Working Capital Management

SUMMER TRAINING REPORT ON WORKING CAPITAL MANAGEMENT IN

VINAYAK TEXTILE MILLS LIMITED

Submitted To: Mr. M.S.Arora (D.G.M.)

In partial fulfillment of requirement for the award of degree in MASTER OF BUSINESS ADMINISTRATION Submitted By:AMAN DEEP PASSI AJAY JAIN (2008-10)

PREFACE

This report , prepared during the summer training, is life’s greatest treasure. The training held was very gainful as it took me close to real life. The study aims to analyze the extent to which volume of working capital has been effectively and efficiently utilized in this unit. The report is divided into various parts for the close analyses of different components of working capital. The last part deals with the conclusion and suggestions to improve the working capital management and to make it more effective.

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 six weeks training that I received at VINAYAK TEXTILE MILLS LTD. First of all, I wish to express my profound gratitude and sincere thanks to MR. M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for his constant and tireless guidance and encouragement given during the study and who allowed me to join summer training at VTM. It gives me immense pleasure to acknowledge my deep sense of gratitude and sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the courtesy and for guidance, support and affection throughout the course of this work. I am extremely grateful to MISS. KAWALPREET KAUR 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.

CONTENTS

CHAPTER 1 THEORETICAL

BACKGROUND

OF

WORKING

CAPITAL

MANAGEMENT CHAPTER 2 HISTORY OF INDIAN TEXTILE INDUSTRY CHAPTER 3 PROFILE OF THE GROUP AND UNIT CHAPTER 4 OUTLINE OF THE STUDY CHAPTER 5 WORKING CAPITAL ANALYSIS • OPERATING CYCLE ANALYSIS • ANALYSIS ON THE BASIS OF HISTORICAL DATA 1. RATIO ANALYSIS 2. COMMON SIZE STATEMENT ANALYSIS 3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL

CHAPTER 6 CASH MANAGEMENT CHAPTER 7 RECEIVABLES MANAGEMENT CHAPTER 8 MANAGEMENT OF INVENTORY CHAPTER 9 FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY APPENDIX REFERENCES AND BIBLIOGRAPHY

EXECUTIVE SUMMARY STUDY TOPIC: WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD. ( A UNIT OF VARDHMAN POLYTEX LTD.)

OBJECTIVES OF THE STUDY: 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. •

To render recommendations for effective management of working capital.

TIME SPAN: A period of five year i.e. 2004-2008 has been taken for the study.

STUDY INSTRUMENT: Annual Reports and other official documents of the selected units of the company.

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 VTM to analyze the working capital management of VTM.

 For understanding the various reports, personal interviews are conducted.  With the help of various techniques like: -

Operating Cycle analysis

-

Ratio Analysis

-

Common size statement

-

Schedule of changes in working capital

The overall position of VTM is studied and analyzed  Suggestions are given on the basis of findings for better understanding of working capital management.

SCHEME OF PRESENTATION: The project report is prepared in three parts. First part of the report gives an overview and theoretical background to the subject i.e working capital management. Second part of the report presents a general profile of VINAYAK TEXTILE MILLS LTD. where the summer training has been undertaken. Third part of the report deals with the project under study which includes: -

Operating Cycle analysis

-

Ratio Analysis

-

Common size statement

-

Schedule of changes in working capital

Chapter- 1 THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT

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.

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.

In brief we can say that working capital is too much necessary for the smooth functioning and proper utilization of fixed assets.

TYPES 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 always same; it 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

NEED 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:A.

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)

So operating cycle can be known as following:Raw Material

Work Progress Cash from Debtors

in

Collection

Sales Finished Goods Credit Sales

Cash 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 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 B.

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR FUTURE:-

These needs may be of Raw Material or Finished Goods. Sometimes because of nonavailability 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.

DETERMINENTS 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. 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 VTM 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.

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. Company is paying 42% dividend to its shareholder. 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.

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.

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 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. VTM 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:

Temporary current assets Short term financing A S S E T S

term financing Permanent current assets

Long term financing

Fixed Assets Time

CONSERVATIVE APPROACH In this approach there is more reliance on long-term financing in comparison to shortterm 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 sources.

Temporary Current Assets A S S E T S

Short-term financing

Permanent Current Assets

Fixed Assets Time

Long-term financing

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 A S S E T S

Permanent current assets

Short term financing

Long term financing

Fixed Assets Time In VTM, the current assets are financed from short term sources as well as long term sources, so they follow conservative approach.

Chapter- 2 HISTORY OF THE INDIAN TEXTILE INDUSTRY

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 19th 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. The spinning and weaving both are very common and attached with each other in all parts of the world. We talk of the ancient times, when maximum work like weaving of the clothes was done manually, but all the things were being done for the right perspectives. From time to time in this world development had taken place, which has been found to be a continuous process.

Similarly considering the developments in the Spinning and

Weaving lot of improvements has come-up. Because earlier too was the Cotton crop was grown by the farmers, but its end use was not done in an effective way, which seems good. So much thick fiber was produced and accordingly its impact for the fabric preparation.

APPARATUS USED FOR SPINNING AND WEAVING DURING PRE-INDEPENDENCE PERIOD

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 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. Though the Cotton industry had progressed a lot, but in case we say that India alone is heading this world, it is wrong. Though in India Textile Machine manufacturers are there and one or two decades ago they were the market leaders, but with the help of the other parts/people of world i.e. Germany, Switzerland etc., India had made a very good recognition in the yarn market. Because Indian Industrial Organizations have also initiated towards the most modernized machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems, Switzerland. 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. Because many other countries like China as Cotton Textiles has went ahead. Though till today India has achieved a lot in the Textile Industry and almost 700 Textile units are working successfully, because India is having at present more than 20 Million spindles and a weaving capacity of more than 2.5 Lac looms and the total output value of the same is around Rs.1500 Cores, employing more than 10 Lac of workers directly. 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.

Chapter- 3 PROFILE OF THE GROUP AND UNIT

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 and VTM is granting authorization to use the Trademark USTERIZED “USTER” think quality. BACK DROP: OSWAL GROUP is a premier of textile group of northern India having its corporate office situated at Ludhiana, Punjab,(India). The organization has existence for last 40 year in core competency of spinning. We were earlier part of the Vardhman Group.but after settlement between two brother in 2003, we have named ourselves as Oswal Group has mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of Garments. The group has ambitious plan to diversify in future but in textiles related activities Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core competencies and capacities in Textile and diversified business to create value for its stakeholders.(USD 110 millions). The group has very good potential and high presence in the textiles industry with well set manufacturing set up for 100% cotton, Polyester cotton, Worsted Spun Yarn ,Dyed Yarn, 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.

COMPANY STRUCTURE

OSWAL GROUP

VPL BATHIND A

VTM LUDHIAN A

ANSHUPA TI LUDHIANA

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 105000 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 ISO9001-2000 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 65 Tons /day. They are also thinking of producing Value added that is (i) Slub yarn (ii) Lyera yarn. Vinayak Textile Mills, a unit at Ludhiana in Punjab with 50000 cotton spindles installed, is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection varies from NE 10s to 40s both in carded and combed varieties. The present capacity in term of production is around 29Tons /Day and 14 -mt dyeing /day.

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.

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.

PRESENT CAPACITIES Presently the group has following production capacity and product range at its different manufacturing facilities. Location

Bathinda (existing )

Installed

Production

Capacity

Capacity

(spindles) 105000

Product Range

65Tons / Day

Cotton, synthetic,

(VPL) Ludhiana

8000

6.5 Tons/Day

blended yarn Acrylic Yarn

(Anshupati Textile) Ludhiana (VTM)

50000

29 Tons/Day

100%cotton

14-MT yarn,Polyester/ dyeing/Day

Cottonblended

COMPUTERISATION Presently the unit is operating under “SAP 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. Personal computers have also been provided separately for each department like administration, costing, R&D, Maintenance as well as the production areas.

USTERIZED CERTIFICATION The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/ Switzerland on April 10, 2007. M/S Vinayak Textile mills, Ludhiana / India fulfil all conditions for using the brand USTERIZED and will be checked regularly at once per year basis.

PRODUCTION The unit is producing different types of yarn both for Domestic consumption and Export purpose. The production department is headed by General Manager (G.M.). The VTM has two units. The unit I is concerned with the production of 100% cotton yarn NE 10s40s, Carded & Combed, Single & Multifold, Dyed , Processed & Polyester yarn NE 10s40s, Carded & Combed with a capability to offer any blend. The unit-II expansion is concerned with production of Worsted Spun yarn 100% Cotton. .Production capacity of unit –I is 15 ton per day and unit-II is 13 tons per day.

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 VTM. having the export and domestic ratio is 34:66. 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.

3.

Direct Dispatches are also made by the units.

ORGNISATION STRUCTURE A chart showing the organizational structure of VTM Ludhiana 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.

Manufacturing Process Flow Chart of VPL 100% COTTON CARDED/COMBED YARN

Issue of Cotton Bales Laying Down Blow Room Card Breaker Draw Frame

Unilap

Finisher Draw Frame

Comber

Speed Frame Ring Frame Winding Cheese Winding T.F.O Conditioning

Conditioning Packing for Double Yarn

Packing for Single Yarn

Storage & Dispatch

MANUFACTURING

PROCESS

IN

VINAYAK

TEXTILE

MILLS

LIMITED, LUDHIANA Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun. 1. MIXING The different varieties of cotton are issued as per product mix from the raw material section in bale from. The different varieties of cotton and different lots are mixed together as per the requirement of end product and standard recommended mixings. The material is conditioned in mixing for 24 hours. 2. BLOW ROOM In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which often comes in the bales. 3. CARDING In this process, further cleaning of fibers is done and the fibers are opened into single fibers extent i.e. the main purpose is further removal of trash in cotton and the industrialization and parallelization of fibers. From the carding machine, the material is delivered in the form of sliver.

4. DRAW FRAME The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card slivers are doubled together in this process to reduce variations and further drafting is done to reduce the wt/yard of delivered sliver. Two passages are given at the draw frame stage. In case of combed counts, the card sliver is fed to the precombing draw frame. The purpose of combing draw frame is to reduce the wt/yard variations in the card sliver and to parallelize the fibers. Singles passage is given at the precombing stage. 5. LAP FORMER 20-25 precombed draw slivers are fed together to produce a lap sheets of fibers, which is wound on the spools. 6. COMBERS The laps prepared on lap former are fed to combers. The main purpose of combing process is to remove the short fibers from the material in the form of noil. The average noil percentage caries from 15% to 18%. The material is delivered in the form of sliver. 7. SPEED FRAME The finisher draw frame sliver is fed to the speed frames for conversion into the roving form. In this process the wt/yard of the sliver is reduced, slight twist is given to the fleece and the material delivered in the form of roving, wound on the plastic bobbins. 8. RING FRAME The roving is fed to ring frame for conversion into yarn. In the process, the weight / yd of roving is reduced as per requirement of ultimate user and the delivered yarn is wound on the plastic bobbins. 9. WINDING In this process, the yarn is wound on paper cones to produce bigger package, as per requirement of the market. The weight / package varies from 1.2 kilogram to 2.1 kilogram. During the process, in addition to the formation of bigger packages, the yarn faults are also removed with help of electronic yarn cleaner. 10. DOUBLING In the case of type cord the process is same upto cone winding. After cone winding the yarn is fed into Cheese Winding. In the process 2 ply or 4 ply is to be done as per requirement. After the yarn is fed into ring doubling and required T.P.I. is given in 2 ply

or 4 ply yarn. In the next process in assembly cheese winding is get the package in the package in the required from to be fed into T.F.O. in T.F.O. final yarn is prepared in the form of cheese and required T.P.I. is given to the final yarn in process. 11. PACKING In this process, the cones / cheese are packed in bags or cartoons as per the requirement of the market. In addition to the packing the material is checked thoroughly to avoid mixing of different materials

Chapter- 4 OUTLINE OF THE STUDY

OUTLINE OF THE STUDY The management of 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. OBJECTIVES OF THE STUDY 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.  To render recommendations for the effective management of working capital. SCOPE OF THE STUDY The study is conducted at “VTM –LUDHIANA” 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 four years.

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 VTM to analyze the working capital management of VTM.  For understanding the various reports, personal interviews are conducted.  With the help of various techniques like:

-

Operating Cycle analysis

-

Ratio Analysis

-

Common size statement

-

Schedule of changes in working capital

The overall position of VTM is studied and analyzed  Suggestions are given on the basis of findings for better understanding of working capital management. 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. LIMITATIONS OF THE STUDY  As central purchase office purchase raw material and central 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 VTM 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.

Chapter- 5 WORKING CAPITAL ANALYSIS

WORKING CAPITAL ANALYSIS 1.OPERATING 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

(1)

Raw Material Conversion Period (RMCP) =

Average Raw Material Stock

X 360

Raw Materials consumed during the year

FOR SPINNING MILL: PARTICULARS 2004-05 Average raw

2005-06

2006-07

2007-08

material stock 183071228.14 Raw material

227150926.07

218046754.94

328005499.45

consumed

385430133.40

309974487.22

410666073.76

495453061.76

during the year RMCP

169.2 DAYS

263.8 DAYS

191.1 DAYS

238.3 DAYS

300 250 200 150

RMCP

100 50 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: PARTICULARS 2004-05 Average raw

2005-06

2006-07

2007-08

material stock Raw material

-

15012815.54

16023458.66

11108879.34

consumed

-

122961363.25

263718304.68

338194022.33

during the year RMCP 45 40 35 30 25 20 15 10 5 0

(2)

-

43.9 DAYS

21.9 DAYS

11.8 DAYS

RMCP

2004-05

2005-06

2006-07

2007-08

Work in Progress Conversion Period (WIPCP) =

Average stock in progress

X 360

Cost of Production FOR SPINNING MILL: PARTICULARS 2004-05 Average stock in

2005-06

2006-07

2007-08

progress Cost

4046698.00

3388006

6406842

8595640.40

500317045.88 2.91 DAYS

426414576.75 2.9 DAYS

608858271.37 3.8 DAYS

751824244.94 4.1 DAYS

production WICP

of

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

WICP

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: PARTICULARS 2004-05 Average stock in

2005-06

2006-07

2007-08

progress Cost

1021072

5791673

6692336

4917031.00

25254802.19 14.6 DAYS

219005634.76 9.5 DAYS

404498734.7 5.9 DAYS

524670967.58 3.4 DAYS

production WICP

of

16 14 12 10 8

WICP

6 4 2 0

(3)

2004-05

2005-06

2006-07

2007-08

Finished Goods Conversion Period (FGCP)

=

Average Finished good inventory Cost of goods sold

X X 360 360

FOR SPINNING MILL: PARTICULARS 2004-05 Average

2005-06

2006-07

2007-08

finished

9473270

12545845

39817039.68

goods 18939831.18

inventory Cost of goods sold

500317045.88

FGCP

13.6 DAYS

426414576.75

751824244.94 608858271.37 7.4 DAYS

19.1 DAYS

2005-06 5857416

2006-07 6745966

2007-08 10034498

7.9 DAYS

20 15 10

FGCP

5 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: PARTICULARS 2004-05 Average finished goods inventory Cost of goods

-

219005634.76

404498734.7

524670967.58

sold FGCP

-

9.6 DAYS

6 DAYS

6.9 DAYS

10 8 6 FGCP

4 2 0

(4)

2004-05

2005-06

2006-07

2007-08

Debtors’ Conversion Period (DCP) =

Average Debtors

X 360

Credit Sales FOR SPINNING MILL : PARTICULARS Average debtors Credit sales

2004-05 37279070.84 596069587.62

2005-06 37279070.84 543167006.35

2006-07 92312638.13 588183650.23

2007-08 29970369.49 730047747.60

DCP

22.4 DAYS

24.7 DAYS

56.5 DAYS

14.8 DAYS

60 50 40 30

DCP

20 10 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: PARTICULARS Average debtors Credit sales

2004-05 247769 212240

2005-06 28959455.84 202379449.81

2006-07 48904270.97 492529652.69

2007-08 99301521.09 610863493.76

DCP

420.3 DAYS

51.5 DAYS

35.7 DAYS

58.5 DAYS

450 400 350 300 250 200

DCP

150 100 50 0

(5)

2004-05

2005-06

2006-07

2007-08

Credit Conversion Period (CCP) =

Average Creditors Credit Purchases

X 360

FOR SPINNING MILL: PARTICULARS Average creditors

2004-05 4316518.31

2005-06 5840979.88

2006-07 5294945.83

2007-08 23709393.26

Credit purchases

385430133.40

309974487.22

410666073.76

495453061.76

CCP

4.03 DAYS

6.8 DAYS

4.6 DAYS

1.7 DAYS

7 6 5 4 CCP

3 2 1 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE:

16 14 12 10 8

CCP

6 4 2 0

2004-05

2005-06

PARTICULARS Average creditors

2006-07

2004-05 -

2007-08

2005-06 5449322.89

2006-07 1203818.69

2007-08 1767614.89

Credit purchases

-

122961363.25

263718304.68

338194022.33

CCP

-

15.9 DAYS

1.6 DAYS

1.9 DAYS

GROSS OPERATING CYCLE FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08

RMCP 169.2 DAYS 263.8 DAYS 191.1 DAYS 238.3 DAYS

WICP 2.91 DAYS 2.9 DAYS 3.8 DAYS 4.1 DAYS

FGCP 13.6 DAYS 7.9 DAYS 7.4 DAYS 19.1 DAYS

DCP 22.4 DAYS 24.7 DAYS 56.5 DAYS 14.8 DAYS

GOC 208.1 DAYS 299.3 DAYS 258.8 DAYS 276.3 DAYS

300 250 200 150

GOC

100 50 0

2004-05

2005-06

2006-07

2007-08

NET OPERATING CYCLE FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08

GOC 208.11 DAYS 299.3 DAYS 258.8 DAYS 276.3 DAYS

CCP 4.03 DAYS 6.8 DAYS 4.6 DAYS 1.7 DAYS

NOC 204.08 DAYS 292.5 DAYS 254.2 DAYS 274.6 DAYS

300 250 200 150

NOC

100 50 0

2004-05

2005-06

2006-07

2007-08

GROSS OPERATING CYCLE FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08

450 400 350 300 250 200 150 100 50 0

RMCP 43.9 DAYS 21.9 DAYS 11.8 DAYS

WICP 14.6 DAYS 9.5 DAYS 5.9 DAYS 3.4 DAYS

FGCP 9.6 DAYS 6 DAYS 6.9 DAYS

DCP 420.3 DAYS 51.5 DAYS 35.7 DAYS 58.5 DAYS

GOC 434.9 DAYS 114.5 DAYS 69.5 DAYS 80.6 DAYS

GOC

2004-05

2005-06

2006-07

2007-08

NET OPERATING CYCLE FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08

GOC 434.9 DAYS 114.5 DAYS 69.5 DAYS 80.6 DAYS

CCP 15.9 DAYS 1.6 DAYS 1.9 DAYS

NOC 434.9 DAYS 98.6 DAYS 67.9 DAYS 78.7 DAYS

450 400 350 300 250 200 150 100 50 0

NOC

2004-05

2005-06

2006-07

2007-08

ANALYSIS It is claimed that gross operating cycle of VTM for spinning mill is increasing in year 2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06. For spinning mill in year 2004-05 it is 208.11 days then it increased to 299.3 days in year 2005-06. In 2006-07, it is decreased to 258.8 days. The main reason of increasing gross operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the stores but in year 2006-07 there is less GOC due to less availability of raw material in stores. The GOC for dye house has shown a significant decreament from 434.9 days in 2004-05 to 69.5 days in year 2006-07. In year 2007-08, it came out to be 80.6 days. The GOP for dye house is not satisfactory as it has decreased to a great extent. 2.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:

1. 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. 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 VTM FOR SPINNING MILL: YEAR

CURRENT

CURRENT

CURRENT RATIO

2004-05 2005-06 2006-07 2007-08

ASSETS 329780134.40 337914119-55 372031954.03 462706185.06

LIABILITIES 22952307.82 25398799.03 29553280.08 47891481.92

14.4 13.3 12.6 9.7

(CR)

16 14 12 10 8

CR

6 4 2 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: YEAR

CURRENT

CURRENT

2004-05 2005-06 2006-07 2007-08

ASSETS 9633007.63 64846029.63 92984361.6 148537709.99

LIABILITIES 10462522.55 13090777.94 8735151.3 5975377.17

CURRENT RATIO (CR) 0.9 4.9 10.6 24.9

25 20 15 CR

10 5 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS The current ratio of the spinning mill 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. The overall position of current ratio for spinning mill is satisfactory. The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05 to10.6 in 2006-07 and then to 24.9 in 2007-08. Initially in 2004-05, the ratio was not satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the year 2007-08.

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 VTM FOR SPINNING MILL: YEAR

LIQUID ASSETS

CURRENT

LIQUID RATIO

2004-05 2005-06 2006-07 2007-08

120598521 89811409.92 127216004.91 81358926

LIABILITIES 22952307.82 25398799.03 29553280.08 47891481.92

5.3 3.5 4.3 1.7

(LR)

6 5 4 3

LR

2 1 0

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: YEAR

LIQUID ASSETS

CURRENT

LIQUID RATIO

2004-05 2005-06 2006-07 2007-08

6123027.86 33218697.57 56812234.26 115776657.53

LIABILITIES 10462522.55 13090777.94 8735151.3 5975377.17

0.6 2.5 6.5 19.4

(LR)

20 15 10

LR

5 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS According to rule of thumb, it should be 1:1. For spinning mill, the liquid ratio has decreased over the past four years. It was 5.3 in 2004-05 and decreased to 4.3 in 2006-07 and then to 1.7 in 2007-08. The decreament in the ratio is not satisfactory, however the ratio 1.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of thumb. For dye house,the liquid ratio has shown a significant increament over the past four years. It increased from 0.6 in 2004-05 to 6.5 in 2006-07 and then to 19.4 in 2007-08. The increament in the ratio is quite good for the dye house. This shows that the investment in liquid assets has increased over the past years.

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 VTM

FOR SPINNING MILL: YEAR

2004-05 2005-06 2006-07 2007-08

ABSOLUTE

CURRENT

ABSOLUTE

LIQUID ASSETS

LIABILITIES

LIQUID

22952307.82 25398799.03 29553280.08 47891481.92

(ALR) 0.01 0.02 0.18 0.01

435629.36 569656 5210807.58 395884.64

0.18 0.16 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0

RATIO

ALR

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: YEAR

ABSOLUTE

CURRENT

ABSOLUTE

LIQUID ASSETS

LIABILITIES

LIQUID (ALR)

2004-05 2005-06 2006-07 2007-08

233902 253609 -

13090777.94 8735151.3 -

0.01 0.02 -

RATIO

0.02 0.015 0.01

ALR

0.005 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS The acceptable standard for this ratio is 0.5:1. Thus spinning mill and dye house, 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 2005-06, 2006-07 due to increased cost of production both for spinning mill and dye house. 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. Working Capital Turnover Ratio

=

Sales Net Working Capital

Working Capital Ratio of VTM FOR SPINNING MILL: YEAR

SALES

NET

WORKING

2004-05 2005-06 2006-07 2007-08

596069587.62 543167006.35 588183650.23 730047747.60

CAPITAL 306883587.58 312620335.52 342591885.95 415076656.14

WCTR 1.9 1.7 1.7 1.8

1.9 1.85 1.8 1.75

WCTR

1.7 1.65 1.6

2004-05

2005-06

2006-07

2007-08

FOR DYE HOUSE: YEAR

SALES

NET

WORKING

2004-05 2005-06 2006-07 2007-08

202379449.81 492529652.69 610863493.76

CAPITAL 51755251.69 84249210.4 142581027.83

WCTR 3.9 5.8 4.3

6 5 4 3

WCTR

2 1 0

2004-05

2005-06

2006-07

2007-08

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. For spinning mill, the ratio is quite same for the past four years. It is 1.9 in 2004-05, 1.7 in years 2005-06 and 200607 and 1.8 in 2007-08. For dye house, the ratio is more than that of spinning mill. It shows increament from 3.9 in 2005-06 to 5.8 in 2006-07 and then decreased to 4.3 in 2007-08. The ratio is satisfactory for dye house but it should not decrease further.

2. 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 FOR SPINNING MILL: FOR YEAR 2004-05: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses

AMOUNT ( IN RS.)

%

570440434.93 17200494.12

62.18 1.87

-

-

Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

587640929.05

64.05

208195599.41 37039996.26 435629.36 84108909.37 329780134.4 917421063.45

22.69 4.04 0.05 9.17 35.95 100

567503938.84 336825183.77 (9804605.98) 894524516.63

61.94 36.76 (1.07) 97.64

3014518.31 16627112.73

0.33 1.81

668837

0.07

1339839.78 21650307.82 916174824.45

0.14 2.36 100

FOR YEAR 2005-06: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES

AMOUNT (IN RS.)

%

565709880.59

49.8

227016140.46

20

4400478.52 797126499.57

0.39 70.23

246141889.88 37279070.84 569656 53923502.83 337914119.55 1135040619.12

21.69 3.28 0.05 4.75 29.77 100

Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

857082196.43 425924449.39 24531788.78 1307538434.6

64.30 31.95 1.84 98.09

5840979.88 18036489.88

0.44 1.35

-

-

1521329.27 25398799.03 1332937233.63

0.11 1.91 100

FOR YEAR 2006-07: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities

AMOUNT (IN RS.)

%

873085829.95 39988683.62

67.94 3.11

913074513.57

71.05

240453655.62 92312638.13 5210807.58 34054852.70 372031954.03 1285106467.6

18.71 18.71 0.41 2.65 28.95 100

730042330.44 532957606.95 (7333537.87) 1255666399.52

56.80 41.47 (0.57) 97.70

5294945.83 21319619.32

0.41 1.67

-

-

2938714.93 29553280.08

0.22 2.3

Total of liability side

1285219679.6

100

FOR YEAR 2007-08: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

AMOUNT (IN RS.)

%

822992994.43

62.69

27165970.92

2.07

850158965.35

64.76

379510100.55 29970369.49 395884.64 52829830.38 462706185.06 1312865150.41

28.91 2.28 0.03 4.02 35.24 100

1026736607.06 431510188.42 (117066371.70) 1341180423.78

73.92 31.06 (8.43) 96.55

24415626.72 23475855.20

1.76 1.69

-

-

47891481.92 1389071905.7

3.45 100

FOR DYE HOUSE: FOR YEAR 2004-05: PARTICULARS

AMOUNT (IN RS.)

%

FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

186017879.85 3641581.77

93.34 1.83

189659461.62

95.17

3247313.77 247769 6137924.86 9633007.63 199292469.25

1.63 0.12 3.08 4.83 100

140951705.11 59872920 (11994678.41) 188829946.7

70.73 (6.02) 30.04 94.75

8359951.15 1429726.92

4.19 0.72

-

-

672844.48 10462522.55 199292469.25

0.34 5.25 100

FOR YEAR 2005-06: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances

AMOUNT (IN RS.)

%

184248879.27

73.72

849096.46

0.34

185097975.73

74.06

31300541.06 28959170.26 233902

12.52 11.59 0.09

Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

4352416.31 64846029.63 249944005.36

1.74 25.94 100

212651256.41 59872920 (14177921.30) 258346255.11

78.34 5.22 22.06 95.18

5449322.89 6821847.92

20.08 2.51

-

-

819607.13 13090777.94 271437033.05

0.30 4.82 100

FOR YEAR 2006-07: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES

AMOUNT (IN RS.)

%

220213154.5

70.24

300237

0.096

220513391.5

70.34

35816899.3 48904270.9 253609 8009581.9 92984361.1 313497752.6

11.42 15.59 0.08 2.55 29.66 100

Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side

215855702.2 59872920 29033979.4 304762601.6

68.9 92.6 19.09 97.21

1203818.69 7335764.53

0.38 2.34

-

-

195567.89 8735151.11 313497752.71

0.062 2.79 100

FOR YEAR 2007-08: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Trade deposits and other Advances Total current liabilities

AMOUNT (IN RS.)

%

209812946.08

58.39

983537.06

0.27

210796483.14

58.66

32341614.46 99301521.09 16894574.44 148537709.99 359334193.13

9 27.63 4.70 41.34 100

236801598.89 131435332.52 53753985.78 421990917.19

55.33 12.56 30.71 98.60

1767614.89 4076005.21

0.41 0.95

-

-

131757.07 5975377.17

0.03 1.4

Total of liability side

427966294.36

100

ANALYSIS For spinning mill, the major part of current assets involves inventories. It covers more than 50% of total current assets. The debtors also have significant part of current assets. It contributes approximate 11% to 30% part of current assets for all the years from 2004-05 to 2007-08. The least contribution is thus of cash and bank balance. On the other hand, current liabilities consist of mainly creditors and other liabilities. In 2007-08, current assets have increased due to increase in inventories and loans & advances, and current liabilities have also shown increament. So the working capital is more for year 2007-08 as compared to last year’s working capital. For dye house, the inventories form a good portion of current assets and contribute 30% to 50% of the total current assets over the past years. The sundry debtors also show fluctuating proportions in the total current assets over the years. The proportion is quite less for year 2004-05 but it increased significantly for the next years and contributed about 66% to the total current assets in year 2007-08. The current liabilities mainly consist of sundry creditors and other liabilities. The sundry creditors have decreased over the past years. The other liabilities have shown increament from year 2004-05 to year 2006-07 but it has decreased in year 2007-08.

3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL SCHEDULE OF CHANGES IN WORKING CAPITAL: FOR SPINNING MILL:

ANALYSIS:

PARTICULARS CURRENT ASSETS: Inventories S. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. creditors Other liabilities Int. accrued but not due Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital

2004-05

2005-06

INCREASE

208195599.41 37039996.26 435629.36

246141889.88 37279070.84 569656

37946290.47 239074.58 134026.64

84108909.37

53923502.83

329780134.4

337914119.55

4316518.31 16627112.73 668837

5840979.88 18036489.88 -

1339839.78

1521329.27

22952307.82

312515320.52

306827826.58

312515320.52

30185406.54

1524461.57 1409377.15 668837 181489.49

5687493.94 312515320.52

DECREASE

5687493.94 312515320.52

38988228.69

38988228.69

FOR YEARS 2004-05 AND 2005-06: PARTICULARS CURRENT ASSETS: Inventories S. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. creditors Other liabilities Trade deposits Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital

2006-07

2007-08

INCREASE

240453655.62 92312638.13 5210807.58

379510100.55 29970369.49 395884.64

139056444.93

34054852.70

52829830.38

18774977.68

372031954.03

462706185.06

5294945.83 21319619.32 2938714.93

23709393.26 23475855.20 706233.46 -

29553280.08

47891481.92

342478673.95

414814703.14

62342268.64 4814922.94

18414447.43 2156235.88 706233.46 2938714.93

72336029.19 414814703.14

DECREASE

72336029.19 414814703.14

160770137.54

160770137.54

As we have a look on the schedule of changes in working capital for the spinning mill over the years 2004-05 and 2005-06, we find that, among current assets,inventories, sundry debtors and cash & bank balances have shown increament from year 2004-05 to year 2006-07. The Loans & advances have got decreased in the same years. Among the current liabilities, the sundry creditors and other liabilities have increased. So the overall net working capital has increased.

FOR YEARS 2006-07 AND 2007-08: Among the current assets,inventories and loans & advances have increased and sundry debtors and cash & bank balances have shown decreament. The total current assets have

increased. Among the current liabilities,sundry crditors and other liabilities have increased. So the net working capital has also increased.

FOR DYE HOUSE:

PARTICULARS CURRENT ASSETS: Inventories S. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. creditors Other liabilities Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital

2004-05

2005-06

INCREASE

3247313.77 247769 -

31300541.06 28959170.26 233902

28053227.29 28711401.26 233902

6137924.86

4352416.31

9633007.63

64846029.63

8359951.15 1429726.92 672844.48

5449322.89 6821847.92 819607.13

10462522.55

13090777.94

(829514.92)

51755251.69

1785508.55

2910628.26 5392121 146762.65

52584766.61 51755251.69

DECREASE

52584766.61 51755251.69

59909158.81

59909158.81

PARTICULARS CURRENT ASSETS: Inventories S. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. creditors Other liabilities Trade deposits Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital

2006-07

2007-08

INCREASE

35816899.34 48904270.97 253609

32341614.46 99301521.09 -

50397250.12

8009581.93

16894574.44

8884992.51

92984361.24

148537709.99

1203818.69 7335764.53 195567.89

1767614.89 4076005.21 131757.07 -

8735151.11

5975377.17

84249210.13

142562332.82

3475284.88 253609

563796.2 3259759.32 131757.07 195567.89

58313122.69 142562332.82

DECREASE

58313122.69 14256332.82

62737569.84

62737569.84

ANALYSIS FOR YEARS 2004-05 AND 2005-06: Among the current assets, inventories, sundry debtors and cash & bank balance have increased but the loans & advances have decreased. The total current assets have increased. Among the current liabilities, sundry creditors have decreased and other liabilities have increased. The total current liabilities have increased. So, the net working capital has increased.

FOR YEARS 2006-07 AND 2007-08: Among the current assets, inventories and cash & bank balances have decreased. On the other hand, sundry debtors and loans & advances have increased. The total current assets have increased. Among the current liabilities, sundry creditors have increased but other liabilities have decreased. So, the net working capital has increased.

Chapter- 6 CASH MANAGEMENT

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. Cash is the most liquid and can be used to make immediate payments. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. On the other hand extreme liquidity may take uneconomic investments. This underlines the significance of cash management. The term cash includes coins, currency and cheques held by the firm ad balances in its bank accounts. Sometimes near- cash items such as marketable securities of bank item deposits are included in cash. 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 management does not end here and the financial manager may also be required to identify the sources from where cash may be produced on a short term basis or the outlets where excess cash may be invested for a short term. 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 shortages will simply disturb the firm’s manufacturing operations where excessive cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor less. Hence, a major function of the financial manager is to maintain a sound cash position. 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

MOTIVES FOR HOLDING CASH Transaction Motive It means a firm holds cash for conduct of business. The daily requirements of cash come under this motive. So enough cash for smooth business is required for transaction motive. Precautionary Motive Under this motive cash is held for most contingencies in future. There may be so many reasons due to which the emergency of cash arises. These reasons can be: (i)

Sudden rise in the demand which leads to more production

(ii)

Due to inflation

(iii)

Due to any miss-happening in future like loss by fire theft etc. the cash is held for precautionary motive in advance. This cash may be held as marketable securities which are highly liquid and low risky.

Speculative Motive The speculative motive relates to holding of cash for investing in profit making opportunity as and when arises. The opportunity may arise in securities, in material purchasing or in any other type. By holding cash for speculative motive, the firm can choose most profitable opportunity, yet by enlarge, business firm do not engage in speculations because the primary motive to hold cash are transaction and precautionary motive. In VTM, it holds cash only for transaction motive. Speculation and precautionary motives cash is held by corporate office. If the VTM requires some more cash to meet any future contingency then it informs about it to corporate office and corporate office sends cash to VTM as per requirement.

But the VTM has to give the reasons for extra cash to

corporate office. 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. 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. Daily cash flow statement is prepared to see the daily cash position. There estimations are sent to corporation office at Ludhiana so that needed cash is obtained at night time. 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 VTM is the cash credit limit, which is as follows:

Banks

Punjab National Bank.

Main Limit

Sub-limit transfer to

(in crores) Peak Normal 2 crores 2 crores

LDH Unit (in crores) 5 crore in month.

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 sublimits is fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds get transferred from main limits. The interest rate paid for this is near about 11.25%. 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. Main outflow of the unit is on raw material cost. Different types of raw material are purchased from different states. Normally cotton is purchased during peak season when good quality cotton is available, generally payment for cotton is made when cotton is received in the mill, and credit period depends upon the states from which cotton is purchased. 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 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.

Chapter- 7 RECEIVABLES MANAGEMENT

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. They represent extension of credit and investment of funds and must be carefully managed. Every firm must develop a credit policy that includes setting credit standard, defining credit terms and employing methods for timely collection of receivables. The receivables (including the debtors and the bills) constitute a significant portion of working capital and are an important element of it. The receivables emerge whenever goods are sold on credit and customers receivables are created when a firm sells goods or services to its customers and accepts, instead of the immediate cash payment the promise to pay within specified period. Thus, 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 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: (i)

Character of a person

(ii)

Capacity of a person

(iii)

Condition of a person

Credit Terms The credit terms refers to the set of stipulation under which the credit is extended to the customers. The credit terms may relate to the following: (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

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 VTM is as follows:

AGEING SCHEDULE Age Classification

Amount

% age of Total

0 – 15 days

35330987.21

22

15 – 30 days

-

0

31 – 60 days

24148419.61

15

61 – 90 days

29297084.01

17

91 – 120 days

8852629.46

19

121 – 180 days

13217364.67

6

More than 180 days

14510162.71

12

Total O/S Amount

157577760.10

100

RECEIVABLES MANAGEMENT IN VTM 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 VTM in the market, s to compare with them; VTM has to make credit sales. 20% to 30% of current assets of VTM are sundry debtors. VTM has a good receivable policy as it has large amount of credit sales. I. CREDIT POLICY OF VTM VTM 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 VTM after receiving amount against any debtors. So record for outstanding debtors is maintained by VTM itself. VTM 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 – VTM 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 VTM 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 VTM provide different credit period. These credit terms are according to the nature of product which are following: Scrap / waste Dyed yarn

- cash basis -

Grey yarn

40 days -15 days

(b) Cash Discount – In case of 100% cotton yarn Advance payment

-

1 % C.D. prior to material dispatch

15 days credit

-

Interest free

Afterwards

-

18 % p.a. interest chargeable

In case of Polyster Cotton Yarn Payment within 48 hours Interest II.

-

1 % CD

@ 18 % p.a., if payment is not made within the prescribed limits.

CREDIT CONTROL Collection efforts made by VTM:

Due to cut-throat competition VTM 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. Commission is also paid to agents This percentage is only on the basis of the realization amount. YARN

COMMISION

GREY DYED

DOMESTIC 1.5% 2%

ON COMMISION

ON

EXPORTS 3% 3%

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VTM DEBTORS TURNOVER RATIO This ratio indicates the number of times average debtors are turned over during a year. The higher 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

FOR SPINNING MILL:

YEAR 2004-05 2005-06 2006-07 2007-08

SALES 596069587.62 543167006.35 588183650.23 730047747.60

AVG DEBTORS 37039996.26 37279070.84 92312638.13 29970369.49

DTR 16.09 times 14.6 times 6.37 times 24.36 times

25 20 15 DTR

10 5 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: As we can observe that, the debtors turnover ratio of the company has increased from 16.09 times in year 2004-05 to 24.36 times in year 2007-08. Increasing DTR is good for the company as it assures that the sundry debtors are more liquid.

FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08

SALES 212240 202379449.81 492529652.69 610863493.76

AVG DEBTORS 247769 28959170.26 48904270.97 99301521.09

DTR 0.9 times 6.99 times 10.1 times 6.2 times

12 10 8 6

DTR

4 2 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: The DTR for dye house has shown increament from 0.9 in 2004-05 to 10.1 in 2006-07 but it again decreased to 6.2 in 2007-08. It is not good for the company that DTR has declined in 2007-08 as it assures less liquid debtors.

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

FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08

DTR 16.09 14.6 6.37 24.36

DCP 22.4 days 24.7 days 56.5 days 14.8 days

60 50 40 30

DCP

20 10 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: The DCP of the spinning mill has decreased from 22.4 in year 2004-05 to 14.8 in year 2007-08 which is quite a good fact as lower DCP assures less time period for the conversion of receivables into cash.

FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08

DTR 0.9 6.99 10.1 6.2

DCP 400 days 51.5 days 35.6 days 58.1 days

400 350 300 250 200

DCP

150 100 50 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: The DCP ratio for dye house has decreased a lot from 400 days in year 2004-05 to 58.1 days in year 2007-08. It’s a promising fact because it takes very less time period to convert the receivables into cash.

Chapter- 8 MANAGEMENT OF INVENTORY

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: (a)

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. (b)

Work-in-Progress: These inventories are semi-manufactured

products. These products are those which are ready for sale. (c)

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:  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 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

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 VTM Inventory Management of VTM is good. VTM 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 VTM 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 VTM but also for the other units of Oswal Group. Cotton is generally received in lots so one lot consists of 55 or 110 bales. 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 VTM has high investment in cotton. DAILY REQUIREMENT OF COTTON For production daily requirement of cotton is 180 bales and when the full capacity of unit gets started then the average requirement of cotton bales will reach to 200 bales.

The total daily production is 55 Tons /day. STORAGE CAPACITY OF VPL Regarding Raw Material Inventory, VTM 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. 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. 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. 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 VTMis quite satisfactory. ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VTM 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. A high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold, the lesser amount of money is required to finance the inventory. Inventory (Raw Material) Turnover Ratio

=

Cost of Goods sold. Average Raw Material Stock

FOR SPINNING MILL:

YEAR

COST OF GOODS AVERAGE SOLD

RAW INVENTORY MATE

TURN

RIAL

OVER

STOC

RATI

K

O(ITR )

2004-05 2005-06 2006-07 2007-08

568168331.8 468091135.05 533565522.12 757225990.36

183071228.14 227150926.07 218046754.94 328005499.45

3.10 times 2.1 times 2.45 times 2.31 times

3.5 3 2.5 2 ITR

1.5 1 0.5 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: The ITR ratio of spinning mill does not show wide fluctuations over the past years. It almost remains constant around 3.1 and 2.3. However , the ratio must increase for better management of inventories.

FOR DYE HOUSE: YEAR

COST OF GOODS AVERAGE SOLD

RAW INVENTORY MATE

TURN

RIAL

OVER

STOC

RATI

K

O(ITR )

2004-05 2005-06 2006-07 2007-08

204971625.4 438273468.85 522017545.97

15012815.54 16023458.66 11108879.34

13.7 times 27.35 times 46.9 times

50 40 30 ITR

20 10 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS The inventory turnover ratio has increased from 13.7 times in 2005-06 to 46.9 times in 2007-08. It is quite a good fact and shows that inventory is managed in an efficient way for the dye house.

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

FOR SPINNING MILL: YEAR

INVENTORY

WORKING

RATIO IN %AGE

2004-05 2005-06 2006-07 2007-08

208195599.41 246141889.88 240453655.62 379510100.55

CAPITAL 306827826.58 312515320.52 342478673.95 414814703.14

67.9 78.8 70.2 91.5

100 80 60 INVENTORY TO WORKING CAPITAL

40 20 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS: We can observe that investment in inventories out of the woking capital has increased from 67.9% in 2004-05 to 91.5% in 2007-08. But investment in inventories should be neither too high nor too low. So it should be maintained near 60% to 70%. FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08

INVENTORY

WORKING

RATIO IN %AGE

31300541.06 35816899.3 32341614.46

CAPITAL 51755251.69 84249210.13 142562332.82

60.5 42.5 22.7

-

70 60 50 40

INVENTORY TO WORKING CAPITAL

30 20 10 0

2004-05

2005-06

2006-07

2007-08

ANALYSIS The investment in inventories has decreased from 60.5% in 2004-05 to 22.7% in 200708. So, it is not a good fact about the dye house and the company should increase the investment in inventories for the dye house.

Chapter- 9 FINDINGS, SUGGESTIONS AND CONCLUSION

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 VTM 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 VTM is very high due to the high raw material conversion period because raw material is a seasonal product.  Now VTM has increased its share in the domestic market by reducing the exports.  For filling its fund requirement VTM depends upon the 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 VTM for purchasing cotton because cotton is a seasonal product. Also EOQ is not followed in stores.

SUGGESTIONS



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.

By conducting the study about working capital management it is found out that working capital management of VTM is too good. VTM has sufficient funds to meet its current obligation every time which is due to sufficient profits and efficient management of VTM. 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 VTM. Overall the working capital management of VTM is very much efficient.

APPENDIX

REFERENCES AND BIBLIOGRAPHY 

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd.



Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc Graw Hill.



Van Horne, Jame C; Fundamentals of Financial Management.



Rustagi R.P.; Principles of Financial Management.



Annual Reports of VINAYAK TEXTILE MILLS LTD..