project report of anand malode 1(existing)
TRANSCRIPT
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PROJECT REPORT
ON
Working Capital Management at Raymond Ucodenim Ltd.
SUBMITTED
RASHTRASANT TUKADOJI MAHARAJ NAGPUR UNIVERSITY, NAGPUR
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
BY
ANAND K. MALODE
UNDER GUIDANCE OF
DR. JUGALKISHOR F. AGRAWAL
Department of Business Management,
Vilasrao Deshmukh College of Engineering & Tech. Mouda, Nagpur
2010-2011
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CERTIFICATE
This is to certify that Anand K. Malode is a bonafide student ofDepartment of
Business Management, Vilasrao Deshmukh College of Engineering & Tech.,Mouda,
Nagpur and studying in M.B.A. Part-II and has completed his project titled
Working Capital Management at Raymond Ucodenim Ltd.
This project report is submitted to RTM Nagpur University in partial fulfillment
of academic requirement for the degree of Master of Business Administration during the
academic year 2009-2011.
I find the work comprehensive, complete and of sufficiently high standard to
warrant its presentation.
Dr. Jugalkishor F. Agrawal Mr. Prasanna Tidke
Guide Director
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DECLARATION
I have carried out the work presented in this project report titled
Working Capital Management at Raymond Ucodenim Ltd.
under the guidance of Dr. Jugalkishor F. Agrawal Dept .of Business Management,
Vilasrao Deshmukh college Of Engineering & Tech., Mouda, Nagpur during the
academic year 2009-2011. This work has not been submitted for any other examination
conducted by RTM Nagpur University or for any other purpose.
DATE : ______________ ......
PLACE: _______________ Mr. ANAND K.MALODE
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ACKNOWLEDGEMENT
I take this opportunity to convey my gratitude to those who provided me help
during the course of my study.
It is indeed a great pleasure to express me sincere thanks and great sense of
gratitude of Dr. Jugalkishor F. Agrawal for their invaluable guidance, timely help and
suggestions and constant encouragement during my project work.
DATE : ____________
PLACE: ____________ Mr. ANAND K. MALODE
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Sr.
NoIndex Page No.
1. EXECUTIVE SUMMARY 1-3
2. INTRODUCTION 4-7
3. COMPANY PROFILE 8-17
4
5.
OBJECTIVES AND SCOPE OF THE PROJECT
Objectives
ScopeMethodology
WORKING CAPITAL
Management of Working CapitalNeed for adequate Working Capital
Factors determining Working Capital requirementSources of Working Capital
Working Capital Classification
18
19-33
6. STATEMENT OF WORKING CAPITAL 34-35
7. INVENTORY MANAGEMENT 36-44
8. CASH MANAGEMENT 45-48
9.RECEIVABLES MANAGEMENT (DEBTORS)
49-56
10.CONCLUSION
57-58
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11.RECOMMENDATION
59-66
12. REFERENCES 67
13. BIBLIOGRAPHY 68
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I. EXECUTIVE SUMMARY
The term working capital has several meanings in business and economic development
finance. Working capital means a businesss investment in short-term assets needed to
operate over a normal business cycle.
Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have the
most direct impact: accounts receivable (current asset) ,inventory (current assets),
accounts payable (current liability).
Use of working capital is providing the ongoing investment in short-term assets that a
company needs to operate. A second purpose of working capital is addressing seasonal or
cyclical financing needs.
Working capital is also needed to sustain a firms growth, to provide liquidity and to
undertake activities to improve business operations and remain competitive, such as
product development, ongoing product and process improvements, and cultivating new
markets.
Raymond Uco Denim Ltd was incorporated in 1925 and is now a Rs.1, 400 crore plus
conglomerate having varied businesses like Textiles, Readymade Garments, Denims,
Engineering Files & Tools, Aviation and Designer Wear. The company is one of the
largest players in the core worsted fabric business with over 60% domestic market shares.
Objectives of the Project are to study working capital management process, to study
receivable management of the company and to study the process of cash and inventory
management.
Working capital management is management for the short-term current assets and current
liabilities, which is of critical importance to a firm. Cash management is to identify the
cash balance which allows the business to meet day to day expenses, but reduces cash
holding costs.
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Inventory management is to identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials and minimizes reordering costs
and hence increases cash flow, supply chain management. Debtors management is to
identify the appropriate credit policy.
A business need for working capital can come as a result of several reasons that include
increasing sales growth or seasonal growth, customers paying slower, need to increase
inventory to support sales growth and/or adding product lines, etc.
Though there is no set of universally applicable rules to ascertain working capital needs,
but these are some of the factors which could be considered: nature of the product,
manufacturing cycle, depreciation policy, seasonal variation, etc.
Working capital can be financed by trade credit, bank credit, cash credit, loans, letter of
credit, commercial paper, etc.
In the year 2010 the inventory period for Raymond Uco Denim Ltd has increased
tremendously from 106 days in 2009 to 272 days in 2010.
This is also supported by the decline in the inventory turnover ratio to a meager of 1.34
times in 2010. Since the company is in the textile industry therefore the inventory varies
according to seasonal and festive demands.
The current ratio is a reflection of financial strength. The current ratio measures the
ability of the firm to meets its current liabilities. Current assets get converted into cash
and provide the funds needed to pay current liabilities. The current ratio has decreased
from 2.68:1 (2009) to 2.33:1 in the year 2010.
Current liabilities have increased by 34.67% from the last year 2009. Provisions have
increased by 20.78%, thus the total current liabilities have increased by 31.42%. Hence as
the increase in the current liabilities is much more than the increase in the current assets,
the current ratio has declined slightly.
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The debtors turnover ratio has improved further in 2010 as it has increased to 5.50 times.
Hence as an effect of the increase in the debtors turnover ratio, there is a significant
improvement in the credit period as it has reduced to 66 days from 77 days. For the year
ended 2009-2010, the cash ratio has fallen from 2.46:1(2009) to 1.73:1 in 2010.
Hence better cash management is needed at Raymond Uco Denim Ltd The extra money
could be utilized to push sales and to pay the increase in the current liabilities. Measures
have to tightened to earn larger profits.
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II. INTRODUCTION
Three Meanings of Working Capital:
The term working capital has several meanings in business and economic development
finance. In accounting and financial statement analysis, working capital is defined as the
firms short-term or current assets and current liabilities. Net working capitalrepresents
the excess of current assets over current liabilities and is an indicator of the firms ability
to meet its short-term financial obligations.
From a financing perspective, working capital refers to the firms investment in two types
of assets. In one instance, working capital means a businesss investment in short-term
assets needed to operate over a normal business cycle. This meaning corresponds to the
required investment in cash, accounts receivable, inventory, and other items listed as
current assets on the firms balance sheet. In this context, working capital financing
concerns how a firm finances its current assets.
A second broader meaning of working capital is the companys overall nonfixed asset
investments. Businesses often need to finance activities that do not involve assets
measured on the balance sheet. For example, a firm may need funds to redesign its
products or formulate a new marketing strategy, activities that require funds to hire
personnel rather than acquiring accounting assets.
Working capital is a valuation metric that is calculated as current assets minus current
liabilities. Also known as operating capital, it represents the amount of day-by-day
operating liquidity available to a business. A company can be endowed with assets and
profitability, but short of liquidity, if these assets cannot readily be converted into cash.
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Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have the
most direct impact:
accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)
In addition, the current (payable within 12 months) portion of debt is critical, because it
represents a short-term claim to current assets. Common types of short-term debt are
bank loans and lines of credit.
Any change in the working capital will have an effect on a business's cash flows. A
positive change in working capital indicates that the business has paid out cash, for
example in purchasing or converting inventory, paying creditors etc.
Hence, an increase in working capital will have a negative effect on the business's cash
holding. However, a negative change in working capital indicates lower funds to pay off
short term liabilities (current liabilities), which may have bad repercussions to the future
of the company.
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Business Uses of Working Capital:
Just as working capital has several meanings, firms use it in many ways. Mostfundamentally, working capital investment is the lifeblood of a company. Without it, a
firm cannot stay in business. Thus, the first, and most critical, use of working capital is
providing the ongoing investment in short-term assets that a company needs to operate.
A business requires a minimum cash balance to meet basic day-to-day expenses and to
provide a reserve for unexpected costs. It also needs working capital for prepaid business
costs, such as licenses, insurance policies, or security deposits. Furthermore, all
businesses invest in some amount of inventory, from a law firms stock of office supplies
to the large inventories needed by retail and wholesale enterprises. Without some amount
of working capital finance, businesses could not open and operate.
A second purpose of working capital is addressing seasonal or cyclical financing needs.
Here, working capital finance supports the buildup of short-term assets needed to
generate revenue, but which comes before the receipt of cash. For example, a toy
manufacturer must produce and ship its products for the holiday shopping season several
months before it receives cash payment from stores. Since most businesses do not receive
prepayment for goods and services, they need to finance these purchases, production,
sales, and collection costs prior to receiving payment from customers.
Another way to view this function of working capital is providing liquidity. Adequate and
appropriate working capital financing ensures that a firm has sufficient cash flow to pay
its bills as it awaits the full collection of revenue. When working capital is not
sufficiently or appropriately financed, a firm can run out of cash and face bankruptcy. A
profitable firm with competitive goods or services can still be forced into bankruptcy if it
has not adequately financed its working capital needs and runs out of cash.
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Working capital is also needed to sustain a firms growth. As a business grows, it needs
larger investments in inventory, accounts receivable, personnel, and other items to realize
increased sales. New facilities and equipment are not the only assets required for growth;
firms also must finance the working capital needed to support sales growth.
A final use of working capital is to undertake activities to improve business operations
and remain competitive, such as product development, ongoing product and process
improvements, and cultivating new markets. With firms facing heightened competition,
these improvements often need to be integrated into operations on a continuous basis.
Consequently, they are more likely to be incurred as small repeated costs than as large
infrequent investments. This is especially true for small firms that cannot afford the cost
and risks of large fixed investments in research and development projects or new
facilities. Ongoing investments in product and process improvement and market
expansion, therefore, often must be addressed through working capital financing.
Working capital management is a continuous planning process wherein the manager has
to take appropriate decisions, as and when required, the failure of which can result in
huge losses for the company. This challenging aspect of working capital management
influenced me to choose this topic as my project.
Working capital management is a continuous planning process wherein the manager has
to take appropriate decisions, as and when required, the failure of which can result in
huge losses for the company. This challenging aspect of working capital management
influenced me to choose this topic as my project.
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III. COMPANY PROFILE
Raymond Ltd was incorporated in 1925 and is now a Rs.1, 400 crore plus
conglomerate having varied businesses like Textiles, Readymade Garments, Denims,
Engineering Files & Tools, Aviation and Designer Wear. The company is one of the
largest players in the core worsted fabric business with over 60% domestic market share.
The denim division has an installed capacity of 30 million meters and produces high
quality ring denims. The company currently ranks among the top 3 producers in India.
The engineering files & tools division constitutes around 12% of the total revenues and is
comparatively a smaller division.
However, Raymonds is the largest manufacturer of engineering files & tools in the
country. The company has entered into global tie-ups and this is expected to add
additional revenues to Raymond Ltd over the next two years. Recognized as the most
respected Textile Company of India, Raymond is amongst the first three fully integrated
manufacturers of Worsted Suiting in the world.
As the flag-bearer of the multi-product, multi-divisional Raymond Ltd Group, it enjoys
over 60% share of Indian Worsted Suiting Market. It produces 25 million meters of high-
value pure-wool, wool blended and premium polyester viscose suiting in addition to half
a million blankets and shawls, all marketed under the flagship brand "Raymond" - a
worldwide trusted name since 1925.
It also produces and markets plush-velvet furnishing fabric in wide array of designs and
colors including carpeting for the niche markets of India and Middle East. Manufacturingfacilities include three world-class fully integrated plants in India, employing state-of-
the-art technology from wool scouring to finishing stage and modern quality management
(ISO 9001) as well as Environment Control Systems (ISO 14001). All the plants are self-
sufficient in terms of providing educational, housing, recreation and spiritual support
system for the employees and connected townships.
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Today the mill has turned into a Rs. 1400 crores conglomerate and is Indias leading
producer of worsted suiting fabric with 60% market share. It is also the largest exporter
of worsted fabrics and readymade garments to 54 countries including Australia, Canada,
USA, the European Union and Japan. The Raymond Ltd group is also the leader among
ready-mades in India with a turnover of Rs. 2000 million with its three brands Park
Avenue, Parx and Manzoni.
Customers today the world over, are looking at one-stop shops that can fulfill all their
needs. At Raymond, they offer fully finished products that span various garment
categories that has been made possible by a seamless horizontal and vertical integration
across divisions. Their textile solutions encompass everything - from worsted suiting to
denim and shirting.
Its not just range but volume and quality that make them the textile major that they are
today. Their plants have a capacity of 31 million meters in producing the finest worsted
fabrics and wool blends. The blends comprise of exotic fibres like cashmere, Mohair or
Angora or blends of wool with casein and bamboo or the ultimate in fine pure wool
Super 230s.
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Raymond Limited continues to achieve enhanced customer satisfaction through ongoing
innovation. Internationally renowned menswear designers today, style their latest
collections from Raymond- the fabric in fashion.
About the company:
Raymond Limited is the worlds largest producer of worsted suiting fabrics, commanding
an over 60% market share in India. With a capacity of 31 million meters, they are among
the few companies in the world, fully integrated to manufacture worsted fabrics, wool &
wool blended fabrics. They also convert these fabrics into suits, trousers and apparels that
are exported to over 55 countries in the world; including European Union, USA, Canada,
Japan and Australia amongst others.
A trendsetter and an innovator in the Indian textile market, their expertise has been
brought to bear by their in-house research & development team. Their innovations have
become milestones in the worsted suiting industry. They mastered the craft of producing
the finest suiting in the world using super fine wool count (from 80s to 230s) and
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blending the same with superfine polyester and other specialty fibres, like Cashmere,
Angora, Alpaca, Pure wool and Linen.
Raymond Limited is amongst the few companies in the world with the expertise to
manufacture even finer worsted suiting fabric- the Super 230s. Today they are recognized
as a pioneer in manufacturing worsted suiting in India, producing nearly 20,000 designs
and colors of suiting fabrics, which are retailed through 30,000 stores in over 400 towns
across India. From fabric to fine tailored clothing, Silver Spark Apparel Ltd. marks the
Group's foray into the global apparel market.
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World-class facilities:
Raymonds manufacturing facilities include three world-class fully
integrated plants in India, deploying state-of-the-art technology
modern quality management systems like ISO 9001 and Environment
Control Systems (ISO 14001). All their plants are self-sufficient and
provide staff welfare measures such as education, housing, recreation
and support systems their employee.
Raymond Limited plants are located in India at the following locations: Thane, near
Mumbai, Chhindwara in Central India and Vapi in Gujarat, near Mumbai.
Thane Plant:
This is the mother plant and is the center of competence for world-class manufacturing
and design facilities. With decades and expertise and finely honed skills, this plant is a
treasure house of knowledge for producing superfine worsted suiting fabrics.
Chhindwara Plant:
The Raymond Limited Chhindwara plant, set up in 1991, is a state-of-the-art integrated
manufacturing facility located 57 kms away from Nagpur in Central India. Built on 100
acres of land, the plant produces premium pure wool, wool blended and polyester viscose
suiting. This plant has achieved a record production capacity of 14.65 million meters,
giving it the distinction of being the single largest integrated worsted-suiting unit in the
world.
Vapi Plant:
Raymond Limited has increased its worsted suiting capacity by 3 million meters, as part
of the second developmental phase of the Vapi plant. After this expansion, Raymond
Limited will have a total capacity for manufacturing 31 million meters of worsted suiting
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per annum. Modeled to meet international standards, the Vapi plant has been set up on
112 acres of lush green land with Hi-tech machinery such as warping equipment from
Switzerland, weaving machines from Belgium, finishing machines, automatic drawing-in
and other machines from Italy.
Investment Rationale Core business to add growth:
The worsted fabric business registered single digit growth over the last two-three years.
This business is likely to take off in the near future and improved product mix and
volume growth will drive growth for the main business of the company. The company is
expanding the capacity of its worsted fabric business by 3 million meters to 28 million
meters through expansion at Vapi plant. This would yield significant improvement in the
operational margins on back of reduced labor cost. The company is also expected to
benefit from the increased outsourcing opportunity in the worsted fabric segment.
Performance of subsidiaries to fuel profitability:
Raymond Limited has formed many subsidiaries like Raymond Limited Apparel Limited,
Colourplus Fashions Ltd, and Hindustan Files Limited etc. The double-digit growth rate
in these companies would significantly improve the consolidated revenues of Raymond
Limited resulting in healthy consolidated numbers. They expect these subsidiaries to
register 12-14 % CAGR over the next two years thereby contributing to the improved
profitability of the company.
Advantage of integrated business:
Raymond Limited has an opportunity to take advantage of the post quota regime through
its increased scalability and ability to move up the value chain right from yarn to
retailing, through its vertically integrated business model. The company has made
capacity additions at opportune time to take advantage of promising business situation.
Global Tie-ups to establish international presence:
Raymond Limited has entered into joint ventures with Gruppo Zambiati of Italy for
manufacturing high value cotton shirts and cotton linen shirting fabric. It has also entered
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into a joint venture with Lanificio Fedora Italy for manufacture of blankets, shawls, and
will transfer its Jalgaon unit to the venture for its 50% stake. These tie-ups would lead to
international branding and a unique growth opportunity for Raymond.
Strong retail penetration & prime real estate value:
Raymond Limited has one of the largest retail penetrations through its 300 odd stores in
prime locations, in 150 cities in India. It also has around 25 shops in 15 plus cities of
Middle East, Sri Lanka, Bangladesh and Nepal. The Raymond Limited Shop retail chain
occupies a space of 1 million square feet built-up area. This is apart from around 160
acres of land at Thane a suburb of Mumbai. The current buoyancy in the real estate rates
is likely to give significant value to Raymond Limited for its property, which is estimated
around Rs.100 crore.
Foray in the Chinese market:
The company is planning entry into Chinese market, which impacts the global textile
business; this is a step ahead towards establishing Raymonds presence in the global
market. The Chinese venture could help Raymond Limited through sourcing of raw
material and intermediate products for the companies manufacturing facilities in India
and marketing its products in Chinese market.
Details of all Raymond Limited products are enlisted below:
Raymond Limited
Incorporated in 1925, Raymond Limited Limited has five divisions comprising of
Textiles, Denim, Engineering Files & Tools, Aviation and Designer Wear.
Raymond Limited Textile is India's leading producer of worsted
suiting fabric with over 60% market share. Raymond Limited
Textiles is the worlds third largest integrated manufacturer.
Raymond Limited Textile has developed strong in-house skills for research &
development and is thus, perceived as pioneer and innovator.
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Furnishings:
The company is known in the market for trend setting designs in
furnishings (home & office) and product innovations.
Product portfolio:
Plain - Hotels & Auditoriums in India.
Shadow Velvet - shadow effect in the plain fabric for elegant appearance -
leading hotels in India.
Stencil Sole producer. Shades ofPlain Velvet.
Dobby - Back-coated plush fabrics that improves the binding strength of pile tothe base fabric. Targeted at the automotive upholstery market. Also used in office
chairs and panels.
Full Pile Jacquard - The entire fabric range is treated with Flurogard to make itstain resistant.
Fire resistance treatment on Raymond Limited velvet:
To cater to the specific requirements of auditoriums, theatres & automobile industry, the
facility to treat the entire product range is available. The fabric is treated with special
chemicals to impart fire resistant property to the fabric.
Raymond Denim, set up in 1996 produces 20 million meters of differentiated Ringspun
denim per annum. The company currently ranks among the top 3
producers in India. Raymond Denim enjoys a substantial market
share in all parts of the world.
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The company exports 55% of its production to around 20 countries around the world and
to leading denim wear brands like Levi's, Pepe, Lee Cooper and retail brands like Zara,
H&M, Gap, Tommy Hilfiger, etc. Raymond Limited UCO Denim is a Joint Venture
between Raymond Limited Indias largest textile and apparel major and UCO NV of
Belgium. We produce and market specialty ring color and stretch denim.
With a combined capacity of 80 million and manufacturing facilities across 3 continents
US, Europe and Asia, Raymond Limited UCO is in a best position to develop an
optimal and flexible service to meet global requirements of large international brands.
Raymond UCO Denim is a Joint Venture between Raymond Ltd, India's largest textile
and apparel major and UCO NV of Belgium. We produce and market specialty ringcolour and stretch denim.
With a combined capacity of 47 million and manufacturing facilities across 2 continents
Europe and Asia, Raymond UCO will be in a best position to develop an optimal andflexible service to meet global requirements of large international brands.
Our facilities
Raymond UCO Denim has state of the art manufacturing facilities in Giurgiu (Romania)and Yavatmal (India). All our facilities produce differentiated ringspun denim, specialty
denim and other niche products for the global fashion market.
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Raymond UCO Denim, India
Capacity: 40 million meters
STATE-OF THE ART PRCESSES USED
To ensure the manufacture of products of international quality, this unit uses state-of-the-art equipment, systems and practices. These include:
Tensorapid equipment to measure Tensile and tear strengths.
Uster testing to control the evenness of all yarns.
Each & every bale of yarn is tested and passed through a double passagedraw for effective quality blending.
Marzoli ring spinning frames and open-end spinning are equipped with auto
doffing and auto bobbin transfer systems. Together with Caipo and Amsler
devices, these systems produce creative denim yarns.
Indigo and sulphur dyeing is achieved through two-slasher dye ranges.
Suker Muller & Masters slasher dye ranges support Picanol & Vamatex high
speed looms to produce 20 million meters per annum.
The Denim Fabrics & Apparels is finished on the Cibitex range with micro
processing to stabilize shrinkage & skew. The stenter finish stabilizes
shrinkage & width of stretch products.
Routine Testing and checking at every stage of the manufacturing process.
Shade standards and consistency are maintained via a system of wash
blankets tested from every roll of Fabrics & Apparels.
The Raymond water treatment plant purifies and recycles all indigo effluent
using reverse osmosisystem This enables the company to use all the water forland projects.
Creative denims are developed with specialist finishing, fancy yarn devices
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IV. OBJECTIVES AND SCOPE OF THE PROJECT
Objectiv
es of the Project: To study working capital management process. To study receivable management of the company. To study the process of cash and inventory management.
Scope of the project:
The scope of the project includes elaborate discussion on:
Statement of working capital. Inventory management Cash management. Debtors management.
The above-mentioned topics form the core part of working capital management.
Limitations:
Not considered other current assets and their ratios, which form a part of working capital
like Stock of raw material, work in progress, outstanding expenses, labor, etc as too many
calculations may lead to confusion.
Methodology: Acquisition of primary and secondary data.
Primary data: The first hand data obtained from the company sources (E.g.;information about the company.
Secondary data: Annual reports, balance sheets, trial balance, etc.
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V. WORKING CAPITAL
Working capital management is management for the short-term current assets and current
liabilities, which is of critical importance to a firm. Lack of efficient and effective
utilization of working capital leads to earn low rate of return on capital employed. The
requirement of working capital varies from firm to firm depending upon the nature of
business, production policy, market conditions, seasonality of operations, conditions of
supply, etc.
Working capital management entails short term decisions - generally, relating to the next
one year period - which are "reversible". These decisions are therefore not taken on the
same basis as Capital Investment Decisions (NPV or related, as above) rather they will be
based on cash flows and / or profitability.
One measure of cash flow is provided by the cash conversion cycle - the net number of
days from the outlay of cash for raw material to receiving payment from the customer. As
a management tool, this metric makes explicit the inter-relatedness of decisions relating
to inventories, accounts receivable and payable, and cash. Because this number
effectively corresponds to the time that the firm's cash is tied up in operations and
unavailable for other activities, management generally aims at a low net count.
In this context, the most useful measure of profitability is Return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12
months by capital employed; Return on equity (ROE) shows this result for the firm's
shareholders. Firm value is enhanced when, and if, the return on capital, which resultsfrom working capital management, exceeds the cost of capital, which results from capital
investment decisions as above.
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Management of working capital:
Guided by the above criteria, management will use a combination of policies and
techniques for the management of working capital. These policies aim at managing the
current assets (generally cash and cash equivalents, inventories and debtors) and the short
term financing, such that cash flows and returns are acceptable. It simply refers to
management of the working capital, or in more precise terms, the management of current
assets. A firms working capital consist of its investment in current asset which include
short term asset such as cash and bank balance, inventories, receivables, and marketable
securities.
Cash management: Identify the cash balance which allows for the business to meet day
to day expenses, but reduces cash holding costs.
Inventory management: Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes reordering costs -
and hence increases cash flow, supply chain management ; Just In Time (JIT); Economic
order quantity (EOQ); Economic production quantity (EPQ).
Debtors management: Identify the appropriate credit policy, i.e. credit terms which willattract customers, such that any impact on cash flows and the cash conversion cycle will
be offset by increased revenue and hence Return on Capital (or vice versa); Discounts
and allowances.
Short term financing: Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier;
however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors
to cash" through "factoring".
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Need for adequate working capital:
Every firm must maintain a sound working capital position otherwise; its business
activities may be adversely affected.
The excess working capital, i.e. when the investment in working capital is more than the
required level, it may result in unnecessary accumulation of inventories resulting in
waste, theft, damage etc. Delay in collection of receivables resulting in more liberal credit
terms to customers than warranted by the market conditions. Adverse influence on the
performance of the management.
On the other hand, inadequate working capital is not good for the firm. It may result in
the following:
The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in lowering of
the profit of the firm.
The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its
liabilities on time.
Working Capital Needs:
A business need for working capital can come as a result of several reasons that include
the following:
Increasing sales growth or seasonal growth.
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Customers paying slower. Need to increase inventory to support sales growth and/or adding product lines. Desire to take discounts on purchases from vendors. Recent operating losses have reduced your cash reserves. Increased expenses due to additional marketing efforts, new employees, office
relocation, etc.
Factors determining working capital requirement:
Though there is no set of universally applicable rules to ascertain working capital needs,
the following factors may be considered:
Nature of business:
The Working capital requirement depends upon the nature of business carried on by the
organization. In a manufacturing firm the requirement is generally high, but it also
depends on the type and nature of the product. The proportion of current asset to total
assets measures the relative requirements of working capital of various industries.
Manufacturing cycle:
Time span required for the conversion of raw materials into finished goods is a block
period. The period in reality extends a little before and after the work-in-progress. The
manufacturing cycle and the fund requirements vary in direct proportion. The funds
blocked in manufacturing cycle vary from industry to industry. Further, even within the
same group of industries, the operating cycle may be different due to technological
considerations.
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Business cycle:
Business fluctuations lead to cyclical and seasonal changes, which, in turn, cause a shift
in working capital position particularly for working capital requirement. The variations in
business conditions may be in two directions: Upward phase when boom conditions
prevail, and Downswing phase when economic activity is marked by a decline. During
the upswing of business activity, the need for working capital is likely to grow and during
the downswing phase the working capital requirement is likely to be less. The decline in
economy is associated with a fall in the volume of sales, which, in turn, leads to a fall in
the level of inventories and book debts.
Seasonal variation:
Variation apart, seasonally factor creates production or even shortage problem. This is the
reason as to why manufacturing concerns producing seasonal products purchase their raw
material throughout the year and carry on the manufacturing activity. For example
woolen garments have a demand during winter. But the manufacturing operation for the
same has to be conducted during the whole year resulting in working capital blockage
during off-season.
Credit policy:
The credit policy influences the requirement of working capital in two ways:
Through credit terms granted by the firm to its customers/buyers of goods. Credit terms available to the firm from its creditors.
Growth and expansion:
It is, of course difficult to determine precisely the relationship between the growth andvolume of business and the increase in working capital. The composition of working
capital also shifts with economic circumstances and corporate practices. However, it is to
be noted that the need for increased working capital funds does not follow the growth in
business activity but precedes it.
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Dividend policy:
The payment of dividend consumes cash resources and, thereby, effects working capital
to that extent. However, if the firm does not pay dividend but retains the profit, working
capital increases. There are wide variations in industry practices as regards the inter
relationship between working capital requirement and dividend payment. In some cases,
shortage of working capital is sometimes a powerful reason for reducing or even skipping
dividends in cash (resolved by payment of bonus shares).
Depreciation policy:
There is an indirect effect of depreciation policy on working capital. Enhanced rates of
depreciation lower the profits and tax liability and, thus, more cash profits. Higher
depreciation means lower disposable profits and a smaller dividend payment. Thus cash
is preserved. If the current capital expenditure falls short of the depreciation provision,
the working capital position is strengthened and there may be no need for short-term
borrowing.
Sources of working capital finance:
Working Capital Finance - Gives your business the money it needs to grow.
Working capital finance makes it possible for the business to obtain capital if the business
has been denied for a bank loan, or if it has little cash flow. Traditional funding through a
standard bank can be difficult to obtain, but they also don't satisfy the needs of expanding
companies. Without capital a business will have to slow down their growth, which can
hurt a business. Working capital finance makes it possible for any business to have access
to the cash it needs, when it needs it.
Working capital finance allows a company to turn their income streams into instant
capital. They can turn their accounts receivables into cash by selling them to a lender who
specializes in accounts receivable factoring. Another method for obtaining working
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capital is to lease equipment or to obtain credit from a company (for eg. Companies like
Office Depot or Lowes in US) that sells items that the business needs. Obtaining lines of
credit from a company are easier than going after a bank loan. If at all possible obtain a
line of credit from a company that will report your business credit scores to the major
business credit bureaus. This will help build your business credit scores, so it is easier to
qualify for large bank loans.
Another popular method of working capital finance is utilizing asset-based financing.
That means that the company would use assets from their own business to secure loans.
They could pledge any commercial real estate their business owns, business vehicles,
equipment, etc. Lending institutions approve asset-based loans quicker because the risk
isn't as high. Small companies often can obtain more cash with an asset-based loan.
Commercial banksare the largest financing source for external business debt including
working capital loans, and they offer a large range of debt products. With banking
consolidation, commercial banks are multistate institutions that increasingly focus on
lending to small business with large borrowing needs that pose limited risks.
Consequently, alternate sources of working capital debt become more important. Savings
banks and thrift lenders are increasingly providing small business loans, and, in some
regions, they are important small business and commercial real estate lenders. Although
savings banks offer fewer products and may be less familiar with unconventional
economic development loans, they are more likely to provide smaller loans and more
personalized service.
Commercial finance companies are important working capital lenders since, as non -
regulated financial institutions, they can make higher risk loans. Some finance companies
specialize in serving specific industries, which allows them to better assess risk and
creditworthiness, and extend loans that more general lenders would not make.
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Another approach used by finance companies is asset-based lending in which a lender
carefully evaluates and lends against asset collateral value, placing less emphasis on the
firms overall balance sheet and financial ratios. An asset-based lending approach can
improve loan availability and terms for small firms with good quality assets but weaker
overall credit. Commercial finance companies also are more likely to offer factoring than
banks.
Trade credit extended by vendors is a fourth alternative for small firms. While trade
credit does not finance permanent or long-term working capital, it helps address short-
term borrowing needs. Extending payment periods and increasing credit limits with major
suppliers is a fast and cost-effective way to finance some working capital needs that can
be part of a firms overall plan to manage seasonal borrowing needs.
Other working capital finance options exist beyond these three conventional credit
sources. Business development corporations (BDCs) are a second alternative source for
working capital loans. BDCs are high-risk lending arms of the banking industry that exist
in almost every state. They borrow funds from a large base of member banks and
specialize in providing subordinate debt and lending to higher-risk businesses. While
BDCs rely heavily on bank loan officers for referrals, economic development
practitioners need to understand their debt products and build good working relationships
with their staffs.
Venture capital firms also finance working capital, especially permanent working capital
to support rapid growth. While venture capitalists typically provide equity financing,
some also provide debt capital. A growing set of mezzanine funds,7 often managed by
venture capitalists, supply medium-term subordinate debt and take warrants that increase
their potential returns. This type of financing is appropriate to finance long-term working
capital needs and is a lower-cost alternative to raising equity.
However, the availability of venture capital and mezzanine debt is limited to fast-growing
firms, often in industries and markets viewed as offering the potential for high returns.
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Government and nonprofit revolving loan funds also supply working capital loans. While
small in total capital, these funds help firms access conventional bank debt by providing
subordinate loans, offering smaller loans, and serving firms that do not qualify for
conventional working capital credit.
Many entrepreneurs and small firms also rely on personal credit sources to finance
working capital, especially credit cards and second mortgage loans on the business
owners home. These sources are easy to come by and involve few transaction costs, but
they have certain limits. First, they provide only modest amounts of capital. Second,
credit card debt is expensive with interest rates of 18% or higher, which reduces cash
flow for other business purposes.
Third, personal credit links the business owners personal assets to the firms success,
putting important household assets, such as the owners home, at risk. Finally, credit
cards and second mortgage loans are not viable for entrepreneurs who do not own a home
or lack a formal credit history.
Immigrant or low-income business owners, in particular, are least able to use personal
credit to finance a business. Given these many limitations, it is desirable to move
entrepreneurs from informal and personal credit sources into formal business working
capital loans that are structured to address the credit needs of their firms.
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Working capital finance may be classified into the following:
Spontaneous source of finance:Finance that naturally arises in the course of business is called as spontaneous financing.
For example: Trade creditors, credit from employees, credit from suppliers of services
etc.
Negotiated financing:
Financing which has to be negotiated with lenders (commercial banks, financial
institutions, and general public) is called as negotiated financing. This kind of financing
may short term or long term in nature.Between spontaneous and negotiated sources of finance, the latter is more expensive and
inconvenient to raise. Spontaneous source of finance reduces the amount of negotiated
financing.
The working capital may be financed in either of the following ways, keeping in
view of accessibility to different sources as well as the cost factor-
Hedging Approach to Working Capital Financing:
Under hedging approach to financing working capital requirements of a firm each asset
in the balance sheet asset side would be off set with a financing instrument of the same
approximate maturity. The basic approach of this method of financing is that the
permanent component of current assets and fixed assets would be met with long-term
funds and the short term or seasonal variation in current assets would be financed with
short-term debt. If the long-term funds are used for short-term needs of the firm, it can
identify and take steps to correct the mismatch in financing.
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Trade credit:
Trade credit refers to the credit extended by suppliers of goods and services in the normal
course of transaction/ business/ sales. It is an informal spontaneous source of finance.
Not requiring negotiation and formal agreement trade credit is free from the restrictions
associated with formal/negotiated source of finance/ credit. It does not involve any
explicit interest charge, however there is an implicit cost of trade credit. As, the cost of
trade credit is generally very high beyond the discount period; the firms should avail of
the discount on prompt payment.
Bank Credit:
It is the primary institutional source of working capital finance in India. Banks in five
ways provide working capital finance:
Cash credit/ Overdraft:
Under cash credit/ overdraft form the banks specify, a pre-determined borrowing/ credit
limit. The borrower can draw/ borrow upto the stipulated credit/ overdraft limit. This
form of bank financing of working capital is highly attractive to the borrowers because,
firstly, it is flexible in that although the borrowed funds are repayable on demand, banks
usually do not recall cash advances/ roll them over and, secondly the borrower has the
freedom to draw the amount in advance as and when required, while the interest liability
is only on the amount actually outstanding.
Loans:
Under this arrangement the entire amount of borrowing is credited to the current account
of the borrower or released in cash. The borrower has to pay interest on the total amount.
The loans are repayable on demand or in periodic installments. They can also be renewed
form time to time. As a form of financing, loans imply a financial discipline on the part
of the borrowers. From the modest beginning in the early nineties, at least 80 % of
MPBF/ credit limit must be in the form of loans in India.
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Bills purchased/ discounted:
Under this arrangement, a bill arises out of a trade sale-purchase transaction on credit.
The seller of goods draws the bill on the purchaser of goods, payable on demand or after
a usance period, not exceeding 90 days. On acceptance of bill by the purchaser, the seller
offers it to the bank for discount/ purchase. On discounting the bill, the bank releases the
funds to the seller. The bill is presented by the bank to the purchaser / acceptor of the bill
on due date for payment. The bills can also be rediscounted with the other banks / RBI.
Term loans:
Under this arrangement the banks advance loans for three to seven years repayable in
yearly or half yearly installments.
Letter of credit:
It is an indirect form of working capital financing and banks assume only the risk, the
credit being provided by the supplier himself. The purchaser of goods on credit obtains a
letter of credit from a bank. The bank undertakes the responsibility to make the payment
to the supplier in case the buyer fails to meet his obligation.
Commercial paper:
Commercial paper is a debt instrument used for short term financing that enables highly
rated corporate borrowers to diversify their sources of short-term borrowings and provide
an additional financial instrument to investors to a freely negotiable interest rate. The
maturity period ranges from three months to one year. Since it is short-term debt, the
issuing company is required to meet dealers fees, rating agency fees, and any other
relevant charges. It is a short term unsecured promissory note issued by corporations with
high credit ratings.
Inter corporate loans and deposits:
In the present corporate world, it is a common practice that the company with surplus
cash will lend other period for short period normally ranging from 60 to 180 days. The
rate of interest will be higher than the bank rate of interest and depending on the financial
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soundness of the Borrower Company. This source of finance reduces the intermediation
of funds in financing.
Public Deposits:
The period of public deposits is usually restricted to a maximum of 5 years at a time.
Thus, this source can provide finance only for short term to medium term, which could be
useful for meeting working capital needs of the company. It is therefore advisable to use
the amounts of public deposits for acquiring assets of long-term nature unless its pay
back period is very short.
Funds generated from operations:
Funds generated from operations during an accounting period increase working capital by
an equivalent amount. The two main components of funds generated from operations are
profits and depreciation. Working capital will increase by the extent of funds generated
from operations.
Deferred tax payment:
Under this arrangement the tax authorities supply the credit. This is created by the
interval that elapses between the earning of the profits of the company and the payment
of the taxes due on them.
Accrued Expenses:
For most firms accrued expenses act as a spontaneous source of short-term finance. One
such example would be that of employees accrued wages. For large firms, the accrued
wages held by the firm constitute an important source of financing. In case of Raymond
Limited Limited, this would amount to wages and salaries of about 6000 employees and
workers.
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VI. STATEMENT OF WORKING CAPITAL
PARTICUL
ARS
For the year ended
Changes In W-cap
Increase Decrease
2004 2009 2010 2004-
05
2009-
06
2004-
05
2004-05
Current
Assets
Inventories29490.66 28756.59
31904.16 3147.5
7734.07
Sundry
Debtors24614.52 22627.67
24846.74 2219.0
7
1986.8
5
Cash and
Bank2675.92 1324.83
2503.17 1178.3
4
1351.0
9
Other
Current
Assets
1887.79 2277.723315.06
389.931037.3
4
Loans and
Advances12122.14 12206.35
14442.0684.21
2235.7
1
Total
Current
Assets
70791.03 67193.1677011.19 9818.0
3
3597.8
7
Current
Liabilities
Acceptances89.75 42.17
45.092.92 47.58
Sundry
Creditors10491.99 11009.37
16427.41517.38
5418.0
4
Advances
against sales449.05 459.52
560.3510.47 100.83
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Due to
Subsidiary
Cos
137.82 207.25177.84
69.43 29.41
Depositsfrom Dealers
and
Agents
4874.25 5134.955318.21
260.7 183.26
Overdrawn
Bank
Balances186.60 484.16
1125.67 297.56 641.61
Other
liabilities1491.91 1689.99 2044.72 198.08 354.73
Interest
accrued but
not due315.87 477.20
528.05 161.3350.85
Provisions 8373.15 5605.176770.84 1165.6
7
2767.9
8
TotalCurrent
Liabilities
26410.39 25109.78 26227.34 1117.56
1300.61
Net Working
Capital
(CA CL)
44380.64 42083.38 50783.85 8700.4
72297.2
6
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VII. INVENTORY MANAGEMENT
Inventory refers to the stock of products a firm is offering for sale and the components
that make up the product. It includes raw materials; work in process (semi-finished
goods). Managing inventory is a juggling act. Excessive stocks can place a heavy burden
on the cash resources of a business. Insufficient stocks can result in lost sales, delays for
customers etc. The key is to know how quickly the overall stock is moving or, put
another way, how long each item of stock sit on shelves before being sold. Obviously,
average stock-holding periods will be influenced by the nature of the business.
Inventory Financing:
As with accounts receivable loans, inventory financingis a secured loan, in this case with
inventory as collateral. However, inventory financing is more difficult to secure since
inventory is riskier collateral than accounts receivable. Some inventory becomes obsolete
and looses value quickly, and other types of inventory, like partially manufactured goods,
have little or no resale value.
Firms with an inventory of standardized goods with predictable prices, such as
automobiles or appliances, will be more successful at securing inventory financing than
businesses with a large amount of work in process or highly seasonal or perishable goods.
Loan amounts also vary with the quality of the inventory pledged as collateral, usually
ranging from 50% to 80%. For most businesses, inventory loans yield loan proceeds at a
lower share of pledged assets than accounts receivable financing. When inventory is a
large share of a firms current assets, however, inventory financing is a critical option to
finance working capital.
Lenders need to control the inventory pledged as collateral to ensure that it is not sold
before their loan is repaid. Two primary methods are used to obtain this control: (1)
warehouse storage; and (2) direct assignment by product serial or identification numbers.
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Under one warehouse arrangement pledged inventory is stored in a public warehouse and
controlled by an independent party (the warehouse operator).
A warehouse receipt is issued when the inventory is stored, and the goods are released
only upon the instructions of the receipt-holder. When the inventory is pledged, the
lender has control of the receipt and can prevent release of the goods until the loan is
repaid. Since public warehouse storage is inconvenient for firms that need on-site access
to their inventory, an alternative arrangement, known as a field warehouse, can be
established.
Here, an independent public warehouse company assumes control over the pledged
inventory at the firms site. In effect, the firm leases space to the warehouse operator
rather than transferring goods to an off-site location. As with a public warehouse, the
lender controls the warehouse receipt and will not release the inventory until the loan is
repaid.
Direct assignment by serial number is a simpler method to control inventory used for
manufactured goods that are tagged with a unique serial number. The lender receives an
assignment or trust receipt for the pledged inventory that lists all serial numbers for the
collateral. The company houses and controls its inventory and can arrange for product
sales. However, a release of the assignment or return of the trust receipt is required before
the collateral is delivered and ownership transferred to the buyer.
This release occurs with partial or full loan repayment. While inventory financing
involves higher transaction and administrative costs than other loan instruments, it is an
important financing tool for companies with large inventory assets. When a company has
limited accounts receivable and lacks the financial position to obtain a line of credit,
inventory financing may be the only available type of working capital debt. Moreover,
this form of financing can be cost effective when inventory quality is high and yields a
good loan-to-value ratio and interest rate.
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Factors to be considered when determining optimum stock levels include:
What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can the company remove slow movers from their product range without
compromising best sellers?
It should be noted that stock sitting on shelves for long periods of time ties up money,
which is not working.
For better stock control, the following may be considered:
Review the effectiveness of existing purchasing and inventory systems. Know the stock turn for all major items of inventory.
Apply tight controls to the significant few items and simplify controls for thetrivial many.
Sell off outdated or slow moving merchandise - it gets more difficult to sell thelonger the company keeps it.
Consider having part of the companys product outsourced to anothermanufacturer rather than make it yourself.
Review your security procedures to ensure that no stock is going out the backdoor!
Higher than necessary stock levels tie up cash and cost more in insurance,accommodation costs and interest charges.
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The inventory of a manufacturing concern usually includes:
Raw material Work-in-Progress Finished goods
Inventory management at Raymond Limited
The inventory of Raymond Limited ltd. includes the following:
Raw material Work-in-Progress Stores and Spares Finished goods.
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The table below gives a brief description of all the types of inventory, the components
included, the valuation methods Followed and other relevant details:
Particulars Raw Material WIP Finished Goods
Stores
& Spares
Componen
ts
i. Wool (Australia)
(Fine micron, coarse)
ii. Polyester(Reliance Ltd.)
iii. Viscose (Locally)
iv. Yarn(RSM)(Rajasthan)
v. Camel hair(Locally)
vi. Soya bean fiber
(Locally)
__ Fabric Oils,
Lubricants
etc.
At its peak Fine micron-Julyand
Stored for the entire
year
Wedding andfestive
Seasons.
Stable: April-August
And Dec-Jan.
Valuation
Method SpecificIdentification
WeightedAverage
Weighted Average
Cost or marketvalue
Whichever is less.
Weighted
Average
Value as in
March
2010
(Rs.Crores)
20 68-70
110
(In accordance withAS-2
Including Exciseduty)
8-9
Managed
by
Production
&Planning dept.
Production
&Planning
dept.
Production and
PlanningDept, Warehouse
dept & Marketingdept.
_
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Ratios:
Ratio usedfor evaluation
Formula used Ratio for the financial year
ended
2010 2009 2004
Inventory
Turnoverratio
(Times)
COGS
Average Inventory 1.34 3.432.84
Inventory
Period
(Days)
365
Inventory Turnover Ratio 272 106129
Current
Ratio
Current assets, loans and advances
Current liabilities and provisions 2.33 2.68 2.68
Interpretation:
Inventory Turnover ratio:
This ratio measures the number of times a companys inventory is turned over in a
year. A high turnover ratio is considered good. From working capital point of view, a
company with a high turnover requires a smaller investment in inventory than one
producing the same sales with a low turnover.
This ratio indicates managements efficiency in turning over the companys inventory,
which can be compared with other companies in the same field. It also suggests how
adequate a companys inventory is for its business volume.
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Current ratio:
The current ratio is a reflection of financial strength. The current ratio measures the
ability of the firm to meets its current liabilities- current assets get converted into cash
and provide the funds needed to pay current liabilities. A current ratio can be improved
by increasing current assets or by decreasing current liabilities. Steps to accomplish an
improvement include:
Paying down debt. Acquiring a long-term loan (payable in more than 1 year's time). Selling a fixed asset. Ploughing back profits into the business.
A high current ratio may mean that cash is not being utilized in an optimal way. For
example, the excess cash might be better invested in equipment. The higher the current
ratio, the greater the margin of safety, the larger the amount of current assets in relation to
current liabilities, the more the firms ability to meet its current obligations.
The current ratio for Raymond Uco Denim Ltd. was 2.68:1 in 2004. The current ratio
stood at 2.68:1 for the year ended 2009.If we compare current ratio of 2009 with 2004,we
can see that the percentage of the ratio remains same for both years but here cash bank
balance has decreased by 51%. Other current assets have increased by 20.6% compared
with 2004. And provisions has decreased by 33.05%, current liabilities so the current
ratio for both the years has remained constant i.e. 2.68:1.
When one sees the changes in assets, cash and bank balance has increased tremendously
by 79.07 %. This is because company has received prompt payments from debtors. Other
current assets have decreased by 25%.
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The overall decrease in earning of interest and dividend was 70%. The Current
Liabilities, provisions have increased by 22.42 %. This is because the provision made by
the company such as proposed dividend, tax on dividends, retirement benefits and excise
duties has increased by 22%.
But the current ratio has decreased from 2.68:1 (2009) to 2.33:1 in the year 2010.
This is the result of the changes in current assets and current liabilities or changes in the
working capital. Current assets comprises of Inventory, Debtors, Cash & Bank balances,
Other Current Assets and Loans & Advances.
The percentage of inventory held by Raymond Limited
Increased by 10%, which is evident form the decline in the inventory turnover ratio and
the increase in the inventory period. Debtors have increased by 7% compared to the
previous year. That means sales and marketing efforts needs a push because inventory is
pilling up. Inventory has increased and so has the debtors.
Cash and bank balances have increased drastically by 88% in 2010 as in the year 2009.
Attention has to be paid to the increase in the amount of cash balances. Other current
assets have also increased by 45.54%. Loans and advances have also increased by
37.35%. Thus the overall current assets have increased by 17.57%. Dividend and interest
subsidy receivable has increased as compared to the last year.
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VIII. CASH MANAGEMENT
There are four primary motives for maintaining cash balances.
TTrraannssaaccttiioonnss MMoottiivvee -- to meet payments arising in the ordinary course of
business.
SSppeeccuullaattiivvee MMoottiivvee -- to take advantage of temporary opportunities
PPrreeccaauuttiioonnaarryy MMoottiivvee- to maintain a cushion or buffer to meet
Unexpected cash needs
CCoommppeennssaattiinngg mmoottiivvee --Hold cash balances to compensate banks for
providing certain services and loans.
The basic objectives of cash management are:
To meet the cash disbursement needs. To minimize funds committed to cash balances.
These are conflicting and mutually contradictory and the task of cash management is to
reconcile them.
Cash Management Techniques:
The strategic aspects of efficient cash management are:
Efficient inventory management Speedy collection of accounts receivables Delaying payments on accounts payable.
There are some specific techniques and processes for speedy collection of receivablesfrom customers and slowing disbursements.
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Speedy Cash Collections:
Expedite preparing and mailing the invoice Accelerate the mailing of payments from customers Reduce the time during which payments received by the firm remain uncollected Prompt payment by customers Early conversion of payments into cash. Concentration Banking Lock Box System
Slowing disbursements:
Avoidance of early payments Centralized disbursements Float Paying from a distant bank Cheque encashment analysis Accruals (goods and services accrued but not paid for)
Cash Management At Raymond Uco Denim Ltd
For early conversion of its receivables into cash, some of the incentives offered by
Limited for early payment are as under:
Cash discounts for payment made within the due period. Bonuses given to the party vary with the volume as well as value of sales. One-third of advertising expenses of retailers and franchisees are borne by the
company.
Raymond Limited ltd. has invested about Rs. 600 crores (approx.), which stands as their
core investment. In order to diversify its risk the company has invested this amount in
various instruments including Mutual funds, debt instruments, corporate deposits,
equity markets, etc.
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Amongst others alternatives the company prefers to invest an amount of Rs.2-5 crores (or
the adjusted amount after considering the daily requirements) in mutual funds on a daily
basis (temporary investment) and play safe with their core investment amount. Another
reason for this decision is the tax-free dividend income (5%-6%) earned by investing in
Mutual funds.
Raymond Limited Ltd. generally experiences surplus profits. Om Kotak Mahindra
ltd., DSP Meryll Lynch are the chief corporate advisors for the company. However the
Board of Directors takes the final decision. One such decision taken by the B.O.D
includes that the companys investment in the equity market should not exceed Rs.50
crores (keeping the volatility of the stock markets in mind).
Finally, it can be seen that the Average Rate of Return on Investment is 5%-6%. All
the decisions regarding investments and cash management are looked after by the
Finance Department (Corporate division).
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Ratios:
Ratio used
for evaluationFormula used Ratio for the financial year
ended
2010 2009 2004
Cash Ratio Cash & Book Balances + Current
Investments
Current Liabilities
1.73 2.46 2.35
Sales to CashRatio Sales_
Cash
51.34 84.19 37.15
Cash Profit
RatioCash Profit * 100
Sales
17.72 18.68 22.75
Notes:
In all the calculations involving Net Sales, the amount is taken net of excise duties paid.
Net sales = Net sales Excise duty
(Rs. In lakhs)
Particulars 2010 2009 2004
Net sales(Net of excise) 132275.51 111534.44 99431.64
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IX. RECEIVABLES MANAGEMENT (DEBTORS)
Cash flow can be significantly enhanced if the amounts owing to a business are collected
faster. Every business needs to know.... who owes them money.... how much is owed....
how long it is owing.... for what it is owed.
Late payments can erode profits and lead to bad debts
Slow payment has a crippling effect on business. If you don't manage debtors, they will
begin to manage your business as you will gradually lose control due to reduced cash
flow and, of course, you could experience an increased incidence of bad debt.
The following measures will help manage your debtors:
Have the right mental attitude to the control of credit and make sure that it getsthe priority it deserves.
Establish clear credit practices as a matter of company policy. Make sure that these practices are clearly understood by staff, suppliers and
customers.
Be professional when accepting new accounts, and especially larger ones. Check out each customer thoroughly before you offer credit. Use credit agencies,
bank references, industry sources etc.
Establish credit limits for each customer... and stick to them. Continuously review these limits when you suspect tough times are coming or if
operating in a volatile sector.
Keep very close to your larger customers. Invoice promptly and clearly. Consider charging penalties on overdue accounts. Consider accepting credit /debit cards as a payment option. Monitor your debtor balances and ageing schedules, and don't let any debts get
too large or too old
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Debtors due over 90 days (unless within agreed credit terms) should generallydemand immediate attention. Look for the warning signs of a future bad debt.
For example.........
Longer credit terms taken with approval, particularly for smaller orders. Use of post-dated cheques by debtors who normally settle within agreed terms. Evidence of customers switching to additional suppliers for the same goods. New customers who are reluctant to give credit references. Receiving part payments from debtors.
Profits only come from paid sales.
The act of collecting money is one, which most people dislike for many reasons and
therefore put on the long finger because they convince themselves there is something
more urgent or important that demands their attention now. There is nothing more
important than getting paid for your product or service. A customer who does not pay is
not a customer.
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Here are a few ideas that may help you in collecting money from debtors:
Develop appropriate procedures for handling late payments. Track and pursue late payers. Get external help if your own efforts fail. Don't feel guilty asking for money.... its yours and you are entitled to it. Make that call now. And keep asking until you get some satisfaction. In difficult circumstances, take what you can now and agree terms for the
remainder. It lessens the problem.
When asking for your money, be hard on the issue - but soft on the person. Don'tgive the debtor any excuses for not paying.
Make it your objective is to get the money - not to score points or get even.Accounts Receivable Financing:
Some businesses lack the credit quality to borrow on an unsecured basis and must pledge
collateral to obtain a loan. Loans secured by accounts receivable are a common form of
debt used to finance working capital. Under accounts receivable debt, the maximum loan
amount is tied to a percentage of the borrowers accounts receivable. When accounts
receivable increase, the allowable loan principal also rises. However, the firm must usecustomer payments on these receivables to reduce the loan balance. The borrowing ratio
depends on the credit quality of the firms customers and the age of the accounts
receivable.
A firm with financially strong customers should be able to obtain a loan equal to 80% of
its accounts receivable. With weaker credit customers, the loan may be limited to 50% to
60% of accounts receivable. Additionally, a lender may exclude receivables beyond a
certain age (e.g., 60 or 90 days) in the base used to calculate the loan limit.
Older receivables are considered indicative of a customer with financial problems and
less likely to pay. Since accounts receivable are pledged as collateral, when a firm does
not repay the loan, the lender will collect the receivables directly from the customer and
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apply it to loan payments. The bank receives a copy of all invoices along with an
assignment that gives it the legal right to collect payment and apply it to the loan. In some
accounts receivable loans, customers make payments directly to a bank-controlled
account (a lock box).
Firms gain several benefits with accounts receivable financing. With the loan limit tied to
total accounts receivable, borrowing capacity grows automatically as sales grow. This
automatic matching of credit increases to sales growth provides a ready means to finance
expanded sales, which is especially valuable to fast-growing firms.
It also provides a good borrowing alternative for businesses without the financial strength
to obtain an unsecured line of credit. Accounts receivable financing allows small
businesses with creditworthy customers to use the stronger credit of their customers to
help borrow funds. One disadvantage of accounts receivable financing is the higher costs
associated with managing the collateral, for which lenders may charge a higher interest
rate or fees. Since accounts receivable financing requires pledging collateral, it limits a
firms ability to use this collateral for any other borrowing. This may be a concern if
accounts receivable are the firms primary asset.
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Receivables (Debtors) Management At Raymond Uco DenimAt RaymondUco Denim Ltd the sales process is as follows:
Raymond Uco Denim Ltd has one agent for each area (state). These agents are the
delcredere agents, and receive commission of up to 2.5 % to 4% (approx). The amount of
commission however varies according to the quality as well as the quantity of the goods.
Under these agents are the various dealers, wholesalers, retailers and franchisees.
The amount invested by the wholesalers is 4 crores and above, therefore they are given
more credit. Whereas, franchisees invest 1 to 3 crores. Retailers on the other hand invest
less as compared to wholesalers and franchisees. Retailers pay to the company either
directly or through the bank dealers (250 in number). In case of direct payments the
company keeps 12.5% as advance deposits. In case of payment through bank dealers
factoring service is being used.
The bills would be earlier discounted with the various banks. These banks included
amongst others, a few Nationalized Banks, UTI, Standard Chartered, Bank Of India, etc.
AGENT (ONE)
DEALERS
WHOLESELLE
RS RETAILER
FRANCHISEES
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The payments are usually in the form of demand drafts or cheques. Almost 50 % of these
payments are received through CMS (Cheque Management Services), and as this facility
is obtained free of cost from UTI bank the company is availing it to its maximum
possible benefit. This definitely very much in favors of the company as it reduces the
delay in collections, as it would otherwise take at least 10 days for the transactions
without the facility.
The company has now started using the factoring service.
The main factoring agents with which the company deals include:
HSBC Bank Standard Chartered Bank UTI Bank. Kotak Mahindra Bank
At present Raymond Uco Denim Ltd is using the factoring services for its 15 parties,
which are as follows:
B.R. Textiles Motilal Vijaysain Pokarna Fabrics Pvt. Limited R.S. Textiles Woollen Collections Shyam Brothers Kamdev Pushpak Rahul Textiles Varun Textiles Shantilal Raichand Sha Shantilal Manshalal Abhisekh Enterprises R. R. Apparels
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The company uses with recourse as well as the without recourse factoring facility
(single channel financing) .The rates vary with the type of facility i.e. with or without
recourse as well they vary with respect to the different banks. However these rates are
recovered entirely from the various agents and dealers. Thus they dont burden the
company at all .The rates are roughly around 6.25 % for with recourse and varies from 10
% to 16 %.
The services without recourse (single channel financing) are availed from the
following banks:
ABN AMRO Bank, CENTURION Bank, HSBC Bank, ICICI Bank.
The credit period given by Raymond Uco Denim Ltd [(as not due)- for MIS
purpose]:
Retailers - 16 days
Franchisees - 45 to 60 to 90 days.
Wholesalers - 60 to 90 days
The provision regarding bad debts is not thought as very essential as the company as
never had any bad debts till date; this is attributed to the credit policy as well as the
collection policy of the company. The company never writes off any party or any amount
as bad, it tries of every possible measure to recover their payments, when not received
directly the company adjusts for the same from the agents commission. The receivables
overdue are against invoices as well as against debit notes. When the overdue is against
the invoices aggressive actions are take by the company. The company withholds
commission for its habitual defaulters. However on an average the credit given is for 104
days.
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Collections Disbursements
Marketable securities
Investment
CONTROL THROUGH INFORMATION
REPORTING
= Funds Flow
= Information Flow
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Ratios:
Ratio used
for evaluationFormula used
Ratio for the financial year
ended
2010 2009 2004
Debtors
Turnover
Ratio
(times)
Net Sales
Avg. Debtors
5.50 4.72 3.70
Credit Period 365
Debtors Turnover Ratio
66 77 99
Interpretation:
Debtors Turnover Ratio:
The debtors turnover ratio has been gradually increasing over the years from 2004 to2009, from 3.70 to 4.72 respectively. This indicates that the credit period has declined
from 99 days (2004) to 77 days (2009). This implies that for the year ended 2009 debtors
on an average are collected in a period of 77 days. A turnover ratio of 4.72 (2009)
signifies that debtors get converted into cash (4.72) approximately 5 times in a year.
Raymond Uco Denim Ltd is a cash rich company. The liberal policy is adopted to
augment its sales thereby not losing its key customers. It is suggested that the company
should adopt stringent credit practices for its debtors thereby, having more funds at its
disposal for investments as well as for daily operating requirements and thus saving on
the interest costs. In order to keep up with the industry credit standards Raymond Uco
Denim Ltd has been gradually reducing its credit period.
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X. CONCLUDING OBSERVATIONS
Every organization should closely watch the movement of current assets and current
liabilities after certain fixed intervals to maintain healthy working capital in the
organization. It helps to keep a record of cash management, debtors management and
inventory management, which forms a major part of working capital. Managing
inventory is a juggling act. Excessive stocks can place a heavy burden on the cash
resources of a business. Insufficient stocks can result in lost sales, delays for customers
etc. The key is to know how quickly the overall stock is moving or, put another way, how
long each item of stock sit on shelves before being sold.
For Raymond Uco Denim Ltd the inventory turnover ratio has increased from 2.84
times (2004) to 3.43 times (2009), but showed a major decline in the year 2009-06.
In the year 2010 the inventory period has increased tremendously from 106 days in 2009
to 272 days in 2010. This is also supported by the decline in the inventory turnover ratio
to a meager of1.34 times in 2010.
Since the company is a textile industry therefore the inventory varies according to
seasonal and festive demands. However, it is seen that as the inventory carrying cost is
reducing because of the falling interest rates, the company may stock more if desired.
There are no norms or standards followed by the company for the raw material, in
process and finished goods inventory due to quantity restrictions and price fluctuations.
The current ratio is a reflection of financial strength. The current ratio measures the
ability of the firm to meets its current liabilities- current assets get converted into cashand provide the funds needed to pay current liabilities. The current ratio has decreased
from 2.68:1 (2009) to 2.33:1 in the year 2010.This is the result of the changes in current
assets and current liabilities or changes in the working capital. Current assets comprises
of Inventory, Debtors, Cash & Bank balances