kavita project file
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PROJECT REPORT
ON
Working Capital Management
IN
J.B.M.COMPONENT PRIVATE LIMITED
(FINANCE DEPARTMENT)
SUBMITTED IN THE PARTIAL FULFILLMENT FOR THE
REQUIREMENT OF
MBA DEGREE
(2014)
ADVANCED COLLEGE
PALWAL M.D. Un!"#$%& R'%*
0
SUBMITTED BY:
KAVITA
ROLL:NO. MB13016
SUBMITTED TO:
MS. NEHA
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PREFACE
The Project entitled +W'#*n, C-% Mn,"/"n% % J.B.M. n BEST WA
STEEL -!%. L%. deals in this segment. The term of study was kept limited to make the
title true. The purpose of the report is to get the in depth understanding of the process of
working capital management. With the growing Indian economy and the liberal
government policies for infrastructure, the demand for MT!" services is increasing and
seeing this as an opportunity is under taking many new projects for e#pansion of the
production which are under implementation for increasing the capacity of the plants.
$bm.component and best way pvt. "td. world recognised MT!" company so the
management of working capital consist of different of new techni%ue which is not common
in Indian MT!" industry.
The main objective of my research that how $.&.M and &'T W!( pvt.ltd. maintain the
proper balance between the amount of current assets and the current liabilities in such a
way that the firm is always able to meet its financial obligations, whenever due. This will
ensure the smooth working of the unit without any production held ups due to paucity of
funds and also how $.&.M. and &'T W!( pvt. "td. manage the current assets in such a
way that the marginal return on investment in these assets is not less than the cost of capital
ac%uired to finance them. This will ensure the ma#imi)ation of the value of the business
unit.
Working capital management in $.&.M. and &'T W!( pvt. "td. is seem to be different
and also effective as comparison other metal firms in India. *eason for being different is
their nature of business and implementation of new techni%ue which help them to smooth
flow of the fund.
Performance of $.&.M. and &'T W!( pvt. "td. +orea and India both are affluent. Their
mi#ed corporate culture and the area of e#pertise in metal processing construction
contract help them to get succeed in every project
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ACNOW!ED"EMENT
The or!"#$!%#o" &ro'e% o *+h "!%+re or %h#* *+e**+, o-&,e%#o"
"ee* oo&er!%#o" !" *+&&or% o &eo&,e. I h!/e ee" or%+"!%e %o e%
o"*%!"% +#!"e e"o+r!e-e"% ro- -!"2 h#h he,&e -e ! ,o%
%o e *+e**+, #" !"2 e4or%*. Th#* or-!, !5"o,ee-e"% #,, h!r,2
e *+#e"% %o e7&re** o"e ee& *e"*e or r!%#%+e %o !,, o %he-.
A% %he o+%*e%8 I o+, ,#5e %o %h!"5 Mr# D$%&'ant Sing& (Training )
Pla*ement O+*er, !" o%her -e-er* o %he &,!e-e"% e,, or
#/#" -e !" o&&or%+"#%2 %o *+e**+,,2 o-&,e%e -2 *+--er
#"%er"*h#& #" %he#r e*%ee-e or!"#$!%#o".
A &ro'e% re&or% h!* "e/er ee" %he *!,e &ro+% o %he &er*o" ho*e
"!-e !&&e!r* o" %he o/er. There !re !,!2* *o-e &eo&,e ho*e
+#!"e &ro/e* %o e o #--e"*e he,& #" #/#" #%* 9"!, *h!&e. So #% #*
-2 9r*% +%2 %o e7&re** -2 r!%#%+e %o!r* !,, o %he-.
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DECLARAT ION
I am +avita ,lass M&! -rd 'M of !dvanced Institute of Technology and management
of Palwal ereby declare that the project entitled /P!*TI!" 01"0I""M2T 30 T
*41I*M2T /is an 3riginal Work and the same has not been submitted to any other
institute for the award of any other degree.
S,n%3#" ' Cn%"
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J.B.M. COMPONENT %.co ,which is incorporated as MT!" company in 1T "td is to provide high
%uality parts ,drawing ?technical services. The Indian company shall be used as
knowledge hub and MT!" centre for global needs for above activities.
The main object of $bm component and best way ltd. India is to carry on all or any of thebusiness to provide develops ,supply and render MT!" and technical services. !nd also
to carry on the business of providing MT!" ,procurement, maintenance and operation
service to industrial ,petrochemical ,environmental, gas, energy generation and refinery
projects.
A#" ' "?-"#%$" n /#*"%n, $%#%",&
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The area of e#pertise is MT!" processing construction contract especially for process
MT!", chemical MT!" ,piping MT!" and instrumental MT!".
With advent of new millennium, global as well as domestic MT!" a markets are faced
with uncertainties, creating a whole new environment where only a handful of market
leaders with global competitiveness can e#pect future.
$bm component and best way ltd. give priorities to health ,safety and environment.
Moreover ,under the business principle to provide an economical and optimised manner
within the fastest possible time, and also focused on building an effective knowledge
management system, improving corporate efficiencies through continued cost reductionand overall improvement efforts, and building a global standard management basis to
become a customer @ oriented ,total solution provider.
0urthermore, with people and technology the critical factors in the MT!" business, $bm
component and best way ltd. is setting out to establish long term training programs aimed
at nurturing professional with e#tensive e#periences in the environment and energy sector
facilitating the arrival of future.
$bm component and best way ltd. is committed to becoming the most reliable business
partner, catering the needs with best %uality and seamless services driven by the attitude of
genuinely caring customer.
$bm component and best way ltd. India Pvt . ltd will try to provide the best manpower and
technology for best product and service to customer.
$bm component and best way ltd. As no 5 mission is generating values to the customers and
shaping businesses for continuous fulfilment of the client
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$bm component and best way ltd. points clients to success. There numerous successes in
petrochemical, refinery, gas, industry, environmental plant and infrastructure businesses
worldwide have served as the basis for success and the power to overcome any difficulties
and e#plore new opportunities. 1ndisputed capabilities, strong potential and unrivalled
enthusiasm are the drivers that $bm component and best way ltd. relies on to bring a
genuine success to their clients.
R""n% n%"#n%'n -#'"%$
P"%#'"/ -#'"%
0or several decades $bm component and best way ltd. has been active in the petrochemical
industry, initially heading large scale petrochemical plant construction projects in +orea
for major companies such as 'amsung Petrochemical. 1sing these e#periences as a strong
foundation, $bm component and best way ltd. has fineBtuned its e#pertise and capabilities
to successfully e#ecute lump sum turnBkey projects including MT!", procurement,
construction and commissioning. 0rom the early 5CC7
R"n"#&
$bm component and best way ltd. has steelumulated e#tensive refinery e#perience across
the globe such as the I3" *efinery Plant in India, &'T 1nleaded =asoline !dditive Plant
in Thailand, and refinery plants in Thailand and Taiwan. In Me#ico, $bm.component and
best way ltd. was awarded both the Tula and 'alamanca *efinery from PMG, proving
the company
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way ltd. is constructing two entral and 'outh !merican projects. They are the PMG
Minatitlan *efinery Plant in Me#ico and PT*3T*I2 2T ? * Plat former *efinery
Plant in Trinidad ? Tobago.9776 marks the year $bm.component and best way ltd. was
awarded a 8T Plant from !*!M3, 'audi !rabia
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In3$%# Pn%$
#ploring overseas markets and pioneering new products, $bm.component and best way
ltd. implements a strong growth strategy. Through Industrial projects in the fields of IT,
energy, automobile, aerospace, food, and sports facilities, $bm.component and best way ltd.
is demonstrating technological leadership and %uality products through its turnBkey
services. In particular, $bm.component and best way ltd. is focused on highBtech sectors
such as display and semiconductors for the purpose of securing top technology. &ased on
its outstanding project e#ecution ac%uired from the +orean market, $bm.component and
best way ltd. has strived to focus on overseas markets in !sia, urope, I', the Middle
ast and "atin !merica. Through such efforts, $bm.component and best way ltd. haspioneered new products such as steel mill plants, power plants, renewable energy plants as
well as new 8P:8istinct ooling Plants; and logistics centers.
R""n% n3$%# -n%$ -#'"%
IT
IT is an important component in the industrial plant sector for $bm.component and best
way ltd.. With a great track record in IT projects and the steelumulation of the world
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&ased on its e#tensive e#perience in the food ? beverage industry as well as other
manufacturing sectors, $bm.component and best way ltd. has successfully completed a
number of large projects based in +orea, including the +T?= Tobsteelo manufacturing
Plant, +onkuk 8airy umsung 0acility, the !san, =umi and 2oksan 0acilities of 2ongs
him, 2amyang 8airy heonan 0acility, $inro ass &eer 0acility and ankook Tire
Plant.!t the same time, $bm.component and best way ltd. has served as a strategic partner
with domestic companies to help them enter overseas markets, taking part in 2ongshim
'hanghai 0acility and ankook Tire Plant in astern urope. $bm.component and best way
ltd. is also working on a number of fronts to e#pand its business portfolio to include
8P:8istrict ooling Plants;, and to secure new growth engines for the future.$bm.component and best way ltd. is strengthening its internal competencies through
constant research and development aimed at =MP:=ood Manufacturing Practices; for
medical and pharmaceutical devices.
.
S%""
In the steel sector, $bm.component and best way ltd. secured contracts representing a total
of 9F million 1'8 in9776 alone. These projects included sinter and &yBproduct =as
'upply 0acilities for yundai 'teel,P3'3 =" 1tility in Me#ico and a blast furnace
facility for the '!I" II'3 'teel Plant. Winning the bid for the yundai 'teel Plant was
particularly significant in that it showed how far $bm.component and best way ltd. has
progressed within an industry that is known for having high barriers for new contractors.
This achievement was made possible by $bm.component and best way ltd.
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ombined eat and Power Plant, Incheon 2onhyun 8istrict Integrated nergy Plant, and
the nergy *ationali)ation 0acility in Mongolia. It has set up a plan to transform overseas
IPP projects into strategic products for longBterm growth and has madevarious efforts to
speciali)e in IPP projects in 'outheast !sia. In Thailand, Philippines and Indonesia, it is
working hard to ac%uire power plant projects including those for PP. &y securing needed
technologies and e#pertise to undertake medium to large si)ed projects:-77 MW IPP or
larger;, it has become an important player in IPP overseas markets and is laying a
foundation for e#ploring new growth engines such as the renewable energy industry.
En!#'n/"n% 7 In#$%#3%3#"!spiring to become a specialist in environmental ? infrastructure through aggressive
technology development and business e#pansion. MT!" companys entered the
environmental sector in the 5C67s and has since been speciali)ing in the environmental and
infrastructure field. &ased on -L years of e#perience in the water business, it established a
comprehensive water management system that covers ultra pure water, wastewater reuse
and highly efficient wastewater treatment, and continues building upon its capabilities in
the design, construction and operation of related facilities overseas. $bm.component and
best way ltd. has secured core technologies in other environmentBrelated areas such as the
reduction of air pollution from IT facilities and municipal waste. 'imultaneously, the
company is actively engaged in '3:'ocial 3verhead apital; projects in the domestic
railway market and has successfully operated projects such as the railway depot and
deployment projects for integrated operation systems. "everaging its e#perience in
environmental ? infrastructure, MT!" company will continue its growth as a leading
water specialist and infrastructure construction company.
R""n% En!#'n/"n% 7 In#$%#3%3#" -#'"%
W%"# T#"%/"n%
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$bm.component and best way entered the sewage treatment sector in the 5CC7
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company secure necessary capabilities related to the deployment and trial operation of
integrated operation systems for urban railways. It plans to be more active in entering
overseas markets such as the Middle ast while diversifying its business portfolio to
include system integration of light rail transit ?M and railway ?M, and by nurturing
this business as a future growth engine.
In#$%#3%3#"
MT!" company entered the '3 sector in the 5CC7s, beginning with its construction of
the 'eogwipo 3utport &reakwater. It has since contributed to the e#pansion of +orea& '/-n&$ R"'#=#"*n, -"#'#/n"
In 9776, despite the dramatic escalation in oil prices and raw material prices, 'amsung
ngineering worked diligently to record an allBtime high. 2ew orders rose HF percent to
+*WJ.L trillion while net profit rose -5 percent to +*W 5FH billion on the back of sales
rising 59percent to a record +*W 9.9 trillion. The performance of the ydrocarbon Plant
8ivision was a stellar one, as MT!" companys continuously secured mega projects in
'audi !rabia, Thailand, and India on the strength of their trusted and respected reputation
developed through their successful business performance. ! notable milestone for MT!"
company includes securing 'audi !rabiaietnam meant another e#pansion into a new market and widening their client
base into the global IT sector. In addition, MT!" company
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in a buyback of a total of 5 million stocks worth +*WFJ.H billion to stabili)e their share
prices and enhance shareholder values, simultaneously and effectively maintaining
shareholderBoriented management for the best interest of their shareholders.
$bm.component and best way ltd.
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INTRODUCTION
orporate finance is an area of finance dealing with the financial decisions corporations
make and the tools and analysis used to make these decisions. The primary goal of
corporate finance is to ma#imi)e corporate value while managing the firms financial risks
!lthough it is in principle different from managerial finance which studies the financial
decisions of all firms, rather than corporations alone, the main concepts in the study of
corporate finance are applicable to the financial problems of all kinds of firms. The
discipline can be divided into longBterm and shortBterm decisions and techni%ues. apital
investment decisions are longBterm choices about which projects receive investment,
whether to finance that investment with e%uity or debt, and when or whether to pay
dividends to shareholders. 3n the other hand, the short term decisions can be grouped
under the heading Working capital management. This subject deals with the shortBterm
balance of current assets and current liabilities the focus here is on managing cash,
inventories, and shortBterm borrowing and lending.
D"n%'n ' >'#*n, -%
The word working capital is made of two words 1.Working and 2. apital. The word working
means day to day operation of the business, whereas the word capital means monetary value of
all assets of the business.
Working capital may be regarded as the life blood of business. Working capital is of major
importance to internal and e#ternal analysis because of its close relationship with the
current dayBtoBday operations of a business. very business needs funds for two purposes.
N "ong term funds are re%uired to create production facilities through purchase of fi#ed
assets such as plants, machineries, lands, buildings ? etc
N 'hort term funds are re%uired for the purchase of raw materials, payment of wages, and
other dayBtoBday e#penses.
. It is other wise known as revolving or circulating capital
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It is nothing but the difference between current assets and current liabilities. i.e.
Working apital O urrent !sset @ urrent "iability.
&usinesses use capital for construction, renovation, furniture, software, e%uipment, or
machinery. It is also commonly used to purchase inventory, or to make payroll. apital is
also used often by businesses to put a down payment down on a piece of commercial real
estate. Working capital is essential for any business to succeed. It is becoming increasingly
important to have steeless to more working capital when we need it.
Working capital typically means the firm
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working capital at a level higher than needed to meet its immediate needs. owever ,the
relationships among carrying costs , shortage costs , and procurement costs are such the
most firms will find that the economic level of working capital is no more than a few
month
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Working capital, also known as net working capital, is a financial metric which represents
operating li%uidity available to a business. !long with fi#ed assets such as plant and
e%uipment, working capital is considered a part of operating capital. It is calculated as
current assets minus current liabilities. If current assets are less than current liabilities, an
entity has a working capital deficiency, also called a working capital deficit. ! company
can be endowed with assets and profitability but short of li%uidity if its assets cannot
readily be converted into cash. Positive working capital is re%uired to ensure that a firm is
able to continue its operations and that it has sufficient funds to satisfy both maturing
shortBterm debt and upcoming operational e#penses. The management of working capital
involves managing inventories, steelounts receivable and payable and cash.
C'n"-% ' >'#*n, -%
=ross Working apital O Total of urrent !sset
2et Working apital O #cess of urrent !sset over urrent "iability
C3##"n% A$$"%$ C3##"n% L=%"$
ash in hand D at bank
&ills *eceivable
'undry 8ebtors
'hort term loans
InvestorsD stock
Temporary investment
Prepaid e#penses
'teelrued incomes
&ills Payable
'undry reditors
3utstanding e#penses
'teelrued e#penses
&ank 3ver draft
1>
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G#'$$ >'#*n, -%B refers to the firm
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of a business . in order to protect their interests, shortBterm creditors always like a company
to maintain current asset at a higher liability. it is a conventional rule to maintain the level
of current asset should be considered in determining the level of current asset vis- a- vis
current liabilities. ! weak li%uidity position poses a threat to the solvency of the
company and make it unsafe and unsound. ! negative working capital means a negative
li%uidity and prove to be harmful for the company As reputation. e#cessive li%uidity is
also bad . it may be due to mismanagement of current assets Therefore ,prompt and timely
action should be taken by management to prove and correct imbalances in li%uidity
position of the firm. 2et working capital concept also cover the %uestion of judicious mi#
long term demand short term fund for financing currents assets.
0or every firm there is a minimum amount of net working capital is permanent.
Therefore , a portion of the working capital should be financed through permanent sources
of fund such as e%uity share capital , debenture , long term, debt, preference share capital ,
or retained earnings. Management must therefore , decide the e#tent to which current asset
should be financed with the e%uity and Dor borrowed capital.
In summary , it may emphasised that both gross and net concepts of working capital are
e%ually important efficient management of working capital . there is no precise way to
determine the e#act amount of gross ,or net working capital for any firm . the data and
problems of each company should be analysed to determine the amount of working
capital . there is no specific rule as to how current asset should be financed . it is not
feasible in practise to finance current asset by short tern sources only. keeping view the
constraints of the individuals company, a judicious mi# long and short term financed
should be invested in current asset . since current involve cost funds , they should beinvested incurrent assets. 'ince current assets involve costs of funds, they should be put to
productive.
W'#*n, -% n %"#/$ ' !" '/-'n"n%$
C$ n "3!"n%$ B This most li%uid form of working capital re%uires constant
supervision. ! good cash budgeting and forecasting system provides answers to key
%uestions such as Is the cash level ade%uate to meet current e#penses as they come dueQWhat is the timing relationship between cash inflow and outflowQ When will peak cash
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needs occurQ When and how much bank borrowing will be needed to meet any cash
shortfallsQ When will repayment be e#pected and will the cash flow cover itQ
S%""'3n%$ #""!=" Many businesses e#tend credit to their customers. If you do, is the
amount of steelounts receivable reasonable relative to salesQ ow rapidly are receivables
being collectedQ Which customers are slow to pay and what should be done about themQ
In!"n%'#& Inventory is often as much as F7 percent of a firms current assets, so
naturally it re%uires continual scrutiny. Is the inventory level reasonable compared with
sales and the nature of your businessQ Whats the rate of inventory turnover compared with
other companies in your type of businessQ
S%""'3n%$ -&=" 0inancing by suppliers is common in small businessR it is one of the
major sources of funds for entrepreneurs. Is the amount of money owed suppliers
reasonable relative to what you purchaseQ What is your firms payment policy doing to
enhance or detract from your credit ratingQ
S%""#3" "?-"n$"$ n %?"$ -&=" These are obligations of your company at any
given time and represent a future outflow of cash.
C'n"-% ' >'#*n, -%
&alance sheet concept
3perating cycle concept
It goes without saying that the pattern of management will be very largely influenced
by the approach taken in defining it. Therefore the two concept are discussed
separately in a nutshell.
Bn" $""% 'n"-%B there are two interpretation of working capital under the balance
sheet concept. It is represented by the e#cess of current assets over current liabilities and is
the amount normally available to finance current operations. &ut some time working
capital is also synonym for gross or total current assets. In that case , the e#cess of current
asset over current liabilities is called the net working capital or net current assets. The
conventional definition of working capital in terms of the difference between the current
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assets and the current liabilities somewhat confusing. Working capital is really what a part
of long @term finance is locked in and used for supporting activities. It is difficult to say
whether this is right or wrong. !pparently are warned about tight working capital
situation , the logic of the above definition would perhaps indicate diversion of long term
finances for short term finances. 0or if shortB term bank loans were procured to bring in
cash , under the conventional method working capital evidently remain unchanged.
"i%uidation of debtor or inventory into cash would also keep the level unchanged.
O-"#%n, &" 'n"-%B a company operating cycle typically consists of three primary
activities purchasing resources , producing the product ,and distributing :selling; the
product. These activities create fund flows that are both unsynchronised and uncertain.
They are synchronised because cash disbursement :for e#ample ,payments for resources
purchases; usually take place before cash receipts :for e#ample, payments for resources;.
They are uncertain because future sales and costs, which generate the respective receipts
and disbursement ,cannot be forecasted with complete steeluracy. If the firm is to maintain
li%uidity and function properly, it has to invest funds in various shortBterm assets :working
capital; during this cycle. It has to maintain a cash balance to pay the bills they come due.
In addition the company must invest in inventories to fill customer orders promptly. !nd
finally ,the company invests in steelounts receivable to e#tend credit to its customer. The
firm /%"# 'n!"#$'n -"#'(RMCP; is the average time period taken to convert raw
material conversion period is the average time period taken to convert material in to
workBin @process *MP depends on raw material consumption per day ,and :b; raw
material inventory. *aw material consumption per day is given by the total raw material
consumption divided by the number of days in the year :say -H7.the raw ,material
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conversion period is obtained when raw material inventory is divided by raw material
inventory is divided by raw material consumption per day. 'imilar calculation can be made
for other inventories debtors and creditors. The following formula can be used
*aw material conversion period O*MI G -H7D*M
W'#* Kn-#'"$$ 'n!"#$'n -"#' (WIPCP; is the average time taken to
complete the semi @finished or work @inBprocess. It is given by the formula
Working @inB process conversion periodOWIPI G -H7D3P
Fn$" ,'' 'n!"#$'n -"#' (FGCP) is the average time taken to sell the
finished goods. 0=P can be calculated as follows
0inished goods conversion periodO0=I G -H7D='
D"=%'#$ 'n!"#$'n -"#'is the average time taken to convert debtors into cash .
8P represent the average collection period. It is calculated as follows
8ebtors conversion period:8P;O 8&T3*' G -H7D*8IT '!"'
C#"%'#$ ""## -"#' is the average time taken by the firm in paying
suppliers. It can be calculated are as follows
reditor deferral periodO creditors # -H7 Dcredit purchases
C$ 'n!"#$'n &" '# n"% '-"#%n, &"
2et operating cycle :23; is the difference between gross operating cycle and payables
deferral period.
2"% '-"#%n, &" (,#'$$ '-"#%n, &" #"%'#$ ""## -"#').
2et operating cycle is also referred to as cash conversion cycle. 'ome people argued that
depreciation and profit should be e#cluded in the computation of cash conversion cycle
since the firm
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to ultimetaly recover total costs and make profitsR therefore the calculation of operating
cycle should include depreciation and even the profits. !lso, in using the aboveB mentioned
formulae, average figures for the period may be used.
RA@ MATERIAL
@ORK IN
PRORESS
FINISH OODSSALES
DEBTORS
BILLS
RECEIVABLES
CASH
OPERATIN" CYC!E
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T&-"$ ' W'#*n, C-%
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SIGNIFICANCE OF WORING CAPITAL
F%'#$ #"3#n, 'n$"#%'n >" "$%/%n, >'#*n, -%.
The average credit period e#pected to be allowed by suppliers.
Total costs incurred on material, wages.
The length of time for which raw material are to remain in stores before they are
issued for production.
The length of the production cycle :or; work in process.
The length of sales cycle during which finished goods are to be kept waiting for
sales.
The average period of credit allowed to customers
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The amount of cash re%uired to make advance payment
I/-'#%n" ' W'#*n, C-% R%'$
R%' F'#/3" R"$3% In%"#-#"%%'n
'tock
Turnover
:in days;
!verage 'tock N
-HFD
ost of =oods
'old
O # days 3n average, you turn over the value of your entire
stock every # days. (ou may need to break this down
into product groups for effective stock management.
3bsolete stock, slow moving lines will e#tend overall
stock turnover days. 0aster production, fewer product
lines, just in time ordering will reduce average days.
*eceivables
*atio
:in days;
8ebtors N -HFD
'ales
O # days It takes you on average # days to collect monies due to
you. If your official credit terms are JF day and it takes
you HF days.
3ne or more large or slow debts can drag out the
average days. ffective debtor management will
minimi)e the days.Payables
*atio
:in days;
reditors N -HFD
ost of 'ales :or
Purchases;
O # days 3n average, you pay your suppliers every # days. If
you negotiate better credit terms this will increase. If
you pay earlier, say, to get a discount this will decline.
If you simply defer paying your suppliers :without
agreement; this will also increase B but your reputation,
the %uality of service and any fle#ibility provided by
your suppliers may suffer.
urrent
*atio
Total urrent
!ssetsD
Total urrent
"iabilities
O # times urrent !ssets are assets that you can readily turn in to
cash or will do so within 59 months in the course of
business. urrent "iabilities are amount you are due to
pay within the coming 59 months. 0or e#ample, 5.F
times means that you should be able to lay your hands
on 5.F7 for every 5.77 you owe. "ess than 5 times
e.g. 7.6F means that you could have li%uidity problems
and be under pressure to generate sufficient cash to
meet oncoming demands.
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4uick *atio :Total urrent
!ssets B
Inventory;D
Total urrent
"iabilities
O # times 'imilar to the urrent *atio but takes steelount of the
fact that it may take time to convert inventory into
cash.
Working
apital *atio
:Inventory S
*eceivables B
Payables;D
'ales
!s U
'ales
! high percentage means that working capital needs
are high relative to your sales.
*atio analysis can be used by financial e#ecutives to check upon the efficiency with whichworking capital is being used in the enterprise. The following are the important ratios to
measure the efficiency of working capital. The following, easily calculated, ratios are
important measures of working capital utili)ation.
Bn" >'#*n, -% -'$%'n
The firm should maintain a sound working capital position. It should have ade%uate
working capital working capital to run its business operations. &oth e#cessive as well as
inade%uate working capital positions are dangerous for the firm
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Tendencies of steelumulation inventories tend to make speculative profits grow.
This may tend to make dividend policy liberal and difficult to cope with in future
when firm is unable to make speculative profits.
In"3%" >'#*n, -% $ $' = n $ %" ''>n, n,"#$
It stagnates growth . it becomes difficult for the firm to undertake profitable
projects for non availability of working capital working capital funds.
It becomes difficult to implement operating plans and achieve the firms profit
target.
3perating inefficiencies creep in when it becomes difficult even to meet dayBday
commitments.
0i#ed assets are not efficiently utilised for the lack of working capital funds. Thus
fir
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D"%"#/nn%$ ' >'#*n, -%
There are no set rules or formulae to determine the working capital re%uirements of firms.
! large number of factors, each having different importance ,influence working capital
needs of firms. The importance of factors also changes for a firm over time. Therefore , an
analysis of relevant factors should made in order to determine total investment in working
capital. The following is the description of factors which generally influence the working
capital re%uirements of firms.
N%3#" ' =3$n"$$working capital re%uirements of a firms are basically influenced by
the nature of its business. Trading and financial firms have a very small investment infi#ed
assets, but re%uire a large sum of money to be invested in working capital. *etail stores, for
e#ample, must carry large stock like W!"BM!*T may carry, say 97,777 items. 'ome
manufacturing businesses, such a tobsteelo manufacturer and construction firms, also
have to invest substantially in working capital and a nominal amount in fi#ed asset. In
contrast ,public utilities may have limited need for working capital and have to
abundantly in fi#ed assets. Their working capital re%uirement are nominal because they
may have only cash sales and supply services, not products. Thus ,no funds will be tied up
in debtors and stock:inventories;. 0or the working capital re%uirements most of the
manufacturing companies will fall between two e#treme re%uirement s of trading firms and
public utilities. 'uch concerns have to make ade%uate investment in current assets
depending upon the total assets structure and other variables.
M#*"% n "/n 'n%'n the working capital needs of a firm are related to its
sales. owever ,it is difficult to precisely determine the relationship between volume of
sales and working capital needs. In practice current asset will have to employed before
takes place. It is, therefore, necessary to make advance planning of working capital for a
growing firm on a continuous basis.
=rowing firm may need to invest in fi#ed assets in order to sustain growing production and
sales. This will , in turn ,increase investment in current assets to support enlarged scale of
operations. =rowing firms need fund continuously. They use e#ternal sources as well as
internal sources to meet increasing needs of funds. These firms faces further problems
when they retain substantial portion of profit, as they will not be able to pay dividends to
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shareholders. It is therefore imperative that such firms do proper planning to finance their
increasing needs for working capital.
'ales depend on demand conditions. "arge number of firms e#perience seasonal and
cyclical fluctuations in demand for their products and services. These business variation
affect the working capital re%uirement, specially the temporary working capital
re%uirement of the firm. When there is a upward swing in the economy , sales will
increase R correspondingly ,the firm
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C#"% -'&the credit policy of the firm affects the working capital by influencing the
level of debtors. The credit terms to be granted to customers may depend upon the norms
of the industry to which the firm belongs. &ut a firm has the fle#ibility of shaping its credit
policy within the constraint of industry norms and practices. The firm should use direction
in granting credit terms to its customers. 8epending upon individual case, different terms
may be given to different customers. ! liberal credit policy without rating credit worthiness
of customers , will be detrimental to the firm and will create a problem of collection later
on. The firm should be prompt in making collections. ! high collection period will mean
tieBup of large funds in debtors. 'lack collection procedure can increase the chances of bad
debt. In order to ensure that unnecessary funds are not tied up in debtors, the firm shouldfollow a rationalised credit policy based on credit standing of customers and other relevant
factors. The should evaluate the credit standing of new customers and periodically review
the credit worthiness of the e#isting customers. The case of delayed payments should be
thoroughly investigated.
A!=%& ' #"% #'/ $3--"#$the working capital re%uirements of a firm are also
affected by credit terms granted by its suppliers. ! firm will needless working capital if
liberal credit terms are available to it from suppliers. 'upplier
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capital re%uirements of the firm. =enerally rising price levels will re%uire a firm to
maintain higher amount of working capital. 'ame levels of current assets will need
increased investment when prices are increasing. owever companies that can
immediately revise their product prices with rising price levels will not face a severe
working capital problem. 0urther , firms will feel effects of increasing general price
level differently as prices of individual products move differently. Thus it is possible
that some companies may not be affected by rising prices while others may be badly
hit
P'"$ '# nnn, %" 3##"n% $$"%$
! firm can adopt different financing policies visBa vis current assets . three types of
financing may be distinguished
"ong term financing @ the sources of long term financing include ordinary share
capital, preference share capital , debenture , long term borrowings from financial
institution and reserved surplus :retained earning;.
'hort termB the short term financing is obtained for a period less than one year. It isarranged in advanced from banks and other supplier of short term finance in the
money market . short @term finances include working capital funds from banks ,
public deposits commercial paper factoring of receivable etc.
'pontaneous financingB spontaneous financing refers to the automatic sources of
short @term fund arising in the normal course of a business. Trade :supplier; credit
and outstanding e#penses are e#ample of spontaneous financing. There is no
e#plicit cost of spontaneous financing. ! firm is e#pected to utilise these sources of
finance to the fullest e#tent. The real choice of financing current asset ,once the
spontaneous sources of financing have been fully utilised , is between the longB
term and short sources of finance.
D"-"nn, 'n %" /? ' $'#% n 'n,%"#/ nnn, %" --#' ''>" =&
'/-n& /& =" #""##" %' $
Matching approachBthe firm can adopt a financial plan which matches the e#pected life of
assets with the e#pected life of the source of funds raised to finance assets with the
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e#pected life of the sources of fund raised to finance a plant e#pected life of ten years R
stock of goods to be sold thirty days may be financed with a thirty @ day commercial paper
or a bank loan. The justification for the e#act matching is that since the purpose of
financing is to pay for assets, the sources of financing and the asset should relin%uished is
e#pensive as funds will not be utilised for the full period. 'imilarly , financing will have to
be made on a continuing basis.
When the firm follow matching approach :also known as hedging approach;,long term
financing will be used to finance fi#ed assets and permanent current asset increases, the
longBterm funds and as level of these assets are financed with long term financing level
also increases. The temporary or variable current asset are financed with short @term funds
as their level increases , the level of short term financing also increases. 1nder matching
plan ,no short term financing will be used if the firm has a fi#ed current assets need only.
onservative approachB a firm in practice may adopt a conservative approach when it
depends more on long term fund for financing needs. 1nder conservative plan the firm
finances its permanent assets and also a part of temporary current assets with long term
financing. In periods when the firm has no need for temporary current assets, the idle long
term funds can be invested in the tradeable securities to conserve li%uidity. The
conservative plan relies heavily on long term financing and therefore , the firm has less risk
of facing the problem of shortage of funds.
!ggressive approachB a firm may be aggressive in financing the current asset. !n
aggressive policy is said to be followed by the firm when it uses more short term financing
than warranted by the matching plan. 1nder an aggressive policy , the firm finance a part
of current asset with the short term financing. 'ome e#tremely aggressive firm may
even finance the a part of their fi#ed asset s with short term financing.
I$$3"$ n >'#*n, -% /n,"/"n%
Working capital management refers to administration of all components of working capital
@ cash , marketable securities, debtor :receivable; and stock :inventories; and creditors
:payables ;. The financial manager must determine level and composition of current assets.
It must see the right source tapped to finance current assets, and that current liabilities are
paid in time.
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There are many aspect of working capital management which make it an important
function of the financial manager.
Time @working capital management re%uires much of the financial manager As
time.
Investment @working capital represents a large portion of the total investment in
asset.
ritically working capital management has great significance for all firms but it is
very critical for small firms.
=rowthB the need for working capital is directly related to firmn, "?/-"
:in crores;
MAHINDRA
TECH.
S.L.PVT.LTD. JMB
COMPONENT
OTHER
'ales 6HF5.5 5J6H.6, L6L9.F, 59-9.-
Total asset CH77.J 5CC5.C, 567CF.C, LH9.C
urrent
asset
LH75.7 LL9.C 55-CL.J, HFL.J
!DT! LC.H JJ.- HH.6, 6H.-
!D'!"' 559.J FC.L 59C.L, F-.J
MTH COMPONENTB is a large , well diversified ,private sector marketing @cumB
manufacturing organisation. In 977- the company
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BEST WA TECHNOLOGis also a diversified company in the private sector.
In 977- ,its current assets are two thirds of total assets and about a third times of
sales. OTHERB is a joint sector:joint venture between state of =ujarat and private
sector; company manufacturing fertili)ers, industrial products:methanol, formic
acid, nitric acid, ammonium nitrate, li%uid nitrogen etc.; and e%uipment products.
Its current assets in the year 977- are less than half of total assets and H7 percent of
sales.
'.".2=I2*I2= '.". was started as a large public sector company. its share
have been partly divested now. It has a dominant position in the power sector. Its
manufacturing operations are spread into industrial and transportation sectors also.
! large number of its products are long productions cycle products. The company
As main customer are state electricity boards who fail to pay their due on time.
current asset s in 977F are C7 percent of total asset and 559 percent of sales.
mpirical observation show that the financial managers have to spend much of their
time to the daily internal operations, relating to current assets and current liabilities of
the firms. !s the largest portion of the financial manager
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There is a direct relationship between a firm ' >'#*n, -% /n,"/"n% n J.B.M. n BEST WA -!%. L%.
The aim of working capital management is to strike off a balance between nn
$%=%& n -#'%=%&.$bm.component and best way pvt. "td. working capital
management maintaining both the factors they have financial stability as well as they
generate profit for the business. There working capital management %uite different from
the industry because of their business profile and for the strong financial assistance from
their parent company. !n e#amination of the components of working capital is helpful at
this point because of the preoccupation of management with the proper combination of
assets and ac%uired funds. 0irst , shortBterm ,or current ,liabilities constitute the portion of
funds which have planned and raised. 'ince there management must be concerned with
the proper financial structure, these and other funds must be raised judiciously , if we see
their past performance their deficiency of their fund is very low.
*ecently in their pani pat project they faced some hindrances because of the cyclone their
infrastructure has been destroyed but the losses has been adjusted in cost , although they
reinstall everything actually it is not a loss but cost has been double. &ecause of this
incident they had impact on their entire working capital management therefore
reinstallation make their initial cash outflow increased and also their profit margin from
this milestone has been decreased. In the same project they make a huge tower and
presume that this tower cannot be install in one process so they adjusted their cost in a such
manner, if the fail to do so they wont face any loss but beyond every one e#pectation they
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install it in one take and that adjusted cost add in the profit.business needs to invest in
current assets to sustain its business operations
MANA"IN" WORIN" CAPITA!
T#" #""!=" /n,"/"n%
*eceivable management refers to the decision a business makes regarding its overall credit
and collection politics and the evaluation of individual credit applicants. In formulating
an operational credit policy , finance manger must analyse the marginal benefits and costs
associated with change in credit terms ,collection efforts etc. receivable management
proves for a firm , both, an asset and a problem an asset because of the promise of a future
cash flow and a problem because of the need to obtain while waiting for the cash flow and
a problem because of need to obtain financing while waiting for the future cash flow. 0irst
a company must decide to sell good on credit. !n affirmative answer will necessitate an
evaluation of the credit . terms which will be consistent with the goal of ma#imi)ing the
value of the company to its shareholder. 3nce an optimum credit policy is determine , thefinancial manager must ascertain the effect it will have on sthe company As current asset
re%uirement s.
'teelount receivable are asset steelounts representing amounts owed to the firm as a result
of the sale of goods and services in the ordinary course of business . The value of these
claims is carried on the balance sheet under titles such as steelounts receivable , trade
receivables or customer receivables. The financial manager can add value to the company
As share by properly influencing three areas the company As aggregate invest receivables
its credit term and credit standard . over investment in receivable can costly because the
investment is typically financed by short term borrowing and because it may signal
steeleptance of late paying customers. If the credit term :cash discount and period allowed
for payment;are not competitive when compared to other seller in the same industry or are
misaligned with the product line profitability , they can also diminish shareholder value.
'etting credit standard for customer incorrectly can erode shareholder because of lost
sales:when too stringent;or uncollectible sales: when too lenient ;. When a firm makes an
ordinary sale of goods or services and does not receive payment the firms grants trade
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credit and creates steelounts receivable which is collected in the future . this steelount
receivable represent and e#tension of credit to customers, allowing them a reasonable
period of time in which to pay for the goods which they have received . receivable are
significant current assets that must be financed on a continuing basis.
T" #""!=" /n,"/"n% -#'"$$
C#"% -'& !#="$
While analysing the receivable management optimum credit policy is one of the important
aspect. In establishing the an optimum credit policy ,we should consider the important
decision variable which influence the level of receivables. !s stated in the preceding
section ,the major controllable decision variables include the following
redit standard analysis
redit terms
ollection policy and procedure
C#"% $%n# are the criteria which a firm follows in selecting customers for the
purpose of credit e#tension. The firm may have tight credit standards that is it may sales
mostly on cash basis and may e#tend credit only to the most reliable financial strong
customer .such standards will result in no bab debt losses, and less cost of credit
administration. &ut the firm may not able to e#pand sales. The profit sacrificed on lost
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sales may be more than the costs saved by the firm. 3n the contrary if credit standard are
loose , the firm may have larger sales but the firm will have to carry larger receivable. The
costs of administering credit and bad debt losses will also increase, thus the choice of
optimum credit standard involves a trade off between incremental return and incremental
costs.
C#"% %"#/$the stipulation under which the firm sells on credit to customers are called
credit to customers are called credit terms. These stipulation include :a; credit period and
:b; the cash discount.
ollection policy is needed because all customer do not pay the firm
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milestone they get payment, so that the over dues would not be their and smooth pattern
would be maintain .
While discussing about the credit standard they provide a general credit standard to their
client that is 5FB-7days in ground of major problem although the firm have tight credit
standard, such credit standard will no result bad debt losses and less cost of credit
administration, and also they don
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'teelording to the j.b.m. and best way pvt. "td. regulation if the completion of project get
delayed ,means the failed to steelomplished their project with in the due date the li%uidity
damage has been deducted by their client.
If they steelomplish their project before time they would be awarded by the bonus from
their client. likewise they done in the petrochemical project of 'audi !rabia ,they got
*'5Fmillion bonus and most of them had been distributed among their employees and rest
they treated as retain earning :fi#ed deposit in bank;.while in case of their ongoing pani
pat project they covered C7U of their milestone means all the installation of machinery
have been completed only testing are going on and they are doing their working three
month advance , in this project they will get bonus .
B'n3$ 3$%/"n%
If j.b.m. component and best way ltd. got delayed for completion of project then , per week
.7FU li%uidity damage has been deducted by their client .9U per week has been given as a
bonus if they done their project in advance means before completion time, a minimum gap
would be their like in case of three year contract they have to complete minimum three
month advance. &onus is calculated over and above the contract value and also it is treated
as a income from other sources in the balance sheet.
Most of their transaction is transaction but in some special case like they re%uired a
immediate payment which is not scheduled earlier in such case they prefer to receive in
cash so that transaction would made more faster, while same thing happen when they are
making payment to their suppliers.
A,n, $"3"
The aging schedule removes one of the limitation of the average collection period. It
breaks down receivable steelording to the length of time for which they have been out
standing. While in case of j.b.m.component and best way ltd. they have tight credit
standard so their average collection period would strictly maintain ,means payment must
be receive within the 9F to -7 days. $bm.component and best way ltd. gets payment
L7Uon the same month and 97U in the ne#t month. This process of receiving payment is
possible because they do heavy and long run project. F!" #"$'n 6>& ' %" =/
'/-'n"n% n ="$% >& %. !" %,% #"% $%n#
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ompetition B generally the higher degree of competition ,the more credit granted by
the firm. however the firm like jbm component and best way ltd. who very less
competitor not only in India but also in world they wouldn
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unnecessary investment. ! firm neglecting the management of inventories will be
jeopardising its longBrun profitability and may fail ultimetaly . it is possible for a
company to reduce its level of inventories to a considerable degree ,e.g 57to 97 percent
,without any adverse effect on production and sales by using simple inventory planning
and control techni%ues. The reduction in e#cessive inventories carries a favourable impact
on a companyAs profitability.
Inventory Management and Inventory ontrol must be designed to meet the dictates of the
marketplace and support the companys strategic plan. The many changes in market
demand, new opportunities due to worldwide marketing, global sourcing of materials, and
new manufacturing technology, means many companies need to change their Inventory
Management approach and change the process for Inventory ontrol.
O="%!" ' n!"n%'#"$ /n,"/"n%
To maintain a large si)e of inventories of raw material and workBinBprogress for
efficient and smooth production and of finished goods for uninterrupted sales
operations.
To maintain a minimum investment in inventories to ma#imise profitability.
In!"n%'#& 'n%#' $&$%"/$
! firm needs an inventory control system to effectively manage its inventory. There are
several inventory control systems in vogue in practice. They range from simple systems to
very complicated systems .the nature of the business and si)e dictate the choice of an
inventory control system. 0or e#ample , a small firm may operate a twoBbin system .under
this system , the company maintains two bins. 3nce inventory in one bin used, order is
placed, and mean while the firm uses inventory in the second bin. 0or a large departmental
store that sell hundreds of items, this system is %uite unsatisfactory. The departmental
store will have to maintain a self operating, automatic computer system for tracking the
inventory position of various items and placing order .
ABC n!"n%'#& 'n%#' $&$%"/Blarge numbers of firms have to maintain several
types of inventories. It is not desirable to keep the same degree of control on all the
items. The firms should pay ma#imum attention to those items whose value is the
highest. The firm should therefore , classify inventories to identify which items
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should receive the most effort in controlling. The firm should be selective in its
approach to control investment in various types of inventories. J3$%n K%/" (%)$&$%"/$B $apanese firms popularised the justBinBtime :jit;system
in the world. In a $IT system material or the manufactured components and parts
arrive to the manufacturing sites or stores just few hours before they are put to use.
The delivery of material is synchronised with the manufacturing cycle and speed.
$IT system eliminates the necessity of carrying large inventories, and thus saves
carrying and other related costs to the manufacturer. The system re%uires perfect
understanding and coordination between the manufacturer and supplier in terms of
the timing of delivery and %uality of the material. Poor %uality material or
components could halt the production. The $IT inventory system complements the
total %uality management. The success of the system depends on how well a
company manages its suppliers. The system put tremendous pressure on suppliers.
They will have to develop ade%uate system and procedure to satis factory meet the
needs of manufacturer. O3%$'3#n,is a system of buying parts and components from outside rather than
manufacturing internally. Many companies develop a single source of supply , and
many others help developing small si)e suppliers of components that they re%uire.
Tata motors has for e#ample developed number of ancillary units around its
manufacturing sites that supply parts and components to its manufacturing plants. C'/-3%"#$" n!"n%'#& 'n%#' $&$%"/$B a computerised inventory control
system enables a company to easily tracks large items of inventories. It is an
automatic system of counting inventories , recording withdrawals and revising the
balance. There is an inBbuilt system of placing order as a computer notices that the
reorder point has reached.
In!"n%'#& /n,"/"n% =& .=./. '/-'n"n% n ="$% >& %.
Inventory management is concerned with keeping enough product on hand to avoid
running out while at the same time maintaining a small enough inventory balance to allow
for a reasonable return on investment. Proper inventory management is important to the
financial health of the corporation. #cessive level of inventory, however ,results in large
inventory carrying costs, including the costs of the capital tied up in the inventory
warehouse fees , insurance etc. while after considering all this factor jbm component and
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best way ltd. decide to follow justBinBtime techni%ue for managing their inventory. *eason
for choosing justBinBtime techni%ue are as follows
While j.b.m. component and best way ltd. usually work on heavy projects and all
the projects are different in nature so their re%uirements are different from each
other , that&
%.
$bm.component and best way ltd. provides industrial service to the refinery , gas ,
petrochemical plant though all this project are heavy project involvement of fund
is also very high, that
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domestic procurement of raw material , for an e#ample there are three party jbm.
com and best way ltd.8"I,I3" P!2I P!T,?'!I" +3"+!T!, when sail
despatched the raw material they have to charge sales ta# , if 'amsung would
receive the raw material and put it in his own warehouse then send to the I3"
again 'amsung would have to charge sales ta# means same item ta# twice
automatically cost has been increase. 0or that reason 'amsung took delivery to the
sail in the middle 'amsung employee endorsed and despatched to the I3" paniB
pat ,'amsung would not posses any material in his own warehouse like this way
warehouse e#pense of $bm.component and best way ltd. have been save and also
they avoid double ta#ation. In case of imported raw material they follow H, S"S" T#n$%'n6 for an e#ample a &ra)ilian supplier in favouring the
representative of $bm.component and best way ltd. of high sea sale agreement with
the &ra)ilian company to transfer the ownership to I3". once the material landed
in Indian port all the ta#es paid by I3".
!n inventory monitoring cell has been constituted at the corporate offices.
The purchases were controlled by the materials management group reporting to the
director of finance .
Monthly review of total inventory at the level of chief e#ecutive of plants andcorporate management is introduced.
Inventory control is dovetailed with the budgeting system
Top 577 inventory items were identified for closer scrutiny and control.
In!"$%/"n% n n!"n%'#"$
In managing the inventories, the firmAs objective should be in consonance with
shareholders wealth ma#imisation principle. To achieve this , the firm should determine the
optimum level of inventory . fficiently controlled inventories make the firm fle#ible.
Inefficient inventory control result in unbalanced inventory and infle#ibility @ the firm may
sometimes run out of stock and sometimes may pile up necessary stock. This increases the
level of investment and make firm unprofitable.
To manage inventories efficiency ,answer should be sought to the following two
%uestions
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ow much should be orderedQ
When should it be orderedQ
While in case of $bm.component and best way ltd. when should it to be ordered considered
to be more important ,because of uncertainty and is a problem of determining the reBorder
point. 3ne of the major inventory management problems to be resolved is how much
inventory is replenished. If the firm is buying raw materials, it has to decide lots in which it
has to be purchased on replenishment. If the firm is planning a production run , the issue is
how much production to schedule, these problems are called order %uantity problem.
8etermining an optimum inventory level involves two types of costs:a;ordering costs:b;
carrying cost.
O#"#n, '$% is includes the entire costs of ac%uiring raw material. They include cost
incurred in ordering , transporting, receiving, inspecting ? storing. In case of jbm.
omponent and bes tway ltd. ,their transporting costs would be adjusted in material cost
or they pay separately to their vendor. 3rdering costs increase with the number of ordersR
thus the more fre%uently inventory ac%uired ,the higher the firms ordering costs.
$bm.component and best way ltd. placed order steelording to their milestone so it is
difficult to identify their ordering costs.
C##&n, '$%$incurred for maintaining a given level of inventory. This include storage
,insurance ,ta#es. $bm component and best way ltd. used to paid ta# addition to their
material cost, they usually pay custom duty, 0&T, service ta#, e#cise duty, vat.
T#" -&=" /n,"/"n% =& =/. '/-'n"n% n ="$% >& %.
$bm component and best way ltd. payment system is based on 0I03 basis. !lthough they
have certain procedure for making payment ,they divide their vendor like international?
national basis.
F''>n, $%"- >'3 =" /n%n" =& %" >" /n,n, %#" -&=".
They familiari)e with their vendors, then they decide the time when actually
material has been utili)e steelording to that the time of delivery. &ased on material
re%uired they gave advance to their supplier ,advance would made 57Uto5FU.
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3nce the material is despatched to the site ,'amsung installed it and commission
the material after successful installation, they bill to the customer as per the term
money received by 'amsung that is generally -7to J7 days. In case of their imported material they pay through letter of credit procedure is
banker given assurance to the vendor then depend upon viability state bank would
allot letter of credit, it is not necessary that only state bank can issue letter of credit
but there would be mutual agreement while choosing bank , if they have large
amount in some bank that bank would gave more preference. In case of domestic
supplier all the payments would be done on cash.
While negotiating the prices to the vendors at the beginning the payment term
generally finali)ed .
! recent e#ample of there payment system ,they are making three watch tower in
pani pat project, they complete their work in scheduled time but they get payment
for second watch tower then they would make payment to those vendor only who
supply material to the second watch tower. If they failed to receive the payment for
first ?third watch tower then the raw material supplier have to wait till the
payment receive but within -7days $bm.component and best way ltd. have to make
payment to their supplier and if their client failed to make payment for this specific
task then they have to pay by their own.
C$ /n,"/"n%
ash is a important current asset for the operation of the business. ash is the basic input
needed to keep the business running on a continuos basis R it is also the ultimate output
e#pected to be realised by selling the service or product manufactured by the firm. The
firm should keep sufficient cash, neither more nor less. ash shortage will disrupt the
firm
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items ,such as marketable securities or bank times deposits ,are also included in cash. The
basic characteristics of nearBcash assets is that they can readily be converted into cash.
=enerally , when a firm has e#cess cash ,it invests it in marketable securities. This kind of
investment contributes some marketable securities. This kind of investment contributes
some profit to the firm.
management is concerned with the managing of :5;cash flows into and out of the firms,
:9;cash balances held by the firm at a point of time by financing deficit or investing surplus
cash. It can be represented in the cash management cycle.
C$ Mn,"/"n% C&"
ash management is also important because it is difficult to predict cash flows steelurately
,particularly the inflows ,and there is no perfect coincidence between the inflows and
outflows of cash. during some periods, cash flow steelurately ,particularly the inflows and
outflows of cash. 8uring some period ,cash outflows will e#ceed cash inflows ,because
payment for ta#es ,dividend or seasonal inventory build up. !t other times , cash inflow
will be more than cash payment because there may be realised in large sums promptly.
0urther , cash management is significant because there may be large cash sales and
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debtors may be realised in large sums promptly. 0urther , cash management is significant
because cash constitutes smallest portion of the total current assets , yet management As
considerable time is devoted in managing it. In recent past , a number of innovation have
been done in cash management techni%ues. !n obvious aim of the firm these days is to
manage its cash affairs in such a way as to keep cash balance at a minimum level and to
invest the surplus cash in profitable investment opportunities. In order to resolve the
uncertainty about cash flow prediction and lack of synchronisation between cash receipts
and payments, the firm should develop appropriate strategies for cash management. The
firm should evolve strategies regarding the following four facts of cash management.
C$ -nnn,@ cash inflows and outflows should be planned to project cash
surplus or deficit for each period of the planning period. ash budget should be
prepared for this purpose.
Mn,n, %" $ '>$B the flow of cash should properly managed. The cash
inflows should be steelelerated while as far as possible , the cash outflows should
be decelerated .
O-%/3/ $ "!"l @ the firm should decide about the appropriate level of cash
balances deficiency should be matched to determine the optimum level of cashbalances.
In!"$%/"n% ' $3#-3$ $@the surplus cash balances should be properly invested
to earn profits. The firm should decide about the division of such cash balance
between alternative short term investment opportunities such as bank deposits,
marketable securities, or interBcorporate leading.
C$ /n,"/"n% n J=/.'/-'n"n% n ="$% >& %.
ash is the lifeblood of a business firm, it is needed to ac%uire supplies, resources,
e%uipment, and other assets used in generating the product and service provided by the
firm. It is also needed to pay wages and salaries to workers and managers. Ta#es to
government , interest and 3bjectives to creditors and dividends to shareholders. More
fundamentally , cash is the medium of e#change which allows management to carry on the
various activities of the business firm from day to day. ash is a important aspect of
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business but more is managing it so every company have it own techni%ue . The $bm
component and best way ltd. strategies regarding the following four facts of cash
management.
ash planning B $bm component and best way ltd. makes cash planning steelording
to their projects, like in case of their pani pat project ,they considered it to be long
term project and cash flow is systematic. !nother project which I took as a
e#ample is considered to be a scattered project , because it is not a single long term
project. &asically head office +orea globally participating ,when they are biding
somewhere they gave order to 'amsung India for to make drawing ? proposal.
3nce $bm component and best way ltd. korea received order then they gave order
to the $bm component and best way ltd. India for making further industrial facility
as per the terms $bm component and best way ltd. India received payment from
$bm component and best way ltd. +orea. While for further clarity I made the cash
budgeting for these one project.
Managing the cash flowB the flow of cash should properly managed. The cash
inflows should be steelelerated while as far as possible , the cash outflows should
be decelerated , $bm component and best way ltd. cash flows are %uite fi#ed in
nature because they prefer to do heavy ?long term project , where payment are
received steelording to the completion of the work ,usually they divide their work
in several milestone and steelording to the completion of milestone they receive
payment from their client. !part from that they get full financial assistance from
their parent company $bm component and best way ltd. +orea , its help them to
make their cash flow more viable. In the same they maintain their cash outflow
,they prioritise their payment first is statutory payment, second is employeessalaries ,third is administrative e#penses and fourth one is vendors and others. In
this way the make balance in their outflow they never face cash deficiency because
of their viable strategies and full support from their parent company.
Investment of surplus cashB it
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government norms, and banks are free to take business decisions in granting finance for
working capital.
$bm component and best way ltd. follows several techni%ue to finance their working
capital
!lthough they have viable financial structure ,but when they start new project they
take initial advance from their customer percentage depend upon the contract value.
'amsung faced default risk in the situation of any steelident happened in the place
of work. It may be happen de to the natural calamities or technical fault. 0or that
particular situation they took loans ?advances from their head %uarter so the flow
of working capital would be maintain .
$bm component and best way ltd. take overdraft in rare cases ,when head %uater
failed to provide them and they re%uire fund in short notice then only take overdraft
and they never cross their overdraft limit.
Their fund flow has been planned in centrali)ed manner and that
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their nature of business and implementation of new techni%ue which help them to smooth
flow of the fund.
Performance of $.&.M. and &'T W!( pvt. "td. +orea and India both are affluent. Their
mi#ed corporate culture and the area of e#pertise in metal processing construction
contract help them to get succeed in every project.
Working capital objectives
$bm component and best way ltd. aims to maintain its position as a worldBclass company,
devoting their human resources and technology to create superior products and services,
while contributing to a greater society for everyone. To this end, they share and pursuecore values People, #cellence, hange, Integrity, and oBprosperity. !s part of an effort
to reali)e these values, they will also adhere to 'amsung
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O="%!"$ 4 $bm component and best way ltd. care for the environment, health and
safety. They engage in environmentally friendly management practices. They value
peoples health and safety.
O="%!"$ 8 $bm component and best way ltd. are a socially responsible corporate
citi)en. They actively perform their duties as a corporate citi)en. They respect the
characteristics of local customs, culture, and society, while striving to prosper alongside
local communities. They build winBwin relationships with business partners.
SCOPEworking capital management is very important aspect in running a business
house successfully ? smoothly on daily basis and on long term basis. 'o in depth
knowledge of working capital management give us idea how to utilise the funds so that
cash asset can be utilised in best manner without any obstacles on business operation.
The study of working capital enable us the recognise the need of future capital ? study
tells us how to utilise it in best manner. The purpose of the report is to get the in depth
understanding of the process of working capital management. With the growing Indian
economy and the liberal government policies for infrastructure, the demand for MT!"
services is increasing and seeing this as an opportunity is under taking many new projects
for e#pansion of the production which are under implementation for increasing the
capacity of the plants. $bm.component and best way pvt. "td. world recognised MT!"
company so the management of working capital consist of different of new techni%ue
which is not common in Indian MT!" industry.
"IMIT!TI32' 30 T 'T18(
B3$& S"3" ' C'n"#n" E?"3%!"$ The concerned e#ecutives were having very
busy schedule because of which they were reluctant to give appointment.
T/"The time duration could not provide ample opportunity to study every detail
of working capital management of the company.
Un>#"n"$$ #ecutives were unaware of many terms related to working capital
study while asking to them.
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C'n"n% In'#/%'n !s the company on steelount of confidential report has
not disclosed some figures. Moreover, in some cases separate steelounts of division
are not separately maintained thereby, leading to restrictions in study.
'econdary data used This project is completed by using secondary data.
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REVIEW OF LITERATURE
Working apital Management is very important aspect of financial management. Working
capital need on daily basis for smoothly running a business house. so, procurement ?
proper availability of working capital is very important in every business. >arious studies
and research has been on this industry by e#perts. ere are the lists of few books that have
been referred to for the purpose of the study.
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RESEARC- MET-ODO!O"Y
*esearch methodology consist of mode of data collection or generation and type of
analysis of data. 8ata collection methods consist of primary collection, secondary
collection, %ualitative data and %uantitative data. while primary data consist of 3riginal
data collected for a specific research goal like 4uestionnaire surveysR Interviews formal or
structured. Then secondary data consist of data originally collected for a different study,
used again for a new research %uestion like Published statistics , Published te#ts ,
documents, forms reports.
!nother part is 4ualitative data and 4uantitative data. While %ualitative 8ata involvingunderstandings of the comple#ity, detail and conte#t of the research subject, often
consisting of te#ts such as interview transcripts and field notes, but also audiovisual
material and %uantitative 8ata that can be described in terms of objects, variables and their
values
In regarding my research work I was strictly relied upon the primary and secondary
method of data collection. Primary research consist of collection the financial information
to the respective individuals of the company, through in depth interview and study of
different financial statement of the company. While my half of the thesis is relied on the
primary data collection as my internal guide is a general manager of finance in jbm.
omponent and best way pvt ltd. so through in depth interview of my guide is one of my
important source of data collection and in the same way he used to provide all the
relevant statement of the company which I can follow and make analysis of it.
While my secondary research consist of collection of data about the brief introduction of
the company ,their ranking in the market ,condition of their e#isting project from the
different website ,company brochure, yearly company maga)ine. !part from the
information about company , I collected information about working capital management,
how different companies managing their working capital , different aspects of working
capital management.
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R"$"# D"$,n
The research design used in this study is "$#-%!".
S/-n, P#'"3#" The sampling procedure consists of
P#'==%& '# #n'/ $/-n, mployees are selected for study using
probability sampling. It is one in which each and every unit of the population has
an e%ual chance of being selected into the sample.
N'n-#'==%& '# n'n#n'/ $/-n,Managers are selected for study using
2onBprobability sampling. In this the chance of including an elementary unit of
population in the sample cannot be determined and hence they do not lend
themselves to a statistical treatment and analysis.
60
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DATA COLLECTION AND ANALSIS
METHODS OF DATA COLLECTION
'econdary sources of data collection was used for the study of working capital
management at $bm component and best way pvt. "td.
THE PRIMAR SOURCES OF DATA COLLECTION
8ataobserved or collecteddirectlyfrom firstBhand e#perienceis called primary data.
'ources to collect Primary data are through
&y administering the %uestionnaireR
&y nonB participative observationR
&y face to face discussions R
THE SECONDAR SOURCE OF DATACOLLECTION
!vailable records
!nnual reports
ompany maga)ines, etcX.
THE SCOPE OF THE SURVE
The survey will be conducted at 'amsung limited 0aridabad. This survey is related to study the
working capital management 'amsung limited 0aridabad. The study is confined to only one
company so that, it has limited scope for getting more knowledge.
61
http://www.businessdictionary.com/definition/data.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.businessdictionary.com/definition/experience.htmlhttp://www.businessdictionary.com/definition/data.htmlhttp://www.investorwords.com/9454/directly.htmlhttp://www.businessdictionary.com/definition/experience.html -
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.#Amo$nt o/ 0orking *apital in 1i2erent 'ear%.
Year% 00=0> 00>0? 00?10 01011
3#4#m#*omponent(in
*rore%, 1=1 ;6
31> >>
Interpretation:
I o+" %h!% #" %he 2e!r 00=0> or5#" !%!, !* 1=1.=>
rore* h#,e #" 2e!r 01011 #% !* >>.33 rore*.
5# T'pe o/ 0orking *apital $%e1 in 34m#*omponent
an1 4e%t 0a' lt1#
Per-!"e"% Te-&or!r2
=; 6
6
00=0> 00>0? 00?10
01011>.
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Interpretation:
O+% o %o%!, or5#" !%!, o %he o-&!"28 =; #*&er-!"e"% !" 6 #* %e-&or!r2 or5#" !%!,.
6# Met&o1 $%e /or Material 1i%pat*&:
Interpretation:
Re*+,% *ho* %h!% -o*% o %he %#-e* o-&!"2 !o&% LEFO
-e%ho %o #**+e #"/e"%or2. A" or o%her %2er* o-&!"2 !,*o
+*e FIFO -e%ho . +% *o-e%#-e* o-&!"2 !,*o !&&,2 HIFO
o%her -e%ho* %o- *+&&,2 #"/e"%or2
Met&o1 FIFO LIFO HIFO O%her
Re%pon1ent%
789
1< 0 10 " !" $3"n% >'#*n, -% n n& #/ 6% /*"$ ,'' #"%'n$- >%
$3--"#$ %#'3, %/"& -&/"n% %' %"/.
D#/#e" #*%r#+%e* re+,!r,2 e%ee" *h!reho,er*
#%h e"o+h or5#" !%!,.
Ie!, or5#" !%!, r!%#o he,&* #" e!*2 ,o!"* ro- !"5*.
6>
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completion they receive bonus from their client .&onus is calculated over and above the
contract value and also it is treated as a income from other sources in the balance sheet.
While their aging sechdule they gets payment L7 percent on the same month and 97U .
This process of receiving payment is possible because the do heavy and long run
project.There payment system is based on 0I03 basis. !lthough they have certain
procedure for making payment ,they divide their vendor like international? national basis.
&ased on material re%uired they gave advance to their supplier ,advance would made
57Uto5FU. They used letter of credit for international supplier? for national supplier they
placed bill as per terms of agreement.
They follow just @inBtime techni%ue for managing their inventory, and it help them to be
more cost effective. &ecause of this they have to purchase si)eable imported raw materials
and compulsory bulk purchases of items like steel and construction item !part from that
$bm.component and best way derive some new techni%ue under the heading of $IT, which
is E1 %#n$%'n7 H, $" $".
ash is a important aspect of business but more is managing it so every company have it
own techni%ue . The $bm.component and best way strategies regarding the following four
facts of cash management ash is a important aspect of business but more is managing it
so every company have it own techni%ue . $bm.component and best way makes cash
planning steelording to their projects, like in case of their pani pat project ,they considered
it to be long term project and cash flow is systematic. $bm.component and best way ltd.
cash flows are %uite fi#ed in nature because they prefer to do heavy ?long term project ,
where payment are received steelording to the completion of the work ,usually they
divide their work in several milestone and steelording to the completion of milestone they
receive payment from their client. while their investment of surplus cash ,they gave
financial assistance to their parent company and other one is In' -'' $&$%"/.
$bm.component and best way pvt. "td. finance their working capital by different sources
likewise when they start new project they take initial advance from their customer
percentage depend upon the contract value. In case of default risk they take loans and
advance from their head %uarter so the flow of working capital would be maintain. In rare
cases they use overdraft ,sometime they re%uire fund in very short notice.
=0
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If we see the trend year wise then their net working capital is increased in year 9755as
comparison to year 9757. Then there is continuous rise in the debtors for two years,where
as it considered to be as a good sign for the business.
Whereas their cash balance is decreasing because they e#pand their business . ompany is
utili)ing the fi#ed cash for e#ploding the projects that is good for growth.
They would not provide any loan and advances to outsider or any supplier. they only give
loan to their parent company .
There current liability is also decreasing "ower current liabilities indicate that company is
not using credit facilities by creditors. I