Description
The Project threw light on the importance and need of Working Capital highlighting the challenges that industry is facing or might face in future. The study tried to evaluate the importance of strategies and what motivates its relevance to a Company in any challenging environment. This project covered the importance of Working Capital for a Company in the challenging environment, and how with the right decisions made at the right time can lead the company into prosperity.
ON WORKING CAPITAL MANAGEMENT
OMEGA APPLIANCES PVT. LTD
Submitted in partial fulfillment of the requirement for the degree of Masters of Business Administration (MBA) of Kumaun University, Nainital
Submitted by:KAMLESH MEHRA
M.B.A. Sem-3rd
DEPARTMENT OF MANAGEMENT STUDIES KUMAUN UNIVERSITY CAMPUS BHIMTAL, NAINITAL
ACKNOWLEDGEMENT
A work is never a work of individual. I owe a sense of gratitude to the intelligence and co-operation of those people who had been so easy to let me understand what I needed from time to time for completion of this executive project.
I am greatly indebted to my guide
Prof. L.K.Singh, faculty guide for finance (Summer internship), DEPARTMENT OF MANAGEMENT STUDIES & Mr. N.Pandey, Manager, Finance department, SHRI DURGA INDUSTRIES, NOIDA
For their constant guidance, advice and help which enabled me to finish this project report properly in time. Last but not the least, I would like to forward my gratitude to my friends & other faculty members who always endured me and stood with me and without whom I could not have completed the project.
KAMLESH MEHRA
DECLARATION
I hereby declare that I have completed my summer project report on “WORKING CAPITAL MANAGEMENT at OMEGA APPLIANCES”. All the information, facts and figures presented in this project. This report is being submitted in partial fulfillment of Masters of Business Administration degree course of KUMAUN UNIVERSITY.
The information and findings in this report are based on the data collected by me. It is my original work. I have neither copied from any report meant for any degree/diploma course nor have submitted for award of any degree/diploma or similar program elsewhere.
Name of student: Kamlesh Mehra Roll No.:101594
PREFACE
A professional course like two year Management program demand both conceptual and practical theory of knowledge. Hence there is a provision of project. By this the students learn through his or her own experience, real situation of corporate world, and its protocols and to put his/her theoretical knowledge into practice. This experience is very valuable for the student and plays a leading as well as vital role in the professional life of the management student.
The report on Omega Appliances was a complete experience in itself, which has provided me with the understanding, which has become an inseparable part of my knowledge of management being learned in Management Program. An opening experience to the concepts of FINANCE department helped me in understanding the concepts that are applied for managing financial resources in the organization.
Implementing & learning the concepts of Finance in a work place provides an opportunity to learn practically. I got a chance to apply the theory & acquaint myself with the functioning of financial methodology. Real learning places its worth only when it gives sweet fruits in future. Project report is one way to learn at work. I enjoyed the interesting experience & every part of it.
CONTENTS
CHAPTER I: ? Company Profile CHAPTER II: ? Research & Methodology ? Need for study ? Objectives ? Methodology ? Limitation CHAPTER III: ? Company profile ? Introduction ? SWOT Analysis ? Working Capital Management ? Debtors Management ? Inventory Management ? Cash Management CHAPTER IV: ? Data Analysis CHAPTER V: ? Findings, Summaries & Conclusion APPENDIX ? Balance Sheet
Executive Summary
Company being established as omega industries in 2004, made an entity with manufacture of home appliance including electric irons, geysers, fans etc. At omega up to date manufacturing facilities, including CNC machines, Stringent quality control procedure and systems, research & development,foundry,heat treatment facilities, screw motor machines, gear grinding machines, metallurgical laboratories, tool room and integrated computer system, have all been set up with sole idea of achieving the highest standards of quality & performance. My project is the study of Working Capital Management. The study was conducted at the head office of Omega Appliances, Noida.The project was of 45 days. During the project interviewed the executive & 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: Investment in Current Assets represents a substantial portion of total investment. Investment in Current Asset & the level of Current liabilities have to be geared quickly to change in Sales. Some of the points to be studied under this topic are: ? How much cash should a firm hold? ? What should be the firm?s credit policy? ? How & When to pay the creditors of the firm? ? How much to invest in inventories? By studying about the company?s different areas like: ? Acid test ratio is more than 1 but it does not mean that company has excessive liquidity. ? Standard current ratio is 2:1 and for industry it is 1.33:1. ? Debtors of the company were high, they were increasing year by year, and so many funds were blocked in debtors. But now the recovery is becoming faster. ? Working Capital turnover ratio is increasing that shows increasing needs of working capital.
Research methodology Primary data The information is collected through the primary sources like: ? Talking with the employees of the department ? Getting information by observation e.g. in manufacturing process ? Discussion with the head of the department Secondary data ? Annual reports of the company ? Office manual of the department ? Magazines, reports in the company. Policy documents of various department.
OBJECTIVE
? ? ? ?
? To
To identify the financial strengths & weakness of the company. Through the net profit ratio & other profitability ratio, understand the profitability of the Evaluating company?s performance relating to financial statement analysis. To know the liquidity position of the company with the help of current ratio. find out the utility of financial ratio in credit analysis & determining the financial capacity of the To know firm?s operating efficiency. To understand effect of credit policy on working capital. understand how working capital contributes to working capital.
company.
company. ? ?
? To
Company profile
Manufacturing Unit-I
:
Shri Durga Industries (Regd.)
D-38, Sector-63 Noida-201301 (UP)
Unit-II :
O.E. & G. (P) Ltd.
Khasara No. 283, Vill-Maganpura Nalagarh, Baddi Distt. Solan (H.P)
Brand Name
:
“OMEGA”
Marketing Unit :
Omega Appliances Pvt. Ltd
Central Ware House
:
454 Nathupura Road Opp-Shri Ram Dharam kanta Burari, Delhi - 110084
BRIEF PROFILE Name of Firm Address of the Manufacturing Unit-1 : Shri Durga Industries (REGD)
:
D-38, Sector-63, Noida-201301(UP) Ph: -0120-2400146, 4548588 : O.E. & G. (P) Ltd. Khasra no.283,MaganPura,Nalagarh, Baddi Dist. Solan (HP) Mob. 09318616116 [email protected] www.omegaappliances.com OMEGA Omega Appliances Pvt. Ltd : : : ISI Marked ISO: 9001-2008 certified By KVQA NORSK
Unit-II
Email Website Brand Marketed By
: : : :
Products International Quality certification Accredited By
Product Range : Geysers (LPG / Electric) All types of Fans (Ceiling, Table, Pedestal, all purpose, cabin, wall etc.) Exhaust Fan, Fresh Air Fan,Heavy Duty Fan (Pedestal/ Mounted Type) for industrial/ commercial use Electric Irons, Immersion Heaters,Heaters, Heat convectors, heating Elements, Submersible Pumps for coolers, FHP Motors Specifications compliance : As per ISI Nos. 996: 1979, 4159:1983, 368:92, 302-2-201:92, 4283: 1981, 374: 1979, 2312: 1967, 366:91, 302-2-3:92, 2082:1993, 8978:199 : : FAN – 48” ES 50 MAGMA Electric Geyser (Metal Body) 6 Ltr. To 25 Ltr. Five Star HOT BOND Electric Geyser ABS Body 6 & 25 – Four Star Partnership Approx. 500 Nos.
STAR RATING (Awarded from BEE)
: Status of Company Manpower : :
BRIEF INTRODUCTION
OMEGA has established its name in Electrical Appliances by providing Quality, Reliability, performance and durability in its products & services. Today, OMEGA brand is one of the leading brands in India. Our products are at the forefront of innovation in Electrical Appliances field which keeps pace with International technology. OMEGA?s rich history of success has been achieved through dedication, teamwork, vision and sincere sense of pride in qualitative result- oriented performance. We also import some hi-technology innovative products from various countries. Our units at NOIDA & BADDI (HP) are equipped with ultra modern state-of-art equipments with latest technology to manufacture a wide range of Electrical Appliances to suite and to meet the demand of the customer accordingly. In keeping pace with the growing demand for OMEGA products. We are setting up another unit at Noida for electrical appliances to fulfill our increasing demand in the market. International Quality System With this thrust, our NOIDA unit has been awarded with ISO: 9001-200 certification from the prestigious International Quality System Organization KVQA accredited by NORSK for its high excellence in quality. Quality standard Omega Products are ISI Marked granted by BUREAU OF INDIAN STANDARD (BIS) New Delhi & Star Rating from BEE New Delhi. Manufacturing, Testing and R&D Facilities All the manufacturing and testing facilities installed in-house is managed by highly Experienced and professionally Qualified Technical Personnel who ensure strict quality check at each level of production. Our R & D facility is fully equipped not only to maintain product quality but also induct innovative improvement in the product, its ease of use, reliability and durability, on a continuous basis capable of setting new standards in the market. MAJOR CLIENTS We have executed several orders in the public sector such as DDA, NDMC, MCD, DJB, northern Railways, South Central Railways, Canara Bank, Air Force, Delhi Cantt., Chandigarh Administration, BBMB, Eledeco infrastructure ltd, National Zoological, Chhattisgarh Industrial Development Corp etc. to name a few. Omega brand products are marketed throughout India through a strong distributors? / dealers? network. Our products are also being exported to several countries. We are also supplying some summer / winter products to several leading Brands of the country.
OMEGA’S STRENGTH ? Star Rated Fans ? Star Rated Electric Water Heaters ? 14 items are ISI marked ? ISO-9001-2008 Certified company ? Quality, Reliability, Durable with Proven performance ? Fully capable to manufacture ELECTRICAL/ GAS APPLIANCES ? Over 3 decades of rich experience in Electrical Appliances ? Superior & Best quality raw materials used ? Consistent improvement and development in products ? Major components are designed, developed and manufactured in-house.
RANGE OF PRODUCTS ? Geysers LPG. ? Geysers Electrical 5 star rating & 4 star rating. ? All types of Fans (Ceiling, Table, Pedestal all purpose, cabin, wall etc.) ? Exhaust Fans, ? Fresh Air Fans ? Heavy Duty Fan (Pedestal/ Mounted Type) for industrial/ commercial use ? Electric Irons, ? Immersion Heaters, Heaters, Heat convectors ? Heating Elements ? Submersible Pumps for Cooler. ? FHP Motors for coolers. AFTER SALE SERVICE We have full-fledged experienced technical team to provide prompt “After Sales Service”.
VISION
A WORLD-CLASS, INNOVATIVE, COMPETITIVE AND PROFITABLE ENGINEERING ENTERPRISE PROVIDING TOTAL BUSINESS SOLUTIONS.
MISSION
TO BE THE LEADING INDIAN ENGINEERING ENTERPRISE PROVIDING QUALITY PRODUCTS SYSTEM AND SERVICES IN THE FIELDS OF ENERGY, TRANSPORTATION, INDUSTRY, INFRASTRUCTURE AND OTHER POTENTIAL AREAS.
VALUES
? MEETING COMMITMENTS MADE TO EXTERNAL AND INTERNAL CUSTOMERS. ? FOSTER LEARNING, CREATIVITY AND SPEED OF RESPONSE. ? RESPECT FOR DIGNITY AND POTENTAIL OF INDIVIDUALS. ? LOYALTY AND PRIDE IN THE COMPANY. ? TEAM PLAYING ? ZEAL TO EXCEL ? INTEGRITY AND FAIRNESS IN ALL MATTERS.
-------------- SWOT ANALYSIS ------------------
STRENGTH (S): ? Low cost producer of quality equipment due to cheap labor and fully depreciated plants. ? Flexible manufacturing set up. ? Entry barrier due to high replacement cost of its manufacturing facilities.
? Comprehensive turnkey experience from product design to commissioning.
WEAKNESSES (W): -
? High working capital requirement due to its exposure to cash starved SEBs (State electricity boards) and High WIP. ? Inability to provide project financing.
OPPORTUNITIES (O): ? High-expected growth in power sectors ? High growth forecast in India?s index of industrial production would increase demand for industrial equipment such as motors and compressors.
THREATS (T): ? Technical suppliers are becoming competitors with the opening up of the Indian economy. ? Fall in global power equipment prices can affect profitability.
Working Capital is commonly defined as the difference between Current Assets and Current Liabilities. Efficient Working Capital Management requires that firms should operate with some amount of working capital, the exact amount varying from firm to firm and depending, among other things on the nature of industry. Capital required for a business can be classified in two main categories viz. 1) Fixed capital, and 2) Working capital. Every business needs funds for two purposes-for establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities. Through purchase of fixed assets such as plants and machinery, land, building, furniture, etc. Investments in these assets represent that part of firm?s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses, etc. These funds are known working Capital. In simple words, working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.
CLASSIFICATION OF WORKING CAPITAL
Working Capital may be classified on two basis: a) On the basis of Concept: On the basis of concept, working capital can be classified as, ? Gross Working Capital ? Net Working Capital b) On the basis of Time: On the basis of time, working capital can be classified as, ? Permanent or Fixed Working Capital ? Temporary or Variable Working Capital
Gross Working Capital: The Gross Working Capital is the Capital invested in the total current assets of the enterprises. Current assets are those assets, which can be converted into cash within a short period, normally an accounting year.
Gross Working Capital = Total Current Assets
Net Working Capital: The term Net Working Capital refers to the excess of current assets over current liabilities, or say,
Net Working Capital = Current Assets – Current Liabilities
Net Working Capital can be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intend to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets of the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital for the following reasons: ? It enables the enterprise to provide correct amount of working capital at correct time. ? Every management is more interested in total current assets with which it has to operate then the sources from where it is made available. ? It takes into consideration of the fact every increase in the funds of the enterprise would increase its working capital. ? The concept is also useful in determining the rate of return on investments in working capital. ? The net working capital concept, however, is also important for the following reasons:? It is a qualitative concept, which indicates the firm?s ability to meet its operating expenses the short-term liabilities.
? It indicates the margin of protection available to short term creditors. ? It is an indicator of financial soundness of enterprise. ? It suggests the need of financing a part of working capital requirement out of the permanent sources of funds
Permanent or Fixed Working Capital: Permanent or fixed capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of current assets is called permanent or fixed working capital as this part of working capital is permanently blocked in current assets. As the business, grow the requirement of working capital also increases due to increase in current assets.
Temporary or Variable Working Capital: Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called the seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaign for conducting research etc. Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in business
Components of Working Capital
There are two of the major components of working capital:
1. Current Assets
Current Assets are those assets which can be converted into cash in the normal course of business
within a short period of say a maximum of one year. They are also called floating or circulating
assets because they cannot be put to constant use. They are meant for resale or produced for the purpose of sale i.e., converting them into cash. In brief, the list of Current Asset comprises of: ? ? ? ? ?
Cash in hand and bank balances Bills receivables Sundry debtors Short term loans and advances Inventories of stock as:
? Raw material ? Work in progress ? Stores ? Finished goods ? ? ? Temporary investment of surplus Prepaid funds Accrued income
2. Current Liabilities
Current Liabilities are those liabilities which are intended to be paid in ordinary course of business within a short period of one accounting year out of the current assets or the income of the business. Such as: ? ? ? ? ? ? ?
Bills payable Sundry creditors or account payables Accrued or outstanding expense Short term loan, advances and deposits Dividend payable Bank overdraft Provision for taxation
Sources of finance
Long term sources (Regular working capital)
Other Sources
Short term sources (Seasonal working capital)
Internal sources Retained earning (profit & loss A/c)
External sources
Internal sources
External sources
-Issue of equity shares -Issue of preference shares - Issue of debentures -Loans from FI?s -Securities from employees -Securities from customers
-Accrual accounts -Depreciation funds
-
fixed assets Security from employees
-
-Zero coupon bonds -Factoring
NEEDS AND OBJECTIVES FOR WORKING CAPITAL
Every business needs some amount of working capital. The needs for working capital, arises due to time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production, production and sales, and realization of cash. Thus, working capital is needed for the following purposes: ? For the purchase of raw material, component and spares. ? To pay wages and salaries. ? To incur day- to- day expenses and overhead costs such as fuel, power and office expenses etc. ? To meet the selling costs such as packing, advertising etc. ? To provide credit facilities to the customers. ? To maintain the inventories of raw material, work in progress, store, spares, and finished stock .For studying the need of working capital in a business, one has to study the business under varying circumstances such as new concern, as a growing and one, which has attained maturity. A new concern requires a lot of funds to meets its initial requirement such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and the ambition of its promoters. Greater the size of the business unit, generally will be the requirement of the working capital. The requirement of the working capital goes on increasing with the growth and expansion of the business until its gains maturity. At maturity, the amount of working capital required is called normal working capital.
Importance of working capital
1. Time devoted to working capital management:-
The largest portion of financial manager?s time is devoted to day to day internal operation the firm. This may be appropriately sum up under the heading "WORKING CAPITAL MANAGEMENT".
2. Investment in current Assets:Current Assets represent more than half of the total assets of a business firm. Because they represent largest investment and because this investment tends to relatively volatile, current assets are worthy for the financial manager's careful attention.
3. Importance for small firm:Current Assets are similarly important for the financial manager's of small firm. Further small firm are relatively limited access to the long term markets, it must necessarily rely on the trade credit and short term bank loan, both of net effect on net working capital by increased current liabilities.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT
1. NATURE OF BUSINESS:-
The requirement of working capital is very limited in public utility undertaking such as Electricity, Water Supply and Railways because they offer cash sales only and supply services not products and no funds are tied up in inventories and receivables. On the other hand, the trading and financial firm requires less investment in fixed assets but have to invest large amounts in current assets. The manufacturing undertaking requires sizable amount of working capital along with fixed investments.
2. PRODUCTION POLICY:The determination of working capital needs depends upon the production policy of the business. The demand for certain products is seasonal i.e.; such products are purchased in certain months of a year. For such industries, two types of production policy can be followed. Firstly they can produce the goods in the months of demand or secondly, they produce for the whole year. If the second alternative were followed, it would mean that until the time of demand finishes, product would have to be kept in stock. It would require additional working capital.
3. LENGTH OF PRODUCTION CYCLE:-
The longer the manufacturing time, the raw material and other supplies have to be carried for a longer time in the process with progressive increment of labor and service costs before the final product is obtained. Therefore, working capital is directly proportional to the length of the manufacturing process.
4. RATE OF STOCK TURNOVER:There is an inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a higher rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover.
5. CREDIT POLICY:-
Credit policy affects the working capital requirements in two ways: (a) (b) Terms of credit allowed by customer to the firm, Terms of credit available to the firm. A concern that purchases its requirements on credit and sells its product/services on cash requires lesser amount of working capital and vice-versa.
6. WORKING CAPITAL CYCLE:The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital
Each component of working capital (namely inventory, receivables and payables) has two dimensions..TIME..and...MONEY. When it comes to managing working capital-TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collects dues from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you?ll have additional fee available to support additional support additional sales growth or investment.
Similarly if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales. It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment- loans, equity, leasing etc.Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a ploguehole, they remove liquidity from business.
7. RATE OF GROWTH AND EXPANSION OF BUSINESS: The larger size businesses require more permanent and variable working capital in comparison to small business. If a company is growing, its working capital requirements will also go on increasing. Thus, the growing concerns require more working capital as compared to the stable industries.
8. SEASONAL VARIATION: Generally, during the busy season, a firm requires larger working capital than in the slack season.
9. BUSINESS FLUCTUATION: In period of boom, when the business is prosperous, there is a need for larger amount of working capital due to rise in sales, rise in prices, optimistic expansion of business etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtors and the firm may have a large amount of working capital idle.
10. EARNING CAPACITY AND DIVIND POLICY:-
Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also effects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profit needs more working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.
11. PRICE LEVEL CHANGES: Price level changes also affect working capital needs. If the prices of different goods increase, to maintain same level of production, more working capital is needed.
12. AVAILABILITY OF RAW MATERIAL: Availability of raw material on the continues basis affects the requirement of working capital. There are certain types of raw materials, which are not available regularly. In such a situation firm requires greater working capital to meet the requirements of production. Some raw materials are available in particular season only for example wool, cotton, oil seeds, etc. They have to keep greater working capital.
13. MAGNITUDE OF PROFIT:Magnitude of profit is different for different businesses. Nature of product, control on the market and ability of managers etc. determine the quantum of profit. If the profit margin is high, it will help to arrange funds internally, which will also increase the working capital.
14.
OTHER FACTOR: -
a) Operating efficiency b) Management ability c) Irregularities of supply d) Import policy e) Asset structure f) Importance of labor
MANAGEMENT OF WORKING CAPITAL
Management of working capital means management of all aspects of current assets and current liabilities. Basically, Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that exist between them. Financial management should determine the quantum and structure of current assets. It should also see that current assets are financed from the proper sources. Management should also see that current liabilities are paid in time, while managing the working capital.
The main objective of working capital management is to manage current assets and current liabilities in a manner so that working capital can be kept in a satisfactory level. It is also taken in to account that the working capital should be neither excessive nor inadequate. The amount of current assets should be adequate to pay the current liabilities in time and adequate security margin can be maintained. Accordingly, proper balance among the different constituents of current assets is maintained so that no current has more than require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the business significantly. Management should, therefore, maintain proper balance among these
factors while managing working capital. If the quantum of working capital is more, it will increase liquidity, but decrease profitability and risk. If working capital relatively declines, it will decrease liquidity but cause an increase in profitability and risk. If business wants to earn more profit, it will have to bear higher risk. Risk means inability of the firm to pay current liabilities in time.
Working Capital Management is three dimensional in nature: -
1) It concerned with the formulation of policies with regard to profitability, liquidity and risk. 2) It is concerned with the decisions about the composition and level of current assets. 3) It is concerned with the decisions about the composition and level of current liabilities.
Policies regarding to Profitability,
Liquidity and Risk.
Composition of level of Current assets
Compos
composition
of level of current liabilities
Dimensions of Working Capital.
EXISTING SYSTEM OF WORKING CAPITAL
To maintain the optimum level of working capital in such a big organization is really a challenging task. The three basic components that determine the level of working capital in any organization are: ? Cash ? Debtors B/R ? Inventory. On the basis of our research in the company, these basic components are managed in the organisation, in the under mentioned manner.
TABLE OF WORKING CAPITAL (Rs. in lacs)
PARTICULARS 2005-06 ACTUAL Current Assets Debtors Inventory Cash Loan and Advances Total 514 191 17 49 771 510 250 23 65 848 471 218 15 57 761 518 230 10 55 813 481 220 9 74 784 554 447 13 57 1071 2006-07 ACTUAL 2007-08 ACTUAL YEARS 2008-09 ACTUAL
(Rs. in La
2009-10 ACTUAL 2010-11 ACTUAL
Current Liabilities Sundry Creditors Adv.from Customers Other liabilities Provisions Total Net Working Capital Turnover Working Capital to Turnover 418 17 58 15 508 263 545 176D 387 15 67 16 485 363 585 226D 345 13 54 19 431 330 610 197D 388 13 65 14 480 333 794 153D 386 5 85 4 480 304 1764 63D 481 110 4 595 476 2232 78D
Working capital to turnover=net working capital/turnover*365 D stands for no. of days
.
INTRODUCTION It is very difficult for the organization to sell always on cash basis in today?s competitive market. In almost every business, we have to sell on credit basis.
The basic objective of management of sundry debtor is to optimize the return on investment on this asset. It is obvious that if there are large amounts tied up in sundry debtors, working capital requirement would be high and consequently interest charges will be high. In such cases, the bad debts and cost of collection of debts would be high. On the other hand if the credit policy is very tight, investment in sundry debtors is low but the sale may be restricted, since the competitors may offer more liberal credit term.
We have limited resources and therefore every resource has its own opportunity cost. Therefore, the management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies.
Debtors and cost of debtors have direct relation; cost will increase due to increase in debtors and vice versa. It depends on the credit sale of concern and credit period (collection period) allowed to customer. It is in interest of customer to pay as late as possible, and company whom made sales, would like to collect their debtor as early as possible. There is a conflict between the two aspects.
Debtor management is the process of finding the equilibrium at which company agree to receive its payment without hampering or having any adverse effect on its sales and customer agrees to pay at their economical buying concept.
Sundry debtor level depends on two measure issues: -
One is volume of credit sales and another is credit period allowed to customer. It is the essence of every business that to sale on credit and allow credit period to the customer in such a competitive market, following factors may be considered before allowing credit period to the customer: ? Nature of the product ? Credit worthiness of the customer, which varies from customer to customer. ? Quantum of advance received from customers ? Credit policy of company, say number of days allowed to customer for payment to the customers. ? Cost of debtors ? Manufacturing cycle time of the product etc.
Debtors Management: There are mainly three aspects of Management of Debtors
1. Credit Policy: -
The credit policy is to determine. It involves a tradeoff between the profits on additional sale that arises due to credit being extended on one hand and the cost of carrying those debtors and bad debts losses on the other.
2. Credit Analysis:-
This requires to determine as how risky is to advance credit to a particular customer.
3. Control of Receivables: -
This requires to the firm to follow up debtors and decide about a suitable credit collection policy. It involves both lying down of credit policy and execution of such policies.
There is a cost of maintaining receivables, which comprises Cost of: ? The company require additional funds as resources are blocked in receivables which involves a cost in the form of interest (loan fund) or opportunity cost (own fund). ? Administrative cost which includes record keeping, investigation of credit worthiness etc. ? Collection cost ? Defaulting cost or Bad debts
STEPS INVOLVED IN MANAGEMENT OF DEBTORS ? Product life cycle should be minimum so that cost of product should not become high to the agreed amount because of time factor. ? There must be provision for discount for early payment of debts by the customers. ? Regular checking of the records of the debtors is essential so as to analyses the current position of that organization. ? While making policy regarding the debtors the point should be considered that customer having excellent past record, follow the lenient policy is adopted for doubtful customers. ? Manage the working capital according to need as recovering the debt from customer as early as possible while get extension of payment of dues on the company of others as suppliers of raw material as late as possible. In most of the contracts, payments of OMEGA are made in following stages: However, the above terms may vary from contract to contract. Based on the above payment terms OMEGA, categories their debtors into two parts: ? Collectible debtors ? Deferred debtors Collectible debtors are those, which are due for payment as on now and there is no credit time allowed to the customer say payment at the time of dispatch.
Deferred debtors are those, which will become due on the occurrence of a particular event such as issuing of MRC (material Receipt Certificate) from customer or completion of contract with certain tests etc.
ANALYSIS OF DEBTORS MANAGEMENT WITH THE HELP OF CERTAIN RATIO?S: -
DEBTORS TURN OVER RATIO
ebtor?s turnover ratio establishes a relationship between net credit sales and average trade debtors. The major objective to calculate ratio is to determine the efficiency with which the trade debtors are managed. We can easily calculate this ratio with the help of the following formula:
Debtors turnover ratio =Net credit sales/average debtor
AVERAGE COLLECTION PERIOD:AVERAGE COLLECTION PERIOD = 365 Debtor's Turnover
Introduction
Inventories constitute most significant part of current assets, in most of the companies in India. To maintain a large size of inventory, a considerable amount of fund is required. It is, therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree, e.g.10% to 20%, without any adverse effect on production and sales, by using inventory planning and control techniques. The reduction in „excessive? inventories carries a favorable impact on a company?s profitability.
There are at least three motives for holding inventories: 1-To facilitate smooth production and sales operation (transaction motive). 2-To guards against the risk of unpredictable changes in usage rate and delivery time (precautionary motive). 3- To make advantage of price fluctuations (speculative motive).
OBJECTIVE: Inventories represent investment of a firm?s funds. The objective of the inventory management should be the maximization of the value of the firm. The firm should therefore consider: (a) Costs, (b) Return, and (c) Risk factors in establishing its inventory policy.
Two types of costs are involved in the inventory maintenance:
1-Ordering costs: - Requisition, placing of order, transportation, and staff services. Ordering costs are fixed per order size increases.
2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance and taxes. Carrying cost increases. The firm should minimize the total cost (ordering cost + carrying cost). The economic order quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The following formula can be used to determine EOQ:
EOQ= (2AO/C) ^1/2
Where, A= Annual requirement. O= Per order cost. C= Per unit carrying cost.
WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH INVENTORY?
The inventory level at which the firm places order to replenish inventory is called reorder point. It depends on (a) the lead time and (b) the usage rate. Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead time0, the reorder point will be equal to:
Lead-time *Usage rate +Safety stock.
The firm should strike a trade-off between the marginal rate of return and marginal cost of funds to determine the level of safety stock. INVENTORY ANALYSIS Altogether the company deals with stock of thousands of items raising a serious problem of how one can keep control of track of all items also, where it is necessary to have some extent of control on each and every item. Different types of analysis each having its own advantages and purpose help in bringing a particular solution to the control of inventory. The most important of all such analysis is ABC analysis. The other one ? ABC analysis ? VED analysis ? SDT analysis ? HML analysis ? FSN analysis ABC ANALYSIS A formal way of classifying inventory items so that important ones will be given the most attention. Through this analysis the professional inventory manager will concentrate his efforts on where they will yield the greatest rewards. The ABC of ABC analysis refers to the classes, A, B and c into which the inventory is divided. A -Is high value items whose rupee volume typically account for 75-80% of the value of total inventory while representing only 10-15% of the inventory items. B -Class is lesser value items whose rupee volume accounts for 15-20% of the value of inventory, while representing 15-20% of the inventory items. C - Class items are low value items whose volume accounts for 10-15% of the inventory values but 75-80% of the inventory items.
The same degree of control is not justified for all the three classes of items. Class [A] requires the greatest attention and class [C] items require least attention. Class [C] items need no special calculations since they represent a low inventory investment. The order might be placed once a year and periodically reviewed once a year, class items are paid more attention then, proper CODs are developed and semiannual review of variables must be done. Class [A] items needs direct attention to the inventory items, EOQ's are to be developed each time an order is placed. The major concern of an ABC classification is to give direct attention to the inventory items that represent the largest amount of expenditure. If inventory levels can be reduced for claim of items it result in a significant reduction in inventory investment.
ABC INVENTORY CLASSIFICATION
Percentage of inventory items 10 15 75
Category of classes A B C
value of the total inventory(rupee volume in %) 75 15 10
VED ANALYSIS
This analysis specially pertains to the classification of maintenance of spares denoting the essentiality of blocking spares.
V - Stands for vital - items when out of stock or when not readily available, completely brings the production a halt.
E - Is for essential - items without which we can temporarily loose our production or disclosure of production occurs within a week.
D - Denotes desirable items - all other items, which are necessary but do not cause any immediate effect on production.
S.D.E. ANALYSIS For developing countries and especially where certain items are in scarce supply. This analysis is very useful.
S - Refers to scarce items, especially imported items and those which are very much in short supply.
D - Are difficult items which are available in market but not easily available.
E - Items are those which are easily available, most local items.
HML ANALYSIS The cost per item is considered for this analysis (H) High cost items (M) Medium cost items (L) Low cost items help in bringing controls over consumption at departments level and for storage.
FSN ANALYSIS Materials are classified as (F) Fast moving (S) Slow moving and (N) Non moving items The non-moving items are of great importance. It is found that many companies maintain huge stock of non-moving items and the number of such items running is thousands. Resulting of non-moving items is to be made to determine where they could be used or to be disclosed off. The fast and slow moving classification helps in arrangement of stocks in stores and their distribution handling methods.
A manufacturing concern is sure to collapse out, if an adequate supply of raw material, process or cash to meet the wage bill, or capacity to wait for the market for its finished products, or commercial enterprises or merchandise to sell its vitally good is finished. Working capital thus is the lifeblood and controlling nerve center of a business. The adequacy of working capital contributes a lot to, raising the standing of a corporation because of better items of goods' purchased reduces the cost of production, on account of the receipt of cash discounts, favorable rates of interest on
bank loans, etc of company. A sufficient working capital is always in a position to take the advantage of any favorable opportunity either to purchase raw materials or to execute a special order or to wait for better market position in the general market of the mgt. Of a corporation is enhanced by its financial soundness. The ability to meet all reasonable demands for cash inordinate delay is a great psychological factor to improve the all round efficiency of the busy and create self-confidence in the press at the helm of affairs in the company. During slump the demand for Working Capital instead of coming down shoot up of good amount is coated up in the inventories and book debts. Concerns having sample resources can side over that period of depression.
FUNCTION OF INVENTORY CONTROL
Functions to be performed in the field of Inventory Control are: 1 Setting up norms for carrying Inventory. 2 Determining what items to be stocked. 3 Setting rules for Inventory replenishments. 4 Receiving, storing and issuing inventory items as needed. 5 Maintaining records of inventory quantities and values. 6 Identifying and deposing of slow moving, non-moving, obsolete or damage inventories. 7 Furnishing summary information on inventory position for control purposes.
Locations of position responsible for performing each of these functions in organization structure greatly vary from company to company.
In OMEGA determination of product material or direct work order material (what?) to be carried in Inventory is more or less automatic result of product design formulation and is given in material forecast for a work order. Indirect materials consumed in
manufacturing process such as electrodes, brazing alloys, tooling etc. are usually given by process engineering or at times by design departments. Balance great bulk of indirect materials is made up of repair parts and general supplies. Responsibility for specific (what?) items to be carried in inventory rests with Works Engineering. With respect to raw materials and purchased parts, responsibility for determining (when?) and how much to buy is a sign to relevant product manufacturing i.e. production planning and material planning groups. However a strict budgetary control and allocation to specific work order control on high value items is exercised by Inventory control department organized separately under Material Management. Purchase department attached to manufacturing department determines (where?) to buy. Determination of indirect material (when?) and how much to buy and (where?), is done by central group under Material Management by consolidating requirements of all sections and while looking at consumption trends over a No. of Years. Again a strict budgetary control and control on high value items for their allocation is exercised by Inventory control group. Receiving and storing is done by Central Stores CSX under Material Management Department. Issuing Inventory is done by CSX on demand from manufacturing and is controlled by Material Planning. Again some on Line checks are proposed to be introduced at raising of Store Issue voucher stage itself, for high value items so that induction is controlled strictly as per requirement of production schedule based on lead time for manufacture to keep WIP inventory under control. Records of Inventory are maintained on a main frame computer centrally arranged having shared access from all functions for their specific use.
Inventory Record Keeping and Related Procedures
How well Inventory records are maintained has a major bearing on the effectiveness of Inventory control program. Mostly information recorded in CO.?s system is: ? Name of the part or material ? Short description ? Identifying No called Material code ? Unit of measurement ? Location in store (custody) ? Bin no. ? Opening, received, issue, closing quantity and value.
These records are maintained in an online system on main frame computer user departments have shared access for posting and retrieval of information. There is a system for reserving specific items as customer specific, which is done by tagging on the item. Posting of withdrawals or issue from inventory is done on specific authorization by a document called Store Issue voucher.
INVENTORY MANAGEMENT ? OMEGA produces long production cycle items against the firm orders from customers. Because of this as well as sizeable imported raw materials and compulsory bulk purchase of items like steel and copper in line with availability from SAIL and MMTC, the company has to carry high level of inventories.
Inventory Turnover Ratio = Sales / Average Inventory
Days of Inventory Holding =365 / Inventory Turnover Ratio
Following is the process through which the company can achieve the optimum inventory level.
STANDARD INVENTOR Y LEVEL
TAKING ACTUAL INVENTORY LEVEL
COMPARISION OF ACTUAL WITH STANDARD
TAKE CORRECTIVE ACTIONS
ANALYSING REASON OF VARIATION/DEVIATION
VARIATION/ DEVIATION
NEED OF INVENTORY MANAGEMENT ? Stiff competition, globalization of trade and liberalization. ? Achieving, increasing and positive EVA. ? Cost reduction. ? Energy conservation. ? Conservation of natural resources. ? Better, work environment. ? Improved health and safety. ? Enhanced public image.
STRATEGIES/MEASURES ? Formation of specific group in each area to identify the wastage elements and seek participation of all.
? Identification of wastage. ? Formulation of action plan to eliminate/minimize wastage. ? Review of status. ? Identification of corrective actions and their implementation. ? Highlighting the gains.
Suggestion: -
After analyzing the steps taken by the company there are some suggestions to manage the Inventory ? There should proper analysis of requirement of raw material. ? Order should be placed according to the lead-time. ? Wastage should be avoided. ? There should be proper coordination between the Inventory Department and Production Department
MANAGEMENT OF CASH
It is the duty of the finance manager to provide adequate cash to all segments of the organization. At the same time, he /she have also to ensure that no funds are block in idle cash as this will involve cost in terms of interest to the concern. A sound cash management scheme has to maintain the twin objective of liquidity and cost.
Meaning of cash management The term cash management refers to the management of cash and „near cash assets? while cash includes coins, currency notes, cheques, bank drafts, and the demand deposits, the near cash assets include marketable securities and time deposits with banks. Such securities and deposits are easily convertible into cash.
MOTIVES FOR HOLDING CASH
In spite of the fact that cash does not earn any substantial return for the business, it is held by the concern with the following motives.
1. Transaction motive.
A Company enters a variety of business transactions
resulting both inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a firm with the motive of making routine business payments maintains cash balance.
2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of unexpected contingencies such as floods, strikes, obsolesces; sharp increase in prices of raw materials, presentation of bills for payment earlier than expected date. More amounts of cash will be kept by the firm if there is more possibility of such contingencies.
3. Speculative motive: OMEGA also keeps cash balance to take advantage of unexpected business opportunities. Such motive is there of speculative nature.
4. Compensation motive.
Banks provide certain services to their customers free of
charge. So they usually require the customers to keep minimum cash balance with them which enables them to earn interest and compensate for the free services rendered.
Reasons of cash management:
Cash management involves the following four basic problems.
1. Controlling level of cash. One of the basic objectives of cash management is to minimize the level of cash balances with the firm. This objective is sought to be achieved by means of the following:
i)Preparing cash budget. Cash budget is the most important device for planning and controlling the use of cash. It involves the future receipts and payments of the firm. On the basis of this information the finance manager can determine the future cash needs of the firm.
ii) Providing for unpredictable discrepancies. Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities.
iii) Availability of alternative source of funds: a firm may need not keep large cash balance. If it has arrangements with banks for borrowing money in times of emergencies.
1. Controlling of cash inflow: in order to prevent fraudulent diversion of cash receipt and speeding up collections of cash, an adequate control on cash inflow is necessary. A properly installed internal check system can, to a great extent, minimize the possibility of fraudulent diversion of cash. Speedier collection of cash can be made possible by adoption of the following two techniques:
i)Concentration banking system: it is a system of decentralizing collection of account receivables. According to this system, CO.?s branch offices are authorized to collect the payment from the customers, and deposit in the local bank accounts. This system facilities fast movement of funds. This system is good in case of the firms having their spread over a large area.
ii) Lock box system: This system is more popular in the U.S.A. and is further step in speeding up collection of cash. This system has been devised to element delay arising in cash of the concentration banking system on account of a time gap between actual receipt of cheques by the regional collection centers and its deposits in the local bank account. Under this system OMEGA hires a post office box and instructs its customers for their remits to the box. It also reduces the chances of frauds in the cash collection process and controls the cash inflows better. In order to avoid the unnecessary pockets of idle funds, the company should maintain minimum number of bank accounts.
2. Controlling outflows of cash: - an efficient control over cash outflows is equally important for conserving cash and reducing financial requirements. Control over cash outflows signifies slow disbursement in order to control the outflows of cash efficiently, a firm should keep in view the following considerations:
i)Centralized system for cash payments: should be followed as compared to decentralized system in cash of collections. All payments should be made from a single control account, i.e., from the central office of the company. However, the local office of the company may pay local expenses.
ii) Payment should be made on the due dates, neither before nor after. The company should neither lose cash discount nor its prestige on account of delayed payments. The company should, therefore, made payments within the terms offered by the suppliers.
iii) Playing float, technique should be used by the company for maximizing the availability of funds. The term „float? means the account tied up in checks which have been issued by BHEL but not have been yet been presented for payment by the creditors. As a result of a time lag between issue of a cheque and its actual presentation, the actual bank balance of a firm may be more than the balance shown in the books. The difference is called „payment of float?. The longer the „float period? the greater would be the benefit of the firm.
TOOLS OF CASH CONTROL 1. Cash Budget: It is the most significant tool of controlling the use of cash. It provides a comparison between actual and budgeted cash receipts and disbursements locating the points of deviations, if any. The financial manager, after ascertaining the reasons for deviations between the actual and budgeted figures, can take the necessary action to remove.
2. Inflows and outflows of cash: in order to check the change in cash position of the firm from one period to another, a cash flow statement is prepared. It helps management in controlling inflows and outflows of cash.
3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial ratios are used for this purpose. These ratios include current ratio, liquidity ratio, receivables turnover ratio, and inventory turnover ratio and cash position ratios.
CURRENT RATIO:It is the best ratio to find relationship between the current assets and current liabilities. We can easily calculate the current ratio with the help of the following formula:
LIQUIDITY RATIO:-
This ratio establishes a relationship between quick assets and current liabilities. The major objective to compute this ratio is to measure the ability of the firm to meet its short-term obligations as and when due without relying upon the realization stock. We can easily calculate this ratio with the help of the following formula:
Liquidity ratio= liquid assets/current liabilities
YEARS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-11
CALCULATIONS 580/508 598/485 543/431 583/480 564/480 624/595
RATIO 1.14 1.23 1.26 1.21 1.18 1.05
DATA ANALYSIS
Graphical representation of current assets of the company
600 500 400 300 200 100 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Debtors Inventory Cash Loan and advance
Graphical representation of Working capital of the company
500 450 400 350 300 250 200 150 100 50 0
476 363 263
WORKING CAPITAL (RS. in Lacs)
330
333
304
2005- 2006- 2007- 2008- 2009- 201006 07 08 09 10 11
Interpretation: If we see from the above table, it can be clearly seen that net working capital has shown a fluctuating trend. It increased drastically from 263 lacs in the year 2005-06 to 363 lacs in the year 2006-07.After this it showed a decline to 304 lacs in year 2009-10.In the year 2010-11 the working capital increased to 476 lacs. Moreover if we compare no. of days of net working capital to turnover, it has also comes down to 78 days from 176 days in previous years. The turnover of the company has shown a constant increase which is sign of growth of the company. This improvement does not come accidentally but considerable measures have been taken to control working capital in organization There is direct relation of working capital requirement with Debtors and Inventory. Above data indicates that company has taken certain strategic measures to manage its Debtor and Inventory. Following are the measures: ? Special task forces were built up from debtors and Inventory Management at senior level. ? Regular follow up at senior level. ? A close contact with the customers. ? Proper age- wise analysis of the debtors. ? Proper classification between collectible Debtors and bad debts. ? Bad debts written off as early as possible after making all efforts for its collection. ? Product cycle minimized so that cost of the product does not become high to the agreed amount because of time factor. ? Formation of specific group in each area to identify the wastage elements and seek participation of all. ? Formulation of action plan to eliminate/minimize wastage. ? Identification of corrective actions and their implementation.
Graphical presentation of debtor turnover ratio (Rs.in lacs)
5 4.2 4 3.16 3 2 1.02 1 1.17 1.31
DEBTOR TURNOVER RATIO
0
2006- 2007- 2008- 2009- 201007 08 09 10 11 YEARS
INTERPRETATION: It indicates the speed with which the debtors turnover an average each year. In general a high ratio indicates the shorter collection period which implies prompt payments by debtors and a low ratio indicates a long collection period which implies delayed payment by debtors. So we can see from the graph and the table above that in the last five years the company is trying to improve the debtors turnover ratio. In 2000-01 it is the least i.e. 1.3 but it again started improving in 2001-02 2.1:1, in2002-03 2.4:1, in2003-04 2:1&in2004-05 2.9:1. It depicts that how efficiently debtors are collected
AVERAGE COLLECTION PERIOD:AVERAGE COLLECTION PERIOD = 365 Debtor's Turnover
Graphical representation of average collection period
DEBTOR COLLECTION PERIOD
400 350 300 250 200 150 100 50 0
358
312
279
NO. OF DAYS
116
87
2006- 2007- 2008- 2009- 201007 08 09 2010 11
YEARS
Interpretation
We can check the managerial efficiency with the help of this ratio by the comparison of average collection period and credit policy of the company form the table we can clearly see that in the year 2006-07 to 358 days , but in year 2007-08 & 2008-09 there was a decrease and it falls down to 312 & 279 respectively . This indicates that
the company was following a very liberal policy in previous years but it improved in the succeeding years. If the days are increasing it indicates that the bad debts are also increasing. It is difficult to lay down a standard collection period; it depends upon the nature of the business. As a general rule the receivables should not exceed 4 to 5 months of credit sales.
STEPS INVOLVED IN MANAGEMENT OF DEBTS: -
The following steps are involved in debtor?s management
? There should a close contact with the customers.
? There should be proper age- wise analysis of the debtors.
? There should be proper classification between collectible Debtors and bad debts.
? Bad debts should be written off as early as possible after making all efforts for its collection.
? Product cycle should be minimized so that cost of the product should not become high to the agreed amount because of time factor. ? There must be a provision of discount for early payment of debts by the customers. ? Regular checking of the records of the debtors is essential so as to analysis the current position of that organization.
? While making a policy, regarding the debtors the point should be considered that customer having excellent past record, follow the lenient policy is adopted for doubtful customers ? Manage the working capital according to need as recovering the debt from customer as early as possible while, get extension of payment of dues on the company of others as suppliers of raw material as late as possible.
Graphical Representation of Days of Inventory Holding
DAYS OF INVENTORY HOLDING
160 140 120 100 80 60 40 20 0
138
140 103 47 55
Days of inventory holding
NO. OF DAYS
2006- 2007- 2008- 2009- 201007 08 09 10 11
YEARS
INTERPRETRATION
If we see from the above table that the days of inventory holding in the year 2010-11 has come down to 55 days from 140 days in the previous year. Inspite of increase in turnover i.e. 585 lacs in 2006-07 from 2232 lacs in the year 2010-11 the days of inventory holding decreases. This indicates that the company is using effective strategy to bring down its inventory level. This makes very less investment in inventory. It is in the interest of every organization to minimize its inventory level. Graph of Inventory
450 400 350 300 250 200 150 100 50 0 2006-07 2007-08 2008-09 2009-10 2010-11
Interpretation By the graphical representation, we can easily understand that the level of inventory is coming down but in 2010-11 it increases due to large amount of raw material .It will comes down if company takes some effective measures to control the level of inventory.
Current Ratio = Current Assets/Current Liabilities Current Assets includes cash and those Assets that can be converted into cash within a year such as marketable Securities, debtors and inventories. Current Liabilities includes creditors, bills payables, accrued expenses, short term Bank loan, and long term debt maturing in the Current year. The Current ratio is a measure of firm?s short term solvency.
years 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-11
Calculations 771/508 848/485 761/431 813/480 784/480 1071/595
Ratio 1.52 1.75 1.77 1.69 1.63 1.80
ANALYSIS OF CURRENT RATIO
1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5 2006-07 2007-08 2008-09 2009-10 2010-11 YEARS
CURRENT RATIO
Interpretation: -
As we know that the current ratio of any company may be 2:1 but according to the U.S.A. Accounting standard any company should maintain a ratio of 1.33:1. Moreover, as we can see from the above table the current ratio in 2010-11 is 1.8:1 which is highest in the last five years.
In 2009-10, the current ratio goes down to 1.63:1 due to increase in the current liabilities and decrease in current assets as compared to previous year. Current assets decrease due to decrease in inventory. It indicates the ideal stock is less, which is favorable for the company. It indicates the company is in position to meet its liabilities. In 2009-10 the ratio is going down to1.63:1 due to decrease in current assets and current liabilities.
LIQUIDITY RATIO Liquidity ratio measures the ability of the firm to meets its current obligations (liabilities).analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements, but liquidity ratios, by establishing a relationship between cash and other assets to current obligations, provide a quick measure of liquidity.
Graph showing comparison on the basis of liquidity ratio
comparision of liquidity
1.3 1.25 1.2 1.15 1.1 1.05 1 0.95 0.9 2006-07 2007-08 2008-09 2009-10
YEARS
Liquidity ratio
2010-11
Interpretation Liquid ratio indicates that what amounts of liquid assets are available for each rupee of current liability. We know that the liquid ratio of any company may be 1:1, is considered to be satisfactory. Now comparing the company's position according to the liquid ratio. In 2010-11 the ratio is 1.05:1 which the best liquidity position years were for the company. It means that the liquidity position of the company is constantly decreasing it is due to large amount of current liabilities as compared to liquid assets. Also the numbers of debtors of the company are increasing. This is not better from management's point of view. As more of amount is blocked in the debts and chances of bad debt will increase.
Balance sheet of Omega Appliances as on 31 march 2011
Liabilities
Capital Account Paid Up Share Capital SHARE APPLICATION Reserves & Surplus Loans (Liability) BANK OVERDRAFT Secured Loans Unsecured Loans ADVANCE FROM V-GUARD Current Liabilities EXPENSES PAYABLE Duties & Taxes Provisions Sundry Creditors DIRECTOR REMUNERATION PAYABLE- MANISH KHANDELWAL DIRECTOR REMUNERATION PAYABLE - RAJEEV KHANDELWAL DIRECTOR REMUNERATION PAYABLE-SARLA KHANDELWAL SALARY PAYABLE WAGES PAYABLE A/C PROFIT AND LOSSS Opening Balance Current Period
ONKAR ENGINES & GENERATORS PVT. LTD. as at 31-Mar-2011 22790260.58 250000.00 6878680.00 15661580.58 51237946.42 25077953.92 14418868.50 11741124.00 34.66 % 15.42 %
46492365.09 551.00 -2124522.37 413595.00 48103745.46
31.45 %
16000.00
82996.00
27290015.34
18.46 %
27290015.34
Total
147810587.43
100 %
Assets
Fixed Assets MACHINERY Office Equipments VEHICLES BUILDING COMPUTER Electrical Fittings FURNITURE & FIXTURE LAND Investments SHARES- SHIVALIK SOLID WASTE MANAGEMENT LIMITED Current Assets Closing Stock Deposits (Asset) Loans & Advances (Asset) Sundry Debtors Cash-in-hand Bank Accounts DEFERD TAX ASSETS INSURANCE ( PREPAID EXP.) REFUND CLAIM Branch / Divisions OEGPL NOIDA UNIT MISC EXP ASSET PRE-OPERTAIVE EXP. PRELIMINARY EXP. PL Suspense Diff. in Opening Balances
ONKAR ENGINES & GENERATORS PVT. LTD. as at 31-Mar-2011 37296178.86 8857503.29 222301.22 1773849.61 25387557.39 343867.42 166449.00 149650.93 395000.00 50000.00 50000.00 108020228.37 44775273.62 294980.00 5768114.00 55441106.63 908701.85 398635.27 367570.00 29443.00 36404.00 2018000.00 2018000.00 27240.00 0.02 % 1.37 % 73.08 % 0.03 % 25.23 %
27240.00 395431.40 395431.40 3508.80 0.27 %
Total
147810587.43
100 %
BIBLIOGRAPHY
REFFERED BOOKS
Title Author Publisher Title Author Publisher
Financial Management - Tenth Edition I.M. Pandey Vikas Publishing House Pvt. Ltd, 2009 Working Capital Management- Thirteenth Edition V.K.Bhalla Anmol Publication Pvt. Ltd.
INTERNET SITE
1. www.ercap.org
2. www.wikipedia.com 3. www.omegaappliances.com 4. Google
doc_952730390.docx
The Project threw light on the importance and need of Working Capital highlighting the challenges that industry is facing or might face in future. The study tried to evaluate the importance of strategies and what motivates its relevance to a Company in any challenging environment. This project covered the importance of Working Capital for a Company in the challenging environment, and how with the right decisions made at the right time can lead the company into prosperity.
ON WORKING CAPITAL MANAGEMENT
OMEGA APPLIANCES PVT. LTD
Submitted in partial fulfillment of the requirement for the degree of Masters of Business Administration (MBA) of Kumaun University, Nainital
Submitted by:KAMLESH MEHRA
M.B.A. Sem-3rd
DEPARTMENT OF MANAGEMENT STUDIES KUMAUN UNIVERSITY CAMPUS BHIMTAL, NAINITAL
ACKNOWLEDGEMENT
A work is never a work of individual. I owe a sense of gratitude to the intelligence and co-operation of those people who had been so easy to let me understand what I needed from time to time for completion of this executive project.
I am greatly indebted to my guide
Prof. L.K.Singh, faculty guide for finance (Summer internship), DEPARTMENT OF MANAGEMENT STUDIES & Mr. N.Pandey, Manager, Finance department, SHRI DURGA INDUSTRIES, NOIDA
For their constant guidance, advice and help which enabled me to finish this project report properly in time. Last but not the least, I would like to forward my gratitude to my friends & other faculty members who always endured me and stood with me and without whom I could not have completed the project.
KAMLESH MEHRA
DECLARATION
I hereby declare that I have completed my summer project report on “WORKING CAPITAL MANAGEMENT at OMEGA APPLIANCES”. All the information, facts and figures presented in this project. This report is being submitted in partial fulfillment of Masters of Business Administration degree course of KUMAUN UNIVERSITY.
The information and findings in this report are based on the data collected by me. It is my original work. I have neither copied from any report meant for any degree/diploma course nor have submitted for award of any degree/diploma or similar program elsewhere.
Name of student: Kamlesh Mehra Roll No.:101594
PREFACE
A professional course like two year Management program demand both conceptual and practical theory of knowledge. Hence there is a provision of project. By this the students learn through his or her own experience, real situation of corporate world, and its protocols and to put his/her theoretical knowledge into practice. This experience is very valuable for the student and plays a leading as well as vital role in the professional life of the management student.
The report on Omega Appliances was a complete experience in itself, which has provided me with the understanding, which has become an inseparable part of my knowledge of management being learned in Management Program. An opening experience to the concepts of FINANCE department helped me in understanding the concepts that are applied for managing financial resources in the organization.
Implementing & learning the concepts of Finance in a work place provides an opportunity to learn practically. I got a chance to apply the theory & acquaint myself with the functioning of financial methodology. Real learning places its worth only when it gives sweet fruits in future. Project report is one way to learn at work. I enjoyed the interesting experience & every part of it.
CONTENTS
CHAPTER I: ? Company Profile CHAPTER II: ? Research & Methodology ? Need for study ? Objectives ? Methodology ? Limitation CHAPTER III: ? Company profile ? Introduction ? SWOT Analysis ? Working Capital Management ? Debtors Management ? Inventory Management ? Cash Management CHAPTER IV: ? Data Analysis CHAPTER V: ? Findings, Summaries & Conclusion APPENDIX ? Balance Sheet
Executive Summary
Company being established as omega industries in 2004, made an entity with manufacture of home appliance including electric irons, geysers, fans etc. At omega up to date manufacturing facilities, including CNC machines, Stringent quality control procedure and systems, research & development,foundry,heat treatment facilities, screw motor machines, gear grinding machines, metallurgical laboratories, tool room and integrated computer system, have all been set up with sole idea of achieving the highest standards of quality & performance. My project is the study of Working Capital Management. The study was conducted at the head office of Omega Appliances, Noida.The project was of 45 days. During the project interviewed the executive & 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: Investment in Current Assets represents a substantial portion of total investment. Investment in Current Asset & the level of Current liabilities have to be geared quickly to change in Sales. Some of the points to be studied under this topic are: ? How much cash should a firm hold? ? What should be the firm?s credit policy? ? How & When to pay the creditors of the firm? ? How much to invest in inventories? By studying about the company?s different areas like: ? Acid test ratio is more than 1 but it does not mean that company has excessive liquidity. ? Standard current ratio is 2:1 and for industry it is 1.33:1. ? Debtors of the company were high, they were increasing year by year, and so many funds were blocked in debtors. But now the recovery is becoming faster. ? Working Capital turnover ratio is increasing that shows increasing needs of working capital.
Research methodology Primary data The information is collected through the primary sources like: ? Talking with the employees of the department ? Getting information by observation e.g. in manufacturing process ? Discussion with the head of the department Secondary data ? Annual reports of the company ? Office manual of the department ? Magazines, reports in the company. Policy documents of various department.
OBJECTIVE
? ? ? ?
? To
To identify the financial strengths & weakness of the company. Through the net profit ratio & other profitability ratio, understand the profitability of the Evaluating company?s performance relating to financial statement analysis. To know the liquidity position of the company with the help of current ratio. find out the utility of financial ratio in credit analysis & determining the financial capacity of the To know firm?s operating efficiency. To understand effect of credit policy on working capital. understand how working capital contributes to working capital.
company.
company. ? ?
? To
Company profile
Manufacturing Unit-I
:
Shri Durga Industries (Regd.)
D-38, Sector-63 Noida-201301 (UP)
Unit-II :
O.E. & G. (P) Ltd.
Khasara No. 283, Vill-Maganpura Nalagarh, Baddi Distt. Solan (H.P)
Brand Name
:
“OMEGA”
Marketing Unit :
Omega Appliances Pvt. Ltd
Central Ware House
:
454 Nathupura Road Opp-Shri Ram Dharam kanta Burari, Delhi - 110084
BRIEF PROFILE Name of Firm Address of the Manufacturing Unit-1 : Shri Durga Industries (REGD)
:
D-38, Sector-63, Noida-201301(UP) Ph: -0120-2400146, 4548588 : O.E. & G. (P) Ltd. Khasra no.283,MaganPura,Nalagarh, Baddi Dist. Solan (HP) Mob. 09318616116 [email protected] www.omegaappliances.com OMEGA Omega Appliances Pvt. Ltd : : : ISI Marked ISO: 9001-2008 certified By KVQA NORSK
Unit-II
Email Website Brand Marketed By
: : : :
Products International Quality certification Accredited By
Product Range : Geysers (LPG / Electric) All types of Fans (Ceiling, Table, Pedestal, all purpose, cabin, wall etc.) Exhaust Fan, Fresh Air Fan,Heavy Duty Fan (Pedestal/ Mounted Type) for industrial/ commercial use Electric Irons, Immersion Heaters,Heaters, Heat convectors, heating Elements, Submersible Pumps for coolers, FHP Motors Specifications compliance : As per ISI Nos. 996: 1979, 4159:1983, 368:92, 302-2-201:92, 4283: 1981, 374: 1979, 2312: 1967, 366:91, 302-2-3:92, 2082:1993, 8978:199 : : FAN – 48” ES 50 MAGMA Electric Geyser (Metal Body) 6 Ltr. To 25 Ltr. Five Star HOT BOND Electric Geyser ABS Body 6 & 25 – Four Star Partnership Approx. 500 Nos.
STAR RATING (Awarded from BEE)
: Status of Company Manpower : :
BRIEF INTRODUCTION
OMEGA has established its name in Electrical Appliances by providing Quality, Reliability, performance and durability in its products & services. Today, OMEGA brand is one of the leading brands in India. Our products are at the forefront of innovation in Electrical Appliances field which keeps pace with International technology. OMEGA?s rich history of success has been achieved through dedication, teamwork, vision and sincere sense of pride in qualitative result- oriented performance. We also import some hi-technology innovative products from various countries. Our units at NOIDA & BADDI (HP) are equipped with ultra modern state-of-art equipments with latest technology to manufacture a wide range of Electrical Appliances to suite and to meet the demand of the customer accordingly. In keeping pace with the growing demand for OMEGA products. We are setting up another unit at Noida for electrical appliances to fulfill our increasing demand in the market. International Quality System With this thrust, our NOIDA unit has been awarded with ISO: 9001-200 certification from the prestigious International Quality System Organization KVQA accredited by NORSK for its high excellence in quality. Quality standard Omega Products are ISI Marked granted by BUREAU OF INDIAN STANDARD (BIS) New Delhi & Star Rating from BEE New Delhi. Manufacturing, Testing and R&D Facilities All the manufacturing and testing facilities installed in-house is managed by highly Experienced and professionally Qualified Technical Personnel who ensure strict quality check at each level of production. Our R & D facility is fully equipped not only to maintain product quality but also induct innovative improvement in the product, its ease of use, reliability and durability, on a continuous basis capable of setting new standards in the market. MAJOR CLIENTS We have executed several orders in the public sector such as DDA, NDMC, MCD, DJB, northern Railways, South Central Railways, Canara Bank, Air Force, Delhi Cantt., Chandigarh Administration, BBMB, Eledeco infrastructure ltd, National Zoological, Chhattisgarh Industrial Development Corp etc. to name a few. Omega brand products are marketed throughout India through a strong distributors? / dealers? network. Our products are also being exported to several countries. We are also supplying some summer / winter products to several leading Brands of the country.
OMEGA’S STRENGTH ? Star Rated Fans ? Star Rated Electric Water Heaters ? 14 items are ISI marked ? ISO-9001-2008 Certified company ? Quality, Reliability, Durable with Proven performance ? Fully capable to manufacture ELECTRICAL/ GAS APPLIANCES ? Over 3 decades of rich experience in Electrical Appliances ? Superior & Best quality raw materials used ? Consistent improvement and development in products ? Major components are designed, developed and manufactured in-house.
RANGE OF PRODUCTS ? Geysers LPG. ? Geysers Electrical 5 star rating & 4 star rating. ? All types of Fans (Ceiling, Table, Pedestal all purpose, cabin, wall etc.) ? Exhaust Fans, ? Fresh Air Fans ? Heavy Duty Fan (Pedestal/ Mounted Type) for industrial/ commercial use ? Electric Irons, ? Immersion Heaters, Heaters, Heat convectors ? Heating Elements ? Submersible Pumps for Cooler. ? FHP Motors for coolers. AFTER SALE SERVICE We have full-fledged experienced technical team to provide prompt “After Sales Service”.
VISION
A WORLD-CLASS, INNOVATIVE, COMPETITIVE AND PROFITABLE ENGINEERING ENTERPRISE PROVIDING TOTAL BUSINESS SOLUTIONS.
MISSION
TO BE THE LEADING INDIAN ENGINEERING ENTERPRISE PROVIDING QUALITY PRODUCTS SYSTEM AND SERVICES IN THE FIELDS OF ENERGY, TRANSPORTATION, INDUSTRY, INFRASTRUCTURE AND OTHER POTENTIAL AREAS.
VALUES
? MEETING COMMITMENTS MADE TO EXTERNAL AND INTERNAL CUSTOMERS. ? FOSTER LEARNING, CREATIVITY AND SPEED OF RESPONSE. ? RESPECT FOR DIGNITY AND POTENTAIL OF INDIVIDUALS. ? LOYALTY AND PRIDE IN THE COMPANY. ? TEAM PLAYING ? ZEAL TO EXCEL ? INTEGRITY AND FAIRNESS IN ALL MATTERS.
-------------- SWOT ANALYSIS ------------------
STRENGTH (S): ? Low cost producer of quality equipment due to cheap labor and fully depreciated plants. ? Flexible manufacturing set up. ? Entry barrier due to high replacement cost of its manufacturing facilities.
? Comprehensive turnkey experience from product design to commissioning.
WEAKNESSES (W): -
? High working capital requirement due to its exposure to cash starved SEBs (State electricity boards) and High WIP. ? Inability to provide project financing.
OPPORTUNITIES (O): ? High-expected growth in power sectors ? High growth forecast in India?s index of industrial production would increase demand for industrial equipment such as motors and compressors.
THREATS (T): ? Technical suppliers are becoming competitors with the opening up of the Indian economy. ? Fall in global power equipment prices can affect profitability.
Working Capital is commonly defined as the difference between Current Assets and Current Liabilities. Efficient Working Capital Management requires that firms should operate with some amount of working capital, the exact amount varying from firm to firm and depending, among other things on the nature of industry. Capital required for a business can be classified in two main categories viz. 1) Fixed capital, and 2) Working capital. Every business needs funds for two purposes-for establishment and to carry out its day-to-day operations. Long-term funds are required to create production facilities. Through purchase of fixed assets such as plants and machinery, land, building, furniture, etc. Investments in these assets represent that part of firm?s capital which is blocked on permanent or fixed basis and is called fixed capital. Funds are also needed for short-term purpose for the purchase of raw material, payment of wages and other day-to-day expenses, etc. These funds are known working Capital. In simple words, working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors and inventories. Funds thus invested in current assets keep revolving fast and are being constantly converted into cash and these cash flows out again in exchange for other current assets. Hence, it is also known as revolving or circulating capital or short-term capital.
CLASSIFICATION OF WORKING CAPITAL
Working Capital may be classified on two basis: a) On the basis of Concept: On the basis of concept, working capital can be classified as, ? Gross Working Capital ? Net Working Capital b) On the basis of Time: On the basis of time, working capital can be classified as, ? Permanent or Fixed Working Capital ? Temporary or Variable Working Capital
Gross Working Capital: The Gross Working Capital is the Capital invested in the total current assets of the enterprises. Current assets are those assets, which can be converted into cash within a short period, normally an accounting year.
Gross Working Capital = Total Current Assets
Net Working Capital: The term Net Working Capital refers to the excess of current assets over current liabilities, or say,
Net Working Capital = Current Assets – Current Liabilities
Net Working Capital can be positive or negative. When the current assets exceed the current liabilities the working capital is positive and the negative working capital results when the current liabilities are more than the current assets. Current liabilities are those liabilities, which are intend to be paid in the ordinary course of business within a short period of normally one accounting year out of the current assets of the income of the business. The gross working capital concept is financial or going concern concept whereas net working capital is an accounting concept of working capital. Both the concepts have their own merits.
The gross concept is sometime preferred to the concept of working capital for the following reasons: ? It enables the enterprise to provide correct amount of working capital at correct time. ? Every management is more interested in total current assets with which it has to operate then the sources from where it is made available. ? It takes into consideration of the fact every increase in the funds of the enterprise would increase its working capital. ? The concept is also useful in determining the rate of return on investments in working capital. ? The net working capital concept, however, is also important for the following reasons:? It is a qualitative concept, which indicates the firm?s ability to meet its operating expenses the short-term liabilities.
? It indicates the margin of protection available to short term creditors. ? It is an indicator of financial soundness of enterprise. ? It suggests the need of financing a part of working capital requirement out of the permanent sources of funds
Permanent or Fixed Working Capital: Permanent or fixed capital is the minimum amount, which is required to ensure effective utilization of fixed facilities and for maintaining the circulation of current assets. Every firm has to maintain a minimum level of current assets is called permanent or fixed working capital as this part of working capital is permanently blocked in current assets. As the business, grow the requirement of working capital also increases due to increase in current assets.
Temporary or Variable Working Capital: Temporary or variable working capital is the amount of working capital, which is required to meet the seasonal demands and some special exigencies. Variable working capital can further be classified as seasonal working capital and special working capital. The capital required to meet the seasonal need of the enterprise is called the seasonal working capital. Special working capital is that part of working capital which is required to meet special exigencies such as launching of extensive marketing campaign for conducting research etc. Temporary working capital differs from permanent working capital in the sense that it is required for short periods and cannot be permanently employed gainfully in business
Components of Working Capital
There are two of the major components of working capital:
1. Current Assets
Current Assets are those assets which can be converted into cash in the normal course of business
within a short period of say a maximum of one year. They are also called floating or circulating
assets because they cannot be put to constant use. They are meant for resale or produced for the purpose of sale i.e., converting them into cash. In brief, the list of Current Asset comprises of: ? ? ? ? ?
Cash in hand and bank balances Bills receivables Sundry debtors Short term loans and advances Inventories of stock as:
? Raw material ? Work in progress ? Stores ? Finished goods ? ? ? Temporary investment of surplus Prepaid funds Accrued income
2. Current Liabilities
Current Liabilities are those liabilities which are intended to be paid in ordinary course of business within a short period of one accounting year out of the current assets or the income of the business. Such as: ? ? ? ? ? ? ?
Bills payable Sundry creditors or account payables Accrued or outstanding expense Short term loan, advances and deposits Dividend payable Bank overdraft Provision for taxation
Sources of finance
Long term sources (Regular working capital)
Other Sources
Short term sources (Seasonal working capital)
Internal sources Retained earning (profit & loss A/c)
External sources
Internal sources
External sources
-Issue of equity shares -Issue of preference shares - Issue of debentures -Loans from FI?s -Securities from employees -Securities from customers
-Accrual accounts -Depreciation funds
-
fixed assets Security from employees
-
-Zero coupon bonds -Factoring
NEEDS AND OBJECTIVES FOR WORKING CAPITAL
Every business needs some amount of working capital. The needs for working capital, arises due to time gap between production and realization of cash from sales. There is an operating cycle involved in sales and realization of cash. There are time gaps in purchase of raw material and production, production and sales, and realization of cash. Thus, working capital is needed for the following purposes: ? For the purchase of raw material, component and spares. ? To pay wages and salaries. ? To incur day- to- day expenses and overhead costs such as fuel, power and office expenses etc. ? To meet the selling costs such as packing, advertising etc. ? To provide credit facilities to the customers. ? To maintain the inventories of raw material, work in progress, store, spares, and finished stock .For studying the need of working capital in a business, one has to study the business under varying circumstances such as new concern, as a growing and one, which has attained maturity. A new concern requires a lot of funds to meets its initial requirement such as promotion and formation etc. These expenses are called preliminary expenses and are capitalized. The amount needed for working capital depends upon the size of the company and the ambition of its promoters. Greater the size of the business unit, generally will be the requirement of the working capital. The requirement of the working capital goes on increasing with the growth and expansion of the business until its gains maturity. At maturity, the amount of working capital required is called normal working capital.
Importance of working capital
1. Time devoted to working capital management:-
The largest portion of financial manager?s time is devoted to day to day internal operation the firm. This may be appropriately sum up under the heading "WORKING CAPITAL MANAGEMENT".
2. Investment in current Assets:Current Assets represent more than half of the total assets of a business firm. Because they represent largest investment and because this investment tends to relatively volatile, current assets are worthy for the financial manager's careful attention.
3. Importance for small firm:Current Assets are similarly important for the financial manager's of small firm. Further small firm are relatively limited access to the long term markets, it must necessarily rely on the trade credit and short term bank loan, both of net effect on net working capital by increased current liabilities.
FACTORS DETERMINING THE WORKING CAPITAL REQUIREMENT
1. NATURE OF BUSINESS:-
The requirement of working capital is very limited in public utility undertaking such as Electricity, Water Supply and Railways because they offer cash sales only and supply services not products and no funds are tied up in inventories and receivables. On the other hand, the trading and financial firm requires less investment in fixed assets but have to invest large amounts in current assets. The manufacturing undertaking requires sizable amount of working capital along with fixed investments.
2. PRODUCTION POLICY:The determination of working capital needs depends upon the production policy of the business. The demand for certain products is seasonal i.e.; such products are purchased in certain months of a year. For such industries, two types of production policy can be followed. Firstly they can produce the goods in the months of demand or secondly, they produce for the whole year. If the second alternative were followed, it would mean that until the time of demand finishes, product would have to be kept in stock. It would require additional working capital.
3. LENGTH OF PRODUCTION CYCLE:-
The longer the manufacturing time, the raw material and other supplies have to be carried for a longer time in the process with progressive increment of labor and service costs before the final product is obtained. Therefore, working capital is directly proportional to the length of the manufacturing process.
4. RATE OF STOCK TURNOVER:There is an inverse co-relationship between the quantum of working capital and the velocity or speed with which the sales are affected. A firm having a higher rate of stock turnover will need lower amount of working capital as compared to a firm having a low rate of turnover.
5. CREDIT POLICY:-
Credit policy affects the working capital requirements in two ways: (a) (b) Terms of credit allowed by customer to the firm, Terms of credit available to the firm. A concern that purchases its requirements on credit and sells its product/services on cash requires lesser amount of working capital and vice-versa.
6. WORKING CAPITAL CYCLE:The speed with which the working cycle completes one cycle determines the requirements of working capital. Longer the cycle larger is the requirement of working capital
Each component of working capital (namely inventory, receivables and payables) has two dimensions..TIME..and...MONEY. When it comes to managing working capital-TIME IS MONEY. If you can get money to move faster around the cycle (e.g. collects dues from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital. As a consequence, you could reduce the cost of bank interest or you?ll have additional fee available to support additional support additional sales growth or investment.
Similarly if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you effectively create free finance to help fund future sales. It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment- loans, equity, leasing etc.Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing down a ploguehole, they remove liquidity from business.
7. RATE OF GROWTH AND EXPANSION OF BUSINESS: The larger size businesses require more permanent and variable working capital in comparison to small business. If a company is growing, its working capital requirements will also go on increasing. Thus, the growing concerns require more working capital as compared to the stable industries.
8. SEASONAL VARIATION: Generally, during the busy season, a firm requires larger working capital than in the slack season.
9. BUSINESS FLUCTUATION: In period of boom, when the business is prosperous, there is a need for larger amount of working capital due to rise in sales, rise in prices, optimistic expansion of business etc. On the contrary in time of depression, the business contracts, sales decline, difficulties are faced in collection from debtors and the firm may have a large amount of working capital idle.
10. EARNING CAPACITY AND DIVIND POLICY:-
Some firms have more earning capacity than other due to quality of their products, monopoly conditions, etc. Such firms may generate cash profits from operations and contribute to their working capital. The dividend policy also effects the requirement of working capital. A firm maintaining a steady high rate of cash dividend irrespective of its profit needs more working capital than the firm that retains larger part of its profits and does not pay so high rate of cash dividend.
11. PRICE LEVEL CHANGES: Price level changes also affect working capital needs. If the prices of different goods increase, to maintain same level of production, more working capital is needed.
12. AVAILABILITY OF RAW MATERIAL: Availability of raw material on the continues basis affects the requirement of working capital. There are certain types of raw materials, which are not available regularly. In such a situation firm requires greater working capital to meet the requirements of production. Some raw materials are available in particular season only for example wool, cotton, oil seeds, etc. They have to keep greater working capital.
13. MAGNITUDE OF PROFIT:Magnitude of profit is different for different businesses. Nature of product, control on the market and ability of managers etc. determine the quantum of profit. If the profit margin is high, it will help to arrange funds internally, which will also increase the working capital.
14.
OTHER FACTOR: -
a) Operating efficiency b) Management ability c) Irregularities of supply d) Import policy e) Asset structure f) Importance of labor
MANAGEMENT OF WORKING CAPITAL
Management of working capital means management of all aspects of current assets and current liabilities. Basically, Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that exist between them. Financial management should determine the quantum and structure of current assets. It should also see that current assets are financed from the proper sources. Management should also see that current liabilities are paid in time, while managing the working capital.
The main objective of working capital management is to manage current assets and current liabilities in a manner so that working capital can be kept in a satisfactory level. It is also taken in to account that the working capital should be neither excessive nor inadequate. The amount of current assets should be adequate to pay the current liabilities in time and adequate security margin can be maintained. Accordingly, proper balance among the different constituents of current assets is maintained so that no current has more than require amount invested in it.
Management of working capital affects profitability, risk and liquidity of the business significantly. Management should, therefore, maintain proper balance among these
factors while managing working capital. If the quantum of working capital is more, it will increase liquidity, but decrease profitability and risk. If working capital relatively declines, it will decrease liquidity but cause an increase in profitability and risk. If business wants to earn more profit, it will have to bear higher risk. Risk means inability of the firm to pay current liabilities in time.
Working Capital Management is three dimensional in nature: -
1) It concerned with the formulation of policies with regard to profitability, liquidity and risk. 2) It is concerned with the decisions about the composition and level of current assets. 3) It is concerned with the decisions about the composition and level of current liabilities.
Policies regarding to Profitability,
Liquidity and Risk.
Composition of level of Current assets
Compos
composition
of level of current liabilities
Dimensions of Working Capital.
EXISTING SYSTEM OF WORKING CAPITAL
To maintain the optimum level of working capital in such a big organization is really a challenging task. The three basic components that determine the level of working capital in any organization are: ? Cash ? Debtors B/R ? Inventory. On the basis of our research in the company, these basic components are managed in the organisation, in the under mentioned manner.
TABLE OF WORKING CAPITAL (Rs. in lacs)
PARTICULARS 2005-06 ACTUAL Current Assets Debtors Inventory Cash Loan and Advances Total 514 191 17 49 771 510 250 23 65 848 471 218 15 57 761 518 230 10 55 813 481 220 9 74 784 554 447 13 57 1071 2006-07 ACTUAL 2007-08 ACTUAL YEARS 2008-09 ACTUAL
(Rs. in La
2009-10 ACTUAL 2010-11 ACTUAL
Current Liabilities Sundry Creditors Adv.from Customers Other liabilities Provisions Total Net Working Capital Turnover Working Capital to Turnover 418 17 58 15 508 263 545 176D 387 15 67 16 485 363 585 226D 345 13 54 19 431 330 610 197D 388 13 65 14 480 333 794 153D 386 5 85 4 480 304 1764 63D 481 110 4 595 476 2232 78D
Working capital to turnover=net working capital/turnover*365 D stands for no. of days
.
INTRODUCTION It is very difficult for the organization to sell always on cash basis in today?s competitive market. In almost every business, we have to sell on credit basis.
The basic objective of management of sundry debtor is to optimize the return on investment on this asset. It is obvious that if there are large amounts tied up in sundry debtors, working capital requirement would be high and consequently interest charges will be high. In such cases, the bad debts and cost of collection of debts would be high. On the other hand if the credit policy is very tight, investment in sundry debtors is low but the sale may be restricted, since the competitors may offer more liberal credit term.
We have limited resources and therefore every resource has its own opportunity cost. Therefore, the management of sundry debtors is an important issue and requires proper policies and efficient execution of such policies.
Debtors and cost of debtors have direct relation; cost will increase due to increase in debtors and vice versa. It depends on the credit sale of concern and credit period (collection period) allowed to customer. It is in interest of customer to pay as late as possible, and company whom made sales, would like to collect their debtor as early as possible. There is a conflict between the two aspects.
Debtor management is the process of finding the equilibrium at which company agree to receive its payment without hampering or having any adverse effect on its sales and customer agrees to pay at their economical buying concept.
Sundry debtor level depends on two measure issues: -
One is volume of credit sales and another is credit period allowed to customer. It is the essence of every business that to sale on credit and allow credit period to the customer in such a competitive market, following factors may be considered before allowing credit period to the customer: ? Nature of the product ? Credit worthiness of the customer, which varies from customer to customer. ? Quantum of advance received from customers ? Credit policy of company, say number of days allowed to customer for payment to the customers. ? Cost of debtors ? Manufacturing cycle time of the product etc.
Debtors Management: There are mainly three aspects of Management of Debtors
1. Credit Policy: -
The credit policy is to determine. It involves a tradeoff between the profits on additional sale that arises due to credit being extended on one hand and the cost of carrying those debtors and bad debts losses on the other.
2. Credit Analysis:-
This requires to determine as how risky is to advance credit to a particular customer.
3. Control of Receivables: -
This requires to the firm to follow up debtors and decide about a suitable credit collection policy. It involves both lying down of credit policy and execution of such policies.
There is a cost of maintaining receivables, which comprises Cost of: ? The company require additional funds as resources are blocked in receivables which involves a cost in the form of interest (loan fund) or opportunity cost (own fund). ? Administrative cost which includes record keeping, investigation of credit worthiness etc. ? Collection cost ? Defaulting cost or Bad debts
STEPS INVOLVED IN MANAGEMENT OF DEBTORS ? Product life cycle should be minimum so that cost of product should not become high to the agreed amount because of time factor. ? There must be provision for discount for early payment of debts by the customers. ? Regular checking of the records of the debtors is essential so as to analyses the current position of that organization. ? While making policy regarding the debtors the point should be considered that customer having excellent past record, follow the lenient policy is adopted for doubtful customers. ? Manage the working capital according to need as recovering the debt from customer as early as possible while get extension of payment of dues on the company of others as suppliers of raw material as late as possible. In most of the contracts, payments of OMEGA are made in following stages: However, the above terms may vary from contract to contract. Based on the above payment terms OMEGA, categories their debtors into two parts: ? Collectible debtors ? Deferred debtors Collectible debtors are those, which are due for payment as on now and there is no credit time allowed to the customer say payment at the time of dispatch.
Deferred debtors are those, which will become due on the occurrence of a particular event such as issuing of MRC (material Receipt Certificate) from customer or completion of contract with certain tests etc.
ANALYSIS OF DEBTORS MANAGEMENT WITH THE HELP OF CERTAIN RATIO?S: -
DEBTORS TURN OVER RATIO
ebtor?s turnover ratio establishes a relationship between net credit sales and average trade debtors. The major objective to calculate ratio is to determine the efficiency with which the trade debtors are managed. We can easily calculate this ratio with the help of the following formula:Debtors turnover ratio =Net credit sales/average debtor
AVERAGE COLLECTION PERIOD:AVERAGE COLLECTION PERIOD = 365 Debtor's Turnover
Introduction
Inventories constitute most significant part of current assets, in most of the companies in India. To maintain a large size of inventory, a considerable amount of fund is required. It is, therefore, absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investment. A firm neglecting the management of inventories will be jeopardizing its long-run profitability and may fail ultimately. It is possible for a company to reduce its levels of inventories to a considerable degree, e.g.10% to 20%, without any adverse effect on production and sales, by using inventory planning and control techniques. The reduction in „excessive? inventories carries a favorable impact on a company?s profitability.
There are at least three motives for holding inventories: 1-To facilitate smooth production and sales operation (transaction motive). 2-To guards against the risk of unpredictable changes in usage rate and delivery time (precautionary motive). 3- To make advantage of price fluctuations (speculative motive).
OBJECTIVE: Inventories represent investment of a firm?s funds. The objective of the inventory management should be the maximization of the value of the firm. The firm should therefore consider: (a) Costs, (b) Return, and (c) Risk factors in establishing its inventory policy.
Two types of costs are involved in the inventory maintenance:
1-Ordering costs: - Requisition, placing of order, transportation, and staff services. Ordering costs are fixed per order size increases.
2-Carrying costs: - Warehousing, handling, clerical and staff services, insurance and taxes. Carrying cost increases. The firm should minimize the total cost (ordering cost + carrying cost). The economic order quantity (EOQ) of inventory will occur at a point where the total cost is minimum. The following formula can be used to determine EOQ:
EOQ= (2AO/C) ^1/2
Where, A= Annual requirement. O= Per order cost. C= Per unit carrying cost.
WHEN SHOULD THE FIRM PLACE AN ORDER TO REPLENISH INVENTORY?
The inventory level at which the firm places order to replenish inventory is called reorder point. It depends on (a) the lead time and (b) the usage rate. Under perfect certainty about the usage rate, the instantaneous delivery (i.e. zero lead time0, the reorder point will be equal to:
Lead-time *Usage rate +Safety stock.
The firm should strike a trade-off between the marginal rate of return and marginal cost of funds to determine the level of safety stock. INVENTORY ANALYSIS Altogether the company deals with stock of thousands of items raising a serious problem of how one can keep control of track of all items also, where it is necessary to have some extent of control on each and every item. Different types of analysis each having its own advantages and purpose help in bringing a particular solution to the control of inventory. The most important of all such analysis is ABC analysis. The other one ? ABC analysis ? VED analysis ? SDT analysis ? HML analysis ? FSN analysis ABC ANALYSIS A formal way of classifying inventory items so that important ones will be given the most attention. Through this analysis the professional inventory manager will concentrate his efforts on where they will yield the greatest rewards. The ABC of ABC analysis refers to the classes, A, B and c into which the inventory is divided. A -Is high value items whose rupee volume typically account for 75-80% of the value of total inventory while representing only 10-15% of the inventory items. B -Class is lesser value items whose rupee volume accounts for 15-20% of the value of inventory, while representing 15-20% of the inventory items. C - Class items are low value items whose volume accounts for 10-15% of the inventory values but 75-80% of the inventory items.
The same degree of control is not justified for all the three classes of items. Class [A] requires the greatest attention and class [C] items require least attention. Class [C] items need no special calculations since they represent a low inventory investment. The order might be placed once a year and periodically reviewed once a year, class items are paid more attention then, proper CODs are developed and semiannual review of variables must be done. Class [A] items needs direct attention to the inventory items, EOQ's are to be developed each time an order is placed. The major concern of an ABC classification is to give direct attention to the inventory items that represent the largest amount of expenditure. If inventory levels can be reduced for claim of items it result in a significant reduction in inventory investment.
ABC INVENTORY CLASSIFICATION
Percentage of inventory items 10 15 75
Category of classes A B C
value of the total inventory(rupee volume in %) 75 15 10
VED ANALYSIS
This analysis specially pertains to the classification of maintenance of spares denoting the essentiality of blocking spares.
V - Stands for vital - items when out of stock or when not readily available, completely brings the production a halt.
E - Is for essential - items without which we can temporarily loose our production or disclosure of production occurs within a week.
D - Denotes desirable items - all other items, which are necessary but do not cause any immediate effect on production.
S.D.E. ANALYSIS For developing countries and especially where certain items are in scarce supply. This analysis is very useful.
S - Refers to scarce items, especially imported items and those which are very much in short supply.
D - Are difficult items which are available in market but not easily available.
E - Items are those which are easily available, most local items.
HML ANALYSIS The cost per item is considered for this analysis (H) High cost items (M) Medium cost items (L) Low cost items help in bringing controls over consumption at departments level and for storage.
FSN ANALYSIS Materials are classified as (F) Fast moving (S) Slow moving and (N) Non moving items The non-moving items are of great importance. It is found that many companies maintain huge stock of non-moving items and the number of such items running is thousands. Resulting of non-moving items is to be made to determine where they could be used or to be disclosed off. The fast and slow moving classification helps in arrangement of stocks in stores and their distribution handling methods.
A manufacturing concern is sure to collapse out, if an adequate supply of raw material, process or cash to meet the wage bill, or capacity to wait for the market for its finished products, or commercial enterprises or merchandise to sell its vitally good is finished. Working capital thus is the lifeblood and controlling nerve center of a business. The adequacy of working capital contributes a lot to, raising the standing of a corporation because of better items of goods' purchased reduces the cost of production, on account of the receipt of cash discounts, favorable rates of interest on
bank loans, etc of company. A sufficient working capital is always in a position to take the advantage of any favorable opportunity either to purchase raw materials or to execute a special order or to wait for better market position in the general market of the mgt. Of a corporation is enhanced by its financial soundness. The ability to meet all reasonable demands for cash inordinate delay is a great psychological factor to improve the all round efficiency of the busy and create self-confidence in the press at the helm of affairs in the company. During slump the demand for Working Capital instead of coming down shoot up of good amount is coated up in the inventories and book debts. Concerns having sample resources can side over that period of depression.
FUNCTION OF INVENTORY CONTROL
Functions to be performed in the field of Inventory Control are: 1 Setting up norms for carrying Inventory. 2 Determining what items to be stocked. 3 Setting rules for Inventory replenishments. 4 Receiving, storing and issuing inventory items as needed. 5 Maintaining records of inventory quantities and values. 6 Identifying and deposing of slow moving, non-moving, obsolete or damage inventories. 7 Furnishing summary information on inventory position for control purposes.
Locations of position responsible for performing each of these functions in organization structure greatly vary from company to company.
In OMEGA determination of product material or direct work order material (what?) to be carried in Inventory is more or less automatic result of product design formulation and is given in material forecast for a work order. Indirect materials consumed in
manufacturing process such as electrodes, brazing alloys, tooling etc. are usually given by process engineering or at times by design departments. Balance great bulk of indirect materials is made up of repair parts and general supplies. Responsibility for specific (what?) items to be carried in inventory rests with Works Engineering. With respect to raw materials and purchased parts, responsibility for determining (when?) and how much to buy is a sign to relevant product manufacturing i.e. production planning and material planning groups. However a strict budgetary control and allocation to specific work order control on high value items is exercised by Inventory control department organized separately under Material Management. Purchase department attached to manufacturing department determines (where?) to buy. Determination of indirect material (when?) and how much to buy and (where?), is done by central group under Material Management by consolidating requirements of all sections and while looking at consumption trends over a No. of Years. Again a strict budgetary control and control on high value items for their allocation is exercised by Inventory control group. Receiving and storing is done by Central Stores CSX under Material Management Department. Issuing Inventory is done by CSX on demand from manufacturing and is controlled by Material Planning. Again some on Line checks are proposed to be introduced at raising of Store Issue voucher stage itself, for high value items so that induction is controlled strictly as per requirement of production schedule based on lead time for manufacture to keep WIP inventory under control. Records of Inventory are maintained on a main frame computer centrally arranged having shared access from all functions for their specific use.
Inventory Record Keeping and Related Procedures
How well Inventory records are maintained has a major bearing on the effectiveness of Inventory control program. Mostly information recorded in CO.?s system is: ? Name of the part or material ? Short description ? Identifying No called Material code ? Unit of measurement ? Location in store (custody) ? Bin no. ? Opening, received, issue, closing quantity and value.
These records are maintained in an online system on main frame computer user departments have shared access for posting and retrieval of information. There is a system for reserving specific items as customer specific, which is done by tagging on the item. Posting of withdrawals or issue from inventory is done on specific authorization by a document called Store Issue voucher.
INVENTORY MANAGEMENT ? OMEGA produces long production cycle items against the firm orders from customers. Because of this as well as sizeable imported raw materials and compulsory bulk purchase of items like steel and copper in line with availability from SAIL and MMTC, the company has to carry high level of inventories.
Inventory Turnover Ratio = Sales / Average Inventory
Days of Inventory Holding =365 / Inventory Turnover Ratio
Following is the process through which the company can achieve the optimum inventory level.
STANDARD INVENTOR Y LEVEL
TAKING ACTUAL INVENTORY LEVEL
COMPARISION OF ACTUAL WITH STANDARD
TAKE CORRECTIVE ACTIONS
ANALYSING REASON OF VARIATION/DEVIATION
VARIATION/ DEVIATION
NEED OF INVENTORY MANAGEMENT ? Stiff competition, globalization of trade and liberalization. ? Achieving, increasing and positive EVA. ? Cost reduction. ? Energy conservation. ? Conservation of natural resources. ? Better, work environment. ? Improved health and safety. ? Enhanced public image.
STRATEGIES/MEASURES ? Formation of specific group in each area to identify the wastage elements and seek participation of all.
? Identification of wastage. ? Formulation of action plan to eliminate/minimize wastage. ? Review of status. ? Identification of corrective actions and their implementation. ? Highlighting the gains.
Suggestion: -
After analyzing the steps taken by the company there are some suggestions to manage the Inventory ? There should proper analysis of requirement of raw material. ? Order should be placed according to the lead-time. ? Wastage should be avoided. ? There should be proper coordination between the Inventory Department and Production Department
MANAGEMENT OF CASH
It is the duty of the finance manager to provide adequate cash to all segments of the organization. At the same time, he /she have also to ensure that no funds are block in idle cash as this will involve cost in terms of interest to the concern. A sound cash management scheme has to maintain the twin objective of liquidity and cost.
Meaning of cash management The term cash management refers to the management of cash and „near cash assets? while cash includes coins, currency notes, cheques, bank drafts, and the demand deposits, the near cash assets include marketable securities and time deposits with banks. Such securities and deposits are easily convertible into cash.
MOTIVES FOR HOLDING CASH
In spite of the fact that cash does not earn any substantial return for the business, it is held by the concern with the following motives.
1. Transaction motive.
A Company enters a variety of business transactions
resulting both inflow and outflow of cash; at times the cash outflow exceed the cash inflow. In order to meet the business obligations in such situation, it is necessary to maintain adequate cash balance. Thus, a firm with the motive of making routine business payments maintains cash balance.
2. Precautionary motive: A firm holds cash balance to meet sudden cash needs arising out of unexpected contingencies such as floods, strikes, obsolesces; sharp increase in prices of raw materials, presentation of bills for payment earlier than expected date. More amounts of cash will be kept by the firm if there is more possibility of such contingencies.
3. Speculative motive: OMEGA also keeps cash balance to take advantage of unexpected business opportunities. Such motive is there of speculative nature.
4. Compensation motive.
Banks provide certain services to their customers free of
charge. So they usually require the customers to keep minimum cash balance with them which enables them to earn interest and compensate for the free services rendered.
Reasons of cash management:
Cash management involves the following four basic problems.
1. Controlling level of cash. One of the basic objectives of cash management is to minimize the level of cash balances with the firm. This objective is sought to be achieved by means of the following:
i)Preparing cash budget. Cash budget is the most important device for planning and controlling the use of cash. It involves the future receipts and payments of the firm. On the basis of this information the finance manager can determine the future cash needs of the firm.
ii) Providing for unpredictable discrepancies. Cash budget shows discrepancies between cash receipts and payments on the basis of normal business activities.
iii) Availability of alternative source of funds: a firm may need not keep large cash balance. If it has arrangements with banks for borrowing money in times of emergencies.
1. Controlling of cash inflow: in order to prevent fraudulent diversion of cash receipt and speeding up collections of cash, an adequate control on cash inflow is necessary. A properly installed internal check system can, to a great extent, minimize the possibility of fraudulent diversion of cash. Speedier collection of cash can be made possible by adoption of the following two techniques:
i)Concentration banking system: it is a system of decentralizing collection of account receivables. According to this system, CO.?s branch offices are authorized to collect the payment from the customers, and deposit in the local bank accounts. This system facilities fast movement of funds. This system is good in case of the firms having their spread over a large area.
ii) Lock box system: This system is more popular in the U.S.A. and is further step in speeding up collection of cash. This system has been devised to element delay arising in cash of the concentration banking system on account of a time gap between actual receipt of cheques by the regional collection centers and its deposits in the local bank account. Under this system OMEGA hires a post office box and instructs its customers for their remits to the box. It also reduces the chances of frauds in the cash collection process and controls the cash inflows better. In order to avoid the unnecessary pockets of idle funds, the company should maintain minimum number of bank accounts.
2. Controlling outflows of cash: - an efficient control over cash outflows is equally important for conserving cash and reducing financial requirements. Control over cash outflows signifies slow disbursement in order to control the outflows of cash efficiently, a firm should keep in view the following considerations:
i)Centralized system for cash payments: should be followed as compared to decentralized system in cash of collections. All payments should be made from a single control account, i.e., from the central office of the company. However, the local office of the company may pay local expenses.
ii) Payment should be made on the due dates, neither before nor after. The company should neither lose cash discount nor its prestige on account of delayed payments. The company should, therefore, made payments within the terms offered by the suppliers.
iii) Playing float, technique should be used by the company for maximizing the availability of funds. The term „float? means the account tied up in checks which have been issued by BHEL but not have been yet been presented for payment by the creditors. As a result of a time lag between issue of a cheque and its actual presentation, the actual bank balance of a firm may be more than the balance shown in the books. The difference is called „payment of float?. The longer the „float period? the greater would be the benefit of the firm.
TOOLS OF CASH CONTROL 1. Cash Budget: It is the most significant tool of controlling the use of cash. It provides a comparison between actual and budgeted cash receipts and disbursements locating the points of deviations, if any. The financial manager, after ascertaining the reasons for deviations between the actual and budgeted figures, can take the necessary action to remove.
2. Inflows and outflows of cash: in order to check the change in cash position of the firm from one period to another, a cash flow statement is prepared. It helps management in controlling inflows and outflows of cash.
3. Ratio analysis: Ratio analysis is also an important tool of cash control. Different financial ratios are used for this purpose. These ratios include current ratio, liquidity ratio, receivables turnover ratio, and inventory turnover ratio and cash position ratios.
CURRENT RATIO:It is the best ratio to find relationship between the current assets and current liabilities. We can easily calculate the current ratio with the help of the following formula:
LIQUIDITY RATIO:-
This ratio establishes a relationship between quick assets and current liabilities. The major objective to compute this ratio is to measure the ability of the firm to meet its short-term obligations as and when due without relying upon the realization stock. We can easily calculate this ratio with the help of the following formula:
Liquidity ratio= liquid assets/current liabilities
YEARS 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-11
CALCULATIONS 580/508 598/485 543/431 583/480 564/480 624/595
RATIO 1.14 1.23 1.26 1.21 1.18 1.05
DATA ANALYSIS
Graphical representation of current assets of the company
600 500 400 300 200 100 0 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Debtors Inventory Cash Loan and advance
Graphical representation of Working capital of the company
500 450 400 350 300 250 200 150 100 50 0
476 363 263
WORKING CAPITAL (RS. in Lacs)
330
333
304
2005- 2006- 2007- 2008- 2009- 201006 07 08 09 10 11
Interpretation: If we see from the above table, it can be clearly seen that net working capital has shown a fluctuating trend. It increased drastically from 263 lacs in the year 2005-06 to 363 lacs in the year 2006-07.After this it showed a decline to 304 lacs in year 2009-10.In the year 2010-11 the working capital increased to 476 lacs. Moreover if we compare no. of days of net working capital to turnover, it has also comes down to 78 days from 176 days in previous years. The turnover of the company has shown a constant increase which is sign of growth of the company. This improvement does not come accidentally but considerable measures have been taken to control working capital in organization There is direct relation of working capital requirement with Debtors and Inventory. Above data indicates that company has taken certain strategic measures to manage its Debtor and Inventory. Following are the measures: ? Special task forces were built up from debtors and Inventory Management at senior level. ? Regular follow up at senior level. ? A close contact with the customers. ? Proper age- wise analysis of the debtors. ? Proper classification between collectible Debtors and bad debts. ? Bad debts written off as early as possible after making all efforts for its collection. ? Product cycle minimized so that cost of the product does not become high to the agreed amount because of time factor. ? Formation of specific group in each area to identify the wastage elements and seek participation of all. ? Formulation of action plan to eliminate/minimize wastage. ? Identification of corrective actions and their implementation.
Graphical presentation of debtor turnover ratio (Rs.in lacs)
5 4.2 4 3.16 3 2 1.02 1 1.17 1.31
DEBTOR TURNOVER RATIO
0
2006- 2007- 2008- 2009- 201007 08 09 10 11 YEARS
INTERPRETATION: It indicates the speed with which the debtors turnover an average each year. In general a high ratio indicates the shorter collection period which implies prompt payments by debtors and a low ratio indicates a long collection period which implies delayed payment by debtors. So we can see from the graph and the table above that in the last five years the company is trying to improve the debtors turnover ratio. In 2000-01 it is the least i.e. 1.3 but it again started improving in 2001-02 2.1:1, in2002-03 2.4:1, in2003-04 2:1&in2004-05 2.9:1. It depicts that how efficiently debtors are collected
AVERAGE COLLECTION PERIOD:AVERAGE COLLECTION PERIOD = 365 Debtor's Turnover
Graphical representation of average collection period
DEBTOR COLLECTION PERIOD
400 350 300 250 200 150 100 50 0
358
312
279
NO. OF DAYS
116
87
2006- 2007- 2008- 2009- 201007 08 09 2010 11
YEARS
Interpretation
We can check the managerial efficiency with the help of this ratio by the comparison of average collection period and credit policy of the company form the table we can clearly see that in the year 2006-07 to 358 days , but in year 2007-08 & 2008-09 there was a decrease and it falls down to 312 & 279 respectively . This indicates that
the company was following a very liberal policy in previous years but it improved in the succeeding years. If the days are increasing it indicates that the bad debts are also increasing. It is difficult to lay down a standard collection period; it depends upon the nature of the business. As a general rule the receivables should not exceed 4 to 5 months of credit sales.
STEPS INVOLVED IN MANAGEMENT OF DEBTS: -
The following steps are involved in debtor?s management
? There should a close contact with the customers.
? There should be proper age- wise analysis of the debtors.
? There should be proper classification between collectible Debtors and bad debts.
? Bad debts should be written off as early as possible after making all efforts for its collection.
? Product cycle should be minimized so that cost of the product should not become high to the agreed amount because of time factor. ? There must be a provision of discount for early payment of debts by the customers. ? Regular checking of the records of the debtors is essential so as to analysis the current position of that organization.
? While making a policy, regarding the debtors the point should be considered that customer having excellent past record, follow the lenient policy is adopted for doubtful customers ? Manage the working capital according to need as recovering the debt from customer as early as possible while, get extension of payment of dues on the company of others as suppliers of raw material as late as possible.
Graphical Representation of Days of Inventory Holding
DAYS OF INVENTORY HOLDING
160 140 120 100 80 60 40 20 0
138
140 103 47 55
Days of inventory holding
NO. OF DAYS
2006- 2007- 2008- 2009- 201007 08 09 10 11
YEARS
INTERPRETRATION
If we see from the above table that the days of inventory holding in the year 2010-11 has come down to 55 days from 140 days in the previous year. Inspite of increase in turnover i.e. 585 lacs in 2006-07 from 2232 lacs in the year 2010-11 the days of inventory holding decreases. This indicates that the company is using effective strategy to bring down its inventory level. This makes very less investment in inventory. It is in the interest of every organization to minimize its inventory level. Graph of Inventory
450 400 350 300 250 200 150 100 50 0 2006-07 2007-08 2008-09 2009-10 2010-11
Interpretation By the graphical representation, we can easily understand that the level of inventory is coming down but in 2010-11 it increases due to large amount of raw material .It will comes down if company takes some effective measures to control the level of inventory.
Current Ratio = Current Assets/Current Liabilities Current Assets includes cash and those Assets that can be converted into cash within a year such as marketable Securities, debtors and inventories. Current Liabilities includes creditors, bills payables, accrued expenses, short term Bank loan, and long term debt maturing in the Current year. The Current ratio is a measure of firm?s short term solvency.
years 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-11
Calculations 771/508 848/485 761/431 813/480 784/480 1071/595
Ratio 1.52 1.75 1.77 1.69 1.63 1.80
ANALYSIS OF CURRENT RATIO
1.85 1.8 1.75 1.7 1.65 1.6 1.55 1.5 2006-07 2007-08 2008-09 2009-10 2010-11 YEARS
CURRENT RATIO
Interpretation: -
As we know that the current ratio of any company may be 2:1 but according to the U.S.A. Accounting standard any company should maintain a ratio of 1.33:1. Moreover, as we can see from the above table the current ratio in 2010-11 is 1.8:1 which is highest in the last five years.
In 2009-10, the current ratio goes down to 1.63:1 due to increase in the current liabilities and decrease in current assets as compared to previous year. Current assets decrease due to decrease in inventory. It indicates the ideal stock is less, which is favorable for the company. It indicates the company is in position to meet its liabilities. In 2009-10 the ratio is going down to1.63:1 due to decrease in current assets and current liabilities.
LIQUIDITY RATIO Liquidity ratio measures the ability of the firm to meets its current obligations (liabilities).analysis of liquidity needs the preparation of cash budgets and cash and fund flow statements, but liquidity ratios, by establishing a relationship between cash and other assets to current obligations, provide a quick measure of liquidity.
Graph showing comparison on the basis of liquidity ratio
comparision of liquidity
1.3 1.25 1.2 1.15 1.1 1.05 1 0.95 0.9 2006-07 2007-08 2008-09 2009-10
YEARS
Liquidity ratio
2010-11
Interpretation Liquid ratio indicates that what amounts of liquid assets are available for each rupee of current liability. We know that the liquid ratio of any company may be 1:1, is considered to be satisfactory. Now comparing the company's position according to the liquid ratio. In 2010-11 the ratio is 1.05:1 which the best liquidity position years were for the company. It means that the liquidity position of the company is constantly decreasing it is due to large amount of current liabilities as compared to liquid assets. Also the numbers of debtors of the company are increasing. This is not better from management's point of view. As more of amount is blocked in the debts and chances of bad debt will increase.
Balance sheet of Omega Appliances as on 31 march 2011
Liabilities
Capital Account Paid Up Share Capital SHARE APPLICATION Reserves & Surplus Loans (Liability) BANK OVERDRAFT Secured Loans Unsecured Loans ADVANCE FROM V-GUARD Current Liabilities EXPENSES PAYABLE Duties & Taxes Provisions Sundry Creditors DIRECTOR REMUNERATION PAYABLE- MANISH KHANDELWAL DIRECTOR REMUNERATION PAYABLE - RAJEEV KHANDELWAL DIRECTOR REMUNERATION PAYABLE-SARLA KHANDELWAL SALARY PAYABLE WAGES PAYABLE A/C PROFIT AND LOSSS Opening Balance Current Period
ONKAR ENGINES & GENERATORS PVT. LTD. as at 31-Mar-2011 22790260.58 250000.00 6878680.00 15661580.58 51237946.42 25077953.92 14418868.50 11741124.00 34.66 % 15.42 %
46492365.09 551.00 -2124522.37 413595.00 48103745.46
31.45 %
16000.00
82996.00
27290015.34
18.46 %
27290015.34
Total
147810587.43
100 %
Assets
Fixed Assets MACHINERY Office Equipments VEHICLES BUILDING COMPUTER Electrical Fittings FURNITURE & FIXTURE LAND Investments SHARES- SHIVALIK SOLID WASTE MANAGEMENT LIMITED Current Assets Closing Stock Deposits (Asset) Loans & Advances (Asset) Sundry Debtors Cash-in-hand Bank Accounts DEFERD TAX ASSETS INSURANCE ( PREPAID EXP.) REFUND CLAIM Branch / Divisions OEGPL NOIDA UNIT MISC EXP ASSET PRE-OPERTAIVE EXP. PRELIMINARY EXP. PL Suspense Diff. in Opening Balances
ONKAR ENGINES & GENERATORS PVT. LTD. as at 31-Mar-2011 37296178.86 8857503.29 222301.22 1773849.61 25387557.39 343867.42 166449.00 149650.93 395000.00 50000.00 50000.00 108020228.37 44775273.62 294980.00 5768114.00 55441106.63 908701.85 398635.27 367570.00 29443.00 36404.00 2018000.00 2018000.00 27240.00 0.02 % 1.37 % 73.08 % 0.03 % 25.23 %
27240.00 395431.40 395431.40 3508.80 0.27 %
Total
147810587.43
100 %
BIBLIOGRAPHY
REFFERED BOOKS
Title Author Publisher Title Author Publisher
Financial Management - Tenth Edition I.M. Pandey Vikas Publishing House Pvt. Ltd, 2009 Working Capital Management- Thirteenth Edition V.K.Bhalla Anmol Publication Pvt. Ltd.
INTERNET SITE
1. www.ercap.org
2. www.wikipedia.com 3. www.omegaappliances.com 4. Google
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