working capital management

SUMMER TRAINING REPORT

ON

WORKING CAPITAL MANAGEMENT

IN VINAYAK TEXTILE MILLS LIMITED

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

In partial fulfillment of requirement for the award of degree in

MASTER OF BUSINESS ADMINISTRATION

Submitted By:- AMAN DEEP PASSI

AJAY JAIN

(2008-10)

PREFACE

This report , prepared during the summer training, is life’s greatest treasure. The training

held was very gainful as it took me close to real life.

The study aims to analyze the extent to which volume of working capital has been

effectively and efficiently utilized in this unit. The report is divided into various parts for

the close analyses of different components of working capital. The last part deals with the

conclusion and suggestions to improve the working capital management and to make it

more effective.

ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication towards work and

prompting guidance, co-operation and deliberation from seniors.”

This report is the outcome of six weeks training that I received at VINAYAK

TEXTILE MILLS LTD.

First of all, I wish to express my profound gratitude and sincere thanks to

MR. M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for

his constant and tireless guidance and encouragement given during the study and who

allowed me to join summer training at VTM.

It gives me immense pleasure to acknowledge my deep sense of gratitude

and sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the

courtesy and for guidance, support and affection throughout the course of this work.

I am extremely grateful to MISS. KAWALPREET KAUR and other

faculty members for their valuable guidance and glorious teaching.

In last, I express my profound gratefulness and indebtedness to the

esteemed organization for granting me the grand privilege of working on a project under

team of experts and professionals in the field of finance.

CONTENTS

CHAPTER 1

THEORETICAL BACKGROUND OF WORKING CAPITAL

MANAGEMENT

CHAPTER 2

HISTORY OF INDIAN TEXTILE INDUSTRY

CHAPTER 3

PROFILE OF THE GROUP AND UNIT

CHAPTER 4

OUTLINE OF THE STUDY

CHAPTER 5

WORKING CAPITAL ANALYSIS

OPERATING CYCLE ANALYSIS

ANALYSIS ON THE BASIS OF HISTORICAL DATA

1. RATIO ANALYSIS

2. COMMON SIZE STATEMENT ANALYSIS

3. ANALYSIS ON THE BASIS OF SCHEDULE

OF CHANGES IN WORKING CAPITAL

CHAPTER 6

CASH MANAGEMENT

CHAPTER 7

RECEIVABLES MANAGEMENT

CHAPTER 8

MANAGEMENT OF INVENTORY

CHAPTER 9

FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY

APPENDIX

REFERENCES AND BIBLIOGRAPHY

EXECUTIVE SUMMARY

STUDY TOPIC:

WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.

( A UNIT OF VARDHMAN POLYTEX LTD.)

OBJECTIVES OF THE STUDY :

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To know the future need of working capital in the running organization.

To render recommendations for effective management of working capital.

TIME SPAN:

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

STUDY INSTRUMENT:

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

METHODOLOGY :

To recognize the various type of information which are necessary for the

study of working capital management.

Collection of data from various department of VTM to analyze the working

capital management of VTM.

For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:

- Operating Cycle analysis

- Ratio Analysis

- Common size statement

- Schedule of changes in working capital

The overall position of VTM is studied and analyzed

Suggestions are given on the basis of findings for better understanding of

working capital management.

SCHEME OF PRESENTATION:

The project report is prepared in three parts.

1. First part of the report gives an overview and theoretical

background to the subject i.e working capital management.

2. Second part of the report presents a general profile of

VINAYAK TEXTILE MILLS LTD. where the summer

training has been undertaken.

3. Third part of the report deals with the project under study

which includes:


- Ratio Analysis



Chapter- 1 THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT

MEANING OF WORKING CAPITAL:-

In simple words working capital means that which is issued to carry out the day to day

operations of a business. Capital required for a business can be classified under two main

categories

Fixed capital

Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day

to day operations. Long term funds are required to create production facilities through

purchase of fixed assets such as plant and machinery, land, building, furniture etc.

Investment in these assets represents that part of firm capital, which is blocked on a

permanent or fixed basis called fixed capital. Funds are also needed for short term

purposes i.e. for the purchase of raw material, payment of wages and other day to day

operations of business. These funds are known as working capital. In other words,

working capital refers to that firm’s Capital, which is required for short – term assets or

current assets. Funds thus invested in current assets keep revolving last and being

constantly converted into cash and this cash flow is again converted into other current

assts. Hence it is known as circulating or short – term capital.

CONCEPT OF WORKING CAPITAL:

1. Gross Working Capital

It is simply called working capital refers to the firm’s investment in current assets so

the total current assets of the firm are known as gross working capital.

2. Net Working Capital

It represents the difference between current assets and current liabilities. Net

working capital may be positive or negative. Positive net working capital is that when

current assets are more than current liabilities. But when current liabilities become

more than current assets than it is negative working capital.

In brief we can say that working capital is too much necessary for the smooth functioning

and proper utilization of fixed assets.

TYPES OF WORKING CAPITAL:

1. Permanent Working Capital:

As the operating cycle is a continuous process so the need for working capital also

arises continuously. But the magnitude of current assets needed is not always

same; it increases and decreases over time. However there is always a minimum

level of current assets. This level is known as permanent or fixed working capital.

2. Temporary Working Capital:

The extra working capital needed to support the changing production and sales

activities, is called variable or functioning or temporary working capital. This can

be shown in the following diagram:-

Amount of Working

Capital Temporary capital

Permanent Capital

Time

NEED FOR WORKING CAPITAL:

The need for working capital cannot be overemphasized. The need of working capital

arises due to the time gap between production and realization of cash from sales. So the

working capital or investment in current assets becomes necessary need for working

capital. It arises due to following reasons:-

A. OPERATING CYCLE

“Operating cycle is the time duration requires for converting sales into cash after the

conversion of resources into inventories.”

First of all a firm purchase Raw Material, then after some processing it is

converted into work–in–progress and after this further processing is done to convert

work–in–progress in finished goods. After the raw material is converted into finished

goods, sales are made. Sales are no always full cash sales; there are credit sales also.

These credit sales after some period are converted into cash. So the whole process takes

the time. This time taken is known as the length of operating cycle. So operating cycles

includes:-

1. Raw Material conversion period (RMCP)

2. Work–in – progress conversion period (WIPCP)

3. Finished goods conversion period (FCP)

4. Debtors Conversion period (DCP)

So operating cycle can be known as following:-

Sales

Raw Material

Work in Progress

Cash Collection from Debtors

Finished Goods

Credit Sales Cash Sales

If the length of the operating cycle has short length period then less working capital is

required. So working capital requirement is directly related with operating cycle.

Operating cycle may be of two types

1. Gross Operating cycle

2. Net operating cycle

1. Gross Operating cycle

Gross Operating cycle is the total time period from the conversion of Raw Material

into finished goods and finished goods into sales and then sales into cash.

GOC =RMCP + WIPCP + FCP + DCP

2. Net Operating Cycle

As we provide period to debtors for the payments, our creditors also provide period to

us for payment to them. So this reduces our requirement of working capital. This also

affects the operating cycle. Operating cycle’s length reduces with so many days as

provided by the creditors to us. The difference between gross operating cycle and

period allowed by the creditors for payment is known as net operating cycle.

NOC = GOC – CPP

B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:-

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

availability of Raw Material or due to seasonal availability of Raw Material some

advances stock of Raw Material becomes necessary for company. In the similar way due

to sudden arise of demand of finished goods in future more finished goods are kept in

stock. For both reasons more working capital is required because funds will be involve in

these safeties stocks.

DETERMINENTS OF WORKING CAPITAL :

Followings are the main determinants of working capital.

1. Nature and Size of Business :

The working capital of a firm basically depends upon nature of its business for e.g.

Public utility undertakings like electricity; water supply needs very less working

capital because offer only cash sales whereas trading & financial firms have a very

less investment in fixed assets but require a large sum of money invested in working

capital.

The size of business also determines working capital requirement and it may be

measured in terms of scale of operations. Greater the size of operation, larger will be

requirement of working capital.

2. Manufacturing Cycle:

The manufacturing cycle also creates the need of working capital. Manufacturing

cycle starts with the purchase and use of Raw Material and completes with the production

of finished goods. If the manufacturing cycle will be longer more working capital will be

required or vice versa.

3. Seasonal variation:

In certain industries like VTM raw material is not available throughout the year. They

have to buy raw material in bulk during the season to ensure an uninterrupted flow and

process them during the year. Generally, during the busy season, a firm requires large

working capital than in the slack season.

.

4. Production Policy:

Production policy also determines the working capital level of a firm. If the firm has

steady production policy, it may require need of continuous working capital. But if the

firms adopt a fluctuating production policy means to produce more during the lead

demand season then the more working capital may require at that time but not in other

period during a financial year. So the different productions policy arises different type

of need of working capital.

5. Firm’s Credit Policy:

The firm’s credit policy directly affects the working capital requirement. If the firm

has liberal credit policy, hence the more credit period will be provided to the debtors

so this will lead to more working capital requirement. With the liberal credit policy

operating cycle length increases and vice versa.

6. Sales Growth:

Working capital requirement is directly related with sales growth. If the sales are

growing, more working capital will be needed due to arises need of more Raw Material,

finished goods and credit sales.

7. Business Cycle:

Business cycle refers to alternate expansion and contraction in general business. In a

period of boom, larger amount of working capital is required where as in a period of

depression lesser amount of working capital is required.

8. Earning Capacity & Dividend Policy:

If the firm has enough earnings and it is not paying dividend then it will not be in need

of external borrowings. If firm wants to increase its earning power then more working

capital will be required also to pay more dividend more profits are needed which give

rise to more working capital. Company is paying 42% dividend to its shareholder.

9. Price Level Changes:

Changes in the price level also effects the working capital requirements. Generally, the

rising prices will require the firm to maintain larger amount of working capital as

more funds will be required to maintain the same current assets.

10. Condition of Supply:

The inventory of raw material, spares and stores depends on the condition of supply.

If the supply is prompt the firm can manage with small inventory. However if the

supply is unpredictable then the firm to ensure continuity of production, should

acquire stocks as and when they are available and have to carry larger inventory on an

average.

11. Other Factors:

Certain other factors such as operating efficiency, management ability, irregularities of

supply, import policy, asset structure, importance of labour, banking facilities, time

lag. etc. also influence the requirement of working capital.

So these are the main determinants of working capital. The importance of influence of

these determinants on working capital may differ from firm to firm.

MEANING AND NATURE OF WORKING CAPITAL

MANAGEMENT

The management of working capital is concerned with two problems that arise in

attempting to manage the current assets, current liabilities and the inter relationship that

asserts between them.

The basic goal is working capital management is to manage current assets and current

liabilities of a firm in such a way that a satisfactory of optimum level of working capital

is maintained i.e. it is neither inadequate nor excessive. This is so because both

inadequate as well as excessive working capital position is bad for business.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-

1. What should be ratio of current assets to sales?

2. What should be the appropriate mix of short term financing and long term

financing for financing these current assets?

1. Current assets in relation to sales:-

If the firm can forecast accurately the factors, which effect the working capital, the

investment in current assets, can be designed uniquely. When uncertainty characteristics

the above factors, as it usually does the investment in current assets cannot be specified

uniquely. In case of uncertainty, the outlay on current assets should consist of base

component meant to meet normal requirement and a safety component meant to cope

with unusual requirement. The safety component depends upon low conservative or

aggressive in the current assets policy of a firm. If the firm purchases a very conservative

current asset policy it would carry a high level of current assets in relation to sales. If a

firm adopts a moderate current assets policy it would carry moderate level of current

assets in relation to sales, finally is a firm follows a highly aggressive current assets

policy, it would carry a low level of current assets in relation to sales.

VTM is following current assets policy showing moderate level of current assets in

relation to sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for

Financing of current assets:-

There are three approaches in this regard, which are discussed below:

HEDGING APPROACH

This approach is also called matching approach. In this approach there is a proper

matching of expected life of asset with the duration of fund. Usually, according to this

approach long-term sources are used for financing permanent current assets and fixed

assets & short-term sources are used for financing temporary current assets:

term financing

Fixed Assets

Time

CONSERVATIVE APPROACH

In this approach there is more reliance on long-term financing in comparison to short-

term financing. Even some part of the temporary current comparison to finance from

long-term sources because long-term sources are less risky in comparison to short-term

sources.

Temporary Current Assets

Short-term financing

Permanent Current Assets Long-term financing

Fixed Assets

Time

Permanent current assets

Temporary current assetsShort term financing

Long term financing

ASSETS

ASSETS

AGGRESSIVE APPROACH

In this approach there is more reliance on short term financing and even a part of

permanent current assets is financed from short-term finance.

Temporary current assets Short term financing

Permanent current assets Long term financing

Fixed Assets

Time

In VTM, the current assets are financed from short term sources as well as long term

sources, so they follow conservative approach.

ASSETS

Chapter- 2

HISTORY OF THE INDIAN TEXTILE

INDUSTRY

HISTORY OF THE INDIAN TEXTILE INDUSTRY:

The human need is to eat well for to be alive and shelter to protect them from discomforts

of nature and a place to live in. Human beings also need something to cover their body to

protect from diverse climates and to add the appearance. Earlier there was a time when

the human being known nothing about the cloth to wear. The human beings first use

plant barks, leaves and animal skin to wrap around them. Then as the development of

brain took place, they started to explore other possibilities and invent more in this area.

There is constant search for clothing and it led to the knowledge of sources from

vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to

manufacture clothes to wear.

The commercial development of man-made fiber began late in the 19 th Century,

experienced much growth during the 1940’s, expanded rapidly after world War – II and

in the 1970’s was still the subject of extensive Research and Development.

The spinning and weaving both are very common and attached with each other in all parts

of the world. We talk of the ancient times, when maximum work like weaving of the

clothes was done manually, but all the things were being done for the right perspectives.

From time to time in this world development had taken place, which has been found to be

a continuous process. Similarly considering the developments in the Spinning and

Weaving lot of improvements has come-up. Because earlier too was the Cotton crop was

grown by the farmers, but its end use was not done in an effective way, which seems

good. So much thick fiber was produced and accordingly its impact for the fabric

preparation.

APPARATUS USED FOR SPINNING AND WEAVING DURING

PRE-INDEPENDENCE PERIOD

Before Independence we talk of the political leaders like Mahatma Gandhi, who had

always insisted to use Khadi Clothes and even self-spinning and weaving. It is also

called as self-dependence for all needs. Such a good initiatives had come-up at India

level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such

initiatives had been proved very good and had attracted many other western countries to

follow such practices and show their excitedness. Though in case we talk of the English

rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but

after the freedom these leaders had got very good appreciation particularly for the self

spinning and weaving and in an overall manner this sector of Spinning and Weaving was

industrialized even after the independence too on the basis of Indian cotton growers.

It is needless to mention here that through out India, cotton growers belts are available

and after independence even English people take their raw material from here and had

established themselves with the Spinning and Weaving industries. Overall In India no

such preferences for the Spinning and Weaving industries were made, however the

Library research reveals that the first Cotton mill had been established in India during

1854 named as Bombay Spinning and Weaving company. Though the Cotton industry

had progressed a lot, but in case we say that India alone is heading this world, it is wrong.

Though in India Textile Machine manufacturers are there and one or two decades ago

they were the market leaders, but with the help of the other parts/people of world i.e.

Germany, Switzerland etc., India had made a very good recognition in the yarn market.

Because Indian Industrial Organizations have also initiated towards the most modernized

machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems,

Switzerland. This is just the example of the development, that in India too the most

modern machinery is being installed. However, it is an evident that the Indian yarn is

always running on the development trend since its Inception of first unit in Bombay, but

its position in the international market has not appeared so good. Because many other

countries like China as Cotton Textiles has went ahead. Though till today India has

achieved a lot in the Textile Industry and almost 700 Textile units are working

successfully, because India is having at present more than 20 Million spindles and a

weaving capacity of more than 2.5 Lac looms and the total output value of the same is

around Rs.1500 Cores, employing more than 10 Lac of workers directly.

The invention and production of man made thirty three fibers that is synthetic fibers like

Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc.,

which ultimately had given a good blow to grow for the Cotton Textile Industry and

know occupy a major part of consumer acceptance. About 50 countries have been

importing such material from India and the description of the Spinning and weaving

industry had remained incomplete without referring to the woolen industry.

Chapter- 3



The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of

industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in

Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills

situated in Ludhiana. Oswal group is earning laurels by exporting yarn of international

quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company

and VTM is granting authorization to use the Trademark USTERIZED “USTER” think

quality.

BACK DROP:

OSWAL GROUP is a premier of textile group of northern India having its corporate

office situated at Ludhiana, Punjab,(India). The organization has existence for last 40

year in core competency of spinning. We were earlier part of the Vardhman Group.but

after settlement between two brother in 2003, we have named ourselves as Oswal Group

has mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of

Garments. The group has ambitious plan to diversify in future but in textiles related

activities

Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core

competencies and capacities in Textile and diversified business to create value for its

stakeholders.(USD 110 millions).

The group has very good potential and high presence in the textiles industry with well set

manufacturing set up for 100% cotton, Polyester cotton, Worsted Spun Yarn ,Dyed Yarn,

and other blended yarns. All the group units have state of the art technology imported

from machinery giant in Europe, Japan, China and many other countries. To ensure

quality commitment to its valuable customers, the R&D department is well equipped with

latest R&D equipments. Continuous efforts are always being made to further improve the

quality and match the industry standard to meet the actual requirements of its quality

conscious customers.

COMPANY STRUCTURE

OSWAL GROUP

VPL BATHIND

A

VTM LUDHIAN

A

ANSHUPATI LUDHIANA

Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in

the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine

Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of

count combination demand of its prospective customers. The quality yarn in this unit is

manufactured using state of art technology imported from Europe, which is fully backed

with ultra modern R&D equipment for consistent quality. The yarn manufactured from

this unit holds a very strong reputation and demand both in domestic and international

market. The present capacity in terms of production is approximately 6.5 ton/Day

Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 105000 cotton

spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord

yarn with vast range of count selection varies from NE 10 to 40 both in carded and

combed varieties. To ensure quality to its customers the group has received the ISO-

9001-2000 certification. This unit is exporting its product to Mauritius, Hong Kong,

Singapore, Egypt, Turkey, Bangladesh, China, Taiwan etc. The company keeps on

receiving repeat orders, which shows the level of confidence, bestowed by its customers

into it. The company had been awarded the Export House status by the Government of

India. The present capacity in term of production is around 65 Tons /day. They are also

thinking of producing Value added that is (i) Slub yarn (ii) Lyera yarn.

Vinayak Textile Mills, a unit at Ludhiana in Punjab with 50000 cotton spindles installed,

is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection

varies from NE 10s to 40s both in carded and combed varieties. The present capacity in

term of production is around 29Tons /Day and 14 -mt dyeing /day.

CURRENT SET UP:

Presently the Company has its corporate office situated at Chandigarh Road, village

Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are

looked after by qualified technocrats/professional at plant/work as well as at corporate

office having rich experience in their respective fields of management.

Ashok Oswal himself a Law Graduate has been looking after the textile business in this

company since 1987. Uptill family settlement, he was actively associated with the

business management of Vardhman group.

PRESENT CAPACITIES

Presently the group has following production capacity and product range at its

different manufacturing facilities.

Location Installed

Capacity

(spindles)

Production

Capacity

Product Range

Bathinda (existing )

(VPL)

105000 65Tons / Day Cotton, synthetic,

blended yarn

Ludhiana

(Anshupati Textile)

8000 6.5 Tons/Day Acrylic Yarn

Ludhiana (VTM) 50000 29 Tons/Day

14-MT

dyeing/Day

100%cotton

yarn,Polyester/

Cottonblended

COMPUTERISATION

Presently the unit is operating under “SAP system”. This system is well structured

keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The

system is functioning to online to finance, raw material, stores and commercial. All the

stauratory returns are generated online from the system.

Personal computers have also been provided separately for each department like

administration, costing, R&D, Maintenance as well as the production areas.

USTERIZED CERTIFICATION

The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/

Switzerland on April 10, 2007. M/S Vinayak Textile mills, Ludhiana / India fulfil all

conditions for using the brand USTERIZED and will be checked regularly at once per

year basis.

PRODUCTION

The unit is producing different types of yarn both for Domestic consumption and Export

purpose. The production department is headed by General Manager (G.M.). The VTM

has two units. The unit I is concerned with the production of 100% cotton yarn NE 10s-

40s, Carded & Combed, Single & Multifold, Dyed , Processed & Polyester yarn NE 10s-

40s, Carded & Combed with a capability to offer any blend. The unit-II expansion is

concerned with production of Worsted Spun yarn 100% Cotton. .Production capacity of

unit –I is 15 ton per day and unit-II is 13 tons per day.

MARKETING

For Marketing of different product, the unit is having a modern marketing department

headed by experienced team which covers all the activities for conversion of finished

goods into cash. It keeps vigil on the market feed-back on the level competition, market,

trend, changing customer needs and modifications. The marketing department deals with

domestic sales, while export department of the group manages export sales. The VTM.

having the export and domestic ratio is 34:66. The unit is having different channels for

distribution of its products.

1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.

2. Branches at Delhi and Ludhiana.

3. Direct Dispatches are also made by the units.

ORGNISATION STRUCTURE

A chart showing the organizational structure of VTM Ludhiana is given on the next page.

It shows the various hierarchical levels of the organization. It is a department line

organization which is divided into various department headed by their respective

department heads. All departments operate under the ultimate control of Chief Executive

Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads

down the line to respective department subordinates.

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

Issue of Cotton Bales

Laying Down

Blow Room

Card

Breaker Draw Frame

Finisher Draw Frame

Unilap

Comber

Speed Frame

Ring Frame

Winding

Cheese Winding

T.F.O

Conditioning

Packing for Double Yarn

Conditioning

Packing for Single Yarn

Storage & Dispatch

MANUFACTURING PROCESS IN VINAYAK TEXTILE MILLS

LIMITED, LUDHIANA

Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.

1. MIXING

The different varieties of cotton are issued as per product mix from the raw material

section in bale from. The different varieties of cotton and different lots are mixed together

as per the requirement of end product and standard recommended mixings. The material

is conditioned in mixing for 24 hours.

2. BLOW ROOM

In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main

purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which

often comes in the bales.

3. CARDING

In this process, further cleaning of fibers is done and the fibers are opened into single

fibers extent i.e. the main purpose is further removal of trash in cotton and the

industrialization and parallelization of fibers. From the carding machine, the material is

delivered in the form of sliver.

4. DRAW FRAME

The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card

slivers are doubled together in this process to reduce variations and further drafting is

done to reduce the wt/yard of delivered sliver. Two passages are given at the draw frame

stage.

In case of combed counts, the card sliver is fed to the precombing draw frame. The

purpose of combing draw frame is to reduce the wt/yard variations in the card sliver and

to parallelize the fibers. Singles passage is given at the precombing stage.

5. LAP FORMER

20-25 precombed draw slivers are fed together to produce a lap sheets of fibers, which is

wound on the spools.

6. COMBERS

The laps prepared on lap former are fed to combers. The main purpose of combing

process is to remove the short fibers from the material in the form of noil. The average

noil percentage caries from 15% to 18%. The material is delivered in the form of sliver.

7. SPEED FRAME

The finisher draw frame sliver is fed to the speed frames for conversion into the roving

form. In this process the wt/yard of the sliver is reduced, slight twist is given to the fleece

and the material delivered in the form of roving, wound on the plastic bobbins.

8. RING FRAME

The roving is fed to ring frame for conversion into yarn. In the process, the weight / yd of

roving is reduced as per requirement of ultimate user and the delivered yarn is wound on

the plastic bobbins.

9. WINDING

In this process, the yarn is wound on paper cones to produce bigger package, as per

requirement of the market. The weight / package varies from 1.2 kilogram to 2.1

kilogram. During the process, in addition to the formation of bigger packages, the yarn

faults are also removed with help of electronic yarn cleaner.

10. DOUBLING

In the case of type cord the process is same upto cone winding. After cone winding the

yarn is fed into Cheese Winding. In the process 2 ply or 4 ply is to be done as per

requirement. After the yarn is fed into ring doubling and required T.P.I. is given in 2 ply

or 4 ply yarn. In the next process in assembly cheese winding is get the package in the

package in the required from to be fed into T.F.O. in T.F.O. final yarn is prepared in the

form of cheese and required T.P.I. is given to the final yarn in process.

11. PACKING

In this process, the cones / cheese are packed in bags or cartoons as per the requirement

of the market. In addition to the packing the material is checked thoroughly to avoid

mixing of different materials

Chapter- 4



The management of working capital is very important. It involves the study of day to day

affairs of the company. The motive behind the study is to develop an understanding about

the working capital management in the running business organization and to help the

company in developing the efficient working capital management. So it helps in future

planning and control decisions.

OBJECTIVES OF THE STUDY

The objectives of the study are as follows:

To analyze the working capital management of the company.

To determine the operating cycle of the unit.

To know the future need of working capital in the running organization.

To render recommendations for the effective management of working capital.

SCOPE OF THE STUDY

The study is conducted at “VTM –LUDHIANA” for 6 weeks duration. The study of W.C.

management is purely based on secondary data and all the information is available within

the company itself in the form of records. To get proper understanding of this concept, I

have done the study of the balance sheets, profit and loss a/c’s, cash accounts, trial

balance, cost sheets. I have also conducted the interviews with employees of accounts and

finance department and stores department. So, scope of the study is limited up to the

availability of official records and information provided by the employees. The study is

supposed to be related to the period of last four years.

RESEARCH METHODOLOGY

To recognize the various type of information which are necessary for the study of

working capital management.

Collection of data from various department of VTM to analyze the working

capital management of VTM.

For understanding the various reports, personal interviews are conducted.

With the help of various techniques like:


- Ratio Analysis



The overall position of VTM is studied and analyzed

Suggestions are given on the basis of findings for better understanding of working

capital management.

SOURCES OF INFORMATION

Primary Data – The personal interview with senior officials and various members

of finance and accounts department and also with other departments and collected

the data.

Secondary Data – All the details necessary for the study was available within the

company itself.

LIMITATIONS OF THE STUDY

As central purchase office purchase raw material and central marketing yarn make

sales. So more detailed information cannot be received about these.

Cash from debtors are collected by the corporate office through commission

agents. So efforts for collection of debtors cannot be clearly known from VTM

Ludhiana.

Investment of funds are also made by corporate office, so it becomes difficult to

know that how much investment is made in different ways for continuous

availability of funds.

Chapter- 5



1.OPERATING CYCLE ANALYSIS

Operating cycle refers to the time period which starts from the raw material purchases

and ends with realization of receivable. So it is total time gap between raw material

purchases to total debtors’ collection. This is also known as working capital cycle.

Operating cycle is therefore expressed in terms of months or weeks or days. The higher

the operating cycle period, higher the working capital requirement. It comprises of raw

material conversion period, WIP conversion period, FG conversion period and debtors’

conversion period and creditors period. The basic reason for calculating operating cycle is

to find out the means for reducing the duration of operating cycle because if duration of

operating cycle will be less than working capital requirement will be less.

OC = R + W + F + D – C

Where,

R = raw material conversion period

W = work in process period

F = finished goods conversion period

D = debtor collection period

C = creditors payment period

(1) Raw Material Conversion Period (RMCP)

= Average Raw Material Stock

Raw Materials consumed during the yearX 360

FOR SPINNING MILL:

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

Average raw

material stock 183071228.14 227150926.07 218046754.94 328005499.45

Raw material

consumed

during the year

385430133.40 309974487.22 410666073.76 495453061.76

RMCP 169.2 DAYS 263.8 DAYS 191.1 DAYS 238.3 DAYS

FOR DYE HOUSE:

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

Average raw

material stock - 15012815.54 16023458.66 11108879.34

Raw material

consumed

during the year

- 122961363.25 263718304.68 338194022.33

RMCP - 43.9 DAYS 21.9 DAYS 11.8 DAYS

(2) Work in Progress Conversion Period (WIPCP)

= Average stock in progress

Cost of Production

FOR SPINNING MILL:

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

Average stock in

progress 4046698.00 3388006 6406842 8595640.40

Cost of

production 500317045.88 426414576.75 608858271.37 751824244.94

WICP 2.91 DAYS 2.9 DAYS 3.8 DAYS 4.1 DAYS

X 360

FOR DYE HOUSE:

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

Average stock in

progress 1021072 5791673 6692336 4917031.00

Cost of

production 25254802.19 219005634.76 404498734.7 524670967.58

WICP 14.6 DAYS 9.5 DAYS 5.9 DAYS 3.4 DAYS

(3) Finished Goods Conversion Period (FGCP)

= Average Finished good inventory

Cost of goods sold

FOR SPINNING MILL:

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

Average

finished goods

inventory

18939831.18 9473270 12545845 39817039.68

Cost of goods

sold 500317045.88 426414576.75

608858271.37

751824244.94

FGCP 13.6 DAYS 7.9 DAYS 7.4 DAYS 19.1 DAYS

FOR DYE HOUSE:

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

Average

finished goods

inventory

- 5857416 6745966 10034498

Cost of goods

sold

- 219005634.76 404498734.7 524670967.58

FGCP - 9.6 DAYS 6 DAYS 6.9 DAYS

X 360X 360X 360

(4) Debtors’ Conversion Period (DCP)

= Average Debtors

Credit Sales

FOR SPINNING MILL :

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

Average debtors 37279070.84 37279070.84 92312638.13 29970369.49

Credit sales 596069587.62 543167006.35 588183650.23 730047747.60

DCP 22.4 DAYS 24.7 DAYS 56.5 DAYS 14.8 DAYS

X 360

FOR DYE HOUSE:

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

Average debtors 247769 28959455.84 48904270.97 99301521.09

Credit sales 212240 202379449.81 492529652.69 610863493.76

DCP 420.3 DAYS 51.5 DAYS 35.7 DAYS 58.5 DAYS

(5) Credit Conversion Period (CCP)

= Average Creditors

Credit PurchasesX 360

FOR SPINNING MILL:

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

Average creditors 4316518.31 5840979.88 5294945.83 23709393.26

Credit purchases 385430133.40 309974487.22 410666073.76 495453061.76

CCP 4.03 DAYS 6.8 DAYS 4.6 DAYS 1.7 DAYS

FOR DYE HOUSE:

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

Average creditors - 5449322.89 1203818.69 1767614.89

Credit purchases - 122961363.25 263718304.68 338194022.33

CCP - 15.9 DAYS 1.6 DAYS 1.9 DAYS

GROSS OPERATING CYCLE FOR SPINNING MILL:

YEAR RMCP WICP FGCP DCP GOC

2004-05 169.2 DAYS 2.91 DAYS 13.6 DAYS 22.4 DAYS 208.1 DAYS




NET OPERATING CYCLE FOR SPINNING MILL:

YEAR GOC CCP NOC

2004-05 208.11 DAYS 4.03 DAYS 204.08 DAYS

2005-06 299.3 DAYS 6.8 DAYS 292.5 DAYS

2006-07 258.8 DAYS 4.6 DAYS 254.2 DAYS

2007-08 276.3 DAYS 1.7 DAYS 274.6 DAYS

GROSS OPERATING CYCLE FOR DYE HOUSE:

YEAR RMCP WICP FGCP DCP GOC

2004-05 - 14.6 DAYS - 420.3 DAYS 434.9 DAYS


2006-07 21.9 DAYS 5.9 DAYS 6 DAYS 35.7 DAYS 69.5 DAYS


NET OPERATING CYCLE FOR DYE HOUSE:

YEAR GOC CCP NOC

2004-05 434.9 DAYS - 434.9 DAYS

2005-06 114.5 DAYS 15.9 DAYS 98.6 DAYS

2006-07 69.5 DAYS 1.6 DAYS 67.9 DAYS

2007-08 80.6 DAYS 1.9 DAYS 78.7 DAYS

ANALYSIS

It is claimed that gross operating cycle of VTM for spinning mill is increasing in year

2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06. For

spinning mill in year 2004-05 it is 208.11 days then it increased to 299.3 days in year

2005-06. In 2006-07, it is decreased to 258.8 days. The main reason of increasing gross

operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the

stores but in year 2006-07 there is less GOC due to less availability of raw material in

stores. The GOC for dye house has shown a significant decreament from 434.9 days in

2004-05 to 69.5 days in year 2006-07. In year 2007-08, it came out to be 80.6 days. The

GOP for dye house is not satisfactory as it has decreased to a great extent.

2.ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON

BASIS OF THE HISTORICAL DATA

There are number of devices to analyze working capital like ratio analysis, common size

statement etc. We will discuss them one by one as follows:

1. RATIO ANALYSIS

Ratio analysis is a technique of analysis and interpretation of financial statements. It is

the process of establishing and interpreting various ratios for helping in making decisions.

It only means of better understanding of financial strengths and weaknesses of a firm.

The main emphasis has been on calculating the ratios related to a working capital

management.

LIQUIDITY RATIOS

These are the ratios which measures the short term solvency or financial position of a

firm. In other words, it refers to the ability of a concern to meet its current obligations as

and when these become due. To measure the liquidity of a firm, the following ratios can

be calculated.

CURRENT RATIO – It may be defined as the relationship between current assets and

current liabilities. This ratio is also known as working capital ratio and measures the

ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and

has the ability to pay its current obligations in time as and when they become due.

A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current

liabilities is considered to be satisfactory.

Current Ratio = Current Assets

Current Liabilities

Current Ratio of VTM

FOR SPINNING MILL:

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT RATIO

(CR)

2004-05 329780134.40 22952307.82 14.4

2005-06 337914119-55 25398799.03 13.3

2006-07 372031954.03 29553280.08 12.6

2007-08 462706185.06 47891481.92 9.7

FOR DYE HOUSE:

YEAR CURRENT

ASSETS

CURRENT

LIABILITIES

CURRENT RATIO

(CR)

2004-05 9633007.63 10462522.55 0.9

2005-06 64846029.63 13090777.94 4.9

2006-07 92984361.6 8735151.3 10.6

2007-08 148537709.99 5975377.17 24.9

ANALYSIS

The current ratio of the spinning mill is above the standard and it guarantees the payment

of dues in time. The current ratio of the company has been considerably high because

they had made over investment in inventories which is the main reason for the high ratio

of current assets. Inventories are high because of seasonal availability of raw material.

The overall position of current ratio for spinning mill is satisfactory.

The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05

to10.6 in 2006-07 and then to 24.9 in 2007-08. Initially in 2004-05, the ratio was not

satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the

year 2007-08.

LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. It is a more

rigorous test of liquidity than the current ratio. It is based on those current assets which

are highly liquid. Inventory and prepaid expenses are excluded because they are deemed

to be least liquid component of current assets. A high quick ratio is the indication that the

firm is liquid and has the ability to meet its current liabilities in time and on the other

hand low ratio represents liquidity position is not good.

Quick Ratio = Quick or Liquid Assets

Current Liabilities

Quick Assets = Current Assets – Inventory – Prepaid Expenses

Quick Ratio of VTM

FOR SPINNING MILL:

YEAR LIQUID ASSETS CURRENT

LIABILITIES

LIQUID RATIO

(LR)

2004-05 120598521 22952307.82 5.3

2005-06 89811409.92 25398799.03 3.5

2006-07 127216004.91 29553280.08 4.3

2007-08 81358926 47891481.92 1.7

FOR DYE HOUSE:

YEAR LIQUID ASSETS CURRENT

LIABILITIES

LIQUID RATIO

(LR)

2004-05 6123027.86 10462522.55 0.6

2005-06 33218697.57 13090777.94 2.5

2006-07 56812234.26 8735151.3 6.5

2007-08 115776657.53 5975377.17 19.4

ANALYSIS

According to rule of thumb, it should be 1:1. For spinning mill, the liquid ratio has

decreased over the past four years. It was 5.3 in 2004-05 and decreased to 4.3 in 2006-07

and then to 1.7 in 2007-08. The decreament in the ratio is not satisfactory, however the

ratio 1.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of

thumb.

For dye house,the liquid ratio has shown a significant increament over the past four years.

It increased from 0.6 in 2004-05 to 6.5 in 2006-07 and then to 19.4 in 2007-08. The

increament in the ratio is quite good for the dye house. This shows that the investment in

liquid assets has increased over the past years.

ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than

inventories yet there may be doubt regarding their realization into cash in time. Absolute

liquid ratio shows the relationship between liquid assets which include cash, bank and

marketable securities.

Absolute Liquid Ratio = Absolute Liquid Assets

Current Liabilities

Absolute Liquid Ratio of VTM

FOR SPINNING MILL:

YEAR ABSOLUTE

LIQUID ASSETS

CURRENT

LIABILITIES

ABSOLUTE

LIQUID RATIO

(ALR)

2004-05 435629.36 22952307.82 0.01

2005-06 569656 25398799.03 0.02

2006-07 5210807.58 29553280.08 0.18

2007-08 395884.64 47891481.92 0.01

FOR DYE HOUSE:

YEAR ABSOLUTE

LIQUID ASSETS

CURRENT

LIABILITIES

ABSOLUTE

LIQUID RATIO

(ALR)

2004-05 - - -

2005-06 233902 13090777.94 0.01

2006-07 253609 8735151.3 0.02

2007-08 - - -

ANALYSIS

The acceptable standard for this ratio is 0.5:1. Thus spinning mill and dye house, we can

say that in all the years, it is below the standard due to very less cash and bank balance

maintained because major cash receipts and payments are handled by corporate office. It

is very less in 2005-06, 2006-07 due to increased cost of production both for spinning

mill and dye house.

WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio

indicates the velocity of the utilization of net working capital. This ratio measures the

efficiency with which the working capital is being used by a firm.

Working Capital Turnover Ratio = Sales

Net Working Capital

Working Capital Ratio of VTM

FOR SPINNING MILL:

YEAR SALES NET WORKING

CAPITAL

WCTR

2004-05 596069587.62 306883587.58 1.9

2005-06 543167006.35 312620335.52 1.7

2006-07 588183650.23 342591885.95 1.7

2007-08 730047747.60 415076656.14 1.8

FOR DYE HOUSE:

YEAR SALES NET WORKING

CAPITAL

WCTR

2004-05 - - -

2005-06 202379449.81 51755251.69 3.9

2006-07 492529652.69 84249210.4 5.8

2007-08 610863493.76 142581027.83 4.3

ANALYSIS

This ratio indicates the number of times the working capital is turned over in the course

of a year. A high working capital ratio indicates the effective utilization of working

capital and less working capital ratio indicates less utilization. For spinning mill, the ratio

is quite same for the past four years. It is 1.9 in 2004-05, 1.7 in years 2005-06 and 2006-

07 and 1.8 in 2007-08. For dye house, the ratio is more than that of spinning mill. It

shows increament from 3.9 in 2005-06 to 5.8 in 2006-07 and then decreased to 4.3 in

2007-08. The ratio is satisfactory for dye house but it should not decrease further.

2. COMMON SIZE STATEMENT ANALYSIS

This analysis is mainly to see the composition of working capital. Its purpose is to see the

%age of each asset to the total asset and %age of each liability to total liability.

COMMON SIZE STATEMENT

FOR SPINNING MILL:

FOR YEAR 2004-05:

PARTICULARS AMOUNT ( IN RS.) %FIXED ASSETS Net block 570440434.93 62.18Capital work-in-progress 17200494.12 1.87Project & Pre-operative expenses

- -

Total fixed assets 587640929.05 64.05CURRENT ASSETSInventories 208195599.41 22.69Sundry debtors 37039996.26 4.04Cash & Bank Balances 435629.36 0.05Loans & Advances 84108909.37 9.17Total current assets 329780134.4 35.95Total assets 917421063.45 100SHARE CAPITAL & RESERVESInter unit balances 567503938.84 61.94Secured loans 336825183.77 36.76Reserves & Surplus (9804605.98) (1.07)Total Capital & Reserves 894524516.63 97.64CURRENT LIABILITIES Sundry creditors 3014518.31 0.33Other liabilities 16627112.73 1.81Interest accrued but not due

668837 0.07

Security deposits & Retention money

1339839.78 0.14

Total current liabilities 21650307.82 2.36Total of liability side 916174824.45 100

FOR YEAR 2005-06:

PARTICULARS AMOUNT (IN RS.) %FIXED ASSETSNet block 565709880.59 49.8

Capital work-in-progress 227016140.46 20Project & Pre-operative expenses

4400478.52 0.39

Total fixed assets 797126499.57 70.23 CURRENT ASSETSInventories 246141889.88 21.69Sundry debtors 37279070.84 3.28Cash & Bank Balances 569656 0.05Loans & Advances 53923502.83 4.75Total current assets 337914119.55 29.77Total assets 1135040619.12 100SHARE CAPITAL & RESERVESInter unit balances 857082196.43 64.30Secured loans 425924449.39 31.95Reserves & Surplus 24531788.78 1.84Total Capital & Reserves 1307538434.6 98.09CURRENT LIABILITIES Sundry creditors 5840979.88 0.44Other liabilities 18036489.88 1.35Interest accrued but not due

- -


1521329.27 0.11


FOR YEAR 2006-07:


Capital work-in-progress 39988683.62 3.11Project & Pre-operative expenses

-

-

Total fixed assets 913074513.57 71.05 CURRENT ASSETS

Inventories 240453655.62 18.71Sundry debtors 92312638.13 18.71Cash & Bank Balances 5210807.58 0.41Loans & Advances 34054852.70 2.65Total current assets 372031954.03 28.95Total assets 1285106467.6 100SHARE CAPITAL & RESERVESInter unit balances 730042330.44 56.80Secured loans 532957606.95 41.47Reserves & Surplus (7333537.87) (0.57)Total Capital & Reserves 1255666399.52 97.70CURRENT LIABILITIES Sundry creditors 5294945.83 0.41Other liabilities 21319619.32 1.67Interest accrued but not due

- -


2938714.93 0.22


FOR YEAR 2007-08:



- -

Total fixed assets 850158965.35 64.76 CURRENT ASSETSInventories 379510100.55 28.91Sundry debtors 29970369.49 2.28Cash & Bank Balances 395884.64 0.03Loans & Advances 52829830.38 4.02Total current assets 462706185.06 35.24Total assets 1312865150.41 100SHARE CAPITAL & RESERVESInter unit balances 1026736607.06 73.92Secured loans 431510188.42 31.06Reserves & Surplus (117066371.70) (8.43)

Total Capital & Reserves 1341180423.78 96.55CURRENT LIABILITIES Sundry creditors 24415626.72 1.76Other liabilities 23475855.20 1.69Interest accrued but not due

- -


- -


FOR DYE HOUSE:

FOR YEAR 2004-05:



- -

Total fixed assets 189659461.62 95.17 CURRENT ASSETSInventories 3247313.77 1.63Sundry debtors 247769 0.12Cash & Bank Balances - -Loans & Advances 6137924.86 3.08Total current assets 9633007.63 4.83Total assets 199292469.25 100SHARE CAPITAL & RESERVESInter unit balances 140951705.11 70.73Secured loans 59872920 (6.02)Reserves & Surplus (11994678.41) 30.04Total Capital & Reserves 188829946.7 94.75CURRENT LIABILITIES Sundry creditors 8359951.15 4.19Other liabilities 1429726.92 0.72Interest accrued but not due

- -


672844.48 0.34


FOR YEAR 2005-06:



- -

Total fixed assets 185097975.73 74.06 CURRENT ASSETSInventories 31300541.06 12.52Sundry debtors 28959170.26 11.59Cash & Bank Balances 233902 0.09Loans & Advances 4352416.31 1.74Total current assets 64846029.63 25.94Total assets 249944005.36 100SHARE CAPITAL & RESERVESInter unit balances 212651256.41 78.34Secured loans 59872920 5.22Reserves & Surplus (14177921.30) 22.06Total Capital & Reserves 258346255.11 95.18CURRENT LIABILITIES Sundry creditors 5449322.89 20.08Other liabilities 6821847.92 2.51Interest accrued but not due

- -


819607.13 0.30


FOR YEAR 2006-07:


Capital work-in-progress 300237 0.096Project & Pre-operative expenses

- -

Total fixed assets 220513391.5 70.34 CURRENT ASSETSInventories 35816899.3 11.42Sundry debtors 48904270.9 15.59Cash & Bank Balances 253609 0.08Loans & Advances 8009581.9 2.55Total current assets 92984361.1 29.66Total assets 313497752.6 100SHARE CAPITAL & RESERVESInter unit balances 215855702.2 68.9Secured loans 59872920 92.6Reserves & Surplus 29033979.4 19.09Total Capital & Reserves 304762601.6 97.21CURRENT LIABILITIES Sundry creditors 1203818.69 0.38Other liabilities 7335764.53 2.34Interest accrued but not due

- -


195567.89 0.062


FOR YEAR 2007-08:



- -

Total fixed assets 210796483.14 58.66 CURRENT ASSETS

Inventories 32341614.46 9Sundry debtors 99301521.09 27.63Cash & Bank Balances - -Loans & Advances 16894574.44 4.70Total current assets 148537709.99 41.34Total assets 359334193.13 100SHARE CAPITAL & RESERVESInter unit balances 236801598.89 55.33Secured loans 131435332.52 12.56Reserves & Surplus 53753985.78 30.71Total Capital & Reserves 421990917.19 98.60CURRENT LIABILITIES Sundry creditors 1767614.89 0.41Other liabilities 4076005.21 0.95Interest accrued but not due

- -

Trade deposits and other Advances

131757.07 0.03


ANALYSIS

For spinning mill, the major part of current assets involves inventories. It covers more

than 50% of total current assets. The debtors also have significant part of current assets. It

contributes approximate 11% to 30% part of current assets for all the years from 2004-05

to 2007-08. The least contribution is thus of cash and bank balance. On the other hand,

current liabilities consist of mainly creditors and other liabilities. In 2007-08, current

assets have increased due to increase in inventories and loans & advances, and current

liabilities have also shown increament. So the working capital is more for year 2007-08

as compared to last year’s working capital.

For dye house, the inventories form a good portion of current assets and contribute 30%

to 50% of the total current assets over the past years. The sundry debtors also show

fluctuating proportions in the total current assets over the years. The proportion is quite

less for year 2004-05 but it increased significantly for the next years and contributed

about 66% to the total current assets in year 2007-08. The current liabilities mainly

consist of sundry creditors and other liabilities. The sundry creditors have decreased over

the past years. The other liabilities have shown increament from year 2004-05 to year

2006-07 but it has decreased in year 2007-08.

3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING

CAPITAL

SCHEDULE OF CHANGES IN WORKING CAPITAL:

FOR SPINNING MILL: PARTICULARS 2004-05 2005-06 INCREASE DECREASECURRENT ASSETS:Inventories 208195599.41 246141889.88 37946290.47S. debtors 37039996.26 37279070.84 239074.58Cash & Bank Balances

435629.36 569656 134026.64

Loans & Advances

84108909.37 53923502.83 30185406.54

Total current assets (A)

329780134.4 337914119.55

CURRENT LIABILITIES:S. creditors 4316518.31 5840979.88 1524461.57Other liabilities 16627112.73 18036489.88 1409377.15Int. accrued but not due

668837 - 668837


1339839.78 1521329.27 181489.49

Total current liabilities (B)

22952307.82 312515320.52

Working capital (A-B)

306827826.58 312515320.52

Net increase in working capital

5687493.94 5687493.94

312515320.52 312515320.52 38988228.69 38988228.69

ANALYSIS:

PARTICULARS 2006-07 2007-08 INCREASE DECREASECURRENT ASSETS:Inventories 240453655.62 379510100.55 139056444.93S. debtors 92312638.13 29970369.49 62342268.64Cash & Bank Balances

5210807.58 395884.64 4814922.94

Loans & Advances

34054852.70 52829830.38 18774977.68


372031954.03 462706185.06

CURRENT LIABILITIES:S. creditors 5294945.83 23709393.26 18414447.43Other liabilities 21319619.32 23475855.20 2156235.88Trade deposits - 706233.46 706233.46Security deposits & Retention money

2938714.93 - 2938714.93


29553280.08 47891481.92


342478673.95 414814703.14


72336029.19 72336029.19

414814703.14 414814703.14 160770137.54 160770137.54FOR YEARS 2004-05 AND 2005-06:

As we have a look on the schedule of changes in working capital for the spinning mill

over the years 2004-05 and 2005-06, we find that, among current assets,inventories,

sundry debtors and cash & bank balances have shown increament from year 2004-05 to

year 2006-07. The Loans & advances have got decreased in the same years. Among the

current liabilities, the sundry creditors and other liabilities have increased. So the overall

net working capital has increased.

FOR YEARS 2006-07 AND 2007-08:

Among the current assets,inventories and loans & advances have increased and sundry

debtors and cash & bank balances have shown decreament. The total current assets have

increased. Among the current liabilities,sundry crditors and other liabilities have

increased. So the net working capital has also increased.

FOR DYE HOUSE:

PARTICULARS 2004-05 2005-06 INCREASE DECREASECURRENT ASSETS:Inventories 3247313.77 31300541.06 28053227.29S. debtors 247769 28959170.26 28711401.26Cash & Bank Balances

- 233902 233902

Loans & Advances

6137924.86 4352416.31 1785508.55


9633007.63 64846029.63

CURRENT LIABILITIES:S. creditors 8359951.15 5449322.89 2910628.26Other liabilities 1429726.92 6821847.92 5392121Security deposits & Retention money

672844.48 819607.13 146762.65


10462522.55 13090777.94


(829514.92) 51755251.69


52584766.61 52584766.61

51755251.69 51755251.69 59909158.81 59909158.81

PARTICULARS 2006-07 2007-08 INCREASE DECREASECURRENT ASSETS:Inventories 35816899.34 32341614.46 3475284.88S. debtors 48904270.97 99301521.09 50397250.12Cash & Bank Balances

253609 - 253609

Loans & 8009581.93 16894574.44 8884992.51

AdvancesTotal current assets (A)

92984361.24 148537709.99

CURRENT LIABILITIES:S. creditors 1203818.69 1767614.89 563796.2Other liabilities 7335764.53 4076005.21 3259759.32Trade deposits - 131757.07 131757.07Security deposits & Retention money

195567.89 - 195567.89


8735151.11 5975377.17


84249210.13 142562332.82


58313122.69 58313122.69

142562332.82 14256332.82 62737569.84 62737569.84

ANALYSIS

FOR YEARS 2004-05 AND 2005-06:

Among the current assets, inventories, sundry debtors and cash & bank balance have

increased but the loans & advances have decreased. The total current assets have

increased. Among the current liabilities, sundry creditors have decreased and other

liabilities have increased. The total current liabilities have increased. So, the net working

capital has increased.

FOR YEARS 2006-07 AND 2007-08:

Among the current assets, inventories and cash & bank balances have decreased. On the

other hand, sundry debtors and loans & advances have increased. The total current assets

have increased. Among the current liabilities, sundry creditors have increased but other

liabilities have decreased. So, the net working capital has increased.

Chapter- 6

CASH MANAGEMENT

CASH MANAGEMENT

Cash management refers to management of cash balance and the bank balance and also

includes the short term deposits. The cash is important current asset for the operation of

the business. Cash is the most liquid and can be used to make immediate payments.

Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or

force it to sell its other assets immediately. On the other hand extreme liquidity may take

uneconomic investments. This underlines the significance of cash management.

The term cash includes coins, currency and cheques held by the firm ad balances in its

bank accounts. Sometimes near- cash items such as marketable securities of bank item

deposits are included in cash.

A financial manager is required to manage the cash flows (both inflows and outflows)

arising out of the operations of the firm. For this he will have to forecast the cash inflows

from sales and outflows for costs etc. This will enable the financial manager to identify

the timings as well as amount of future cash flows. Cash management does not end here

and the financial manager may also be required to identify the sources from where cash

may be produced on a short term basis or the outlets where excess cash may be invested

for a short term.

Cash is the basic input needed to keep the business running on continuous basis. It is also

the ultimate output expected to realize by selling the product manufactured by the firm.

Cash shortages will simply disturb the firm’s manufacturing operations where excessive

cash will simply remain idle. Thus, firm should keep sufficient cash neither more nor

less. Hence, a major function of the financial manager is to maintain a sound cash

position. Cash management is one of the key areas of working capital management. A

part from the fact that it is the most liquid current asset

, cash is the common denominator to which all the current assets can be reduced because

the major liquid asset i.e. receivables and inventory get eventually converted into cash.

Cash management is concerned with the managing of:

Cash inflows and outflows of the unit

Cash flows within the unit

Cash balance held by the unit at a point of time by financing deficit or investing

surplus cash

MOTIVES FOR HOLDING CASH

Transaction Motive

It means a firm holds cash for conduct of business. The daily requirements of cash come

under this motive. So enough cash for smooth business is required for transaction motive.

Precautionary Motive

Under this motive cash is held for most contingencies in future. There may be so many

reasons due to which the emergency of cash arises. These reasons can be:

(i) Sudden rise in the demand which leads to more production

(ii) Due to inflation

(iii) Due to any miss-happening in future like loss by fire theft etc. the cash is held

for precautionary motive in advance. This cash may be held as marketable

securities which are highly liquid and low risky.

Speculative Motive

The speculative motive relates to holding of cash for investing in profit making

opportunity as and when arises. The opportunity may arise in securities, in material

purchasing or in any other type. By holding cash for speculative motive, the firm can

choose most profitable opportunity, yet by enlarge, business firm do not engage in

speculations because the primary motive to hold cash are transaction and precautionary

motive.

In VTM, it holds cash only for transaction motive. Speculation and precautionary motives

cash is held by corporate office. If the VTM requires some more cash to meet any future

contingency then it informs about it to corporate office and corporate office sends cash to

VTM as per requirement. But the VTM has to give the reasons for extra cash to

corporate office.

The firm should evolve strategies regarding the following four facts of cash management:

(1) Cash Planning

(2) Managing the cash flow

(3) Optimum cash level

(4) Investing surplus cash

1. CASH PLANNING

Cash planning is a technique to plan to control the use of cash. Cash planning can help to

anticipate future cash flows and the need of the form and reduces the possibility of idle

cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the

most significant device to plan for and control cash receipt and payments.

The unit under the study makes cash planning through following tools:

Cash Budget

Rolling cash flow statement

Daily cash flow statement

The cash budgets are prepared by the firm on monthly and yearly basis. Through cash

budget the unit can make estimates of cash receipts and disbursement during a future

period of time. There estimates show the requirement of cash in the unit.

Another device used for cash planning is six monthly rolling cash flow statement

prepared on monthly basis. This statement shows the projections of inflows and outflows

of cash during the next six months.

This statement can help in taking various decisions, if the unit wants to make any capital

payment, these statements can tall when there is surplus of cash and payments can be

made during the month.

Daily cash flow statement is prepared to see the daily cash position. There estimations are

sent to corporation office at Ludhiana so that needed cash is obtained at night time.

2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and

outflows without any loss to the unit and without impairing its goodwill in the market.

These are made at head office Ludhiana so the main source of cash inflows to VTM is the

cash credit limit, which is as follows:

Banks Main Limit

(in crores)

Sub-limit transfer to

LDH Unit (in crores)

Peak Normal

Punjab National Bank. 2 crores 2 crores 5 crore in month.

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for

fulfilling day-to-day requirements of working capital. The daily bank-position of sub-

limits is fixed to H.O. for monitoring daily bank position. In case of drawn in sub-limits

the funds get transferred from main limits. The interest rate paid for this is near about

11.25%. The cash credit limits are sanctioned by the bank against the hypothecation

stocks and fluctuating assets as security.

The unit can withdraw from these limits as and when needed. The amount received from

the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash

management the surplus funds are transferred to other units if those units need cash thus

increasing the overall profitability.

Main outflow of the unit is on raw material cost. Different types of raw material are

purchased from different states. Normally cotton is purchased during peak season when

good quality cotton is available, generally payment for cotton is made when cotton is

received in the mill, and credit period depends upon the states from which cotton is

purchased.

Cash outflows also arise on account of purchase of stores, spares and all other material

normal credit for these products is mainly 30 to 60 days and full credit period is used.

3. DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the

optimum level i.e. neither it is too high that it remains idle and the firm losses interest on

it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5

lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per

day is kept in hand, thus the unit maintains the appropriate amount of cash balance and

meets the firms obligations as and when they due.

4. INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to

maintain high level of assets during cotton season, which falls between October to March.

During April to September the company gets its cash credit limits reduced in the

respective banks. The company has very good system of managing its current assets. The

current assets of the unit are managed at corporate level and the unit seeks funds

according to their requirements calculated on day-to-day basis. Hence there are no idle

funds at unit level.

As the funds are monitored / controlled at corporate level, therefore, it becomes the prime

responsibility of H.O. to have a good policy of investing idle funds in an appropriate

security keeping in view the requirement of funds in the future and liquidity of the

security in which the investment is being made.

Chapter- 7



Accounts receivables are simply extension of credit to the firm’s customers, allowing

them a reasonable period of time in which to pay for the goods. Most firms treat accounts

receivables as a marketing tool to promote sales and profits. They represent extension of

credit and investment of funds and must be carefully managed. Every firm must develop

a credit policy that includes setting credit standard, defining credit terms and employing

methods for timely collection of receivables. The receivables (including the debtors and

the bills) constitute a significant portion of working capital and are an important element

of it. The receivables emerge whenever goods are sold on credit and customers

receivables are created when a firm sells goods or services to its customers and accepts,

instead of the immediate cash payment the promise to pay within specified period. Thus,

receivables are a type of loan extended by the seller to the buyer to facilitate the purchase

process. As against the ordinary type of loan the trade credit in the form of receivables is

not a profit making service but an inducement or facility to the buyer-customer of the

firm.

Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up

the sale, which ultimately results in pushing up the profits earned by the firm. At some

time selling goods on credit result in blocking of funds in accounts receivables.

Additional funds are required for operating needs of business, which involves extra costs

in terms of interest. Moreover, increase in receivables also increase chances of bad debts.

The creation of accounts receivables is beneficial as well as dangerous. The finance

manager has to follow a policy which uses cash funds as economically as possible by

extending receivables without adversely affecting the chance of increasing sales and

making more profits. Receivables Management generally means what type of credit

policy a firm should adopt so that sales and profits can be promoted on the one hand and

funds can be economically utilized on the other hand.

So the receivables management must be attempted by adopting a systematic approach and

considering the following of receivables management:

(1) THE CREDIT POLICY

(2) CREDIT CONTROL

1. CREDIT POLICY

It may be defined as the set of parameters and principles that govern the extension

of credit to the customers. This requires the determination of

(i) The credit standard i.e. The conditions that the customers must meet

before being granted credit and

(ii) The credit terms i.e. the terms and conditions on which the credit is

extended to the customers.

These are discussed as follows:

The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of

the customers. Therefore, to be on a safer side, it must set credit standard which should be

applied in selecting customers for credit sales. The credit standards of a firm represent the

basic criteria for the extension of a credit to customer.

So the credit standard is the combination of three C’s

These are:

(i) Character of a person

(ii) Capacity of a person

(iii) Condition of a person

Credit Terms

The credit terms refers to the set of stipulation under which the credit is extended to the

customers. The credit terms may relate to the following:

(a) Credit Period – The credit period is an important aspect of the credit policy. It

refers to the length of time customers are allowed to pay for their purchases. It

may differ from one market to another market. The credit period generally varies

from 15 days to 60 days. In some cases the credit period may be zero and only

cash sales are made. It refers to the time duration in terms of net date e.g. if a

firm’s credit terms are “net 30”; it means the customers are expected to pay within

30 days from the date of sales. As much the credit period will be shorter, it will be

beneficial for a firm. But the firm has to lengthen its credit period to increase

sales. But one must compare the cost of extended credit with the incremental

profits. If this cost is less then it will be beneficial for company to increase the

credit period.

(b) Discount Terms – It is reduction in payment offer to customer to induce them to

repay credit obligation within a specified period of time. In practice credit terms

would include:

(i) The rate of cash discount

(ii) The cash discount period

(iii) The net credit period

2. CREDIT CONTROL

The next important step in the management of receivables is the control of these

receivables. Following are the directions for controlling the receivables.

(1) The Collection Procedure – The overall collection procedure of the firm should

neither be too lenient nor too strict. A strict collection policy can affect the

goodwill and damage the growth prospects of the sales. If a firm has a lenient

credit policy, the customer with a natural tendency towards slow payments may

become slower to settle his accounts. One possible way of ensuring early

payments from customers may be to charge interest on over due balances.

(2) Monitoring of receivables – To control the level of receivables, the firm should

apply regular checks and there should be a continuous monitoring system. For

this, number of measures are available as follows:

(i) A common method to monitor the receivables is the collection period or number

of day’s outstanding receivables.

(ii) Another technique available for monitoring the receivables is known as ageing

schedule. Ageing schedule down book debts according to the length of time of

which they have been outstanding. The ageing schedule provides more

information about collection experience. It helps to shot out the slow paying

debtors. The Performa of the ageing schedule prepared by the VTM is as follows:

AGEING SCHEDULE

Age Classification Amount % age of Total

0 – 15 days 35330987.21 22

15 – 30 days - 0

31 – 60 days 24148419.61 15

61 – 90 days 29297084.01 17

91 – 120 days 8852629.46 19

121 – 180 days 13217364.67 6

More than 180 days 14510162.71 12

Total O/S Amount 157577760.10 100

RECEIVABLES MANAGEMENT IN VTM

As earlier discussed, credit sales are too much necessary to increase the total sales. The

main reason behind this is cut-throat competition. There are also many competitors of

VTM in the market, s to compare with them; VTM has to make credit sales. 20% to 30%

of current assets of VTM are sundry debtors. VTM has a good receivable policy as it has

large amount of credit sales.

I. CREDIT POLICY OF VTM

VTM not directly make sales. Sales are made by corporate office directly. So the sales

process is centralized. As the sales process, debtors are also collected by the corporate

office directly. Corporate office just receives the amount from the debtors. But it does not

have any record of outstanding debtors. It sends the credit note to VTM after receiving

amount against any debtors. So record for outstanding debtors is maintained by VTM

itself. VTM sends fortnightly reports to corporate office which records the data about the

outstanding debtors for different periods. In these reports debtors outstanding for one

month or six months are shown separately. In this way, corporate office comes to know

about age segments of different customers. Corporate office may avoid selling goods to

those customers who have not paid for a long period.

CREDIT POLICY VARIABLES

1. Credit Standards – VTM provides credit to customers after getting

information about that customer. For this market research is done by

marketing department to know about reputation of customer in the market and

financial position of him. From the records of customers having VTM and

from financial record of those customers, the ability to pay is checked. Thus

customer is only known after getting information about him and then credit is

provided.

2. Credit Terms

(a) Credit Period – For different products VTM provide different credit

period. These credit terms are according to the nature of product which are

following:

Scrap / waste - cash basis

Dyed yarn - 40 days

Grey yarn -15 days

(b) Cash Discount –

In case of 100% cotton yarn

Advance payment - 1 % C.D. prior to material dispatch

15 days credit - Interest free

Afterwards - 18 % p.a. interest chargeable

In case of Polyster Cotton Yarn

Payment within 48 hours - 1 % CD

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

II. CREDIT CONTROL

Collection efforts made by VTM:

Due to cut-throat competition VTM has to make credit sales. To collect the funds Oswal

group has adopted a decentralized method. Oswal group has established its collection

centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from

the debtors and send it to corporate office. The number of collection centers in a

particular city depends upon the number of customers to minimize the bad debts and to

accelerate the collections.

Commission is also paid to agents This percentage is only on the basis of the realization

amount.

YARN COMMISION ON

DOMESTIC

COMMISION ON

EXPORTS

GREY 1.5% 3%

DYED 2% 3%

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VTM

DEBTORS TURNOVER RATIO

This ratio indicates the number of times average debtors are turned over during a year.

The higher the value of debtor turnover ratio the more liquid is the debtors. Similarly low

debtor turnover ratio implies less liquid debtors.

Debtors turnover ratio = Sales

Avg. Debtors

FOR SPINNING MILL:

YEAR SALES AVG DEBTORS DTR

2004-05 596069587.62 37039996.26 16.09 times

2005-06 543167006.35 37279070.84 14.6 times

2006-07 588183650.23 92312638.13 6.37 times

2007-08 730047747.60 29970369.49 24.36 times

ANALYSIS:

As we can observe that, the debtors turnover ratio of the company has increased from

16.09 times in year 2004-05 to 24.36 times in year 2007-08. Increasing DTR is good for

the company as it assures that the sundry debtors are more liquid.

FOR DYE HOUSE:

YEAR SALES AVG DEBTORS DTR

2004-05 212240 247769 0.9 times

2005-06 202379449.81 28959170.26 6.99 times

2006-07 492529652.69 48904270.97 10.1 times

2007-08 610863493.76 99301521.09 6.2 times

ANALYSIS:

The DTR for dye house has shown increament from 0.9 in 2004-05 to 10.1 in 2006-07

but it again decreased to 6.2 in 2007-08. It is not good for the company that DTR has

declined in 2007-08 as it assures less liquid debtors.

Debtor Conversion Period (DCP)

The average no. of days for which a firm has to wait before its receivables is converted

into cash.

DCP = 360

DTR

FOR SPINNING MILL:

YEAR DTR DCP

2004-05 16.09 22.4 days

2005-06 14.6 24.7 days

2006-07 6.37 56.5 days

2007-08 24.36 14.8 days

ANALYSIS:

The DCP of the spinning mill has decreased from 22.4 in year 2004-05 to 14.8 in year

2007-08 which is quite a good fact as lower DCP assures less time period for the

conversion of receivables into cash.

FOR DYE HOUSE:

YEAR DTR DCP

2004-05 0.9 400 days

2005-06 6.99 51.5 days

2006-07 10.1 35.6 days

2007-08 6.2 58.1 days

ANALYSIS:

The DCP ratio for dye house has decreased a lot from 400 days in year 2004-05 to 58.1

days in year 2007-08. It’s a promising fact because it takes very less time period to

convert the receivables into cash.

Chapter- 8



Inventory is very important part of current assets. Approximately 60% part of current

assets is inventories. So the proper management of inventory is required for successful

working capital management. As the larger amount of funds is involved in the

inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories

In inventories we include:

(a) Raw Material: There are those basic inputs which are converted into work-in-

progress after the manufacturing process. Raw materials are purchased for

production and storage purpose.

(b) Work-in-Progress: These inventories are semi-manufactured products. These

products are those which are ready for sale.

(c) Finished Goods: These are completely manufactured products. These products

are those which are ready for sale.

Here is one another type of inventory also which is not directly related with

production but facilitate in production process. These inventories are known as

supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.

OBJECTIVES OF INVENTORY MANAGEMENT

There are so many objectives of inventory management. These objectives may differ

from firm to firm. The main objectives of inventory management are:

To make adequate investment in inventories so that funds can be best utilized.

Smooth production in present and future.

Time availability of inventories.

Smooth and uninterrupted sale processes.

Minimize the cost related with inventories.

To meet the future price change.

To get adequate return on investment.

INVENTORY MANAGEMENT TECHNIQUES

For inventories management the two questions must be answered. First, that how much

be ordered in one order so that excess or insufficient inventories can be avoided.

Secondly, when the order should be placed, so that timely availability of inventory is

there. To get answer of these two questions we use two techniques which are following:

1) ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to

know how much we must order in single time. So that all the cost related with inventory

are minimum. Determining an optimum inventory level involves two types of costs (a)

Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes

the total of ordering and carrying costs.

(a) Ordering Costs – All these costs which are incurred in placing one order. It

includes; requisition, transportation, receiving, inspecting, clerical and staff

services. Ordering costs are fixed per order. Therefore they decline as the order

size increases.

(b) Carrying Costs – Cost incurred for maintaining a given level of inventory are

called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs

vary with inventory.

To calculate economic order quantity there is formula:

EOQ = 2AO/C

Where,

A = Annual requirement

O = Ordering cost per order

C = Carrying cost of inventory

2) REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the

inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage

(c) EOQ

Lead Time is the time normally taken in replenishing inventory after the order has been

placed.

Average Usage is the inventory used on average daily basis or average weekly basis.

So, Reorder Point = Lead Time x Average Usage

If the firm also maintains safety stock then the reorder point will be:

Reorder Point = (Lead Time x Average Usage) + Safety Stock

So when the inventory of reorder point will be in store then the order will be placed for

purchase of inventory. In this way, the production process will not stop because the

inventory will be available for that period.

INVENTORY MANAGEMENT IN VTM

Inventory Management of VTM is good. VTM has a different stores department. All the

inventories except raw material purchases are handled by stores department. Stores

department does its work very efficiently.

INVENTORY PLANNING

For the planning of inventory requirement, budgets are prepared by different departments

as per requirements. The material issued during the budget period will not be more than

the budget. This rule is strictly followed. For cotton, requirements are planned in

consultation with production department. Stores department have nothing to do with it.

PURCHASE OF RAW MATERIAL

As in VTM raw material is cotton. First of all the requirement for cotton are determined

by the production department than this requirement is sent to commercial departments.

Commercial departments send these requirements to corporate office in detail. Then

corporate office directs the cotton purchase office to purchase cotton in bulk not only for

VTM but also for the other units of Oswal Group. Cotton is generally received in lots so

one lot consists of 55 or 110 bales.

As the cotton has seasonal availability, so the purchasing of cotton is made within the

period of October to march. For the other months, cotton is purchased within these

months. That is the reason VTM has high investment in cotton.

DAILY REQUIREMENT OF COTTON

For production daily requirement of cotton is 180 bales and when the full capacity of unit

gets started then the average requirement of cotton bales will reach to 200 bales.

The total daily production is 55 Tons /day.

STORAGE CAPACITY OF VPL

Regarding Raw Material Inventory, VTM has 10 godowns.The capacity of 10 godowns

is 45000 bales approximately.

If capacity of store is exhausted in unit then it has private storage facility to store cotton.

These godowns do not have electric fitting because cotton is highly inflammable.

ISSUING OF INVENTORY

When any department requires any inventory, it sends its requirement to stores

department. The maximum time within the requirement must be met is 72 hours.

Material is issued on the basis of monthly weighted average method.

INSPECTION OF INVENTORIES

Inspection of inventory is made at the end of month randomly. The stock taking of all the

items is not possible keeping in view number of items.

SAFETY STOCK OF INVENTORIES

For the continuous production process, safety stock of inventories is maintained. In case

of cotton atleast 15 days requirements must be in hand every time. For other inventories

stock is maintained according to supply period and as per their requirement.

INVENTORY CONTROL

Inventory control is done by budgets. As the budgets are prepared for the planning

purpose. Total requirements for inventory during financial period are determined by

budget. When the material is issued to any department then the total amount of material

issue is deducted from the budget of that good and balance is calculated, only this balance

quantity of inventories will be issued during the remaining financial period. These

records are maintained on daily basis. For different units, the records are prepared

separately.

For inventory control not any ABC analysis or VED analysis is done. The company also

doesn’t follow standardized system of inventory like EOQ. In case of raw material as the

input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the

cotton season. In case of spares & stores, the inventory is easily available in market;

therefore, the same is procured on requirement basis. The company always maintains

stock of critical items, the failure / non-availability of which can cause less of production.

As all the units of group are in spinning the stock of critical items, where the high value is

involved in financial terms, the inventory is maintained in single unit. This could save lot

of money which can be utilized in another area and it also helps to maintain inventory at

optimum level.

So we can say that overall inventory management of VTMis quite satisfactory.

ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VTM

INVENTORY TURNOVER RATIO

It indicates the number of times the stock has been turned over during the period and

evaluates the efficiency with which the firm is to manage inventory. A high inventory

turnover indicates efficient management of inventory because more frequently the stocks

are sold, the lesser amount of money is required to finance the inventory.

Inventory (Raw Material) Turnover Ratio = Cost of Goods sold.

Average Raw Material Stock

FOR SPINNING MILL:

YEAR COST OF GOODS

SOLD

AVERAGE RAW

MATERIAL

STOCK

INVENTORY

TURNOVER

RATIO(ITR)

2004-05 568168331.8 183071228.14 3.10 times

2005-06 468091135.05 227150926.07 2.1 times

2006-07 533565522.12 218046754.94 2.45 times

2007-08 757225990.36 328005499.45 2.31 times

ANALYSIS:

The ITR ratio of spinning mill does not show wide fluctuations over the past years. It

almost remains constant around 3.1 and 2.3. However , the ratio must increase for better

management of inventories.

FOR DYE HOUSE:

YEAR COST OF GOODS

SOLD

AVERAGE RAW

MATERIAL

STOCK

INVENTORY

TURNOVER

RATIO(ITR)

2004-05 - - -

2005-06 204971625.4 15012815.54 13.7 times

2006-07 438273468.85 16023458.66 27.35 times

2007-08 522017545.97 11108879.34 46.9 times

ANALYSIS

The inventory turnover ratio has increased from 13.7 times in 2005-06 to 46.9 times in

2007-08. It is quite a good fact and shows that inventory is managed in an efficient way

for the dye house.

INVENTORY TO WORKING CAPITAL RATIO:

This ratio is usually calculated to study the liquid financial position of business

enterprises.

Inventory to working capital ratio = Inventory

Working Capital

FOR SPINNING MILL:

YEAR INVENTORY WORKING

CAPITAL

RATIO IN %AGE

2004-05 208195599.41 306827826.58 67.9

2005-06 246141889.88 312515320.52 78.8

2006-07 240453655.62 342478673.95 70.2

2007-08 379510100.55 414814703.14 91.5

ANALYSIS:

We can observe that investment in inventories out of the woking capital has increased

from 67.9% in 2004-05 to 91.5% in 2007-08. But investment in inventories should be

neither too high nor too low. So it should be maintained near 60% to 70%.

FOR DYE HOUSE:

YEAR INVENTORY WORKING

CAPITAL

RATIO IN %AGE

2004-05 - - -

2005-06 31300541.06 51755251.69 60.5

2006-07 35816899.3 84249210.13 42.5

2007-08 32341614.46 142562332.82 22.7

ANALYSIS

The investment in inventories has decreased from 60.5% in 2004-05 to 22.7% in 2007-

08. So, it is not a good fact about the dye house and the company should increase the

investment in inventories for the dye house.

Chapter- 9

FINDINGS, SUGGESTIONS AND CONCLUSION

FINDINGS

Due to seasonal availability of raw material is purchased in bulk during the

months between March to Oct. so the most part of current assets is covered by

inventories.

Liquidity ratios of VTM are too high because of maintaining more inventory

stock of raw material.

Raw material is purchased by corporate office for all the units in bulk to get the

advantages of bulk purchasing.

The cost of raw material fluctuates depending upon the availability of crop in the

particular season, so it effect the finished product price.

The operating cycle of VTM is very high due to the high raw material conversion

period because raw material is a seasonal product.

Now VTM has increased its share in the domestic market by reducing the exports.

For filling its fund requirement VTM depends upon the State bank of India.

It holds the cash only for transaction purpose. Corporate office holds the cash for

major receipts & payments.

EOQ technique is not followed by VTM for purchasing cotton because cotton is a

seasonal product. Also EOQ is not followed in stores.

SUGGESTIONS

Management should make the proper use of inventory control techniques

like fixation of minimum, maximum and ordering levels for all the items for less

blockage of money.

The unit should also adopt proper inventory control like ABC analysis etc.

This inventory system can make the inventory management more result oriented.

The EOQ can be followed in stores.

Due to competition, prices are market driven and for earning more margin

company should give the more concentration on cost reduction by improving its

efficiency.

The investments of surplus funds are made by the corporate office and the

unit is not generally involved while taking decisions with regard to structure of

investment of surplus funds. The corporate office should involve the units so as to

better ascertain the future requirements of funds and accordingly the investments

are made in different securities.

The company is loosing its overseas customers due to decrease in exports

so the sufficient amount of exports should the maintained.

Company’s average debtor collection period is 55 days. So company

should try to reduce it for improving the efficiency.

By conducting the study about working capital management it is found out that working

capital management of VTM is too good. VTM has sufficient funds to meet its current

obligation every time which is due to sufficient profits and efficient management of

VTM.

Cash management and receivable management are too much good because of centralized

control on these. Raw material for the all units of OSWAL group is purchased by

corporate office in bulk which is the best way. Safety measures for inventories are also

quiet sufficient in VTM. Overall the working capital management of VTM is very much

efficient.

APPENDIX

REFERENCES AND BIBLIOGRAPHY

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

Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc

Graw Hill.

Van Horne, Jame C; Fundamentals of Financial Management.

Rustagi R.P.; Principles of Financial Management.

Annual Reports of VINAYAK TEXTILE MILLS LTD..

working capital management

Documents

volume of working capital

firms capital

firm capital

future need of working

study chapter

theoretical management

cash management chapter

receivables management