A SUMMER PROJECT REPORT ON WORKING CAPITAL MANGEMENT VIDEOCON APPLIANCES LTD (REFRIGERATER DIVISION), AURANGABAD.

SUBMITTED TO Vishwakarma Institute of Management Pune University, In partial fulfilment of the requirement for the award of the Degree of the Master of Business Administration (auto) 2007-08

Guided by Mrs. V.Hake

Submitted by Rupesh lahoti.

ACKNOWLEDGEMENT
It is my pleasure to place on record my sincere gratitude towards my guide Mr. Dhiraj Jain (HRD Dept.) Videocon Appliances Limited, who spent his precious time providing continuous ideas and expert guidance to my Report work, it was his direction and encouragement at every moment and step that motivated me to steer the research work confidently and successfully. I am also thankful to our Venerable Principal, Dr. SHARAD JOSHI whose encouragement, moral support and provide the valuable guidance, which has been a source of inspiration to me. I am especially thankful to Mrs.V.Hake who has to provide me valuable guidance, which is helpful to fulfillment my Report I am also thankful to my friends who directly or indirectly helped me lot. I am indebted to my respected parents because of whose blessing I have been able to carry out this work successfully.

Mr. Rupesh Lahoti

Sr. No. Particulars Page No. 1 Company Profile 04 Value & Philosophy 06 History 06 Group Profile 07 Vision & Mission 08 2 Basic Accounting Terminology 11 3 Introduction 20 4 Objective Behind The Study 22 5 Working Capital An Introduction 23 Types of Working Capital 24 6 Principle of Working Capital Management 27 7 Factors Determining of Working Capital 29 Sources of Working Capital 31 8 Methods of Calculation of Require of Working Capital 33 Working Capital Cycle 33 Components Of Working Capital 35 Management of Working Capital 36 9 37 Evaluation of Working Capital Statement of Working Capital Requirement Statement of Operating Cycle Statement of Change In Working Capital Cash Management Finding Suggestion. Limitation. Conclusion. Bibliography. 38 39 40 41 44

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Company Profile

The Late Shri. Nandlal Madhavlal Dhoot Founder, The Videocon Group (26 February 1932 - 26 April 1993) A man of Ideas. A man of Substance. Shri Nandlal Madhavlal Dhoot, the founder of the Videocon Group, completed his education in Ahmednagar and Pune. He was a successful sugarcane and cotton cultivator. As a next logical step to vertical integration, he boldly took upon an entrepreneurial venture by importing machinery from Europe to set up the Gangapur Sakhar Karkhana (Sugar Mill) in 1955. Those were the times when the village did not even have electricity. Thus was unleashed an Industrial Revolution. In 1984, the Dhoot family launched Videocon International Limited with an avowed purpose of producing world class Colour Television set thought technical tie- up with Toshiba Corporation of Japan.

Videocon group companies have won prestigious approval and certificate from India and abroad. These includes the approval from VDE testing and Certificate Institute Germany, the British Standard, the CE approval for exporting to Europe and the ISO 9002 certification. The Videocon Group is ever evolving group continuing to sty trends in every sphere of its activity. The group enjoys an unassailable leadership position interactive T.V, Co lour T.V.; high ended audio system, VCD, VCR, air-conditioners, washing machine Tran chillers as well as no-frost refrigerator. After firmly entrenching itself in a field of consumer electronic and home appliances. The group has boldly venture into business that are crux of nation mainly petroleum and power .The group has further ventured to leverage its strengths to boosts progress of the nation. Videocon sprawling state of the art facility is spread across 18 locations in India. The latest inclusion is the Rs.400 crore. Ultra modern and environmental friendly manufacturing facility set up at Banglore. It houses state of the art robot machineries. Robotic machineries and India. Do you see a disconnect there? Not anymore. The inertia of diversification was catalyzed with the inspection of Videocon Appliance ltd. In 1988. The company manufactured advanced washing machines and has thus changed the lives of millions of women. The company has revolutionized the A.C. market by creating superior quality A.C. 1992 Videocon breathed new life into the refrigerator market by introducing Indias first No frost refrigerator. The refrigerator plant follows the international quality to ensure defect free products with a total production capacity of more than 1.5 million refrigerator per year. Videocon Refrigerator is amongst largest selling branch in the market place.

Values & Philosophy

The die was cast. Over the years, Nandlalji's path-breaking attitude found expression in a myriad ways, earning him the well-deserved reputation of the pioneer of industrial activity in Marathwada India. In early 80's Nandlalji initiated his three sons - Venugopal, Rajkumar and Pradeep into business. Through a technical tie up with Toshiba Corporation of Japan, he launched India's first world-class color Television: Videocon. Today, Videocon is household name across the nation- India's No. 1 brand of Consumer Electronics & Home Appliances, trusted by over 50 million people to improve their quality of life.

History

Group Profile

Vision & Mission

Videocons mission: a reflection of continuity and change Videocons mission expression has been crafted to envelope both extant and emerging realities: To delight and deliver beyond expectation through ingenious strategy, intrepid entrepreneurship, improved technology, innovative products, insightful marketing and inspired thinking about the future. A breakdown of the statement above reveals a means and end approach, where the end is articulated at the beginning with the means linked to it.

To delight and deliver beyond expectation: the end

This segment not only underlines the importance of the ultimate goal - customer satisfaction (delight) and ultimate target - the customer, but also of intermediate processes and principals, which have contributed to building a robust, dependable Videocon value chain (deliver). As a result of its focus on developing loyal customers and reliable associates, Videocon is able to exceed expectations.

Through ingenious strategy the means

In the cutthroat world of today, it is only by taking recourse to advance planning and strategy that a business can hope to survive. Although textbook strategy has its uses, reproducing it in verbatim for the real world would be foolish because of the absence of textbook conditions. Thus, there is a need for a bounded rationality, spontaneity and improvisation that is flexible enough for scenarios both imaginable and unimaginable.

Videocons ingenious maneuvers are actually flexi-strategy that abstracts from shifting ground conditions and decides game plans, or sometimes changes the rules of the game.

Intrepid entrepreneurship the means

An enterprise with the odds stacked against it makes great business sense. This is because higher the obstacles, lower the number of players likely to be active in that field - thus, fetching extraordinary returns. The only requirement is a bold and confident attitude willing to brave the odds. Videocons foray into oil and gas is a bold and intrepid endeavor that arises from immense faith on the surefooted competence of the companys in-house managerial talent.

Improved technology the means

Technology is no more a premium input; it has become the bare minimum in recent years. Rapid advances have only fuelled this phenomenon. Videocon is extremely vigilant in shunting out dated technology and replacing it with the best-in-class offers of the times.

Innovative products the means

Product development, innovation and customizations are the tools Videocon uses to stay ahead of the competition. This is because a continuous stream of innovative products excites the market and enhances brand recall. A strategy that Videocon banks on a lot, especially on the domestic front.

Insightful marketing the means

The market share battle scene has long shifted from technology and processes to the psyche of the customer. This means that those with deeper insights into the elusive mind of the buyer are likely to dominate. Videocon is reinforcing marketing strengths to read better the pulse of the market and help create products that map perfectly into customer preferences.

Inspired thinking about the future. the means

The future is unpredictable, but not doing anything about it is fraught with grave risk. Videocon extrapolates future trends on the basis of current changes in technology and preferences as well as sheer gut feel. Fine-tuned business instincts are worth their weight in gold, lots of it. The company has perfected its practice almost into an art form with some calculated gambles like oil and gas proving to be absolute money-spinners.

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Basic Accounting Terminologies

Introduction
Every human being consciously engages himself in some meaningful activity. Although the measure of success may vary in each case one has to be careful and cautious at every stage in his life. Bookkeeping and accountancy is a science, which has attracted the attention all such human activities. Accounting enables a person to assess the risk appropriate steps.

Account an account denotes a summarized record of transactions pertaining to one

person, one kind of asset, or one class of income, or one class of income or loss.

Assets properties of every description owned by a person will be called assets for
example land and building, plant and machinery, cash balance, bank balance etc.

Bad debts which are irrecoverable and written off from debtors A/C as a loss are
termed as bad debts.

Casting means the totaling of the books of account casting has to be done of the ledger
accounts and also of a journal. Creditor a creditor is a person to whom we owe some thing. He is the person to whom we have to pay.

Capital the dictionary meaning of the term capital is wealth capital is the total account
invested in business the capital of a business is the claim of the owner to the business is the claim of the owner to the business.

Debtor is person who owes something he is the person who has to pay to other person.

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Drawing is the total amount withdrawn by a trader from his business for meeting
personal expenses. Trader becomes a debtor of business by the amount withdrawn by him from business for private purpose.

Discount it is an allowance or a concession allowed by the receiver of benefit to the

giver of benefit. It is normally allowed to the customers, debtors, and retailers etc. the discount may be classified in two ways. 1) Cash discount. 2) Trade discount. Cash discount it is discount allowed to customer as an inducement to make payment immediately. Cash discount is closely related to cash receipt and cash payment. When cash is received, discount is allowed is a loss to a business while cash discount received is a gain to him. Trade discount it is an allowance made by a wholesaler to a retailer in order to enable the retailer to sell the articles at list prices and earn a reasonable margin of profit. The amount of trade discount is deducted from the invoice; therefore, it has no connection as to the receipt and payment of cash. Hence, trade discount does not appear in the books of accounts.

Entry the term entry refers to the recording of a transaction in the books of account. It is
the primary record of a transaction in the books called journal or any other subsidiary journal.

Expenses the effort made by business to obtain the revenues are termed as expenses. It
is the amount spent on manufacturing and selling of goods and services.

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Folio it means the page number of the book of original entry or of the ledger by writing
folio i.e. page number, one can easily find out on what page the original entry is made and on what page the entry is made in the main book.

Goods commodities in which a trader deals are called as goods. Insolvent a person is said to be insolvent when his liabilities are more than asset Insolvency when the liabilities of a firm are greater than its assets, it is referred to as
insolvency indicating the liabilities of a business to meet all its liabilities. Such a business firm is said insolvent.

Journal is the book 0f accounts in which business transaction are first recorded. It is a
book of prime entry or first entry.

Liabilities debts owed by a person are called liabilities. Liabilities represent the total
amount to creditors. Debts arise because, goods may be purchased out but payment may not be made at the time of purchasing the goods. Therefore the total amount payable to creditors will be the liabilities.

Narration it is a brief explanation or description on to a journal entry it is given on the

line just below the journal entry within the brackets.

Posting transaction entered in the original books of entry are also to be recorded in the
ledger on the basis of the entry made in the original book is called posting.

Purchases the goods bought for resale or manufacture and resale are called purchases.
Purchases may be classified as 1) Cash purchase 2) Credit purchase 13

Revenue it represent the accomplishment of the enterprise until the company has been
successful in selling its products, no revenue is realized. Revenue is the amount that adds to the capital.

Sales the goods sold by a business for cash or on credit are called sales. The sales may
be classified as; 1) Cash sales 2) Credit sales

Solvent a person is said to be solvent when his assets are equal to or more than his
liabilities.

Stock goods unsold lying with a business on any given date are called as stocks. Transactions a transaction are an exchange of money or moneys worth between two
parties. It is dealing between two parties. It is dealing between two or more persons. The transactions are classified on the basis of exchange of goods and service they may be. 1) Barter transactions. 2) Monetary transactions. Monetary transactions are classified in they two types. 1) Cash transactions. 2) Credit transactions.

Book keeping is defined as the process of analyzing, classifying and recording

transaction in a systematic manner to provide the information about the financial affairs of the business concerns.

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Accounting is a wider concept, which includes book keeping accounting, is involved

not only maintaining records, but also balancing of accounts, interrupting the balances, preparation of summaries, drawing conclusions from the summaries knowing the results of financial transactions etc.

Classification of accounts.
Accounts are classified in to four types 1) Personal accounts. 2) Real accounts. 3) Nominal accounts. Personal accounts DEBIT THE RECIVER AND CREDIT THE GIVER Real accounts DEBIT WHAT COMES IN AND CREDIT WHAT GOES OUT

Nominal accounts DEBIT EXPENSES AND LOSSES AND CREDIT GAINS OR INCOMES.

Journal is derived from the French word jour which means a day journal is the book
of original entry or primary entry. It is book of daily record first of all the business transactions are recorded in the journal and subsequently they are posted in the ledger.

Ledger a group of accounts is known as ledger a ledger is the principle book of

account a journal is meant for passing the entries of business transaction. A ledger is a bound book. It contains many pages, which are called folios. These pages are consecutively numbered. For each account a separate page is kept. Every ledger has an index. It is generally an alphabetic index one page is allotted for each alphabet. All the accounts commencing with that particular alphabet are indicated on that particular page only. The page number on which the particular account appears is shown in the index. 15

This facilities appear is shown against the account in the index. The facilities immediate reference.

Ledger posting
After the transaction has been analyzed into its debit and credit elements in a journal, each such debit and credit elements must be transferred in a journal accounts. The process of transfer of entries from journal to ledger account is called ledger posting.

Trial balance
After posting the transaction to respective ledger accounts they are balanced and then a trial balance is drawn. A trial balance is a statement, which shows the list of accounts showing debit balances and list of accounts showing credit balance. If double entry principles are strictly followed the total of the entire debit balances must agree with the total of all the credit balance.

Trade discount
The amount of trade discount is deducted from the bill itself. Therefore, a trade discount does not appear in the books of accounts. If a trade discount is given in the transaction, the amount of such a trade discount is deducted from the gross value of purchase and only the net value (arrived at after allowing a trade discount) is recorded in the purchase books.

Debit note
A debit note is sent to the supplier when the goods purchased from him are returned. A debit note is a statement sent by the buyer to the supplier stating the full details of the good returned. It is sent along with the goods. It intimates the supplier that his account has been debited by the value of the good returned to him. 16

Credit note
A credit note is sent to the customers when we receive goods returned from them. It gives the full details of the good returned by the customer. Credit notes are generally is printed in red ink. Transaction is recorded in this book on the basis of credit notes.

Trial balance
The dictionary for accountants written is a list or abstract of the balance or of total debits and total credits of the accounts in a ledger, the purpose being to determine the equality of posted debits and credits and to establish a basic summary for financial statements. Subsidiary books (sub division of journal) If all the business transaction were recorded in one and the same journal, the journal would be bulky and cumbersome. It would be very difficult to make clerks to work on the same journal at one and the same time. Instead of recording all the transaction in on and the same journal, they are recorded in separate journals meant for the purpose. Therefore, in order to meet the requirements of modern business, the original journal is divided into the following Purchase book Sales book Purchase return book Sales return book Cash book Bills receivable book. Bills payable book. Journal proper. 17

Final accounts
The final accounts are prepared to find out the profit or loss and to know the financial position of the business. These account consist of The trading account The profit and loss account Balance sheet

Trading account
A trading account is prepared to find out the gross profit or gross loss in the business done during the year. The gross profit is the difference between the cost of good sold and the sale proceed without any deduction of indirect expenses. Hence, in the trading account it is necessary to include all items of expenses directly affecting the cost of good sold. The cost of good sold includes the purchase price of the good sold plus buying and bringing expenses and the expenses of conversion of raw material into saleable finished goods.

Profit and loss account

Profit and loss account is another summary account, which is prepared after preparation of trading account. Trading account does not disclose the net income or loss. There are other expenses in order to ascertain the profit or not loss.

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Balance sheet
A balance sheet is a statement of the financial position of a business on a given date. It is a snapshot of the financial condition of the business. The balance sheet is not account; it is only a statement showing asset and liabilities of the business. It is important to note that the balance sheet always balances. The total value of the assets is always equal to the capital and liabilities.

We can define balance sheet as a statement of financial position of any economics unit as at a given moment of time, its assets, at cost, depreciated cost or another indicated value, its liabilities and its ownership equities

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Introduction
Working Capital is so much in use in common parlance and is so much misunderstood even among the professional managers the controversy and confusion persists. While an accountant will regard working capital as current assets minus current liabilities and call is as net working capital. But the finance managers concern is to find fund for each item of current assets as such costs and risks that the evolving financial structure remains balanced he two. When one ask a production controller; what is working capital? His answer is very simple and straightforward. To him working capital is the fund needed to meet dayto-day working expenses. Is there any difference between the statement of he accountant, finance manager and production controller? In the ultimate analysis he late may be true, but according to accountant or the finance manager I is the very working expense that get blocked in current assets along he productive distributive line if an enterprise and net working capital is that liquidity which takes care if he working expenses if he line gets extended due to any reason. Working capital may be regarded as he life blood of a business; its effective provision can do much o ensure the success of a business while its inefficient management can lead not only o loss of profit but also o ultimate downfall of what otherwise might be considered as a promising concern. Much has been right made of he long term planning in he use of working capital is immeasurable. A study of working capital is of major impotence to internal and external analysis because of is close relationship with the current day-to-day operation of a business. 20

Working capital consist of broadly of hat portion of he assets of a business which are used in, o elated o current operations and represented at any one time by the operating cycles of such items as against receivables, inventories of raw material, stores, work in process and finished goods, need notes of bill receivable and cash. When current liabilities and provision exceeds current assets the differenced is referred to as negative working capital. This situation does not generally exits in a business firm because this is generally a situation of crises. , This has been admirably summed up Brown and Heward, who compare it with a river which is always their, but whose water level is constantly changing. The blockage of funds, which was eventual, becomes routine and inevitable due to globalization waves through out the world. Modern economic theory has introduced a concept of Global Village, which makes he cut throat competition more servers. In his current scenario managing the day-to-day affaires has become the challenging task. Now a day it may be somewhat easy to erect a company or industry, as several loan schemes at subsidized rates are available. Bu at the same time managing industry by feeding them regularly with aw material and labour is assumed to be difficult and critical task. Hence working capital, which was initially, emerges, as a convenience now has become a compulsion for an industrial undertaking.

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Objective behind the Study of Working Capital & Research Methodology

Working capital management is very important in modern business. The analysis of working capital is also very useful for short-term management of funds. The following are objective of study: 1) To make. Items wise analysis of the elements or component of working capital to identify the items responsible for change in working capital. 2) To calculate of working capital for last Four Year.

Scope & Limitation of the Study

1. The Study is limited to Four Years (2002-03 to 2005-06) performance of the Company. 2. The data used in this study have been from published annual reports only. As per the requirement and necessary some data are grouped and sub grouped. 3. For making a clear-cut opinion, Ratio technique of financial management has been used.

Data & Methodology Of The Study:

The data of videocon appliances Ltd. For the Year 2002-03 to 2005-06 used in this study have been taken from secondary sources e.g. Published annual report of the company. Editing, classification and tabulation of the financial data, which are collected from the above-mentioned sources, have been done as per the requirement of the study.

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Working Capital an Introduction

Meaning:
Working capital could be defined as the portion of assets used in current operations. The movements of the funds from capital to income and profits and back to working capital are one of the most important characteristics of the business. This cyclical operation is concerned with utilization of the funds with the hope hat will return with an additional amount called income. If the operations of the company are to run smoothly, a proper relationship between fixed capital and current capital has to maintain. Sufficiently liquidity is important and must be achieved and maintained to provide that funds to pay off obligation as they arise. The adequacy of cash and other current assets together with their efficient handling, virtually determine the survival o demise of the company. A businessman should be able to judge the accurate requirement of working capital and should be quick enough to raise the enquired funds to finance he working capital needs. Working capital is also called as net current assets, it is the excess of current assets over current liabilities. All organization has to carry working capital. It is important from the point of view of both liquidity and profitability. Poor management of working capital means that funds that unnecessarily tied up in idle assets hence educing liquidity and also reducing ability to invest in productive assets such as plant and machinery. So affecting profitability.

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The term working capital refers to current assets, which may be defined as: i) Those which are convertible into cash or equivalents with the period of one year and ii) Those which are required to meet day to day operations,

The fixed as well as current assets, both requires investment of Funds. So the management of working capital and fixed assets apparently seem to involve it type of consideration but it is no so. The management of working capital involve different concept and methodology than the techniques used in fixed assets management.

Types of working capital

The type, kinds of a thing are depending upon the different utilization of working capital. It prominently works in the direction of performing different functions in different situation and in the context of divergent variables. So following are some important types of working capital.

Net Working Capital Negative Working Capital Types Of Working Capital Cash Working Capital

Gross Working Capital

Permanent Working capital

. Balance Sheet Working Capital

Temporary Working Capital 24

1) Net Working Capital: Term Net working capital can be define in two way i) ii) It is the difference between current assets and current liabilities. Amount left for operational requirement.

2) Gross Working Capital: Gross working capital means the total current assets. 3) Permanent Working Capital: It is the minimum amount of the current assets, which are needs to conduct the business even during the dullest season of the year. This amount varies from year to year depending upon the growth of a company and stage of the business cycle in which it operates. It is the amount of funds required to produce the goods and services, which are necessary to satisfy demand at a particular point. It represents the current assets, which are required on a continuing basis over the year. It is maintain as the medium to carry on operation at any time. Permanent working capital has following features: i) ii) iii) It is classified on the basis of the time factor. Its size increase with the growth of the business. It constantly shifted from one assets o another and continues to remain in the business process. 4) Temporary Working Capital: It represents the additional assets, which are required at different times during the operating year. Seasonal working capital is the additional amount of current assets

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particularly cash, receivables, and inventory which is required during the more active business seasons of the year. It is the temporary investment in the current assets and possesses he following features: a) It is not always gainfully employed, though is May also shift from one asset to another as permanent working capital does. b) It is particularly suited to business of seasonal on cyclical nature. 5) Balance Sheet Working Capital: The balance sheet working capital is one, which is calculated from the items appearing in the balance sheet. Gross working capital, which is represented by the excess of current assets over current liabilities, is example of the balance sheet working capital. 6) Cash Working Capital: It is one, which is calculated from the items appearing in he Profit and Loss Account. It shows the real flow of money or value at a particular time and considered to be most realistic approach in working capital management. It is the basic of he operation cycle concept, which has assumed a great importance in financial management in recent year. The reason is that the cash working capital indicates he adequacy of he cash flow which is an essential pre requisite of a business. 7) Negative Working Capital: It emerges when current liabilities exceeds current assets, such a situation is absolutely theoretical and occurs when a firm is nearing a crisis of some magnitude.

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Principles of Working Capital Management:

There are some principles of sound working capital management policy. They are as follows: 1) Principle of Risk Variation: Risk here refers to inability of a firm to meet its obligation when they become due for payment. Large investment in current assets with less dependence on a short term borrowing increase liquidity, reduces dependence on short term borrowing increases liquidity, reduces risk. On the other hand less investment in current assets and greater dependence on debt increase the risk, reduces liquidity and increases profitability. In other word these is a definite inverse relationship between he degree of risk and profitability. A conservative management prefers to minimize risk by maintaining a higher level of current assets or working capital while a liberal management should be to establish a suitable trade off between profitability and risk. 2) Principle of Cost of Capital: The various sources of rising of working capital finance have different cost of capital and the degree of risk involved. Generally higher the risk lower is the cost and lower the risk higher is the cost. A sound working capital management should always try to achieve a proper balance between these two.

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3) Principle of Equity position: According this principle, the amount of working capital invested in each component should be adequately justified by a firms equity position. Every rupee invested in the current assets should contribute to he net worth of he firm. 4) Principle of Maturity of Payment: This principle is concerned with planning he sources of finance for working capital. According to this principle, a firm should make every efforts o related maturity of payment to its flow of internally generated funds. Maturity pattern of various current obligations is an impotent factor in risk assumptions and risk assessment.

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Factors determining working capital

1) Nature or character of Business: The working capital requirement of a firm basically depends upon he nature of its business. Public utility undertaking like Electricity, Water Supply, and Railways need vary limited working capital because they offer cash sales only and supply services, not products and as such no funds are tied up in inventories and receivables. On the other hand trading and financial firms require less investment in fixed assets but hey have o invest large amount in current assets like inventories, receivables and cash. So they need large amount of working capital. 2) Production cycle: Another factor, which has a bearing on the quantum of working capital, is the production cycle. The term production or manufacturing cycle refers to the time involved in he manufacturing of goods. It coves he time span between the procurement of raw material and the completion of he manufacturing process leading o he production of finished goods. In other words, there is sometime gap before raw material becomes finished goods. To sustain such activities that need for working capital is obvious. The longer time span (production cycle) the large will be he tied up funds and therefore, larger is working capital need and vise versa. 3) Production Policy: In certain industry he demand is subject to wide fluctuations due to seasonal variations. The requirement of working capital in such case, depend upon he production policy. He production can be either kept steady by accumulating inventories during slack 29

period with a view to meet high demand during peak season of he production could be curtailed during he slack season and increased during he peak season. If policy is o keep production steady by accumulating inventories it will require higher working capital. 4) Credit Policy: The credit terms granted o customers have a bearing in the magnitude of working capital by determining he level of book debts. The credit sales result in higher book debs. Higher book debts mean more working capital. On the other hand, if liberal credit terms are available from he supplies of goods trade need less working capital. The working capital requirement of a business are thus, affected by term of purchase and sale, and he ole given to credit by a company in its dealing with creditors and debtors. 5) Growth and Expansion: The working capital requirement of concern increase with he growth and expansion of its business activities. Although, It is difficult to determine he relationship between he growth in he volume of business and he growth in he working capital of a business, yet it may be concluded hat for normal rate of expansion in he volume of business. We may have retained profits to provide for me working capital but in fast growing concern, we shall require lager amount of working capital. 6) Seasonal Variation: In certain industry raw material is no available throughout the year. They have to buy raw material in bulk during the season to ensure uninterrupted flow and process them during the entire year. So a huge amount is blocked in form of row material during he peak season, which gives more requirements for working capital and less requirement during he slack season.

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7) Earning Capacity: Some firm have more earning capacity than others due o quality of thee products, monopoly condition etc. Such firms with high earning capacity may generate cash profits from operations and contribute o their working capital. 8) Dividend Policy: The dividend policy of a concern influence on he requirement of the working capital. A firm that maintains a steady high ate of cash dividend irrespective of its profits level needs more working capital than the firm that retains large part of its profits and does not pay at high ate of cash dividend. 9) Other Factors: Certain other factors such as operating efficiency, management ability, irregularities in supply, import policy, assets structure, importance of labour, banking facilities etc, also influence he requirement of working capital.

Sources Of Working Capital

Mainly there are two sources of working capital: i. Permanent or Fixed working capital ii. Temporary or variables working capital In any concern, a part of the working capital investments are as investment in fixed assets. This is so because there is always a minimum level of current assets, which are copiously required by he, enterprise to carry out its day-to-day business operation and this minimum cannot be expected to educe at any time. This minimum level of current assets need long term working capital, which is permanently blocked.

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Similarly, some amount of working capital may be required to meet the seasonal demands and some special exigencies such as rise in prices, strikes, etc. this gives rise to short term working capital which is required for day to day transaction also. The fixed proportion of working capital should be generally financed from the fixed capital sources while he temporary or variable working capital equipment may be met from he short term sources of capital. The various sources for financing working capital are as follows:

Sources Of Working Capital

Long term Sources

1) 2) 3) 4) Shares Debentures Public Deposits Ploughing back of Profits 5) Loans from Financial institution

Short Term sources

1) 2) 3) 4) 5) 6) Commercial Banks Indigenous Banks Trade Creditors Installment Credit Advances Account receivable Credit 7) Accrued Expenses 8) Differed Income 9) Commercial Paper

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Methods of Calculation of Required Working Capital

The methods of calculation of required working capital are as follows:

Working Capital Cycle:

The working capital cycle is also known as operating cycle. It refers to the duration between he firms payment of cash for raw material, entering into production and inflow of cash from debtors and realization of receivables. Simply speaking, operating cycle is the duration between he outflow of cash and inflow of cash and this may be evidenced from he following working capital cycle.

Receivables

Cash

Finished Goods

Raw Material

Work In Process

The above and network diagram may offer a clear picture of a complete working capital i.e. it is a cash phenomenon. In the diagram, raw material, stock refers to material only. In work in process, components involve are aw material, wages, and overhead more specifically manufacturing overheads. Finished stock consists components of material, wages and overheads inclusive of factory, office and administration and selling and distribution. Debtors include material, wages, overheads and profits. Credit involves for the components of raw material, etc. something a contingency margin is also given while estimating the working capital requirement. 33

The operating cycle consists of he following events, which continues throughout he life of a firm remaining engaged in commercial activities.

Avg. Stock of Raw Material 1) Raw Material Holding Period = Avg. Cost of Consumption per day Avg. Stock of Work In Process 2) Work in Process Holding Period = Avg. Cost of Production per day Avg. Stock Of Finished Goods 3) Finished Goods Holding Period = Avg. Cost of Goods Sold per day Avg. Book Debt 4) Receivables Collection Period = Avg. Credit Sales per day Avg. Trade Creditors 5) Creditors Collection Period = Avg. Credit Purchased per day In the form of a simple equation working capital cycle or operating cycle can be represented as bellow:

O = R+W+F+D-C
Where, O = Operating Cycle (In Days) R = Raw Materials Holding Period W = Work in Process Holding Period F = Finished Goods Holding Period D = Receivables Collection Period C = Creditors Collection Period.

Total Operating Cost Working Capital Required = Number of Operating Cycle

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Components of Working Capital:

Current Assets:
i) ii) Stock of Raw Material (formonth consumption) Work In Process (forMonth) a) Raw Materials b) Direct Labour c) Overheads Stock of Finished Goods (formonth sales) a) Raw Materials b) Labour c) Overheads Sundry Debtors or Receivables (formonth sales) a) Raw Materials b) Labour c) Overheads Payments in Advance (if any) Balance of Cash (required to meet day-to-day Expenses) Any Other (if any)

Amount
-----------

iii)

------

iv)

------

v) vi) vii)

-------------

Less: Current Liabilities:

i) ii) iii) Creditors (formonth purchase of raw materials) Outstanding Expenses (for month) Others (if any) --------------------------------------

Working Capital (CA CL) Add: Provision/ Margin for contingencies Net Working Capital Required

35

Management of working capital:

Working capital, in general practice, refers to he excess of current assets over current liabilities. Management of working capital therefore, is concerned with problems that arise in attempting to mange he current assets, current liabilities, and interrelationship that exists between them. In other word it refers to all aspects of administration of both current assets and current liabilities. The basic goal of working capital management is o manage the current assets and current liabilities of a firm in such way that a satisfactory level of working capital is maintain, i.e. neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position are bad for the business. Inadequacy of working capital, may lead the firm insolvency and excessive working capital implies idle funds, which earn no profit for the business. Working capital management policies of he firm have a great effect on its profitability, liquidity and structural health of he organization. In this context, working capital management is three-dimensional nature: 1) Dimension I is concerned with the formulation of he policy with regard to Profitability, risk and liquidity. 2) Dimension II is concerned with the decision about he composition and level of current assets. 3) Dimension III is concerned with the decision about he composition and level of current liabilities.

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This dimension aspect of he working capital has been more clearly and precisely Explains by the following diagram. Profitability, Risk & Liquidity Dimension I

Dimension III

Dimension II Composition & Level of current assets

Composition & level Of current Liabilities

Evaluation of working capital

The working capital management needs attention of all the financial. Manger as working capital management is important for avoiding unnecessary blockage of fund. Like that liquidity is important at it refer to the short-term financial strength of company. It is very important to have proper balance in regard to the liquidity of the firm. For assessing the appropriate working capital and liquidity position the following tables are relevant.

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Table I - Statement Of Working Capital Requirement Particulars

A) Current Assets: i) Inventories ii) Sundry Debtors iii) Cash & Bank Balance iv) Other Current Assets v) Loans & Advances 2002-03 2371923131 2129611335 150096788 7045660 573879754 5232556668 B) Current Liabilities: i) Current Liabilities ii) Provisions 1677427019 38395374 1715822393 Working Capital (A-B) Add: Provision for Contingencies Net Working Capital Requirement 3516734275 -3516734275 2003-04 2408949822 2141497697 170250276 50999449 441160933 5212858177 1915816994 35425889 1951242883 3261615294 -3261615294 2004-05 2598543332 2118827972 162214670 12278799 278628907 5170473680 1525006973 41057949 1566064922 3604408758 -3604408758 2005-06 2883150119 3158308150 142323543 15608656 467120093 6666510561 1088482082 86616306 1175098388 5491412173 -5491412173

Graphical Representation of Working Capital Requirement

Working Capital Requirement 6000000000 5000000000 4000000000 3000000000 2000000000 1000000000 0 2002-03 2002-04 2002-05 2002-06 Year Working Capital Requirement

Working Capital (in Rs.)

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Table II -Statement of Operating Cycle Of Videocon Appliances Ltd. From 2002-03 To 2005-06
Components Raw Material Conversion Period WIP Conversion Period Finished Goods conversion Period Debtors Conversion Period Total Operating Cycle Less: Creditors Conversion Period Operating Cycle (In Days) Operating Cycle (Times) 2002-03 67.91 32.53 4.46 78.51 183.41 63.90 120 3.05 2003-04 61.62 27.60 3.65 70.55 163.42 60.63 103 3.55 2004-05 64.82 26.48 2.99 68.84 163.13 58.93 104 3.50 2005-06 69.16 25.75 3.29 82.81 181.01 44.66 136 2.68

Graphical Representation of Operating Cycle

Operating Cycle (in Times) 4 3.5 3 2.5 2 1.5 1 0.5 0 2002-03 2002-04 2002-05 2002-06 Year Operating Cycle (Times)

Operating Cycle (in Times)

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Table III - Statement of Changes in Working Capital

Particulars

Previous Year

Current Year

Effect on Working Capital Increase Decrease

A) Current Assets: i) Inventories ii) Sundry Debtors iii) Cash & Bank Balance iv) Other Current Assets v) Loans & Advances Total Current Assets: B) Current Liabilities: i) Current Liabilities ii) Provisions Total Current Liabilities:

2598543332 2883150119 2118827972 3158308150 162214670 142323543 12278799 278628907 15608656 . 467120093

284606787 1039480178 19891127 3329857 188491186

5170473680 6666510561

1525006973 1088482082 41057949 86616306 1566064922 1175098388

436524891 45558357

Working Capital (A-B) Net Increase Or Decease In Working Capital

3604408758 5491412173

1887003415

1887003415

5491412173 5491412173

1952432899 1952432899

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Observation And Summary

Training in a huge company like VIDEOCON, which is fast growing company in the field of home appliances. It is noticed that functioning in the company is carried out very systematically and technically. As the today world is of competitive world and all are going globally, so very company has special attention to survive and grow in a market and it is observes that the VAL is doing it level best to survive. It is observed that VIDEOCON firmly believe on human and ethical value so, being a soft management they treat employee as a very important and appreciating assets of continuous growing. Not only this company that strive to ensure organization growth by raising strength of employees and providing various facilities for every individual to raise his\ her full potential.

Table I: It is observed that current asset decrease up to 2004-05 as compare to 2002-03 but in the year 2005-06 it had been increase from 517.04cr to 666.65cr and the current liabilities has been increase from 2002-04. It decreases in 2004-05 and again it increases 2005-06. It shows fluctuation in every year. Working capital of videocon appliances ltd at only in the 2003-04 it decreases reaming year i.e. 2004-05 and 2005-06 it increase it means that in the year 2003-04 working capital falls down which shows the current liabilities increasing in greater percentage as compare to current asset. In the 2003-04 working capital also shows the negative trend due to the increase in the current liability in the condition of the year 2004-05 and 2005-06 are increased it shows the positive trend. 41

Table II: As per the table II it is clear that the operating cycle of VAL improved regularly their position from the 120 to 103 days between the 2002-03 to 2004-05 but in the year 2005-06 it is of the 136 days it shows that in inefficient utilization of working capital in the year 2003-04 the operating cycle is 120days. It means the working capital is 3.05 times used in the financial year, in the year 2003-04 operating cycle is used 103 days. It means the working capital is 3.55 times used in the year. In the year 2004-05 operating cycle is used 104 days so working capital is 3.5 times used in year. In the year 2005-06 operating cycle is 136 days, which is maximum period among the four year as it is the highest time, consuming cycle so the working capital is used only 3 times and also observe that in year 2003-04 operating cycle of minimum period among the 4 periods it shows an efficient utilization of working capital.

Table III: Statement of changes in the working capital is prepared to show the changes in the working capital between the two balance sheet dates. This statement is prepared with the help of the current asset and current liabilities derived from the 2 balance sheets So,

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i) ii) iii) iv)

An increase in current asset increases working capital A decrease in current assets decreases in working capital An increase in current liabilities decreases working capital. A decrease in current liabilities increase working capital

It is worth noting that schedule of changes in working capital is prepared only from current assets and current liabilities and the other information is not of any use for preparing this statement. From the table 2 it is observe that the debtors collection period had been decreases regularly from 2002-03 to 2004-05 every year it indicates fast collection of debtor. Operating cycle decreases regularly from 120 to103 days in year 2002-03 to 200405 but in year 2005-06 it suddenly increases to 136 days from the above study it is clear that the operating cycle in terms of no of days is increased which is not favorable sign. There are 2.68 operating cycle in year so there will be apportionment of higher cost to each operating cycle to decrease in no of operating cycle there is tremendous decrease in net working capital in the year 2005-06 due to increase in current liabilities. The company should look in to the proper current liabilities.

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WORKIN CAPITAL CYCLE

A firm requires many years to recover initial investment in fixed assets. On contrary the investment in current asset is turned over many times a year. Investment in such current assets is realized during the operating cycle of the firm. Each component of working capital (namely inventory, receivables and Payables) has two dimensions ... TIME ......... and MONEY. When it comes To managing working capital - TIME IS MONEY. If you can get money to Move faster around the cycle (e.g. collect dues from debtors more quickly) Or reduce the amount of money tied up (e.g. reduce inventory levels relative To sales), the business will generate more cash or it will need to borrow less Money to fund working capital. As a consequence, you could reduce the

44

Cost of bank interest or you'll have additional free money available to Support additional sales growth or investment. Similarly, if you can Negotiate improved terms with suppliers e.g. get longer credit or an Increased credit limit; you effectively create free finance to help fund future Sales. It can be tempting to pay cash, if available, for fixed assets e.g. computers, plant, vehicles etc. If you do pay cash, remember that this is now longer available for working capital. Therefore, if cash is tight, consider other ways of financing capital investment - loans, equity, leasing etc. Similarly, if you pay dividends or increase drawings, these are cash outflows and, like water flowing downs a plughole, they remove liquidity from the business

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CASH MANAGEMENT:
Cash management is one of the key areas of WCM. Apart from the fact That it is the most liquid asset, cash is the common denominator to which all Current assets, that is, receivables & inventory get eventually converted into Cash. Cash is oil of lubricate the ever-turning wheels of business: without it the process grinds to a shop. Motives for holding cash with reference to cash management are used in two senses: It is used broadly to cover currency and generally accepted equivalents of cash, such as cheques, drafts and demand deposits in banks. It includes near-cash assets, such as marketable securities & time deposits in banks.

The main characteristic of these is that they can be readily sold & converted Into cash. They serve as a reserve pool of liquidity that provides cash Quickly when needed. They provide short term investment outlet to excess Cash and are also useful for meeting planned outflow of funds.

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CASH IS MAINTAINED FOR FOUR MOTIVES: A. Transaction motive:

Transaction motive refer to the holding of cash to meet routine cash Requirements to finance the transactions which a firm carries on in a variety Of transactions to accomplish its objectives which have to be paid for in the Form of cash. E.g. payment for purchases, wages, operating expenses, Financial charges like interest, taxes, dividends etc. Thus requirement of Cash balances to meet routine need is known as the transaction motive and Such motive refers to the holding of cash to meet anticipated obligations Whose timing is not perfectly synchronized with cash receipts?

B. Precautionary motive:
A firm has to pay cash for the purposes which can not be predicted or Anticipated. The unexpected cash needs at the short notice may be due to: Floods, strikes & failure of customer slow down in collection of current receivables Increase in cost of raw material Collection of some order of goods as customer is not satisfied the cash balance held in reserves for such random and unforeseen fluctuations in cash flows are called as precautionary balance. Thus, precautionary cash provides a cushion to meet unexpected contingencies. The more unpredictable are the cash flows, the larger is the need for such balance.

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C. Speculative motive:
It refers to the desire of the firm to take advantage of opportunities which present themselves at unexpected moment & which are typically outside the normal course of business. If the precautionary motive is defensive in Nature, in those firms must make provisions to tide over unexpected Contingencies, the speculative motive represents a positive and aggressive. Approach. The speculative motive helps to take advantages of: An opportunity to purchase raw material at reduced price on payment Of immediate cash. A chance to speculate on interest rate movements by buying securities when interest rates are expected to decline. Make purchases at favorable price. Delay purchase of raw material on the anticipation of decline in prices.

OBJECTIVES OF CASH MANAGEMENT:

I. To meet the cash disbursement needs in the normal course of business firms have to make payment of Cash on a continuous and regular basis to the supplier of goods, employees and so son. Also the collection is done from the Basic objective is to meet payment schedule that is to Have sufficient cash to meet the cash disbursement needs of the Firm.

II. To minimize the funds committed to cash balances First of all if we keep high cash balance, it will ensure prompt payment Together with all the advantages. But it also implied that the large funds will 48

Remain idle, as cash is the non-earning asset and firm will have to forego Profits. On the other hand, low cash balance mean failure to meet payment Schedule. Therefore we should have optimum level of cash balance.

FACTORS DETERMININING CASH NEEDS:

1) Synchronization of cash - need for the cash balances arises from the Nonsynchronization of the inflows & outflows of cash. First need in Determining cash needs is, the extent of non-synchronization of cash Receipts & disbursements. For this purpose cash budget is to be Prepared. Cash budget point out when the firm will have excess or Shortage of cash.

2) Short cash period reveals the period of cash shortages. Every Shortage of cash whether expected or unexpected involves a cost Depending upon the security, duration & frequency of shortfall & how The shortage is covered. Expenses incurred as a shortfall are called Short costs.

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There are following costs included in the short cash Transaction cost: this is usually the brokerage incurred in relation to The some short-term near-cash assets like marketable securities. Borrowing costs: these include interest on loan, commitment charges & other expenses relating to loan. Loss of cash discount: that s a loss because of temporary shortage of cash. Cost associated with deterioration of credit rating.

Penalty rates: By a bank to meet a shortfall in compensating balances.

1) Excess cash balance - cost associated with excessively large cash A balance is known as excess cash balance cost. If large funds are Idle the implication is that the firm has missed the opportunity to Invest those funds and has thereby lost interest. This loss of interest Is primarily the excess cost.

2) Procurement & Management cost cost associated with establishing And operating cash management staff and activities. They are Generally fixed and accounted for by salary, handling of securities Etc.

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3) Uncertainty the first requirement in cash management is Precautionary cushion to cope with irregularities in cash flows, Unexpected delays in collection &disbursements, defaults and Unexpected cash needs. Impact can be reduced through: Improved forecasting of tax payments, capital expenditure, dividends Etc. Increased ability to borrow through overdraft facility.

DETERMINING THE CASH NEEDS:

Cash needs can be determined though preparing cash budget, for year, Month, week etc. Cash reports, providing a comparison of actual development with forecast Figures are helpful in controlling and revising cash forecasts on a continual Basis the important cash reports are The daily cash reports Daily treasury reports The monthly cash report Monitoring collection and receivables: The Finance Manager must control the levels of cash balance at various Points in the organization. This task assumes special importance on Account of the fact that there is generally tendency amongst divisional Manager to keep cash balance in excess of their needs. Hence a finance Manager must devise a

51

system whereby each division of organizationRetains enough cash to meet its day-to-day requirements without having Surplus balance on hand. For this methods have to be employed to: Speed up the mailing time of payment from customers Reduce the time during which payments received by the firm remain Uncollected and speed up the movement funds to disbursement banks. For this purpose following can be helpful: 1 Prompt billing often there is time lag between the dispatches of goods Or provision of service and the sending of bills. By preparing and Sending the bills promptly, a firm can ensure earlier remittance. It Should be realized that it is in the area of billing that the company Control is high and there is a sizeable opportunity to free up cash. For this treasure should work with controller and others in: Accelerating invoice data Mailing bills promptly Identifying payment locations. 2 Expeditious collections of cheques - expediting collecgion of cheques Is important and there are to methods 1. Concentration banking, 2. Lock box method

Concentration banking: (decentralized collection) key Elements are, the major bank account of the company is wet Up with a concentration bank, generally situated in the same Place where the company is head quartered.

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Customers are Advised to mail their remittances to collection centre close tog Them. Payments collected in different collection centers are Deposited in local banks which in turn transfer them to the Concentration banks Lock box method: Silent features are as follows A number of post office boxes are rented by the company In different locations Customers are advised to mail there remittances to the Lock boxes. Banks are authorized to picked up the cheques from the Lock boxes and deposit them in the companies account. Controlling payables/disbursements: by proper control of Payables Company can manage cash resources. This involves Payment should be made as and when it fall due. Centralized disbursement payables and their Disbursements may be centralized. This helps in Consolidating the funds at head office scheduling Payments, reducing unproductive bank balance and Investing surplus funds more effectively. Proper synchronization of inflows and outflows helps a Company to get greater mileage from cash resources. Float: when firm issues cheques they reduce the balance in Their books, but balance in banks book is not reduced till the Payment is made by bank. This amount of cheques issued by The firm but not paid for by the bank is referred to as payment

Float. When the cheques are deposited with bank the firm Increases the balance in its books. The balance in the bank s Book however is cleared.

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The amount of cheques deposited By the firm in the bank but not cleared is referred to as Collection float. Difference between payment float and Collection float is called as net float. When the net float is Positive the balance in the books of bank is higher than the Balance in the books of firm. When the firm enjoys the positive Float (net) it may issue cheques even if it have an overdrawn Bank account in its books. Such an action is referred to as Playing the float it is considered risky. Accruals: accruals can be defined as current liabilities that Represent a service or goods received by a firm but not yet Paid for. For example remuneration to employee s that render Services in advance and receive payment later. In a way, they Extend credit to the firm for a period at the end of which they Are paid. Weekly is more important as compared to monthly. Other examples, rent to lessons, taxes to government.

OPTIMAL CASH BALANCE

It a firm maintains a small cash balance, it has to sell its marketable Securities more frequently than if it holds a large cash balance. Hence Trading or transaction costs will tend to diminish if cash balance becomes Larger. However, the opportunity costs of maintaining cash rise as the cash Balance increases.

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From the figure, the total costs of holding cash are at a minimum when the Size of the cash balance is C. This represents optimal cash balance. Deployment of surplus funds: Company s often has surplus funds for short period of time before they are Required for capital expenditure, loan repayment or some other purposes. The one end they are invested in term deposit in bank and on other end is Invested in equity shares. They can be invested in several options like Units of the unit 1964 scheme: This is the most important mutual fund Scheme in India. It has the following features-

It is an open ended scheme as it accepts funds from investors & also permits To withdraw their investments.

The units have face value of Rs. 10.00/- The sale & purchase price of units Are not squarely based on the net asset per unit, as should be the case for A truly open ended scheme.

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DEBTORS MANAGEMENT.

Assessing the credit worthiness of customers

Before extending credit to a customer, a supplier should analyze the five Cs Of credit worthiness, which will provoke a series of questions? These are:

Capacity: will the customer be able to pay the amount agreed within The allowable credit period? What is their past payment record? How Large is the customer's business capital. What is the financial health? Of the customer? Is it a liquid and profitable concern, able to make Payments on time?

Character: Does the customers management appear to be committed To prompt payment? Are they of high integrity? What are their Personalities like?

Collateral: what is the scope for including appropriate security in? Return for extending credit to the customer?

Conditions: what are the prevailing economic conditions? How are These likely to impact on the customers ability to pay promptly?

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Whilst the materiality of the amount will dictate the degree of analysis Involved, the major sources of information available to companies in Assessing customers credit worthiness is:

Bank references. These may be provided by the customers bank to Indicate their financial standing. However, the law and practice of Banking secrecy determines the way in which banks respond to Credit enquiries, which can render such references uninformative, Particularly when the customer is encountering financial difficulties.

Trade references. Companies already trading with the customer May be willing to provide a reference for the customer. This can be Extremely useful, providing that the companies approached are a Representative sample of all the clients suppliers. Such references Can be misleading, as they are usually based on direct credit Experience and contain no knowledge of the underlying financial Strength of the customer.

Financial accounts. The most recent accounts of the customer can Be obtained either direct from the business, or for limited companies, From Companies House. While subject to certain limitations past

57

Accounts can be useful in vetting customers. Where the credit risks Appears high or where substantial levels of credit are required, the Supplier may ask to see evidence of the ability to pay on time. This Demands access to internal future budget data. Personal contact. Through visiting the premises and interviewing Senior management, staff should gain an impression of the efficiency And financial resources of customers and the integrity of its Management.

Credit agencies. Obtaining information from a range of sources Such as financial accounts, bank and newspaper reports, court Judgments, payment records with other suppliers, in return for a fee, Credit agencies can prove a mine of information. They will provide a Credit rating for different companies. The use of such agencies has Grown dramatically in recent years.

Past experience. For existing customers, the supplier will have Access to their past payment record. However, credit managers Should be aware that many failing companies preserve solid Payment records with key suppliers in order to maintain supplies, but They only do so at the expense of other creditors. Indeed, many

58

Companies go into liquidation with flawless payment records with key Suppliers.

General sources of information. Credit managers should scout Trade journals, business magazines and the columns of the business Press to keep abreast of the key factors influencing customers' Businesses and their sector generally. Sales staffs who have their Ears to the ground can also prove an invaluable source of Information.

Credit terms granted to customers Although sales representatives work under the premise that all sales Are good (particularly, one may add, where commission is involved!), The credit manager must take a more dispassionate view. They must Balance the sales representative's desire to extend generous credit Terms, please customers and boost sales, with a cost/benefit Analysis of the impact of such sales, incorporating the likelihood of Payment on time and the possibility of bad debts. Where a customer Does survive the credit checking process, the specific credit terms Offered to them will depend upon a range of factors. These include:

Order size and frequency: companies placing large and/or frequent Orders will be in a better position to negotiate terms than firms

59

Ordering on a one-off basis.

Market position: the relative market strengths of the customer and Supplier can be influential. For example, a supplier with a strong Market share may be able to impose strict credit terms on a weak, Fragmented customer base. Profitability: the size of the profit margin on the goods sold will Influence the generosity of credit facilities offered by the supplier. If Margins are tight; credit advanced will be on a much stricter basis Than where margins are wider.

Financial resources of the respective businesses: from the Suppliers perspective, it must have sufficient resources to be able to Offer credit and ensure that the level of credit granted represents an Efficient use of funds. For the customer, trade credit may represent An important source of finance, particularly where finance is Constrained. If credit is not made available, the customer may switch To an alternative, more understanding supplier.

Industry norms: unless a company can differentiate itself in some Manner (e.g., unrivalled after sales service), its credit policy will Generally be guided by the terms offered by its competitors. Suppliers will have to get a feel for the sensitivity of demand to

60

Changes in the credit terms offered to customers.

Business objectives: where growth in market share is an objective, Trade credit may be used as a marketing device (i.e., liberalized to Boost sales volumes). The main elements of a trade policy are:

Terms of trade: the supplier must address the following questions: Which customers should receive credit? How much credit should be? Advanced to particular customers and what length of credit period Should be allowed?

Cash discounts: suppliers must ponder on whether to provide Incentives to encourage customers to pay promptly. A number of Companies have abandoned the expensive practice of offering Discounts as customers frequently accepted discounts without Paying in the stipulated period.

Collection policy: an efficient system of debt collection is essential. A good accounting system should invoice customers promptly, follow Up disputed invoices speedily, issue statements and reminders at Appropriate intervals, and generate management reports such as an Aged analysis of debtors. A clear policy must be devised for overdue

61

Accounts, and followed up consistently, with appropriate procedures (Such as withdrawing future credit and charging interest on overdue Amounts). Materiality is important. Whilst it may appear nonsensical To spend time chasing a small debt, by doing so, a company may Send a powerful signal to its customers that it is serious about the Application of its credit and collection policies. Ultimately, a balance Must be struck between the cost of implementing a strict collection Policy (i.e., the risk of alienating otherwise good customers) and the Tangible benefits resulting from good credit management

Problems in collecting debts

Despite the best efforts of companies to research the companies to whom They extend credit; problems can, and frequently do, arise. These include Disputes over invoices, late payment, deduction of discounts where Payment is late, and the troublesome issue of bad debts. Space precludes A detailed examination of debtor finance, so this next section concentrates Solely on the frequently examined method of factoring.

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Factoring an evaluation
Key elements: Factoring involves raising funds against the security of a company's trade Debts, so that cash is received earlier than if the company waited for its Credit customers to pay. Three basic services are offered, frequently Through subsidiaries of major clearing banks: Sales ledger accounting, involving invoicing and the collecting of Debts; Credit insurance, which guarantees against bad debts; Provision of finance, whereby the factor immediately advances about 80% of the value of debts being collected. There are two types of factoring service: Non-recourse factoring is where the factoring company purchases the Debts without recourse to the client. This means that if the clients debtors Do not pay what they owe, the factor will not ask for his money back from The client.

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Recourse factoring, on the other hand, is where the business takes the Bad debt risk. With 80% of the value of debtors paid up front (usually Electronically into the clients bank account, by the next working day), the Remaining 20% is paid over when either the debtors pay the factor (in the Case of recourse factoring), or, when the debt becomes due (non-recourse Factoring). Factors usually charge for their services in two ways: Administration fees and finance charges. Service fees typically range from 0.5 - 3% of annual turnover. For the finance made available, factors levy a Separate charge, similar to that of a bank overdraft.

Advantages
Provides faster and more predictable cash flows; Finance provided is linked to sales, in contrast to overdraft limits, Which tend to be determined by historical balance sheets? Growth can be financed through sales, rather than having to resort to External funds; The business can pay its suppliers promptly (perhaps benefiting from Discounts) and because they have sufficient cash to pay for stocks, The firm can maintain optimal stock levels; Management can concentrate on managing, rather than chasing Debts; The cost of running a sales ledger department is saved and the Company benefits from the expertise (and economies of scale) of the Factor in credit control

64

Disadvantages
The interest charge usually costs more than other forms of short-term Debt; the administration fee can be quite high depending on the number of Debtors, the volume of business and the complexity of the accounts; By paying the factor directly, customers will lose some contact with The supplier. Moreover, where disputes over an invoice arise, having The factor in the middle can lead to a confused three-way Communication system, which hinders the debt collection process;

Traditionally the involvement of a factor was perceived in a negative Light (indicating that a company was in financial difficulties), though Attitudes are rapidly changing.

FINDINGS
In entire Study of Project it has been observed that the overall performance of the company in all sectors has been remarkable. The year 2005 -2006 has yet another eventful year for Videocon Appliances. In this year Company has achieved story financial results registering a growth in sales and increase in Profitability

This has been possible because of Strong working capital management and Focused efforts of company to explore and expand their markets. 65

SUGGESTIONS
Company has to maintained Proper records showing full particulars including Quantitative details and situation of fixed assets. Company has to restructure the Procedure of Verification of inventory should Be reasonable and adequate in relation to the size of the company and nature of Business. It is important for company that company has to give guarantees for loans Taken by others from banks or financial institutions are not prejudicial to the Interest of the company. The company has not defaulted in repayment of dues to a financial institution Or bank.

LIMITATIONS
The time span available is constituted limitation of the entire Project. The time allocated for present study was only so days, and it is very difficult To cover all the aspects of the project within such a short period. Working capital Management is so vast topic and it is very difficult to cover All aspects of working capital management in a project report.

66

CONCLUSION
In entire Study of Project we can conclude that the Company will have to Adopt systematic method for proper records of accents. Further company will have to re-develop the procedure for inventory Management. Company has to make separate Provision for internal assessment. Videocon appliances . is one of the leading industrial group in India as per that they have to develop their marketing strategies.

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BIBILOGRAPHY

Finacial Mangement Study material, Intermediate Level By S.N.Inamdar

Advance financial management Text and cases by Prasanna Chandra Himalaya Publishing House

FINANCIAL JOURNALS OF ICFAI Published by ICFAI PRESS

Web Site: -

www.videoconworld.com www.google.com

Annual Report of Videocon

: - 2003 - 06

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