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.

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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

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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 manager’s 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.

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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

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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.

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Reason for this is that very basics of fixed assets decision process and working capital decision process are different. What should be the level of individual current assets? 3. 2. Excess investment may also expose the firm to undue risk e. What should be the total investment in working capital of the firm? 2. Those which are convertible into cash or equivalent within a period of one year. The fixed assets involve long period perspective.Working capital management Working capital refers to current asset which may be defined as: 1. working capital involve different concept and methodology than the techniques used in fixed asset management. For example. On the other hand. where as in working capital the time horizon is limited. continuously monitor these assets to ensure that the desired levels are being maintained.g. Fixed asset affect the long-term profitability while current assets affect the short-term liquidity of firm. Though fixed asset and current asset both require investment of funds. hence the concept of time value of money is applied in order to discount the future cash flows. Too large an investment in current assets means tying up funds that can be productively used elsewhere. too little investment also can be expansive. the inventory cannot be sold or the receivable cannot be collected. What should be the relative proportion of different sources to finance the working capital requirement? 6 . Those which are required to meet day to day operations. Financial manager is faced with decisions involving some of the considerations are as follows: 1. insufficient inventory may mean that sales are lost as the finish goods which customers’ wants are not available. Managing current asset may require more attention than managing fixed assets. in case. and the financial manager must therefore. in general to one year only and the time value of money concept is not used. because level of investment in each of the current asset varies from day to day.

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

Thus. Working capital management depends on several variables and hence 8 . Working capital management policies exercise strong influence on a company’s profitability. enhance the goodwill of a company as it can meet its operational expenses and maturing liabilities in time. The current assets and current liabilities of a business entity efficiently. enables an orgnisation to tide over difficult periods successfully.”  OBJECTIVES OF WORKING CAPITAL MANAGEMENT The primary objective of working capital is to manage. with idea to bring about a satisfactory level of working capital to that business can run smoothly. Improves the prospects of prosperity and progress of company. facilitates obtaining credit forms banks without much difficulty. ensure the solvency of a company. Adequate working capital is an important factor behind the prosperity of a business organization. Working capital management aims to strike a judicious balance between individual items of current assets current liabilities and thereby achiev3s a reasonable safety margin. ensure the credit standing of a company. liquidity and its structural health. the problem of working capital management is one of ‘best utilization of scarce resources. enables a company to make prompt payments to its creditors and thereby take advantage of cash and quantity discount offered by them. It is rightly called as “the backbone of the financial structure of a business organisation. 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.Working capital management Adequate working capital: a) b) c) d) e) f) g) h) enables a company to meet a its obligations.

Size of the business unit: The amount of working capital required depends on the scale of operation of the business organization. A manufacturing concern requires more working capital as compared to a firm engaged in trading. Simple and short production process requires less working capital. Nature of business: The quantum of working capital required by a business organization is related to the type and nature of its business activities. greater amount of working capital will be required. 2. the requirement of working capital varies from industry to industry and from time to time in the same industry. The level of production decides the investment in current assets which in turn decides the quantum of working capital required. Production Policies: Production policies of a business organization exert considerable influence on the requirement of working capital. Production Process: if the production process stretches over a long period of time.Working capital management efficiency and judgment on the part of managers and financial controllers are important requisites for the success of any commercial venture. 3. 9 . Public utilities require less working capital as they sell services on cash basis only. Production policies depend on the nature of the product. Thus taking in to consideration financial manager must establish: • •  A well defined working capital policy A self-sufficient working capital management system. Large organizations require more working capital than small-scale organizations. A trading organization requires proportionately larger working capital as it has to carry large inventories and allow credit to customers. 4. They are as follows: 1. However. FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS The amount of working capital required by a business organization depends on many factors.

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

Others Factors: In addition to the above. etc. This concept of working capital is widely accepted in financial management and normally for granting finance banks consider net working capital concept. prepaid expenses. accrued income. Thus working capital management may be defined as the management of firm’s sources and uses of working capital in order to maximize the wealth of the shareholders 1. Gross Working Capital =Total Current Assets 2.2 DIFFERENT TYPES OF WORKING CAPITAL 1. 13. finished goods stores and consumable stores. advance payments. Net Working Capital = Total Current Assets –Total Current Liabilities. NET WORKING CAPITAL: The term net working capital may be defined as the excess of total current assets over total current liabilities. GROSS WORKING CAPITAL: The gross working capital refers to the firm’s investment in all current assets taken together. Changes in Technology: Changers in technology as regards production have impact on the need of working capital. import and taxation policies pursued by the government are some of the numerous factors that decide the working capital requirements. sundry debtors.Working capital management 12. Items of current assets are like stock of raw materials. Gross working capital is equal to the total current assets only. 11 . the degree of co-ordination between production and distribution policies. bills receivable. cash and bank balance. means of transport and communications. short term investments. work –in-progress.

The gross working capital also gives an idea of total funds required for maintaining current assets. The net working capital also 12 . 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. The gross working capital denotes the total working capital or total investment in current assets. assets over current liabilities. On other hand. This will help avoiding: • • The unnecessarily stoppage of work or chance of liquidation due to insufficient working capital. business. net working capital refers to amount of funds that must be invested by the firm. financial position of any business. concept. a firm should have just adequate level of total current assets. Effect on profitability because over flowing working capital implies cost. Gross working capital is a quantitative Net working capital is a qualitative 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. 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. Therefore. A firm should maintain an optimum level of gross working capital. more or less regularly in current assets. they differ form each other in various respects.Working capital management GROSS AND NET WORKING CAPITAL – DISTINGUISHED Though Gross working capital and net working capital are nothing but quantitative concepts.

This also gives an idea of buffer available to the current liability. sudden increases in demand. sever competition etc 13 . 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. contract. 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. riots. floods. Drastic increases in taxes. 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. war. 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. 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. 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.Working capital management denotes the net liquidity being maintained by the firm.

00.00.g.Working capital management Permanent Working Capital and Variable Working Capital. business process once the purpose is served.: 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. example. not necessarily increase with the growth of business.000.Distinguish PERMANEMT WORKING CAPITAL VARIABLE WORKING CAPITAL This is required as long as the business This is required for a temporary period.: if the current assets is Rs 5. as for continues as a going concern. during seasons.000 and the current liabilities are Rs 3. 14 . 5) POSITIVE WORKING CAPITAL When the current assets are more than the current liabilities such a situation is known as positives working capital e.000 the working capital is Rs 2.00.g. The size of permanent working capital The sizes of temporary working capital need increases with the growth of business. e. 6) NEGATIVE WORKING CAPITAL When current liabilities are more than the current assets such a situation is known as working capital. Permanent working capital never leaves the Variable working capital disappears from the business.

500000. this mean that the firms return on investment drops because profit is unchanged. greater the risk of ill-liquidity. the less likely it is to become insolvent. Therefore. In other words.Working capital management e. Having a large working capital may reduce the liquidity risk faced by the firm. In addition to above. but it can have a negative effect on the cash flows.3 RISK AND RETURN IN WORKING CAPITAL Another important aspect of working capital policy is to maintain and provide sufficient liquidity to the firm. 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. So. then it is a situation of zero working capital. However if the firms increase in investment does not increase the corresponding return. Production stoppages and the lost sales from the inventory shortage 2. 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: 15 . Conversely. 1.g. Inability to pay the creditors on time. 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. Greater liquidity makes the firm meeting its obligation. lower levels of liquidity are associated with increasing levels of risk. other things remain same. greater the firms reliance on the short term debt in financing its current asset. If the current assets are Rs 500000 and also the current liabilities are Rs. By maintaining large investment in current asset firm can reduces chances of 1. more liquid is the firm. the relationship of working capital. and profitability here means the reduction of cost of maintaining of current asset. but simultaneously greater liquidity involves cost also. 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.

16 . otherwise similar firms which have more uncertainty about the future operations. it may be found that its is consisting mainly of the obsolete and slow moving stock. the risk of insolvency is reduced. but profitability also reduced. For e. which does not have such access. the total current assets may be sufficient to cover the current liabilities but when the composition of current asset is analyzed. because the former can tap these sources if it needs to cover the increasing current liabilities. Moreover. Similarly. c) Future uncertainty: To the extent that future operations of the firm are predictable and stable.Working capital management When liquidity increases. the different elements of current assets should also be appropriately balanced. 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. So profitability and risk move in the same direction. 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. Each element and its position in the total working capital should be analyzed in the light of its characteristics. This stock may not provide desired level of liquidity to pay off the current liabilities. b) Economic conditions: Holding other factors constant. 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. However when the liquidity is reduced. the profitability increases but the risk of insolvency also increases. the firm can survive with lower investment in working capital than could.g.

The key is to know how quickly your overall stock is moving or. average stockholding periods will be influenced by the nature of the business. Excessive stocks can place a heavy burden on the cash resources of a business. The major current assets are cash. Obviously.4 ELEMENTS OF WORKING CAPITAL Working capital management is concerned with the problems that arise in attempting to manage the current assets. The current liabilities are accounts payable. put another way.  INVENTORY MANAGEMENT: Managing inventory is a juggling act. the following may be considered: • Review the effectiveness of existing purchasing and inventory systems. 17 . bills payable. accounts receivable and inventory. components etc. Factors to be considered when determining optimum stock levels include: • • • • What are the projected sales of each product? How widely available are raw materials. Insufficient stocks can result in lost sales. current liabilities and the interrelationship that exists between them. marketable securities. delays for customers etc.Working capital management 1. how long each item of stock sit on shelves before being sold.? 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. For better stock control. bank overdraft and outstanding expenses. which is not working.

To protect its sales from competitors 2. Marketing tool Receivable has three characteristics: Know the stock turn for all major items of inventory. Buyers requirement 4.Working capital management • • • • • door!" Higher than necessary stock levels tie up cash and cost more in insurance. Sell off outdated or slow moving merchandise . Companies bargaining power 5. Firms grant trade credit for following reason: 1. acting as a bridge for the movement of goods through production and distribution stages to customers. 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.it gets more difficult to sell the longer you keep it. Apply tight controls to the significant few items and simplify controls for the trivial many. Consider having part of your product outsource to another manufacturer rather than make it yourself. Relationship with dealers 6. Review your security procedures to ensure that no stock "is going out the back 18 . To attract potential customers to buy its product at favorable term 3.

It involve an element of risk 2. 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. It implies futurity. Receivable is a major component of current asset. Extra profits  CASH MANAGEMENT: Financing of Current Assets: 19 . There are various costs and benefits attached with a credit policy.Working capital management 1. Administrative cost 3. Costs of financing. Credit policy ranges from credit to any one to no credit. Increase in profits 3. Cost of default by customer Benefit of Receivables 1. Costs of Receivables 1. 2. A Firms investment in account receivable depends on 1. 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. It is based on economic value 3. Collection period Therefore average investment in Accounts receivable is Daily credit sales * Average collection period. Delinquency costs 4. Increase in sales 2. The volume of credit sales 2.

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

21 . 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.Working capital management 2. Speculative motive 4. c) Meeting unexpected cash outflows without more problems. it will help firm in a) avoiding a chance of default. 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. 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. b) Availing the opportunities of getting cash discounts by making early or prompt payments. Compensation motive Objective of cash management: Following are the two main objective of the cash management 1. Precautionary motive 3. the firm is foregoing interest income on the balance. Therefore. Minimize the cash balance: Investment in idle cash balance is a dead investment and has no earning. staff required for cash management etc which will have a bearing on determining the cash balance required by a firm. whatever cash balance is maintained. 2. They are uncertainties of a particular trade.To provide the cash needed to meet the obligations: if the firm have sufficient cash in hand.

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

Such a policy tends to reduce the risk of shortage of working capital by increasing the safety component of current asset. manage cash flow and generate payments with speed.5 DIFFERENT TYPES OF WORKING CAPITAL POLICIES Current Assets Conservative Moderate Aggressive Sales Level Above figure show three policies in working capital management. processing payments and analyzing the vendor’s performances gives a clear picture of cash flow and provides the level of payables processing needed for the business. 23 . Payable management for an organization contributes to operational excellence by. Payable management helps in achieving more accurate cost of goods sold. O Improve the cash flow and enhance vendor relations. The conservative policy also reduces the risk of nonpayment to liability. I In conservative policy value of current asset increases more rapidly than sales level.   n moderate policy value of current asset increases in proportion with sales level.  ptimizing the workforce with improved productivity. 1. Achieve higher levels of accounting efficiency and accuracy.Working capital management Payable management gives an effective control over the expenses. Tracking vendors. accuracy and efficiency.

1. 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 risk of insolvency of the firm increases as it maintains law liquidity. cash credit. Banks are the largest providers of working capital finance to firms. Each company’s working capital need is determined as per the norms. then comes the question of financing of the same. It can be availed in the forms of overdraft. These norms are based on the recommendations of the following committees – 24 .  Bank Finance – Bank finance is the most commonly negotiated source of the working capital finance.6 WORKING CAPITAL FINANCE After determining the level of working capital. The buying firms do not have to pay cash immediately for the purchase made. This type of aggressive policy has many implications. 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. purchase/discount of bills and loan.Working capital management In aggressive type of policy sales level increases more in percentage than increase in current assets. This deferral of payments is a short-term financing called trade credit.

tax & interest. Deferred income represents funds received by the firm for goods and services.  Commercial Paper – Commercial paper is an important money market instrument for raising short-term finances.g.g. The operating cycle is defined as the time duration starting from the procurement of goods or raw materials and ending with the sales realization. to a great extent upon the operating cycle of the firm. 1. Accrued expenses and deferred income also provide some funds for financing working capital. which it has agreed to supply in future.Working capital management The Tandon Committee The Chore Committee  Accrued Expenses & Deferred Income – Accrued expenses represent a liability that a firm has to pay for the services. 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. For e. 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. 25 . advance payments made by the customers. The length and nature of the operating cycle differs from one firm to another depending upon the size and nature of the firm. which it has already received. For e.7 OPERATING CYCLE The working capital requirement of a firm depends. salaries & wages.

conversion period. finished goods storage period and average collection period before getting back cash along with profit. Conversion of work-in-progress into finished goods. while shorter operating cycle period indicates that the locking up of funds in current assets is relatively for short duration. . . The total duration of all the segments mentioned 26 . 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. which generate the respective receipts and disbursements. . They are unsynchronized because cash disbursements usually take place before cash receipts. Sale of finished goods (cash or credit). cannot be forecasted with complete accuracy. Longer the operating cycle the more working capital funds the firm needs. They are uncertain because future sales and costs. . .Working capital management A company’s operating cycle typically consists of three primary activities: purchasing resources. The segments of the operating cycle include raw material storage period. producing the product and selling the product. Conversion of receivables into cash. Conversion of raw materials into work-in-progress. The concept of operating cycle is useful in controlling as well as forecasting working capital. These activities create fund flows that are both unsynchronized and uncertain.

The manager should make all possible efforts to collect the book debts promptly. 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. 4) Effective Credit Policies The finance manager should streamline the credit and collection policies and minimize the investment in debtors. upgrade system of production and shortest possible manufacturing cycle.Working capital management 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.ordinate all the activities.  27 . IMPORTANCE OF OPEARTING CYCLE CONCEPT: It is important for deciding cash working capital required to meet the operating expenses going concern. Reduction of operating cycle Every management tries to reduce the operating cycle in order to decrease the need of working capital. The concept important because of the longer the operating cycle more will be the requirement of working capital . at right price at right place. 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. 2) Production management The production manager looks after proper maintenance of plant and machinery and plan and co.the management has to see that this cycle does not become longer.

28 . Work In Progress Holding Period = -----------------------------. government fiscal and monetary policies.* 365 days Expenses Amount  METHODS OF PROJECTING WORKING CAPITAL REQUIREMENTS: (A) conventional method (B) operating cycle method (A) Conventional method: according this method.* 365 Days Credit purchases Outstanding expenses 5. Greater emphasis is laid on liquidity of a business.* 365 Days Cost of Goods Sold Debtors 4.* 365 Days Purchase cost of RM Closing stock of WIP 2. Creditors Creditors Holding Period = ---------------------.Working capital management 5) External Environment Length of operating cycle is also influenced by other external environmental factors. Debtors Holding Period = ------------------. Lag in payment = ------------------------------.* 365 Days Credit Sales 5. 1.* 365 Days Cost of Production Closing stock of FG 3.8 FORMULAS TO CALCULATE WORKING CAPITAL: Closing Stock of Raw Material 1. Raw Material Holding Period = ----------------------------------------. Finished goods Holding Period = ----------------------------. cash inflows and outflows are matched with each other. The management should minimize the adverse impact of these policies on the operating cycle. EXIM policies have an impact on operating cycle.

it will include only last three stages. 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: 29 .the operating cycle period will be start .and creditors period in the base of manufacturing cum marketing organization . finished stock period.it is the time period required for the whole operation starting with cash and ending with up cash plus . the total period of opearting cycle is broken into various stages raw material waiting period. processing period . Working capital is decided on the basis if length of the capital opearting cycle .in the case of marketing organization . Estimation of working capital requirement becomes easy when the opearting cycle is given . It refers to working is realistic way. debtors period . it has to be calculated with analysis of necessary data . it is expressed in terms of months or weeks or days . 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 .Working capital management (B) Operating cycle method: this method is more dynamic. if it is not given .

as per this method working capital is determined on basis of past experience . 30 . 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.Working capital management 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.

Canada. which has resulted in path-breaking new products. engineering files & tools. The company is engaged in many divisions like textile. The company exports it’s suiting to more than 50 countries including USA.Working capital management CHAPTER 2 INTRODUCTION OF RAYMOND INDIA LTD. prophylactics and cosmetics. denim. Prophylactics and Toiletries. Over the years. The group is the leader in textiles. ready-made & accessories. Quality and Leadership. Engineering Files & Tools.1 INTRODUCTION The company has completed 79 years. With a capacity of 25 million meters of wool & wool-blended fabrics.house skills for research & development Textile has been responsible for raising the standard of the Indian textiles industry. Raymond ves in Excellence. Readymade Garments. Raymond group having businesses in Textiles. 31 . Raymond Textile has developed strong in. Raymond Textile is India's leading producer of worsted suiting fabric with over 60% market share. apparel. During this period the company has grown from a small woollen mill to a leading global producer of woollen fabrics. Raymond belie. Raymond Textiles is the world’s third largest integrated manufacturer. Japan and the Middle East. 2. & files & tools in India and enjoys a pronounced position in the international market. Europe. Perceived as pioneer and innovator.

Be: offers an eclectic mix of formal. through the inorganic route. ethnic and fusion styles with accessories. J K Files & Tools. Thyssen-Krupp steel. is the world’s largest producer of steel files with 90% market share in India and about 30% market share in the world. The Aviation division. office and evening wear for men and women. The Engineering Files & Tools division. the company has focused on its textile business.Working capital management The Denim division has an installed capacity of 16 million meters and produces high quality ring denims. After restructuring the company's textile business's share including garments. 32 . The Designer Wear division. With the divestment of its steel and cement businesses.85bn and the steel business to German steel major.21bn. Known for high quality and reliable services. the company divested its cement business to Lafarge India for Rs7. In a restructuring exercise. which enjoys higher growth rates as well as margins. Million Air was launched in 1996 to provide air charter services. for Rs4. in western. Raymond is further consolidating by merging its textile subsidiaries with itself and is planning to expand the ready-made garments segment. Million Air has a fleet of three helicopters and one executive jet The company also diversified its business interests into cement and steel. The products are exported to over 30 countries in the world. Be: is an exclusive pret-a-porter range that houses designs by some of the finest Indian designers. worsted fabric and denim has gone up to around 90%. The company currently ranks among the top 3 producers in India.

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

Working capital management stronger with a better bottom line. 2. is India’s leading producer of worsted suiting fabric with a 60% market share. the woollen mill by the creek has turned into a Rs. the European Union and Japan. Parx and Manzoni. J. Today. 1400 crores conglomerate and is India’s leading producer of worsted suiting fabric with 60% market share.K. And happily the growth graph continues to rise higher…and higher. Parx & Manzoni. more focused approach. is the manufacturer and marketer of KamaSutra brand of premium condoms. 34 . 2000 million with its three brands – Park Avenue. become market oriented and achieved a consolidated position. Helene Curtis Ltd. USA. Canada.K. It is also the largest exporter of worsted fabrics and readymade garments to 54 countries including Australia. Color Plus Fashions Pvt. J. Ltd. has three highly regarded menswear brands in its folio: Park Avenue. is the marketers of the Park Avenue and Premium brands of men’s toiletries. Established in 1994 Color plus is one of the leading domestic brands for premium casual wear in the country. The Raymond group is also the leader among readymades in India with a turnover of Rs. Raymond Apparel Ltd.3 THE GROUP COMPANIES OF RAYMOND ARE: Raymond Ltd. In its pursuit of excellence Raymond continues to achieve enhanced customer satisfaction through ongoing innovation. Ansell Ltd.

room fresheners Premium casual wear brand in high quality natural fibers like cotton and linen. shaving cream. Australia. readymade accessories such as tie. America. Europe etc. The premium condom brand with the unique for the pleasure of making love positioning in textured & flavored variants. The luxury range of men’s shirts and ties acknowledged for its high quality and international styling. ethnic and fusion styles. An exclusive prêt-a-porter line of ready-to-wear designer clothing for women and men in western. in superior mixed and performance oriented weaves. Formal readymade garments & accessories for men it has recently bagged the "Most Admired Brand" and "Most Admired Trouser Brand" awards. denim.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. socks handkerchiefs and leather belts to Africa. Raymond exports fabrics. The range of cosmetics & toiletries including after-shaves. cologne. blankets. blends and denim wear catering to the smart. garments. fashionable and comfortable clothing segment. shampoos. Asia. The semi formal and casual range of cottons.Working capital management 2. 35 . soaps deodorants.

Working capital management 2. But. companies depend on growth to build a strong market value. Raymond is a leading player in the textile segment with a presence in several segments .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 36 . The sales of the textile division. growth is a double-edged sword. are of seasonal nature. The revenue of the textile division registered an impressive growth of 46 per cent 2. which contributes substantially to the company’s total sales and profitability. more than ever. as most veteran executives know.worsted textiles. Managing growth is a challenge. A strong brand and significant cash surplus are the key advantages that would enable the company to pursue both organic and inorganic growth opportunities. denim and apparels. Creating growth is a challenge.5 GROWTH Today. The company is well positioned to explore multitude of growth opportunities available to the sector.

However. (Rs.01 29083.40 2969.Working capital management CHAPTER 3 ANALYSIS AND INTERPRETATION OF DATA 3. It is calculated by deducting current liabilities from current assets. taking individually.90 21715.56 45343.52 2675.86 82490.16 24846.90 8063.24 8373.06 14442. comparing the given years it is seen that there is increase in stock year by year also increase in debtors.64 26227.66 37147.14 70791. 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) 18037.06 77011.84 32998.03 29490.18 44013.39 44380.36 26877.34 6770.66 24614.In lakhs) Particulars a) Current Assets.59 2005 2006 2007 From the above table.17 3315. This means that the company is purchasing the material but not able to sell in the market and 37 .1 CALCULATION OF WORKING CAPITAL Introduction: Working Capital refers to the capital required to meet day to day operations.92 1887. the company has favorable working capital.74 2503.79 12122.03 31904.07 2561. This may be due to inability to sell the products.19 28366.15 26410.

Thus.19 2714. This may be due to increase in proposed dividend and tax for the same. 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. Particulars CURRENT ASSETS.1 6 4475.32 144. Cash is fluctuating over the period of three years. 2009 (Rs. Current liabilities are decreasing.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. in lacs) 31st March. they may not be this due to increased stock.75 1561.34 9007.97 8673.78 84.74 10004.69 28366. the company has enough cash reserves to pay-off the creditors in stipulated time. Loans and advances are favorably stable along the period of three years.76 1311. many a times it may happened that liquidity position are favorable but in fact.75 2563.42 31904.36 84.50 31st March. 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 2007.92 1848. 2010 (Rs. Other current assets are decreasing. as such.36 2486. in lacs) 38 .3 5 8451.80 7001.

93 1745.87 lacs)] 5.83) 2318.31 lacs) (ii) Balances with Scheduled Banks: In Current Accounts (including remittances-in-transit Rs. Previous year Rs.59 39 3.0.47 91.Nil) 1329.76 386.76 _ . Previous year Rs.6.97 lacs.20 lacs due from subsidiaries.1 0 (c) Cash and Bank Balances: (i) Cash on hand (including cheques on hand Rs. Previous year Rs.07 24977.1499.14 272.20 2129.7 4 22292.64 lac)] (iii)Balances with Non-Scheduled Banks: In Current Accounts: The Municipal Co-operative Bank Limited [Maximum balance during the year Rs.6.0.00 lacs) In Deposit Account [includes Rs.83 (649.5 9 23411.61 lac deposit receipt endorsed in favour of Government authorities as security (Previous year Rs.51 _ 1754.96 1899.5 5 26877.67 92.737.248.16 lac.0.62 709.3 1 649.32 1435.8. 658. Previous year Rs.68 (386.82 lacs (Previous year Rs.21 lacs) 21092.22 24846.2.64 Considered doubtful Less: Provision (ii) Other Debts : Secured (considered good) Unsecured Considered good (including Rs.46 lacs duefrom subsidiaries.Working capital management Considered good (including Rs.68) 2684.

40 2. and others: Considered good [includes Rs.50 lac (Previous year Rs.16 32.86 10.74 3716.67.0.30. 14.87 5362.63 3315.00) --4102.06 758.23 2969.00 (32.90 1149.00) 346.60 11.81 1283.Nil (Previous year Rs.88.Working capital management The Hongkong & Shanghai Banking Corporation.08 lacs Previous year Rs.50 lac)] (d) Other Current Assets: (i) Export Incentives receivable (ii) Dividend. Interest Subsidy and Interest receivable (Interest accrued on Investments Rs391.00 32. Shanghai [Maximum balance during the year Rs.00 (32.06 lacs) (iii) Claims and Other receivables [Net of provision for doubtful claims Rs.9.81 6621.46 lacs)] In Deposit Accounts: The Municipal Co-operative Bank Limited [Maximum balance during the year Rs.50 2561.17 0.00 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 4405.86 lacs)] (e) Loans and Advances (Unsecured. unless otherwise specified): [Refer Notes 3 and 5] Subsidiary Companies: Loans and other dues Loans and Advances to co.50 2503. considered good.34 330.0.92 881.76 412.67 1798.89 104.79 lacs (Previous year Rs.75 0.87 40 .

1 2.56 16427.77 21715.40 871.25 29083.28 2049.90 149.15 5600.86 82490.04 430. 241. etc.09 Acceptances Sundry Creditors [including Rs.43 — 26227.Customs.160. Others (including with subsidiaries Rs.58 2912.81) 3.66 37147.21 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 24.07 2017. 160.20 (11.71 223.67 2044.59 (104.36 14442.72 528.58 468.32 lacs due as remuneration to the Directors (Previous year Rs.197.02 866.21 326.05 3069.84 32998.8 9 771.33 lacs Previous year Rs.3 4 17722.64 1007.35 177.62 1815.33 lacs) Per Balance Sheet CURRENT LIABILITIES AND PROVISIONS (a) Current Liabilities : 45.84 5318.52 41 .04 521. Excise.29 8063.34) 24.28 3069.21 1125.0 6 77011.48 6770.44 ---5253.Working capital management Less: Provision Balances with .4 1 560.1 9 5990.

daily Credit (assume 365 days) -Avg. daily COP (assume 365 days) -Avg.64 258.37 77. stock of WIP Conversion Period (in days) C.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.36 253.72 26842. (Rs. (assume 365 days) -Avg. Collection Period (in days) E. stock of FG FG Storage Period (in days) D.15 12307.41 2696. daily COS.39 57.90 7598. Avg.76 49 85469.29 276.22 12553.52 4264. Lakhs) In Particulars A.Finished Goods Storage Period -Annual Cost of Sales -Avg.01 65. daily Purchases -Avg. Conversion Period -Annual Cost of Production -Avg. Payment Period -Annual Credit Purchases -Avg. Debtors Avg.65 44 Material -Avg. stock of RM RM Storage Period (in days) B.Working capital management 8 3.03 38 2005 21079.21 45 94431.93 7622.67 104 29712.15 234. Payment Period (in days) Operating Cycle (in days) A+B+C+D-E 100819.37 55 72973.36 51 62377. Creditors Avg.10 170.60 4233 209 92401.75 2956.85 81. daily consumption of RM (assume 365 days) -Avg.38 37 239 Source: Balance sheet Income Account Raw Material Storage Period: To calculate the & & Expenditure .38 199. Collection Period -Annual Credit Sales -Avg.70 2416. Avg. Raw Material Storage Period -Annual consumption Of 2006 Raw 28296.16 30907.68 132 23982.

. is leading to increasing requirement of higher level of stock. 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. 43 .e. Debtors/BR maintenance discount policy and other bad debts. 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. surely affecting the Raw Material storage period.Working capital management Raw Material. no specific trend can be observed in their proportion.259 lakhs in 2006. Though the average daily Cost of Sales and average stock of Finished Goods figures are increasing. 1000 lakhs. increased to 49 days in 2005 and again came down to 45 days in 2006. Naturally increasing sales will show increased average daily credit. which is the obvious result of increasing production pattern of the organization. Coming down of collection period from 132 days to 104 days is showing the strong receivable policies of the company. Thus the Raw Material storage period is increasing upto 55 days in 2006. which is heavily resulting into reduced collection period. Company is constantly showing increasing turnover and the figures can be taken as indicator of the same from the operating cycle point of view. Finished Goods Storage Period: It is mainly dependent on sales trend of the company. Storage period on an average divide the average stock maintain by the organization by daily consumption. resulting in giving the blocking period. It can be said that increased Raw Material storage period of 9 days is very much compensated by the conversion period. The lesser period of Finished Goods stock gives favorable view towards organization’s operating cycle management. which can be easily pointed out by Finished Goods storage period. Average Collection Period: It is cumulative figure effect of company’s credit policy.This shows that more funds are blocked in Raw Material. which is reduced by 12 days. For 9 days. though increasing production demands more flow of Raw Material Conversion Period: The observation is showing increasing daily Cost of Production. Rs. From the observation of the figures it can be seen that increasing consumption of Raw Material. The decrease is about Rs. 199 lakhs. which can be observed in the given figures i. 170 lakhs to Rs.

Increasing purchases are the result of the increased turnover of the company. The average payment period is reduced to 33 days from 37 days with increasing average daily purchases from Rs. Thus. and Collection period reduced by Average payment period to creditors. The whole operating cycle was of 236 days. 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. showing the favorable working capital position in comparison of earlier two years. parallelly compensates the reducing collection period. Conversion period. decreasing payment period.M storage period. which increased by just 3 days (239 days) in 2005 and came down to 209 days in 2006.Working capital management Average Payment Period: Though the company is allowing enough credit periods to its debtors it is getting even lesser period from its creditors.G storage period.81 lakhs over the period of three years. calling for more liquidity or cash. the components included.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.65 lakhs to Rs. 3. F. the valuation methods followed and other relevant details: Particulars Raw Material Work-inProgress Finished Goods Stores and Spares 44 .

Lubricants etc.e. from the month of Oct. the inventory is accordingly ordered in the months of June –July and stored for the entire year. Camel hair (Locally) Soya bean fiber (Locally) Fine micron-July and stored At its peak Valuation Method Value as in May 2005 (Rs.Yarn Component (RSM) (Rajasthan). coarse) Polyester (Reliance Ltd. dept. The ordering of the raw materials depends on the landing cost.5 months. The production time being 2-2. Stable-AprilAugust Dec-Jan Weighted Average Cost or market value Which ever is less.). which is the product of the following: Price. 22.and 24 microns are imported throughout the year. the lead-time (the time from when the order is placed to when the material stock is actually received) being 2 months. onwards. 110 (in accordance with AS-2 including Excise duty) Production and planning Weighted Average 8-9 Fabric Oils. 45 . and exchange rate fluctuations. i. Production & 14 for the entire year Specific Identification Weighted Average 68-70 Wedding and festive Seasons.crores)) Managed by Production and Planning Dept.Working capital management Wool (Australia) (fine micron. Warehousing  RAW MATERIAL: Wool: Tops of around 19microns and less are seasonally imported and of around 21. The maximum demand is during the festive and wedding season. Planning dept. availability.Viscose (Locally).

) of the ex-mill price which turns out to be around Rs.  WORK-IN-PROGRESS: The in process inventory for the company is fairly stable throughout the year at Rs. ACCOUNT RECEIVABLE:  46 . 1820 crores.Working capital management It is expected that the company should maintain 100% raw material inventory as it accounts for only 27%(approx. as fluctuations are present throughout the year. The production is more or less in stock during the period April – August and starts depleting somewhere in the months of September / October. Thus the finished goods inventory levels and debtors are more or less constant. Exports are more or less constant. The pricing policy of the raw materials is done by specific identification method. the debtors are at their lowest and vice versa.2-3 crores. There are no standards or norms followed by the company in specific as fluctuations dominate the market. This is mainly as the following mentioned factors are more or less constant throughout the year: a) Machine efficiency. when the inventory is at its peak. The company does not maintain any safety stock. in this method the raw material stock is imported consignment -wise and the stock identification is done in the form of lots. it again starts picking up in the months of December / January (which is the peak). b) Loading.e. As the finished goods and inventory vary inversely. though there the predominant exports are in the months of April – July.68-70 crores with a minor fluctuation of around Rs. c) Flow  FINISHED GOODS: The finished goods inventory at the company is very volatile. i. The debtors constitute the major portion of Inventory.

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

at the rate of 6. when dealers accept these Bills. 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.25% for 90 days bill.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. Channel financing is done through Centuring financing. franchisee. ABN Amro HSBC. Factoring is done with HSBC. Bank discounts the bill in two ways: 1. 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 48 . Normally 16 days are allowed for collecting money through check or demand draft. while 10 days are allowed for bills and Cash Management Service. This is not true for all dealers. The credit period allowed for wholesaler. In this rate is 10-12% depending on bank and worthiness of dealer.Working capital management In collection of bill Raymond send bill to dealers. UTI. ICC bank. but in case of any default of payment it will help bank by stopping the delivery of the goods to the customer. Kotak Mahindra. if the company feels that the dealer is worthy then it will allow supply of goods to default dealer. In without recourse system bank will check the worthiness of dealer because Raymond is not going to pay the bill. the Banks will discount them. In this way Raymond maintains good relations with bank as well as dealers.with recourse 2.

Working capital management The commission given to the agent varies from 2.  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. The company also gives free bags. Diwali. Their average rate of return on this investment is 5-6%. They also manage the liquidity at time of requirement by investing it in to different period. In case of booming period of sales like marriage season.5-3. The Government and other payments are made through the State Bank of India and Bank of India. They are using conservative policy for working capital management in order to not to loose the sales. Generator for franchisee in order to make payment properly. 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 invest in Chartered Bank on daily basis. hence the company can say that they will recover the bad debt. they require more working capital before two month of booming period of sales. For a particular area there is only one agent and the amount of his commission is in crores of Rupees. They also maintain the records of all payment receipts of the company’s registered office at Ratnagiri. Kotak Mahindra and DSP Merrill Lynch are the advisers of Raymond.  CASH MANAGEMENT: Raymond is cash rich company. Standard Chartered 49 .5% depending on quality of product. Also no other investment gives more rate of return than this because bank interest rates are low. Air conditioner. Major payments are made through UTI Bank.

5000.1000-Rs. the modes of payment differ according to the amount. The salaries are paid through cheques. CHAPTER 4 CONCLUSIONS AND SUGGESSTIONS  CONCLUSIONS General Conclusions: 50 . The company generally receives 2%-4% cash discount and 15-30 days of credit. 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 company’s account in rupees equivalent to the foreign currency of the concerned supplier including transfer charges. The company plant is situated at Thane in order to avoid the octroi duty. The company makes payment after receiving the goods except incase of Reliance to whom they make advance payment.Working capital management Bank. which is controlled by the Salary department. At Raymond Ltd. which is shown in the following table--Amount in Rs. The payment structure is revised quarterly. Only the Pran Brothers give regular discounts even on bills of Rs. The Commercial department does all the negotiation regarding purchases. HSBC because only these banks gives the facility of free cheques printed with the name of Raymond’s while other banks charge for the same.

rationalization of products and distribution channels. The operating cycle Lock – In –Period came down to 209 days in 2006 compared to 239 days in 2005 and. Raymond shops network. Specific Conclusions: Though the consumption of Raw Material. both in terms of volume and revenue.Working capital management Despite the difficult conditions in the international market the company continued to be on the growth path.  SUGGESTIONS General Suggestions: The company has to take steps to counter the rising input cost and domestic competition through cost reduction. judicious inventory management and research and development. which shows that the working capital position of the company is favorable as compared to the earlier 2 years. already representing largest retailing space under any single brand crossed the 300 mark (20 overseas) reduces the commission paid to dealers. cost of production and cost of sales has increased in 2006. agents etc thereby increasing the profit within the company. This shows the improvement in the collection policies of the company. net working capital is decreased by 30 days due to decrease in collection period. 51 . which includes discounting of channel financing. and aggressive collection policy.

The company can adopt the aggressive approach to finance current assets. which shows that more funds are blocked in Raw Materials for 9 days though increasing production demands more flow of Raw Material. the company may stock more if desired.Working capital management As China has become a part of World Trade Organization. 01 BALANCE SHEET AS ON 31st MARCH 52 . the company has to leverage a strong brand in the international market. Using modern production techniques like ‘Just in Time’ approach will reduce the Raw Material storage period and increase the liquidity or cash in hand. CHAPTER 5 ANNEXURE ANNEXURE NO. which can hamper the Indian Textile market. This is more risky but may add to the return on assets. In this approach the firm finances a part of its permanent current assets with short term financing. It is seen that as the inventory carrying cost is reducing because of the falling interest rates. Specific Suggestions: The Raw Material storage period has increased from 51 days in 2005 unto 55 days in 2006.

48 55397.49 40643.59 123003.96 78761.45 6138.24 1478.24 24722.73 219964.8 84511.19 97952.09 71586.66 29490.Working capital management 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.15 26227.86 82490.52 2675.37 104855.16 24846.15 98447.50 22928.29 5701.10 54667.84 53 29083.01 5587.08 129477.71 158207.84 56686.34 6770.64 8568.56 76787.53 6138.06 14442.06 77011.73 57309.74 2503.79 12122.28 28366.05 22074.68 6138.81 73660.36 26877.08 98717.40 2969.80 67765.90 8063.90 21715.07 2561.85 136672.80 68907.51 76174.08 112856.56 54667.00 15604.17 3315.03 31904.73 202185.86 135615.84 67605.85 42122. Other Current Assets Loans & Advances Less: Current liabilities & Provisions Current Liabilities Provisions 18037.24 8373.94 2008 2009 2010 .45 6402.45 118994.14 70791.05 47650. Loans & Advances Inventories Sundry Debtors Cash & Bank Bal.92 1887.66 24614.

01 202185.Working capital management 26410.56 45343.89) 18042.39 Net Current Assets TOTAL ANNEXURE NO.64 (3468.96 791.68 102393.94 3528.75 22932.81) 123272.83 51.12 2008 2009 128419.03 219964.56 132473.84 2308.08 140637.10 37147.82 137497.(1187.91 14459.77 17365.51 116853.26) 121798.63 4711.64 8124. Selling & General Expenses Finance Charges Depreciation & Amortisation Less: Trial Run Expenditure capitalised Finished and process stock transferred on divestment of Business ---.39 31134.27 Profit for the year before exceptional items Add/less: Exceptional items 18312.83 ---. 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.17 2010 44380.52 8163.45 32998.(70.45 22558.46) (510.65 (994.53 18120.64 158207.10 29344.75) 26113.04) (417.92 37737.15 345.16 98540.82 27099.67) 15698.35 9077.31 124530.09 6337.42 54 .51 125317.12 23833.16 20397.16 40665.85 7271.18 44013.91 6305.

43 10058.68 22701.00 4000.00) 275.10 4210.77 (146.63) 192.30) 16717.98) (110.88 1000.88 88.36 36929.00 20125.36 1450.05 3375.54 430.04 521.28 BIBLIOGRAPHY BOOKS: 55 .04 432.41 16203.38 --.00 33.00 3069.52 6144.90 5984.48 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 250.358.58 9040.00 28.00 2750.54 12229.95 3069.00 6000.28 23823.00 13183.00 788.00 1275.42 16370.78 16717.74 10601.38 (18.00 26.00 (815.00) 2974.Working capital management 18658.39 4660.05 (1.00 1210.62 27888.

yahoo.com SEARCH ENGINES www.google.com www.raymondindia.com 56 . Arvind Dhond.Working capital management Chaudhary and chopde. ‘Financial Management (Text & Problems)’. WEBSITES: www. ‘Financial Management (Theory & Practice)’.