project report wc 2010 verson ii

8/7/2019 Project Report WC 2010 Verson II

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PROJECT REPORT

ON

Working Capital Managementfor Aditya Promoters Ltd.

Noida

BY

AJEET KUMARMBA 3yr

Roll No. 16080102357Enrollment No: A1920207035

Amity School of Distance Learning,Noida

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(Batch of 2007-10)

ACKNOWLEDGEMENT

A work is never a work of an individual. I owe a sense of gratitude

to the intelligence and co-operation of those people who had been

so easy to let me understand what I needed from time to time for

completion of this exclusive project.

I am grateful to my project guide Mr. Deepak Rastogi Sr. Manager

Finance & Accounts in Aditya Promoters Ltd, Noida for guide meto undertake this project.

Last but not the least, I would like to forward my gratitude to my

friends & other interviewed members who always endured me

and stood with me and without whom I could not have completed

the project.

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Ajeet

Kumar

DECLARATION

I do hereby declare that this piece of project report entitled A

Study on Working capital Management practices in Aditya

Promoters Ltd. Noida for partial fulfillment of the requirements

for the award of the degree of Master of Business &

Administration is a record of original work done by me under the

supervision of my project guide Mr. Deepak Rastogi .This project

work is my own and has neither been submitted nor published

elsewhere.

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Ajeet Kumar

PLACE: Signature ofthe Student

DATE:

CONTENTS

Sr.No.

Chapter Particulars PageNo.

1 Certificate 1

2 Letter of Appreciation 2

3 Acknowledgement 3

4 1 Company Introduction 7

5 2 Objective & Scope 9

6 3 Introduction of Working Capital 10

7 4 Study Design & Methodology 11

8 5 Data Collection 129 6 Data Analysis & Interpretation 16

10 Key Working Capital Ratios 19

11 7 Finding of the Study 21

12 8 Recommendations 47

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13 9 Conclusion 50

14 Bibliography 51

15 Guide Resume 52

CHAPTER -1

INTRODUCTION

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CHAPTER 1 : INTRODUCTION

The life blood of business, as is evident, signified funds required

for day-to-day operations of the firm. The management of working

capital assumes great importance because shortage of working

capital funds is perhaps the biggest possible cause of failure of

many business units in recent times. There it is of great

importance on the part of management to pay particular attention

to the planning and control for working capital. An attempt has

been made to make critical study of the various dimensions of the

working capital management of ADITYA.

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Decisions relating to working capital and short term financing arereferred to as working capital management. These involve

managing the relationship between a firm's short-term assets andits short-term liabilities. The goal of Working capital managementis to ensure that the firm is able to continue its operations andthat it has sufficient money flow to satisfy both maturing short-term debt and upcoming operational expenses.

ABOUT ADITYA PROMOTERS LTD.

The Organization was incorporated in 10 July 1987, M/s Aditya

Promoters Ltd. (APL) having its registered office at 4428, Ganesh

Bazar, Cloth Market, Delhi 110 006 and also Branches in major

cities in India. The Company is the foremost MANUFACTURERS of

Vacuum Flask, Thermo wares and Household Plastic Goods in the

country. Besides, Since August, 2000 company is a regular

importer of Glassware, Vacuum Flask, Nonstickware, andKicthenware since 1987 companys product brand name ADITYA is

a recognized one not only in India but abroad too.

Aditya today is a hallmark of quality & care. Care that is reflectedin our vast spectrum of innovative and elegant Vacuum Flasks inStainless Steel Body, Metal Body & Plastic Body, Thermo wareProducts like Casseroles, Lunch Boxes, Ice Boxes & Water Storage

Jugs, Plastic Products like Serving Trays, Air Tight Containers,Mugs & Glasses and Gift Sets like Tea Sets, Coffee Sets, Cocktail& Whisky Sets etc. to name a few.

Aditya has recently started manufacturing Acrylic Items under

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"ACROSET" brand name like Dinner Sets, Serving Trays, DividedPlates & Table Top items like Coaster Sets, Ashtray & Pen Stands

etc.

Aditya product range has been thoughtfully and aestheticallycreated to suit all occasions and every pocket, keeping in mindthe utility & durability value of the products.

Keeping pace with the changing items & Globalization, Aditya hasdiversified into marketing of imported products like 1. Glassware,2. Vacuum Flasks, 3. Non-Stick Cookware, 4. Decorative,

Handmade & Hand Cut Glassware, 5. Melamine Crockery, 6.Porcelain Crockery, 7. Stainless Steel Vacuum Flasks and isshortly going to add to its already impressive range - Electric RiceCookers.

Now, Aditya represents world leaders like 1. Pasabahce -Glassware, 2. F&D - High Quality Crystal Glassware, 3. Denizli -Handmade Crystal Glassware, 4. Elegenzia - Decorated Glasses, 5.Flora - Decorated Vases & Bowls (from Turkey), 6. Eternity - Nonstick Cookware (from Turkey), 7. Marinex Tableware andOvenware (from Brazil), 8. Imported Acroset - Acrylic BathroomAccessories (from China), 9. Bio Hi Lock - Air Tight BacterneriaFree Containers (from Korea), 10. WoodStock - Porcelain, BoneChina & Stone ware (from China), & 11. Stainless Steel Flasks(from China)

It has been a passion with Aditya to add style, elegance andconvenience to your life by manufacturing world-class productsand making worlds top brands available at your doorstep by

importing & distributing them in India.

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ADITYA-PRODUCTS

Manufacturing

Vacuum Flask Products

Thromo ware Products

Acrylic Product

S.S. Flask

Imported Goods

Pasabahce Glassware Product

Marinex Glassware Product

Saint Gobain Glassware Product

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Objective & Scope

The major objective of the study is to proper understanding theworking capital of Aditya Promoters Ltd. to suggest measures toovercome the shortfalls if any.

Funds needed for short term needs for the purpose like raw

materials, payment of wages and other day to day expenses areknown as working capital. Decisions relating to working capital(Current assets-Current liabilities) and short term financing areknown as working capital management. It involves therelationship between a firms short-term assets and its short termliabilities. By definition, working capital management entailsshort-term definitions, generally relating to the next one yearperiod.

The goal of working capital management is to ensure that the firmis able to continue its operation and that it has sufficient cash flowto satisfy both maturing short term debt and upcomingoperational expenses.

Working capital is primarily concerned with inventoriesmanagement, Receivable management, cash management &Payable management.

Inventories management at ADITYA:

Aditya is a large scale manufacturing company involved in miningof Bauxite and production of Aluminum. Therefore, it has to

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maintain large quantity of inventories at production units for itssmooth running and functioning.

Cash management at ADITYA:

Aditya has been accumulating huge cash surpluses over last

several years, which enables the organization to maintain

adequate cash reserves and to generate required amount of cash.

Receivables management at ADITYA:

ADITYA has set up its office at all metro cities in India i.e. Mumbai,Kolkata, New Delhi, Chennai, Bangalore, Kerala. This marketingoffice obtains sales order from Vaccum Flask & Glassware Productusers in India. On the basis of order received for differentproducts it marks production planning of different row material.

INTRODUCTION OF WORKING CAPITAL

Working Capital:

The life blood of business, as is evident, signified funds required

for day-to-day operations of the firm. The management of workingcapital assumes great importance because shortage of working

capital funds is perhaps the biggest possible cause of failure of

many business units in recent times. There it is of great

importance on the part of management to pay particular attention

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to the planning and control for working capital. An attempt has

been made to make critical study of the various dimensions of the

working capital management of ADITYA.

Decisions relating to working capital and short term financing arereferred to as working capital management. These involvemanaging the relationship between a firm's short-term assets andits short-term liabilities. The goal of Working capital managementis to ensure that the firm is able to continue its operations andthat it has sufficient money flow to satisfy both maturing short-term debt and upcoming operational expenses.

Objective of the study:

The following are the main objective which has been undertakenin the present study:

1. To determine the amount of working capital requirement and

to calculate various ratios relating to working capital.

2. To make an item wise study of the components of the

working capital.

3. To suggest the steps to be taken to increase the efficiency in

management of working capital.

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Place of study:

The project study is carried out at the Finance Department ofAditya Promoters Ltd. office situated at Noida, Uttar Pradesh. The

study is undertaken as a part of the MBA (DLP) curriculum from 01FEB 2010 to 15 JUL 2010.

Study Design and Methodology:

Two types of data are collected, one is primary data and second one is

secondary data. The primary data were collected from the Department

Personnel through questionnaire and structured Interviews. The secondary

data were collected from the Company last financial reports and Balance

Sheets, Bank Report, Income Tax Statements for last three years.

1. Primary Data

I have planned to use two tools of research namely the Questionnaire and the

Structured Interviews.o Questionnaire

a. Sample Size : 10 Respondents

b. Sample Composition :

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Finance Director : 1

Finance Manager : 1

Executive : 8

o Structured Interviews

a. Sample Size : 4

b. Sample Composition

Finance Director : 1

Finance Manager : 1

Sr. Executive : 2

2. Secondary Data

The Secondary data I will get from the Company last Financial Report and

Balance Sheets, Bank Report, Income Tax Statements, Fund & Cash Flow

Statements for last three years.

Data Collection 5 YEARS PERFORMANCE HIGHLIGHTS

1. SALES Rs. Lacs

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1110

1250

1470

1680

1950

2005 2006 2007 2008 2009


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2. Purchase-Rs. Lacs

3. NET PROFIT- Rs. Lacs

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880

10601170

1430

1590

2005 2006 2007 2008 2009


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0

20

40

60

80

Profit as per Balance S

Profit as per

Balance Sheet

34 41 56 65 70

2005 2006 2007 2008 2009

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5. Current Assets & Current Liabilities : Rs. Lacs

2005 2006 2007 2008 2009

Current Assets 535.00 620.00 702.80 823.40 933.20

Current Liabilities 355.00 410.00 466.30 574.10 691.40

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DATA ANALYSIS AND INTERPRETATION

(Rs in Lacs)

A.Current Assets :

2005 2006 2007 2008 2009

Inventories 410.10 480.00 530.00 585.00 615.00Sundry debtors 99.40 120.50 150.60 210.60 290.80Cash and bank

balance 10.10 9.90 11.20 13.30 12.60Other current assets 8.60 7.60 8.40 9.70 10.50Loans and advances 6.80 2.00 2.60 4.80 4.30

TOTAL 535.00 620.00 702.80 823.40 933.20

B. CURRENT LIABELITIES :

2005 2006 2007 2008 2009

Bank Borrowing 200.70 230.80 250.70 300.60 348.90Sundry Creditors 88.60 110.90 135.90 190.30 260.50Other Liabilities 22.60 23.50 30.40 31.50 33.60Security Depositsfrom Debtors 6.60 7.80 10.80 13.20 12.80Loans and advances fromShare Holders 36.50 37.00 38.50 38.50 35.60

TOTAL 355.00 410.00 466.30 574.10 691.40

WORKINGCAPITAL (A-B): 180.00 210.00 236.50 249.30 241.80

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Current Ratio 1.51 1.51 1.51 1.43 1.35

OPERATING PROFIT MARGIN (%)

2005 2006 2007 2008 2009Operating Profit (inLacs) 103.03 110.03 149.86 165.26 156.31Operating Margin% 9.28 8.80 10.19 9.84 8.02

(Values in Lacs)

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2. NET PROFIT MARGIN (%)

2005 2006 2007 2008 2009

Net Profit (in Lacs) 24.65 30.99 39.29 35.28 38.12

Net Profit Margin% 2.22 2.48 2.67 2.10 1.95

(Value in Lacs)

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Key Working Capital Ratios

The following, easily calculated, ratios are important measures ofworking capital utilization.

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Ratio Formulae Result

Interpretation

StockTurnover(in days)

AverageStock *

365/Cost of

Goods Sold

= xdays

On average, you turn over thevalue of your entire stock every xdays. You may need to break thisdown into product groups foreffective stock management.Obsolete stock, slow moving lineswill extend overall stock turnoverdays. Faster production, fewerproduct lines, just in time ordering

will reduce average days.

Receivables Ratio(in days)

Debtors *365/

Sales

= xdays

It takes you on average x days tocollect monies due to you. Ifyoure official credit terms are 45day and it takes you 65 days...why?One or more large or slow debtscan drag out the average days.Effective debtor management will

minimize the days.

PayablesRatio(in days)

Creditors *365/

Cost ofSales (or

Purchases)

= xdays

On average, you pay yoursuppliers every x days. If younegotiate better credit terms thiswill increase. If you pay earlier,say, to get a discount this willdecline. If you simply defer payingyour suppliers (withoutagreement) this will also increase -

but your reputation, the quality ofservice and any flexibility providedby your suppliers may suffer.

CurrentRatio

TotalCurrentAssets/

= xtimes

Current Assets are assets that youcan readily turn in to cash or willdo so within 12 months in the

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TotalCurrent

Liabilities

course of business. CurrentLiabilities are amount you are dueto pay within the coming 12months. For example, 1.5 timesmeans that you should be able tolay your hands on 1.50 for every1.00 you owe. Less than 1 timese.g. 0.75 means that you couldhave liquidity problems and beunder pressure to generatesufficient cash to meet oncoming

demands.

QuickRatio

(TotalCurrentAssets -

Inventory)/Total

CurrentLiabilities

= xtimes

Similar to the Current Ratio buttakes account of the fact that itmay take time to convertinventory into cash.

WorkingCapitalRatio

(Inventory

+Receivables- Payables)/

Sales

As %Sales

A high percentage means thatworking capital needs are highrelative to your sales.

Other working capital measures include the following:

Bad debts expressed as a percentage of sales. Cost of bank loans, lines of credit, invoicediscounting etc. Debtor concentration - degree of dependency on alimited number of customers.

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Once ratios have been established for your business, it isimportant to track them over time and to compare them with

ratios for other comparable businesses or industry sectors.

When planning the development of a business, it is critical thatthe impact of working capital be fully assessed when making cashflow forecasts.

Finding of the Study

Every business needs investment to procure fixed assets, whichremain in use for a longer period. Money invested in these assetsis called Long term Funds or Fixed Capital.Business also needs funds for short-term purposes to financecurrent operations. Investment in short term assets like cash,inventories, debtors etc., is called Short-term Funds or Working

Capital. The Working Capital can be categorized, as fundsneeded for carrying out day-to-day operations of the businesssmoothly. The management of the working capital is equallyimportantas the management of long-term financial investment.

Every running business needs working capital. Even a businesswhich is fully equipped with all types of fixed assets required isbound to collapse without

o

adequate supply of raw materials for processing;o cash to pay for wages, power and other costs;o creating a stock of finished goods to feed the market

demand regularly; and,o The ability to grant credit to its customers.

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All these require working capital. Working capital is thus like the

lifeblood of a business. The business will not be able to carry onday-to-day activities without the availability of adequate workingcapital.

Working capital cycle involves conversions and rotation of variousconstituentsComponents of the working capital. Initially cash is convertedinto raw materials.

Subsequently, with the usage of fixed assets resulting in valueadditions, the raw materials get converted into work in processand then into finished goods. When sold on credit, the finishedgoods assume the form of debtors who give the business cash ondue date. Thus cash assumes its original form again at the endof one such working capital cycle but in the course it passesthrough various other forms of current assets too. This is howvarious components of current assets keep on changing theirforms due to value addition. As a result, they rotate and businessoperations continue. Thus, the working capital cycle involvesrotation of various constituents of the working capital.

While managing the working capital, two characteristics of currentassets should be kept in mind viz. (i) short life span, and (ii) swifttransformation into other form of current asset.

Each constituent of current asset has comparatively very short lifespan. Investment remains in a particular form of current asset fora short period. The life span of current assets depends upon the

time required in the activities of procurement; production, salesand collection and degree of synchronization among them. A veryshort life span of current assets results into swift transformationinto other form of current assets for a running business.

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These characteristics have certain implications:

Decision regarding management of the working capital hasto be taken frequently and on a repeat basis.

The various components of the working capital are closelyrelated and mismanagement of any one componentadversely affects the other components too.

The difference between the present value and the bookvalue of profit is not significant.

The working capital has the following components, which are inseveral forms of current assets:

o Stock of Cash

o Stock of Raw Material

o Stock of Finished Goods

o Value of Debtors

o Miscellaneous current assets like short term investmentloans & Advances

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A number of definitions have been formulated: perhaps the mostwidely acceptable would be;

WORKING CAPITAL represents the excess ofCURRENT ASSETSover CURRENT LIABILITIES

The same may be designated in the following equation:

WORKING CAPITAL= CURRENT ASSETS CURRENT LIABILITIES:

Funds thus invested in current assets keep revolving fast and arebeing constantly converted in to cash and this cash flows outagain in exchange for other current assets. Thus it is known asrevolving or circulating capital or short term capital.

These are two concepts of working capital:-

a. Gross Working Capital.b. Net Working Capital.

Gross working capital is the total of all current assets. Net workingcapital is the difference between current assets and currentliabilities. Though the later concept of working capital iscommonly used it is an accounting concept with little sense to saythat a firm manages its net working capital. What a firm really

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does is to take decisions with respect to various current assetsand current liabilities. The constituents of current assets and

current liabilities are shown in table A.

Constituents of Current Assets and CurrentLiabilities

Current Assets

Inventories Raw materials and components, Work inprogress, Finished goods, other.

Trade Debtors.

Loans and Advances. Investments. Cash and Bank balance.

Current Liabilities

Sundry Creditors. Trade Advances. Borrowings.

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Provisions.

The working capital needs of a business are influenced bynumerous factors. The important ones are discussed inbrief as given below:

Nature of Enterprise:

The nature and the working capital requirements of an enterpriseare interlinked. While a manufacturing industry has a long cycle ofoperation of the working capital, the same would be short in anenterprise involved in providing services. The amount requiredalso varies as per the nature; an enterprise involved in productionwould require more working capital than a service sectorenterprise.

Manufacturing/Production Policy:

Each enterprise in the manufacturing sector has its ownproduction policy, some follow the policy of uniform productioneven if the demand varies from time to time, and others mayfollow the principle of 'demand-based production' in whichproduction is based on the demand during that particular phase of

time. Accordingly, the working capital requirements vary for bothof them.

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Working Capital Cycle:

In manufacturing concern, working capital cycle starts with thepurchase of raw materials and ends with realization of cash fromthe sale of finished goods. The cycle involves the purchase of rawmaterials and ends with the realization of cash from the sale offinished products. The cycle involves purchase of raw materialsand stores, its conversion in to stock of finished goods throughwork in progress with progressive increment of labor and service

cost, conversion of finished stick in to sales and receivables andultimately realization of cash and this cycle continuous again fromcash to purchase of raw materials and so on.

Operations:

The requirement of working capital fluctuates for seasonalbusiness. The working capital needs of such businesses mayincrease considerably during the busy season and decreaseduring the slack season. Ice creams and cold drinks have a greatdemand during summers, while in winters the sales are negligible.

Market Condition:

If there is high competition in the chosen product category, thenone shall need to offer sops like credit, immediate delivery ofgoods etc. for which the working capital requirement will be high.

Otherwise, if there is no competition or less competition in themarket then the working capital requirements will be low.

Credit Policy:

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The credit policy is concerned in its dealings with debtors andcreditors influence considerably the requirements of the working

capital. A concern that purchases its requirements on credit andsells its products/services on cash requires lesser amount ofworking capital. On the other hand a concern buying itsrequirements for cash and allowing credit to its customers, shallneed larger amount of funds are bound to be tied up in debtors orbills receivables.

Business Cycle:Business Cycle refers to alternate expansion and contraction ingeneral business activities. In a period of born i.e. when thebusiness is prosperous there is a need for larger amount ofworking capital due to increase in sales, rise in prices, optimisticexpansion of business etc. On the country at he time ofdepression i.e. when there is a down swing of the cycle, businesscontracts, sales decline, difficulties are faced in collections fromdebtors and firms may have a large amount of working capital

lying ideal

Availability of Raw Material:

If raw material is readily available then one need not maintain alarge stock of the same, thereby reducing the working capitalinvestment in raw material stock. On the other hand, if raw

material is not readily available then a large inventory/stockneeds to be maintained, thereby calling for substantialinvestment in the same.

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Growth and Expansion:

Growth and expansion in the volume of business results inenhancement of the working capital requirement. As businessgrows and expands, it needs a larger amount of working capital.Normally, the need for increased working capital funds precedesgrowth in business activities.

Earning Capacity and Dividend policy

Some firms have more earning capacity than others due to thequality of their products, monopoly conditions etc. Such firms withhigh earning capacity may generate cash profits from operationsand contribute to their capital. The dividend policy of a concernalso influences the requirements of the working capital. A firmthat maintains steady high rate of cash dividend irrespective of itsgeneration of profits needs more capital than the firm retainslarger part of its profits and does not pay high rate of cashdividend.

Price Level Changes

Generally, rising price level requires a higher investment in theworking capital. With increasing prices, the same level of currentassets needs enhanced investment.

Manufacturing Cycle

The manufacturing cycle starts with the purchase of raw materialand is completed with the production of finished goods. If themanufacturing cycle involves a longer period, the need forworking capital would be more. At times, business needs toestimate the requirement of working capital in advance for proper

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control and management. The factors discussed above influencethe quantum of working capital in the business. The assessment

of working capital requirement is made keeping these factors inview. Each constituent of working capital retains its form for acertain period and that holding period is determined by thefactors discussed above. So for correct assessment of the workingcapital requirement, the duration at various stages of the workingcapital cycle is estimated. Thereafter, proper value is assigned tothe respective current assets, depending on its level ofcompletion.

Other Factors

Certain other factors such as operating efficiency, managementability, irregularities a supply, import policy, asset structure,importance of labor, banking facilities etc. also influences therequirement of working capital.

Component of Working Capital Basis of Valuation

Stock of raw material Purchase cost of raw materials

Stock of work in process At cost or market value, whicheveris lower

Stock of finished goods Cost of production

Debtors Cost of sales or sales value

Cash Working expenses

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Each constituent of the working capital is valued on the basis ofvaluationEnumerated above for the holding period estimated. The total ofall such valuation becomes the total estimated working capitalrequirement.

The assessment of the working capital should be accurate even inthe case of small and micro enterprises where business operationis not very large. We know that working capital has a very close

relationship with day-to-day operations of a business. Negligencein proper assessment of the working capital, therefore, can affectthe day-to-day operations severely. It may lead to cash crisis andultimately to liquidation. An inaccurate assessment of the workingcapital may cause either under-assessment or over-assessment ofthe working capital and both of them are dangerous.

WORKING CAPITAL MANAGEMENT

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Working Capital Management refers to management of currentassets and current liabilities. The major thrust of course is on the

management of current assets .This is understandable becausecurrent liabilities arise in the context of current assets. WorkingCapital Management is a significant fact of financial management.Its importance stems from two reasons:-

Investment in current assets represents a substantial portionof total investment.

Investment in current assets and the level of currentliabilities have to be geared quickly to change in sales. To be

sure, fixed asset investment and long term financing areresponsive to variation in sales. However, this relationship isnot as close and direct as it is in the case of working capitalcomponents.

The importance of working capital management is effected in thefact that financial manages spend a great deal of time inmanaging current assets and current liabilities. Arranging shortterm financing, negotiating favorable credit terms, controlling themovement of cash, administering the accounts receivable, and

monitoring the inventories consume a great deal of time offinancial managers.

The problem of working capital management is one of thebest utilization of a scarce resource.

Thus the job of efficient working capital management is aformidable one, since it depends upon several variables such ascharacter of the business, the lengths of the merchandising cycle,

rapidity of turnover, scale of operations, volume and terms ofpurchase & sales and seasonal and other variations.

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CONSEQUENCES OF UNDER ASSESSMENT OFWORKING CAPITAL

o Growth may be stunted. It may become difficult for theenterprise to undertake profitable projects due to non-availability of working capital.

o Implementation of operating plans may become difficult andconsequently the profit goals may not be achieved.

o Cash crisis may emerge due to paucity of working funds.

o Optimum capacity utilization of fixed assets may not beachieved due to non availability of the working capital.

o The business may fail to honour its commitment in time,thereby adversely affecting its credibility. This situation maylead to business closure.

o The business may be compelled to buy raw materials oncredit and sell finished goods on cash. In the process it mayend up with increasing cost of purchases and reducingselling prices by offering discounts. Both these situationswould affect profitability adversely.

o Non-availability of stocks due to non-availability of fundsmay result in production stoppage.

o While underassessment of working capital has disastrousimplications on business, over assessment of working capitalalso has its own dangers.

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CONSEQUENCES OF OVER ASSESSMENT OFWORKING CAPITAL

o Excess of working capital may result in unnecessaryaccumulation of inventories.

o It may lead to offer too liberal credit terms to buyers andvery poor recovery system and cash management.

o It may make management complacent leading to itsinefficiency.

o Over-investment in working capital makes capital lessproductive and may reduce return on investment. Working

capital is very essential for success of a business and,therefore, needs efficient management and control. Each ofthe components of the working capital needs propermanagement to optimize profit.

The working capital in certain enterprise may beclassified into the following kinds.

1. Initial working capital.

The capital, which is required at the time of the

commencement of business, is called initial working capital.

These are the promotion expenses incurred at the earliest

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stage of formation of the enterprise which include the

incorporation fees. Attorney's fees, office expenses and

other expenses.

2. Regular working capital.

This type of working capital remains always in the enterprise

for the successful operation. It supplies the funds necessary

to meet the current working expenses i.e. for purchasing raw

material and supplies, payment of wages, salaries and other

sundry expenses.

3. Fluctuating working capital.

This capital is needed to meet the seasonal requirements of

the business. It is used to raise the volume of production by

improvement or extension of machinery. It may be secured

from any financial institution which can, of course, be metwith short term capital. It is also called variable working

capital.

4. Reserve margin working capital.

It represents the amount utilized at the time of

contingencies. These unpleasant events may occur at any

time in the running life of the business such as inflation,

depression, slump, flood, fire, earthquakes, strike, lay off andunavoidable competition etc. In this case greater amount of

capital is required for maintenance of the business.

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Financing Working Capital

Now let us understand the means to finance the working capital.Working capital or current assets are those assets, which unlikefixed assets change their forms rapidly. Due to this nature, theyneed to be financed through short-term funds. Short-term fundsare also called current liabilities. The following are the majorsources of raising short-term funds:

I. Suppliers Credit:

At times, business gets raw material on credit from the suppliers.The cost of raw material is paid after some time, i.e. uponcompletion of the credit period. Thus, without having an outflowof cash the business is in a position to use raw material andcontinue the activities. The credit given by the suppliers of rawmaterials is for a short period and is considered current liabilities.These funds should be used for creating current assets like stockof raw material, work in process, finished goods, etc.

ii. Bank Loan for Working Capital:

This is a major source for raising short-term funds. Banks extendloans to businesses to help them create necessary current assetsso as to achieve theRequired business level. The loans are available for creating thefollowing currentAssets:

Stock of Raw Materials Stock of Work in Process

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Stock of Finished Goods Debtors

Banks give short-term loans against these assets, keeping somesecurity margin.The advances given by banks against current assets are short-term in nature and banks have the right to ask for immediaterepayment if they consider doing so. Thus bank loans for creationof current assets are also current liabilities.

iii. Promoters Fund:

It is advisable to finance a portion of current assets from thepromoters funds. They are long-term funds and, therefore do notrequire immediate repayment.These funds increase the liquidity of the business.

Management of Inventory

Inventories constitute the most significant part of current assetsof a large majority of companies in India. On an average,inventories are approximately 60 % of current assets in publiclimited companies in India.

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Because of the large size of inventories maintained by firmsmaintained by firms, a considerable amount of funds is required

to be committed to them. It is, therefore very necessary tomanage inventories efficiently and effectively in order to avoidunnecessary investments. A firm neglecting a firm themanagement of inventories will be jeopardizing its long runprofitability and may fail ultimately.

The purpose of inventory management is to ensure availability ofmaterials in sufficient quantity as and when required and also tominimize investment in inventories at considerable degrees,

without any adverse effect on production and sales, by usingsimple inventory planning and control techniques.

Needs to hold inventories:

There are three general motives for holding inventories:-

Transaction motive emphasizes the need to maintain

inventories to facilitate smooth production and salesoperation.

Precautionary motive necessities holding of inventories toguard against the risk of unpredictable changes in demandand supply forces and other factors.

Speculative motive influences the decision to increases orreduce inventory levels to take advantage of pricefluctuations and also for saving in re-ordering costs andquantity discounts etc.

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Objective of Inventory Management:-

The main objectives of inventory management are operationaland financial. The operational mean that means that the materialsand spares should be available in sufficient quantity so that workis not disrupted for want of inventory. The financial objectivemeans that investments in inventories should not remain ideal

and minimum working capital should be locked in it.

The following are the objectives of inventory management:-

o To ensure continuous supply of materials, spares andfinished goods.

o To avoid both over-stocking of inventory.o To maintain investments in inventories at the optimum level

as required by the operational and sale activities.o To keep material cost under control so that they contribute

in reducing cost of production and overall purchases.o To eliminate duplication in ordering or replenishing stocks.

This is possible with the help of centralizing purchases.o To minimize losses through deterioration, pilferage,

wastages and damages.o To design proper organization for inventory control so that

management. Clear cut account ability should be fixed atvarious levels of the organization.

o To ensure perpetual inventory control so that materialsshown in stock ledgers should be actually lying in the stores.

o To ensure right quality of goods at reasonable prices.

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o To facilitate furnishing of data for short-term and long termplanning and control of inventory

Management of cash

Cash is the important current asset for the operation of thebusiness. Cash is the basic input needed to keep the businessrunning in the continuous basis, it is also the ultimate output

expected to be realized by selling or product manufactured by thefirm.

The firm should keep sufficient cash neither more nor less. Cashshortage will disrupt the firms manufacturing operations whileexcessive cash will simply remain ideal without contributinganything towards the firms profitability. Thus a major function ofthe financial manager is to maintain a sound cash position.

Cash is the money, which a firm can disburse immediately without

any restriction. The term cash includes coins, currency andcheques held by the firm and balances in its bank account.Sometimes near cash items such as marketing securities or bankterm deposits are also included in cash. Generally when a firm hasexcess cash, it invests it is marketable securities. This kind ofinvestment contributes some profit to the firm.

Need to hold cash

The firms need to hold cash may be attributed to the followingthree motives:-

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The Transaction Motive:The transaction motive requires a firm tohold cash to conduct its business in the ordinary course. The firmneeds cash primarily to make payments for purchases, wages andsalaries, other operating expenses, taxes, dividends, etc.

The Precautionary Motive: A firm is required to keep cash formeeting various contingencies. Though cash inflows and outflowsare anticipated but there may be variations in these estimates.For example a debtor who pays after 7 days may inform of hisinability to pay, on the other hand a supplier who used to givecredit for 15 days may not have the stock to supply or he may not

be in opposition to give credit at present.

Speculative Motive: - The speculative motive relates to theholding of cash for investing in profit making opportunities as andwhen they arise.

The opportunities to make profit changes. The firm will hold cash,when it is expected that interest rates will rise and security pricewill fall.

Components of working capital are calculated as

follows:

1) Raw Materials Storage Period=Average stock of rawmaterials/Average cost of raw material consumption per day.

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2.) W-I-P Holding period=Average w-i-p in inventory/Average costof production per day.

3.) Stores and spares conversion period= Average stock of Storesand spares/ Average consumption per day.

4.) Finished goods conversion period= Average stock of finishedgoods/Average cost of goods sold per day.

5.) Debtors collection period=Average book debts/Average creditsales per day.

6.) Credit period availed=Average trade creditors/Average creditpurchase per day.

Management of Receivables

A sound managerial control requires proper management of liquidassets and inventory. These assets are a part of working capital ofthe business. An efficient use of financial resources is necessaryto avoid financial distress. Receivables result from credit sales.

A concern is required to allow credit sales in order to expand itssales volume. It is not always possible to sell goods on cash basis

only. Sometimes other concern in that line might have establisheda practice of selling goods on credit basis. Under thesecircumstances, it is not possible to avoid credit sales withoutadversely affecting sales.

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The increase in sales is also essential to increases profitability.After a certain level of sales the increase in sales will not

proportionately increase production costs. The increase in saleswill bring in more profits. Thus, receivables constitute a significantportion of current assets of a firm. But for investment inreceivables, a firm has to insure certain costs. Further, there is arisk of bad debts also. It is therefore, very necessary to have aproper control and management of receivables.

Needs to hold cash:

Receivables management is the process of making decisionsrelating to investment in trade debtors. Certain investments inreceivables are necessary to increase the sales and the profits ofa firm. But at the same time investment in this asset involves costconsideration also. Further, there is always a risk of bad debtstoo.

Thus, the objective of receivable management is to take a sounddecision as regards investments in debtors. In the words ofBolton, S.E., the need of receivables management is to promote

sales and profits until that point is reached where the return ofinvestment in further funding of receivables is less than the costof funds raised to finance that additional credit.

Important Terms

Working Capital Cycle

Cash flows in a cycle into, around and out of a business. It is thebusiness's life blood and every manager's primary task is to help

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keep it flowing and to use the cash flow to generate profits. If abusiness is operating profitably, then it should, in theory,

generate cash surpluses. If it doesn't generate surpluses, thebusiness will eventually run out of cash and expire.

The faster a business expands , the more cash it will need forworking capital and investment. The cheapest and best sources ofcash exist as working capital right within business. Goodmanagement of working capital will generate cash will helpimprove profits and reduce risks. Bear in mind that the cost ofproviding credit to customers and holding stocks can represent a

substantial proportion of a firm's total profits.

There are two elements in the business cycle that absorb cash -Inventory (stocks and work-in-progress) and Receivables (debtorsowing you money). The main sources of cash are Payables (yourcreditors) and Equity and Loans.

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Each component of working capital (namely inventory,receivables and payables) has two dimensions ........TIME .........

and MONEY. When it comes to managing working capital - TIME ISMONEY. If you can get money to move faster around the cycle(e.g. collect monies due from debtors more quickly) or reduce theamount of money tied up (e.g. reduce inventory levels relative tosales), the business will generate more cash or it will need toborrow less money to fund working capital. As a consequence,you could reduce the cost of bank interest or you'll haveadditional free money available to support additional sales growthor investment. Similarly, if you can negotiate improved terms with

suppliers e.g. get longer credit or an increased credit limit; youeffectively create free finance to help fund future sales.

If you....... Then......

Collect receivables (debtors)faster

You release cashfrom the cycle

Collect receivables (debtors)slower

Your receivablessoak up cash

Get better credit (in terms ofduration or amount) fromsuppliers

You increaseyour cashresources

Shift inventory (stocks)faster

You free up cash

Move inventory (stocks)slower

You consumemore cash

It can be tempting to pay cash, if available, for fixed assets e.g.computers, plant, vehicles etc. If you do pay cash, remember thatthis is now longer available for working capital. Therefore, if cashis tight, consider other ways of financing capital investment -loans, equity, leasing etc. Similarly, if you pay dividends or

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increase drawings, these are cash outflows and, like water flowingdowns a plug hole, they remove liquidity from the business.

More businesses fail for lack of cash than forwant of profit.

Sources of Additional Working Capital

Sources of additional working capital include the following:

Existing cash reserves Profits (when you secure it as cash!) Payables (credit from suppliers) New equity or loans from shareholders Bank overdrafts or lines of credit Long-term loans

If you have insufficient working capital and try to increase sales,you can easily over-stretch the financial resources of thebusiness.

This is called overtrading. Early warning signs include:

o Pressure on existing casho Exceptional cash generating activities e.g. offering high

discounts for early cash paymento Bank overdraft exceeds authorized limito Seeking greater overdrafts or lines of credit

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o Part-paying suppliers or other creditorso Paying bills in cash to secure additional supplieso Management pre-occupation with surviving rather than

managing

Frequent short-term emergency requests to the bank (to help pay

wages, pending receipt of a cheque).

Handling Receivables (Debtors)

Cash flow can be significantly enhanced if the amounts owing to abusiness are collected faster. Every business needs to know....who owes them money.... how much is owed.... how long it isowing.... for what it is owed.

Late payments erode profits and can lead tobad debts.

Slow payment has a crippling effect on business; in particular onsmall businesses who can least afford it. If you don't managedebtors, they will begin to manage your business as you willgradually lose control due to reduced cash flow and, of course,you could experience an increased incidence of bad debt.

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The following measures will help manage your debtors:

1. Have the right mental attitude to the control of credit andmake sure that it gets the priority it deserves.

2. Establish clear credit practices as a matter of companypolicy.

3. Make sure that these practices are clearly understood bystaff, suppliers and customers.

4. Be professional when accepting new accounts, andespecially larger ones.

5. Check out each customer thoroughly before you offer credit.

Use credit agencies, bank references, industry sources etc.6. Establish credit limits for each customer... and stick to them.7. Continuously review these limits when you suspect tough

times are coming or if operating in a volatile sector.8. Keep very close to your larger customers.9. Invoice promptly and clearly.10. Consider charging penalties on overdue accounts.11. Consider accepting credit /debit cards as a payment

option.12. Monitor your debtor balances and ageing schedules,

and don't let any debts get too large or too old.

Recognize that the longer someone owes you, the greater thechance you will never get paid. If the average age of your debtorsis getting longer, or is already very long, you may need to look forthe following possible defects:

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weak credit judgement poor collection procedures lax enforcement of credit terms slow issue of invoices or statements errors in invoices or statements Customer dissatisfaction.

Debtors due over 90 days (unless within agreed credit terms)should generally demand immediate attention. Look for the

warning signs of a future bad debt. For example.........

o longer credit terms taken with approval, particularly forsmaller orders

o use of post-dated checks by debtors who normally settlewithin agreed terms

o evidence of customers switching to additional suppliers forthe same goods

o new customers who are reluctant to give credit referenceso Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one which most people dislike formany reasons and therefore put on the long finger because theyconvince themselves there is something more urgent or importantthat demand their attention now. There is nothing more importantthan getting paid for your product or service. A customer whodoes not pay is not a customer.

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Managing Payables (Creditors)

Creditors are a vital part of effective cash management andshould be managed carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasingfunction can create liquidity problems. Consider the following:

o Who authorizes purchasing in your company - is it tightlymanaged or spread among a number of (junior) people?

o Are purchase quantities geared to demand forecasts?o Do you use order quantities which take account of stock-

holding and purchasing costs?o Do you know the cost to the company of carrying stock?o Do you have alternative sources of supply? If not, get quotes

from major suppliers and shop around for the best discounts,credit terms, and reduce dependence on a single supplier.

o How many of your suppliers have a returns policy?o Are you in a position to pass on cost increases quickly

through price increases to your customers?o If a supplier of goods or services lets you down can you

charge back the cost of the delay?o Can you arrange (with confidence!) to have delivery of

supplies staggered or on a just-in-time basis?

There is an old adage in business that if you can buy well thenyou can sell well. Management of your creditors and suppliers isjust as important as the management of your debtors. It isimportant to look after your creditors - slow payment by you may

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create ill-feeling and can signal that your company is inefficient(or in trouble!).

Remember, a good supplier is someone who will work with you to

enhance the future viability and profitability of your company

RECOMMENDATION

After done all the research I came to know that the company

Aditya Promoters Ltd. facing the problem of inefficient

Management practice for Managing the Working Capital.

I found that that due to inefficient Inventory Management & lazy

debt collection could be the reason for inefficient Working Capital.

Therefore I would like to recommend some point for Inventory

Management & speedy Debt Collections.

Inventory Management:

The cost for raw material was not calculated properly. Thisoccurred because the costing method is set to averageand beginning balances were entered with a zero cost. Thelarger the number of pieces on-hand at a zero cost, the morenew receipts it will take until the unit cost isaccurately calculated.

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Company should follow the Economic Order Quantity rules to

maintain the sufficient stock into the warehouse and order n

pipeline.

As the company deals in Glassware, Thermoware,Vaccumflask goods, should be follow the FEFO method tomaintain the good stock movement.

Working stock supports day-to-day operations and willcontinuously cycle up and down as the material is consumedand replenished.

There should be appropriate paperwork for every type ofstock withdrawal. Under no circumstances should materialleave the warehouse without being entered in the computer.Eliminate "no charge/no paperwork" material swaps. Productsamples should be charged to a salespersons account untilthey are either returned to stock or charged to the customer.

All printed picking documents should be filled by the end of

the day. Stock receipts should be put away and entered in

the computer system within 24 hours of arrival.

Implement a comprehensive cycle counting program. A good

cycle counting program can replace your traditional year-end

physical inventory.

Protect company against theft; make sure that the only

people in your warehouse belong in your warehouse.

Pilferage is a larger problem than most distributors realize.

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Credit Control & Debt Collection Management:

Provide Discounts for Early Payment - by offering a special

discount for early payment of an invoice, cash flow problems

can be avoided. Make it very clear on the invoice what the

discount would be. For instance, a 10% discount in exchange

for settlement within seven days of the date of the invoice.

The customer can see that you are serious. If they are a

good payer and were going to pay the invoice anyway, why

not get some cash back in the process by benefiting from thediscount. Providing discounts are a commonly used business

practice and can easily be absorbed into the pricing

structure of any commercial enterprise.

Set Management Credit Limits - decide policies for the limit

of trade credit for each major customer or groups of

customers. These can be decided by using a credit rating

agency, or a credit insurer, or choose a % of current working

capital

Consider Using a Factoring Organization - it is possible for a

company to outsource/ sell or 'factor' the credit of unpaid

customer bills to a third party institution (an invoice factoring

company), in exchange the majority of the unpaid business

debt to be paid immediately to the company. This has the

effect of speeding up cash flow as well as potentially

reducing debt collection agencies (if outsourced),administration costs.

Ask Customers for the Trade References - when dealing with

an unknown prospective customer seeking trade credit, a

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commonplace action to ask for the names and telephone

numbers of some of their other existing suppliers. If offering

credit terms this process, asking real people about them is

an essential supplement to the sterile and administrative

credit checking process. Referees have already dealt with

your perspective customer end hence will be up to provide a

first-hand account of how they do business, how quickly they

settle their outstanding debts and whether they are to be

relied upon. Ask simply questions like how long have they

known them, what sales per month and do they keep their

promises.

Clearly Communicate Your Terms of Business - whenever

company deal with new prospects or existing clients, it is

essential that your terms of business are highlighted at an

early stage. These include adding company payment terms,

order notes, statements of account, order

acknowledgements, dispatch notes, s, invoices and e-mails &

send an invoice with a payment before deadline. Try and getinvoices paid faster than the time it takes to pay to suppliers.

Company will know what the average ad hoc basis from their

own invoices. By providing company contractual terms,

company liabilities are protected in case of any potential

legal dispute in the future.

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CONCLUSION

After study the components of working capital

management system of ADITYA. It is found that the

company has need good and effective policies and its

performance could be better. But company was did good

even in this bad recession situation company has

managed to post good reasonable profit. Company iscompeting well at the domestic level and it is among the

low cost producers of product Vacuum Flask, Glassware,

Thermoware only because of its proper management of

finance, specially the short term finance known as the

working capital.

Company need to more focus on Inventory Management

and Credit Control policies to make those more effectiveand systematic manner.

The company is a matured one and it has contributed well

in the countries growth and development and will also

continue to perform and contribute to the whole nation.

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BIBLIOGRAPHY

Financial Management.I.M. Pandey

Annual Report of ADITYA.

Auditors Report, Directors Report and Investors

Report of ADITYA.

Fund Flow & Cash Flow statements.

Personal interviews with management peoples of the

company.

www.google.co.in

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Guide Resume

1. Mr. Deepak Rastogi,

Mr. Deepak Rastogi has great Professional Experience and he is a MBA

from ICFAI University and presently working with Aditya Promoters Ltd.

last 2 Year as Manager Finance & Accounts, and previous assignment

he done managerial activity in Alcome Perfumes & Cosmetic Pvt. Ltd,

Noida for 7 Years. He has potential of develop a New Industry & Project

Financing & Planning.

2. Mr. Surendra Khemka,

Mr. Surendra Kumar Khemka is a Executive Director Finance &

Accounts of the Organization. He has also member of Board of

Directors of Group Companies. He is Post Graduate with Commerce

from Delhi University. He is diversified Businessman and also having

vast experience in Finance & Accounts.

Other Directorships :

1. Aditya Infotech Ltd.

2. News Print Sales Corporation

3. Aditya Info Solution

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4. INT Info Solution

Signature of the Student

Ajeet Kumar

Date :

PREFACE

To start any business, First of all we need finance and the success

of that business entirely depends on the proper management of

day-to-day finance and the management of this short-term capital

or finance of the business is called Working capital Management.

Working Capital is the money used to pay for the everyday

trading activities carried out by the business - stationery needs,

staff salaries and wages, rent, energy bills, stocks, payments for

supplies and so on.

I have tried to put my best effort to complete this task on the

basis of skill that I have achieved during the last one year study in

the institute.

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I have tried to put my maximum effort to get the accurate

statistical data. However I would appreciate if any mistakes are

brought to my by the reader.

project report wc 2010 verson ii

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