Working capital management

OBJECTIVES OF THE PROJECT

The objectives of the study are To understand and study in general the management of working capital. To analyze the distribution of gross working capital into various components. To calculate the operating cycle period.

IMPORTANCE OF THE STUDY

In every business organization its financial transactions are recorded in the systematic term, which called Financial Statement such as Profit and Loss Account and Balance Sheet. Financial Statements shows the financial strength and weakness of the firm, hence, the Financial Statements are prepared for the decision-making. Management becomes able to this purpose such financial statement are necessary to be analyzed. The study was useful to understand the Working Capital Management at Raymond Ltd. It was useful in understanding all theoretical concepts, how they are practically implemented.

LIMITATIONS
This project is not far from limitations. The limitations are: A company generally cannot disclose its internal policies to outsiders. In such case, it is very difficult to find out and gather complete and true information in the forms of figures regarding financial matters.

Working capital management METHODOLOGY

Research in common parlance refers to a search for knowledge. Research may be defined as manipulation of things, concepts or symbols for the purpose of generalizing to extent, correct or verify knowledge, whether that knowledge aids in construction of theory or in the practice of an art. Research objectives: The main objectives of research in management are: 1. To verify and to test the existing facts and theories. 2. To gain familiarity with a phenomenon or to achieve new insights into it. 3. To establish generalization in various fields of knowledge. 4. To bring to limelight information that could have never been brought to the knowledge under normal course. METHODS OF DATA COLLECTION Primary data collected from: Personal interview was the main tool for the collection of primary data and information. This study has brought in use very little primary data in relation with the elements of working capital. Secondary data collected from: Since the study is based on the financial aspects of the company so the annual report of the organization, Trial Balance, Income & Expenditure accounts of the company brought in use. Besides the company profile and theoretical aspects taken from the secondary sources. PRESENTATION OF THE DATA The data collected is presented in the form of: (a) (b) Tables Bar diagrams

Working capital management

(c) Pie charts

EXECUTIVE SUMMARY
Management of working capital is a challenging task particularly in developing countries like India. In developing countries generally, there is shortage of funds, frequent changes in the monetary policy as an instrument of controlling inflation, vast demands on bank funds, high interest rates, shortage of goods and services luring both business houses and consumers to hoard and maintain large inventories and existence of parallel black economy. A large part of finance managers is devoted in managing working capital to get day-to-day needs of an organization. His prime attention is devoted to maintain sufficient liquidity in the form of cash, marketable securities, accounts receivables and inventories to grease the operations of business adequately. But at the same time he is to take care of the profitability of the organization. Too much liquidity is a burden on profitability, as these are inversely related to each other. It is to balance between these two conflicting objectives of liquidity and profitability. For the organization it is a continuous process.

ANALYSIS OF DATA
For the analysis ratio has been used and for calculation of working capital and operating cycle two years figures has been compared crudely.

Working capital management

TABLE OF CONTENT
CHAPTER. NO.

TOPIC 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

THEORETICAL BACKGROUND Introduction Different types of working capital Risk and return in Working Capital Elements of Working Capital Different policies of working capital Working Capital Finance Operating Cycle Formulas to calculate working capital INTRODUCTION OF COMPANY Introduction History Group Companies Brands Growth Organization Chart ANALYSIS & INTERPRETATION OF DATA Calculation Of Working Capital Calculation Of Operating Cycle Elements Of Working Capital Management CONCLUSION & SUGGESTION ANNEXURES BIBLIOGRAPHY

PAGE NO.
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2 2.1 2.2 2.3 2.4 2.5 2.6 3 3.1 3.2 3.3 4 5 6

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47 49 52

Working capital management CHAPTER 1 THEORETICAL BACKGROUND WORKING CAPITAL MANAGEMENT

1.1 INTRODUCTION Working capital management refers to management of the working capital, or more precise, the management of current assets. Every organisation commercial as well as non-commercial requires some amount of fixed capital assets. Land and building, plant and machinery, furniture and fixtures , vehicles etc. in addition to fixed capital an organisation requires for additional capital for financing day to day activities such capital which is required for financing day to day activities is called as working capital. It is the life blood of an organisation. A firms working capital consist of its investment in current asset which include short term asset such as cash and bank balance, inventories, receivables, and marketable securities. Definition: Working capital is descriptive of that capital which is not fixed. But the more common use of working capital is to consider it as the difference between the book value of the current assets and the current liabilities. Working capital, like many other financial and accounting terms, has been used by different people in different senses. One school through believes, as all capital resources available to a business organisation, from shareholders, bondholders, and creditors ,works up in the business activities to generate revenue and facilities future expansion and growth, they are to be considered as working capital. Working capital management arises from two considerations: 1. Existence of working capital is imperative in any firm. 2. The working capital involves investment of funds of the firm.

Working capital management

Working capital refers to current asset which may be defined as: 1. Those which are convertible into cash or equivalent within a period of one year. 2. Those which are required to meet day to day operations. Though fixed asset and current asset both require investment of funds, working capital involve different concept and methodology than the techniques used in fixed asset management. Reason for this is that very basics of fixed assets decision process and working capital decision process are different. The fixed assets involve long period perspective; hence the concept of time value of money is applied in order to discount the future cash flows, where as in working capital the time horizon is limited, in general to one year only and the time value of money concept is not used. Fixed asset affect the long-term profitability while current assets affect the short-term liquidity of firm. Managing current asset may require more attention than managing fixed assets, because level of investment in each of the current asset varies from day to day, and the financial manager must therefore; continuously monitor these assets to ensure that the desired levels are being maintained. Too large an investment in current assets means tying up funds that can be productively used elsewhere. Excess investment may also expose the firm to undue risk e.g. in case, the inventory cannot be sold or the receivable cannot be collected. On the other hand, too little investment also can be expansive. For example, insufficient inventory may mean that sales are lost as the finish goods which customers wants are not available. Financial manager is faced with decisions involving some of the considerations are as follows: 1. What should be the total investment in working capital of the firm? 2. What should be the level of individual current assets? 3. What should be the relative proportion of different sources to finance the working capital requirement?

Working capital management

NEED FOR ADEQUATE WORKING CAPITAL: The need and importance of adequate working capital for day to day operation can hardly be underestimated. Every firm must maintain a sound working capital position otherwise; its business activities may be adversely affected. Thus every firm must have adequate working capital. The excess working capital, when the investment in working capital is more than the required level, may result in a). Unnecessary accumulation of inventories resulting in waste, theft, damage etc. b). Delay in collection of receivables resulting in more liberal credit terms to customers than warranted by the market conditions. c). Adverse influence on the performance of the management. On the other hand, inadequate working capital situation is not good for the firm. Such a situation may have following consequences: The fixed asset may not be optimally used. Firm growth may stagnate. Interruptions in production schedule may occur ultimately resulting in lowering of the profit of the firm. The firm may not be able to take benefit of an opportunity. Firm goodwill in the market is affected if it is not in a position to meet its liabilities on time. IMPORTANCE OF WORKING CAPITAL In the above discussion, we have tried to understand tall the aspect of the concept of working capital. After studying the working capital, we must understand its importance in financial management. It is as important as blood to body. Organizations profitability to a large extent depends on the quantum of working capital available to it. Adequate working capital is a source of energy to any business organization. It is the life blood an organization. 7

Working capital management

Adequate working capital: a) b) c) d) e) f) g) h) enables a company to meet a its obligations; ensure the solvency of a company; ensure the credit standing of a company; facilitates obtaining credit forms banks without much difficulty; enables a company to make prompt payments to its creditors and thereby take advantage of cash and quantity discount offered by them; enables an orgnisation to tide over difficult periods successfully; enhance the goodwill of a company as it can meet its operational expenses and maturing liabilities in time; Improves the prospects of prosperity and progress of company. Adequate working capital is an important factor behind the prosperity of a business organization. It is rightly called as the backbone of the financial structure of a business organisation. OBJECTIVES OF WORKING CAPITAL MANAGEMENT The primary objective of working capital is to manage. The current assets and current liabilities of a business entity efficiently, with idea to bring about a satisfactory level of working capital to that business can run smoothly. Working capital management aims to strike a judicious balance between individual items of current assets current liabilities and thereby achiev3s a reasonable safety margin. Working capital management policies exercise strong influence on a companys profitability, liquidity and its structural health. Estimating the amount of working capital required and identification of the sources form which the required funds have to be raised have become the twin objectives of working capital management. Thus, the problem of working capital management is one of best utilization of scarce resources. Working capital management depends on several variables and hence

Working capital management

efficiency and judgment on the part of managers and financial controllers are important requisites for the success of any commercial venture. Thus taking in to consideration financial manager must establish: A well defined working capital policy A self-sufficient working capital management system. FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

The amount of working capital required by a business organization depends on many factors. They are as follows: 1. Nature of business: The quantum of working capital required by a business organization is related to the type and nature of its business activities. Public utilities require less working capital as they sell services on cash basis only. A trading organization requires proportionately larger working capital as it has to carry large inventories and allow credit to customers. A manufacturing concern requires more working capital as compared to a firm engaged in trading. However, the requirement of working capital varies from industry to industry and from time to time in the same industry. 2. Production Policies: Production policies of a business organization exert considerable influence on the requirement of working capital. Production policies depend on the nature of the product. The level of production decides the investment in current assets which in turn decides the quantum of working capital required. 3. Production Process: if the production process stretches over a long period of time, greater amount of working capital will be required. Simple and short production process requires less working capital. 4. Size of the business unit: The amount of working capital required depends on the scale of operation of the business organization. Large organizations require more working capital than small-scale organizations.

Working capital management

5. Terms of Purchases and sales: A business organization making purchases on credit and selling on cash terms would require less working capital, whereas an organization selling goods on credit would require more working capital. If payment is to be made in advance to suppliers, large amount of working capital would be required. 6. Turnover of Inventories: A business organization having low inventory turnover would necessitate more working capital whereas, thigh inventory turnover would necessitate limited working capital. 7. Turnover of Circulating Capital: The speed with which circulation capital completes its cycle. i.e. con version of cash into inventory of raw material, raw materials into finished gods. Finished goods into debts and debts into cash, decides the working capital requirement of an organization. Slow movement of working capital cycle necessitates larger provision of working capital. 8. Seasonal Variations: In case of seasonal industries, like sugar and oil mills, more working capital is required during peak seasons as compared to slack seasons. 9. Dividend Polices: Dividend policies of a business organization also influence the requirement of working capital. Whereas a liberal dividend policy demands higher working capital, a conservative dividend policy will not act as a constant on working capital resources. This is relevant for companies. In case of other forms like partnership firms, it is a case of policies of drawings by partners. 10. Business cycle: Business expands during the period of prosperity and declines during the periods of depression. More working capital is required during the periods of prosperity and less during the periods of depression. 11. Inflation: A business concern requires more working capital during inflation. This factor may be compensated to some extend by rise in selling price.

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12. Changes in Technology: Changers in technology as regards production have impact on the need of working capital. 13. Others Factors: In addition to the above, the degree of co-ordination between production and distribution policies, means of transport and communications, import and taxation policies pursued by the government are some of the numerous factors that decide the working capital requirements. Thus working capital management may be defined as the management of firms sources and uses of working capital in order to maximize the wealth of the shareholders 1.2 DIFFERENT TYPES OF WORKING CAPITAL 1. GROSS WORKING CAPITAL: The gross working capital refers to the firms investment in all current assets taken together. Gross working capital is equal to the total current assets only. Items of current assets are like stock of raw materials, work in-progress, finished goods stores and consumable stores, sundry debtors, bills receivable, cash and bank balance, prepaid expenses, accrued income, advance payments, short term investments, etc. Gross Working Capital =Total Current Assets 2. NET WORKING CAPITAL: The term net working capital may be defined as the excess of total current assets over total current liabilities. This concept of working capital is widely accepted in financial management and normally for granting finance banks consider net working capital concept. Net Working Capital = Total Current Assets Total Current Liabilities.

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Working capital management

GROSS AND NET WORKING CAPITAL DISTINGUISHED Though Gross working capital and net working capital are nothing but quantitative concepts, they differ form each other in various respects. The major points of difference between these two concepts are as follows: GROSS WORKING CAPITAL NET WORKING CAPITAL

Gross working capital means total current Net working capital means excess of current assets. assets over current liabilities. Gross working capital is a quantitative Net working capital is a qualitative concept. concept. Gross working capital indicates the strength Net working capital is considered to be the of current position of a business index of solvency and liquidity of the organization. business. Gross working capital data cannot be used in Net working capital data is immensely isolation to indicate the charges in working useful in measuring the changes it the capital and to analyze the flow of funds. financial position of any business.

The gross working capital denotes the total working capital or total investment in current assets. A firm should maintain an optimum level of gross working capital. This will help avoiding: The unnecessarily stoppage of work or chance of liquidation due to insufficient working capital. Effect on profitability because over flowing working capital implies cost. Therefore, a firm should have just adequate level of total current assets. The gross working capital also gives an idea of total funds required for maintaining current assets. On other hand, net working capital refers to amount of funds that must be invested by the firm, more or less regularly in current assets. The net working capital also

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denotes the net liquidity being maintained by the firm. This also gives an idea of buffer available to the current liability. 3) PERMENENT WORKING CAPITAL This represent the quantum of current assets required on a continuing basis for and entry year the quantum of permanent working capital will vary according to the level of business actives from time from time permanent working capital is of two types: a) Initial working capital b) Regular working capital a) Initial working capital: This is the working capital required at the inception of an organisation. It may be difficult for a company to obtain credit from the bank and at the same time it and be required to grant credit to its customer. In such a case adequate working capital is required to activates the circulation capital and keep it moving b) Regular working capital: this is the amount of working capital required for the continuous operation of an enterprise. It refers to excess of current assets over current liabilities. Any organisation has to maintain a minimum stock of material finished goods 4) VARIABLE WORKING CAPITAL: Variable working capital is also called temporary working capital. Two types of variable working capital are as follow: 1) Seasonal working capital: it is the amount of working capital to meet the demand of seasonal requirement. During the seasonal more working capital is required and during the off seasonal less amount of working capital required. 2) Special working capital: In order to meet unforeseen eventualities such as strikes, fire, floods, riots, sudden increases in demand, war, contract. Drastic increases in taxes, sever competition etc

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Permanent Working Capital and Variable Working Capital- Distinguish PERMANEMT WORKING CAPITAL VARIABLE WORKING CAPITAL

This is required as long as the business This is required for a temporary period, as for continues as a going concern. example, during seasons. Permanent working capital never leaves the Variable working capital disappears from the business. business process once the purpose is served, The size of permanent working capital The sizes of temporary working capital need increases with the growth of business. not necessarily increase with the growth of business. 5) POSITIVE WORKING CAPITAL When the current assets are more than the current liabilities such a situation is known as positives working capital e.g.: if the current assets is Rs 5,00,000 and the current liabilities are Rs 3,00,000 the working capital is Rs 2,00,000. 6) NEGATIVE WORKING CAPITAL When current liabilities are more than the current assets such a situation is known as working capital. e.g.: if the current assets are Rs 500000 and the current liabilities are Rs 650000 the working capital is negative to the extent of Rs 150000 7) ZERO WORKING CAPITAL When the investment in current assets is exactly equal to the current liabilities in such a situation it shows zero working capital.

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e.g. If the current assets are Rs 500000 and also the current liabilities are Rs. 500000; then it is a situation of zero working capital. 1.3 RISK AND RETURN IN WORKING CAPITAL Another important aspect of working capital policy is to maintain and provide sufficient liquidity to the firm. Having a large working capital may reduce the liquidity risk faced by the firm, but it can have a negative effect on the cash flows. Greater liquidity makes the firm meeting its obligation, but simultaneously greater liquidity involves cost also. Therefore, the net effect on the value of the firm should be used to determine the optimum amount of working capital. Risk return trade off in working capital management is trade off between the Firms liquidity and its profitability. By maintaining large investment in current asset firm can reduces chances of 1. Production stoppages and the lost sales from the inventory shortage 2. Inability to pay the creditors on time. However if the firms increase in investment does not increase the corresponding return, this mean that the firms return on investment drops because profit is unchanged. In addition to above, other things remain same, greater the firms reliance on the short term debt in financing its current asset, greater the risk of ill-liquidity. A firm can reduce its risk of ill-liquidity through the use of long-term debt at the cost of reduction on its return on investment. So the risk in this context is measured by the probability that firm will become technically insolvent by not paying current liabilities as they occur, and profitability here means the reduction of cost of maintaining of current asset. In other words, more liquid is the firm; the less likely it is to become insolvent. Conversely, lower levels of liquidity are associated with increasing levels of risk. So, the relationship of working capital, liquidity and risk of the firm is that the liquidity and risk move in opposite direction. The Risk Return Syndrome Can Be Summed Up As Follows:

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When liquidity increases, the risk of insolvency is reduced, but profitability also reduced. However when the liquidity is reduced, the profitability increases but the risk of insolvency also increases. So profitability and risk move in the same direction. Moreover, the different elements of current assets should also be appropriately balanced. Each element and its position in the total working capital should be analyzed in the light of its characteristics. For e.g. the total current assets may be sufficient to cover the current liabilities but when the composition of current asset is analyzed, it may be found that its is consisting mainly of the obsolete and slow moving stock. This stock may not provide desired level of liquidity to pay off the current liabilities. Similarly, higher level of cash and bank balance may provide liquidity but affect the profitability because keeping cash and bank balance is not profitable use of the resources. The risk of liquidity effect of working capital changes depend on a number of factor such as: a) Stand-by sources: A firm with stand-by source of external financing is less exposed to liquidity risk than the firm, which does not have such access, because the former can tap these sources if it needs to cover the increasing current liabilities. b) Economic conditions: Holding other factors constant, firms typically experience larger changes in liquidity risk as a consequence of working capital change when the economy is in recession than when in boom. c) Future uncertainty: To the extent that future operations of the firm are predictable and stable, the firm can survive with lower investment in working capital than could, otherwise similar firms which have more uncertainty about the future operations.

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1.4 ELEMENTS OF WORKING CAPITAL Working capital management is concerned with the problems that arise in attempting to manage the current assets, current liabilities and the interrelationship that exists between them. The major current assets are cash, marketable securities, accounts receivable and inventory. The current liabilities are accounts payable, bills payable, bank overdraft and outstanding expenses. INVENTORY MANAGEMENT: Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers etc. The key is to know how quickly your overall stock is moving or, put another way, how long each item of stock sit on shelves before being sold. Obviously, average stockholding periods will be influenced by the nature of the business. Factors to be considered when determining optimum stock levels include: What are the projected sales of each product? How widely available are raw materials, components etc.? How long does it take for delivery by suppliers? Can you remove slow movers from your product range without compromising best sellers? It should be noted that stock sitting on shelves for long periods of time ties up money, which is not working. For better stock control, the following may be considered: Review the effectiveness of existing purchasing and inventory systems.

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door!" Higher than necessary stock levels tie up cash and cost more in insurance, accommodation costs and interest charges. The inventory of a manufacturing concern usually includes: Raw material Work-in-Progress Finished goods ACCOUNT RECEIVABLE: It is essential marketing tool, acting as a bridge for the movement of goods through production and distribution stages to customers. Firms grant trade credit for following reason: 1. To protect its sales from competitors 2. To attract potential customers to buy its product at favorable term 3. Buyers requirement 4. Companies bargaining power 5. Relationship with dealers 6. Marketing tool Receivable has three characteristics: Know the stock turn for all major items of inventory. Apply tight controls to the significant few items and simplify controls for the trivial many. Sell off outdated or slow moving merchandise - it gets more difficult to sell the longer you keep it. Consider having part of your product outsource to another manufacturer rather than make it yourself. Review your security procedures to ensure that no stock "is going out the back

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1. It involve an element of risk 2. It is based on economic value 3. It implies futurity. Receivable is a major component of current asset, granting credit and creating debtors amount to blocking of the Firms funds thus time interval between the date of sales and the date of payment has to be financed out of working capital. A Firms investment in account receivable depends on 1. The volume of credit sales 2. Collection period Therefore average investment in Accounts receivable is Daily credit sales * Average collection period. Credit policy ranges from credit to any one to no credit. If credit is given to any one then there is chances of creating bad debt on other hand if credit is not given then sales will reduce. There are various costs and benefits attached with a credit policy. Costs of Receivables 1. Costs of financing. 2. Administrative cost 3. Delinquency costs 4. Cost of default by customer Benefit of Receivables 1. Increase in sales 2. Increase in profits 3. Extra profits CASH MANAGEMENT: Financing of Current Assets:

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Another important aspect of working capital management is to decide the pattern of financing the current asset. Breaking down working capital needs into permanent components over time provides a useful by-product in terms of financing choice. Permanent component is predictable insofar as it is linked up to expected change in sale or cost of goods sales over time, temporary components is also predictable in general as it follows the same pattern every year. So two components need to be financed accordingly for which the different sources of funds can be grouped as follows: 1. Long term sources: e.g. share capital, retained earning, debentures and long term borrowings. 2. Short term sources: e.g. bank credits public deposit, commercial papers, factoring etc. 3. Transactionary sources: e.g. credit allowed by suppliers and outstanding labor and other expenses. There are different approaches to take this decision relating to financing mix of working capital as follows: 1. Hedging approach: In this approach financing maturity should follow the cash flow characteristics of the assets being financed. The general rule is that the length of the finance should match with the life duration of assets. The financing mix as suggested by the hedging approach is a desirable financing pattern. However, it may be noted that the exact matching of maturity period of current assets and sources of finance is always not possible because of uncertainty involved. 2. Conservative approach: In this approach all or most of the working capital needs are met by long-term sources and thus the firm avoids the risk of uncertainty. 3. Aggressive approach: In this approach the firm decides to finance a part of the permanent working capital by short-term sources. Motives for holding cash: Though cash is the most liquid asset, but it doesnt earn any substantial return for the business. But every firm maintains some cash balance because of following motives: 1. Transaction motive 20

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2. Precautionary motive 3. Speculative motive 4. Compensation motive Objective of cash management: Following are the two main objective of the cash management 1.To provide the cash needed to meet the obligations: if the firm have sufficient cash in hand, it will help firm in a) avoiding a chance of default. b) Availing the opportunities of getting cash discounts by making early or prompt payments. c) Meeting unexpected cash outflows without more problems. 2. Minimize the cash balance: Investment in idle cash balance is a dead investment and has no earning. Therefore, whatever cash balance is maintained, the firm is foregoing interest income on the balance. Factors affecting the cash: Various factoring which will determine the amount of cash balance to be kept by the firm are a) Cash cycle: the term cash cycle refers to the length of the time between the payment for purchase of raw material and the receipts of the sales revenue b) Cash inflow and cash outflows: every firm has to maintain cash balance because its expected inflows and outflows are not always synchronized. c) Cost of cash balance: another factor to be considered while determining the minimum cash balance is the cost of maintaining excess cash or of meeting shortages of cash. There is always an opportunity cost of maintaining excessive cash balance. In addition to above factors there are some other considerations also affecting the need for cash balance. They are uncertainties of a particular trade, staff required for cash management etc which will have a bearing on determining the cash balance required by a firm. 21

Working capital management

MARKETABLE SECURITIES: Management of Marketable securities is an integral part of investment of cash as this may serve both the purposes of liquidity and cash provided choice of investment is made correctly. As the working capital needs are fluctuating, it is possible to park excess funds in some short-term securities, which can be liquidated which need for cash is left. The selection of securities should be guided by three principles: (i) Safety- Return and risk go hand in hand. As the objective in this investment is ensuring liquidity, minimum risk is the criterion of selection. (ii) Maturity- Matching of maturity and forecasted cash needs is essential. Price of longterm securities fluctuates more with change in interest rates and is therefore more risky. (iii) Marketability- It refers to the convenience, speed and cost at which a security can be converted into cash. If the security can be sold quickly without loss of time and price it is highly liquid or marketable. Marketable Security Alternative: The choice of marketable securities is mainly limited to government treasury bill, deposits with banks and inter-corporate deposits. Unit Trust of India and Commercial papers of corporate are other attractive means of parking surplus funds, for companies along with deposits with sister concerns or associate companies. ACCOUNTS PAYABLE: Paying according to best terms is a critical component in maximizing the organizations purchasing profitability. Timely payments to suppliers, vendors and employees reduces costs, relieves administrative burden and helps in better utilization of short term working capital. 22

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Payable management gives an effective control over the expenses. Tracking vendors, processing payments and analyzing the vendors performances gives a clear picture of cash flow and provides the level of payables processing needed for the business. Payable management for an organization contributes to operational excellence by, ptimizing the workforce with improved productivity. O Improve the cash flow and enhance vendor relations. Achieve higher levels of accounting efficiency and accuracy. Payable management helps in achieving more accurate cost of goods sold, manage cash flow and generate payments with speed, accuracy and efficiency. 1.5 DIFFERENT TYPES OF WORKING CAPITAL POLICIES
Current Assets Conservative Moderate

Aggressive

Sales Level Above figure show three policies in working capital management. n moderate policy value of current asset increases in proportion with sales level. I In conservative policy value of current asset increases more rapidly than sales level. Such a policy tends to reduce the risk of shortage of working capital by increasing the safety component of current asset. The conservative policy also reduces the risk of nonpayment to liability.

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In aggressive type of policy sales level increases more in percentage than increase in current assets. This type of aggressive policy has many implications. The risk of insolvency of the firm increases as it maintains law liquidity. The firm is expose to greater risk as it may not be able to face unexpected change

in market Reduced investment in current asset will result in increase in profitability of the firm. 1.6 WORKING CAPITAL FINANCE After determining the level of working capital, then comes the question of financing of the same. The source of finance for working capital may be categorized as Trade Credit Bank Finance Accrued Expenses & Deferred Income Commercial Papers

Trade Credit Trade credit refers to the credit that a customer gets from suppliers of goods in the normal course of business. The buying firms do not have to pay cash immediately for the purchase made. This deferral of payments is a short-term financing called trade credit. Bank Finance Bank finance is the most commonly negotiated source of the working capital finance. It can be availed in the forms of overdraft, cash credit, purchase/discount of bills and loan. Banks are the largest providers of working capital finance to firms. Each companys working capital need is determined as per the norms. These norms are based on the recommendations of the following committees

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The Tandon Committee The Chore Committee Accrued Expenses & Deferred Income Accrued expenses represent a liability that a firm has to pay for the services, which it has already received. For e.g. salaries & wages, tax & interest. Deferred income represents funds received by the firm for goods and services, which it has agreed to supply in future. For e.g. advance payments made by the customers. Accrued expenses and deferred income also provide some funds for financing working capital. It is a limited source as payment of accrued expenses cannot be postponed for a long period and similarly advance income will be received only when there is a demand-supply gap or the firm is a monopoly. Commercial Paper Commercial paper is an important money market instrument for raising short-term finances. The Reserve Bank of India introduced the commercial paper scheme in the Indian money market in 1989. Commercial paper is a form of unsecured promissory note issued by the firms to raise short-term funds. 1.7 OPERATING CYCLE The working capital requirement of a firm depends, to a great extent upon the operating cycle of the firm. The operating cycle is defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. The length and nature of the operating cycle differs from one firm to another depending upon the size and nature of the firm.

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A companys operating cycle typically consists of three primary activities: purchasing resources, producing the product and selling the product. These activities create fund flows that are both unsynchronized and uncertain. They are unsynchronized because cash disbursements usually take place before cash receipts. They are uncertain because future sales and costs, which generate the respective receipts and disbursements, cannot be forecasted with complete accuracy. The concept of operating cycle is useful in controlling as well as forecasting working capital. Longer the operating cycle the more working capital funds the firm needs, while shorter operating cycle period indicates that the locking up of funds in current assets is relatively for short duration.

Cash

Debtors/BR

Raw Material

Sales Finished Goods

W ork-in Progress

Thus the operating cycle of a firm consists of the time required for the completion of the chronological sequence of the following: Procurement of raw materials and services. . . Conversion of raw materials into work-in-progress. . Conversion of work-in-progress into finished goods. . Sale of finished goods (cash or credit). . Conversion of receivables into cash. The segments of the operating cycle include raw material storage period, conversion period, finished goods storage period and average collection period before getting back cash along with profit. The total duration of all the segments mentioned 26

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above is known as gross operating cycle period. When the average payment period of the company to its suppliers is deducted from the gross operating cycle period the resultant period is called the net operating cycle period or the operating cycle period. IMPORTANCE OF OPEARTING CYCLE CONCEPT: It is important for deciding cash working capital required to meet the operating expenses going concern. The concept important because of the longer the operating cycle more will be the requirement of working capital .the management has to see that this cycle does not become longer. Reduction of operating cycle Every management tries to reduce the operating cycle in order to decrease the need of working capital. The following suggestion reduces the length of operation cycle: 1) Purchase management The purchase manager to ensure availability to right quantity of material at right time, at right price at right place. 2) Production management The production manager looks after proper maintenance of plant and machinery and plan and co- ordinate all the activities, upgrade system of production and shortest possible manufacturing cycle. 3) Marketing management The marketing manager should adopt various techniques of sales promotion and reduce the period of shortage of finished goods in the warehouse. 4) Effective Credit Policies The finance manager should streamline the credit and collection policies and minimize the investment in debtors. The manager should make all possible efforts to collect the book debts promptly.

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5) External Environment Length of operating cycle is also influenced by other external environmental factors, government fiscal and monetary policies, EXIM policies have an impact on operating cycle. The management should minimize the adverse impact of these policies on the operating cycle.

1.8 FORMULAS TO CALCULATE WORKING CAPITAL:

Closing Stock of Raw Material 1. Raw Material Holding Period = ----------------------------------------- * 365 Days Purchase cost of RM Closing stock of WIP 2. Work In Progress Holding Period = ------------------------------ * 365 Days Cost of Production Closing stock of FG 3. Finished goods Holding Period = ----------------------------- * 365 Days Cost of Goods Sold Debtors 4. Debtors Holding Period = ------------------- * 365 Days Credit Sales 5. Creditors Creditors Holding Period = ---------------------- * 365 Days Credit purchases

Outstanding expenses 5. Lag in payment = ------------------------------- * 365 days Expenses Amount METHODS OF PROJECTING WORKING CAPITAL REQUIREMENTS: (A) conventional method (B) operating cycle method (A) Conventional method: according this method, cash inflows and outflows are matched with each other. Greater emphasis is laid on liquidity of a business.

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(B) Operating cycle method: this method is more dynamic. It refers to working is realistic way. Working capital is decided on the basis if length of the

capital

opearting cycle . It is calculated on dividing operating expenditure boo the number of operating cycle

CONCEPT OF OPEARTING CYCLE Method An important method if estimating working capital requirements is opearting cycle

opearting cycle also called as working capital .it is the time period required for the whole operation starting with cash and ending with up cash plus . it is expressed in terms of months or weeks or days . the total period of opearting cycle is broken into various stages raw material waiting period, processing period , finished stock period, debtors period ,and creditors period in the base of manufacturing cum marketing organization .in the case of marketing organization ,the operating cycle period will be start .it will include only last three stages. Estimation of working capital requirement becomes easy when the opearting cycle is given . if it is not given , it has to be calculated with analysis of necessary data . The methodology is follows: Operating cycle (op) = R+ W+ F+D+C Where R = period of waiting for raw and stores W= processing period F= finished goods wanting period D = debtors collection period C= creditors payment period The various components of operating cycle are calculated as follows:

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R=

Average stock of raw materials and stores --------------------------------------------------------------Average raw material and stores consumed per day

Average work in process inventory W = -------------------------------------------Average Cost of production per day Average finished goods inventory F = --------------------------------------------Average Cost of goods sold per day Average account receivable D = ------------------------------------------Average credit sales per day Average accounts payable C = -----------------------------------------Average credit purchases per day

Percentage of sales method: It is traditional and very simple method if estimation of working capital requirements. as per this method working capital is determined on basis of past experience . The relation between sales and working capital is found. Then this relationship may be taken as base for a determination of working capital for the future.

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CHAPTER 2 INTRODUCTION OF RAYMOND INDIA LTD.

2.1 INTRODUCTION The company has completed 79 years. During this period the company has grown from a small woollen mill to a leading global producer of woollen fabrics. The company is engaged in many divisions like textile, ready-made & accessories, engineering files & tools, denim, prophylactics and cosmetics. Raymond group having businesses in Textiles, Readymade Garments, Engineering Files & Tools, Prophylactics and Toiletries. The group is the leader in textiles, apparel, & files & tools in India and enjoys a pronounced position in the international market. Raymond belie, which has resulted in path-breaking new products. Perceived as pioneer and innovator, Raymond ves in Excellence, Quality and Leadership. Raymond Textile is India's leading producer of worsted suiting fabric with over 60% market share. With a capacity of 25 million meters of wool & wool-blended fabrics, Raymond Textiles is the worlds third largest integrated manufacturer. The company exports its suiting to more than 50 countries including USA, Canada, Europe, Japan and the Middle East. Over the years, Raymond Textile has developed strong in- house skills for research & development Textile has been responsible for raising the standard of the Indian textiles industry. 31

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The Denim division has an installed capacity of 16 million meters and produces high quality ring denims. The company currently ranks among the top 3 producers in India. The products are exported to over 30 countries in the world. The Engineering Files & Tools division, J K Files & Tools, is the worlds largest producer of steel files with 90% market share in India and about 30% market share in the world. The Designer Wear division, Be: is an exclusive pret-a-porter range that houses designs by some of the finest Indian designers. Be: offers an eclectic mix of formal, office and evening wear for men and women, in western, ethnic and fusion styles with accessories. The Aviation division, Million Air was launched in 1996 to provide air charter services. Known for high quality and reliable services, Million Air has a fleet of three helicopters and one executive jet The company also diversified its business interests into cement and steel. In a restructuring exercise, the company divested its cement business to Lafarge India for Rs7.85bn and the steel business to German steel major, Thyssen-Krupp steel, for Rs4.21bn. With the divestment of its steel and cement businesses, the company has focused on its textile business. Raymond is further consolidating by merging its textile subsidiaries with itself and is planning to expand the ready-made garments segment, which enjoys higher growth rates as well as margins, through the inorganic route. After restructuring the company's textile business's share including garments, worsted fabric and denim has gone up to around 90%.

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2.2 HISTORY Around the time the Singhania family was building, consolidating and expanding its various businesses in Kanpur, one Mr. Wadia, was in a similar manner engaged in fulfilling his dream: he set up a small woollen mill in the area around Thane creek, 40 kms away from Bombay. The Sassoons, a well-known industrialist family of Bombay, who renamed it as The Raymond Woollen Mills, soon acquired this mill. When the Singhanias were looking for new regions to establish their presence and new fields to venture into, they concurred that textiles appeared to hold promise. A piece of information that a woollen mill was available on the outskirts of Bombay clinched the issue. When the grandson of Lala Juggilal, Lala Kailashpat Singhania took over Raymond in 1944, the mill was primarily making cheap and coarse woollen blankets, and modest quantities of low priced woollen fabrics. The vision and foresight of Mr. Kailashpat Singhania helped greatly in establishing the J.K. Groups presence in the western region. Under his able stewardship, Raymond embarked upon a gradual phase of technological upgradation and modernization producing woollen fabrics of a far superior quality. Under Mr. Gopalakrishna Singhania, the mill became a world-class factory and the Raymond brand became synonymous with fine quality woollen fabrics. At Raymond, quality did not rest on its laurels. When Dr. Vijayapat Singhania took over the reins of the company in 1980, he injected fresh vigour into Raymond, transforming it into a modern, industrial conglomerate. His son Mr. Gautam Hari Singhania, the present chairman and managing director has been instrumental in restructuring the Group. With the divestment of the Synthetics, Steel and Cement divisions he initiated, the Group has emerged 33

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stronger with a better bottom line, more focused approach, become market oriented and achieved a consolidated position. Today, the woollen mill by the creek has turned into a Rs. 1400 crores conglomerate and is Indias leading producer of worsted suiting fabric with 60% market share. It is also the largest exporter of worsted fabrics and readymade garments to 54 countries including Australia, Canada, USA, the European Union and Japan. The Raymond group is also the leader among readymades in India with a turnover of Rs. 2000 million with its three brands Park Avenue, Parx and Manzoni. In its pursuit of excellence Raymond continues to achieve enhanced customer satisfaction through ongoing innovation. And happily the growth graph continues to rise higherand higher.

2.3 THE GROUP COMPANIES OF RAYMOND ARE: Raymond Ltd. is Indias leading producer of worsted suiting fabric with a 60% market share. Raymond Apparel Ltd. has three highly regarded menswear brands in its folio: Park Avenue, Parx & Manzoni. J.K. Ansell Ltd. is the manufacturer and marketer of KamaSutra brand of premium condoms. J.K. Helene Curtis Ltd. is the marketers of the Park Avenue and Premium brands of mens toiletries. Color Plus Fashions Pvt. Ltd. Established in 1994 Color plus is one of the leading domestic brands for premium casual wear in the country.

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2.4 THE BRANDS OF RAYMOND GROUP The largest and most respected textile brand in India for 'The Complete Man' addressing the innate need of men to look good and at the same time possess strength of character. Formal readymade garments & accessories for men it has recently bagged the "Most Admired Brand" and "Most Admired Trouser Brand" awards. The semi formal and casual range of cottons, blends and denim wear catering to the smart, fashionable and comfortable clothing segment. The luxury range of mens shirts and ties acknowledged for its high quality and international styling.

An exclusive prt-a-porter line of ready-to-wear designer clothing for women and men in western, ethnic and fusion styles.

The premium condom brand with the unique for the pleasure of making love positioning in textured & flavored variants. The range of cosmetics & toiletries including after-shaves, shampoos, cologne, shaving cream, soaps deodorants, room fresheners Premium casual wear brand in high quality natural fibers like cotton and linen, in superior mixed and performance oriented weaves. Raymond exports fabrics, blankets, garments, denim, readymade accessories such as tie, socks handkerchiefs and leather belts to Africa, America, Asia, Australia, Europe etc.

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2.5 GROWTH Today, more than ever, companies depend on growth to build a strong market value. But, as most veteran executives know, growth is a double-edged sword. Creating growth is a challenge. Managing growth is a challenge. Raymond is a leading player in the textile segment with a presence in several segments - worsted textiles, denim and apparels. A strong brand and significant cash surplus are the key advantages that would enable the company to pursue both organic and inorganic growth opportunities. The company is well positioned to explore multitude of growth opportunities available to the sector. The sales of the textile division, which contributes substantially to the companys total sales and profitability, are of seasonal nature. The revenue of the textile division registered an impressive growth of 46 per cent 2.6 ORGANISATION CHART

MANAGING DIRECTOR

CORPORATE FINANCE

CORPORATE LEGAL / PR

GENERAL MANAGER (TEXTILE DIVISION)

GENERAL MANAGER (DENIM DIVISION)

GENERAL MANAGER (FILES & TOOLS DIVISION)

PRODUCTIO N

MARKETING

PERSONNEL

NORTH ZONE

EAST ZONE

WEST ZONE

SOUTH ZONE

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CHAPTER 3 ANALYSIS AND INTERPRETATION OF DATA

3.1 CALCULATION OF WORKING CAPITAL Introduction: Working Capital refers to the capital required to meet day to day operations. It is calculated by deducting current liabilities from current assets. (Rs.In lakhs) Particulars a) Current Assets, Loans and Advances: -Inventories -Sundry Debtors -Cash and Bank Balances -Other Current Assets -Loans and Advances Gross Working Capital (a) b) Current Liabilities and Provisions: -Current Liabilities -Provisions TOTAL (b) Net Working Capital (a-b) 18037.24 8373.15 26410.39 44380.64 26227.34 6770.84 32998.18 44013.01 29083.90 8063.66 37147.56 45343.03 29490.66 24614.52 2675.92 1887.79 12122.14 70791.03 31904.16 24846.74 2503.17 3315.06 14442.06 77011.19 28366.36 26877.07 2561.40 2969.90 21715.86 82490.59

2005

2006

2007

From the above table, taking individually, the company has favorable working capital. However, comparing the given years it is seen that there is increase in stock year by year also increase in debtors. This may be due to inability to sell the products. This means that the company is purchasing the material but not able to sell in the market and 37

Working capital management

as such the sale is reducing and so are the debtors and also the stock is increasing because of increased purchase and reduced sales. Thus, many a times it may happened that liquidity position are favorable but in fact, they may not be this due to increased stock. Cash is fluctuating over the period of three years. Other current assets are decreasing. Loans and advances are favorably stable along the period of three years. Current liabilities are decreasing; as such, the company has enough cash reserves to pay-off the creditors in stipulated time. This may be due to the trust on the suppliers about the material quality. Provisions on other hand were stable in 2005 and 2006 but sudden shoot up in the year 2007. This may be due to increase in proposed dividend and tax for the same. Particulars CURRENT ASSETS, LOANS AND ADVANCES (a) Inventories: (i) Loose Tools (ii) Stores and Spare Parts (iii) Stock-in-Trade: Raw Materials Goods-in-Process Finished Goods (iv) Merchanting Goods (v) Goods-in-Transit (b) Sundry Debtors : (i) Debts outstanding for a period exceeding six months Secured (considered good) Unsecured 106.32 144.80 7001.74 10004.3 5 8451.76 1311.36 2486.42 31904.1 6 4475.97 8673.34 9007.19 2714.92 1848.69 28366.36 84.75 2563.78 84.75 1561.50 31st March, 2009 (Rs. in lacs) 31st March, 2010 (Rs. in lacs)

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Considered good (including Rs.6.46 lacs duefrom subsidiaries; Previous year Rs.Nil) 1329.32 1435.64 Considered doubtful Less: Provision (ii) Other Debts : Secured (considered good) Unsecured Considered good (including Rs.1499.20 lacs due from subsidiaries; Previous year Rs.737.21 lacs) 21092.5 9 23411.1 0 (c) Cash and Bank Balances: (i) Cash on hand (including cheques on hand Rs. 658.97 lacs; Previous year Rs.248.31 lacs) (ii) Balances with Scheduled Banks: In Current Accounts (including remittances-in-transit Rs.0.16 lac; Previous year Rs.2.00 lacs) In Deposit Account [includes Rs.0.61 lac deposit receipt endorsed in favour of Government authorities as security (Previous year Rs.0.64 lac)] (iii)Balances with Non-Scheduled Banks: In Current Accounts: The Municipal Co-operative Bank Limited [Maximum balance during the year Rs.8.82 lacs (Previous year Rs.6.87 lacs)] 5.59 39 3.47 91.67 92.20 2129.93 1745.14 272.62 709.22 24846.7 4 22292.5 5 26877.07 24977.3 1 649.83 (649.83) 2318.51 _ 1754.96 1899.76 386.68 (386.68) 2684.76 _

Working capital management

The Hongkong & Shanghai Banking Corporation, Shanghai [Maximum balance during the year Rs. 14.79 lacs (Previous year Rs.9.46 lacs)] In Deposit Accounts: The Municipal Co-operative Bank Limited [Maximum balance during the year Rs.0.50 lac (Previous year Rs.0.50 lac)] (d) Other Current Assets: (i) Export Incentives receivable (ii) Dividend, Interest Subsidy and Interest receivable (Interest accrued on Investments Rs391.08 lacs Previous year Rs.88.06 lacs) (iii) Claims and Other receivables [Net of provision for doubtful claims Rs.Nil (Previous year Rs.67.86 lacs)] (e) Loans and Advances (Unsecured, considered good, unless otherwise specified): [Refer Notes 3 and 5] Subsidiary Companies: Loans and other dues Loans and Advances to co. and others: Considered good [includes Rs.30.00 lacs secured] Considered doubtful Less: Provision Advance Tax (Net of provision for tax) Advances recoverable in cash or in kind or for value to be received : Considered good Considered doubtful 4405.89 104.81 6621.60 11.34 330.00 32.00 (32.00) 346.74 3716.16 32.00 (32.00) --4102.87 5362.81 1283.63 3315.06 758.23 2969.90 1149.67 1798.92 881.76 412.75 0.50 2503.17 0.50 2561.40 2.86 10.87

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Less: Provision Balances with - Customs, Excise, etc. Others (including with subsidiaries Rs. 160.33 lacs Previous year Rs.160.33 lacs) Per Balance Sheet CURRENT LIABILITIES AND PROVISIONS (a) Current Liabilities : 45.09 Acceptances Sundry Creditors [including Rs. 241.32 lacs due as remuneration to the Directors (Previous year Rs.197.21 lacs)] Advances against Sales Due to Subsidiary Companies Deposits from Dealers and Agents Overdrawn Bank Balances Other Liabilities Interest accrued but not due (b) Provisions : For Proposed Dividend For Tax on Proposed Dividend For Taxation (Net of Advance Tax) For Fringe Benefit Tax (Net of Advance Tax) For Retirement Benefits For Excise Duties Others Per Balance Sheet 24.28 2049.21 326.40 871.48 6770.84 32998.1 2.58 2912.71 223.02 866.29 8063.66 37147.56 16427.4 1 560.35 177.84 5318.21 1125.67 2044.72 528.05 3069.04 430.43 26227.3 4 17722.8 9 771.64 1007.15 5600.62 1815.07 2017.25 29083.90 149.28 3069.04 521.58 468.44 ---5253.36 14442.0 6 77011.1 9 5990.77 21715.86 82490.59 (104.81) 3.20 (11.34) 24.52

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8 3.2 CALCULATION OF OPERATING CYCLE Introduction: Operating cycle is the time duration starting from the procurement of goods or raw materials and ending with the sales realization. (Rs. Lakhs) In

Particulars A. Raw Material Storage Period -Annual consumption Of

2006 Raw 28296.37 77.52 4264.37 55 72973.38 199.93 7622.03 38

2005 21079.39 57.75 2956.36 51 62377.10 170.90 7598.65 44

Material -Avg. daily consumption of RM (assume 365 days) -Avg. stock of RM RM Storage Period (in days) B. Conversion Period -Annual Cost of Production -Avg. daily COP (assume 365 days) -Avg. stock of WIP Conversion Period (in days) C.Finished Goods Storage Period -Annual Cost of Sales -Avg. daily COS. (assume 365 days) -Avg. stock of FG FG Storage Period (in days) D. Avg. Collection Period -Annual Credit Sales -Avg. daily Credit (assume 365 days) -Avg. Debtors Avg. Collection Period (in days) E. Avg. Payment Period -Annual Credit Purchases -Avg. daily Purchases -Avg. Creditors Avg. Payment Period (in days) Operating Cycle (in days) A+B+C+D-E

100819.29 276.22 12553.21 45 94431.64 258.72 26842.67 104 29712.85 81.41 2696.60 4233 209

92401.36 253.15 12307.76 49 85469.15 234.16 30907.68 132 23982.01 65.70 2416.38 37 239

Source: Balance sheet Income Account Raw Material Storage Period: To calculate the & &

Expenditure

Working capital management

Raw Material. Storage period on an average divide the average stock maintain by the organization by daily consumption, resulting in giving the blocking period. From the observation of the figures it can be seen that increasing consumption of Raw Material. is leading to increasing requirement of higher level of stock, surely affecting the Raw Material storage period. Thus the Raw Material storage period is increasing upto 55 days in 2006.This shows that more funds are blocked in Raw Material. For 9 days, though increasing production demands more flow of Raw Material Conversion Period: The observation is showing increasing daily Cost of Production, which is the obvious result of increasing production pattern of the organization. The organization has successfully maintained the stock level of Work in Progress with a very little variation. The average daily Cost of Production is increasing from Rs. 170 lakhs to Rs. 199 lakhs. Over the period of three years maintaining the same level of Work in Progress is red5ucing the conversion period from 44 days to 38 days. It can be said that increased Raw Material storage period of 9 days is very much compensated by the conversion period, which is reduced by 12 days. Finished Goods Storage Period: It is mainly dependent on sales trend of the company. Company is constantly showing increasing turnover and the figures can be taken as indicator of the same from the operating cycle point of view. Though the average daily Cost of Sales and average stock of Finished Goods figures are increasing, no specific trend can be observed in their proportion, which can be easily pointed out by Finished Goods storage period, increased to 49 days in 2005 and again came down to 45 days in 2006. The lesser period of Finished Goods stock gives favorable view towards organizations operating cycle management. Average Collection Period: It is cumulative figure effect of companys credit policy, Debtors/BR maintenance discount policy and other bad debts. Naturally increasing sales will show increased average daily credit, which can be observed in the given figures i.e. Rs.259 lakhs in 2006.. The decrease is about Rs. 1000 lakhs, which is heavily resulting into reduced collection period. Coming down of collection period from 132 days to 104 days is showing the strong receivable policies of the company.

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Average Payment Period: Though the company is allowing enough credit periods to its debtors it is getting even lesser period from its creditors. Thus, decreasing payment period, calling for more liquidity or cash, parallelly compensates the reducing collection period. The average payment period is reduced to 33 days from 37 days with increasing average daily purchases from Rs.65 lakhs to Rs.81 lakhs over the period of three years. Increasing purchases are the result of the increased turnover of the company. It can be said that reducing payment period is observed due to changing policies of the company. Operating Cycle Lock-in-Period: This is the jumbled effect of R.M storage period, Conversion period, F.G storage period, and Collection period reduced by Average payment period to creditors. The whole operating cycle was of 236 days, which increased by just 3 days (239 days) in 2005 and came down to 209 days in 2006, showing the favorable working capital position in comparison of earlier two years.

3.3 ELEMENTS OF WORKING CAPITAL MANAGEMENT INVENTORY MANAGEMENT:

The inventory of the company includes the following: Raw material Work-in-Progress Stores and Spares Finished goods The table below gives a brief description of all the types of inventory, the components included, the valuation methods followed and other relevant details: Particulars Raw Material Work-inProgress Finished Goods Stores and Spares

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Wool (Australia) (fine micron, coarse) Polyester (Reliance Ltd.),Viscose (Locally),Yarn Component (RSM) (Rajasthan), Camel hair (Locally) Soya bean fiber (Locally) Fine micron-July and stored At its peak Valuation Method Value as in May 2005 (Rs.crores)) Managed by Production and Planning Dept. Production & 14 for the entire year Specific Identification Weighted Average 68-70 Wedding and festive Seasons. Stable-AprilAugust Dec-Jan Weighted Average Cost or market value Which ever is less. 110 (in accordance with AS-2 including Excise duty) Production and planning Weighted Average 8-9 Fabric Oils, Lubricants etc.

Planning dept. dept, Warehousing RAW MATERIAL: Wool: Tops of around 19microns and less are seasonally imported and of around 21, 22,and 24 microns are imported throughout the year. The ordering of the raw materials depends on the landing cost, which is the product of the following: Price, availability, and exchange rate fluctuations. The maximum demand is during the festive and wedding season, i.e. from the month of Oct. onwards. The production time being 2-2.5 months, the lead-time (the time from when the order is placed to when the material stock is actually received) being 2 months, the inventory is accordingly ordered in the months of June July and stored for the entire year.

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It is expected that the company should maintain 100% raw material inventory as it accounts for only 27%(approx.) of the ex-mill price which turns out to be around Rs. 1820 crores. The company does not maintain any safety stock, as fluctuations are present throughout the year. The pricing policy of the raw materials is done by specific identification method, in this method the raw material stock is imported consignment -wise and the stock identification is done in the form of lots. There are no standards or norms followed by the company in specific as fluctuations dominate the market. WORK-IN-PROGRESS: The in process inventory for the company is fairly stable throughout the year at Rs.68-70 crores with a minor fluctuation of around Rs.2-3 crores. This is mainly as the following mentioned factors are more or less constant throughout the year: a) Machine efficiency; b) Loading; c) Flow FINISHED GOODS: The finished goods inventory at the company is very volatile. The production is more or less in stock during the period April August and starts depleting somewhere in the months of September / October, it again starts picking up in the months of December / January (which is the peak). Exports are more or less constant, though there the predominant exports are in the months of April July. The debtors constitute the major portion of Inventory. As the finished goods and inventory vary inversely, i.e. when the inventory is at its peak, the debtors are at their lowest and vice versa. Thus the finished goods inventory levels and debtors are more or less constant. ACCOUNT RECEIVABLE:

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In Raymond Ltd. the goods are sold through the following distribution channel: Dealer

Wholesaler, retailer, franchisees In order to gain more profit or to keep profit within the company it has 300 own retail shops. The company is very speculative about appointing its dealers. To appoint new dealers it is taking following precautions 1. Worthiness of dealers is checked by the Raymond and also conformed from the agent of that particular area. 2. It will not appoint two dealers in same area, which will hamper the market of each other .if necessary it will appoint new dealers with proper market survey 3. Amount of credit is decided by company. If credit is given to new dealers then there is a risk of bad debts if he is not able to make the payment. Raymond takes security deposit of 2% of net sales of previous year sales. As most of the sales are on credit so it is necessary to manage the collection properly so payment is collected through: 1. Direct payment 2. Collection of bills The company it is not allowing any discount on early payment Direct payment is collected through check or Cash Management Service (CMS). 50% of collection is through CMS, which reduces delay in collection.

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In collection of bill Raymond send bill to dealers, when dealers accept these Bills, the Banks will discount them. Bank discounts the bill in two ways: 1.with recourse 2.without recourse In with recourse system company is giving guarantee that if dealer is not paying bill then company will pay it, which is secure hence bank will not check dealer worthiness it will just check signature. In this way Raymond maintains good relations with bank as well as dealers. Factoring is done with HSBC, UTI, Kotak Mahindra, at the rate of 6.25% for 90 days bill. In without recourse system bank will check the worthiness of dealer because Raymond is not going to pay the bill, but in case of any default of payment it will help bank by stopping the delivery of the goods to the customer. This is not true for all dealers, if the company feels that the dealer is worthy then it will allow supply of goods to default dealer. Channel financing is done through Centuring financing, ABN Amro HSBC, ICC bank. In this rate is 10-12% depending on bank and worthiness of dealer. Normally 16 days are allowed for collecting money through check or demand draft, while 10 days are allowed for bills and Cash Management Service. The credit period allowed for wholesaler, franchisee, retailers are as follows Wholesaler Franchisee Retailers 90 days 60 days 45 days

Due to credit policy Raymond claims that they do not have any bad debt since long year. In case any dealer made the bad debt then in that case the commission of agent is held and the amount of bad debt is recovered from that commission

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The commission given to the agent varies from 2.5-3.5% depending on quality of product. For a particular area there is only one agent and the amount of his commission is in crores of Rupees, hence the company can say that they will recover the bad debt. The company also gives free bags, Air conditioner, Generator for franchisee in order to make payment properly. CASH MANAGEMENT: Raymond is cash rich company. They are using conservative policy for working capital management in order to not to loose the sales. In case of booming period of sales like marriage season, Diwali, they require more working capital before two month of booming period of sales. The company does not have debt so even if they follow conservative approach they are managing to have less reduction in profit due to liquidity by investing it in to short-term investment like mutual funds for monthly quarterly or semiannually basis. They also manage the liquidity at time of requirement by investing it in to different period. Kotak Mahindra and DSP Merrill Lynch are the advisers of Raymond. They also invest in Chartered Bank on daily basis. Their average rate of return on this investment is 5-6%. Also no other investment gives more rate of return than this because bank interest rates are low. ACCOUNTS PAYABLE: The payment section in the Accounts department in the company makes payment to the 20 departments of the company and some part of management expenditure. They also maintain the records of all payment receipts of the companys registered office at Ratnagiri. The Government and other payments are made through the State Bank of India and Bank of India. Major payments are made through UTI Bank, Standard Chartered

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Bank, HSBC because only these banks gives the facility of free cheques printed with the name of Raymonds while other banks charge for the same. At Raymond Ltd. the modes of payment differ according to the amount, which is shown in the following table--Amount in Rs. 0-1000 1000-20000 Above 20000 Mode of payment Petty cash Cash / Cheque Cheque

The payment to the foreign suppliers is made through the banks by debiting the companys account in rupees equivalent to the foreign currency of the concerned supplier including transfer charges. The salaries are paid through cheques, which is controlled by the Salary department. The company makes payment after receiving the goods except incase of Reliance to whom they make advance payment. The company generally receives 2%-4% cash discount and 15-30 days of credit. Only the Pran Brothers give regular discounts even on bills of Rs.1000-Rs.5000. The Commercial department does all the negotiation regarding purchases. The company plant is situated at Thane in order to avoid the octroi duty. The payment structure is revised quarterly.

CHAPTER 4 CONCLUSIONS AND SUGGESSTIONS

CONCLUSIONS General Conclusions:

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Despite the difficult conditions in the international market the company continued to be on the growth path, both in terms of volume and revenue. Raymond shops network, already representing largest retailing space under any single brand crossed the 300 mark (20 overseas) reduces the commission paid to dealers, agents etc thereby increasing the profit within the company. Specific Conclusions: Though the consumption of Raw Material, cost of production and cost of sales has increased in 2006, net working capital is decreased by 30 days due to decrease in collection period. This shows the improvement in the collection policies of the company, which includes discounting of channel financing, and aggressive collection policy. The operating cycle Lock In Period came down to 209 days in 2006 compared to 239 days in 2005 and, which shows that the working capital position of the company is favorable as compared to the earlier 2 years.

SUGGESTIONS General Suggestions: The company has to take steps to counter the rising input cost and domestic competition through cost reduction, rationalization of products and distribution channels, judicious inventory management and research and development.

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As China has become a part of World Trade Organization, which can hamper the Indian Textile market, the company has to leverage a strong brand in the international market. It is seen that as the inventory carrying cost is reducing because of the falling interest rates, the company may stock more if desired. Specific Suggestions: The Raw Material storage period has increased from 51 days in 2005 unto 55 days in 2006, which shows that more funds are blocked in Raw Materials for 9 days though increasing production demands more flow of Raw Material. Using modern production techniques like Just in Time approach will reduce the Raw Material storage period and increase the liquidity or cash in hand. The company can adopt the aggressive approach to finance current assets. In this approach the firm finances a part of its permanent current assets with short term financing. This is more risky but may add to the return on assets.

CHAPTER 5 ANNEXURE
ANNEXURE NO. 01 BALANCE SHEET AS ON 31st MARCH

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Particulars Sources of Funds: Shareholders Funds Share Capital Reserves & Surplus Loan Funds Secured Loans Unsecured Loans Deferred Tax Liability TOTAL Application of Funds: Fixed Assets Gross Block Less: Depreciation Net Block Capital WIP Investments Current Assets, Loans & Advances Inventories Sundry Debtors Cash & Bank Bal. Other Current Assets Loans & Advances Less: Current liabilities & Provisions Current Liabilities Provisions 18037.24 8373.15 26227.34 6770.84 53 29083.90 8063.66 29490.66 24614.52 2675.92 1887.79 12122.14 70791.03 31904.16 24846.74 2503.17 3315.06 14442.06 77011.19 97952.73 57309.49 40643.24 1478.85 42122.09 71586.85 136672.80 67765.80 68907.00 15604.8 84511.81 73660.28 28366.36 26877.07 2561.40 2969.90 21715.86 82490.59 123003.48 55397.84 67605.64 8568.51 76174.15 98447.50 22928.24 24722.05 47650.29 5701.71 158207.45 6402.73 202185.10 54667.56 54667.56 76787.84 56686.05 22074.96 78761.01 5587.73 219964.68 6138.08 98717.37 104855.45 6138.08 112856.45 118994.53 6138.08 129477.86 135615.94 2008 2009 2010

Working capital management

26410.39 Net Current Assets TOTAL ANNEXURE NO. 02 PROFIT & LOSS ACCOUNT FOR THE YEAR ENDED 31st MARCH Particulars Income Sales Services & Export Incentives Other Income Expenditure Material Costs Manufacturing & Operating Cost Increase/Decrease in Finished & processed stock Employment Costs Administrative, Selling & General Expenses Finance Charges Depreciation & Amortisation Less: Trial Run Expenditure capitalised Finished and process stock transferred on divestment of Business ---- (1187.81) 123272.27 Profit for the year before exceptional items Add/less: Exceptional items 18312.77 17365.15 345.65 (994.67) 15698.64 8124.64 (3468.26) 121798.53 18120.12 23833.84 2308.94 3528.09 6337.85 7271.16 98540.31 124530.83 ---- (70.75) 26113.63 4711.91 6305.51 125317.83 51.04) (417.46) (510.89) 18042.16 20397.96 791.45 22558.39 31134.16 40665.75 22932.10 29344.92 37737.82 27099.12 2008 2009 128419.35 9077.82 137497.17 2010 44380.64 158207.45 32998.18 44013.01 202185.10 37147.56 45343.03 219964.68

102393.56 132473.91 14459.52 8163.51 116853.08 140637.42

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Working capital management

18658.42 16370.48 Profit for the year before tax Provision for income tax Current tax Deferred tax Provision for Wealth tax Profit for the year after tax Add/Less:Prior period Adjustments(net) Excess provision for tax written back Balance brought forward Balance available for Appropriation Appropriation Debenture Redemption Reserve General Reserve Proposed Dividend Tax on Proposed Dividend Balance carried to Balance Sheet 250.00 1275.00 6000.00 1210.05 3375.95 3069.04 432.54 430.43 10058.90 5984.52 6144.78 16717.36 1450.00 4000.00 3069.04 521.58 9040.62 27888.77 (146.98) (110.63) 192.38 (18.00) 2974.74 10601.41 16203.68 22701.88 88.05 (1.30) 16717.36 36929.39 4660.00 2750.00 788.88 1000.38 --- 358.00 26.00 33.00 13183.54 12229.10 4210.00 (815.00) 275.00 28.00 20125.28 23823.28

BIBLIOGRAPHY
BOOKS:
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Working capital management

Chaudhary and chopde, Financial Management (Text & Problems), Arvind Dhond, Financial Management (Theory & Practice),

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