working capital management
TRANSCRIPT
TABLE OF CONTENTS
S.NO. PARTICULARS PAGE NO.
1 INTRODUCTION
2 ORGANIZATIONAL PROFILE OF THE
COMPANY
3 FINANCIAL HIGHLIGHTS:
i DIFFERENT SECTIONS IN THE
DEPARTMENT
ii BILLS PAYABLE (INLAND)
iii MATERIAL ACCOUNTS SECTION
iv BUDGET SECTION
v TIME OFFICE SECTION
vi PROVIDENT FUND SECTION
vii CATEGORIES OF OPERATION
4 RESEARCH METHODOLOGY
5 SWOT ANALYSIS
6 FINDINGS
7 CONCLUSION
8 SUGGESTIONS
9 BIBLIOGRAPHY
10 LIST OF ABBREVIATIONS
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INTRODUCTION OF TOPIC
Working capital management is concerned with the problems that arise in
attempting to manage the current assets, the current liabilities and the interrelationship
that exists between them.
The term current assets refer to those assets which in the ordinary course of
business can be, or will be, converted into cash within one year without undergoing a
diminution in value and without disrupting the operations of the firm. The major current
assets are cash, marketable securities, accounts receivable and inventory.
Current liabilities are those liabilities which are intended, at their inception, to be
paid in the ordinary course of business, within a year, out of the current assets or
earnings of the concern. The basic current liabilities are accounts payable, bill payable,
bank overdraft, and outstanding expenses.
The goal of working capital management is to manage the firm’s current assets
and liabilities in such a way that a satisfactory level of working capital is maintained.
This is so because if the firm cannot maintain a satisfactory level of working capital, it is
likely to become insolvent and may even be forced into bankruptcy. The current assets
should be large enough to cover its current liabilities in order to ensure a reasonable
margin of safety.
The interaction between current assets and current liabilities is, therefore, the
main theme of the theory of working management.
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CONCEPTS OF WORKING CAPITAL
There are two concepts of working capital:
1. Gross working capital.
2. Net working capital.
Gross working capital refers to the firm’s investment in current assets. Current
assets are the assets which can be converted into cash within an accounting
year and include cash, short-term securities, debtors, (accounts receivable or
book debts) bills receivable and stock (inventory).
Gross work capital = total current assets
Net working capital refers to the difference between current assets and current
liabilities, Current liabilities are those claims of outsiders which are expected to
mature for payment within an accounting year and include creditors (accounts
payable), bills payable, and outstanding expenses. Net working capital can be
positive or negative. A positive net working capital will arise when current assets
exceed current liabilities are in excess of current assets.
Net working capital = current assets – current liabilities
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NEED FOR WORKING CAPITAL
The need for working capital (gross) or current assets cannot be
overemphasized. Given the objective of financial decision making to maximize the
shareholders’ wealth, it is necessary to generate sufficient profits. The extent to which
profits can be earned will naturally depend, among other thins, upon the magnitude of
the sales. A successful sales programmed is, in other words necessary for earning
profits by any business enterprise. However, sales do not convert into cash instantly;
there is invariably a time-lag between the sale of goods and the receipt of cash. There
is, therefore, a need for working capital in the form of current assets to deal with the
problem arising out of the lack of immediate realization of cash against goods sold.
Therefore, sufficient working capital is necessary to sustain sales activity.
Technically, this is referred to as the operating or cash cycle. The operating cycle
can be said to be at the heart of the need for work capital. The continuing flow from
cash to suppliers, to inventory, to accounts receivable and back into cash is what is
called the operating cycle. In others words, the term cash cycle refers to the length of
time necessary to complete the following cycle of events.
1. Conversion of cash into inventory;
2. Conversion of inventory into receivables;
3. Conversion of receivables into cash.
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OPERATING CYCLE OR WORKING CAPITAL CYCLE
Operating cycle is the time duration required to covert sales after the conversion
of recourses into inventories, into cash.
The operating cycle consists of three phases;
PHASE:-1 Cash gets converted into inventory. This includes purchase of raw materials,
conversion of raw materials into work-in-progress, finished goods and finally the transfer
of goods to stock at the end of the manufacturing process. In the case of trading
organizations, this phase is shorter as there would be no manufacturing activity and
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cash is directly converted to inventory. The phase is, of course, totally absent in the
case of service organizations.
PHASE:-2 In this phase the inventory is converted into receivables as credit sales are
made to customers. Firms which do not sell on credit obviously not have phase II of the
operating cycle.
PHASE:-3 The last phase represents the stage when receivables are collected. This
phase completes the operating cycle. Thus, the firm has moved from cash to inventory,
to receivables and to cash again.
The above operating cycle is repeated again and again over the period
depending upon the nature of the business and type of product etc. The duration of the
operating cycle of a manufacturing firm is the sum of:-
i. Inventory conversion period. (ICP)
ii. Debtors (receivable) conversion period. (DCP)
The inventory conversion period is the total time needed for producing and
selling the product. Typically, it includes:
a. Raw material conversion period (RMCP).
b. Work-in-process conversion period (WIPCP).
c. Finished goods conversion period (FGCP).
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The debtors’ conversion period is the time required to collect the outstanding amount
from the customers. The total of inventory conversion period and debtors’ conversion
period is referred to as gross operating cycle (GOC).
In practice, a firm may acquire resources (such as raw materials) on credit and
temporarily postpone payment of certain expenses. Payables, which the firm can defer,
are spontaneous sources of capital to finance investment in current assets. The
creditors (payables) deferral period (CDP) is the length of time of the firm is able to
defer payments on various resource purchases. The difference between (gross)
operating cycle and payables deferral period is net operating cycle (NOC).
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TYPES OF WORKING CAPITAL
PERNAMENT WORKING CAPITAL: Permanent of fixed working capital is the
minimum amount which is required to ensure effective utilization of fixed facilities and
for maintaining the circulation of current assets. There is always a minimum level of
current assets, which is continuously required by the enterprise to carry cut its normal
business operations. For example, every firm has to maintain a minimum level of raw
materials, work-in-process, finished goods and cash balance. This minimum level of
current assets is called permanent or fixed working capital as this part of capital is
permanently blocked in current assets. As the business grows the requirements of
permanent working capital also increase due to the increase in current assets.
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The permanent working capital can further be classified as regular working capital and
reserve working capital required ensuring circulation of current assets from cash to
inventories, from inventories to receivables and from receivables to cash and so on.
i. Regular working Capital: This is the amount of working capital required for
the continuous operations of an enterprise. It refers to the excess of current
assets over current liabilities. Any organization has to maintain a
minimum stock of materials, finished goods and case to ensure its smooth
work and to meet its immediate obligations.
ii. Reserve Working Capital : Reserve working capital is the excess amount
over the requirement for regular working capital which may be provided for
contingencies that may arise at unstated period such as strikes, rise in prices,
depression, etc.
Temporary or Variable Working Capital: Temporary or variable working capital is
the amount of working capital which is required to meet the seasonal demands and
some special exigencies. Variable working capital can be further classified as seasonal
working capital and special working capital.
i. Seasonal Working Capital: Seasonal working capital is required to meet the
seasonal needs of the enterprise such as a textile dealer would require large
amount of funds a few months before Diwali.
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ii. Special Working Capital : Special working capital is that part of working
capital which is required to meet special exigencies such as launching of
extensive marketing campaigns for conducting research, etc.
Temporary working capital differs from permanent working capital in the sense
that it is required for short periods and cannot be permanently employed gainfully in the
business.
The following diagrams would show the difference between permanent and
temporary working capital. Figure (1) present temporary working capital and figure (2)
present permanent working capital.
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BALANCE WORKING CAPITAL POSITION
The firm should maintain a sound working capital position. It should have
adequate working capital to run its business operations. Both excessive as well as
inadequate working capital positions are dangerous from the firm’s point of view.
Excessive working capital means holdings costs and idle funds which earn no profits for
the firm. Paucity of working capital not only impairs the firm’s profitability but also results
in production interruptions and inefficiencies and sales disruptions.
The dangers of excessive working capital are as follows:
It results in unnecessary accumulation of inventories. Thus, chances of inventory
mishandling, waste, theft and losses increase
It is an indication of defective credit policy and slack collection period.
Consequently, higher incidence of bad debts results, which adversely affects
profits.
Excessive working capitals make management complacent which degenerates
into managerial inefficiency.
Tendencies of accumulating inventories tend to make speculative profits grow.
This may tend to make dividend policy liberal and difficult to cope with in future
when the firm is unable to make speculative profits.
Inadequate working capital is also bad and has the following dangers:
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It stagnates growth. It becomes difficult for the firm to undertake profitable
projects for non-availability of working capital funds.
It becomes difficult to implement operating plans and achieve the firm’s profit
target.
Operating inefficiencies creep in when it becomes difficult even to meet day-to-
day commitments.
Fixed assets are not efficiently utilized for the lack of working capital funds. Thus
the firm’s profitability would deteriorate.
Paucity of working capital funds render the firm unable to avail attractive credit
opportunities etc.
The firm loses its reputation when it is not in a position to honour its short-term
obligations. As a result, the firm faces tight credit terms.
An enlightened management should therefore, maintain the right amount of
working capital on a continuous basis. Only then a proper functioning of business
operations will be ensured. Sound financial and statistical techniques, supported by
judgment, should be used to predict the quantum of working capital needed at different
time periods.
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POLICIES FOR FINANCEING CURRENT ASSETS
A firm can adopt different policies vis-à-vis current assets. Three types of financing may
be distinguished:
Long-term financing : The sources of long-term financing include ordinary
share capital, preference share capital, debenture, long-term borrowings from
financial institutions and reserves and surplus (retained earnings).
Short-term financing : The short-term financing is obtained for a period less
than one year. It is arranged in advance from banks and other suppliers of short
term finance in the money market. Short-term finance includes working capital
funds from banks, public deposits, commercial paper, factoring of receivable etc.
Spontaneous financing : Spontaneous financing refers to the automatic
sources of short-term funds arising in the normal course of a business. Trade
(suppliers’) credit and outstanding expenses are examples of spontaneous
financing. There is no explicit cost of spontaneous financing. A firm is expected
to utilize these sources of finances to the fullest extent. The real choice of
financing current assets, once the spontaneous sources of financing have been
fully utilized, is between the long-term and short-term sources of finances.
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DETERMINING FINANCING MIX
Financing mix is the choice of source of financing of current assets. There are
three basic approaches to determine an appropriate financing mix:
(a) Hedging approach
(b) Conservative approach
(c) Aggressive approach
(a) Hedging approach : the term ‘hedging’ is often used in sense of a risk-
reducing investment strategy involving transactions of a simultaneous but
opposing nature so that the effect of one is likely to counterbalance the effect
of the other. With reference to an appropriate financing-mix, the term hedging
can be said to refer to the process of matching maturities of debt with the
maturities of financial needs. This approach to the financing decision to
determine an appropriate financing-mix is, therefore, also called as matching
approach.
(b) Conservative approach : A firm in practice may adopt a conservative
approach in financing its current and fixed assets. The financing policy of the
firm is said to be the conservative when it depends more on long-term funds
for financing needs. Under a conservative plan, the firm finances its
permanent assets and also a part of temporary current assets with long term
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financing. In the periods when the firm has no need for temporary current
assets, the idle long-term funds can be invested in the tradable securities to
conserve liquidity. The conservative plan relies heavily on long-term
financing and, therefore, the firm has less risk of facing the problem of
shortage of funds.
(c) Aggressive approach : A firm may be aggressive in financing its assets. An
aggressive policy is said to be followed by the firm when it uses more short-
term financing than warranted by the matching plan. Under an aggressive
policy, the firm finances a part of its permanent current assets with short-term
financing. Some extremely aggressive firms may even finance a part of there
fixed assets with short-term financing. The relatively more use of short-term
financing makes the firm more risky.
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COMPUTATION OF WORKING CAPITAL
The two components of working capital (WC) are current assets (CA) and current
liabilities (CI). They have a bearing on the cash operating cycle. In order to calculate the
working capital needs, what is required is the holding period of various types of
inventories, the credit collection period and the credit payment period. Working capital
also depends on the budgeted level of activity in terms of production/sales. The
calculation of WC is based on the assumption that the production/sales is carried on
evenly throughout the year and all costs, accrue similarly.
The steps involved in estimating the different items of CA and CI are as follows.
Estimation of Current Assets
1. Raw Materials Inventory : The investment in raw materials inventory is
estimated on the basis of:-
Budgeted cost of raw Average inventory
Production x materials(s) x holding period
(In units) per unit (Months/days)
12 months/365 days
2. Work-in-Process(W/P) Inventory : The relevant costs to determine work-in-
process inventory are the proportionate share of cost of raw materials and
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conversion costs (Labour and manufacturing overhead cost excluding
depreciation). In case, full unit of raw material is required in the beginning, the
unit cost of work-in-process would be higher, that is cost of full unit + 50 per cent
of conversion cost, compared to the raw material requirement throughout the
production cycle: S/P is normally equivalent to 50 per cent of total cost of
production. Symbolically:
Budgeted Estimated work Average time span
Production x -in-process cost x of work-in-progress
(In units) per unit (Months/days)
12 months/365 days
3. Finished Goods Inventory : Working capital required to finance the finished
goods inventory is given by factors summed up:-
Budgeted cost of goods produced finished goods
Production x per unit (excluding x holding period
(In units) depreciation) (Months/days)
12 months/365 days
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4. Debtors : The WC tied up in debtors should be estimated in relation to total cost
price (excluding depreciation) Symbolically:-
Budgeted cost of sales per average debt
Credit sales x unit excluding x collection period
(in units) depreciation (months/days)
12 months/365 days
5. Cash and Bank Balances : Apart from WC needs for financing inventories and
debtors, firms also procedure of determining such and amount. This would
primarily be based on the motives for holding cash balances of the business firm,
attitude of management toward risk, the access to the borrowing sources in times
of need and past experience, and so on.
Estimation of Current Liabilities:
1. Trade Creditors :
Budgeted yearly Raw material Credit period
Production x cost x allowed by creditors
(in units) per unit (months/days)
12 months/365 days
2. Direct Wages:
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Budgeted yearly Direct labour Average time-lag in
Production x cost x payment of wages
(in units) per unit (months/days)
12 months/365 days
3. Overheads (Other Than Depreciation and Amortization).
Budgeted yearly Overhead Average time-lag in
Production x cost x payment of overheads
(in units) per unit (months/days)
12 months/365 days
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FORMATE: Determination of Working Capital.
(i) Estimation of Current Asset: Amount
(a) Minimum desired cash and bank balances.
(b) Inventories:
Raw material
Work-in-process
Finished goods
(c) Debtors
…………
…………
…………
…………
…………
Total Current Assets …………
(ii) Estimation of Current Liabilities:
(a) Creditors.
(b) Wages.
(c) Overheads
…………
…………
…………
Total Current Liabilities …………
(iii) Net Working Capital(i-ii)
Add: margin for contingency
…………
…………
(iv) Net Working Capital Required …………
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CASH MANAGEMENT
Introduction
Cash is the important current assets for the operation of the business. Cash is
the basic input needed to keep the business running on a continuous basis; it is
also the ultimate output expected to de realized by selling the service or product
manufactured by the firm. The firm should keep sufficient cash, neither more nor
less. Cash shortage will disrupt the firm’s manufacturing operations while
excessive cash will simply remain idle, without contributing anything towards the
firm’s profitability. Thus, a major function of the financial manager is to maintain a
sound cash position.
Facets of Cash Management
Cash management is concerned with the managing :-
Cash planning: cash inflows and outflows should be planned to project cash
surplus or deficit for each period of the planning period. Cash budget should be
prepared for this purpose.
Managing the cash flows: the flow of cash should be properly managed. The
cash inflows should be accelerated while, as far as possible, the cash outflows
should be decelerated.
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Optimum cash level: the firm should decide about the appropriate level of cash
balances. The cost of excess cash and danger of cash deficiency should be
matched to determine the optimum level of cash balances.
Investing surplus cash: the surplus cash balances should be properly invested
to earn profits. The firm should decide about the division of such cash balance
between alternative short-term investment opportunity such as bank deposits,
marketable securities, or inter-corporate lending.
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Cash Management Cycle
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MOTIVES FOR HOLDING CASH
The firm’s need to hold cash may be attributed to the following three motives:
The transactions motive
The precautionary motive
The speculative motive
Compensative motive
Transaction motive : The transaction motive requires a firm to hold cash to
conduct its business in the ordinary course. The firm needs cash primarily to
make payments for purchases, wages and salaries, other operating expenses,
taxes, dividends etc. the need to hold cash would not arise if there were perfect
synchronization between cash receipts and cash payments, i.e., enough cash is
received when the payment has to be made. But cash receipts and payments are
not perfectly synchronized. For those periods, when cash payment exceed cash
receipts, the firm should maintain some cash balance to be able to make
required payments. For transactions purpose, a firm may invest its cash in the
marketable securities. Usually, the firm will purchase securities whose maturity
corresponds with some anticipated payments, such as dividends, or taxes in the
future. Notice that the transactions motive mainly refers to holding cash to meet
anticipated payments whose timing is not perfectly matched with cash receipts.
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Precautionary motive : The precautionary motive is the need to hold cash to
meet contingencies in the future. It provides a cushion or buffer to withstand
some unexpected emergency. The precautionary amount of the cash depends
upon the predictability of the cash flows. If cash flows can be predicted with
accuracy, less cash will be maintained for emergency. The amount of
precautionary cash is also influenced by the firm’s ability to borrow at short notice
when need arises. Stronger the ability of the firm to borrow at short notice, lesser
will be the need for precautionary balance. The precautionary balance may be
kept in cash marketable securities. Marketable securities play an important role
here. The amount of cash set aside for precautionary reasons is not expected to
earn anything; therefore, the firm should attempt to earn some profit in it. Such
funds should be invested high-liquid and low-risk marketable securities.
Precautionary balance should, thus, be hold more in marketable securities and
relatively less in cash.
Speculative motive: The speculative motive relates to the holding of cash
for investing in profit-making opportunities as and when they arise. The
opportunity t make profit may arise when the security prices change. The firm will
hold cash, when it is expected that interest rates will rise and security prices will
fall. Securities can be purchased when the interest rate is expected to fall; the
firm will benefit by the subsequent fall in interest rates and increase in security
prices. The firm may also speculate on materials’ prices. If it is expected that
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materials’ prices will fall, the firm can postpone materials’ purchasing and make
purchases in the future when price actually falls. Some firms may hold cash for
speculative purpose. By and large, business firms do not engage in speculations.
Thus, the primary motives to hold cash and marketable securities are: the
transactions and the precautionary motives.
Compensating motive : Yet another motive to hold cash balances is to
compensate banks for providing certain services and loans.
Banks provide a variety of services to business firms, such as clearance of
cheque, supply of credit information, transfer of funds, and so on. While for some
of these services banks charge a commission or fee, for others they seek indirect
compensation. Usually clients are required to maintain a minimum balance of
cash at the banks. Since the balance cannot be utilized by the firms for
transaction purposes, the banks themselves can use the amount to earn a return.
Such balances are compensating balances.
Compensating balances are also required by some loan agreements between a
bank and its customers. During periods when the supply of credit is restricted
and interest rates are rising, banks require a borrower to maintain a minimum
balance in his account as a condition precedent to the grant of loan. This is
presumably to ‘compensate’ the bank for a rise in the interest rate during the
period when the loan will be pending.
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CASH MANAGEMENT MODEL
Two important cash management model which lead to determination of optimum
balance of cash are:-
(1) Optimum cash balance under certainty : Baumol’s Model
(2) Optimum cash balance under uncertainty : The Miller-Orr Model
Optimum cash balance under certainty : Baumol’s Model
The Baumol’s model of cash management provides a formal approach for determining a
firm’s optimum cash balance under certainty. It considers cash management similar to
an inventory management problem. As such, the firm attempts to minimize the sum of
the cost of holding cash and the cost of converting marketable securities to cash.
The Baumol’s model makes the following assumption:-
The firm is able to forecast its cash needs with certainty.
The firm’s cash payments occur uniformly over the period of time.
The opportunity cost of holding cash is known and it does not change over time.
The firm will incur the same transaction cost whenever it converts securities to
cash.
Let us assume that the firm sells securities and starts with a cash balance of C
rupees. As the firm sped cash, its cash balance decreases steadily and reaches
to zero. The firm replenishes its cash balance to C rupees by selling marketable
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securities. This pattern continues over the time. Since the cash balance
decreases steadily, the average cash balance will be: C/2.
The firm incurs a holding cost for keeping the cash balance. It is an opportunity
cost; that is, the return forgone on the marketable securities. If the opportunity
cost is k, then the firm’s holding cost for maintaining an average cash balance is
as follows:-
Holding cost = k(C/2)
The firm incurs a transaction cost whenever it converts its marketable
securities to cash. Total number of transactions during the year will be total funds
requirement, T, divided by the cash balance, C, i.e. T/C. the per transaction cost
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is assumed to be constant. If per transaction cost is c, then the total transaction
cost will be:-
Transaction cost = c(T/C)
The total annual cost of the demand for cash will be:
Total cost = k(C/2) + c(T/C)
The holding cost increases as demand for cash, C, increases. However, the
transaction cost reduces because with increasing C the number of transaction will
decline. Thus there is a trade-off between the holding cost and the transaction
cost .
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The optimum cash balance, C*, is obtained when the total cost is minimum. The
formula for optimum cash balance is as follows:-
C* = 2cT/k
Where,
C*= optimum cash balance,
c = cost per transaction,
T = total cash needed during the year, and
k = opportunity cost of holding cash balance.
The optimum cash balance will increase with increase in the per transaction cost
and total funds required and decrease with the opportunity cost.
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Optimum Cash Balance under Uncertainty: The Miller-Orr Model
Miller-Orr model is a model that provides for cost-efficient transactional balances
and assumes uncertain cash flows and determines an upper limit and return
point for cash balances.
It assumes that net cash flows are normally distributed with a zero value mean
and a standard deviation. As shown in following figure, the MO model provides
for two control limits—the upper control limit and the lower control as well as a
return point. If the firm’s cash flows fluctuate randomly and hit the upper limit,
then it buys sufficient marketable securities to come back to a normal level of
cash balance (the return point). Similarly, when the firm’s cash flows wander and
hit the lower limit, it sells sufficient marketable securities to bring the cash
balance back to the normal level (the return point).
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The firm sets the lower control limit as per its requirement of maintaining
minimum cash balance. The difference between the upper limit and the lower
limit depends on the following factors:
The transaction cost (c)
The interest rate, (i)
The standard deviation ( of net cash flows.
The formula for determining the distance between upper and lower control limits
(called Z) is as follows:
(Upper limit – Lower limit) = ( 3/4 * Transaction Cost * Cash Flow
Variance/Interest per day)1/3
Z = (3/4*cσ2/ i )1/3
We can notice from above equation that the upper and lower limits will be far off
from each other (i.e. Z will be larger) if transaction cost is higher or cash flows
show greater fluctuations. The limits will come closer as the interest increases. Z
is inversely related to the interest rate. It is noticeable that the upper control limit
is three times above the lower control limit and the return point lies between the
upper and the lower limits. Thus,
Upper limit = lower limit + 3Z
Return point = lower limit + Z
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The net effect is that the firms hold the average cash balance equal to:
Average Cash Balance = Lower Limit + 4/3Z
The MO model is more realistic since it allows variation in cash balance within
lower and upper limits. The financial manager can set the lower limit according to
the firm’s liquidity requirement. The past data of the cash flow behavior can be
used to determine the standard deviation of net cash flows. Once the upper and
lower limits are set, managerial attention is needed only if the cash balance
deviation from the limits. The action under these situations are anticipated and
planned in the beginning.
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MARKETABLE SECURITIES
Meaning and characteristics:
Once the optimum level of cash balance of a firm has been determined, the
residual of its liquid assets is invested in marketable securities. Such securities
are short-term investment instruments to obtain a return on temporarily idle
funds. In other words, they are securities which can be converted into cash in a
short period of time, typically a few days. The basic characteristics of marketable
securities affect the degree of their marketability/liquidity. To be liquid, a security
must have two basic characteristics: a ready market and safety of principal.
Ready marketability minimizes the amount of time required to convert a security
into cash. A ready market should have both breadth in the sense of a large
number of participants scattered over a wide geographical area as well as depth
as determined by its ability to absorb the purchase/sale of large amounts of
securities.
The second determinant of liquidity is that there should be little or no loss in the
value of a marketable security over time. Only those securities that can be easily
converted into cash without any reduction in the principal amount qualify for
short-term investments. A firm would be better off leaving the balances in cash if
the alternative were to risk a significant reduction in principal.
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MARKETABLE SECURITY ALTERNATIVES
Marketable security alternatives are more prominent marketable/near-cash securities
available for investment. Our concern is with money market instruments.
Treasury bills : Treasury bills (TBs) are short-term government securities.
The usual practice in India is to sell treasury bills at a discount and redeem them
at par on maturity. The difference between the issue price and the redemption
price, adjusted for the time value of money, is return on treasury bills. They have
liquidity. Also, they do not have the default risk.
Commercial papers : Commercial papers (CPs) are short-term, unsecured
securities issued by the highly creditworthy large companies. They are issued
with e maturity of three months to one year. CPs are marketable securities, and
therefore, liquidity is not a problem.
Certificates of deposits: Certificates of deposits (CDs) are papers issued
by banks acknowledging fixed deposits for a specified period of time. CPs are
negotiable instruments that make them marketable securities.
Bank deposits : A firm can deposit its temporary cash in a bank for fixed
period of time. The interest rate depends on the maturity period.
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For example, the current interest rate for a 30 to 45 days deposit is about 3 per
cent and for 180 days to one year is about 6-7 per cent. The default risk of the
bank deposits is quite low since the government owns most banks in India.
Inter-corporate deposit : Inter-corporate lending/borrowing or deposits is a
popular short-term investment alternative for companies in India. Generally a
cash surplus company will deposit (lend) its funds in a sister or associate
companies or with outside companies with high credit standing. In practice,
companies can negotiate inter-corporate borrowing or lending for very short
periods. The risk of default is high, but returns are quite attractive.
Money market mutual funds: Money market mutual funds (MMMFs)
focus on short-term marketable securities such as TBs, CPs, CDs or call money.
They have a minimum lock-in period of 30 days, and after this period, an
investor can withdraw his or her money time at a short notice or even across the
counter in some cases. They offer attractive yields; yields are usually 2 per cent
above than on bank deposits of same maturity. MMMFs are of recent origin in
India, and they have become quite popular with institutional investors and some
companies.
Repurchase agreements: These are legal contracts that involve the actual
sale of securities by borrower to the lender with a commitment on the part of the
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former to repurchase the securities at the current price plus a stated interest
charge. The securities involved are government securities and other money
market instruments. The borrower is either a financial institution or a security
dealer.
Bills discounting: Surplus funds may be deployed to purchase/discount
bills. Bills of exchange are drawn by seller (drawer) on the buyer (drawee) for
the value of goods delivered to him. During the tendency of the bill, if the seller is
in need of funds, he may get it discounted. On maturity, the should be presented
to the drawee for payment.
Call market: It deals with funds borrowed/lent over night/one day (call) money
and notice money for periods up to 14 days. It enables corporate to utilize their
float money gainfully. However, the returns (call rates) are highly volatile. The
stipulations pertaining to the maintenance of cash reserve ratio (CRR) by banks
in the major determinant of the demands in the funds and is responsible for
volatility in the call rates.
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RECEIVABLE MANAGEMENT
INTRODUCTION
The term receivable is defined as ‘debt owed to the firm by customers arising
form sale of goods or services in the ordinary course of business’. When a firm
makes an ordinary sale of goods or services and does not receive payment, the
firm grants trade credit and creates accounts receivable which could be collected
in the future. Receivables management is also called trade credit management.
Thus, accounts receivable represent an extension of credit to customers,
allowing them a reasonable period of time in which to pay for the goods received.
Cost associated with the extension of credit:
The major categories of cost associated with the extension of the credit and
account receivables are:
1. Collection cost
2. Capital cost
3. Delinquency cost, and
4. Default cost.
Collection cost: Collection costs are administrative costs incurred in collecting the
receivables from the customers to whom credit sales have been made. Included
in this category of costs are:
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a) Additional expenses on the creation and maintenance of a credit
department with staff, accounting records, stationary, postage and other
related items;
b) Expenses involved in acquiring credit information either through outside
specialist agencies or by the staff of the firm itself.
These expenses would not be incurred if the firm does not sell on credit.
Capital cost: The increased level of accounts receivable is an investment in
assets. They have to be financed thereby involving a cost. There is a time lag
between the sale of goods to, and payment by, the customers. The firm should
arrange for additional funds to meet its own obligations while waiting for
payments from its customers. The cost on the use of additional capital to support
credit sales, which alternatively could be profitably employed elsewhere, is,
therefore, a part of the cost of extending credit or receivables.
Delinquency cost: this cost arises out of the failure of the customers to meet
their obligations when payments on credit sales become due after the expiry of
the credit period. Such costs are called delinquency cost. The important
components of this cost are:
i. Blocking up of funds for an extended period,
ii. Cost associated with steps that have to be initiated to collect the over
dues.
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Default cost: the firm may not be able to recover the over dues because of the
inability of the customers. Such debts are treated as bad debts and have to be
written off as they cannot be realized. Such costs are known as default cost
associated with credit sales and account receivables.
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CREDIT POLICY
The credit policy of a firm provides the frame work to determine:
a) Whether or not to extend credit to a customer and
b) How much credit to extend.
The term credit policy is used to refer to the combination of three decision
variables:
1. Credit standards,
2. Credit terms, and
3. Collection efforts
Credit standards: Credit standards are criteria to decide the type of
customers to whom goods could be sold on credit. If a firm has more slow paying
customers, its investment in accounts receivable will increase. The firm will also
be exposed to higher risk of default.
Credit terms: Credit terms specify duration of credit and terms of payment by
customers. Investment in accounts receivable will be high if customers are
allowed extended time period for making payments.
Credit terms have three components:
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i. Credit period, in terms of the duration of time for which trade credit is
extended. During this period the over due amount must be paid by the
customers.
ii. Cash discount, if any, which the customer can take advantage of, that is,
the over due amount will be reduced by this amount.
iii. Cash discount period, which refers to the duration during which the
discount can be availed of.
Collection efforts: Collection efforts determine the actual collection period.
The lower the collection period, the lower will be the investment in accounts
receivable and vice versa.
The effort should in the beginning be polite, but, with the passage of time it
should gradually become strict. The steps usually taken are:
i. Letters, including reminders, to expedite payments;
ii. Telephone calls, for personal contacts;
iii. Personal visit;
iv. Help of collection agencies; and finally,
v. Legal action.
INVENTORY MANAGEMENT42
MEANING AND TYPE
Inventories are stock of the product a company is manufacturing for sale and
components that make up the product. The various forms in which inventories
exist in a manufacturing company are:-
Raw materials: Raw materials are those basic inputs that are converted
into finished product through the manufacturing process. Raw material
inventories are those units which have been purchased and stored for
future productions.
Work-in-progress: Work-in-progress inventories are semi manufactured
products. They represent products that need more work before they
become finished products for sale.
Finished Goods: Finished goods inventories are those completely
manufactured products which are ready for sale. Stocks of raw material
and work-in-progress facilitate production while stock of finished goods is
required for smooth marketing operations.
The levels of three kinds of inventories for a firm depend on the nature of its
business.
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NEED TO HOLD INVENTORIES
Maintaining inventories involves tying up of the company’s funds and incurrence
of storage and holding costs. If it is expensive to maintain inventories, why do
companies hold inventories? There are three general motives for holding
inventories:-
Transaction Motive: Transaction motive emphasizes the need to
maintain inventories to facilitate smooth production and sales operation.
Precautionary Motive: Precautionary motive necessitates holding of
inventories to guard against the risk of unpredictable changes in demand
and supply forces and other factors.
Speculative Motive: Speculative motive influences the decision to
increase or reduce inventory levels to take advantage of price
fluctuations.
COST OF HOLDING INVENTORIES
The cost associated with the inventory fall into two basic categories:-
i. Ordering or Acquisition or Set-up costs, and
ii. Carrying costs.
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Ordering costs: This category of costs is associated with the acquisition or
ordering of inventory. Firms have to place orders with suppliers to replenish
inventory of raw materials. The expenses involved are referred to as ordering
costs. They include costs incurred in the following activities: requisitioning,
purchase ordering, transporting, receiving, inspection and storing. Ordering costs
increases in proportion to the number of order placed.
Carrying costs: Cost incurred for maintaining a given level of inventory are
called carrying costs. They include storage, insurance, taxes, deterioration and
obsolescence. Carrying costs vary with inventory size. This behavior is contrary
to that of ordering costs which decline with increase in inventory size.
The economic size of inventory would thus depend on trade-off between carrying
costs and ordering costs.
OBJECTIVE OF INVENTORY MANAGEMENT
In the context of inventory management, the firm is faced with the problem of
meeting two conflicting needs:
To maintain a large size of inventories of raw material and work-in-
progress for efficient and smooth production and of finished goods for
uninterrupted sales operations.
To maintain a minimum investment in inventories to maximize profitability.
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Both excessive and inadequate inventories are not desirable. These are two
danger points within which the firm should avoid. The objective of inventory
management should be to determine and maintain optimum level of inventory
investment.
The major dangers of over investment in inventories are:
a. Unnecessary tie-up of the firm’s funds and loss of profit,
b. Excessive carrying costs, and
c. Risk of liquidity.
The excessive level of inventories consumes funds of the firm, which can not be
used for any other purpose, and thus, it involves an opportunity cost.
Maintaining an inadequate level of inventories is also dangerous. The
consequences of under investment in inventories are:
a. Production hold-ups and
b. Failure to meet delivery commitments.
The aim of inventory management, thus, should be to avoid excessive and
inadequate levels of inventories and to maintain sufficient inventory for the
smooth production and sales operation. An effective inventory management
should:
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Ensure a continuous supply of raw materials to facilitate uninterrupted
production.
Maintain sufficient stocks of raw materials in periods of short supply and
anticipate price changes.
Maintain sufficient finished goods inventory for smooth sales operation,
and efficient customer service.
Minimize the carrying cost and time, and
Control investment in inventories and keep it at an optimum level.
DETERMINATION OF STOCK LEVELS
Various stock levels are discussed as such:
1. Minimum level (safety stock): This represents the quantity of stock that
should be held at the time, stock level is normally not allowed facing below
this level. This level of stock is a buffer stock for use during emergencies.
Fall in stock level below minimum level will indicate potential danger to the
business.
2. Re-ordering level: When the quantity of materials reaches at a certain
figure then fresh order is sent to get material again. The order is sent
before the materials reach minimum stock level. The rate of ordering level
is fixed between minimum level and maximum level. Reordering level is
fixed with the following formula:
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Reordering level = Maximum consumption × maximum reorder period
3. Maximum level: It is the quantity of materials beyond which a firm should
not exceed its stock. If the quantity exceeds maximum level then it will be
over stocking. Over stocking will means blocking of more working capital,
more space of storing the materials, more wastage of material and more
chances of losses from obsolescence. The following formula may be used
for calculating maximum stock level:
Maximum stock level = re-ordering level + reordering quantity – (minimum
consumption × minimum reorder period )
4. Danger level: it is the level beyond which materials should not fall in any
case. If the danger level arises then immediate step should be taken to
replenish the stock even if more cost is incurred in arranging the materials.
If materials are not arranged immediately there is a possibility of stoppage
of work. Danger level is determined with the following formula:
Danger level = average consumption × maximum reordering period for
emergency purchase
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5. Average Stock level: The average stock level is calculated as such:
Average stock level = minimum stock level + ½ of reordering quantity
INVENTORY MANAGEMENT TECHNIQUES
1) A B C Inventory control system: A B C Inventory control system is an
inventory management technique that divides inventory into three
categories of descending importance based on the rupee investment in
each on the basis of the cost involved, the various inventory items are,
according to the system categorized into three classes - A, B and C.
The high value items are classified as ‘A item’ and would be under the
tightest control. ‘C items’ represents relatively least value and would be
under simple control. ‘B items’ fall in between these two categories and
require reasonable attention of management.
2) Just-in-time (JIT) Systems: Japanese firms popularized the Just-in-time
system in the word. In the JIT system material or the manufactured
components and parts arrive to the manufacturing sites or stores just few
hours before they are put to use. The delivery of material is synchronized
with the manufacturing cycle and speed; this eliminates the necessity of
carrying large inventories, thus, saves carrying and other manufacturing
costs.
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3) Out-Sourcing: A few years ago there was a tendency to manufacture all
the parts of components in house, but now companies are adopting the
practice of out sourcing. It is a system of buying parts and components
from out side rather than manufacturing internally for example Tata Motors
developed number of units around its manufacturing sites that supply
parts and components to its manufacturing units.
4) Computerized Inventory Control system: Now days this system is
adopted by every firm, large or small for controlling inventories. This
system enables a company to easily track large items of inventories. It is
an automatic system of counting inventories, recording withdrawals and
revising the balance. There is an inbuilt system of placing order as the
computer notices that the re-order point has been reached.
5) Economic order quantity (EOQ) analysis: EOQ is the inventory
management technique for determining optimum order quantity which is
the one that minimize the total of its order and carrying cost. It balances
fixed ordering cost against variable ordering cost.
EOQ can be calculated with the following formula-
EOQ = 2 × quantity required × ordering cost
Carrying costs
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The EOQ can be determined with the help of following graph:-
In the above figure, it can be seen that the ordering cost of an item is
decreasing and carrying cost is increasing as the size of the order is
increases. The trade-off of these two costs is attained at a level at which total
cost is least. This level is designated as economic order quantity.
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OBJECTIVES OF THE STUDY
This training as per scheduled under syllabi has been emphasis on getting aware with
the practical environment of an organization and specifically with the concerned
department related to the specialization. There are certain objectives stated as under:
1 To integrate theoretical knowledge with practical orientation through assignments.
2 To get aware with the procedure of financial department.
3 To know how the functions passes through other departments in relation to
financial departments.
4 To become familiar with the formats of different documents and their meaning.
5 To know each departments decision effect on finance department and vice-versa.
6 To coincide each functioning with the accounting perspective.
7 Try to generate new ways of performing a task.
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8 To differentiate the practical task from theoretical knowledge.
9 To know organizational structure and specifically financial department.
10 To get habitual with the stressful working condition.
53
ORGANIZATIONAL PROFILE OF
THE COMPANY
54
India’s first Public Sector Unit (PSU) - ITI Ltd was established in 1948. Ever
since, as a pioneering venture in the field of telecommunications, it has contributed
to 50% of the present national telecom network. With state-of-the-art
manufacturing facilities spread across six locations and a countrywide network of
marketing/service outlets, the company offers a complete range of telecom
products and total solutions covering the whole spectrum of Switching,
Transmission, Access and Subscriber Premises equipment.
ITI joined the league of world class vendors of Global System for Mobile (GSM)
technology with the inauguration of mobile equipment manufacturing facilities at
its Mankapur and Rae Bareli Plants in 2005-06. This ushered in a new era of
indigenous mobile equipment production in the country. These two facilities
supply more than nine million lines per annum to both domestic as well as export
markets.
The company is consolidating its diversification into Information and
Communication Technology (ICT) to hone its competitive edge in the convergence
market by deploying its rich telecom expertise and vast infrastructure. Network
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Management Systems, Encryption and Networking Solutions for Internet
Connectivity are some of the major initiatives taken by the company.
Secure communications is the company's forte with a proven record of engineering
strategic communication networks for India's Defense forces. Extensive in-house
R&D work is devoted towards specialized areas of Encryption, NMS, IT and
Access products to provide complete customized solutions to various customers.
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Shri K.L.DhingraChairman and Managing Director
Shri K.L. Dhingra joined ITI as Chairman and Managing Director on April 8, 2010. He has an illustrious career spanning over 30 years in the fields of Banking, Financial Services, Lending, Corporate Governance and Business Leadership. Shri Dhingra is a Master in Commerce (M.Com), Bachelor in Law, Master in Business Administration (MBA Finance) from Faculty of Management Studies (FMS), Delhi University . He has acquired additional Banking qualifications from India (CAIIB) and UK (ACIB, London ).
He holds the distinction of being the only employee of an Indian Financial Institution who passed A.C.I.B. ( London ) examination globally in July 1997. He holds the rare distinction of being the Fellow of The Institute of Banking and Finance, Mumbai, the Fellow of The Chartered Institute of Bankers in Scotland , Fellow of The Financial Services Institute of Australasia (Finsia) and also an Associate Member of Chartered Institute of Bankers, UK , now renamed as IFS School of Finance , UK .
Shri Dhingra is also the Vice Chairman of Standing Conference of Public Enterprises (SCOPE) for more than two years from April 1, 2009. He is the Chairman of Finance Committee, SCOPE. Shri Dhingra, before that, was member of SCOPE Board for two terms of two years each from April 2005 to March 2009 and has been associated with the Western Indian Regional Council of SCOPE and also its Finance Committee.
Shri Dhingra has participated in number of training programmes in India and abroad. He had extensive training exposures in Singapore , Germany , Austria , Australia and China . Many leading organizations have conferred on him awards for `Corporate Excellence’, `Industrial Excellence’, `Performance Excellence’ and `Management Excellence’. He has been a member of the prestigious Experimental Reimbursable Seeding Operation (ERSO) Trust Fund of UN-Habitat, as a financial expert representing Asian countries.
Out of total of 37 years of experience, Shri Dhingra has been Board level Executive for more than ten years including 3 ½ years as the Chairman and Managing Director. Prior to his joining ITI Ltd., he
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was Chairman and Managing Director of Housing and Urban Development Corporation Ltd. (HUDCO) for more than 2 ½ years. He has also been Director (Finance) in Mumbai Railway Vikas Corporation Limited (MRVC), a PSU under the Ministry of Railways and also in Indian Rare Earths Limited (IREL), a PSU under the Department of Atomic Energy for a period totaling to about seven years.
Shri R K Agarwal Director
(Marketing)
Shri R K Agarwal took over as Director (Marketing) of ITI Ltd from March 9, 2010. Prior to this, he was General Manager (Corporate Marketing). An industrial engineering graduate, Shri Agarwal joined ITI Ltd in 1976 as an assistant executive engineer in the Company’s Bangalore Plant. Shri Agarwal’s 33 year experience spans areas such as manufacturing, quality control and marketing.
Shri K.K. Gupta Director(Production) Shri K.K. Gupta took over as Director (Production) of ITI Limited
on May 1, 2010. Prior to this, he was General Manager, Corporate HR and GSM (South Zone). An Electronics and Telecommunication Engineer, Shri Gupta joined ITI in 1977 as an Assistant Executive Engineer at the Company’s Naini Plant. Shri Gupta’s 33 years of experience covers the diverse fields of manufacturing - telephones and transmission, GSM projects and human resources.
Shri Ravi KhandelwalDirector (Finance)
Shri Ravi Khandelwal has taken over as Director (Finance) of ITI Ltd from March 5, 2011. Prior to this, he was Executive Director of Container Corporation of India Ltd., (CONCOR), a PSU under the Ministry of Railways. Mr. Khandelwal is Cost Accountant and has done MBA (Finance) and a Commercial Public Enterprises Management Course from University of Bradford , U.K. He has extensive overseas training exposures in Holland , Belgium and Portugal on various subjects including Financial Planning. Mr. Khandelwal brings along with him from CONCOR the competence and capability to achieve outcome from compelling situations owing to his `Out of the box’ thinking. During his tenure in CONCOR, he was instrumental in bringing various JV Companies where he was CONCOR’s nominee Director to start making profits within a short time of their inception. Over all, Mr. Khandelwal has 28 years of rich professional experience. He is recipient of prestigious national individual excellence awards from the Union Minister of State for Railways.
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Shri N.K. SrivastavaDirector
Company Secretary
Smt.Rachana ChoudharyCompany Secretary
Independent Directors
Prof.M. BalakrishnanIndependent Director
Shri T.S. NarayanasamyIndependent Director
Dr. S.K. ChaudhuryIndependent Director
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INFRASTRUCTURE
In house Research & Development
Network System Unit capable of undertaking turnkey jobs
Self contained component evaluation centre
Fully automated assembly lines
In circuit tester (ICT)
Modern Chemical, Metallurgical Labs
Mechanical fabrication/Machine shops with modern CNC machines
Molding & Die casting
Full fledged state of the art tool rooms
SMT (Surface mount technology)
Environmental testing
Component approval center approved by BSNL
FACILITIES
PCB manufacturing facilities
Mechanical Fabrication / Machine Shop with modern CNC machines and
Finishing shop
Card assembly and Testing including In circuit tester
SMT Line
Plastic Injection Technology
Through-Hole Component Assembly
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Manufacturing facilities for Mechanical items
Fabrication of Towers and Shelters for GSM.
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BTS
Base Trans-Receiver Station (BTS) “BTS A-9100”, is radio frequency mobile communication product based on GSM technology. It is a set of equipments that facilitates wireless communication between user equipment (UE) and a network. A BTS in general consists of Trans-receiver module, Antenna Network Combiner, Controller (SUMA) & Alarm Extension System (XIBM). It is a self contained unit for transmitting / receiving signal for mobile communication.
Types of BTS: 1. Indoor BTS 2. Outdoor BTS 3. Dual Band BTS 4. Twin TRX BTS
BTS SHELTER
Shelter is a portable Sealed cabin made up of sandwiched insulated panels with polyurethane as filler material between galvanized pre-coated steel sheet.
Floor is made up of 19mm thick marine plywood and is covered with PVC antistatic flooring.
MS tube is reinforced inside floor panel for higher floor load capacity.
Secondary slanting roof is provided to
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protect primary roof from direct sunlight and rainwater.
Door is fixed with heavy-duty hinges. It is equipped with hydraulic closer & three way locking arrangement.
Shelter is installed on suitable base frame of galvanized I-beam supported on concrete pedestal.
ITI LIMITED Rae Bareli is manufacturing Prefabricated Shelter for housing of BTS & its accessories used in Telecom Mobile Service.
PRODUCT RANGE
The following three types of shelter of internal dimensions (all in mm) are being manufactured: Type I : 3000 L x 2000 x W x 2500 H Type II : 4000 L x 3500 x W x 3000 H Type III : 5000 L x 3500 x W x 3000 H
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PRODUCT RANGE
Square Lattice Type of RTT(as per GR) : - 10M, 15M, 20M Height. Triangular Type RTT(SERC) : - 9M, 12M, 15M & 18M Height.
TECHNICAL SPECIFICATION
Square Lattice type of RTT are manufactured as per GR No. GR/TWR-09 FEB. 2004
Design of triangular type RTT is duly approved from Structural Engineering Research Center (SERC), Chennai.
All members of RTT are made up of structural steel as per IS2062 Grade A & hot dip Zinc galvanized as per IS 4759.
It can carry 6 Nos. GSM/WLL Antenna & 3 Nos. 0.6M dia Microwave Antenna.
Basic design of RTT is for wind speed 200 Km/h. It can survive wind velocity up to of 210 km/h for short duration.
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TRANSCEIVER
Alcatel's new Twin TRX radio transceiver doubles the capacity of existing equipment, while occupying the same space in the rack.
The new Twin TRX is particularly adapted for densely populated urban areas, with a maximum capacity of 24 TRX per Base Station cabinet.
Twin TRX transceivers can be installed in the full range of Alcatel's indoor and outdoor BTS.
CDMA (Code Division Multiple Access)
CDMA (Code Division Multiple Access) is a digital wireless technology to provide mobile communication. CDMA works by converting speech into digital information, which is then transmitted as a radio signal over a wireless network. CDMA uses a unique code to distinguish each different call. The receiving device is instructed to decipher only the data corresponding to a particular code to reconstruct the signal. This enables many subscribers to share the same frequency band and, at the same time, without any cross talk or interference.
CDMA WLL technology provides option of limited as well as full mobility to the customers. This helps to provide faster
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last mile connectivity, where laying of cables is difficult.
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Financial Highlights :
ANNUAL REPORT 2010-2011
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BALANCE SHEET
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PROFIT AND LOSS
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SOURCES AND APPLICATION OF FUNDS
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FINANCE AND ACCOUNTS DEPTT.
SYSTEMS MANUAL
INTRODUCTION
The finance and Accounts department occupies a very important position in any
organization as it has a role to play in almost the activities right from
conceptualization of a project till its successful implementation for smooth
running and thereafter.
A System manual of a department proves to be an effective tool and guide
not only in the hands of the personnel responsible for proper discharge of their
duties and responsibilities but also a helpful tool for other departments’ personnel
foe their reference and understanding the functions to progress their issues
concerning Accounts and Finance. It is the department having large customers
in-house as well as outside the organization.
This Manual has been prepared giving activities of each section in the
department in brief. Details, forms and formats used in the working have not
been incorporated here and the same can be obtained from the Accounts
Department.
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FUNCTIONS AND RESPONSIBILITIES
The department is entrusted with the following functions and responsibilities:
(a) To ensure financial discipline as per guideline of the company.
(b) To advise management for all matters having financial implications including
financial co-ordination before commitments are made.
(c) Regulations of payments for supply and services including salaries, wages
and other payments required for furthering legitimate objectives of the
company.
(d) Compilations of Accounts and getting the same audited by statutory and
Govt. Auditors.
(e) Compilation and co-ordination of fixed price quotation for sale of company‘s
product and services as per the norms of the company.
(f) Collecting dues on beI.T.I.f of the company from the customers as well as
other agencies.
(g) Financial Appraisal of the company.
(h) To prepare budgets and to exercise budgetary control for the utilization of
available resources in the best possible manner.
(i) Inter-action with various operating levels in the division.
(j) Co-ordination and inter-action with the managing director and corporate
office.
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(k) To have an effective M.I.S. for prompt reporting to the higher management for
decision making.
In order to fulfill these responsibilities the finance and Accounts Department
has been divided into different sections as per convenience and for smooth
flow of activities in discharging the above responsibilities.
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DIFFERENT SECTIONS IN THE DEPARTMENT
1. BILLS PAYABLE
(a) Inland Bills
(b) Foreign Bills
(c) Services & Civil works
2. FINANCE
3. PAYROLL
4. CASH OFFICE
5. BILLS RECEIVABLE
6. COST ACCOUNTS
7. MATERIAL ACCOUNTS
8. BOOK KEEPING
9. BUDGET & M.I.S.
10.TIME OFFICE
11.PROVIDENT FUND
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BILLS PAYABLE (INLAND)
FUNCTIONS
The following functions are the functions of Bills Payable (inland) section:
(i) Payment of Advance to suppliers as stipulated in the purchase order.
(ii) Payment of Final Bills.
(iii) Bank dealings with relation to suppliers e.g. Opening of letter of credit, Bank
Guarantee and the payment to bank on the due dates.
(iv) Accounting and Pricing of R.D.R. (Receiving cum discrepancy report).
(v) Maintenance of Commitment Register for Budgetary Purpose.
(vi) Payment of Misc. Advance/imp rest approved by the competent authority.
FLOW OF WORK
(i) All the P.O. received are first entered in the P.O. Register before putting the
same in a separate file.
(ii) If the P.O. stipulates for payment of Advance to vendor, an Advance payment
is given.
(iii) After receipt of the goods, suppliers invoice duly linked with relevant R.D.R
are received from the Purchase Department which are scrutinized with
reference to relevant Purchase Order and then passed for payment after
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making adjustments for Advance Payments already made. Remittance
vouchers are prepared based on the passed invoices and are forwarded to
cash section for issuance of cheque.
(iv) In respect of P.O. where payment is stipulated as “through bank” the BPI
section, after intimation from the Bank through Purchase Department, makes
entry in the Register and after checking the documents with the P.O. passes
the invoice and sends the remittance Voucher to the cash section to arrange
payment and collection of Documents from the Bank by the Purchase
Department
(v) In respect of local purchases made on “cheque against Delivery basis” the
proforma invoice is linked with the relevant Purchase Order and the payment
is authorized and Remittance voucher is sent to the cash section for making
payment.
(vi) Pending the receipt of R.D.R from transit in the respect of material received
but not taken on charge due to delay in inspection/commissioning/rejections
the payments made to suppliers as Advance on receipt of goods through
Bank.
(vii) Documents/Cheque against delivery basis are put in G.I.T. i.e. goods in
Transit Account at the year end.
(viii) In respect of those P.O. where material has been received but the payment
has not been released, the appropriate liability is provided for at the year-end
so as to account for all expenses.
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(ix) Follow up with I.M.M. Department for release of R.D.R in respect of those
P.O’s where advance payment has been made so as to clear Advances.
(x) In respect of rejected materials, follow-up is to be made with I.M.M. Deptt. to
get those rejected materials replaced from the vendor so as to clear G.I.T.
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BILLS PAYABLE (FOREIGN)
FUNCTIONS
(i) Payment and accounting of:
Advance to suppliers as per the terms and conditions of Purchase
Order.
License fees, Royalty etc as per the license agreement with the foreign
collaborator.
Customs duty, freight bills.
Final bills.
(ii) Opening of letters of credit on the advice of I.M.M Deptt and Liaisoning with
Banks for foreign Exchange release and payments on maturity date.
(iii) Maintenance of commitment registers for budgetary purposes.
(iv) Maintenance of deferred liabilities accounts.
(v) Pricing of R.D.R (Receiving-cum-discrepancy Report) with P.O. rates and
loading of customs duty, freight and insurance charges.
(vi) Priced R.D.R are sent to materials Accounts Section/E.D.P for punching in
Batch mode for the processing of materials ledger.
FLOW OF WORK
(i) All purchase orders, contracts received are entered in the registers before
opening of separate file for each P.O.
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(ii) All the P.O. opened in favour of foreign suppliers as per the terms of
purchase orders are entered in register to record the particulars about their
extension, revalidation and utilization. On maturity of the L.C. the Bank
Adjustment voucher is prepared on the basis of bank advice and sent to cash
section for adjustment. Particulars of payments are also noted in the relevant
P.O.
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BILLS PAYABLE -- SERVICES
FUNCTIONS
Payment and accounting of advances.
Payment and accounting of running bills to contractors.
Payment and accounting of final bills.
Adjustment and recovery of advances.
Accounting and adjustment of earnest money and security deposits.
Capitalization of buildings.
Payment of all service bills e.g. telephone, electricity, water, canteen,
transportation and sanitation etc.
Payments to all consultants e.g. architects, advocates, part time doctors etc.
Payment of misc. advances/ imp rest approved by the competent financial
authority and their adjustments.
Payment to all casual employees.
FLOW OF WORK
(i) Advances to contractors are given as per the acceptance letter given to the
contractor which is recovered with interest by any of deduction from on
account payment bills in suitable percentage in relation to the progress of
work so as to recover all sums advanced by the time 80% of the contract is
completed.
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(ii) Material advances to the extent of 75% of the value of materials brought by
contractors and lying at the site are given on certification of the engineer-in-
charge and are recovered from running/ final bills.
(iii) In respect of running bills the works accounts section links the bill, submitted
by contractors duly certified by Engineers-in-charge, with the
contract/acceptance letter/work order etc., and arranges payment after
deducting income tax, balance security deposits and other advances if any
and retaining the prescribed percentage of the bill towards the retention
money. However, where the contractor has given bank guarantee toward
retention money no deduction is to be made on this account.
(iv) Similarly the final bill submitted by the contractor is checked with the
Measurement book and the gross amount payable is determined. The amount
settled against running bills, advances if any, penalty for delay in completion
of work, recovery towards consumption of material, T.D.S. etc is deduced
from the gross amount payable. One I.T.I.f of the security deposit refundable
to the contractor is retained as defect liability deposit.
(v) Capitalization of the buildings and other capital works is done on receipt of
the completion certificate and final bills and the classification of the building is
done in accordance with the rules in force.
(vi) Payment of bills for services e.g. electricity, telephone, water etc, received
from plant Maintenance Deptt/concerned user duly verified by them and
approved by the competent authority are made.
86
FINANCE SECTION
OBJECTIVES
To ensure that the financial description is maintained in the Division.
To ensure that all expenditure is incurred with due regard to principles of financial
propriety.
To ensure that the final proposals are routed to the competent authority as per
delegation/sub-delegation of powers so as to ensure compliance of the
provisions of the companies act, the Memorandum and Articles of association of
the company and the relevant rules and regulations of the company and the
guidelines issued by the company.
To ensure that the funds are available in the approved Capital and performance
budget so as to cover the relevant proposals.
To submit MIS reports to Corporate Office monthly.
FUNCTIONS
To scrutinize and give financial concurrence as per delegation of power for each
proposal involving:
(i) Capital expenditure
(ii) Revenue expenditure
(iii) Purchase of materials/stores/tools and other services
(iv) Manpower requirements
87
(v) Waiver of dues/write off of losses
(vi) Cases involving relaxation of rules etc as per delegation of powers
(vii) Sale, lease, alienation or disposal of company’s assets
(viii) Award of contract in respect of civil/electrical works/other works/plant
orders
(ix) Project Reports
Certification for availability of funds with reference to capital and performance
budget and appropriation of funds.
88
PAYROLL SECTION
OBJECTIVES
To regulate salaries and wages of all employees as per terms of employment.
To regulate payment of welfare facilities extended bi the management e.g.
L.T.C., Medical, Interest subsidy, School fee etc.
Payment and recovery of various nature of advances such as Travel advance,
LTC advance, conveyance advance and timely adjustment thereof.
To ensure timely remittance of amounts recovered from employees to various
agencies like LIC, UPICA, and HDFC etc.
To ensure all statutory deductions e.g. TDS, PF etc are made from the salaries of
the employees and deposited timely with the appropriate authority.
To ensure proper accounting is done as per the requirement of statue and
corporate office guidelines.
To adhere the provisions laid down in the Personnel Manual relevant to the
above functions.
FUNCTIONS
(1) The payroll record is updated from time to time entering therein increment drawn,
promotion, transfer etc.
89
(2) The master data in regard to all officers/employees is sent to computer Deptt. In
respect of basic pay, DA, HRA, CCA etc. and this data is updated every month
depending upon the changes.
(3) The deductions to be made are fed to the Computer Deptt by means of deduction
statement. Computer Deptt. in turn prints out the deduction statement in the form
of the check lists by 25th of the every month. Payroll section corrects the same
with reference to the various documents and recovery registers and send it back
to Computer Deptt. for final adoption by 26th/27th of the month.
(4) The computer deptt prints the payroll in duplicate in which one copy is
maintained in the payroll section for record purpose and the original copy is
distributed to the employees concerned.
(5) Disbursement of salary and wages
Payment of salary to officers is made through Bank based on the payroll received
from the computer Deptt. In case of non-supervisory personnel the payment is
made by cash by various groups except few cases where the payment is made
through P.N.B, I.T.I. branch. Cash is drawn two days in advance i.e. last day of
month and filled in the envelopes and these envelopes are kept in safe custody
in cash office for disbursement on list of next month.
(6) Remittance of Recoveries
Various recoveries made from employees in respect of LIC premium, HDFC loan,
Income tax etc are remitted to the various agencies within the stipulated date by
means of cheque.
90
(7) Payment of advances and adjustment thereof and reimbursement of expenses
Various types of advances such as car/scooter advance, contingency advance,
TA/DA etc are paid and adjusted/recovered as per the rules of the company. Also
reimbursement of expenses like medical school fee, conveyance etc is made as
per the rules of the company.
(8) Accounting procedures
Monthly payroll journal entry is made both for supervisory and non-supervisory
personnel and sent to book keeping sections for adoption. For payment made to
persons from other divisions, proper accounting is done to ensure that necessary
advice is raised to the concerned division.
(9) To make payments to Ex-employees towards final settlement of their dues.
(10) To monitor the controllable expenditures e.g. medical exp., conveyance exp. Etc
on monthly basis and to ensure it does not exceed the budget provided for it.
91
BILLS RECEIVABLE SECTION
OBJECTIVES
To ensure that dues from customers in respect of goods supplied and serviced
rendered are recovered timely as per Ministry in accordance with the Govt. letter
issued by Ministry of Defense dated 24th Aug, 1995.
To ensure that invoices in respect of Advances, stage payments, final deliveries
are raised timely in order to have smooth cash flow position.
To ensure that proper accounting is done as per the requirement and
accounting instruction laid down by the corporate office.
To ensure that all statutory payments e.g. sales tax, excise duty, custom duty is
recovered from the customer and is deposited timely with the appropriate
authority.
FUNCTIONS
The following are the functions of bills receivable section:
Preparation and rendering of Invoices to I.A.F. in respect of the following
activities in accordance with the guidelines laid down in the Govt. letter dated
30th Sept, 1997:
a) Manufacturing activity
b) Repair and Overhaul
c) Supply of spares against R.M.S. order
d) Deferred Revenue Expenditure
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The following documents sI.T.I.l be produced in support of the invoices rendered:
a) Initial balances are recorded on the basis of customer order:
i. Firm/ forecast task given by the Air Force;
ii. C.R.I. co-ordinated I.D.T.O. for divisional task;
iii. R.M.S. order.
b) Subsequent stages final payments are claimed on the basis of milestones
achieved, dispatch advices, acknowledgement received from Air Force in
form Q423, inspection note certified by the C.R.I. about the progress of
work done.
c) In respect of repair and overhaul work the payment is strictly regulated
based on the nature of work carried out e.g. functional test, defect
investigation, and zero hours servicing, repaired, overhauled.
To prepare and render invoices to non AIF customers in respect of following
activities:
i. Development sales for customer financed projects,
ii. Supplies and services rendered to civil customers,
iii. Supplies against R.M.S. orders from Army, Navy.
To claim payments from AO(DAD) on the basis of fitment details received from
the user Division.
To submit invoice for reimbursement of Royalty from Air Force and setup sales
for these claims and create claims receivable.
93
To follow up with AO(DAD) and other customers for collecting the payment
against the invoices raised.
To provide details to budget section for compilation of sales budget on the basis
of sales orders, firm/forecast task, I.D.T.O. for budget estimates, revised
estimates, F.C.
To collect sales tax from the customers and deposit the same.
To compile sales tax returns and submit the same to IMN Deptt. and to sales tax
authority for assessment.
94
COST ACCOUNTING SECTION
OBJECTIVES
To establish a costing system in line with the activities and the product range of
the division.
To determine the price realizable from the customer for the products
manufactured/ repaired/ overhauled/ serviced/ supplied by the division.
FUNCTIONS
To determine the rate of absorption/recovery of labour and other overheads for
recovering labour cost on the different jobs undertaken i.e. man-hour rate
computation.
To accumulate the labour and overheads content of each activity based on
evaluated L.T.B. generated by E.D.P. from work orders/ time dockets.
To keep track of different jobs completed and job lying incomplete in different
stages over a reasonable period of time and to co-ordinate with concerned
production controllers for justification for jobs lying unfinished beyond a
reasonable period of time and to ensure their early disposition.
To review work orders on which no material/ labour cost has been recorded and
finding out the reasons for the same.
95
To get the W.I.P. statement as on 31st march from E.D.P. for all mfg.
components, sub-assembly W.I.P., assembly W.I.P. for physical verification by
the concerned production shops.
To ensure that the valuation of W.I.P. has been done correctly keeping in view
the percentage of completion of the job.
To keep track of S.I.T. transaction with different division.
To keep record of all I.D.T.O. received and issued.
To send debit advices to other division for items dispatched against I.D.T.O.
received from them.
To accept the debit raised by other divisions for items received by the division in
respect of requirements raised by or through I.D.T.O.
To evaluate P.C. Memo for S.I.T. issues, Russian consumption for overhaul and
amortization of D.R.E.
To work on the cost of sales and to reconcile the same with the designation of
various customers financed projects.
To work out the royalty payable to different licensors as per the license
agreement.
To liaise with AO(DAD) for verification of claims in respect of labour booking on
production and D.R.E. items and other issues like wage arrears, idle hours etc.
To prepare fixed price quotation/ price catalogue for the different items
manufactured/ repaired/ overhauled/ serviced/ supplied by the division and to get
the same approved by the AHQ.
96
MATERIAL ACCOUNTS SECTION
OBLECTIVES
To ensure that all the receipts and issues of materials from stores are recorded
and accounted for properly.
To ensure that all non-moving/slow moving materials are identified as “surplus”
by I.M.M. and a suitable redundancy provision is made against them and is
disposed off.
To ensure that bin card balances are reconciled with the Material Ledger
balances in co-ordination with I.M.M. and the balances of material ledgers tallies
with the General Ledger.
FUNCTIONS
To send the priced R.D.R. received from Bills Payable section to E.D.P. for
opening in the Batch Mode and thus all the Receipts are recorded and control is
exercised over all the Purchases Value-wire.
To generate exception list for missing R.D.R. and getting it resolved with Bills
Payable Sections.
All the materials drawn excess when returned are credited to stores through
Stores Return Voucher.
The E.D.P. after processing of all M.R./Issue Vouchers prints the Material Issue
Analysis Statements monthly indicating:-
97
The cost of materials drawn against various job orders, Expense
accounts;
The cost of material issued to Contractors and others;
The cost of tools issued to various tool cribs from Main Tool Stores;
On the basis of list of materials/transfers reclassification indicating the material
code no./Quantity and value, necessary Journal entries are passed debit/credit to
relevant inventory accounts.
On the basis of stock verification sheets indicating stock verification note no.,
material code no., shortages/overages, necessary Journal entries are passed
after obtaining clarification from stores department by debit/credit to stock
adjustment account and credit/debit to relevant inventory accounts after taking
approval of C.F.A. wherever required for adjustments/write-off of stores.
A list of materials not moved for over 5 yrs is given by E.D.P. which is reviewed
by stores/concerned for programming deptt. Materials not required for production
or for other purposes are identified and suitable action is taken by I.M.M. for
finding their usage in other divisions or is auctioned.
Redundancy provision is made in the books of accounts at the rate of 100% for
Non Moving inventory and for closed Projects as special Provision on the basis
of list given by E.D.P. further a normal provision at 1.5% is made on the balance
inventory.
98
BOOK KEEPING SECTION
OBJECTIVES
1. To compile the accounts of the company are prepared as per the requirement of
the statute/corporate office guidelines.
2. To assess the performance of the company in financial terms such as sales
debtors, profit, value of production, value added etc.
3. To furnish data/information in respect of Income Tax Assessment done at
corporate office.
4. To get the accounts or the company audited by the Internal Statutory &
Government auditors as prescribed by law.
FUNCTIONS:
1. Journal entries originated by the various sections of Finance and Accounts Deptt.
are sent, to book keeping section. Those entries are serially numbered and
punched in to the computer and thereby posted to the General Ledger.
2. Preparation of Trial Balance, Profit & loss A/C and Balance Sheet Accounts are
computerized and are drawn for every quarter as on 30th June, 30th Sept, 31st
December and final accounts as on 31st March of each Financial year.
3. Maintenance of Fixed Asset Register and depreciation schedule.
99
(i) For all capital items purchases, RDR are furnished by the bills payable
section like wise details of assets like buildings etc. capitalized are also
furnished by civil works section to the book keeping section. The maintenance
of Asset ledger is computerized in which the details like date of purchase,
nature of item, P.O. No. location of asset etc. are recorded.
(ii) Depreciation on capital assets is calculated as per the policy of the company
and is reckoned accordingly as an operating expense of the division.
4. Inter Division transactions are accounted through control account adjustment
advices which are reconciled twice in a year at the clearing house.
5. Physical verification of fixed assets is done as per the guidelines of corporate
office.
6. To provide support to other Sections of accounts in their reconciliation and
control functions.
100
BUDGET SECTION
OBJECTIVES
1. To layout a comprehensive plan of action expressed in financial and physical
terms and to achieve the targets of the company against the available resources.
2. It is a tool in the hands of the management to establish goals, objectives and
targets of the company and measure the performance against the above targets.
3. To ensure the overall control over expenditures it is necessary that all
expenditures (except that of contingent nature) is authorized through the budget
approval.
FUNCTION:
1. The period of budget is the financial year from April to March and covers a period
of three years as under:
Current year - Revised estimates i.e. R.E.
Budget year - Budget estimates i.e. B.E.
(Next year)
Forecast year - Forecast estimates i.e. F.C.
(Next to Budget year)
Thus budget in the sole authority to authorize expenditure.
101
The Budgets are broadly classified into two categories.
CAPITAL BUDGET PERFORMANCE BUDGET
1. New projects. 1. Order status.
2. Existing project 2. Production budget.
3. Improvement & rationalization 3. Sales budget.
4. Replacement. 4. Purchase budget.
5. Welfare Budget. 5. Foreign Exchange.
6. Design & Development 6. Manpower budget.
7. Computers. 7. Training budget.
8. Profit & loss budget.
9. Welfare budget.
10. Overhead budget.
11. Ways & means budget.
12. Projected Balance sheet.
2. To insure that capital facility is made available in time to meet the production
requirement. The proposals are classified under three categories i.e. plant &
machinery, civil works & others.
3. Presenting estimates and expenditures in terms of function, programmes
activities and project with their financial and physical aspects closely interwoven.
102
4. The targets set the critically reviewed from the point of view of availability of
resources and their optimal utilization and to achieve cost reduction.
5. Analysis of variances and to find out the reasons of such variances and take
suitable remedial measures.
6. All important budgets like production, sales, profit & loss, working capital etc.
after approval of the Board are broken into monthly budgets to ensure uniform
production from month to month.
103
TIME OFFICE SECTION
OBJECTIVES:
Maintenance of leave records and feeding of attendance records to Computer
Deptt.
Maintenance of attendance records of Casual dallies, Project Engineers and
Contract Diploma Technicians.
To provide data for the vacation leave provision to be made in the books of
accounts.
FUNCTIONS:
To issue leave cards for the calendar year to all the employees/officers of the
division.
To maintain leave ledgers PB No wise for all the personnel. Credit is given to
each account according to his entitlement as per the guidelines laid down by the
Corporate office and the posing is done simultaneously from the attendance
reports received from the concerned deptt.
To verify the applications of V.L. encashment and advice accordingly to payroll
section.
To make calculations for payment of attendance bonus to Group A to Group D
employees.
104
To make calculations for provision of vacation leave to be accounted for the final
accounts.
To verify the applications for advanced vacation leave approved through P/A
Deptt. and making adjustment thereof in subsequent time period.
To maintain night duty roaster of officers deputed on night duty and to ensure
that time off claimed in lieu of such duty is not availed beyond 90 days.
To verify the time off claimed in lieu of extra work done/Sunday duty, sports
duty/Scouts duty etc.
To provide data to payroll section for payment of single wages in lieu of work
done on general holidays and double wages in lieu of work done on National
Holidays.
To provide data for gratuity payment in case of final settlement.
To provide data to payroll section for deduction of time loss on the basis of late
arrival report received from security deptt.
105
PROVIDENT FUND SECTION
OBJECTIVES:
To ensure timely collection of provident fund money recovered from members
every month by the employer.
To invest the provident fund accumulations in approved securities as stipulated
by statute.
To make payment of loans to members as per the rules/guidelines/Bye-laws.
To prepare Income and Expenditure Account and Balance sheet of the fund and
getting the same duly audited and approved by the Trustees.
To file the returns of provident fund to RPFC.
FUNCTIONS:
The PE subscription of members if deducted monthly from salary. The amount so
deducted (which is 10% of basic pay and DA) along with Company’s contribution
is collected from the payroll section before 10th of each month and credited to
fund’s account.
Payment of loans (Refundable and Non-Refundable) to members as per the
rules of the company, subject to availability of funds.
The investments of provident fund money is made in the approved securities and
details of investment is approved by the Board of Trustees.
To watch timely recovery of interest and keep watch on securities.
106
Interest is credited to the account of each member at such rate as may be
determined by the Board of Trustees, taking into account the income of the Trust
during each Financial year.
To maintain family pension account of each member and remittance RPFC at the
stipulated cites and file monthly and yearly returns.
To remit the amount of PE deduction for contractual/casual workers by cheque to
RPFC and file the the return in respect of the same.
To distribute the annual statement of PE to all the members in the format
prescribed by RPFC.
To make final payment of PE due to a member on his retirement/resignation or to
the nominee in the case of death of a member as per rules.
To maintain accounts of provident fund transactions and get audited by the
statutory auditors of the company and approved by the board of trustees.
To fine the monthly returns in the prescribed formats and submit to RPFC by 25 th
of each month in respect of provident fund and family pension fund.
To forward insurance claims to LIC Bangalore in respect of deceased members.
CATEGORIES OF OPERATION107
In I.T.I. Division the work carried out in the following categories.
1. MAINUFACTURING AND ASSEMBLING OPERATIONS:
a. Of aircrafts, aero-engines avionics ground radars, accessories and
instruments.
b. Of spares required for overhaul of aircrafts, engines, etc. and DRDL for
supply to IAF against RMS order, navy, army, etc.
c. Of other equipments like foreign and costing.
2. REPAIRS AND OVERHAUL ACTIVITIES:
a. Aircraft, engines, avionics ground radars, accessories and instruments.
b. Other equipments.
3. DESIGN AND DEVELOPMENT ACTIVITIES:
Of aircrafts, aero-engines, avionics, ground radars, accessories and instruments.
Though I.T.I. manufactured do not come in the range of products under cost
audit and cost. Accounting Records rules formed by the Government of India, a full
fledged cost accounting system is essential for effective cost monitoring and cost
control.
Participation of Lucknow Division in Totality
108
(Rs. in Lakhs)
Sr.No. Name
of the
Project
Material
consumed
Labour
Consumed
Other
Overheads
Total
Cost
Profit
% of
Cost
Selling
Price
1. Chetak 190 169 63 422 10% 464
2. GSE 112 99 37 248 71/2% 266
3. Rigs 101 90 34 225 10% 247
4. HPT-32 137 122 45 304 10% 334
5. Jaguar 234 208 78 520 10% 572
6. Kiran 58 51 19 128 71/2% 137
7. MIG 411 366 137 914 10% 1005
8. SU-30 1958 1740 652 4350 10% 4785
9. ALH 18 16 6 40 10% 44
10. Dornier 142 126 47 315 10% 346
109
Participation of Lucknow Division in Totality
0
1000
2000
3000
4000
5000
6000
Material consumed
Labour Consumed
Other Overheads
Total Cost
Profit % of Cost
Selling Price
110
Research Methodology
Research Problem: In every step of life resources are always scarce. In the same
way, Business organizations are also facing such type of problems. In this respect every
organization wishes to use available resources in an optimum manner. This study refers
to the all aspects of current assets, namely cash, marketable securities, debtors and
stock and current liabilities.
Research Objective: To study the process of Working Capital Management with
main emphasis on the technique which is used in I.T.I, Raibareilly.
Research Design: Descriptive Research
Type of Research: Analytical
Data Collection Methods: Secondary
111
SWOT ANALYSIS
STRENGTH :
1) I.T.I. is headed by an excellent and extra ordinary chairman, who is most capable of
managing the organization by getting the work load from Indian Air Force, Navy,
Army and Coast Guard for its financial growth and management.
2) The technological know how are very confidential and have the best – suited for
making and overhauling the Defense Aircraft that is incomparable with any
technologies.
3) I.T.I. is a very good pay-master to its employees as it is very much financially healthy
due to its existence under Ministry of Defense.
4) The monitoring of the Finance and the manufacturing and delivery of Aircraft to the
customers timely for the best use of the same.
5) The reputation of I.T.I. being the Defense organization has its importance and
technically and financially renowned among PSUs (Public Sector undertakings) as
Navratna and carries ISO: 14001 company .Quality in the world/Internal Business
Organization.
112
WEAKNESSES:
1) IAF is fully satisfied with the performance of I.T.I. so far as the following of licences
Technical know how are concerned, but due to recent Air crashes of MIG Aircraft
and few other Aircrafts there are few problems which are minor.]
2) Sometimes the foreign vendors on whom I.T.I. depends for procuring raw materials
for projects are not in a position to deliver the same in time this causes financial
loses to I.T.I. by paying liquidated damages to IAF / Customers.
3) Sometimes I.T.I. use to make payment to suppliers as advance for procurement of
raw-material because there are some parties who can not supply without advance
payment due to their financial problems.
4) Sometimes I.T.I. does not get the approval from IAF against the items appeared in
FPQ (Fixed Price Quotation) at the rate prevalent in the International market with
then approved suppliers. Escalation percentage in respect of the items where it is
much more than permissible limit can put to loss to the extent it is more.
5) Machineries required from Foreign vendor take abnormal time leading to-delay in the
normal manufacturing function, hence now I.T.I. wants get similar type of
machineries if approved by the customers.
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OPPORTUNITIES:
1) I.T.I. is the only manufacturer of the Defense Aircrafts; hence the job opportunities
as well as profit earning opportunities are more to day and in the forthcoming years.
2) Promotion opportunities are in-vogue to all the professionals including technical and
non-technical areas Departments.
3) As I.T.I. has monopoly in the manufacturing and overhauling of aircraft, so it can
explore all the advantages related to this field.
4) As I.T.I. has developed its own R & D centers so now it would not have to depend on
Russia for Technical know how.
THREATS:
1) I.T.I. has fear to terrorist as it is a defense organization producing fighter aircrafts.
2) Though I.T.I. is manufacturing fighter Aircrafts in confidence and getting the same
inspected by the authorized officials of Air force. There is a fear that during testing
there should not be any unwanted happening / rejections of Aircrafts which may
cause the losses.
3) During war, I.T.I. has its fear of attack by enemy – countries as I.T.I. is very famous
for a very good supporting organization with arms / fighter aircraft.
4) Threatening is given by many agencies / users that the materials modules / parts /
equipment are not be touched by any country’s ship or otherwise. In case any
project is given by false that the above, materials / modules / part have been
touched by any ship during importing then the user suspect on unnecessarily.
114
FINDINGS
1. In case of Customer financed Projects, funds are provided by the parties other
than IAF. For e.g. Navy, Coast guard or Border Security Forces. I.T.I. has to work for
them.
2. The term loan or other Government loan which is provided to I.T.I. by IAF is at very
minimum rate of interest i.e. 2-3%.
3. Only 40% of Internal Resources are available for funding capital expenditure and
Rest 60% is used in provisions & Reserves.
4. Pricing policy which is adopted by I.T.I. is based on FPQ. 10% profit is taken on
total cost, which is fixed price of the company.
5. I.T.I. invests 60% in the form of securities.
6. The share of I.T.I. is 45%. The share of Government is 51% and the rest 4% share
are taken by Tata Steel.
7. While purchasing any machines I.T.I. adopt pay back period in order to know the
period in which total cost of the machines can be recovered.
8. Replacement cost involves cost of machine and the processing charges which
include labour overhead and installation charges.
9. I.T.I. has no big competitor in the whole market i.e. means I.T.I. has monopoly in
the field of aircraft industry.
10. I.T.I. is listed amongst the top ten public sector units in the country.
11. Main customer of I.T.I. is IAF; ADA is one other customer of I.T.I.. Ratio between
IAF and other customers is 87:13 approx.
115
12. All standards related to production more or less depend upon direct workers.
13. Efficiency of direct workers is calculated 66%. Earlier it is used to be 75%. It is
decreased by 9%. It is one of the causes of increasing of MHR.
116
CONCLUSION
The topic undertaken for study was too wide to be studied in detail & in all
aspects. Duration of the summer training was limited and the sample size was restricted
to accessories division Raibareli only. The data so collected to write this report is the
result of direct personal accounts department. This study not only makes me familiar
with big organization like I.T.I., but also provided me the practical view that how the
financial functions and theories are applicable in an organization.
I.T.I. is listed among top ten public sector units which are running in profit. Its
main customer is IAF; its other customers are ADA and other civil customers, Navy, Air
Force and Coast Guard etc.
All sections of Finance & Accounts department functioning separately but in a
coordinated manner. Their functioning depends on each other. One section provides
data as an input to other section, the section processes it and gets output in this manner
these sections are interdependent.
Budget and budgetary control system is a wide area to cover. The method of
budgeting is differs from industry to industry on the basis of requirements. In I.T.I.
budgeting system, the period considered for budgeting is the financial year from April to
March. It lays a comprehensive plan of action expressed plan of action expressed in
financial and physical terms. It acts as a tool in the hands of management to establish
117
goals, objects and target of the company. It ensures the overall control over the
expenditure as all the expenditures are sanctioned in the budget.
It is ensured that working capital facility is made available in time to suit
production requirement. Estimates and expenditures are presented physical and
financial aspects. Approval of Board is required to break the budget into monthly budget
to ensure uniform production from month to month. In the context of I.T.I., budgeting
system that is prevailing can be said to be an effective one of the organization.
118
SUGGESTIONS
1) Before preparation of cash Budget, the records documents available in the locations
of Current Assets physically present should be checked to compare with that of
items physically available.
2) The source of supply with the details of Purchase Orders and dealers. If any
available in India alternatively should be computerized and maintained.
3) Lead time for receiving raw materials from suppliers is more, it should be reduced.
4) No. of years which the total value of the capital items to be depreciated, should be
indicated against each item on the basic of type of the capital items.
5) If existing machineries / plants are in need of frequent repairs / maintenance, then
history book should be maintained with the details of date of breakdown, repair /
maintenance cost.
6) Two Registers i.e. one for purchase of plant / machineries from foreign vendors and
other for Indigenous source should be maintained to know the feasibility of procuring
similar type of capital items within or below the procuring time with economical
condition.
7) A team consisting of concerned user department for this there is need of the capital
items. Finance, commercial should be proposed for incorporating the capital item in
the Budget.
8) Budgeting should include every pie of amount so that there is no embarrassing
situation during procurement; so far the funds are concerned to pay.
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9) While preparing capital budget Present Value of money should be taken.
10)Intranet facility should be frequently used so as to save money and time.
11)The system of company should be elastic and capable of adopting changes.
12)Year wise records showing the value of the items with the gross value and written
down value should be maintained.
13)The exchange rate applied in case of anticipated foreign sources for procurement
should have the authentic record for cross- check.
14)Similar kind of working conditions should be provided to employees of same level.
15)The company should try to set orders from other customers other than permanent
customers so that company could get economy of scale and reduce cost of
production to maximize its profit.
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BIBLIOGRAPHY
I.M. Pandey: Financial Management, 4th edition Tata McGraw-Hill Publishing
Company Limited, New Delhi (2004).
V.K. BI.T.I.l: “Working Capital Management”, 5th edition Anmol Publication New
Delhi (2003).
Prasanna Chandra: Financial Management Theory and Practice, 6th edition Tata
McGraw-Hill Publishing Company Limited, New Delhi (2004).
Khan and Jain: Financial management, 4th edition Tata McGraw-Hill Publishing
Company Limited, New Delhi (2004).
Annual Report of I.T.I. Raibareli.
Financial websites :-
www.I.T.I.-india.com
www.hindubusiness.com
www.mag-india.com
www.domail-b.com
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LIST OF ABBREVIATIONS
Abbreviation Description
P.O. PURCHASE ORDER
R.D.R RECEIVING-CUM-DISCREPANCY REPORT
G.I.T GOODS IN TRANSIT
S.I.T STOCKS IN TRADE
B/E BILL OF ENTRY
L/C LETTER OF CREDIT
M.I.S. MANAGEMENT INFORMATION SYSTEM
F.P.Q. FIXED PRICE QUOTATION
P.C. PRICE CATALOGUE
I.D.T.O. INTER DIVISIONAL TRANSFER ORDER
I.F.D. INTER FACTORY DEMAND
D.R.E. DEFERRED REVENUE EXPENDITURS
R.M.S.O. REPAIRS MAINTENANCE SUPPLY ORDER
L.T.B. LABOUR TIME BOOKING
W.I.P. WORK IN PROGRESS
A.H.Q. AIR HEAD QUARTERS
M.R. MATERIAL REQUISITION
C.F.A. COMPETENT FINANCIAL AUTHORITY
B.E. BUDGET ESTIMATES
R.E. REVISED ESTIMATES
F.C. FORECAST
AO(DAD) ACCOUNTS OFFICER (DEFENCE ACCOUNTS
DEPARTMENT)
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