A study on Working Capital Management

@
Royal Classic Group

Presented By,
Syed Quaiser Hussain
 Meaning of Working Capital

 The capital which is required for day to day

routine activities like payment of wages, purchase of
raw material etc. is known as working capital.

 Objective of Working Capital
Management

 The administration of the firm’s current assets and the

financing needed to support current assets.

Kinds of working Capital
 Graphic presentation of
Working Capital

Temporary or
Temporary or
Variable Working
Variable Working
Capital
Capital

Permanent or Permanent or
Fixed working Fixed working
capital capital
o t nuo mA

Time
t nuo mA

Time
Working Capital Cycle
 Factors affecting working capital
1.Nature of Business
2.Size of Business
3.Production Policy
4.Manufacturing process
5.Seasonal Variations
6.Credit policy
7.Rate of Growth of Business
8.Price level changes
9.Rate of stock turnover
10.Working capital cycle
 Factors affecting estimation
of
working capital
1. Total cost incurred on material, wages, overheads.
2. The length of time for which raw material are to remain in stores
before they are issued to production.
3. The length of production cycle.
4. The average debt- collection period
9. The amount of cash required to pay day – to – day expenses.
10.The average debt payment period.
11.Time lag in the payment of wages and other expenses.
12.The average amount of cash required to make advance
payments.
9.
Determining the working capital
financing mix
 Sources


of
Long- term/
Fixed/
Permanent Working Capital
1.Shares
2.
3.Debentures
4.
5.Public Deposits
6.
7.Retained Earnings
8.
9.Long term Loans from Financial Institution

  Sources
of
Temporary/
Variable/
Short-term Working Capital
1.Indigenous Bankers
2.Trade Credit
3.Advances
4.Factoring
5.Accrued Expenses
6.Deferred Incomes
7.Commercial Paper
8.Commercial Banks

 Balance Sheet
Short Term Items
Current assets 2008-09 2009-10 (Rs. in Crore)
Inventories 96.42 83.10
Sundry Debtors 45.20 39.95
Cash & Bank 7.27 5.56
Loan& Advances 23.67 27.48
172.57 156.10

Current liabilities
Short term borrowings 95.85 101.33
Trade and other payables 23.10 27.07
Other financial liabilities 0.96 1.15
Short term provisions 8.91 8.03
128.82 137.58
Turnover 292.89
Cost of goods sold 198.02

15
Operating Cycle

Purchase Resources Pay Sell on Credit Receive Cash

Inventory Conversion 103 days Receivables Conversion

50 days

Payables Period Cash Conversion Cycle

51 days 101 days

Operating Cycle

152

16
Operating & Cash Cycle
 ANALYSIS OF WC

Funds Working
Ratio Flow Capital
Analysis Analysis Budget
 Ratio Analysis
It is a simple arithmetical expression of one number to another. The
technique of ratio analysis can be employed for measuring short
term liquidity or working capital position of the firm. The following
ratios may be calculated for this purpose:-
ØCurrent ratio.
ØAcid test ratio.
ØInventory turnover ratio.
ØReceivables turnover ratio.
ØPayables turnover ratio.
ØWorking capital turnover ratio.
ØDebt-Equity Ratio.
ØReturn on Investment.
ØGross Profit Ratio.
ØNet Profit Ratio.

Liquidity Ratios
Activity Ratios
Debtors Turnover Ratio
Creditors Turnover Ratio
Working Capital Turnover Ratio
 Credit Policy @ RCG
 The important dimensions of a firm’s credit policy
are:


Ø Credit quality standards

Ø Credit period
Ø Cash discount
Ø Collection effort

 Credit Assessment
Considering Following ratios decision can be made on the financial strength of the company
 MDA (Multiple Discriminant Analysis) - The Z score Model
Z-Test: The Edward Altman Z score: This method uses the
following combination of a set of 5 financial ratios. This score uses
statistical techniques to predict a company's probability of failure
using the following variables from a company's financial statements.
 The above ratios calculated are then multiplied by the weighs and the results are
added together as follows:

Z - Score = A x 3 . 3 + B x 0 . 999 + C x 0 . 6 + D x 1 . 2 + E x 1 . 4

Where, A, B, C, D, E are the results of five ratios calculated:

The Interpretation of Z score:

Company is safe
ould be cautious
re good chances for the company going bankrupt within 2 years of operations
inancial embarrassment .
 Debtors management @ RCG
 There are 132 debtors for the financial year ending
31st march 2010 with an outstanding amount of
39.95crores. The total debtors are classified into 4
main segments:
ØExporters
ØMBO-Distributors
ØUrban Retail Division
ØOthers

The preference of the security from debtors at RCG
diagrammatically shown below:
 Short term financing @ RCG
 Channel Financing:


Ø Discounting of Bills drawn by a company and in favour of the company’s Dealers / Distributors
Ø To provide Overdraft facility to the dealers / distributors who have business dealings with large Corporate.


 Receivable Purchase Financing: Under this financing the company discounts it receivables with the
banks. On maturity of these receivables the company collects the amount from these debtors and pays it to
the bank.


 Export Financing: Under this financing also the company discounts it receivables with the banks but
these receivables are not backed up by the Insurance Company. On maturity of these receivables the
company collects the amount from these debtors and pays it to the bank.

 The banks that the company has collaborated for channel financing are the Corporation bank and the ICICI
while for receivable purchase the company has collaboration with Axis bank & ICICI bank. The bank
discounts the purchases with the prevailing interest rates for the amount and the maturity period. The
maximum period that the company has agreed with the banks for due dates of the receivables is 90 days.

Recommendation to the Company of my study
Ø Conversion of open credit customers to bank financed customers
Ø Factoring without recourse
Ø Factoring/discounting backed by Insurance companies
Ø Credit Assessment: The financial numbers of private companies
may not be reliable. Thus the company should use other
parameters also to determine the credit scoring of a debtor. The
parameters often used for credit rating are customer’s profile, its
market share, technology standards, capital investment, credit
history and ability to pay debts on time.
Ø Securitization from open credit customers
 Conclusion
 On comparison of the financial information of the Royal
Classic Group for the year ended March 2009 & March
2010, during the time of slowdown of the economy the
sales of the company was deteriorated there was increase
in outstanding amount of debtors which is improved
debtors has decreased by 13.14% and company has
recorded growth in sale by 12%, the company has
managed its operations well. The management of current
assets, current liabilities and the working capital is also
satisfactory. It is so because the company recorded an
increase in sales and decrease in the working capital thus
deleveraging by efficient management of its assets.

 Limitations of the Study
Ø Credit policies of other companies:For an effective study of any subject,
comparison is very important. Thus to know the effectiveness of the credit
policies of the Royal Classic Group, comparison of credit policies should be
done with its competitive companies. But, the credit policy of other companies is
unavailable for making comparison.


Ø Time: I have interacted with maximum possible members in the company to gather
as much information as possible. But as there is a shortage of time I was unable
to interact with some of the members and get more information on the credit
policies of the company. Also due to shortage of time, I mainly concentrated on
the items of the assets side of the balance sheet during the project. Change in the
items like Debtors, Inventory, Loans & Advances were more into focus than the
liabilities.


Ø As I was at head office of domestic division I couldn’t gather much information

about export division.

 Bibliography
Ø Financial Management Theory & Practice, Prasanna Chandra
Ø Working Capital Management and Control, Principles & Practice, Satish.
B. Mathur,
Ø Working Capital management, Hrishikesh Mukherjee
Ø Management Accounting, M.Y Khan & P.K Jain
Ø Royal Classic Group Annual Report, 2008-09 & 2009-10


 Web References:
Ø www.capitaline.com
Ø www.rcg.in

Thank
You