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Final Report
The company has well developed sales network with branch office at
Bombay, Delhi, Ahmedabad, Kolkata and Coimbtore. Plans are about to
open in Allahabad & Hydarabad. This will give the company network
throughout India. After establishing itself in India the company had turned
its eyes towards the export market. Participating in numerous international
exhibitions in India and also in abroad. The company has secured orders
against global competition.
The company caters to synthetic yarn industry in India and abroad,
manufacturing a complete range of machinery from polyester poy to
weaving and knitting. This product range makes it leading supplier of
machinery for the synthetic filament industry M/S Himson Textile Eng. Ltd.
Was incorporated in January 1979 for the manufacture of sophisticated
textile machineries and its spare parts. The company has been having
collaboration with world famous manufacturers of different textile machines.
Presently the company is having collaboration with TEIJIN SEKI
COMPANY LTD.JAPAN, CAMBER INTERNATIONAL LTD. UK AND
M.T.S., and S.P.A. ITALY.
In the decade of early 80`s, the synthetic textile industry witnessed a rapid
spurt of activities. The synthetic textile industry had undergone a dramatic
Sea of changes in the area of Man fabrics in India as well as across the
globe.
The turnover of group which was few millions when it commenced
operation has increased to USA $ 150 millions in 1997-98 and turnover of
HTEPL has increased from USA $ 1 million in 1987 to USA $ 90 million in
(3)
(4)
(THEORETICAL BACKGROUND)
2.1
2.2
2.3
2.4
2.5
OPERATING CYCLE
2.6
2.7
2.8
2.9
EXCESSIVE
OR
INADEQUATE
DANGEROUS
(5)
WORKING
CAPITAL-THE
(6)
(7)
(8)
(9)
Symbolically: O = R + W + F + D - C.
Where,
Phase-V
Phase-IV
Cash
Phase-I
Finished
Good
Raw Material
Phase-II
Phase-III
Work in Progress
(10)
a)
Permanent Working Capital: The need for current assets arises because of operating cycle. The
operating cycle is continuous process and therefore the need for current
assets is felt constantly. But the magnitude of current assets needed is not
always the same. It increases and decreases over time. However there is
always a minimum level of current assets, which are continuously required,
by firm to carry or its business operations is called permanent or fixed
working capital. This minimum level of working capital is necessary on the
regular basis even if the management of working capital is done efficiently
in the organization.
As this type of working capital is minimum necessary for the business
at all points of time, it is financed by the long-term sources.
b)
Temporary Working Capital: The amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The need for such type of
working arises because of fluctuations in production and sales. The
additional requirement may be during more active season when the volume
of production and sales more goes up necessitating extra blockage of funds
temporarily in current assets like Bank Balance, inventory, debtors, etc.
The temporary working capital is the additional funds required.
Whose volume is different at different points of time and hence it is financed
by short-term sources.
(11)
Time
(Figure 2a)
A
M
O
U
N
T
O
F
W.
C.
Time
(Figure 2b)
(12)
(13)
3. Manufacturing Cycle: The manufacturing cycle refers to the time spent by a product right
from the stage of purchase of its raw material to the stage of completion of
finished goods. Obviously the larger the manufacturing cycle of a company
the higher is the volume of working capital needed to finance blockage of
money in raw material, work in progress and finished good.
4. Business Cycle: No business can remain study for all the time. It passes through the
stages of prosperity and depression. During Prosperity, the volume of sales
increases necessitating higher level of inventories and debtors, i.e. more
Amount of working capital is required to sustain higher levels of activity
during prosperity. Depression has exactly an opposite effect on the level of
working capital requirement.
5. Credit Policy: If the organization is following a liberal credit p[policy for its
customers, it will result in higher debtors leading to requirement of more
working capital.
However, if the organization is availing liberal credit term from its
suppliers, the need for working capital is reduced.
6. Tax Structure: The entire profit generated may not be available to the organization
because of a simplest fact. The organization has to pay its taxes in time. Tax
rates vary in different forms of organization and accordingly working capital
requirement of different organization will be different.
(14)
7. Dividend Pay out ratio: If dividend payout ratio is high, the organization may have earned
profit but-the profits available only after payment of dividends is available
for financing working capital. Hence, higher working capital will be
required if Dividend payout ratio is high.
8. Availability of Funds: If the credit worthiness of an organization is good, it may manage the
business with less Working Capital. The reason may be that the organization
may procure the funds whenever it needs the funds.
9. Change in Technology: Change in technology affect the requirement for working Capital. If
the firm decides to go for automation, this would reduce the requirements of
Working Capital. If the firm adopts a labor-intensive process, the
requirement of working capital will be larger.
10.Size of the Firm: Bigger firms may require lesser working capital as compared to their
total sales or assets. Of course the absolute amount of working capital will
be higher in bigger firms.
(15)
Negotiated Sources
Short-term
Sources
Long-term
Sources
(2) Outstanding
(2) Retained
Expenses
(3) Bills payable etc.
(3) Short-loans
Earnings
(3) Debentures
term funds.
(16)
(1)
Long-term Financing: Long-term working capital should be provided in such a manner that
the enterprise might have its uninterrupted use for a long time. It can be
conveniently financed by shares, debentures, loans from financial Institution
term loans from banks, reserve surplus etc.
(2)
Short-term financing: The category of funds covers the need of working capital for
Spontaneous Financing: It refers to the automatic sources of short-term funds arising in the
(Table 1)
Proportion of W.C.
Sources
A)
B)
Equity Share
Short-term Loan From BOB.
(17)
Financing (in %)
80%
20%
2.9 EXCESSIVE
OR
DANGEROUS
The firm should maintain a sound working capital position. It should
have adequate working capital to run its business operations. Both excessive
as well as inadequate working capital positions are dangerous from the
firms point of view. Excessive Working capital means idle funds, which
earn no profit for the firm paucity of working capital not only impairs firms
profitability but also results in production interruptions and inefficiencies.
The dangers of excessive Working Capital are as follows:
1) A firm may be tempted to over trade and lose heavily.
2) The situation may lead to unnecessary purchases and accumulation of
inventories. This cause more chances of theft, waste, losses, etc.
3) These arise an imbalance between liquidity and profitability.
4) It means funds are idle when funds are idle, no profit is earned when it
is so, the rate of return on its investments goes down.
5) The situation leads to greater production, which may not have
matching demand.
6) The excess of working capital may lead to carelessness about cost of
production.
In adequate working capital is also bad and has the following dangers:
1) It stagnates growth. It becomes difficult for the firm to undertake
profitable projects for non-availability of working capital funds.
2) It may fail to pay its dividend because of non-availability of funds.
(18)
(19)
(20)
(21)
(22)
(23)
Introduction: It has already been discussed that working capital acts as lifeblood to
an organization. The Himson group of Industry mainly producing textile
machineries at lowest possible cost so that they are enable to sale it in
profitable manner. As major sale is on credit basis and not on cash mode,
working capital is of immense significance for efficiently carried out its dayto-day operation. In the absence of proper and effective management of
working capital, it would be difficult to achieve the basic objective of its
operational efficiency.
For the efficient management of Working Capital, analyses of working
capital of company through:
Inventory management
Receivable management
Cash management
Ratio analysis
All these are analyzed subsequently in this part.
(24)
I.
Particulars
Current Assets
1) Inventories
2) Sundry Debtors
3) Cash & Bank Balance
4) Loans & Advances
5) Other current Assets
Total Current Assets (A)
Current Liabilities
1) Current Liabilities
2) Provision
Total Current Liabilities (B)
2000-01
(Figures in thousands)
YEARS
2001-02
2002-03
339,596
300,586
68,193
192,942
27,872
929,189
350,615
369,429
124,547
224,777
17,358
1,086,726
504,596
321,324
231,670
232,705
37,502
1,327,797
408,440
1,025
409,465
455,039
4413
459,452
528,285
28,413
556,698
627,274
519,724
771,099
(Table-2)
(25)
II.
following table.
Year
2000-01
2001-02
2002-03
(Rs. in thousands)
Gross W.C. (Rs.)
Growth (%)
929,189
0.11
1,086,726
16.94
1,327,797
22.18
(Here year 1999-00 taken as 100%)
Growth (%)
25
22.18
20
16.94
2000-01
2001-02
2002-03
15
10
5
0
0.11
2000-01
2001-02
2002-03
Year
(26)
III.
liabilities. This ration measure firms potential reservoir funds relate to net
assets.
Year
2000-01
2001-02
2002-03
(Rs. in thousands)
Net Assets (Rs.) Ratio (in times)
11,84,161
0.53
11,34,542
0.46
11,22,410
0.69
(Table-4)
Ratio
0.8
0.7
0.6
0.5
0.4
0.3
0.69
0.53
0.46
2000-01
2001-02
2002-03
0.2
0.1
0
2000-01
2001-02
2002-03
Year
(27)
O=R+W+F+D-C
R= Raw material storage period
=
Year 2000-01
=
124833
-----------1927.60
65 days.
Year 2001-02
=
120933.5
--------------2349.31
52 days.
Year 2002-03
=
275028
-----------4044.83
68 days.
W= Work-in-progress period
=
(28)
Year 2000-01
=
49819
-----------2305.96
22 days.
Year 2001-02
=
191456
--------------2807.08
68 days.
Year 2002-03
=
125521
-----------4658.33
27 days.
Year 2000-01
=
17823.5
-----------4316.95
5 days.
Year 2001-02
=
13283
--------------2294.75
6 days.
(29)
Year 2002-03
=
12514.5
-----------3350.13
4 days.
Average debtors
---------------------------------Average credit sales per day
Year 2000-01
=
287156
-----------2898.23
99 days.
Year 2001-02
=
335007.5
--------------3465.99
97 days.
Year 2002-03
=
345376.5
-----------6150.48
56 days.
Average creditors
------------------------------------------Average credit purchase per day
(30)
Year 2000-01
=
327468
-----------1924.33
170 days.
Year 2001-02
=
301568
--------------2147.15
140 days.
Year 2002-03
=
371553
-----------3441.96
108 days.
Operating Cycle
(Figure in Days)
Particulars
Inventory Storage period
Raw material
Work-in-progress
Finished Stock
Debtor Collection Period
Total (A)
Creditors Payment Period (B)
Operating Cycle Period (A-B)
2000-01
YEARS
2001-02
2002-03
65
22
05
99
191
170
21
52
68
06
97
223
140
83
68
27
04
56
155
108
47
(Table-5a)
Operating Cycle Period
Year
2000-01
2001-02
2002-03
83
47
Days
(Table-5b)
90
80
70
60
50
40
30
20
10
0
83
47
21
2000-01
2001-02
2002-03
Year
(32)
2000-01
2001-02
2002-03
V. MANAGEMENT OF INVENTORY
Inventory constitute major portion of current asset of public Ltd.
Companies in India .The manufacturing companies hold inventories in the
form of Raw material, work-in-process and finish good,
There are at least three motives for holding inventories.
(1) To
facilitate
smooth
production
and
sales
operation
(Transaction motive)
(2) To guard against the risk of unpredictable changes in usage
rate and delivery time (Precautionary Motive)
(3) To take advantage of price fluctuations. (Speculative Motive)
Inventories represent investment of a firms funds and that is why
management of inventory is necessary for the maximization of the value of
the firm. The firm should therefore consider (a) Costs (b) Return (c) Risk
Factors in establishing its inventory policy.
EVALUATION OF INVENTORY MANAGEMENT PERFORMANCE: Ratio analysis has been used for making evaluation of Inventory
management performance. As the raw material used in the company is pig
iron, proper planning and handling is required for the purpose of achieving
the right quality of output.
The ratios for last three years have been worked out and compared.
The various figures are given in the table.
(33)
2000-01
329550.5
929189
760872
Ratio (%)
2001-02
331822.5
1086729
891349
2002-03
414866
1327797
15207147
0.35
0.30
0.31
2.31
2.69
3.67
158
136
99
a) Inventory to Gross
Working Capital (1/2)
b) Inventory Turnover (3/1)
c) Inventory Conversion
Period (365/b) days
(Table 6)
Inventory Turnover
3.67
4
3.5
3
2.5
Inventory Turnover
Inventory Turnover
2.69
2.31
2
1.5
1
0.5
0
2000-01
2001-02
2002-03
180
160
140
120
100
80
60
40
20
0
158
136
99
2000-01
Year
2000-01
2001-02
2001-02
2002-03
Year
2002-03
2000-01
(Graph 4)
2001-02
(Graph 5)
(34)
2002-03
VI.
MANAGEMENT OF RECEIVABLE
When firm sell goods for cash, payments are received immediately
and therefore no receivables are created. However when a firm sells goods
or services on credit, payments are received only at a future date and
receivables are created. It is an essential marketing tool in modern
business trade. Credit creates receivables, which the firm is expected to
collect in near future. A firm grants credit to its customers so that its sales
are its customers so that its sales are not lost to competitors.
Account receivable constitutes a significant portion of the total current
assets of the business after inventories. The receivables arising out of credit
has three characteristics.
I.
II.
III.
DEBTORS TURN-OVER RATIO: This is also called Debtors velocity or Receivable Turnover. A
firm sells goods on credit and cash basis. When firm extends credit to its
customers, book debts are created in firms A/c debtors expected to converted
in to cash over short period and thus included in current assets. It is used to
measure liquidity of the receivables or to find out period over, which
receivables remain uncollected.
(35)
Total Sales
----------------------Average Debtors
365
-----------------------------------Receivable turnover ratio
Sales
1042284
1247759
2214174
Avg. Debtors
287156
335007.5
345376.5
(Table 7)
Ratio
3.63
3.72
6.41
6
5
4
3.63
3.72
3
2
1
0
2000-01
2001-02
Collection Period
100
98
57
2002-03
120
100
100
80
57
60
40
20
0
2000-01
Year
2000-01
2001-02
98
2001-02
2002-03
Year
2002-03
2000-01
(Graph 6)
2001-02
(Graph 7)
(36)
2002-03
VII.
MANAGEMENT OF CASH: Cash in the important current assets for the operations of the business.
Cash is the basic input needed to keep the business running on continuos
basis, it is also the ultimate output expected to be realized by selling the
service or product manufactured by the firm. The firm should keep sufficient
cash, neither more or less. Cash shortage will disrupt the firms
manufacturing operation while excessive cash will simply remain idle,
without contributing anything towards firms profitability. Thus, a major
function of the financial managers is to maintain a sound financial position.
Cash management involves following four factors: I.
II.
III.
IV.
needs. A firm needs cash to make payment for acquisition of resources and
services for the normal conduct of business. It keeps additional funds to
meet any emergency situation. Some firms maintain cash for taking
advantages of speculative changes in price of input and output.
EVALUATION OF CASH MANAGEMENT PERFORMANCE: The following ratios have been used to evaluate different aspects of
cash management.
(1)
(2)
(37)
(3)
The figures of cash and Bank Balance, total current assets and current
liabilities for the year 2000-01to 2002-03 are given in the table.
Cash Management in Himson Pvt. Ltd.
(Rs. In 000s)
ITEM
(1) Cash & Bank Balance
(2) Total Current Assets
(3) Total Current Liabilities
a) Cash to Current Asset
Ratio (1/2)
b) Cash Turnover Ratio (3/1)
c) Average age of cash
(365/b) days
2000-01
68193
929189
408440
Ratio (%)
2001-02
124547
1086729
455039
2002-03
231670
1327797
528285
7.34
11.46
17.45
5.99
3.65
2.28
61
100
160
(Table 8)
Avg. Age of Cash
5.99
6
5
3.65
4
3
2.28
2
1
0
2000-01
2001-02
2002-03
180
160
140
120
100
80
60
40
20
0
160
100
61
2000-01
Year
2000-01
2001-02
2001-02
2002-03
Year
2002-03
2000-01
(Graph 8)
2001-02
(Graph 9)
(38)
2002-03
1. Ratios relating to liquidity of working capital: Liquidity ratios are used to measure the ability of firm to pay its
maturing obligation in time. This ratio helpful for both short-term creditors
and internal management of the firm. The following are types of ratios
relating to liquidity of working capital.
A. Current Ratio: It is most common measure for measuring liquidity. It is also called
Working Capital Ratio. It expresses relationship between current assets &
current liabilities.
Current Ratio
Current Assets
---------------------Current Liabilities
(39)
(Rs. in 000s)
Year
2000-01
2001-02
2002-03
Current Assets
929,189
1,086,726
1,327,797
Current Liabilities
408,440
455,039
528,285
(Table 9)
Ratio (times)
2.27:1
2.39:1
2.51:1
The acceptable norms for this ratio is 2:1 considering this it can be
said that company has maintained sound ratio over three year
B. Quick Ratio: It is also known as liquid ratio or acid test ration. It is a relation
between quick assets and quick liabilities. It is more useful in knowing the
liquidity of firm than current ratio.
Quick Ratio =
Quick Assets
---------------------Current Liabilities
Quick Assets
589,593
736,111
823,201
Current Liabilities
408,440
455,039
528,285
(Table 10)
Ratio (times)
1.44
1.62
1.56
The acceptable norm for this ratio is 1:1 but the company as already
maintained it above the norms, which indicate sound financial position.
(40)
2000-01
0.37
0.32
0.07
0.22
0.02
100
(Table 11)
2001-02
0.32
0.34
0.11
0.21
0.02
100
2002-03
0.38
0.24
0.17
0.17
0.03
100
Net Sales
--------------------------Total Gross W. C.
(Rs. in 000s)
Year
2000-01
Net Sales
1,042,284
Ratio (times)
1.12
2001-02
2002-03
1,247,759
2,214,174
1,086,726
1,327,797
(Table 12)
1.15
1.67
This ratio tells us the relative efficiency with which the business
organization utilizes the short-term resources to generate output.
B. Circulation of Net Working Capital: The method used to measure the effectiveness of net working capital
is to divide net sales by net working capital. The ratio is computed as
follows: Net Sales
Circulation of Net Working Capital = -----------Net W.C.
(Rs. in 000s)
Year
2000-01
2001-02
2002-03
Sales
1,042,284
1,247,759
2,214,174
Ratio (times)
1.66
2.40
2.87
4. Other Ratio: A. Cash Position Ratio: This ratio is variation of quick ratio. It measures the relationship
between cash and near cash its on the one had, and immediately maturing
(42)
obligations on the other. The inventory and debtors are excluded from
current assets, to calculate this ratio.
Year
2000-01
2001-02
2002-03
Cash
68,193
124,547
231,670
Current Liabilities
408,440
455,039
528,285
(Table 14)
Ratio (times)
0.17
0.28
0.44
100
(Rs. in 000s)
Year
2000-01
2001-02
2002-03
(43)
Ratio (%)
5.60
12.22
18.92
C. Current Liabilities to Total Assets Ratio: This ratio shows the relationship between current liability and total
assets [Net Fixed Assets + Investment + Current Assets]
Current Liabilities
---------------------Total Assets
(Rs. in 000s)
Year
2000-01
2001-02
2002-03
Current Liabilities
Total Assets
408,440
1,703,885
455,039
1,761,816
528,285
1,893,509
(Table 16)
Ratio (times)
0.24
0.26
0.29
D. Current Assets to Total Assets Ratio: The ratio brings out the percentage of current assets to total net assets
of the business. This ratio indicates the extent of liquidity nature of assets
required in comparison with total net assets. The formal for ratio is given
below.
Current Assets to Total Assets Ratio =
(44)
Current Assets
---------------------Total Assets
(Rs. in 000s)
Year
2000-01
2001-02
2002-03
Current Assets
929,189
1,086,726
1,327,797
Total Assets
1,703,885
1,761,816
1,893,509
(Table 17)
(45)
Ratio (times)
0.55
0.62
0.70
(46)
(A) Findings: -
Ratio
1) Net W. C. to Net Assets
2) Inventory to Gross W.C.
3) Inventory Turnover
4) Inventory Conversion
Avg. of Ratio
0.56
0.32
2.89
131
period (days)
5) Debtors Turnover
6) Debt collection Period
3.63
100
3.72
98
6.41
57
4.59
85
(days)
7) Cash to Current Assets.
8) Cash Turnover Ratio
9) Avg. Age of Cash (days)
10) Current ratio
11) Quick Ratio
12) Circulation of Gross
7.34
5.99
61
2.27
1.44
1.12
11.46
3.65
100
2.39
1.62
1.15
17.45
2.28
160
2.51
1.56
1.67
12.08
11.92
107
2.39
1.54
1.31
Working Capital
13) Circulation
of Net
1.66
2.40
2.87
2.31
Working Capital
14) Cash Position
15) Return on fixed Assets
16) Current liabilities to
0.17
5.60
0.24
0.28
12.22
0.26
0.44
18.92
0.29
0.30
12.25
0.26
Total Assets
17) Current Assets to Total
0.55
0.62
0.70
0.62
Assets
(Table 18)
The following are the findings of the analysis: (a) Gross working capital: -
(47)
(48)
This ratio is above the standard norm of 1:1 through out study period
so it can be said that it has satisfactory liquidity position.
(12) Circulation of Gross Working Capital: The ratio shows upward trend over the three-year period. It means
there is lower investment in current asset as compared to sales. Some say
that there is an improvement in working capital utilization.
(13) Circulation of Net Working Capital: The ratio shows an increasing trend over 3 years, which means there
is an improvement in utilization of Net Working Capital during the period.
(50)
(B) SUGGESTIONS: From the analysis of working capital ratios, I have some suggestion
for company, which might help them in improving management of working
capital:
The Gross working capital is increasing over three years but the
major proportion of current assets comprise of inventories in each
year. The company should try to reduce investment in inventory.
(51)
(52)
BIBLIOGRAPHY
Name of Book
Author
P. Mohanrao
Publisher
Deep &
Deep
Financial Management
I. M. Pandy
Vikash
Tata
T. J. Rana &
B. S. Shah
Publication
Financial Management
McGrawhill
Financial Management
Naresh Jain
Management Accounting
(53)
Himalaya
(54)
(55)