CHAPTER 6

CASH MANAGEMENT

CHAPTER 7
RECEIVABLES MANAGEMENT

CHAPTER 8
MANAGEMENT OF INVENTORY

CHAPTER 9
FINDINGS, SUGGESTIONS, CONCLUSION, BIBLIOGRAPHY

APPENDIX

REFERENCES AND BIBLIOGRAPHY

 EXECUTIVE SUMMARY

STUDY TOPIC:

WORKING CAPITAL MANAGEMENT OF VINAYAK TEXTILE MILLS LTD.

( A UNIT OF VARDHMAN POLYTEX LTD.)

OBJECTIVES OF THE STUDY:

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.
• To render recommendations for effective management of working capital.

TIME SPAN:

A period of five year i.e. 2004-2008 has been taken for the study.

STUDY INSTRUMENT:

Annual Reports and other official documents of the selected units of the company.

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 VTM to analyze the working
capital management of VTM.
  For understanding the various reports, personal interviews are conducted.
 With the help of various techniques like:
- Operating Cycle analysis
- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
The overall position of VTM is studied and analyzed
 Suggestions are given on the basis of findings for better understanding of
working capital management.

SCHEME OF PRESENTATION:

The project report is prepared in three parts.

First part of the report gives an overview and theoretical background to the subject
i.e working capital management.
Second part of the report presents a general profile of VINAYAK TEXTILE
MILLS LTD. where the summer training has been undertaken.
Third part of the report deals with the project under study which includes:

- Operating Cycle analysis

- Ratio Analysis
- Common size statement
- Schedule of changes in working capital
 Chapter- 1
THEORETICAL BACKGROUND
OF WORKING CAPITAL MANAGEMENT
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 firm’s 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.

CONCEPT OF WORKING CAPITAL:

1. Gross Working Capital

It is simply called working capital refers to the firm’s 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.
In brief we can say that working capital is too much necessary for the smooth functioning
and proper utilization of fixed assets.

TYPES 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 always
same; it 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
NEED 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:-

A. 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 work–in–progress and after this further processing is done to convert
work–in–progress 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. Raw Material conversion period (RMCP)
2. Work–in – progress conversion period (WIPCP)
3. Finished goods conversion period (FCP)
4. Debtors Conversion period (DCP)

So operating cycle can be known as following:-

Raw Material

Work in
Progress

Cash Collection
from
Debtors Sales
Finished Goods

Credit Cash Sales

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. Gross Operating cycle
2. 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
affects the operating cycle. Operating cycle’s 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

B. WORKING CAPITAL REQUIREMENT FOR THE ANTICIPATED

NEEDS FOR FUTURE:-
These needs may be of Raw Material or Finished Goods. Sometimes because of non-
availability 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.
 DETERMINENTS 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.
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 VTM 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.
 5. Firm’s Credit Policy:
The firm’s 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. Company is paying 42% dividend to its shareholder.

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 working capital as
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.

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.

MAJOR DECISIONS IN WORKING CAPITAL MANAGEMENT

There are two major decisions management relating to working capital management:-
1. What should be ratio of current assets to sales?
2. 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
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.
VTM 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 term financing
S
E Permanent current assets
T Long term financing
S

Fixed Assets

Time

CONSERVATIVE APPROACH

In this approach there is more reliance on long-term financing in comparison to short-

term 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
sources.

Temporary Current Assets

A Short-term financing
S
S
E
T
S
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 Short term financing

A
S
S
E
T Permanent current assets Long term financing
S

Fixed Assets

Time

In VTM, the current assets are financed from short term sources as well as long term
sources, so they follow conservative approach.
 Chapter- 2

HISTORY OF THE INDIAN TEXTILE

INDUSTRY
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 1940’s, expanded rapidly after world War – II and
in the 1970’s was still the subject of extensive Research and Development.

The spinning and weaving both are very common and attached with each other in all parts
of the world. We talk of the ancient times, when maximum work like weaving of the
clothes was done manually, but all the things were being done for the right perspectives.
From time to time in this world development had taken place, which has been found to be
a continuous process. Similarly considering the developments in the Spinning and
Weaving lot of improvements has come-up. Because earlier too was the Cotton crop was
grown by the farmers, but its end use was not done in an effective way, which seems
good. So much thick fiber was produced and accordingly its impact for the fabric
preparation.
 APPARATUS USED FOR SPINNING AND WEAVING DURING
PRE-INDEPENDENCE PERIOD

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
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. Though the Cotton industry
had progressed a lot, but in case we say that India alone is heading this world, it is wrong.
Though in India Textile Machine manufacturers are there and one or two decades ago
they were the market leaders, but with the help of the other parts/people of world i.e.
Germany, Switzerland etc., India had made a very good recognition in the yarn market.

Because Indian Industrial Organizations have also initiated towards the most modernized
machinery produced by Schlafhorsts – Germany, Luwa – Humidification systems,
Switzerland. 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. Because many other
countries like China as Cotton Textiles has went ahead. Though till today India has
achieved a lot in the Textile Industry and almost 700 Textile units are working
successfully, because India is having at present more than 20 Million spindles and a
weaving capacity of more than 2.5 Lac looms and the total output value of the same is
around Rs.1500 Cores, employing more than 10 Lac of workers directly.

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.
 Chapter- 3

PROFILE OF THE GROUP AND UNIT

 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
and VTM is granting authorization to use the Trademark USTERIZED “USTER” think
quality.

BACK DROP:

OSWAL GROUP is a premier of textile group of northern India having its corporate
office situated at Ludhiana, Punjab,(India). The organization has existence for last 40
year in core competency of spinning. We were earlier part of the Vardhman Group.but
after settlement between two brother in 2003, we have named ourselves as Oswal Group
has mainly into Spinning and Dyeing of all type of Yarn in different manufacturing of
Garments. The group has ambitious plan to diversify in future but in textiles related
activities

Oswal Group will achieve a turnover of Rs.500 crores by strengthening its core
competencies and capacities in Textile and diversified business to create value for its
stakeholders.(USD 110 millions).

The group has very good potential and high presence in the textiles industry with well set
manufacturing set up for 100% cotton, Polyester cotton, Worsted Spun Yarn ,Dyed Yarn,
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.

COMPANY STRUCTURE

OSWAL
GROUP

ANSHUPA
TI
LUDHIANA
VPL VTM
BATHIND LUDHIAN
A A
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 105000 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 ISO-
9001-2000 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 65 Tons /day. They are also
thinking of producing Value added that is (i) Slub yarn (ii) Lyera yarn.

Vinayak Textile Mills, a unit at Ludhiana in Punjab with 50000 cotton spindles installed,
is manufacturing 100% cotton yarn and Polyster yarn with vast range of count selection
varies from NE 10s to 40s both in carded and combed varieties. The present capacity in
term of production is around 29Tons /Day and 14 -mt dyeing /day.

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.
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.

PRESENT CAPACITIES
Presently the group has following production capacity and product range at its different
manufacturing facilities.

Location Installed Production Product Range

Capacity Capacity
(spindles)
Bathinda (existing ) 105000 65Tons / Day Cotton, synthetic,
(VPL) blended yarn
Ludhiana 8000 6.5 Tons/Day Acrylic Yarn
(Anshupati Textile)
Ludhiana (VTM) 50000 29 Tons/Day 100%cotton
14-MT yarn,Polyester/
dyeing/Day Cottonblended

COMPUTERISATION

Presently the unit is operating under “SAP 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.
Personal computers have also been provided separately for each department like
administration, costing, R&D, Maintenance as well as the production areas.

USTERIZED CERTIFICATION
The unit had been awarded USTER certificate by Uster technologies AG CH-8610 Uster/
Switzerland on April 10, 2007. M/S Vinayak Textile mills, Ludhiana / India fulfil all
conditions for using the brand USTERIZED and will be checked regularly at once per
year basis.
PRODUCTION
The unit is producing different types of yarn both for Domestic consumption and Export
purpose. The production department is headed by General Manager (G.M.). The VTM
has two units. The unit I is concerned with the production of 100% cotton yarn NE 10s-
40s, Carded & Combed, Single & Multifold, Dyed , Processed & Polyester yarn NE 10s-
40s, Carded & Combed with a capability to offer any blend. The unit-II expansion is
concerned with production of Worsted Spun yarn 100% Cotton. .Production capacity of
unit –I is 15 ton per day and unit-II is 13 tons per day.

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 VTM.
having the export and domestic ratio is 34:66. The unit is having different channels for
distribution of its products.
1. Selling agents at Ludhiana, Amritsar, Delhi, Mumbai and Tirupur.
2. Branches at Delhi and Ludhiana.
3. Direct Dispatches are also made by the units.

ORGNISATION STRUCTURE
A chart showing the organizational structure of VTM Ludhiana 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.
 Manufacturing Process Flow Chart of VPL
100% COTTON CARDED/COMBED YARN

Issue of Cotton Bales

Laying Down

Blow Room

Card

Breaker Draw Frame Unilap

Finisher Draw Frame Comber

Speed Frame

Ring Frame

Winding

Cheese Winding

T.F.O

Conditioning Conditioning

Packing for Single Yarn Packing for Double Yarn

Storage & Dispatch

MANUFACTURING PROCESS IN VINAYAK TEXTILE MILLS
LIMITED, LUDHIANA

Raw cotton is used as a basic raw material for producing 100% cotton yarn for ring spun.
1. MIXING
The different varieties of cotton are issued as per product mix from the raw material
section in bale from. The different varieties of cotton and different lots are mixed together
as per the requirement of end product and standard recommended mixings. The material
is conditioned in mixing for 24 hours.
2. BLOW ROOM
In this process, the cleaning and opening of fibers is done in a sequence of beaters. Main
purpose is to reduce tuft size, remove the trash particles and foreign matter etc, which
often comes in the bales.
3. CARDING
In this process, further cleaning of fibers is done and the fibers are opened into single
fibers extent i.e. the main purpose is further removal of trash in cotton and the
industrialization and parallelization of fibers. From the carding machine, the material is
delivered in the form of sliver.