mafatlal working capital

8/19/2019 Mafatlal Working Capital

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The following structure of project work should be followed to

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Chapter No. 1 - Introduction:

In this chapter Selection and relevance problem, historical background of the

problem, definition/s of related aspects, characteristics, different concepts pertaining to

the problem etc can be covered bY the candidate.

Chapter No. !esearch "ethodology

This chapter will include Objectives, !pothesis, Scope of the stud!, Selection of the

problem, Sample si"e, #ata collection, Tabulation of data, Techni$ues and tools to be used,

limitations of the stud!, significance of the stud! etc.

Chapter No. # $iterature !e%iew

This chapter will provide information about studies done on the respective issue. This would

assists students to undertake further stud! on same issue.

Chapter No. & - 'ata (resentation and 'ata )nalysis

This chapter is the core part of the stud!. The anal!sis pertaining to collected data will be

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findings. In this table of information, presentation of graph etc can be should be provided

b! the students.

Chapter No. * - Conclusion

In this unit of project work findings of work will be covered b! the candidate and

suggestion will be mentioned b! the candidate to validate the objectives and

h!potheses.

If re$uired more chapters of data anal!sis can be added.

%ibliograph!

&ppendi'


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I-#+C

hapter -o. Title )age -o.9 Introduction

: esearch (ethodolog!

; >iterature eview

8 & ompan! )rofile

8 % #ata &nal!sis

= onclusion

7 eferences


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&)T+ 9

I-TO#0TIO-


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*ODI-3 &)IT&>

(+&-I-3 &-# #+

*orking capital is the amount of funds which a compan! has to finance its da! to

da! operations it can be regards as the part of capitals which the capitals is basicall!

classified into fi'ed and working.


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E *orking capital is the amount of funds necessar! to the cost of operating the

enterprise. Operating e'penses involve investment in current assets, pa!ment towards

overhead and e'penses. Investment made in these heads is classified as working

capitalF.

G. smith

E The sum of the current assets is the working capital of the businessF

HH*ODI-3 &)IT&> 0+-T &SS+TS J 0+-T >I&%I>ITYF


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O-+)T O< *ODI-3 &)IT&>

There are two concepts of working capital that are4

9K %alance sheet concept

:K Operating c!cle concept.

9K %alance sheet concept4

*orking capital as per this defined in terms of current assets and current

liabilities. %alance sheet concept further classifies working capital into aK gross and bK

net working capital.

aK 3ross working capital4 it refers to total investment made in current assets. It is also

called circulating rotating from one head to another. +'. ash to raw material, raw

material to finished products, finished products to debtors, and debtors to cash. This

concept stresses on $uantit! aspectL i.e. to refer to total investment made in different

current assets. %onneville and bewa! have defined gross working capital as HH an!

fund received which increases the current assetsF.

bK -et *orking capital4 as per this concept working capital is the difference between

current assets and current liabilities. This concept stresses on $ualit! aspect of

working capital. The difference between current assets highlights on li$uidit! aspect

and $ualit! of current assets. & firm that has e'cess of current assets over liabilities is

said to possess ade$uate li$uidit!. On the contrar! firm that has e'cess of current

liabilit! over current assets means it does not have ade$uate li$uidit!. It means that

part of current assets of such firm are financed through fi'ed assets.


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Cash Raw Materials

Work In ProcessFinished goodSales

Debtors

:K Operating c!cle concept4

Operating !cle or *orking apital !cle indicates the length of time between

affirms pa!ing for raw materials entering into finished stock and receiving cash on the

sales of such onger the operating c!cle greater

will be the amount of *orking apital re$uired and vice versa. Thus it pla!s an

important role in determining the *orking apital needs of a firm.

O)+&TI-3 Y>+ &T

Operating !cle is the time duration re$uired to convert sales, after the

conversion of resources into inventories, into cash. The operating c!cle of a 3..T.(

involves three phases.

9. &c$uisition of resources such as raw material, labour, power and

fuel etc.

:. (anufacture of the product which includes conversion of raw


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material into work6In6 progress into finished goods.

;.Sales of the product either for cash or on credit. redit sales creates

book #ebts for collection.

In the (&&> (I>> >T# Mmanufacturing concernK, the working capital

operating c!cle starts with the purchase of raw materials and ends with the reali"ation

of cash from the sale of finished products. It is also called as cash conversion c!cle,

production c!cle etc. It involves the purchase of raw materials and stores, its into

stocks of finished goods through the work6in6)rogress with the progressive increment

of labor and service costs, conversion of finished goods MYarn )roductsK into sales,

#ebtors and receivables and ultimatel! reali"ation of cash and this c!cle continuous

again from cash to purchases of raw material and so on.


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KINDS OF

WORKING

CAPIA!

"# ON $%

&ASIS OF

CONC%P

GROSS

WORKING

CAPIA!

N%

WORKING

CAPIA!

'# ON $%

&ASIS OF

IM%

P%RMAN%N

OR FI(%D

R%G)!AR R%S%R*%

%MPORAR+

OR *ARIA&!%

S%ASONA! SP%CIA!

>&SSI

*orking capital can be classified on the basis of concept and on the basis of time.

Narious t!pes of working capital are as follows

9K On the basis of concept 4

*orking capital on this basis of concept is classified into

&K 3ross working capital4 It refers to total investment made in current asset.

urrent assets are the asset which can be converted into cash within a short period of

an accounting !ear. urrent assets include cash, debtors, bills receivables and short

term securities etc.

%K -et working capital4 It is the difference between current assets and current

liabilities. urrent liabilities are those claims of outsiders which are e'pected to

mature for pa!ment within an accounting !ear and include creditors, bills pa!able and

outstanding e'penses. -et working capital can be positive or negative. )ositive net

working capital will arise when current asset e'ceeds current liabilities. & negative networking capital occurs when current liabilities are in e'cess of current assets.


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:K On the basis of time 4

lassification of working capital in this case is made on the basis

of time for which investment is re$uired. Dinds of working capital in

this categor! are4

9K )ermanent 4 Some portion of working capital alwa!s remain permanent or fi'ed.

This refers to minimum investment a firm has to make and keep in certain current

assets.


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&K Seasonal working capital4 re$uirement of working capital is based on

particular seasons

e'L winter, summer or festival seasons etc during these seasons there will be

additional demand for the products. To meet out such demand firm has to make

additional arrangement of working capital.

%K Special working capital4 re$uirement of such working capital is necessitated to

meet demands of special occasionHs e'. Occasion of world cup cricket, Ol!mpics,

kumba mela, elections. #uring these special occasions demand for goods and service

will increase. To meet such special demand firm has to make temporar! arrangement

of working capital

#+T+(I-&-TS O< *ODI-3 &)IT&>

e$uirement of working capital differs from one firm to other. This is because

of business conditions and policies of conducting business differ. *orking capital

re$uired b! each from is determined b! following factors.

9K -ature of business4 important factor that determines re$uirement of working

capital is nature of business a firm is undertaking.


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8K Stock turn over4 stock turnover refers to number of times stock is turned over

that is it refers to sales. uicker the stock turn over M$uick salesK less is the working

capital. Slow pace of stock turnover demands more investment is locked up in

operation.

=K redit polic!4 redit polic! of the firm will influence re$uirements of working

capital.


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-eeds of *orking apital4

The need for working capital to run the da!6to6da! business activities cannot

be overemphasi"ed. *e will hardl! find a business firm which does not re$uired an!

amount of working capital. Indeed, firms differ in their re$uirements of the working

capital.

The firmHs aim is that ma'imi"ing the wealth of shareholders. +arning a stead!

amount of profit re$uires successful sales activit!. The firm has to invest enoughfunds in current assets for generating of sales activit!. urrent assets are needed

because sales do not convert into cash instantaneousl!. There is alwa!s an operating

c!cle involved in the conversion of sales into cash. Therefore *orking apital

re$uired for4

9K To meet the cost of inventories including total of raw materials purchased

parts, operating Supplies, work in progress, finished goods.

:K To pa! wages, salaries, for indirect labor, clerical staff, managerial and

supervision staff.

;K To meet overhead costs, including those of maintenance services activities,

fuel, power charges, ta'es and general e'pense administration.

8K To bear the e'pansion Mwith regard to promotion of salesK e.g. e'penses on packing, advertisement, salesmanship, Sales Servicing, &fter re$uires, redit


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I()OT&-+ O< *ODI-3 &)IT&>

+ven though the skills for maintaining the working capital are somewhat

uni$ue, the goals are the same6vi". to make an efficient use of funds for minimi"ing

the risk of loss to attain profit objectives.


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omponents of *orking apital4

There are two components of *orking apital

&. urrent &ssets

%. urrent >iabilities

&K urrent &ssets4

omponents of urrent &ssets are as follows4

9. ash 2 %ank %alance

:. Stock of aw (aterial at cost6 work in process and


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omponents of urrent >iabilities are as follows4

9. Sundr! reditors for the goods and e'penses.

:. Income ta' deducted at sources from contractors.

;. +'penses )a!able.

8. 0nclaimed #ividend.

=. Securit! #eposits.

7. >iabilities for bills discounted.

?. %ank Overdraft &cceptance.

*orking apital (anagement concerned with the following aspects4

9. ash (anagement4

ash is the important current asset for the operation of the business. cash is

the basic input needed to keep the business running on a continuous basisL it is also

the ultimate output e'pected to be reali"ed b! selling the service or product

manufactured b! the firm. The firm should keep sufficient cash, neither more nor less.

ash is the li$uid form of an asset. It is the read! mone! available in the

firm or with the business, essential for its operations. & firm needs the cash for the

following three purposes4

MaK The Transaction (otive4

MbK The )recautionar! (otive4

McK The Speculative (otive4


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:. eceivables (anagement4

eceivable represents amounts owed to the firm as a result of sale ofgoods or services on the ordinar! course of business. These are claims of the firm

against its customers and form part of its current assets. These receivables are carried

for the customers. The period of credit and e'tent of receivables depends upon the

credit polic! followed b! the firm. The main purpose of maintaining or investing in

receivables is to meet competitors, to increase sales, and to maintain a cordial

relationship with the clients.

;. Inventor! management4

+ver! enterprise needs inventor! for smooth running of its activities. It

serves as a link between production and distribution process. There is, generall! a

time lag between the recognition of a need and its fulfillment. The greater the time

lag, the higher the re$uirements for inventor!. The unforeseen fluctuations in demand

and suppl! of goods necessitate the need for inventor!. (oreover, it provides acushion for future price fluctuations.


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T+CTI>+ I-#0STY I- I-#I&

The Te'tile Sector in India ranks ne't to &griculture. Te'tile is one of IndiaHs oldest

industries and has a formidable presence in the national econom! in as much as it

contributes to about 98 per cent of manufacturing value6addition, accounts for aroundone6third of our gross e'port earnings and provides gainful emplo!ment to millions of

people. The te'tile industr! occupies a uni$ue place in our countr!. One of the earliest

to come into e'istence in India, it accounts for 98P of the total Industrial production,

contributes to nearl! ;BP of the total e'ports and is the second largest emplo!ment

generator after agriculture.

Te'tile Industr! is providing one of the most basic needs of people and the holds

importanceL maintaining sustained growth for improving $ualit! of life. It has a

uni$ue position as a self6reliant industr!, from the production of raw materials to the

deliver! of finished products, with substantial value6addition at each stage of

processingL it is a major contribution to the countr!Qs econom!. This paper deals with

structure, growth and si"e of the Indian te'tile industr!, role of te'tile industr! in

econom!, ke! advantages of the industr!, te'tile industr! e'port and global scenario

and strength, weakness, opportunities and treats of the Indian te'tile industr!.

I-TO#0TIO-

The Indian te'tile industr! is one of the largest in the world with a massive raw

material and te'tiles manufacturing base. Our econom! is largel! dependent on the

te'tile manufacturing and trade in addition to other major industries. &bout :?P of

the foreign e'change earnings are on account of e'port of te'tiles and clothing alone.

The te'tiles and clothing sector contributes about 98P to the industrial production and

;P to the gross domestic product of the countr!. &round @P of the total e'cise

revenue collection is contributed b! the te'tile industr!. So much so, the te'tile

industr! accounts for as large as :9P of the total emplo!ment generated in the

econom!. &round ;= million people are directl! emplo!ed in the te'tile


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manufacturing activities. Indirect emplo!ment including the manpower engaged in

agricultural based raw6material production like cotton and related trade and handling

could be stated to be around another 7B million.

& te'tile is the largest single industr! in India Mand amongst the biggest in the worldK,

accounting for about :BP of the total industrial production. It provides direct

emplo!ment to around :B million people. Te'tile and clothing e'ports account for

one6third of the total value of e'ports from the countr!. There are 9,::? te'tile mills

with a spinning capacit! of about :A million spindles. *hile !arn is mostl! produced

in the mills, fabrics are produced in the powerloom and handloom sectors as well. The

Indian te'tile industr! continues to be predominantl! based on cotton, with about 7=P

of raw materials consumed being cotton. The !earl! output of cotton cloth was about

9:.@ billion m Mabout 8: billion ftK. The manufacture of jute products M9.9 million

metric tonsK ranks ne't in importance to cotton weaving. Te'tile is one of IndiaHs

oldest industries and has a formidable presence in the national econom! inasmuch as

it contributes to about 98 per cent of manufacturing value6addition, accounts for

around one6third of our gross e'port earnings and provides gainful emplo!ment to

millions of people. The! include cotton and jute growers, artisans and weavers who

are engaged in the organised as well as decentralised and household sectors spread

across the entire countr!.

I-#I&- T+CTI>+ I-#0STY ST0T0+ &-# 3O*T

IndiaHs te'tile industr! is one of the econom!Hs largest. In :BBB/B9, the te'tile and

garment industries accounted for about 8 percent of 3#), 98 percent of industrial

output, 9@ percent of industrial emplo!ment, and :? percent of e'port earnings

MashimK. IndiaHs te'tile industr! is also significant in a global conte't, ranking

second to hina in the production of both cotton !arn and fabric and fifth in the

production of s!nthetic fibers and !arns.


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In contrast to other major te'tile6producing countries, mostl! mostl! small6scale,

nonintegrated spinning, weaving, cloth finishing, and apparel enterprises, man! of

which use outdated technolog!, characteri"e IndiaHs te'tile sector. Some, mostl!

larger, firms operate in the Eorgani"edF sector where firms must compl! with

numerous government labor and ta' regulations. (ost firms, however, operate in the

small6scale Eunorgani"edF sector where regulations are less stringent and more easil!

evaded.

The uni$ue structure of the Indian te'tile industr! is due to the legac! of ta', labor,

and other regulator! policies that have favored small6scale, labor6intensive

enterprises, while discriminating against larger scale, more capital6intensive

operations. The structure is also due to the historical orientation towards meeting the

needs of IndiaHs predominatel! low6income domestic consumers, rather than the

world market. )olic! reforms, which began in the 9A@Bs and continued into the 9AABs,

have led to significant gains in technical efficienc! and international competitiveness,

particularl! in the spinning sector. owever, broad scope remains for additional

reforms that could enhance the efficienc! and competitiveness of IndiaHs weaving,

fabric finishing, and apparel sectors.

Structure Of IndiaHs Te'tile Industr!

0nlike other major te'tile6producing countries, IndiaHs te'tile industr! is comprised

mostl! of small6scale, nonintegrated spinning, weaving, finishing, and apparel6

making enterprises. This uni$ue industr! structure is primaril! a legac! of

government policies that have promoted labor6intensive, small6scale operations and

discriminated against larger scale firms4

omposite (ills. elativel! large6scale mills that integrate spinning, weaving and,

sometimes, fabric finishing are common in other major te'tile6producing countries. InIndia, however, these t!pes of mills now account for about onl! ; percent of output in


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the te'tile sector. &bout :?7 composite mills are now operating in India, most owned

b! the public sector and man! deemed financiall! Esick.F

Spinning. Spinning is the process of converting cotton or manmade fiber into !arn to

be used for weaving and knitting. >argel! due to deregulation beginning in the mid6

9A@Bs, spinning is the most consolidated and technicall! efficient sector in IndiaHs

te'tile industr!. &verage plant si"e remains small, however, and technolog! outdated,

relative to other major producers. In :BB:/B;, IndiaHs spinning sector consisted of

about 9,987 small6scale independent firms and 9,=AA larger scale independent units.

*eaving and Dnitting. *eaving and knitting converts cotton, manmade, or blended

!arns into woven or knitted fabrics. IndiaHs weaving and knitting sector remains

highl! fragmented, small6scale, and labor6intensive. This sector consists of about ;.A

million handlooms, ;@B,BBB EpowerloomF enterprises that operate about 9.? million

looms, and just 9;?,BBB looms in the various composite mills. E)owerloomsF are

small firms, with an average loom capacit! of four to five owned b! independent

entrepreneurs or weavers. (odern shuttleless looms account for less than 9 percent of

loom capacit!.


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3rowth of Te'tile Industr!

India has alread! completed more than =B !ears of its independence. The anal!sis of

the growth pattern of different segment of the industr! during the last five decades of

post independence era reveals that the growth of the industr! during the first two

decades after the independence had been gradual, though lower and growth had been

considerabl! slower during the third decade. The growth thereafter picked up

significantl! during the fourth decade in each and ever! segment of the industr!. The

peak level of its growth has however been reached during the fifth decade i.e., the last

ten !ears and more particularl! in the ABs. The Te'tile )olic! of 9A@= and +conomic

)olic! of 9AA9 focussing in the direction of liberalisation of econom! and trade had in

fact accelerated the growth in 9AABs. The spinning spearheaded the growth during this

period and man6made fibre industr! in the organised sector and decentralised weaving

sector.

Si"e of Te'tile Industr! in India

The te'tile industr! in India covers a wide gamut of activities ranging from

production of raw material like cotton, jute, silk and wool to providing high value6

added products such as fabrics and garments to consumers.

The industr! uses a wide variet! of fibres ranging from natural fibres like

cotton, jute, silk and wool to man made fibres like pol!ester, viscose, acr!lic and

multiple blends of such fibres and filament !arn.

The te'tile industr! pla!s a significant role in Indian econom! b! providing

direct emplo!ment to an estimated ;= million people, b! contributing 8 per cent of

3#) and accounting for ;= per cent of gross e'port earnings. The te'tile sector

contributes 98 per cent of the value6addition in the manufacturing sector.


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Te'tile e'ports during the period of &pril6


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India is the third largest producer of cotton with the largest area under cotton

cultivation in the world. It has an edge in low cost cotton sourcing compared to other

countries.

&verage wage rates in India are =B67B per cent lower than that in developed

countries, thus enabling India to benefit from global outsourcing trends in labour

intensive businesses such as garments and home te'tiles.

#esign and fashion capabilities are ke! strengths that will enable Indian

pla!ers to strengthen their relationships with global retailers and score over their

hinese competitors.

)roduction facilities are available across the te'tile value chain, from spinning

to garments manufacturing. The industr! is investing in technolog! and increasing its

capacities which should prove a major asset in the !ears to come.

>arge Indian pla!ers such as &rvind (ills, *elspun India, &lok Industries and

a!monds have established themselves as Q$ualit! producersQ in the global market.

This recognition would further enable India to leverage its position among global

retailers.

India has gathered e'perience in terms of working with global brands and this

should benefit Indian vendors.

3ON+-(+-T I-ITI&TIN+S

*ith a view to raise IndiaQs share in the global te'tiles trade to 9B per cent b! :B9=

Mfrom the current ; per centK, the (inistr! of Te'tiles proposes =B new te'tile parks.

Out of the =B, ;B have been alread! sanctioned b! the government Mwith a cost of 0SR

?9B millionK. Set up under the Scheme for Integrated Te'tile )arks MSIT)K, this

initiative will not onl! make the industr! cost competitive, but will also enhance

manufacturing capacit! in the sector.


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&part from the above, a series of progressive measures have been planned to

strengthen the te'tile sector in India4

Technolog! (ission on otton MT(K

Technolog! 0pgradation fund Scheme MT0


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benefit of Indian fashion industr!L ommon ompliance ode to encourage

acceptabilit! among apparel bu!ers and Training entres for uman esource

#evelopment on )ublic )rivate )artnership M)))K mode.

I-#I&- T+CTI>+ I-#0STY

In te5tile cenario

In e'ports otton !arns, fabric, made ups etc made largest chunk with 0SR ;.;;

%illion or :7.=P in te'tiles categor!, and ead! (ade garments M(3K6cotton

including accessories made largest chunk with 8.7? %illion 0S R or ;?.9 P of total

e'ports. *hereas, manmade !arn and fabrics in te'tiles group and (3J(an made

fibers constituted second position in the two categories, respectivel!. arpets and

woolen garments are other items e'ported from India.

In global scenario

#eveloped countriesQ e'ports declined from =:.:P share in 9AAB to ;?.@ P in :BB:.

&nd that of developing countries increased from 8?.@P to 7:.: P in the same period.

In :BB; the e'ports figures in percentage of the world trade in Te'tiles 3roup Mfor

select countriesK were4


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I-#I&- T+CTI>+ I-#0STY J S*OT &-&>YSIS

Strength

India has rich resources of raw materials of te'tile industr!. It is one of the

largest producers of cotton in the world and is also rich in resources of fibres like

pol!ester, silk, viscose etc.

India is rich in highl! trained manpower. The countr! has a huge advantage

due to lower wage rates. %ecause of low labor rates the manufacturing cost in te'tile

automaticall! comes down to ver! reasonable rates.

India is highl! competitive in spinning sector and has presence in almost all processes of the value chain.

Indian garment industr! is ver! diverse in si"e, manufacturing facilit!, t!pe of

apparel produced, $uantit! and $ualit! of output, cost, and re$uirement for fabric etc.

It comprises suppliers of read!6made garments for both, domestic or e'ports markets.

*eakness


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Dnitted garments manufacturing has remained as an e'tremel! fragmented

industr!. 3lobal pla!ers would prefer to source their entire re$uirement from two or

three vendors and the Indian garment units find it difficult to meet the capacit!

re$uirements.

Industr! still plagued with some historical regulations such as knitted

garments still remaining as a SSI domain.

>abour force giving low productivit! as compared to other competing

countries.

Technolog! obsolescence despite measures such as T0ow bargaining power in a customer6ruled market.

India seriousl! lacks in trade pact memberships, which leads to restricted

access to the other major markets.

Indian labour laws are relativel! unfavorable to the trades and there is an

urgent need for labour reforms in India.

Opportunit!

>ow per6capita domestic consumption of te'tile indicating significant

potential growth.

#omestic market e'tremel! sensitive to fashion fads and this has resulted in

the development of a responsive garment industr!.

IndiaQs global share is just ;P while hina controls about 9=P. In post6:BB=,

hina is e'pected to capture 8;P of global te'tile trade.

ompanies need to concentrate on new product developments.


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Increased use of to develop designing capabilities and for developing

greater options.

Threats

ompetition in post6:BB= is not just in e'ports, but is also likel! within the

countr! due to cheaper imports of goods of higher $ualit! at lower costs.

Standards such as S&6@BBB or *&) have resulted in increased pressure on

companies for improvement of their working practices.

&lternative competitive advantages would continue to be a barrier.

O->0SIO-

The Indian te'tile industr! has a significant presence in the Indian econom! as well as

in the international te'tile econom!. Its contribution to the Indian econom! is

manifested in terms of its contribution to the industrial production, emplo!ment

generation and foreign e'change earnings. The industr! also contributes significantl!

to the world production of te'tile fibres and !arns including jute. In the world te'tile

scenario, it is the largest producer of jute, second largest producer of silk, third largest

producer of cotton and cellulosic fibre!arn and fifth largest producer of s!nthetic

fibre!arn. Te'tile Industr! is providing one of the most basic needs of people and the

holds importanceL maintaining sustained growth for improving $ualit! of life. The

3overnment of India has also included new schemes in the &nnual )lan for :BB?6B@

to provide a boost to the te'tile sector. These include schemes for


34/96

&)T+ :

+S+&

(+TO#O>O3Y


35/96

70T$IN4 7+ T84 T0'2

The (anagement of working capital is ver! important. It involves the stud! of da! to

da! affairs of the compan!. The motive behind the stud! is to develop an understanding

about the working capital management in the running business organi"ation and to help

the compan! in developing the efficient working capital management. So It helps in

future planning and control decisions.

794CTI4 7+ T84 T0'24

9K To stud! the working capital management.

:K To know the sources of working capital.

;K To stud! the different components of working capital of the compan!.

8K To calculate the operating c!cle of an organi"ation.

=K To calculate the working capital of an organi"ation.

7K To stud! the li$uidit! position of the compan! with the help of ratios.

C7(4 7+ T84 T0'2

The stud! is conducted at U(afatlal >td.H &hmedabad. The stud! of *orking capital

management is purel! based on secondar! data and all the information is available

within the compan! it self in the form of records. To get proper understandings of this

concept, I have done the stud! of the balance sheets, profit 2 loss a/cs, cash accounts,

trial balance, cost sheets. I have also conducted the interviews with emplo!ees of

accounts and finance department and stores department. So, scope of the stud! is

limited upto the availabilit! of official records and information provided b! the

emplo!ees. The stud! is supposed to the related to the period of last four financial

!ears.

!44)!C8 "4T87'7$7/2

To ecogni"e the various t!pe of information which are necessar! for the

stud! of working capital management. ollection of data from various department to anal!"e.


36/96

Schedule of changes in working capital

The overall position of (&&> is studied and anal!"ed. Suggestions are given on the basis of findings for better understanding of

working capital management.

70!C4 7+ IN+7!")TI7N

)rimar! data46 The personal interview with senior officials and

various members of finance and accounts department and also

with other departments and collected the data. Secondar! data46 &udited reports of the compan!.


37/96

&)T+ ;

>iterature

eview


38/96

&)T+ 8&

O()&-Y

)O+


39/96


40/96

"afatlal Industries $imited has been a leader in Te5tiles for o%er 1;; years.

(afatlal Industries >td.

Daledonia, 7th


41/96

(I>Hs product portfolio comprises a complete range of products consisting of !arnd!ed Shirtings, Suitings, Noiles, )rints, >inens, %leached *hite inen and ead!mades in otton, >inen, )ol!ester/ otton,)ol!ester/Niscose, otton/>!cra, )N/>!cra, Terr! a!on and )ol!ester wool blends.

The total sales of (afatlal Industries >td. for the last financial !ear :B9: 6 :B9; wasover @B million meters.

Nadiad 0nit

+stablished in 9A9;.

One of the largest composite te'tile mills in

the countr!.

It produces some of the finest fabrics, in acount range of ?Qs to 98BQs, which are

supplied to the most demanding customers

and oversees.

Its modern e$uipments include shuttle less

looms and latest processing e$uipments such

as ombi %leaching ange, ontinuous

#!eing ange and 97 colour Stormac otar!

)rinting machines.

as well6e$uipped ualit! &ssurance

laboratories accredited b! (arks and

Spencer, -e't, #3&, #3S2# and

Ordinance imited into (afatlal

Industries >imited, specialit! and

fashion denims Mmerceri"ed, stretch,coated and ringK have now been

added to our product range.

)roduction commenced in 9AA?.

State6of6the6art composite

manufacturing facilities.

)roduces fashion denim fabrics.

)ccreditions4

ISO ABB94:BB@

ISO 98BB94:BB@

Oeko6Te' Standard 9BB

3OTS M3lobal Organic Te'tile

StandardK

O+ MOrganic +'change / Te'tile

+'changeK


42/96

&> 3&3&>%&I

The stor! of the (afatlal 3roup is a stirring saga of a blend of traditional values and

modern technolog! triumphing over circumstances. (r. (afatlal 3agalbhai the

founder, was born in 9@?;, to a weaver of &hmedabad. is father, who was neither

educated nor prosperous, made a living b! doing odd jobs. It wasnQt long before a

!oung (afatlal, who was still in his earl! teens, had to leave school to help his father

peddle te'tile products. *ith goods hanging from their shoulders, both father and son

would scour the countr!side in search of bu!ers. Some of the bu!ers proved to be (r.

(afatlalQs benefactors in later !ears, when he metamorphosed into an industrialist.

The! not onl! provided him with capital, but also gave it at low rates of interest.

#riven b! curiosit! and ambition, he took up a job as a mill6hand. e wanted to

understand the entire gamut of operationsL his big break came onl! at the age of ;9.

&longwith handulal (ahadevia, a friend, and &rthur Shorrock, an +nglishman who

knew some %ritish te'tile6machiner! manufacturers in >ancashire, he took over the

management of a small mill in &hmedabad, and named it the Shorrock (ill. Of the

initial e$uit! capital of s ;.:= lakhs, (r. (afatlal picked up ;B shares of s 9,BBB

each while his father picked up another ;B shares. &long with his partners, he evolved

an innovative scheme to raise the rest of the funds. In those da!s, business concernswere run b! managing agencies. So, the enterprising partners promised investors a

share in the managing agenc!.


43/96

SI &NI-# (&&>

The first mill did e'tremel! well, and (r. (afatlal developed an appetite for

e'pansion. Si' !ears later, in 9A9:, he bought a mill in neighbouring -adiad for s7.:7 lakhs. The second mill was christened -ew Shorrock.


44/96

The &rvind (afatlal 3roup believes in business e'cellence without compromise.

This is the wa! we have alwa!s done business. &ctions matter, mere intentions donQt.

*hat does e'cellence without compromise meanW

It means honouring business commitments even in competitive times.

It means "ero short6cuts.

Our groupQs living truth is reflected perfectl! in our corporate identit!.

& blue lotus formed out of the letters &(3 and a verbal e'pression 1The +thics of

+'cellence.1

The blue lotus or QIndivarQ is >ord NishnuQs favourite flower.

The Indivar plant alwa!s has at least one flower in the bloom ever! da!.

The flower has an e'$uisite fragrance but it doesnQt spread b! itself. You have to sniff

it. Ner! similar to the &rvind (afatlal 3roup, the organisation that doesnQt shout about

its achievements.

Indivar. It rises above circumstances. +ver! da!.

ualit! )olic!

*e shall provide our customers in -ational and International (arkets products and

services of agreed standards. *e also commit to e'tend the ualit! concept to all

phases of our business b! strengthening partnership with our customers and suppliers.

*e shall continue our endeavours to develop new products and markets, especiall! for

e'ports.


45/96

*e shall develop our information s!stem to regular feed back on product $ualit!

performance, and acceptance from our e'ternal customers to prepare ourselves to

meet the future re$uirements.

*e shall pa! special attention to ealth, Safet! 2 +nvironmental re$uirement.

*e provide skills and training to our emplo!ees and promote open communication to

ma'imise their contribution in achieving $ualit! e'cellence.

*e shall continue ISO ABB94:BB@ series of $ualit! standards to ensure total customer

satisfaction b! suppl!ing our products which conform to contractual re$uirements.

.&.(&&>

hairman

3O0) O()&-I+S

-avin


46/96

The &rvind (afatlal 3roup took over (II-#I& hemicals in 9A?7, and, in the !ears

to follow, turned it around totall!. In fact, the compan! has been the largest

manufacturer of rubber chemicals in India for more than two decades. Toda!,

-OI>Hs customer profile spans the global market as well.

Nisit us at4 www.nocilrubberchemicals.com or www.natocil.com

http://www.natocil.com/http://www.natocil.com/http://www.natocil.com/


47/96

%O&# O< #I+TOS

(&-&3+(+-T T+&(


48/96

9AB=

Sets up first te'tile mill in &hmedabad, India

9A9:

)urchased a second te'tile mill in neighbouring -adiad, India

9A97

)urchased another mill in Surat

9A9A

Shifts base to (umbai with the purchase of a te'tile mill

9A;9

+stablishes one more te'tile mill in -avsari

9A88

Shri -avichandra (afatlal takes over the famil! business, after the sad demise of the

founder, Shri (afatlal 3agalbhai.

9A8=6=8

3roup invests heavil! in cotton te'tile mills and their moderni"ation to become the

third largest mill owner in India. +stablishes a strong foothold in mumbai

9A=8

Shri &rvind (afatlal takes over the reins of the group companies and starts

diversification of the 3roup businesses.

9A?B

(afatlal promotes ace cricketers and football pla!ers thereb! gaining tremendous

mileage.

9A?A

&fter division of the (afatlal 3roup business, the &rvind (afatlal 3roup focuses on

te'tiles, petro chemicals, rubber chemicals and fluoro chemicals.

9A@B6AB

onsolidates its position in te'tiles, e'panding the te'tile machiner! activities.

(r. rishikesh (afatlal takes over the reins of the compan!.

9AA8


49/96

9AA7

Obtains ISO6ABB9 certification.

Goint Nenture M=BP4=BPK with %urlington Industries, 0S& called (afatlal %urlington

Industries >td. for manufacturing denim fabrics.

:BBB

:BB7

(ajor e'pansion in the area of corporate uniform and work wear fabric.

)aved a new path to success b! ac$uiring the entire stake of %urlington Industries,

0S& to setup (afatlal #enim >td.

:BB?

:BBA

Introduce largest collection of school uniform fabrics in domestic market.

(afatlal #enim >td. establishes itself as the largest supplier of denim material in

India, and as a reliable suppl! chain partner for value added and fashion denims.

:B99

The sad demise of the hairman +meritus Shri &rvind (afatlal

:B9:

>aunches home furnishing range with terr! towels and bedsheets

:B9;

(afatlal #enim >td. amalgamated with (afatlal Industries >td.

(odernisation of -adiad unit.

apacit! e'pansion of -avsari unit.


50/96

The! sa!, change is the onl! constant and change invariabl! brings transformation.

*ith constant innovation over the !ears, (afatlal has introduced a wide range of

te'tile fabrics. It has been witness to revolutionar! changes in the te'tile market, right

from olden da!s of managing agencies, to current s!stem of te'tile dealers and

merchants. (astering a range of fabrics that spells $ualit!, the brand toda! has a widedistribution network.

(afatlal Industries >td. has spread its fame and fragrance far and wide. The finesse

and $ualit! of its products are world renowned. In India, famous brands like (arks 2

Spencer, -e't, #ebenhams, Tomm! ilfiger, 3ap, (arco )olo, Gules, *rangler, >ee,

Gack 2 Gones, 0< and +sprit procure their fabric from here.

(afatlal Industries >td. has gone be!ond boundaries and e'tended its hori"ons b!

e'porting its world6class fabrics, including denims, to customers in 0S&, South

&merica, 0D, Swit"erland, Ital!, anka, Sudan, (auritania, (ala!sia,

Indonesia, Thailand, ong Dong and Gapan.

Social esponsibilit! in itself is a feeling that we belong to the people at large and

more so to the people we serve. The satisfaction of giving is supreme when we e'pect

nothing in return. This giving comes from unconditional urge to do something

meaningful for the Societ!. (afatlal Industries >imited has alwa!s held this thoughtclose to its heart. *e have strived for improvement in conditions faced b! the need!

and the poor. *e full! believe that such acts of giving back to the Societ! are at the

core of a balanced life.

*ith inspiration from )aram )uj!a anchhoddasji (aharaj, UShri Sadguru Seva

Sangh TrustH was founded in 9A7@. The Trust was guided and nurtured b! the late Shri

&rvind (afatlal. The Trust is full! supported under the aegis of &rvind (afatlal

3roup. The Trust is aimed at providing food to the hungr!, clothing support to thedowntrodden and the gift of sight to the blind.

*hether it is health care, education, agriculture, dair! or women empowerment UShri

Sadguru Seva Sangh TrustH MSSSSTK has contributed towards an overall development

of entire areas surrounding the districts of hitrakoot and &nandpur in (adh!a

)radesh. +ssential ealth services in the field of 3eneral (edicine, 3astroenterolog!,

Obstetrics, 3!naecolog! and )aediatrics have been made available. The Trust has

performed a record 98 lakh M9.8 millionK e!e surgeries under innumerable e!e camps


51/96

through Shri Sadguru -etra hikitsala!a which is located at hitrakoot and

&nandpur.

The late Shri &rvind (afatlal was a great philanthropist and was activel! associatedwith %&I< #evelopment esearch imited, we consider our contribution as a humble tribute to

what Societ! has given us. *e have pledged our resources in various sectors and are

striving continuousl! with the sole objective of creating an environment of well6being

in all spheres of life.

*e wish ever! life to be empowered and ever! deed to have a meaningful impact on

societ!.


52/96

&)T+ 8 %

#&T&

&-&>YSIS


53/96

#eterminants of *orking apital

The following factors should be considered carefull! while determining the amount of

*orking capital re$uired4

9. -ature of business J The amount of working capital is basicall! related to the

nature and the volume of the business.


54/96

the contrar!, firms earning low margin of profits due to competition or

mismanagement need larger amount of working capital.

A. redit polic! J & firm following liberal credit polic! and thus granting credit

facilities to all customers without evaluating the credit worthiness will re$uire more

working capital to carr! book debts. On the contrar!, a firm that adopts strict credit

polic! and grants facilities to customers with high credit standing will re$uire less

amount of working capital as funds tied6up in receivables will be released promptl!

for further uses.

Significance of ade$uate *orking apital

&de$uate working capital is a source of energ! to an! business organi"ation. It

provides

the following advantages to a business enterprise4

9. &de$uate working capital enables a firm to make prompt pa!ments to the

suppliers and thus it can also avail the advantage of cash discount b! pa!ing cash for

the purchase of raw material.

:. If a firm has ade$uate working capital, it can declare and distribute enough

dividends when there are sufficient profits. This creates satisfaction among the

shareholders.

;. In business, promptness to third parties creates goodwill and increases thedebt capacit! of the concerned firm. This in turn ensures uninterrupted flow of

production.

8. & firm having ade$uate working capital and li$uid assets can arrange loans

from the banks on eas! and favourable terms, as it provides a good securit! for the

unsecured loans.

=. &de$uate working capital has ps!chological effect on the directors and

e'ecutives of the firm as it motivates them to work vigorousl!. It creates an

environment of securit!, confidence, high morale and increases overall efficienc! in

the business.

7. &de$uate working capital increases the productivit! or efficienc! of fi'ed

assets in the business.

+ffects of e'cessive *orking apital

+'cess or redundant working capital refers to the idle funds which do not earn an!

profits for the firm. XInade$uate working capital is disastrousL whereas redundant

working capital is a criminal waste . & firm ma! suffer following disadvantages from‖

e'cess working capital4


55/96

9. It ma! lead to unnecessar! purchasing and accumulation of inventories

causing more chances of mishandling of inventories, theft, waste, losses, etc.

:. .+'cessive working capital implies e'cessive debtors and defective credit

policies causing higher incidence of bad debts that ultimatel! affects profits of the

firm.

;. It indicates inefficient management of the firm. It shows that the management

is not interested in effectivel! utili"ing the resources and encouraging econom!.

8. +'cessive working capital remains idle and earns no profits for the firm, even

though interest has to be paid on it. This reduces the amount of profits.

=. It is an indicator of inefficient management. ence, shareholders believe that

the! are not getting proper return on their investments. This results in lowering the

value of shares causing discontentment among shareholders.

7. It promotes profits of speculative nature b! stock6piling. It results in liberal

dividend polic!, but the management has to face difficulties in future when there are

no speculative profits.


56/96

Mafatlal

Industries

Standalone Profit & Loss

account------------------- in Rs. Cr. -------------------

Mar

'15Mar '14 Jun '13 May '12 Mar '11

12

mths 9 mths 13 mths 14 mths 12 mths

nco!e

Sales Turnover 797.49 143.75 670.61 152.66 138.23

Excise Dut 0.00 0.00 0.00 0.00 0.00

!et Sales 797.49 143.75 670.61 152.66 138.23

"ther #ncome 49.87 $13.46 123.06 51.31 401.34

Stoc% &'(ustments 25.72 0.64 10.30 $1.17 0.17

"otal nco!e #$3.%# 13%.3 #%3.$ 2%2.#% 53.$4

()enditure

)a* +aterials 569.73 75.59 98.59 59.66 61.03

,o*er - uel /ost 70.71 34.38 56.90 57.40 49.99

Emloee /ost 72.74 35.53 70.18 48.46 35.73

"ther +anuacturin Exenses 3.12 0.99 4.61 3.19 2.93

Sellin an' &'min Exenses 0.00 0.00 43.38 10.13 24.98

+iscellaneous Exenses 59.81 45.81 14.27 10.66 10.42

,reoerative Ex /aitalise' 0.00 0.00 0.00 0.00 0.00

Total Exenses 776.11 192.30 287.93 189.50 185.08

Mar

'15Mar '14 Jun '13 May '12 Mar '11


57/96

*)eratin+ Profit 4$.1% -4$.1 32.# -3#.%1 -4,.,#

,D#T 96.97 $61.37 516.04 13.30 354.66

#nterest 32.00 2.45 12.73 6.04 10.52

,DT 64.97 $63.82 503.31 7.26 344.14

Dereciation 14.44 2.03 2.52 3.33 4.02

"ther ritten " 0.00 0.00 0.00 0.01 12.79

,roit eore Tax 50.53 $65.85 500.79 3.92 327.33

Extra$or'inar items $0.87 14.00 4.28 58.84 10.34

,T ,ost Extra$or' #tems 49.66 $51.85 505.07 62.76 337.67

Tax 12.50 0.00 124.50 11.00 0.16

Re)orted et Profit 3$.1, -51.#, 3#%.5, 51.$, 33$.51

Total alue &''ition 206.38 116.71 189.34 129.85 124.05

,reerence Divi'en' 0.00 0.00 0.00 0.00 0.00

Euit Divi'en' 6.96 0.00 0.00 0.00 0.00

/ororate Divi'en' Tax 1.18 0.00 0.00 0.00 0.00

Per sare data /annualised0

Shares in issue la%hs 98.13 98.14 98.14 98.14 50.00

arnin+ Per Sare /Rs0 3$.#$ -52.#4 3#$.$# 52.$4 ,$5.%1

Euit Divi'en' 50.00 0.00 0.00 0.00 0.00

oo% alue )s 330.22 311.06 363.91 $23.87 $210.38


58/96

Mafatlal ndustries

Standalone alance Seet ------------------- in Rs. Cr. -------------------

Mar

'15Mar '14 Jun '13 May '12 Mar '11

12


Sources *f unds

Total Share /aital 39.81 39.81 69.81 69.81 95.00

Euit Share /aital 9.81 9.81 9.81 9.81 5.00

Share &lication +one 4.10 0.00 0.00 0.00 0.00

,reerence Share /aital 30.00 30.00 60.00 60.00 90.00

)eserves 314.25 295.46 347.32 $33.24 $110.19

)evaluation )eserves 0.00 0.00 0.00 0.00 0.00

etort 35#.1, 335.2$ 41$.13 3,.5$ -15.1

Secure' :oans 89.97 5.45 34.21 36.09 51.88

;nsecure' :oans 0.00 0.09 36.14 36.87 48.65

"otal et #.$ 5.54 $%.35 $2., 1%%.53

"otal Liailities 44#.13 34%.#1 4#$.4# 1%.53 #5.34

Mar

'15Mar '14 Jun '13 May '12 Mar '11

12


6))lication *f unds


59/96

/aital or% in ,roress 62.49 3.64 0.00 0.00 0.00

n8est!ents 4#.$2 5%.1% 54.$$ 124.$# 1,5.,$

#nventories 106.63 28.77 26.80 15.67 16.36

Sun'r De>tors 122.17 51.82 60.92 50.23 52.74

/ash an' an% alance 141.40 189.23 3.08 33.21 3.54

Total /urrent &ssets 370.20 269.82 90.80 99.11 72.64

:oans an' &'vances 56.71 50.40 35.16 70.18 52.08

ixe' Deosits 0.00 0.00 633.00 2.24 16.92

Total /&? :oans - &'vances 426.91 320.22 758.96 171.53 141.64

Deere' /re'it 0.00 0.00 0.00 0.00 0.00

/urrent :ia>ilities 163.41 42.40 175.27 139.06 229.20

,rovisions 20.56 7.15 167.11 67.46 26.53

Total /: - ,rovisions 183.97 49.55 342.38 206.52 255.73

et Current 6ssets 242.4 2$%.,$ 41,.5# -34. -114.%

+iscellaneous Exenses 0.00 0.00 0.00 0.00 0.01

"otal 6ssets 44#.15 34%.#1 4#$.4 1%.54 #5.32

/ontinent :ia>ilities 96.02 87.77 95.57 90.42 61.54

oo% alue )s 330.22 311.06 363.91 $23.87 $210.38


60/96

Mafatlal ndustries

Cas lo ------------------- in Rs. Cr. -------------------

Mar '15 Mar '14 Jun '13 May '12 Mar '11

12 mths 9 mths 13 mths 14 mths 12 mths

et Profit efore "a( 5%.53 -,5.#, 5%$.$4 ,2.$4 33$.,$

!et /ash rom "eratin &ctivities 39.34 $369.37 465.30 $34.40 72.05

!et /ash use' in@rom

#nvestin &ctivities 8.53 17.55 147.03 83.17 2.35

!et /ash use' in@rom inancin

&ctivities $63.25 $93.58 $13.15 $33.47 $90.97

et /decrease09increase n Cas and

Cas :ui8alents-15.3# -445.4% 5.1# 15.3% -1,.5$

"enin /ash - /ash Euivalents 99.48 634.63 35.45 20.15 36.72

/losin /ash - /ash Euivalents 84.10 189.23 634.63 35.45 20.15

Mafatlal ndustries

Ra Materials ------------------- in Rs. Cr. ------------------- Mar 2%13

Product a!e ;nit res - /otton !ot )eorte' !& 124.30

Aarn !ot )eorte' !& 61.82

"thers !ot )eorte' !& 8.94

a>rics !ot )eorte' !& 7.64

"otal 2%2.$


61/96

Operating )rofit 2 O)(

Operating )rofit gives an indication of the current operational profitabilit! of the

business and allows a comparison of profitabilit! between different companies after

removing out e'penses that can obscure how the compan! is reall! performing.

Interest cost depends on the managementQs choice of financing, ta' can var! widel!

depending on ac$uisitions and losses in prior !ears, and depreciation and amorti"ation

policies ma! differ from compan! to compan!.


62/96

+%IT#& is an acron!m for +arnings %efore Interest, Ta'es, #epreciation, and

&morti"ation. )%T stands for )rofit %efore Ta', and )&T stands for )rofit &fter Ta'.

The graph visuall! shows how the net profit of the compan! stand reduced due to theimpact of Interest, #epreciation, and Ta'.


63/96

Total &ssets 2 &sset Turnover atio

Total &ssets is the sum of all assets, current and fi'ed. The asset turnover ratio

measures the abilit! of a compan! to use its assets to efficientl! generate sales. The

higher the ratio indicates that the compan! is utili"ing all its assets efficientl! to

generate sales. ompanies with low profit margins tend to have high asset turnover.


64/96

-et Sales

Sales is the total amount of products or services sold b! the compan!.


65/96

-etworth

-etworth is the difference between a compan!Qs total assets and its total liabilities. It

is also known as shareholders e$uit!.


66/96

eturn On apital +mplo!ed P

apital +mplo!ed is defined as total assets less current liabilities. eturn On apital

+mplo!ed is a ratio that shows the efficienc! and profitabilit! of a compan!Qs capital

investments. The O+ should alwa!s be higher than the rate at which the compan!

borrows mone!.


67/96

#ividend

#ividend is a pa!ment made b! a compan! to its shareholders usuall! as a distribution

of profits. *hen a compan! makes profit it can either re6invest it in the business or it

distribute it to its shareholders b! wa! of dividends. The dividend pa!out ratio is the

amount of dividends paid to shareholders relative to the amount of total net profit of a

compan!.

& reduction in dividends paid is not appreciated b! investors and usuall! the stock

price moves down as this could point towards difficult times ahead for the compan!.

On the other hand a stable dividend pa!out ratio indicates a solid dividend polic! b!

the compan!Qs management.


68/96

%ook Nalue MsK

%ook value is a compan!Qs assets minus its liabilities. In simple terms it would be the

amount of mone! that a share holder would get if a compan! were to li$uidate.


69/96

atio &nal!sis is a powerful tool of financial anal!sis. &le'ander all first presented

it in 9AA9 in


70/96

useful

from following objects.

9. Short term and long term planning

:. (easurement and evaluation offinancial performance

;. Stud of financial trends

8. #ecision making for investment and operations

=. #iagnosis of financial ills

7. )roviding valuable insight into firms financial position or picture.

N&-T&3+S 2 #ISN&-T&3+S O< &TIO &-&>YSIS4

&dvantages4

The following are the main advantages derived of ratio anal!sis, which are obtained

from

the financial statement via )rofit 2 >oss &ccount and %alance Sheet.

aK The anal!sis helps to grasp the relationship between various items in the financial

statements.

bK The! are useful in pointing out the trends in important items and thus help the

management to forecast

cK *ith the help of ratios, inter firm comparison made to evolve future market

strategies.

dK Out of ratio anal!sis standard ratios are computed and comparison of actual with

standards reveals the variances. This helps the management to take corrective action.

eK The communication of that has happened between two accounting the dates are

revealed effective

&ction.

fK Simple assessmentsof li$uidit!, solvenc! profitabilit! efficienc! of the firm are

indicted b! ratio anal!sis. atios meet comparisons much more valid.

#isadvantages4

atio anal!sis is to calculate and eas! to understand and such statistical calculation

stimulation thinking and develop understanding. %ut there are certain drawbacks and

dangers the! are.

iKThere is a trend! to use to ratio anal!sis profusel!.

iiK&ccumulation of mass data obscured rather than clarifies relationship.

iiiK *rong relationship and calculation can lead to wrong conclusion.

9. In case of inter firm comparison no two firm are similar in si"e, age and product


71/96

unit.Mfor e'ampleK one firm ma! purchase the asset at lower price with a higher

returnand another firm witch purchase the asset at asset athigher price will have a

lower

returnK

:. %oth the inter period and inter firm comparison are affected b! price level changes.

&

change in price level can affect the validit! of ratios calculated for different time

period.

;. 0nless varies terms like groupprofit, operating profit, net profit, current asset,

current

liabilit! etc., are properl! define, comparison between two variables become

meaningless.

8. atios are simple to understand and eas! to calculate. The anal!st should not take

decision should not take decision on a single ratio. e has to take several ratios into

consideration.

ST&-#&#S O< O()&ISIO-4

9.atios calculated from the past financial statements of the same firm.

:.atio developed using the projected or perform financial statementof the same firm

;.atios of some selected firm especiall! the most progressive and successful, at the

same point of time.

8.atios of the industr! to which the firm belongs.

I()OT&-+ O< &TIO &-&>YSIS

In the preceding discussion in the form, wehave illustrated the compulsion and

implication of important ratios that can be calculated from the %alance Sheet and

)rofit 2

>oss account of a firm. &s a tool of financial management, the! are of crucial

significance. The importance of ratio anal!sis lies in the fact and enables the drawing

of

inferences regarding the performance of a firm. ation anal!sis is a relevant in

assessing

the performance of a firm in respect of the following aspect.

&0TIO- I- 0SI-3 &TIOS

9.It is difficult to decide on the proper bases of comparison.

:.The comparison rendered difficult because of difference in situation of two


72/96

companiesorofone6compan! for different !ears.

;.The price level change make the interpretation of ratios invalid8.The difference in

thedefinition of items in the balance sheet and )rofit 2 >oss

statement make the interpretation of ratios difficult.

=.The ratios calculated at a point of time are less informative and defective as the!

suffer from sort term changes.

7.The ratios are generall! calculated from the past financial statement and thus are no

indicatorsof


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9.0+-T &TIO

It is relationship between firmHs current assets and current liabilit!.

urrent assets

urrent ratio 5555555555555555555555555555555

urrent liabilit!

Y+& :B9= :B98 :B9; :B9: :B99

0+-T

&SS+STS

;?B.:B :7A.@: AB.@B AA.99 ?:.78

0+-T>I&%I>ITI+

S

97;.89 8:.8B 9?=.:? 9;A.B7 ::A.:B

&TIO :.:7 7.;7 B.=9 B.?9 B.;9


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&S (&-&3+(+-T

Introduction

ash management is one of the ke! areas of working capital management. ash is the

li$uid current asset. The main dut! of the finance manager is to provide ade$uate cash

to

all segments of theorgani"ation. The important reason for maintaining cash balances

is

the transaction motive. & firm enters into variet! of transactions to accomplish its

objectives which have to be paid for in the form of cash.

(eaning of cash

The term EcashF with reference to cash management used in two senses. In a narrower

sense it includes coins, currenc! notes, che$ues, bank drafts held b! a firm. n a

broader

sense it also includes Enear6cash assetsF such as marketable securities and time

deposits

with banks.

Objectives of cash management4

There are two basic objectives of cash management. The! are6

To meet the cash disbursement needs as per the pa!ment schedule.

To minimi"e the amount locked up as cash balances.

%asic problems in ash (anagement4

ash managementinvolves the following four basic problems.

ontrolling level of cash

ontrolling inflows of cash

ontrolling outflows of cash and

Optimum investment of surplus cash.

#etermining safet! level for cash4

The finance manager has to take into account the minimum cash balance that the firm

must keep to avoid risk or cost of running out of funds. Such minimum level ma! be

termed as Esafet! level of cashF. The finance manager determines the safet! level of

cash

separatel! both for normal periods and peak periods. 0nder both cases he decides

about

two basic factors. The! are6


75/96

#esired da!s of cash4

It means the number of da!s for which cash balance should be sufficient to cover

pa!ments.

&verage dail! cash flows4

This means average amount of disbursements which will have to be made dail!.

riteria for investment of surplus cash4

In most of the companies there are usuall! no formal written instructions for investing

the

surplus cash. It is left to the discretion and judgment of the finance manager. *hile

e'ercising such judgment, he usuall! takes into consideration the following factors6

Securit!4

This can be ensured b! investing mone! in securities whose price remains more or

less

stable.

>i$uidit!4

This can be ensured b! investing mone! in short term securities including short term


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&S&TIO

It is relationship between cash and current liabilities.

ash

ash ratio 55555555555555555555555

urrent liabilities.

Y+& :B9= :B98 :B9; :B9: :B99

&S 989.8B 9@A.:; ;.B@ ;;.:9 ;.=8

0+-T

>I&%I>ITI+

S

97;.89 8:.8B 9?=.:? 9;A.B7 ::A.:B

&TIO B.@? 8.87 B.B: B.:8 B.B9

The cash ratio is generall! a more conservative look at a compan!Qs abilit! to cover its

liabilities than man! other li$uidit! ratios. This is due to the fact that inventor! and

accounts receivable are left out of the e$uation. Since these two accounts are a large

part of man! companies, this ratio should not be used in determining compan! value,

but simpl! as one factor in determining li$uidit!. Ner! few companies will have

enough cash and cash e$uivalents to full! cover current liabilities, which isnQt

necessaril! a bad thing, so donQt focus on this ratio being above 949.


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++IN&%>+S (&-&3+(+-T

Introduction4eceivables constitute a significant portion of the total assets of the business.

*hen a firm seller goods or services on credit, the pa!ments are postponed to future

dates and receivables are created. If the! sell for cash no receivables created.

(eaning4

eceivable are asset accounts representing amounts owed to the firm as a result of

sale of

goods or services in the ordinar! course of business.)urpose of receivables4

&ccounts receivables are created because of credit sales. The purpose of receivables is

directl! connected with the objectives of making credit sales. The objectives of credit

sales are as follows6

&chieving growth in sales.

Increasing profits.

(eeting competition.

evel of sales.

redit period.

ash discount.

osts of maintaining receivables4

The costs with respect to maintenance of receivables are as follows6

apital costs4 This is because there is a time lag between the sale of goods to

customers and the pa!ment b! them. The firm has, therefore to arrange for additional

funds to meet

its obligations.

&dministrative costs4


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ollection costs4

The firm has to incur costs for collecting the pa!ments from its credit customers.

#efaulting costs4

The firm ma! not able to recover the over dues because of the inabilit! of customers.

Such debts treated as bad debts.

eceivables management4

eceivables are direct result of credit sale. The main objective of receivables

management is to promote sales and profits until that point is reached where the OI

in

further funding of receivables is less than the cost of funds raised to finance that

additional credit Mi.e.L cost of capitalK. Increase in receivables also increases chances

of bad debts. Thus, creation of receivables is beneficial as well as dangerous.


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Total sales

#ebtors turnover ratio 555555555555555555555555555555

#ebtors

Y+& :B9= :B98 :B9; :B9: :B99

TOT&>

S&>+S

?A?.8A 98;.?= 7?B.79 9=:.77 9;@.:;

#+%TOS 9::.9? =9.@: 7B.A: =B.:; =:.?8

&TIO 7.=; :.?? 99.BA ;.B; :.7:

#ebtors constitute an important constituent of current assets and therefore the $ualit!

of

the debtors to a great e'tent determines a firmHs li$uidit!. It shows how $uickl!

receivables or debtors are converted into cash. In other words, the #T is a test of the

li$uidit! of the debtors of a firm. The li$uidit! of firmHs receivables can be e'amined

in two wa!s the! are #T and average collection period. The higher the ratio the

better. The compan!Hs ratio is bumping over !ears, but itHs improving.

',"- ',". ',"/ ',"' ',""

,

'

.

0

1

",

"'

0#-/

'#22

""#,3

/#,/'#0'

Debt Turnover Ratio

#+%T O>>+TIO- )+IO#


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#ebtorHs collection period is nothing but the period re$uired to collect the mone!

from

The customers after the credit sales. & speed collection reduces the length of operating

c!cle and vice versa. The more $uickl! the customers pa!, the less risk from bad

debts,

the lower the e'penses of collection and more li$uid the nature of of this asset.

It indicates the speed with which debts are collected.

#a!s/months in a !ear

#ebt collection period 5555555555555555555555555555555

#ebtorHs turnover ratio

Y+& :B9= :B98 :B9; :B9: :B99

#&YS ;7= ;7= ;7= ;7= ;7=

&TIO 7.=; :.?? 99.BA ;.B; :.7:

#&YS =7 9;: ;; 9:B 9;A

The debt collection period decreases dramaticall! rom 9;A in :BBA to =7 da!s in

:B9;. Its less than standard period of AB da!s.


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&S TO 0+-T &SS+TS &TIO

Y+& :B9= :B98 :B9; :B9: :B99

&S 989.8B 9@A.:; ;.B@ ;;.:9 ;.=8

0+-T

&SS+STS

;?B.:B :7A.@: AB.@B AA.99 ?:.78

&TIO B.;@ B.?B B.B; B.;; B.B=

',""

',"'

',"/

',".

',"-

, ,#" ,#' ,#/ ,#. ,#- ,#0 ,#2 ,#1

Cash to Current Assets

ompare to previous !ears, the data of last two !ears shows that compan! has ver!

good cash balance.

I-N+-TOY (&-&3+(+-T

Introduction4

Inventories are stock of the product a compan! is manufacturing for sale and

components. That makeup the products. The various forms inwhich inventories e'ist

in amanufacturing compan! are4 aw6materials, work6in6process, finished goods.

aw6(aterials46&re those basic inputs that are converted into finished products

through the manufacturing process. aw6materials inventories arethose units,

which have been purchased and stored for future production.

*ork6In6)rocess inventories are semi6manufactured products. The represent

products that need more work before the! become finished products for sale.


82/96

production which stock of finished goods is re$uired for smooth marketing

operations. These inventories serve as a link between production and

consumption of goods.

Stores and spares are also maintained b! some firms. This includes office and

plant cleaning materials like soaps, brooms, oil, fuel, light, bulbs etc. These

materials do not directl! enter in production. %ut are necessar! for production

process.

-eed to holding inventor!

The $uestion of managing inventories arises onl! when the compan! holds

inventories.

(aintaining inventories involves t!ing up of the compan!Qs funds and incurrence of

storage and handling cost. It is e'pensiveto maintain inventories, wh! does compan!

hold inventoriesW There are three general motives for holding inventories.

9.Transaction (otive46+mphasi"es the need to maintain inventories to facilitate

smooth production and sales operations

:.)recautionar! motive46-ecessitates holding of inventories to guard against the risk

of unpredictable changes in demand and suppl! forces and other factors.

;.Speculative motive46Influences the decision to increase or reduce inventor! levels to

take advantages of price influences.

& compan! should maintain ade$uate stock of materials for a continuous suppl! to the

factor! for the uninterrupted production. It is not possible for a compan! to procure

raw

materials whenever it isneeded. & time lag e'ists between demand for materials and

its

suppl!. &lso there e'ists uncertaint! in procuring raw materials in time on man!

occasions. The procurement of materials ma! be dela!ed because of such factors as

strike, transport disruption or short suppl!. Therefore, the firm should maintain

sufficient

stock of raw materials at a given time to stream line production.

Objective of Inventor! (anagement

In the conte't of inventor! management the firm is faced with the problem of meeting

two conflicting needs L

ZTo maintain a large si"e of inventor! for sufficient and smooth production and

sales operations.


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ZTo maintain a minimum investment in inventories to ma'imi"e profitabilit!.

%oth e'cessive and inade$uate inventories are not desirable. Theseare two dangerous

points within which the firm should operate. The objective of inventor! management

should be to determine and maintain optimum level of inventor! investment. The

optimum level of inventor! will lie between the two danger points of e'cessive and

inade$uate inventories.

The firm should alwa!s avoid a situation of over investment or under investment in

inventories. The major dangerous of over investment are,

• 0nnecessar! tie6up of the firms funds losses of profit

• +'cessive carr!ing cost

• isk of $ualit!

The aim of inventor! management thus should be to avoid e'cessive and

inade$uate

levels of inventories and to maintain sufficient inventor! for smooth production

and sales

operations. +fforts should be made to place an order at the right timewith the right

source to ac$uire the right $uantit! at the right price and $ualit!. &n effective

inventor!

management should

+nsure a continuous suppl! of raw materials to facilitate uninterrupted

production.

(aintain sufficient stock of raw materials inperiods of short suppl! and

anticipate price changes.

(aintain sufficient finished goods inventor! for smooth sales operations and

efficient customer service.

(inimi"e the carr!ing cost and time.ontrol investment in inventories and keep it at an optimum level.

Inventor! management techni$ues 4

In managing inventories the firm objective should be in consonance with the

shareholdersQ wealth ma'imi"ation principle. To achieve this firm should

determine the optimum level of inventor!. +fficientl!controlled inventories make

the firm fle'ible.

Inefficient inventor! control results in unbalanced inventor! and infle'ibilit!6the

firm ma! sometimes run out of stock and sometimes ma! pileup unnecessar!


84/96

stocks. This increases level of investment and makes the firm unprofitable.

To manage inventories efficienc!, answers should be sought to the following two

$uestions.

9K ow much should be orderedW

:K *hen should it be orderedW The first $uestion how much to order, relates to the

problem of determining economic order $uantit! M+OK, and is answered with an

anal!sis of costs of manufacturing certain level of inventories. The second

$uestion when to order arise because of determining the reorder point.

Inventor! turnover atio46

Inventor! turnover ratio indicates the efficienc! of the firm in producing and

selling its products. It is calculated b! dividing the cost of goods sold b! the

average inventor!. The average inventor! is the average of open and closing

balance of inventor!.

It indicates the inventories turning into receivables through sales.

SalesInventor! turnover ratio 55555555555555555555555555

Inventor!

Y+& :B9= :B98 :B9; :B9: :B99

S&>+S ?A?.8A 98;.?= 7?B.79 9=:.77 9;@.:;I-N+-TOY 9B7.7; :@.?? :7.@B 9=.7? 97.;7

&TIO ?.8@ 8.AA :=.B: A.?8 :9.9B

& ratio showing how man! times a compan!Qs inventor! is sold and replaced over a

period. The da!s in the period can then be divided b! the inventor! turnover formula

to calculate the da!s it takes to sell the inventor! on hand or 1inventor! turnover

da!s.1 This ratio should be compared against industr! averages. & low turnover

implies poor sales and, therefore, e'cess inventor!. & high ratio implies either strong

sales or ineffective bu!ing.

igh inventor! levels are unhealth! because the! represent an investment with a rate

of return of "ero. It also opens the compan! up to trouble should prices begin to fall.

I-N+-TOY O>#I-3 )+IO#

Y+& :B9= :B98 :B9; :B9: :B99

#a!s ;7= ;7= ;7= ;7= ;7=

I-N+-TOY

&TIO

?.8@ 8.AA :=.B: A.?8 :9.9B

I-N+-TOY 8@.@B ?;.98 98.=@ ;?.8? 9?.;B


85/96

O>#I-3

)+IO#

*orking apital Turnover atio

Y+& :B9= :B98 :B9; :B9: :B99

Sales ?A?.8A 98;.?= 7?B.79 9=:.77 9;@.:;

-et working

capital

:B7.?A ::?.8: [email protected]?K M;A.A=K M9=7.=7K

atio ;.@7 B.7;

The working capital turnover ratio measures how well a compan! is utili"ing its

working capital to support a given level of sales. *orking capital is current assets

minus current liabilities. & high turnover ratio indicates that management is being

e'tremel! efficient in using a firmQs short6term assets and liabilities to support sales.

onversel!, a low ratio indicates that a business is investing in too man! accounts

receivable and inventor! assets to support its sales, which could eventuall! lead to an

e'cessive amount of bad debts and obsolete inventor!. ompan! achieved ver! good

ration in !ear :B9;, all other !ears are below average and in +# and compan!

should take some measures to improvise this.

Operating and cash onversion !cle

Operating c!cle method is the best techni$ue for estimating future cash working

capital of a firm. 0nder this method, total operating e'penses for a period are divided

b! the number of operating c!cles in the relevant period to find out the cash cost of

working capital. Thus, the computation of total operating e'penses, operating c!cle

and number of operating c!cles in the !ear is essential for estimating the amount of

working capital, as discussed below4

Operating e'penses include purchase of raw material, direct labour cost, fuel and power, administrative and selling and distribution e'penses for a specific period for


86/96

which estimates can be obtained from cost records.

Operating c!cle period means the total number of da!s involved in the different stages

of operation commencing from the purchase of raw materials and ending with

collection of sale proceeds from debtors after adjusting the number of da!Us credit

allowed b! suppliers. It is calculated b! using the following formula4

I. )+IO# O< O)+&TI-3 Y>+

(aterial storage period M(KV *ork6in6progress period M*K V IY 46

The basic objective of working capital management is that there should be an

optimum investment in working capital. There should not be either e'cessive working

capital or shortage of working capital. In order to decide the optimum investment

working capital, there is a need to consider different policies of working capital. The

different policies are discussed.

M&K atio of current assets to sales46


87/96

The current assets change as a result of changes in the sales. & firm has to decide

about the proportion of current assets to be maintained in relation to sales. There can

be aggressive, moderate or conservative current assets policies.

&- &33+SSIN+ 0+-T assets polic! is followed, a firms will

maintain a ver! low level of current assets in relation to sales.

& O-S+N&TIN+ )O>IY implies carr!ing of a ver! high level of current

assets in relation to sales.

& (O#+&T+ )O>IY is a via media between the two e'treme policies

mentioned above and results into a moderate proportion of current assets to sales.


88/96

& (O#+&T+ 0+-T assets polic! tries to balances risk

and profitabilit! b! keeping moderate level of current assets in relation to

sales

onservative

(oderate

urrent

&ggressive

)ssets

B Sales

M%K


89/96

ItUs esults in unnecessar! accumulation of inventories. Thus, chances of

inventor! mishandling, waste, theft and losses increase.

ItUs an indication of defective credit polic! and slack collection period.

onse$uentl!, higher incidence of bad debts results, which adversel! affects profits.

+'cessive working capital makes management complacent which degenerates

into managerial inefficienc

mafatlal working capital

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