project wc

ABHISHEK INDUSTRIES LTD.

DSDSSS

2010

Submitted in the partial fulfillment of the degree of MBA

SUBMITTED TO:

MR.KAVISH DHANDA

BUSINESS HEAD

(CHEMICAL AND ENERGY)

2010

PREPARED BY:

SHIFALI LOI L-

2009-BS-25-MBA PUNJAB

AGRICULTURAL UNIVERSITY

PROJECT REPORT ON MANAGEMENT OF WORKING CAPITAL IN PAPER

88

CERTIFICATE

Certified that Miss Shifali Loi, an MBA student , Department of Business Management, Punjab Agricultural University, Ludhiana, was placed in this organization:___________________________________________ for summer training for a period of six weeks during June-July,2010, in partial fulfillment of the requirement of her MBA degree of the university. She has been assigned project entitled:-________________________________________________________

In our opinion, her work has been satisfactory.

Signature

Name and Designation of Training Incharge: __________________________________________________

88

ACKNOWLEDGEMENT

“Everything is difficult before it becomes easy. This transition comes through because of certain people who by their pioneering efforts leave their indelible mark on others.”

I take this opportunity to express my profound sense of gratitude and respect all those who helped me throughout the duration of this project.I would specially like to thank Mr. Rajinder Gupta, Managing Director, Abhishek Ind. Ltd. for giving me opportunity to complete my project in this esteemed organisation. I owe special & sincerest thanks to my guide Mr. Kavish Dhanda and Mr. Dinesh Garg for his innovative ideas, reflective encouragement and guidance throughout my training period.

I would like to thank Mr. Ajay, Mr. Akhil, Mr. Manoranjan for sharing their knowledge and information required for collecting data.

This assignment of computing and analyzing the working capital for Paper Division of Abhishek Industries Ltd. Has helped me to develop an understanding about the concepts of corporate finance. It helped me understand how important it is for a firm to maintain its cash flows in the short-term in order to sustain itself in the long terms.

Finally I would like to thank all concerned in the company who helped me from time to time in understanding the overall working of Paper Division.

88

EXECUTIVE SUMMARY

The objective of the project was to study the working capital for Paper Division of the Abhishek Industries Ltd.

Cash-to-cash Cycle indicates the duration of time it takes the firm to convert its activities requiring cash into cash returns. It is vital because the cycle represents the number of days a firm’s cash remains tied up within the operations of the business. Free Cash Flow can be defined as the cash flow available to a company after financing all worthwhile investments; defined as operating income after tax plus depreciation less investment.

Cash to cash cycle tracks how efficiently a company uses its working capital by looking at inventory and cash flow movement in and out of the business. It indicates the duration of time it takes the firm to convert its activities requiring cash into cash returns. It is vital because the cycle represents the number of days a firm’s cash remains tied up within the operations of the business

88

TABLE OF CONTENTS

1. COMPANY PROFILE……………………………………………………..6

a) Introduction………………………………………………………..6b) Ratios – Financial, Liquidity, Profitability………………………14

2. WORKING CAPITAL MANAGEMENT AND CASH TO CASH CYCLE…………………………………………………………………….19

a) Cash Flow Cycle of the firm……………………………………..19b) Working capital Management……………………………………21c) Cash - To - Cycle………………………………………………..24d) OBJECTIVES of the project………………………………….....28

3. RESEARCH METHODOLOGY………………………………………...29a) Research

Design………………………………………………….29b) Sampling Design…………………………………………………29c) Data Collection…………………………………………………..29

4. MANUFACTURING PROCESS OF PAPER………………………....30

5. METHODOLOGY FOR COMPUTATION OF ACTUAL CASH-TO-CASH CYCLE…………………………………………………………….37

a) Methodology followed…………………………………………...37b) Key Terms and Formulae Used…..………………………………38c) Computation of Cash-to-Cash Cycle…..…………………………

39

6. IDEAL CASH- TO- CASH CYCLE…………………………………….43a) General Observations…………………………………………….43b) Ideal Cash - To- Cash Cycle of Paper………………………......44

ANNEXURES

BIBLIOGRAPHY

88

COMPANY PROFILE

Incorporated in 1990, the company was founded by Mr. Rajinder Gupta (MD of company) with an installation capacity of 17,280 spindles. Trident is an entity that believed in making difference. The group ventured into the high margin terry towels business with 54 looms and paper segment with capacity of 50,000 TPD in 1996 which were ably supported by captive power plant and soda recovery plant to maintain the self sustainability in long run. Presently company is achieving a compound annual growth rate of 30%.

Based on export performance the co. has been recognized as star trading house by ministry of commerce and industry in 2009.

Corporate Philosophy:-

Vision :- inspired by challenge we will add value to life and together prosper globally.

Values :-to provide customer satisfaction through teamwork, based on honesty and integrity for continuous growth and development.

Acquisitions :- Abhishek Spinfab Corporation Ltd. having facilities of processing of 4767 TPA of cotton yarn and manufacturing of 3032 TPA of terry towels products was amalgamated across company high court order dated may 13, 1999. Varinder Agro Chemicals Ltd. having facilities of

88

producing 34,250 MTs of paper and 1,00,000 MTs of Sulphuric Acid was amalgamated with the company with high court order dated January 03, 2002.

Businesses and segments

TEXTILE PAPER CHEMICALS ENERGY

The company operates in three main business segments yarn, terry towel, paper and chemicals. The group’s mainly deals in textile and paper. Textile contributes nearly 75% of total business revenue, whereas paper and chemical segment contribute the remaining percentage.

Within textiles, terry towel and a value added segment is the prime business followed by yarn.

YARN 2,24,448 SPINDLES

YARN PROCESING

6,825 TPA

OPEN END YARN

1,920 ROTORS

TERRY TOWEL

374 LOOMS

WRITING &PRINTING PAPER

1,75,000 TPA

SULPHURIC ACID

1,00,000 TPA

CO-GENERATION OF POWER (ENERGY)

50 MW

88

A) TERRY TOWEL DIVISION

A value added segment having a continuous growth momentum, the terry towel business of the company is the prime source of export earnings and international recognition to the company.

Presently, the division operates with an installed capacity of 374 looms of towels and 6825 TPA of processed yarn. Ultra-modern German, Swiss and Italian technology has been adopted in order to provide consumers the products that they cherish.

AIL supplies its toweling products to world’s biggest and most reputed companies and retail chain stores like Walmart, linen & things, JC penny, target, Goezze, sears holding company, Primark, new Zealand merchants, American pacific, etc. among the top 20 retailers of us, AIL has business relationship with at-least 11 of them.

The company has a major presence in the mid and high segment of terry towel market, with an impressive product profile as mentioned below:

Terry towel and toweling products:Piece Dyed Dobbies, Yarn Dyed Single & Double Jacquards, Uni-dyed Jacquards, Yarn Dyed Stripes, Weft Inserts & Checks, Terry & Velour Finish, Beach Towels, Bath Sheets, Bath Towels, Hand Towels, Guest Towels, Face fringes, Bath Mats and Kitchen Towels.

Damask Flat Fabrics:Dobby & Jacquard is suitable for kitchen & table linen.

88

B) YARN DIVISION

The yarn division of the company manufactures combed, carded yarn, polyester cotton and PVA yarn. Besides, catering to the captive consumption of terry towel division, the yarn division has developed a significant presence in the export market with its quality products.

Currently, AIL has 2,24,488 spindles producing value added yarn such as yarn made from Egyptian cotton, PVA yarn and combed yarn. AIL, has also upgraded its existing spinning facilities through automation and increasing the value adding processes. Besides, the company has installed 1920 rotors to produce open end yarn for the captive consumption of terry towel division as well as independent market sale. The product range includes:

100% cotton (grey, dyed and mercerized) yarn Single and TFO doubled yarn. Hosiery and weaving (combed and carded) Open end yarn for weaving and hosiery. Ring spun and OE Slub yarn. Compact yarn. Contamination controlled yarns. Stretch yarns- core spun Lycra. Yarn from imported premium cotton varieties: Pima, Giza,

Australian cotton, MCU- 5 Zero twist PVA - Hydro and hollow yarns Doubled, dyed, gassed and mercerized cotton yarns Cotton bamboo, cotton modal, cotton viscose and other blends. Certified organic cotton yarns Yarns from special fiber: Cupro, corn, silk, banana and soya.

88

C) PAPER AND CHEMICAL DIVISION

Rated as one of the lowest cost producer of paper in the country using agro residue, AIL presently operates in mid segment of the paper market with an installed capacity of 1,75,000 TPA. The paper and chemical division specializes in manufacturing two end products i.e., paper and Sulphuric acid. The division also produces by-products, which are co-generation of power and caustic recovery. The low cost power and steam produced are supplied to the terry towel plant which contributes significantly to the bottom line of the company. This division produces the following types of products:

Writing and printing paper gradesCopier paperEco printIvory whiteSuper white MaplithoCrystalline, Silverline and Goldline MaplithoBible printingOffset printingCream woveDeluxe super printTrident base paper Watermark paperSulphuric acid

88

By Products:- Caustic Soda

The company has ambitious plans to move up in the value chain by producing coated wood free SS variety of paper and move up in high growth, high marign value added segment.

C) Company Initiatives : - The Company strives in the direction of success by committing itself to continuous improvement apart from growth and expansion.

1)Innovative approaches Innovation is the key to success in today’s competitive world. At trident, we recognize this fact and innovation is an integral part of our very being. We have done the strategy mapping of the organization.

2)Business excellence

In its pursuit for excellence, trident group has successfully implemented viable vision, six sigma and lean management to make itself a world class organization.

3)Balance score card After the strategy mapping, we are effectively applying the balance score card for four perspectives mentioned below, and the business growth is also measured through these parameters.

Financial perspectiveCustomer perspectiveInternal perspectiveLearning and growth perspective

D)How the company differs from its competitors

1)Yarn Abhishek is one of the most modern and hi-tech units existing today.An edge that our mill has over others is its proximity to RM (raw material)

base i.e. PHR (the cotton belt starts from Barnala onwards and we get the best-suited cotton in our range i.e. ne 12s to 30s at relatively m low prices.

Customer base vis-à-vis our production capacity is one of our main strengths. We have developed market in all parts of India and abroad (especially Delhi and Ludhiana which are best suited for us). We also nurture our own terry towel plant.

88

Facilities for producing open yard for captive consumption as well independent market sale.

Today other than 100 % cotton yard, we also manufacture Slub Yarn, Dye Fast, Cotton Yard, PVA Yarn, Acrylic Yarn, Hollow Yarn and Zero Twist Yarn to cater to varied requirements and tastes of our customers.

2) Paper World’s largest wheat straw based paper manufacturer. First agro based paper manufacturer to adopt elemental chlorine free

(ECF) technology in India. Superior quality paper is produced despite the use of agro based raw materials.

Timely delivery of order at the customer destination. Excellent coordination of internal activities resulting in better service to

the customer. Customer oriented approach leading to zero repeatability of complaints. As a result of customer’s confidence in the company, we govern the

payment terms and conditions. New product development has been a constant Endeavour of our division. Conversion of energy through state-of-the art, imported machinery. One of the India’s lowest cost paper producers. By-products-co-generation of power and caustic recovery. Research and Development initiatives being carried on throughout the

year to ensure consistent quality of all products.

3) Sulphuric Acid Location advantageConsistent quality and purity

4) Terry towel Vertically integrated plant having facilities to manufacture yarn to

finished product under one roof. State-of-the art technology, machineries and know-how from the best

international technology suppliers. Largest production capacity in India & amongst first five plants in the

world. Proven Track Record. Prestigious & well-known global customer base. Wide variety of towel to cater every segment.

88

Better & Cost effective raw material due to backward integration.

Specialist in Embroidery & Embellished Terry Towel.

VARIOUS TYPES OF RAW MATERIAL AVAILABLE- IN -GENERAL

Hard wood – Eucalyptus, Subabul, Casuarina Soft wood – Pine, Spruce Bamboo Non wood – Bagasse, rice straw, wheat straw, other grasses Recycled fibre Agro residue – wheat straw, bagasse

Abhishek Paper is using Hard wood ( Eucalyptus, Polpar ), Bamboo and Wheat Straw.

RAW MATERIAL AT ABHISHEK

225 TPD Wheat Straw Fiber line with ECF Technology.100 TPD Hard wood Fiber lineImported Hard wood & Soft wood pulpAddictives from reputed Vendors like Ivax, Ciba, Clariant & Arjun etc.

WHAT DOES A RAW MATERIAL CONTAIN

CelluloseHemi CelluloseLigninOther Extractives, Raisins etc.

PULP MILL OBJECTIVES

Remove the Lignin from the raw materialAvoid degradation of cellulose and maintain the inherent strength of the

pulp

88

To achieve the same while maintaining the yield of the raw material ABHISHEK INDUSTRIES LTD

FINANCIAL RATIOS

2010 2009 2008 2007LIQUIDITY RATIOS

1) Current assets 716.54

572.22 502.90 471.70

Current liabilities 920.81

884.22 580.22 418.85

Current Ratio 0.78 0.65 0.87 1.13

NOTE- We have assumed all the current liabilities as shown in Balance sheet as payable for routine payments and not for project payments.

2010 2009 2008 20072) Sales 1,803.36 1,398.05 1,048.67

Ratios

Current Ratio= Current Liabilities/Current Liabilities

INTERPRETATION- Current ratio represents current asets to current libilties which tells that how well the firm is able to pay its current liabities out of current assets.High current raio represents good liquidity position of the firm.In the case of Abhishek industries ratio of CA to CL has decreased from 2007 to 2008 and further 2007 to 2009 and further got improved in 2010.So the liquidity position of the firm is not so good.

88

816.59 Avg Debtors 76.47 49.43 34.28 32.95 Collection period 15.48 12.91 11.93 14.73

Collection Period= Sales/Avg. Debtors*365

INTERPRETATION - The value of debtors turnover was high in 2008 which implies the efficient management of debtors or more liquid are the debtors. But the debtors turnover ratio was decreasing in 2009 and 2010.The DTR is not so low but is low as compared to 2008. Collection period represents the number of days for which a firm has to wait before its receivables are converted into cash. Shorter the average collection period, the better the quality of debtors. The collection period of company is good in 2008 as compared to 2007 as it is short in 2008 .But in 2009 and 2010, the collection period was long. So it implies that company doesn’t get quick payments.

2010 2009 2008 20073) Purchases 1002.33 786.62 590.9 419.87

Avg Creditors 153.39 143.88 92.25 57.115Payment Period 55.86 66.76 56.98 49.65

Payment Period=Purchases/Avg. Creditors*365

88

2010 2009 2008 2007

4) Net Sales 1803.36 1398.06 1048.67 816.59

Avg Inventory 304.825 105.485 229.7 215.975

ITR 5.92

13.25

4.57 3.78

ITR= Net Sales/Avg. Inventory

INTERPRETATION - Inventory Turnover Ratio of the company was high in 2009 as compared to all other years, The ITR was low in year 2007 as compared to all other years which implies that inventory has over investment and the quality of the goods was poor which leads to low profits as compared to total investments.

2010 2009 2008 20075) Avg stock of RM

180.85 118.96

140.73

136.45

RM cons per day 2.50

1.95

1.46

1.02

RM cons period 72.34

61.13

96.66

134.43

6) Avg stock of WIP

INTERPRETATION -CTR represents the average number of days taken by a firm to pay its creditors. The lower the ratio the better is the liquidity position of the firm and the higher the ratio, less liquid is the position of the firm. The liquidity position of

the company was good in 2009 as compared to other years. The payment period of the company is high in 2009 which

implies that company is enjoying benefits from creditors but it can be bad also as lesser discount facilities will be

available and higher prices have to be paid to creditors.

88

43.50 33.07 33.86 33.14 TC OF prod per day

4.01 3.13

2.50

1.83

WIP conv Period 10.85

10.56

13.54

18.11

7) Avg stock of FG 51.84

50.89

47.42

39.67

Net sales per day 4.94

3.83

2.87

2.24

FG conv period 10.49

13.29

16.50

17.73

PROFITABILITY RATIOS

2010 2009 2008 20071 EBIDTA 355.99 260.53 154.00 179.41

Sales 1,803.36 1,398.10 1,048.67 816.59 EBIDTA Ratio 19.74% 18.63% 14.69% 21.97%

INTERPRETATION - A good EBIDTA ratio is one which is enough to cover the operating expenses and to provide for fixed charges. Sothe EBIDTA ratio of the company is quite good.

2010 2009 2008

2007

2 Operating Profit 63.34 61.16 13.6 56.92Sales 1803.36 1398.1 1048.67 816.59Operating Profit Ratio 4% 4% 1% 7%

INTERPRETATION - A good Operating Profit ratio is one which is enough to cover all the expenses of the company. So the operating profit ratio of the company is quite good.

88

2010

2009

2008

2007

3 PBT 93.04 -82.79 48.11 61.41

sales 1803.36 1398.1 1048.67 816.59

PBT Ratio 5% -6% 5% 8%

INTERPRETATION - PBT ratio is obtained after adjusting all expenses. It tells that the earnings of the company have decreased from 2007 to 2010 and it is negative also in 2009.

2010

2009

2008

2007

4 PAT 56.46

(53.04)

39.95 40.94

sales 1803.36 1398.1 1048.67 816.59

PAT Ratio 3% -4% 4% 5%

INTERPRETATION - This ratio tells the firm's ability to face adverse economic conditions such as price competition low demand etc. The PAT ratio of the company has also decreased from2007 to 2010 and it is negative in year 2009.

LEVERAGE RATIOS 2010

2009 2008 2007

1 Debt 1178.49 1150.62 1260.91 759.86Equity 571.18 479.24 509.7 466.76Debt Equity ratio 2.06 2.40 2.47 1.63

INTERPRETATION - Debt Equity is calculated to measure the extent to which debt financing has been used in business. It basically gives an idea about the cushion available to the outsiders upon liquidation of firm. The ratio of the company tells that debt is more than equity as the company borrows more money from outsiders.

CHAPTER 2

88

THEORY OF CASH-TO-CASH CYCLE & WORKING CAPITA L

This Chapter covers the theory of Cash-to-cash cycle. This chapter is divided into 6 sections. First section explains what are cash inflows and cash outflows in an organization. It also reflects the importance of Working Capital Management. It explains the reason as to why a firm holds cash instead of investing. It also covers how Working Capital Management can be analysed using Cash-to-Cash Cycle. Section 3 and explains the theory of Cash-to-cash cycle and as well as their importance from organization point of view. In the last section objectives for the project are formulized.

2.1CASH FLOW CYCLE OF THE FIRM

“The length of time between purchase of raw material and the collection of accounts receivable generated in the sale of final

product is called Cash Conversion or Cash to Cash Cycle”.

Understanding the cash flow cycle of the business firm is critical to successful financial management. The term liquidity is often used to describe the ability to pay bills when they are due. Liquid Assets include cash and a few other things that can be sold, (not inventory) to raise cash immediately. Fixed Assets are buildings, plant and equipment, short term assets are inventory and accounts receivable are routinely converted to cash as part of the cycle.

Cash to cash cycle tracks how efficiently a company uses its working capital by looking at inventory and cash flow movement in and out of the business. As all sales do not convert into cash immediately, there is always an operating cycle involved in the conversion of sales into cash. A firm requires long gestation periods to recover the initial investment in fixed assets such as plant & machinery or land & building. On the contrary, investment in current assets is turned over many times in a year and is realized during the firms operating cycle, which is usually less than a year.

Thus operating cycle starts from ash, finishes at cash and hen again restarts from cash. Need for working capital depends upon period of operating cycle. Greater the period, more will be the need for working capital. Period of

88

operating cycle in a manufacturing concern is greater than the period of operating cycle in a trading concern because in trading units, cash is converted directly into finished goods.

Firms have to keep adequate stock of raw material to avoid risk of non-availability of raw materials. Similarly, concerns must have adequate stock of finished goods to meet the demand in market on continuous basis and to avoid being out of stock. Concerns also have to sell finished goods on credit due to competition, which necessitates the money tied up in debtors and bill receivables. In addition to all these, organizations have to keep ready cash to pay the manufacturing expenses etc. and to meet contingencies.

LENGTH OF CASH TO CASH CYCLE

Number of day’s inventory is held by the company in the form of raw materials, work in process as well as final product.

Days of sales outstanding or number of days it takes for a customer to pay.

Accounts Payable measured in number of days relating to bills outstanding.

88

Cash to cash cycle is an important analysis tool that allows the credit analyst to determine more easily why and when the business needs more cash to operate, and when and how will it be able to repay the cash. Managing asset conversion in favor of the business owner is the ultimate goal of transport logistics and

technology such as just in time inventory.

2.2WORKING CAPITAL MANAGEMENT

Working Capital Management involves the relationship between a firm’s short-term assets and its short term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. Net Working Capital is defined as difference between Current Assets and Current Liabilities.

This is of critical importance to a firm. Managers spend about 70% managing for the short-term. This makes sense. Every day companies take in money, write receipts, balance checkbooks, record receivable records, manage inventory and the like. Also, short-term management

88

should not be discounted. As the old saying goes, “If you can make it in the short term long enough, you don’t need to worry about the long term.” Cash Budgets may be utilized in managing working capital. For better understanding of the Working Capital, it is important to know the reasons for which firms hold cash.

FACTORS DETERMINING WORKING CAPITAL

1. Nature of the business

2. Nature of the industry

3. Cash requirements

4. Manufacturing time

5. Volume of sales

6. Credit control

7. Seasonal operations

8. Cash reserves

9. Operational efficiency

10.Attitude towards risk

11.Inventory turnover

12.Business turnover

13. Repayment ability

DISADVANTAGES OF REDUNDANT/EXCESS WORKING CAPITAL

1. Idle funds, non-profitable for business, poor ROI2. Unnecessary purchase and accumulation of inventories over required level.3. Excessive debtors and defective credit policy, higher incidences of bad

debts.4. Overall inefficiency in the organization.

5. Credit worthiness suffers.6. Due to low rate of return on investments, market value of shares may fall.

88

DISADVANTAGES OF INADEQUATE/ SHORT WORKING CAPITAL

1. Inability to payoff short term liabilities in time.2. Economies of scale not possible.3. Difficult to exploit favorable market situations.4. Day-to-day liquidity worsens.5. ROA/ROI falls sharply.

The above analysis shows that both excess as well as short working capital situations are bad for any business. Every business concern should have adequate working capital to run its business operations.

However out of the two, inadequacy of working capital is more dangerous from the point of view of the firm.

WHY FIRMS HOLD CASH

The finance profession recognizes the three primary reasons offered by economist John Maynard Keynes to explain why firms hold cash. The three reasons are for purpose of speculation, for the purpose of precaution, and for the purpose of making transactions. All three of these reasons stem from the need for companies to possess liquidity.

The three reasons are given below:Speculation: Economist Keynes described this reason for holding

cash as creating the ability for a firm to take advantage of special opportunities that if acted upon quickly will favour the firm. An example of this would be purchasing extra inventory at a discount that is greater than the carrying costs of holding the inventory.

Precaution: Holding cash as a precaution serves as an emergency fund for a firm. If expected cash inflows are not received as expected cash held on a precautionary basis could be used to satisfy short-term obligations that the cash inflow may have been bench marked for.

88

Transaction: Firms are in existence to create products or provide services/ The providing of services and creating of products results in the need for cash inflows and outflows. Firms hold cash in order to satisfy the cash inflow and cash outflow needs that they have.

Some cycles and ratios that aid in managing Working Capital are:

Cash-to-Cash Cycle: Time between paying for inventory and collecting on receivables.

Operating Cycle: Time between ordering materials and collecting cash from receivables.

Debtors Cycle: Measures the average time between when a product is sold on credit and cash is received. Average collection period equals accounts receivables divided average days sales. Averaage debtors cycle is net sales divided by 365.

Creditors Cycle: Accounts payable divided by cost of goods sold per day. Cost of goods sold per day is cost of goods sold divided by 365.

Inventory Cycle: Average cost of goods sold per day x inventory conversion period.

2.3 CASH-TO-CASH CYCLE

Cash-to-cash Cycle or Cash conversion Cycle indicates how cash is moving throughout the company in terms of duration. In essence, this ratio is vital because the cycle represents the number of days a firm’s cash remains tied up within the operations of the business. The Cash Conversion Cycle is a derived ratio. It can, however, be constructed using three ratios that compose the calculation of the cash conversion cycle by taking a little time to look at a firm’s inventory, receivables, and payables. It can be derived from the three ratios as shown below:

Cash-to-Cash Cycle = Inventory Cycle + Debtor Cycle - Creditor Cycle

The cash conversion cycle, or Cash-to-Cash Cycle, simply indicates the duration of time it takes to convert its activities requiring cash into cash returns. As highlighted earlier, this ratio is vital since it represents the number of days a

88

firm’s cash is occupied with its operations. Naturally, a firm wants this cycle to be as short as possible. Therefore, a downward trend in this cycle is a positive signal while an upward trend is a negative signal. Why is this so? When the cash conversion cycle shortens, cash becomes free for other uses such as investing in new capital, spending on equipment and infrastructure, as well as preparing for possible share buy-backs down the road. On the flipside, when the cash conversion cycle lengthens, cash remains tied up in the firm’s core operations, leaving little leeway for other uses of this cash flow.

For calculating Cash-To-Cash Cycles, Inventory Cycle, Debtors Cycle, and Creditors cycle need to be calculated. They are calculated as below:

Inventory Cycle: Inventory Cycle consists of four different cycles viz. Raw Material Cycle, Work-in-Progress Cycle, Finished Goods Cycle and Stores Cycle. They are calculated separately and added to get the Inventory Cycle. Each cycle is calculated as follows:

Raw Material Cycle: It represents the no. of days in which the raw material stock needs to be replenished. It is calculated as:

Raw Material Cycle = Raw Material Inventory * 365 Raw Material Consumed

oWork-in-Progress ( WIP) Cycle: It represents the no. of days in which the Work-in-Progress is converted to Finished Goods. It is calculated as:

WIP Cycle = WIP Inventory * 365 Cost of Production till WIP

oFinished Goods Cycle: It represents the no. of days Finished Goods are stocked before they are dispatched to the customer. It is calculated as:

Finished Goods Cycle = Finished Goods Inventory * 365 Cost of Goods Sold

o Stores Cycles: It represents the no. of days in which the stores needs to be replenished. It is calculated as:

88

Stores Cycle = Stores Inventory *365 Stores Consumed

So the Inventory Cycle can be given by:

Inventory Cycle = Raw Material + WIP Cycle + Finished Goods Cycle + Stores Cycle

Debtor Cycle: Also known as Average Collection Period, represents the average time required to collect receivables i.e from the time the customer is billed (ideally, when goods are shipped or services provided) until that amount receivable becomes cash. It is calculated as:

Debtor Cycle = Accounts Receivable * 365 Annual Net Sales

Creditor Cycle: It represents the days the creditors of the company give credit to the company. It is calculated as:

Creditor Cycle = Accounts Payable * 365 Net Credit Purchases0

Finally Cash- To- Cash Cycle is given by:

Cash-To-Cash Cycle = Inventory Cycle + Debtors Cycle – Creditor Cycle

As can be see when Inventory Cycle and/or Debtor Cycle increases Cash-to-Cash Cycle also increases. While Cash-to-Cash Cycle decreases, when Inventory Cycle and/or Debtors Cycle decreases. Vice versa is true in case of Creditor Cycle. So in order to decrease Cash-to-Cash Cycle companies should focus on collecting receivables as soon as possible and delay payments as far as possible. But this is not possible beyond a certain extent. So the area on which a company has to concentrate is reducing the Inventory Cycle. Reducing Inventory Cycle is easier said than done. The main purpose of keeping inventory is to avoid stock out condition. If inventory is reduced stock out may occur, which may result in loss of business as well as loss of reputation. If the inventory is increased the Cash-to-Cash Cycle, in turn affecting the profitability and free cash flow of the company. Hence proper monitoring of the Cash-to-Cash Cycle is of utmost importance from a company’s point of view.

88

TIME & MONEY CONCEPT IN CASH TO CASH CYCLE

When it comes to managing working capital, each component of the cycle (namely inventory, receivables and payables) has two dimensions TIME and MONEY. As a result, we can get money to move faster around the cycle or reduce the amount of money tied up. Then business will generate more cash or it will need to borrow less money to fund working capital.

If you Then..

Collect receivables (debtors) faster

You release cash from the cycle

Collect receivables(debtors) slower

Your receivables soak up cash.

Get better credit (in terms of duration/amount) from suppliers

You increase your cash resources

Shift inventory faster You free up cash

Move inventory slower You consume more cash

Cash to Cash Cycle of Paper Division of Abhishek Industries

YEARS CASH TO CASH CYCLE2007 31.022008 38.992009 (5.45)2010 (35.36)

88

2.4 OBJECTIVES OF THE PROJECT

Management of Working Capital Compute Cash-to-Cash Cycle of Paper Division of Abhishek

Industries

CHAPTER 3

88

RESEARCH METHODOLOGY

3.1 Research DesignFirst theoretical background was done as regards to Cash-to-cash Cycle and Working Capital. To understand the theoretical concepts thoroughly Cash-to-Cash Cycle was calculated for Paper department of Abhishek Industries Ltd. The data taken for this purpose was from the Quarterly Report of Abhishek Industries for April-June 2010. Since the scope of the project was limited to only Paper Division of Abhishek Industries Ltd. the manufacturing process followed in the division was studied.

Time was spent on understanding of the manufacturing process for paper dvision. Also data was collected regarding the theoretical lead times, average consumption and average inventory stock for various raw material used in Paper. The above information was gathered from the people concerned in Paper Manufacturing.

After having a sound background about the processes followed in the Paper Division, Research Design was prepared to compute Ideal and Actual Cash-to-Cash Cycle.

3.2 Sampling DesignActual inventory data for various raw materials, WIP, Finished Goods & Stores was taken. The data was collected for a 3 month period viz. April, May and June 2010.

3.3 Data Collection The data was taken from Ledgers and MIS. On the basis of data collected Cash-to-Cash Cycle for the Paper plant was calculated for the quarter.

CHAPTER 4

88

Manufacturing Process of paper

Recovery 1&2

88

PULP PROCESS :

RECOVERY PROCESS:

88

PAPER PROCESS :

Raw Material Yard : Wheat Straw/ Bagasse/ Sarkanda is bought from farmers? Traders. The incoming raw material it tested for moisture and amount of dust.

De – duster : Wheat straw and bagasse are processed through the de – duster. The bagasse pith is sent to the boiler feed ( mixed with rice husk ). The dust is utilized for internal land filling/ internal disposed off.

Wet washing : Wheat Straw is wet washed and sand is removed by gravity settling. The required water comes from recovery. A contractor disposes off the removed sand. There is a screw press to squeeze out the excess water. After the screw press the moisture of wet washed straw is tested.

Digesters : There are 3 kinds of digesters i.e Stationery, Continuous and Batch. Here the raw material is cooked to separate the fibers (cellulose). The fibers are cemented to each other by Lignin (an organic compound).The raw material is mixed with NAOH (White Liquor) which comes from Soda Recovery section, in required proportions i.e 13% of the raw material. The White liquor dissolves this

88

compound and becomes black in appearance, hence called Black Liquor. Some steam is opened to facilitate packing of the material where the temperature of the material is raised to 175’ C by medium pressure steam at 7 – 7.25 %. It takes around 5 – 6 hrs in batch digester whereas 20 – 21 min in continuous digester. Here the Kappa no. to be maintained is 13 – 15. Kappa no. denotes the amount of lignin in the mixture.

Blow Tank : There are 2 such units of 100 m3 each. The steam that is flashed during the blowing operation is condensed in a heat recovery unit (condenser) and the pulp is stored for further processing. (It also acts as the storage of pulp, as we can store roughly 6 digester worth of pulp for further processing in 2 such units). There are sample points also in the blowing line, and in case the blow is not satisfactory in terms of cooking, i.e., there is a major uncooked part, then the blow is stopped and the digester is further steamed.

Stone catcher: There are 2 such equipments meant for the removal of foreign objects ( stones, iron pieces etc) which might have come thru while loading operations of raw materials. The thick pulp in blow tank is diluted with black liquor.

Washing and Screening:-

Riffler: Only one such equipment. Here the sand is further removed by gravity settling. The pulp slurry is pumped to vibratory knitters screen located at the washer floor.

Vibratory Knotters: There are 3 in numbers. The pulp, which is pumped from the riffler, contains uncooked part is removed by the screens of the knitters and again sent back to the digesters for re-cooking.

Brown Stock Washers (BSW): We have 5 washers. In brown stock washers, the back liquor is removed in washing. It is a counter current operation. The pulp is washed in all 5 washers and black liquor is removed and directly sent to the soda recovery. (For its conversion into white liquor again) and also the pulp is screened that is the uncooked part of pulp is removed i.e, whose kappa no. is more than 13 to 15 is sent back to the digester for cooking. So the screened pulp is moved ahead.

Un-bleach Pulp High Density Storage Tower no.1: Here the final washed and screened pulp is stored for bleaching. The volume of this tower is 260m3.

88

Whenever some work has to be done at the backend meaning BSW’S or refiners\ centri-cleaners, then this tower is filled and the back stages are attended for any breakdown/ preventive maintenance. This tower keeps on feeding the bleaching stage. Dilution in this tower takes place.

Bleaching Process:-

Chest no. 1: Here the pulp from HDT 1 with chlorine backwater is diluted with the chlorine backwater; it is a post-equalizing chest. By diluting it with chlorine backwater, we utilize the residual chlorine in the back water, thereby reducing the pollution load.

Chlorine Tower: Storage capacity: 80m3. The diluted pulp slurry is pumped to the bottom of the chlorine tower and there chlorine gas is injected into the pulp. (The chlorine gas comes in chlorine cylinders, each having around 900 kgs to 875 kgs of liquefied chlorine gas, the gas is then vaporized using a steam heated vaporizer and injected at the top, with pulp slurry) the chlorine-injected pulp is then flows down to the bottom of tower and enters the tower. The tower has a retention time of 30-45 mins and then the diluted pulp over flows to the chlorine washer.

Chlorine Washers: Here the reaction products of the chlorine stage are removed. But the major portions of the products are not removed because they are not soluble in water. Hence they are made soluble in the next extraction stage or alkali stage, in which we add pure NaOH, bought from outside and diluted in the caustic preparation area. The test done are: residual chlorine at inlet in ppm, outlet kappa no. amount of chlorine used depends upon the quality of the pulp. Chlorinated pulp is pale yellow in colour.

Caustic Day Tank: Here the caustic, which is utilized in the extraction stage is stored. The capacity of this tank is 15 m3. This is then pumped to the alkali stage. The caustic strength is tested in gpl.

Note:- It should be noted that in all bleach washers spray showers used for washing pulp, the paper machine back water is utilized. And in case of BSW’s only in the last stage i.e. BSW no. 3 hot washers frpm sap along with raw water is used.(Temp of around 60-64oc

88

Alkali Tower: Storage capacity: 70m3. The pulp from the chlorine washer stage is mixed with NaOH and enters the alkali tower and flows down. Here the pulp gets the retention time of 1 ¼ hours and is then pumped to the alkali washer to remove the reaction products. Here the ph & temperature of the pulp is tested.

Alkali Washers: The pulp is washed with the machine backwater and then it is mixed with calcium Hypo-chlorite solution that is prepared in-house. The outlet kappa no. of alkali washer is tested. Sometimes, the brightness of the outlet pulp is also tested when we add hydrogen peroxide, a special brightening agent, at outlet of chlorine washer.

Hypo-plant: here calcium hypochlorite is prepared by passing chlorine gas thru slaked lime. Mixing it with water in a rotary drum slaker slakes lime. The white liquid is also called milk of lime. This is taken into a reactor and chlorine is passed and it converts the free calcium hypochloride. The mud which is also there in the hypo is removed in 2 clarifiers, which are in series. The clear liquid is pumped in a hypo-day tank, which acts as a storage. From here the liquid is pumped to the washers floor. The hypo strength is tested in gpl as active chlorine, free lime is also being tested.

Hypo Day Tank: Here the hypo from the hypo plant is stored and it has the storage capacity of 50m3. The liquid is pumped from here to washer floor.

Centri – cleaners : These further remove the sand. We have 3 sets of them called the primary, secondary and tertiary cleaners. The reject of one becomes the feed of another and the reject of tertiary is finally drained. The rejects from the tertiary cleaners are drained and collected in a riffler, which is disposed off by the contractor.

88

Hypo Tower no. 1 : Storage capacity: 180m3. Here the pulp brightening takes place, Calcium Hypochlorite being the bleaching agent. The pulp is then pumped to hypo washer no. 1 to remove the reaction products.

Hypo washer no. 1 : The reacted pulp from the first hypo stage is pumped to this washer to remove the reaction products. Then further hypo is added and the pulp enters the second hypo stage. The tests done here are : residual chlorine at inlet in ppm, brightness of pulp and hand sheets to observe specks level.

Hypo tower no. 2 : Storage Capacity : 180 m3 This is exactly the same as Hypo tower no.1, having the same volumetric capacity and same reaction conditions.

Vibratory Screens : Here the foreign particles, like iron chips, pieces of stone etc are removed here.

Hypo washer no. 2 : Here the reaction products are washed with machine back water and the bleached pulp is stored in a storage tower. The tests done here are : residual chlorine are inlet in ppm, brightness of pulp and hand sheets to observe specks level. The strength properties of pulp are also tested – tear factor and breaking length. The freeness of pulp is also tested known as OSR.

STOCK PREPARATION

This section is subsequent to pulp mill and here all are the non – fibrous additives are added to the bleached pulp manufactured in the pulp mill. The operation is a batch operation & the pulp is mixed in proportions, which consists of a fixed quantity of produced pulp, refined imported wood pulp and Broke (this comes during paper breakage roll change at pope reel and also from the finishing house) slushed in a pulper and

88

recycled back. Whenever some defective paper is manufactured, it recycled back into the system

CHAPTER 5

METHODOLOGY AND COMPUTATION OF ACTUAL CASH-TO-CASH CYCLE

This Chapter covers the methodology followed while computing the actual Cash- to- Cash Cycle for Paper Plant. The key terms and formulaes used to compute them have also been explained. Actual Cash- to- Cash Cycle has been computed.

5.1 Methodology followed for calculating Actual Cash- to- Cash Cycle

Inventory level data was collected for the period April 2010 – July 2010. Raw Material Inventory was taken from Ledgers. Finished goods & WIP Inventory, Debtors, Creditors, Sales, Raw

material Consumed andStores were taken from MIS. For calculating the Inventory Cycle, average Inventory level for each

month were calculated by adding opening and closing stock and then dividing it by 2.

For calculating Raw material Cycle simple average of three months was taken and was divided by Raw Material Consumption.

Stores Cycle was not calculated separately and was considered as a part of Raw Material because they were consumed simultaneously with Raw material.

The same procedure of Raw material Cycle was followed while calculating WIP Cycle and Finished Goods Cycle.

For calculating Debtors Cycle, Average Sales for the 3 month was analysed.

88

From the Total Raw material Cycle, WIP Cycle, Finished goods Cycle, Debtors Cycle and Creditors Cycle, Cash- to –Cycle was calculated for the quarter.


5.2 Key Terms And Formulaes Used

Inventory Cycle: Inventory Cycle consists of four different cycles viz. Raw Material Cycle, Work-in-Progress Cycle, Finished Goods Cycle and Stores Cycle. They are calculated separately and added to get the Inventory Cycle. Each cycle is calculated as follows:

Raw Material Cycle: It represents the no. of days in which the raw material stock needs to be replenished. It is calculated as:

Raw Material Cycle = Raw Material Inventory * 365 Raw Material Consumed

oWork-in-Progress ( WIP) Cycle: It represents the no. of days in which the Work-in-Progress is converted to Finished Goods. It is calculated as:


oFinished Goods Cycle: It represents the no. of days Finished Goods are stocked before they are dispatched to the customer. It is calculated as:


oStores Cycles: It represents the no. of days in which the stores needs to be replenished. It is calculated as:

88

Stores Cycle = Stores Inventory *365 Stores Consumed

So the Inventory Cycle can be given by:

Inventory Cycle = Raw Material + WIP Cycle + Finished Goods Cycle + Stores Cycle

Debtor Cycle: Also known as Average Collection Period, represents the average time required to collect receivables i.e from the time the customer is billed (ideally, when goods are shipped or services provided) until that amount receivable becomes cash. It is calculated as:

Debtor Cycle = Accounts Receivable * 365 Annual Net Sales

Creditor Cycle: It represents the days the creditors of the company give credit to the company. It is calculated as:

Creditor Cycle = Accounts Payable * 365 Net Credit Purchases



Note- Stores Cycle was not calculated while estimating Cash-To-Cash Cycle as Stores include Risk Stores and Critical Stores like Mechanical Store, Civil Store, General Stores, Instrument Stores and Capital Goods Stores which are not considered because their consumption is need base and it does not form the part of the regular production schedule.

5.3 Computation Of Cash- To- Cash Cycle

As the computation is done only for the 1st quarter, therefore, instead of 365 days, 90 days are taken.

88

Raw

Material Cycle = Raw Material Inventory * 90 Raw Material Consumed

= 698.87/ 6648.17 * 90 = 9.4 or 9 Days


= 446.5483/ 14052.4* 90 = 2.86 or 3 Days

INVENTORYRAW MATERIAL

APRIL 1.04.2010 30.04.2010 AVERAGE

CLOSING STOCK 491.03 715.63 603.33

MAY 1.05.2010 31.05.2010 AVERAGE

CLOSING STOCK 735.75 776.33 756.04

JUNE 1.06.2010 30.06.2010 AVERAGE

CLOSING STOCK 750.89 723.59 737.24

QUARTERLY AVERAGE 698.87

RAW MATERIAL CONSUMPTION 6648.17

FINISHED GOODS

APRIL 1.04.2010 30.04.2010 AVERAGECLOSING STOCK 275.87 338.78 307.325

MAY 1.05.2010 31.05.2010 AVERAGECLOSING STOCK 373.68 507.38 440.53

JUNE 1.06.2010 30.06.2010 AVERAGECLOSING STOCK 444.81 738.77 591.79

QUARTERLY AVERAGE 446.5483COST OF SALES 14052.4

88

WORK - IN - PROGRESS

APRIL 1.04.2010 30.04.2010 AVERAGECLOSING STOCK 190 204 197

MAY 1.05.2010 31.05.2010 AVERAGECLOSING STOCK 236 215 225.5

JUNE 1.06.2010 30.06.2010 AVERAGECLOSING STOCK 234 178 206

QUARTERLY AVERAGE 209.5COST OF PRODUCTION 13902.15


= 209.5/ 13902.15 * 90 = 1.35 or 2 Days

Inventory Cycle = Raw Material + WIP Cycle + Finished Goods Cycle

= (9 + 2 + 3) Days = 14 Days

DEBTORS

APRIL 1.04.2010 30.04.2010 AVERAGECLOSING BALANCE 1982 1702 1842

MAY 1.05.2010 31.05.2010 AVERAGECLOSING BALANCE 1759 2020 1889.5

JUNE 1.06.2010 30.06.2010 AVERAGECLOSING BALANCE 2198 1623 1910.5

QUARTERLY AVERAGE 1880.667NET CREDIT SALES 14052.4

88

Debtor Cycle = Accounts Receivable * 90 Annual Net Sales = 1880.667/ 14052.4 * 90 = 12.044 or 12 Days

CREDITORS

APRIL 1.04.2010 30.04.2010 AVERAGECLOSING BALANCE 1595 1580 1587.5

MAY 1.05.2010 31.05.2010 AVERAGECLOSING BALANCE 1580 1560 1570

JUNE 1.06.2010 30.06.2010 AVERAGECLOSING BALANCE 1560 1500 1530

QUARTERLY AVERAGE 1562.5NET CREDIT PURCHASES 7175.5

Creditor Cycle = Accounts Payable * 90 Net Credit Purchases

= 1562.5/ 7175.5 * 90 = 19.8 = 20 Days


Cash-To-Cash Cycle = Inventory Cycle + Debtors Cycle – Creditor Cycle or Deferred Payment Period

= (14 + 12 – 20) Days = 6 Days

88

CHAPTER – 6

IDEAL CASH- TO- CASH CYCLE

4.1 General Observations

While collecting the data some observations were made. These observations are as follows:

For most of the Raw Materials the inventory keeping standard is Lead Time plus 1-2 days.

Inventory stocks are usually kept according to production plan. Agricultural Raw Materials are purchased on cash. Mostly Wheat Straw is used for manufacturing of Paper. Sarkanda is used only when there is shortage of wheat straw. It

reduces the quality of paper. Bagasse is used when it is in season. It increases the efficiency of

the recovery plant as it produces a chemical compound in the black liquor, which has high calorific value.

During April- June wheat straw inventory is increased as it is easily available and prices are low.

Ratio of wood pulp used depends on the quality of paper to be produced.

Recovery Plant recovers around 92% of the caustic. So new caustic used is 8-9% of the total requirement of the caustic.

The alternator installed at the Co-generation Plant has rated capacity of 50MW.

Power is also being purchased from PSEB

Ideal Cash-to-Cash Cycle was computed on the basis of the norms followed while keeping the inventory as well as norm for sales (for considering Debtors) and purchases (for considering Creditors).

88

4.2 Ideal Cash-To-Cash Cycle of Paper

As a company policy purchase of raw material is done either on cash basis or by issuing a L/C. So ideally there should not be any creditors. But actual credit cycle comes out to be 20 days, therefore it can be reduced to 15 days as it can reduce the overall lended cost of the project.

Also, Stores Cycle was not calculated while estimating Cash-To-Cash Cycle as Stores include Risk Stores and Critical Stores like Mechanical Store, Civil Store, General Stores, Instrument Stores and Capital Goods Stores which are not considered because their consumption is need base and it does not form the part of the regular production schedule.

88

ANNEXURES

RAW MATERIAL CLOSING STOCK

DATES Value (Lacs)

1.04.2010 169

30.04.2010 344.2

1.05.2010 344.2

31.05.2010 362.48

1.06.2010 362.48

30.06.2010 380.9

FINISHED GOODS CLOSING STOCK

DATES Value (Lacs)

1.04.2010 275.87

30.04.2010 338.78

1.05.2010 373.68

31.05.2010 507.38

1.06.2010 444.81

30.06.2010 738.77WORK - IN – PROGRESS CLOSING STOCK

DATES Value (Lacs)

1.04.2010 190

30.04.2010 204

1.05.2010 236

31.05.2010 215

1.06.2010 234

30.06.2010 178

88

DEBTORS CLOSING STOCK

DATES VALUE (Lacs)

1.04.2010 1982

30.04.2010 1702

1.05.2010 1759

31.05.2010 2020

1.06.2010 2198

30.06.2010 1623

PROFIT AND LOSS ACCOUNT FOR THE 1 ST QUARTER

PARTICULAR VALUE (In Lacs)

CREDITORS CLOSING STOCK

DATES VALUE (Lacs)

1.04.2010 3385

30.04.2010 3385

1.05.2010 3566

31.05.2010 3966

1.06.2010 3948

30.06.2010 3234

88

SALES 11867.36

Less: Quanity Discount 42.39

Net Sales Value 11824.87

Add: Scrap 59.22

Add:Other Income 72.58

Stock/inc&dec 802.39

NET INCOME 12759.17

TOTAL RAW MATERIAL COST(B) 3354.47

TOTAL CHEMICAL COST © 2254.73

TOTAL FUEL & OTHER COSTS (D) 105.46

TOTAL CONVERSION COSTS (E) 3924.98

TOTAL VARIABLE COSTS (A+B+C+D+E) 9639.64

TOTAL FIXED COSTS (F) 4774.3

TOTAL COST (A+B+C+D+E+F) 14413.94

NET PROFIT ( Without cost of net worth) -1654.77

Wacc & TAT 315.23

NET PROFIT=(Without cost of Net worth)-PPR -1970

Mar ' 09

SOURCES OF FUNDS Owner's Fund Equity Share Capital 222.19Share Application Money 0.00Preference Share Capital 0.00Reserves & Surplus 224.15Loan Funds Secured Loans 1,553.69Unsecured Loans 3.21Total 2,003.24 USES OF FUNDS

88

Fixed Assets Gross Block 2,103.21Less : Revaluation Reserve 0.00Less : Accumulated Depreciation 631.52Net Block 1,471.69Capital Work-in-progress 209.37 Investments 118.71 Net Current Assets Current Assets, Loans & Advances 556.32Less : Current Liabilities & Provisions 352.85Total Net Current Assets 203.47Miscellaneous expenses not written 0.00Total 2,003.24Note : Book Value of Unquoted Investments 114.30Market Value of Quoted Investments 5.05Contingent liabilities 128.84

2,221.95

BIBLIOGRAPHY

1. http://www.tridentindia.com 2. http://www.wikipedia.com 3. Financial Management I.M PANDEY4. Financial Management R.P Rustogi

http://www.wikipedia.com/

http://www.tridentindia.com/

88

Balance Sheet as on 31st Mar, 2009

project wc

Documents