60

NET DRAWING POWER 99


Method-2

Rs. In Lacs

Particular Rs. Total Amt.

Stock 100

Less: Creditors 60

Net stock 40


DRAWING POWER ON STOCK (A) 30

Debtors 120


DRAWING POWER ON DEBTORS (B) 84

TOTAL D.P (A+B) 114

Purpose: to meet the working capital needs of their ice-cream and food processed business.

Security: Company is required to maintain sufficient security for this facility with the bank. They are as follow.

A) D.P not executed by company.

B)Hypothecation of raw material, finished goods, stores and spares ,packing material lying/stored at their factory at Dudheshwar ,Bareilly, Pundhra, proposed plant at Calcutta and other warehousing of their associate concerns at company’s C&F site and other place.

C) Letter of continuing security

D) Letter of undertaking

E) Irrevocable power of Attorney for book debts.

Provision: cash credit limit is allowed against stock at various plants as per requirement. Company is required to provide insurance for all the stock.

General terms;

Company is required to submit monthly statement of stock and book debts hypothecated to the bank as of each month by the 10th of the following month, if any delay will attract penalty


3. EPC/PCFC:

Company has taken both the kinds of financing facilities from the bank i.e., pre

and post shipment. Under pre-shipment, company takes two types of credit

facilities i.e., EPC (export packing credit) and PCFC (packing credit in foreign

currency). Under pre-shipment they have taken FBD/FBP (foreign bill

discounting/purchase) for meeting their working capital requirement. Now their

financing mechanism goes like this; Company takes credit on the export orders

on hand through EPC/PCFC window for producing goods. These goods are then

transported through ship to their destination. In this whole transition it is the

banks of both the parties (Vadilal and their customer) that take care of the

financial aspect of the transaction.

On our request, our bank puts money in our C.C account for utilization. Such a

credit is permissible for a period of 180 days. Within this 180 days company is

required to submit the export documents in the bank for realizing payment the

foreign customer by its bank and then duly deposited in our banks account in

India.

After goods are sent for shipment, documents are submitted to the domestic

bank within 180 days (failing to this bank charges penal interest from the

company) these documents include invoice and inland letter. These documents

are than submitted to the foreign bank by the domestic bank seeking

conformation of the payment by the customer within the stipulated period. Then

these documents are given to the customer against which he can take delivery of

the goods from the shipping company.

On the due date, customer make payment to their bank and that bank submits

the amount to our bank and hence the account is liquidated.

In case of “Vadilal” the company procure Raw Material for processed food like

mango, green Peas, Sweet Corn, Okra, Mixed Vegetables etc during its season

and process it in Frozen Foods and exports the same as per requirements of the

customer for whole year and enjoys the benefit of low rate of interest by availing

EPC/PCFC.


Company has also taken post-shipment financing from the consortium in the form

of FBD/FBP. Whenever company is in the need of extra finance they take it from

the bank by discounting their export invoice from the bank


B) Non fund based working capital:

Non fund based working capital includes:

1. LETTER OF CREDIT:

There always remain the risks of default on the part of buyer. Therefore, suppliers

and particularly foreign suppliers insist on getting a guarantee from the buyer’s bank

for the payment in the event of default on the part of the buyer. This facility is

extended by the bank to its customer in the form of an instrument called “Letter of

Credit”. This arrangement passes the risk of suppliers to the bank. This facility is

extended by banks to only financially sound customer. However, unlike cash credit

or overdraft facility Letter of Credit is an indirect form of financing; the bank will make

payment on behalf of the buyer only if he fails to meet his obligation.


L/C Transaction Structure

1. Vadilal Industry Ltd. enters into a purchase agreement with its supplier, For Ice-

Cream and Frozen Food business.

2. Vadilal Industry Ltd completes an Application for an irrevocable Letter of Credit with

information pertaining to VIL transaction and then submits it to Issuing bank (SBI

Bank) for processing.

3. The Letter of Credit is usually issued within 24 hours of the time the Issuing Bank

(SBI Bank) sends the Letter of Credit to the Advising Bank (IDBI Bank).

4. The Advising bank (IDBI Bank) establishes the authenticity of the Letter of Credit and

informs the Beneficiary (i.e., supplier) that it has been received.

5. Supplier, ships goods to VIL against the letter of credit.

6. The Supplier / Beneficiary presents the Documents to the Advising Bank for payment

under the Letter of Credit.

7. The IDBI bank sends the Documents to the SBI bank which checks to make sure

they conform to the terms of the letter of credit.

8. VIL pays Issuing bank for the amount drawn under the Letter of Credit or has

previously made arrangements for extended credit terms.

9. The Issuing Bank releases the Documents to VIL and the SBI Bank wires the funds to

your Supplier through its IDBI Bank.


2. BANK GUARANTEE:

A bank Guarantee is a written contract given by a bank on the behalf of a Company.

By issuing this guarantee, a bank takes responsibility for payment of a sum of money

in case, if it is not paid by the Company on whose behalf the guarantee has been

issued. In return, a bank gets some commission for issuing the guarantee. Any

company can apply for a Bank Guarantee, if his or her company has obligations

towards a bank for which funds need to be blocked in order to guarantee that his or

her company fulfil its obligations (for example carrying out certain works, payment of

a debt, etc.) In case of any changes or cancellation during the transaction process, a

Bank Guarantee remains valid until the customer dully releases the bank from its

Liability.

In the situations, where a Company fails to pay the money, the bank must pay the

amount within three working days. This payment can also be refused by the bank, if

the claim is found to be unlawful.

Bank is providing three kinds of guaranties: “Advance Payment Guarantee”

allows buyer to gives advance payment to the seller party in order to carry out the

particular projects according to the terms and conditions of the contract. Here the

bank will give guarantee on behalf of another party for the payment of the remaining

fund to the main party.

“Corporate Guarantee” is given by a Company to a Customer acknowledging

obligation to the Terms of Contract. Corporate Guarantee is provided by the

Company to another company for the same purpose but it is not foolproof. It is

however a legally valid document and the Customer can sue the Company in Court if

it does not pay up.

The seller issues a “Performance Bank Guarantee” to passionate ensure or give

concrete commitment to the buyer through its bank. This method ensures the buyer

the timely execution of an agreement to have the goods exported to the buyer

Company. In case the seller defaults on execution of the terms agreed, upon the

Performance Bank Guarantee ensures the buyer for payment of the guarantee

amount by the issuing bank.


WORKING CAPITAL FINANCING

TRADE CREDIT

Trade Credit appears to be a cost free source of finance as it does not involve any

explicit interest charges. However, in practice it is not free. It involves an implicit cost

which may be transferred to buyer by the supplier in the form increased prices or the

forgone Cash Discount extended by the supplier to the buyer for the early payment of

the dues. At times for meeting their finance requirements, companies stretch their

account payables. However, this again proves to be very costly both implicitly and

explicitly. Explicitly in the sense that company might have to pay penal interest for this

delayed period and implicitly in the sense that this adversely affects the company’s

creditworthiness.

WORKING CAPITAL ADVANCES BY COMMERCIAL BANK

WHAT IS CONSORTIUM?

Consortium is a Latin word, meaning ‘partnership, association or society’ and

derives from censors ‘ partner’, itself from con-‘together’ and sores ‘fate’, meaning

owner of means or comrade.

A consortium is an association of two or more individuals, companies, organizations,

or governments (or any combination of these entities) with the objective of

participating in a common activity or pooling their resources for achieving a common

goal.


WHY A BANK CONSORTIUM?

Bank Consortium means, an association of more than one bank which join together

to fulfil the financial requirements of a company. In the same way in Vadilal having

five banks called Bank of Baroda, State Bank of India, State Bank of Travancore,

IDBI, and Export Import Bank of India (EXIM). In which BOB is lead bank of Vadilal

and others are followed banks. They share a proportionately in a pre decided

manner, these are as follow 29%, 21%, 17%, 14%, 18% respectively, Such an

arrangement diversifies the risk from any one bank, in other words risk of default on

the part of company gets divided among the consortium members and hence a bank

can finance more amount of money depending on the degree of risk it can take.

Consortium banking had faded away with the demise of financial institutions.

However, with the kind of revolution that has occurred in the financial system of

India, this concept is regarding its popularity. According to banking sources, banks

are appointing a single security trustee who will draft the terms and conditions for the

entire group of banks involved in lending.

Consortium lending had become past due to problem in settling non-performing

assets through the Corporate Debt Restricting (CDR) method. Disagreement among

bankers used to cause the entire process to fall through. In extreme cases in the

past, even major lenders had gone ahead with the debt restricting process without

the full consent of lenders. Therefore, each bank had decided to have its own terms

and condition for lending to a corporate account. However, consortium banking has

made a comeback after the legal procedure for settling bad accounts has been

simplified and streamlines by the Reserve Bank of India and through the enactment

of the securitization act.

Company also has an excess to the private sources for funds in the form of bill

discounting. However this source is used only to fill the transitional gaps on monthly

bases. This is not any major sources of finance.

Now coming to the VADILAL Industries Limited, bank has been the most feasible

sources for financing their requirement of working capital. Bank generally do not

finance with adequate security. Company has very well fulfilled this requirement by

means of hypothecation of stock, book debt and mortgage of fixed assets.


Apart from this, company also uses Trade Credits from its suppliers in the form of

sundry which are also known as Account Payable.

As far as cost of the funds is concerned, Vadilal is well as per the running market

rate and nothing extra is to be paid. However, their cost vitiates due to change in

bank interest rates i.e. Base Rate Previously it was a BPLR (Benchmark Prime

Lending Rate) which is changes as per guidelines of RBI and Banks Policy.

Thus from all this we can say that company has quite successfully met its finance

requirement for their working capital given the external and internal limitations.

PUBLIC DEPOSIT

Public Deposits are an important source of financing the medium-term and long-term

requirements of a company. The term 'Public Deposit' implies any money received by a

company through the deposits collected from the public. The public includes the general

public, employees and shareholders of the company but excludes the money received

in the form of shares and debentures. The public deposits are generally solicited by

company in order to finance the working capital requirements of the Company. Besides

the issue of Shares- Equity, Preference and Debentures, a company can accept

deposits from the public to finance its medium and short-term requirements of funds.

This source has become very popular recently because, a company offers interest at a

rate higher than offered by banks. As far as Vadilal is concerned, it also accepts public

deposit to meet the short-term financial/ working capital requirement. Under this

method, Vadilal is able to obtain funds directly from public without financial

intermediaries. They offer interest to the investors over public deposits.


INTER CORPORATE DEPOSIT

An Inter-Corporate Deposit (ICD) is an unsecured loan extended by one corporate to

another. Existing mainly as a refuge for low rated corporate, this market allows funds

surplus corporate to lend to other corporate. Also the better-rated corporate can borrow

from the banking system and lend in this market. In the same way Vadilal borrow the

funds from the bank, and then after they lend these funds to other corporate, and

receive higher interest rate. As the cost of funds for a corporate in much higher than a

bank, the rates in this market are higher than those in the other markets. ICDs are

unsecured, and hence the risk inherent is high. The ICD market is not well organised

with very little information available publically about transaction detail.

Such Inter Corporate Deposits are as follow:

Call Deposits: In theory, a lender can withdraw a call deposit on giving a day’s

notice. In practice, however, the lender has to wait for at least three days. The

interest rate on such deposits is varying from company to company.

Three-month Deposits: This type of deposit is more common and more popular in

practice as far as Vadilal Industries is concerned. Such deposits are taken by the

borrowers to make up for the short term cash inadequacy which can occur due to

many reasons.

Six-month Deposits: Normally, lending companies do not extend deposits beyond

this time frame. Such deposits are usually made with first-class borrowers & carry a

higher interest rate.


BANK FINANCE FOR WORKING CAPITAL

Banks are the main institutional sources of the Working Capital Finance in India. After

Trade Credit, Bank Credit is the most important source of financing working capital

requirements. The amount approved by the bank for the firm’s working capital is called

Credit Limit. Credit Limit is the maximum funds which a firm can obtain from the banking

system. In case of companies with seasonal businesses banks may fix separate limits

for peak and non peak season indicating the time period during the year when these

two limits will be applicable. In practice, banks do not lend 100% of the limit sanctioned.

They deduct margin money from it.

FORMS OF BANK FINANCE

An organization can withdraw funds from the bank in various forms within the maximum

permissible limit. They are as follow:

Overdraft:

Under Overdraft facility the Company is allowed to withdraw funds in excess of the

balance in his Current Account up to a certain specified limit during a stipulated period.

Overdrawn amount is repayable on demand. It is a very flexible arrangement from the

Company’s point of view since he can withdraw and repay funds whenever he desires

within the overall stipulation. Interest is charged on the daily balances – on the amount

actually withdrawn – subject to some minimum charges.

Discount of Bills:

When sale and purchase transaction takes place, the seller issues an invoice (Bill) to

the purchaser. If this sale is a credit sale, then seller will get the money from the

purchaser only after expiry of credit period. The bank discounts the borrower’s bills. The

amount provided under this agreement is covered within the overall cash credit or

overdraft limit. When a Bill is discounted, the borrower is paid the discounted amount of

the bill. However bank collects the full amount on the maturity. Difference between the

amounts is the banks charge for this service.


A bill arises out of trade transaction. The seller of goods draws the bill on the purchaser.

The bill may be either clean or documentary and may be payable on demand or after an

insurance period which does not exceed 90 days. On acceptance of the bill by the

purchaser, the seller offers it to the bank for discount/purchase. When the bank

discounts/purchases the bill it releases the funds to the seller. The bank presents the bill

to the purchaser on the due date and gets its payment. However, this source is used

only to fill the transitional gaps on monthly basis. This is not any major source of

finance.

Working Capital Loan:

A borrower may sometimes require extra amount of funds due to occurrence of some

unforeseen contingencies. This is given to them in the form Working Capital Loan.

Sometimes a borrower may require additional credit in excess of sanctioned credit limit

to meet unforeseen contingencies. Banks provide such credit through a Working Capital

Demand Loan (WCDL) account or a separate “non–operable” cash credit account. This

arrangement is presently applicable to borrowers having working capital requirement of

Rs.10 crores or above. The minimum period of WCDL keeps on changing. WCDL is

granted for a fixed term on maturity of which it has to be liquidated, renewed or rolled

over. On such additional credit, the borrower has to pay a higher rate of interest more

than the normal Rate of Interest. However borrower is required to pay a higher rate of

interest as compared to the normal rate. Here I would like to mention the working capital

requirement of the “Vadilal Industries Limited.” are as follow: first of all I m mentioning

the fund based facility of W.C, Vadilal having total fund based loan of Rs. 52.67 Cr from

their consortium bank. Now coming to the non-fund based facility of W.C loan, Vadilal

having total of Rs. 12 Cr from the same.


GUIDELINES FOR BANK FINANCE

Bank Credit is a scarce source of finance. Banks are the safest place for an

individual as well as business man to keep their money. However, returns on Bank

Deposits are very less as compared to the other investment options. Therefore banks

get limited amount of deposits which they can offer under various credit facilities.

Moreover there are many other contenders for bank credit. These mainly include

agriculture, small scale industries, farmers, small man and many others. Public

limited companies also approach commercial banks for their working capital

requirement.

Hence, monetary authorities have been very particular regarding the efficient and

legitimate use of bank finance by the companies. In this regard, Reserve Bank of

India has taken many steps from time to time for bringing the necessary changes in

the banking system with the changing needs. An important chapter of this reform

journey is Tandon committee and the Chore committee.

These committees laid down norms which formed the basis for extending bank

finance to the companies for fulfilling their credit needs for working capital. They

introduced the concept of MPBF i.e. “Maximum Permissible Bank Finance”. MPBF

formed a substantial part of the working capital gap (Current Assets – Current

Liabilities).

Finance only a part of the working capital requirement and not the 100%. Logic

behind such recommendation was that, since certain amount remains invested in the

business on permanent basis which is also termed as permanent working capital,

such amount should be financed from the long term sources of funds of the firm.

These committees also recommended on the style of credit and the information

system (flow). In addition to this chore committee recommended banks to consider

peak and non peak limits separately in case of the businesses which are having

seasonal element in them.

These efforts have been very successful in reforming the credit system of the banks.

It has resulted in more optimize usage of bank finance. However still we have to do a

long way on this path since lot of in efficiencies still exist some of which have

developed with the passage of time and changing requirement.


TANDON COMMITTEE RECOMMENDATIONS

NORMS FOR CURRENT ASSETS:

Tandon Committee defined the norms of raw materials, stock-in-progress, finished

goods, and receivables for fifteen major industries. Subsequently, more industries

were covered.

MAXIMUM PERMISSIBLE BANK FINANCE:

The Tandon Committee had suggested three methods for determining the maximum

permissible bank Finance (MPBF). These methods are described below:

Method 1: MPBF = 0.75 (CA - CL)

Method 2: MPBF = 0.75 (CA) - CL

Method 3: MPBF = 0.75 (CA - CCA) – CL

Where,

CA = Current Assets as per the norms laid down

CL = Non-bank Current Liabilities like trade credit and provisions

CCA = Core Current Assets which represent the permanent component of working

capital.

To consider the calculation of the MPBF under the three methods, let us consider

the data for the Vadilal Industries Limited:


CURRENT ASSETS AND CURRENT LIBILITIES OF

VADILAL INDUSTRIES LIMITED

PARTICULAR 2008-09 2009-10 2010-11

Current Assets

Inventories 3699.98 5573.21 5588.85

Sundry Debtors 2958.96 3209.37 3494.54

Cash and Bank Balance 162.27 246.56 138.06

Other Current Assets 63.05 272.87 289.06

SUB TOTAL (A) 6884.26 9302.01 9510.51

LESS: Current Liabilities

Sundry Creditors 1218.55 2119.53 1540.38

Other Liabilities 494.52 741.64 842.38

Bills Payable/ Acceptances 896.75 1640.99 1106.93

Advances from Customers 17.71 27.76 28.74

Due to Managing Directors 1.9 25.33 8.6

Unclaimed Dividend 6.75 8.92 11.75

Unpaid Matured Deposit 19.16 26.39 33.52

Interest on Deposit 3.05 4.14 11.3

SUB TOTAL (B) 2658.39 4594.7 3583.6

NET CURRENT ASSETS (A-B) 4225.87 4707.31 5926.91


CORE CURRENT ASSETS

CORE CURRENT ASSETS 2008-09 2009-10 2010-11

Stores & Spares 150.26 172.34 241.86

Raw Materials 682.16 1060.48 1598.06

Packing Materials 507.21 760.18 806

Total 1339.63 1993 2645.92

CALCULATION FOR MPBF

Particular 2008-09 2009-10 2010-11

METHOD-1: 0.75 (CA-CL)

Net Current Assets 4225.9 4707.3 5926.9

Method-1 3169.4 3530.5 4445.2

METHOD-2: 0.75(CA) – CL

Current Assets 5163.2 6976.5 7132.9

Current Liabilities 2658.4 4594.7 3583.6

Method-2 2504.8 2381.8 3549.3

METHOD-3: 0.75(CA - CCA) – CL

Current Assets 6884.3 9302 9510.5

Core Current Assets 1339.6 1993 2645.9

Current Liabilities 2658.4 4594.7 3583.6

CA – CCA 5879.5 7807.3 7526.1

Method-3 3221.1 3212.6 3942.5


CURRENT RATIO: 2008-09 2009-10 2010-11

MPBF + CURRENT LIBILITIES

METHOD- 1 5827.8 8125.2 8028.8

METHOD- 2 5163.2 6976.5 7132.9

METHOD- 3 5879.5 7807.3 7526.1

CURRENT RATIO:

M-1 1.18 1.14 1.18

M-2 1.33 1.33 1.33

M-3 1.17 1.19 1.26

Out of the three methods for determining the Maximum Permissible Bank Finance

(MPBF), the second method has been adopted since the minimum Current Ratio in this

type of method works out to be 1.30. For example, the Current Liabilities of Vadilal

Industries Ltd. for the year 2009 is 2658.43 Lacs and the Current Assets for the year

2009 are 6884.26 Lacs. According to the second method, MPBF comes out to be

2504.8 Lacs. This means that now, the total Current Liabilities including MPBF will be:

Rs. 2504.8 Lacs (MPBF) + Rs. 2658.39 Lacs (Current Liabilities) = Rs. 5163.2 Lacs as

a result, the current Ratio comes out to be = 6884.26/5163.2 = 1.33.

CURRENT RATIO NORMS:

Tandon Committee recommended that a company seeking Working Capital Financing

should maintain a minimum Current Ratio of 1.33. However, in the present times, a

Current Ratio of 1.33 is regarded only as a benchmark and banks do accept a lower

Current Ratio depending upon the circumstances. While deciding MPBF, banks do look

into many factors such as duration & nature of the operating cycle, projected build-up of

Current Assets & Liabilities, projected Turnover, Profitability & Liquidity.


CONCLUSION

After performing Ratio and liquidity analysis on the financial data of the company

and analyzing various avenues from where the company has financed its working

capital requirement, one can say that the company is adequately managing its

working capital needs.

Ratio Analysis performed on the company’s financial data provides a broader

overview of the company’s liquidity position. From the Ratio Analysis, we can

observe that the company’s Liquidity Ratios have been increasing over the past few

years. However, this increase can be attributed to the steady increase in the

inventory level which is the least Liquid Current Asset. Ratio Analysis also indicates

that the company can put in more efforts to efficiently handle its slow moving

inventory. Turnover Ratios also suggest that the Average Collection Period has

decreased over the years, which is a good sign for the company as far as its credit

management policy is concerned. Stiff competition in the ice-cream business,

uncertainty and volatility in the market & an increase in the material & finance cost

can be attributed to this decrease in the Profit Margin.

As far as Working Capital Financing is concerned, history of Vadilal Industries Ltd.

suggests that financing through banks has been one of the most feasible sources for

financing its working capital requirements. Cash-Credit/Overdrafts, Working Capital

Loans, Discount of Bills, Letter of Credit are different modes of financing availed

through commercial banks. Trade Credit from the suppliers is another mode of

financing preferred by the company for financing its working capital needs.

Liquidity Analysis suggests that a major portion of the company’s Current Assets are

inventories. Cash & Bank Balances occupy very small portion of the company’s total

Current Assets which may be a cause for concern.


In these two months of my summer training I have learned a lot not just on any

particular aspect, rather it has been a fruitful learning experience for me in all the

spheres of corporate life. Apart from just reinforcing the academic learning, it has

taught me how to work in an environment which is full of uncertainties. Hope that i

can make full use of what I have learned in Vadilal in my professional career.


RECOMMENDATIONS

Vadilal being a growing enterprise is on the expansion mode. This is favoured by the

growing market for its product and hence company’s funds requirements are always

on an upswing. Competition in the ice-cream market from reputed companies like

Amul, Havmor and Kwality Walls is growing along with an increase in the market

share of the ice-cream makers belonging to the unorganized sector and thus, there

is constant pressure on the profit margin of the company. Hence to remain

profitable, company must try to reduce its operating cost to the maximum possible

extent. This reduction in operating cost will be ensured by adopting a more efficient

working capital management policy. This will require better co-ordination between

different departments concerned.

With major expansion work being carried out in both Pundhra & Bareilly plant of

Vadilal Industries Ltd. so as to cater to the growing needs of the consumers,

inventory level is bound to move up. Hence, the company will have to relook its

inventory management practices so as to make it more efficient.

Since the company is on an expansion spree and undergoing various brand-building

endeavours, costs are expected to increase. But hopefully these costs will lead to

more sales in the future and the company will be able to create a stronger hold on

the market and sustain the growth momentum in the future.


LIMITATIONS OF THE STUDY

Financial statements contain summarized information as a result of which there are

chances that some important relevant information may be left out. Because of the

limitations of the financial statements, Ratios calculated on the basis of these

statements may not always be the true reflection of the overall year’s results.

Ratios need to be interpreted carefully since there are no fixed standards for ideal

Ratios. For example, it is difficult to establish the ideal Ratios against which one can

compare the Ratios of Vadilal Industries. This is because the ice-cream industry in

Gujarat is still unorganized and as a result it is difficult to establish the industry

average of the Financial Ratios. Thus, it can be possible that due to personal bias or

due to other reasons, different people may interpret the same Ratio differently.

Sometimes it is difficult to compare same Ratios between two firms operating in the

same industry because those firms differ in their businesses, their size, their

accounting procedures, etc. For example, although Vadilal and Amul operate in the

same ice-cream industry, it is difficult to compare their Ratios since both these

companies have different & diversified business profiles.

The project had to be done using previous years’ data since the Annual Report for

the year ending 31st March, 2012 has not been released yet and also the financial

findings based on the unaudited information of the present year could be misleading.


BIBLIOGRAPHY

Various sources of information used in this project are as follows:

Chandra, P. Financial Management, New Delhi: Tata McGraw-Hill Publishing

Company Limited.

Financial Statements of Vadilal Industries Ltd.

(n.d.). Retrieved from http://www.vadilalgroup.com/

Opportunities. (2010). Retrieved from http://dare.co.in/opportunities/other-

business-opportunities/ice-cream-industry-in-india.htm

(n.d.). Retrieved from

http://www.istockanalyst.com/article/viewarticle/articleid/2832512

DOI: www.investopedia.com

Finance Department


OPERATING STATEMENT OF "VADILAL INDUSTRIES LIMITED."

Rs. In Lacs

PARTICULARS 2008-09 2009-10 2010-11

GROSS SALES 15363 18891 23583

(i) Domestic Sales

(ii) Export Sales

(iii) Others 55 80 91

TOTAL 15418 18971 23674

Less: Excise duty 2 1 32

NET SALES 15416 18970 23642

Other Business Income 0 0 0

Derivative Losses -570 0 0

Total Income 14846 18970 23642

% age rise(+) or fall (-) in net

Sales as compared to previous year

COST OF SALES

i) Raw materials/Goods Purchased 9382 11756 13554

(a) Imported

(b) Indigenous

ii) Packing Materials 97 687 130

(a) Imported

(b) Indigenous

iii) Other Spares 34 47 60

(a) Imported 0

(b) Indigenous 0

iv) Power & Fuel 1186 1379 1785

v) Direct Labour 28 33 39

vi) Other mfg. expenses 1065 1253 1677

vii) Depreciation 484 565 817

viii) SUB-TOTAL (i to vii) 12276 15720 18063

xii) ADD: Op.stk of Work in process 0 0 0

xiii) SUB TOTAL 12276 15720 18063

xiv) DED : Cl.stk of work in process 0 0 0

xv) SUB TOTAL / COST OF PRODUCTION 12276 15720 18063

xvi) ADD: Op.stk of finished goods 1527 2360 3579


xvii) SUB TOTAL 13803 18080 21642

xviii) DED: Cl.stk of Finished goods 2360 3579 2933

xv) SUB TOTAL / TOTAL COST OF SALES 11443 14501 18709

Gross Profit 3403 4469 4934

Selling & distribution expenses 2538 3035 3318

General & Administrative expenses

SUB TOTAL (5 + 6) 13981 17536 22027

Op. Profit before Int. (3-7) 865 1433 1616

Interest (Gross)

Interest received

Interest Net 749 631 961

Op. Profit after interest (8-9) 116 802 654

i) ADD Other Non-Operating income 86 77 94

(a) Profit on sale of F.A. & Invts.

(b) Others 17

Sub-Total (Income)

ii) DED. Other Non-Operating exp.

(a) Previous Yr's adjustment/others

(b) Preliminary exp. W/O

Sub-Total (Expenses)

iii) NET of Other non-op.Income/Exp.

PROFIT BEFORE TAX/LOSS (10+11(iii)) 219 879 748

Tax Provision 111 304 241

NET PROFIT / LOSS (12-13) 108 575 507


BALANCE SHEET OF VADILAL INDUSTRIES LIMITED.

₨ in Lacs ₨ in Lacs ₨ in Lacs

PARTICULARS SCHEDULE 2008-09 2009-10 2010-11

1.Sources of funds:

(A) Share holders funds

(i)Share capital 1 719 719 719

(ii)Reserves & surpluses 2 2811 3239 3602

TOTAL 3530 3958 4320

(B) Add: Differed govt. grant 35 32 29

(C) Loan funds:

(i)Secured Loan: 3

a)Term Loan 2492 4010 6657

b)Working capital loan 2933 3202 4286

Total of Secured loan 5425 7212 10943

Unsecured loan 4 1204 2009 3341

Total 6629 9221 14284

(D) Differed tax liability 5 578 549 783

Total 10771 13760 19415

2. Application of funds:

1)Fixed Assets 6

a)Gross block 9380 9796 14880

Less: Depreciation 4031 4559 5332

Net block 5349 5237 9549

b)work in progress 159 3050 2614

5508 8287 12163

2)Investments: 7 330 159 158

3)Current Assets, loan & provisions:

a)Inventories 8 3700 5573 5589

b)Sundry debtors 9 2959 3321 3495

c)Cash and bank bal. 10 162 247 138

d)Other Current Assets 11 63 161 289

e)Loans and advances 12 1012 1123 1450

Subtotal (A) -{ 7897 10425 10961

less: Current liability and prov.

a)Current liability 13 2746 4681 3662

b)Provision 14 259 492 254

Subtotal (B)-{ 3005 5173 3917

Net Current Assets(A-B) 4891 5252 7044

4)Misc. expenditure 15 42 63 50

Total: 10771 13760 19415

Summer internship report_Vadilal

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