A SUMMER TRAINING REPORT ON ANALYSIS OF WORKING CAPITAL MANAGEMENT CONDUCTED AT CEASE FIRE INDUSTRY LTD

IN PARTIAL FULFILMENT FOR THE DEGREE OF BACHELOR OF BUSINESS ADMINISTRATION (B.B.A.) (SESSION 2010-2013)

SUBMITTED TO: Dr.Ravikant swami

SUBMITTED BY: hussan singh

Company Profile
Ceasefire, India’s most trusted fire safety and security company. The company, at heart, is an altruistic one: one that aims at saving lives and giving people the means to protect themselves. The market structure however, is based on keen industry acumen; an instinctive aptitude for sensing the consumer’s needs, and fulfilling those needs in the best possible way. Since its inception, Ceasefire has grown from a company that dealt exclusively with extinguishers to one that has branched out to cover everything in the fire safety and security spectrum. Ceasefire is India’s largest and best fire safety company and has its expertise in complete fire fighting solutions. Ceasefire has made an exponential leap in scale over a few decades. An evolution; for which we had steadily laid the ground a few years back. By building India's most trusted fire safety brand by making substantial investments in R&D, technology, and manpower. Over the past few years, our sales and marketing network has steadily grown, making strong inroads into over 300 cities and towns across the nation. Our dedicated manpower capability today is approximately 1500 strong. Our product portfolio has expanded beyond measure, to span complete fire safety across all market segments, as well as Safety and Security Systems beyond mere fire protection. Ceasefire operates in three divisions:

Fire Safety solution division The range of products covers every area of fire safety: from fire safety modules and extinguishers

Security Division Ceasefire's Security Division offers cuttingedge devices designed to protect both compact areas like homes and

Projects Division This division was created to help design an effective fire safety and security plan for large-scale projects like malls and hotels. The project team will take care

to escape gear and signage. much larger spaces like of everything; from determining shopping malls. the equipment required to maintaining the products installed.

I would sincere thanks to Mr. solving queries and being there to help me whenever required.ACKNOWLEDGEMENTS I would like to take this opportunity to thank all the people who helped me in completion of my management training and in the compilation of this report. I would always be obliged to him because he shared his real-life experiences with me. (Manager.Finance and Accounts Department) for providing me guidance at each and every step of the training. . I am thankful to the other members of the finance department who explained me finance work.

3 Objectives of Inventory Management 4.Table of Contents i. Payable Management 3.4 Trade off on Receivables 2.5.1 Credit Policy 2. Abstract Introduction 1.6 Channel Financing 3.5 Liquidity Vs. Working Capital Management 1.2 ABC Analysis 4. ii.5.5 Safety Stock 4.3 Economic Order Quantity 4.1 Discounting of Bills 4.5.3 Cost of Receivables 2. Kaizen .6 Lean manufacturing a.1 Introduction 1.2 The operating Cycle and Working Capital Needs 1.5.6 Working Capital Policy 2.4 Factors Affecting Working Capital Requirement 1.3 Operating Cycle of CEASE FIRE 1.2 Need for Inventory 4.5.2 Objective of Receivable Management 2.4 Reorder Point 4. Just In Time (JIT) b.5.5 Determinants of Receivables 2. Kanban System c.1 Perpetual Inventory Verification 4. Profitability.1 Need of Receivables 2.2 Credit Control 2.A Risk Return Trade Off 1.1 Types of Inventory 4.5. Receivables Management 2. Inventory Management 4.4 Cost of holding Inventory 4.5.5 Techniques for Inventory Management 4.

7 Techniques of managing Cash in CEASE FIRE 6. Single Piece Flow System e. Conclusion 7.d. Cash management 5.2 Objectives of Cash management 5.3 Cost of Holding Cash 5. Gemba Walking f. Virtual Storage 5. Refrences .5 Benefits of Cash management 5.6 Cash Budget 5.1 Need of Cash 5.

giving special focus on how they are being implemented practically. is invested wisely. ABC Analysis. Payable Management and Cash management. Another prominent tool being implemented at CEASE FIRE is Sweeping Facility for Cash Management . along with their working and importance. Most of these are being implemented in the plant (like PIV. As a part of inventory management. Single Piece Flow System etc). . It makes sure that the cash is not lying idle. Just like any other firm.ABSTRACT The project titled ‘Analysis Of Woking Capital Management’ aims at understanding and analyzing the Working Capital . Credit Terms. JIT. various inventory management techniques are studied. These methods. I did Discounting of Bills as a part of Payable management technique. As far as receivables management is concerned. and Collection Policy and Procedure are understood. and is being used efficiently. and moreover. Safety Stock etc) are studied. which are not practically implemented (like Reorder Point. there is an innovative technique being used by CEASE FIRE for managing its receivables efficiently. and all these tools are very much focused and effective in doing so. It’s an easy way to check the savings a firm can make by paying its suppliers early. Even those tools. Working capital management comprises of four major parts – Inventory management. Collections are tried to be made as fast as they can. Credit Policy. There are a number of tools available for a proper working capital management. are studied in detail. Apart from this. Receivables management. as far as possible. Most of them are studied as a part of the project. This technique. Also. known as Channel Financing makes sure that the receivables are collected almost instantly. even CEASE FIRE is trying to minimize its debtors. in case opportunities are there.

have been provided. so the study that is being carried. and to understand it. ‘Analysis of Working Capital Management’. is to understand and analyze the working capital structure of the manufacturing unit of CEASE FIRE Limited . by improving the working capital structure of the plant. cannot be done. SCOPE: The report comprises of various suggestions. to judge the efficiency of CEASE FIRE Limited as a whole.INTRODUCTION PURPOSE: The purpose of the report. the project -span of 9-weeks. the suggestions being made in this report may or may not be practically applicable in the all types of industries. Working with professionals gives us a feeling of how our future life would be. The objective was also to check the the real life situations in an industry as differing from theories. was insufficient for understanding. may be useful for just one factory. and how we are supposed to behave in the business world. one has to get involved with it. and not for others. Therefore. Apart from this. and analyzing the working capital structure of a plant completely. This is be done by suggesting ideas to improve inventory management. a generalization of this report. separately. In addition. The project will throw a light on how to link theory with the business world. Suggestions for improving the overall efficiency of the plant. receivables management and cash management processes. . at each and every step of the processes that are taking place at the FSW factory. as well as collectively. LIMITATIONS: The report covers the practices followed at one plant of the company. as there may be difference in the business module from one factory to another. regarding the proper management of the working capital. Working Capital Management is a part of Corporate Finance.

the data is collected on the spot from the persons involved in the different processes. including that of CEASE FIRE itself. I constantly interacted with various employees of the Company and gathered useful information on related matters. Marketing Department. I also tried to get involved with people from various departments. As far as possible. have also helped me a lot in collecting data and understanding concepts. right from Accounts & Finance Department to Planning & Purchase Department. Stores Department. I have tried to collect data by myself. Various books and internet sites. Apart from self-experimenting and observing. which were used in the report as well as for my personal knowledge.METHODS OF COLLECTING DATA AND THEIR SOURCES: In most of the cases. Fabrication Department and Personnel Department. .

and. the current liabilities and the relationship that exists between them. Even a business which is fully equipped with all types of fixed assets required is likely to collapse. b) Cash to pay for wages. a) Adequate supply of raw materials for processing. The business will not be able to carry on day-to-day activities without the availability of adequate working capital. d) The ability to grant credit to its customers..Working Capital Management Every business needs investment to procure fixed assets. debtors etc. as funds needed for carrying out day-to-day operations of the business smoothly. which remain in use for a longer period. inventories. c) Creating a stock of finished goods to feed the market demand regularly. Working Capital management is concerned with the problems that arise in attempting to manage the current assets. or will be converted into cash within one year without undergoing diminution in the value and without disrupting the operations of firm. Money invested in these assets is called ‘Long term Funds’ or ‘Fixed Capital’. Every running business needs working capital. Investment in short term assets like cash. The management of the working capital is equally important as the management of long-term financial investment. The ‘Working Capital’ can be categorized. Business also needs funds for short-term purposes to finance current operations. Working capital is thus like the lifeblood of a business. is called ‘Short-term Funds’ or ‘Working Capital’. The current assets refers to those assets which in the ordinary course of business can be. if it does not have. The major current assets are: Cash  Marketable Securities . power and other costs.

Overheads . out of current assets or earnings of the concern.  Net Working Capital: The term net working capital may be defined as the excess of total current assets over total current liabilities.Creditors – Direct wages . For example. 220000.  Gross Working Capital (or total Working Capital): The gross working capital refers to the firm’s investment in all the current assets taken together. Accounts Receivables  Inventory The Current Liabilities are those liabilities which are intended. 50000. debtors of Rs. then the gross working capital of the firm is Rs. to which these current liabilities are delayed. The basic current liabilities are: Accounts Payable  Bills Payable  Bank Overdraft  Outstanding Expenses The term Working Capital may be used in two different ways. Gross Working Capital= Sum Total of Current Assets = RM + WIP + FG + Debtors + Cash and Bank Balance Net Working Capital= Difference between current assets and current Liabilities RM + WIP + FG + Debtors + Cash and Bank Balance . the firm gets availability of funds for that period. within a year. 100000. The extent. 70000 and inventory of raw material and finished goods has been assessed at Rs. at their inception. if a firm has a cash balance of Rs. to be paid in the ordinary course of business.

The Operating Cycle and Working Capital Needs The working Capital requirement of firm depends. Conversion of receivables into cash. iii. ii. Conversion of work-in-progress into finished goods. v. to a great extent upon the operating cycle of the firm. . iv. the operating cycle of a firm consists of the time required for the completion of the chronological sequence of some or all of the following: i. Procurement of raw materials and services. There is a time gap between happening of the first event and happening of the last event. Conversion of raw materials into work-in-progress. Thus. The operating cycle may be defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. Sale of finished goods (cash or credit). This time gap is called the operating cycle. The length and nature of the operating cycle may differ from one firm to another depending upon the size and nature of the firm. In case of manufacturing concern. this series starts from procurement of raw materials and ending with the sales realization of finished goods.

Thus ‘cash’ assumes its original form again at the end of one such working capital cycle but in the course it passes through various other forms of current assets too. with the usage of fixed assets resulting in value additions. As a result. the working capital cycle involves rotation of various constituents of the working capital. they rotate and business operations continue. When sold on credit. the finished goods assume the form of debtors who give the business cash on due date. the raw materials get converted into work in process and then into finished goods. .Cash Creditors Debtors Raw material Value Addition Working Expenses Value Addition Finished Goods Work in Process Figure:1 – Working capital Cycle Explanation of diagram Working capital cycle involves conversions and rotation of various constituents/components of the working capital. Initially ‘cash’ is converted into raw materials. Subsequently. Thus. This is how various components of current assets keep on changing their forms due to value addition.

some manufactured by its own. They are paid on daily basis to perform work of a nonrecurrent nature. Sometimes it may happen that company needs product in the form of raw material manufactured by its own SBU’s.  Conversion of Raw material into finished goods These purchased raw materials are then converted by the production unit into finished goods and then sold. The time lag between the purchase of raw materials and the sale of finished goods is known as the inventory period. .CEASE FIRE ’s Operating Cycle The operating cycle of CEASE FIRE is as follows: Procurement of raw material The operating cycle for a company primarily begins with the purchase of raw materials. They are sourced from the Contractors of the Company. This is treated as fixed overheads. In this case stock is transferred within the company but it won’t be considered as actual sale and no sale tax levied but it is liable to pay excise duty since excise duty is paid on production and it is the liability of manufacturer. There are three types of labour here Skilled Labor Here a lob our hour rate is fixed and the number of hours required to perform that work is determined and on the basis of this labor expenses are determined. Some raw materials are procured from outside. Labor Labor is vital for conversion of inputs into finished goods. Casual labor This is not permanent labor. CEASE FIRE is a capital goods manufacturer. which are paid for after a delay representing the creditor's payable period.

receivables form an important part of working capital management. or cheques of party which are subject to realization. Channel Financing Channel financing is used to receive fast money from debtors. . Most of the firms generally sells goods or services on credit and it takes a little time to realize. pay orders. Upon sale of finished goods on credit terms.Vendoring When there is a capacity constraint then a part of the work is done by vendors and the parts manufactured by these vendors are assembled. Hence. there exists a time lag between the sale of finished goods and the collection of cash on sale. This period is known as the accounts receivables period  Conversion of Receivables into Cash There are basically two ways available to vendors to pay their dues to CEASE FIRE . These are:Cash Payment method In this a vendor is supposed to clear his dues within a limited amount of time and mode of payment must be highly liquid. The vendors can pay by demand drafts. This is also called job work  Conversion of Work-in-progress into finished goods  Sale of Finished Goods Goods are sold either on cash basis or credit basis.

Negligence in proper assessment of the working capital. It may lead to cash crisis and ultimately to liquidation. The goal of Working Capital Management is to manage current assets and liabilities in such a way that a satisfactory level of working Capital is maintained. but it can have a negative effect on the cash flows.A Risk-Return Trade off Net Working Capital has bearing on Profitability as well as risk. therefore. The assessment of the working capital should be accurate even in the case of small and micro enterprises where business operation is not very large.Liquidity versus Profitability. An inaccurate assessment of the working capital may cause either under-assessment or over-assessment of the working capital and both of them are dangerous. can affect the dayto-day operations severely. The term Profitability used in this context is measured by profits after expenses. . The term Risk is defined as the probability that a firm will become technically insolvent so that it will not be able to meet its obligations when they become due for payment. It is said that greater the amount of working capital the less risk prone the firm is The decision on how much working capital be maintained involves a trade-off because having a large working capital may reduce the liquidity risk faced by the firm. Therefore. the net effect on the value of the firm should be used to determine the optimal amount of working capital. We know that working capital has a very close relationship with day-to-day operations of a business.

Optimum capacity utilisation of fixed assets may not be achieved due to nonavailability of the working capital. Both these situations would affect profitability adversely. over assessment of working capital also has its own dangers. • Non-availability of stocks due to non-availability of funds may result in production stoppage. . Cash crisis may emerge due to paucity of working funds. While underassessment of working capital has disastrous implications on business. The business may fail to honour its commitment in time. Implementation of operating plans may become difficult and consequently the profit goals may not be achieved. In the process it may end up with increasing cost of purchases and reducing selling prices by offering discounts.CONSEQUENCES OF UNDER ASSESSMENT OF WORKING CAPITAL • • • • • • Growth may be stunted. CONSEQUENCES CAPITAL • OF OVER ASSESSMENT OF WORKING Excess of working capital may result in unnecessary accumulation of inventories. This situation may lead to business closure. thereby adversely affecting its credibility. The business may be compelled to buy raw materials on credit and sell finished goods on cash. It may become difficult for the enterprise to undertake profitable projects due to non-availability of working Capital.

depending upon the sales forecast. between the sales and current assets. the financial manager should also estimate the requirement of current assets. . There are three types of working capital policies which a firm may adopt i. The actual and forecasted sales have major impact on the amount of current assets which the firm must maintain. moderate working capital policy.e. Over-investment in working capital makes capital less productive and may reduce return on investment.• • • It may lead to offer too liberal credit terms to buyers and very poor recovery system and cash management. These policies describe the relationship between sales level and the level of current assets. and aggressive working capital policy. So. conservative working capital policy. Working Capital: Policy There is an inevitable relationship. It may make management complacent leading to its inefficiency.

The conservative working capital policy also reduces the risk of non payment to liabilities. then the level of current assets will also be increased by 10%. if the sales increase or expected to increase by 10%. For example. This aggressive policy has many implications• The risk of insolvency of the firm increases as the firm maintains low liquidity. the increase in sales level will be coupled with proportionate increase in level of current assets also e.g. for 10% increase in sales the level of current asset is increased by 7% only. In case of aggressive working capital policy the increase in sales does not result in proportionate increase in current asset. In case of conservative working capital policy.Current assets Conservative Moderate Aggresive Sales level Figure 2 : Different types of working Capital Policies In case of moderate working capital policy. . the level of current assets will be increased more than proportionately. the firm does not like to take risk. For every increase in sales. Such a policy tends to reduce the risk of shortage of working capital by increasing the safety component of current assets.

RECEIVABLES MANAGEMENT The term Receivables is defined as debt owed to the firm by customers arising from the sale of goods and services in the ordinary course of business. Hence Receivables management forms an important part of working capital management. therefore accountants enter these promises in their balance sheet as accounts receivables. Most of the businesses today sell goods and services on credit and it takes times for the receivables to realize. Such a policy tends to reduce the risk of shortage of working capital by increasing the safety component of current assets. When companies sell their products they sometimes demand cash on delivery. The customers’ promise to pay for their purchases constitutes valuable assets. Receivables are a type of loan extended by the seller to the buyer to facilitate purchase process. in the market Reduced investment in current assets will result in increase in profitability of the firm CEASE FIRE and its Working Capital policy CEASE FIRE follows conservative working capital policy i. for every increase in sales level the level of current assets will be increased more than proportionately. This policy also reduces the risk of non payment of liabilities. .e.• • The firm is exposed to greater risk as it may not be able to face unexpected change. but in most cases they sell goods on credit and allow a delay in payment.

these funds are to be procured at some explicit or implicit cost. As a marketing tool. Higher credit sales at more liberal terms will no doubt increase the profits of the firm. This is known as the cost of financing the receivables. employees. Hence Receivables management assumes significance in the context of overall working capital management. Credit sale are treated as marketing tool to aid sale of goods. etc. . The firm on the other hand. has to arrange funds to meet its own obligation towards payment to supplier. but simultaneously also increases the risk of bad debts as well as result in more and more funds blocking in the receivables. sometimes the firms are compelled and sometimes the firms desire to adopt liberal credit policies for pushing up the sales. ii) Administrative Cost: A firm will be required to incur various costs in order to maintain the record of credit customers before the credit sales as well as after the credit sales. Thus. Objective of Receivables management In a competitive environment. the objective of receivables management is matching the cost of increasing sales with the benefits arising out of increases sales with the objective of maximizing the return on investments of the firm.Need of Receivables The sale of goods on credit is an essential part of working capital management. Cost of Receivables i) Cost of Financing: The credit sales delays the time of sales realization and therefore the time gap between incurring the cost and the sales realization is extended. they are intended to promote sales and increase profits.

partly or wholly unrealizable. known as bad debt also becomes a cost to the firms. More liberal credit terms may be expected to generate higher sales revenue and higher profits. a firm should try to frame its credit policy in such a way as to attain the best possible combination of profitability and liquidity. iv) Cost of default by Customers: If there is default by customers and the receivables becomes. but they increases the potential costs also as the chances of bad debts increases and there will be decrease in liquidity of firms. Thus.iii) Delinquency Cost: This is the cost incurred if there is any delay in payment by a customer. . Costs Total cost of receivables Default cost Delinquency costs Cost of financing Administrative Costs Normal (20 days) Default (40 days) Credit period (days) Trade off on receivables The trade off on receivables can be applied to find out whether to liberalize credit terms or not. then this amount. On the other hand a stringent credit policy reduces the profitability but may increase the liquidity of the firms.

The terms of sale i. The percentage of credit sales to total sales. So. Higher the sales higher will be the receivables. These also determine the quantum of receivables. the credit and collection policies. 2.e. : Profitability and Liquidity of a firm Determinants of Receivables In any firm the quantum of receivables is determined by several factors. 1. But this is not under the control of financial manager.Figure 4 Credit Policy. These are under the control of financial manager. the receivable management must be attempted by adopting a systematic approach and considering the following aspects of receivables management: • • The Credit Policy The Credit Control .

it takes a risk about the paying capacity of the customers. including the length of the period for which the credit will be offered. The basic decision to be made regarding receivables is to decide how much credit be extended to a customer and on what terms. . The firm must consider the cost involved in increasing the credit period which will result in increase in the investment in receivables. This requires the determination of i) Credit standard ii) Credit terms The Credit Standards: when a firm sells on credit. The following points should be noted while setting the credit standard for a firm: • • • Effect of particular standard on sales volume. Lengthening the credit period increases the sales by attracting more and more customers. the interest rate on the credit and the cost of default. The credit policy may be defined as set of parameters and principles that govern the extension of credit to its customers. Effect of a particular standard on the total bad debts of the firm Effect of a particular standard on the total collection cost. it must set credit standards which should be applied in selecting customers for credit sales. whereas squeezing the credit period has the distracting effect. Credit Terms: It refers to set of stipulations under which the credit is extended to the customers. Therefore to be on safer side. The credit terms specify how the credit will be offered. Credit period: It refers to the length of time over which the customers are allowed to delay payments. This is what is known as credit policy.Credit Policy A firm makes significant investment by extending credit to its customers and thus requires a suitable and effective credit policy to control the level of total investment in the receivables.

2% discount if payment made within 20 days. 2/10.g. Practical Implementation CREDIT TERMS: Credit Period.The cash discount period allowed by CEASE FIRE is 1 to 3 days.The credit period at CEASE FIRE is not constant.g.75 0 There are basically two ways available to vendors to pay their dues to CEASE FIRE . 3% discount if payment made within 10 days. Different discount rates may be offered for different periods e. For some vendors. This depends entirely on company’s policies. Cash discount period. it may be 45 days or 60 days.Discount terms: The customers are generally offered cash discount to induce them to make prompt payments. for others. It can be different for different vendors. Cash discount. 3/10. otherwise full payment by the end of 30 days from the date of sale. This can be summarized as follows: Credit Discount Period (days) 1 3 30/45/60 Credit Discount (%) 2 1.75%. net 30 means that a 3% cash discount if payment made within 10 days . Both the discount rate and the period within which it is available are reflected in the credit terms e. These . it is 30 days.The cash discount offered by CEASE FIRE is 2% to 1. 2% discount if payment made within 20 days. depending upon cash discount period.

a cheque is issued by the vendor drawn on the name of CEASE FIRE .): Here. Control of Receivables Once the credit has been extended to a customer as per credit policy.are: Cash: In cash payment method. And the mode of payment must be highly liquid (Cheque or Demand Draft).D. . There are three options available with the vendors: i) Blank Cheque Arrangement: In Blank Cheque arrangement. by the vendor. The collection Procedure: The firm should have a built in system under which customer may be reminded a few days in advance about the bill becoming due. As soon as the material is received and invoice is generated. a vendor is supposed to clear his dues within a limited amount of time. iii) Demand Draft (D. the vendors provide CEASE FIRE blank Cheques drawn on the name of CEASE FIRE . CEASE FIRE is allowed to fill the relevant amount pertaining to the transaction that took place between CEASE FIRE and its vendor. This Cheque can be cleared on the same day the invoice is generated. on generation of invoice. a demand draft is drawn on the name of CEASE FIRE . the next important step in the management of receivables is the control of receivables. ii) Cheque Arrangement: In simple Cheque arrangement. The things to be taken into consideration are:1. as soon as invoice is generated.

A strict collection policy can affect the goodwill and damage the growth prospects of the sales. If the firm has a lenient credit policy. having a normal credit period of 30 days may be classified as follows: Age Group (Number of Days) Less than 30 days 31-45 days 46-60 days 61 and above %of total outstanding Receivables 60% 20% 10% 10% . The older the receivables. the objective of collection procedure and policies should be to speed up the slow paying customers and reduce the incidents of bad debts. the receivables of a firm. For example. Monitoring of Receivables:The financial mangers should keep a watch on the credit worthiness of all the individual customers as well as the total credit policy of the firm. the total outstanding receivables on particular days are classified into different age groups together with percentage of total receivables that fall in each age group. Average collection period= Average Receivables Credit sales per day Another technique for monitoring the Receivables is known as aging schedule. Thus. • A common method to monitor receivables is the collection Period or number of day’s outstanding receivables. the customers with a natural tendency towards slow payment may become even slower to settle his accounts.The collection procedure of the firm should neither be too lenient nor too strict. the lower is the quality and greater the likelihood of a default. The quality of the receivables of a firm can be measured by looking at the age of receivables. 2. In the aging schedule.

then the case must be taken for an approval for a temporary increase in the line of credit. As long as the customer’s unpaid balance remains within this maximum limit. 10% of the receivables are overdue but 30 days and 10% are over due by more than 30 days. The weak financials of the supplier (leading to delay in supply and non-availability of market credit) or the dealers of the products (delay in receipt in payment leading to higher book debts) could adversely impact the top-line(sales) as well as bottom-line(profits) of the financed firm. in conventional lending. Channel Financing Channel financing is different from the conventional lending since.Accounting Ratios: Two accounting ratios may be calculated in particular may be calculated to find out the changing pattern of receivables. These are i) Receivables Turnover Ratio ii) Average collection Period Both the ratio should be calculated on a continuous basis to monitor the receivables.Here the firm has a credit period of 30 days and 60% of the total receivables are less than 30 days old. the financing banks are generally not concerned as to how the suppliers of the firm and dealers of the products of firm. Different lines of credit may be allowed to different customers. 4. In the . Lines of Credit: It is the maximum amount a particular customer may have as due to the firm at any time. are financing their activity. This type of aging schedule can provide a kind of an early warning suggesting i) Deterioration of receivables quality ii) Where to emphasize the appropriate corrective actions 3. However if new order is going to increase the indebtedness of a customer beyond his line of credit. 20% of the receivables are over due by 15 days. the account may be routinely handled. The ratios so calculated for the firm must then be compared with the standard for that industry or with past ratios of the same firm.

it need not avail of credit from its bank to pay off the supplier if the supplier gets the finance in his own name from the bank for the raw materials supplied on credit in the form of say. be it the manufacturer/trader. Through channel financing. For instance. drawee bills financing.channel financing the financing bank may have to find ways and means as to how the suppliers and buyers (dealers of the product) can be financed through various instruments/facilities. . . This enables the manufacturing firm to get cash immediately for the finished goods supplied. the supplier of the inputs or the dealer/buyer or the financing bank. Hence. the bank makes a due diligence assessment of the suppliers’/dealers’ standing and credit worthiness and decides to provide finance on merit. the channel financing adds value to the transaction for all the parties concerned. Thereafter. The bank can also allow loan to the dealer for the credit term that has been fixed between the firm and the dealer in the form of receivable finance or finance against book debts or factoring of the receivables. the business firms can out-source a major part of their working capital needs thereby reducing their dependence on bank finance.

Channel Finance Benefits to Corporate: • • Assured availability of finance to their Channel Partner's at lower than current cost.A simplified channel finance solution is as follows:- Figure:-5 Step1: Step2: Step3: Step4: Supply Advice of to goods ABN from to Corporate make to Channel for the Partner. • • . Conversion of balance sheet item to an off balance sheet liability. Repayment by Channel Partner to ABN AMRO Bank as per facility term. purchase. Corporate can use this as a Marketing tool and strengthen their relationship / reward loyalty of the Channel Partners Release of funds from the balance sheet resulting in improvement in financial ratios. AMRO payment Payment by ABN AMRO for goods purchased by Channel Partner.

High service and delivery standards compared to current neighborhood banker. Channel Partners can increase sales through higher purchasing power. the risk is diversified through finance to supplier. the credit exposure norms are better observe Practical Implementation The practice of channel financing is followed in CEASE FIRE to a great extent and the company is benefiting a lot through this system of collection of debtors. Channel Partners may be able to increase profitability by availing of Cash discounts from Corporate. manufacturer and the dealers.• Greater efficiencies in the Corporate's receivable management and cash management process. Ability to introduce payment discipline with their Channel Partners • Channel Finance Benefits to Channel Partners: • • • • • Steady and cheaper source of working capital financing. Channel finance benefits to banks: • • Increased customer base Since. Simplicity of documentation and approval procedures. The banks which provide Channel Financing facility to CEASE FIRE are: ICICI bank  Deustche bank .

When a firm buys goods on credit the supplier will state a final payment date . 60000 per month and the credit allowed by supplier is two month. the aim of the firms is to realize its debtors as fast as possible but too pay its creditors as late as possible. Since. So. a firm makes a credit purchase of Rs. Creditors can be managed by discounting of bills. 60000*2months). making the payment for two months. So. It means the firm would be getting the supplies without however. then the working capital supplied by creditors is Rs.e. For example. Working Capital is the difference between current assets and current liabilities and creditors form an important part of current liabilities. The postponement of payment to the creditors makes the firm to utilize this money elsewhere or help the firm to sell on credit without blocking its own funds. to which the payment to these current liabilities is delayed. The payment for these purchases may be postponed for the period of credit allowed by suppliers. To encourage firm to pay before final payment . So. 120000 (i. So. Bill Discounting is a relatively new concept in India. a part of the funds required to maintain current assets is provided by current liabilities and the firm will be required to invest the funds in only those current assets which are not financed by current liabilities. the supplier of the firm in fact provides working capital to the firm for the credit period. Rs.Payable Management As the firm sells goods on credit it may also procure/purchase raw material and finished goods on credit basis. a firm can save a considerable amount if these creditors are managed. The extent. the firm gets the availability of funds for that period.

Now it’s the decision of firm whether to avail or not that discount facility provided by supplier. . get into a contract with financial institutuions or banks( like ICICI bank or CEASE FIRE finance Ltd. In a wider sense. Also. For that they should see whether it is profitable for them or not. because the company is going to pay less than what it was supposed to pay initially The cash thus saved can be invested elsewhere. It’s an indirect cash inflow . These financial institutions pay the suppliers the requisite amount on behalf of these firms and they charge some interest on the amount paid by them to the suppliers from these firms. By using discounting of bills technique huge sums of money can be saved. the supplier will offer a cash discount for prompt settlement. commonly used to indicate various items of stores kept in stock in order to meet future demands. which have huge cash reserves. inventory can be defined as an idle resource which has an economic value. Inventory Management The Dictionary meaning of Inventory is 'a list of goods'. it make possible to calculate savings being received on account of availing discount. Benefits of Discounting of Bills • • • • • • Discounting of Bills make it easy to decide whether the discount being allowed by the supplier is worth taking or not. generally.date . It is however. in monetary terms It also helps in improving relationship between vendors/suppliers. It’s a win-win situation for both-the company as well as suppliers as the suppliers will be getting money much before the stipulated time and the company is able to enjoy the benefits of discount offered by the suppliers. ( like CEASE FIRE ).). by just paying the discounted amount in time. Big firms.

components and assemblies used in the manufacture of a product. In any organization. (c) Work in progress -. The inventories need not be viewed as an idle asset rather these are an integral part of firm’s operations. Need For Inventory Every organization needs to maintain a minimum amount of inventory so as to fulfill its customer’s demands. We can also say that inventory is composed of assets that will be sold in the future in the normal course of business. (b) Consumables & Spares -.These may include all raw materials. the organizations foresee future demand and they plan their inventory levels accordingly.These may include materials required for maintenance and day-to-day operation.Finished goods not yet sold or put into use. Inventory refers to stockpile of products that a firm is offering for sale and the component that makes up the product. they become strain on the resources. (d) Finished Products -.Inventory is assets to the firm and requires investment and hence involves the commitment of firm’s resources. But the question arises how much inventory be maintained? If the inventories are too big. the firm may loose sales. Also. however. These reasons can be classified as: . if they are too small. there may be following four types of inventory: (a) Raw materials & parts-.These are items under various stages of production not yet converted as finished goods.

To control inventory investment by maintaining optimum Inventory. Precautionary motive: A firm should keep some inventory for unforeseen circumstances also. f. b. To minimize investment in inventory and to ensure maximum turnover of inventory in an accounting period. Cost of holding Inventory Every firm maintains some stock of raw materials.both ordering cost and carrying cost. Objectives of Inventory management a. g.Transactionary motive: to meet the day to day requirements of sales. To ensure a continuous supply of raw materials to facilitate uninterrupted production. To ensure adequate and timely supply of finished goods to the market through proper distribution. c. e. To minimize inventory carrying costs in business.moving items and/or non-moving items do not pile up. d. To maintain sufficient stock of raw materials in periods of short supply and anticipate price changes. To ensure stocking of relevant materials in adequate quantities and to ensure that unwanted or slow. To eliminate waste and delays in the process of manufacturing at all stages so as to reduce inventory pile up. customer demand etc. Speculative Motive: The firm keep some inventory in order to capitalize opportunity to make profit. h. by holding . It is benefited. production process. work-in-progress and finished goods depending upon the requirement and other features of the firm.

there would not have been any problem of inventory management and every firm would have maintained higher and higher level of inventories. The cost of holding inventory includes the following:• Ordering Cost. The different elements of costs involved in holding inventory are as follows: (a) Interest on capital / cost of capital / opportunity costs .The cost associated with the acquisition or ordering of inventory is known as ordering cost.inventory but there is cost involved with it. and a variable component which changes with the order size. Such expenses involved are referred to as ordering cost. in units • Carrying Cost: The very fact that the items are required to be kept in stock means additional expenditure to the organization. O= Ordering cost per order Q= Lot size. A= Annual Requirement of a particular material in units or numbers or kgs. had these cost not there. It includes: o Carriage Inward o Insurance Inward o Communication cost o Stationary Cost o Demurrage Charges Ordering Cost= (A*O)/Q where. The ordering cost may have fixed component which is not affected by the order size. Firms have to place order with suppliers to replenish inventory of raw materials.

. Some examples are: o Non availability/ small amount available with vendors o Non availability of substitutes o Quality desired not matching with the supplied ones o Updated or improved product not available. be as follows: Interest/costs of capital/opportunity cost Obsolescence and depreciation cost Storage. C is carrying cost 15 to 25% 2 to 5% 3 to 5% 1 to 2% 21 to 37% • Stock-out Cost (A Hidden Cost): A stock out is a situation when the firm is not having units of an item in store but there is demand for that either from the customers or production department. Insurance costs Total Carrying Cost is calculated by: Carrying Cost= ( C*O)/Q where. handling etc.(b) Obsolescence and depreciation (c) The cost of storage. therefore. handling and stock verification (d) Insurance Costs The average inventory carrying costs can. There is always a cost of stock out in the sense that the firm faces a situation of lost sales or back orders.

The tool depends upon the type of inventory. namely materials. this means that average value of inventory held is higher with the consequence of higher inventory carrying cost.e. There are various tools for effective inventory management.Total Cost The total cost associated with inventory is the sum of ordering and carrying cost i. if the number of order is less. Conversely. a direct consequence would be reduction in inventory held and hence carrying cost would be less. some of these tools have an impact not only on inventory but on whole structure of the organization. They help in reducing cost and improving the efficiency of organization as a whole. Perpetual Inventory Verification . Suppose the ordering cost increases because more number of times the order is repeated. work-in-progress or finished goods. Techniques used for inventory management The finance department of every organization aims at maintaining an optimum level of inventory on the basis of the trade-off between cost and benefit to maximize the owners wealth. Total cost= Carrying Cost+ Ordering Cost = C*O/Q + A*O/Q One Underlying principle should be kept in time that ordering cost and carrying cost are inversely related to each other.

This is done to check out actual inventory level and is done on a continuous basis. The database which. In PIV method. Any faults in the system. b. ideally. Checking it against the database of the stores can give us a fair idea about how efficiently the system is working c. the amount of inventory is checked both in documents as well as stores. these two numbers rarely match. The exact amount of inventory present in the plant can be checked. Here. regarding the errors associated with updating of database of stores department can be traced. some items are checked randomly and while checking those items issues and receipt of those items is stopped we can say that these items are brought to freezing state. Recommendations . This happens because of various reasons. Practically. which may or may not be under the control of management. should be refreshed simultaneously whenever there is a change in inventory and it should match with physical inventory level. Some of the reasons for mismatch are: • • • • • • • • • Delay in entering data Technical Errors (intranet or SAP not working) Documentation Error (document not submitted) Posting Error Material issued but document not processed Document processed but material not issued Material send for job work but not received effectively Pilferage Material waiting for quality check Benefits Of Perpetual Inventory Verification a.

ABC Analysis This is done to solve classification problem. Class A B C Total No Of Inventory Value (%) 70 20 10 100 Items (%) 10 20 70 100 . The ABC analysis classifies various inventory items into three sets of groups of priority and allocates managerial efforts in proportion of the priority. The ABC analysis is based on the assumption that same degree of control should not be exercised on all items of inventory. The most important thing in inventory control management is classification of different types of inventories to determine the type and control required for each.• • PIV should be done as frequently as possible. those of intermediate importance are classified as class ‘B’ and the remaining items are classified as class ‘C’. • Unless or until data is entered no material should be issued or received. It should be made sure that data is updated from time to time that is as soon as material is issued or received. followed by items in class ‘B’ and then items in class ‘C’. The financial Manager should monitor different items belonging to different groups in that order of priority. corresponding data should be updated on the plant database. This is done based on the experience That 10% of items in the inventory accounts for 70% of consumption in value so they are classified as ‘A’ class items 20% of items in the inventory account for 20% of consumption in value so they are classified as ‘B” class items 70% of the items in the inventory accounts for 10% of consumption in value so they are classified as ‘C’ class items. Utmost attention is required for class ‘A’ items. The most important items are classified as class ‘A’ .

Similarly a not very important component may receive extra attention then it deserves . B. An item of inventory may not be very expensive. still it will be classified under group ‘C’. On the other hand there is not much to worry about class B and class C items. Each item can be given appropriate attention as per classification. It keeps an eye ion those items which are more crucial for production process than others.Table :. This is a serious limitation of ABC analysis. and C items. There are around 7000 items which are categorized as A. It would require serious attention but due to this classification. but may be very critical to production process and/ or may not be easily available. In either case it is detrimental to the growth of the company. it will receive less attention. Practical Implementation ABC analysis is strictly followed in CEASE FIRE . such items are given due attention so that there is neither an excess nor deficit of such materials. Limitations of ABC analysis This system suffers from major drawback.ABC Analysis Benefits Of ABC analysis • • It serves as a tool for classification for inventory. Economic Order Quantity Model: .

After ABC analysis we get to know which item deserves how much attention. This method is rarely used for class ‘A’ items because class ‘A’ items are ordered only when requirement arises. EOQ is generally used to determine the order quantities of class ‘C’ items and sometimes for class ‘B’ items also. A firm should neither place too large or too small orders. There are only two costs associated with the inventory. The formula for estimating EOQ is: EOQ= √ (2A*O)/C Where. and these are the cost of ordering and the cost of carrying the inventory. The importance of effective inventory management is directly related to size of the inventory.This is to solve order quantity problem. The next Problem is to determine the lot size in which a particular item of inventory will be required. there is no need to keep inventory of class ‘A’ items. The inventory management basically focuses on maintaining an optimum level of inventory in order to minimize the cost attached with different inventory levels. A = annual requirement of a particular material in units or numbers Or Kgs . which ensures that total of carrying and ordering cost is minimum. The optimum level of inventory is known as Economic Order Quantity (EOQ) or Economic lot size. There is no time gap between placing an order and getting its supply The cost per order of an item is constant and the cost of carrying inventory is also fixed and is given as a percentage of average value of inventory. This refers to that quantity per order. The approach to determine EOQ is based on the following assumptions:• • • • The total usage of particular item for a given period (usually a year) is known with certainty and the usage rate is even throughout the year.

If the firm places the orders for that item of this economic order quantity. This will happen because with the increase in the size of order. The total annual carrying cost is increasing with the increase in order size. . This will happen because the firm would be keeping more and more items in the stores. At this particular level the order size is designated as the economic order quantity.Graphical Presentation Of EOQ Model Explanation The figure shows that the total ordering cost for any particular item is decreasing as the size per order is increasing. then the total annual cost of inventory of that item will be minimized. the total number of order for a particular item will decrease resulting in decrease in the order cost.e. The trade-off of these two costs is attained at the level at which the total amount of cost is least. the total carrying cost + the total ordering cost) initially reduces with the increase in size of order. However. the total cost of inventory (i.O = Ordering cost per order C = carrying cost per unit Figure 7 :.

Hence. It saves cost as it saves carrying and ordering cost. EOQ is estimated on the basis of prior experience and future requirements. It also results in strong relationship with vendors. maintenance cost etc. nails. it suffers from the disadvantage that the order cost is assumed to be uniform during a particular period. are common for all types of items. I ITEM SL98354BOOOS CS94314KOOOS SL97299OMOOS SH97609OOKOS EOQ 219 237 327 245 . To prove the usefulness of this method. gaskets etc. Accordingly. assessment of EOQ is not very relevant for this kind of business line. crimps. bolts. However. Moreover. wires. batons. The main point of problem in calculating EOQ is regarding the estimation of ordering and carrying costs. It results in saving of time. EOQ is calculated to show how this model works and how it can be useful in maintaining proper inventory levels. lubricants. Because there are no set rules to find exact storage cost. Practical Implication EOQ is a relatively old technique for assessing the lot size of the order. some arbitrary costs (ordering cost and carrying cost) are assumed.Benefits of EOQ • • • • It makes sure that there is neither an excess nor deficit of inventory. Since the production unit of CEASE FIRE is involved in manufacturing of tailor-made products. the general usage items like nuts. it may have restricted application in the FSW plant. They have to be estimated because there are no provisions available to calculate them. This happens so because it is very difficult to classify to calculate storage and maintenance costs.

SH97608OOMOS 258 Table – Economic Order Quantity RECOMMENDATIONS: • • Provisions to calculate EOQ must be made because a guess work may prove to be wrong. procurement. Than. a part of this (say 20%) should be taken as carrying cost and rest as ordering cost. the total cost involved in ordering. storage and maintenance must be calculated. Reorder point (under certainty conditions): To solve order point problem: Reorder point is that level of inventory at which an order should be placed for replenishing the current stock of inventory. At first. It may be defined as level of inventory when . transporting.

it becomes difficult to estimate average daily usage of inventory. It is the inventory level which is equal to consumption during the lead time. reorder point is not calculated at CEASE FIRE . Trends of requirements of various items are observed and accordingly order point is estimated for different items. So. As far as average daily usage of inventory is concerned. Here the problem is in estimating exact lead times and average daily usage of inventory. A material which can be ordered from different suppliers may have different lead times. but also on the supplies and his geographical location. The difficulty in estimating lead time is that it is never fixed and also. i.fresh order should be placed for procuring additional inventory equal to the economic order quantity. Reorder point is calculated as: Rρс = L*U Where. PRACTICAL IMPLEMENTATION: Practically. the fact is that CEASE FIRE follows engineered-toorder business. The demands keep fluctuating dayby-day. . • It makes it easier to keep track of inventory and to know when exactly next lot of material is needed.e. it depends not only on the material. it manufactures according to immediate demands. L = Lead time (in days) U = Average daily usage of inventory Benefits of reorder point • It makes sure that plant does not run out of stock in any given day.

a calculation based on assumed lead times and average daily usage of inventory is done. For instance. This can prove to be helpful in implementing reorder point at CEASE FIRE . which are not possible practically. It will make sure that the plant does not run short of inventory for even a single day. ITEM SL98354BOOOS CS94314KOOOS SL97299OMOOS SH97609OOKOS SH97608OOMOS Rc 100 180 150 144 120 RECOMMENDATIONS: • • Reorder point is a useful tool and hence. should be implemented. . The demand may exceed the anticipated level. Safety stock: To overcome unexpected situations The EOQ and the reorder point have some assumptions.To emphasize on the importance of reorder point. Lead times should be estimated based on both – the type of material and the supplier. the demand for inventory is like to fluctuate from time to time.

To avoid such undesirable situations safety stock is maintained. average daily usage of inventory and lead time. PRACTICAL IMPLEMENTATION: The determination of the optimum safety stock involves dealing with uncertain demand. floods. average number of units per order. Safety Stock may be defined as the minimum additional inventory to serve as a safety margin or buffer or cushion to meet an unexpected increase in usage resulting from an unusually high demand and/or an uncontrollable late receipt of incoming inventory. The first step. • It acts as a buffer. transportation. To give an overview of the whole process. • It is an effective tool to minimize shortage cost. I calculated safety stock of a few items based on certain assumptions regarding the stock-out acceptance factor. is to estimate the probability of being out of stock as well as the size of stock-out in terms of the shortage of inventory at different levels of safety stock. and other bottlenecks.Similarly. the plant is able to maintain its immediate demand. ITEM Ss SL98354BOOOS 156 CS94314KOOOS 256 SL97299OMOOS 213 SH97609OOKOS 187 SH97608OOMOS 209 Table – Safety Stock . The delay may be due to strikes. therefore. Benefits of Safety Stock • It is useful as it makes sure that even after reorder point is passed. the receipt of inventory from the suppliers may be delayed beyond the expected lead time.

Visual Controls using Kanban cards b.. Receiving material just in time (JIT). Defects/Rework c. A place for everything and everything in its place (PEEP) c. Create instructions and Standard Operating procedures e. workplace organization using the 5 S System is necessary: a. . d. Waiting 3. d.. Sort . The best way to do this is to have a VISUAL FACTORY where there is nothing hidden .Lean Manufacturing There are many hidden wastes in any organisation . Over Production b. Studying the flow of material or Value Stream Mapping. Remove unneeded items b. Motion d. Elimination of hidden wastes .. To achieve waste elimination . Lean Manufacturing is a tool to enable us to achieve this objective Fundamentals of Lean Manufacturing : 1. Standardize.. To get rid of these hidden wastes we need to first unhide them... c. 2. Line Balancing to avoid up piling up of material at any stage.. Set –in – order. Reducing Lead Time at every stage of every process through a.These wastes fall into seven basic categories : a. Shine . High Inventory f.. Sustain. Smooth flow of Material & Information to meet on demand service to customers but without having to hold high inventories .. Maintain the above through support and encouragement 4. Transportation e. Over processing & g. Clean enough to inspect and expose any defect .

and automatically. Some of the tools of lean manufacturing which helps in inventory management and control are:• • • • • • Just In time ( right amount in the right place at right time) Kaizen ( continuous improvement process) Kanban (pull production) Single Piece Flow System Gemba Walking Virtual Storage Lean Manufacturing can be achieved by implementing following tools: Just in Time Concept: The basic philosophy behind JIT is that the firm should keep minimum level of inventory on hand relying on suppliers to furnish ‘stock’ ‘just in time’ as and when required. . production time and cost are reduced. technology and management of materials and inventory. BY eliminating waste quality is improved. as far as possible. of one of several types. Lean management (also known as Big JIT) is a philosophy of operations management that seeks to eliminate waste in all aspects of aspects of firm’s production activities: human relations. All of these tools aim at reducing wastes. f. Set up time reduction using SMED (single minute exchange of dies ). Total Productive Maintenance to improve overall operation of the equipment. To solve the problem of waste lean manufacturing has several tools at its disposal. Lean manufacturing is a management philosophy focuses on reduction of the seven wastes to improve overall customer value. This is in direct contrast to the traditional inventory philosophy which emphasizes keeping sufficient levels of safety stocks to ensure that production will not be interrupted. vendor relations.e.

So. it becomes very difficult to pierce nails in it). material keeps moving. There are certain issues related to wooden packing cases: • • • They are bulky and over-sized. the process is done such that all the steps are taken simultaneously. nearly. inventory of material used to pile up. provisions are made so that all the parts of a product are kept together.Thus JIT system benefits in two ways:• By reducing the ordering cost. in order to avoid all these problems. While manufacturing switchboards. the Final Assembly Department informs it to Packing and Purchase . at each and every stage of manufacturing/production in the plant. All the finished goods need to be packed in wooden packing cases (also known as crate packing cases). They have storing constraints. So. the different parts used to lie scattered here and there. earlier. Procurement of packing cases is another good example of implementation of JIT concept in CEASE FIRE . Stores Department and Fabrication Departments are the main users of this technique. After implementation of JIT. what best can be done is – as soon as the material is about to complete. This is attempted by locating inventories supplies in convenient locations. This is attempted by developing a strong relationship with suppliers and setting up restocking strategies that cut time. • By reducing the safety stock . So. Moreover. Practical Implementation Just-in-time is implemented. one part of the whole manufacturing was done and than other steps took place. for an order of say 1000 items in three months period. Dryness of wood up to a specific point is allowed (if the wood gets drier. Also.

workstations located along production lines only produce/deliver desired components when they receive a card and an empty container. RECOMMENDATIONS: • All the workers. Ban. Kanban System The Japanese refer to Kanban as a simple parts-movement system that depends on cards and boxes/containers to take parts from one work station to another on a production line. Kanban stands for Kan. The essence of the Kanban concept is that a supplier or the warehouse should only deliver components to the production line as and when they are needed. Any kind of idle time should not be allowed.signal. right amount of material should pass from one stage to the other. Another point that must be kept in mind is that.Department. In addition. There is no need to pile-up materials. which are not going to be used immediately. must be given proper training regarding the practical implementation of JIT. • • Any sort of delay between any two processes should be minimized as far as possible. In case of line interruptions. each work-station will only produce enough components to fill the container and then stop. indicating that more parts will be needed in production. especially those who are working in Fabrication Department. Stores Department and Purchase Department. Within this system. packing and Purchase Department gets ready with their wooden packing materials. just-in-time as the finished goods are received by them. so that there is no storage in the production area.card. Kanban limits the amount of . Now.

the production or delivery of components are pulled to the production line. Figure 8 :. The Kanban method described here appears to be very simple. this is a "visual record" procedure.inventory in the process by acting as an authorization to produce more inventory.Kanban System Advantages of Kanban Process • • • • • • A simple and understandable process Provides quick and precise information Low costs associated with the transfer of information Provides quick response to changes Limit of over-capacity in processes Avoids overproduction . Since Kanban is a chain process in which orders flow from one process to another. However. In contrast to the traditional forecast oriented method where parts are pushed to the line.

• • •

Is minimizing waste Control can be maintained Delegates responsibility to line workers

"Kanban represents an efficient tool to continuously rationalize the production process and find the source of problems". Since the circulation of Kanban will stop if there is a production problem on line, it is easy to both spot and correct the problem instantaneously.

PRACTICAL IMPLEMENTATION:
Kanban is implemented in Stores Department at CEASE FIRE Faridabad. For this, a Kanban card is attached with each and every item present in the Stores Department. Each Kanban carries all the relevant information about the item, which is useful in estimating its requirements. A typical Kanban card bears following information:

CAT NO.:......................................................................................... DESCRIPTION:.............................................................................. INITIATOR:.................................................................................... BUYER:........................................................................................... CONSUMPTION:........................................................................... MAXIMUM LEVEL:...................................................................... MINIMUM LEVEL:........................................................................ REORDER LEVEL:........................................................................ Figure 4 – Kanban Card

RECOMMENDATIONS:
• • CAT numbers should be different, that is no two CAT numbers should be same. To make it more effective, no one should be permitted to take material out of or to put back the material in the bin unless and until he has updated the entries on the Kanban card. • • The data mentioned on the card attached with each bin should be updated as soon as some material is issued from that bin. Reorder level should always be kept in mind so that as soon as that point is reached, the bin should again be filled with the same material up to its optimum capacity.

KaiZen
KAIZEN: For continuous improvement: Kaizen literally stands for ‘Kai’-change and ‘Zen’-to become good. The Kaizen philosophy lies behind many Japanese management concepts such as Total Quality Control, Quality Control Circles, small group activities, labor relations, etc. Kaizen is based on a Five-S framework: a. Seiri - Tidiness b. Seiton - Orderliness c. Seiso - Cleanliness d. Seiketsu - Standardized clean-up

e. Shitsuke - Discipline Key elements of Kaizen are: • • • • • • • Quality - Quality circles Effort - Suggestion for improvement Teamwork - Involvement of all employees Willingness - To change Communication Improved morale Personal discipline

The Kaizen method of continuous incremental improvements is an originally Japanese management concept for incremental change. The Kaizen cycle has four steps: • • • • Establishing a plan to change whatever needs to be improved Carrying out changes on a small scale Observing the results Evaluating both the results and the process and determining what has been learned

BENEFITS OF KAIZEN:
a. It improves safety. b. It improves efficiency of workers as well as the whole plant. c. It improves the dedication of the employees as it keeps them safe from any kind of mishap. d. It makes the plant well-organized. PRACTICAL IMPLEMENTATION:

there are many big and small changes made. separate parking bays for keeping trolleys. Once. and as far as possible. Apart from this. pathways.There is a Gang Punching Machine in the fabrication department. This ensured the safety of the employees working at the machine. posters to provide information to employees regarding their safety. • Another point that must be kept in mind is that Kaizen need not be a big change. Creating flow exposes inefficiencies that demand immediate solutions. RECOMMENDATIONS: • • It should be checked that all the Kaizen principles followed are being implemented properly. To avoid any further mishaps. and shortest delivery time. Everyone concerned is motivated to fix the problems and inefficiencies because the plant will shut down if they don't. a worker accidentally cut his fingers in the process of Gang Punching. to be punched. lowest cost. like inclusion of stools to help workers in cutting sheets. it had a manual system for moving the sheet. Flow means that a customer order triggers the process of obtaining the raw materials . Employees should be asked to implement Kaizen principle on their own and their valuable suggestions should be kept in mind. inside the machine and simultaneously moving a knob. companies have to create continuous flow wherever applicable. should be implemented. to big changes like replacing a number of old machines with a multitasking/many-in-one machine Single piece flow system To become lean. a wooden block was placed in the machine which could be pushed to move sheets inside the machine and the need for pushing the sheet inside the machine by hand was avoided. Earlier. etc. it can be as small as keeping a chart of most frequently used telephone numbers near your desk. Shortening the elapsed time from raw materials to finished goods leads to the best quality.

Every operator is an inspector and works to fix any problems in station before passing them on.needed just for that customer's order. The whole process should take a few hours or days. A computerized design is made by using various kinds of programming softwares available with the plant. The production process starts with planning. Various steps involved in production of any item at CEASE FIRE FSW plant. So. Thus. Finally. the punching process on metal sheets and other items starts followed by bending and drilling/tapping. . where it is decided what is to be produced in the next one month or so. which flow immediately to a plant. the layout of company should be such that all these processes should be done in a continuous manner Advantages of single piece flow system Quality. where workers assemble the order. different parts are assembled together to get theproduct as desired by the customer. But if defects do get missed and passed on. The raw materials then flow immediately to supplier plants. we can quickly see who is too busy and who is idle. and is held responsible for his part in the production process. a blue-print of the products is made in the programming stage. painting of different parts takes place. Higher Productivity. Now. Every second step acts as a customer to the previous step. It is easy to calculate the value-added work and then figure out how many people are needed to reach a certain production rate. After this. It is much easier to build in quality in one-piece flow. powder coating is done. In a one-piece-flow cell. A problem/delay at any one or more of the steps will lead to a halt in the production process. each and every employee involved at different stages of the production process is thoroughly trained. rather than a few weeks or months. There are. After that. and then the completed order flows immediately to the customer. they will be detected very quickly and the problem can be immediately diagnosed and corrected. Each step depends on its immediate predecessor for performing its function. where workers immediately fill the order with components. To make the product attractive and easy-to-use.

CASH MANAGEMENT Cash is the most liquid current asset. Instead of relying on reports to run a plant or company. However. This clearly underlines the significance and essence of cash management. whether its a factory or a store. it’s not only the money in hand or bank. i. Here the supplier is asked to open their stores or warehouses within the premises of company and as and when the material is required an order is placed to the supplier and the suppliers of the godown deliver the goods to the company with the copy of invoice.e. virtual storage helps to receive timely delivery of inventory as the goods are lying in the godown and are issued as and when required.Gemba Walking Gemba means Actual Place. this practice is not followed in CEASE FIRE . Virtual Storage This is another technique of effective inventory management. the manager should put on some walking shoes and "go and see" at the "actual place". This Practice is also followed in CEASE FIRE . So. Cash can be defined in many ways. inventory and receivables get eventually converted into cash. Cash includes: • Currency . it is much more than that. It is the common denominator to which all current assets can be reduced because the other major liquid assets.

Since this balance can not be utilized by the firms for transaction purposes. The major reasons of keeping cash are: • Transaction motive – this refers to the holding of cash to meet routine cash requirements • Precautionary motive – these refer to the cash balances held in reserve for random and unforeseen fluctuations in cash flows • Speculative motive – it refers to the desire of a firm to take advantage of opportunities which present themselves at unexpected moments • Compensating motive – usually banks ask clients to maintain a minimum balance of cash with them (bank). as and when needed. of all types. the banks themselves can use the amount to earn a return. OBJECTIVES OF CASH MANAGEMENT: . acts as a reserve pool of liquidity that provides cash quickly. They also provide a short-term investment outlet for excess cash and are also useful for meeting planned outflows of funds. Such balances are compensating balances.• • • • • Cheques Drafts Demand deposits Marketable securities Time deposits NEED OF CASH: Cash.

it has no earning power.The basic objectives of cash management can be classified majorly in the following three types: a. cash does not earn any return. without earning anything. To minimize funds committed to cash balances – this is important as cash which is lying idle is of no use to the firm c. That is. in fact it keeps depreciating with time. To prevent insolvency or bankruptcy arising out of inability of a firm to meet its obligations. Depreciation cost . c. COST OF HOLDING CASH: Cash management has some costs associated with it. To meet the cash disbursement needs (payment schedule) – these include payments to vendors as well as salaries to employees etc. b. It leads to a strong credit rating f. The relationship with bank is not strained. To synchronize inflows and outflows of cash – an excess of either inflow or outflow may be detrimental to the growth of the company. It helps in fostering good relations with trade creditors and suppliers of raw materials. b. BENEFITS OF CASH MANAGEMENT: Some of the major benefits of cash management are: a. d. No earning power . A cash discount can be availed if payment is made within the due date e.Irrespective of the form in which cash is held as an asset.Cash keeps lying idle. as prompt payment may help their own cash management. To take advantage of favorable business opportunities that may be .

available periodically g.) Cash is the most liquid current asset. The firm can meet unanticipated cash expenditure within a minimum of strain during emergencies (strikes. Cash Budget Cash budget basically incorporates estimates of future inflows and outflows f cash over a projected short period of time which may usually be a year . While the proportion of assets held in the form of cash is very small. The main sources for these flows are given hereunder: . fire. week or even on daily basis. its efficient management is crucial to the solvency of the business. It is of vital importance to the daily operations of business. Cash budgeting is a useful device for this purpose. Effective cash management is facilitated if he cash budget is further broken down into month. There are two components of cash budget (i) cash inflows and (ii) cash outflows. new market strategy by competitor etc. Therefore. planning cash and controlling its use are very important tasks.half or a quarter year.

Cash Outflows (a) Cash purchases (b) Cash payment to creditors (c) Cash payment for other revenue expenditure (d) Cash payment for assets creation (e) Cash payment for withdrawals. A suggestive format for ‘Cash Budget’ is given below: Cash Budget of M/s… Particulars January March Estimated cash inflows ---------------------Months Feburary . etc (d) Cash receipt of other revenue income (e) Cash received from sale of investments or assets. deposits.Cash Inflows (a) Cash sales (b) Cash received from debtors (c) Cash received from loans. taxes (f) Repayment of loans. etc.

the collections and disbursals of all the locations are recorded and the cash is kept at one central location as it is quite cumbersome for an organization to maintain records of collection and disbursals of cash of its different offices.I. Opening cash balance IV. Total cash outflows III. Sweeping Facility Rather than keeping cash at different locations. and is certainly a waste of work force. Estimated excesses or shortfall ofcash (V–VI) How CEASE FIRE Manages its cash? Managing cash is very essential for the business since it is crucial for solvency of business. CEASE FIRE uses various techniques to manage its cash operations. Minimum level of cash Balance VII. Total cash inflows Estimated cash outflows ---------------------II. . It also involves a number of extra personnel. Add/Deduct surplus/Deficit during the month (I–II) V. Closing cash balance (III–IV) VI.

BENEFITS OF SWEEPING FACILITY: It’s a win-win situation for both – the company and the bank. Gets a chance to negotiate with the bank over the interest rate which CEASE FIRE is supposed to pay to the bank. This huge sum can be invested in business also. Bank charges the company according to the services rendered by it. Also. Benefits for the company: a. Mumbai. Moreover. For this a suitable multi-locational bank is selected. Powai and all other places where CEASE FIRE offices are located and also because it has the facility of Central Banking. Both of the parties are benefited by this technique. having central banking facility. where it can be invested to earn some profit. because it is simply lying idle. especially in Delhi. which is a prerequisite for a bank to offer such service. Bank can use these funds for its daily business purposes. it will definitely amount to a huge sum. which has branches in all the locations where the different offices of the company are located. b. which will again prove to be profitable. This huge sum will make it easier for the company to negotiate with the bank regarding the interest rate which CEASE FIRE is supposed to pay for availing such facility. For this purpose CEASE FIRE has selected Standard Chartered Bank because of its intensive reach in nearly each and every corner of the country. Benefits for the bank: a. b. the money lying scattered with various offices is of no use as such. PRACTICAL IMPLEMENTATION: Sweeping Facility service is a prominent tool used for proper cash management at CEASE FIRE . . preferably the one. A better option will be to deposit this cash into a bank.time and money. if all the money is kept at one place.

as and when a center in any particular region requires some money. Conclusion The objective of working capital management is to maintain the optimum balance of each of the working capital components. This includes making sure that funds are held as cash in bank deposits for as long as and in the largest amounts possible. Mumbai. such cash may more appropriately be "invested" in other assets or in reducing other liabilities. All the offices are allowed to make cash collection and disbursals through a common bank account of CEASE FIRE at Standard chartered Bank. RECOMMENDATIONS: Now-a-days most of the banks provide central banking facility. Later. However. its location and interest rate etc are made at the Head Office of CEASE FIRE – Treasury Department. Now. it withdraws the same with the bank . the bank receives the same amount from the central account of CEASE FIRE . so the main criterion of selection of bank should be the interest rate it is charging for rendering such services (it should be as low as possible. based on the past experience or on the basis of current business transactions daily cash flows are estimated i.e. Day Light Limit Every Branch of CEASE FIRE maintains two accounts one having the sweeping facility and one not having. Here. This day light limit is used where sweeping facility is not available. how much cash inflow will be there and how much cash outflow will be there and based on this estimation that much amount is maintained in the account.What happens is – all the money is deposited in one account. . thereby maximising the interest earned. All the financial decisions regarding the selection of bank. CEASE FIRE Mumbai.

Furthermore. For example. departments need to recognise that each department has a unique mix of working capital components. . some departments have significant inventory levels.When considering these techniques and strategies of Working capital. working capital management is not an end in itself. others have little if any inventory. The needs of efficient working capital management must be considered in relation to other aspects of the department's financial and nonfinancial performance. The emphasis that needs to be placed on each component varies according to department. It is an integral part of the department's overall management.

K.com www.com.Cease fire .Refrences i. M. Rustogi. Pandey I.. Y. iii. ‘Financial Management’. ‘Financial Management’. ii. New Delhi. Tata McGraw Hill. ‘Financial Management’.. M. R. and Jain P. 2004. Galgotia Publishing House. Vikas Publishing House Pvt Ltd.google. . v. . Costs Khan. 2005.2006 www. P. iv.. New Delhi. New Delhi.

Sign up to vote on this title
UsefulNot useful