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Report on Summer Training WORKING CAPITAL MANAGEMENT Of
Submitted to Lovely Professional University
In partial fulfillment of the Requirements for the award of Degree of Master of Business Administration
Submitted by: Abhishek Sharma 10804312.
DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA (2009)
In today’s era of cut throat competition MBA’s are sure to have an edge over their counter parts. During post graduation in master of business administration program, Students comes direct contact with the real corporate world through the industrial training. An MBA program provides its students with an in-depth study of various managerial activities that are performed in any organization. A detailed research/analysis of managerial activities conducted in various departments like finance, marketing, human resources, production, credit management department etc. gives the student the conceptual idea of what they are expected to manage and how to manage and how to obtain the maximum output through minimum inputs of resources available and how to minimize the wastage of resources. As MBA students, I have taken our industrial training in SARASWATI DYNAMICS PVT LTD ROORKEE.
Words are indeed inadequate to convey my deep sense of gratitude to all those who have helped me in completing this summer project to the best of my ability. Being a part of this project has certainly been a unique and a very productive experience on my part. I am really thankful to Mr. Amitabh Gupta (Director commercial) & Mr. Arun Sharma (Account Manager) for making all kinds of arrangements to carry the project successfully and for guiding and helping me to solve all kinds of quarries regarding the project work. His systematic way of working and incomparable guidance has inspired the pace of the project to a great extent. I would also like to thank my mentor and project – coordinator, Mr.Rajveer Gupta, (Finance & Accounts) for assigning me a project of such a great learning experience and acquainting me with real life project financing and appraisal. I am very grateful to Mr. Rohit Duggal of LPU, Phagwara and very thankful for their useful guidance and advise. Last but not least I would like to thank all the employees of Saraswati Dynamics pvt ltd. who have directly or indirectly helped me with their moral support for the completion of my project.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 PARTICULARS PREFACE ACKNOWLEDGMENT INTRODUCTION OF WORKING CAPITAL DETERMINANT OF WORKING CAPITAL WORKING CAPITAL COMPONENT TYPES OF WORKING CAPITAL SOURCES OF WORKING CAPITAL SIGNIFICANCE OF WORKING CAPITAL IMPORTANCE OF WORKING CAPITAL RATIO BLUE PRINT OF GOOD WORKING CAPITAL POLICY LITERATURE REVIEW INDUSTRY OVERVIEW COMPANY PROFILE MANAGEMENT RECENT ACHIVEMENT &MILESTONE MISSION & VISION PRODUCT RANGE IMAGES OF SARASWATI DYNAMICS QUALITY OUTLOOK OBJECTIVE & OBLIGATION SWOT ANALYSIS SATEMENT SHOWING CAHANGE IN W.C. CALCULATION OF WORKING CAPITAL VARIOUS COMPONENETS OF WORKING CAPITAL WORKING CAPITAL RATIOS & ANALYSIS OPERATING CYCLE RESARCH METHODOLOGY CONCLUSION,MAJORFINDING,SUGGESTION APPENDIX BIBLIOGRAPHY PAGE NO. 2 3 6 9 10 14 15 18 19 24 28 33 36 38 39 40 41 45 49 50 51 54 55 56 66 77 87 91 94
An Introduction To Working Capital Management
“Working capital means the part of the total assets of the business that change from one form to another form in the ordinary course of business operations.” In a perfect world, there would be no necessity for current assets and liabilities because there would be no uncertainty, no transaction costs, information search costs, scheduling costs, or production and technology constraints. The unit cost of production would not vary with the quantity produced. Borrowing and lending rates shall be same. Capital, labour, and product market shall be perfectly competitive and would reflect all available information, thus in such an environment, there would be no advantage for investing in short term assets. However the world we live is not perfect. It is characterized by considerable amount of uncertainty regarding the demand, market price, quality and availability of own products and those of suppliers. There are transaction costs for purchasing or selling goods or securities. Information is costly to obtain and is not equally distributed. There are spreads between the borrowings and lending rates for investments and finanancings of equal risks. Similarly each organization is faced with its own limits on the production capacity and technologies it can employ there are fixed as well as variable costs associated with production goods. In other words, the markets in which real firm operated are not perfectly competitive. These real world circumstances introduce problem’s which require the necessity of maintaining working capital. For example,, an organization may be faced with an uncertainty regarding availability of sufficient quantity of crucial imputes in future at reasonable price. This may necessitate the holding of inventory, current assets. Similarly an organization may be faced with an uncertainty regarding the level of its future cash flows and insufficient amount of cash may incur substantial costs. This may necessitate the holding of reserve of short term marketable securities, again a short term capital asset. In corporate financial management, the term Working capital management” (net) represents the excess of current assets over current liabilities.
Concept of working capital:The word working capital is made of two words 1.Working and 2. Capital The word working means day to day operation of the business, whereas the word capital means monetary value of all assets of the business.
Working capital: Working capital may be regarded as the life blood of business. Working capital is of major importance to internal and external analysis because of its close relationship with the current day-to-day operations of a business. Every business needs funds for two purposes.
* Long term funds are required to create production facilities through purchase of fixed assets such as plants, machineries, lands, buildings & etc * Short term funds are required for the purchase of raw materials, payment of wages, and other day-to-day expenses. . It is otherwise known as revolving or circulating capital It is nothing but the difference between current assets and current liabilities. i.e. Working Capital = Current Asset – Current Liability.
Businesses use capital for construction, renovation, furniture, software, equipment, or machinery. It is also commonly used to purchase inventory, or to make payroll. Capital is also used often by businesses to put a down payment down on a piece of commercial real estate. Working capital is essential for any business to succeed. It is becoming increasingly important to have access to more working capital when we need it.
In simple words working capital is the excess of current Assets over current liabilities. Working capital has ordinarily been defined as the excess of current assets over current liabilities. Working capital is the heart of the business. If it is weak business cannot proper and survives. Sit is therefore said the fate of large scale investment in fixed assets is often determined by a relatively small amount of current assets. As the working capital is important to the company is important to keep adequate working capital with the company. Cash is the lifeline of company. If this lifeline deteriorates so does the company’s ability to fund operation, reinvest do meet capital requitrents and payment. Understanding Company’s cash flow health is essential to making investment decision. A good way to judge a company’s cash flow prospects is to look at its working capital management. The company must have adequate working capital as much as needed by the company. It should neither be excessive or nor inadequate. Excessive working capital cuisses for idle funds laying with the firm without earning any profit, where as inadequate working capital shows the company doesn’t have sufficient funds for financing its daily needs working capital management involves study of the relationship between firm’s current assets and current liabilities. The goal of working capital management is to ensure that a firm is able to continue its operation. And that is has sufficient ability to satisfy both maturing short term debt 7
and upcoming operational expenses. The better a company managers its working capital, the less the company needs to borrow. Even companies with cash surpluses need to manage working capital to ensure those surpluses are invested in ways that will generate suitable returns for investors.
The primary objective of working capital management is to ensure that sufficient cash is available to” Meet day to day cash flow needs. Pay wages and salaries when they fall due Pay creditors to ensure continued supplies of goods and services. Pay government taxation and provider of capital – dividends and Ensure the long term survival of the business entity.
Concept of working capital
• • Gross Working Capital = Total of Current Asset Net Working Capital = Excess of Current Asset over Current Liability
Current Assets Current Liabilities • Cash in hand / at bank • Bills Payable • Bills Receivable • Sundry Creditors • Sundry Debtors • Outstanding expenses • Short term loans • Accrued expenses • Bank Over draft • Investors/ stock • Temporary investment • Prepaid expenses • Accrued incomes
Determinants of working capital
Working capital requirements of a concern depends on a number of factors, each of which should be considered carefully for determining the proper amount of working capital. It may be however be added that these factors affect differently to the different units and these keeps varying from time to time. In general, the determinants of working capital which re common to all organization’s can be summarized as under:
Nature of business Need for working capital is highly depends on what type of business, the firm in. there are trading firms, which needs to invest a lot in stocks, ills receivables, liquid cash etc. public utilities like railways, electricity, etc., need much less inventories and cash. Manufacturing concerns stands in between these two extends. Working capital requirement for manufacturing concerns depends on various factors like the products, technologies, marketing policies. Production policies Production policies of the organization effects working capital requirements very highly. Seasonal industries, which produces only in specific season requires more working capital . some industries which produces round the year but sale mainly done in some special seasons are also need to keep more working capital. Size of business Size of business is another factor to determines the need for working capital Length of operating cycle. Operating cycle of the firm also influence the working capital . longer the orating cycle, the higher will be the working capital requirement of the organization.
Credit policy Companies; follows liberal credit policy needs to keep more working capital with them. Efficiency of debt collecting machinery is also relevant in this matter. Credit availability form suppliers also effects the company’s working capital requirements. A company doesn’t enjoy a liberal credit from its suppliers will have to keep more working capital
Business fluctuation Cyclical changes in the economy also influence the level of working capital. During boom period, the tendency of management is to pile up inventories of raw materials and finished goods to avail the advantage of rising prove. This creates demand for more capital. Similarly, during depression when the prices and demand for manufactured goods. Constantly reduce the industrial and trading activities show a downward termed. Hence the demand for working capital is low. Current asset policies. The quantum of working capital of a company is significantly determined by its current assets. Policies. A company with conservative assets policy may operate with relatively high level of working capital than its sales volume. A company pursuing an aggressive amount assets policy operates with a relatively lower level of working capital.
Fluctuations of supply and seasonal variations Some companies need to keep large amount of working capital due to their irregular sales and intermittent supply. Similarly companies using bulky materials also maintain large reserves’ of raw material inventories. This increase the need of working capital . some companies manufacture and sell goods only during certain seasons. Working capital requirements of such industries will be higher during certain season of such industries period.
Other factors Effective co ordination between production and distribution can reduce the need for working capital . transportation and communication means. If developed helps to reduce the working capital requirement/.
Working capital in terms of five components:
1. Cash and equivalents: - This most liquid form of working capital requires constant supervision. A good cash budgeting and forecasting system provides answers to key questions such as: Is the cash level adequate to meet current expenses as they come due? What is the timing relationship between cash inflow and outflow? When will peak cash needs occur? When and how much bank borrowing will be needed to meet any cash shortfalls? When will repayment be expected and will the cash flow cover it?
2. Accounts receivable: - Many businesses extend credit to their customers. If you do, is the amount of accounts receivable reasonable relative to sales? How rapidly are receivables being 10
collected? Which customers are slow to pay and what should be done about them?
3. Inventory: - Inventory is often as much as 50 percent of a firm's current assets, so naturally it requires continual scrutiny. Is the inventory level reasonable compared with sales and the nature of your business? What's the rate of inventory turnover compared with other companies in your type of business? 4. Accounts payable:- Financing by suppliers is common in small business; it is one of the major sources of funds for entrepreneurs. Is the amount of money owed suppliers reasonable relative to what you purchase? What is your firm's payment policy doing to enhance or detract from your credit rating? 5. Accrued expenses and taxes payable: - These are obligations of your company at any given time and represent a future outflow of cash.
Two different concepts of working capital are:• • Balance sheet or Traditional concept Operating cycle concept.
Balance sheet or Traditional concept:- It shows the position of the firm at certain point of time. It is calculated in the basis of balance sheet prepared at a specific date. In this method there are two type of working capital:-
Gross working capital Net working capital
Gross working capital:- It refers to the firm’s investment in current assets. The sum of the current assets is the working capital of the business. The sum of the current assets is a quantitative aspect of working capital. Which emphasizes more on quantity than its quality, but it fails to reveal the true financial position of the firm because every increase in current liabilities will decrease the gross working capital
Net working capital:- It is the difference between current assets and current liabilities or the excess of total current assets over total current liabilities.
Working capital= current assets - current liabilities.
Net working capital: - It is also can defined as that part of a firm’s current assets which is financed with long term funds. It may be either positive or negative. When the current assets exceed the current liability, the working capital is positive and vice versa.
Operating cycle concept:- The duration or time required to complete the sequence of events right from purchase of raw material for cash to the realization of sales in cash is called the operating cycle or working capital cycle.
DEBTORS & BILLS RECEIVABLES WORK IN PROGRESS
Each component of working capital (namely inventory, receivables and payables) has two dimensions TIME and MONEY. When the comes to managing working capital TIME IS MONEY. If you can get money to move fester around the cycle (collect monies due from debtors more quickly) or reduce the amount of money tied up (i.e.., reduce inventory level 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 cost of bank interest or you will have additional freee4 money available to support addition sales growth or investment. Similarly, if you can negotiate improved terms with suppliers e.g. get longer credit or an increased credit limit, you festively create freed finance to help fund future sales a perusal of operational cycle reveals that the cash invested in operations are recycled back in to cash. However it takes time to reconvert the cash. Cash flows in cycle into around and out of a business it the business’s lifeblood and every manager’s primary task to help keep it flowing and to use the cash flow to generate profits. The shorter the period of operating cycle the larger will be the turnover of the funds invested in various purposes.
Types of Working Capital:-
TYPES OF WORKING CAPITAL ON THE BASIS OF B/S CONCEPT GROSS WORKING CAPITAL ON THE BASIS OF TIME REGULAR WORKING CAPITAL TEMPORARY WORKING CAPITAL SEASONAL WORKING CAPITAL SPECIFIC WORKING CAPITAL
NET WORKING CAPITAL
Kinds of working capital
Working capital can be put in two categories: 1) fixed or permanent working capital and 2) fluctuating or temporary working capital Fixed or permanent working capital The volume of investment in current assets an change over a period of time. But always there is minimum level of current assets that must be kept in order to carry on the business. This is the irreducible minimum amount needed for maintaining the operating cycle. It is the investment in current assets. This is permanently locked up in the business and therefore known as permanent working capital. Variable/temporary working capital It is the volume of working capital. This is needed over and above the fixed working capital in order to meet the unforced market changes and contingencies. In other words any amount over and about the permanent level of working capital is variable or fluctuating working capital . this type of working capital is generally financed from short ter souse of finance such as bank credit because this amount is not permanently required and is usually paid back during off season or after the contingency.
Sources of working capital The company can choose to finance its current assets by Long term sources Short term sources
A combination of them. Long term sources of permanent working capital include equity and preference shares, retained earnings, debentures and other long term debts from public deposits and financial institution. The long term working capital needs should meet through long term means of financing. Financing through long term means provides stability, reduces risk or payment. And increases liquidity of the business concern. Various types of long term sources of working capital are summarized as follow
Issue of shares It is the primary and most important sources of regular or permanent working capital. Issuing equity shares as it does not create and burden on the income of the concern. Nor the concern is obliged to refund capital should preferably raise permanent working capital.
Retained earnings Retained earnings accumulated profits are a permanent sources of regular working capital. It is regular and cheapest. It creates not charge on future profits of the enterprises. Issue of debentures It creates a fixed charge on future earnings of the company. Company is obliged to pay interest. Management should make wise choice in procuring funds by issue of debentures. Long term debt Company can raise fund from accepting public deposits, debts from financial institutions like banks, corporations etc. the cost is higher than the other financial tools. Other sources sale of idle fixed assets, securities received from employees and customers are examples of other sources of finance. Short term sources of temporary working capital Temporary working capital is required to meet the day to day business expenditures. The variable working capital would finance from short term sources of funds. And only the period needed. it has the benefits of ,low cost and establishes closer relationships with banker. Some sources of temporary working capital are given below; Commercial bank A commercial bank constitutes a significant sources for short term or temporary working capital this will be in the form of short term loans, cash credit, and overdraft and though discounting the bills of exchanges. Public deposits Most of the companies in recent years depends on this sources to meet their short term working capital requirements ranging fro six month to three years. Various credits Trade credit, business credit papers and customer credit are other sources of short term working capital. Credit from suppliers, advances from customers, bills of exchanges, promissnotes, etc helps to raise temporary working capital
Reserves and other funds Various funds of the company like depreciation fund. Provision for tax and other provisions kept with the company can be used as temporary working capital.
The company should meet its working capital needs through both long term and short term funds. It will be appropriate to meet at least 2/3 of the permanent working capital equipments form long term sources, whereas the variables working capital should be financed from short term sources. The working capital financing mix should be designed in such a way that the overall cost of working capital is the lowest, and the funds are available on time and for the period they are really required.
SOURCES OF ADDITIONAL WORKING CAPITAL
Sources of additional working capital include the following
Existing cash reserves Profits (when you secure it as cash) Payables (credit from suppliers) New equity or loans from shareholder Bank overdrafts line of credit Long term loans
If you have insufficient working capital and try to increase sales, you can easily over stretch the financial resources of the business. This is called overtrading. Early warning signs include Pressure on existing cash Exceptional cash generating activities. Offering high discounts for clear cash payment Bank overdraft exceeds authorized limit Seeking greater overdrafts or lines of credit Part paying suppliers or there creditor. Management pre occupation with surviving rather than managing.
SIGNIFICANCE OF WORKING CAPITAL:-
PAYMENT TO SUPPLIERS EASY LOAN FROM BANKS SIGNIFICAN-CE OF WORKING CAPITAL INCREASE EFFECIENC-Y INCREASE DEBT CAPACITY INCREASE IN FIX ASSETS DIVIDEND DISTRIBUTION
The prime objective of the company is to obtain maximum profit thought the business. The amount of profit largely depends upon the magnitude of sales. However the sale does not convert into cash instantaneously. There is always a time gap between sale of goods and receipt of cash. The time gap between the sales and their actual realization in cash is technically termed as operating cycle. Additional capital required to have uninterrupted business operations, and the amount will be locked up in the current assets. Regular availability of adequate working capital is inevitable for sustained business operation. If the proper fund is not provided for the purpose, the business operations will be effected. And hence this part of finance to be managed well.
Factors requiring consideration while estimating working capital.
• • • • • •
The average credit period expected to be allowed by suppliers. Total costs incurred on material, wages. The length of time for which raw material are to remain in stores before they are issued for production. The length of the production cycle (or) work in process. The length of sales cycle during which finished goods are to be kept waiting for sales. The average period of credit allowed to customers The amount of cash required to make advance payment
Importance of Working Capital Ratios
Ratio analysis can be used by financial executives to check upon the efficiency with which working capital is being used in the enterprise. The following are the important ratios to measure the efficiency of working capital. The following, easily calculated, ratios are important measures of working capital utilization.
Stock Turnover (in days)
Average Stock * = x days 365/ Cost of Goods Sold
On average, you turn over the value of your entire stock every x days. You may need to break this down into product groups for effective stock management. Obsolete stock, slow moving lines will extend overall stock turnover days. Faster production, fewer product lines, just in time ordering will reduce average days. It takes you on average x days to collect monies due to you. If your official credit terms are 45 day and it takes you 65 days. One or more large or slow debts can drag out the average days. Effective debtor management will minimize the days. On average, you pay your suppliers every x days. If you negotiate better credit terms this will increase. If you pay earlier, say, to get a discount this will decline. If you simply defer paying your suppliers (without agreement) this will also increase - but your reputation, the quality of service and any flexibility provided by your suppliers may suffer. Current Assets are assets that you can readily turn in to cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Similar to the Current Ratio but takes account of the fact that it may take time to convert inventory into cash.
Receivables Ratio (in days)
365/ = x days
Payables Ratio (in days)
Creditors * 365/ = x days Cost of Sales (or Purchases)
Current Ratio Total Assets/ Total Liabilities
Current = x times Current
Working Capital Ratio
(Total Current = x times Assets - Inventory)/ Total Current Liabilities (Inventory + As % A high percentage means that working capital needs are Receivables - Sales high relative to your sales. Payables)/ Sales
Advantages of adequate working capital Adequate working capital provides certain benefits to the company they are: 1 increase in debt capacity and goodwill Adequate working capital represents the financial soundness of the company. If one company is financially sound it would be able to pay its creditors timely and properly. It will increase companies’ goodwill. It crests confidence among investors and creditors. Thus a firm with adequate working capital can raise requisite funds from market, borrow short term credit form banks, and purchases inventories of raw material etc., for the smooth operations of its business. Increase in production inefficiency With adequate working capital the firm can smoothly carryout research and development actives and thus adds to it production efficiency. Exploitation of favorable opportunities In the presence of adequate working capital, a company can avail the benefits of favorable opportunities. Adequate working capital will help the company to have bulk purchases, seasonal storage of raw material etc., which would reduce the cost of production, thus adds to its profit. Meeting contingencies adverse changes: A company can easily face certain business and economic crises a company having adequate working capital can successfully meet contingencies such as business oscillations, financial crisis arising from heavy losses etc., Available cash discount Maintenance of adequate working capital enables a company to avail the advantage of cash discount by making cash payment for to the suppliers of raw materials and merchandise. Obviously it will reduce the cost of production and increase the profit of the company. Solvency and efficiency fixed assets. It helps to maintain the solvency of the company. So that payments could be made in time as and when they fall due. Likewise, adequate working capital also increases the efficiency for fixed assets insofar as their proper maintenance depends upon the availability of funds.
Attractive dividend to shareholders It enables the company to offer attractive dividend to the shareholders so that sense of security and confidence will increase among them. It also increases the market values of its shares.
Dangers of inadequate working capital Having inadequate working capital les to so many of dangers as it doesn’t fulfill its purpose. Some are given below: Loss of goodwill and creditworthiness As the firm fails to on or its current liabilities it loses it goodwill and creditworthiness among its creditors. Consequently, the firm finds it difficult to procure the requisite funds for its business operations on easy terms, which ultimately results in reduced profitability as well as production interruption. Firm can’t make use of favorable opportunities The firm fails to undertake the profitable projects, which not only prevent the fir from availing the benefits of favorable opportunities but also stagnate its growth.
Adverse effects of credit opportunities The firm also fails to avail the attractive credit opportunities but also stagnate its growth Operational inefficiencies In leads the company to operating inefficiencies, as day to day commitments cannot be met. Effects on financial capacity Inadequacy of working capital also weakness the shock absorbing capacity of the firm because it cannot meet the contingencies arising form business oscillations, financial losses, due to shortage of working capital. Non achievement of profit target The firm cannot implement operational plans due to unavailability of fund. This will lead to non achievement of profit margin.
Dangers of redundant working capital As the inadequate working capital is dangerous to the firm, redundant working capital also brings hazardous condition in to the company. Let us discuss the dangers of redundant working capital to the company.
Low rate of return on capital Excessive or redundant working capital implies the presence of idle funds that earn no profit to the firm. So it cannot earn a proper rate of return on its total investments, whereas profits are distributed on its total investment, whereas profits are distributed on the whole of its capital. Decline in capital and efficiency Since the rate of return on capital is low the company tempts to make some adjustment to inflate profit to increase the dividend. Sometimes these unearned dividends paid out of the company’s capital to keep up the show of prosperity by window dressing of accounts. Certain provision, such as provision for depreciation, repairs and renewals are into made. This leads to decline in operating efficiency of the firm. Loss of goodwill and confidence. Lower rate of return leads to lower dividend available to share holder. This leads to down fall in market value of the company’s share and markets the shareholder lose their confident in company. Evils of over capitalization Excessive working capital is often responsible for giving berth to the situation of overcapitalization in the company with all its evils. Over capitalizations is not only disastrous to the smooth survival of the company but also interests of those associated with the company.
Destruction of turnover ratio It destructs the control over turnover ratio. This is commonly used in the conduct of an efficient business. It is evident from the foregoing discussion that a company must have adequate working capital pursuant to its requirements. It should neither be excessive not inadequate. Both situations are dangerous. While inadequate working capital adversely affects the business operations and profitability. Excessive working capital remains idle and earns no profits for the company. So company must assure its working capital is adequate for its operations.
Blueprint for a good working capital management policy General action Set planning standards for stock days. Debtor days and creditor’s days. Having set planning standards (as above) KEEP TO THEM. Impress on staff that these targets are just important operating budgets and standards cost. Instill an understanding amongst the staff that working capital management produces profits. Action on stocks Keep stock levels as low as possible, consistent with not running out of stock and not ordering stock in uneconomically small quantities. “just in time” stock management is fine, as long as it is “just in time” and never fails to deliver on time. Consider keeping stock in suppliers warehouses drawing on its as needed and saving warehousing cost. Action on debtors /customers Assess ALL significant new customers for their ability to pay. Take references, examine account , and ask around. Try not to take on new customers who would be poor payers. Re assess ALL significant customers periodically. Stop supplying existing customers who are poor payers, you may lose sales, but you are after QUALITY of business rather than QUANTITY of business. Sometimes poor paying customers suddenly (and magically!!) find cash to settle invoices if their supplies are being cut off. If customers can’t pay / won’t pay let your competitor have them. Give your competitor a few more problems. Consider factoring sales invoices the extra cost may be worth it in terms of quick payment of sales revenue, less debtor administration and more time to carry out your business (rather than spend time chasing debts) Consider offering discounts for prompt settlement of invoices, but only if the discounts are lower than the costs of borrowing the money owed from other sources. Action on creditors Do NOT pay invoices too early take advantage of credit offered by suppliers it’s free!! Only pay early if the supplier is offering a discount. Even then, consider this to be an investment. Will you get a better return by using working capital to settle the invoice and take the discount than by investing the working capital in some other way? Establish a register of creditors to ensure that creditors are paid on the correct date not earlier an not later. 24
THE CONCEPT OF ZERO WORKING CAPITAL In today’s world of intense global competition, working capital management is receiving increasing attention from managers striving for peak efficiency the goal of many leading companies today, is zero working capital. Proponent of the zero working capital concept claims that a movement toward this goal not only generates cash but also speeds up production and helps business make more timely deliveries and operate more efficiently. The concept has its own definition of working capital: inventories+ receivables- payables. The rational here is (I) that inventories and receivables are the keys to making sales, but (II) that inventories can be financed by suppliers through account payables. Companies use about 20% of working capital for each sale. So, on average, working capital is turned over five times per year. Reducing working capital and thus increasing turnover has two major financial benefits. First every money freed up by reducing inventories or receivables, by increasing payables, results in a onetime contribution to cash flow. Second, a movement toward zero working capital permanently raises a company’s earnings. The most important factor in moving toward zero working capital is increased speed. If the production process is fast enough, companies can produce items as they are ordered rather than having to forecast demand and build up large inventories that are managed by bureaucracies. The best companies delivery requirements. This system is known as demand flow or demand based management. And it builds on the just in time method of inventory control. Clearly it is not possible for most firms to achieve zero working capital and infinitely efficient production. Still, a focus on minimizing receivables and inventories while maximizing payables will help a firm lower its investment in working capital and achieve financial and production economies.
ESTIMATION OF WORKING CAPITAL MANGEMENT As discussed above a number of factors are responsible for determining the amount of working capital required by affirm. Let us know discuss the various methods/ technique used in assessment of firm’s working capital requirements. These methods are. 1) Estimation of components of working capital method. This method is based on the basic definition of working capitalizes, excess of current assets over the current liabilities. In other word the amount of different constituent of the working capital such as debtors, cash inventories, creditors etc are estimated separately and the total amount of working capital requirement is worked out accordingly.
(ii) Percent sales method This is the most simple and widely used method in combination with other scientific methods. According to this method a ratio is determined for estimating the future working capital requirement. This is the generally based on the past experience of management as the ratio varies from industry to industry. For example if the past experience shows that the amount of working capital has been 20% of sales and projected amount of sales for the next year is Rs 10 lakes, the required amount of working capital shall be Rs Two lakh. As seen from above the above method is merely an estimation based on past experience. Their fore a lot depends on the efficiency of decision maker, which may not be correct in all circumstances. Moreover the basic assumptions regarding linear relationship between sales and the working capital may not hold well in all the cases. Therefore this method is not dependable and not universally acceptable. At best, this method gives a rough idea about the working capital. (iii) Operating cycle approach The need of working capital arises mainly because of them gap between the production of goods and their actual realization after sales. This gap is technically referred as the “operating cycle” or the “cash cycle” of the business. If it were possible to complete the entire job instantaneously, there would be no need for current asset (working capital) but since it is not possible, every business organization is forced to have current asset and hence operating cycle. It may be divided into four stages. 1. 2. 3. 4. Raw materials and stores storage space. Work in process stage. Finished goods inventory stage. Debtor’s collection stage,
Duration of operating cycle The duration of the operating cycle is equal to sum of the duration of these stages less the credit period allowed by the suppliers of the firm. In symbol OC= R+W+F+D—C WHERE OC= Duration of the Operating Cycle R= Raw materials and storage space periods W= work in process periods. F= finished goods storage periods D= debtor collection period C= Creditors collection period.
The component of the operating Analysis” which is as follow.
average stock of raw material --------------------------------Average raw material consumption per day
Average stock of stores --------------------------------------------Average stores consumption per day
average work in process inventory --------------------------------------------------Average cost of production per day
average book debts --------------------------------------------------Average credit sales per day
average trade credit ---------------------------------------------------Average trade credit purchase per day
Impact of Working Capital Management Policies on Corporate Performance—An Empirical Study Sushma Vishnani, Bhupesh Kr. Shah (2007)
It is felt that there is the need to study the role of working capital management policies on profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effort has been made to make an empirical study of Indian Consumer Electronics Industry for assessing the impact of working capital policies & practices on profitability during the period 1994–95 to 2004–05. The impact of working capital policies on profitability has been examined by computing coefficient of correlation and regression analysis between profitability ratio and some key working capital policy indicator ratios.
Working Capital Management: A Study on British American Tobacco Bangladesh Company Ltd.
Md. Sayaduzzaman (2007)
The efficiency of working capital management of British American Tobacco Bangladesh Company Ltd. is highly satisfactory due to the positive cash inflows, planned approach in managing the major elements of working capital. Applications of multi-dimensional models of current assets mix may have positive impact on the continuous growth & development of this multinational enterprise. This depends on co-operation of the stakeholders and business environment in the context of globalization.
The Effect of Working Capital Management on Firm Profitability: Evidence from Turkey F. Samiloglu and K. Demirgunes (2008)
The aim of this study is to analyze the effect of working capital management on firm profitability. In accordance with this aim, to consider statistically significant relationships between firm profitability and the components of cash conversion cycle at length, a sample consisting of Istanbul Stock Exchange (ISE) listed manufacturing firms for the period of 19982007 has been analyzed under a multiple regression model. Empirical findings of the study show that accounts receivables period, inventory period and leverage affect firm profitability negatively; while growth (in sales) affects firm profitability positively.
Working Capital Management, Growth and Performance of New Public Companies By Beneda, Nancy, Zhang, Yilei (2008) The current study contributes to the literature by examining impact of working capital management on the operating performance and growth of new public companies. The study also sheds light on the relationship of working capital with debt level, firm risk, and industry. Using a sample of initial public offerings (IPO's), the study finds a significant positive association between higher levels of accounts receivable and operating performance. The study further finds that maintaining control (i.e. lower amounts) over levels of cash and securities, inventory, fixed assets, and accounts payables appears to be associated with higher operating performance, as well. We find that IPO firms which are experiencing unusually high growth tend not to perform as well as those with low to moderate growth. Further firms which are experiencing high growth tend to hold higher levels of cash and securities, inventory, fixed assets, and accounts payables. These findings tend to suggest that firms are willing to sacrifice performance (accept low or negative operating returns) to increase their growth levels. The higher level of growth is also associated with higher operating and financial risk. The findings of this study suggest that perhaps IPO firms should stay more focused on their operating performance than on maintaining high growth levels.
Working Capital and Financial Management Practices in the Small Firm Sector Michael J. Peel ,Nicholas Wilson (2008) MICHAELJ. PEEL IS A LECTURER IN accountancy and finance at Cardiff Business School, University of Wales, and Nicholas Wilson is Professor of Credit Management at the University of Bradford, England. Very little research has been conducted on the capital budgeting and working capital practices of small firms. The purpose of this paper is to present the results of a preliminary study on the working capital and financial management practices of a sample of small firms located in the north of England. In general, the results of the survey indicated that a relatively high proportion of small firms in the sample claimed to use quantitative capital budgeting and working capital techniques and to review various aspects of their companies' working capital. In addition, the firms which claimed to use the more sophisticated discounted cash flow capital budgeting techniques, or which had been active in terms of reducing stock levels or the debtors' credit period, on average tended to be more active in respect of working capital management practices. It is hoped that the issues raised will stimulate further theoretical and empirical contributions on this neglected and important area of small business research.
Study on working capital management Stuttgart/Munich, June 29, 2009 Roland Berger Strategy Consultants study on working capital management: Optimizing current assets helps tap into cash potential and build buffers against insolvency
• • • • •
Our study entitled "Working capital – Cash for recovery" looks at 216 European companies with total sales of EUR 3,700 billion and total EBIT of EUR 422 billion Presently, the insolvency risk is increasing as higher cash requirements coincide with reduced cash supply and high financing costs Internal sources of finance are becoming more interesting: one of the main lever is tapping into the cash potential in working capital The companies surveyed had a combined potential of EUR 353 billion in Q1 2009, roughly one third more than in 2008 Relative to tied-up working capital, utilities and engineered products companies have the greatest cash reserves hidden in their working capital
In the current economic situation, companies are facing a higher risk of insolvency. On the one hand, they need more cash; on the other, lenders are more tightfisted than usual and the financing costs are higher. In its study entitled "Working capital – Cash for recovery", Roland Berger Strategy Consultants has analyzed 216 European companies by taking a close look at their 31
internal sources of finance. The result? At the moment, releasing the cash reserves hidden in working capital offers the greatest potential for improving liquidity. According to the Roland Berger experts, the companies surveyed had a total cash potential of EUR 353 billion. This turned out to be especially true for utilities and engineered products companies. "In the current recession, working capital is emerging as a key source of internal finance," says Roland Schwientek, Partner at Roland Berger's Operations Strategy Competence Center. Increased cash requirements and a reduced cash supply with higher financing costs combine to increase the likelihood of insolvency. In their study called "Working capital – Cash for recovery", the experts highlight alternative sources of internal finance: "As some traditional sources of cash have dried up, the most promising solution is to tap into the liquidity potential hidden in working capital," says Schwientek. According to the experts, internal finance based on optimized working capital is much more effective than external finance. Even small improvements in receivables, inventories and payables can generate significant reductions in external finance requirements.
EXAMPLE A recent example of business attempting to maximize working capital management is the recurrent attention being given to the application of Six Sigma® methodology. Six Sigma® methodologies help companies measure and ensure quality in all areas of the enterprise. When used to identify and rectify discrepancies, inefficiencies and erroneous transactions in the financial supply chain, Six Sigma® reduces Days Sales Outstanding (DSO), accelerates the payment cycle, improves customer satisfaction and reduces the necessary amount and cost of working capital needs. There appear to be many success stories, including Jennifer Towne’s (2002) report of a 15 percent decrease in days that sales are outstanding, resulting in an increased cash flow of approximately $2 million at Thibodaux Regional Medical Center. Furthermore, bad debts declined from $3.4 million to $600,000. However, Waxer’s (2003) study of multiple firms employing Six Sigma® finds that it is really a “get rich slow” technique with a rate of return hovering in the 1.2 – 4.5 percent range
Indian Electrical Industry
Prospects of the Indian Electric/Electronic industry Like every other industrial sector in India, the Indian Electrical/Electronics Industry too is slowly emerging from out of its "protective cover". For far too long has Indian Industry remained shackled and consequently inward looking. Over the past fifty years there was no exposure to global players and competition, with the result that the Industry grew up in a sheltered environment, dependent on the Government for everything, from licenses to protection to tariffs. Each one of these interventions was aimed at securing protection for oneself and ensuring growth of one’s own organization at the cost of industry and the nation at large. Lack of global competition encouraged a "cost plus" approach, where every conceivable cost increase was passed on to the customer. There was thus no motivation to reduce costs. With delicensing, decontrol and deregulation, Indian Industry has suddenly been exposed to global competition. Since last decade, India has witnessed what global players have achieved and what they are capable of achieving. We are becoming aware of competition on our turf. In this scenario, every company complains of increased competition, lower order books and shrinking margins. The Indian Electrical/Electronics Industry is of course further besieged by the fact that there is a dearth of business on account of lack of investment in the power infrastructure. Many organizations in this industry are looking overseas to develop the export markets owing to reduce demand at home. At the outset, it must be stated that the reduced domestic demand is at best a temporary phenomenon. The power sector in India is bound to grow and this will undoubtedly boost demand from the Utilities, quite apart from the industrial demand which will continue to grow with increased industrial output. The poor financial health of the SEBs is however a damper that cannot be wished away in the short term. This will continue to plague corporate in the Electrical Industry, until the SEB restructuring and unbundling brings a turnaround in the medium term. Segments of Electrical and Electronics Industry The global electrical and electronics industry centres around various adjunct sectors. Few of them are Electronic Components, Computer & Office Equipments, Telecommunications, Consumer Electronics as well as Industrial Electronics.
Electronic Components Industry This particular industry is engaged in designing, manufacturing, marketing, supporting, selling and distributing of broad range of electronic components such as bolts, clamps, fasteners, lighting, semi conductors, integrated circuits, microprocessors, cables and wires, switches, sensors, keyboards, sockets, sonar devices, test and inspection equipment etc. Worldwide market leaders electronic components are United States of America, European, Asian countries like Japan, China, India, Taiwan, and Hong Kong.
Future Prospects The domestic market in India is itself large, and one must firstly satisfy this market with products that meet international quality standards. With increasing globalization, every international player is now operating in India, providing goods and services complying with international quality. Once we deliver high quality products and services within the domestic market, accessing the international market for exports should not pose a serious challenge. The Electrical/Electronics Industry in India is growing to its full potential in the coming years and no doubt that India will soon come to be recognized for quality products and services which in turn, will bring this industry to a position of true leadership.
Indian electrical industry has grown because of government's thrust on it and also due to overall economic growth. It has also reached a stage where the industry has demonstrated its capabilities. The industry has seen a growth of 20% and should continue at the same level for the next few years.
Factors Governing the Growth of this Industry Every industry thrives on some supporting factors. In this connection, there are few factors governing the growth of electrical and electronics industry: Research & development played an important role to the increased productivity and higher-value added electrical and electronics products. Foreign investments accelerated growth in production and export as well. To expand their business, foreign companies have done huge investments which lead developing countries in establishing production units. Global industries like Medical, Telecommunications, Industrial & cordially supported by electrical & electronics industry.
Increase in income changed living standards of the common mass. As a result, it increased the demand of electronics especially consumer electronics products globally. Electric & Electrical industry is highly fragmented which comprises of many small and medium size enterprises resulting into a huge industry. Asia Pacific region is emerging as the most spinning place for the consumer electronics industry, as the markets remain still unreached. Innovation has played importantly in this industry. It led to a consistent demand for newer and faster products and applications
Saraswati Dynamics pioneered the manufacturing of Electrodynamics vibration shakers in India way back in the early 1970s. It continued the development cycle in coming years, adding newer and related products to its stable of vibration testing equipment such as the combo-base horizontal slip tables. In the two decades that followed, Saraswati raised the standards of its products to match international quality.
The turn of new century revolutionized testing standard in India, with Saraswati offering an additional range of test systems in the form of Environmental Simulation Chambers – both stand –alone and the types that integrate with all brands of vibration systems for Combined Simulated Testing.
This has positioned the company as an unrivalled market leader in the Asian sub-continent.
Each product from Saraswati Dynamics was a first, exemplifying topmost quality and performance. The best names in automotive manufacturing in India became partners in the progress – they received not only a highly dependable product suiting their applications but also un-matched service support. Together, it spell true value for money.
Every product at Saraswati is conceptualized by qualified engineers, equipped with the knowledge of both domestic and international markets and trained to understand the applications. The turnkey expertise to integrate both vibration equipment and the chamber for combined operation from a single control system comes as another jewel in the crown.
Our customers positioned us as a brand they recognize a niche in every product we manufacture, which is comparable with the best brands in the world.
As we compete internationally, our key positioning strategy remains value pricing, product performance and brand building. Pricing goes along with the other two. We will always be a value for money player, and we owe it to a three pronged strategy – strong R&D, manufacturing efficiencies and attending to the customer’s feedbacks. 37
Saraswati Dynamics is the world’s first company to manufacture the full range of vibration test systems and Environmental test chambers under one roof. These systems are being extensively used by export-oriented units and multinationals across the region. Having established its credentials with multinationals giants and blue-chip companies in Asia, Saraswati Dynamic now opens its door to the rest of the world with its strong value-for-money brand.
Name 1. Mrs. Kavita Goel 2. Mr. Mukesh Goel 3. Mr. Amitabh Gupta 4. Mr. Hemant k Arora 5. Mr. Arun Sharma 6. Mr. Vijay Kohli 7. Mr. Ashish Goel
Designation (Director). (MG Director). (Director commercial). (CA) (Accounts manager). (Purchase manager). (Material Manager).
Recent Achievements And Milestone Of Saraswati Dynamics
MOU with ENCOPIM, Spain.
MOU with IMV, Japan.
Saraswati Dynamics participated in two major exhibition-automotive testing expo 2007 China and America. Saraswati brings to India servo-pneumatic and hydraulic test system.
5. Saraswati dynamics get the certificate of ISO9001:2000
Saraswati dynamics gets the certificate of recognition for indigenous product & technology from SIAT.
MISSION & VISION Mission:
To achieve international standards of excellence in all aspect of division and diversified business with focus on customer delight through value of product, Services, cost and reduction. To provide technology and service through sustained research and development.
Vision is to “SEE MORE” . It describes Saraswati Dynamics products and services which delight its customers by helping them see more in comfort, safety & security.
Saraswati Dynamics' wide range of shakers are designed to meet today's challenging applications by providing all the performance and capability demanded by design and development, product qualification, stress screening and most importantly reliability. The SEV & SEW series of shakers represent the state-of-the-art air and water cooled technology and can be intergrated with all brands of Environmental chambers for combined, integrated stress screening tests
Product Special Air Cooled Shakers Automotive Special Shakers Combined integrated systems Low Capacity Shakers
Category Workshop Equipment Workshop Equipment Workshop Equipment Workshop Equipment
SEV 125 Series Shakers • Air-cooled • Solid trunion mounting • Active suspension system • Models SEV 125/ SPA 500V SEV 125/ SPA 1K SEV 125/ SPA 2K
SEV 140 Series Shakers • Air-cooled • Solid trunion mounting • Low frequency isolation assembly • Active suspension system • Models SEV 140/ SPA 2K SEV 140/ SPA 3K SEV 140/ SPA 4K
SEV 180 Series Shakers • Air-cooled • Trunion mounted • Low frequency isolation assembly • Active suspension system • Models SEV 180/ DSA 4K SEV 180/ DSA 6K SEV 180/ DSA 8K 42
SEV 240 Series Shakers • Air-cooled • Trunion mounted • Active suspension system • Low frequency isolation assembly • Models SEV 240/ DSA 8K SEV 240/ DSA 10K SEV 240/ DSA 15K
SEV 400 Series Shakers • Air-cooled • Trunion mounted • Low frequency isolation assembly • Active suspension system • Models SEV 400/ DSA 16K SEV 400/ DSA 24K SEV 400/ DSA 32K
SEV 360 Series Shaker • Air-cooled • Trunion mounted • Low frequency isolation assembly • Active suspension system • Models SEV 360/ DSA 24K SEV 360/ DSA 36K SEV 360/ DSA 40K
SEV 440 Series Shakers • Air-cooled • Trunion mounted • Active and composite suspension system • Low frequency isolation assembly • Models SEV 440/ DSA 42K SEV 440/ DSA 48K SEV 440/ DSA 56K SEV 440/ DSA 62K
IMAGES OF SARASWATI DYNAMICS PVT LTD
ECO FRIENDLY PLANT
IMAGES OF MAKING FINISHED GOODS
Customized service is not merely creating customer relations, it is oriented towards customer delight. Every customer is an individual, hence special to us. When we are delighted to serve our customers, our customers too find our services delightful. Developing trust Quality of service, knowledge, expertise, courtesy and promptness – these are the hallmarks on which we develop trust and keep it. Information exchange Our customer relationship actually begins even before the sale. Each customer receives personal attention, and we make ourselves available at any time should our services be required. Extended services Saraswati Dynamics offers comprehensive Annual Maintenance Contract (AMC) beyond the warranties. Our readiness saves the customer, money and time both. Some of the highlights of extended services include:
• • • • • • •
High quality customer support 24 hrs x 7 days “Service hot-line” Installation and Commissioning Operation and parts warranty Application guidance Training programmes. Original spares
Easy reach Website contains all information about the company and products, product listing and their specifications, technology updates and current news. Just fill up the feedback form and get immediate response. Design and Development Do you have a specific product in mind? Draw out the edifications and hand them over to our sales representative nearest to you. We will even advise you if your specifications need modifying so that you get what you want – in the shortest time and at optimum cost. 47
Single Source Supplier Saraswati Dynamics provide their customers all the information, product and after sales service including technical and spares support which gives them the benefit of money and time saving.
Service Quality The ISO 9001:2000 norms of the company are stretched beyond 100% satisfaction to define customer delight. Saraswati Dynamics assures 12 months warranty including spares and labor. The warranty period starts from the date of commissioning. Add-on Warranty Under our add-on warranty option, the warranty can be extended on mutually agreed terms and cost. The add-on warranty comes with a number of benefits for the customers. Installation and commissioning The Company’s engineers are given extensive training, who then ensure that each installation meets the highest quality standards laid under ISO9001:2000
"In this new era of customised services, Saraswati Dynamics goes beyond customer satisfaction."
Saraswati Dynamics having its factory at Roorkee (Hardwar) dealing in hi-tech, capital intensive, multi-disciplinary, Electro-magnetic Vibration Shaker System used to simulate vibration environments for product(s) qualification as per international standards besides production of critical spares and sub-assemblies in mechanical and electronics for Defence. More details on our vibration system can be seen by visiting our website at http://www.saraswatidynamics.com/ 170 people at Roorkee (Hardwar) are pursuing development and production in the discipline of mechanical, electro-magnetic, power electronics and DSP hardware/software for vibration group including sales, marketing and other commercial activities besides 3-different profit centers for defence sector. Saraswati Dynamics enjoy brand leadership in the domestic market and presence in South East Asia and Main Land China. The clientele includes DEFENCE - HAL, Ordnance Factories, EME Workshops & DGQA Estt.; RESEARCH - DRDO's, BARC, IGCAR, ISRO, CSIR and INDUSTRIAL - All major giants in automobile like Telco, Maruti, Hyundai, HeroHonda, Escorts etc. besides development and regular production for Defence Armament Stores.
OBJECTIVES & OBLIGATIONS
To maximize utilization of the existing facilities in order to improve efficiency and increase productivity. To work towards the achievement of self-sufficiency in the field of shakers market by setting up adequate capacity and to build up expertise in lying of crude. To further enhance distribution network for providing assured service to customers throughout the country through expansion of reseller network as per Marketing Plan/ Government approval.
Towards Customers and Dealers: To provide prompt, courteous and efficient
service and quality products at fair and reasonable prices. To ensure prompt dealings with integrity, impartiality and courtesy and promote ancillary industries.
Towards Employees: Develop their capability and advancement through appropriate training and carrier planning. Towards Community: To develop techno-economically viable and environment friendly products for the benefit of the people.
SWOT ANALYSIS OF SRASWATI DYNAMICS PVTLTD
Strengths:1. Price of different range of product is more compatible than others. 2. Saraswati Dynamics pioneered the manufacturing of electrodynamic vibration shakers in India.
3. Saraswati Dynamic is innovative in nature they make changes in their product on time to time. 4. Saraswati Dynamics is the world first company to manufacture the full range of vibration test system and environmental test chamber’s under one roof.
Weaknesses 1. Limited market and tough competition 2. Continuous increase in labor cost. 3. The Shortage of skilled laborers. 4. Appreciation of rupees against foreign currencies.
Opportunities 1. Increase in the production and sell of cement at different plants have increased the turnover of the company. 2. The modernization, productivity improvement and cost control measures will improve the performance of the division in times to come. 3. Explore the new market in the rest of the world.
Threats 1. The numbers of players are increasing which further increases the competition 2. Appreciation of rupees against foreign currencies affects the income of the company. 3. It is hard to find the skillful labor for the company.
Statement showing change in working capital for Saraswati Dynamics
Particulars Current Assets Inventories Sund. Debtors Cash & Bank Loan & Advances Total ( A ) Current Liabilities C.L. Provisions Total ( B ) ( A-B ) ↑ in working capital Total 34394235 2980000 37374235 58748590 19139989 3184500 22324489 48010083 10738507 58748590 15254246 204500 07-08 1,4182750 48975443 2304500 30660132 96122825 06-07 14052466 30901152 1895049 23485905 70334572 Increase ( + ) 130284 18074291 409451 7174227 Decrease (- )
15254246 10738507 25992753
Statement showing change in working capital for Saraswati Dynamics
Particulars Current Assets Inventories Sund. Debtors Cash & Bank Loan & Adv. Total ( A ) 06-07 14052466 30901152 1895049 23485905 70334572 05-06 13908710 12821864 1496214 13988679 42215467 Increase ( + ) 143756 18079288 398835 9497226 Decrease ( - )
Current Liabilities C.L. 19139989 26021539 Provisions 3184500 1233000 Total ( B ) 22324489 27254539 ( A-B ) ↑ in capital Total 48010083 14960928 33049155 48010083 48010083
1951500 33049155 35000655
CALCULATION OF WORKING CAPITAL FOR SARASWATI DYNAMICS
Particular CURRENT ASSETS INVENTORIES SUNDRY DEBTORS CASH AND BANK LOANS & ADVANCES
13908710 12821864 1496214 13988679 -------------42215467 ---------------
14052466 30901152 1895049 23485905 ------------70334572 ---------------
14182750 48975443 2304500 30660132 ----------961225 -----------
TOTAL CURRENT ASSESTS (a) LESS:-
CURRENT LIABILITIES AND PROVISIONS CURRENT LIABILITIES PROVISION TOTAL CURRENT LIABILITIES (b) NET CURRENT ASSETS (a-b) 26021539 1233000 ------------27254539 --------------14960928 19139989 3184500 -------------22324489 -------------48010083 34394235 2980000 ------------37374235 -------------58748590
NET WORKING CAPITAL
70000000 60000000 48010803 58748590
50000000 40000000 30000000 20000000 14960928 10000000 0
ANALYSIS OF VARIOUS COMPONENTS OF WORKING CAPITAL INVENTORY ANALYSIS Inventory is total amount of goods and materials content in a store of factory at any given time. Inventory means stock of three:1. Raw materials 2. Semi finished goods. 3. Finished goods.
Position of inventory in Saraswati Dynamics ory
Particular Raw material Stock in process
31.03.06 3152145 10756565 --------------13908710 -----------------
31.03.07 2928101 11124365 ---- ------------14052466 ---------------
31.03.08 2672500 11510250 ---------------14182750 ------------
Analysis through chart:
14182750 14200000 14100000 AMOUNT 14000000 13900000 13800000 13700000 2006 2007 YEAR 2008 13908710 14052466
INTERPRETATION: By analyzing the 3 years data we see that the inventories are increased year by year. We are looking increasing pattern in inventories. We can see that inventories are grown by 1% and 0.9% in 06-07 and 07-08 respectively from previous year. By this growth we can say that the company is growing. A company uses inventory when they have demand in market and Saraswati Dynamics is having a demand in industry market. That is biggest reason for increase in inventories. From other point of view we can say that the liquidity of firm is blocked in inventories but to stock is very good due to uncertainty of availability of raw material in time.
SUNDRY DEBTORS ANALYSIS
Debtors or an account receivable is an important component of working capital and fall under current assets. Debtors will arise only when credit sales are made. Position of Sundry Debtors inSaraswati Dynamics Particular Debts outstanding more than 6 months 31.03.06 781270 31.03.07 3888555 31.03.08 5672000
Other Debts Total (a) Less: Doubtful Debts Total (b) Total (a-b)
11091194 -----------------11872464 ----------------
27012597 45946207 ------------------- ----------30901152 51618207 ------------------------
949400 949400 -------------12821864 --------------
-------2642764 ----------------------30901152 48975443 ----------------------
Analysis through chart:
60000000 50000000 Amount 40000000 30000000 20000000 10000000 0 2006 2007 YEAR 2008
INTERPRETATION In the table and figure we see that there is continuous rise in the debtors of Saraswati Dynamics in the successive years. A simple logic is that debtors increase only when sales increase and if sales increases it is good sign for growth. We can see 141% and 58% growth in 06-07 and 07-08 06 respectively from previous years. We can say that it is a good sign as well as negative also. Company policy of debtors is very good but a risk of bad debts is always present in high debtors. When sales are increasing with a great speed the profit also increases. If company decreases the Debtors they can use the money in many investment plans.
CASH AND BANK BALANCE ANALYSIS
Cash is called the most liquid asset and vital current assets, it is an important component of working capital. In a narrow sense, cash includes notes, bank draft, cheque etc while in a broader sense it includes near cash assets such as marketable securities and time deposits with bank. securities
Position of Cash and Bank Balance in Saraswati Dynamics
Cash in hand Fixed deposit Bank balances With scheduled bank: In Current Account Total
185943 -------------1496214 -------------
447188 ------------1895049 ------------------
483304 ----------2304500 ---------
Analysis through chart:
2500000 2000000 AMOUNT 1500000 1000000 500000 0 2006 2007 YEAR 2008
INTERPRETATION If we analyze the above table and chart we find that it follows a increasing trend. In the year 2006 it had maintained a huge amount of cash and bank balance which has increase in the year 2007 and 2008. Although company’s cash is increasing but this is very good sign for company. The analysis shows that the fix deposits of company are rapidly fallen in the year as 42.3% in 0708 respectively from previous year. Company is utilizing the fixed cash for exploding the projects that is good for growth,
LOANS AND ADVANCES ANALYSIS
Loans and Advances here refers to any to amount given to different parties, company, employees for a specific period of time and in return they will be liable to make timely repayment of that amount in addition to interest on that loan.
Position of Other Loans & Advances in Saraswati Dynamics
Particular Advance Tax & Tds Loans & Advances (assets) Prepaid Expenses Security Deposit & Earnest Money Total
31.03.06 128878 11684618 244335 770928 -- ---------------12828759 ------------------
31.03.07 353919 22079745 43000 1009240 -------------23485904 -----------------
31.03.08 1926354 27466165 216326 1051286 -------------30660131 --------------
Analysis through chart:
35000000 30000000 25000000 AMOUNT In RS 20000000 15000000 10000000 5000000 0 2006 2007 YEAR 2008
INTERPRETATION If we analyze the table and the chart we can see that it follows an increasing trend which is a good sign for the company. We can see that the increase of 83% and 30.54% in 06 06-07 and 07-08 respectively from previous year. The increasing pattern shows that company is giving advances for the expansion of plants and machinery which is good sign for better production. Although company’s cash is blocked but this is good that company is doing modernization of plants In time to compete with other plants competitors in market.
CURRENT LIABILITIES ANALYSIS Current liabilities are any liabilities that are incurred by the firm on a short term basis or current liabilities that has to be paid by the firm within one year. 61
Position of Other Current Liabilities in Saraswati Dynamics
Particular Advance From customer Bank O/D A/c Creditor for expenses Creditor for good Creditor for other Expenses payable& Duties & Taxes
31.03.06 523512 431 9674075 12720801 ---------3102720 ----------------26021539 -------------------
31.03.07 10084413 1482216 2487913 3518381 ----1567066 --------------19139989 ---------------
31.03.08 7536341 84248 1503979 11617976 11027760 2623931 --------3434235 343 --------
Analysis through chart:
AMOUNT ( IN RS )
35000000 30000000 25000000 20000000 15000000 10000000 5000000 0 2006 2007 YEAR 2008
INTERPRETATION If we analyze the above table then we can see that it follow an uneven trend. The important component of current liabilities is sundry creditors and other liabilities. In 06-07 it decreased by 27% and in 07-08 it increased by 75%. In 07-08 it was increased because of growth in other liabilities .This is liability for company so this should be less. When company have minimum liabilities it creates a better goodwill in market. High current liabilities indicate that company is using credit facilities by creditors.
Position of Other Provisions in Saraswati Dynamics
Particular Fringe Benefit Tax Income tax Total
31.03.06 562000 671000 ------------1233000 -------------
31.03.07 425000 2759500 -------------3184500 ------------
31.03.08 300000 2680000 ------------2980000 -------------
Analysis through chart:
3500000 3000000 AMOUNT ( IN RS ) 2500000 2000000 1500000 1000000 500000 0 2006 2007 YEAR 2008
From the above table we can see that provision shows an uneven trend and the huge amount is being kept in these provisions. Though the profits of the company are increased income tax is also increased which is good that company is creating goodwill in market by paying income tax creating in time. The income tax is increased by 158% in 06 06-07 and fall 6% in 07-08 respectively from 08 previous year. Although company is paying more income tax but also they are earning more. This is good sign for Company g growth.
Position of RECEIVABLE RATIO in Saraswati Dynamics FORMULA DEBTORS RECEIVABLE RATIO = ---------------- * 365 SALES
YEAR RECEIVABLE RATIO (IN DAYS)
Analysis through chart:
160 140 120 DAYS 100 80 60 40 20 0 2006 2007 YEAR 2008
INTERPRETATION Generally a low debtors turnover ratio implies that it considered congenial for the business as it implies better cash flow. The ratio indicates the time at which the debts are collected on an average during the year. Needless to say that a high Debtors Turnover Ratio implies a shorter collection period which indicates prompt payment made by the customer. Now if we analyze the three year data we can say that it holds a good position while receiving its money from its debtors. The ratios are in an increasing trend, which implies that recovery position is good and company should maintain these positions
Position of PAYABLE RATIO in Saraswati Dynamics
FORMULA CREDITORS PAYABLE RATIO= ----------------------------- * 365 COST OF SALES
PAYABLE RATIO (IN DAYS)
Analysis through chart:
140 120 100 DAYS 80 60 40 20 0 2006 2007 2008
INTERPRETATION Actually this ratio reveals the ability of the firm to avail the credit facility from the suppliers throughout the year. Generally a low creditor’s turnover ratio implies favorable since the firm enjoys lengthy credit period
Now if we analyze the three years data we find that in the year 2006 the ratio was very high which means that its position of creditors that year was not good, but in the next years it is seen that it has followed a decreasing trend which is very good sign for the company but in 2008 it followed a increasing trend So we can say it not enjoys a very good credit facility from the from the suppliers.
Position of CURRENT RATIO in Saraswati Dynamics
TOTAL CURRENT ASSETS CURRENT RATIO= -------------------------------------------TOTAL CURRENT LIABILITIES
Analysis through chart:
3.5 3 2.5 DAYS 2 1.5 1 0.5 0 2006 YEAR 2007 2008
This ratio reflects the financial stability of the enterprise. The standard of the normal ratio is 2:1 but in most of companies standard is taken according to Tandon Committee which is taken as 1.33:1.
Now if we analyze the three years data it can be predicted that it holds a stable position all throughout period but it is seen that it holds a low position in 2006 compare the standard one but the company improve its position in 2007 &2008 which show improving position of the company
Position of QUICK RATIO in Saraswati Dynamics FORMULA TOTAL CURRENT ASSETS - INVENTORIES QUICK RATIO= ----------------------------------------------------------------TOTAL CURRENT LIABILITIES
Analysis through chart:
3 2.5 2 DAYS 1.5 1 0.5 0 2006 2007 YEAR 2008
INTERPRETATION It is the ratio between quick liquid assets and quick liabilities. The normal value for such ratio is taken to be 1:1. It is used as an assessment tool for testing the liquidity position of the firm. It indicates the relationship between strictly liquid assets whose realizable value is almost certain on one hand and strictly liquid liabilities on the other hand. Liquid assets comprise all current assets minus stock.
By analyzing the three years data it can be said that its position was weak in the year 2006 but it improved significantly in the next two years and was stable during that year and it is meet with the standard & in the year 2007 & 2008 it was very satisfactory and it can be said that its liquidity position is stable & good.
Position of WORKING CAPITAL RATIO in Saraswati Dynamics
COST OF GOOD SOLD WORKING CAPITAL TURNOVER RATIO = ------------------------------------------------------WORKING CAPITAL
YEAR WORKING CAPITAL RATIO
Analysis through chart:
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2006 2007 YEAR 2008
INTERPRETATION This ratio indicates whether the investments in current assets or net current assets ( i.e., working capital ) have been properly utilized. In order words it shows the relationship between sales and working capital. Higher the ratio lower is the investment in working capital and higher is the profitability. But too high ratio indicates over trading. This ratio is an important indicator about the working capital position. Now if we analyze the three years data, we find that it follows a decreasing trend which means that its investment in working capital is higher and the company not utilizing more of its profit. But we find that it is not a good sign for the company and the company is required to look into these matters closely.
Position of INVENTORY TURNOVER RATIO in Saraswati Dynamics
FORMULA AVERAGE STOCK STOCK TURN OVER RATIO (IN DAYS) = --------------------------------------- * 365 COST OF GOODS SOLD
STOCK TURN OVER RATIO
Analysis through chart:
80 70 60 DAYS 50 40 30 20 10 0 2006 2007 2008
INTERPRETATION This ratio tells the story by which stock is converted into sales. A high stock turnover ratio reveals the liquidity of the inventory i.e., how many times on an average, inventory is turned over or sold during the year. If a firm maintains a minimum stock level in order to maximize sales by quick rotation of inventory and the holding cost of inventory will be minimum. A low stock turnover ratio reveals undesirable accumulation of obsolete stock.
By analyzing the three year data it seen that it follows an uneven trend. We see that from the year 2006 to 2007 it is more which has been rectified in the year 2008. But it is needless to say that ratio the company maintains is very high in 2006 &2007 and the company is required to take measures to lower down this ratio as it affects the working capital cycle of company and the flow of cash in the company. In 2008 we saw company take measure to lower down its ratio which is good for company because A low stock turnover ratio reveals undesirable accumulation of obsolete stock.
Position of Debt-Equity RATIO in Saraswati Dynamics
Formula = Debt / Equity
Calculation of debt-equity ratio at Saraswati dynamics
Particulars Debt Equity D/E Ratio
2005-06 4750068 31543972 0.15:1
2006-07 70518408 51077695 1.38:1
2007-08 58513399 72736936 0.80:1
Analysis through chart:
1.6 1.4 1.2 D/E Ratio 1 0.8 0.6 0.4 0.2 0 2005-06 2006-07 YEAR 2007-08
This ratio establishes a relationship between external liabilities and shareholder fund. The DER is worked out to ascertain the relative proportion of debt & equity in financing the assets of the firm. Generally, a debt equity ratio Of 1:1 is considered satisfactory When a company has lower d/e ratio, it means that company is utilizing its own funds and reserves rather than taking loans from outsiders. Saraswati Dynamic have a uneven trend in d/e ratio so we can say that in 2006 which portray that debt is less than shareholder fund but in 2007 it increase due to it increase in debt more than its equity but in 2008 its lees than the equity which show company in satisfactory position & the long term solvency position of the enterprise is quite comfortable.
Material storage period position of Saraswati Dynamics
Material storage period (in days) =
Average stock for the year --------------------------------------Daily average consumption
Average stock =
opening stock + closing stock --------------------------------------2
Daily average consumption =
Annual average consumption ----------------------------------------360
Material storage period (R) =
Analysis through chart:
2006 2007 2008
Production process period position of Saraswati Dynamics
Production process period (in days) =
Average work in process (WIP) --------------------------------------Average production cost
opening WIP + closing WIP --------------------------------------2
Average production cost
Average daily cost of production ----------------------------------------360
Production process period (W)
Analysis through chart:
2006 2007 2008 361
Finished goods storage period position of Saraswati Dynamics FORMULA
Finished goods storage period (in days) =
Average stock of the finished good --------------------------------------Average cost of sales per day
Average finished good =
opening finished goods + closing finished goods ------------------------------------------------2
Average cost of sales
Annual cost of goods sold ----------------------------------------360
Finished goods storage period (F)
Interpretation Saraswati Dynamics doesn’t hold the finished goods in stock. As the finished goods is manufactured it made their goods after the demand of product from the customer. That’s why the finished good storage period of saraswati dynamics is nil.
Debtor collection period of saraswati dynamics FORMULA
Debtor collection period
average debtors -----------------------------Daily average sales
= opening debtor + closing debtor ------------------------------------------2
Daily average sales
Annual sales ----------------------------360
Debtor collection period (D) =
Analysis through chart:
2006 2007 2008
Creditor payment period of Saraswti Dynamics
FORMULA Creditor payment period = Average trade creditor ------------------------------------------Average credit purchase per day
Average payment period =
opening creditor + closing creditor --------------------------------------------------2
Average credit purchase per day =
Annual credit purchase ------------------------------360
Creditor payment period(C)
Analysis through chart
2006 85 2007 2008 228
Operating cycle period of Saraswati Dynamics Formula OC = R +W+F+D-C
Operating cycle period
Analysis through chart
214 2006 2007 2008 1063
OBJECTIVE OF THE RESARCH
The objective of this project work is to focus on the working capital of the SARAWATI DYNAMICS PVT LTD and exploring its potential in the company. The project contain the basic postulates of working capital, procedure of analysis of working capital, ratio being used to define the working capital and the impact of working capital in the company in case of excess or inadequacy. Also, the project contains analysis of estimation of working capital requirement and the procedure to estimate working capital requirement in manufacturing and trading concern and from the data available it can be concluded that it holds a very strong position in the market.
The research design for the comparative study is of exploratory type and the focus is given to discover the possible measures, by detailed analysis, for the company which would be helpful up to some extent to retain a good position in the competitive market. The research design is not formal and rigid one as the focus depends upon the availability of new ideas and relationship among variables.
DATA COLLECTION METHOD
Primary Data: The primary data are which are collected afresh and for the first time, and thus happen to be original in character.
Secondary sources: The Secondary data are those which have already been collected and through processed the statically process. For the purpose of study both primary as well as secondary data have been used. The secondary data have been collected from company broachers, newspapers, company annual reports, and websites. For the collection of primary data personally asked the question. For the purpose of knowing whereabouts of the company in the present market secondary data has disclosed many important information as- market share of the company and its potential in the electro dynamic vibration market leaders on the basis of various attributes .
Tools for analysis: The following statistical tools have been used for analyzing the data. Column diagram Sampling percentage Pie-Diagram
SIMPLE PERCENTAGE ANALYSIS Percentage refers to a special kind of ratio. Percentages are used in making comparison between two or more variables to find the efficacy of each variable. Percentages are used to describe relationships among them replacing the common base say (100) so that comparisons can be made easy and meaning full.
current year Previous year
After completing my project on working capital management in Saraswati Dynamics, I can say that now I understand working capital much better and in a practical way. This project helps me in understanding the daily requirement in a manufacturing firm.
During my training period in Saraswati Dynamics I am able to know the importance of working capital in any company especially if the concern is a big one. It enable the company to have regular supply of raw material, regular payment of salary and wages, exploit the favorable market conditions, have ability to face crisis and also make the good image of the company. In Saraswati Dynamics the working capital requirements are very high as production is continuous in the concern. Working capital is also a major external source of capital for especially small and medium sized firms. These firms have relatively limited access to capital markets and tend to overcome this complication by short-term borrowing. Working capital position of such firms is not only an internal firm-specific matter, but also an important indicator of risk for creditors. Higher amount of working capital enables a firm to meet its short-term obligations easier. This results increase in borrowing capability and decrease in default risk (and consequential decrease in cost of capital and increase in firm value). So, it is possible to state that efficiency in working capital management affects not only short-term financial performance (profitability), but also long-term financial performance (firm value maximization).
From the discussion in this project we can say that Saraswati Dynamics manage its working capital requirement in an effective and efficient manner. Its current assets are approx. twice of its current liabilities which is the standard for any company and it means that the company always have the sufficient amount of cash to meet any type of liability at any time.
Statement Showing Difference from Previous Year
000000000 ↑ by0% 143756 ↑ by 1% 108079288 ↑ by 141% 398835 ↑ by 26.6% -6881550 ↓ by 26.44% 19533723 ↑ by 86.76%
-100000 ↓.79% 130284 ↑ by 0.92% 18074291 ↑ by 58% 409451 ↑ by 21.6% 15254246 ↑ by 76.69% 21659241 ↑ by 51.51%
Cash & Bank
Reserve & Surplus
1. Saraswati Dynamics profit is increasing day by day from last three years. 2. Saraswati Dynamics has shown that it is very strong competitor in Electrodynamics shaker market in India. 3. Overall all ratios of the company are good and company need to work with more efficiency 4. Lack of advertisement can be said as weak point of the Saraswati Dynamics. 5. Firm profitability can be increased by shortening accounts receivables and inventory periods 6. Position of the stock is increasing per year that is good sign to face the competition coming ahead. 7. Recession in the economy affect the Saraswati Dynamics. 8. Appreciation in rupees reduces the profit the company. 9. The major sources of raw materials are local sources and USA, UK, etc 10. Working capital management of the Saraswati Dynamics Is satisfactory due to efficient management of inventory, debtors, cash balances and working funds. 11. The major elements of working capital are inventory, debtors, cash balances and short term investments. 12. Cash management of the company is done through cash budget, cash flow statement and other steps. 13. The company has bright prospects due to efficient management of mace, machine materials & technology. 14. The company has successful uses of working capital due to planned inventory, receivables, cash, finance and good cash inflow.
Reference of book Dr.A.K.Garg (2007), Basic Business Finance, Swati Prakashan Publisher, UP C.R.Kothari (2009), Research Methodology, New Age International Publishers, New Delhi
Reference of web page www.saraswatidynamics.com http://aggregate-inventory-management-47605.htm http://www.allelectricalproducts.com/indian-electricalindustry.html http://isb.agepub:com/(g)/content/abstract/1412152 http://findarticles:com/P/articles/mi-qa3857/is200807/ai_n30992061 http://wwwfinanceweek:co.uk/item/6240 http://findarticle.com/P/article/mi-qa5439/is_200801/ai_n27996599 http://wwwemeraldinsight.com/insight/viewcontentservlet?filename=published/emeraldfull text article/Articles/0010340208html
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