SUMMER TRAINING REPORT ON WORKING CAPITAL MANAGEMENT

IN

VINAYAK TEXTILE MILLS LIMITED

Submitted To:
Mr. M.S.Arora (D.G.M.)

In partial fulfillment of requirement for the award of degree in MASTER OF BUSINESS ADMINISTRATION Submitted By:AMAN DEEP PASSI AJAY JAIN (2008-10)

PREFACE

This report , prepared during the summer training, is life’s greatest treasure. The training held was very gainful as it took me close to real life. The study aims to analyze the extent to which volume of working capital has been effectively and efficiently utilized in this unit. The report is divided into various parts for the close analyses of different components of working capital. The last part deals with the conclusion and suggestions to improve the working capital management and to make it more effective.

ACKNOWLEDGEMENT

“Accomplishment of a task with desired success calls for dedication towards work and
prompting guidance, co-operation and deliberation from seniors.” This report is the outcome of six weeks training that I received at VINAYAK TEXTILE MILLS LTD. First of all, I wish to express my profound gratitude and sincere thanks to MR. M.S. ARORA(D.G.M, ACCOUNTS DEPARTMENT),Incharge of the project for his constant and tireless guidance and encouragement given during the study and who allowed me to join summer training at VTM. It gives me immense pleasure to acknowledge my deep sense of gratitude and sincere thanks to Mr. GURNAM SINGH, ACCOUNTS OFFICER for extending the courtesy and for guidance, support and affection throughout the course of this work. I am extremely grateful to MISS. KAWALPREET KAUR and other faculty members for their valuable guidance and glorious teaching. In last, I express my profound gratefulness and indebtedness to the esteemed organization for granting me the grand privilege of working on a project under team of experts and professionals in the field of finance.

CONTENTS

CHAPTER 1 THEORETICAL MANAGEMENT CHAPTER 2 HISTORY OF INDIAN TEXTILE INDUSTRY CHAPTER 3 PROFILE OF THE GROUP AND UNIT CHAPTER 4 OUTLINE OF THE STUDY CHAPTER 5 WORKING CAPITAL ANALYSIS • OPERATING CYCLE ANALYSIS • ANALYSIS ON THE BASIS OF HISTORICAL DATA 1. RATIO ANALYSIS 2. COMMON SIZE STATEMENT ANALYSIS 3. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL BACKGROUND OF WORKING CAPITAL

CHAPTER 6 CASH MANAGEMENT CHAPTER 7 RECEIVABLES MANAGEMENT CHAPTER 8 MANAGEMENT OF INVENTORY CHAPTER 9 FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY APPENDIX REFERENCES AND BIBLIOGRAPHY

EXECUTIVE SUMMARY
STUDY TOPIC:
WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD. ( A UNIT OF VARDHMAN POLYTEX LTD.)

OBJECTIVES OF THE STUDY:
To analyze the working capital management of the company. To determine the operating cycle of the unit. To know the future need of working capital in the running organization. • To render recommendations for effective management of working capital.

TIME SPAN:
A period of five year i.e. 2004-2008 has been taken for the study.

STUDY INSTRUMENT:
Annual Reports and other official documents of the selected units of the company.

METHODOLOGY:
 To recognize the various type of information which are necessary for the study of working capital management.  Collection of data from various department of VTM to analyze the working capital management of VTM.

 For understanding the various reports. personal interviews are conducted.  With the help of various techniques like: Operating Cycle analysis Ratio Analysis Common size statement Schedule of changes in working capital The overall position of VTM is studied and analyzed  Suggestions are given on the basis of findings for better understanding of working capital management.e working capital management. where the summer training has been undertaken. Second part of the report presents a general profile of VINAYAK TEXTILE MILLS LTD. Third part of the report deals with the project under study which includes: Operating Cycle analysis Ratio Analysis Common size statement Schedule of changes in working capital . First part of the report gives an overview and theoretical background to the subject i. SCHEME OF PRESENTATION: The project report is prepared in three parts.

Chapter.1 THEORETICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT .

But when current liabilities become more than current assets than it is negative working capital. Gross Working Capital It is simply called working capital refers to the firm’s investment in current assets so the total current assets of the firm are known as gross working capital. working capital refers to that firm’s Capital. Net working capital may be positive or negative. land. . Positive net working capital is that when current assets are more than current liabilities.e. for the purchase of raw material. payment of wages and other day to day operations of business. Net Working Capital It represents the difference between current assets and current liabilities. which is blocked on a permanent or fixed basis called fixed capital. 2. Funds are also needed for short term purposes i. Funds thus invested in current assets keep revolving last and being constantly converted into cash and this cash flow is again converted into other current assts. Capital required for a business can be classified under two main categories • • Fixed capital Working capital Every business needs funds for two purposes. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery. These funds are known as working capital.MEANING OF WORKING CAPITAL:In simple words working capital means that which is issued to carry out the day to day operations of a business. Investment in these assets represents that part of firm capital. building. In other words. which is required for short – term assets or current assets. Hence it is known as circulating or short – term capital. for its establishment and to carry on its day to day operations. furniture etc. CONCEPT OF WORKING CAPITAL: 1.

Temporary Working Capital: The extra working capital needed to support the changing production and sales activities. However there is always a minimum level of current assets.In brief we can say that working capital is too much necessary for the smooth functioning and proper utilization of fixed assets. But the magnitude of current assets needed is not always same. This level is known as permanent or fixed working capital. 2. is called variable or functioning or temporary working capital. This can be shown in the following diagram:- Amount of Working Capital Temporary capital Permanent Capital Time . it increases and decreases over time. Permanent Working Capital: As the operating cycle is a continuous process so the need for working capital also arises continuously. TYPES OF WORKING CAPITAL: 1.

After the raw material is converted into finished goods. 2. then after some processing it is converted into work–in–progress and after this further processing is done to convert work–in–progress in finished goods. Sales are no always full cash sales. It arises due to following reasons:A. sales are made. So operating cycles includes:1. So the whole process takes the time. These credit sales after some period are converted into cash. there are credit sales also. OPERATING CYCLE “Operating cycle is the time duration requires for converting sales into cash after the conversion of resources into inventories. So the working capital or investment in current assets becomes necessary need for working capital. This time taken is known as the length of operating cycle. 3. Raw Material conversion period (RMCP) Work–in – progress conversion period (WIPCP) Finished goods conversion period (FCP) Debtors Conversion period (DCP) So operating cycle can be known as following:Raw Material Work Progress Cash from Debtors Collection in Sales Finished Goods Credit Sales Cash Sales .” First of all a firm purchase Raw Material.NEED FOR WORKING CAPITAL: The need for working capital cannot be overemphasized. The need of working capital arises due to the time gap between production and realization of cash from sales. 4.

So this reduces our requirement of working capital. 2. In the similar way due to sudden arise of demand of finished goods in future more finished goods are kept in stock. GOC =RMCP + WIPCP + FCP + DCP 2. Net Operating Cycle As we provide period to debtors for the payments. Gross Operating cycle Net operating cycle Gross Operating cycle Gross Operating cycle is the total time period from the conversion of Raw Material into finished goods and finished goods into sales and then sales into cash. So working capital requirement is directly related with operating cycle. The difference between gross operating cycle and period allowed by the creditors for payment is known as net operating cycle. Operating cycle may be of two types 1. This also affects the operating cycle. our creditors also provide period to us for payment to them. . Sometimes because of nonavailability of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw Material becomes necessary for company. For both reasons more working capital is required because funds will be involve in these safeties stocks. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR FUTURE:These needs may be of Raw Material or Finished Goods. Operating cycle’s length reduces with so many days as provided by the creditors to us.If the length of the operating cycle has short length period then less working capital is required. 1. NOC = GOC – CPP B.

If the firm has steady production policy. So the different productions policy arises different type of need of working capital.DETERMINENTS OF WORKING CAPITAL: Followings are the main determinants of working capital. Nature and Size of Business : The working capital of a firm basically depends upon nature of its business for e. Manufacturing Cycle: The manufacturing cycle also creates the need of working capital. They have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the year. 1. . 2. during the busy season. Public utility undertakings like electricity. Production Policy: Production policy also determines the working capital level of a firm. it may require need of continuous working capital. The size of business also determines working capital requirement and it may be measured in terms of scale of operations. Seasonal variation: In certain industries like VTM raw material is not available throughout the year. water supply needs very less working capital because offer only cash sales whereas trading & financial firms have a very less investment in fixed assets but require a large sum of money invested in working capital. a firm requires large working capital than in the slack season. . larger will be requirement of working capital. Generally. 3. But if the firms adopt a fluctuating production policy means to produce more during the lead demand season then the more working capital may require at that time but not in other period during a financial year. 4.g. Manufacturing cycle starts with the purchase and use of Raw Material and completes with the production of finished goods. Greater the size of operation. If the manufacturing cycle will be longer more working capital will be required or vice versa.

finished goods and credit sales. If the sales are growing. larger amount of working capital is required where as in a period of depression lesser amount of working capital is required. spares and stores depends on the condition of supply. However if the supply is unpredictable then the firm to ensure continuity of production. 6. 7. Price Level Changes: Changes in the price level also effects the working capital requirements. Earning Capacity & Dividend Policy: If the firm has enough earnings and it is not paying dividend then it will not be in need of external borrowings. If firm wants to increase its earning power then more working capital will be required also to pay more dividend more profits are needed which give rise to more working capital. If the firm has liberal credit policy. Company is paying 42% dividend to its shareholder.5. If the supply is prompt the firm can manage with small inventory. Business Cycle: Business cycle refers to alternate expansion and contraction in general business. Sales Growth: Working capital requirement is directly related with sales growth. should working capital as . With the liberal credit policy operating cycle length increases and vice versa. Condition of Supply: The inventory of raw material. Firm’s Credit Policy: The firm’s credit policy directly affects the working capital requirement. the rising prices will require the firm to maintain larger amount of more funds will be required to maintain the same current assets. 10. more working capital will be needed due to arises need of more Raw Material. hence the more credit period will be provided to the debtors so this will lead to more working capital requirement. In a period of boom. 8. Generally. 9.

acquire stocks as and when they are available and have to carry larger inventory on an average. The importance of influence of these determinants on working capital may differ from firm to firm. So these are the main determinants of working capital. Other Factors: Certain other factors such as operating efficiency. This is so because both inadequate as well as excessive working capital position is bad for business. MEANING AND NATURE OF WORKING CAPITAL MANAGEMENT The management of working capital is concerned with two problems that arise in attempting to manage the current assets. importance of labour. What should be ratio of current assets to sales? What should be the appropriate mix of short term financing and long term financing for financing these current assets? . management ability. 2. The basic goal is working capital management is to manage current assets and current liabilities of a firm in such a way that a satisfactory of optimum level of working capital is maintained i. asset structure. time lag.e. irregularities of supply. 11. import policy. it is neither inadequate nor excessive. current liabilities and the inter relationship that asserts between them. etc. banking facilities. also influence the requirement of working capital. MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT There are two major decisions management relating to working capital management:1.

2. according to this approach long-term sources are used for financing permanent current assets and fixed assets & short-term sources are used for financing temporary current assets: . Usually. finally is a firm follows a highly aggressive current assets policy. If the firm purchases a very conservative current asset policy it would carry a high level of current assets in relation to sales. In case of uncertainty. as it usually does the investment in current assets cannot be specified uniquely. it would carry a low level of current assets in relation to sales. If a firm adopts a moderate current assets policy it would carry moderate level of current assets in relation to sales. the investment in current assets. which are discussed below: HEDGING APPROACH This approach is also called matching approach. The safety component depends upon low conservative or aggressive in the current assets policy of a firm.1. the outlay on current assets should consist of base component meant to meet normal requirement and a safety component meant to cope with unusual requirement. can be designed uniquely. Current assets in relation to sales:- If the firm can forecast accurately the factors. When uncertainty characteristics the above factors. Determining a Short Term and Long Term Financing Mix for Financing of current assets:There are three approaches in this regard. In this approach there is a proper matching of expected life of asset with the duration of fund. which effect the working capital. VTM is following current assets policy showing moderate level of current assets in relation to sales as is evident from ratio analysis.

Even some part of the temporary current comparison to finance from long-term sources because long-term sources are less risky in comparison to short-term sources. Temporary Current Assets A S S E T S Short-term financing Permanent Current Assets Long-term financing Fixed Assets Time .Temporary current assets Short term financing A S S E T S term financing Permanent current assets Long term financing Fixed Assets Time CONSERVATIVE APPROACH In this approach there is more reliance on long-term financing in comparison to shortterm financing.

. the current assets are financed from short term sources as well as long term sources. so they follow conservative approach. Temporary current assets A S S E T S Short term financing Permanent current assets Fixed Assets Time Long term financing In VTM.AGGRESSIVE APPROACH In this approach there is more reliance on short term financing and even a part of permanent current assets is financed from short-term finance.

Chapter.2 HISTORY OF THE INDIAN TEXTILE INDUSTRY .

The spinning and weaving both are very common and attached with each other in all parts of the world. There is constant search for clothing and it led to the knowledge of sources from vegetation i. The human beings first use plant barks.e. which could be knitted and woven to manufacture clothes to wear. experienced much growth during the 1940’s.e. From time to time in this world development had taken place. which has been found to be a continuous process. . leaves and animal skin to wrap around them. but its end use was not done in an effective way. they started to explore other possibilities and invent more in this area.HISTORY OF THE INDIAN TEXTILE INDUSTRY: The human need is to eat well for to be alive and shelter to protect them from discomforts of nature and a place to live in. Then as the development of brain took place. So much thick fiber was produced and accordingly its impact for the fabric preparation. wool. Because earlier too was the Cotton crop was grown by the farmers. when maximum work like weaving of the clothes was done manually. but all the things were being done for the right perspectives. Human beings also need something to cover their body to protect from diverse climates and to add the appearance. which seems good. We talk of the ancient times. Cotton and from animals i. Earlier there was a time when the human being known nothing about the cloth to wear. The commercial development of man-made fiber began late in the 19th Century. Similarly considering the developments in the Spinning and Weaving lot of improvements has come-up. expanded rapidly after world War – II and in the 1970’s was still the subject of extensive Research and Development.

1947. but after the freedom these leaders had got very good appreciation particularly for the self spinning and weaving and in an overall manner this sector of Spinning and Weaving was industrialized even after the independence too on the basis of Indian cotton growers.e. Though in case we talk of the English rule before the Independence i. who had always insisted to use Khadi Clothes and even self-spinning and weaving.APPARATUS USED FOR SPINNING AND WEAVING DURING PRE-INDEPENDENCE PERIOD Before Independence we talk of the political leaders like Mahatma Gandhi. it was not appreciated by the English Rulers. Such a good initiatives had come-up at India level amongst the followers of the Leader – Mahatma Gandhi. On the other side too such initiatives had been proved very good and had attracted many other western countries to follow such practices and show their excitedness. It is also called as self-dependence for all needs. .

India had made a very good recognition in the yarn market. but in case we say that India alone is heading this world. that in India too the most modern machinery is being installed.e. however the Library research reveals that the first Cotton mill had been established in India during 1854 named as Bombay Spinning and Weaving company. However. which ultimately had given a good blow to grow for the Cotton Textile Industry and know occupy a major part of consumer acceptance... it is wrong. it is an evident that the Indian yarn is always running on the development trend since its Inception of first unit in Bombay. Though in India Textile Machine manufacturers are there and one or two decades ago they were the market leaders. This is just the example of the development. Switzerland etc. Because many other countries like China as Cotton Textiles has went ahead. The invention and production of man made thirty three fibers that is synthetic fibers like Nylon.It is needless to mention here that through out India. Germany. because India is having at present more than 20 Million spindles and a weaving capacity of more than 2. cotton growers belts are available and after independence even English people take their raw material from here and had established themselves with the Spinning and Weaving industries. . Switzerland.5 Lac looms and the total output value of the same is around Rs. etc. Overall In India no such preferences for the Spinning and Weaving industries were made. Acrylic fibers. Luwa – Humidification systems. employing more than 10 Lac of workers directly. Viscose. but with the help of the other parts/people of world i. but its position in the international market has not appeared so good. Filament yarns. Though till today India has achieved a lot in the Textile Industry and almost 700 Textile units are working successfully.1500 Cores. Because Indian Industrial Organizations have also initiated towards the most modernized machinery produced by Schlafhorsts – Germany. Melange yarn. About 50 countries have been importing such material from India and the description of the Spinning and weaving industry had remained incomplete without referring to the woolen industry. Polyester Fiber. Though the Cotton industry had progressed a lot.

Chapter.3 PROFILE OF THE GROUP AND UNIT .

All the group units have state of the art technology imported from machinery giant in Europe. we have named ourselves as Oswal Group has mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of Garments.(India). The group has very good potential and high presence in the textiles industry with well set manufacturing set up for 100% cotton. Punjab.(USD 110 millions). Vinayak Textile Mills situated in Ludhiana. BACK DROP: OSWAL GROUP is a premier of textile group of northern India having its corporate office situated at Ludhiana. Oswal group is earning laurels by exporting yarn of international quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company and VTM is granting authorization to use the Trademark USTERIZED “USTER” think quality.PROFILE OF THE GROUP AND UNIT The industrial city.Dyed Yarn. Continuous efforts are always being made to further improve the . and other blended yarns. China and many other countries. Worsted Spun Yarn . We were earlier part of the Vardhman Group.Ludhiana nestles the corporate Headquarters of the Oswal Group of industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in Ludhiana. The group has ambitious plan to diversify in future but in textiles related activities Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core competencies and capacities in Textile and diversified business to create value for its stakeholders. Vardhman Polytex Limited situated in Bathinda. The organization has existence for last 40 year in core competency of spinning. Polyester cotton.but after settlement between two brother in 2003. the R&D department is well equipped with latest R&D equipments. Japan. To ensure quality commitment to its valuable customers.

COMPANY STRUCTURE OSWAL GROUP VPL BATHIND A VTM LUDHIAN A ANSHUPA TI LUDHIANA .quality and match the industry standard to meet the actual requirements of its quality conscious customers.

To ensure quality to its customers the group has received the ISO9001-2000 certification. a unit at Ludhiana in Punjab with 50000 cotton spindles installed. village Mundian. The present capacity in terms of production is approximately 6. based at Ludhiana in Punjab. to meet every sort of count combination demand of its prospective customers. Polyster cotton yarn and Tyre cord yarn with vast range of count selection varies from NE 10 to 40 both in carded and combed varieties. Singapore. with vast product range. is manufacturing 100% cotton yarn. The present capacity in term of production is around 29Tons /Day and 14 -mt dyeing /day. This unit is exporting its product to Mauritius. Hong Kong. The quality yarn in this unit is manufactured using state of art technology imported from Europe. Mink Yarn and Fancy yarn. The company keeps on receiving repeat orders. They are also thinking of producing Value added that is (i) Slub yarn (ii) Lyera yarn.Anshupati Textiles Limited. The present capacity in term of production is around 65 Tons /day. Taiwan etc. Vinayak Textile Mills. Ludhiana and works at Bathinda &Ludhiana. CURRENT SET UP: Presently the Company has its corporate office situated at Chandigarh Road. China. manufactures the Machine Knitting Yarn. is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection varies from NE 10s to 40s both in carded and combed varieties. Turkey. the worsted spinning units in the Indian subcontinent with 8000 worsted spindles installed. The yarn manufactured from this unit holds a very strong reputation and demand both in domestic and international market.5 ton/Day Vardhman Polytex Limited. The company had been awarded the Export House status by the Government of India. Egypt. Bangladesh. The day to day operations are looked after by qualified technocrats/professional at plant/work as well as at corporate office having rich experience in their respective fields of management. . a unit based at Bathinda in Punjab with 105000 cotton spindles installed. which shows the level of confidence. which is fully backed with ultra modern R&D equipment for consistent quality. bestowed by its customers into it.

The system is functioning to online to finance. Maintenance as well as the production areas. . blended yarn Acrylic Yarn 100%cotton Cottonblended Product Range 14-MT yarn. synthetic. 2007. PRESENT CAPACITIES Presently the group has following production capacity and product range at its different manufacturing facilities. he was actively associated with the business management of Vardhman group. Ludhiana / India fulfil all conditions for using the brand USTERIZED and will be checked regularly at once per year basis. stores and commercial. Location Installed Capacity Bathinda (existing ) (VPL) Ludhiana (Anshupati Textile) Ludhiana (VTM) (spindles) 105000 8000 50000 Production Capacity 65Tons / Day 6. Personal computers have also been provided separately for each department like administration.Polyester/ COMPUTERISATION Presently the unit is operating under “SAP system”. All the stauratory returns are generated online from the system. Uptill family settlement. R&D.Ashok Oswal himself a Law Graduate has been looking after the textile business in this company since 1987. raw material. USTERIZED CERTIFICATION The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/ Switzerland on April 10. and TDS etc. This system is well structured keeping in view the present tax regime like VAT. costing. M/S Vinayak Textile mills. SERVICE TAX.5 Tons/Day 29 Tons/Day dyeing/Day Cotton.

The VTM has two units. Selling agents at Ludhiana. trend. It keeps vigil on the market feed-back on the level competition. The production department is headed by General Manager (G. 3. Single & Multifold. Direct Dispatches are also made by the units. The unit-II expansion is concerned with production of Worsted Spun yarn 100% Cotton. Ashok Goyal.PRODUCTION The unit is producing different types of yarn both for Domestic consumption and Export purpose. while export department of the group manages export sales. The unit is having different channels for distribution of its products. . 2. market. having the export and domestic ratio is 34:66. The VTM. Amritsar.M. Carded & Combed. The marketing department deals with domestic sales.Production capacity of unit –I is 15 ton per day and unit-II is 13 tons per day. MARKETING For Marketing of different product. the unit is having a modern marketing department headed by experienced team which covers all the activities for conversion of finished goods into cash.). It shows the various hierarchical levels of the organization. It is a department line organization which is divided into various department headed by their respective department heads. . changing customer needs and modifications. The orders flow directly from unit head to different departmental heads down the line to respective department subordinates. Carded & Combed with a capability to offer any blend. Mumbai and Tirupur. 1. Dyed . Delhi. Branches at Delhi and Ludhiana. Processed & Polyester yarn NE 10s40s. The unit I is concerned with the production of 100% cotton yarn NE 10s40s. All departments operate under the ultimate control of Chief Executive Sh. ORGNISATION STRUCTURE A chart showing the organizational structure of VTM Ludhiana is given on the next page.

Manufacturing Process Flow Chart of VPL 100% COTTON CARDED/COMBED YARN Issue of Cotton Bales Laying Down Blow Room Card Breaker Draw Frame Finisher Draw Frame Speed Frame Ring Frame Winding Cheese Winding T.F.O Conditioning Packing for Single Yarn Conditioning Packing for Double Yarn Unilap Comber Storage & Dispatch .

1. LUDHIANA Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.MANUFACTURING PROCESS IN VINAYAK TEXTILE MILLS LIMITED. the material is delivered in the form of sliver. remove the trash particles and foreign matter etc. BLOW ROOM In this process. The different varieties of cotton and different lots are mixed together as per the requirement of end product and standard recommended mixings. CARDING In this process. MIXING The different varieties of cotton are issued as per product mix from the raw material section in bale from. 3. 2. Main purpose is to reduce tuft size. From the carding machine. the cleaning and opening of fibers is done in a sequence of beaters. further cleaning of fibers is done and the fibers are opened into single fibers extent i.e. which often comes in the bales. the main purpose is further removal of trash in cotton and the industrialization and parallelization of fibers. The material is conditioned in mixing for 24 hours. .

wound on the plastic bobbins. the card sliver is fed to the precombing draw frame. SPEED FRAME The finisher draw frame sliver is fed to the speed frames for conversion into the roving form. In case of combed counts.2 kilogram to 2.1 kilogram.4. The main purpose of combing process is to remove the short fibers from the material in the form of noil. in addition to the formation of bigger packages. During the process. The average noil percentage caries from 15% to 18%.P. Singles passage is given at the precombing stage. In the process 2 ply or 4 ply is to be done as per requirement. The material is delivered in the form of sliver. After cone winding the yarn is fed into Cheese Winding. LAP FORMER 20-25 precombed draw slivers are fed together to produce a lap sheets of fibers. 5. DRAW FRAME The purpose of this process is to reduce the wt/yard in the card sliver 6 to 8 end of card slivers are doubled together in this process to reduce variations and further drafting is done to reduce the wt/yard of delivered sliver. the yarn faults are also removed with help of electronic yarn cleaner. as per requirement of the market. 7. In this process the wt/yard of the sliver is reduced.I. 10. RING FRAME The roving is fed to ring frame for conversion into yarn. The purpose of combing draw frame is to reduce the wt/yard variations in the card sliver and to parallelize the fibers. The weight / package varies from 1. In the process. Two passages are given at the draw frame stage. is given in 2 ply . After the yarn is fed into ring doubling and required T. 8. DOUBLING In the case of type cord the process is same upto cone winding. 9. 6. slight twist is given to the fleece and the material delivered in the form of roving. COMBERS The laps prepared on lap former are fed to combers. WINDING In this process. the yarn is wound on paper cones to produce bigger package. the weight / yd of roving is reduced as per requirement of ultimate user and the delivered yarn is wound on the plastic bobbins. which is wound on the spools.

O.P.F.F. 11.I. In addition to the packing the material is checked thoroughly to avoid mixing of different materials . In the next process in assembly cheese winding is get the package in the package in the required from to be fed into T.or 4 ply yarn.O. is given to the final yarn in process. final yarn is prepared in the form of cheese and required T. in T. PACKING In this process. the cones / cheese are packed in bags or cartoons as per the requirement of the market.

Chapter.4 OUTLINE OF THE STUDY .

scope of the study is limited up to the availability of official records and information provided by the employees.  To know the future need of working capital in the running organization. So. trial balance. So it helps in future planning and control decisions. The study of W.  To render recommendations for the effective management of working capital. It involves the study of day to day affairs of the company. The study is supposed to be related to the period of last four years. I have done the study of the balance sheets.C.OUTLINE OF THE STUDY The management of working capital is very important. To get proper understanding of this concept. SCOPE OF THE STUDY The study is conducted at “VTM –LUDHIANA” for 6 weeks duration. . cash accounts.  To determine the operating cycle of the unit. OBJECTIVES OF THE STUDY The objectives of the study are as follows:  To analyze the working capital management of the company. cost sheets. management is purely based on secondary data and all the information is available within the company itself in the form of records. I have also conducted the interviews with employees of accounts and finance department and stores department. The motive behind the study is to develop an understanding about the working capital management in the running business organization and to help the company in developing the efficient working capital management. profit and loss a/c’s.

 Collection of data from various department of VTM to analyze the working capital management of VTM.  For understanding the various reports.RESEARCH METHODOLOGY  To recognize the various type of information which are necessary for the study of working capital management.  With the help of various techniques like: . personal interviews are conducted.

 Cash from debtors are collected by the corporate office through commission agents.  Investment of funds are also made by corporate office. SOURCES OF INFORMATION  Primary Data – The personal interview with senior officials and various members of finance and accounts department and also with other departments and collected the data. So efforts for collection of debtors cannot be clearly known from VTM Ludhiana. so it becomes difficult to know that how much investment is made in different ways for continuous availability of funds. So more detailed information cannot be received about these. .- Operating Cycle analysis Ratio Analysis Common size statement Schedule of changes in working capital The overall position of VTM is studied and analyzed  Suggestions are given on the basis of findings for better understanding of working capital management. LIMITATIONS OF THE STUDY  As central purchase office purchase raw material and central marketing yarn make sales.  Secondary Data – All the details necessary for the study was available within the company itself.

Chapter.5 WORKING CAPITAL ANALYSIS .

R = raw material conversion period W = work in process period F = finished goods conversion period D = debtor collection period C = creditors payment period (1) Raw Material Conversion Period (RMCP) = Average Raw Material Stock X 360 . OC = R + W + F + D – C Where. It comprises of raw material conversion period. So it is total time gap between raw material purchases to total debtors’ collection. Operating cycle is therefore expressed in terms of months or weeks or days. The higher the operating cycle period. FG conversion period and debtors’ conversion period and creditors period. The basic reason for calculating operating cycle is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than working capital requirement will be less.OPERATING CYCLE ANALYSIS Operating cycle refers to the time period which starts from the raw material purchases and ends with realization of receivable. WIP conversion period.WORKING CAPITAL ANALYSIS 1. This is also known as working capital cycle. higher the working capital requirement.

1 DAYS 2007-08 328005499.Raw Materials consumed during the year FOR SPINNING MILL: PARTICULARS 2004-05 Average raw material stock 183071228.45 495453061.14 Raw material consumed during the year RMCP 385430133.76 191.8 DAYS 2006-07 218046754.66 263718304.40 169.68 2007-08 11108879.34 338194022.33 .25 2006-07 16023458.2 DAYS 2005-06 227150926.07 309974487.54 122961363.76 238.22 263.3 DAYS 300 250 200 150 100 50 0 2004-05 2005-06 2006-07 2007-08 RMCP FOR DYE HOUSE: PARTICULARS 2004-05 Average raw material stock Raw material consumed 2005-06 15012815.94 410666073.

88 2.1 DAYS 2005-06 3388006 2006-07 6406842 2007-08 8595640.94 4.91 DAYS 426414576.9 DAYS 21.75 2.9 DAYS 608858271.40 .37 3.during the year RMCP 45 40 35 30 25 20 15 10 5 0 - 43.8 DAYS RM CP 2004-05 2005-06 2006-07 2007-08 (2) Work in Progress Conversion Period (WIPCP) = Average stock in progress Cost of Production X 360 FOR SPINNING MILL: PARTICULARS 2004-05 Average stock in progress Cost production WICP 4046698.00 of 500317045.9 DAYS 11.8 DAYS 751824244.

00 16 14 12 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 WICP (3) Finished Goods Conversion Period (FGCP) .4.58 3.19 14.4 DAYS 2005-06 5791673 2006-07 6692336 2007-08 4917031.5 4 3.5 3 2.5 0 WICP 2004-05 2005-06 2006-07 2007-08 FOR DYE HOUSE: PARTICULARS 2004-05 Average stock in progress Cost production WICP 1021072 of 25254802.5 1 0.7 5.6 DAYS 219005634.76 9.5 DAYS 404498734.9 DAYS 524670967.5 2 1.

68 20 15 10 5 0 FGCP 2004-05 2005-06 2006-07 2007-08 FOR DYE HOUSE: PARTICULARS 2004-05 Average finished goods inventory Cost of goods sold FGCP 219005634.6 DAYS 426414576.9 DAYS 2005-06 5857416 2006-07 6745966 2007-08 10034498 .75 7.76 9.4 DAYS 751824244.= Average Finished good inventory Cost of goods sold X 360 X 360 FOR SPINNING MILL: PARTICULARS 2004-05 Average finished goods 18939831.18 inventory Cost of goods sold FGCP 500317045.37 7.6 DAYS 404498734.1 DAYS 2005-06 9473270 2006-07 12545845 2007-08 39817039.9 DAYS 608858271.7 6 DAYS 524670967.58 6.88 13.94 19.

13 588183650.49 730047747.62 22.7 DAYS 2006-07 92312638.8 DAYS 60 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 DCP .60 14.35 24.84 543167006.4 DAYS 2005-06 37279070.23 56.10 8 6 4 2 0 FGCP 2004-05 2005-06 2006-07 2007-08 (4) Debtors’ Conversion Period (DCP) = Average Debtors Credit Sales X 360 FOR SPINNING MILL : PARTICULARS Average debtors Credit sales DCP 2004-05 37279070.5 DAYS 2007-08 29970369.84 596069587.

FOR DYE HOUSE: PARTICULARS Average debtors Credit sales DCP 2004-05 247769 212240 420.5 DAYS 2006-07 48904270.8 DAYS 2006-07 5294945.83 410666073.5 DAYS 450 400 350 300 250 200 150 100 50 0 DCP 2004-05 2005-06 2006-07 2007-08 (5) Credit Conversion Period (CCP) = Average Creditors Credit Purchases X 360 FOR SPINNING MILL: PARTICULARS Average creditors Credit purchases CCP 2004-05 4316518.69 35.88 309974487.81 51.09 610863493.3 DAYS 2005-06 28959455.40 4.76 4.26 495453061.97 492529652.22 6.03 DAYS 2005-06 5840979.84 202379449.7 DAYS 2007-08 99301521.7 DAYS .31 385430133.76 1.6 DAYS 2007-08 23709393.76 58.

89 122961363.6 DAYS 2007-08 1767614.69 263718304.89 338194022.68 1.7 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 CCP FOR DYE HOUSE: 16 14 12 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 CCP PARTICULARS Average creditors Credit purchases CCP 2004-05 - 2005-06 5449322.9 DAYS 2006-07 1203818.25 15.33 1.9 DAYS .

8 DAYS 191.3 DAYS 258.5 DAYS 254.11 DAYS 299.8 DAYS 276.4 DAYS 19.9 DAYS 3.8 DAYS 4.7 DAYS 56.7 DAYS NOC 204.08 DAYS 292.8 DAYS GOC 208.03 DAYS 6.1 DAYS 299.1 DAYS 238.6 DAYS 1.5 DAYS 14.9 DAYS 7.3 DAYS WICP 2.3 DAYS CCP 4.GROSS OPERATING CYCLE FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 RMCP 169.3 DAYS 258.8 DAYS 4.6 DAYS 7.2 DAYS 263.4 DAYS 24.1 DAYS DCP 22.3 DAYS 300 250 200 150 100 50 0 2004-05 2005-06 2006-07 2007-08 GOC NET OPERATING CYCLE FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 GOC 208.1 DAYS FGCP 13.2 DAYS 274.8 DAYS 276.91 DAYS 2.6 DAYS .

9 DAYS 3.9 DAYS 11.5 DAYS 80.5 DAYS 80.9 DAYS 1.6 DAYS 9.8 DAYS WICP 14.5 DAYS 69.9 DAYS NOC 434.6 DAYS CCP 15.3 DAYS 51.5 DAYS 69.6 DAYS 6 DAYS 6.300 250 200 150 100 50 0 2004-05 2005-06 2006-07 2007-08 NOC GROSS OPERATING CYCLE FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 RMCP 43.9 DAYS 21.9 DAYS 98.9 DAYS DCP 420.6 DAYS 1.9 DAYS 78.9 DAYS 114.7 DAYS 58.9 DAYS 114.6 DAYS 67.5 DAYS 5.7 DAYS .5 DAYS 35.4 DAYS FGCP 9.6 DAYS 450 400 350 300 250 200 150 100 50 0 GOC 2004-05 2005-06 2006-07 2007-08 NET OPERATING CYCLE FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 GOC 434.5 DAYS GOC 434.

The main reason of increasing gross operating cycle in 2004-05 and 2005-06 is due to more availability of raw material in the stores but in year 2006-07 there is less GOC due to less availability of raw material in stores. 2. The GOC for dye house has shown a significant decreament from 434.6 days. In 2006-07.11 days then it increased to 299. For spinning mill in year 2004-05 it is 208. The GOP for dye house is not satisfactory as it has decreased to a great extent.8 days.3 days in year 2005-06. In year 2007-08. it came out to be 80.5 days in year 2006-07.ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF THE HISTORICAL DATA There are number of devices to analyze working capital like ratio analysis. it is decreased to 258. We will discuss them one by one as follows: .9 days in 2004-05 to 69. common size statement etc.450 400 350 300 250 200 150 100 50 0 NOC 2004-05 2005-06 2006-07 2007-08 ANALYSIS It is claimed that gross operating cycle of VTM for spinning mill is increasing in year 2004-05 and 2005-06 and it is decreasing for dye house in year 2004-05 and 2005-06.

A ratio equal or near to the rule of thumb of 2:1 i.e. It is the process of establishing and interpreting various ratios for helping in making decisions. RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements.3 12.92 CURRENT RATIO (CR) 14. To measure the liquidity of a firm.40 337914119-55 372031954. it refers to the ability of a concern to meet its current obligations as and when these become due. CURRENT RATIO – It may be defined as the relationship between current assets and current liabilities.03 462706185.06 CURRENT LIABILITIES 22952307.7 Current Assets Current Liabilities . the following ratios can be calculated. High current ratio indicates firm is liquid and has the ability to pay its current obligations in time as and when they become due. current assets double the current liabilities is considered to be satisfactory. It only means of better understanding of financial strengths and weaknesses of a firm. This ratio is also known as working capital ratio and measures the ability of the firm to meet current liabilities. Current Ratio = Current Ratio of VTM FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 CURRENT ASSETS 329780134.03 29553280.6 9.4 13.82 25398799. The main emphasis has been on calculating the ratios related to a working capital management.1. LIQUIDITY RATIOS These are the ratios which measures the short term solvency or financial position of a firm. In other words.08 47891481.

6 24.94 8735151.6 148537709.55 13090777.3 5975377.16 14 12 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 CR FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 CURRENT ASSETS 9633007.9 4.9 10.99 CURRENT LIABILITIES 10462522.63 92984361.17 CURRENT RATIO (CR) 0.63 64846029.9 .

LIQUID RATIO – This ratio is also known as quick ratio or acid test ratio. The overall position of current ratio for spinning mill is satisfactory.25 20 15 10 5 0 CR 2004-05 2005-06 2006-07 2007-08 ANALYSIS The current ratio of the spinning mill is above the standard and it guarantees the payment of dues in time. The current ratio of the company has been considerably high because they had made over investment in inventories which is the main reason for the high ratio of current assets.6 in 2006-07 and then to 24. It is a more rigorous test of liquidity than the current ratio. It is based on those current assets which are highly liquid. Inventories are high because of seasonal availability of raw material. the ratio was not satisfactory but it is quite satisfactory for the years after 2004-05 and especially for the year 2007-08. The current ratio of dye house has shown a remarkable increament from 0.9 in 2004-05 to10.9 in 2007-08. Quick Ratio = Quick or Liquid Assets Current Liabilities . Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratio is the indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand low ratio represents liquidity position is not good. Initially in 2004-05.

92 127216004.94 8735151.92 LIQUID RATIO (LR) 5.53 CURRENT LIABILITIES 10462522.6 2.7 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 LR FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 LIQUID ASSETS 6123027.91 81358926 CURRENT LIABILITIES 22952307.55 13090777.08 47891481.Quick Assets = Current Assets – Inventory – Prepaid Expenses Quick Ratio of VTM FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 LIQUID ASSETS 120598521 89811409.3 1.86 33218697.4 .57 56812234.5 4.3 5975377.3 3.17 LIQUID RATIO (LR) 0.82 25398799.5 6.03 29553280.5 19.26 115776657.

For dye house. bank and marketable securities. The decreament in the ratio is not satisfactory.6 in 2004-05 to 6. The increament in the ratio is quite good for the dye house. ABSOLUTE LIQUID RATIO – Although receivables are generally more liquid than inventories yet there may be doubt regarding their realization into cash in time. This shows that the investment in liquid assets has increased over the past years. however the ratio 1. Absolute liquid ratio shows the relationship between liquid assets which include cash.20 15 10 5 0 LR 2004-05 2005-06 2006-07 2007-08 ANALYSIS According to rule of thumb.5 in 2006-07 and then to 19. the liquid ratio has decreased over the past four years.the liquid ratio has shown a significant increament over the past four years. Absolute Liquid Ratio = Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio of VTM . It was 5. it should be 1:1.3 in 2004-05 and decreased to 4. It increased from 0.4 in 2007-08.7 in 2007-08 matches the rule of thumb but it should be quite more than the rule of thumb.7 in 2007-08. For spinning mill.3 in 2006-07 and then to 1.

12 0.92 ABSOLUTE LIQUID (ALR) 0.36 569656 5210807.16 0.08 47891481.01 RATIO 0.1 0.01 0.06 0.94 8735151.03 29553280.01 0.FOR SPINNING MILL: YEAR ABSOLUTE LIQUID ASSETS 2004-05 2005-06 2006-07 2007-08 435629.02 0.02 0 ALR 2004-05 2005-06 2006-07 2007-08 FOR DYE HOUSE: YEAR ABSOLUTE LIQUID ASSETS 2004-05 2005-06 2006-07 2007-08 233902 253609 CURRENT LIABILITIES 13090777.64 CURRENT LIABILITIES 22952307.82 25398799.18 0.02 RATIO .14 0.08 0.18 0.3 ABSOLUTE LIQUID (ALR) 0.04 0.58 395884.

Thus spinning mill and dye house. 2006-07 due to increased cost of production both for spinning mill and dye house.7 1.35 588183650. WORKING CAPITAL TURNOVER RATIO – Working capital turnover ratio indicates the velocity of the utilization of net working capital.9 1.01 0. we can say that in all the years.02 0.005 0 ALR 2004-05 2005-06 2006-07 2007-08 ANALYSIS The acceptable standard for this ratio is 0.7 1.015 0.14 = Sales Net Working Capital .60 NET WORKING 1.0. Working Capital Turnover Ratio Working Capital Ratio of VTM FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 SALES 596069587. it is below the standard due to very less cash and bank balance maintained because major cash receipts and payments are handled by corporate office.23 730047747.5:1. It is very less in 2005-06.58 312620335.8 WCTR CAPITAL 306883587.95 415076656. This ratio measures the efficiency with which the working capital is being used by a firm.62 543167006.52 342591885.

6 2004-05 2005-06 2006-07 2007-08 WCTR FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 SALES 202379449.8 4.9 5.7 1.8 1. A high working capital ratio indicates the effective utilization of working .9 1.85 1.3 CAPITAL 51755251.76 NET WORKING WCTR 3.65 1.4 142581027.83 6 5 4 3 2 1 0 2004-05 2005-06 2006-07 2007-08 WCTR ANALYSIS This ratio indicates the number of times the working capital is turned over in the course of a year.69 84249210.1.69 610863493.81 492529652.75 1.

It is 1.12 % 62. COMMON SIZE STATEMENT ANALYSIS This analysis is mainly to see the composition of working capital. COMMON SIZE STATEMENT FOR SPINNING MILL: FOR YEAR 2004-05: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses AMOUNT ( IN RS. 1.9 in 2004-05. 2. For dye house.8 in 2006-07 and then decreased to 4.3 in 2007-08. the ratio is quite same for the past four years.9 in 2005-06 to 5. the ratio is more than that of spinning mill. For spinning mill. It shows increament from 3.) 570440434.8 in 2007-08. The ratio is satisfactory for dye house but it should not decrease further. Its purpose is to see the %age of each asset to the total asset and %age of each liability to total liability.87 - .18 1.93 17200494.7 in years 2005-06 and 200607 and 1.capital and less working capital ratio indicates less utilization.

84 336825183.76 (1.39 70.63 3014518.84 569656 53923502.78 21650307.52 797126499.45 64.69 4.81 0.59 227016140.26 435629.37 329780134.98) 894524516.31 16627112.77 100 .4 917421063.05 4.33 1.07) 97.45 567503938.8 20 0.46 4400478.36 84108909.73 668837 1339839.04 0.36 100 FOR YEAR 2005-06: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES AMOUNT (IN RS.83 337914119.07 0.17 35.28 0.05 208195599.12 % 49.75 29.23 21.Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side 587640929.05 22.77 (9804605.82 916174824.05 9.88 37279070.95 100 61.94 36.57 246141889.55 1135040619.) 565709880.64 0.14 2.41 37039996.69 3.

80 41.70 372031954.44 1.03 1285106467.70 0.3 .43 425924449.44 532957606.6 730042330.Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side 857082196.27 25398799.62 913074513.30 31.09 0.52 5294945.41 2.08 % 67.47 (0.) 873085829.84 98.41 1.95 1.03 1332937233.11 71.65 28.83 21319619.6 5840979.35 0.22 2.57 240453655.58 34054852.88 18036489.62 92312638.93 29553280.71 18.88 1521329.57) 97.95 100 56.05 18.87) 1255666399.13 5210807.39 24531788.91 100 FOR YEAR 2006-07: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities AMOUNT (IN RS.11 1.63 64.95 (7333537.71 0.95 39988683.32 2938714.94 3.78 1307538434.67 0.

28 0.55 1.91 2.69 3.35 379510100.78 24415626.7 % 62.76 28.43 27165970.72 23475855.06 1312865150.41 1026736607.24 100 73.69 2.70) 1341180423.42 (117066371.Total of liability side 1285219679.92 1389071905.06 431510188.07 64.6 100 FOR YEAR 2007-08: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side AMOUNT (IN RS.76 1.92 31.55 29970369.92 850158965.) 822992994.49 395884.02 35.03 4.20 47891481.06 (8.64 52829830.43) 96.45 100 FOR DYE HOUSE: FOR YEAR 2004-05: PARTICULARS AMOUNT (IN RS.) % .38 462706185.

02) 30.77 189659461.48 10462522.34 5.25 93.73 (6.08 4.09 .25 100 FOR YEAR 2005-06: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances AMOUNT (IN RS.63 0.85 3641581.72 0.11 59872920 (11994678.72 0.) 184248879.26 233902 % 73.06 28959170.FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side 186017879.27 849096.62 3247313.73 31300541.04 94.59 0.75 4.92 672844.7 8359951.34 74.77 247769 6137924.25 140951705.19 0.83 95.55 199292469.52 11.15 1429726.41) 188829946.86 9633007.06 12.34 1.63 199292469.12 3.46 185097975.83 100 70.17 1.

13 13090777.11 5449322.3 48904270.096 70.30 4.66 100 .5 300237 220513391.6 % 70.Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side 4352416.22 22.63 249944005.18 20.82 100 FOR YEAR 2006-07: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES AMOUNT (IN RS.89 6821847.74 25.24 0.5 35816899.05 1.08 2.34 11.) 220213154.06 95.34 5.9 253609 8009581.30) 258346255.59 0.41 59872920 (14177921.31 64846029.51 0.55 29.94 271437033.92 819607.42 15.1 313497752.08 2.94 100 78.9 92984361.36 212651256.

08 983537.34 100 55.69 7335764.11 313497752.2 59872920 29033979.89 8735151.34 0.03 1.13 236801598.09 97.09 16894574.53 195567.062 2.6 19.60 0.4 304762601.79 100 AMOUNT (IN RS.71 98.44 148537709.78 421990917.07 5975377.63 4.52 53753985.17 % 58.41 0.4 .) 209812946.66 9 27.27 58.99 359334193.38 2.33 12.06 210796483.95 0.19 1767614.46 99301521.89 4076005.70 41.71 68.21 0.6 1203818.9 92.Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Security deposits & Retention money Total current liabilities Total of liability side FOR YEAR 2007-08: PARTICULARS FIXED ASSETS Net block Capital work-in-progress Project & Pre-operative expenses Total fixed assets CURRENT ASSETS Inventories Sundry debtors Cash & Bank Balances Loans & Advances Total current assets Total assets SHARE CAPITAL & RESERVES Inter unit balances Secured loans Reserves & Surplus Total Capital & Reserves CURRENT LIABILITIES Sundry creditors Other liabilities Interest accrued but not due Trade deposits and other Advances Total current liabilities 215855702.56 30.39 0.21 131757.14 32341614.89 131435332.

36 100 ANALYSIS For spinning mill.Total of liability side 427966294. In 2007-08. The other liabilities have shown increament from year 2004-05 to year 2006-07 but it has decreased in year 2007-08. It contributes approximate 11% to 30% part of current assets for all the years from 2004-05 to 2007-08. So the working capital is more for year 2007-08 as compared to last year’s working capital. The debtors also have significant part of current assets. The current liabilities mainly consist of sundry creditors and other liabilities. The least contribution is thus of cash and bank balance. For dye house. current liabilities consist of mainly creditors and other liabilities. It covers more than 50% of total current assets. the inventories form a good portion of current assets and contribute 30% to 50% of the total current assets over the past years. The sundry creditors have decreased over the past years. and current liabilities have also shown increament. The sundry debtors also show fluctuating proportions in the total current assets over the years. ANALYSIS ON THE BASIS OF SCHEDULE OF CHANGES IN WORKING CAPITAL SCHEDULE OF CHANGES IN WORKING CAPITAL: FOR SPINNING MILL: . the major part of current assets involves inventories. The proportion is quite less for year 2004-05 but it increased significantly for the next years and contributed about 66% to the total current assets in year 2007-08. On the other hand. current assets have increased due to increase in inventories and loans & advances. 3.

52 38988228.58 5687493.78 5840979.49 22952307.47 239074.52 312515320.54 4316518.94 312515320.36 84108909.88 18036489.41 37039996.52 5687493.64 DECREASE 30185406.26 435629.84 569656 53923502.15 668837 181489.73 668837 1339839.88 37279070.94 312515320.31 16627112.69 .57 1409377. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. creditors Other liabilities Int.88 1521329.52 312515320.55 INCREASE 37946290.37 329780134.69 38988228. accrued but not due Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital 2004-05 208195599.58 134026.4 2005-06 246141889.83 337914119.27 1524461.ANALYSIS: PARTICULARS CURRENT ASSETS: Inventories S.82 306827826.

93 29553280. we find that.43 2156235.55 29970369. Among the current liabilities.14 160770137.13 5210807.14 47891481.06 INCREASE 139056444.32 2938714. creditors Other liabilities Trade deposits Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital 2006-07 240453655.92 414814703.08 342478673.54 As we have a look on the schedule of changes in working capital for the spinning mill over the years 2004-05 and 2005-06. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S.inventories. sundry debtors and cash & bank balances have shown increament from year 2004-05 to year 2006-07.93 62342268.46 2938714.62 92312638.38 462706185.26 23475855.19 414814703.95 72336029. among current assets.93 23709393.58 34054852.83 21319619.94 18774977. The total current assets have . The Loans & advances have got decreased in the same years.64 52829830.54 160770137.68 DECREASE 5294945. the sundry creditors and other liabilities have increased. So the overall net working capital has increased.46 - 18414447.FOR YEARS 2004-05 AND 2005-06: PARTICULARS CURRENT ASSETS: Inventories S.20 706233.70 372031954.64 4814922. FOR YEARS 2006-07 AND 2007-08: Among the current assets.03 2007-08 379510100.19 414814703.14 72336029.49 395884.inventories and loans & advances have increased and sundry debtors and cash & bank balances have shown decreament.88 706233.

61 51755251.65 10462522. Among the current liabilities. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S.06 28959170.77 247769 6137924.26 233902 4352416.63 2005-06 31300541.26 233902 DECREASE 1785508.89 6821847.55 8359951.69 52584766.86 9633007.81 59909158. creditors Other liabilities Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital 2004-05 3247313. So the net working capital has also increased.63 INCREASE 28053227.29 28711401.92) 52584766.15 1429726.92 672844.13 2910628.55 (829514.69 59909158.61 51755251.31 64846029.48 5449322.increased. FOR DYE HOUSE: PARTICULARS CURRENT ASSETS: Inventories S.69 13090777.94 51755251.92 819607.sundry crditors and other liabilities have increased.81 .26 5392121 146762.

07 195567.21 131757.69 142562332.82 5975377. Among the current liabilities.84 62737569.89 1767614.44 148537709.99 INCREASE DECREASE 3475284. the net working capital has increased. The total current assets have increased.69 14256332.17 142562332.69 7335764. creditors Other liabilities Trade deposits Security deposits & Retention money Total current liabilities (B) Working capital (A-B) Net increase in working capital 2006-07 35816899.13 58313122.97 253609 8009581. sundry creditors have decreased and other liabilities have increased.34 48904270.93 92984361. inventories.2 3259759.89 4076005.89 8735151.53 195567. sundry debtors and cash & bank balance have increased but the loans & advances have decreased.24 2007-08 32341614. debtors Cash & Bank Balances Loans & Advances Total current assets (A) CURRENT LIABILITIES: S. So. . The total current liabilities have increased.46 99301521.84 ANALYSIS FOR YEARS 2004-05 AND 2005-06: Among the current assets.82 58313122.88 50397250.51 1203818.12 253609 8884992.07 - 563796.PARTICULARS CURRENT ASSETS: Inventories S.82 62737569.11 84249210.32 131757.09 16894574.

The total current assets have increased.FOR YEARS 2006-07 AND 2007-08: Among the current assets. . inventories and cash & bank balances have decreased. sundry creditors have increased but other liabilities have decreased. So. sundry debtors and loans & advances have increased. Among the current liabilities. On the other hand. the net working capital has increased.

Chapter.6 CASH MANAGEMENT .

This underlines the significance of cash management. On the other hand extreme liquidity may take uneconomic investments. The term cash includes coins. It is also the ultimate output expected to realize by selling the product manufactured by the firm. Sometimes near. Insufficiency of cash at any stage may prevent a firm from discharging its liabilities or force it to sell its other assets immediately. firm should keep sufficient cash neither more nor less. Cash management is concerned with the managing of:  Cash inflows and outflows of the unit  Cash flows within the unit  Cash balance held by the unit at a point of time by financing deficit or investing surplus cash . Hence. Cash management does not end here and the financial manager may also be required to identify the sources from where cash may be produced on a short term basis or the outlets where excess cash may be invested for a short term.e. currency and cheques held by the firm ad balances in its bank accounts. a major function of the financial manager is to maintain a sound cash position.cash items such as marketable securities of bank item deposits are included in cash. Cash is the basic input needed to keep the business running on continuous basis. The cash is important current asset for the operation of the business. Cash shortages will simply disturb the firm’s manufacturing operations where excessive cash will simply remain idle. Cash management is one of the key areas of working capital management. Thus.CASH MANAGEMENT Cash management refers to management of cash balance and the bank balance and also includes the short term deposits. This will enable the financial manager to identify the timings as well as amount of future cash flows. A part from the fact that it is the most liquid current asset . A financial manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. Cash is the most liquid and can be used to make immediate payments. For this he will have to forecast the cash inflows from sales and outflows for costs etc. cash is the common denominator to which all the current assets can be reduced because the major liquid asset i. receivables and inventory get eventually converted into cash.

There may be so many reasons due to which the emergency of cash arises. In VTM. yet by enlarge. business firm do not engage in speculations because the primary motive to hold cash are transaction and precautionary motive. the cash is held for precautionary motive in advance. This cash may be held as marketable securities which are highly liquid and low risky. The firm should evolve strategies regarding the following four facts of cash management: (1) (2) (3) (4) Cash Planning Managing the cash flow Optimum cash level Investing surplus cash But the VTM has to give the reasons for extra cash to . Speculation and precautionary motives cash is held by corporate office. If the VTM requires some more cash to meet any future contingency then it informs about it to corporate office and corporate office sends cash to VTM as per requirement. corporate office. in material purchasing or in any other type. So enough cash for smooth business is required for transaction motive. These reasons can be: (i) (ii) (iii) Sudden rise in the demand which leads to more production Due to inflation Due to any miss-happening in future like loss by fire theft etc. Precautionary Motive Under this motive cash is held for most contingencies in future. Speculative Motive The speculative motive relates to holding of cash for investing in profit making opportunity as and when arises. the firm can choose most profitable opportunity. The opportunity may arise in securities.MOTIVES FOR HOLDING CASH Transaction Motive It means a firm holds cash for conduct of business. The daily requirements of cash come under this motive. By holding cash for speculative motive. it holds cash only for transaction motive.

CASH PLANNING Cash planning is a technique to plan to control the use of cash. There estimates show the requirement of cash in the unit. Another device used for cash planning is six monthly rolling cash flow statement prepared on monthly basis. This statement shows the projections of inflows and outflows of cash during the next six months. Cash planning can help to anticipate future cash flows and the need of the form and reduces the possibility of idle cash.1. These are made at head office Ludhiana so the main source of cash inflows to VTM is the cash credit limit. There estimations are sent to corporation office at Ludhiana so that needed cash is obtained at night time. Daily cash flow statement is prepared to see the daily cash position. The unit under the study makes cash planning through following tools:  Cash Budget  Rolling cash flow statement  Daily cash flow statement The cash budgets are prepared by the firm on monthly and yearly basis. MANAGING CASH FLOWS Significant part of cash management is the management of cash flow both inflows and outflows without any loss to the unit and without impairing its goodwill in the market. This statement can help in taking various decisions. weekly and monthly basis. 2. if the unit wants to make any capital payment. which is as follows: . Cash budget is the most significant device to plan for and control cash receipt and payments. Cash planning may redone on daily. Through cash budget the unit can make estimates of cash receipts and disbursement during a future period of time. these statements can tall when there is surplus of cash and payments can be made during the month.

5 lacs for the routine expenses. nor it is too low that the firm is always in cash tight position. 3. generally payment for cotton is made when cotton is received in the mill. for monitoring daily bank position. The unit can withdraw from these limits as and when needed. Cash outflows also arise on account of purchase of stores.Banks Main Limit (in crores) Peak Normal 2 crores 2 crores Sub-limit transfer to LDH Unit (in crores) 5 crore in month. Punjab National Bank. Main outflow of the unit is on raw material cost. Different types of raw material are purchased from different states. around the days of wages the amount is approx. The unit always keep 1. Normally cotton is purchased during peak season when good quality cotton is available.e. spares and all other material normal credit for these products is mainly 30 to 60 days and full credit period is used. The interest rate paid for this is near about 11. 4 lacs per day is kept in hand. To exchange the efficiency of cash management the surplus funds are transferred to other units if those units need cash thus increasing the overall profitability.25%. DETERMINING OPTIMUM BALANCE An efficient finance manager always aims at preparing the cash and bank balance at the optimum level i. The daily bank-position of sublimits is fixed to H. 4.O. thus the unit maintains the appropriate amount of cash balance and meets the firms obligations as and when they due. and credit period depends upon the states from which cotton is purchased. neither it is too high that it remains idle and the firm losses interest on it. In case of drawn in sub-limits the funds get transferred from main limits. The main limits are controlled by H. The cash credit limits are sanctioned by the bank against the hypothecation stocks and fluctuating assets as security. The sub-limits have been allocated to the unit for fulfilling day-to-day requirements of working capital. INVESTING IDLE CASH . The amount received from the sale of yarn is debited at head office in main limit.O.

Hence there are no idle funds at unit level.Since the main input of the company is of seasonal nature. to have a good policy of investing idle funds in an appropriate security keeping in view the requirement of funds in the future and liquidity of the security in which the investment is being made. therefore. which falls between October to March. The company has very good system of managing its current assets. Therefore the company has to maintain high level of assets during cotton season. The current assets of the unit are managed at corporate level and the unit seeks funds according to their requirements calculated on day-to-day basis. During April to September the company gets its cash credit limits reduced in the respective banks. As the funds are monitored / controlled at corporate level. it becomes the prime responsibility of H.O. .

Chapter.7 RECEIVABLES MANAGEMENT RECEIVABLES MANAGEMENT .

allowing them a reasonable period of time in which to pay for the goods. Receivables are a direct result of credit sale. defining credit terms and employing methods for timely collection of receivables. increase in receivables also increase chances of bad debts. Most firms treat accounts receivables as a marketing tool to promote sales and profits. As against the ordinary type of loan the trade credit in the form of receivables is not a profit making service but an inducement or facility to the buyer-customer of the firm.Accounts receivables are simply extension of credit to the firm’s customers. Every firm must develop a credit policy that includes setting credit standard. Credit sale is resorted by a firm to push up the sale. CREDIT POLICY . The creation of accounts receivables is beneficial as well as dangerous. which ultimately results in pushing up the profits earned by the firm. which involves extra costs in terms of interest. So the receivables management must be attempted by adopting a systematic approach and considering the following of receivables management: (1) (2) THE CREDIT POLICY CREDIT CONTROL 1. The finance manager has to follow a policy which uses cash funds as economically as possible by extending receivables without adversely affecting the chance of increasing sales and making more profits. Receivables Management generally means what type of credit policy a firm should adopt so that sales and profits can be promoted on the one hand and funds can be economically utilized on the other hand. The receivables (including the debtors and the bills) constitute a significant portion of working capital and are an important element of it. At some time selling goods on credit result in blocking of funds in accounts receivables. Additional funds are required for operating needs of business. The receivables emerge whenever goods are sold on credit and customers receivables are created when a firm sells goods or services to its customers and accepts. receivables are a type of loan extended by the seller to the buyer to facilitate the purchase process. Moreover. instead of the immediate cash payment the promise to pay within specified period. They represent extension of credit and investment of funds and must be carefully managed. Thus.

If this cost is less then it will be beneficial for company to increase the credit period.g.When a firm sells on credit.e. It may differ from one market to another market. it must set credit standard which should be applied in selecting customers for credit sales. It refers to the length of time customers are allowed to pay for their purchases. Character of a person Capacity of a person Condition of a person . The credit terms may relate to the following: (a) Credit Period – The credit period is an important aspect of the credit policy.It may be defined as the set of parameters and principles that govern the extension of credit to the customers. In some cases the credit period may be zero and only cash sales are made. it means the customers are expected to pay within 30 days from the date of sales. if a firm’s credit terms are “net 30”. it will be beneficial for a firm. This requires the determination of (i) (ii) The credit standard i. The credit period generally varies from 15 days to 60 days. But one must compare the cost of extended credit with the incremental profits. So the credit standard is the combination of three C’s These are: (i) (ii) (iii) Credit Terms The credit terms refers to the set of stipulation under which the credit is extended to the customers. The conditions that the customers must meet before being granted credit and The credit terms i. As much the credit period will be shorter. to be on a safer side.e. It refers to the time duration in terms of net date e. Therefore. it takes about the paying capacity of the customers. The credit standards of a firm represent the basic criteria for the extension of a credit to customer. These are discussed as follows: The Credit Standard: . But the firm has to lengthen its credit period to increase sales. the terms and conditions on which the credit is extended to the customers.

One possible way of ensuring early payments from customers may be to charge interest on over due balances. Ageing schedule down book debts according to the length of time of which they have been outstanding. The Performa of the ageing schedule prepared by the VTM is as follows: . CREDIT CONTROL The next important step in the management of receivables is the control of these receivables. For this. Following are the directions for controlling the receivables. as ageing schedule. the customer with a natural tendency towards slow payments may become slower to settle his accounts. If a firm has a lenient credit policy. (2) Monitoring of receivables – To control the level of receivables. In practice credit terms would include: (i) (ii) (iii) The rate of cash discount The cash discount period The net credit period 2. (1) The Collection Procedure – The overall collection procedure of the firm should neither be too lenient nor too strict. number of measures are available as follows: (i) (ii) A common method to monitor the receivables is the collection period Another technique available for monitoring the receivables is known or number of day’s outstanding receivables. The ageing schedule provides more information about collection experience.(b) Discount Terms – It is reduction in payment offer to customer to induce them to repay credit obligation within a specified period of time. the firm should apply regular checks and there should be a continuous monitoring system. It helps to shot out the slow paying debtors. A strict collection policy can affect the goodwill and damage the growth prospects of the sales.

In this way. Corporate office may avoid selling goods to those customers who have not paid for a long period. credit sales are too much necessary to increase the total sales. So record for outstanding debtors is maintained by VTM itself. CREDIT POLICY OF VTM VTM not directly make sales.21 24148419. It sends the credit note to VTM after receiving amount against any debtors. Corporate office just receives the amount from the debtors. debtors are also collected by the corporate office directly. VTM has a good receivable policy as it has large amount of credit sales. The main reason behind this is cut-throat competition.10 % age of Total 22 0 15 17 19 6 12 100 RECEIVABLES MANAGEMENT IN VTM As earlier discussed. 20% to 30% of current assets of VTM are sundry debtors. VTM has to make credit sales.01 8852629. Sales are made by corporate office directly.67 14510162.61 29297084. corporate office comes to know about age segments of different customers.46 13217364. s to compare with them. As the sales process. In these reports debtors outstanding for one month or six months are shown separately. So the sales process is centralized.AGEING SCHEDULE Age Classification 0 – 15 days 15 – 30 days 31 – 60 days 61 – 90 days 91 – 120 days 121 – 180 days More than 180 days Total O/S Amount Amount 35330987. But it does not have any record of outstanding debtors. VTM sends fortnightly reports to corporate office which records the data about the outstanding debtors for different periods.71 157577760. . There are also many competitors of VTM in the market. I.

the ability to pay is checked. Credit Terms (a) Credit Period – For different products VTM provide different credit period.cash basis 40 days -15 days CREDIT CONTROL Collection efforts made by VTM: Due to cut-throat competition VTM has to make credit sales. For this market research is done by marketing department to know about reputation of customer in the market and financial position of him. if payment is not made within the prescribed limits. Oswal group has established its collection centers in different cities as in Delhi. Thus customer is only known after getting information about him and then credit is provided. interest chargeable . prior to material dispatch Interest free 18 % p.. 1 % C. 1 % CD @ 18 % p. Ludhiana etc. The number of collection centers in a . Credit Standards – VTM provides credit to customers after getting information about that customer.a. and these centers collect money from the debtors and send it to corporate office. From the records of customers having VTM and from financial record of those customers.D. To collect the funds Oswal group has adopted a decentralized method.a.CREDIT POLICY VARIABLES 1. These credit terms are according to the nature of product which are following: Scrap / waste Dyed yarn Grey yarn (b) Cash Discount – In case of 100% cotton yarn Advance payment 15 days credit Afterwards In case of Polyster Cotton Yarn Payment within 48 hours Interest II.. 2.

particular city depends upon the number of customers to minimize the bad debts and to accelerate the collections. Commission is also paid to agents This percentage is only on the basis of the realization amount. YARN GREY DYED COMMISION DOMESTIC 1.5% 2% ON COMMISION EXPORTS 3% 3% ON

ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VTM DEBTORS TURNOVER RATIO This ratio indicates the number of times average debtors are turned over during a year. The higher the value of debtor turnover ratio the more liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors. Debtors turnover ratio FOR SPINNING MILL: = Sales Avg. Debtors

YEAR 2004-05 2005-06 2006-07 2007-08

SALES 596069587.62 543167006.35 588183650.23 730047747.60

AVG DEBTORS 37039996.26 37279070.84 92312638.13 29970369.49

DTR 16.09 times 14.6 times 6.37 times 24.36 times

25 20 15 10 5 0 DTR

2004-05

2005-06

2006-07

2007-08

ANALYSIS: As we can observe that, the debtors turnover ratio of the company has increased from 16.09 times in year 2004-05 to 24.36 times in year 2007-08. Increasing DTR is good for the company as it assures that the sundry debtors are more liquid.

FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 SALES 212240 202379449.81 492529652.69 610863493.76 AVG DEBTORS 247769 28959170.26 48904270.97 99301521.09 DTR 0.9 times 6.99 times 10.1 times 6.2 times

12 10 8 6 4 2 0 2004-05 2005-06 2006-07 2007-08 DTR

ANALYSIS: The DTR for dye house has shown increament from 0.9 in 2004-05 to 10.1 in 2006-07 but it again decreased to 6.2 in 2007-08. It is not good for the company that DTR has declined in 2007-08 as it assures less liquid debtors.

Debtor Conversion Period (DCP) The average no. of days for which a firm has to wait before its receivables is converted into cash. DCP = 360 DTR

FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 DTR 16.09 14.6 6.37 24.36 DCP 22.4 days 24.7 days 56.5 days 14.8 days

8 in year 2007-08 which is quite a good fact as lower DCP assures less time period for the conversion of receivables into cash.60 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 DCP ANALYSIS: The DCP of the spinning mill has decreased from 22. FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 400 350 300 250 200 150 100 50 0 2004-05 2005-06 2006-07 2007-08 DCP DTR 0.5 days 35.9 6.6 days 58.1 days .1 6.2 DCP 400 days 51.99 10.4 in year 2004-05 to 14.

1 days in year 2007-08.ANALYSIS: The DCP ratio for dye house has decreased a lot from 400 days in year 2004-05 to 58. It’s a promising fact because it takes very less time period to convert the receivables into cash. .

so it must be carried with care for proper utilization of funds. Approximately 60% part of current assets is inventories. As the larger amount of funds is involved in the inventories.Chapter. So the proper management of inventory is required for successful working capital management.8 MANAGEMENT OF INVENTORY MANAGEMENT OF INVENTORY Inventory is very important part of current assets. Nature of Inventories .

Here is one another type of inventory also which is not directly related with production but facilitate in production process. First. These products are those which are ready for sale. The main objectives of inventory management are:  To make adequate investment in inventories so that funds can be best utilized.  To meet the future price change. (b) (c) Work-in-Progress: These inventories are semi-manufactured Finished Goods: These are completely manufactured products. fuel. Cleaning material. when the order should be placed. INVENTORY MANAGEMENT TECHNIQUES For inventories management the two questions must be answered. OBJECTIVES OF INVENTORY MANAGEMENT There are so many objectives of inventory management. electric tube etc are the supplies. so that timely availability of inventory is there. These inventories are known as supplies. Secondly. Raw materials are purchased for production and storage purpose.  Smooth and uninterrupted sale processes.In inventories we include: (a) Raw Material: There are those basic inputs which are converted into work-in-progress after the manufacturing process. To get answer of these two questions we use two techniques which are following: 1) ECONOMIC ORDER QUANTITY (EOQ) .  Time availability of inventories. These products are those which are ready for sale.  Minimize the cost related with inventories. that how much be ordered in one order so that excess or insufficient inventories can be avoided. oil.  To get adequate return on investment.  Smooth production in present and future. These objectives may differ from firm to firm. products.

It includes storage. handling. A O C = = = Annual requirement Ordering cost per order Carrying cost of inventory 2AO/C 2) REORDER POINT Reorder point is that inventory level at which an order should be placed to replenish the inventory. Determining an optimum inventory level involves two types of costs (a) Ordering Cost and (b) Carrying cost. Average Usage is the inventory used on average daily basis or average weekly basis. . requisition. taxes. receiving. Carrying costs vary with inventory. clerical and staff services. It includes. (a) Ordering Costs – All these costs which are incurred in placing one order. inspecting. So that all the cost related with inventory are minimum. To calculate reorder point we should know (a) Lead Time (b) Average Usage (c) EOQ Lead Time is the time normally taken in replenishing inventory after the order has been placed. By this we come to know how much we must order in single time. transportation. To calculate economic order quantity there is formula: EOQ = Where. insurance. The EOQ is that inventory level which minimizes the total of ordering and carrying costs. Ordering costs are fixed per order. (b) Carrying Costs – Cost incurred for maintaining a given level of inventory are called carrying cost. Therefore they decline as the order size increases.Economic order quantity provides the answer of our first question.

Cotton is generally received in lots so one lot consists of 55 or 110 bales. The material issued during the budget period will not be more than the budget. In this way. This rule is strictly followed. so the purchasing of cotton is made within the period of October to march. DAILY REQUIREMENT OF COTTON For production daily requirement of cotton is 180 bales and when the full capacity of unit gets started then the average requirement of cotton bales will reach to 200 bales. All the inventories except raw material purchases are handled by stores department. First of all the requirement for cotton are determined by the production department than this requirement is sent to commercial departments. For cotton. As the cotton has seasonal availability. the production process will not stop because the inventory will be available for that period. Then corporate office directs the cotton purchase office to purchase cotton in bulk not only for VTM but also for the other units of Oswal Group. For the other months. Reorder Point = Lead Time x Average Usage (Lead Time x Average Usage) + Safety Stock If the firm also maintains safety stock then the reorder point will be: Reorder Point = So when the inventory of reorder point will be in store then the order will be placed for purchase of inventory. VTM has a different stores department. cotton is purchased within these months. INVENTORY MANAGEMENT IN VTM Inventory Management of VTM is good. Stores department does its work very efficiently. Stores department have nothing to do with it.So. Commercial departments send these requirements to corporate office in detail. PURCHASE OF RAW MATERIAL As in VTM raw material is cotton. INVENTORY PLANNING For the planning of inventory requirement. budgets are prepared by different departments as per requirements. requirements are planned in consultation with production department. . That is the reason VTM has high investment in cotton.

These . These godowns do not have electric fitting because cotton is highly inflammable. When the material is issued to any department then the total amount of material issue is deducted from the budget of that good and balance is calculated. If capacity of store is exhausted in unit then it has private storage facility to store cotton. The stock taking of all the items is not possible keeping in view number of items. INSPECTION OF INVENTORIES Inspection of inventory is made at the end of month randomly. SAFETY STOCK OF INVENTORIES For the continuous production process. As the budgets are prepared for the planning purpose. safety stock of inventories is maintained. The maximum time within the requirement must be met is 72 hours. STORAGE CAPACITY OF VPL Regarding Raw Material Inventory. Total requirements for inventory during financial period are determined by budget. For other inventories stock is maintained according to supply period and as per their requirement. only this balance quantity of inventories will be issued during the remaining financial period. ISSUING OF INVENTORY When any department requires any inventory.The total daily production is 55 Tons /day. In case of cotton atleast 15 days requirements must be in hand every time. it sends its requirement to stores department. Material is issued on the basis of monthly weighted average method.The capacity of 10 godowns is 45000 bales approximately. VTM has 10 godowns. INVENTORY CONTROL Inventory control is done by budgets.

the inventory is maintained in single unit. So we can say that overall inventory management of VTMis quite satisfactory. the inventory is easily available in market. the same is procured on requirement basis. the failure / non-availability of which can cause less of production. For inventory control not any ABC analysis or VED analysis is done.records are maintained on daily basis. For different units. therefore. A high inventory turnover indicates efficient management of inventory because more frequently the stocks are sold. the lesser amount of money is required to finance the inventory. the records are prepared separately. Average Raw Material Stock FOR SPINNING MILL: . In case of spares & stores. the requirement for the whole year is purchased in the cotton season. The company also doesn’t follow standardized system of inventory like EOQ. As all the units of group are in spinning the stock of critical items. The company always maintains stock of critical items. where the high value is involved in financial terms. Inventory (Raw Material) Turnover Ratio = Cost of Goods sold. This could save lot of money which can be utilized in another area and it also helps to maintain inventory at optimum level. In case of raw material as the input (cotton) is of seasonal nature. ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VTM INVENTORY TURNOVER RATIO It indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which the firm is to manage inventory.

1 and 2.YEAR COST OF GOODS AVERAGE SOLD RAW INVENTORY MATE RIAL STOC K TURN OVER RATI O(ITR ) 3.31 times 2004-05 2005-06 2006-07 2007-08 568168331.10 times 2.1 times 2.5 0 2004-05 2005-06 2006-07 2007-08 ITR ANALYSIS: The ITR ratio of spinning mill does not show wide fluctuations over the past years.07 218046754. .5 3 2.8 468091135.94 328005499.45 times 2.12 757225990.5 1 0. It almost remains constant around 3.05 533565522.45 3. However .14 227150926.3. the ratio must increase for better management of inventories.36 183071228.5 2 1.

97 15012815.35 times 46.7 times in 2005-06 to 46.9 times TURN OVER RATI O(ITR ) 50 40 30 20 10 0 ITR 2004-05 2005-06 2006-07 2007-08 ANALYSIS The inventory turnover ratio has increased from 13.7 times 27.9 times in 2007-08.34 13.66 11108879. .FOR DYE HOUSE: YEAR COST OF GOODS AVERAGE SOLD RAW INVENTORY MATE RIAL STOC K 2004-05 2005-06 2006-07 2007-08 204971625.54 16023458. It is quite a good fact and shows that inventory is managed in an efficient way for the dye house.4 438273468.85 522017545.

58 312515320.2 91.95 414814703.62 379510100.14 RATIO IN %AGE 67.41 246141889.52 342478673.5 100 80 60 40 20 0 2004-05 2005-06 2006-07 2007-08 INVENTORY TO WORKING CAPITAL .INVENTORY TO WORKING CAPITAL RATIO: This ratio is usually calculated to study the liquid financial position of business enterprises.55 WORKING CAPITAL 306827826.88 240453655. Inventory to working capital ratio = Inventory Working Capital FOR SPINNING MILL: YEAR 2004-05 2005-06 2006-07 2007-08 INVENTORY 208195599.8 70.9 78.

5% in 2004-05 to 22. it is not a good fact about the dye house and the company should increase the investment in inventories for the dye house. FOR DYE HOUSE: YEAR 2004-05 2005-06 2006-07 2007-08 INVENTORY 31300541. .5 22.7% in 200708.46 WORKING CAPITAL 51755251.ANALYSIS: We can observe that investment in inventories out of the woking capital has increased from 67.5% in 2007-08. But investment in inventories should be neither too high nor too low. So.3 32341614.82 RATIO IN %AGE 60.06 35816899.9% in 2004-05 to 91. So it should be maintained near 60% to 70%.13 142562332.5 42.7 70 60 50 40 30 20 10 0 2004-05 2005-06 2006-07 2007-08 INVENTORY TO WORKING CAPITAL ANALYSIS The investment in inventories has decreased from 60.69 84249210.

9 FINDINGS.Chapter. SUGGESTIONS AND CONCLUSION .

 Liquidity ratios of VTM are too high because of maintaining more inventory stock of raw material.  The operating cycle of VTM is very high due to the high raw material conversion period because raw material is a seasonal product. so the most part of current assets is covered by inventories.  It holds the cash only for transaction purpose.  For filling its fund requirement VTM depends upon the State bank of India.  Raw material is purchased by corporate office for all the units in bulk to get the advantages of bulk purchasing.  Now VTM has increased its share in the domestic market by reducing the exports. Also EOQ is not followed in stores.  The cost of raw material fluctuates depending upon the availability of crop in the particular season. Corporate office holds the cash for major receipts & payments. so it effect the finished product price.FINDINGS  Due to seasonal availability of raw material is purchased in bulk during the months between March to Oct. .  EOQ technique is not followed by VTM for purchasing cotton because cotton is a seasonal product.

Due to competition. The corporate office should involve the units so as to better ascertain the future requirements of funds and accordingly the investments are made in different securities.      . The unit should also adopt proper inventory control like ABC analysis etc.SUGGESTIONS  Management should make the proper use of inventory control techniques like fixation of minimum. The company is loosing its overseas customers due to decrease in exports so the sufficient amount of exports should the maintained. The EOQ can be followed in stores. So company should try to reduce it for improving the efficiency. Company’s average debtor collection period is 55 days. This inventory system can make the inventory management more result oriented. The investments of surplus funds are made by the corporate office and the unit is not generally involved while taking decisions with regard to structure of investment of surplus funds. maximum and ordering levels for all the items for less blockage of money. prices are market driven and for earning more margin company should give the more concentration on cost reduction by improving its efficiency.

. Safety measures for inventories are also quiet sufficient in VTM. VTM has sufficient funds to meet its current obligation every time which is due to sufficient profits and efficient management of VTM. Overall the working capital management of VTM is very much efficient. Cash management and receivable management are too much good because of centralized control on these. Raw material for the all units of OSWAL group is purchased by corporate office in bulk which is the best way.By conducting the study about working capital management it is found out that working capital management of VTM is too good.

APPENDIX .

P. Financial Management: Theory and Practice..REFERENCES AND BIBLIOGRAPHY   Pandey I. Ltd. Chandra Prasanna.M. Annual Reports of VINAYAK TEXTILE MILLS LTD. Jame C. Financial Management.    Van Horne. Tata Mc Graw Hill. Rustagi R. Vikas Publishing House Pvt... Principles of Financial Management. . Fundamentals of Financial Management.

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