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ICFAI UNIVERSITY
DEHRADUN
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Name: Gopal Krishan
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IUD No.:
Enrollment No.:
0901202792
09BS0002792
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Course code:
Course title:
SLFI502
Financial Management II
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Date of Submission: 24th Dec, 2009
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Title of assignment: Working Capital
management of Grasim Industries Limited
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Student Sign Faculty Sign
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Table of Contents
Introduction to the assignment:...................................................................................................... 3
Company for the working capital management: ........................................................................... 3
Cash conversion cycle: ................................................................................................................... 3
Assumptions for cash conversion cycle: ....................................................................................... 4
Calculation of cash conversion cycle for Grasim Industries Limited: ........................................ 4
1. Raw material storage period ............................................................................................... 4
2. Work-in-progress storage period ........................................................................................ 4
3. Finished goods storage period ............................................................................................ 4
4. Average Collection Period .................................................................................................. 4
5. Average Payment Period .................................................................................................... 5
6. Operating cycle for Grasim ................................................................................................ 5
Working capital requirement: ........................................................................................................ 5
Analysis of the report: .................................................................................................................... 7
References: ...................................................................................................................................... 7
This practice used to go in a cycle. He would take a loan from bank, sell inventory, repay the
loan and them take another loan. Today the same cycle is followed by complex businesses in
which they purchase inventory, sell them on credit and then collect amount receivables. This
cycle is known as cash conversion cycle.
Inventory conversion period is average time required to convert material into finished
goods and then to sell those goods.
o Inventory conversion period =
Receivables collection period is the average length of time required to convert the
firm’s receivables into cash.
o Receivables collection period =
Payables deferral period is the average time between the purchase of the inventory
and the payment made for them.
o Payable deferral period =
Cash conversion cycle is the average time for which the cash is tied up in the current
assets.
We manage the cash conversion cycle because if the cash is blocked in current assets for a
longer time, we loose the opportunity cost on it. If the same amount of money is invested in
the long term assets it can give us better returns. That is why; we must reduce our cash
conversion cycle to shortest period possible. The shorter the period the better it is.
Where, raw material also includes components of goods, spare parts and packing material.
6.33
Average Stock of Work-in-progress = = 103.46
Where, total cost of sales includes salary of employees, selling and distribution expenses,
excise duty, financial expenses, consumption of work in progress, consumption of finished
goods.
Therefore, cost of sales = 598.17 + 1920.29 + 1268.66 + 142.14 + 6257.02 + 152.6 – 216.22
= 10,122.66
Where, total credit purchases include purchases of raw material, purchases of finished goods
to be sold and purchases of spare parts, packaging material, etc.
Raw material storage period + Work-in-progress storage period + finished goods storage
period + Average collection period – Average payment period
By using the operating cycle, we can calculate the working capital requirement of the
company. Through the operating cycle we come to know the various components and the
duration of each component. This helps us in identifying and estimating the working capital
requirement.
For Grasim Industries Limited we do not have any units of production. So we can estimate
the requirement of working capital by using the sales to various components ratios. In the
year 2008-09, the sale of the company is Rs. 10,804.01 crores. Here we will estimate the
working capital requirement if the company aims at a sales of Rs. 12,000 crore in the next
financial year.
Here in this case, we are getting a total of 24,194crores of working capital in different forms
of assets. The total at the bottom of every column in the next table shows us the amount of
working capital required under each head of the assets.
2. Manufacturing Exp
In W.I.P 0.21 659.74
In Finished goods 0.22 683.72
In debtors 0.71 2208.53 3551.99
4. Profits
In debtors 0.71 423.86 423.86
Total 11726.56 1499.44 2492.78 8476.00 24194.78
References:
1. Annual report of Grasim Industries limited for the year 2008-09.
2. www.moneycontrol.com
3. Financial management, IUP, October 2005 published, chapter 13 th.
4. Corporate Finance by Brigham. Chapter 16.
5. Financial management, 4t edition by Khan and Jain.