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Transcript of Working Capital Management Vardhman
CAPSTON PROJECT REPORT
ON
WORKING CAPITAL MANAGEMENT
OF
VARDHMAN
Submitted to Lovely Professional University
In partial fulfillment of the requirements for the award of degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by:NEHA VARUN
2020070362
Supervisor:Mrs. Anita soni
Lect. (LPU)
DEPARTMENT OF MANAGEMENTLOVELY PROFESSIONAL UNIVERSITY
PHAGWARA (2007-2009)
1
LOVELY PROFESSIONAL UNIVERSITYDEPARTMENT OF MANAGEMENT
Certificate of Completion by the Faculty Advisor TO WHOMSOEVER IT MAY CONCERN
This is to certify that the project report titled
“________________________________________” carried out by
Mr._________________(student name), S/o or D/o____________(Father’s Name) has
been accomplished under my guidance & supervision as a duly registered MBA student
of the Lovely Professional University, Phagwara. This project is being submitted by
him/her in the partial fulfillment of the requirements for the award of the Master of
Business Administration from Lovely Professional University.
His dissertation represents his original work and is worthy of consideration for the award
of the degree of Master of Business Administration.
___________________________________(Name & Signature of the Faculty Advisor)
Title: ______________________________
Dare: ______________________________
Date:
2
LOVELY PROFESSIONAL UNIVERSITYDEPARTMENT OF MANAGEMENT
of Authenticity by Student DECLARATION
I, "________________________________(student's name)”, hereby declare that the
work presented herein is genuine work done originally by me and has not been published
or submitted elsewhere for the requirement of a degree programme. Any literature, data
or works done by others and cited within this dissertation has been given due
acknowledgement and listed in the reference section.
_______________________ (Student's name & Signature)
_______________________(Registration No.)
Date:__________________
3
ACKNOWLEDGEMENT
“Accomplishment of a task with desired success calls for dedication towards
work and prompting guidance, co-operation and deliberation from seniors.”
This report is the outcome of the capstone project that I did in the Vardhman
Polytex Limited, Ludhiana.
It gives me immense pleasure to acknowledge my deep sense of gratitude
and sincere thanks to Mr. M.S.Arora C.M. (A&C) and to Mr. Rajiender Pal (Executive
HRD) for agreeing for the training and to my revered guide Mr. Sanjeev Wadhawan for
extending the courtesy and for his guidance, support and affection throughout the course
of this work.
I am extremely grateful to Mr. Vijay Arora and other faculty members for
their valuable guidance and glorious teaching.
In last, I express my profound gratefulness and indebtedness to the
esteemed organization for granting me the grand privilege of working on a project under
team of experts and professionals in the field of finance.
NEHA VARUN
4
TABLE OF CONTENTS (Part A)
1. Introduction to Vardhman………………………………………………….7
1.1 History………………………………………………………………………...9 1.2 Profile of the company……………………………………………………….10 1.3 Company structure………………………………………………………......10 1.4 Current setup…………………………………………………………………11
1.5 Present capacities……………………………………………………………..12
1.6 Computerisation………………………………………………………………12
1.7 ISO certification………………………………………………………………13
1.8 Production…………………………………………………………………….13
1.9 Marketing……………………………………………………………………..13
2. Organization structure………………………………………………………14
2.1 Manufacturing process………………………………………………………16
3. Objectives of the study……………………………………………………….17
3.1 Scope of the study…………………………………………………………….17
4.Review of literature……………………………………………………….........18
5. Research methodology……………………………………………………….21 5.1 Sources of information………………………………………………………21 5.2 Report writing……………………………………………………………….21
6. Limitations of the study………………………………………………………22
5
Part B
1. Theoretical background of working capital management……………………23
1.1 Meaning…………………………………………………………………………23
1.2 Concept………………………………………………………………………….24
1.3 Type of working capital………………………………………………………...24
1.4 Need for working capital…………………………………………………….....26
1.5 Determinants of working capital………………………………………………28
2.Meaning and Nature of working capital………………………………………..32
2.1 Major decisions in working capital management……………………………32
3.Working capital analysis…………………………………………………………35
3.1 Operating cycle analysis……………………………………………………….35
3.2Ratio analysis…………………………………………………………………….39
4.Cash management………………………………………………………………..46
5.Recievables management…………………………………………………………50
6. Management of inventory……………………………………………………….59
7. Findings………………………………………………………………………….67
8. Recommendations………………………………………………………………..68
9. Conclusion………………………………………………………………………..69
10. References………………………………………………………………………70
6
1.INTRODUCTION TO THE COMPANY
1.1 HISTORY OF THE INDIAN TEXTILE INDUSTRY
The human need is to eat well for to be alive and shelter to protect them from discomforts
of nature and a place to live in. Human beings also need something to cover their body to
protect from diverse climates and to add the appearance. Earlier there was a time when
the human being known nothing about the cloth to wear. The human beings first use
plant barks, leaves and animal skin to wrap around them. Then as the development of
brain took place, they started to explore other possibilities and invent more in this area.
There is constant search for clothing and it led to the knowledge of sources from
vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to
manufacture clothes to wear.
The commercial development of man-made fiber began late in the 19 th Century,
experienced much growth during the 1940’s, expanded rapidly after world War – II and
in the 1970’s was still the subject of extensive Research and Development.
Before Independence we talk of the political leaders like Mahatma Gandhi, who had
always insisted to use Khadi Clothes and even self-spinning and weaving. It is also
called as self-dependence for all needs. Such a good initiatives had come-up at India
level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such
initiatives had been proved very good and had attracted many other western countries to
follow such practices and show their excitedness. Though in case we talk of the English
rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but
7
after the freedom these leaders had got very good appreciation particularly for the self
spinning and weaving and in an overall manner this sector of Spinning and Weaving was
industrialized even after the independence too on the basis of Indian cotton growers.
It is needless to mention here that through out India, cotton growers belts are available
and after independence even English people take their raw material from here and had
established themselves with the Spinning and Weaving industries. Overall In India no
such preferences for the Spinning and Weaving industries were made, however the
Library research reveals that the first Cotton mill had been established in India during
1854 named as Bombay Spinning and Weaving company This is just the example of the
development, that in India too the most modern machinery is being installed. However, it
is an evident that the Indian yarn is always running on the development trend since its
Inception of first unit in Bombay, but its position in the international market has not
appeared so good.
The invention and production of man made thirty three fibers that is synthetic fibers like
Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc.,
which ultimately had given a good blow to grow for the Cotton Textile Industry and
know occupy a major part of consumer acceptance. About 50 countries have been
importing such material from India and the description of the Spinning and weaving
industry had remained incomplete without referring to the woolen industry.
8
1.2 PROFILE OF THE GROUP AND UNIT
The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of
industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in
Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills
situated in Ludhiana. Oswal group is earning laurels by exporting yarn of international
quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company.
BACK DROP:
M/s Vardhman Polytex Ltd., a public limited co. set up in the year 1980 is managed by
board of directors with Mr. Ashok Oswal as its Chairman cum Managing director since
1987. Over a period of time, the company has grown manifold under the guidance of Mr.
Oswal. In1987, when the Company was taken over from Mohtas, it had only 12000
spindles and at present, the capacity has moved up gradually to 108000 Spindles.
The group has very good potential and high presence in the textiles industry with well set
manufacturing set up for 100% cotton, Polyester cotton, Tyre cord, 100% Acrylic and
other blended yarns. All the group units have state of the art technology imported from
machinery giant in Europe, Japan, China and many other countries. To ensure quality
commitment to its valuable customers, the R&D department is well equipped with latest
R&D equipments. Continuous efforts are always being made to further improve the
quality and match the industry standard to meet the actual requirements of its quality
conscious customers.
9
1.3 COMPANY STRUCTURE
10
OSWAL GROUP
VPL BATHIND
A
ANSHUPATI
LUDHIANA
VTM LUDHIAN
A
Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in
the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine
Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of
count combination demand of its prospective customers. The quality yarn in this unit is
manufactured using state of art technology imported from Europe, which is fully backed
with ultra modern R&D equipment for consistent quality. The yarn manufactured from
this unit holds a very strong reputation and demand both in domestic and international
market. The present capacity in terms of production is approximately 6.5 ton/Day
Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 74592 cotton
spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord
yarn with vast range of count selection varies from NE 10 to 40 both in carded and
combed varieties. To ensure quality to its customers the group has received the ISO-
9001-2000 certification. This unit is exporting its product to Mauritius, Hong Kong,
Singapore, Egypt, Turkey, Bangladesh, China, Taiwan etc. The company keeps on
receiving repeat orders, which shows the level of confidence, bestowed by its customers
into it. The company had been awarded the Export House status by the Government of
India. The present capacity in term of production is around 36500 Kg/day.
1.4 CURRENT SET UP:
Presently the Company has its corporate office situated at Chandigarh Road, village
Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are
looked after by qualified technocrats/professional at plant/work as well as at corporate
office having rich experience in their respective fields of management.
11
Ashok Oswal himself a Law Graduate has been looking after the textile business in this
company since 1987. Uptill family settlement, he was actively associated with the
business management of Vardhman group.
1.5 PRESENT CAPACITIES
Presently the group has following production capacity and product range at its
different manufacturing facilities.
Location Installed
Capacity
(spindles)
Production
Capacity
Product Range
Bathinda (existing )-49248
(VPL) (under erection)-25344
74592 36500kg/Day
14000kg/day
Cotton, synthetic,
blended yarn
Ludhiana
(Anshupati Textile)
8000 6.50 MT/Day Acrylic Yarn
Ludhiana (VTM) 24288 14MT/Day
13-MT
dyeing/Day
100% Cotton yarn
1.6 COMPUTERISATION
Presently the unit is operating under “Tally system”. This system is well structured
keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The
system is functioning to online to finance, raw material, stores and commercial. All the
stauratory returns are generated online from the system.
12
1.7 I.S.O. CERTIFICATION
The unit had been awarded ISO-9002 certificate by bureau of India standards after the
final audit, which took place in the unit from 24th July, 1996. The ISO certification is an
assurance of good quality of the product. But at present unit had been awarded ISO-9001
– 2000 by bureau of India Standard.
1.8 PRODUCTION
The unit is producing difference types of yarn both for Domestic consumption and Export
purpose. The production department is headed by Assistant General Manager (A.G.M.).
The department has four units. The unit I is concerned with production of cotton yarn.
The unit – II is concerned with the production of cotton yarn & Tyre Cord yarn. The unit-
II expansion is concerned with Polyester, Cotton yarn, blended yarn & at last in unit – III
partially Polyester & 100% Cotton yarn is made.
1.9 MARKETING
For Marketing of different product, the unit is having a modern marketing department
headed by experienced team which covers all the activities for conversion of finished
goods into cash. It keeps vigil on the market feed-back on the level competition, market,
trend, changing customer needs and modifications. The marketing department deals with
domestic sales, while export department of the group manages export sales. The V.P.L.’s
having the export and domestic ratio is 26:74. The unit is having different channels for
distribution of its products.
1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.
2. Branches at Delhi and Ludhiana.,Direct Dispatches are also made by the units.
13
2. ORGNISATION STRUCTURE
A chart showing the organizational structure of V.P.L. Bathinda is given on the next
page. It shows the various hierarchical levels of the organization. It is a department line
organization which is divided into various department headed by their respective
department heads. All departments operate under the ultimate control of Chief Executive
Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads
down the line to respective department subordinates.
14
15
Issue of Cotton Bales
Laying Down
Blow Room
Card
Breaker Draw Frame
Finisher Draw Frame
Unilap
Comber
Speed Frame
Ring Frame
Winding
Cheese Winding
T.F.O
Conditioning
Packing for Double Yarn
Conditioning
Packing for Single Yarn
Storage & Dispatch
Manufacturing Process Flow Chart of VPL 100% COTTON CARDED/COMBED YARN
2.1 MANUFACTURING PROCESS IN VARDHMAN POLYTED LIMITED,
BATHINDA
Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.
1. MIXING
2. BLOW ROOM
3. CARDING
4. DRAW FRAME
5. LAP FORMER
6. COMBERS
7. SPEED FRAME
8. RING FRAME
.9. WINDING.
10. DOUBLING
11. PACKING
16
3.OBJECTIVES OF THE STUDY
The managemenf working capital is very important. It involves the study of day to day
affairs of the company. The motive behind the study is to develop an understanding about
the working capital management in the running business organization and to help the
company in developing the efficient working capital management. So it helps in future
planning and control decisions.
The objectives of the study are as follows:
To analyze the working capital management of the company.
To determine the operating cycle of the unit.
To know the future need of working capital in the running organization.
3.1 SCOPE OF THE STUDY
The study is conducted at “VPL – BATHINDA” for 6 weeks duration. The study of W.C.
management is purely based on secondary data and all the information is available within
the company itself in the form of records. To get proper understanding of this concept, I
have done the study of the balance sheets, profit and loss a/c’s, cash accounts, trial
balance, cost sheets. I have also conducted the interviews with employees of accounts and
finance department and stores department. So, scope of the study is limited up to the
availability of official records and information provided by the employees. The study is
supposed to be related to the period of last three year.
17
4.REVIEW OF LITERATURE
Sushma Vishnani, Bhupesh Kr. Shah (1995) It is felt that there is the need to study the
role of working capital management policies on profitability of a company.
Conventionally, it has been seen that if a company desires to take a greater risk for bigger
profits and losses, it reduces the size of its working capital in relation to its sales. If it is
interested in improving its liquidity, it increases the level of its working capital. However,
this policy is likely to result in a reduction of the sales volume, therefore of profitability.
Hence, a company should strike a balance between liquidity and profitability. In this
paper an effort has been made to make an empirical study of Indian Consumer
Electronics Industry for assessing the impact of working capital policies & practices on
profitability during the period 1994–95 to 2004–05. The impact of working capital
policies on profitability has been examined by computing coefficient of correlation and
regression analysis between profitability ratio and some key working capital policy
indicator ratios.
Maynard E. Rafuse (1996) Argues that attempts to improve working capital by delaying
payment to creditors is counter-productive to individuals and to the economy as a whole.
Claims that altering debtor and creditor levels for individual tiers within a value system
will rarely produce any net benefit. Proposes that stock reduction generates system-wide
financial improvements and other important benefits. Urges those organizations seeking
concentrated working capital reduction strategies to focus on stock management
strategies based on “lean supply-chain” techniques.
Appuhami, B A Ranjith (2008) The purpose of this research is to investigate the impact
of firms' capital expenditure on their working capital management. The author used the
data colleted from listed companies in the Thailand Stock Exchange. The study used
Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a
proxy for working capital measurement and developed multiple regression models. The
empirical research found that firms' capital expenditure has a significant impact on
18
working capital management. The study also found that the firms' operating cash flow,
which was recognized as a control variable, has a significant relationship with working
capital management.
Stephen Bush (2008) Commercial borrowers sometimes overlook short-term options for
commercial loans. In the current recessionary conditions, it is wise to explore all working
capital management options. This article will shed some light on shorter-term choices
such as short-term commercial mortgages and business cash advances.
Due to misunderstandings about long-term commercial financing, short-term commercial
loans are often not considered properly. Although long-term commercial real estate
financing options are often appropriate, there are practical short-term business financing
choices that will be more workable and profitable for commercial borrowers.
The most critical short-term commercial financing techniques typically include short-
term merchant cash advance and credit card processing programs and commercial real
estate loan programs. Both working capital funding approaches are frequently a source of
confusion for business owners.
Gopinathan Thachappilly (2009 ) Working capital is the cash needed to carry on
operations during the cash conversion cycle, i.e. the days from paying for raw materials
to collecting cash from customers.Raw materials and operating supplies must be bought
and stored to ensure uninterrupted production. Wages, salaries, utility charges and other
incidentals must be paid for converting the materials into finished products. Customers
must be allowed a credit period that is standard in the business. Only at the end of this
cycle does cash flow in again.
Allensius (2009) There will usually be only a few business financing sources that are
regularly successful at executing the credit card financing and processing. There are key
difficulties to avoid with a working capital advance, and selecting an effective funding
source is essential to an appropriate business cash advance program.
19
A long-term commercial mortgage is appropriate for many businesses that own
commercial property. Commercial property should be financed with an appropriate
combination of short-term and long-term funding. It is wise to consider long-term
business financing of up to 30 years when a longer-term commercial real estate loan is
feasible.
20
5. RESEARCH METHODOLOGY
To recognize the various type of information which are necessary for the study of
working capital management.
Collection of data from various department of VPL to analyze the working capital
management of VPL.
For understanding the various reports, personal interviews are conducted.
With the help of various techniques like:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
The overall position of VPL is studied and analyzed
Suggestions are given on the basis of findings for better understanding of working
capital management.
5.1 SOURCES OF INFORMATION
Primary Data – The personal interview with senior officials and various members
of finance and accounts department and also with other departments and collected
the data.
Secondary Data – All the details necessary for the study was available within the
company itself.
5.2 REPORT WRITING
Report Encompasses – Charts, diagrams
21
6. LIMITATIONS OF THE STUDY
As cotton purchase office purchase raw material and cotton marketing yarn make
sales. So more detailed information cannot be received about these.
Cash from debtors are collected by the corporate office through commission
agents. So efforts for collection of debtors cannot be clearly known from VPL
ludhiana.
Investment of funds are also made by corporate office, so it becomes difficult to
know that how much investment is made in different ways for continuous
availability of funds.
22
1.THEORATICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT
1.1 Meaning of working capital:-
In simple words working capital means that which is issued to carry out the day to day
operations of a business. Capital required for a business can be classified under two main
categories
Fixed capital
Working capital
Every business needs funds for two purposes, for its establishment and to carry on its day
to day operations. Long term funds are required to create production facilities through
purchase of fixed assets such as plant and machinery, land, building, furniture etc.
Investment in these assets represents that part of firm capital, which is blocked on a
permanent or fixed basis called fixed capital. Funds are also needed for short term
purposes i.e. for the purchase of raw material, payment of wages and other day to day
operations of business. These funds are known as working capital. In other words,
working capital refers to that firm’s Capital, which is required for short – term assets or
current assets. Funds thus invested in current assets keep revolving last and being
constantly converted into cash and this cash flow is again converted into other current
assts. Hence it is known as circulating or short – term capital.
23
1.2 CONCEPT OF WORKING CAPITAL
1. Gross Working Capital
It is simply called working capital refers to the firm’s investment in current assets so
the total current assets of the firm are known as gross working capital.
2. Net Working Capital
It represents the difference between current assets and current liabilities. Net
working capital may be positive or negative. Positive net working capital is that when
current assets are more than current liabilities. But when current liabilities become
more than current assets than it is negative working capital. Gross working capital
and net working capital of VPL for the last three years are as follows:
(In crores)
Particulars 2002-03 2003-04 2004-05
Gross Working Capital 78.99 93.38 71.36
Net Working Capital 74.04 89.06 65.69
In brief we can say that working capital is too much necessary for the smooth functioning
and proper utilization of fixed assets.
1.3TYPE OF WORKING CAPITAL
1. Permanent Working Capital:
As the operating cycle is a continuous process so the need for working capital also
arises continuously. But the magnitude of current assets needed is not asame; it
24
increases and decreases over time. However there is always a minimum level of
current assets. This level is known as permanent or fixed working capital.
2. Temporary Working Capital:
The extra working capital needed to support the changing production and sales
activities, is called variable or functioning or temporary working capital. This can
be shown in the following diagram:-
Amount of Working
Capital Temporary capital
Permanent Capital
Time
25
1.4NEED FOR WORKING CAPITAL
The need for working capital cannot be overemphasized. The need of working capital
arises due to the time gap between production and realization of cash from sales. So the
working capital or investment in current assets becomes necessary need for working
capital. It arises due to following reasons:-
OPERATING CYCLE
“Operating cycle is the time duration requires for converting sales into cash after the
conversion of resources into inventories.”
First of all a firm purchase Raw Material, then after some processing it is
converted into work–in–progress and after this further processing is done to convert
work–in–progress in finished goods. After the raw material is converted into finished
goods, sales are made. Sales are no always full cash sales; there are credit sales also.
These credit sales after some period are converted into cash. So the whole process takes
the time. This time taken is known as the length of operating cycle. So operating cycles
includes:-
1. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)
26
So operating cycle can be known as following:-
Sales
If the length of the operating cycle has short length period then less working capital is
required. So working capital requirement is directly related with operating cycle.
Operating cycle may be of two types
1. Gross Operating cycle
2. Net operating cycle
1. Gross Operating cycle
Gross Operating cycle is the total time period from the conversion of Raw Material
into finished goods and finished goods into sales and then sales into cash.
GOC =RMCP + WIPCP + FCP + DCP
2. Net Operating Cycle
As we provide period to debtors for the payments, our creditors also provide period to
us for payment to them. So this reduces our requirement of working capital. This also
27
Raw Material
Work in Progress
Cash Collection from Debtors
Finished Goods
Credit Sales Cash Sales
affects the operating cycle. Operating cycle’s length reduces with so many days as
provided by the creditors to us. The difference between gross operating cycle and
period allowed by the creditors for payment is known as net operating cycle.
NOC = GOC – CPP
A. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED
NEEDS FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because of non-
availability of Raw Material or due to seasonal availability of Raw Material some
advances stock of Raw Material becomes necessary for company. In the similar way due
to sudden arise of demand of finished goods in future more finished goods are kept in
stock. For both reasons more working capital is required because funds will be involve in
these safeties stocks.
1.5DETERMINENTS OF WORKING CAPITAL
Followings are the main determinants of working capital.
1. Nature and Size of Business :
The working capital of a firm basically depends upon nature of its business for e.g.
Public utility undertakings like electricity; water supply needs very less working
capital because offer only cash sales whereas trading & financial firms have a very
less investment in fixed assets but require a large sum of money invested in working
capital.
28
The size of business also determines working capital requirement and it may be
measured in terms of scale of operations. Greater the size of operation, larger will be
requirement of working capital.
2. Manufacturing Cycle:
The manufacturing cycle also creates the need of working capital. Manufacturing cycle
starts with the purchase and use of Raw Material and completes with the production of
finished goods. If the manufacturing cycle will be longer more working capital will be
required or vice versa.
3. Seasonal variation:
In certain industries like VPL raw material is not available throughout the year. They
have to buy raw material in bulk during the season to ensure an uninterrupted flow and
process them during the year. Generally, during the busy season, a firm requires large
working capital than in the slack season.
.
4. Production Policy:
Production policy also determines the working capital level of a firm. If the firm has
steady production policy, it may require need of continuous working capital. But if the
firms adopt a fluctuating production policy means to produce more during the lead
demand season then the more working capital may require at that time but not in other
period during a financial year. So the different productions policy arises different type
of need of working capital.
29
5. Firm’s Credit Policy:
The firm’s credit policy directly affects the working capital requirement. If the firm
has liberal credit policy, hence the more credit period will be provided to the debtors
so this will lead to more working capital requirement. With the liberal credit policy
operating cycle length increases and vice versa.
6. Sales Growth:
Working capital requirement is directly related with sales growth. If the sales are
growing, more working capital will be needed due to arises need of more Raw
Material, Finished goods and credit sales.
7. Business Cycle:
Business cycle refers to alternate expansion and contraction in general business. In a
period of boom, larger amount of working capital is required where as in a period of
depression lesser amount of working capital is required.
8. Earning Capacity & Dividend Policy:
If the firm has enough earnings and it is not paying dividend then it will not be in need
of external borrowings. If firm wants to increase its earning power then more working
capital will be required also to pay more dividend more profits are needed which give
rise to more working capital.
30
9. Price Level Changes:
Changes in the price level also effects the working capital requirements. Generally, the
rising prices will require the firm to maintain larger amount of working capital as
more funds will be required to maintain the same current assets.
10. Condition of Supply:
The inventory of raw material, spares and stores depends on the condition of supply.
If the supply is prompt the firm can manage with small inventory. However if the
supply is unpredictable then the firm to ensure continuity of production, should
acquire stocks as and when they are available and have to carry larger inventory on an
average.
11. Other Factors:
Certain other factors such as operating efficiency, management ability, irregularities of
supply, import policy, asset structure, importance of labour, banking facilities, time
lag. etc. also influence the requirement of working capital.
So these are the main determinants of working capital. The importance of influence of
these determinants on working capital may differ from firm to firm.
31
2.Meaning and Nature of Working Capital Management
The management of working capital is concerned with two problems that arise in
attempting to manage the current assets, current liabilities and the inter relationship that
asserts between them.
The basic goal is working capital management is to manage current assets and current
liabilities of a firm in such a way that a satisfactory of optimum level of working capital
is maintained i.e. it is neither inadequate nor excessive. This is so because both
inadequate as well as excessive working capital position is bad for business.
2.1 MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT
There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. What should be the appropriate mix of short term financing and long term
financing for financing these current assets?
1. CURRENT ASSETS IN RELATION TO SALES:-
If the firm can forecast accurately the factors, which effect the working capital, the
investment in current assets, can be designed uniquely. When uncertainty characteristics
the above factors, as it usually does the investment in current assets cannot be specified
uniquely. In case of uncertainty, the outlay on current assets should consist of base
component meant to meet normal requirement and a safety component meant to cope
with unusual requirement. The safety component depends upon low conservative or
aggressive in the current assets policy of a firm. If the firm purchases a very conservative
32
current asset policy it would carry a high level of current assets in relation to sales. If a
firm adopts a moderate current assets policy it would carry moderate level of current
assets in relation to sales, finally is a firm follows a highly aggressive current assets
policy, it would carry a low level of current assets in relation to sales.
VPL is following current assets policy showing moderate level of current assets in
relation to sales as is evident from ratio analysis.
2. Determining a Short Term and Long Term Financing Mix for Financing of
current assets:-
There are three approaches in this regard, which are discussed below:
HEDGING APPROACH
This approach is also called matching approach. In this approach there is a proper
matching of expected life of asset with the duration of fund. Usually, according to this
approach long-term sources are used for financing permanent current assets and fixed
assets & short-term sources are used for financing temporary current assets:
term financing
Fixed AssetsTime
CONSERVATIVE APPROACH
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Permanent current assets
Temporary current assetsShort term financing
Long term financing
ASSETS
In this approach there is more reliance on long-term financing in comparison to short-
term financing. Even some part of the temporary current comparison to finance from
long-term sources because long-term sources are less risky in comparison to short-term.
Temporary Current Assets
Short-term financing
Permanent Current Assets Long-term financing
Fixed Assets
Time
AGGRESSIVE APPROACH
In this approach there is more reliance on short term financing and even a part of
permanent current assets is financed from short-term finance.
Temporary current assets Short term financing
Permanent current assets Long term financing
Fixed Assets Time
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ASSETS
ASSETS
In VPL, the current assets are financed from short term sources as well as long term
sources, so they follow conservative approach.
3. WORKING CAPITAL ANALYSIS
3.1OPERATING CYCLE ANALYSIS
Operating cycle refers to the time period which starts from the raw material purchases
and ends with realization of receivable. So it is total time gap between raw material
purchases to total debtors’ collection. This is also known as working capital cycle.
Operating cycle is therefore expressed in terms of months or weeks or days. The higher
the operating cycle period, higher the working capital requirement. It comprises of raw
material conversion period, WIP conversion period, FG conversion period and debtors’
conversion period and creditors period. The basic reason for calculating operating cycle is
to find out the means for reducing the duration of operating cycle because if duration of
operating cycle will be less than working capital requirement will be less.
OC = R + W + F + D – C
Where,
R = raw material conversion period
W = work in process period
F = finished goods conversion period
D = debtor collection period
C = creditors payment period
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(1) Raw Material Conversion Period (RMCP)
= Average Raw Material Stock
Raw Materials consumed during the year
(In crores)
PARTICULARS 2002-03 2003-04 2004-05
Opening Stock of
Raw Material
18.00 32.48 47.95
Closing Stock of
Raw Material
32.48 47.95 38.41
Average Stock 25.24 40.21 43.18
Raw Materials
consumed
70.89 88.62 90.92
RMCP 128 163 171
(2) Work in Progress Conversion Period (WIPCP)
= Average stock in progress
Cost of Production
(In crores)
PARTICULARS 2002-03 2003-04 2004-05
Opening Stock of
WIP
0.75 0.87 1.05
Closing Stock of
WIP
0.87 1.05 0.99
Average Stock 0.81 0.96 1.02
Cost of Production 103.99 121.48 123.6
WIPCP 3 3 3
36
X 360
X 360
(3) Finished Goods Conversion Period (FGCP)
= Average Finished good inventory
Cost of goods sold
(In crores)
PARTICULARS 2002-03 2003-04 2004-05
Opening Stock of
FG
5.86 8.91 6.31
Closing Stock of FG 8.91 6.31 5.91
Average Stock 7.38 7.60 6.11
Cost of Goods Sold 108.25 127.62 128.27
FGCP 24 21 17
(4) Debtors’ Conversion Period (DCP)
= Average Debtors
Credit Sales
(In crores)
PARTICULARS 2002-03 2003-04 2004-05
Opening Debtors 19.72 23.97 25.81
Closing Debtors 23.97 25.81 18.54
Average Debtors 21.84 24.88 22.17
Credit Sales 130.58 157.94 144.48
DCP 60 57 55
(5) Credit Conversion Period (CCP)
37
X 360X 360X 360
X 360
= Average Creditors
Credit Purchases
(In crores)
PARTICULARS 2002-03 2003-04 2004-05
Opening Creditors 0.92 0.11 0.55
Closing Creditors 0.11 0.55 2.79
Average Creditors 0.51 0.33 1.67
Credit Purchases 83.95 103.76 80.92
CCP 2 1 7
GROSS OPERATING CYCLE
Year RMCP WIPCP FGCP DCP GOC
2002-03 128 3 24 60 215
2003-04 163 3 21 57 244
2004-05 171 3 17 55 246
NET OPERATING CYCLE
Year GOC CCP NOC
2002-03 215 2 213
2003-04 244 1 243
2004-05 246 7 239
ANALYSIS
38
X 360
It is claimed that gross operating cycle of VPL is increasing year by year. In 2002-03, it is
215 days then it increased to 244 days. In 2004-05, it is increased to 246 days. The main
reason of increasing gross operating cycle year by year is due to the more availability of
raw material in the stores.
ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF
THE HISTORICAL DATA
There are number of devices to analyze working capital like ratio analysis, common size
statement etc. We will discuss them one by one as follows:
3.2 RATIO ANALYSIS
Ratio analysis is a technique of analysis and interpretation of financial statements. It is
the process of establishing and interpreting various ratios for helping in making decisions.
It only means of better understanding of financial strengths and weaknesses of a firm.
The main emphasis has been on calculating the ratios related to a working capital
management.
LIQUIDITY RATIOS
These are the ratios which measures the short term solvency or financial position of a
firm. In other words, it refers to the ability of a concern to meet its current obligations as
and when these become due. To measure the liquidity of a firm, the following ratios can
be calculated.
39
CURRENT RATIO – It may be defined as the relationship between current assets and
current liabilities. This ratio is also known as working capital ratio and measures the
ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and
has the ability to pay its current obligations in time as and when they become due.
A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current
liabilities is considered to be satisfactory.
Current Ratio = Current Assets
Current Liabilities
Current Ratio of VPL
Year Current Assets Current Liabilities Current Ratio
2002-03 78.99 4.92 16
2003-04 93.38 4.32 21.6
2004-05 71.36 5.66 12.6
ANALYSIS
The current ratio of the unit is above the standard and it guarantees the payment of dues
in time. The current ratio of the company has been considerably high because they had
made over investment in inventories which is the main reason for the high ratio of current
assets.
Inventories are high because of seasonal availability of raw material. But in 2004-05, the
ratio has decreased as compared to 2003-04. The reason is due to decrease in current
40
assets, the main reduction in cost of raw material and increase in the current liabilities.
But overall position of current ratio is satisfactory.
LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. It is a more
rigorous test of liquidity than the current ratio. It is based on those current assets which
are highly liquid. Inventory and prepaid expenses are excluded because they are deemed
to be least liquid component of current assets. A high quick ratio is the indication that the
firm is liquid and has the ability to meet its current liabilities in time and on the other
hand low ratio represents liquidity position is not good.
Quick Ratio = Quick or Liquid Assets
Current Liabilities
Quick Assets = Current Assets – Inventory – Prepaid Expenses
Quick Ratio of VPL
Year Quick Assets Current Liabilities Quick Ratio
2002-03 35.62 4.92 7.22
2003-04 37.31 4.32 8.64
2004-05 25.36 5.66 4.48
ANALYSIS
According to rule of thumb, it should be 1:1. In all the above years it has been very high
than the rule of thumb.
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ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than
inventories yet there may be doubt regarding their realization into cash in time. Absolute
liquid ratio shows the relationship between liquid assets which include cash, bank and
marketable securities.
Absolute Liquid Ratio = Absolute Liquid Assets
Current Liabilities
Absolute Liquid Ratio of VPL
Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio
2002-03 1.58 4.93 0.32
2003-04 0.59 4.32 0.14
2004-05 0.93 5.66 0.16
ANALYSIS
The acceptable standard for this ratio is 0.5:1. Thus, we can say that in all the years, it is
below the standard due to very less cash and bank balance maintained because major cash
receipts and payments are handled by corporate office. It is very less in 2003-04, 2004-05
due to increased cost of production.
WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio
indicates the velocity of the utilization of net working capital. This ratio measures the
efficiency with which the working capital is being used by a firm.
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Working Capital Turnover Ratio = Sales
Net Working Capital
Working Capital Ratio of VPL
Year Sales Net Working Capital Working Capital Turnover Raito
2002-03 130.58 74.04 1.76
2003-04 157.99 89.06 1.77
2004-05 144.48 65.69 2.20
ANALYSIS
This ratio indicates the number of times the working capital is turned over in the course
of a year. A high working capital ratio indicates the effective utilization of working
capital and less working capital ratio indicates less utilization. In 2004-05, the working
capital is reduced due to reduction in stock as the raw material prices are decreased. But
the ratio has increased from 1.77 times in 2003-04 to 2.20 times in 2004-05 which shows
effective utilization of working capital.
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II COMMON SIZE STATEMENT ANALYSIS
This analysis is mainly to see the composition of working capital. Its purpose is to see the
%age of each asset to the total asset and %age of each liability to total liability.
COMMON SIZE STATEMENT
(In crores)
PARTICULARS 2002 – 03 2003 – 04 2004 – 05
AMT % AMT % AMT %
CURRENT ASSETS
Inventories 43.37 54.90 56.08 60.05 46.00 64.46
S. Debtors 23.97 30.35 25.81 27.64 18.54 25.98
Cash & Bank 1.58 2.00 0.59 0.63 0.93 1.30
Loan & Advances 10.07 12.75 10.90 11.67 5.89 8.25
TOTAL 78.99 100 93.38 100 71.36 100
CURRENT
LIABILITES
S. Creditors 1.15 23.37 0.55 12.76 2.79 49.29
Advances 0.74 15.04 0.79 18.33 0.63 11.13
Other Liabilities 3.01 61.18 2.95 68.45 2.22 39.22
Security Deposits 0.02 0.41 0.02 0.46 0.02 0.35
TOTAL 4.92 100 4.31 100 5.66 100
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ANALYSIS
As major part of current assets involve inventories. It covers more than 50% of total
current assets. The debtors also have significant part of current assets. It contributes
approximate 25% to 30% part of current assets. The least contribution is thus of cash and
bank balance.
On the other hand, current liabilities consist of mainly creditors and other liabilities. In
2004-05, current assets have decreased due to decrease in inventories and loans &
advances, whereas current liabilities have increased. So this year working capital is less
as compared to last year’s working capital.
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4. CASH MANAGEMENT
Cash management refers to management of cash balance and the bank balance and also
includes the short term deposits. The cash is important current asset for the operation of
the business. On the other hand extreme liquidity may take uneconomic investments. This
underlines the significance of cash management. A financial manager is required to
manage the cash flows (both inflows and outflows) arising out of the operations of the
firm. For this he will have to forecast the cash inflows from sales and outflows for costs
etc. This will enable the financial manager to identify the timings as well as amount of
future cash flows Cash is the basic input needed to keep the business running on
continuous basis. It is also the ultimate output expected to realize by selling the product
manufactured by the firm. Cash management is one of the key areas of working capital
management. A part from the fact that it is the most liquid current asset, cash is the
common denominator to which all the current assets can be reduced because the major
liquid asset i.e. receivables and inventory get eventually converted into cash. Cash
management is concerned with the managing of:
Cash inflows and outflows of the unit
Cash flows within the unit
Cash balance held by the unit at a point of time by financing deficit or investing
surplus cash
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The firm should evolve strategies regarding the following four facts of cash management:
(1) Cash Planning
(2) Managing the cash flow
(3) Optimum cash level
(4) Investing surplus cash
1. CASH PLANNING
Cash planning is a technique to plan to control the use of cash. Cash planning can help to
anticipate future cash flows and the need of the form and reduces the possibility of idle
cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the
most significant device to plan for and control cash receipt and payments.
The unit under the study makes cash planning through following tools:
Cash Budget
Rolling cash flow statement
Daily cash flow statement
The cash budgets are prepared by the firm on monthly and yearly basis. Through cash
budget the unit can make estimates of cash receipts and disbursement during a future
period of time. There estimates show the requirement of cash in the unit.
Another device used for cash planning is six monthly rolling cash flow statement
prepared on monthly basis. This statement shows the projections of inflows and outflows
of cash during the next six months.
47
This statement can help in taking various decisions, if the unit wants to make any capital
payment, these statements can tall when there is surplus of cash and payments can be
made during the month.
2. MANAGING CASH FLOWS
Significant part of cash management is the management of cash flow both inflows and
outflows without any loss to the unit and without impairing its goodwill in the market.
These are made at head office Ludhiana so the main source of cash inflows to VPL is the
cash credit limit, which is as follows:
Banks Main Limit
(in lakhs)
Sub-limit transfer to
BTI Unit (in lakhs)
Peak Normal
Canara Bank 1020 600 125
State Bank of India 625 420 150
State Bank of Patiala 130 160
Bank of Baroda 890 530 100
State Bank of Indore 425 205
UTI Bank Ltd. 90 90
TOTAL 3180 2005 375
The main limits are controlled by H.O. The sub-limits have been allocated to the unit for
fulfilling day-to-day requirements of working capital. The daily bank-position of sub-
limits is faxed to H.O. for monitoring daily bank position. In case of drawn in sub-limits
48
the funds get transferred from main limits. The interest rate paid for this is near about
10%. The cash credit limits are sanctioned by the bank against the hypothecation stocks
and fluctuating assets as security.
The unit can withdraw from these limits as and when needed. The amount received from
the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash
management the surplus funds are transferred to other units if those units need cash thus
increasing the overall profitability.
Cash outflows also arise on account of purchase of stores, spares and all other material
normal credit for these products is mainly 30 to 60 days and full credit period is used.
3. DETERMINING OPTIMUM BALANCE
An efficient finance manager always aims at preparing the cash and bank balance at the
optimum level i.e. neither it is too high that it remains idle and the firm losses interest on
it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5
lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per
day is kept in hand, thus the unit maintains the appropriate amount of cash balance and
meets the firms obligations as and when they due.
4. INVESTING IDLE CASH
Since the main input of the company is of seasonal nature. Therefore the company has to
maintain high level of assets during cotton season, which falls between October to March.
During April to September the company gets its cash credit limits reduced in the
respective banks. The company has very good system of managing its current assets. The
49
current assets of the unit are managed at corporate level and the unit seeks funds
according to their requirements calculated on day-to-day basis. Hence there are no idle
funds at unit level.
As the funds are monitored / controlled at corporate level, therefore, it becomes the prime
responsibility of H.O. to have a good policy of investing idle funds in an appropriate
security keeping in view the requirement of funds in the future and liquidity of the
security in which the investment is being made.
5.RECEIVABLES MANAGEMENT
Accounts receivables are simply extension of credit to the firm’s customers, allowing
them a reasonable period of time in which to pay for the goods. Most firms treat accounts
receivables as a marketing tool to promote sales and profits. Receivables are a type of
loan extended by the seller to the buyer to facilitate the purchase process. As against the
ordinary type of loan the trade credit in the form of receivables is not a profit making
service but an inducement or facility to the buyer-customer of the firm.
Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up
the sale, which ultimately results in pushing up the profits earned by the firm. At some
time selling goods on credit result in blocking of funds in accounts receivables.
Additional funds are required for operating needs of business, which involves extra costs
in terms of interest. Moreover, increase in receivables also increase chances of bad debts.
The creation of accounts receivables is beneficial as well as dangerous. The finance
manager has to follow a policy which uses cash funds as economically as possible by
50
extending receivables without adversely affecting the chance of increasing sales and
making more profits. Receivables Management generally means what type of credit
policy a firm should adopt so that sales and profits can be promoted on the one hand and
funds can be economically utilized on the other hand.
So the receivables management must be attempted by adopting a systematic approach and
considering the following of receivables management:
(1) THE CREDIT POLICY
(2) CREDIT CONTROL
1. CREDIT POLICY
It may be defined as the set of parameters and principles that govern the extension
of credit to the customers. This requires the determination of
(i) The credit standard i.e. The conditions that the customers must meet
before being granted credit and
(ii) The credit terms i.e. the terms and conditions on which the credit is
extended to the customers.
These are discussed as follows:
The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of
the customers. Therefore, to be on a safer side, it must set credit standard which should be
applied in selecting customers for credit sales. The credit standards of a firm represent the
basic criteria for the extension of a credit to customer.
So the credit standard is the combination of three C’s
These are:
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(i) Character of a person
(ii) Capacity of a person
(iii) Condition of a person
(a) Credit Period – The credit period is an important aspect of the credit policy. It
refers to the length of time customers are allowed to pay for their purchases. It
may differ from one market to another market. The credit period generally varies
from 15 days to 60 days. In some cases the credit period may be zero and only
cash sales are made. It refers to the time duration in terms of net date e.g. if a
firm’s credit terms are “net 30”; it means the customers are expected to pay within
30 days from the date of sales. As much the credit period will be shorter, it will be
beneficial for a firm. But the firm has to lengthen its credit period to increase
sales. But one must compare the cost of extended credit with the incremental
profits. If this cost is less then it will be beneficial for company to increase the
credit period.
(b) Discount Terms – It is reduction in payment offer to customer to induce them to
repay credit obligation within a specified period of time. In practice credit terms
would include:
(i) The rate of cash discount
(ii) The cash discount period
(iii) The net credit period
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2. CREDIT CONTROL
The next important step in the management of receivables is the control of these
receivables. Following are the directions for controlling the receivables.
(1) The Collection Procedure – The overall collection procedure of the firm should
neither be too lenient nor too strict. A strict collection policy can affect the
goodwill and damage the growth prospects of the sales. If a firm has a lenient
credit policy, the customer with a natural tendency towards slow payments may
become slower to settle his accounts. One possible way of ensuring early
payments from customers may be to charge interest on over due balances.
(2) Monitoring of receivables – To control the level of receivables, the firm should
apply regular checks and there should be a continuous monitoring system. For
this, number of measures are available as follows:
(i) A common method to monitor the receivables is the collection period or number
of day’s outstanding receivables.
(ii) Another technique available for monitoring the receivables is known as ageing
schedule. Ageing schedule down book debts according to the length of time of
which they have been outstanding. The ageing schedule provides more
information about collection experience. It helps to shot out the slow paying
debtors. The Performa of the ageing schedule prepared by the VPL is as follows:
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AGEING SCHEDULE
Age Classification Amount % age of Total
0 – 15 days 124199099 67
15 – 30 days - 0
31 – 60 days 18537179 10
61 – 90 days 9268589 5
91 – 120 days 27805768 15
121 – 180 days 3707436 2
More than 180 days 1853718 1
Total O/S Amount 185371789 100
RECEIVABLES MANAGEMENT IN VPL
As earlier discussed, credit sales are too much necessary to increase the total sales. The
main reason behind this is cut-throat competition. There are also many competitors of
VPL in the market, s to compare with them; VPL has to make credit sales. 20% to 30% of
current assets of VPL are sundry debtors. VPL has a good receivable policy as it has large
amount of credit sales.
I. CREDIT POLICY OF VPL
VPL not directly make sales. Sales are made by corporate office directly. So the sales
process is centralized. As the sales process, debtors are also collected by the corporate
office directly. Corporate office just receives the amount from the debtors. But it does not
have any record of outstanding debtors. It sends the credit note to VPL after receiving
amount against any debtors. So record for outstanding debtors is maintained by VPL
54
itself. VPL sends fortnightly reports to corporate office which records the data about the
outstanding debtors for different periods. In these reports debtors outstanding for one
month or six months are shown separately. In this way, corporate office comes to know
about age segments of different customers. Corporate office may avoid selling goods to
those customers who have not paid for a long period.
CREDIT POLICY VARIABLES
1. Credit Standards – VPL provides credit to customers after getting information
about that customer. For this market research is done by marketing department
to know about reputation of customer in the market and financial position of
him. From the records of customers having VPL and from financial record of
those customers, the ability to pay is checked. Thus customer is only known
after getting information about him and then credit is provided.
2. Credit Terms
(a) Credit Period – For different products VPL provide different credit period.
These credit terms are according to the nature of product which are following:
For Tyre Cord - 45 days
To customer of cotton yarn - 15 days
Sale to agents - 10 days
(b) Cash Discount –
In case of cotton yarn
Advance payment - 1 % C.D. prior to material dispatch
After 48 hours - 0.85 %
Within Week - 0.50 %
55
15 days credit - Interest free
Afterwards - 18 % p.a. interest chargeable
In case of Tyre Cord Yarn
Payment within 48 hours - 3 % CD
Payment within week - 2 % CD
45 days credit period - Interest free
Interest @ 18 % p.a., if payment is not made within the prescribed limits.
II CREDIT CONTROL
Collection efforts made by VPL:
Due to cut-throat competition VPL has to make credit sales. To collect the funds Oswal
group has adopted a decentralized method. Oswal group has established its collection
centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from
the debtors and send it to corporate office. The number of collection centers in a
particular city depends upon the number of customers to minimize the bad debts and to
accelerate the collections.
1.5% commission is also paid to agents and 0.75 % in case of tyre cord to collect debtors.
This percentage is only on the basis of the realization amount.
56
ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VPL
Debtors Turnover Ratio (DTR)
This ratio indicates the number of times average debtors are turned over during a year.
The higher the value of debtor turnover ratio the value of debtor turnover ratio the more
liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors.
Debtors turnover ratio = Sales
Avg. Debtors
Year Sales Avg. Debtors DTR
2002-03 130.58 21.84 5.98
2003-04 157.99 24.88 6.35
2004-05 144.48 22.17 6.52
Debtor Conversion Period (DCP)
The average no. of days for which a firm has to wait before its receivables is converted
into cash.
DCP = 360
DTR
Year DTR DCP
2002-03 5.98 360/5.98 = 60
2003-04 6.35 360/6.35 = 57
2004-05 6.52 360/6.52 = 55
57
Analysis
The DTR ratio in 2002-03 was 5.98 times which has been increased to 6.35 in 2003-04
and 6.52 in 2004-05. And regarding DCP, it was 60 days in 2002-03 which has decreased
to 57 in 2003-04 and 55 in 2004-05.
Thus high DTR ratio indicates more efficient management of debtors because it means
less collection period of debtors. Debtor’s collection period has been decreasing from last
two years which shows management is taking step to collect the dues.
So we can conclude receivable management of VPL quiet sufficient.
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6. MANAGEMENT OF INVENTORY
Inventory is very important part of current assets. Approximately 60% part of current
assets is inventories. So the proper management of inventory is required for successful
working capital management. As the larger amount of funds is involved in the
inventories, so it must be carried with care for proper utilization of funds.
Nature of Inventories
In inventories we include:
(b) Raw Material: There are those basic inputs which are converted into work-in-
progress after the manufacturing process. Raw materials are purchased for
production and storage purpose.
(c) Work-in-Progress: These inventories are semi-manufactured products. These
products are those which are ready for sale.
(d) Finished Goods: These are completely manufactured products. These products
are those which are ready for sale.
Here is one another type of inventory also which is not directly related with
production but facilitate in production process. These inventories are known as
supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.
OBJECTIVES OF INVENTORY MANAGEMENT
There are so many objectives of inventory management. These objectives may differ
from firm to firm. The main objectives of inventory management are:
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To make adequate investment in inventories so that funds can be best utilized.
Smooth production in present and future.
Time availability of inventories.
Smooth and uninterrupted sale processes.
Minimize the cost related with inventories.
To meet the future price change.
To get adequate return on investment.
INVENTORY MANAGEMENT TECHNIQUES
For inventories management the two questions must be answered. First, that how much
be ordered in one order so that excess or insufficient inventories can be avoided.
Secondly, when the order should be placed, so that timely availability of inventory is
there. To get answer of these two questions we use two techniques which are following:
1) ECONOMIC ORDER QUANTITY (EOQ)
Economic order quantity provides the answer of our first question. By this we come to
know how much we must order in single time. So that all the cost related with inventory
are minimum. Determining an optimum inventory level involves two types of costs (a)
Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes
the total of ordering and carrying costs.
(a) Ordering Costs – All these costs which are incurred in placing one order. It
includes; requisition, transportation, receiving, inspecting, clerical and staff
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services. Ordering costs are fixed per order. Therefore they decline as the order
size increases.
(b) Carrying Costs – Cost incurred for maintaining a given level of inventory are
called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs
vary with inventory.
To calculate economic order quantity there is formula:
EOQ = 2AO/C
Where,
A = Annual requirement
O = Ordering cost per order
C = Carrying cost of inventory
2) REORDER POINT
Reorder point is that inventory level at which an order should be placed to replenish the
inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage
(c) EOQ
Lead Time is the time normally taken in replenishing inventory after the order has been
placed.
Average Usage is the inventory used on average daily basis or average weekly basis.
So, Reorder Point = Lead Time x Average Usage
If the firm also maintains safety stock then the reorder point will be:
Reorder Point = (Lead Time x Average Usage) + Safety Stock
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So when the inventory of reorder point will be in store then the order will be placed for
purchase of inventory. In this way, the production process will not stop because the
inventory will be available for that period.
INVENTORY MANAGEMENT IN VPL
Inventory Management of VPL is good. VPL has a different stores department. All the
inventories except raw material purchases are handled by stores department. Stores
department does its work very efficiently.
INVENTORY PLANNING
For the planning of inventory requirement, budgets are prepared by different departments
as per requirements. The material issued during the budget period will not be more than
the budget. This rule is strictly followed. For cotton, requirements are planned in
consultation with production department. Stores department have nothing to do with it.
PURCHASE OF RAW MATERIAL
As in VPL raw material is cotton. First of all the requirement for cotton are determined
by the production department than this requirement is sent to commercial departments.
Commercial departments send these requirements to corporate office in detail. Then
corporate office directs the cotton purchase office to purchase cotton in bulk not only for
VPL but also for the other units of Oswal Group. Cotton is generally received in lots so
one lot consists of 55 or 110 bales.
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As the cotton has seasonal availability, so the purchasing of cotton is made within the
period of October to march. For the other months, cotton is purchased within these
months. That is the reason VPL has high investment in cotton.
DAILY REQUIREMENT OF COTTON
For production daily requirement of cotton is 250 bales and when the full capacity of 3 rd
unit gets started then the average requirement of cotton bales will reach to 365 bales.
The total daily production is 36500kg/day.
STORAGE CAPACITY OF VPL
Regarding Raw Material Inventory, VPL has 10 godowns.The capacity of 10 godowns is
45000 bales approximately.
If capacity of store is exhausted in unit then it has private storage facility to store cotton.
Regarding Finished goods Inventory, VPL has four godowns. Two godowns are for unit –
I for domestic and export purpose, one godown is for unit – II and its expansion, at last
remaining one godown is with unit-III.
These godowns do not have electric fitting because cotton is highly inflammable.
ISSUING OF INVENTORY
When any department requires any inventory, it sends its requirement to stores
department. The maximum time within the requirement must be met is 72 hours.
Material is issued on the basis of monthly weighted average method.
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INSPECTION OF INVENTORIES
Inspection of inventory is made at the end of month randomly. The stock taking of all the
items is not possible keeping in view number of items.
SAFETY STOCK OF INVENTORIES
For the continuous production process, safety stock of inventories is maintained. In case
of cotton atleast 15 days requirements must be in hand every time. For other inventories
stock is maintained according to supply period and as per their requirement.
INVENTORY CONTROL
Inventory control is done by budgets. As the budgets are prepared for the planning
purpose. Total requirements for inventory during financial period are determined by
budget. When the material is issued to any department then the total amount of material
issue is deducted from the budget of that good and balance is calculated, only this balance
quantity of inventories will be issued during the remaining financial period. These
records are maintained on daily basis. For different units, the records are prepared
separately.
For inventory control not any ABC analysis or VED analysis is done. The company also
doesn’t follow standardized system of inventory like EOQ. In case of raw material as the
input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the
cotton season. In case of spares & stores, the inventory is easily available in market;
therefore, the same is procured on requirement basis. The company always maintains
stock of critical items, the failure / non-availability of which can cause less of production.
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As all the units of group are in spinning the stock of critical items, where the high value is
involved in financial terms, the inventory is maintained in single unit. This could save lot
of money which can be utilized in another area and it also helps to maintain inventory at
optimum level.
So we can say that overall inventory management of VPL is quite satisfactory.
ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VPL
INVENTORY TURNOVER RATIO
It indicates the number of times the stock has been turned over during the period and
evaluates the efficiency with which the firm is to manage inventory.
Inventory (Raw Material) Turnover Ratio = Cost of Production
Average Raw Material Stock
Year Cost of Production Avg. Stock of RM ITR
2002-03 103.99 25.24 4.12 times
2003-04 121.48 40.21 3.02 times
2004-05 123.6 43.18 2.86 times
ANALYSIS
The inventory turnover ratio has been deceased from 3.02 times in 2003-04 to 2.86 times.
It is not due to inefficient inventory management but because in 2004-05 the Cotton is
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also purchased for unit III but production is not yet started and also prices are Less as
compare to previous year.
INVENTORY TO WORKING CAPITAL RATIO
This ratio is usually calculated to study the liquid financial position of business
enterprises.
Inventory to working capital ratio = Inventory
Working Capital
Year Inventory Working Capital Ratio in %age
2002-03 43.37 78.97 54.92
2003-04 56.08 93.38 60.04
2004-05 46.00 71.36 64.46
ANALYSIS
Too high and too low investment in inventory is not good for company. In 2002-03 it is
54.92% of gross working capital which has been increased to 60.04% in 2003-04 and
64.46% in 2004-05. Overall inventory constitute a large part of gross working capital
because raw material is available seasonably only which shows more blockage of money.
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7. FINDINGS
Due to seasonal availability of raw material is purchased in bulk during the
months between March to Oct. so the most part of current assets is covered by
inventories.
Liquidity ratios of VPL are too high because of maintaining more inventory stock
of raw material.
Raw material is purchased by corporate office for all the units in bulk to get the
advantages of bulk purchasing.
The cost of raw material fluctuates depending upon the availability of crop in the
particular season, so it effect the finished product price.
The operating cycle of VPL is very high due to the high raw material conversion
period because raw material is a seasonal product.
Now VPL has increased its share in the domestic market by reducing the exports.
For filling its fund requirement VPL depends upon the Canara bank and State
bank of India.
It holds the cash only for transaction purpose. Corporate office holds the cash for
major receipts & payments.
EOQ technique is not followed by VPL for purchasing cotton because cotton is a
seasonal product. Also EOQ is not followed in stores.
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8. RECOMMENDATIONS
Management should make the proper use of inventory control techniques
like fixation of minimum, maximum and ordering levels for all the items for less
blockage of money.
The unit should also adopt proper inventory control like ABC analysis etc.
This inventory system can make the inventory management more result oriented.
The EOQ can be followed in stores.
Due to competition, prices are market driven and for earning more margin
company should give the more concentration on cost reduction by improving its
efficiency.
The investments of surplus funds are made by the corporate office and the
unit is not generally involved while taking decisions with regard to structure of
investment of surplus funds. The corporate office should involve the units so as to
better ascertain the future requirements of funds and accordingly the investments
are made in different securities.
The company is loosing its overseas customers due to decrease in exports
so the sufficient amount of exports should the maintained.
Company’s average debtor collection period is 55 days. So company
should try to reduce it for improving the efficiency.
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9. CONCLUSION
By conducting the study about working capital management it is find out that working
capital management of VPL is too good. VPL has sufficient funds to meet its current
obligation every time which is due to sufficient profits and efficient management of
VPL.
Cash management and receivable management are too much good because of
centralized control on these. Raw material for the all units of OSWAL group is
purchased by corporate office in bulk which is the best way. Safety measures for
inventories are also quiet sufficient in VPL. Overall the working capital management
of VPL is very much efficient.
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10. REFERENCES
Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd. 2nd Ed.New Delhi, pp.38-45.vol 12
Chandra Prasanna; Financial Management: Theory and Practice; TataMCgrill
Van Horne, Jame C; Fundamentals of Financial Management
Rustagi R.P.; Principles of Financial Management.
Kothari.k.c: wishwa prakashan, new delhi 2001 k.k gupta publisher ISBN
8173280363
http://www.investopedia.com/articles/fundamental/03/061803.asp
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http://gbr.sagepub.com/cgi/content/abstract/8/2/267
http://business-financial-planning.suite101.com/article.cfm/ working_capital_management_manages_flow_of_funds
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http://www.caclubindia.com/_list_detail.asp?article_id=1086
http://www.docstoc.com/docs/2411542/An-Analysis-of-Working-Capital- Management-Results-Across-Industries
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