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CAPSTON PROJECT REPORT ON WORKING CAPITAL MANAGEMENT OF

VARDHMAN

Submitted to Lovely Professional University In partial fulfillment of the requirements for the award of degree of MASTER OF BUSINESS ADMINISTRATION

Submitted by: NEHA VARUN 2020070362

Supervisor: Mrs. Anita soni Lect. (LPU)

DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA (2007-2009) 1

LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT

Certificate of Completion by the Faculty Advisor


TO WHOMSOEVER IT MAY CONCERN
This is to certify that the project carried report out titled by

________________________________________

Mr._________________(student name), S/o or D/o____________(Fathers Name) has been accomplished under my guidance & supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This project is being submitted by him/her in the partial fulfillment of the requirements for the award of the Master of Business Administration from Lovely Professional University. His dissertation represents his original work and is worthy of consideration for the award of the degree of Master of Business Administration. ___________________________________ (Name & Signature of the Faculty Advisor) Title: ______________________________ Dare: ______________________________

Date:

LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT

of Authenticity by Student
DECLARATION

I, "________________________________(student's name), hereby declare that the work presented herein is genuine work done originally by me and has not been published or submitted elsewhere for the requirement of a degree programme. Any literature, data or works done by others and cited within this dissertation has been given due acknowledgement and listed in the reference section.

_______________________ (Student's name & Signature) _______________________ (Registration No.) Date:__________________

ACKNOWLEDGEMENT

Accomplishment of a task with desired success calls for dedication towards


work and prompting guidance, co-operation and deliberation from seniors. This report is the outcome of the capstone project that I did in the Vardhman Polytex Limited, Ludhiana. It gives me immense pleasure to acknowledge my deep sense of gratitude and sincere thanks to Mr. M.S.Arora C.M. (A&C) and to Mr. Rajiender Pal (Executive HRD) for agreeing for the training and to my revered guide Mr. Sanjeev Wadhawan for extending the courtesy and for his guidance, support and affection throughout the course of this work. I am extremely grateful to Mr. Vijay Arora and other faculty members for their valuable guidance and glorious teaching. In last, I express my profound gratefulness and indebtedness to the esteemed organization for granting me the grand privilege of working on a project under team of experts and professionals in the field of finance.

NEHA VARUN

TABLE OF CONTENTS (Part A) 1. Introduction to Vardhman.7 1.1 History...9 1.2 Profile of the company.10 1.3 Company structure......10 1.4 Current setup11 1.5 Present capacities..12 1.6 Computerisation12 1.7 ISO certification13 1.8 Production.13 1.9 Marketing..13 2. Organization structure14 2.1 Manufacturing process16 3. Objectives of the study.17 3.1 Scope of the study.17 4.Review of literature.........18 5. Research methodology.21 5.1 Sources of information21 5.2 Report writing.21 6. Limitations of the study22

Part B
1. Theoretical background of working capital management23 1.1 Meaning23 1.2 Concept.24 1.3 Type of working capital...24 1.4 Need for working capital.....26 1.5 Determinants of working capital28 2.Meaning and Nature of working capital..32 2.1 Major decisions in working capital management32 3.Working capital analysis35 3.1 Operating cycle analysis.35 3.2Ratio analysis.39 4.Cash management..46 5.Recievables management50 6. Management of inventory.59 7. Findings.67 8. Recommendations..68 9. Conclusion..69 10. References70

1.INTRODUCTION TO THE COMPANY 1.1 HISTORY OF THE INDIAN TEXTILE INDUSTRY

The human need is to eat well for to be alive and shelter to protect them from discomforts of nature and a place to live in. Human beings also need something to cover their body to protect from diverse climates and to add the appearance. Earlier there was a time when the human being known nothing about the cloth to wear. The human beings first use plant barks, leaves and animal skin to wrap around them. Then as the development of brain took place, they started to explore other possibilities and invent more in this area. There is constant search for clothing and it led to the knowledge of sources from vegetation i.e. Cotton and from animals i.e. wool, which could be knitted and woven to manufacture clothes to wear. The commercial development of man-made fiber began late in the 19th Century, experienced much growth during the 1940s, expanded rapidly after world War II and in the 1970s was still the subject of extensive Research and Development. Before Independence we talk of the political leaders like Mahatma Gandhi, who had always insisted to use Khadi Clothes and even self-spinning and weaving. It is also called as self-dependence for all needs. Such a good initiatives had come-up at India level amongst the followers of the Leader Mahatma Gandhi. On the other side too such initiatives had been proved very good and had attracted many other western countries to follow such practices and show their excitedness. Though in case we talk of the English rule before the Independence i.e. 1947, it was not appreciated by the English Rulers, but 7

after the freedom these leaders had got very good appreciation particularly for the self spinning and weaving and in an overall manner this sector of Spinning and Weaving was industrialized even after the independence too on the basis of Indian cotton growers. It is needless to mention here that through out India, cotton growers belts are available and after independence even English people take their raw material from here and had established themselves with the Spinning and Weaving industries. Overall In India no such preferences for the Spinning and Weaving industries were made, however the Library research reveals that the first Cotton mill had been established in India during 1854 named as Bombay Spinning and Weaving company This is just the example of the development, that in India too the most modern machinery is being installed. However, it is an evident that the Indian yarn is always running on the development trend since its Inception of first unit in Bombay, but its position in the international market has not appeared so good. The invention and production of man made thirty three fibers that is synthetic fibers like Nylon, Acrylic fibers, Polyester Fiber, Viscose, Filament yarns, Melange yarn, etc., which ultimately had given a good blow to grow for the Cotton Textile Industry and know occupy a major part of consumer acceptance. About 50 countries have been importing such material from India and the description of the Spinning and weaving industry had remained incomplete without referring to the woolen industry.

1.2 PROFILE OF THE GROUP AND UNIT

The industrial city- Ludhiana nestles the corporate Headquarters of the Oswal Group of industries. The Oswal Empire comprises of Anshupati Textiles Limited situated in Ludhiana, Vardhman Polytex Limited situated in Bathinda, Vinayak Textile Mills situated in Ludhiana. Oswal group is earning laurels by exporting yarn of international quality to several countries and VPL Bathinda is an ISO 9001-2000 certified company. BACK DROP: M/s Vardhman Polytex Ltd., a public limited co. set up in the year 1980 is managed by board of directors with Mr. Ashok Oswal as its Chairman cum Managing director since 1987. Over a period of time, the company has grown manifold under the guidance of Mr. Oswal. In1987, when the Company was taken over from Mohtas, it had only 12000 spindles and at present, the capacity has moved up gradually to 108000 Spindles. The group has very good potential and high presence in the textiles industry with well set manufacturing set up for 100% cotton, Polyester cotton, Tyre cord, 100% Acrylic and other blended yarns. All the group units have state of the art technology imported from machinery giant in Europe, Japan, China and many other countries. To ensure quality commitment to its valuable customers, the R&D department is well equipped with latest R&D equipments. Continuous efforts are always being made to further improve the quality and match the industry standard to meet the actual requirements of its quality conscious customers.

1.3 COMPANY STRUCTURE

OSWAL GROUP

VPL BATHIND A

ANSHUPA TI LUDHIAN A

VTM LUDHIAN A

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Anshupati Textiles Limited, based at Ludhiana in Punjab, the worsted spinning units in the Indian subcontinent with 8000 worsted spindles installed, manufactures the Machine Knitting Yarn, Mink Yarn and Fancy yarn, with vast product range, to meet every sort of count combination demand of its prospective customers. The quality yarn in this unit is manufactured using state of art technology imported from Europe, which is fully backed with ultra modern R&D equipment for consistent quality. The yarn manufactured from this unit holds a very strong reputation and demand both in domestic and international market. The present capacity in terms of production is approximately 6.5 ton/Day Vardhman Polytex Limited, a unit based at Bathinda in Punjab with 74592 cotton spindles installed, is manufacturing 100% cotton yarn, Polyster cotton yarn and Tyre cord yarn with vast range of count selection varies from NE 10 to 40 both in carded and combed varieties. To ensure quality to its customers the group has received the ISO9001-2000 certification. This unit is exporting its product to Mauritius, Hong Kong, Singapore, Egypt, Turkey, Bangladesh, China, Taiwan etc. The company keeps on receiving repeat orders, which shows the level of confidence, bestowed by its customers into it. The company had been awarded the Export House status by the Government of India. The present capacity in term of production is around 36500 Kg/day.

1.4 CURRENT SET UP:


Presently the Company has its corporate office situated at Chandigarh Road, village Mundian, Ludhiana and works at Bathinda &Ludhiana. The day to day operations are looked after by qualified technocrats/professional at plant/work as well as at corporate office having rich experience in their respective fields of management. 11

Ashok Oswal himself a Law Graduate has been looking after the textile business in this company since 1987. Uptill family settlement, he was actively associated with the business management of Vardhman group.

1.5 PRESENT CAPACITIES


Presently the group has following production capacity and product range at its different manufacturing facilities. Location Installed Capacity Bathinda (existing )-49248 (VPL) (under erection)-25344 Ludhiana (Anshupati Textile) Ludhiana (VTM) (spindles) 74592 8000 24288 Production Capacity 36500kg/Day 14000kg/day 6.50 MT/Day 14MT/Day 13-MT dyeing/Day 1.6 COMPUTERISATION Presently the unit is operating under Tally system. This system is well structured keeping in view the present tax regime like VAT, SERVICE TAX, and TDS etc. The system is functioning to online to finance, raw material, stores and commercial. All the stauratory returns are generated online from the system. Cotton, synthetic, blended yarn Acrylic Yarn 100% Cotton yarn Product Range

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1.7 I.S.O. CERTIFICATION The unit had been awarded ISO-9002 certificate by bureau of India standards after the final audit, which took place in the unit from 24th July, 1996. The ISO certification is an assurance of good quality of the product. But at present unit had been awarded ISO-9001 2000 by bureau of India Standard.

1.8 PRODUCTION The unit is producing difference types of yarn both for Domestic consumption and Export purpose. The production department is headed by Assistant General Manager (A.G.M.). The department has four units. The unit I is concerned with production of cotton yarn. The unit II is concerned with the production of cotton yarn & Tyre Cord yarn. The unitII expansion is concerned with Polyester, Cotton yarn, blended yarn & at last in unit III partially Polyester & 100% Cotton yarn is made. 1.9 MARKETING For Marketing of different product, the unit is having a modern marketing department headed by experienced team which covers all the activities for conversion of finished goods into cash. It keeps vigil on the market feed-back on the level competition, market, trend, changing customer needs and modifications. The marketing department deals with domestic sales, while export department of the group manages export sales. The V.P.L.s having the export and domestic ratio is 26:74. The unit is having different channels for distribution of its products. 1. 2. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur. Branches at Delhi and Ludhiana.,Direct Dispatches are also made by the units.

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2. ORGNISATION STRUCTURE A chart showing the organizational structure of V.P.L. Bathinda is given on the next page. It shows the various hierarchical levels of the organization. It is a department line organization which is divided into various department headed by their respective department heads. All departments operate under the ultimate control of Chief Executive Sh. Ashok Goyal. The orders flow directly from unit head to different departmental heads down the line to respective department subordinates.

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Manufacturing Process Flow Chart of VPL


100% COTTON CARDED/COMBED YARN
Issue of Cotton Bales Laying Down Blow Room Card Breaker Draw Frame Finisher Draw Frame Speed Frame Ring Frame Winding Cheese Winding T.F.O Conditioning Packing for Single Yarn Conditioning Packing for Double Yarn Unilap Comber

Storage & Dispatch

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2.1

MANUFACTURING

PROCESS

IN

VARDHMAN

POLYTED

LIMITED,

BATHINDA Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun. 1. MIXING 2. BLOW ROOM 3. CARDING 4. DRAW FRAME 5. LAP FORMER 6. COMBERS 7. SPEED FRAME 8. RING FRAME .9. WINDING. 10. DOUBLING 11. PACKING

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3.OBJECTIVES OF THE STUDY The managemenf working capital is very important. It involves the study of day to day affairs of the company. The motive behind the study is to develop an understanding about the working capital management in the running business organization and to help the company in developing the efficient working capital management. So it helps in future planning and control decisions.

The objectives of the study are as follows: To analyze the working capital management of the company. To determine the operating cycle of the unit. To know the future need of working capital in the running organization.

3.1 SCOPE OF THE STUDY The study is conducted at VPL BATHINDA for 6 weeks duration. The study of W.C. management is purely based on secondary data and all the information is available within the company itself in the form of records. To get proper understanding of this concept, I have done the study of the balance sheets, profit and loss a/cs, cash accounts, trial balance, cost sheets. I have also conducted the interviews with employees of accounts and finance department and stores department. So, scope of the study is limited up to the availability of official records and information provided by the employees. The study is supposed to be related to the period of last three year.

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4.REVIEW OF LITERATURE

Sushma Vishnani, Bhupesh Kr. Shah (1995) It is felt that there is the need to study the role of working capital management policies on profitability of a company. Conventionally, it has been seen that if a company desires to take a greater risk for bigger profits and losses, it reduces the size of its working capital in relation to its sales. If it is interested in improving its liquidity, it increases the level of its working capital. However, this policy is likely to result in a reduction of the sales volume, therefore of profitability. Hence, a company should strike a balance between liquidity and profitability. In this paper an effort has been made to make an empirical study of Indian Consumer Electronics Industry for assessing the impact of working capital policies & practices on profitability during the period 199495 to 200405. The impact of working capital policies on profitability has been examined by computing coefficient of correlation and regression analysis between profitability ratio and some key working capital policy indicator ratios. Maynard E. Rafuse (1996) Argues that attempts to improve working capital by delaying payment to creditors is counter-productive to individuals and to the economy as a whole. Claims that altering debtor and creditor levels for individual tiers within a value system will rarely produce any net benefit. Proposes that stock reduction generates system-wide financial improvements and other important benefits. Urges those organizations seeking concentrated working capital reduction strategies to focus on stock management strategies based on lean supply-chain techniques. Appuhami, B A Ranjith (2008) The purpose of this research is to investigate the impact of firms' capital expenditure on their working capital management. The author used the data colleted from listed companies in the Thailand Stock Exchange. The study used Shulman and Cox's (1985) Net Liquidity Balance and Working Capital Requirement as a proxy for working capital measurement and developed multiple regression models. The empirical research found that firms' capital expenditure has a significant impact on 18

working capital management. The study also found that the firms' operating cash flow, which was recognized as a control variable, has a significant relationship with working capital management. Stephen Bush (2008) Commercial borrowers sometimes overlook short-term options for commercial loans. In the current recessionary conditions, it is wise to explore all working capital management options. This article will shed some light on shorter-term choices such as short-term commercial mortgages and business cash advances. Due to misunderstandings about long-term commercial financing, short-term commercial loans are often not considered properly. Although long-term commercial real estate financing options are often appropriate, there are practical short-term business financing choices that will be more workable and profitable for commercial borrowers. The most critical short-term commercial financing techniques typically include shortterm merchant cash advance and credit card processing programs and commercial real estate loan programs. Both working capital funding approaches are frequently a source of confusion for business owners. Gopinathan Thachappilly (2009 ) Working capital is the cash needed to carry on operations during the cash conversion cycle, i.e. the days from paying for raw materials to collecting cash from customers.Raw materials and operating supplies must be bought and stored to ensure uninterrupted production. Wages, salaries, utility charges and other incidentals must be paid for converting the materials into finished products. Customers must be allowed a credit period that is standard in the business. Only at the end of this cycle does cash flow in again. Allensius (2009) There will usually be only a few business financing sources that are regularly successful at executing the credit card financing and processing. There are key difficulties to avoid with a working capital advance, and selecting an effective funding source is essential to an appropriate business cash advance program. 19

A long-term commercial mortgage is appropriate for many businesses that own commercial property. Commercial property should be financed with an appropriate combination of short-term and long-term funding. It is wise to consider long-term business financing of up to 30 years when a longer-term commercial real estate loan is feasible.

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5. RESEARCH METHODOLOGY To recognize the various type of information which are necessary for the study of working capital management. Collection of data from various department of VPL to analyze the working capital management of VPL. For understanding the various reports, personal interviews are conducted. With the help of various techniques like: Operating Cycle analysis Ratio Analysis Common size statement

The overall position of VPL is studied and analyzed Suggestions are given on the basis of findings for better understanding of working capital management. 5.1 SOURCES OF INFORMATION Primary Data The personal interview with senior officials and various members of finance and accounts department and also with other departments and collected the data. Secondary Data All the details necessary for the study was available within the company itself. 5.2 REPORT WRITING Report Encompasses Charts, diagrams

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6. LIMITATIONS OF THE STUDY As cotton purchase office purchase raw material and cotton marketing yarn make sales. So more detailed information cannot be received about these. Cash from debtors are collected by the corporate office through commission agents. So efforts for collection of debtors cannot be clearly known from VPL ludhiana. Investment of funds are also made by corporate office, so it becomes difficult to know that how much investment is made in different ways for continuous availability of funds.

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1.THEORATICAL BACKGROUND OF WORKING CAPITAL MANAGEMENT

1.1 Meaning of working capital:In simple words working capital means that which is issued to carry out the day to day operations of a business. Capital required for a business can be classified under two main categories Fixed capital Working capital

Every business needs funds for two purposes, for its establishment and to carry on its day to day operations. Long term funds are required to create production facilities through purchase of fixed assets such as plant and machinery, land, building, furniture etc. Investment in these assets represents that part of firm capital, which is blocked on a permanent or fixed basis called fixed capital. Funds are also needed for short term purposes i.e. for the purchase of raw material, payment of wages and other day to day operations of business. These funds are known as working capital. In other words, working capital refers to that firms Capital, which is required for short term assets or current assets. Funds thus invested in current assets keep revolving last and being constantly converted into cash and this cash flow is again converted into other current assts. Hence it is known as circulating or short term capital.

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1.2 CONCEPT OF WORKING CAPITAL 1. Gross Working Capital

It is simply called working capital refers to the firms investment in current assets so the total current assets of the firm are known as gross working capital.

2.

Net Working Capital It represents the difference between current assets and current liabilities. Net

working capital may be positive or negative. Positive net working capital is that when current assets are more than current liabilities. But when current liabilities become more than current assets than it is negative working capital. Gross working capital and net working capital of VPL for the last three years are as follows: (In crores) Particulars Gross Working Capital Net Working Capital 2002-03 78.99 74.04 2003-04 93.38 89.06 2004-05 71.36 65.69

In brief we can say that working capital is too much necessary for the smooth functioning and proper utilization of fixed assets.

1.3TYPE OF WORKING CAPITAL


1. Permanent Working Capital: As the operating cycle is a continuous process so the need for working capital also arises continuously. But the magnitude of current assets needed is not asame; it

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increases and decreases over time. However there is always a minimum level of current assets. This level is known as permanent or fixed working capital.

2.

Temporary Working Capital: The extra working capital needed to support the changing production and sales activities, is called variable or functioning or temporary working capital. This can be shown in the following diagram:-

Amount of Working Capital Temporary capital

Permanent Capital Time

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1.4NEED FOR WORKING CAPITAL The need for working capital cannot be overemphasized. The need of working capital arises due to the time gap between production and realization of cash from sales. So the working capital or investment in current assets becomes necessary need for working capital. It arises due to following reasons:OPERATING CYCLE Operating cycle is the time duration requires for converting sales into cash after the conversion of resources into inventories. First of all a firm purchase Raw Material, then after some processing it is converted into workinprogress and after this further processing is done to convert workinprogress in finished goods. After the raw material is converted into finished goods, sales are made. Sales are no always full cash sales; there are credit sales also. These credit sales after some period are converted into cash. So the whole process takes the time. This time taken is known as the length of operating cycle. So operating cycles includes:1. 2. 3. 4. Raw Material conversion period (RMCP) Workin progress conversion period (WIPCP) Finished goods conversion period (FCP) Debtors Conversion period (DCP)

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So operating cycle can be known as following:Raw Material

Work Progress
Cash from Debtors Collection

in

Sales
Finished Goods Credit Sales Cash Sales

If the length of the operating cycle has short length period then less working capital is required. So working capital requirement is directly related with operating cycle. Operating cycle may be of two types 1. 2. Gross Operating cycle Net operating cycle

1.

Gross Operating cycle Gross Operating cycle is the total time period from the conversion of Raw Material into finished goods and finished goods into sales and then sales into cash. GOC =RMCP + WIPCP + FCP + DCP

2.

Net Operating Cycle As we provide period to debtors for the payments, our creditors also provide period to us for payment to them. So this reduces our requirement of working capital. This also 27

affects the operating cycle. Operating cycles length reduces with so many days as provided by the creditors to us. The difference between gross operating cycle and period allowed by the creditors for payment is known as net operating cycle. NOC = GOC CPP

A.

WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED NEEDS FOR FUTURE:-

These needs may be of Raw Material or Finished Goods. Sometimes because of nonavailability of Raw Material or due to seasonal availability of Raw Material some advances stock of Raw Material becomes necessary for company. In the similar way due to sudden arise of demand of finished goods in future more finished goods are kept in stock. For both reasons more working capital is required because funds will be involve in these safeties stocks.

1.5DETERMINENTS OF WORKING CAPITAL Followings are the main determinants of working capital. 1. Nature and Size of Business : The working capital of a firm basically depends upon nature of its business for e.g. Public utility undertakings like electricity; water supply needs very less working capital because offer only cash sales whereas trading & financial firms have a very less investment in fixed assets but require a large sum of money invested in working capital.

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The size of business also determines working capital requirement and it may be measured in terms of scale of operations. Greater the size of operation, larger will be requirement of working capital.

2. Manufacturing Cycle: The manufacturing cycle also creates the need of working capital. Manufacturing cycle starts with the purchase and use of Raw Material and completes with the production of finished goods. If the manufacturing cycle will be longer more working capital will be required or vice versa.

3. Seasonal variation: In certain industries like VPL raw material is not available throughout the year. They have to buy raw material in bulk during the season to ensure an uninterrupted flow and process them during the year. Generally, during the busy season, a firm requires large working capital than in the slack season. . 4. Production Policy: Production policy also determines the working capital level of a firm. If the firm has steady production policy, it may require need of continuous working capital. But if the firms adopt a fluctuating production policy means to produce more during the lead demand season then the more working capital may require at that time but not in other period during a financial year. So the different productions policy arises different type of need of working capital.

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5.

Firms Credit Policy:

The firms credit policy directly affects the working capital requirement. If the firm has liberal credit policy, hence the more credit period will be provided to the debtors so this will lead to more working capital requirement. With the liberal credit policy operating cycle length increases and vice versa. 6. Sales Growth: Working capital requirement is directly related with sales growth. If the sales are growing, more working capital will be needed due to arises need of more Raw Material, Finished goods and credit sales.

7. Business Cycle: Business cycle refers to alternate expansion and contraction in general business. In a period of boom, larger amount of working capital is required where as in a period of depression lesser amount of working capital is required.

8. Earning Capacity & Dividend Policy: If the firm has enough earnings and it is not paying dividend then it will not be in need of external borrowings. If firm wants to increase its earning power then more working capital will be required also to pay more dividend more profits are needed which give rise to more working capital.

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9. Price Level Changes: Changes in the price level also effects the working capital requirements. Generally, the rising prices will require the firm to maintain larger amount of more funds will be required to maintain the same current assets. 10. Condition of Supply: The inventory of raw material, spares and stores depends on the condition of supply. If the supply is prompt the firm can manage with small inventory. However if the supply is unpredictable then the firm to ensure continuity of production, should acquire stocks as and when they are available and have to carry larger inventory on an average. 11. Other Factors: Certain other factors such as operating efficiency, management ability, irregularities of supply, import policy, asset structure, importance of labour, banking facilities, time lag. etc. also influence the requirement of working capital. So these are the main determinants of working capital. The importance of influence of these determinants on working capital may differ from firm to firm. working capital as

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2.Meaning and Nature of Working Capital Management The management of working capital is concerned with two problems that arise in attempting to manage the current assets, current liabilities and the inter relationship that asserts between them. The basic goal is working capital management is to manage current assets and current liabilities of a firm in such a way that a satisfactory of optimum level of working capital is maintained i.e. it is neither inadequate nor excessive. This is so because both inadequate as well as excessive working capital position is bad for business. 2.1 MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT There are two major decisions management relating to working capital management:1. 2. What should be ratio of current assets to sales? What should be the appropriate mix of short term financing and long term financing for financing these current assets?

1.

CURRENT ASSETS IN RELATION TO SALES:-

If the firm can forecast accurately the factors, which effect the working capital, the investment in current assets, can be designed uniquely. When uncertainty characteristics the above factors, as it usually does the investment in current assets cannot be specified uniquely. In case of uncertainty, the outlay on current assets should consist of base component meant to meet normal requirement and a safety component meant to cope with unusual requirement. The safety component depends upon low conservative or aggressive in the current assets policy of a firm. If the firm purchases a very conservative

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current asset policy it would carry a high level of current assets in relation to sales. If a firm adopts a moderate current assets policy it would carry moderate level of current assets in relation to sales, finally is a firm follows a highly aggressive current assets policy, it would carry a low level of current assets in relation to sales. VPL is following current assets policy showing moderate level of current assets in relation to sales as is evident from ratio analysis.

2. Determining a Short Term and Long Term Financing Mix for Financing of current assets:-

There are three approaches in this regard, which are discussed below: HEDGING APPROACH This approach is also called matching approach. In this approach there is a proper matching of expected life of asset with the duration of fund. Usually, according to this approach long-term sources are used for financing permanent current assets and fixed assets & short-term sources are used for financing temporary current assets: Temporary current assets Short term financing A S S E T S

term financing Permanent current assets Long term financing

Fixed AssetsTime CONSERVATIVE APPROACH

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In this approach there is more reliance on long-term financing in comparison to shortterm financing. Even some part of the temporary current comparison to finance from long-term sources because long-term sources are less risky in comparison to short-term.

Temporary Current Assets A S S E T S Short-term financing

Permanent Current Assets

Long-term financing

Fixed Assets Time AGGRESSIVE APPROACH In this approach there is more reliance on short term financing and even a part of permanent current assets is financed from short-term finance.

Temporary current assets A S S E T S

Short term financing

Permanent current assets Fixed Assets Time

Long term financing

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In VPL, the current assets are financed from short term sources as well as long term sources, so they follow conservative approach.

3. WORKING CAPITAL ANALYSIS

3.1OPERATING CYCLE ANALYSIS Operating cycle refers to the time period which starts from the raw material purchases and ends with realization of receivable. So it is total time gap between raw material purchases to total debtors collection. This is also known as working capital cycle. Operating cycle is therefore expressed in terms of months or weeks or days. The higher the operating cycle period, higher the working capital requirement. It comprises of raw material conversion period, WIP conversion period, FG conversion period and debtors conversion period and creditors period. The basic reason for calculating operating cycle is to find out the means for reducing the duration of operating cycle because if duration of operating cycle will be less than working capital requirement will be less. OC = R + W + F + D C Where, R = raw material conversion period W = work in process period F = finished goods conversion period D = debtor collection period C = creditors payment period

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(1)

Raw Material Conversion Period (RMCP) = Average Raw Material Stock Raw Materials consumed during the year (In crores) X 360

PARTICULARS 2002-03 Opening Stock of 18.00 Raw Material Closing Stock Raw Material Average Stock Raw consumed RMCP (2) of 32.48 25.24

2003-04 32.48 47.95 40.21 88.62 163

2004-05 47.95 38.41 43.18 90.92 171

Materials 70.89 128

Work in Progress Conversion Period (WIPCP) = Average stock in progress Cost of Production (In crores) X 360

PARTICULARS 2002-03 Opening Stock of 0.75 WIP Closing Stock of 0.87 0.81 103.99 3

2003-04 0.87 1.05 0.96 121.48 3

2004-05 1.05 0.99 1.02 123.6 3

WIP Average Stock Cost of Production WIPCP (3)

Finished Goods Conversion Period (FGCP) = Average Finished good inventory Cost of goods sold 36 X 360 X 360

(In crores) PARTICULARS 2002-03 Opening Stock of 5.86 FG Closing Stock of FG 8.91 Average Stock 7.38 Cost of Goods Sold FGCP (4) 108.25 24 2003-04 8.91 6.31 7.60 127.62 21 2004-05 6.31 5.91 6.11 128.27 17

Debtors Conversion Period (DCP) = Average Debtors Credit Sales (In crores) X 360

PARTICULARS Opening Debtors Closing Debtors Average Debtors Credit Sales DCP (5)

2002-03 19.72 23.97 21.84 130.58 60

2003-04 23.97 25.81 24.88 157.94 57

2004-05 25.81 18.54 22.17 144.48 55

Credit Conversion Period (CCP) = Average Creditors Credit Purchases (In crores) X 360

PARTICULARS Opening Creditors Closing Creditors

2002-03 0.92 0.11

2003-04 0.11 0.55

2004-05 0.55 2.79

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Average Creditors Credit Purchases CCP

0.51 83.95 2

0.33 103.76 1

1.67 80.92 7

GROSS OPERATING CYCLE Year 2002-03 2003-04 2004-05 RMCP 128 163 171 WIPCP 3 3 3 FGCP 24 21 17 DCP 60 57 55 GOC 215 244 246

NET OPERATING CYCLE Year 2002-03 2003-04 2004-05 GOC 215 244 246 CCP 2 1 7 NOC 213 243 239

ANALYSIS It is claimed that gross operating cycle of VPL is increasing year by year. In 2002-03, it is 215 days then it increased to 244 days. In 2004-05, it is increased to 246 days. The main reason of increasing gross operating cycle year by year is due to the more availability of raw material in the stores.

ANALYSIS OF WORKING CAPITAL FROM DIFFERENT ASPECTS ON BASIS OF THE HISTORICAL DATA

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There are number of devices to analyze working capital like ratio analysis, common size statement etc. We will discuss them one by one as follows:

3.2 RATIO ANALYSIS Ratio analysis is a technique of analysis and interpretation of financial statements. It is the process of establishing and interpreting various ratios for helping in making decisions. It only means of better understanding of financial strengths and weaknesses of a firm. The main emphasis has been on calculating the ratios related to a working capital management. LIQUIDITY RATIOS These are the ratios which measures the short term solvency or financial position of a firm. In other words, it refers to the ability of a concern to meet its current obligations as and when these become due. To measure the liquidity of a firm, the following ratios can be calculated.

CURRENT RATIO It may be defined as the relationship between current assets and current liabilities. This ratio is also known as working capital ratio and measures the ability of the firm to meet current liabilities. High current ratio indicates firm is liquid and has the ability to pay its current obligations in time as and when they become due. A ratio equal or near to the rule of thumb of 2:1 i.e. current assets double the current liabilities is considered to be satisfactory.

Current Ratio =

Current Assets

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Current Liabilities Current Ratio of VPL Year 2002-03 2003-04 2004-05 Current Assets 78.99 93.38 71.36 Current Liabilities 4.92 4.32 5.66 Current Ratio 16 21.6 12.6

ANALYSIS The current ratio of the unit is above the standard and it guarantees the payment of dues in time. The current ratio of the company has been considerably high because they had made over investment in inventories which is the main reason for the high ratio of current assets. Inventories are high because of seasonal availability of raw material. But in 2004-05, the ratio has decreased as compared to 2003-04. The reason is due to decrease in current assets, the main reduction in cost of raw material and increase in the current liabilities. But overall position of current ratio is satisfactory.

LIQUID RATIO This ratio is also known as quick ratio or acid test ratio. It is a more rigorous test of liquidity than the current ratio. It is based on those current assets which are highly liquid. Inventory and prepaid expenses are excluded because they are deemed to be least liquid component of current assets. A high quick ratio is the indication that the firm is liquid and has the ability to meet its current liabilities in time and on the other hand low ratio represents liquidity position is not good.

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Quick Ratio

Quick or Liquid Assets Current Liabilities

Quick Assets = Current Assets Inventory Prepaid Expenses Quick Ratio of VPL Year 2002-03 2003-04 2004-05 Quick Assets 35.62 37.31 25.36 Current Liabilities 4.92 4.32 5.66 Quick Ratio 7.22 8.64 4.48

ANALYSIS According to rule of thumb, it should be 1:1. In all the above years it has been very high than the rule of thumb.

ABSOLUTE LIQUID RATIO Although receivables are generally more liquid than inventories yet there may be doubt regarding their realization into cash in time. Absolute liquid ratio shows the relationship between liquid assets which include cash, bank and marketable securities. Absolute Liquid Ratio = Absolute Liquid Assets Current Liabilities

Absolute Liquid Ratio of VPL Year Absolute Liquid Assets Current Liabilities Absolute Liquid Ratio

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2002-03 2003-04 2004-05

1.58 0.59 0.93

4.93 4.32 5.66

0.32 0.14 0.16

ANALYSIS The acceptable standard for this ratio is 0.5:1. Thus, we can say that in all the years, it is below the standard due to very less cash and bank balance maintained because major cash receipts and payments are handled by corporate office. It is very less in 2003-04, 2004-05 due to increased cost of production.

WORKING CAPITAL TURNOVER RATIO Working capital turnover ratio indicates the velocity of the utilization of net working capital. This ratio measures the efficiency with which the working capital is being used by a firm. Working Capital Turnover Ratio = Sales Net Working Capital Working Capital Ratio of VPL Year 2002-03 2003-04 2004-05 Sales 130.58 157.99 144.48 Net Working Capital 74.04 89.06 65.69 Working Capital Turnover Raito 1.76 1.77 2.20

ANALYSIS

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This ratio indicates the number of times the working capital is turned over in the course of a year. A high working capital ratio indicates the effective utilization of working capital and less working capital ratio indicates less utilization. In 2004-05, the working capital is reduced due to reduction in stock as the raw material prices are decreased. But the ratio has increased from 1.77 times in 2003-04 to 2.20 times in 2004-05 which shows effective utilization of working capital.

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COMMON SIZE STATEMENT ANALYSIS

This analysis is mainly to see the composition of working capital. Its purpose is to see the %age of each asset to the total asset and %age of each liability to total liability.

COMMON SIZE STATEMENT (In crores) PARTICULARS CURRENT ASSETS Inventories S. Debtors Cash & Bank 2002 03 AMT % 43.37 23.97 1.58 54.90 30.35 2.00 43 2003 04 AMT % 56.08 25.81 0.59 60.05 27.64 0.63 2004 05 AMT % 46.00 18.54 0.93 64.46 25.98 1.30

Loan & Advances TOTAL CURRENT LIABILITES S. Creditors Advances Other Liabilities Security Deposits TOTAL

10.07 78.99

12.75 100

10.90 93.38

11.67 100

5.89 71.36

8.25 100

1.15 0.74 3.01 0.02 4.92

23.37 15.04 61.18 0.41 100

0.55 0.79 2.95 0.02 4.31

12.76 18.33 68.45 0.46 100

2.79 0.63 2.22 0.02 5.66

49.29 11.13 39.22 0.35 100

ANALYSIS As major part of current assets involve inventories. It covers more than 50% of total current assets. The debtors also have significant part of current assets. It contributes approximate 25% to 30% part of current assets. The least contribution is thus of cash and bank balance. On the other hand, current liabilities consist of mainly creditors and other liabilities. In 2004-05, current assets have decreased due to decrease in inventories and loans & advances, whereas current liabilities have increased. So this year working capital is less as compared to last years working capital.

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4. CASH MANAGEMENT

Cash management refers to management of cash balance and the bank balance and also includes the short term deposits. The cash is important current asset for the operation of the business. On the other hand extreme liquidity may take uneconomic investments. This underlines the significance of cash management. A financial manager is required to manage the cash flows (both inflows and outflows) arising out of the operations of the firm. For this he will have to forecast the cash inflows from sales and outflows for costs etc. This will enable the financial manager to identify the timings as well as amount of future cash flows Cash is the basic input needed to keep the business running on continuous basis. It is also the ultimate output expected to realize by selling the product manufactured by the firm. Cash management is one of the key areas of working capital management. A part from the fact that it is the most liquid current asset, cash is the common denominator to which all the current assets can be reduced because the major liquid asset i.e. receivables and inventory get eventually converted into cash. Cash management is concerned with the managing of: Cash inflows and outflows of the unit Cash flows within the unit Cash balance held by the unit at a point of time by financing deficit or investing surplus cash

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The firm should evolve strategies regarding the following four facts of cash management: (1) (2) (3) (4) Cash Planning Managing the cash flow Optimum cash level Investing surplus cash

1.

CASH PLANNING

Cash planning is a technique to plan to control the use of cash. Cash planning can help to anticipate future cash flows and the need of the form and reduces the possibility of idle cash. Cash planning may redone on daily, weekly and monthly basis. Cash budget is the most significant device to plan for and control cash receipt and payments.

The unit under the study makes cash planning through following tools: Cash Budget Rolling cash flow statement Daily cash flow statement

The cash budgets are prepared by the firm on monthly and yearly basis. Through cash budget the unit can make estimates of cash receipts and disbursement during a future period of time. There estimates show the requirement of cash in the unit. Another device used for cash planning is six monthly rolling cash flow statement prepared on monthly basis. This statement shows the projections of inflows and outflows of cash during the next six months. 46

This statement can help in taking various decisions, if the unit wants to make any capital payment, these statements can tall when there is surplus of cash and payments can be made during the month. 2. MANAGING CASH FLOWS

Significant part of cash management is the management of cash flow both inflows and outflows without any loss to the unit and without impairing its goodwill in the market. These are made at head office Ludhiana so the main source of cash inflows to VPL is the cash credit limit, which is as follows:

Banks

Main Limit (in lakhs) Peak Normal 1020 600 625 420 130 160 890 530 425 205 90 90 3180 2005

Sub-limit transfer to BTI Unit (in lakhs) 125 150 100 375

Canara Bank State Bank of India State Bank of Patiala Bank of Baroda State Bank of Indore UTI Bank Ltd. TOTAL

The main limits are controlled by H.O. The sub-limits have been allocated to the unit for fulfilling day-to-day requirements of working capital. The daily bank-position of sublimits is faxed to H.O. for monitoring daily bank position. In case of drawn in sub-limits the funds get transferred from main limits. The interest rate paid for this is near about 10%. The cash credit limits are sanctioned by the bank against the hypothecation stocks and fluctuating assets as security. The unit can withdraw from these limits as and when needed. The amount received from the sale of yarn is debited at head office in main limit. To exchange the efficiency of cash 47

management the surplus funds are transferred to other units if those units need cash thus increasing the overall profitability. Cash outflows also arise on account of purchase of stores, spares and all other material normal credit for these products is mainly 30 to 60 days and full credit period is used.

3.

DETERMINING OPTIMUM BALANCE

An efficient finance manager always aims at preparing the cash and bank balance at the optimum level i.e. neither it is too high that it remains idle and the firm losses interest on it, nor it is too low that the firm is always in cash tight position. The unit always keep 1.5 lacs for the routine expenses, around the days of wages the amount is approx. 4 lacs per day is kept in hand, thus the unit maintains the appropriate amount of cash balance and meets the firms obligations as and when they due.

4.

INVESTING IDLE CASH

Since the main input of the company is of seasonal nature. Therefore the company has to maintain high level of assets during cotton season, which falls between October to March. During April to September the company gets its cash credit limits reduced in the respective banks. The company has very good system of managing its current assets. The current assets of the unit are managed at corporate level and the unit seeks funds according to their requirements calculated on day-to-day basis. Hence there are no idle funds at unit level. As the funds are monitored / controlled at corporate level, therefore, it becomes the prime responsibility of H.O. to have a good policy of investing idle funds in an appropriate

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security keeping in view the requirement of funds in the future and liquidity of the security in which the investment is being made.

5.RECEIVABLES MANAGEMENT

Accounts receivables are simply extension of credit to the firms customers, allowing them a reasonable period of time in which to pay for the goods. Most firms treat accounts receivables as a marketing tool to promote sales and profits. Receivables are a type of loan extended by the seller to the buyer to facilitate the purchase process. As against the ordinary type of loan the trade credit in the form of receivables is not a profit making service but an inducement or facility to the buyer-customer of the firm. Receivables are a direct result of credit sale. Credit sale is resorted by a firm to push up the sale, which ultimately results in pushing up the profits earned by the firm. At some time selling goods on credit result in blocking of funds in accounts receivables. Additional funds are required for operating needs of business, which involves extra costs in terms of interest. Moreover, increase in receivables also increase chances of bad debts. The creation of accounts receivables is beneficial as well as dangerous. The finance manager has to follow a policy which uses cash funds as economically as possible by extending receivables without adversely affecting the chance of increasing sales and making more profits. Receivables Management generally means what type of credit policy a firm should adopt so that sales and profits can be promoted on the one hand and funds can be economically utilized on the other hand.

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So the receivables management must be attempted by adopting a systematic approach and considering the following of receivables management: (1) (2) THE CREDIT POLICY CREDIT CONTROL

1. CREDIT POLICY It may be defined as the set of parameters and principles that govern the extension of credit to the customers. This requires the determination of (i) The credit standard i.e. The conditions that the customers must meet before being granted credit and (ii) The credit terms i.e. the terms and conditions on which the credit is extended to the customers. These are discussed as follows: The Credit Standard: - When a firm sells on credit, it takes about the paying capacity of the customers. Therefore, to be on a safer side, it must set credit standard which should be applied in selecting customers for credit sales. The credit standards of a firm represent the basic criteria for the extension of a credit to customer. So the credit standard is the combination of three Cs These are: (i) (ii) (iii) Character of a person Capacity of a person Condition of a person

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(a) Credit Period The credit period is an important aspect of the credit policy. It refers to the length of time customers are allowed to pay for their purchases. It may differ from one market to another market. The credit period generally varies from 15 days to 60 days. In some cases the credit period may be zero and only cash sales are made. It refers to the time duration in terms of net date e.g. if a firms credit terms are net 30; it means the customers are expected to pay within 30 days from the date of sales. As much the credit period will be shorter, it will be beneficial for a firm. But the firm has to lengthen its credit period to increase sales. But one must compare the cost of extended credit with the incremental profits. If this cost is less then it will be beneficial for company to increase the credit period. (b) Discount Terms It is reduction in payment offer to customer to induce them to repay credit obligation within a specified period of time. In practice credit terms would include: (i) (ii) (iii) The rate of cash discount The cash discount period The net credit period

2. CREDIT CONTROL The next important step in the management of receivables is the control of these receivables. Following are the directions for controlling the receivables.

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(1) The Collection Procedure The overall collection procedure of the firm should neither be too lenient nor too strict. A strict collection policy can affect the goodwill and damage the growth prospects of the sales. If a firm has a lenient credit policy, the customer with a natural tendency towards slow payments may become slower to settle his accounts. One possible way of ensuring early payments from customers may be to charge interest on over due balances. (2) Monitoring of receivables To control the level of receivables, the firm should apply regular checks and there should be a continuous monitoring system. For this, number of measures are available as follows: (i) A common method to monitor the receivables is the collection period

or number of days outstanding receivables. (ii) Another technique available for monitoring the receivables is known

as ageing schedule. Ageing schedule down book debts according to the length of time of which they have been outstanding. The ageing schedule provides more information about collection experience. It helps to shot out the slow paying debtors. The Performa of the ageing schedule prepared by the VPL is as follows:

AGEING SCHEDULE Age Classification 0 15 days Amount 124199099 % age of Total 67

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15 30 days 31 60 days 61 90 days 91 120 days 121 180 days More than 180 days Total O/S Amount

18537179 9268589 27805768 3707436 1853718 185371789

0 10 5 15 2 1 100

RECEIVABLES MANAGEMENT IN VPL As earlier discussed, credit sales are too much necessary to increase the total sales. The main reason behind this is cut-throat competition. There are also many competitors of VPL in the market, s to compare with them; VPL has to make credit sales. 20% to 30% of current assets of VPL are sundry debtors. VPL has a good receivable policy as it has large amount of credit sales. I. CREDIT POLICY OF VPL VPL not directly make sales. Sales are made by corporate office directly. So the sales process is centralized. As the sales process, debtors are also collected by the corporate office directly. Corporate office just receives the amount from the debtors. But it does not have any record of outstanding debtors. It sends the credit note to VPL after receiving amount against any debtors. So record for outstanding debtors is maintained by VPL itself. VPL sends fortnightly reports to corporate office which records the data about the outstanding debtors for different periods. In these reports debtors outstanding for one month or six months are shown separately. In this way, corporate office comes to know

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about age segments of different customers. Corporate office may avoid selling goods to those customers who have not paid for a long period. CREDIT POLICY VARIABLES 1. Credit Standards VPL provides credit to customers after getting information about that customer. For this market research is done by marketing department to know about reputation of customer in the market and financial position of him. From the records of customers having VPL and from financial record of those customers, the ability to pay is checked. Thus customer is only known after getting information about him and then credit is provided. 2. Credit Terms (a) Credit Period For different products VPL provide different credit period. These credit terms are according to the nature of product which are following: For Tyre Cord To customer of cotton yarn Sale to agents (b) Cash Discount In case of cotton yarn Advance payment After 48 hours Within Week 15 days credit Afterwards In case of Tyre Cord Yarn 1 % C.D. prior to material dispatch 0.85 % 0.50 % Interest free 18 % p.a. interest chargeable 45 days 15 days 10 days

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Payment within 48 hours Payment within week 45 days credit period

3 % CD 2 % CD Interest free

Interest @ 18 % p.a., if payment is not made within the prescribed limits.

II

CREDIT CONTROL Collection efforts made by VPL:

Due to cut-throat competition VPL has to make credit sales. To collect the funds Oswal group has adopted a decentralized method. Oswal group has established its collection centers in different cities as in Delhi, Ludhiana etc., and these centers collect money from the debtors and send it to corporate office. The number of collection centers in a particular city depends upon the number of customers to minimize the bad debts and to accelerate the collections. 1.5% commission is also paid to agents and 0.75 % in case of tyre cord to collect debtors. This percentage is only on the basis of the realization amount.

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ANALYSIS OF EFFICIENCY OF RECEIVABLES MANAGEMENT IN VPL

Debtors Turnover Ratio (DTR) This ratio indicates the number of times average debtors are turned over during a year. The higher the value of debtor turnover ratio the value of debtor turnover ratio the more liquid is the debtors. Similarly low debtor turnover ratio implies less liquid debtors. Debtors turnover ratio = Sales Avg. Debtors Year 2002-03 2003-04 2004-05 Sales 130.58 157.99 144.48 Avg. Debtors 21.84 24.88 22.17 DTR 5.98 6.35 6.52

Debtor Conversion Period (DCP) The average no. of days for which a firm has to wait before its receivables is converted into cash. DCP = 360 DTR Year 2002-03 2003-04 2004-05 DTR 5.98 6.35 6.52 DCP 360/5.98 = 60 360/6.35 = 57 360/6.52 = 55

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Analysis The DTR ratio in 2002-03 was 5.98 times which has been increased to 6.35 in 2003-04 and 6.52 in 2004-05. And regarding DCP, it was 60 days in 2002-03 which has decreased to 57 in 2003-04 and 55 in 2004-05. Thus high DTR ratio indicates more efficient management of debtors because it means less collection period of debtors. Debtors collection period has been decreasing from last two years which shows management is taking step to collect the dues. So we can conclude receivable management of VPL quiet sufficient.

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6. MANAGEMENT OF INVENTORY

Inventory is very important part of current assets. Approximately 60% part of current assets is inventories. So the proper management of inventory is required for successful working capital management. As the larger amount of funds is involved in the inventories, so it must be carried with care for proper utilization of funds.

Nature of Inventories
In inventories we include: (b) Raw Material: There are those basic inputs which are

converted into work-in-progress after the manufacturing process. Raw materials are purchased for production and storage purpose. (c) Work-in-Progress: These inventories are semi-manufactured

products. These products are those which are ready for sale. (d) Finished Goods: These are completely manufactured

products. These products are those which are ready for sale. Here is one another type of inventory also which is not directly related with production but facilitate in production process. These inventories are known as supplies. Cleaning material, oil, fuel, electric tube etc are the supplies.

OBJECTIVES OF INVENTORY MANAGEMENT There are so many objectives of inventory management. These objectives may differ from firm to firm. The main objectives of inventory management are:

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To make adequate investment in inventories so that funds can be best utilized. Smooth production in present and future. Time availability of inventories. Smooth and uninterrupted sale processes. Minimize the cost related with inventories. To meet the future price change. To get adequate return on investment.

INVENTORY MANAGEMENT TECHNIQUES For inventories management the two questions must be answered. First, that how much be ordered in one order so that excess or insufficient inventories can be avoided. Secondly, when the order should be placed, so that timely availability of inventory is there. To get answer of these two questions we use two techniques which are following:

1)

ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity provides the answer of our first question. By this we come to know how much we must order in single time. So that all the cost related with inventory are minimum. Determining an optimum inventory level involves two types of costs (a) Ordering Cost and (b) Carrying cost. The EOQ is that inventory level which minimizes the total of ordering and carrying costs. (a) Ordering Costs All these costs which are incurred in placing one order. It includes; requisition, transportation, receiving, inspecting, clerical and staff

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services. Ordering costs are fixed per order. Therefore they decline as the order size increases. (b) Carrying Costs Cost incurred for maintaining a given level of inventory are called carrying cost. It includes storage, insurance, handling, taxes. Carrying costs vary with inventory. To calculate economic order quantity there is formula: EOQ = Where, A O C = = = Annual requirement Ordering cost per order Carrying cost of inventory 2AO/C

2)

REORDER POINT

Reorder point is that inventory level at which an order should be placed to replenish the inventory. To calculate reorder point we should know (a) Lead Time (b) Average Usage (c) EOQ Lead Time is the time normally taken in replenishing inventory after the order has been placed. Average Usage is the inventory used on average daily basis or average weekly basis. So, Reorder Point = Lead Time x Average Usage

If the firm also maintains safety stock then the reorder point will be: Reorder Point = (Lead Time x Average Usage) + Safety Stock

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So when the inventory of reorder point will be in store then the order will be placed for purchase of inventory. In this way, the production process will not stop because the inventory will be available for that period.

INVENTORY MANAGEMENT IN VPL Inventory Management of VPL is good. VPL has a different stores department. All the inventories except raw material purchases are handled by stores department. Stores department does its work very efficiently.

INVENTORY PLANNING For the planning of inventory requirement, budgets are prepared by different departments as per requirements. The material issued during the budget period will not be more than the budget. This rule is strictly followed. For cotton, requirements are planned in consultation with production department. Stores department have nothing to do with it.

PURCHASE OF RAW MATERIAL As in VPL raw material is cotton. First of all the requirement for cotton are determined by the production department than this requirement is sent to commercial departments. Commercial departments send these requirements to corporate office in detail. Then corporate office directs the cotton purchase office to purchase cotton in bulk not only for VPL but also for the other units of Oswal Group. Cotton is generally received in lots so one lot consists of 55 or 110 bales.

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As the cotton has seasonal availability, so the purchasing of cotton is made within the period of October to march. For the other months, cotton is purchased within these months. That is the reason VPL has high investment in cotton.

DAILY REQUIREMENT OF COTTON For production daily requirement of cotton is 250 bales and when the full capacity of 3 rd unit gets started then the average requirement of cotton bales will reach to 365 bales. The total daily production is 36500kg/day.

STORAGE CAPACITY OF VPL Regarding Raw Material Inventory, VPL has 10 godowns.The capacity of 10 godowns is 45000 bales approximately. If capacity of store is exhausted in unit then it has private storage facility to store cotton. Regarding Finished goods Inventory, VPL has four godowns. Two godowns are for unit I for domestic and export purpose, one godown is for unit II and its expansion, at last remaining one godown is with unit-III. These godowns do not have electric fitting because cotton is highly inflammable.

ISSUING OF INVENTORY When any department requires any inventory, it sends its requirement to stores department. The maximum time within the requirement must be met is 72 hours. Material is issued on the basis of monthly weighted average method.

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INSPECTION OF INVENTORIES Inspection of inventory is made at the end of month randomly. The stock taking of all the items is not possible keeping in view number of items.

SAFETY STOCK OF INVENTORIES For the continuous production process, safety stock of inventories is maintained. In case of cotton atleast 15 days requirements must be in hand every time. For other inventories stock is maintained according to supply period and as per their requirement.

INVENTORY CONTROL Inventory control is done by budgets. As the budgets are prepared for the planning purpose. Total requirements for inventory during financial period are determined by budget. When the material is issued to any department then the total amount of material issue is deducted from the budget of that good and balance is calculated, only this balance quantity of inventories will be issued during the remaining financial period. These records are maintained on daily basis. For different units, the records are prepared separately. For inventory control not any ABC analysis or VED analysis is done. The company also doesnt follow standardized system of inventory like EOQ. In case of raw material as the input (cotton) is of seasonal nature, the requirement for the whole year is purchased in the cotton season. In case of spares & stores, the inventory is easily available in market; therefore, the same is procured on requirement basis. The company always maintains stock of critical items, the failure / non-availability of which can cause less of production.

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As all the units of group are in spinning the stock of critical items, where the high value is involved in financial terms, the inventory is maintained in single unit. This could save lot of money which can be utilized in another area and it also helps to maintain inventory at optimum level. So we can say that overall inventory management of VPL is quite satisfactory.

ANALYSIS OF EFFICIENCY OF INVENTORY MANAGEMENT IN VPL

INVENTORY TURNOVER RATIO It indicates the number of times the stock has been turned over during the period and evaluates the efficiency with which the firm is to manage inventory. Inventory (Raw Material) Turnover Ratio = Cost of Production Average Raw Material Stock

Year 2002-03 2003-04 2004-05

Cost of Production 103.99 121.48 123.6

Avg. Stock of RM 25.24 40.21 43.18

ITR 4.12 times 3.02 times 2.86 times

ANALYSIS The inventory turnover ratio has been deceased from 3.02 times in 2003-04 to 2.86 times. It is not due to inefficient inventory management but because in 2004-05 the Cotton is

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also purchased for unit III but production is not yet started and also prices are Less as compare to previous year.

INVENTORY TO WORKING CAPITAL RATIO This ratio is usually calculated to study the liquid financial position of business enterprises. Inventory to working capital ratio = Inventory Working Capital

Year 2002-03 2003-04 2004-05

Inventory 43.37 56.08 46.00

Working Capital 78.97 93.38 71.36

Ratio in %age 54.92 60.04 64.46

ANALYSIS Too high and too low investment in inventory is not good for company. In 2002-03 it is 54.92% of gross working capital which has been increased to 60.04% in 2003-04 and 64.46% in 2004-05. Overall inventory constitute a large part of gross working capital because raw material is available seasonably only which shows more blockage of money.

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7. FINDINGS

Due to seasonal availability of raw material is purchased in bulk during the months between March to Oct. so the most part of current assets is covered by inventories. Liquidity ratios of VPL are too high because of maintaining more inventory stock of raw material. Raw material is purchased by corporate office for all the units in bulk to get the advantages of bulk purchasing. The cost of raw material fluctuates depending upon the availability of crop in the particular season, so it effect the finished product price. The operating cycle of VPL is very high due to the high raw material conversion period because raw material is a seasonal product. Now VPL has increased its share in the domestic market by reducing the exports. For filling its fund requirement VPL depends upon the Canara bank and State bank of India. It holds the cash only for transaction purpose. Corporate office holds the cash for major receipts & payments. EOQ technique is not followed by VPL for purchasing cotton because cotton is a seasonal product. Also EOQ is not followed in stores.

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8. RECOMMENDATIONS

Management should make the proper use of inventory control techniques like fixation of minimum, maximum and ordering levels for all the items for less blockage of money.

The unit should also adopt proper inventory control like ABC analysis etc. This inventory system can make the inventory management more result oriented. The EOQ can be followed in stores.

Due to competition, prices are market driven and for earning more margin company should give the more concentration on cost reduction by improving its efficiency.

The investments of surplus funds are made by the corporate office and the unit is not generally involved while taking decisions with regard to structure of investment of surplus funds. The corporate office should involve the units so as to better ascertain the future requirements of funds and accordingly the investments are made in different securities.

The company is loosing its overseas customers due to decrease in exports so the sufficient amount of exports should the maintained.

Companys average debtor collection period is 55 days. So company should try to reduce it for improving the efficiency.

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9. CONCLUSION

By conducting the study about working capital management it is find out that working capital management of VPL is too good. VPL has sufficient funds to meet its current obligation every time which is due to sufficient profits and efficient management of VPL. Cash management and receivable management are too much good because of centralized control on these. Raw material for the all units of OSWAL group is purchased by corporate office in bulk which is the best way. Safety measures for inventories are also quiet sufficient in VPL. Overall the working capital management of VPL is very much efficient.

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10. REFERENCES

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd. 2nd Ed.New Delhi, pp.38-45.vol 12 Chandra Prasanna; Financial Management: Theory and Practice; TataMCgrill Van Horne, Jame C; Fundamentals of Financial Management Rustagi R.P.; Principles of Financial Management. Kothari.k.c: wishwa prakashan, new delhi 2001 k.k gupta publisher ISBN 8173280363 http://www.investopedia.com/articles/fundamental/03/061803.asp http://www.emeraldinsight.com/Insight/viewContentItem.do;jsessionid=FF023E7 701E36A384B9F5A1DD4ED25B2? contentType=Article&hdAction=lnkhtml&contentId=864829 http://gbr.sagepub.com/cgi/content/abstract/8/2/267 http://business-financialplanning.suite101.com/article.cfm/working_capital_management_manages_flow_ of_funds http://www.articlealley.com/article_581878_19.html http://www.articlearchives.com/banking-finance/financial-markets-investingsecurities/2306728-1.html http://www.caclubindia.com/_list_detail.asp?article_id=1086 http://www.docstoc.com/docs/2411542/An-Analysis-of-Working-CapitalManagement-Results-Across-Industries

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