EXECUTIVE SUMMARY

I had the opportunity to take up the Internship Project at Vardhman textiles limited . During the
project I had the privilege of being guided by Mr. Ajay Sharma, Executive in Finance
department.
Vardhman, a household name in Northern India, has carved out a niche for itself in textile
industry. The Vardhman group was setup in 1962 by late Lala Rattan Chand Oswal, father of
present Chairman cum Managing Director, Sh. S.P. Oswal. Vardhman aims to be world class
textile organization producing diverse range of products for the global textile market. Vardhman
seeks to achieve customer delight through excellence in manufacturing and customer service
based on creative combination of state-of-the-art technology and human resources.
My project is study of inland bill discounting under letter of credit and Analysis of Working
capital and of Yarn division Of Vardhman textiles limited.
The study was conducted at the commercial department of textiles limited under Account
Receivable Department.
The project was of 6 weeks duration. During the project interviewed the executives & staff to
collect the data, & also made use of company records & annual reports. The data collected were
then compiled, tabulated and analyzed.
The objective of my internship was the knowledge of sale under letter of credit of yarn customers
and to operate the working capital cycle of the management.
Working Capital Management is a very important facet of financial management due to:
✔ Investments in current assets represent a substantial portion oftotal investment.
✔ Investment in current assets & the level of current liabilities have toBe geared quickly to
change sales.
Some the points to be studied under this topic are:
✔ How much cash should a firm hold?
✔ What should be the firms credit policy?
✔ How to & when to pay the creditors of the firm?
✔ How much to invest in inventories?
By studying about the company s different areas I came to know

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certain things like:
➢ Acid test ratio is more than one but it does not mean that company has excessive liquidity.
➢ Creditors turnover ratio also improved so it is better for company
➢ Inventory turnover ratio is improving from 2006-7 to 2007-08, which means inventory is
used in better way so it is good for the company.

A study of letter of credit deals with studying and understanding the Letter of credit, different
fields of letter of credit and different types of L/C charges namely L/C Advising charges, L/C
Amendment charges and discrepancy charges and calculating saving potential and making
recommendations.
A letter of credit (LC) is a binding document that a buyer can request from his bank in order to
guarantee that the payment for goods will be transferred to the seller. Basically, a letter of credit
gives the seller reassurance that he will receive the payment for the goods.
By studying the LC of Yarn division I came to know
➢ All the dealing of LC is centralized of yarn customers.
➢ It reduces the credit risk of company
➢ It even reduces the payment delays
➢ It increase the liquidity position of company
Some suggestions for the company are

• The prices should be less to re-establish the market for Yarn.

• Not only for yarn customers but for other product customer dealing under letter of
credit should done

• Company should put more efforts to improve its liquidity position

 LETTER OF CREDIT

The English name “letter of credit” derives from the French word “accreditif”, a power to do
something, which in turn is derivative of the Latin word “accreditivus”, meaning trust.
A letter of credit is basically a document issued by a bank guaranteeing a client's ability to pay
for goods or services. A bank or finance company issues a letter of credit on behalf of a buyer,
authorizing the seller to obtain payment within a specified timeframe once the terms and
conditions outlined in the letter of credit are met. The letter of credit acts like an insurance
contract for both the buyer and seller and practically eliminates the credit risk for both parties,
while at the same time reducing payment delays. A letter of credit provides the seller with the
greatest degree of safety when extending credit. It is useful when the buyer is not well known
and when exchange restrictions exist or are possible.
The LC can also be the source of payment for a transaction, meaning that a will get paid by
redeeming the letter of credit. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer in
another. The parties to a letter of credit are usually a beneficiary who is to receive the money,
the issuing bank of whom the applicant is a client, and the advising bank of whom the
beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or
canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if
any. In executing a transaction, letters of credit incorporate functions common Traveler's
cheques.

FROM ABOVE WE CAN CONCLUDE LETTER OF CREDIT IS

A letter of credit is a document issued mostly by financial institutions which usually provides an
irrevocable payment undertaking to a beneficiary against complying documents as stated in the
credit.
Once the beneficiary or a presenting bank acting on his behalf, makes a presentation to the
issuing bank or confirming bank, if any, within the expiry date of L/C, comprising documents
complying with the terms and conditions of the L/C, the applicable UCP. And international
standard banking practices. The issuing bank or confirming bank, if any, is obliged to honor
irrespective of any instructions from the applicants to the contrary.

Seller Bank

Buyer Bank
Seller

Buyer

Carrier

After a contract s concluded between buyer and seller, buyer bank supplies a letter of credit to
the seller

Seller consigns goods to a carrier in exchange for a bill of lading.

Seller Bank

Buyer Bank

Seller

Buyer

Carrier
Seller provide bill of lading to a bank in exchange for payment. Seller’s bank exchanges bill of
lading for payment from a buyer’s bank. Buyer’s bank exchange bill of lading for payment from
buyer.

Seller Bank

Buyer Bank

Seller

Buyer

Carrier

Buyer provides bill of lading to a carrier and takes delivery of goods

Seller Bank
Buyer Bank

Seller

Buyer

Carrier
Elements of a Letter of Credit
• A payment undertaking given by a bank (issuing bank)
• On behalf of a buyer (applicant)
• To pay a seller (beneficiary) for a given amount of money
• On presentation of specified documents representing the supply of goods
• Within specified time limits
• Documents must conform to terms and conditions set out in the letter of credit
• Documents to be presented at a specified place
PARTIES TO AND ASSOCIATED WITH THE LETTER OF CREDIT
1. Applicant
The applicant is the party who requests and instructs the issuing bank to open a letter of credit in
favor of the beneficiary. The applicant usually is the importer or the buyer of goods and/or
services. The applicant can also be another party acting on behalf of the importer, such as a
confirming house. The confirming house is equivalent to a buying office, it acts as an
intermediary between buyer and seller, and it can be located in a third country or in the seller’s
country.
2.Beneficiary
The beneficiary is entitled to payment as long as he can provide the documentary evidence
required by the letter of credit. The letter of credit is a distinct and separate transaction from the
contract on which it is based. All parties deal in documents and not in goods. The issuing bank is
not liable for performance of the underlying contract between the customer and beneficiary. The
issuing bank's obligation to the buyer, is to examine all documents to insure that they meet all the
terms and conditions of the credit. Upon requesting demand for payment the beneficiary warrants
that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms
to the letter of credit, the seller must be paid by the bank.
3.Issuing Bank
The issuing bank's liability to pay and to be reimbursed from its customer becomes absolute
upon the completion of the terms and conditions of the letter of credit. Under the provisions of
the Uniform Customs and Practice for Documentary Credits, the bank is given a reasonable
amount of time after receipt of the documents to honor the draft.The issuing banks' role is to
provide a guarantee to the seller that if compliant documents are presented, the bank will pay the
seller the amount due and to examine the documents, and only pay if these documents comply
with the terms and conditions set out in the letter of credit.Typically the documents requested
will include a commercial invoice, a transport document such as a bill of lading or airway bill
and an insurance document; but there are many others. Letters of credit deal in documents, not
goods.
4.Advising Bank
An advising bank, usually a foreign correspondent bank of the issuing bank will advise the
beneficiary. Generally, the beneficiary would want to use a local bank to insure that the letter of
credit is valid. In addition, the advising bank would be responsible for sending the documents to
the issuing bank. The advising bank has no other obligation under the letter of credit. If the
issuing bank does not pay the beneficiary, the advising bank is not obligated to pay.
5.Confirming Bank
The correspondent bank may confirm the letter of credit for the beneficiary. At the request of the
issuing bank, the correspondent obligates itself to insure payment under the letter of credit. The
confirming bank would not confirm the credit until it evaluated the country and bank where the
letter of credit originates. The confirming bank is usually the advising bank.

TYPES OF LETTER OF CREDIT

1.Commercial and stand by L/C: Commercial letters of credit are used primarily to facilitate
foreign trade. The commercial letter of credit is the primary payment mechanism for a
transaction. It is a contractual agreement between a bank, known as the issuing bank, on behalf
of one of its customers, authorizing another bank, known as the advising or confirming bank, to
make payment to the beneficiary. The issuing bank, on the request of its customer, opens the
letter of credit. The issuing bank makes a commitment to honor drawings made under the credit.
The beneficiary is normally the provider of goods and/or services. Essentially, the issuing bank
replaces the bank's customer as the payee The standby letter of credit serves a different function.
The standby letter of credit serves as a secondary payment mechanism. The bank will issue the
credit on behalf of a customer to provide assurances of his ability to perform under the terms of a
contract. A bank will issue a standby letter of credit on behalf of a customer to provide
assurances of his ability to perform under the terms of a contract between the beneficiary. The
parties involved with the transaction do not expect that the letter of credit will ever be drawn
upon. The standby letter of credit assures the beneficiary of the performance of the customer's
obligation. The beneficiary is able to draw under the credit by presenting a draft, copies of
invoices, with evidence that the customer has not performed its obligation. The bank is obligated
to make payment if the documents presented comply with the terms of the letter of credit.
They are issued by banks to stand behind monetary obligations, to insure the refund of advance
payment, to support performance and bid obligations, and to insure the completion of a sales
contract. The credit has an expiration date.The standby letter of credit is often used to guarantee
performance or to strengthen the credit worthiness of a customer. In the above example, the letter
of credit is issued by the bank and held by the supplier. The customer is provided open account
terms. If payments are made in accordance with the suppliers' terms, the letter of credit would
not be drawn on. The seller pursues the customer for payment directly. If the customer is unable
to pay, the seller presents a draft and copies of invoices to the bank for payment.
2.Revocable or irrevocable letter of credit: Letters of credit may be either revocable or
irrevocable. A revocable letter of credit may be revoked or modified for any reason, at any time
by the issuing bank without notification. A revocable letter of credit cannot be confirmed. Once
the documents have been presented and meet the terms and conditions in the letter of credit, and
the draft is honored, the letter of credit cannot be revoked. The revocable letter of credit is not a
commonly used instrument. If a letter of credit is revocable it would be referenced on its
face.The irrevocable letter of credit may not be revoked or amended without the agreement of the
issuing bank, the confirming bank, and the beneficiary. An irrevocable letter of credit from the
issuing bank insures the beneficiary that if the required documents are presented and the terms
and conditions are complied with, payment will be made. If a letter of credit is irrevocable it is
referenced on its face.
3) Sight or usance letter of credit: All letters of credit require the beneficiary to present a
draft and specified documents in order to receive payment. A draft is a written order by which the
party creating it, orders another party to pay money to a third party. A draft is also called a bill of
exchange. There are two types of drafts: sight and time. A sight draft is payable as soon as it is
presented for payment. The bank is allowed a reasonable time to review the documents before
making payment. A time draft is not payable until the lapse of a particular time period stated on
the draft. The bank is required to accept the draft as soon as the documents comply with credit
terms. The issuing bank has a reasonable time to examine those documents. The issuing bank is
obligated to accept drafts and pay them at maturity. A Letter of credit is known as a Sight letter
of credit if it involves payment to the seller against a Sight Draft. On the other hand, if the
payment is made against a Usance Draft, then it is known as Usance letter of credit.

DIFFERENT FIELDS OF LETTER OF CREDIT

 FROM :( NAME & ADDRESS OF OPENING BANK )

This clause contains details of bank which has opened the Letter of Credit, and it works on
the behalf of the buyer of goods. The opening bank plays the first step in the whole process
of letter of credit.
 TO :( NAME & ADDRESS OF ADVISING BANK )
This clause shows the details of bank which plays the foremost role in the process of letter of
credit. The advising bank belongs to the country of seller. It plays the role of middleman
between the seller and the opening bank

 TYPE OF L/C :IRREVOCABLE

This clause shows the type of L/C in which it is being made. Various types of L/C’s are
Revocable, Irrevocable, Commercial, Negotiable etc.

 L/C Number :
The clause shows a particular number for L/C and every L/C has different number so that
difference can be judged between different L/C’s.

 DATE OF ISSUE :
This clause shows that date on which the opening bank has issued the L/C.

 DT. & PLACE OF EXPIRY : __________________________________IN INDIA

This shows about the date and the place in india where the lc will get expired, means that
financial institution where the L/C is send by the opening bank.

 NAME & ADDRESS OF THE:

APPLICANT
It contains detail about the buyer of the goods. It gives complete address of the buyer.

 NAME & ADDRESS OF THE:

BENEFICIARY
It shows details of the seller of goods, like seller’s name, address, country to which he
belongs.

 AMOUNT OF CREDIT IN :
✔ US DOLLARS /EURO/ANY
✔ OTHER FREELY
✔ EXCHANGEABLE CURRENCY
✔ (IN FIGURES & WORDS)
It shows the currency in which the deal is been made, the code for that currency as well as
the amount of the goods

 PERCENTAGE CREDIT : AS PER CONTRACT

AMOUNT TOLERANCE
Sometimes the amount in the letter of the credit and the exact amount of the goods does not
match. There can be a difference between the both. So a specific percentage of amounts of
goods specified in L/C is given as a tolerance and the exact amount of goods can be in
between the minimum and maximum tolerated limits.

 CREDIT AVAILABLE WITH:

This part shows the details of that party from where the amount can be reimburses by the
seller. This state’s either a specified bank in India or any bank in India.

 USANCE OF THE DRAFTS :

This clause shows whether the draft is payable at sight or at any date in future.

 DRAFTS TO BE DRAWN ON:

It tells about the party which acts as a drawee. Generally the opening bank acts as a drawee
 PARTIAL SHIPMENT : AS PER CONTRACT
This clause contains details whether the shipment of goods is allowed through one shipment
or the goods can be sending through various shipments.

 TRANSHIPMENT : AS PER CONTRACT

Transshipment means when the goods are send,

 SHIPMENT FROM :
It tells about that place from where goods are send by the seller.

 SHIPMENT TO :
It’s that place where the goods are sending by the seller. And generally its that country where
the buyer lives.

 LATEST SHIPMENT DATE :

It’s that date till which the goods should reach to the buyer. After that date, it’s the choice of
the buyer whether he accepts the goods or not.

 DESCRIPTION OF GOODS :
✔ Description of Materials
✔ Size ( in mm) and Quantity (in MT)
✔ Specification
✔ Tolerance
✔ Quantity
✔ Quantity Tolerance
✔ Price per MT (in USD/Euro/any other freely exchangeable currency)
 DOCUMENTS REQUIRED :
Beneficiary’s Commercial Invoice - one original plus two signed copies covering materials
shipped. Invoices will be raised on the basis of (THEORETICAL/ ACTUAL/ DRAFT SURVEY)
WEIGHT.

L/C in Vardhman
In this system , first corporate centralized market Yarn department advices a branch to make sale
of yarn through letter of credit In case of those customers who are either new for a organization
whose credit worthiness is not satisfactory according to market research report
NOTE
All L/C of Yarn division is deal by State bank of Patiala
Thereafter on the basis of instructions sent by CMY department, the branch advise the customers
to open the L/C with the bank. Some of the common points stated in th L/C are mentioned
below:
➢ Prorate shipment
➢ Transshipment
➢ Shipment date
➢ Expiry period of L/C
➢ Usance period
➢ Rate of interest for the usance period
➢ Other conditions as per mutual consent between buyer and seller

After opening the L/C concerned unit makes the sale to the customers as per agreed terms
and conditions stipulated in the L/C. Then concerned unit sent the invoice and other papers to
the centralized accounting cell for lodging the documents with the bank.. This documents
consists of
➢ Bill of exchange
➢ Original invoice
➢ Original G/r copy
➢ Packing list
➢ Copy of L/C
On the Due date mentioned in the L/C, we receive the realization advice from the bank, where
we have lodged the document drawn under L/C. after getting the advice from the bank, we credit
the customers with the amount we have realized

DOCUMENTS NEED FOR L/C

Letter of credit documents are required to be arranged in the following series:

By seller (duplicate documents)
 Bill of exchange
 Bill
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Original letter of credit
By seller’s bank (Duplicate documents)
 Letter
 Bill of exchange
 Bill
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Letter of credit (duplicate)
By buyer’s bank (Original documents)
 Bill of exchange
 Bill
 Goods lorry receipt
 Party acceptance letter
 Debit note
 Packing list
 Letter of credit (DUPLICATE)
 BILL OF EXCHANGE
 A non- interest bearing written order used primarily in international trade that binds one party to
pay a fixed sum of money to another party at a predetermined future date
It’s an unconditional order issued by a party or business which directs the recipient to pay a
fixed sum of money to a third party at a future date. The future date may b either fixed or
negotiable. A bill of exchange must be in writing and signed and dated also called draft

Negotiation of letter of credit

NEGOTIABLE means the ability to be sold or transfers to another party as a form of payment.
Something which is negotiable is transferable by endorsement and delivery.
(When documents come back from bank).
JOURNAL ENTIRES
IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2….
PARTICULARS L.F
DEBIT CREDIT (RS)
(RS)
Particular bank a/c……………………………Dr XXXX

Interest on inland bill discount a/c…………….Dr XXXX

To inland bill discount a/c

(BEING Negotiation of ibdno……….on dated……. XXXX

Inland bill discount charges a/c………………..Dr

To bank a/c XXXX

(BEING INALND BILL DISCOUNTING CHGS DR
BY BANK ON DATED ……….AGST IBD NO……
XXXX
How interest is calculated?
Total bill of exchange amount * rate of interest* number of days in Bill of exchange.
Rate of interest is 11.5% (according to STATE BANK OF PATIALA)
Number of days is calculated as per the conditions laid down IN L/C AGREEMENT

Realization of bill of exchange

JOURNAL ENTIRES
IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2….

PARTICULARS L.F DEBIT(RS) CREDIT (RS)

I inland and bill discounting a/c………Dr XXXX

To party account XXXX

(BEING REALISATION OF IBD NO, AGST INV

NO…….ON DATED…….)

• At the time of realisation of L/C there may be over due days

Bank will charge over due interest against late payment according to number of days
 Fully payment but late payment (overdue interest charged by bank)
JOURNAL ENTIRES
IN THE BOOKS OF VARDHMAN AT THE YEAR ENDED MARCH 31ST 2….

PARTICULARS L.F DEBIT(RS) CREDIT (RS)

Party a/c …………………………..Dr XXXX

To bank XXXX
( BEING AMOUNT OF OVERDUE INTEREST DEBITED
TO PARTY ACCOUNT AGST IBD NO. ON DATED …
…..)
INTRODUCTION TO WORKING CAPITAL

Working Capital is life blood and nerve centre of a business. Just as circulation of blood is
essential for the survival of the human being similarly working capital is necessary for the
survival of every business organization, whether it is a small organization or a big organization.
Every business needs funds for two purposes-for the establishment and to carry out its day to day
operations. Long terms funds are required to create production facilities through purchase of
fixed assets such as plant & machinery, land & building, furniture & fixtures etc. Investments in
these assets the present that part of the firm’s capital, which is blocked on a permanent or fixed
basis and is called fixed capital. Funds are also needed for short-term purposes as for the
purchase of raw material, payment of wages & other day to day expenses etc. these funds are
known as working capital.
Before discussing about the working capital management of VARDHMAN TEXTILES
LIMITED, we should know the meaning, definition and different concepts of working capital.

MEANING OF WORKING CAPITAL

In simple words, working capital refers to that part of the firm’s capital which is required for
financing short term or current assets such as, cash, marketable securities, debtors, and
inventories or in other words the working capital is the excess of current assets over current
liabilities.

CLASSIFICATON OR KINDS OF WORKING CAPITAL

Working capital may be classified in two ways:
a) On the basis of concept
b) On the basis of time

On The Basis Of Concept

On the basis of concept, working capital is classified as gross working capital and net working
capital. This classification is important from the point of view of the financial manager.
Gross working capital: - This is a wider term in a relation to the working capital. It includes all
current assets. Thus the gross working capital is the capital invested in total current assets of the
company. Examples of current assets are:

1. Cash in hand and Bank

2. Bill Receivables

3. Sundry Debtors

4. Short Term Loan & Advances

5. Inventory of Stock

6. Prepaid expenses

ON THE BASIS OF TIME, WORKING CAPITAL MAY BE CLASSIFIED AS:

  Permanent or fixed working capital

 Temporary or variable working capital

PERMANENT OR FIXED WORKING CAPITAL: Permanent working capital is the

minimum amount which is required and ensures effective utilization of fixed facilities and or
maintaining the circulation of current assets. There is always a minimum level of current assets
which is continuously required by the enterprise to carry out its normal business operations. For
example, work-in-progress, finished goods and cash balance. This minimum level of current
assets is called permanent working capital as this part of the capital is permanently blocked in
current assets. As the business grows, the requirements of permanent working capital also
increase due to the increase in current assets.

TEMPORARY OR VARIABLE WORKING CAPIAL: Temporary working capital is the

amount of working capital which is required to meet the seasonal demands and some special
exigencies. Variable working capital can be further classified as seasonal working capital and
special working capital. Most of the enterprises have to provide additional working capital to
meet the seasonal and social needs. The capital required to meet the seasonal needs of the
enterprise is called seasonal working capital. Special working capital is that part of working
capital which is required to meet exigencies such as launching of extensive marketing campaign
for conducting research, etc

FACTORS DETERMINING THE WORKING CAPITAL

The working capital requirement of the concern depends upon a large numbers of factors such as
nature and the size of business, the character of their operations, the length of production cycles,
the rate of stock turnover and the state of economic situation. It is not possible to rank them
because all such factors are of different importance and influence of individual factor changes for
a firm overtime. However, the following are important factors generally influencing the working
capital requirements.

 Nature and character of business.

 Size of business\scale of operation.

 Production policy.

 Manufacturing process\length of production cycle.

 Seasonal variation.

 Working capital cycle.

 Rate of stock turnover.

 Credit policy

 Business cycle.

 Rate of growth of business.

 Earning capacity and dividend policy.

 Price level changes.

  Other factors.

IMPOTANCE OF ADEQUATE WORKING CAPITAL

Working Capital is the blood and the nerve centre of business. Just as the blood circulation is
essential in the human bodies for maintaining life, working capital is very important to maintain
the running of business. No business can run successfully without an adequate amount of
working capital.
The advantages are as follows:
 Solvency of the business. Adequate working capital helps in maintaining solvency of the
business by providing uninterrupted flow of production.
 Goodwill. Sufficient working capital enables a business concern to make prompt
payments.
 Easy loan. A concern having adequate working capital high solvency and good credit
standing can arrange loans from banks and others on easy terms.
 Cash discounts. Adequate working capital also enables a concern to avail cash discounts
on the purchase and hence it reduces costs.
 Regular payments of salaries, wages and other day to day commitments. A company
which has adequate working capital can make regular payments of salaries, wages and
other day to day commitments with raises the morale of its employees, increases their
efficiency, reduces wastages and enhances production and profits.
 Exploitation of favorable market conditions. Only concerns with adequate working
capital can exploit favorable market conditions such as purchasing its requirement in bulk
when the prices are lower and holding its inventory for higher prices.
 Ability to face crises. Adequate working capital enables the concern face business crises
in emergencies such as depression because during such periods, generally, there is much
pressure on working capital
THE NEED OF WORKING CAPITAL
The need for working capital cannot be over emphasized. Every business needs some amount of
working capital. The need for working capital arises due to the time gap between the productions
and realized of cash from sales. There is an operating cycle involved in sales and realization of
cash. There are time gaps in purchase of raw material and production; production and sales; and
realization of cash.
Thus, working capital is needed for the following purposes:

 For the purchase of raw materials, components and spares.

 To pay wages and salaries.

 To incur day-to-day expenses and overhead costs such as fuel, power and office expenses
etc.

 To meet the selling costs as packing, advertising, etc.

 To maintain the inventories of raw material, work-in-progress, stores and spares and
finish stock.

 To provide credit facilities to the customers.

OPERATING CYCLE OF VARDHMAN TEXTILES LIMITED

The operating cycle refers to the length of the length of time between the firms paying the cash
for the material, entering into the production process\stock and the inflow of cash from debtors.
There is a complete cycle from cash to cash where in cash gets converted into raw material,
work-in-progress, finished goods debtors and finally in cash. Short-term funds are required to
meet the requirements of the funds during this time period this time period depends on the length
of time within which the original cash gets converted into cash again. The determination of
working capital cycle helps in the forecast, control and management of working capital. It
indicates the total time lag and the relative significance of constituent parts.
THE OPERATING CYCLE CONSISTS OF FOLLOWING EVENTS, WHICH
CONTINUES THROUGHOUT THE LIFE OF BUSINESS.

 Conversion of cash to raw material.

 Conversion of raw material to work in progress.

 Conversion of work in progress into finished goods.

 Conversion of finished goods into accounts receivable.

 Conversion of accounts receivable into cash.

FINANCING BY THE WORKING CAPITAL REQUIRMENTS BY BANKS

The bank credit is the primary institutional source of working capital finance. The bank provides
finance through loan agreements, overdrafts, cash credit, purchasing of bills, and term loans.
Banks have been certain norms in granting working capital finance to companies. These norms
have been greatly influenced by the recommendation of various committee appointed by
RESERVE BANK OF INDIA from time to time.

VARDHMAN TEXTILES LIMITED finance his working capital from the different banks like
ICICI BANK, STATE BANK OF INDIA, ALLAHABAD BANK,PUNJAB NATIONAL
BANK. Company finances the amount according to its need according to its need of working
capital requirement.
WORKING CAPITAL LIMITS FROM SCHEDULED BANKS FOR YEAR 2007-08

BANKS RS

State Bank of Patiala 5 crore

Punjab National Bank 5 crore

Allahabad Bank 50 crore

ICCI 5 crore
NET WORKING CAPITAL
Net working capital is the difference between the current assets and the current liabilities.
Therefore it is called net working capital. When current assets exceed current liabilities then the
working capital is positive otherwise negative. Examples of current liabilities.

 Bill Payable

 Sundry creditors

 Outstanding expenses

 Short term loans

 Dividend payable

 Bank overdraft
 REVIEWS

1. Bergami Robert (2007) analysis that that international trade transactions carry inherently
more risk than domestic trade transactions, because of differences in culture, business
processes, laws and regulations. It is therefore important for traders to ensure that payment is
received for goods dispatched and that the goods received and paid for comply with the
contract of sale. One effective way of managing these risks has been for traders to rely on the
letter of credit as a payment method. However for exporters in particular, the letter of credit
has presented difficulties in meeting the compliance requirements necessary for the payment
to be triggered. The current rules that govern letter of credit transactions(UCP 500) have been
under review for the past three years and an updated set of rules (UCP 600) is expected to be
introduced on 1July 2007. This paper focuses on the changes mooted for 2007and compares
these main issues with the existing rules and other associated guidelines and regulations
governing this method of payment. This paper considers the implication to changes of letter
of credit transactions and the sharing of risk. Firstly the paper provides some background to
letters of credit, then comments on existing literature and models, and subsequently an
analysis of the most important changes to the existing rules, before reaching a conclusion.
The conclusion is that the UCP 600 have not paid enough consideration to traders and service
providers and are likely to engender an environment of uncertainty for exporters in particular.

2. Dolan John (2007) analysis that The Law of Letters of Credit – Commercial and
Standby Credits is the four the Edition of a traditional treatise on a rather narrow legal
subject. Letters of credit fall into two categories: (1) commercials, which find use in
international sales; and (2) standbys that are a common device in many domestic
transactions. As international trade becomes more and more rationalized, the use of
commercials has diminished; but the use of the standby has enjoyed something of a boom,
for it accomplishes much that security interests, surety ship arrangements, and other credit
 enhancing devices accomplish and does it with significantly lower transaction costs.
Regrettably, the parties using letters of credit often are unaware of the credit’s legal
significance. This treatise covers the legal features of the commercial and the standby, all in a
global context. While it is codified to some extent in the Uniform Commercial Code, the law
of letters of credit is largely the law merchant, the is gentium; and the UCC defers in many
respects to international rules. Thus, the treatise deals with those international rules and cites
cases from virtually all of the common-law jurisdictions in an effort to provide complete
coverage of the field.

3. Padachi Kesseven (2006 )analysis that A well designed and implemented working capital
management is expected to contribute positively to the creation of a firm’s value The purpose
of this paper is to examine the trends in working capital management and its impaction firms’
performance. The trend in working capital needs and profitability of firms are examined to
identify the causes for any significant differences between the industries. The dependent
variable, return on total assets is used as a measure of profitability and the relation between
working capital management and corporate profitability is investigated for a sample of
58small manufacturing firms, using panel data analysis for the period 1998 –2003. The
regression results show that high investment in inventories and receivables is associated with
lower profitability. The key variables used in the analysis are inventories days, accounts
receivables days, accounts payable days and cash conversion cycle. A strong significant
relationship between working capital management and profitability has been found in
previous empirical work. An analysis of the liquidity, profitability and operational efficiency
of the five industries shows significant changes and how best practices in the paper industry
have contributed to performance. The findings also reveal an increasing trend in the short-
term component of working capital financing.

4. KlienCarter (2005) studied that For a relatively small fee and assuming sufficient collateral
or creditworthiness of the tenant or a guarantor, a tenant may be able to apply for and have its
bank issue to its landlord a letter of credit (“L/C”) to secure the tenant’s obligations under a
long-term lease. If the L/C is large enough, the landlord may enter into a lease with a tenant
 that the landlord would otherwise refuse due to the tenant’s lack of creditworthiness. From
the tenant’s perspective, an L/C may be preferable to a large security deposit. An L/C will not
necessarily tie up large amounts of the tenant’s cash or other liquid collateral, as would a
security deposit. Instead, the cash can be deployed as working capital in the tenant’s
business. An L/C is an independent obligation of the issuer. As long as conforming
documents specified by the terms of the
L/C is presented to the issuer before the expiration date and no fraud is involved, the issuer must
honor. The credit of the issuer stands behind the obligation of the tenant. If the tenant is insolvent
and/or bankrupt, the issuer still must honor the beneficiary’s conforming draws. Rights the
landlord will lose if the L/C draw is enjoined and the credit expires. This two-part article
provides tips for drafting L/Cs. Part one includes a discussion of using the International Standby
Practices, keeping the draw condition s simple and allowing partial draws conclusion addresses
issues such as providing coverage of the settlement period after lease termination; shortening
pitfalls is eliminated.. The conclusion of this article will provide six more drafting tips and a
discussion of the issuing banks’ concerns.

5. Lazaridis Dr Ioannis, Tryfonidis Dimitrios (2004) analysis that the relationship of corporate
profitability and working capital management. We used a sample of 131 companies listed in
the Athens Stock Exchange (ASE) for the period of 2001-2004. The purpose of this paper is
to establish a relationship that is statistical significant between profitability, the cash
conversion cycle and its components for listed firms in the ASE. The results of our research
showed that there is statistical significance between profitability, measured through gross
operating profit, and the cash conversion cycle. Moreover managers can create profits for
their companies by handling correctly the cash conversion cycle and keeping each different
component (accounts receivables, accounts payables, inventory) to an optimum level.

6. Schelin Johan (2004) studied that This thesis give a historical introduction in foreign trade
and letters of credit. The reasons for using letters of credit will be shown. The legal
relationships of the concerned parties will be analysed. The doctrine of strict compliance will
be explained. Then problems will be worked out: the different interpretation of strict
 compliance, the fraudulent exception and questions of liability if the doctrine of strict
compliance was not carefully used. The thesis bases on German law, but tries, whenever
useful, to compare with law of other countries and / or International law. At the end of the
thesis a critical outlook will follow. The analyse of problems concerning the strict
compliance lead to the result that still today, about 100 years after letters of credit became a
common method to pay, problems exist. One of these problems is the different interpretation
of courts in different countries. Especially the considerations of German courts that strict
compliance must be interpreted in the frontiers of good faith and that letters of credit must be
interpreted as will declarations.

7. Shelton Fred (2002) studied that Working capital, an important liquidity indicator, has
historically been a major benchmark of the surety and credit-granting institutions. In today’s
environment, because of the tight bond and credit markets, both institutions are scrutinizing
the amount and quality of working capital more than ever. The fewer resources that need to
be invested in working capital, after recognizing liquidity risk, the better.

8. Weinraub Herbert, Visscher Sue (1998) studies that This study looked at ten diverse
industry groups over an extended time period to examine the relative relationship between
aggressive and conservative working capital practices. Results strongly show that the
industries had significantly different current asset management policies. Additionally, the
relative industry ranking of the aggressive/conservative asset policies exhibited remarkable
stability over time. Industry policies concerning relative aggressive/conservative liability
management were also significantly different. Interestingly, it is evident there is a high and
significant negative correlation between industry asset and liability policies. Relatively
aggressive working capital asset management seems balanced by relatively conservative
working capital financial management.
9. Mills Geofrey (1996) analysis that the impact of inflation on the capital budgeting process. It
has shown that it is reasonable to expect that the cost of capital will increase at the same rate
as the rate of inflation on an ex ante basis, and that this increase will be a multiplicative
relationship. In addition, the paper has shown that the capital budgeting process is not neutral
with respect to inflation, even if output prices rise at the same rate as costs. Of critical
importance is the degree of net working capital as a proportion of the overall financing
required, the higher the net working capital the greater being the impact of inflation on
capital spending. Finally, it would appear that corporate financial behavior is influenced by
inflation. Inflation will cause the firm to reduce its capital budget, to attempt to reduce net
working capital, and to alter the debt/asset ratio using short term debt, thus driving up short
term rates relative to long term rates.
 About Vardhman Group

Vardhman is a major integrated textile producer in India. The Group was setup in 1965
at Ludhiana, Northern India. Since then, the Group has expanded manifold and is today,
one of the largest textile conglomerates in India. The Group portfolio includes Manufacturing
and marketing of Yarns, Fabrics, Sewing Threads, Fiber and Alloy Steel. The group started its
corporate journey with an installed capacity of 6000 spindles in
1965 under the flagship company Vardhman Spinning & General Mills Limited (now known as
Vardhman Holdings Limited and is an investment arm of the Group) in Ludhiana. Over the years
the group has expanded its spinning capacities besides adding new businesses. The group has
also diversified into yarn processing, weaving, And Sewing Thread, fabric processing, acrylic
fiber manufacturing and into special/ alloy steels. Today, close to 20,000 people are the
Organization is most important asset its human capital
The Vardhman group comprises of three listed and two unlisted companies-
Listed Companies
Listed companies
➢ Vardhman Textiles Limited (formerly Mahavir Spinning Mills Limited)
➢ Vardhman Acrylics Limited
➢ Vardhman Holdings Limited1 (formerly Vardhman Spinning & General Mills
Limited)
Unlisted Companies
VMT Spinning Company Limited
Vardhman Threads Limited

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