Final Sip Report (1)

APROJECT REPORT ON WORKING CAPITAL MANAGEMENT AT SPARKON ENGINEERS .AND FABRICATION LTD, TAL: SANGOLA DIST: SOLAPUR SUBMITTED BY: ATUL MADANE Master in Management Studies During the year 2011-13 NCRD’s Sterling Institute of Management Studies, Nerul, Navi Mumbai ACKNOWLEDGEMENT 1 It is a matter of great satisfaction and pleasure to present this report on Working Capital Management of SPARKON ENGINEERS .AND FABRICATION LTD, SANGOLA DIST: SOLAPUR I take this opportunity to owe my thanks to all those involved in my training. This project report could not have been completed without the guidance of project guide Prof. Mayur Malviya. Their timely help & encouragement helped me to complete this project successfully. I thank Mrs. VINEETA KAPOOR (SR. OFFICER HRD) for giving me opportunity to work at SPARKON ENGINEERS .AND FABRICATION LTD, SANGOLA DIST: SOLAPUR, as A FINANCE TRAINEE. I am thankful Mr. SAMBHAJI PATIL (SR. FINANCE MANAGER) for their encouragement and able guidance at every stage of my training work. I express my gratitude towards staff SPARKON ENGINEERS .LTD, SANGOLA DIST: SOLAPUR, those who have helped me directly or indirectly in completing the training. 2 EXECUTIVE SUMMARY Company being established as SPARKON ENGINEERS .AND FABRICATION LTD, EKHATPUR Govt registered under “State Co-operative Society Act”. My Project is the study of working capital management. The project was of 2 months duration. During the project I interviewed the executives & staff to collect the data, & also made use of company records & annual reports. The data collected were then compiled, tabulated and analyzed. Working Capital Management is a very important facet of financial management due to: 1. Investments in current assets represent a substantial portion of total investment. 2. Investment in current assets & the level of current liabilities have to be geared quickly to change sales. 3 1 Particulars: Objective & Scope of Project Page No: 2 Company Profile 3 4 5 6 7 8 9 Theoretical Background Research Methodology Data Analysis & Interpretation Findings & Suggestion Recommendations Bibliography 58 OBJECTIVES 4 .INDEX No. To find out the utility of financial ratio in credit analysis & determining the financial capacity of the firm. COMPANY PROFILE 5 .• • To identify the financial strengths & weakness of the company Through the net profit ratio & other profitability ratio. • • • Evaluating company s performance relating to financial statement analysis. understand the profitability of the company. To know the liquidity position of the company with the help of current ratio. Cryogenic vessels Vacuum casting chambers Sparkon engineers has the following certifications • • • • ASME ‘U’ stamp ISO 9001-2000 EIL approved National Board Registration 2) VISION OF THE COMPANY: 6 . Uni Tanks. the factory and office building was totally renovated and S. Pressure vessels. Lin Tanks Storage Vessels. Sparkon Engineers started its manufacturing in 1995 as a fabricator of Mild Steel (M. Agitators..S fabrication work. • • • • • • Process equipment for Beverage & Wineries Pressure Vessels. SS fabricated heavy jobs Desalination plants.S fabrication of heavy jobs in various specialities like Storage tanks. Heat exchangers. with an objective of becoming one of the best fabrication units in India. Brewery & Distillery Equipments. Founder the unit was able to maintain constant growth year after year.A Rupnar. In the year 2004. Sparkon is one of the first five units in Pune doing heavy S. Company started doing jobs in Stainless Steel (SS) fabrication and today.Sparkon Engineers manufactures specialized equipments in Stainless Steel & Alloy steel material. Pharma & Cosmetic Industry equipments were started on fullfledge scale. During 2000-01. Reactors.S) jobs. Defence sector jobs. Columns Heat Exchangers.S) & Carbon Steel (C.1) ABOUT THE ORGANIZATION: Sparkon engineers is a Fabtech sister concern company having manufacturing units in Chakan Pune & Sangola Solapur. Under the leadership and vision of Shri R. To be a world-class leader in our business and achieve global standards through quality and innovation. We are committed to bring value and higher returns for our associates and stakeholders. To partner with our clients and associates in achieving better standards of excellence by overcoming challenges with zeal and confidence. 3) MISSION OF THE COMPANY: 7 • To become one of the leading engineering companies in the world with a foundation built on quality, safety, innovation and cost competitiveness To establish a culture of innovation, self-motivation and ownership towards work To provide cost-effective and quality solutions for our clients To strive to achieve better standards of quality and excellence in any ecosystem To invest in eco-friendly systems To extend the benefits of industrial development to rural India through employment generation and women empowerment Foster team bonding and encourage employees to embrace new ideas, and build HR processes for nurturing skills and capabilities • • • • • • 4) DIFFERENT DEPARTMENTS OF ORGANISATION: SPARKON ENGINEERS .LTD, EKHATPUR is a very big Factory in Solapur district. It is having various functional departments for smooth and systematic working those department are • • • • • HR & Safety Department. Accountant Department. Production Department. Engineering. Inventory Management. 5) MAIN ACTIVITY:- 8 The project report of ‘SPARKON ENGINEERS .AND FABRICATION LTD., SANGOLA. Was prepared by All India Federation of Co-operative manufacturing units. Industrial finance statement granted the term loan for the project is a shown below, Sr. No 1. 2 3 4 5 6 Details Share holder capital Govt. Maharashtra share capital Term loan S.I.C.O.M Subsidy Interest Received Mill own resources TOTAL Amount [in Crores Rupees] No No 45.00 No No 17.00 62.00 Land:The people of this area open hearted by gave the land at very cheap rate for construction of the project. Totally the project purchased 19 acres. The land is utilized very judiciously under the direction of Board of Directors. The manufacturing units has put up a jack well in the Chincholi Water Tank & transported water by its own pipeline & pumps through a distance of 4 Km. Building:The manufacturing units building is comparatively different from normal mill building. First in the history of the manufacturing units to use Siporex prefabricated slab for the roof. This has given good result in the production & other parameters. The manufacturing units also built an up to date canteen building & rest room for the workers An administrative building guest houses, etc. were also constructed on modern lines. All these factors have resulted in the efficient working of the mill. Plant and Machinery:9 India. There are lots of benefits to the workers from the Group Gratuity Scheme. Workers:The workers of this project were selected from local or needy persons. The Board of Directors have taken almost care in deciding the salaries of workers. Products • Equipments Manufacturing Under the equipments manufacturing division following process equipment are manufactured using Carbon Steel. Medical check-up of all the workers is done by Dr. Due to this the workers feel attachment to the mill. Humid LUWA. The machinery selection was also done judiciously to see that most modern technology is adopted. The average age of the worker in this project is about 24 years. The project has taken accident benefit insurance policies for all the workers. The nutritious food contains two biscuit packet & 400 gm. For the first time in the Maharashtra Jumbo Ring frames are installed in the project. Stainless Steel & Alloy Steel • • • • • • • • Reactors Process Columns Heat Exchangers (Shell / Tube / Finned Types) Dryer and regenerator Pressure vessels Separators Heat Exchangers (Shell / Tube / Finned) Degasser 10 . Coimbatore & Sclaphors Germany & Phase -II purchased are Lakshmi machine works. groundnuts & roasted bread. The project is providing nutritious food to the workers at the 50% subsidized rate. The project is paying wages equivalent to other reputed mills of this area. has made arrangement with Life Insurance Corporation of India by adopting Group Gratuity Scheme. The selections of workers are done by leaders of the village. Coimbatere &Ritar Switzerland Electejen Spain.All the machinery from blow room to ring frames Phase –I purchased are Lakshmi machine works. This nutritious food maintained good health & hard work of the workers. SA789. LTCS. SS etc.38thk ASME ‘U’ Stamp Weight 100 t Tube Sheet SA 350 LF2. SA 333 R/C/B with Gr 6. long VII Div I • PRESSURE VESSELS : Length Upto 25000 mm Weight Metallurgy Upto 150 t CS. Admiralty Brass 5/8” Dia X 18 Naval Brass Gauge (1. Code PD5500 / ASME Sec VIII Div I & Div II Diameter Upto 6000 mm • EXECUTION OF LSTK / EPCC PROJECTS Projects division undertakes execution of LSTK / EPCC Projects for: 11 . SA 105 etc. SA 516 Gr 60.16BWG.UNS. Inhabited SA387 Gr 22.• • • • • • Purifier vessels Pressure swing absorbers Scrubbers Pulsating Chambers Cryogenic Vessels HEAT EXCHANGERS : Tube SA 334 Gr6. SA 240 Gr 304. 8. Shell Code SA 516 Gr 60. 4000 mm 20000 mm 50 t ASME Section 100 t SA 182 F304L. Tema class 10thk .22thk) • COLUMNS : Metallurgy Diameter Length Weight Code Weight SA 516 Gr 70.S31803. Testing of Mounded bullets and Piping Supply and Installation of Cathodic Protection System. Fabrication. piles for 22 nos Storage tank maximum diameter 78. semi process and final products.• • • Process Units Mounded Storage facilities Tankages MOUNDED BULLETS FOR STORAGE OF LPG / PROPYLENE LPG Storage system with the Storage Vessel above the ground and mounded with sand / Soil are generally huge capacity vessels strictly confirming to SMPV Rules and OISD standard. We undertake projects execution on LSTK/ EPCC (Engineering. The project consists of : • • • • • • • Civil structure. Erection. These are site fabricated by hydraulic jacking method. Procurement.5 metres Allied pumps 3 nos. The scope of EPCC Contracts include: • • • • • Soil Investigation and report there of Design and detailed engineering Ground Improvement & Civil works SProcurement. We are executing project for intermediate storage facility at IOCL Paradip Refinery. Electrical and Instrumentation work Safety measures like Fire Fighting Total project Commissioning and hand over • • EPCC Projects -TANKAGES Tankages are used in refineries to store crude. Alkaline bullets Hydrogen compressing & facility Fire Fighting PLC instrumentation Pressure Vessels We are into manufacturing of pressure vessels of various sizes and capacities as 12 . Construction & Commissioning) basis. is entrusted to world renowned M/S. We are catering to Oil and Gas. Ginning project:There is no Ginning Project in the mill. The construction work of building. The automatic humidification system. etc. The expansion provided employment to about 100 persons directly & about 400 persons indirectly. humidification. electrification. which is installed . the management took a decision to expand its capacity from the existing unit in phases. Gherzi Eastern Company. Resources mobilization:It is expected that the mill will raise the required resources for the scheme as under- (Rs. Process and Power Industries. For this expansion most modern machinery were installed. Heat Exchangers We are into manufacturing of Heat Exchangers of various sizes and capacities as per client requirement. In addition the equipment manufacture in this 13 . In Crore) a) Equity from internal resources (25%) b) Term loan from bank (75%) Total 17 45 62 Proposed Expansion & Addition of Back Process machinery:To achieve higher profit & still improved performance result.per client requirement. From this project the socio-economic development of the industrially backward area of the Solapur district was be possible. The mill purchases ginning cotton from local merchants. 5242897 1. In crore 17. No.8289 0.336 43. The proposed first phase of 15600 spindles expansion & back process machinery involved an investment of Rs.expansion is earmarked for export.6270918 21.02 0. Export of quality will fetch good margin of profit & will help the country to learn valuable foreign exchange.4989 0.85 0. 1 2 3 4 5 6 7 8 Items Civil construction Plant & Machinery Electrification Humidification Misc.44 0. There is big demand for quality product in International market. Fixed assets Per operative expenses Contingency Additional marginal Total Rs.1251815 Infrastructure:Fabtech has six manufacturing units in Pune and one manufacturing unit in Solapur district Advanced manufacturing facilities including • • • Covered shops Bending facilities Handling facilities (EOT & mobile Cranes) 14 . 62 crore The detail of the cost of the project is shown belowSr. • • • • • • • • • • • • • • • • • • • • • • • • • • • • Heavy Press machines Automatic & manual Welding machines Drilling facilities Qualified & experienced manpower for production & quality control in shops Qualified & experienced manpower for handling projects from Office as well as site Equipments / Tools / Tackles for projects execution Streamlined processes enabled by SAP ERP system CERTIFICATIONS AND APPROVALS : ISO 9001:2000 by BVQI ASME "U" Stamp ASME “R” Stamp National Board Registration EIL Shop approval PESO (CCOE Nagpur) Shop Approval IBR Shop Approval HANDLING FACILITY: EOT CRANES IN SHOP. 1200 AMPS SMAW WELDING MACHINES. 10 MT MANUAL HANDLING FACILITIES ALSO AVAILABLE MOTORIZED ROTATORS .20 mt. WELDING FACILITY: SAW WELDING MACHINES. 600 / 400 AMPS GTAW WELDING MACHINES.30 mt. CRAWLER CRANES . 600 / 400 AMPS TESTING FACILITIESY: Hydrotesting Radiography Testing 15 . to 150 mt. to 250 mt. 25 MT MOBILE CRANES. • • • • • • Magnetic Particle Testing Thickness Testing Pneumatic Testing Ultrasonic Testing Dye Penetrant Testing Elcometers ORGANIZATION CHART Chairman Board of Directors 16 . Managing Directors C.O. E. Finance Administration HR Production Production engineer Shift officer Spinning Manager SQC Dept Maintenance Dept Engineering Dept Shift in charge SQC in charge Maintains Charge Chief Engineer Supervisor Investigator Supervisors Deputy Engineer Jobbers Wrapping Boy Workers Workmen 17 . only. Working capital in simple terms means the amount of funds that a company requires for financing its day-to-day operations. for the most effective utilization of enterprise resources. Marketing or Production revolves around the Finance dept. All other departments whether HR. An essential precondition for sound and consistent assets management is establishing the sound and consistent assets management policies covering fixed as well as current assets. In modern financial management. Finance manager should develop sound techniques of managing current assets. efficient allocation of funds has a great scope. 18 . The finance department makes the resources available to different departments and at the end of the year it analyzes the results received from utilization of those available Resources.FINANCE DEPARTMENT The Finance department deals in the best utilization of the available financial resources irrespective of the constraints. in finance and profit planning. uncertainties and overcoming obstacles. It is key department in any organization and plays major role in company s success and failure. INTRODUCTION Management is an art of anticipating and preparing for risks. Finance doesn’t only means currency notes or money. It also analysis the opportunities to make best utilization of resources to increase the profitability of the company by maintaining the liquidity and at the minimum risk. but any asset or liability in the company is a part of finance as the money is invested in all these and the profitability of the company is measured after considering all the factors. the fixed and current assets have to be combined in optimum proportions. Net current assets or net working capital refers to the current assets less current liabilities.” 19 . it is also known as Circulating capital or Current capital for current assets are rotating in their nature. In other words it is the Net Current Assets or Net Working Capital.WHAT IS WORKING CAPITAL? Working capital refers to the investment by the company in short terms assets such as cash. DEFINITIONS OF WORKING CAPITAL: The following are the most important definitions of Working capital: “Working capital is the difference between the inflow and outflow of funds. In other words it is the net cash inflow. marketable securities.” “Working capital is defined as the excess of current assets over current liabilities and provisions. it means.” “Working capital represents the total of all current assets. Symbolically. In other words it is the Gross working capital. Net Working Capital = Current Assets-Current Liabilities. In short. The inadequacy or mismanagement of working capital is the leading cause of business failures. It is also pointed out that working capital is nothing but one segment of the capital structure of a business. To meet the current requirements of a business enterprise such as the purchases of services. any business organization cannot run smoothly or successfully. is comparable to the blood in the human body like finance s life and strength i.e.IMPORTANCE OF WORKING CAPITAL Working capital may be regarded as the lifeblood of the business. Without insufficient working capital. profit of solvency to the business enterprise. Thus enterprise can have a balance between liquidity and profitability. the cash and credit in the business. Therefore the management of working capital is essential in each and every activity. WORKING CAPITAL MANAGEMENT 20 . Financial management is called upon to maintain always the right cash balance so that flow of fund is maintained at a desirable speed not allowing slow down. In the business the Working capital is comparable to the blood of the human body. Therefore the study of working capital is of major importance to the internal and external analysis because of its close relationship with the current day to day operations of a business. working capital is essential. raw materials etc. If the firm cannot maintain the satisfactory level of working capital. Working capital management is a short term financial management. while short term financial decisions involve cash flow within a year or within operating cycle. Working capital management is concerned with the problems that arise in attempting to manage the current assets. To maintain the margin of safety current asset should be large enough to cover its current assets. the current liabilities & the inter relationship that exists between them. it is likely to become insolvent & may be forced into bankruptcy. Long term finance involves the cash flow over the extended period of time i. Composition of working capital : A) Major Current Assets 1) Cash 2) Accounts Receivables 3) Inventory 4) Marketable Securities B) Major Current Liabilities 1) Bank Overdraft 2) Outstanding Expenses 3) Accounts Payable 4) Bills Payable The Goal of Capital Management is to manage the firm current assets & liabilities. The current assets refer to those assets which can be easily converted into cash in ordinary course of business. so that the satisfactory level of working capital is maintained. without disrupting the operations of the firm.INTRODUCTION: Working Capital is the key difference between the long term financial management and short term financial management in terms of the timing of cash.e 5 to 15 years. Main theme of the theory of working capital management is interaction between the 21 . CONCEPT OF WORKING CAPITAL: There are 2 concepts: Gross Working Capital Net Working Capital   Gross working capital: It is referred as total current assets. agreement should be made quickly. Implications of Net Working Capital: Net working capital is necessary because the cash outflows and inflows do not 22 . Working capital is basically related with the question of profitability versus liquidity & related aspects of risk. as idle investment earns nothing. Therefore there should be adequate investment in current assets. If surplus funds are available they should be invested in short term securities. NET WORKING CAPITAL = CURRENT ASSETS -CURRENTLIABILITIES If the working capital is efficiently managed then liquidity and profitability both will improve. Inadequate working capital can threaten solvency of the firm because of its inability to meet its current obligations. Focuses on. Difference between current assets and current liabilities Net working capital is that portion of current assets which is financed with long term funds.current assets & current liabilities. Financing of current assets: Whenever the need for working capital funds arises. Optimum investment in current assets: • • An excessive investment impairs firm s profitability. They are not components of working capital but outcome of working capital. Net working capital (NWC): Defined by 2 ways. The risk of becoming technically insolvent is measured by NWC. In general the cash outflows resulting from payments of current liability are relatively predictable. If the firm wants to increase profitability. the profitability will decrease. the less NWC will be required. More predictable the cash inflows are. The term profitability is measured by profits after expenses. an important consideration is tradeoff between probability and risk. the risk will definitely increase.coincide. it will be necessary to maintain current assets at level adequate to cover current liabilities that are there must be NWC. Firm s aim is to maximize the wealth of shareholders and to earn sufficient return from its operations. Investment in current assets and level of current liability has to be geared quickly to change in sales. 23 . For evaluating NWC position. Firms differ in their requirement of working capital (WC). The term risk is defined as the profitability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. But where the cash inflows are uncertain. The cash inflows are however difficult to predict. Business undertaking required funds for two purposes: o To create productive capacity through purchase of fixed assets. Its importance stems from two reasons: • • Investment in current asset represents a substantial portion of total investment. WCM is a significant facet of financial management. If firm wants to reduce the risk. PLANNING OF WORKING CAPITAL: Working capital is required to run day to day business operations. get longer credit or an increased credit limit.g. if 24 . It can be tempting to pay cash. WC management affect the profitability and liquidity of the firm which are inversely proportional to each other. you could reduce the cost of bank interest or you'll have additional free money available to support additional sales growth or investment. and MONEY. if you can negotiate improved terms with suppliers e. WORKING CAPITAL CYCLE A firm requires many years to recover initial investment in fixed assets. Sales are necessary for earning profits. This is referred to as the operating or cash cycle. receivables and payables) has two dimensions .. If you can get money to move faster around the cycle (e.g.. Each component of working capital (namely inventory. hence proper balance should be maintained between two. To convert the sale of goods into cash.. reduce inventory levels relative to sales).TIME IS MONEY. TIME . The importance of WCM is reflected in the fact that financial managers spend a great deal of time in managing current assets and current liabilities.g. On contrary the investment in current asset is turned over many times a year. the business will generate more cash or it will need to borrow less money to fund working capital. When it comes to managing working capital .. The extent to which profit can be earned is dependent upon the magnitude of sales. you effectively create free finance to help fund future sales. collect dues from debtors more quickly) or reduce the amount of money tied up (e. Sufficient WC is necessary to sustain sales activity. sales do not convert into cash instantly.. Investment in such current assets is realized during the operating cycle of the firm.... there is need for WC in the form of current asset to deal with the problem arising out of immediate realization of cash against good sold. However.o To finance current assets required for running of the business.. there is invariably a time lag between sale of goods and the receipt of cash. As a consequence. Similarly.. This time period is dependent upon the length of time within which the original cash gets converted into cash again. You free up cash. Your receivables soak up cash. vehicles etc. if you pay dividends or increase drawings. These three combined together will constitute work in progress. etc. remember that this is now longer available for working capital. You release cash from the cycle. entering into production process/stock & the inflow of cash from debtors (sales). work in progress will get converted into sundry debtors. they remove liquidity from the business If you ...available. consider other ways of financing capital investment loans. these are cash outflows and. Then it has to pay labor costs & incurs factory overheads. work in progress.. Move inventory (stocks) slower. You consume more cash. Collect receivables (debtors) faster. OPERATING CYCLE The working capital cycle refers to the length of time between the firms paying the cash for materials. Similarly. finished goods and finally into cash again. if cash is tight. You increase your cash resources. leasing etc.. cash will be paid out for the other part immediately. After the production cycle is complete. suppose a company has certain amount of cash it will need raw materials. equity. This cash can be again used for financing raw material. plant. Then. Short term funds are required to meet the requirements of funds during this time period. The cycle is also known 25 . Shift inventory (stocks) faster. Sundry debtors will be realized in cash after the expiry of the credit period. like water flowing downs a plughole.. Therefore. Collect receivables (debtors) slower. for fixed assets e. Get better credit (in terms of duration or amount) from suppliers. Some raw materials will be available on credit but.g. computers. work in progress etc. If you do pay cash. thus there is complete cycle from cash to cash wherein cash gets converted into raw material. finished goods are held for 30 days & 30 days cycle. the third phase results in cash inflows which are not certain because sales and collection which give e rise to cash inflows are difficult to forecast accurately. It indicates the total time lag & the relative signify acne of its constituent parts.e. The total days are 120. For example. Operating cycle consists of the following: 1) 2) Conversion of cash into raw-materials. i. 26 . it gets credit from the supplier for 15 credit is extended to debtors. Sales of the product (cash / credit). Conversion of raw-material into work-in-progress. Working capital cycle can be determined by adding the number of days required for each stage in the days. First and second phase of the operating cycle result in cash outflows. The duration may vary depending upon the business policies. 1. and be predicted with reliability once the production targets and cost of inputs are known.as operating cycle or cash cycle. 60 -15 + 15 + 15 + 30 + 30 days is the total of working capital.. Acquisition of resources. Thus the working capital cycle helps in the forecast. 3) Conversion of work-in-progress into finished stock. Manufacture of the product and 3. company holds raw material on average for 60 days. 2. However. control & management of working capital. In light of the facts discusses above we can broadly classify the operating cycle of a firm into three phases viz. the operating cycle process can be expressed as follows: Operating cycle = R + W + F + D C R = Raw material storage period W = Work in progress holding period F = Finished goods storage period D = Debtors collection period C = Credit period availed 27 .4) Conversion of finished stock into account receivable through sales. and 5) Conversion of accounts receivable into cash. In the form of an equation. RMCP WIPCP FGCP ICP RCP .Raw Material Conversion Period .Work in Progress Conversion Period Finished Goods Conversion Period Inventory Conversion Period Receivables Conversion Period Payables Deferral Period 28 Payables (PDP) - .WORKING CAPITAL CYCLE Work-in-progress Raw materials stock Finished goods stock Wages & overheads Selling Expenses Raw materials stock Sale Trade debtors Trade creditors Cash Taxation Shareholders Loan creditors Lease payments Fixed assets The firm is therefore. required to invest in current assets for smooth and uninterrupted functioning. The difference between GOC and PDP is known as Net Operating Cycle and if Depreciation is excluded from the expenses in computation of operating cycle. ICP is the total time needed for producing and selling the products. CALCULATIONS: On the basis of financial statement of an organization we can calculate the inventory conversion period.NOC GOC - Net Operating Cycle Gross Operating Cycle Here. on the basis of information presented in the Balance sheet statement of Fabtech Textile Company Limited. WIPCP and FGCP. the length of gross as well as net operating cycle is calculated as follows: TYPES OF WORKING CAPITAL: 1) PERMANENT AND 29 . the working capital position is directly proportional to the Net Operating Cycle. As mentioned above. In short. Usually. the length of GOC is the sum of ICP and RCP. On the other hand. RCP is the total time required to collect the outstanding amount from customers. the NOC also represents the cash collection from sale and cash payments for resources acquired by the firm and during such time interval between cash collection from sale and cash payments for resources acquired by the firm and during such time interval over which additional funds called working capital should be obtained in order to carry out the firms operations. PDP is the result of such an incidence and it represent the length of time the firm is able to defer payments on various resources purchased. firm acquires resources on cr. edit basis. Debtors / receivables conversion period and the creditor’s conversion period and based on such calculations we can find out the length of the operating cycle (in days) both gross as well as net operating cycle. Hence it is the sum total of RMCP. Excessive working capital not only impairs the firm’s profitability but also result in production interruptions and inefficiencies. extra inventory of finished goods will have to be maintained to support the peak periods of sales. or fixed. Thus. On the other hand. The extra working capital. Both excessive as well as inadequate working capital positions are dangerous from the firm’s point of view. The operating cycle is a continuous process and. Both kinds of working capital PERMANENT and TEMPORARY .sometimes increasing and sometimes decreasing. or VARIABLE. the need for current assets is felt constantly. chances of inventory mishandling. While temporary working capital is fluctuating. but temporary-working capital is created by the firm to meet liquidity requirements that will last only temporary working capital. investment in raw material. It is permanent in the same way as the firms fixed assets are.are necessary to facilitate production and sale through the operating cycle. This minimum level of current assets is referred to as permanent. The dangers of excessive working capital are as follows: It results in unnecessary accumulation of inventories. However. Depending upon the changes in production and sales. over and above permanent working capital. For example. or TEMPORARY working capital. It should have adequate working capital to run its business operations. will fluctuate. the need for working capital.2) VARIABLE WORKING CAPITAL The need for current assets arises because of the operating cycle. needed to support the changing production and sales activities is called FLUCTUATING. theft and losses 30 . It is shown that permanent working capital is stable over time. and investment in receivable may also increase during such periods. therefore. the permanent capital is difference between permanent and temporary working capital can be depicted through figure. working capital. waste. work-in-process and finished goods will fall if the market is slack. BALANCED WORKING CAPITAL POSITION The firm should maintain a sound working capital position. But the magnitude of current assets needed is not always a minimum level of current assets which is continuously required by the firm to carry on its business operations. 31 . Paucity of working capital funds render the firm unable to avail attractive credit opportunities etc. each having a different importance. The firm loses its reputation when it is not in a position to honor its short-term obligations. Tendencies of accumulating inventories tend to make speculative profits grow. A firm s net working capital position is not only important as an index of liquidity but it is also used as a measure of the firm s risk. the importance of factors changes for a firm over time. Inadequate working capital is also bad and has the following dangers: It strengths growth. Only then a proper functioning of business operations will be ensured.increase. maintain the right amount of working capital on a continuous basis. therefore. supported by judgment. influence working capital needs of firms. the less likely that it will default in meeting its current financial obligations. Excessive working capital makes management complacent which degenerates into managerial inefficiency. All other things being equal. A large number of factors. should be used to per edict the quantum of working capital needed at different time periods. An enlightened management should. the firm s profitability would deteriorate. Lenders such as commercial banks insist that the firm should maintain a minimum net working capital position. This may tend to make dividend policy liberal and difficult to cope with in future when the firm is unable to make speculative profits. Also. Therefore.availability of working capital funds. Sound financial and statistical techniques. which adversely affects profits. Risk in this regard means chances of the firm being unable to meet its obligations on due date. Fixed assets are not efficiently utilized for the lack of working capital funds. It becomes difficult to implement operating plans and achieve the firm profit target. It is an indication of defective credit policy slack collections period. Operating inefficiencies creep in when it becomes difficult even to meet day commitments. the firm faces tight credit terms. Consequently. higher incidence of bad debts results. Thus. an analysis of relevant factors should be made in order to determine total investment in working capital. It becomes difficult for the firm to undertake profitable projects for non. DETERMINANTS OF WORKING CAPITAL There are no set rules or formula to determine the working capital requirements of firms. the more the net working capital a firm has. The lender considers a positive net working as a measure of safety. As a result. The following is the description of factors which generally influence the working capital requirements of firms.) Working capital requires most of the manufacturing concerns to fall between the two extreme requirements of trading firms and public utilities. current assets will have to be employed before growth takes place. Trading and financial firms have a very small investment in fixed assets. Price Level Changes Nature of Business: Working capital requirements of a firm are basically influenced by the nature of its business. Retail stores. Credit Policy 5. Sales and Demand Conditions 3. In contrast. Technology and Manufacturing Policy 4.e. Thus. necessary to make advance planning of working capital for a growing firm on a continuous basis. Availability of Credit 6. Some manufacturing business. 1. Sales and Demand Conditions: The working capital needs of a firm are related to its sales. must carry large stocks of a variety of goods to satisfy varied and continuous demand of their customers. Nature of Business 2. not products. such as tobacco manufacturers and construction firm. It is . no funds will be tied up in debtors and stock (inventor i. therefore. but require a large sum of money to be invested in working capital. 32 . public utilities have a very limited need for working capital and have to invest abundantly in fixed assets. Their working capital requirements are nominal because they may have only cash and supply services. It is difficult to precisely determine the relationship between volume of sales and working capital needs. Such concerns have to make adequate investment in current assets depending upon the total assets structure and other variables. for example. also have to invest substantially in working capital and a nominal amount in fixed assets. In practice. Operating Efficiency 7. sales will increase. Under recessionary conditions. It uses external sources as well as internal sources to meet increasing needs of funds. it will be more expensive during slack periods when the firm has to sustain its working force and physical facilities without adequate production and sales. follow a policy of steady production. Seasonal fluctuations not only affect working capital requirements but also create production problems for the firm. When there is an upward swing in the economy. 33 . when there is a decline in the economy sales will fall and consequently. It is. The increasing level of inventories during the slack season will require increasing funds to be tied up in the working capital for some months. A firm may. firms generally resort to substantial borrowing.A growing firm may need to invest funds in fixed assets in order to sustain its growing production and sales. Most firms experience seasonal and cyclical fluctuations in the demand for their products and services. During periods of peak demand. Sales depend on demand conditions. increasing production may be expensive for the firm. This will. On the other hand. increase investment in current assets to support enlarged scale of operations. Imperative that proper planning be done by such companies to finance their increasing needs for working capital. irrespective of seasonal changes in order to utilize its resources to the fullest extent. Such a policy will mean accumulation of inventories during off season and their Quick disposal during the peak season. correspondingly. To meet their requirements of funds for fixed assets and current assets under boom period. therefore. Similarly. levels of inventories and debtors will also fall. the firm’s investment in inventories and debtors will also increase. in turn. Such a firm faces fur their financial problems when it retains substantial portion of its profits. It would not be able to pay dividends to shareholders. This act of firm will require further additions of working capital. specially the temporary working capital requirement of the firm. firms try to reduce their short term borrowings. These business variations affect the working capital requirements. Under boom. It should be realized that a growing firm needs funds continuously. To meet their requirements of funds for fixed assets and current assets under boom further additions of working capital. thus. additional investment in fixed assets may be made by some firms to increase their productive capacity. four months. service and financial enterprises do not have a manufacturing cycle. Technology and Manufacturing Policy The manufacturing cycle (or the inventory conversion cycle) comprises of the purchase and use of raw material the production of finished goods. Longer the manufacturing cycle.e. A steady production policy will cause inventor i. They will manufacture the original product line during its increasing demand and when it has an off. soaps. financial arrangements for seasonal working capital requirements can be made in advance. Thus. Therefore. In order to minimize their investment in working capital. to accumulate during the off. Any delay in manufacturing process will results in accumulation of work.in.process and waste of time. larger will be the firm working capital requirements. it should be ensured that manufacturing cycle is completed within the specified period. seasonal fluctuations generally conform to a steady pattern. especially firm Manufacturing industrial products have a policy of asking for advance payment from their customers. if there are alternative technologies of manufacturing a product. if costs and risks of maintaining a constant production policy. An extended manufacturing time span means a larger tie. A strategy of constant production may be maintained in order to resolve the working capital problems arising due to seasonal changes in the demand for the firm product. the manufacturing cycle in the case of a boiler.reason periods and the firm will be exposed to greater inventory costs and risks. For example. varying its production utilized for manufacturing varied products. . Once a manufacturing technology has been selected. the technological process with the shortest manufacturing cycle may be chosen. This needs proper planning and coordination at all levels of activity. chocolate etc. Thus. depending on its size. may be a few hours. production policies will differ from firm to firm. However. 34 depending on the circumstances of individual firm. Non-manufacturing firms. may range between six to twenty. the manufacturing cycle of products such as detergent powder. other products may be manufactured to utilize physical resources and working force. Thus.season. the financial plan or arrangement should be flexible enough to take care of some abrupt Seasonal fluctuations.Unlike cyclical fluctuations. can have the advantage of diversified Activities and solve their working capital problems. On the other hand.up of funds in inventories. some firms. A firm which can get bank credit easily on favorable condition will operate with less working capital than a firm without such a facility. will be detrimental to the firm and will create a problem of collections. Operating Efficiency The operating efficiency of the firm relates to the optimum utilization of resources at minimum costs. the availability of credit from banks also influences the working capital needs of the firm. In order to ensure that unnecessary funds are not tied up in debtors. Availability of Credit The working capital requirements of a firm are also affected by credit terms granted by its creditors. different terms may be given to different customers. helps in releasing the pressure on working capital. Depending upon the individual case. A liberal credit policy. 35 . The use of working capital is improved and pace of cash conversion cycle is accelerated with operating efficiency. without rating the credit. But a firm has the flexibility of shaping its credit policy within the constraint of industry norms and practices. The firm will be effectively contributing in keeping the working capital investment at a lower level if it is efficient in controlling operating costs and utilizing current assets. thus. it can certainly ensure efficiency and effective use of its materials. the firm should follow a rationalized credit policy based on the credit standing of customers and periodically review the creditworthiness of the exiting customers. A high collection period will mean tie. The case of delayed payments should be thoroughly investigated. Similarly. Slack collection procedures can increase the chance of bad debts. The credit terms to be granted to customers may depend upon the norms of the industry to which the firm belongs. labor and other resources. Better utilization of resources improves profitability and.worthiness of customers. A firm will need less working capital if liberal credit terms are available to it. Although it may not be possible for a firm to control prices of materials or wages of labor. The firm should be discretion in granting credit terms to its customers.up of large funds in book debts.Credit Policy The credit policy of the firm affects the working capital by influencing the level of debtors. and working capital. Generally. rising price levels will require a firm to maintain higher amount of working capital. Further. which requires long-term funds. It is possible that some companies may not be affected by rising price will be different for companies. which requires shortterm-funds.Price Level Changes The increasing shifts in price level make functions of financial manager difficult. Same levels of current assets will need increased investment when price are increasing. REQUIREMENTS OF FUNDS Funds Requirements of company 1) Fixed Capital     Preliminary Expenses Purchase of Fixed Assets Establishment work exp. Fixed working capital 2) Working Capital • • • • Raw Material Inventories Goods in Process others Every company requires funds for investing in two types of capital i.e. He should anticipate the effect of price level changes on working capital requirement of the firm. effects of increasing general price level will be felt differently by firm as individual price may move differently. Some will face no working capital problem. fixed capital. However. 36 . companies which can immediately revise their product price levels will not face a server working capital problem. while working capital problems of other may be aggravated. Loan from financial institution 2. pending Short-term source (Temporary working capital) 1. Floating of Debentures 3. Early warning signs include: 1) Pressure on existing cash 2) Exceptional cash generating activities e. Commercial paper Sources of additional working capital include the following: 1) Existing cash reserves 2) Profits (when you secure it as cash!) 3) Payables (credit from suppliers) 4) New equity or loans from shareholders 5) Bank overdrafts or lines of credit 6) Term loans If you have insufficient working capital and try to increase sales. Factoring 2. Trade credit 37 . offering high discounts for early cash payment 3) Bank overdraft exceeds authorized limit 4) Seeking greater overdrafts or lines of credit 5) Part-paying suppliers or other creditors 6) Paying bills in cash to secure additional supplies 7) Management pre-occupation with surviving rather than managing 8) Frequent short-term emergency requests to the bank (to receipt of a cheque) help pay wages.g. This is called overtrading. Issue of shares 5.SOURCES OF WORKING CAPITAL Long. Accepting public deposits 4.term source (Fixed working capital) 1. Bill discounting 3. Cash credit 6. you can easily over-stretch the financial resources of the business. Bank overdraft 4. An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.LONG TERM SOURCES Issue of shares Ordinary shares are also known as equity shares and they are the most common form of share in the UK. When they are issued. 10 for every share it issues. 38 . The market value of a share is the amount at which a share is being sold on the stock exchange and may be radically different from the nominal value. Shares sold at par are sold for their nominal value only .it is the value written on the share certificate that all shareholders will be given by the company in which they own shares. The nominal value of a share is the issue value of the share .10 share is sold at par. so can the dividends paid to ordinary shareholders.so if Rs. shares are usually sold for cash. then the issue price will be the par value plus an additional premium. dividends may be nothing whereas in good years they may be substantial. as many shares are these days. Since the profits of companies can vary wildly from year to year. If a share is sold at a premium. In bad years. at par and/or at a premium. the company selling the share will receive Rs. the debenture holders will be preferential creditors and will be entitled to the repayment of some or all of their money before the shareholders receives anything. the debenture holder has a legal interest in that asset and the company cannot dispose of it unless the debenture holder agrees. it still has to pay its interest charges. If the business fails. Then.DEBENTURES Debentures are loans that are usually secured and are said to have either fixed or floating charges with them. LOANS FROM OTHER FINANCIAL INSTITUTIONS The term debenture is a strictly legal term but there are other forms of loan or loan stock. A secured debenture is one that is specifically tied to the financing of a particular asset such as a building or a machine. SHORT TERM SOURCES 39 . even if a company makes a loss. Debenture holders have the right to receive their interest payments before any dividend is payable to shareholders and. A loan is for a fixed amount with a fixed repayment schedule and may appear on a balance sheet with a specific name telling the reader exactly what the loan is and its main details. If the debenture is for land and/or buildings it can be called a mortgage debenture. just like a mortgage for a private house. most importantly. you invoice your customer and send a copy of the invoice to the factor and most factoring arrangements require you to factor all your sales. Bank overdrafts are given on current accounts and the good point is that the interest payable on them is calculated on a daily basis. INVOICE DISCOUNTING Invoice discounting enables you to retain the control and confidentiality of your own sales ledger operations. The invoice discounter will then pay the remainder of the invoice. Factoring also gives you the opportunity to outsource your sales ledger operations and to use more sophisticated credit rating systems. Under these circumstances. So if the company borrows 40 . it must deposit the funds in a bank account controlled by the invoice discounter. The invoice discounter makes a proportion of the invoice available to you once it receives a copy of an invoice sent. 'Confidential invoice discounting’ ensures that customers do not know you are using invoice discounting as the client company sends out invoices and statements as usual. The factor pays you a set proportion of the invoice value within a pre-arranged time .typically. it works this way: Once you make a sale. most factors offer you 80-85% of an invoice's value within 24 hours. Different invoice discounters will impose different requirements. less any charges. The client company collects its own debts. Once the client receives payment.FACTORING Factoring allows you to raise finance based on the value of your outstanding invoices. The major advantage of factoring is that you receive the majority of the cash from debtors within 24 hours rather than a week. Once you have set up a factoring arrangement with a Factor. A company might have small cash flow problems from time to time but such problems don't call for the need for a formal long-term loan.term basis. three weeks or even longer. OVERDRAFT FACILITIES Many companies have the need for external finance but not necessarily on a long. a company will often go to its bank and arrange an overdraft. The requirements are more stringent than for factoring. Take a look at any company's balance sheet and see how much they have under the heading of Creditors falling due within one year' . CASH MANAGEMENT Cash management is one of the key areas of WCM. It includes near-cash assets. drafts and demand deposits in banks. 25. Why do they include lines of credit as a source of finance? They all. if they manage their creditors carefully they can use the line of credit they provide for us to finance other parts of their business. such as a supplier of raw materials. They serve as a reserve pool of liquidity that provides cash quickly when needed. 25. such as cheques. Cash is oil of lubricate the ever-turning wheels of business: without it the process grinds to a shop. Apart from the fact that it is the most liquid asset. it only pays a little bit of interest. TRADE CREDIT This source of finance really belongs under the heading of working capital management since it refers to short-term credit. If that company is allowed an average of 30 days to pay its creditors then they can see that effectively it has a short term loan of Rs.000 for a company.let's imagine it is Rs. The main characteristic of these is that they can be readily sold & converted into cash. By a 'line of credit' they mean that a creditor. receivables & inventory get eventually converted into cash. CASH IS MAINTAINED FOR FOUR MOTIVES: 41 . will allow us to buy goods now and pay for them later.000 for 30 days and it can do whatever it likes with that money as long as it pays the creditor on time. such as marketable securities & time deposits in banks. cash is the common denominator to which all current assets. They provide short term investment outlet to excess cash and are also useful for meeting planned outflow of funds. that is. Contrast the effects of an overdraft with the effects of a loan. Motives for holding cash with reference to cash management are used in two senses: It is used broadly to cover currency and generally accepted equivalents of cash.only a small amount. Make purchases at favorable price. wages. Delay purchase of raw material on the anticipation of decline in prices. E. The unexpected cash needs at the short notice may be due to: Floods. in that firms must make provisions to tide over unexpected contingencies.g. Thus requirement of cash balances to meet routine need is known as the transaction motive and such motive refers to the holding of cash to meet anticipated obligations whose timing is not perfectly synchronized with cash receipts. Speculative motive: It refers to the desire of the firm to take advantage of opportunities which present themselves at unexpected moment & which are typically outside the normal course of business. operating expenses. The speculative motive helps to take advantages of: An opportunity to purchase raw material at reduced price on payment of immediate cash. C. Transaction motive: Transaction motive refer to the holding of cash to meet routine cash finance the transactions which a firm carries on in a variety of transactions to accomplish its objectives which have to be paid for in the form of cash. precautionary cash provides a cushion to meet unexpected contingencies. Precautionary motive: A firm has to pay cash for the purposes which cannot be predicted or anticipated. The more unpredictable are the cash flows. A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline. If the precautionary motive is defensive in nature. taxes.A. strikes & failure of customer Slowdown in collection of current receivables Increase in cost of raw material Collection of some order of goods as customer is not satisfied The cash balance held in reserves for such random and unforeseen fluctuations in cash flows are called as precautionary balance. Thus. the speculative motive represents a positive and aggressive approach. payment for purchases. the larger is the need for such balance. 42 . requirements to B. dividends etc. financial charges like interest. To meet the cash disbursement needs In the normal course of business firms have to make payment of cash on a continuous and regular basis to the supplier of goods. Basic objective is to meet payment 43 . Also the collection is done from the de4btorw. employees and so son.OBJECTIVES OF CASH MANAGEMENT I. Expenses incurred as a shortfall are called short costs. DETERMINING THE CASH NEEDS: Cash needs can be determined though preparing cash budget. 44 . 2) Short cash Cash period reveals the period of cash shortages. First need in determining cash need is. it will ensure prompt payment together with all the advantages. For this purpose following can be helpful: 1 Prompt billing often there is time lag between the disptachof goods or provision of service and the sending of bills. month. the extent of nonsynchronization of cash receipts & disbursements. low cash balance mean failure to meet payment schedule. are helpful in controlling and revising cash forecasts on a continual basis The important cash reports are The daily cash reports Daily treasury reports The monthly cash report Monitoring collection and receivables: The Finance Manager must control the levels of cash balance at various points in the organization. cash reports. FACTORS DETERMININING CASH NEEDS: 1) Synchronization of cash . For this methods have to be employed to: Speed up the mailing time of payment from customers Reduce the time during which payments received by the firm remain uncollected and speed up the movement funds to disbursement banks. But it also implied that the large funds will remain idle. Hence a finance manager must devise a system whereby each division of organization retains enough cash to meet its day-to-day requirements without having surplus balance on hand. By preparing and sending the bills promptely. II.schedule that is to have sufficient cash to meet the cash disbursement needs of the firm. For this purpose cash budget is to be prepared. This task assumes special importance on account of the fact that there is generally tendency amongst divisional manager to keep cash balance in excess of their needs. Therefore we should have optimum level of cash balance. for year. providing a comparison of actual development with forecast figures. a firm can esure earlier remittance. as cash is the non-earning asset and firm will have to forego profits. week etc. To minimize the funds committed to cash balances First of all if we keep high cash balance. Every shortage of cash whether expected or unexpected involves a cost depending upon the security duration & frequency of shortfall & how the shortage is covered. Cash budget point out when the firm will have excess or shortage of cash.need for the cash balances arise from the non synchronization of the inflows & outflows of cash. On the other hand. Payments collected in different collection centres are deposited in local banks which in turn transfer them to the concentration banks Lock box method: Silent features are as followsA number of post office boxes are rented by the company in different locations. This amount of cheques issued by the firm but not paid for by the bank is referred to as payment FLOAT . The balance in the bank s book however is cleared.The major bank account of the company is wet up with a concentration bank. When the cheques are deposited with bank the firm increases the balance in its books.expediting collecgion of cheques is important and there are to methods 1. ACCRUALS: accruals can be defined as current liabilities that represent a service or goods received by a firm but not yet paid for.It should be realized that it is in the area of billing that the company control is high and there is a sizeable opporltunity to free up cash. When the net float is positive the balance in the books of bank is higher than the balance in the books of firm. Centralized disbursement payables and their disbursements may be centralized. For this treasure should work with controller and others in : Accelerating invoice data Mailing bills promptly Identifying payment locations. Banks are authosized to picked up the cheques from the lock boxes and depositthem in the companies account. Customers are advised to mail their remittances to collection centre close tgo them.l Customersare advised to mail there remittances to the lock boxes. For example remuneration to employee s that render services in advance and receive payment later. they extend credit to the firm for a period 45 . This helps in consolidating the funds at head office scheduling payments. Difference between payment float and collection float is called as net float . Lock box method Concentration banking : (decentralized collection) key elements are. Float: when firm issues cheques they reduce the balance in their books. generally situated in the same place where the company is head quartered. The amount of cheques deposited by the firm in the bank but not cleared is referred to as collection float . Concentration banking. but balance in banks book is not reduced till the payment is made by bank. This involves Payment should be made as and when it fall due. 2. 2 Expeditious collection of cheques . Controlling payables/disbursements: by proper control of payables company can manage cash resources. reducing unproductive bank balance and investing surplus funds more effectively. When the firm enjoys the positive float (net) it may issue cheques even if it have an overdrawn bank account in its books. Such an action is referred to as playing the float It is considered risky. Proper synchronization of inflows and outflows helps a company to get greater mileage from cash resources. In a way. a supplier should analyze the five Cs of credit worthiness. Hence trading or transaction costs will tend to diminish if cash balance becomes larger. It has the following features. From the figure.at the end of which they are paid. Assessing the credit worthiness of customers • • Before extending credit to a customer. the total costs of holding cash are at a minimum when the size of the cash balance is C . At the one end they are invested in term deposit in bank and on other end are invested in equity shares. loan repayment or some other purposes. Deployment of surplus funds: Company s often have surplus funds for short period of time before they are required for capital expenditure. the opportunity costs of maintaining cash rise as the cash balance increases. However. Weekly is more important as compared to monthly. DEBTORS MANAGEMENT. 10.00/. The units have face value of Rs.The sale & purchase price of units are not squarely based on the net asset per unit. OPTIMAL CASH BALANCE It a firm maintains a small cash balance. They can be invested in several options like Units of the unit 1964 scheme: This is the most important mutual fund scheme in India. This represents optimal cash balance. These are: Capacity : will the customer be able to pay the amount agreed within the allowable credit period? What is their past payment record? How large is the customer's business capital.It is a open ended scheme as it accepts funds from investors & also permits to withdraw their investments. as should be the case for a truly open ended scheme. which will provoke a series of questions. 46 . it has to sell its marketable securities more frequently than if it holds a large cash balance. However. which can render such references uninformative. staff should gain an impression of the efficiency and financial resources of customers and the integrity of its management. • Credit agencies. able to make payments on time? • • • Character : do the customers management appear to be committed to prompt payment? Are they of high integrity? What are their personalities like? Collateral : what is the scope for including appropriate security in return for extending credit to the customer? Conditions : what are the prevailing economic conditions? How are these likely to impact on the customers ability to pay promptly? Whilst the materiality of the amount will dictate the degree of analysis involved. or for limited companies. providing that the companies approached are a representative sample of all the clients suppliers. as they are usually based on direct credit experience and contain no knowledge of the underlying financial strength of the customer. • Personal contact. This can be extremely useful. Such references can be misleading. the supplier may ask to see evidence of the ability to pay on time. This demands access to internal future budget data. Through visiting the premises and interviewing senior management. Obtaining information from a range of sources such as financial accounts. court judgments. • Financial accounts. particularly when the customer is encountering financial difficulties. the law and practice of banking secrecy determines the way in which banks respond to credit enquiries. Companies already trading with the customer may be willing to provide a reference for the customer. payment records with other 47 . These may be provided by the customers bank to indicate their financial standing. bank and newspaper reports. While subject to certain limitations past accounts can be useful in vetting customers. from Companies House. The most recent accounts of the customer can be obtained either direct from the business. Where the credit risk appears high or where substantial levels of credit are required. • Trade references. the major sources of information available to companies in assessing customers credit worthiness are: • Bank references.what is the financial health of the customer? Is it a liquid and profitable concern. • Profitability: the size of the profit margin on the goods sold will influence the generosity of credit facilities offered by the supplier. credit advanced will be on a much stricter basis than where margins are wider. where commission is involved!). For the customer. incorporating the likelihood of payment on time and the possibility of bad debts. credit managers should be aware that many failing companies preserve solid payment records with key suppliers in order to maintain supplies. They will provide a credit rating for different companies.suppliers. the credit manager must take a more dispassionate view. but they only do so at the expense of other creditors. one may add. • Credit terms granted to customers Although sales representatives work under the premise that all sales are good (particularly. credit agencies can prove a mine of information. For example. fragmented customer base. it must have sufficient resources to be able to offer credit and ensure that the level of credit granted represents an efficient use of funds. many companies go into liquidation with flawless payment records with key suppliers. Sales staffs who have their ears to the ground can also prove an invaluable source of information. • Financial resources of the respective businesses: from the supplier's perspective. a supplier with a strong market share may be able to impose strict credit terms on a weak. trade credit may represent 48 . Market position: the relative market strengths of the customer and supplier can be influential. However. Where a customer does survive the credit checking process. They must balance the sales representative's desire to extend generous credit terms. the supplier will have access to their past payment record. The use of such agencies has grown dramatically in recent years. in return for a fee. please customers and boost sales. Indeed. • Past experience. If margins are tight. • General sources of information. with a cost/benefit analysis of the impact of such sales. For existing customers. the specific credit terms offered to them will depend upon a range of factors. Credit managers should scout trade journals. These include: • • Order size and frequency: companies placing large and/or frequent orders will be in a better position to negotiate terms than firms ordering on a one-off basis. business magazines and the columns of the business press to keep abreast of the key factors influencing customers' businesses and their sector generally. the risk of alienating otherwise good customers) and the tangible benefits resulting from good credit management • Problems in collecting debts : Despite the best efforts of companies to research the companies to whom they extend credit. Suppliers will have to get a feel for the sensitivity of demand to changes in the credit terms offered to customers. trade credit may be used as a marketing device (i.an important source of finance. A good accounting system should invoice customers promptly. particularly where finance is constrained. the customer may switch to an alternative. Ultimately. Whilst it may appear nonsensical to spend time chasing a small debt. • Business objectives: where growth in market share is an objective. its credit policy will generally be guided by the terms offered by its competitors. • Industry norms: unless a company can differentiate itself in some manner (e. These 49 .e. Materiality is important. The main elements of a trade policy are: • Terms of trade: the supplier must address the following questions: which customers should receive credit? How much credit should be advanced to particular customers and what length of credit period should be allowed? • Cash discounts: suppliers must ponder on whether to provide incentives to encourage customers to pay promptly.. with appropriate procedures (such as withdrawing future credit and charging interest on overdue amounts). If credit is not made available.. A clear policy must be devised for overdue accounts. more understanding supplier. and generate management reports such as an aged analysis of debtors. arise. and frequently do. a balance must be struck between the cost of implementing a strict collection policy (i. follow up disputed invoices speedily. • Collection policy: an efficient system of debt collection is essential. problems can. unrivalled after sales service).g.. a company may send a powerful signal to its customers that it is serious about the application of its credit and collection policies. and followed up consistently. issue statements and reminders at appropriate intervals. A number of companies have abandoned the expensive practice of offering discounts as customers frequently accepted discounts without paying in the stipulated period.e. by doing so. liberalized to boost sales volumes). • • Factoring an evaluation Key elements: Factoring involves raising funds against the security of a company's trade debts. or. With 80% of the value of debtors paid up front (usually electronically into the clients bank account.5 . on the other hand. For the finance made available.3% of annual turnover. the remaining 20% is paid over when either the debtors pay the factor (in the case of recourse factoring). similar to that of a bank overdraft. Provision of finance. growth can be financed through sales. Space precludes a detailed examination of debtor finance. so that cash is received earlier than if the company waited for its credit customers to pay. management can concentrate on 50 . Factors usually charge for their services in two ways: administration fees and finance charges. whereby the factor immediately advances about 80% of the value of debts being collected. rather than having to resort to external funds. factors levy a separate charge. the factor will not ask for his money back from the client. is where the business takes the bad debt risk. the firm can maintain optimal stock levels. Service fees typically range from 0. finance provided is linked to sales. so this next section concentrates solely on the frequently examined method of factoring. There are two types of factoring service: • Non-recourse factoring is where the factoring company purchases the debts without recourse to the client. • Recourse factoring . and the troublesome issue of bad debts. Advantages It provides faster and more predictable cash flows. by the next working day). when the debt becomes due (nonrecourse factoring). late payment. in contrast to overdraft limits. involving invoicing and the collecting of debts. which guarantees against bad debts. Three basic services are offered. Credit insurance. frequently through subsidiaries of major clearing banks: Sales ledger accounting. This means that if the clients debtors do not pay what they owe. which tend to be determined by historical balance sheets. the business can pay its suppliers promptly (perhaps benefiting from discounts) and because they have sufficient cash to pay for stocks. deduction of discounts where payment is late.include disputes over invoices. Moreover. having the factor in the middle can lead to a confused three-way communication system.is it tightly managed or spread among a number of (junior) people? Are purchase quantities geared to demand forecasts? Do you use order quantities. where disputes over an invoice arise. which take account of stock holding and purchasing costs? Do you know the cost to the company of carrying stock? Do you have alternative sources of supply? If not. Traditionally the involvement of a factor was perceived in a negative light (indicating that a company was in financial difficulties). the administration fee can be quite high depending on the number of debtors. CREDITORS MANAGEMENT MANAGING PAYABLES (CREDITORS) Creditors are a vital part of effective cash management and should be managed carefully to enhance the cash position. Disadvantages The interest charge usually costs more than other forms of short-term debt. get quotes from major suppliers and 51 .managing. though attitudes are rapidly changing. the cost of running sales ledger department is saved and the company benefits from the expertise (and economies of scale) of the factor in credit control . which hinders the debt collection process. By paying the factor directly. customers will lose some contact with the supplier. rather than chasing debts. Purchasing initiates cash outflows and an over-zealous purchasing function can create liquidity problems. Consider the following: Who authorizes purchasing in your company . the volume of business and the complexity of the accounts. average stock-holding periods will be influenced by the nature of the business. put another way.no later.slow payment by you may create ill feeling and can signal that your company is inefficient (or in trouble!). INVENTORY MANAGEMENT Managing inventory is a juggling act. arrive at the factory early that morning. a fresh vegetable shop might turn over its entire stock every few days while a motor factor would be much slower as it may carry a wide range of rarely-used spare parts in case somebody needs them. This helps to minimize manufacturing costs as JIT stocks take up little space. JIT is a good model to strive for as it embraces all the principles of prudent stock management. delays for customers etc. Excessive stocks can place a heavy burden on the cash resources of a business. they are able to conserve substantial cash. and reduce dependence on a single supplier. The key issue for a business is to identify the fast and slow stock movers with the objectives of establishing optimum stock levels for each category and. thereby. It is important to look after your creditors . no earlier . Insufficient stocks can result in lost sales. Obviously. The key is to know how quickly your overall stock is moving or. Because JIT manufacturers hold stock for a very short time. many large manufacturers operate on a Just-In-Time (JIT) basis whereby all the components to be assembled on a particular today. minimize the cash tied up in stocks. Factors to be considered when determining optimum stock levels include: 52 . Management of your creditors and suppliers is just as important as the management of your debtors. how long each item of stock sit on shelves before being sold. For example. Nowadays. credit terms. How many of your suppliers have a returns policy? Are you in a position to pass on cost increases quickly through price increases to your customers? If a supplier of goods or services lets you down can you charge back the cost of the delay? Can you arrange (with confidence!) to have delivery of supplies staggered or on a just-intime basis? There is an old adage in business that if you can buy well then you can sell well.shop around for the best discounts. minimize stock holding and virtually eliminate the risks of obsolete or damaged stock. Review your security procedures to ensure that no stock "is going out the back door!" Higher than necessary stock levels tie up cash and cost more in insurance. For better stock control.What are the projected sales of each product? How widely available are raw materials. RESEARCH METHODOLOGY Any research requires two types of information. Consider having part of your product outsourced to another manufacturer rather than make it yourself. Sell off outdated or slow moving merchandise . components etc. Know the stock turn for all major items of inventory. TYPES OF DATA PRIMARY SOURCES DATA SECONDARY SOURCES DATA 53 . try the following: Review the effectiveness of existing purchasing and inventory systems.it gets more difficult to sell the longer you keep it.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best sellers? Remember that stock sitting on shelves for long periods of time ties up money. accommodation costs and interest charges. Apply tight controls to the significant few items and simplify controls for the trivial many. which is not working for you. Reports in the company.g. Secondary Data: • • • • The data is collected through the secondary sources like: Annual Reports of the company. Office manuals of the department. Policy documents of various departments. Discussion with the head of the department. Magazines.Primary Data: • • • • The information is collected through the primary sources like: Talking with the employees of the department. in manufacturing processes. 54 . Getting information by observations e. 22 52.36 2009-2010 2010-2011 2011-2012 55 .5. Particulars (A)Current Assets Inventories Sundry Debtors Cash and bank balance Loan and advances 275.71 83.84 38.77 31.01 65.96 281.94 102.69 25.14 61.25 258.1 Statement of working capital of Sparkon Engineers And Fabrication LTd.1 SCHEDULE OF CHANGES IN WORKING CAPITAL Table No 5.71 185. (For the year 2009 to 2012 ) (Rs In lacks). 37 497.87 337. 2011-2012 it was decreased to 160.54 160.32 157.14 36.2 Title – Scheduled of changes in working capital 2009-2010 and 2010-2011 (Rs In lacks) Particulars (A)Current Assets Inventories Sundry Debtors Cash and bank 275.01 357.33 285.35 170.Total (A) 450.01 65.1 indicate that the amount working capital for the year 20092010 stood at 164.67 (B) Current liabilities Creditors Other current liabilities and provisions Total (B) Working capital 124.15 Source – Annual Report of Sparkon Engineers & fabrication Ltd.94 102.87 lacks in the year 2009-2010 and 2010 -2011 .157.52 157.50 164.55 514.45 56 2009-2010 2010-2011 Increase Decrease 5.19 200. Interpretation : The above table no 4. TABLE NO 5.15 lacks respectively this was mainly due to decreased In Current Assets In proportion to the decrease in current liabilities .51 30.69 281.1.22 52.71 83.15 161.07 .22 167. 4.01 4.15 161.balance Loan and advances Total (A) 25.50 164.01 .87 337. TABLE NO.87 and in 2010-2011 It was 160.37 61.07 5.29 (B) Current liabilities Creditors Other current liabilities and provisions Total (B) Working capital Decrease working capital Total 164.87 124.55 35.25 497.35 170.Sangola Interpretation : The above table 5.54 160.22 167.2 shows the working capital was decreasing trend in the year 2009 -2010 It was 164.97 285.96 450.32 46.86 Source – Annual Report of Sparkon Engineers & fabrication Ltd .3 Title schedule of changes in working capital 2010-2011 and 2011-2012(Rs in lacks) 57 . 52 157.33 13.77 31.86 160.2012 it was 157.67 132.32 157.01 357.88 22.94 102.Particulars (A)Current Assets Inventories Sundry Debtors Cash and bank balance Loan and advances Total (A) 2010 -2011 2011-2012 Increase Decrease 281.03 33.22 52.89 (B) Current liabilities Creditors Other current liabilities and provisions Total (B) Working capital Decrease working capital Total 160.54 160.15 2.01 and In 2011.37 29.01 Source – Annual Report of Sparkon Engineers & fabrication Ltd.22 167.55 258.72 185.15 due to the decrease in creditors and increase In provisions but other current assets were decreased 58 .50 63.25 497.Sangola Interpretation :-The above table 5.19 200.01 337.14 61.82 38.3 shows the working capital was in decreasing trend year 2010 -2011 it was 160.01 170.36 514. Ratio analysis gives an insight onto the operational & financial aspects of the firm . ratio of the firm for the one year is compared with those of another . These are explained as by form.Key working capital Ratios :RATIO ANALYSIS :In this chapter analysis of working capital has been made with some relevant ratio of Working capital . Ratio analysis is a process of determining & interpreting numerical relationship based o financial statement . The major ratios for calculating working capital are 1 Current Ratio 1 Acid test ratio 3 Inventory turnover Ratio 1)Current Ratio Current Ratio = Current Assets / Current liabilities 59 . Major ratio of “Sparkon Engineers & fabrication Ltd Sangola is compared for three years. The standard current ratio is 2:1 The above table 4.58 2010-2011 497.54 1.52 1.37 285.44 Current Ratio Interpretation : Current ratio indicates rupees of current asset available for each rupees of current liabilities .55 337.50 1.6 indicates current ratio of firm over of the last five year current ratio is below the standard of the organization 60 .47 2011-2012 514.Year Current Assets Current liabilities Ratio 2009-2010 450.67 357. 50 0.95 357.33 337.66 285.72 61 .64 2011-2012 255.61 2010-2011 216.54 0.2) Acid test Ratio Acid Test Ratio=Quick Asset/Quick Liabilities Table No. (Figures In Lacks) Year Current Assets Current liabilities Ratio 2009-2010 174.52 0. Gross Profit. Stock Turnover Ratio=Cost goods sold/Average inventory. In the year 2009 -10 it was 0. Stock Turnover Ratio Stock Turnover Ratio indicates the effectiveness &efficiency of the inventory management. The standard liquidity ratio is 1 :1 The 4.64:1 in the 2010-11 it was 0.Interpretation Acid test ratio indicates rupees of quick assets available for each rupees of current assets.72 :1 in the 2011-2012 And it indicates organizational difficulty in short term solvency.61:1 it was 0.io shows how speedily The stock is turned in to account receivable or cash through sales. The lower stock turnover ratio the more efficient the stock is said to be managed &vice versa. Average Inventory = Opening Stock + Closing Stock / 2 62 . • • Cost of goods sold = Sales .7 indicates liquidity ratio of the organization over the last five years was below to the standard liquidity ratio. 77 1.56 2.44 269.05 2010-2011 507.83 267.90 2011-2012 420.55 Interpretation: 63 .98 271.Table No : Year Current Assets Current liabilities Inventory Ratio (Figar shows in Lacks) 2009-2010 556.13 1. 7) Working capital turnover ratio is continuously increasing that shows increasing needs of working capital. KPCL s ratios satisfactory. 5) Inventory turnover ratio is improving from 2001-02 to 2005-06. 2011-2012 This shows the management of stock finished goods is very effective.increase in ratio is beneficial for the company because as ratio increases the number of days of collection for debtors decreases. they were increasing year by year. 2) Standard current ratio is 2:1 and for industry it is 1.The above indicates that the stock turnover ratio for the year 2009-2010 was 2. so the sales has decreased. FINDINGS 1) Defense sales order of Rs. which means inventory is used in better way so it is good for the company. so more funds were blocked in debtors. 64 .33:1. 4) Debtors of the company were high. 6) Debtors turnover ratio is improving from 2001-02 to 2005. But now recovery is becoming faster.05% which indicates achievement of maximum sales turnover with minimum expenses compared to 20102011. 3) Acid test ratio is more than one but it does not mean that company has excessive liquidity. 9 cr was not there for the first quarter of 2005-06.06. 65 . 2) Net operating cycle is increasing that means there is a need to make improvements in receivables/debtors management. 9) Production capacity is not utilized to the full extent SUGGESTIONS 1) It can be said that overall financial position of the company is normal but it is required to be improved from the point of view of profitability. 3) Company should stretch the credit period given by the suppliers.8) Interest coverage ratio is increasing from last four years. 4) Company should not rely on Long-term debts. 5) Company should try to increase Volume based sales so as to stand in the competition. Ensuring that sufficient liquid resources are available to the company is a pre-requisite for corporate survival. which demands a far less conservative outlook. Conclusion Working capital management is of critical importance to all companies. 66 . Companies must strike a balance between minimizing the risk of insolvency (by having sufficient working capital) with the need to maximize the return on assets. BIBLIOGRAPHY 1) Financial Management Prassanna Chandra. 5) Annual reports of Kirloskar Pneumatic Co. 2) Website of Kirloskar. 4) Financial Management Satish Inamdar. Ltd 67 . 3) Google.