A REPORT

ON

“WORKING CAPITAL MANAGEMENT IN

EMBIZON TECHNOLOGIES”

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 TABLE OF CONTENTS

1. Introduction
 The problems
 Purpose of study
 Research methodology
 Limitations
2. Embizon technologies
3. Embizon Ttechnologies – An Overview
4. Conceptual Framework
 Introduction to Working Capital Management
 Significance of working capital management
 Liquidity vs Profitability: Risk – Return trade off
 Classification of working capital
 Types of working capital needs
 Financing of working capital
 Factors determining working capital requirements
 Working capital cycle
 Sources of working capital
 Working capital position
 Inventory management
 Cash management
 Managing payables (Creditors)
 Working capital & short-term financing

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5. Analysis
 Industry analysis
 Concluding analysis
 Suggestions and recommendations
 Bibliography

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 INTRODUCTION:

The project undertaken is on “WORKING CAPITAL MANAGEMENT IN

EMBIZON TECHNOLOGIES”.
It describes about how the company manages its working capital and the various
steps that are required in the management of working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the

company's ability to fund operations, reinvest and meet capital requirements and
payments. Understanding a company's cash flow health is essential to making
investment decisions. A good way to judge a company's cash flow prospects is
to look at its working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations
or, more specifically, for financing the conversion of raw materials into finished
goods, which the company sells for payment. Among the most important items
of working capital are levels of inventory, accounts receivable, and accounts
payable. Analysts look at these items for signs of a company's efficiency and
financial strength.
The working capital is an important yardstick to measure the company’s
operational and financial efficiency. Any company should have a right amount
of cash and lines of credit for its business needs at all times.

This project describes how the management of working capital takes place at

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Embizon Technologies.

THE PROBLEMS

In the management of working capital, the firm is faced with two key problems:

1. First, given the level of sales and the relevant cost considerations, what are the
optimal amounts of cash, accounts receivable and inventories that a firm should
choose to maintain?
2. Second, given these optimal amounts, what is the most economical way to
finance these working capital investments? To produce the best possible
results, firms should keep no unproductive assets and should finance with the
cheapest available sources of funds. Why? In general, it is quite advantageous
for the firm to invest in short term assets and to finance short-term liabilities.

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 PURPOSE OF STUDY

The objectives of this project were mainly to study the inventory, cash and
receivable at Embizon Technologies Ltd., but there are some more and they
are -

The main purpose of our study is to render a better understanding of

the concept “Working Capital Management”.

To understand the planning and management of working capital at

Embizon Technologies Ltd.
To measure the financial soundness of the company by analyzing various
ratios.
To suggest ways for better management and control of working capital at
the concern.

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 RESEARCH METHODOLOGY

This project requires a detailed understanding of the concept –

“Working Capital Management”. Therefore, firstly we need to have a
clear idea of what is working capital, how it is managed in Embizon
Technologies, what are the different ways in which the financing of
working capital is done in the company.

The management of working capital involves managing inventories,

accounts receivable and payable and cash. Therefore one also needs to
have a sound knowledge about cash management, inventory management
and receivables management.

Then comes the financing of working capital requirement, i.e. how the
working capital is financed, what are the various sources through which it
is done.
And, in the end, suggestions and recommendations on ways for better
management and control of working capital are provided.

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 LIMITATIONS OF THE STUDY:

We cannot do comparisons with other companies unless and until

we have the data of other companies on the same subject.
Only the printed data about the company will be available and not
the back–end details.
Future plans of the company will not be disclosed to the trainees.
Lastly, due to shortage of time it is not possible to cover all the
factors and details regarding the subject of study.
The latest financial data could not be reported as the company’s
websites have not been updated.

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 EMBIZON TECHNOLOGIES:

Experienced in providing printed circuit board design

and product consultancy services to companies throughout the
India and Abroad. Our clients appreciate the knowledge,
expertise and quality we bring on the table.
We have earned customer appriciation and pat on back for
delivering professionally engineered solutions across many
market sectors and technologies, with a proactive and cost-
effective approach.
Embizon Technologies extensive experience in designing
PCBs for all types of applications, including the latest PCI
and DDR technologies. We can satisfy all your requirements
for high-speed digital, analog, RF, backplane, flexi-rigid, high
frequency RF Antenna and other high technology designs.

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 EMBIZON TECHNOLOGIES LIMITED

AN OVERVIEW ABOUT THE COMPANY

VISION:

Our vision is to become a recognized leader in delivering highest

Quality PCB Engineering Solutions, Products and Services to our

customers. We believe Happy and Satisfied Customers with the

services are the secret to our success

MISSION STATEMENT:

Through human ingenuity and technology, our mission is to provide

world-class engineering solutions, in a timely and cost-effective
manner to our clients and their customers.

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 CORE VALUES:

 Nothing transforms life like education.

 We shall honor all commitments
 We shall be committed to Quality, Innovation and Growth in every
endeavor
 We shall be responsible corporate citizens

QUALITY POLICY:

"We shall deliver defect-free products, services and solutions to meet

the requirements of our external and internal customers, the first time,
every time."

OBJECTIVES:

 MANAGEMENT OBJECTIVES –
To fuel initiative and foster activity by allowing individuals,
freedom of action and innovation in attaining defined
objectives.

 PEOPLE OBJECTIVES –

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 To help people in Embizon Technologies Ltd., share
company’s success, which they make possible; to provide
job security based on their performance; to
recognize their individual achievements; and help them gain a
sense of satisfaction and accomplishment from their work.

WORKING CAPITAL MANAGEMENT

CONCEPTUAL FRAMEWORK

INTRODUCTION TO WORKING CAPITAL

“Working Capital is the Life-Blood and Controlling Nerve Center of a

business”

The working capital management precisely refers to management of

current assets. A firm’s working capital consists of its investment in
current assets, which include short-term assets such as:

Cash and bank balance,

Inventories,
Receivables (including debtors and bills),

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 Marketable securities.

Working capital is commonly defined as the difference between current assets

and current liabilities.

WORKING CAPITAL = CURRENT ASSETS-CURRENT LIABILITIES

There are two major concepts of working capital:

Gross working capital

Net working capital

Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets,
which can be converted into cash with in a financial year. The gross working
capital points to the need of arranging funds to finance current assets.

Net working capital:

It refers to the difference between current assets and current liabilities. Net
working capital can be positive or negative. A positive net working capital

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 will arise when current assets exceed current liabilities. And vice-versa for
negative net working capital. Net working capital is a qualitative concept. It
indicates the liquidity position of the firm and suggests the extent to which
working capital needs may be financed by permanent sources of funds. Net
working capital also covers the question of judicious mix of long-term and
short-term funds for financing current assets.

Significance Of Working Capital Management

The management of working capital is important for several reasons:

For one thing, the current assets of a typical manufacturing firm account for
half of its total assets. For a distribution company, they account for even
more.

Working capital requires continuous day to day supervision. Working

capital has the effect on company's risk, return and share prices,

There is an inevitable relationship between sales growth and the level of

current assets. The target sales level can be achieved only if supported by
adequate working capital Inefficient working capital management may lead
to insolvency of the firm if it is not in a position to meet its liabilities and
commitments.

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 LIQUIDITY VS PROFITABILITY: RISK - RETURN
TRADE OFF

Another important aspect of a working capital policy is to maintain and

provide sufficient liquidity to the firm. Like the most corporate financial
decisions, the decision on how much working capital be maintained
involves a trade off- having a large net working capital may reduce the
liquidity risk faced by a firm, but it can have a negative effect on the
cash flows. Therefore, the net effect on the value of the firm should be
used to determine the optimal amount of working capital.

Sound working capital involves two fundamental decisions for the firm.
They are the determination of:

The optimal level of investments in current assets.

The appropriate mix of short-term and long-term financing used to
support this investment in current assets, a firm should decide
whether or not it should use short-term financing. If short-term
financing has to be used, the firm must determine its portion in total
financing. Short-term financing may be preferred over long-term
financing for two reasons:
The cost advantage
Flexibility

But short-term financing is more risky than long-term financing.

Following table will summarize our discussion of short-term versus
long-term financing.

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Maintaining a policy of short term financing for short term or temporary
assets needs (Box 1) and long- term financing for long term or
permanent assets needs (Box 3) would comprise a set of moderate risk –
profitability strategies. But what one gains by following alternative
strategies (like by box 2 or box 4) needs to weighed against what you
give up.

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 CLASSIFICATION OF WORKING CAPITAL

Working capital can be classified as follows:

On the basis of time

On the basis of concept

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 TYPES OF WORKING CAPITAL NEEDS

Another important aspect of working capital management is to analyze

the total working capital needs of the firm in order to find out the
permanent and temporary working capital. Working capital is required
because of existence of operating cycle. The lengthier the operating
cycle, greater would be the need for working capital. The operating
cycle is a continuous process and therefore, the working capital is
needed constantly and regularly. However, the magnitude and quantum
of working capital required will not be same all the times, rather it will
fluctuate.

The need for current assets tends to shift over time. Some of these
changes reflect permanent changes in the firm as is the case when the
inventory and receivables increases as the firm grows and the sales
become higher and higher. Other changes are seasonal, as is the case
with increased inventory required for a particular festival season. Still
others are random reflecting the uncertainty associated with growth in
sales due to firm's specific or general economic factors.

The working capital needs can be bifurcated as:

Permanent working capital

Temporary working capital

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Permanent working capital:

There is always a minimum level of working capital, which is

continuously required by a firm in order to maintain its activities. Every
firm must have a minimum of cash, stock and other current assets, this
minimum level of current assets, which must be maintained by any firm
all the times, is known as permanent working capital for that firm. This
amount of working capital is constantly and regularly required in the
same way as fixed assets are required. So, it may also be called fixed
working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is
temporary, fluctuating or variable working capital. The position of the
required working capital is needed to meet fluctuations in demand
consequent upon changes in production and sales as a result of seasonal
changes.

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The permanent level is constant while the temporary working capital is
fluctuating increasing and decreasing in accordance with seasonal
demands as shown in the figure.

In the case of an expanding firm, the permanent working capital line

may not be horizontal. This is because the demand for permanent
current assets might be increasing (or decreasing) to support a rising
level of activity. In that case line would be rising.

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 FINANCING OF WORKING CAPITAL

There are two types of working capital requirements as discussed above.

They are:

Permanent or Fixed Working Capital requirements

Temporary or Variable Working Capital requirements

Therefore, to finance either of these two working capital requirements,

we have long-term as well as short-term sources.

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 FACTORS DETERMINING WORKING CAPITAL
REQUIREMENTS

There are many factors that determine working capital needs of an

enterprise. Some of these factors are explained below:

 Nature or Character of Business.

The working capital requirement of a firm is closely related to the
nature of its business. A service firm, like an electricity
undertaking or a transport corporation, which has a short
operating cycle and which sells predominantly on cash basis, has
a modest working capital requirement. Oh the other hand, a
manufacturing concern like a machine tools unit, which has a
long operating cycle and which sells largely on credit, has a very
substantial working capital requirement.
Sintech is a manufacturing concern so this requires them to keep a
very sizeable amount in working capital.

 Size of Business/Scale of Operations.

Sintech has a good position in its segment and they are also spending their operations in
the domestic market as well as in foreign market. The scale of operations and the size it
holds in the market makes it a must for them to hold their inventory and current asset at a
huge level.

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  Rate of Growth of Business.
The rate of growth of sales indicates a need for increase in the
working capital requirements of the firm. As the firm is projected
to increase their sales by 69% from what it was in 2009, it is
required to guard them against the increasing requirements of the
net current asset by way of efficient working capital management.
The sales and projected sales level determine the investment in
inventories and receivables.

 Price Level Changes.

Changes in the price level also affect the working capital
requirements. It was the reduced margins in the price of the raw
materials that had prompted them to go for bulk purchases thus
making on additions to their net current assets. They might have
gone for this large-scale procurement for availing discounts and
anticipating a rise in prices, which would have meant that more
funds are required to maintain the same current assets.

WORKING CAPITAL CYCL

The upper portion of the diagram above shows in a simplified form the
chain of events in a manufacturing firm. Each of the boxes in the upper
part of the diagram can be seen as a tank through which funds flow.
These tanks, which are concerned with day-to-day activities, have funds
constantly flowing into and out of them.

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 The chain starts with the firm buying raw materials on credit.
In due course this stock will be used in production, work will be
carried out on the stock, and it will become part of the firm’s work-
in-progress.
Work will continue on the WIP until it eventually emerges as the
finished product.
As production progresses, labor costs and overheads need have to
be met.
Of course at some stage trade creditors will need to be paid.
When the finished goods are sold on credit, debtors are increased.
They will eventually pay, so that cash will be injected into the firm.

Each of the areas- Stock (raw materials, WIP, and finished goods), trade
debtors, cash (positive or negative) and trade creditors – can be viewed as
tanks into and from which funds flow.

Working capital is clearly not the only aspect of a business that affects
the amount of cash.

The business will have to make payments to government for

taxation.
Fixed assets will be purchased and sold
Lessors of fixed assets will be paid their rent
Shareholders (existing or new) may provide new funds in the form
of cash
Some shares may be redeemed for cash
Dividends may be paid

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 Long-term loan creditors (existing or new) may provide loan
finance, loans will need to be repaid from time-to-time, and
Interest obligations will have to be met by the business

Unlike, movements in the working capital items, most of these ‘non-

working capital’ cash transactions are not every day events. Some of
them are annual events (e.g. tax payments, lease payments, dividends,
interest and, possibly, fixed asset purchases and sales). Others (e.g. new
equity and loan finance and redemption of old equity and loan finance)
would typically be rarer events.

SOURCES OF WORKING CAPITAL

Embizon Technologies has the following sources available for the

fulfillment of its working capital requirements in order to carry on its
operations smoothly:

Banks:
These include the following banks –
State Bank of India
Canara Bank
HDFC Bank Ltd.
ICICI Bank Ltd.
Societe Generale
Standard Chartered Bank
State Bank of Patiala
State Bank of Saurashtra

Commercial Papers:
Commercial Papers have become an important tool for
financing working capital requirements of a company.
Commercial Paper is an unsecured promissory note issued
by the company to raise short-term funds. The buyers of the
commercial paper include banks, insurance companies, unit

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trusts, and companies with surplus funds to invest for a short
period with minimum risk.
EMBIZON issues Commercial Papers and had 4000
commercial papers in the year 2006.

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INVENTORY MANAGEMENT

Inventories
Inventories constitute the most important part of the current assets of
large majority of companies. On an average the inventories are
approximately 60% of the current assets in public limited companies in
India. Because of the large size of inventories maintained by the firms, a
considerable amount of funds is committed to them. It is therefore,
imperative to manage the inventories efficiently and effectively in order
to avoid unnecessary investment.

Nature of Inventories

Inventories are stock of the product of the company is manufacturing for

sale and components make up of the product. The various forms of the
inventories in the manufacturing companies are:

Raw Material: It is the basic input that is converted into the

finished product through the manufacturing process. Raw materials
are those units which have been purchased and stored for future
production.
Work-in-progress: Inventories are semi-manufactured products.
They represent product that need more work they become finished
products for sale.
Finished Goods: Inventories are those completely manufactured
products which are ready for sale. Stocks of raw materials and
work-in-progress facilitate production, while stock of finished
goods is required for smooth marketing operations. Thus,
inventories serve as a link between the production and
consumption of goods.

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Inventory Management Techniques

In managing inventories, the firm’s objective should be to be in

consonance with the shareholder wealth maximization principle. To
achieve this, the firm should determine the optimum level of inventory.
Efficiently controlled inventories make the firm flexible. Inefficient
inventory control results in unbalanced inventory and inflexibility-the
firm may sometimes run out of stock and sometimes pile up unnecessary
stocks.

Economic Order Quantity (EOQ): The major problem to be

resolved is how much the inventory should be added when
inventory is replenished. If the firm is buying raw materials, it has
to decide lots in which it has to purchase on replenishment. If the
firm is planning a production run, the issue is how much
production to schedule. These problems are called order quantity
problems, and the task of the firm is to determine the optimum or
economic lot size. Determine an optimum level involves two types
of costs:-
 Ordering Costs: This term is used in case of raw material
and includes all the cost of acquiring raw material. They
include the costs incurred in the following activities:
 Requisition
 Purchase Ordering
 Transporting
 Receiving
 Inspecting
 Storing

Ordering cost increase with the number of orders placed;

thus the more frequently inventory is acquired, the higher the
firm’s ordering costs. On the other hand, if the firm
maintains large inventory’s level, there will be few orders
placed and ordering costs will be relatively small. Thus,
ordering costs decrease with the increasing size of inventory.

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  Carrying Costs: Costs are incurred for maintaining a given
level of inventory are called carrying costs. These include
the following activities:
 Warehousing Cost
 Handling
 Administrative cost
 Insurance
 Deterioration and obsolescence

Carrying costs are varying with inventory size. This

behavior is contrary to that of ordering costs which decline
with increase in inventory size. The economic size of
inventory would thus depend on trade-off between carrying
costs and ordering cost.

The increasing component of raw materials in inventory is due to

the fact that the company has gone for bulk purchases and has
increased consumption due to a fall in prices and reduced margins
for the year. Another reason might be the increasing sales, which
might have induced them to purchase more in anticipation of a
further increase in demand of the product. And the low
composition of work-in-progress is understandable as because of
the nature of the business firm is involved in.

To the question as to whether the increasing costs in inventory are

justified by the returns from it the answer could be found in the
EMBIZON retail expansion. EMBIZON caters to the need of the
two separate segments:

a) Institutions for which they manufacture against orders and,

b) Retail segment of the market.

They are more into retail than earlier and at present more than 650
retail outlets branded with EMBIZON sign ages and more are in
the pipeline

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 The company in order to meet its raw materials requirements could
have gone for frequent purchases, which would have resulted in
lesser cash flows for the firm rather than the high expenditure
involved when procuring in at bulk. The reason why the firm has
gone for these bulk purchases because of the lower margins and the
discounts it availed because of procuring in bulk quantities.

A negative growth in WIP could be because:

a) The time taken to convert raw materials to finished goods is

very minimal
b) This is also due to capacity being not utilized at the
optimum.

ABC System: ABC system of inventory keeping is followed in

the factories. Various items are categorized into three different
levels in the order of their importance. For e.g. items such as
memory, high capacity processors and royalty are placed in the
‘A’ category. Large number of firms has to maintain several types
of inventories. It is not desirable the same degree of control all the
items. The firm should pay maximum attention to those items
whose value is highest. The firm should therefore, classify
inventories to identify which items should receive the most effort
in controlling. The firm should be selective in approach to control
investment in various types of inventories. This analytical
approach is called “ABC Analysis”. The high-value items are
classified as “A items” and would be under tightest control. “C
items” represent relatively least value and would require simple
control. “ B items” fall in between the two categories and require
reasonable attention of management.
JIT: The relevance of JIT in EMBIZON Info system can be questioned.
This is because they procure materials on the basis of projections made at
least two or three months before. Even at the time of procurement they
ensure that they procure much more than what actually is required by the
firm that is they hold significant amount of inventory as safety stock. This
is done to counter the threat involved in default and accidental
breakdowns. The levels of safety stock usually vary according to the
usage.

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 CASH MANAGEMENT
SOURCES OF CASH:

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 shareholders
Bank overdrafts or lines 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 e.g. offering high discounts
for early cash payment
Bank overdraft exceeds authorized limit.
Seeking greater overdrafts or lines of credit
Part-paying suppliers or other creditors
Paying bills in cash to secure additional supplies
Management pre-occupation with surviving rather than managing
Frequent short-term emergency requests to the bank (to help pay
wages, pending receipt of a cheque).

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 CASH MANAGEMENT IN EMBIZON TECHNOLOGIES:

The cash management system followed by the Embizon Technologies

is mainly lock box system.

Cash Management System involves the following steps:

1. The branch offices of the company at various locations hold the

collection of cheques of the customers.
2. Those cheques are either handed over to the CMS agencies or bank
of the particular location take charge of whole collection.
3. These CMS agencies or bank send those cheques to the clearing
house to make them realized. These cheques can be local or
outstation.
4. The CMS agencies or bank send information to the central hub of
the company regarding realization/cheque bounced.
5. The central hub passes on the realized funds to the company as per
the agreed agreements.
6. The CMS agencies or concerned bank provides the necessary MIS
to the company as per requirement.

In cash management the collect float taken for the cheques to be realized
into cash is irrelevant and non-interfering because banks such as Standard
Chartered, HDFC and CitiBank who give credit on the basis of these
cheques after charging a very small amount. These credits are given to
immediately and the maximum time taken might be just a day. The
amount they charge is very low and this might cover the threat of the
cheque sent in by two or three customers bouncing. Even otherwise the
time taken for the cheques to be processed is instantaneous. Their Cash
Management System is quite efficient.

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 Cash vs. Marketable Securities

The investment in marketable securities rather than having large cash

balances in something that has been given thought for by the firm. This is
because while a firm gets revenue in the form of interests by investments,
it actually has to pays certain amount money to the banks for maintaining
current accounts and fixed deposits usually have a longer maturity period.
That is, the problem with high investments is that the opportunity to earn
is lost, thus a firm has to maintain an optimal cash balance. But the
investment in mutual funds or other marketable securities might create a
problem of investment, as they might not be readily realizable as say
liquid cash or the amount deposited in the current account. The
investments in say fixed assets say may earn a fixed rate of interest but
they have a maturity period attached to them.

In EMBIZON, Standard Chartered is the concentration bank in which all

the inflows from the deposit banks are concentrated and passed on to the
disbursement banks for further disbursement.

Liquid Cash Balance

The liquid cash maintained in the business is only that much as is

required to satisfy the daily requirements of the firm and not more. The
rest of the cash is invested into mutual funds and also held in fixed
deposits and current accounts.

Instruments Used

The instrument used here are primarily cheques comprising of around

97% of what is used in. The rest 2-3% comprise of the letters of credit.

Thus working capital is the lifeline for every business. The main
advantages of sufficient working capital are:

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  It helps in prompt payment
 Ensures high solvency in the company and good credit
standing.
 Regular supply of material and continuous production.
 Ensures regular payment of salaries and wages and day to
day commitments.

RECEIVABLES MANAGEMENT

Cash flow can be significantly enhanced if the amounts owing to a

business are collected faster. Every business needs to know.... who owes
them money.... how much is owed.... how long it is owing.... for what it
is owed.

Late payments erode profits and can lead to bad debts.

Slow payment has a crippling effect on business; in particular on small

businesses whom can least afford it. If you don't manage debtors, they
will begin to manage your business as you will gradually lose control
due to reduced cash flow and, of course, you could experience an
increased incidence of bad debt.

The following measures will help manage your debtors:

1.Have the right mental attitude to the control of credit and make sure
that it gets the priority it deserves.
2.Establish clear credit practices as a matter of company policy.
3.Make sure that these practices are clearly understood by staff,
suppliers and customers.
4.Be professional when accepting new accounts, and especially
largerones.
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 5.Check out each customer thoroughly before you offer credit. Use
credit agencies, bank references, industry sources etc.
6.Establish credit limits for each customer and stick to them.
7.Continuously review these limits when you suspect tough times are
coming or if operating in a volatile sector.
8.Keep very close to your larger customers.
9.Invoice promptly and clearly.

10.Consider charging penalties on overdue accounts.

11.Consider accepting credit /debit cards as a payment option.

12.Monitor your debtor balances and aging schedules, and don't let any
debts get too old.

Recognize that the longer someone owes you, the greater the chance you
will never get paid. If the average age of your debtors is getting longer,
or is already very long, you may need to look for the following possible
defects.

 Poor collection procedures.

 Lax enforcement of credit terms.
 Slow issue of invoices or statements.
 Errors in invoices or statements.
 Customer dissatisfaction.
 Weak credit judgement.

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Debtors due over 90 days (unless within agreed credit terms) should generally
demand immediate attention. Look for the warning signs of a future bad debt.
For example…..

1. Longer credit terms taken with approval, particularly for smaller orders.
2. Use of post-dated checks by debtors who normally settle within agreed
terms.
3. Evidence of customers switching to additional suppliers for the same
goods.
4. New customers who are reluctant to give credit references.
5. Receiving part payments from debtors.

Profits only come from paid sales.

The act of collecting money is one, which most people dislike for many
reasons and therefore put on the long finger because they convince themselves
that there is something more urgent or important that demand their attention
now. There is nothing more important than getting paid for your product or
service. A customer who does not pay is not a customer.

HERE ARE FEW WAYS IN COLLECTING MONEY FROM DEBTORS: -

 Develop appropriate procedures for handling late payments.
 Track and pursue late payers
 Get external help if you own efforts fail.
 Don’t feel guilty asking for money .. its yours and you are entitled to it.
 Make that call now. And keep asking until you get some satisfaction.
 In difficult circumstances, take what you can now and agree terms for the
remainder, it lessens the problem.
 When asking for your money, be hard on the issue – but soft on the person.
Don’t give the debtor any excuses for not paying.
 Make that your objective is to get the money, not to score points or get
even.

COLLECTION POLICIES:

It refers to the collection procedures such as letters, phone calls and other follow
up mechanism to recover the amount due from the customers. It is obvious that
costs are incurred towards the collection efforts, but bad debts as well as
average collection period would decrease. Further, a strict collection policy of
the firm is expensive for the firm because of the high cost is required to be
incurred by the firm and it may also result in loss of goodwill. But at the same
time it minimizes the loss on account of bad debts. Therefore, a firm has to
strike a balance between the cost and benefits associated with collection
policies.

The steps usually followed in collection efforts are:

Sending repeated letters and reminders to the customers

Personal visits
Using agencies involved in collection process
Making telephonic reminders
Initiating legal actions
Real Time Gross Settlement (RTGS)

Real Time Gross Settlement as such is a concept new in nature and though the
firm uses the system with all the members of the consortium, it is still in its
primal stage and will take time before all of the clients of the firm are willing to
accept it. The firm has made a proposal to the consortium of the banks during
appraisal for faster implementation of internet based banking facility by all the
banks and adoption of RTGS payment system through net.

The debtor’s turnover ratio is completely dependent upon the credit policy
followed by the firm. The credit policy followed by the firm should be such that
the threat of bad debts and the default rate involved should be terminated.

That the creditors turnover ratio has declined and payment period has increased
indicate that the company has got a leeway in making the payment to the
creditors by way of increased time.

With creditors they are having pre-agreements and have undertaken

arrangements with them, which they believe to be the best in the business and
these are fixed.

(NOTE: Acceptances are not included in the computation of creditors turnover)

MANAGING PAYABLES (Creditors)

Creditors are a vital part of effective cash management and should be

managed carefully to enhance the cash position.

Purchasing initiates cash outflows and an over-zealous purchasing function

can create liquidity problems.

Consider the following: -

 Who authorizes purchasing in your company - is it tightly managed or

spread among a number of (junior) people?
 Are purchase quantities geared to demand forecasts?
 Do you use order quantities, which take account of stock holding and
 purchasing costs?
 Do you know the cost to the company of carrying stock?
 Do you have alternative sources of supply? If not, get quotes from major
suppliers and shop around for the best discounts, credit terms as it reduces
dependence on a single supplier.
 How many of your suppliers have a return policy?
 Are you in a position to pass on cost increases quickly through price
increases to your customers?
 If a supplier of goods or services lets you down can you charge back the
cost of the delay?
 Can you arrange (with confidence!) to have delivery of supplies staggered
or on a just-in-time basis?

There is an old adage in business that "if you can buy well then you can sell
well". Management of your creditors and suppliers is just as important as the
management of your debtors. It is important to look after your creditors- slow
payment by you may create ill feeling and can signal that your company is
inefficient (or in trouble!).

Remember that a good supplier is someone who will work with you to enhance

the future viability and profitability of your company.

 Financing Current Assets

The firm has to decide about the sources of funds, which can be availed to
make investment in current assets.

Long term financing:

It includes ordinary share capital, preference share capital, debentures, long

term borrowings from financial institutions and reserves and surplus.

Short term financing:

It is for a period less than one year and includes working capital funds from
banks, public deposits, commercial paper etc.

Spontaneous financing:

It refers to automatic sources of short-term funds arising in normal course of

business. There is no explicit cost associated with it. For example, Trade
Credit and Outstanding Expenses etc.

Depending on the mix of short and long term financing, the company can
follow any of the following approaches.

Matching Approach

In this, the firm follows a financial plan, which matches the expected life of
assets with the expected life of source of funds raised to finance assets. When
the firm
follows this approach, long term financing will be used to finance fixed assets
and permanent current assets and short term financing to finance temporary or
variable current assets.

Conservative Approach

In this, the firm finances its permanent assets and also a part of temporary
current assets with long term financing. In the periods when the firm has no
need for temporary current assets, the long-term funds can be invested in
tradable securities to conserve liquidity. In this the firm has less risk of facing
the problem of shortage of funds.

Aggressive Approach

In this, the firm uses more short term financing than warranted by the
matching plan. Under an aggressive plan, the firm finances a part of its current
assets with short term financing.

Relatively more use of short term financing makes the firm more risky.

Current asset to fixed asset ratio:

The financial manager should determine the optimum level of current assets so
that the wealth of shareholders is maximized. A firm needs fixed and current
assets to support a particular level of output
The level of current assets can be measured by relating current assets. Dividing
current assets by fixed assets gives CA/FA ratio. Assuming a constant level of fixed
assets, a higher CA/FA ratio indicates a conservative current assets policy and a lower CA/FA ratio means an
aggressive current assets policy assuming other factors to be constant. A conservative policy i.e. higher
CA/FA ratio implies greater liquidity and lower risk; while an aggressive policy i.e. lower CA/FA ratio indicates

higher risk and poor liquidity. The current assets policy of the most firms may fall
between these two extreme policies. The alternative current assets policies
may be shown with the help of the following figure.

In this figure the most conservative policy is indicated by alternative A, where

as CA/FA ratio is greatest at every level of output. Alternative C is the most

aggressive policy, as CA/FA ratio is lowest at all levels of output. Alternative B

lies between the conservative and aggressive policies and is an average policy.
 WORKING CAPITAL & SHORT-TERM FINANCING

SHORT TERM FINANCING

Other than the investment in current assets, the firm also has to be concerned
with short-term to long-term debt as this plays a very important role in
determining the amount of risk undertaken by the firm. That is, the firm not
only has to be concerned about current assets but also the sources through
which they are financed. A firm before financing in either of the two, has to
take into consideration various aspects. While short term might seem the ideal
way to finance your assets than the long term due to shorter maturity period and
also less of costs are involved, there is an inherent risk in short term financing
due to fluctuating interest rates and due to the reason that the firm might be
unable to ready the amount in a shorter span of time.

Under secured loan cash credit, along with non fund based facilities, foreign
currency term loan from banks are secured by way of hypothecation of stock-in-
trade, book debts as first charge and by way of second chanrge on all the
immovable and movable assets of the parent company. Term loan in Indian
rupees from a bank is subject to a prior charge in favour of company’s bankers
on book debts and stock in trade for working capital facilities.

Here EMBIZON has a major portion of their financing done through short term
financing than long term financing. The preference of short term financing to
long term as such is not the part of any policy employed by the firm but it was
due to the reason that the interest rates in short term were more investor friendly
and the cost involved in them were also low. At present, we can see that the
firm is moving more towards long term financing as the interest terms in the
long term has reduced compared to the short term.
 YEAR- END COMMERCIAL PAPERS

MERITS OF COMMERCIAL PAPERS:

 It is an alternative source of raising short-term finance, and proves to be

handy during periods of tight bank credit.
 It is a cheaper source of finance in comparison to the bank credit.

DEMERITS OF COMMERCIAL PAPERS:

 It is an impersonal method of financing.

 It is always available to the financially sound and highest rated
companies.
 The amount of loanable funds available in the commercial paper market
is limited to the amount of excess liquidity of the various purchasers of
commercial paper.
 ANALYSIS

INDUSTRY ANALYSIS
INDUSTRY STRUCTURE AND DEVELOPMENTS

Over the past decade, the Information Technology (IT) industry

has become one of the fastest growing industries in India,
propelled by exports (the industry accounted for more than a
quarter of India’s services exports in 2004-05). The key
segments that have contributed significantly (96 percent of
total) to the industry’s exports include – Software and services
(IT services) and IT enabled services (ITES) i.e. business
services. Over a period of time, India has established itself
as a preferred global sourcing base in these segments and they
are expected to continue to fuel growth in the future.

CONCLUDING ANAYSIS

The working capital position of the company is sound and the various
sources through which it is funded are optimal.
The company has used its dividend policy, purchasing, financing and
investment decisions to good effect can be seen from the inferences made
earlier in the project.
The debts doubtful have been doubled over the years but their percentage
on the debts has almost become half. This implies a sales and collection
policy that get along with the receivables management of the firm.
The returns have been affected by a marked growth in working capital
and though a 29.75% in 2006 return on investment is good, but it got
reduced as compared to 39.01% return in 2005.
The various ratios calculated are an indicator as to the fact that the
profitability of the firm and sales are on a rise and also the deletion of the
inefficiencies in the working capital management.
The firm has not compromised on profitability despite the high liquidity
is commendable.
Embizon Technologies has reached a position where the default costs are
as low as negligible and where they can readily factor their accounts
receivables for availing finance is noteworthy.
 SUGGESTIONS AND RECOMMENDATIONS

The management of working capital plays a vital role in running of a

successful business. So, things should go with a proper understanding for
managing cash, receivables and inventory.

Embizon Technologies is managing its working capital in a good manner, but

still there is some scope for improvement in its management. This can help the
company in raising its profit level by making less investment in accounts
receivables and stocks etc. This will ultimately improve the efficiency of its
operations. Following are few recommendations given to the company in
achieving its desired objectives:

The business runs successfully with adequate amount of the working

capital but the company should see to it that the cash should not be tied
up in excessive amount of working capital.
Though the present collection system is near perfect, the company as
due to the increasing sales should adopt more effective measures so as
to counter the threat of bad debts.
The over purchasing function should be avoided as it could lead to
liquidity problems.
The investment of cash in marketable securities should be increased, as
it is very profitable for the company.
Holding of excessive and insufficient stock must be avoided as it creates
a burden on the cash resources of a business and results in lost sales,
delays for customers, etc respectively.
 BIBLIOGRAPHY

Following sources have been sought for the preparation of this report:

Corporate Intranet
Financial Statements (Annual Reports)
Direct interaction with the employees of the company
Internet ----www.embizontechnologies.in
Textbooks on financial management -
 I.M.Pandey
 Khan and Jain
 Prasanna Chandra